CELL PATHWAYS INC, S-1/A, 1997-10-22

CELL PATHWAYS INC
S-1/A, 1997-10-22
PHARMACEUTICAL PREPARATIONS

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<PAGE>

AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 22, 1997

REGISTRATION NO. 333-37557
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------

AMENDMENT NO. 1

TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
--------------
CELL PATHWAYS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
--------------
DELAWARE 2834 86-0719923
(STATE OR OTHER (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
JURISDICTION CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
OF INCORPORATION OR
ORGANIZATION)

702 ELECTRONIC DRIVE
HORSHAM, PENNSYLVANIA 19044
(215) 706-3800
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
--------------
ROBERT J. TOWARNICKI
CHIEF EXECUTIVE OFFICER
CELL PATHWAYS, INC.
702 ELECTRONIC DRIVE
HORSHAM, PENNSYLVANIA 19044
(215) 706-3800
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
--------------
COPIES TO:
JAMES C. T. LINFIELD, ESQ. ALLAN G. SPERLING, ESQ.
REX R. O'NEAL, ESQ. CLEARY, GOTTLIEB, STEEN & HAMILTON
COOLEY GODWARD LLP ONE LIBERTY PLAZA
2595 CANYON BOULEVARD, SUITE 250 NEW YORK, NEW YORK 10006
BOULDER, COLORADO 80302-6737 (212) 225-2000
(303) 546-4000
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the Registration Statement becomes effective.

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

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

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

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

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

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

PROSPECTUS OCTOBER 22, 1997

2,500,000 SHARES

[LOGO OF CELL PATHWAYS APPEARS HERE]
CELL PATHWAYS, INC.

COMMON STOCK
($.01 PAR VALUE)

All of the 2,500,000 shares of Common Stock, $.01 par value (the "Common
Stock") being offered hereby (the "Shares") are being issued and sold by Cell
Pathways, Inc. ("CPI" or the "Company"). Prior to this offering, there has been
no public market for the Common Stock of the Company. It is currently
anticipated that the initial public offering price will be between $11.00 and
$13.00 per Share. See "Underwriting" for a discussion of the factors to be
considered in determining the initial public offering price.

Application has been made to have the Common Stock approved for listing on the
Nasdaq National Market under the trading symbol "CLPA."

SEE "RISK FACTORS" COMMENCING ON PAGE 6 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE COMMON STOCK OFFERED
HEREBY.

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>
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PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC DISCOUNT COMPANY(1)
<S> <C> <C> <C>
Per Share..................................... $ $ $
Total (2)..................................... $ $ $
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</TABLE>
(1) Before deducting expenses of this offering payable by the Company estimated
at $550,000.
(2) The Company has granted to the Underwriters a 30-day option to purchase up
to an aggregate 375,000 additional shares of Common Stock at the Price to
Public, less the Underwriting Discount, solely to cover over-allotments, if
any. If the Underwriters exercise such option in full, the total Price to
Public, Underwriting Discount and Proceeds to Company will be $ , $ ,
and $ , respectively. See "Underwriting."

The Shares are offered subject to receipt and acceptance by the Underwriters,
to prior sale and to the Underwriters' right to reject any order in whole or in
part and to withdraw, cancel or modify the offer without notice. It is expected
that delivery of the Shares will be made at the office of Salomon Brothers Inc,
Seven World Trade Center, New York, New York, or through the facilities of The
Depository Trust Company, on or about , 1997.

SALOMON BROTHERS INC
BANCAMERICA ROBERTSON STEPHENS
COWEN & COMPANY

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

Cell Pathways' technology focuses on the selective induction of apoptosis in
cells that manifest abnormal growth (neoplastic cells), such as precancerous
and cancerous cells. Apoptosis is a naturally occurring physiological process
in which a number of components inside the cell "program" the cell to die
without causing harm to surrounding cells.

[ARTIST'S DEPICTION OF COLON CELLS APPEARS HERE]

The cells of the colon are typically columnar.

[ARTIST'S DEPICTION OF COLON CANCER CELLS APPEARS HERE]

When neoplasia develops, the affected cells are abnormal in shape and have
larger nuclei. The neoplastic cells eventually grow beyond the normal shape of
the tissues.

Apoptosis is visible as the development of clumps of material in the nucleus,
followed by the dismantling of the cell into apoptotic vesicles, which are
naturally cleared by the body.

[ARTIST'S DEPICTION OF THE EFFECT OF CONVENTIONAL CHEMOTHERAPY ON NORMAL AND
CANCEROUS CELLS]

EXISTING CHEMOTHERAPEUTIC AGENTS as well as radiation induce apoptosis in
rapidly proliferating cells without differentiating between neoplastic and
normal cells. The death of normal cells gives rise to many of the adverse
effects of conventional cancer therapy.

[ARTIST'S DEPICTION OF THE EFFECT OF FGN-1 ON NEOPLASTIC LESIONS]

CPI'S COMPOUND FGN-1 has been shown in a Phase I/II trial in patients
afflicted with Adenomatous Polyposis Coli ("APC") to induce apoptosis in
neoplastic lesions without altering the rate of cell death in neighboring
normal tissues.

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 ITS MARKET PRICE,
PURCHASES OF THE COMMON STOCK TO COVER ALL OR SOME OF A SHORT POSITION IN THE
COMMON STOCK MAINTAINED BY THE UNDERWRITERS AND THE IMPOSITION OF PENALTY
BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."

<PAGE>

PROSPECTUS SUMMARY

The following summary is qualified in its entirety by the more detailed
information and Financial Statements, including the Notes thereto, contained
elsewhere in this Prospectus. Investors should carefully consider the
information set forth under the heading "Risk Factors." In this Prospectus, the
term "Company" or "CPI" refers to Cell Pathways, Inc. Unless otherwise
indicated, the information in this Prospectus (i) assumes the conversion of all
of the outstanding shares of the Company's convertible preferred stock (the
"Convertible Preferred Stock") into Common Stock upon consummation of this
offering; (ii) assumes no exercise of the Underwriters' over-allotment option;
(iii) excludes the issuance of up to 82,612 shares of Common Stock upon
redemption of the Company's 61,250 outstanding shares of Redeemable Preferred
Stock; and (iv) reflects a 1-for-1.8157 reverse split of the Company's
outstanding Common Stock.

THE COMPANY

CPI is a pharmaceutical company focused on the development and
commercialization of products to prevent and treat cancer. The Company is
currently planning clinical trials of its lead compound FGN-1 in six
indications and is conducting an ongoing pivotal Phase III trial for
Adenomatous Polyposis Coli ("APC"), a disease characterized by numerous
precancerous polyps of the colon. The Company plans to initiate Phase II/III
trials of FGN-1 for sporadic adenomatous colonic polyps, prostate cancer, lung
cancer and breast cancer in the fourth quarter of 1997, and to commence
clinical trials of FGN-1 for Barrett's Esophagus and cervical dysplasia in
1998. The Company's technology is based upon its discovery of a novel mechanism
which the Company believes, based on its research, can be targeted to induce
selective apoptosis, or programmed cell death, in precancerous and cancerous
cells without affecting normal cells. Utilizing this proprietary knowledge, the
Company has created over 400 new chemical compounds, over 200 of which display
significantly greater apoptotic potency than FGN-1.

CPI's objectives are to be a leader in cancer chemoprevention and to build an
integrated pharmaceutical company focused on the oncology market. To meet these
objectives, the Company intends to: (i) pursue accelerated clinical development
of FGN-1; (ii) leverage the Company's technology to develop additional agents
for cancer therapy and chemoprevention; (iii) commercialize products directly
to focused physician groups; and (iv) develop strategic collaborations for
selected indications and markets.

The Company's clinical trial strategy for its targeted indications is to
identify subsets of larger patient populations in which clinical endpoints
occur in high frequency and in a relatively short time frame. The Company plans
to utilize data obtained in its completed clinical trials in its initial
indications to provide a basis for commencing more advanced clinical trials in
other indications. The Company believes that this strategy may allow the
Company to reduce the size and duration of clinical trials, thereby generating
statistically significant clinical results more quickly and cost-effectively.

Adenomatous Polyposis Coli. Consistent with its clinical trial strategy, the
Company has chosen APC as its initial indication and has obtained Orphan Drug
status for FGN-1 in the treatment of APC. In a Phase I/II study completed in
January 1997, 18 APC patients were treated with FGN-1 for six months. At the
end of the study, all patients elected to continue in an open label extension
of the study, and several patients have exceeded 24 months on the drug. In this
study and its extension, nearly all patients have been observed to experience a
dose-related reduction in the number and size of exophytic (i.e., raised over
the surface) precancerous rectal polyps that were six millimeters or less in
diameter at the beginning of the study. In the extended study, no progressive
increase in polyp size or

3
<PAGE>

volume was observed in 13 of the 14 patients who have remained in the study and
have been maintained on the optimal dose. There have been no withdrawals from
the study or its extension attributable to serious adverse events. After
reviewing the results of the Phase I/II trial with the FDA, CPI initiated a
pivotal Phase III study in the second quarter of 1997, which will include 150
patients at approximately 12 centers worldwide. The Company is initiating a
concurrent Phase III study in patients with high rates of polyp formation who
otherwise would be excluded from the first Phase III study. There can be no
assurance that the results of the Phase I/II study will be indicative of
results in the Phase III studies or that the Phase III studies will show that
FGN-1 is sufficiently safe and effective for marketing approval by the FDA or
other regulatory authorities.

Sporadic Adenomatous Colonic Polyps. Sporadic adenomatous colonic polyps
occur in more than 30% of people in the U.S. over the age of 50 and are
histologically and genetically indistinguishable from the polyps of APC. In
September 1997, CPI completed a Phase IB study in 18 patients with a history of
sporadic adenomatous colonic polyps and/or cervical dysplasia. CPI plans to
initiate a multi-center, pivotal Phase II/III trial in the fourth quarter of
1997 to evaluate the safety and efficacy of different doses of FGN-1 in the
treatment of existing sporadic adenomatous colonic polyps.

Other Precancer Indications. The Company plans to commence clinical trials of
FGN-1 for other precancerous indications, including Barrett's Esophagus and
cervical dysplasia. Barrett's Esophagus is a precancerous condition of the
lower esophagus. An estimated 2,000,000 people in the U.S. have Barrett's
Esophagus, but only one half have symptoms that could lead to diagnosis.
Cervical dysplasia, a precancerous lesion of the cervix, is diagnosed in
approximately 5% of the fifty million Pap smears performed each year in the
U.S. A small portion of these cases progress to cervical cancer. CPI plans to
initiate Phase II studies in 1998 to evaluate the safety and efficacy of
different doses of FGN-1 for the treatment of Barrett's Esophagus and cervical
dysplasia.

Cancer Indications. In addition, CPI plans to test FGN-1 for certain cancers,
including prostate, lung and breast cancer. It is estimated that in 1997 there
will be approximately 209,000 new cases of prostate cancer and approximately
185,000 new cases of breast cancer in the U.S. The Company plans to initiate
Phase II/III clinical studies in the fourth quarter of 1997 to evaluate the
safety and efficacy of different doses of FGN-1 in preventing the recurrence of
prostate and breast cancer. It is estimated that in 1997 there will be
approximately 177,000 new cases of lung cancer in the U.S. In the fourth
quarter of 1997, the Company plans to conduct a pilot study of the safety and
efficacy of FGN-1 in patients with advanced lung cancer.

The Company has to date retained all rights to FGN-1 and its other compounds,
and plans to establish its own sales force to promote FGN-1 for indications
treated by relatively small, well-defined groups of clinical specialists. To
reach larger physician groups, such as gynecologists, the Company may enter
into marketing agreements with pharmaceutical or biotechnology companies. The
Company also plans to seek partners for international development and
commercialization of its products in all indications.

The business of the Company began operating in partnership form in 1990. The
Company was incorporated in Delaware in November 1992, and served as the
general partner of the partnership until September 1993 when it acquired the
partnership's assets. The Company's executive offices are located at 702
Electronic Drive, Horsham, PA 19044 and its telephone number is (215) 706-3800.

4
<PAGE>

THE OFFERING

<TABLE>
<S> <C>
Common Stock offered............................ 2,500,000 Shares
Common Stock outstanding after the offering..... 10,160,184 shares(1)
Use of proceeds................................. For research and development
activities, including clinical
development of FGN-1; working
capital; and general corporate
purposes, including capital
expenditures. See "Use of
Proceeds."
Proposed Nasdaq National Market symbol.......... CLPA
</TABLE>

RISK FACTORS
See "Risk Factors," commencing on page 6 for a discussion of certain factors
that should be considered by prospective purchasers of the Shares.

SUMMARY FINANCIAL DATA
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------------------- ------------------
1992 1993 1994 1995 1996 1996 1997
------- ------- ------- ------- ------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Revenue................ $ -- $ -- $ -- $ -- $ -- $ -- $ --
------- ------- ------- ------- ------- -------- --------
Operating expenses:
Research and
development.......... 814 1,623 2,429 2,575 4,163 2,861 5,586
General and
administrative....... 596 698 705 644 663 439 584
Provision for
redemption of
Redeemable Preferred
Stock................ -- -- -- -- -- -- 1,017
------- ------- ------- ------- ------- -------- --------
Total operating
expenses............. 1,410 2,321 3,134 3,219 4,826 3,300 7,187
------- ------- ------- ------- ------- -------- --------
Loss from operations... (1,410) (2,321) (3,134) (3,219) (4,826) (3,300) (7,187)
Interest income........ 19 52 24 28 91 80 288
------- ------- ------- ------- ------- -------- --------
Net loss............... $(1,391) $(2,269) $(3,110) $(3,191) $(4,735) $ (3,220) $ (6,899)
======= ======= ======= ======= ======= ======== ========
Pro forma net loss per
share(2).............. $ (0.62) $ (0.90)
======= ========
Shares used in
computing pro forma
net loss per
share(2).............. 7,687 7,699
======= ========
</TABLE>

<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
------------------------
ACTUAL AS ADJUSTED(3)
-------- --------------
(IN THOUSANDS)
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents............................. $ 11,401 $ 38,205
Working capital....................................... 10,549 37,353
Total assets.......................................... 12,105 38,909
Notes payable......................................... 75 75
Accumulated deficit................................... (22,587) (22,587)
Total stockholders' equity............................ 9,865 37,761
</TABLE>
- --------

(1) Excludes 281,550 shares of Common Stock issuable upon the exercise of
outstanding stock options and 134,065 shares of Common Stock issuable upon
the exercise of outstanding warrants, 751,889 shares of Common Stock
reserved for future issuance under the Company's 1997 Equity Incentive Plan
and up to 82,612 shares of Common Stock that may be issued upon the
redemption of the Redeemable Preferred Stock. See "Management--Employee
Benefit Plans," "Description of Capital Stock" and "Shares Eligible for
Future Sale."
(2) See Note 2 of Notes to Financial Statements for information concerning the
computation of pro forma net loss per share.

(3) As adjusted to give effect to the sale of the Shares by the Company
pursuant to this offering (assuming an initial public offering price of
$12.00 per Share), after deducting the Underwriting Discount and estimated
offering expenses payable by the Company and the use of the estimated net
proceeds therefrom. The redemption of $1.1 million of the Redeemable
Preferred Stock assumes the issuance of 45,500 shares of Common Stock and
the payment of $546,000 in cash. See "Use of Proceeds" and
"Capitalization."

5
<PAGE>

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

Certain statements contained in "Prospectus Summary," "Risk Factors,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business," including statements regarding the anticipated
development and expansion of the Company's business, the products which the
Company expects to offer, anticipated research and development expenditures
and regulatory reform, the intent, belief or current expectations of the
Company, its directors or its officers, primarily with respect to the future
operating performance of the Company, and other statements contained herein
regarding matters that are not historical facts are "forward-looking"
statements (as such term is defined in the Private Securities Litigation
Reform Act of 1995). Because such statements include risks and uncertainties,
actual results may differ materially from those expressed or implied by such
forward-looking statements. Factors that could cause results to differ
materially from those expressed or implied by such forward-looking statements
include, but are not limited to, the factors set forth in "Risk Factors,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business."

RISK FACTORS

The Shares offered hereby involve a high degree of risk. In addition to the
other information in this Prospectus, the following risk factors should be
considered carefully before purchasing the Common Stock offered hereby.

EARLY STAGE OF DEVELOPMENT; ABSENCE OF DEVELOPED PRODUCTS; UNCERTAINTY OF
CLINICAL TRIALS

The Company is at an early stage of development and must be evaluated in
light of the uncertainties and complications present in a development stage
company. The Company has no products approved for sale and does not expect to
have any products available to be marketed in the near future. CPI has only
one product candidate in clinical trials, FGN-1. The Company has not completed
tests for the safety and efficacy of FGN-1 and has not commenced such tests
for any other compounds.

Before obtaining regulatory approval for the commercial sale of any of its
product candidates, the Company must demonstrate through preclinical and
clinical trials that the product is safe and effective for use in each target
indication. The results from preclinical and early clinical trials may not be
predictive of results that will be obtained in large-scale clinical trials.
There can be no assurance that clinical trials of the Company's product
candidates will demonstrate sufficient safety and efficacy to obtain the
requisite regulatory approvals or will result in marketable products. Clinical
trials are often conducted with patients who are critically ill. During the
course of treatment these patients may die or suffer other adverse medical
events for reasons that may not be related to the pharmaceutical agent being
tested, but which can nevertheless affect clinical trial results. A number of
companies in the pharmaceutical and biotechnology industries have suffered
significant setbacks in advanced clinical trials, even after achieving
promising results in earlier trials.

The completion of clinical trials of the Company's product candidates could
be delayed by many factors and there can be no assurance that such delays or
terminations will not occur. One such factor is the rate of enrollment of
patients, which generally varies throughout the course of a clinical trial and
which depends on the size of the patient population, the number of clinical
trial sites, the proximity of the patients to clinical trial sites, the
eligibility criteria for the clinical trial and the existence of competitive
clinical trials. The Company cannot control the rate at which patients present
themselves for enrollment, and there can be no assurance that the rate of
patient enrollment will be consistent with the Company's expectations or be
sufficient to enable clinical trials of the Company's product candidates to be
completed in a timely manner. The Company is planning to commence at least
four clinical trials before the end of 1997. The Company has limited
experience managing clinical trials and any delays or terminations of such
trials would have a material adverse effect on the Company's business,
financial condition and results of operations.

6
<PAGE>

Although FGN-1 is in Phase III clinical trials for the treatment of APC,
trials to date have involved only a limited number of patients. No assurance
can be given as to the ability of the Company to submit a New Drug Application
("NDA") to the U.S. Food and Drug Administration ("FDA") or the foreign
equivalent with respect to FGN-1 on a timely basis, if at all. In addition,
results obtained in clinical trials for the treatment of APC may not be
predictive of results of clinical trials for other indications. If the
Company's product candidates are not shown to be safe and effective in
clinical trials, including the current Phase III clinical trial for FGN-1,
there would be a material adverse effect on the Company's business, financial
condition and results of operations.

No assurance can be given that the Company will be able to submit an
Investigational New Drug Application ("IND") or foreign equivalents with
respect to any follow-on compounds, that the Company will be permitted to
undertake human clinical testing of such additional compounds, or, if
permitted, that such compounds will be demonstrated to be safe and effective.
The Company's compounds may prove to have undesirable and unintended side
effects or other characteristics that may prevent or limit their commercial
use. Products, if any, resulting from the Company's research and development
programs are not expected to be commercially available for a number of years
even if they are successfully developed and proven to be safe and effective.
Thus, there can be no assurance that any of the Company's product development
efforts will be successfully completed, that regulatory approvals will be
obtained or will be as broad as sought, that the Company's products will be
capable of being produced in commercial quantities at a reasonable cost or
that any products, if introduced, will achieve market acceptance. The failure
of the Company to complete clinical trials, obtain regulatory approval or
successfully market its products, if approved, would have a material adverse
effect on the Company's business, financial condition and results of
operations. See "Business--Products in Development" and "--Government
Regulation."

DEPENDENCE ON FGN-1

The Company has one compound, FGN-1, in clinical trials, and does not expect
to have additional compounds in clinical trials in the near future. FGN-1 has
not been approved for marketing by the FDA for any indication and trials to
date have involved only a limited number of patients. There can be no
assurance that marketing approval for FGN-1 will be obtained. FGN-1 is
currently in Phase III clinical trials for the prevention of precancerous
polyps in patients with APC. If approved for marketing, there can be no
assurance that FGN-1 will gain market acceptance or of the extent of the
marketing efforts necessary to gain any such acceptance. In addition,
competition to FGN-1 may develop from other new or existing products. The
failure of FGN-1 to be approved for marketing or to gain market acceptance
would have a material adverse effect on the Company's business, financial
condition and results of operations.

The number of APC patients in the U.S. is limited and may be as few as
25,000. In order to increase the potential applications for which FGN-1 may be
used, the Company must successfully complete lengthy clinical trials and
thereafter receive marketing clearance from the FDA for each additional
indication. There can be no assurance that the Company will successfully
complete these clinical trials and receive appropriate regulatory clearance on
a timely basis, if at all. The inability to do so would have a material
adverse effect on the Company's business, financial condition and results of
operations. Although the Company has obtained Orphan Drug status for FGN-1 for
the treatment of APC, there can be no assurance that this will provide any
meaningful competitive advantage to the Company. See "Business--Government
Regulation."

TECHNOLOGICAL UNCERTAINTY

To date, the FDA has not approved any drug for the prevention of
precancerous lesions or cancer, and there can be no assurance that CPI will be
able to develop successfully such a chemoprevention

7
<PAGE>

drug, that such drug could be developed within the Company's proposed timeline
or that such drug will be commercially viable or will achieve market
acceptance. The Company's area of focus, oncology in general and
chemoprevention in particular, is not thoroughly understood and there can be
no assurance that the products the Company is seeking to develop will prove to
be safe and effective in preventing or treating precancerous lesions or
cancer.

The Company believes that FGN-1 and its other compounds selectively induce
apoptosis through a novel mechanism. Additional research by the Company or
others may cause the Company to revise or abandon this approach, adversely
affecting the Company's ability to develop products on a timely basis, if at
all. There can be no assurance that the use of the Company's technology will
lead to the development and approval of commercial pharmaceutical products
that are safe and efficacious. There can be no assurance that the Company's
competitors will not develop safer and more effective products, obtain patent
protection or intellectual property rights that limit the Company's ability to
commercialize products that may be developed or commercialize products earlier
than the Company. See "Business--CPI Technology."

FUTURE CAPITAL NEEDS; UNCERTAINTY OF ADDITIONAL FUNDING

Development of the Company's initial product candidate, FGN-1, and
additional compounds will require substantial additional funds to conduct
research, development and clinical trials necessary to bring such products to
market and to establish manufacturing, marketing and distribution
capabilities. The Company's future capital requirements will depend on many
factors, including, among others: scientific progress in its research and
development programs; progress with preclinical and clinical trials; progress
in obtaining regulatory approvals; the costs involved in preparing, filing,
prosecuting, maintaining and enforcing patent claims; competing technological
efforts and market developments; changes in the Company's existing research
relationships; the ability of the Company to establish sales and marketing
capabilities; the extent of competition; and the ability of the Company to
establish collaborative arrangements to the extent necessary. Based on current
projections, the Company estimates that its existing capital resources, the
net proceeds from this offering and interest thereon, together with facility
and equipment financing, will be sufficient to fund the Company's capital
requirements through approximately the end of 1999, although there can be no
assurance that the Company will not require additional financing earlier.
There is a risk of delay or failure at any stage of developing a product
candidate, and the time required and costs involved in successfully
accomplishing the Company's objectives cannot be predicted. Actual drug
research and development costs could substantially exceed budgeted amounts,
which could have a material adverse effect on the Company's business,
financial condition and results of operations.

There can be no assurance that the Company's revenue and expense forecasts
will prove to be accurate. To the extent necessary, the Company intends to
seek additional funding through public or private equity or debt financings,
collaborative relationships, capital lease transactions or other available
financing transactions. However, there can be no assurance that additional
financing will be available on acceptable terms, if at all, and such
financings could be dilutive to existing stockholders. Moreover, in the event
that additional funds are obtained through arrangements with collaborative
partners, such arrangements 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. If adequate funds are
not available, the Company may be required to delay, reduce the scope of or
eliminate one or more of its research or development programs. The failure of
the Company to obtain adequate financing when needed and on acceptable terms
would have a material adverse effect on the Company's business, financial
condition and results of operations. See "Use of Proceeds" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations."

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HISTORY OF OPERATING LOSSES; ACCUMULATED DEFICIT; EXPECTED FUTURE LOSSES

The Company and its predecessor have experienced significant operating
losses since inception in 1990. As of September 30, 1997, the Company had an
accumulated deficit of approximately $22.6 million. The Company expects to
incur additional operating losses over the next several years and expects
cumulative losses to increase substantially as the Company's research and
development efforts and preclinical and clinical testing expand. The Company's
ability to achieve profitability is dependent on its ability, alone or with
others, to complete the development of its proposed products successfully,
obtain the required regulatory approvals, manufacture and market its proposed
products successfully or have such products manufactured and marketed by
others and gain market acceptance for such products. There can be no assurance
if or when the Company will achieve profitability. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."

UNCERTAINTY OF PROTECTION OF PATENTS AND PROPRIETARY RIGHTS

CPI's success will depend, in part, on its ability to obtain patents,
operate without infringing the proprietary rights of others and maintain trade
secrets, both in the U.S. and other countries. Patent matters in the
pharmaceutical industry can be highly uncertain and involve complex legal and
factual questions. Accordingly, the validity, breadth, and enforceability of
CPI's patents and the existence of potentially blocking patent rights of
others cannot be predicted, either in the U.S. or in other countries.

As of October 15, 1997, CPI held title or exclusive licenses to two issued
U.S. patents, one allowed U.S. patent application and one pending U.S. patent
application relating to the therapeutic use of FGN-1 in the treatment of
neoplasia and/or precancerous lesions. The Company has no composition of
matter patent on FGN-1 because FGN-1, which is a sulfone derivative of the
non-steroidal anti-inflammatory drug ("NSAID") sulindac, was described in an
expired 1972 patent, U.S. 3,654,349, and in various scientific journal
articles published in the 1970s. CPI has also been issued or holds exclusive
licenses to 11 foreign patents (including patents in various European
countries and in Australia and an allowed Japanese patent application), as
well as two other pending foreign patent applications relating to the use of
FGN-1 in pharmaceutical compositions for the treatment of neoplasia and/or
precancerous lesions. In Europe, CPI's patent rights relating to FGN-1 are
directed to the use of FGN-1 in the manufacture of pharmaceutical compositions
for the treatment of precancerous lesions. CPI also holds title or exclusive
licenses to four U.S. patent applications which have been allowed, 18 other
pending U.S. patent applications, five issued foreign patents and 18 pending
foreign applications on other compounds, or therapeutic methods involving such
compounds, for the treatment of colonic polyps, precancerous lesions, and/or
neoplasia. CPI also has filed a U.S. patent application on methods for
screening compounds for their usefulness in selectively inducing apoptosis
involving an apoptosis regulatory element ("ARE"). CPI intends to file
additional applications, as appropriate, for patents on new compounds,
products, or processes discovered or developed through application of the
Company's technology.

Beyond the patents granted to date, there can be no assurance that CPI will
discover or develop patentable products or processes, that patents will issue
from any of the currently pending patent applications, or that claims granted
on issued patents will be sufficient to protect the Company's technology.
Potential competitors or other researchers in the field may have filed patent
applications, been issued patents, published articles or otherwise created
prior art that could restrict or block the Company's efforts to obtain
additional patents. There also can be no assurance that the Company's issued
patents or pending patent applications, if issued, will not be challenged,
invalidated or circumvented or that the rights granted thereunder will provide
proprietary protection or competitive advantages to the Company. CPI's patent
rights also depend on its compliance with technology and patent licenses upon
which its patent rights are based and upon the validity of assignments of
patent rights from consultants and other inventors that were, or are, not
employed by CPI.

In addition, competitors may manufacture and sell CPI's potential products
in those foreign countries where CPI has not filed for patent protection or
where patent protection may be unavailable,

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<PAGE>

not obtainable or ultimately not enforceable. The ability of such competitors
to sell such products in the U.S. or in foreign countries where CPI has
obtained patents is usually governed by the patent laws of the countries in
which the product is sold. In addition, to the extent that clinical uses of
FGN-1 are discovered beyond those set forth in CPI's patent claims, CPI may
not be able to enforce its patent rights against companies marketing FGN-1 for
such other clinical uses.

The success of the Company also will depend, in part, on CPI not infringing
patents issued to others. Pharmaceutical companies, biotechnology companies,
universities, research institutions, and others may have filed patent
applications or have received, or may obtain, issued patents in the U.S. or
elsewhere relating to aspects of the Company's technology. It is uncertain
whether the issuance of any third-party patents will require the Company to
alter its products or processes, obtain licenses, or cease certain activities.
Some third-party applications or patents may conflict with the Company's
issued patents or pending applications. Such conflict could result in a
significant reduction of the coverage of the Company's issued or licensed
patents. In addition, if patents are issued to other companies which contain
blocking, dominating or conflicting claims and such claims are ultimately
determined to be valid, the Company may be required to obtain licenses to
these patents or to develop or obtain alternative technology. If any licenses
are required, there can be no assurance that the Company will be able to
obtain any such licenses on commercially favorable terms, if at all, and if
these licenses are not obtained, the Company might be prevented from pursuing
the development of certain of its potential products. The Company's failure to
obtain a license to any technology that it may require to commercialize its
products may have a material adverse impact on the Company's business,
financial condition and results of operations.

Litigation, which could result in substantial costs to the Company, may also
be necessary to enforce any patents issued or licensed to the Company or to
determine the scope and validity of the proprietary rights of others. In this
connection, under the Abbreviated New Drug Application provisions of U.S. law,
after four years from the date marketing approval is granted to the Company by
the FDA for a patented drug, a generic drug company may submit an Abbreviated
New Drug Application to the FDA to obtain approval to market in the U.S. a
generic version of the drug patented by the Company. If approval is given to
the generic drug company, the Company would be required to promptly initiate
patent litigation to prevent the marketing of such a generic version prior to
the normal expiration of the patent. There can be no assurance that the
Company's issued or licensed patents would be held valid by a court of
competent jurisdiction. In addition, if competitors of the Company file patent
applications in the U.S. that claim technology also claimed by the Company,
the Company may have to participate in interference proceedings to determine
priority of invention. These proceedings, if initiated by the U.S. Patent and
Trademark Office, could result in substantial cost to the Company, even if the
eventual outcome is favorable to the Company. An adverse outcome with respect
to a third party claim or in an interference proceeding could subject the
Company to significant liabilities, require disputed rights to be licensed
from third parties, or require the Company to cease using such technology, any
of which could have a material adverse effect on the Company's business,
financial condition and results of operations.

CPI also relies on trade secrets to protect technology, especially where
patent protection is not believed to be appropriate or obtainable or where
patents have not issued. CPI attempts to protect its proprietary technology
and processes, in part, by confidentiality agreements and assignment of
invention agreements with its employees and confidentiality agreements with
its consultants and certain contractors. There can be no assurance that these
agreements will not be breached, that the Company would have adequate remedies
for any breach, or that the Company's trade secrets will not otherwise become
known or be independently discovered by competitors. Such trade secrets or
other intellectual property of the Company, should they become known to its
competitors, could result in a material adverse effect on the Company's
business, financial condition and results of operations. To

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<PAGE>

the extent that the Company or its consultants or research collaborators use
intellectual property owned by others in their work for the Company, disputes
may also arise as to the rights to related or resulting know-how and
inventions.

INTENSE COMPETITION; RAPID TECHNOLOGICAL CHANGE

The industry in which the Company competes is characterized by extensive
research and development efforts and rapid technological progress. New
developments occur and are expected to continue to occur at a rapid pace, and
there can be no assurance that discoveries or commercial developments by the
Company's competitors will not render some or all of the Company's potential
products obsolete or non-competitive, which would have a material adverse
effect on the Company's business, financial condition and results of
operations. The Company's competitive position also depends on its ability to
attract and retain qualified scientific and other personnel, develop effective
proprietary products, implement development and marketing plans, obtain patent
protection and secure adequate capital resources.

In the fields of cancer therapy and the prevention of precancerous and
cancerous lesions, other products are being developed that may compete
directly with the products that the Company is seeking to develop and market.
The Company is aware of clinical trials in which a number of pharmaceutical
and nutritional agents are being examined for their potential usefulness in
the treatment of precancerous lesions and cancer. These include studies of
NSAID-like compounds, cyclooxygenase inhibitors, difluoromethylornithine
("DFMO") and natural nutrients in the treatment of APC and sporadic colonic
polyps, studies of retinoids and DFMO in the treatment of cervical dysplasia
and studies of tamoxifen for the prevention of breast cancer. Additional
compounds being tested in various epithelial lesions include compounds related
to aspirin, various vitamins and nutritional supplements, oltipraz, N-acetyl
cysteine and compounds that interfere with hormone activities. The studies are
being conducted by pharmaceutical and biotechnology companies, major academic
institutions and government agencies. There are other agents, including
certain prescription drugs, that have been observed to have an effect on the
ARE. Although the Company is not aware that any third party has demonstrated
the preclinical utility of these compounds in the treatment of precancerous or
cancerous lesions, there can be no assurance that such existing or new agents
will not ultimately be found to be useful, and therefore competitive with any
future products of the Company.

Near-term competition from fully integrated and more established
pharmaceutical and biotechnology companies is expected. Most of these
companies have substantially greater financial, research and development,
manufacturing and marketing experience and resources than the Company and
represent substantial long-term competition for the Company. Such companies
may succeed in discovering and developing pharmaceutical products more rapidly
than the Company or pharmaceutical products that are safer, more effective or
less costly than any that may be developed by the Company. Such companies also
may be more successful than the Company in production and marketing. Smaller
companies may also prove to be significant competitors, particularly through
collaborative arrangements with large pharmaceutical and established
biotechnology companies. Academic institutions, governmental agencies and
other public and private research organizations also conduct clinical trials,
seek patent protection and establish collaborative arrangements for the
development of oncology products.

CPI will face competition based on product efficacy and safety, the timing
and scope of regulatory approvals, availability of supply, marketing and sales
capabilities, reimbursement coverage, price and patent position. There can be
no assurance that the Company's competitors will not develop safer and more
effective products or obtain patent protection or intellectual property rights
that limit the Company's ability to commercialize products that may be
developed or commercialize products earlier than the Company. There can be no
assurance that the Company's issued patents or pending patent applications, if
issued, will not be challenged, invalidated or circumvented or that the rights
granted thereunder will provide proprietary protection or competitive
advantage to the Company.

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<PAGE>

DEPENDENCE ON COLLABORATIVE RELATIONSHIPS

The Company's development and clinical testing efforts are dependent on
third party contractors, such as contractors for animal toxicology studies and
contract research organizations. The loss of any material third party
contractor or the failure of such contractor to perform its duties as
contracted could delay the Company's development efforts and could have a
material adverse effect on the Company's business, financial condition and
results of operations.

The Company has entered into a Clinical Trials Agreement (the "Agreement")
with the National Cancer Institute ("NCI"), pursuant to which the NCI has
agreed to sponsor clinical trials of FGN-1 for the prevention of precancerous
colonic polyps and for at least one other cancer prevention indication. Under
the Agreement, the NCI contracts directly with third parties to conduct such
trials. The NCI has the right to conduct clinical trials with FGN-1 in any
cancer prevention treatment indication it would like and the Company is
obligated to provide FGN-1 for such trials. In the event that CPI elects to
have the NCI conduct trials needed for regulatory approval, there can be no
assurance that the NCI procedures or changes in policy will not cause such
trials or regulatory filings to be completed on a slower schedule than if CPI
were directly conducting such trials. See "Business--National Cancer Institute
and Other Collaborative Arrangements."

The Company's strategy for commercialization of its proposed products for
certain indications and markets includes collaborating with corporate partners
and others, and, to the extent that such corporate partnerships may be entered
into, is dependent upon the subsequent success of these outside parties in
performing their responsibilities. CPI currently does not have any
collaborations for the commercialization of products. There can be no
assurance that the Company will be able to negotiate any collaborative
arrangements in the future on acceptable terms, if at all, or that such
collaborative arrangements will be maintained or be successful. To the extent
that such arrangements are negotiated, the amount and timing of resources to
be devoted to these activities are not within the complete control of the
Company. There can be no assurance that such partners will perform their
obligations as expected or that the Company will derive any revenue from such
arrangements. There can be no assurance that the Company's future
collaborators will not pursue their existing or alternative technologies or
product candidates in preference to those being developed in collaboration
with the Company. In addition, there can be no assurance that the Company's
future collaborators will pay license fees to the Company, that they will
develop and market any products under the agreements or that they will commit
to fund product development costs. To the extent that the Company chooses not
to enter into collaborative relationships, or is unable to establish such
arrangements, the Company would be required to continue to undertake research,
development and marketing of its proposed products at its own expense. In
addition, the Company may encounter significant delays in introducing its
proposed products into certain markets or find that the development,
manufacture or sale of its proposed products in such markets is adversely
affected by the absence of such collaborative agreements. See "Business--
Products in Development," "--Manufacturing" and "--Marketing and Sales."

EXTENSIVE GOVERNMENT REGULATION; NO ASSURANCE OF NECESSARY FDA AND OTHER
REGULATORY APPROVALS

The research, design, testing, manufacturing, labeling, marketing,
distribution and advertising of pharmaceutical products such as the Company's
proposed products are subject to extensive regulation by governmental
regulatory authorities in the U.S. and other countries. The drug development
and approval process is generally lengthy, expensive and subject to
unanticipated delays. Data obtained from preclinical and clinical testing are
subject to varying interpretations that could delay, limit or prevent FDA
approval. In addition, delays or rejections may be encountered based upon
changes in FDA policy for drug approval during the period of development and
FDA regulatory review of each submitted NDA. Satisfaction of such regulatory
requirements, which includes demonstrating to the

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<PAGE>

satisfaction of the FDA that the relevant product is both safe and effective,
typically takes several years or more depending upon the type, complexity and
novelty of the product and requires the expenditure of substantial resources.
There can be no assurance that the Company will not encounter problems in
clinical trials which would cause the Company or the FDA to delay or suspend
clinical trials. Any such delay or suspension could have a material adverse
effect on the Company's business, financial condition and results of
operations. See "Business--Products in Development" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations."

The Company has not completed testing any of its products for safety or
efficacy in humans. The pivotal Phase III studies of FGN-1 for APC and the
Phase II and III studies of FGN-1 for other indications, if and when
initiated, will seek efficacy data as well as additional safety data and will
require substantial time and significant funding. There can be no assurance
that clinical studies for any of the Company's compounds currently under
development will be completed successfully within any specified time period,
if at all. Further, there can also be no assurance that such testing will show
FGN-1 or any other product to be safe or effective. There can be no assurance
that the Company will not encounter problems in clinical trials that will
cause the Company to delay or suspend clinical trials. See "Business--Products
in Development."

The Company's current clinical trial strategy for the development of drugs
for the prevention of precancerous lesions assumes that the FDA will accept
reduction in the formation of precancerous lesions as an endpoint for
precancer trials. To date, the FDA has not approved any chemoprevention
compounds and there can be no assurance that the FDA will approve such
compounds in the future. Should the FDA require CPI to demonstrate the
efficacy of FGN-1 in the reduction of certain cancers or in overall mortality
rates resulting from certain cancers, the Company's clinical trial strategy
would be materially and adversely affected, as significant additional time and
funding would be required to demonstrate such efficacy. There can be no
assurance that CPI will be able to successfully develop a safe and effective
chemoprevention product or that such product will be commercially viable or
will achieve market acceptance.

There can be no assurance even after such time has been expended and
expenses incurred that regulatory approval will be obtained for any
therapeutic products being developed by the Company. Further, even if such
regulatory approval is obtained, the Company, its products, its contract
manufacturers and its commercial collaborators are subject to continual
regulatory review in both the U.S. and other countries, and later discovery of
previously unknown problems with regard to such a product, distributor or
manufacturer may result in restrictions on such product or manufacturer,
including withdrawal of the product from the market and disqualification or
decertification of the distributor or manufacturer.

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<PAGE>

granted, the Company would be required to comply with FDA requirements for
manufacturing, labeling, advertising, record keeping and reporting of adverse
experiences and other information. In addition, the Company would be required
to comply with federal and state anti-kickback and other health care fraud and
abuse laws that pertain to the marketing of pharmaceuticals. Failure to comply
with regulatory requirements and other factors could subject CPI to regulatory
or judicial enforcement actions, including but not limited to product recalls
or seizures, injunctions, withdrawal of the product from the market, civil
penalties, criminal prosecution, refusals to approve new products and
withdrawals of existing approvals, as well as enhanced product liability
exposure, any of which could have a material adverse effect on the Company's
business, financial condition and results of operations. Sales of the
Company's products outside the U.S. will be subject to foreign regulatory
requirements governing clinical trials, marketing approval, manufacturing and
pricing. Non-compliance with these requirements could result in enforcement
actions or penalties or could delay introduction of the Company's products in
certain countries. See "Business--Manufacturing" and "--Marketing and Sales."

The Company has obtained Orphan Drug status for FGN-1 for the treatment of
APC. Although Orphan Drug status may provide an applicant exclusive marketing
rights in the U.S. for a designated indication for seven years following
marketing approval, in order to obtain such benefits, the applicant must be
the sponsor of the first NDA approved for that drug and indication. Moreover,
amendment of the Orphan Drug Act by the U.S. Congress and reinterpretation by
the FDA are frequently discussed. Therefore, there can be no assurance as to
the precise scope of protection that may be afforded by Orphan Drug status in
the future, or that the current level of exclusivity will remain in effect.

POTENTIAL LIMITATIONS ON THIRD-PARTY REIMBURSEMENT AND HEALTH CARE REFORM

In both U.S. and foreign markets, sales of the Company's proposed products
will depend in part on the availability of reimbursement from third-party
payors such as government health administration authorities, private health
insurers and other organizations. The levels of revenues and profitability of
pharmaceutical companies may be affected by the continuing efforts of
governmental and third-party payors to contain or reduce the costs of health
care. The Company cannot predict the effect that private sector or
governmental health care reforms may have on its business, and there can be no
assurance that any such reforms will not have a material adverse effect on the
Company's business, financial condition and results of operations. In
addition, in both the U.S. and elsewhere, sales of prescription drugs are
dependent in part on the availability of reimbursement to the consumer from
third-party payors, such as government and private insurance plans. Third-
party payors are increasingly challenging the price and cost-effectiveness of
medical products and services. Significant uncertainty exists as to the
reimbursement status of newly approved health care products. There can be no
assurance that the Company's proposed products will be considered cost-
effective or that adequate third-party reimbursement will be available to
enable the Company to maintain price levels sufficient to realize an
appropriate return on its investment in product development. Legislation and
regulations affecting the pricing of pharmaceuticals may change before any of
the Company's proposed products are approved for marketing. Adoption of such
legislation could further limit reimbursement for medical products and
services. As a result, the Company may elect not to market future products in
certain markets.

LACK OF MANUFACTURING EXPERIENCE; RELIANCE ON CONTRACT MANUFACTURERS AND
SUPPLIERS

The Company does not have facilities to manufacture and produce its
compounds for preclinical, clinical or commercial purposes. The Company's
product candidates have never been manufactured for commercial purposes and
there can be no assurance that such products can be manufactured at a cost or
in quantities necessary to make them commercially viable. If the Company is
unable to manufacture or contract for a sufficient supply of its compounds on
acceptable terms, or if it should

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<PAGE>

encounter delays or difficulties in its relationships with manufacturers, the
Company's preclinical and human clinical testing schedule would be delayed,
resulting in delay of the submission of products for regulatory approval or
delay of the market introduction and subsequent sales of such products, which
would have a material adverse effect on the Company's business, financial
condition and results of operations. Furthermore, CPI or contract
manufacturers must supply all necessary documentation in support of the
Company's NDA on a timely basis and must adhere to Good Laboratory Practice
("GLP") and current Good Manufacturing Practice ("cGMP") regulations enforced
by the FDA through its facilities inspection program. If these facilities
cannot pass a pre-approval plant inspection, the FDA approval of the products
will not be granted.

FGN-1 is manufactured in bulk form for the Company by Zambon Group
("Zambon"), a large pharmaceutical contract manufacturer located in Milan,
Italy. The Company also works with a single U.S.-based manufacturer, Ohm
Laboratories Inc. ("Ohm"), which manufactures FGN-1 in its final dosage form.
Although the Company is negotiating with these suppliers regarding long-term
supply agreements, the Company currently does not have such agreements with
Zambon or Ohm. There can be no assurance that such suppliers will continue to
make available to the Company the required quantities of FGN-1 on reasonable
terms, if at all. If either Zambon or Ohm is unable or unwilling to make FGN-1
available to the Company in required quantities, there can be no assurance
that the Company will be able to identify and contract with alternative
contract manufacturers. The Company would incur significant costs and delays
to qualify an alternative manufacturer, which could have a material adverse
effect on the Company's business, financial condition and results of
operations. The availability and price of FGN-1 may be subject to curtailment
or change due to limitations that may be imposed under governmental
regulations, suppliers' allocations to meet the demand of other purchasers,
interruptions in production by suppliers and market and other events and
conditions, which could have a material adverse effect on the Company's
business, financial condition and results of operations. See "Business--
Manufacturing."

ABSENCE OF SALES AND MARKETING EXPERIENCE; DEPENDENCE ON THIRD PARTIES

The Company has no experience in sales, marketing or distribution. Depending
upon the marketing strategy ultimately adopted with respect to each relevant
market, the Company intends either to market its products, if developed and
approved, on its own or through relationships with pharmaceutical companies
that have established distribution systems and direct sales forces. To market
any of its products directly, the Company must develop a marketing and sales
force with technical expertise and with supporting distribution capabilities.
There can be no assurance that the Company will be able to establish in-house
sales, marketing and distribution capabilities or relationships with third
parties, or that it will be successful in gaining market acceptance for its
products. To the extent that the Company enters into co-promotion or other
licensing arrangements, any revenues received by the Company will depend upon
the efforts of third parties, and there can be no assurance that such efforts
will be successful. See "Business--Marketing and Sales."

NEED TO ATTRACT AND RETAIN KEY EMPLOYEES AND CONSULTANTS

Because of the specialized scientific nature of the Company's business, the
Company's success is highly dependent upon its ability to attract and retain
qualified scientific and technical personnel. The Company is highly dependent
on the principal members of its scientific and management staff, particularly
Dr. Rifat Pamukcu, and the loss of any of their services might significantly
delay or prevent the achievement of research, development, or business
objectives. The Company does not maintain key-man life insurance with respect
to any of its employees, nor does it intend to secure such insurance. The
Company also relies on consultants and advisors, including the members of its
Scientific Advisory Board, to assist the Company in formulating its research
and development strategy. Retaining and attracting qualified personnel,
consultants and advisors is critical to the Company's success. In order to
pursue its product development and marketing and sales plans, the Company will
be required to hire additional qualified scientific personnel to perform
research and development, as

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<PAGE>

well as personnel with expertise in clinical testing, government regulation,
manufacturing and marketing and sales. The Company faces competition for
qualified individuals from numerous pharmaceutical and biotechnology
companies, universities and other research institutions. There can be no
assurance that the Company will be able to attract and retain such individuals
on acceptable terms, if at all, and the failure to do so could have a material
adverse effect on the Company's business, financial condition and results of
operations.

POTENTIAL PRODUCT LIABILITY; POSSIBLE INSUFFICIENCY OF INSURANCE

The Company's business will expose it to potential product liability risks
that are inherent in the testing, manufacturing and marketing of human
therapeutic products. Clinical research involves the testing of new drugs on
human volunteers pursuant to a research plan, and such testing involves a risk
of liability for personal injury or death to patients due to, among other
reasons, possible unforeseen adverse side effects or improper administration
of the new drug. Many of these patients are already seriously ill and are at
risk of further illness or death. The Company currently has clinical trial
liability insurance but there can be no assurance that it will be able to
maintain such insurance. CPI could be materially and adversely affected if it
were required to pay damages or incur defense costs: (i) in connection with a
claim outside the scope of indemnity or insurance coverage; (ii) if the
indemnity, although applicable, is not performed in accordance with the terms
of the relevant contract; or (iii) if the Company's liability exceeds the
amount of applicable insurance. In addition, there can be no assurance that
insurance will continue to be available on terms acceptable to the Company, if
at all, or that, if obtained, the insurance coverage will be sufficient to
cover any potential claims or liabilities. Similar risks would exist upon the
commercialization or marketing of any products by the Company or its partners.

HANDLING AND DISPOSAL OF HAZARDOUS MATERIALS

The Company's research and development involves the controlled use of
hazardous materials, chemicals and various radioactive compounds. Although the
Company believes that its safety procedures for handling and disposing of such
materials comply with the standards 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. The Company may incur
substantial costs to comply with environmental regulations if the Company
develops manufacturing capacity.

ABSENCE OF PRIOR TRADING MARKET; POTENTIAL VOLATILITY OF STOCK PRICE; NO
DIVIDENDS

Prior to this offering, there has been no public market for the Company's
Common Stock. There can be no assurance that an active trading market will
develop or, if one develops, that it will be maintained. The public offering
price of the Common Stock, which will be established by negotiation between
the Company and the representatives of the Underwriters, may not be indicative
of prices that will prevail in the market after this offering. See
"Underwriting" for factors to be considered in determining the offering price.
The market price of the Common Stock, like that of the common stock of many
other early-stage pharmaceutical companies, is likely to be highly volatile.
Factors such as the fluctuation in the Company's operating results, comments
by research analysts, announcements of technological innovations or new
commercial products by the Company or its competitors, progress with clinical
trials, governmental regulation, changes in reimbursement policies,
developments in patent or other proprietary rights of the Company or its
competitors, including litigation, developments in the Company's relationships
with collaborative partners, if any, public concern as to the safety and
efficacy of drugs developed by the Company and its competitors and general
market conditions may have a significant effect on the market price of the
Common Stock. The Company has never paid any cash dividends and does not
anticipate paying cash dividends in the foreseeable future. See "Dividend
Policy."

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SHARES ELIGIBLE FOR FUTURE SALE; REGISTRATION RIGHTS

Sales of shares of Common Stock (including shares issued upon the exercise
of outstanding options and warrants) in the public market after this offering
could adversely affect the market price of the Common Stock. In addition to
the 2,500,000 Shares offered hereby, as of the date of this Prospectus, there
will be 7,660,184 shares of Common Stock outstanding (assuming no exercise of
the Underwriters' over-allotment option and no exercise of outstanding stock
options and warrants), all of which are "restricted securities" (the
"Restricted Shares") under the Securities Act of 1933, as amended (the
"Securities Act"). Beginning 90 days after the date of this Prospectus,
approximately 5,368 Restricted Shares will become eligible for sale in the
public market pursuant to Rule 144 and Rule 701 under the Securities Act.
Certain officers, directors and stockholders of the Company, who together hold
5,844,290 of the Restricted Shares, have agreed not to sell their shares for a
period of 180 days from the date of this Prospectus. Following completion of
the 180-day period, 2,837,393 shares will be eligible for sale pursuant to
Rule 144(k) and 3,006,897 shares held by certain affiliates of the Company
will be eligible for sale subject to the volume limitations of Rule 144. Upon
completion of this offering, the holders of the 3,006,897 shares, subject to
their agreement not to sell such shares for a period of 180 days, will be
entitled to certain rights with respect to registration of such shares for
offer or sale to the public. In addition, the Company intends to register
1,294,266 shares of Common Stock reserved for issuance under its 1997 Equity
Incentive Plan following the date of the Prospectus. See "Management--Employee
Benefit Plans," "Shares Eligible for Future Sale" and "Description of Capital
Stock--Registration Rights."

CONTROL BY EXISTING STOCKHOLDERS; ANTI-TAKEOVER PROVISIONS

Upon the closing of the offering, the Company's directors and executive
officers will, in the aggregate, beneficially own approximately 29.72% of the
Company's outstanding shares of Common Stock (approximately 28.67% if the
Underwriters' over-allotment option is exercised in full). See "Principal
Stockholders." Accordingly, these stockholders, acting together, will be able
to control many matters requiring approval by the stockholders of the Company,
including the election of directors. Moreover, the Company's Certificate of
Incorporation does not provide for cumulative voting with respect to the
election of directors. Consequently, the present directors and executive
officers will be able to exercise substantial influence over the election of
the members of the Board of Directors. Such concentration of ownership could
have an adverse effect on the price of the Common Stock or have the effect of
delaying or preventing a change in control of the Company. In addition,
certain provisions of Delaware law and the Company's Certificate of
Incorporation could have the effect of making it more difficult for a third
party to acquire, or of discouraging a third party from attempting to acquire,
control of the Company. Such provisions could limit the price that certain
investors might be willing to pay in the future for shares of the Company's
Common Stock. These provisions of Delaware law and the Company's Certificate
of Incorporation may also have the effect of discouraging or preventing
certain types of transactions involving an actual or threatened change of
control of the Company (including unsolicited takeover attempts), even though
such a transaction may offer the Company's stockholders the opportunity to
sell their stock at a price above the prevailing market price. Certain of
these provisions allow the Company to issue preferred stock without any vote
or further action by the stockholders and prevent or eliminate cumulative
voting in the election of directors. These provisions may make it more
difficult for stockholders to take certain corporate actions and could have
the effect of delaying or preventing a change in control of the Company. See
"Business," "Management," "Principal Stockholders," and "Description of
Capital Stock--Convertible Preferred Stock" and "--Delaware Anti-Takeover Law
and Certain Charter Provisions."

DILUTION

The initial public offering price will be substantially higher than the book
value per share of Common Stock. Investors purchasing Shares in this offering
will therefore incur immediate and substantial dilution of $8.31 per share of
Common Stock, assuming an initial public offering price of $12.00 per Share.
See "Dilution."

17
<PAGE>

USE OF PROCEEDS

The net proceeds to the Company from the sale of the 2,500,000 Shares
offered by the Company hereby are estimated to be approximately $27,350,000
($31,535,000 if the Underwriters' over-allotment option is exercised in full),
based on an assumed initial public offering price of $12.00 per Share and
after deducting the Underwriting Discount and the estimated expenses of this
offering payable by the Company. Upon completion of this offering, the Company
must redeem the outstanding $1.1 million of Redeemable Preferred Stock in
cash, registered Common Stock or a combination thereof.

The Company expects to use the net proceeds of this offering primarily to
fund its research and development activities, including the clinical
development of FGN-1. The balance will be used for working capital and general
corporate purposes, including capital expenditures. The Company has an option
exercisable until March 31, 1998 to purchase its Horsham, Pennsylvania
facility for $3.4 million and is evaluating financing alternatives. The
Company expects to spend up to $3.1 million to install and equip laboratories
and offices at the Horsham facility within approximately the next six months.
The Company may from time to time evaluate opportunities to acquire
complementary technologies or businesses, but currently has no understandings
or agreements related to such acquisitions.

Pending any such uses, the Company intends to invest the net proceeds from
this offering in U.S. government securities and investment grade, interest-
bearing instruments. The Company expects to continue to be able to avoid the
registration requirements of the Investment Company Act of 1940 (the "1940
Act"). Application of the provisions of the 1940 Act would have a material
adverse effect on the Company's business, financial condition and results of
operations.

The amount and timing of the net proceeds actually allocated to specific
research and development activities will depend upon numerous factors, such as
favorable and unfavorable developments in the clinical trial program of FGN-1
and the preclinical development of other compounds, the timing and amount of
clinical trial and other development work, if any, undertaken by the NCI, the
receipt of necessary regulatory approvals, the cost of preparing, filing,
prosecuting, maintaining, defending and enforcing patent claims and other
intellectual property rights, the status of competitive products and
technologies and the timing and availability of alternative methods of
financing for the Company, including any future strategic alliances and joint
ventures with third parties. The Company's research and development
expenditures will vary as product candidates, if any, are added or abandoned.
Funds actually expended for each use may vary significantly depending upon a
number of factors. The Company has not determined the amount it plans to spend
for each purpose or the timing of such expenditures.

The Company believes that the net proceeds of this offering, together with
the Company's available cash reserves, should be adequate to satisfy its
capital requirements through approximately the end of 1999, although there can
be no assurance that the Company will not require additional funds prior to
such date. The Company's future capital needs will be dependent upon many
factors, including progress in its research and development activities, the
magnitude and scope of these activities, progress with preclinical and
clinical trials, the cost of preparing, filing, prosecuting, maintaining,
defending and enforcing patent claims and other intellectual property rights,
competing technological and market developments, the establishment of
collaborative arrangements, and the cost of any additional manufacturing
scale-up and establishment of a sales organization and related marketing
activities, if undertaken by the Company.

DIVIDEND POLICY

The Company has never declared or paid any dividends on its capital stock
and currently intends to retain any future earnings to finance the growth and
development of its business. Therefore, the Company does not intend to pay any
cash dividends in the foreseeable future.

18
<PAGE>

CAPITALIZATION

The following table sets forth the actual and as adjusted capitalization of
the Company as of September 30, 1997. The as adjusted capitalization of the
Company gives effect to the sale of the 2,500,000 Shares being offered by the
Company hereby, at an assumed initial public offering price of $12.00 per
Share (after deducting the Underwriting Discount and estimated offering
expenses payable by the Company) and the application of the estimated net
proceeds therefrom. The financial data presented below should be read in
conjunction with the Company's Financial Statements and the Notes thereto,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" herein and the other financial data included elsewhere in this
Prospectus.

<TABLE>
<CAPTION>
SEPTEMBER 30, 1997(1)
------------------------
ACTUAL AS ADJUSTED(2)
-------- --------------
(IN THOUSANDS)
<S> <C> <C>
Short-term notes payable.............................. $ 52 $ 52
======== ========
Long-term notes payable, net of current portion....... 23 23
-------- --------
Redeemable Preferred Stock, $.01 par value, 61,250
shares authorized and outstanding actual; none
outstanding as adjusted.............................. 1,092 --
-------- --------
Stockholders' equity:
Convertible Preferred Stock, $.01 par value,
13,000,000 shares authorized and 6,013,685 shares
outstanding actual; 2,000,000 shares authorized and
none outstanding as adjusted....................... 32,003 --
Common Stock, $.01 par value; 17,000,000 shares
authorized and 1,646,499 shares outstanding actual;
25,000,000 authorized and 10,205,684 shares
outstanding as adjusted(3)......................... 17 102
Additional paid-in capital.......................... 469 60,283
Stock subscription receivable from issuance of
Common Stock....................................... (37) (37)
Accumulated deficit................................. (22,587) (22,587)
-------- --------
Total stockholders' equity......................... $ 9,865 $37,761
-------- --------
Total capitalization.............................. $ 10,980 $37,784
======== ========
</TABLE>
- --------

(1) Gives effect to the 1-for-1.8157 reverse stock split of each outstanding
share of Common Stock effected in October 1997.

(2) Gives effect to the conversion of all outstanding shares of Convertible
Preferred Stock into Common Stock and as adjusted to give effect to the
sale of the Shares by the Company pursuant to this offering. The
redemption of the Redeemable Preferred Stock assumes the issuance of
45,500 shares of Common Stock and the payment of $546,000 in cash.

(3) Excludes 281,550 shares of Common Stock issuable upon the exercise of
outstanding stock options, 751,889 shares of Common Stock reserved for
future issuance under the Company's 1997 Equity Incentive Plan and 134,065
shares of Common Stock issuable upon the exercise of outstanding warrants.
The actual shares outstanding excludes up to 82,612 shares of Common Stock
that may be issued upon redemption of the Redeemable Preferred Stock, and
the shares outstanding as adjusted includes the issuance of 45,500 shares
of Common Stock upon the redemption of the Redeemable Preferred Stock. See
"Management--Employee Benefit Plans," "Description of Capital Stock," and
"Shares Eligible for Future Sale."

19
<PAGE>

DILUTION

The net tangible book value of the Company as of September 30, 1997 was
approximately $9,782,000, or $1.28 per share of outstanding Common Stock, and
assumes the conversion of all outstanding shares of Convertible Preferred
Stock at the closing of this offering and the 1-for-1.8157 reverse split of
the outstanding Common Stock. Net tangible book value per share is determined
by dividing the amount of the Company's total tangible assets less total
liabilities by the number of outstanding shares of Common Stock, which
includes the conversion of all outstanding Preferred Stock at the closing of
this offering. After giving effect to the sale by the Company of 2,500,000
Shares offered hereby (at an assumed initial public offering price of $12.00
per Share), and the application of the net proceeds therefrom, and the
redemption of the Redeemable Preferred Stock assuming the issuance of 45,500
shares of Common Stock and payment of $546,000 in cash, the pro forma net
tangible book value of the Company at September 30, 1997 would have been
approximately $37,678,000, or $3.69 per share. This represents an immediate
increase in such net tangible book value of $2.41 per share to existing
stockholders and an immediate dilution of $8.31 per share to new stockholders
purchasing Shares in this offering. The following table illustrates this
dilution per share:

<TABLE>
<S> <C> <C>
Assumed initial public offering price per Share.................... $12.00
------
Net tangible book value per share before offering................ $1.28
Increase per share attributable to new investors................. 2.41
-----
Net tangible book value per share after offering................... 3.69
------
Dilution per share to new investors................................ $ 8.31
======
</TABLE>

The following table summarizes, on a pro forma basis as of September 30,
1997, the differences between the existing stockholders and the new investors
with respect to the number of shares purchased from the Company, the total
consideration paid and the average price per share paid.

<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
------------------ ------------------- PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ------- ----------- ------- ---------
<S> <C> <C> <C> <C> <C>
Existing stockholders.......... 7,660,184 75% $33,108,000 52% $4.32
New investors.................. 2,500,000 25 30,000,000 48 12.00
---------- --- ----------- ---
Total........................ 10,160,184 100% 63,108,000 100%
========== === =========== ===
</TABLE>

The foregoing tables and calculations are based on the number of shares
outstanding as of September 30, 1997, after giving effect to the conversion of
all of the outstanding shares of Preferred Stock into Common Stock and
excludes 281,550 shares issuable pursuant to stock options granted under the
1997 Equity Incentive Plan at an average exercise price of $3.82, 751,889
shares of Common Stock reserved for future issuance under the Company's 1997
Equity Incentive Plan, 134,065 shares issuable upon the exercise of
outstanding warrants at an average exercise price of $6.23 and up to
approximately 82,612 shares of Common Stock that may be issued upon the
redemption of the Company's Redeemable Preferred Stock. To the extent that
such options and warrants are exercised and such Redeemable Preferred Stock is
redeemed for Common Stock in the future, there will be further dilution to new
investors. See "Management--Employee Benefit Plans."

20
<PAGE>

SELECTED FINANCIAL DATA

The following selected financial data with respect to the Company's balance
sheet data at December 31, 1995, 1996 and September 30, 1997 and with respect
to the Company's statement of operations data for each of the three years
ended December 31, 1994, 1995 and 1996 and the nine month periods ended
September 30, 1996 and 1997 have been derived from the Company's Financial
Statements, which have been audited by Arthur Andersen LLP, independent public
accountants, as indicated in their report included elsewhere herein. The
balance sheet data as of December 31, 1992, 1993 and 1994 and the statement of
operations data for the years ended December 31, 1992 and 1993 have been
derived from audited Financial Statements not included herein. The results of
operation for the nine months ended September 30, 1997 are not necessarily
indicative of results to be expected for the full year of any future period.
The selected financial data set forth below should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations", and the Company's Financial Statements and Notes included
elsewhere in this Prospectus.

<TABLE>
<CAPTION>
NINE MONTHS
ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------------------- ----------------------
1992 1993 1994 1995 1996 1996 1997
------- ------- ------- ------- ------- ------- -------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Revenue................ $ -- $ -- $ -- $ -- $ -- $ -- $ --
------- ------- ------- ------- ------- ------- -------
Operating expenses:
Research and
development........... 814 1,623 2,429 2,575 4,163 2,861 5,586
General and
administrative........ 596 698 705 644 663 439 584
Provision for
redemption of
Redeemable Preferred
Stock................. -- -- -- -- -- -- 1,017
------- ------- ------- ------- ------- ------- -------
Total operating
expenses............ 1,410 2,321 3,134 3,219 4,826 3,300 7,187
------- ------- ------- ------- ------- ------- -------
Loss from operations... (1,410) (2,321) (3,134) (3,219) (4,826) (3,300) (7,187)
Interest income........ 19 52 24 28 91 80 288
------- ------- ------- ------- ------- ------- -------
Net loss............... $(1,391) $(2,269) $(3,110) $(3,191) $(4,735) $(3,220) $(6,899)
======= ======= ======= ======= ======= ======= =======
Pro forma net loss per
share(1).............. $ (0.62) $ (0.90)
======= =======
Shares used in
computing pro forma
net loss per
share(1).............. 7,687 7,699
======= =======

DECEMBER 31,
------------------------------------------- SEPTEMBER 30,
1992 1993 1994 1995 1996 1997
------- ------- ------- ------- ------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash
equivalents........... $ 2,732 $ 1,335 $ 605 $ 2,203 $ 645 $11,401
Working capital
(deficiency).......... 2,531 613 (294) 834 (313) 10,549
Total assets........... 2,759 1,396 704 2,330 1,106 12,105
Notes payable.......... -- -- -- -- 111 75
Accumulated deficit.... (2,383) (4,652) (7,762) (10,953) (15,688) (22,587)
Total stockholders'
equity(2)............. 2,545 660 (242) 901 (180) 9,865
</TABLE>
- --------
(1) See Note 2 of Notes to Financial Statements for information concerning the
computation of pro forma net loss per share.

(2) Partner's equity for 1992. See "Results of Operations--Management
Discussion and Analysis of Financial Condition and Results of Operations."
Based on the number of shares outstanding as of June 30, 1997, after
giving effect to the conversion of all of the outstanding shares of
Preferred Stock into Common Stock. Excludes 281,550 shares of Common Stock
issuable upon the exercise of outstanding stock options, 751,889 shares of
Common Stock reserved for future issuance under the Company's 1997 Equity
Incentive Plan, 134,065 shares of Common Stock issuable upon the exercise
of outstanding warrants and up to approximately 82,612 shares of Common
Stock that may be issued upon the redemption of the Redeemable Preferred
Stock. See "Management--Employee Benefit Plans," "Description of Capital
Stock" and "Shares Eligible for Future Sale."

21
<PAGE>

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

OVERVIEW

The Company is engaged in the research and development of pharmaceutical
compounds intended primarily for the treatment of precancerous lesions and
cancer. From the inception of the Company's business in partnership form in
1990, the Company's operating activities have related primarily to conducting
research and development activities, raising capital and recruiting personnel.
The business converted from partnership to corporate form in September 1993.
Historically, the Company has conducted its business with few direct employees
and many consultants. In the four years leading to the filing of the IND with
the FDA in December 1993 to permit the commencement of human clinical trials
of the Company's first product candidate FGN-1, the Company spent a total of
$4.6 million. Annual expenses increased to $3.1 million, $3.2 million and $4.8
million in 1994, 1995 and 1996, respectively. Phase I clinical trials for FGN-
1 began in February 1994; Phase I/II clinical trials began in August 1995; and
Phase III clinical trials commenced in the second quarter of 1997. Several
additional clinical trials of FGN-1 are expected to commence in the fourth
quarter of 1997 and in 1998, contributing to significantly higher expenses.

The Company has not received any revenue from the sale of products, and no
product candidate of the Company has been approved or will be approved for
marketing in the near future, if ever. Accordingly, the Company's revenue has
been limited to small amounts of interest income, and its primary source of
capital has been the sale of equity securities. As of September 30, 1997, the
Company's accumulated deficit was $22.6 million and its cash on hand was $11.4
million. The Company anticipates that it will continue to incur additional
operating losses for the next several years. There can be no assurance that
the Company's products will be approved for marketing, that the Company will
attain profitability or, if profitability is achieved, that the Company will
remain profitable on a quarterly or annual basis in the future.

RESULTS OF OPERATIONS

Nine Months Ended September 30, 1997 and 1996

Research and development expenses increased 95%, from $2.9 million during
the first nine months of 1996 to $5.6 million in the first nine months of
1997, largely due to increased levels of activity with respect to the
development of FGN-1 and cell biology research related to the Company's
technology. General and administrative expense increased from $439,000 in the
first nine months of 1996 to $584,000 in the first nine months of 1997. The
Company recorded a provision for redemption of the Redeemable Preferred Stock
of $1.0 million during the nine months ended September 30, 1997, as the
Company determined redemption had become probable. The net loss increased from
$3.2 million in the first nine months of 1996 to $6.9 million in the first
nine months of 1997.

Interest income increased from $80,000 in the first nine months of 1996, to
$288,000 in the first nine months of 1997, reflecting the Series F Convertible
Preferred Stock financing which resulted in proceeds of $17.5 million, which
commenced in December 1996 and concluded in June 1997.

Fiscal Years Ended December 31, 1996 and 1995

Research and development expenses increased 62% from $2.6 million in 1995 to
$4.2 million in 1996. This increase was due primarily to increased activity
and costs associated with the pharmaceutical and clinical development of FGN-
1, including the Phase I/II trial of FGN-1 in APC which commenced in August
1995 and, with extensions and adjustments, continued throughout 1996; and
increases in the staffing and supply of the Company's research laboratory and
funding of third party research. Certain costs associated with the Phase I/II
clinical trial of FGN-1 were paid by the NCI directly to the clinical site and
are not reflected in the Company's financial statements. General and
administrative expense increased 3% from $644,000 in 1995 to $663,000 in 1996.
The net loss increased from $3.2 million in 1995 to $4.7 million in 1996.

22
<PAGE>

Interest income increased from $28,000 in 1995 to $91,000 in 1996, due to
the higher cash balances resulting from the sale of the Series E Convertible
Preferred Stock which commenced in June 1995 and resulted in net proceeds of
$6.8 million during the period ending May 1996.

Fiscal Years Ended December 31, 1995 and 1994

Research and development expenses increased 6% from $2.4 million in 1994 to
$2.6 million in 1995, primarily due to the continuing development costs of
FGN-1. General and administrative expense decreased 9%, from $705,000 in 1994
to $644,000 in 1995. The net loss for 1995 increased to $3.2 million from a
net loss of $3.1 million in 1994.

Interest income increased from $24,000 in 1994, to $28,000 in 1995.

LIQUIDITY AND CAPITAL RESOURCES

The Company has financed its operations since inception primarily with the
net proceeds received from private placements of equity securities. These
placements aggregated a total of $32.3 million from inception through
September 30, 1997. Net cash generated by financing activities was $2.2
million, $4.3 million and $3.5 million in 1994, 1995 and 1996, respectively,
and $16.9 million during the nine months ended September 30, 1997, primarily
reflecting the sale of equity securities. The most recent Series F Convertible
Preferred Stock private placement which commenced in December of 1996 and
concluded in June 1997 raised $17.5 million.

Net cash used in the operating activities described above was $2.9 million,
$2.7 million and $4.9 million in 1994, 1995 and 1996, respectively. Net cash
used for equipment and deposits in 1994, 1995 and 1996 was $17,000, $26,000
and $161,000, respectively. Net cash used in operating activities during the
first nine months of 1997 was $5.9 million, with an additional $193,000
incurred for equipment purchases, compared to $3.2 million and $120,000 during
the first nine months of 1996, respectively.

Cash on hand (including restricted cash of approximately $200,000) at
September 30, 1997 totaled $11.6 million, compared with $1.5 million as of
September 30, 1996. Cash on hand (including restricted cash of $194,000 in
1996) at December 31, 1994, 1995 and 1996 was $605,000, $2.2 million and
$839,000, respectively.

In March 1996, the Company borrowed $150,000 from a bank for the primary
purpose of equipping its laboratory facilities. The note bears interest at a
rate of 7.79% and is payable in equal monthly installments through March 1999.
At all times the Company keeps approximately $200,000 in a restricted account
pledged to the bank to secure the loan, letters of credit, and other short-
term indebtedness which may arise from time to time.

The Company anticipates that annual expenditures for preclinical studies,
clinical trials, product development, research and general and administrative
expense will increase significantly in future years. In anticipation of the
possible FDA approval for the marketing of FGN-1, the Company expects to begin
preparing for the commercialization of the Company's first product during 1998
and to accelerate such preparation in 1999, adding substantial additional
expense. However, there can be no assurance that the Company will be able to
successfully complete the clinical development of FGN-1 for APC or any other
indication, that the FDA will grant approval within the time frame expected,
if at all, that the other developments or expansions in the Company's programs
of research, development and commercialization will not require additional
funding or encounter delays or that, in light of these or other circumstances,
the Company will be able to achieve the planned levels of revenue, expense and
cash flow.

In June 1997, the Company executed a lease for a 40,000 square foot building
in Horsham, Pennsylvania for a ten-year period with rents rising to
approximately $405,000 in 1998 and $470,000

23
<PAGE>

in 2003. The Company is currently in the process of consolidating its
operations in this building and expects to spend up to $3.1 million during the
next six months to install and equip laboratories and offices. Under this
lease, the Company has the option, exercisable until March 31, 1998, to
purchase the building for $3.4 million. The Company is exploring potential
financing alternatives to furnish and equip the building and potentially to
exercise its option to purchase the building.

The Company expects to finance its continued growth and development largely
through equity financings. Assuming that the Company raises a net amount of
$27.4 million in the current offering, the Company anticipates that such
proceeds, together with current balances and the interest on combined cash
balances, will provide the Company with sufficient working capital to sustain
operations through approximately the end of 1999, although there can be no
assurance that the Company will not require additional funding prior to that
time. The Company anticipates that, if there are delays in its current
programs or if its current programs of research and development yield
expansion opportunities, the Company would seek additional financing, whether
through public or private equity or debt financings, corporate alliances or
through combinations thereof.

There can be no assurance that additional equity or debt capital will, if
needed, be available on terms acceptable to the Company, if at all. Any
additional equity financing would be dilutive to stockholders. Debt financing,
if available, may include restrictive covenants. If additional funds should be
needed but are not available, the Company may be required to curtail its
operations significantly or to obtain funds by entering into collaborative
arrangements or other arrangements on unfavorable terms. The failure by the
Company to raise capital on acceptable terms if and when needed would have a
material adverse effect on the Company's business, financial condition and
results of operations.

INFLATION

The Company does not believe that inflation has had any significant impact
on the Company's business to date.

INCOME TAXES

As of September 30, 1997, the Company had approximately $17.5 million of net
operating loss carryforwards ("NOLs") for income tax purposes available to
offset future federal income tax, subject to limitations for alternative
minimum tax. The NOLs are subject to examination by the federal and state tax
authorities and expire between 2008 and 2012.

Prior to its conversion into corporate form, the business had accumulated
losses totaling approximately $3.9 million. For tax purposes, these losses
were distributed to the partners in accordance with the provisions of the
partnership agreement of the Company's predecessor partnership. Thus, these
losses, while included in the financial statements of the Company, are not
available to offset future taxable income, if any, of the Company.

The Tax Reform Act of 1986 contains provisions that may limit the NOLs
available to be used in any given year upon the occurrence of certain events,
including significant changes in ownership interest. A change in ownership of
a company of greater than 50% within a three-year period results in an annual
limitation on the Company's ability to utilize its NOLs from tax periods prior
to the ownership change. The Company expects that upon closing of this
offering, such a limitation will be triggered. However, the Company does not
expect such limitation to have a significant impact on its operations.

24
<PAGE>

ACCOUNTING MATTERS

The Company adopted Statement of Financial Accounting Standards No. 123
("SFAS 123"), "Accounting for Stock-Based Compensation," effective January 1,
1996. SFAS 123 defines a fair value based method of accounting for employee
stock compensation, including stock options. However, companies may continue
to account for stock compensation using the intrinsic-value-based method as
prescribed by Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees," and provide pro forma disclosures of net income
and earnings per share assuming the fair-value-based method had been applied.
The Company has elected to account for stock compensation using the intrinsic-
value-based method, and thus, SFAS 123 will not have any material impact on
reported operating results.

The Financial Accounting Standards Board recently issued Statement of
Financial Accounting Standards No. 128 ("SFAS 128"), "Earnings Per Share."
SFAS 128 is effective for fiscal years ending after December 15, 1997; early
adoption is not permitted. SFAS 128 replaces primary and fully diluted EPS
with basic and diluted earnings per share, respectively. The Company does not
expect SFAS 128 to have a material impact on its reported pro forma net loss
per share amounts.

25
<PAGE>

BUSINESS

OVERVIEW

CPI is a pharmaceutical company focused on the development and
commercialization of products to prevent and treat cancer. The Company is
currently planning clinical trials of its lead compound FGN-1 in six
indications and is conducting an ongoing pivotal Phase III trial for
Adenomatous Polyposis Coli ("APC"), a disease characterized by numerous
precancerous polyps of the colon. The Company plans to initiate Phase II/III
trials of FGN-1 for sporadic adenomatous colonic polyps, prostate cancer, lung
cancer and breast cancer in the fourth quarter of 1997, and to commence
clinical trials of FGN-1 for Barrett's Esophagus and cervical dysplasia in
1998. The Company's technology is based upon its discovery of a novel
mechanism which the Company believes, based on its research, can be targeted
to induce selective apoptosis, or programmed cell death, in precancerous and
cancerous cells without affecting normal cells. Utilizing this proprietary
knowledge, the Company has created over 400 new chemical compounds, over 200
of which display significantly greater apoptotic potency than FGN-1.

BUSINESS STRATEGY

CPI's objectives are to be a leader in cancer chemoprevention and to build
an integrated pharmaceutical company focused on the oncology market. To meet
these objectives the Company intends to:

. Pursue accelerated clinical development of FGN-1. CPI's development
program for FGN-1 is initially focused on indications where small
clinical trials with clear endpoints are expected to yield statistically
significant results. CPI is currently conducting Phase III clinical
trials of FGN-1 for APC, and plans to initiate clinical trials in six
additional indications in 1997 and 1998. By focusing initially on APC, an
indication for which there is a clear need for improved therapies and the
potential to demonstrate efficacy relatively quickly, the Company seeks
to accelerate the market introduction of FGN-1.

. Leverage the Company's technology to develop additional agents for cancer
therapy and chemoprevention. Based on its proprietary technology and its
planned application of high-throughput screening techniques, CPI intends
to expand its library of compounds with the objective of developing
agents for the treatment of certain cancers and precancerous lesions.

. Commercialize products directly to focused physician groups. The Company
intends to establish its own focused sales force to promote products in
the U.S. targeted at diseases that are treated by relatively small, well-
defined groups of physicians. These diseases include APC, sporadic
adenomatous colonic polyps, Barrett's Esophagus, prostate cancer and
bladder cancer.

. Develop strategic collaborations for selected indications and
markets. The Company will seek to establish strategic relationships for
the development and commercialization of potential products for
indications, such as cervical dysplasia, that would require significant
marketing and sales resources. The Company is seeking partners for
international development and commercialization of potential products.

CARCINOGENESIS

Cancer results from a sequence of changes involving the genes of cells which
eventually leads to abnormal and uncontrolled cell proliferation. This multi-
stage process is known as carcinogenesis and generally results from a
combination of factors which occur over a period of years. Certain factors,
such as inherited genetic defects, are present at birth. Other factors that
may contribute to carcinogenesis include environmental exposures and the aging
process. Carcinogenesis is first

26
<PAGE>

recognized clinically when abnormal cells become visible to a screening
procedure or reach a size or location sufficient to create clinical signs and
symptoms. The clinical emergence may occur many years following the events
which first initiated carcinogenesis. Generally, cells characterized by
abnormal growth that may lead to cancer but have not yet invaded surrounding
tissue are termed precancerous.

PRECANCEROUS LESIONS. Many cancers are preceded by precancerous lesions,
which are accumulations of abnormal cells. Because precancerous lesions are
usually asymptomatic, the ability to identify and monitor them and to
intervene clinically before the possible development of cancer is dependent
upon diagnostic screening tests. Recent years have seen broader applications
of screening tests, including the Pap smear, flexible sigmoidoscopy and the
Prostate Specific Antigen ("PSA") test. In addition, there have been recent
advances in genetic screening, such as the BRCA1 and BRCA2 tests to detect
individuals with a higher risk of developing breast cancer in the future.

Precancerous lesions are most often diagnosed in epithelial tissues, such as
the skin or the inside surface of organs, including the intestine, cervix,
bladder and prostate. The following table lists examples of epithelial
precancerous lesions, the types of cancer to which such lesions can progress
and the diagnostic screening tests currently in use to detect such lesions.

EXAMPLES OF EPITHELIAL PRECANCEROUS LESIONS

<TABLE>
<CAPTION>
TYPE OF LESION RELATED CANCER CONVENTIONAL METHOD OF DIAGNOSIS
- -------------- -------------- --------------------------------
<S> <C> <C>
Actinic Keratosis Skin Visual examination
Adenomatous Colonic
Polyp Colorectal Endoscopy (sigmoidoscopy or colonoscopy)
Barrett's Esophagus Esophageal Endoscopy (esophagogastroscopy)
Bronchial or Lung
Dysplasia Lung Sputum cytology
Cervical Intraepithelial
Neoplasia Cervical Papanicolau (Pap) smear
Prostatic
Intraepithelial
Neoplasia Prostate Prostate Specific Antigen (PSA) and
digital rectal examination

Transitional Cell
Carcinoma in situ
(earliest stage) Bladder Cystoscopy
</TABLE>

Patients with precancerous lesions are advised to follow a program of
regular monitoring and removal of lesions where appropriate. However,
existing techniques for treating precancerous lesions are often expensive,
have undesirable side effects or are of limited effectiveness. Endoscopic or
surgical removal can be effective for single lesions, but risks and costs
increase significantly if lesions recur, if there are numerous lesions or if
lesions occur in less accessible tissues. Because of their significant side
effects, systemic administration of most existing chemotherapeutic drugs is
not appropriate for treating precancerous lesions. Reduction of environmental
risks or change in diet are generally more effective in preventing the early
stages of carcinogenesis than in arresting or reversing the changes that occur
in the later stages of carcinogenesis. As a result of the inadequacy of
current treatments, there is a significant need for the development of new
therapeutics to treat precancerous lesions. If left untreated and not reversed
by natural processes, precancerous lesions may progress to cancer.

CANCER. The American Cancer Society estimates that over 1.4 million new
cases of cancer will be diagnosed and approximately 560,000 cancer deaths will
occur in the U.S. in 1997. Cancer is the second leading cause of death in the
U.S., and over 7.4 million people living in the U.S. have had cancer. Due in
part to the development of new diagnostic procedures, the highest number of
new cancer diagnoses are currently occurring in the prostate, breast, lung and
colon/rectum, representing approximately 60% of all new cancer cases.

Cancer is generally treated by attempting to remove the cancerous cells,
either by surgery or by chemical or radiation therapies. Currently available
chemotherapies and radiation therapies target all

27
<PAGE>

rapidly dividing cells, both cancerous and healthy, and therefore result in
serious side effects. The limited efficacy and harmful side effects of existing
cancer treatments and the costs associated with managing these side effects
continue to drive the search for new therapies.

CPI TECHNOLOGY

To address the need for new therapies, the Company's technology focuses on
the selective induction of apoptosis in cells that manifest abnormal growth
(neoplastic cells), such as precancerous and cancerous cells. Apoptosis is a
naturally occurring physiological process in which a number of components
inside the cell "program" the cell to die without causing harm to surrounding
cells. Apoptosis occurs in tissues that are continually renewing themselves,
such as the lining of the digestive system, or as a natural defense mechanism
that prevents the replication of cells that have undergone DNA damage. The
Company's technology is based upon its discovery of a novel mechanism which the
Company believes, based on its research, can be targeted to induce selective
apoptosis in neoplastic cells without affecting normal cells.

Many existing chemotherapeutic agents as well as radiation induce apoptosis
in rapidly proliferating cells without differentiating between neoplastic cells
and normal cells. This can result in toxicity, including suppression of the
immune system, hair loss and gastrointestinal disturbances. As a result of this
toxicity, most existing chemotherapeutic agents and radiation therapy are not
appropriate for treating precancerous lesions in otherwise healthy individuals
for whom safety and tolerability are essential for chronic or extended
therapeutic use.

CONVENTIONAL INDUCTION OF APOPTOSIS IN CANCER THERAPY. Radiation therapy and
many existing chemotherapeutic agents act on proliferating cells by disrupting
cellular DNA synthesis to induce apoptosis. As depicted below, once significant
damage occurs to the DNA (1), a process is initiated that is controlled by the
gatekeeper protein p53 (2), and modulated by various proteins such as bax and
bcl-2 (3). This process results in the activation of the Interleukin Converting
Enzyme-like ("ICE-like") proteases (4), which trigger a cascade of events
resulting in apoptosis (5). The end result of apoptosis is the dismantling of
the cell into apoptotic vesicles (6), which are naturally cleared by the body.
The apoptotic mechanism identified by CPI does not appear to involve p53, or
the modulator proteins, such as bax or bcl-2.

[ART OF CONVENTIONAL INDUCTION OF APOPTOSIS IN THE CELL APPEARS HERE]

28
<PAGE>

DISCOVERY OF NOVEL APOPTOTIC MECHANISM. The Company believes it has
discovered a previously undefined mechanism for regulating apoptosis. Research
suggests that two key elements of this mechanism are an apoptosis inducing
element ("AIE"), which is activated by naturally-occurring triggers, and an
apoptosis regulatory element ("ARE"), an enzyme which plays a key role in
controlling levels of activated AIE. CPI has determined in colon cancer that
the neoplastic tissue has a higher level of ARE activity than neighboring
normal tissue, which may prevent neoplastic cells from responding to normal
signals that trigger apoptosis. When ARE activity increases, as in neoplastic
cells, AIE activity is reduced and activation of a critical downstream protein
is interrupted, subsequently preventing the activation of the ICE-like
proteases and apoptosis.

SELECTIVE INDUCTION OF APOPTOSIS BY CPI COMPOUNDS. Research suggests that the
Company's compounds, including FGN-1, are targeted at inhibiting ARE activity
in neoplastic cells. As shown in the diagram below, CPI compounds (1) reduce
ARE activity (2), thereby preventing ARE from deactivating the active AIE (3).
Research suggests that the active AIE (4) is then available to trigger a
critical downstream protein (5), which leads to the activation of the ICE-like
proteases (6). As in the case of conventional cancer treatment, the ICE-like
proteases then trigger a cascade of events leading to apoptosis (7) and the
resulting apoptotic vesicles (8).

[ART OF SELECTIVE INDUCTION OF APOPTOSIS BY CPI COMPOUNDS APPEARS HERE]

RESEARCH AND DEVELOPMENT ACTIVITIES. The Company's Biological Discovery Group
consists of its research employees, members of its Scientific Advisory Board,
contract researchers and consultants. The Biological Discovery Group has
identified the specific intracellular protein targeted by FGN-1 and has made
significant progress in sequencing the target protein's gene. The Company has
developed polymerase chain reaction ("PCR")-based probes that may be used to
identify additional indications to be targeted and to develop diagnostic tools.
The Company continues to identify additional elements involved in regulating
the newly identified apoptotic mechanism. CPI plans to investigate the
potential applicability of its novel apoptotic mechanism to other
hyperproliferative diseases, such as benign prostatic hyperplasia, coronary
restenosis, psoriasis and polycystic renal disease. There can be no assurance
that the Company's investigation will be successful.

29
<PAGE>

Utilizing its understanding of chemical structure and biological activity,
the Company has created over 400 new chemical compounds in five chemical
families and over 27 chemical classes, over 200 of which display significantly
greater apoptotic potency than FGN-1. The Company's new compounds are tested
for inhibitory effects on the growth of cancer cells in vitro, for the
induction of apoptosis and for activity against the intracellular target ARE.

A number of CPI compounds have shown activity against in vitro cultures of
transplantable human cancers of the breast, colon, lung and prostate.
Preliminary results of studies with the Company's compounds in primary
cultures of human cancers have shown activity against breast cancer. The
Company is conducting tests on other compounds and tissues. Significant
additional preclinical and clinical trials are necessary to determine the
activity of FGN-1 and other CPI compounds in these cancer indications. See
"Risk Factors--Early Stage of Development; Absence of Developed Products;
Uncertainty of Clinical Trials," and "--Technological Uncertainty."

The Company plans to leverage its understanding of the structure-activity
relationship of CPI's compounds by using combinatorial chemistry techniques
and high-throughput screening systems to expand its proprietary chemical
library. The Company intends to contract with outside firms to create targeted
chemical libraries including thousands of diverse chemical classes. CPI will
then screen these compounds in order to identify potential additional lead
compounds.

30
<PAGE>

PRODUCTS IN DEVELOPMENT

CPI is developing a family of products targeted at the treatment and
management of precancerous lesions and cancer. The Company's lead compound,
FGN-1, is a sulfone derivative of the NSAID sulindac. CPI has shown that FGN-1
exhibits strong anti-neoplastic effects but lacks the anti-cyclooxygenase
activity that is associated with the serious gastrointestinal and renal side
effects observed in NSAIDs. Although FGN-1 is currently in Phase III clinical
trials for the treatment of APC, there can be no assurance that the Company
will obtain marketing approval for FGN-1. Clinical testing of FGN-1 has
involved only a limited number of patients to date and results obtained in
these trials for FGN-1 in the treatment of APC are not necessarily predictive
of the results of future clinical trials for APC or of clinical results for
any other therapeutic indication. See "Risk Factors--Early Stage of
Development; Absence of Developed Products; Uncertainty of Clinical Trials,"
and "--Dependence on FGN-1." The following table lists the potential
indications for, and current clinical development status of, FGN-1:

FGN-1 DEVELOPMENT PROGRAM

<TABLE>
<CAPTION>
INDICATION CLINICAL DEVELOPMENT STATUS(1)
- ---------- ------------------------------
<S> <C>
Precancer
Adenomatous Polyposis
Coli Pivotal Phase III trial initiated in 2Q 1997
Phase I/II trial completed in 1Q 1997
Orphan Drug status obtained 1Q 1994
Sporadic Adenomatous
Colonic Pivotal Phase II/III trial expected to commence 4Q 1997
Polyps Phase IB trial completed in 3Q 1997
Barrett's Esophagus Phase II trial expected to commence in 1998
Cervical Dysplasia Phase II trial expected to commence in 1998
Phase IB trial completed in 3Q 1997
Cancer
Prostate Cancer Phase II/III trial expected to commence 4Q 1997
Lung Cancer Pilot study expected to commence 4Q 1997
Breast Cancer Pivotal Phase II/III trial expected to commence 4Q 1997
</TABLE>
- --------
(1) A "Pivotal" study is a clinical trial used as primary evidence of safety
and efficacy.
Clinical trials are conducted in three phases, which may overlap:
"Phase I" trials involve the initial introduction of an investigational new
drug into humans and are designed to test for tolerance and side effects
and to determine the metabolic and pharmocologic actions of the drug in
humans. Phase IB denotes a later stage Phase I study.
"Phase II" involves clinical studies conducted in a limited number of
patients to evaluate preliminarily the effectiveness of the drug for a
particular indication and to determine the optimal dosage and the common
short-term side effects and risks.
"Phase III" involves expanded studies to evaluate the safety and
effectiveness of the drug.

The Company's clinical trial strategy seeks to identify subsets of patient
populations for the various targeted indications where the endpoints of
clinical trials occur in high frequency or in a relatively short time frame.
Because the Company is studying FGN-1 for multiple indications, the Company
plans to utilize safety and pharmacokinetic data obtained in clinical trials
completed to date to provide a basis for commencing more advanced clinical
trials in other indications. The Company believes that this strategy of
designing clinical trials around selected populations and utilizing existing
safety data may allow the Company to reduce the duration of clinical trials
and the number of test subjects enrolled in its clinical trials, thereby
generating statistically significant clinical results more quickly and cost-
effectively.

31
<PAGE>

CLINICAL DEVELOPMENT OF FGN-1 FOR PRECANCEROUS LESIONS

Based on FGN-1's safety profile, the Company believes that the compound may
be useful in treating patients with precancerous lesions for whom a drug's
long-term safety profile is important. The initial indication for FGN-1 is
APC, and the Company is also pursuing clinical development of FGN-1 for three
other types of epithelial lesions: sporadic adenomatous colonic polyps,
Barrett's Esophagus and cervical dysplasia. These indications have been
selected based upon several factors, including encouraging preclinical results
and clinical need.

Adenomatous Polyposis Coli. FGN-1 is currently in Phase III clinical trials
for APC, which is an inherited disease characterized by the development of
hundreds to thousands of adenomatous polyps in the colon and the progression
to colon cancer if left untreated. This disease can be confirmed within a
family by genetic testing. Most APC patients must be endoscopically screened
beginning in their teenage years and must have a substantial portion of their
large intestine removed by age 20. Even with this treatment, these patients
continue to develop polyps in the remaining rectal tissue and are typically
monitored by endoscopy 2 to 4 times each year. At each examination, polyps are
removed. CPI's clinical program is testing FGN-1 in patients who previously
have had most of their large intestine removed, leaving the rectum intact
(sub-total colectomy).

It is estimated that there are between 25,000 and 40,000 APC patients in the
U.S. Because of the large number of lesions that occur in these patients and
the continuous development of new lesions with no spontaneous remission, the
Company believes that clinical trials in APC can be conducted in, and
statistically significant results obtained from, a relatively small number of
patients.

In a Phase I/II study conducted with the support of the NCI at the Cleveland
Clinic Foundation, 18 APC patients were treated with FGN-1 for six months. The
study was completed in January 1997 and was designed to observe the safety and
pharmacokinetics of increasing doses of FGN-1. No serious adverse events
attributable to FGN-1 were reported at the clinically effective doses of 400-
600 mg total daily dose. At the 800 mg total daily dose level, four out of six
patients displayed asymptomatic reversible elevations of liver enzymes; all of
such patients continued in the trial at lower dose levels. At the end of the
study, all patients elected to continue in an open label extension of the
study, and several patients have exceeded 24 months on the drug. There have
been no withdrawals from the study or its extension attributable to serious
adverse events.

In the Phase I/II study and its extension, nearly all patients were observed
to experience a marked reduction in the number and size of exophytic (i.e.,
raised over the surface), precancerous rectal polyps that were six millimeters
or less in diameter at the beginning of the study. The effect was observed to
be correlated to dosage, with 600 mg per day having a significantly more
pronounced effect than 400 mg per day. In the extended study, no progressive
increase in polyp size or volume was observed in 13 of the 14 patients who
have remained in the study and have been maintained on the optimal dose.

Following treatment with FGN-1, examination of certain regressing polyps
showed substantial increases in the rate of apoptosis compared with untreated
polyps, while the rate of apoptosis in nearby normal tissue was unchanged. The
Company interprets the different apoptotic rates observed as evidence that
FGN-1 selectively induces apoptosis in neoplastic cells without affecting
normal cells.

Although the Phase I/II study of 18 patients generated preliminary evidence
of effectiveness, additional clinical evidence is necessary before the safety
and efficacy of FGN-1 for APC can be established. Accordingly, CPI initiated a
pivotal Phase III study in the second quarter of 1997. This study will include
150 patients in a double-blind, placebo-controlled trial of FGN-1 at
approximately 12 centers in the U.S., Sweden, the United Kingdom and Israel.
The primary endpoint of the study is reduction in the formation of new polyps.
The design and endpoints of the study have been reviewed with the FDA. The
Company expects to complete enrollment in the study by the end of 1997 and to
follow the patients for 12 months. In addition, the Company plans to enroll
patients with high rates of

32
<PAGE>

recurrence of polyps, who otherwise would be excluded from the pivotal Phase
III study, in a second, concurrent efficacy study that may, if the FDA
requires, include a dose response component. The Company intends to seek
marketing approval for FGN-1 for the prevention of precancerous adenomatous
polyps in APC patients. There can be no assurance that the results of the
Phase I/II study will be indicative of results in the Phase III study or that
the Phase III study will show that FGN-1 is sufficiently safe and effective
for marketing approval by the FDA or other regulatory authorities.

Patients with APC are usually managed by gastroenterologists and colorectal
surgeons. There are approximately 9,500 gastroenterologists and 1,000
colorectal surgeons in the U.S. The Company believes that a subset of these
physicians treats a significant number of APC patients and the Company intends
to focus its marketing efforts on these physicians.

Sporadic Adenomatous Colonic Polyps. Sporadic adenomatous colonic polyps are
relatively common precancerous lesions occurring in the large intestine. These
polyps are histologically, microscopically and genetically indistinguishable
from the polyps of APC.

More than 30% of people in the U.S. over the age of 50 have sporadic
adenomatous colonic polyps. Most of these people will develop only one or two
polyps and once the polyps are removed will not require significant ongoing
medical attention. There are, however, subgroups of people at higher than
usual risk of developing colorectal cancer who should be monitored frequently.
These patients include people with close relatives that have had colorectal
cancer, people over age 60 and people with multiple polyps or polyps which are
large or severely dysplastic or which recur frequently. CPI is targeting these
patients for clinical studies and chemopreventive therapy.

The American Cancer Society, American College of Gastroenterology, American
Gastroenterological Association and other expert organizations recommend that
all people over the age of 50 be screened for precancerous colonic polyps and
colon cancer. This recommendation is not followed universally and, as a
result, a large number of people whose polyps have not been detected are at
risk of develping colon cancer. The procedure for screening for sporadic
adenomatous colonic polyps is an endoscopic examination of the lower part of
the large intestine. This procedure, a sigmoidoscopy, is performed by
gastroenterologists, internists and other physicians. For more extensive and
invasive examination of patients who have had polyps detected by sigmoidoscopy
and for the treatment of sporadic adenomatous colonic polyps, a colonoscopy is
performed, usually by a gastroenterologist.

In September 1997, CPI completed a two-month Phase IB safety and
pharmacokinetic study in 18 patients who had a history of either sporadic
adenomatous colonic polyps and/or cervical dysplasia. The Company plans to
initiate multi-center, pivotal Phase II/III studies in these indications. The
first study, scheduled to commence in the fourth quarter of 1997, is to be a
double-blind, placebo-controlled study to evaluate the safety and efficacy of
different doses of FGN-1 in the treatment of existing sporadic adenomatous
colonic polyps. The Company may need to conduct further concurrent studies of
safety and pharmacokinetics.

Gastroenterologists and colorectal surgeons are primarily responsible for
performing colonoscopies and managing treatment of individuals who have
sporadic adenomatous colonic polyps. There are approximately 10,500 of these
physicians in the U.S. This target audience of physicians builds on and
overlaps with the group of physicians who treat APC and is a logical extension
of the Company's planned marketing and sales efforts.

33
<PAGE>

Barrett's Esophagus. Barrett's Esophagus is a precancerous condition of the
lower esophagus characterized by progressive and readily identifiable changes
in the appearance of the lining of the esophagus or esophageal epithelium.
Some patients experience reflux of stomach acid into the esophagus,
exacerbating the condition. Patients with Barrett's Esophagus have 30 to 40
times greater risk of developing esophageal cancer than the average person.
Treatment with anti-acid therapy or other anti-reflux measures is usually not
effective. Approximately 1% of the U.S. population, or an estimated 2,000,000
people, have Barrett's Esophagus, but only one half of this group experiences
symptoms that could lead to diagnosis.

CPI plans to initiate a 12-month Phase II study in patients with Barrett's
Esophagus to evaluate the safety and efficacy of FGN-1. The Company's proposed
clinical endpoints are reduction in the area affected or in the degree of
dysplasia found in the affected tissues.

Barrett's Esophagus is diagnosed by upper gastrointestinal endoscopy, a
procedure usually performed by gastroenterologists. Treatment is usually
managed by gastroenterologists or by thoracic surgeons, of whom there are
approximately 2,000 in the U.S. Because of the significant overlap between the
physician groups who treat Barrett's Esophagus with those who treat APC and
sporadic adenomatous colonic polyps, the Company does not anticipate that any
significant increase in the sales and marketing organization will be required
to promote products for Barrett's Esophagus.

Cervical Dysplasia. Cervical dysplasia is a relatively common precancerous
lesion of the cervix that is easily diagnosed by Pap smears. Fifty million Pap
smears are performed each year in the U.S., of which approximately 5% reveal
some form of cervical dysplasia. Although very few cases of cervical dysplasia
progress to cancer, it is estimated that in 1997 there will be approximately
15,000 new cases of cervical cancer in the U.S.

In September 1997, CPI completed a two-month Phase IB safety and
pharmacokinetic study in 18 patients who had a history of sporadic adenomatous
colonic polyps and/or cervical dysplasia. CPI plans to initiate in 1998 a six-
month Phase II study to evaluate the safety and efficacy of different doses of
FGN-1 in reducing the size of the area affected by and degree of dysplasia.
Based on the results of that study, further studies may be initiated.

Treatment of cervical dysplasia, especially those cases with more severe
dysplasia or recurrence, is usually performed by gynecologists, of whom there
are approximately 36,000 in the U.S. The Company anticipates seeking a
marketing partner for sales to this large physician market.

CLINICAL DEVELOPMENT OF FGN-1 FOR CANCEROUS LESIONS

Laboratory studies have demonstrated that FGN-1 arrests or slows the
progression of certain cancerous lesions. Based on the safety profile of FGN-1
and its novel mechanism of activity, the Company believes that FGN-1 may be
clinically useful in augmenting radiation and conventional chemotherapy in the
treatment of cancers and the prevention of recurrence. The Company believes
that cancer cells that are resistant to radiation or conventional chemotherapy
may be killed by FGN-1 due to its effect on an apoptotic mechanism that is
different from that targeted by conventional therapies.

The Company is planning additional clinical studies in specific cancer
indications, using the safety and pharmacokinetic data from its APC and
sporadic colonic adenomatous polyp/cervical dysplasia studies to support the
initiation of Phase II or Phase II/III studies. The Company plans to expand
the trials covered under its existing IND for FGN-1 to cover these additional
indications. Results of earlier clinical trials of FGN-1 in the treatment of
APC are not predictive of the results that may be obtained from trials of FGN-
1 in the treatment of cancer.

34
<PAGE>

Prostate Cancer. It is estimated that in 1997 there will be approximately
209,000 new cases of prostate cancer in the U.S. In in vitro and in vivo
studies, the Company has observed that FGN-1 inhibits growth of prostate
cancer, including one such cancer that is resistant to conventional
chemotherapeutic drugs. The Company plans to initiate a Phase II/III clinical
study for prostate cancer in 1997. This study will include men who have had a
prostatectomy and have rising PSA levels, which is often a sign of recurrent
prostate cancer that is not detectable by current imaging or diagnostic
methods. The endpoint of this study is the arrest or delay in the elevation of
PSA. Depending on the results of this study, the Company anticipates
additional clinical studies to confirm the efficacy of the compound.

Prostate cancer is commonly diagnosed and treated by urologists, of whom
there are approximately 10,000 in the U.S. Oncologists, of whom there are
5,500 in the U.S., manage the chemotherapeutic treatment of prostate cancer.
If the Company develops products to treat prostate cancer, the Company
anticipates marketing these products directly to urologists and oncologists.

Lung Cancer. It is estimated that in 1997 there will be approximately
177,000 new cases of lung cancer in the U.S. FGN-1 has shown positive results
in the prevention of chemically-induced lung cancer in rodents. The Company
plans to conduct a pilot study of the safety and efficacy of FGN-1 in patients
with advanced lung cancer. The results of this exploratory study will
determine the Company's plans for further studies.

Lung cancer may be diagnosed by general practitioners or internists.
Oncologists manage the chemotherapeutic treatment of lung cancer. If the
Company develops products to treat lung cancer, the Company anticipates
marketing these products directly to oncologists.

Breast cancer. It is estimated that in 1997 there will be approximately
185,000 new cases of breast cancer in the U.S. The Company has observed that
FGN-1 and other CPI compounds show dose-related inhibitory effects in several
in vitro breast cancer cell systems, in in vivo chemically-induced cancer
models and in in vitro studies with primary breast cancer tissues removed from
patients. The Company plans to initiate a Phase II/III study to evaluate the
safety and efficacy of FGN-1 in the prevention of recurrence of breast cancer
in women who have not responded to traditional recurrence prevention, such as
tamoxifen, and who are in remission after having been treated with
conventional chemotherapeutic agents.

Gynecologists usually diagnose breast cancer, while oncologists manage the
chemotherapeutic treatment. If the Company develops any products to treat
breast cancer, the Company anticipates marketing these products to
oncologists.

NATIONAL CANCER INSTITUTE AND OTHER COLLABORATIVE ARRANGEMENTS

Pursuant to a Clinical Trials Agreement entered into in 1994, the NCI agreed
to sponsor human clinical efficacy trials of FGN-1 for at least two precancer
indications. The first indication is colonic adenomas, including APC. The NCI
sponsored a portion of the Phase I/II clinical study for APC that the Company
concluded in January 1997. The second indication for which the NCI will
sponsor clinical trials is under discussion. The NCI has the right to conduct
as many additional clinical trials as it would like and the Company is
obligated to provide FGN-1 for such studies. The Company has retained all
commercial rights to FGN-1, and the agreement with the NCI contains no
provisions for royalties or restrictions on CPI's ability to commercialize
FGN-1.

The Company has also entered into an amendment of the Clinical Trials
Agreement with the NCI to permit the NCI to conduct preclinical testing and,
if agreed with the Company, clinical testing of three additional CPI
compounds. The Company believes that continued collaboration with the NCI will
advance the progress of both the Company and the NCI in developing therapies
to treat precancerous lesions in a variety of tissues.

35
<PAGE>

In June 1991, the Company entered into a Research and License Agreement with
the University of Arizona. Under the agreement, the Company agreed to attempt
to commercialize at least one product and the University agreed to conduct a
research program in support of the Company's efforts. The University of
Arizona has granted a license to the Company for all patents based on
inventions developed by the University's employees in conjunction with the
Company. The Company has agreed to pay to the University a royalty based on
sales of products based on each such patent.

CPI maintains collaborative relationships with a number of university-based
researchers and commercial vendors throughout the U.S., Europe and Israel who
furnish additional cell biology studies, in vivo pharmacological studies, in
vivo drug candidate screening and animal toxicological studies and scale-up
and synthesis of promising new compounds. CPI retains all exclusive rights to
commercialize the inventions and discoveries that result from these
collaborations.

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<PAGE>

SCIENTIFIC ADVISORY BOARD

The Company is assisted in its research and development activities by its
Scientific Advisory Board ("SAB") composed of physicians and scientists who
review the Company's research and development, participate in the design of
clinical trials, discuss technological advances relevant to the Company and
its business and otherwise assist the Company. The members of the SAB are
appointed by the Company's management. The SAB meets at least four times
annually and certain members meet in smaller groups or with the Company
individually as needed. Dr. Rifat Pamukcu, the Company's Chief Scientific
Officer and Senior Vice President, Research and Development, served as co-
chair of the Company's SAB prior to joining the Company in 1993, and continues
to participate in all SAB meetings. SAB members are compensated in cash and
stock options for their services to the Company. The Company also reimburses
each member for expenses incurred when traveling to and attending meetings.
All SAB members have commitments or consulting contracts with other
organizations and companies, some of which are competitors or potential
competitors of the Company, that may limit their availability to the Company.
None of these individuals is expected to devote more than a small portion of
his time to the Company. The members of the SAB are listed below by area of
specialization.

SCIENTIFIC ADVISORY BOARD

<TABLE>
<CAPTION>
NAME PROFESSIONAL AFFILIATION
---- ------------------------
<C> <S>
CELLULAR & ANIMAL RESEARCH
Dennis Ahnen, M.D. Professor of Medicine, University of Colorado
School of Medicine; Director of Cancer
Prevention and Control, University of
Colorado Cancer Center
David M. Livingston, M.D. Emil Frei Professor of Medicine, Harvard
Medical School; Chief of the Division of
Neoplastic Disease Mechanisms and Chairman of
the Executive Committee for Research, Dana-
Farber Cancer Institute
Alan C. Sartorelli, Ph.D. Alfred Gilman Professor of Pharmacology and
Epidemiology, Yale University School of
Medicine; formerly Director of Yale
Comprehensive Cancer Center
CLINICAL & DRUG DEVELOPMENT
David S. Alberts, M.D. Associate Dean of Research, Director of
Cancer Prevention and Control Program, and
Professor of Medicine and Pharmacology,
Arizona Cancer Center, University of Arizona
Randall W. Burt, M.D. (Chairman) Professor of Internal Medicine and Chief of
Gastroenterology, University of Utah School
of Medicine; formerly Chief of Medical
Services, Veterans Administration Medical
Center, Salt Lake City, Utah
Daniel D. Von Hoff, M.D. Director of the Institute for Drug
Development, Cancer Therapy and Research
Center at the University of Texas Health
Science Center
INDUSTRY RESEARCH & DEVELOPMENT
Ira Ringler, Ph.D. Pharmaceutical industry consultant; formerly
President Takeda-Abbott Pharmaceuticals, and
Vice President, Pharmaceutical Research and
Development, Abbott Laboratories
</TABLE>

37
<PAGE>

PATENTS AND PROPRIETARY TECHNOLOGY

As of October 15, 1997, CPI held title or exclusive licenses to two issued
U.S. patents, one allowed U.S. patent application and one pending U.S. patent
application relating to the therapeutic use of FGN-1 in the treatment of
neoplasia and/or precancerous lesions. The Company has no composition of
matter patent on FGN-1 because FGN-1, which is a sulfone derivative of the
NSAID sulindac, was described in an expired 1972 patent, U.S. 3,654,349, and
in various scientific journal articles published in the 1970s. CPI has also
been issued or holds exclusive licenses to 11 foreign patents (including
patents in various European countries and in Australia and an allowed Japanese
patent application) as well as two other pending foreign patent applications
relating to the use of FGN-1 in pharmaceutical compositions for the treatment
of neoplasia and/or precancerous lesions. In Europe, CPI's patent rights
relating to FGN-1 are directed to the use of FGN-1 in the manufacture of
pharmaceutical compositions for the treatment of precancerous lesions. CPI
also holds title or exclusive licenses to four U.S. patent applications which
have been allowed, 18 other pending U.S. patent applications, five issued
foreign patents and 18 pending foreign applications on other compounds, or
therapeutic methods involving such compounds, for the treatment of colonic
polyps, precancerous lesions, and/or neoplasia. CPI also has filed a U.S.
patent application on methods for screening compounds for their usefulness in
selectively inducing apoptosis involving the ARE. CPI intends to file
additional applications, as appropriate, for patents on new compounds,
products, or processes discovered or developed through application of the
Company's technology.

In addition, competitors may manufacture and sell CPI's potential products
in those foreign countries where CPI has not filed for patent protection or
where patent protection may be unavailable, not obtainable or ultimately not
enforceable. The ability of such competitors to sell such products in the U.S.
or in foreign countries where CPI has obtained patents is usually governed by
the patent laws of the countries in which the product is sold. In addition, to
the extent that clinical uses of FGN-1 are discovered beyond those set forth
in CPI's patent claims, CPI may not be able to enforce its patent rights
against companies marketing FGN-1 for such other clinical uses.

38
<PAGE>

any third-party patents will require the Company to alter its products or
processes, obtain licenses, or cease certain activities. Some third-party
applications or patents may conflict with the Company's issued patents or
pending applications. Such conflict could result in a significant reduction of
the coverage of the Company's issued or licensed patents. In addition, if
patents are issued to other companies which contain blocking, dominating or
conflicting claims and such claims are ultimately determined to be valid, the
Company may be required to obtain licenses to these patents or to develop or
obtain alternative technology. If any licenses are required, there can be no
assurance that the Company will be able to obtain any such licenses on
commercially favorable terms, if at all, and if these licenses are not
obtained, the Company might be prevented from pursuing the development of
certain of its potential products. The Company's failure to obtain a license
to any technology that it may require to commercialize its products may have a
material adverse impact on the Company's business, financial condition and
results of operations.

COMPETITION

39
<PAGE>

depends on its ability to attract and retain qualified scientific and other
personnel, develop effective proprietary products, implement development and
marketing plans, obtain patent protection and secure adequate capital
resources.

In the fields of cancer therapy and the prevention of precancerous and
cancerous lesions, other products are being developed that may compete
directly with the products that the Company is seeking to develop and market.
The Company is aware of clinical trials in which a number of pharmaceutical
and nutritional agents are being examined for their potential usefulness in
the treatment of precancerous lesions and cancer. These include studies of
NSAID-like compounds, cyclooxygenase inhibitors, difluoromethylornithine
("DFMO") and natural nutrients in the treatment of APC and sporadic colonic
polyps, studies of retinoids and DFMO in the treatment of cervical dysplasia
and studies of tamoxifen for the prevention of breast cancer. Additional
compounds being tested in various epithelial lesions include compounds related
to aspirin, various vitamins and nutritional supplements, oltipraz, N-acetyl
cysteine and compounds that interfere with hormone activities. The studies are
being conducted by pharmaceutical and biotechnology companies, major academic
institutions and government agencies. There are other agents, including
certain prescription drugs, that have been observed to have an effect on ARE.
Although the Company is not aware that any third party has demonstrated the
preclinical utility of these compounds in the treatment of precancerous or
cancerous lesions, there can be no assurance that such existing or new agents
will not ultimately be found to be useful, and therefore competitive with any
future products of the Company.

CPI will face competition based on product efficacy and safety, the timing
and scope of regulatory approvals, availability of supply, marketing and sales
capability, reimbursement coverage, price and patent position. There can be no
assurance that the Company's competitors will not develop safer and more
effective products or obtain patent protection or intellectual property rights
that limit the Company's ability to commercialize products that may be
developed or commercialize products earlier than the Company. There can be no
assurance that the Company's issued patents or pending patent applications, if
issued, will not be challenged, invalidated or circumvented or that the rights
granted thereunder will provide proprietary protection or competitive
advantage to the Company.

GOVERNMENT REGULATION

The research, design, testing, manufacturing, labeling, marketing,
distribution and advertising of products such as the Company's proposed
products are subject to extensive regulation by governmental regulatory
authorities in the U.S. and other countries. The drug development and approval
process is generally lengthy, expensive and subject to unanticipated delays.
The FDA and comparable agencies in foreign countries impose substantial
requirements on the introduction of new pharmaceutical products through
lengthy and detailed preclinical and clinical testing procedures, sampling
activities and other costly and time-consuming compliance procedures. A new
drug may not

40
<PAGE>

be marketed in the U.S. until it has undergone rigorous testing and has been
approved by the FDA. The drug may then be marketed only for the specific
indications, uses, formulation, dosage forms and strengths approved by the
FDA. Similar requirements are imposed by foreign regulators upon the marketing
of a new drug in their respective countries. Satisfaction of such regulatory
requirements, which includes demonstrating to the satisfaction of the FDA that
the relevant product is both safe and effective, typically takes several years
or more depending upon the type, complexity and novelty of the product and
requires the expenditure of substantial resources. Preclinical studies must be
conducted in conformance with the FDA's GLP regulations. The Company's
compounds require extensive clinical trials and FDA review as new drugs.
Clinical trials are vigorously regulated and must meet requirements for FDA
review and oversight and requirements under GCP guidelines. There can be no
assurance that the Company will not encounter problems in clinical trials
which would cause the Company or the FDA to delay or suspend clinical trials.
Any such delay or suspension could have a material adverse effect on the
Company's business, financial condition and results of operations.

The steps required before a drug may be marketed in the U.S. include: (i)
preclinical laboratory and animal tests; (ii) submission to the FDA of an
application for an IND exemption, which must become effective before human
clinical trials may commence; (iii) human clinical trials to establish the
safety and efficacy of the drug; (iv) submission of a detailed NDA to the FDA;
and (v) FDA approval of the NDA. In addition to obtaining FDA approval for
each product, each domestic establishment where the drug is to be manufactured
must be registered with the FDA. Domestic manufacturing establishments must
comply with cGMP regulations and are subject to periodic inspections by the
FDA. Foreign manufacturing establishments manufacturing drugs intended for
sale in the U.S. also must comply with cGMP regulations and are subject to
periodic inspection by the FDA or by local authorities under agreement with
the FDA.

Preclinical tests include laboratory evaluation of product chemistry and
animal studies to assess the metabolic and pharmacologic activity and
potential safety and efficacy of the product. Preclinical tests must be
conducted by laboratories that comply with FDA regulations regarding GLP. The
results of preclinical tests are submitted to the FDA as part of an IND, which
must become effective before the sponsor may conduct clinical trials in human
subjects. Unless the FDA objects to an IND, the IND becomes effective 30 days
following its receipt by the FDA. There is no certainty that submission of an
IND will result in FDA authorization of the commencement of clinical trials.

Clinical trials involve the administration of the investigational drug to
patients. Every clinical trial must be conducted under the review and
oversight of an institutional review board ("IRB") at each institution
participating in the trial. The IRB evaluates, among other things, ethical
factors, the safety of human subjects and the possible liability of the
institution. Clinical trials typically are conducted in three phases, which
generally are conducted sequentially, but which may overlap. Clinical trials
test for efficacy and safety, side effects, dosage, tolerance, metabolism and
clinical pharmacology. Phase I tests involve the initial introduction of the
drug to a small group of subjects to test for safety, dosage tolerance,
pharmacology and metabolism. Phase II trials involve a larger but still
limited patient population to determine the efficacy of the drug for specific
indications, to determine optimal dosage and to identify possible side effects
and safety risks. If a drug appears to be efficacious in Phase II evaluations,
larger-scale Phase III trials are undertaken to evaluate the safety and
effectiveness of the drug, usually, though not necessarily, in comparison with
a placebo or an existing treatment. There can be no assurance, however, that
Phase I, Phase II or Phase III testing will be completed successfully within
any specified time period, if at all. Furthermore, the FDA may suspend
clinical trials at any time if it decides that patients are being exposed to a
significant health risk.

The results of the preclinical studies and clinical trials are submitted to
the FDA as part of an NDA for approval of the marketing of the drug. The NDA
also includes information pertaining to the chemistry, formulation and
manufacture of the drug and each component of the final product, as well

41
<PAGE>

as details relating to the sponsoring company. The NDA review process takes
from one to two years on average to complete, although reviews of treatments
for cancer and other life-threatening diseases may be accelerated. However,
the process may take substantially longer if the FDA has questions or concerns
about a product. In general, the FDA requires at least two adequate and well-
controlled clinical studies demonstrating efficacy in order to approve an NDA.
The FDA may, however, request additional information, such as long-term
toxicity studies or other studies relating to product safety. Notwithstanding
the submission of such data, the FDA ultimately may decide that the
application does not satisfy its regulatory criteria for approval. Finally,
the FDA may require additional clinical tests following NDA approval.

There can be no assurance that the drugs the Company is seeking to develop
will prove to be safe and effective in treating or preventing cancer. The
development of such drugs will require the commitment of substantial resources
to conduct the preclinical development and clinical trials necessary to bring
such compounds to market. Drug research and development by its nature is
uncertain. There is a risk of delay or failure at any stage, and the time
required and cost involved in successfully accomplishing the Company's
objectives cannot be predicted. Actual drug research and development costs
could exceed budgeted amounts, which could have a material adverse effect on
the Company's business, financial condition and results of operations.

CPI cannot predict when, if ever, it might submit for regulatory review
additional compounds currently under development. Once the Company submits its
potential products for review, there can be no assurance that the FDA or other
regulatory approvals for any pharmaceutical products developed by CPI will be
granted on a timely basis, if at all. The FDA and comparable agencies in
foreign countries impose substantial requirements on the introduction of new
pharmaceutical products through lengthy and detailed preclinical and clinical
testing procedures, sampling activities and other costly and time-consuming
compliance procedures. Clinical trials are vigorously regulated and must meet
requirements for FDA review and oversight and requirements under GCP
guidelines. A new drug may not be marketed in the U.S. until it has been
approved by the FDA. There also can be no assurance that the Company will not
encounter delays or rejections that the FDA will not make policy changes
during the period of product development and FDA regulatory review of each
submitted NDA. A delay in obtaining or failure to obtain such approvals would
have a material adverse effect on the Company's business, financial condition
and results of operations. Even if regulatory approval is obtained, it would
be limited as to the indicated uses for which the product may be promoted or
marketed. A marketed product, its manufacturer and the facilities in which it
is manufactured are subject to continual review and periodic inspections. If
marketing approval is granted, the Company would be required to comply with
FDA requirements for manufacturing, labeling, advertising, record keeping and
reporting of adverse experiences and other information. In addition, the
Company would be required to comply with federal and state anti-kickback and
other health care fraud and abuse laws that pertain to the marketing of
pharmaceuticals. Failure to comply with regulatory requirements and other
factors could subject CPI to regulatory or judicial enforcement actions,
including, but not limited to, product recalls or seizures, injunctions,
withdrawal of the product from the market, civil penalties, criminal
prosecution, refusals to approve new products and withdrawal of existing
approvals, as well as enhanced product liability exposure, any of which could
have a material adverse effect on the Company's business, financial condition
and results of operations. Sales of the Company's products outside the U.S.
will be subject to foreign regulatory requirements governing clinical trials,
marketing approval, manufacturing and pricing. Non-compliance with these
requirements could result in enforcement actions and penalties or could delay
introduction of the Company's products in certain countries.

42
<PAGE>

compounds and there can be no assurance that the FDA will approve such
compounds in the future. Should the FDA require CPI to demonstrate the
efficacy of FGN-1 in the reduction of certain cancers or in overall mortality
rates resulting from certain cancers, the Company's clinical trial strategy
would be materially and adversely affected, as significant additional time and
funding would be required to demonstrate such efficacy. There can be no
assurance that CPI will be able to successfully develop a safe and efficacious
chemoprevention product or that such product will be commercially viable or
will achieve market acceptance.

In 1988 and again in 1992, the FDA issued regulations intended to expedite
the development, evaluation and marketing of new therapeutic products to treat
life-threatening and severely debilitating illnesses for which no satisfactory
alternative therapies exist. One program under these regulations provides for
early consultation between the sponsor and the FDA in the design of both
preclinical studies and clinical trials. Another program provides for
accelerated approval based on a surrogate endpoint. There can be no assurance,
however, that any future products the Company may develop will be eligible for
evaluation by the FDA under these regulations. In addition, there can be no
assurance that FGN-1 or any future products the Company may develop, if
eligible for these programs, will be approved for marketing sooner than would
be traditionally expected. Regulatory approval granted under these regulations
may be restricted by the FDA as necessary to ensure the safe use of the drug.
In addition, post-marketing clinical studies may be required. If FGN-1 or any
future products of the Company do not perform satisfactorily in such post-
marketing clinical studies, they would likely be required to be withdrawn from
the market.

In most cases, pharmaceutical companies rely on patents to provide market
exclusivity for the periods covered by the patents. See "Business--Patents and
Proprietary Technology." In the U.S., the Drug Price Competition and Patent
Term Restoration Act of 1984 (the "Hatch-Waxman Act") permits an extension of
patents in certain cases to compensate for patent time expended during
clinical development and FDA review of a drug. In addition, the Hatch-Waxman
Act establishes a period of market exclusivity, independent of any patents,
during which the FDA may not accept or approve abbreviated applications for
generic versions of the drug from other sponsors, although the FDA may accept
and approve subsequent long-form applications for the drug. The applicable
period of market exclusivity for a drug containing an active ingredient not
previously approved is five years. There is no assurance that all or any of
the Company's products, if approved, will receive market exclusivity under the
Hatch-Waxman Act. Failure to receive such exclusivity could have an adverse
effect on the Company's business, financial condition and results of
operations.

Among the requirements for product approval is the requirement that
prospective manufacturers conform to the FDA's cGMP standards, which also must
be observed at all times following approval. Accordingly, manufacturers must
continue to expend time, money and effort in production, record keeping and
quality control to ensure compliance with cGMP standards. Failure to so comply
subjects the manufacturer to possible FDA action, such as the suspension of
manufacturing or seizure of the product. The FDA may also request a voluntary
recall of a product.

Health care reform legislation, if enacted, could result in significant
change in the financing and regulation of the health care business. In
addition, legislation affecting coverage and reimbursement under Medicare,
Medicaid and other government medical assistance programs has been enacted
from

43
<PAGE>

time to time. The Company is unable to predict whether such legislation will
be enacted in the future or, if enacted, the effect of such legislation on the
future operation of the Company's business. Changes adversely affecting drug
pricing, drug reimbursement, and prescription benefits, among other changes,
could have a materially adverse effect on the Company's business, financial
condition and results of operations.

MANUFACTURING

The Company currently has no manufacturing facilities for clinical or
commercial production of any of its compounds under development. The Company
is currently relying on third-party manufacturers to produce its compounds for
research and clinical purposes. Therefore, CPI will need to develop its own
facilities or contract with third-parties for the manufacture of products, if
any, that it may develop for its own account or in connection with
collaborative arrangements in which it has retained manufacturing rights.

The Company is working with Zambon, an Italian manufacturer of
pharmaceutical chemicals, for the supply of FGN-1 in bulk form. In its most
recent FDA inspection, this manufacturer was found to adhere to cGMP
regulations. Zambon is one of the largest manufacturers of generic sulindac.
Several batches of FGN-1 drug substance, the manufacturing process of which is
similar to that of sulindac, have been delivered by the manufacturer to CPI at
a scale suitable for commercial use and are currently being used in the
Company's pivotal Phase III APC study. Zambon has the capacity to supply the
Company's current and foreseeable future requirements for FGN-1 and is
currently in discussions with CPI to provide for the long-term supply of FGN-
1.

The Company is also working with Ohm, a U.S.-based contract manufacturer, to
manufacture FGN-1 in its final pharmaceutical dosage form. Manufacturing
methods have been transferred to and developed with this contractor. Capsules
used in the current pivotal Phase III APC study are made by this manufacturer
at a scale suitable for commercialization, substantially reducing the need for
further bioequivalency studies. At this time, the Company is negotiating a
formal, commercial supply agreement with this manufacturer.

MARKETING AND SALES

The Company has to date retained all rights to FGN-1 and its other compounds
and plans to establish its own sales, marketing and distribution organization.
The Company plans to promote FGN-1, if approved for sale, primarily to the
gastroenterologists and other physicians who manage patients with APC,
sporadic adenomatous colonic polyps and Barrett's Esophagus. These initial
markets are treated by approximately 10,500 physicians, a relatively small
target audience. If the Company receives additional FDA approvals for FGN-1,
CPI may expand its sales and marketing team to reach other targeted groups of
physicians. Target groups would include the approximately 10,000 urologists
who manage most prostate cancer patients and the approximately 5,500
oncologists who manage cancer therapy patients.

Certain indications, based on their treatment by a large number of
physicians, require an extensive sales force to sufficiently reach the
appropriate physician groups. Cervical dysplasia, for example, is treated by
approximately 36,000 gynecologists. To reach these more extensive physician
groups, the Company may, if appropriate, enter into co-marketing agreements
with pharmaceutical or biotechnology companies.

The Company anticipates marketing its products in Europe by entering into
strategic alliance agreements with established sales organizations located in
such markets, and the Company is currently in preliminary discussions with
several such parties. In Japan and other Pacific Rim countries the Company is
seeking marketing partners to assist in local clinical trials, regulatory
filings, and marketing, sales and distribution. See "Risk Factors--Absence of
Sales and Marketing Experience, Dependence on Third Parties."

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<PAGE>

EMPLOYEES

As of October 15, 1997, the Company employed 27 persons full-time. CPI
places an emphasis on obtaining the highest available quality of staff. None
of the Company's employees is covered by collective bargaining arrangements
and management considers relations with its employees to be good.

FACILITIES

The Company leases approximately 40,000 square feet of space in Horsham,
Pennsylvania. This lease expires in 2007. The Company has an option
exercisable until March 31, 1998 to purchase this facility for $3.4 million
and is evaluating financing alternatives in order to determine whether to
exercise this option. The Company is currently occupying approximately 15,000
square feet of existing office space while renovating the remaining 25,000
square feet to include approximately 10,000 square feet of laboratory space
and 15,000 square feet of office, warehouse and mechanical space. The Company
also leases approximately 7,900 square feet in Aurora, Colorado, half of which
is laboratory space and half of which is office space. This lease expires in
March 1999. Upon completion of renovations in Horsham, Pennsylvania, the
Company will discontinue all operations in the Aurora facility and consolidate
into the Horsham site.

LEGAL PROCEEDINGS

CPI is not a party to any legal proceedings.

45
<PAGE>

MANAGEMENT

EXECUTIVE OFFICERS, DIRECTORS AND KEY EMPLOYEES

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

<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Robert J. Towarnicki............... 46 Director; Chief Executive Officer

Christopher J. Blaxland............ 56 Director; President

Rifat Pamukcu, M.D. ............... 40 Chief Scientific Officer; Senior Vice President--Research
and Development

Richard H. Troy.................... 60 Director; Senior Vice President--Finance,
Law and Administration; Corporate Secretary

William A. Boeger(1)(2)............ 48 Chairman of the Board of Directors

Thomas M. Gibson(2)................ 70 Director

Roger J. Quy, Ph.D.(1) ............ 46 Director

Peter G. Schiff(1)................. 45 Director

Randall M. Toig, M.D. ............. 47 Director

Kerstin B. Menander, M.D., Ph.D. .. 60 Vice President--Medical Affairs

Gary A. Piazza, Ph.D. ............. 38 Senior Director of Biology
</TABLE>
- --------
(1) Member of the Compensation and Stock Option Committee.
(2) Member of the Audit Committee.

EXECUTIVE OFFICERS AND DIRECTORS

ROBERT J. TOWARNICKI has served as Chief Executive Officer and a Director of
the Company since October 1996. Prior to joining the Company, from 1992 to
1996 he served as President, Chief Operating Officer, a Director and most
recently as Executive Vice President of Integra LifeSciences Corporation,
which is the publicly held parent firm for a group of biotechnology and
medical device companies including Collatech, Inc., ABS LifeSciences Inc.,
Telios Pharmaceuticals, Inc. and Vitaphore Corporation. In addition, from 1991
to 1992, he served as Founder, President and Chief Executive Officer of
MediRel, Inc. From 1989 to 1991 he was General Manager of Focus/MRL, Inc. from
1985 to 1989 he was Vice President of Development and Operations for Collagen
Corporation and from 1974 to 1985 he held a variety of operations management
positions at Pfizer, Inc. and Merck & Co., Inc. Mr. Towarnicki was a Ph.D.
candidate in Pharmaceutical Chemistry at Temple University School of Pharmacy
and received his M.S. and B.S. degrees from Villanova University.

CHRISTOPHER J. BLAXLAND has served as President and a Director of the Company
since September 1993. Prior to joining the Company, from 1992 to 1993 he
headed the Pharmaceutical Group of Greenwich Pharmaceuticals, Inc., where he
was responsible for establishing and leading that company's commercial
activities, including Phase III development, regulatory affairs, medical
affairs, sales and marketing, manufacturing and quality control. Prior to 1992
he held executive positions with SmithKline Beecham plc for 21 years, serving
in regulatory, commercial development, sales marketing and general management
positions in Australia, Korea, The Netherlands and the U.S. Mr. Blaxland
graduated from the Veterinary School at the University of Sydney, Australia.

RIFAT PAMUKCU, M.D. is the Company's Chief Scientific Officer and Senior Vice
President--Research and Development. Dr. Pamukcu is a co-founder of the
Company. Prior to joining the Company, from 1989 to March 1993, he was
Assistant Professor of Medicine at the University of Cincinnati and co-chair
of the Company's SAB. He continued as an Adjunct Assistant Professor of
Medicine at the University of Cincinnati from 1993 to 1995. He was a
postdoctoral fellow from 1986 to 1989 in the

46
<PAGE>

Division of Gastroenterology at the University of Chicago. Dr. Pamukcu
received a B.A. in Biology from Johns Hopkins University in 1979 and an M.D.
degree from the University of Wisconsin School of Medicine in 1983.

RICHARD H. TROY has served as Senior Vice President--Finance, Law and
Administration, Corporate Secretary and a Director of the Company since
January 1993. He has been an advisor to the Company since its inception, and
he is a director and President of FGN, Inc., the predecessor partnership's
first general partner and a principal stockholder of the Company. Prior to
joining the Company, from 1990 to 1992, he served as Vice President and
Associate General Counsel of UST, Inc. Prior to that, from 1973 to 1990, he
worked at Combustion Engineering, Inc., most recently as Vice President and
Deputy General Counsel, and from 1964 to 1973, he practiced law with the firm
of Shearman & Sterling in New York City. Mr. Troy received a B.A. in
Philosophy from Georgetown University in 1959, studied at the Ludwig-
Maximilians-Universitat in Munich in 1959-60, and received a LL.B. degree from
Harvard Law School in 1963.

WILLIAM A. BOEGER has served as Chairman of the Board of Directors of the
Company since September 1996 and has served as a Director since December 1992.
Since 1993 he also has been Chairman of the Board of Calypte Biomedical
Corporation; he also served as President and Chief Executive Officer of
Calypte Biomedical Corporation from 1993 to 1995. In addition, Mr. Boeger is
Chief Executive Officer of Pepgen Corporation. Since 1986 he has been Managing
General Partner of Quest Ventures II, a venture capital company that he
founded. From 1981 to 1986 Mr. Boeger was employed by Continental Capital
Ventures, a publicly-traded venture capital fund, where he attained the
position of General Partner. Mr. Boeger received a B.S., with an emphasis in
Psychobiology, from Williams College in 1972 and an M.B.A. from the Harvard
Business School.

THOMAS M. GIBSON has served as a Director of the Company since August 1996. He
is also President of Jupiter Electric Company, Inc. and President of
Integrated Technologies Development Corporation. Prior to joining the
Company's Board of Directors, from 1965 to 1990 he was associated with Gibson
Electric Company, Inc., where he attained the position of Chief Executive
Officer. In addition, in the early 1980s he co-founded Gibson Information
Systems, a data service bureau. Mr. Gibson attended Culver Military Academy,
the University of Arizona and University of Illinois.

ROGER J. QUY, PH.D. has served as a Director of the Company since December
1992. He has been with Technology Partners, a venture capital company, since
1989. From 1982 to 1989, Dr. Quy held various management positions with the
Hewlett-Packard Company. Dr. Quy received his undergraduate degree with a
major in Psychology and Law and a Doctorate in Neuroscience from the
University of Keele, England, and an M.B.A. from the Haas School of Business,
University of California, Berkeley.

PETER G. SCHIFF has served as a Director of the Company since December 1992.
He is the President and founder of Northwood Ventures LLC, a firm specializing
in venture capital and leveraged buyouts, President of Northwood Capital
Partners LLC, and Managing General Partner of Rabbit Hollow Partners. Prior to
founding Northwood Ventures LLC in 1983, Mr. Schiff worked for E.M. Warburg,
Pincus & Co., Inc. from 1980 to 1983, and at Chemical Bank from 1976 to 1980.
Mr. Schiff received a B.A. from Lake Forest College in 1974 and an M.B.A. from
the University of Chicago's Graduate School of Business in 1976.

RANDALL M. TOIG, M.D. has served as a Director of the Company since November
1994. He is Associate of Clinical Obstetrics and Gynecology in the Department
of Obstetrics and Gynecology at both the Northwestern University Hospital and
the Northwestern University Medical School. He is also in private medical
practice in Chicago, Illinois and is a Fellow at the American College of
Obstetrics and Gynecology. Dr. Toig received a B.S. in Zoology and
Anthropology from the University of Michigan in 1972 and an M.D. from the
University of Pittsburgh School of Medicine in 1977.

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<PAGE>

KEY EMPLOYEES

KERSTIN B. MENANDER, M.D., PH.D. has served as Vice President--Medical Affairs
at the Company since January 1997. Prior to joining the Company, she held
senior positions at large pharmaceutical companies such as Syntex Corporation
and Abbott Laboratories as well as at smaller companies. She has conducted
basic research within the area of histopathology and held a position as
Associate Professor in the Department of Histology at the University of Lund,
Sweden. Dr. Menander received her M.D. and Ph.D. degrees from the University
of Lund, Sweden, in 1972 and 1969, respectively.

GARY A. PIAZZA, PH.D. has been the Company's Senior Director of Biology,
responsible for preclinical efficacy testing of new compounds since January
1994. Prior to joining the Company, from 1989 to 1993 he was a Staff Scientist
for The Procter & Gamble Company. From 1987 to 1989, he was a Research
Assistant Oncologist at Brown University/Rhode Island Hospital in the
departments of Pathology and Medical Oncology. From 1985 to 1987, he was a
Research Fellow in the Department of Pharmacology at The Fox Chase Cancer
Center in Philadelphia where he received specialized training in cancer cell
biology. Dr. Piazza received his Ph.D. in Pharmacology from the University of
Alabama at Birmingham in 1985.

COMMITTEES

The Compensation and Stock Option Committee (the "Compensation Committee")
consists of Messrs. Boeger, Quy and Schiff. The Compensation Committee
administers the Company's 1997 Equity Incentive Plan and 1995 Stock Award Plan
and makes awards thereunder. The Compensation Committee also determines the
compensation of the elected officers of the Company.

The Audit Committee consists of Messrs. Boeger and Gibson. The Audit
Committee makes recommendations to the Board of Directors regarding the
engagement of the Company's independent certified public accountants and the
review of the scope and effect of the audit engagement.

DIRECTORS' COMPENSATION

The Company's Directors do not currently receive any compensation for
service on the Board of Directors or any committee thereof. See "Management--
Employee Benefit Plans." Directors are reimbursed for certain expenses in
connection with attendance at Board and committee meetings.

EMPLOYMENT AGREEMENTS

In October 1996, the Company entered into an employment agreement with
Robert J. Towarnicki providing for annual compensation of $175,000 and up to
$35,000 as an annual bonus, an option to purchase up to 96,381 shares of
Common Stock at $0.91 per share subject to a four-year vesting schedule,
certain relocation expenses and a severance payment equal to six months of
salary and vesting of at least 48,190 options in the event of termination
without cause. On July 23, 1997, the Company's Board of Directors increased
Mr. Towarnicki's annual salary to $195,000, effective as of January 1, 1998.

In September 1993, the Company entered into an employment agreement with
Christopher J. Blaxland providing for annual compensation of $150,000, to
increase by $25,000 upon the Company's completion of a $5 million financing,
and up to 25% of base compensation in annual bonus, an option to purchase up
to 59,949 shares of Common Stock subject to a four-year vesting schedule,
certain relocation expenses, a severance payment equal to twelve months of
salary and group insurance programs in the event of termination by the Company
without cause or termination by Mr. Blaxland for

48
<PAGE>

good reason. As of 1997, the Company had increased Mr. Blaxland's annual
compensation to $165,000, and on July 23, 1997, the Company's Board of
Directors increased Mr. Blaxland's annual salary to $175,000, effective as of
January 1, 1998.

In February 1993, the Company entered into an employment agreement with
Rifat Pamukcu providing for annual compensation of $110,000 and up to $30,000
as an annual bonus, certain relocation expenses and a severance payment equal
to nine months of salary in the event of involuntary termination or
termination by Dr. Pamukcu for good reason. As of 1997, the Company had
increased Dr. Pamukcu's annual compensation to $145,000, and on July 23, 1997,
the Company's Board of Directors increased Dr. Pamukcu's annual salary to
$175,000, effective as of January 1, 1998.

In January 1993, the Company entered into a memorandum of employment with
Richard H. Troy providing for annual compensation of $110,000, to increase by
$50,000 upon the Company's initial public offering, up to $30,000 as an annual
bonus, and a severance payment equal to six months of salary and benefits in
the event of termination without cause or termination by Mr. Troy for good
reason. As of 1997, the Company had increased Mr. Troy's annual compensation
to $140,000, and on July 23, 1997, the Company's Board of Directors increased
Mr. Troy's annual salary to $160,000, effective as of January 1, 1998.

49
<PAGE>

EXECUTIVE COMPENSATION

The following table sets forth the compensation earned by the Company's
Chief Executive Officer and the three other highly compensated executive
officers whose total annual salary and bonus exceeded $100,000 for services
rendered to the Company during the fiscal year ended December 31, 1996
(collectively, the "Named Executive Officers"):

SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
LONG TERM
ANNUAL COMPENSATION COMPENSATION AWARDS
----------------------- -------------------------
SECURITIES
STOCK UNDERLYING
NAME AND PRINCIPAL POSITION SALARY BONUS AWARDS OPTIONS
- --------------------------- ---------- --------- ---------- -----------
<S> <C> <C> <C> <C>
Robert J. Towarnicki(1)... $ 32,532(1) $ -- $ -- 96,381
Chief Executive Officer

Floyd G. Nichols(1)....... 79,519(1) 25,000(2) 12,800(3) --
Chief Executive Officer

Christopher J. Blaxland... 165,000 25,000(2) 12,800(3) 33,045
President

Rifat Pamukcu, M.D. ...... 145,000 25,000(2) 12,800(3) 33,045
Chief Scientific Officer;
Senior Vice President--
Research and Development

Richard H. Troy........... 140,000 25,000(2) 12,800(3) 27,537
Senior Vice President--
Finance, Law and
Administration; Corporate
Secretary
</TABLE>
- --------
(1) Floyd G. Nichols served as Chief Executive Officer of the Company until
his death in May 1996. Robert J. Towarnicki began serving as Chief
Executive Officer of the Company in October 1996.
(2) In February 1996, the Compensation Committee awarded bonuses of $25,000 in
cash to each of Floyd G. Nichols, Christopher J. Blaxland, Rifat Pamukcu
and Richard H. Troy with respect to services rendered during the 1993-1995
period.

(3) In March 1996, pursuant to the 1995 Stock Award Plan, the Compensation
Committee awarded 22,030 shares of the Company's Common Stock to each of
Floyd G. Nichols, Christopher J. Blaxland, Rifat Pamukcu and Richard H.
Troy with respect to services rendered during the 1993-1995 period. The
fair market value of such stock awards was $0.58 per share, as determined
by the Board of Directors.

EMPLOYEE BENEFIT PLANS

By actions of September 13, 1993, October 1, 1993 and March 9, 1994, the
Board of Directors of the Company adopted and amended a stock option plan (the
"1993 Stock Option Plan"), which was approved by vote of the stockholders at
the annual meeting of stockholders held on April 6, 1994. The 1993 Stock
Option Plan authorizes the Company to grant to eligible employees, directors
and consultants of the Company, as determined by the Company's Compensation
Committee, options to purchase shares of the Company's Common Stock. On July
23, 1997, the Board of Directors amended the 1993 Stock Option Plan to
increase from 468,139 to 1,294,266 the number of shares of the Company's
Common Stock authorized for issuance under the 1993 Stock Option Plan. As of
September 30, 1997, the Company had granted, pursuant to its 1993 Stock Option
Plan, options for a total of 576,244 shares of Common Stock, of which 260,827
have been exercised.

On October 14, 1997, the Board amended and restated the 1993 Stock Option
Plan to constitute the 1997 Equity Incentive Plan (the "1997 Equity Incentive
Plan"). The 1997 Equity Incentive Plan provides for the grant of incentive
stock options, as defined under the Internal Revenue Code of 1986, as amended
(the "Code"), to employees and nonstatutory stock options, restricted stock
purchase awards, stock appreciation rights and stock bonuses to employees,
directors and consultants of the Company. The Board, or a Committee appointed
by the Board, administers the 1997 Equity Incentive Plan, and determines
recipients and types of awards to be granted, including the exercise price,
number of shares subject to the award and the exercisability thereof.

50
<PAGE>

The terms of stock options granted under the 1997 Equity Incentive Plan may
not exceed 10 years. The exercise price of options granted under the 1997
Equity Incentive Plan is determined by the Board (or Committee), provided that
the exercise price for an option cannot be less than 100% of the fair market
value of the Common Stock on the date of the option grant unless such option
is granted pursuant to an assumption of or a substitution for another option.
Options granted under the 1997 Equity Incentive Plan vest at the rate
specified in the option agreement. Generally, no stock option may be
transferred by the optionee other than by will or the laws of descent or
distribution, provided that an optionee may designate a beneficiary who may
exercise the option following the optionee's death. An optionee whose
relationship with the Company or any affiliate ceases for any reason may
exercise vested options for a term provided in the option agreement.

No incentive stock option may be granted to any person who, at the time of
the grant, owns (or is deemed to own) stock possessing more than 10% of the
total combined voting power of the Company or any affiliate of the Company,
unless the option exercise price is at least 110% of the fair market value of
the stock subject to the option on the date of grant and the term of the
option does not exceed five (5) years from the date of grant. In addition, the
aggregate fair market value, determined at the time of grant, of the shares of
Common Stock with respect to which incentive stock options are exercisable for
the first time by an optionee during any calendar year (under the 1997 Equity
Incentive Plan and all other stock plans of the Company and its affiliates)
may not exceed $100,000.

When the Company becomes subject to Section 162(m) of the Code (which denies
a deduction to publicly held corporations for certain compensation paid to
specified employees in a taxable year to the extent that the compensation
exceeds $1,000,000), no person may be granted options under the 1997 Equity
Incentive Plan covering more than 1,500,000 shares of Common Stock in any
calendar year.

Shares subject to stock awards that have expired or otherwise terminated
without having been exercised in full again become available for the grant of
awards under the 1997 Equity Incentive Plan. The Board (or Committee) has the
authority to reprice outstanding options and to offer optionees the
opportunity to replace outstanding options with new options for the same or a
different number of shares. Both the original and new options will count
toward the per-person, calendar year limitation set forth above.

Restricted stock purchase awards granted under the 1997 Equity Incentive
Plan may be granted pursuant to a repurchase option in favor of the Company in
accordance with a vesting schedule and at a price determined by the Board (or
Committee). Stock bonuses may be awarded in consideration of past services
without a purchase payment. Rights under a stock bonus or restricted stock
bonus agreement generally may not be transferred other than by will or the
laws of descent and distribution during such period as the stock awarded
pursuant to such an agreement remains subject to the agreement.

Upon certain changes in control of the Company, all outstanding awards under
the 1997 Equity Incentive Plan shall have the time at which they may be
exercised in full be accelerated and the awards terminated if not exercised
prior to such change in control. In some instances the Company is required to
make a cash payment in settlement of accelerated, but unexercised options that
have terminated due to the change in control.

On October 14, 1997, the Board adopted the 1997 Non-Employee Directors'
Stock Option Plan (the "Directors' Plan") to provide for the automatic grant
of options to purchase shares of Common Stock to non-employee directors of the
Company. The Directors' Plan is administered by the Board, unless the Board
delegates administration to a committee.

The aggregate number of shares of Common Stock that may be issued pursuant
to options granted under the Directors' Plan is 250,000. Pursuant to the terms
of the Directors' Plan, each person serving as a director of the Company who
is not an employee of the Company (a "Non-Employee Director") shall, upon the
effectiveness of the initial public offering of the Company's Common Stock,

51
<PAGE>

automatically be granted an option to purchase 3,000 shares of Common Stock
(the "Initial Grant"). Each person who first becomes a Non-Employee Director
after the effectiveness of the initial public offering of the Company's Common
Stock, automatically shall be granted an option to purchase 10,000 shares of
Common Stock (the "Inaugural Grant"). In addition, on the date of each annual
stockholders meeting commencing with the meeting in 1998, each Non-Employee
Director who has served at least one full year as director will automatically
be granted an option to purchase 3,000 shares of Common Stock (the
"Anniversary Grant").

Options subject to an Initial Grant under the Directors' Plan will vest in
full on March 31, 1998. Options subject to an Inaugural Grant under the
Directors' Plan will vest in three equal, annual installments commencing on
the first anniversary of the date of the grant of the option. Options subject
to an Anniversary Grant under the Directors' Plan will vest in full on the
first anniversary of the date of the grant of the option. The vesting of all
options under the Directors' Plan is conditioned on the continued service of
the recipient as a director, employee or consultant of the Company or any
affiliate of the Company.

The exercise price of the options granted under the Directors' Plan will be
equal to the fair market value of the Common Stock granted on the date of
grant. No option granted under the Directors' Plan may be exercised after the
expiration of 10 years from the date it was granted. Options granted under the
Directors' Plan generally are non-transferable, except as provided in the
option agreement. The Directors' Plan will terminate on the tenth anniversary
of the date of its adoption by the Board unless sooner terminated by the
Board.

In the event of certain changes of control, options outstanding under the
Directors' Plan will automatically become fully vested and will terminate if
not exercised prior to such change of control.

On October 14, 1997, the Board approved the Employee Stock Purchase Plan
(the "Purchase Plan") covering an aggregate of 300,000 shares of Common Stock.
The Purchase Plan is intended to qualify as an "employee stock purchase plan"
within the meaning of Section 423 of the Code. Under the Purchase Plan, the
Board may authorize participation by eligible employees, including officers,
in periodic offerings following the adoption of the Purchase Plan. The
offering period for any offering will be no longer than 27 months.

Employees are eligible to participate in the Purchase Plan if they are
employed by the Company or an affiliate of the Company designated by the
Board. Employees who participate in an offering can have up to 15% of their
earnings withheld pursuant to the Purchase Plan and applied, on specified
dates determined by the Board, to the purchase of shares of Common Stock. The
price of Common Stock purchased under the Purchase Plan will be not less than
85% of the lower of the fair market value of the Common Stock on the
commencement date of each offering period or the relevant purchase date.
Employees may end their participation in the offering at any time during the
offering period, and participation ends automatically on termination of
employment with the Company.

In the event of certain changes of control, the Board has discretion to
provide that each right to purchase Common Stock will be assumed or a similar
right substituted by the successor corporation, or the Board may shorten the
offering period and provide for all sums collected by payroll deductions to be
applied to purchase stock immediately prior to the change in control. The
Purchase Plan will terminate at the Board's direction.

In November 1995, the Board of Directors of the Company adopted a stock
award plan (the "1995 Stock Award Plan"). The 1995 Stock Award Plan allows the
Company to award Common Stock to certain employees, directors and consultants,
as determined by the Company's Compensation Committee, in consideration for
their performing services for the Company. As of September 1997, the Company
had made awards of an aggregate of 101,888 shares of stock pursuant to the
1995 Stock Award Plan to Christopher J. Blaxland, Floyd G. Nichols, Rifat
Pamukcu, Richard H. Troy and certain other employees.

52
<PAGE>

The following table sets forth each grant of stock options made during the
year ended December 31, 1996 to each of the Named Executive Officers:

OPTION GRANTS IN FISCAL YEAR 1996

<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED
PERCENT OF ANNUAL RATES OF STOCK
TOTAL OPTIONS EXERCISE PRICE APPRECIATION FOR
NUMBER OF GRANTED TO OR BASE OPTION TERMS(2)
OPTIONS EMPLOYEES IN PRICE ----------------------
NAME GRANTED FISCAL YEAR ($/SHARE) EXPIRATION DATE(1) 5% 10%
---- --------- ------------- --------- ------------------ ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Robert Towarnicki(3).... 96,381(4) 33.5% $0.91 October 24, 2006 $ 55,025 $ 139,450
Floyd G. Nichols........ -- -- -- -- -- --
Christopher
Blaxland(3)............ 33,045(5) 11.5 0.58 May 2, 2006 12,075 30,600
Rifat Pamukcu(3)........ 33,045(5) 11.5 0.58 May 2, 2006 12,075 30,600
Richard H. Troy(3)...... 27,537(5) 9.6 0.58 May 2, 2006 10,000 25,500
</TABLE>
- --------
(1) The standard options granted pursuant to the 1993 Stock Option Plan expire
ten years after date of grant.
(2) The potential realizable value is calculated assuming that the fair market
value of Common Stock on the date of the grant as determined by the Board
appreciates at the indicated annual rate compounded annually for the
entire term of the option and that the option is exercised and the Common
Stock received therefor is sold on the last day of the term of the option
for the appreciated price. The 5% and 10% rates of appreciation are
mandated by the rules of the Securities and Exchange Commission and do not
represent the Company's estimate or projection of future increases in the
price of its Common Stock.
(3) In July 1997, the Company granted options to purchase 55,075 shares of
Common Stock to Robert J. Towarnicki, options to purchase 5,507 shares of
Common Stock to Christopher J. Blaxland, options to purchase 13,768 shares
of Common Stock to Rifat Pamukcu and options to purchase 5,507 shares of
Common Stock to Richard H. Troy. All of the above options to purchase
Common Stock are exercisable at a price of $6.72 per share.
(4) 24,095 shares vest upon first anniversary of grant; 2,008 vest monthly
between November 30, 1997 and September 30, 2000; and 2,004 vest on
October 31, 2000.
(5) Twenty-five percent of the total options granted vest upon each
anniversary of grant over four years.

53
<PAGE>

The following table sets forth information with respect to (i) the exercise
of stock options by the Named Executive Officers during the fiscal year ended
December 31, 1996, (ii) the number of unexercised options held by the Named
Executive Officers as of December 31, 1996 and (iii) the value of unexercised
in-the-money options as of December 31, 1996:

OPTION EXERCISES AND YEAR-END VALUE TABLE
<TABLE>
<CAPTION>
VALUE OF
NUMBER OF UNEXERCISED
UNEXERCISED IN-THE-MONEY
OPTIONS AT OPTIONS
DEC. 31, 1996 AT DEC. 31, 1996
SHARES ACQUIRED VALUE EXERCISABLE/ EXERCISABLE/
NAME ON EXERCISE REALIZED UNEXERCISABLE(1) UNEXERCISABLE(2)
---- --------------- -------- ---------------- ----------------
<S> <C> <C> <C> <C>
Robert J. Towarnicki.... -- -- 96,381/-- --/--
Floyd G. Nichols........ -- -- --/-- --/--
Christopher J.
Blaxland............... 59,949(3) -- (4) 33,045/-- $10,800/--
Rifat Pamukcu........... -- -- 33,045/-- 10,800/--
Richard H. Troy......... 27,537(5) -- (6) --/-- --/--
</TABLE>
- --------
(1) All options are subject to vesting; however, early exercise is possible
with portions thereof remaining subject to a repurchase option of the
Company.

(2) To date, all options have been granted at exercise prices equal to the
fair market value per share of Common Stock, as determined by the Board of
Directors; the fair market value at December 31, 1996 was $0.91.
(3) Includes 15,145 shares that were subject to a repurchase option on behalf
of the Company as of December 31, 1996.

(4) Granted on September 13, 1993, with an exercise price of $0.58 per share;
exercised on April 6, 1996, at which time the Company's Board of Directors
determined that the fair market value was $0.58 per share.
(5) All 27,537 shares were subject to a repurchase option of the Company as of
December 31, 1996.

(6) Granted and exercised on May 3, 1996, with an exercise price and fair
market value, as determined by the Board of Directors, of $0.58 per share.

LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS

The Company's Bylaws provide that the Company will indemnify its directors,
officers, employees and agents to the fullest extent permitted by Delaware
law. The Company will adopt Amended and Restated Bylaws, effective upon the
closing of this offering, which will provide that the Company will indemnify
its directors and executive officers to the fullest extent permitted by
Delaware law; provided, however, that the Company may modify the extent of
such indemnification by individual contracts, and shall not be required to
indemnify any director or executive officer in connection with any proceeding
(or part thereof) initiated by such person unless (i) such indemnification is
expressly required to be made by law, (ii) the proceeding was authorized by
the Company's Board of Directors, (iii) such indemnification is provided by
the Company, in its sole discretion, pursuant to the powers vested in the
Company under Delaware law or (iv) such indemnification is required to be made
under the Company's Amended and Restated Bylaws. Under the Amended and
Restated Bylaws, the Company shall have the power to indemnify its other
officers, employees and agents as permitted under Delaware law.

In addition, the Company's Certificate of Incorporation provides that, to
the fullest extent permitted by Delaware Law, the Company's directors will not
be liable for monetary damages for breach of the directors' fiduciary duty to
the Company and its stockholders. This provision of the Certificate of
Incorporation does not eliminate the duty of care, and in appropriate
circumstances equitable remedies such as an injunction or other forms of non-
monetary relief would remain available under Delaware law. Each director will
continue to be subject to liability for breach of the director's duty of
loyalty to the Company, for acts or omissions not in good faith or involving
intentional misconduct, for knowing violations of the law, for any transaction
from which the director derived an improper personal benefit, for improper
transactions between the director and the Company, for improper distributions
to stockholders and for improper loans to directors and officers. This
provision also does not affect a director's responsibilities under any laws,
such as the federal securities laws or state or federal environmental laws.

54
<PAGE>

The indemnification provisions in the Company's Bylaws permit
indemnification for certain liabilities arising under the Securities Act.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the Company
pursuant to the foregoing provisions, or otherwise, the Company has been
advised that in the opinion of the Securities and Exchange Commission (the
"Commission") such indemnification is against public policy as expressed in
the Securities Act and is, therefore, unenforceable.

There is no pending litigation or proceeding involving a director or officer
of the Company as to which indemnification is being sought, nor is the Company
aware of any pending or threatened litigation that may result in claims for
indemnification by any director or officer.

55
<PAGE>

CERTAIN TRANSACTIONS

FIRST ROUND OF SERIES E PREFERRED

Between April 1994 and July 1994, the Company sold to institutional and other
accredited investors a total of 298,908 shares of Series E Convertible
Preferred Stock ("Series E Preferred") at a price of $7.44 per share and
warrants to purchase an additional 10,323 shares of Series E Preferred at $7.44
per share in a first round of financing of Series E Preferred. In August 1995,
in connection with repricing the Series E Preferred to $5.72 per share, the
Company's Board of Directors authorized the issuance of additional Series E
Preferred. In conjunction with this new price, the Company issued 90,161 shares
of Series E Preferred and 3,114 warrants to purchase Series E Preferred to the
previous holders of Series E Preferred. Certain directors, executive officers
and five percent stockholders purchased Series E Preferred and warrants to
purchase Series E Preferred in the first round of financing of Series E
Preferred, as follows: FGN, Inc., which is a holder of more than five percent
of the Company's voting stock and a Director and the President of which is
Richard H. Troy, a Director, Senior Vice President--Finance, Law and
Administration and Corporate Secretary of the Company, purchased 7,168 shares
of Series E Preferred; the Thomas M. Gibson Trust established by Thomas M.
Gibson, a Director of the Company, purchased a total of 524 shares of Series E
Preferred; Quest Ventures II and Quest Ventures International, entities in
which William A. Boeger, a Director of the Company, is a general manager,
purchased a total of 27,519 shares of Series E Preferred and warrants to
purchase Series E Preferred; Randall M. Toig, a Director of the Company,
purchased 3,584 shares of Series E Preferred; Richard H. Troy, a Director,
Senior Vice President--Finance, Law and Administration and the Corporate
Secretary of the Company, purchased 2,581 shares of Series E Preferred and
warrants to purchase Series E Preferred; Technology Partners, which is a holder
of more than five percent of the Company's voting stock and a general manager
of which is Roger J. Quy, a Director of the Company, purchased 92,597 shares of
Series E Preferred and warrants to purchase Series E Preferred; Rabbit Hollow
Partners, the Managing General Partner of which is Peter G. Schiff, a Director
of the Company, purchased 18,121 shares of Series E Preferred; and Northwood
Ventures LLC, which is a holder of more than five percent of the Company's
voting stock and the President of which is Peter G. Schiff, a Director of the
Company, purchased 73,993 shares of Series E Preferred and warrants to purchase
Series E Preferred.

BRIDGE LOAN AND SECOND ROUND OF SERIES E PREFERRED

The Company commenced the second round of Series E Preferred financing
between June and August 1995, when the Company received a bridge loan of
$791,000 from certain of its stockholders and issued convertible promissory
notes with an annual interest rate of 9% to such stockholders. Certain
directors, executive officers and five percent stockholders participated in the
bridge loan, as follows: Floyd G. Nichols, who was a Director and the Company's
Chief Executive Officer, purchased a $50,000 convertible promissory note;
Northwood Ventures LLC, the President of which is Peter G. Schiff, a Director
of the Company, purchased a $200,000 convertible promissory note; Quest
Ventures II, a general manager of which is William A. Boeger, a Director of the
Company, purchased a $50,000 convertible promissory note; and Technology
Partners West Fund IV, a general manager of which is Roger J. Quy, a Director
of the Company, purchased a $90,000 convertible promissory note. The Company
converted the bridge loan's principal and interest into 139,680 shares of
Series E Preferred and warrants to purchase an additional 69,140 shares of
Series E Preferred in August 1995.

Between August 1995 and May 1996, the Company issued 1,246,459 shares of
Series E Preferred and warrants to purchase an additional 116,131 shares of
Series E Preferred at $5.72 per share, which includes those issued in
converting the bridge loan. Certain directors, executive officers and five
percent stockholders purchased Series E Preferred in the conversion of the
bridge loan and the second round of financing of Series E Preferred, as
follows: Floyd G. Nichols, who was a Director and the Company's Chief Executive
Officer, purchased 9,691 shares of Series E Preferred and

56
<PAGE>

warrants to purchase Series E Preferred; Northwood Ventures LLC, the President
of which is Peter G. Schiff, a Director of the Company, purchased 81,065
shares of Series E Preferred and warrants to purchase Series E Preferred;
Northwood Capital Partners LLC, the President of which is Peter G. Schiff, a
Director of the Company, purchased 45,461 shares of Series E Preferred;
Technology Partners West Fund IV, a general manager of which is Roger J. Quy,
a Director of the Company, purchased 83,206 shares of Series E Preferred and
warrants to purchase Series E Preferred; and Thomas M. Gibson, a Director of
the Company, and the Thomas M. Gibson Trust purchased a total of 17,484 shares
of Series E Preferred.

SERIES F PREFERRED

Between December 1996 and June 1997, the Company sold a total of 2,648,491
shares of Series F Convertible Preferred Stock ("Series F Preferred") and
warrants to purchase 69,295 shares of Series F Preferred to institutional
investors and accredited investors. Certain directors, executive officers and
five percent stockholders of the Company participated in the private offering,
as follows: Technology Partners, which is a holder of more than five percent
of the Company's voting stock and a general partner of which is Roger J. Quy,
a Director of the Company, purchased 55,654 shares of Series F Preferred;
Northwood Ventures LLC, which is a holder of more than five percent of the
Company's voting stock and a President of which is Peter G. Schiff, a Director
of the Company, purchased 61,133 shares of Series F Preferred and warrants to
purchase Series F Preferred; Northwood Capital Partners LLC, the President of
which is Peter G. Schiff, a Director of the Company, purchased 15,283 shares
of Series F Preferred and warrants to purchase Series F Preferred; The Goldman
Sachs Group, L.P., which is a holder of more than five percent of the
Company's voting stock, purchased 390,737 shares of Series F Preferred and
warrants to purchase Series F Preferred; and Grosvenor G. Nichols, the
brother-in-law of Richard H. Troy, a Director, Senior Vice President--
Finance, Law and Administration and the Corporate Secretary of the Company,
purchased 14,181 shares of Series F Preferred and warrants to purchase Series
F Preferred.

GRANTS OF BONUSES AND STOCK OPTIONS

On July 23, 1997, the Company's Compensation Committee authorized the grant
of stock options at an exercise price of $6.72 per share under the Company's
1993 Stock Option Plan and the payment of cash bonuses as follows:

<TABLE>
<CAPTION>
OPTIONS CASH
------- -------
<S> <C> <C>
Robert J. Towarnicki..................................... 55,075 $40,000
Christopher J. Blaxland.................................. 5,507 25,000
Rifat Pamukcu............................................ 13,768 25,000
Richard H. Troy.......................................... 5,507 25,000
</TABLE>

MANDATORY REDEMPTION OF COMPANY'S REDEEMABLE PREFERRED STOCK

Upon the closing of the offering, the Company must redeem, in cash and/or
registered Common Stock at the option of the Company, in an aggregate value of
$1,092,070, the outstanding shares of Redeemable Preferred Stock, all of which
are held by FGN, Inc., a holder of more than five percent of the Company's
voting stock and a director, the President and a stockholder of which is
Richard H. Troy, a Director, Senior Vice President--Finance, Law and
Administration and the Corporate Secretary of the Company. Pursuant to
arrangements FGN, Inc. entered into in 1990 with certain

57
<PAGE>

persons who participated in the founding of the Company, FGN, Inc. will
immediately pay out all but $75,000 of the proceeds of such redemption of the
Redeemable Preferred Stock to or on behalf of such persons, including the
payment of cash and/or registered Common Stock in an aggregate value of
$150,000 to Rifat Pamukcu, the Company's Chief Scientific Officer and Senior
Vice President--Research and Development, and the payment of cash and/or stock
in an aggregate value of $100,000 to Richard H. Troy, a Director, Senior Vice
President--Finance, Law and Administration and Corporate Secretary of the
Company.

58
<PAGE>

PRINCIPAL STOCKHOLDERS

The following table sets forth certain information regarding the beneficial
ownership of the Company's Common Stock as of September 30, 1997, as adjusted
to give effect to the sale by the Company of the Shares offered hereby
(assuming no exercise of the Underwriters' over-allotment option) by (i) each
principal stockholder, including those known by the Company to be the
beneficial owner of more than 5% of the Company's Common Stock, (ii) each
Named Executive Officer, (iii) each director of the Company, and (iv) all
current directors and executive officers of the Company as a group.

<TABLE>
<CAPTION>
PERCENT OF SHARES
NUMBER BENEFICIALLY OWNED(1)
OF SHARES BENEFICIALLY --------------------------------
BENEFICIAL OWNER OWNED PRIOR TO OFFERING PRIOR TO OFFERING AFTER OFFERING
---------------- ----------------------- ----------------- --------------
<S> <C> <C> <C>
PRINCIPAL STOCKHOLDERS:
FGN, Inc.(2)............ 1,007,827 13.16% 9.92%
1300 S. Potomac St.,
Suite 110
Aurora, CO 80012
Northwood Ventures 580,205 7.55% 5.70%
LLC(3).................
485 Underhill Blvd.,
Suite 205
Syossett, NY 11791
Technology Partners..... 529,414 6.91% 5.21%
West Fund IV, L.P.
150 Tiburon Blvd.,
Suite A
Belvedere, CA 94920
The Goldman Sachs Group, 390,737 5.09% 3.84%
L.P.(4)................
85 Broad Street
New York, NY 10004
New York Life Insurance 372,129 4.86% 3.66%
Company................
51 Madison Avenue
New York, NY 10010
Vulcan Ventures, 332,435 4.34% 3.27%
Inc.(5)................
110-110 Avenue N.E.,
Suite 550
Bellevue, WA 98004
DIRECTORS AND EXECUTIVE
OFFICERS:**
Christopher J. 120,531 1.57% 1.19%
Blaxland(6).............
William A. Boeger(7).... 181,660 2.37% 1.79%
Thomas M. Gibson(8)..... 39,218 * *
Rifat Pamukcu, M.D.(9).. 204,107 2.65% 2.00%
Roger J. Quy, 529,414 6.91% 5.21%
Ph.D.(10)...............
Peter G. Schiff(11)..... 580,205 7.55% 5.70%
Randall M. Toig, 75,461 * *
M.D.(12)................
Robert J. 159,274 2.06% 1.56%
Towarnicki(13)..........
Richard H. Troy(14)..... 1,169,570 15.26% 11.50%
All executive officers
and directors as a
group
(9 persons)(15)........ 3,059,440 39.25% 29.72%
</TABLE>
- --------
* Indicates beneficial ownership of less than one percent.
**The address of the directors and executive officers is 702 Electronic
Drive, Horsham, PA 19044.

59
<PAGE>

(1) This table is based upon information supplied by officers, directors and
principal stockholders. Unless otherwise indicated in the footnotes to
this table and subject to community property laws where applicable, the
Company believes that each of the stockholders named in this table has
sole voting and investment power with respect to the shares indicated as
beneficially owned. Applicable percentages are based on 7,660,184 shares
of Common Stock outstanding as of September 30, 1997 and 10,160,184
shares of Common Stock outstanding after completion of this offering,
adjusted as required by rules promulgated by the Commission.

(2) Until the closing of this offering, FGN, Inc. has the authority to vote
419,905 additional shares of Common Stock of which it is not the
beneficial owner but that it holds in trust for 11 persons, including
135,264 shares for Rifat Pamukcu and 88,119 shares for Richard H. Troy,
Mr. Troy's wife and daughter. Excludes up to approximately 82,612 shares
of Common Stock that might be received upon redemption of the Company's
Redeemable Preferred Stock, less than 10% of which, if so redeemed, would
remain with FGN, Inc.
(3) Includes 60,331 shares and warrants to purchase 413 shares beneficially
owned by Northwood Capital Partners LLC, 53,919 shares and warrants to
purchase 413 shares beneficially owned by Rabbit Hollow Partners and
14,870 shares beneficially owned by the Edward T. Schiff et. al. Trust,
entities that may be deemed affiliates of Northwood Ventures LLC.
(4) Includes 18,606 shares issuable upon exercise of outstanding warrants.
(5) Includes 7,442 shares issuable upon exercise of outstanding warrants.
(6) Includes 5,507 shares subject to stock options exercisable immediately
pursuant to the terms of an early exercise agreement, although unvested
shares remain subject to a repurchase option by the Company.
(7) Includes 7,367 shares owned of record by Mr. Boeger, 103,530 shares owned
of record by Quest Ventures II and 70,763 shares owned of record by Quest
Ventures International. Mr. Boeger is a managing general partner of Quest
Ventures II and Quest Ventures International, and may be deemed to share
voting and investment power with respect to such shares. Mr. Boeger
disclaims beneficial ownership of such shares except to the extent of his
pecuniary interest therein.
(8) Includes 14,292 shares in the Thomas M. Gibson Trust established by
Thomas M. Gibson.
(9) Includes 135,264 shares beneficially owned by Dr. Pamukcu but held in
trust by FGN, Inc. and 46,813 shares subject to stock options exercisable
immediately pursuant to an early exercise agreement, although unvested
shares remain subject to a repurchase option by the Company.
(10) Includes 529,414 shares owned of record by Technology Partners. Dr. Quy
is a general partner of Technology Partners, and may be deemed to share
voting and investment power with respect to such shares. Dr. Quy
disclaims beneficial ownership of such shares except to the extent of his
pecuniary interest therein.
(11) Includes 450,259 shares and warrants owned of record by Northwood
Ventures LLC, 60,744 shares and warrants owned of record by Northwood
Capital Partners LLC, 54,332 shares and warrants owned of record by
Rabbit Hollow Partners and 14,870 shares owned of record by the Edward T.
Schiff et. al. Trust. Mr. Schiff is the President of Northwood Ventures
LLC, the President of Northwood Capital Partners LLC, the Managing
General Partner of Rabbit Hollow Partners and the Trustee of the Edward
T. Schiff et. al. Trust; he may be deemed to share voting and investment
power with respect to such shares. Mr. Schiff disclaims beneficial
ownership of such shares except to the extent of his pecuniary interest
therein.
(12) Includes 372 shares issuable upon exercise of outstanding warrants.
(13) Includes 372 shares issuable upon exercise of outstanding warrants and
55,075 shares subject to stock options exercisable immediately pursuant
to the terms of an early exercise agreement, although unvested shares
remain subject to a repurchase option by the Company.
(14) Includes 71,597 shares beneficially owned by Mr. Troy but held in trust
by FGN, Inc., warrants to purchase 82 shares, and 5,507 shares subject to
stock options exercisable immediately pursuant to the terms of an early
exercise agreement, although unvested shares remain subject to a
repurchase option by the Company. Also includes 15,007 shares
beneficially owned by Mr. Troy's spouse, Elizabeth N. Troy, and 8,866
shares beneficially owned by Mr. Troy's daughter, Elizabeth D. Troy, as
well as 1,007,827 shares owned of record by FGN, Inc., of which Mr. Troy
is a director and the President. Mr. Troy may be deemed to share voting
and investment power with respect to such 23,873 shares beneficially
owned by his spouse and daughter and to such 1,007,827 shares
beneficially owned by FGN, Inc.; however, Mr. Troy disclaims beneficial
ownership of such shares except to the extent of his pecuniary interest
therein.
(15) Includes shares held by directors and executive officers of the Company
and entities affiliated with such persons. See Notes 6 through 14 above.

60
<PAGE>

DESCRIPTION OF CAPITAL STOCK

The following description of the capital stock of the Company and certain
provisions of the Company's Certificate of Incorporation and Bylaws is a
summary and is qualified in its entirety by the provisions of the Certificate
of Incorporation and Bylaws, which have been filed as exhibits to the
Company's Registration Statement, of which this Prospectus is a part.

As of September 30, 1997, the Company's authorized capital stock consisted
of 17,000,000 shares of Common Stock, $0.01 par value, 61,250 shares of
Redeemable Preferred Stock, $0.01 par value per share and 13,000,000 shares of
Convertible Preferred Stock, $0.01 par value. As of such date, there were
1,646,499 shares of Common Stock outstanding held of record by 40
stockholders, 61,250 shares of Redeemable Preferred Stock outstanding and
6,013,685 shares of Convertible Preferred Stock outstanding. Assuming the
conversion of all outstanding Convertible Preferred Stock into Common Stock
and the effectiveness of a 1-for-1.8157 reverse split of the outstanding
shares of Common Stock there were 7,660,184 shares of Common Stock
outstanding.

COMMON STOCK

The holders of Common Stock are entitled to one vote for each share held of
record on all matters submitted to a vote of the stockholders. The holders of
Common Stock are not entitled to cumulative voting rights with respect to the
election of Directors, and as a consequence, minority stockholders will not be
able to elect Directors on the basis of their votes alone. Subject to
preferences that may be applicable to any then outstanding shares of Preferred
Stock, holders of Common Stock are entitled to receive ratably such dividends
as may be declared by the Board of Directors out of funds legally available
therefor. See "Dividend Policy." In the event of a liquidation, dissolution or
winding up of the Company, holders of the Common Stock are entitled to share
ratably in all assets remaining after payment of liabilities and the
liquidation preference of any then outstanding Preferred Stock. Holders of
Common Stock have no preemptive rights. All outstanding shares of Common Stock
are, and all shares of Common Stock to be outstanding upon completion of this
offering will be, fully paid and nonassessable.

The Company will adopt an Amended and Restated Certificate of Incorporation
and Amended and Restated Bylaws that will provide that, effective upon the
closing of this offering, the Board of Directors has the authority to issue up
to 25,000,000 shares of Common Stock, including those shares previously issued
and outstanding.

REDEEMABLE PREFERRED STOCK

The Redeemable Preferred Stock is non-voting, not convertible and not
eligible to receive any dividend. Upon the closing of this offering, the
Company must redeem in cash and/or registered Common Stock, at the option of
the Company, all outstanding shares of Redeemable Preferred Stock. FGN, Inc.
holds all shares of Redeemable Preferred Stock. Pursuant to arrangements FGN,
Inc. entered into in 1990 with certain persons who participated in the
founding of the Company and who have served as employees of or consultants to
the Company, FGN, Inc. will immediately pay out all but $75,000 of the
proceeds of such redemption to or on behalf of such persons. As a result of
forfeitures, the Company's redemption obligation has been reduced to
$1,092,070. The Company has recorded a charge to income of $1,017,000 in the
quarter ended September 30, 1997 to reflect the redemption.

CONVERTIBLE PREFERRED STOCK

Upon the closing of this offering, all outstanding shares of Convertible
Preferred Stock will be converted into 6,013,685 shares of Common Stock. The
Company will adopt an Amended and Restated Certificate of Incorporation and
Amended and Restated Bylaws which will provide that,

61
<PAGE>

effective upon the closing of this offering the Board of Directors has the
authority, without further action by the stockholders, to issue up to 2,000,000
shares of Preferred Stock in one or more series and to fix the rights,
preferences, privileges and restrictions thereof, including dividend rights,
conversion rights, voting rights, terms of redemption, liquidation preferences,
sinking fund terms and the number of shares constituting any series or the
designation of such series, without any further vote or action by stockholders.
The issuance of Preferred Stock could adversely affect the voting power of
holders of Common Stock and the likelihood that such holders will receive
dividend payments and payments upon liquidation and could have the effect of
delaying, deferring or preventing a change in control of the Company. The
Company has no present plan to issue any shares of Preferred Stock.

WARRANTS

In connection with the Company's Series E Preferred financings, the Company
issued warrants to purchase 129,568 shares of Series E Preferred at $5.72 per
share, of which warrants to purchase 64,798 shares of Series E Preferred have
been exercised. The outstanding warrants to purchase 64,770 shares may be
exercised in whole at any time or in part from time to time prior to their
expiration on the earlier of June 5, 1999 or a firm commitment underwritten
public offering, including this offering.

The Company issued warrants to purchase 69,295 shares of Series F Preferred
at $6.72 per share in connection with its Series F financing. Such warrants may
be exercised in whole at any time or in part from time to time prior to their
expiration on July 20, 1999.

The exercise price for the warrants and the number of shares issuable upon
exercise of the warrants are subject to adjustment upon a stock split, stock
dividend or subdivision. Additionally, an adjustment will be made upon a sale
of all or substantially all of the assets of the Company or in the case of a
reorganization, reclassification, consolidation or merger of the Company, in
order to enable holders of warrants to purchase the number of shares of stock
receivable in such event by a holder of the number of shares of Preferred Stock
that might otherwise have been purchased upon exercise of the warrants. The
warrants do not confer upon the holder any voting or any other rights of a
stockholder of the Company.

REGISTRATION RIGHTS

The Company and the holders of the Company's Common Stock, Series A Preferred
Stock, Series B Preferred Stock, Series C Preferred Stock, Series D Preferred
Stock, Series E Preferred Stock and Series F Preferred Stock have entered into
a stockholders agreement, as amended (the "Stockholders Agreement"), whereby
certain stockholders may request that the Company use its best efforts to
effect the registration (a "Demand Registration Right") of certain securities
under the Securities Act of 1933 (the "Securities Act") and certain
stockholders must receive notice of the Company's intent to register Common
Stock under the Securities Act and may request that the Company use its best
efforts to cause certain securities of the stockholders to be registered (a
"Piggyback Registration Right"). The Stockholders Agreement provides, however,
that if the representatives of the underwriters advise the Company in writing
that marketing factors require a limitation on the number of shares to be
underwritten, the number of shares that the stockholders may cause to be
registered pursuant to a Piggyback Registration Right may be reduced or
eliminated altogether. The representatives of the underwriters have so advised
the Company in writing that marketing factors require a limitation on the
number of shares to be underwritten to the number of shares offered by the
Company; thus, the stockholders may not exercise any registration rights in
this offering. The Stockholder Agreement provides that all registration rights
terminate for each holder of Common Stock after the closing of this offering if
all shares held by such holder may be sold under Rule 144(k) under the
Securities Act during any 90-day period.

62
<PAGE>

DELAWARE ANTI-TAKEOVER LAW AND CERTAIN CHARTER PROVISIONS

The Company is subject to the provisions of Section 203 of the Delaware
General Corporation Law (the "Delaware Law"), an anti-takeover law. In
general, the statute 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 the business combination is approved
in a prescribed manner. For purposes of Section 203, a "business combination"
includes a merger, asset sale or other transaction resulting in a financial
benefit to the interested stockholder, and an "interested stockholder" is a
person who, together with affiliates and associates, owns (or within three
years prior, did own) 15% or more of the corporation's voting stock.

The Company's Certificate of Incorporation requires that any action required
or permitted to be taken by stockholders of the Company must be effected at a
duly called annual or special meeting of the stockholders and may not be
effected by a consent in writing unless the Board is provided with at least
10-day prior written notice. The Company's Bylaws provide that special
meetings of the stockholders of the Company may be called only by the Board of
Directors, the Chairman of the Board, the Chief Executive Officer or holders
of 20% of the Company's voting stock. In addition, the Company's Bylaws
provide that the authorized number of Directors may be changed only by
resolution of the Board of Directors. The Company's Stockholders Agreement
provides that Directors can only be removed for cause by a majority vote of
the stockholders or by the entity that, pursuant to the Stockholders
Agreement, appointed such Director.

The Company will adopt an Amended and Restated Certificate of Incorporation
and Amended and Restated Bylaws that will become effective upon the closing of
this offering. Under the Amended and Restated Certificate of Incorporation,
stockholders of the Company will be unable to effect actions by written
consent after the occurrence of an initial public offering, including this
offering. Special meetings of the stockholders of the Company will be called
only by the Board of Directors, the Chairman of the Board, or the Chief
Executive Officer. The Amended and Restated Certificate of Incorporation will
provide that the Board will be classified, that the authorized number of
directors may be changed only by resolution of the Board of Directors and that
directors may only be removed for cause by a majority vote of the
stockholders.

These provisions may have the effect of delaying, deterring or preventing a
change in control of the Company, depressing the market price of Common Stock
or discouraging hostile takeover bids in which stockholders of the Company
could receive a premium for their shares of Common Stock.

LISTING

Application has been made to have the Common Stock approved for listing on
the Nasdaq National Market under the trading symbol "CLPA."

TRANSFER AGENT AND REGISTRAR

BankBoston, N.A. is the transfer agent and registrar for the Company's
Common Stock.

63
<PAGE>

SHARES ELIGIBLE FOR FUTURE SALE

Prior to this offering, there has been no public market for the Common Stock
of the Company. Future sales of substantial amounts of Common Stock in the
public market could adversely affect market prices prevailing from time to
time. Furthermore, since only a limited number of shares will be available for
sale shortly after this offering because of certain contractual and legal
restrictions on resale described below, sales of substantial amounts of Common
Stock of the Company in the public market after the restrictions lapse could
adversely affect the prevailing market price and the ability of the Company to
raise equity capital in the future.

Upon completion of this offering, the Company will have an aggregate of
10,160,184 shares of Common Stock outstanding (assuming no exercise of the
Underwriters' over-allotment option and no exercise of outstanding options and
warrants). Of these shares, the 2,500,000 Shares sold in this offering will be
freely tradable without restriction or further registration under the
Securities Act, unless such shares are purchased by "affiliates" of the
Company as that term is defined in Rule 144 under the Securities Act
("Affiliates"). The remaining 7,660,184 shares of Common Stock held by
existing stockholders are "restricted securities" as that term is defined in
Rule 144 under the Securities Act (the "Restricted Shares"). Restricted Shares
may be sold in the public market only if registered or if they qualify for an
exemption from registration under Rule 144 or 701 promulgated under the
Securities Act, which rules are summarized below. As a result of the
contractual restrictions described below and the provisions of Rules 144 and
701, additional shares will be available for sale in the public market as
follows:

<TABLE>
<CAPTION>
DAYS AFTER SHARES
DATE OF ELIGIBLE FOR
THIS PROSPECTUS FUTURE SALE COMMENT
--------------- ------------ -------
<S> <C> <C>
Upon Effectiveness...... 2,500,000 Freely tradable. Shares sold in offering.
90 Days................. 5,368 Rule 144 and Rule 701 (outstanding shares not subject to
180-day lockup).
180 Days................ 5,844,290 Lockup released. Outstanding shares salable under Rule 144,
Rule 144(k) and Rule 701 (3,006,897 of which are held by
Affiliates and will be subject to the volume limitations of
Rule 144 and Rule 701 described below).
</TABLE>

Following completion of the 180-day lock-up period, holders of the 3,006,897
shares that will be subject to the volume limitations of Rule 144 and Rule 701
will be entitled to certain rights with respect to the registration of such
shares under the Securities Act. Registration of such shares under the
Securities Act would result in such shares becoming freely tradable without
restriction under the Securities Act (except for shares purchased by
Affiliates) immediately upon the effectiveness of such registration. See
"Description of Capital Stock--Registration Rights."

64
<PAGE>

agreed that it will not, during the 180-day period commencing on the date of
the Underwriting Agreement, without the prior written consent of Salomon
Brothers Inc, offer, sell, or contract to sell, or otherwise dispose of (or
enter into any transaction which is designed to, or could be expected to,
result in the disposition (whether by actual disposition or effective economic
disposition due to cash settlement or otherwise) by the Company or any
affiliate of the Company or any person in privity with the Company or any
affiliate of the Company) directly or indirectly, or announce the offering of,
any other shares of Common Stock or any securities convertible into, or
exchangeable for, shares of Common Stock, except that the Company may issue,
sell or file a registration statement with the Commission with respect to
Common Stock pursuant to any employee stock option plan, stock ownership plan
or dividend reinvestment plan of the Company in effect on the date of the
Underwriting Agreement or in connection with the redemption of the Redeemable
Preferred Stock and the Company may issue Common Stock issuable upon the
conversion of securities or the exercise of warrants outstanding on the date of
the Underwriting Agreement.

In general, under Rule 144 as currently in effect, beginning 90 days after
the Effective Date, an Affiliate of the Company or person (or persons whose
shares are aggregated) who has beneficially owned Restricted Shares for at
least one year will be entitled to sell in any three-month period a number of
shares that does not exceed the greater of (i) one percent of the then
outstanding shares of the Company's Common Stock or (ii) the average weekly
trading volume of the Company's Common Stock in the Nasdaq National Market
during the four calendar weeks immediately preceding the date on which notice
of the sale is filed with the Securities and Exchange Commission. Sales
pursuant to Rule 144 are subject to certain requirements relating to manner of
sale, notice, and the availability of current public information about the
Company. A person (or persons whose shares are aggregated) who is not deemed to
have been an Affiliate of the Company at any time during the 90 days
immediately preceding the sale and who has beneficially owned Restricted Shares
for at least two years is entitled to sell such shares under Rule 144(k)
without regard to the limitations described below.

An employee, officer or director of or consultant to the Company who
purchased or was awarded shares or options to purchase shares pursuant to a
written compensatory plan or contract is entitled to rely on the resale
provisions of Rule 701 under the Securities Act, which permits Affiliates and
non-Affiliates to sell their Rule 701 shares without having to comply with Rule
144's holding period restrictions, in each case commencing 90 days after the
date of this Prospectus. In addition, non-Affiliates may sell Rule 701 shares
without complying with the public information, volume and notice provisions of
Rule 144.

65
<PAGE>

UNDERWRITING

Upon the terms and subject to the conditions set forth in the Underwriting
Agreement, the Company has agreed to sell to each of the Underwriters named
below (the "Underwriters"), for whom Salomon Brothers Inc, BancAmerica
Robertson Stephens and Cowen & Company are acting as representatives (the
"Representatives"), and each of such Underwriters has severally agreed to
purchase from the Company the respective number of Shares set forth opposite
its name below:

<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
----------- ---------
<S> <C>
Salomon Brothers Inc...............................................
BancAmerica Robertson Stephens.....................................
Cowen & Company....................................................
---------
Total.......................................................... 2,500,000
=========
</TABLE>

In the Underwriting Agreement, the several Underwriters have agreed, subject
to the terms and conditions set forth therein, to purchase all of the Shares
offered hereby (other than those covered by the over-allotment option described
below) if any such shares of Common Stock are purchased. In the event of a
default by any Underwriter, the Underwriting Agreement provides that, in
certain circumstances, purchase commitments of the non-defaulting Underwriters
may be increased or the Underwriting Agreement may be terminated. The Company
has been advised by the Representatives that the several Underwriters propose
initially to offer such Shares at the public offering price set forth on the
cover page of this Prospectus and to certain dealers at such price less a
concession not in excess of $ per Share. The Underwriters may allow, and
such dealers may reallow, a concession not in excess of $ per Share to other
dealers. After the initial offering, the public offering price and such
concessions may be changed.

The Company has granted to the Underwriters an option, exercisable during the
30-day period after the date of this Prospectus, to purchase up to 375,000
additional shares of Common Stock, at the public offering price less the
Underwriting Discount set forth on the cover page of this Prospectus. The
Underwriters may exercise such option only to cover over-allotments in the sale
of the shares of Common Stock that the Underwriters have agreed to purchase. To
the extent that the Underwriters exercise such option, each Underwriter will
have a firm commitment, subject to certain conditions, to purchase a number of
option shares proportionate to such Underwriter's initial commitment.

The Representatives have informed the Company that they do not intend to
confirm sales to any account over which they exercise discretionary authority.

In connection with this offering, certain Underwriters and selling group
members and their respective affiliates may engage in transactions that
stabilize, maintain or otherwise affect the market price of the Common Stock.
Such transactions may include stabilization transactions effected in accordance
with Rule 104 of Regulation M, pursuant to which such persons may bid for or
purchase Common Stock for the purpose of stabilizing its market price. The
Underwriters also may create a short position for the account of the
Underwriters by selling more Common Stock in connection with the Offering than
they are committed to purchase from the Company, and in such case may purchase
Common Stock in the open market following completion of the offering to cover
all or a portion of such short position. The Underwriters may also cover all or
a portion of such short position, up to 375,000 shares of Common Stock, by
exercising the Underwriters' over-allotment option referred to above. In
addition, Salomon Brothers Inc, on behalf of the Underwriters, may impose
"penalty bids" under

66
<PAGE>

contractual arrangements with the Underwriters whereby it may reclaim from an
Underwriter (or dealer participating in the offering) for the account of the
other Underwriters, the selling concession with respect to Common Stock that
is distributed in the offering but subsequently purchased for the account of
the Underwriters in the open market. Any of the transactions described in this
paragraph may result in the maintenance of the price of the Common Stock at a
level above that which might otherwise prevail in the open market. None of the
transactions described in this paragraph is required, and, if they are
undertaken, they may be discontinued at any time.

The Company's officers, directors and certain stockholders are obligated,
pursuant to the terms of the Stockholders Agreement, not to offer, sell,
contract to sell, pledge or otherwise dispose of shares of capital stock of
the Company for a period of 180 days after the Effective Date. In addition,
the Company's officers, directors and certain stockholders will agree that
they will not, without the prior written consent of Salomon Brothers Inc,
offer, sell, contract to sell, pledge or otherwise dispose of, or file a
registration statement with the Commission in respect of, or establish or
increase a put equivalent position or liquidate or decrease a call equivalent
position within the meaning of Section 16 of the Securities Exchange Act of
1934, as amended, with respect to, any shares of capital stock of the Company
or any securities convertible into or exercisable or exchangeable for such
capital stock, or publicly announce an intention to effect any such
transaction, for a period of 180 days after the date of the Underwriters
Agreement, other than (i) any Shares to be sold in this offering, (ii) any
option or warrant or the conversion of a security outstanding on the date of
the Underwriting Agreement and referred to herein and (iii) shares of Common
Stock disposed as of bona fide gifts so long as the transferee agrees to be
bound by the lock-up obligation described in this sentence. The Company has
agreed that it will not, during the 180-day period commencing on the date of
the Underwriting Agreement, without the prior written consent of Salomon
Brothers Inc, offer, sell, or contract to sell, or otherwise dispose of (or
enter into any transaction which is designed to, or could be expected to,
result in the disposition (whether by actual disposition or effective economic
disposition due to cash settlement or otherwise) by the Company or any
affiliate of the Company or any person in privity with the Company or any
affiliate of the Company) directly or indirectly, or announce the offering of,
any other shares of Common Stock or any securities convertible into, or
exchangeable for, shares of Common Stock, except that the Company may issue,
sell or file a registration statement with the Commission with respect to
Common Stock pursuant to any employee stock option plan, stock ownership plan
or dividend reinvestment plan of the Company in effect on the date of the
Underwriting Agreement or in connection with the redemption of the Redeemable
Preferred Stock and the Company may issue Common Stock issuable upon the
conversion of securities or the exercise of warrants outstanding on the date
of the Underwriting Agreement.

The Underwriting Agreement provides that the Company will indemnify the
several Underwriters against certain liabilities, including liabilities under
the Securities Act, or contribute to payments the Underwriters may be required
to make in respect thereof. In the opinion of the Commission such
indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable.

Prior to this offering, there has been no public market for the Common
Stock. The price to the public for the Shares has been determined through
negotiations between the Company and the Representatives and was based on,
among other things, the Company's financial and operating history and
condition, the prospects of the Company and its industry in general, the
management of the Company and the market prices of securities of companies
engaged in businesses similar to those of the Company. There can, however, be
no assurance that the prices at which the Shares will sell in the public
market after this offering will not be lower than the price at which the
Shares are sold by the Underwriters.

67
<PAGE>

LEGAL MATTERS

The validity of the shares of Common Stock offered hereby will be passed upon
for the Company by Cooley Godward LLP, Boulder, Colorado. Certain legal matters
will be passed upon for the Underwriters by Cleary, Gottlieb, Steen & Hamilton,
New York, New York. Certain legal matters pertaining to the Company's patents
will be passed upon for the Company by Brinks Hofer Gilson & Lione, Chicago,
Illinois. Certain legal matters pertaining to the Company's regulatory matters
will be passed upon for the Company by Hyman, Phelps & McNamara, P.C.,
Washington, D.C.

EXPERTS

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

The statements in this Prospectus as set forth under the captions "Risk
Factors--Uncertainty of Protection of Patents and Proprietary Rights" and
"Business--Patents and Proprietary Technology" have been reviewed and approved
by Brinks Hofer Gilson & Lione, Chicago, Illinois, patent counsel to the
Company, as experts on such matters, and are included herein in reliance upon
such review and approval.

ADDITIONAL INFORMATION

The Company has filed with the Securities and Exchange Commission (the
"SEC"), Washington, D.C., a Registration Statement on Form S-1 under the Act,
with respect to the Common Stock offered hereby. This Prospectus does not
contain all of the information set forth in the Registration Statement and the
exhibits and schedules thereto. For further information with respect to the
Company and such Common Stock, reference is made to the Registration Statement
and the exhibits and schedules filed as part thereof. Statements contained in
this Prospectus as to the contents of any contract or document filed as an
exhibit to the Registration Statement is qualified by reference to such exhibit
as filed. A copy of the Registration Statement, and the exhibits and schedules
thereto, may be inspected without charge at the public reference facilities
maintained by the SEC in Room 1024, 450 Fifth Street, N.W., Washington, D.C.
20549, and at the SEC's regional offices located at the Northwestern Atrium
Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661 and Seven
World Trade Center, 13th Floor, New York, New York 10048, and copies of all or
any part of the Registration Statement may be obtained from such offices upon
the payment of the fees prescribed by the SEC. The SEC maintains a World Wide
Web site that contains reports, proxy and information statements and other
information regarding registrants that file electronically with the SEC. The
address of the SEC's World Wide Web site is http://www.sec.gov.

68
<PAGE>

CELL PATHWAYS, INC.

INDEX TO FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
CELL PATHWAYS, INC.
Report of Independent Public Accountants................................ F-2
Balance Sheets as of December 31, 1995 and 1996 and September 30, 1997
and on a pro forma basis as of September 30, 1997 (unaudited).......... F-3
Statements of Operations for the years ended December 31, 1994, 1995,
1996, and for the nine months ended September 30, 1996 and 1997 and the
period from inception (August 10, 1990) to September 30, 1997 ......... F-4
Statements of Stockholders' Equity for the period from inception (August
10, 1990) to September 30, 1997 ....................................... F-5
Statements of Cash Flows for the years ended December 31, 1994, 1995,
1996, and for the nine months ended September 30, 1996 and 1997 and the
period from inception (August 10, 1990) to September 30, 1997 ......... F-7
Notes to Financial Statements........................................... F-8
</TABLE>

F-1
<PAGE>

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Board of Directors ofCell Pathways, Inc.:

We have audited the accompanying balance sheets of Cell Pathways, Inc. (a
Delaware corporation in the development stage), as of December 31, 1995, and
1996, and September 30, 1997 and the related statements of operations,
stockholders' equity (deficit) and partners' investment, and cash flows for
the three years ended December 31, 1994, 1995 and 1996, the nine month periods
ended September 30, 1996 and 1997 and for the period from inception (August
10, 1990) to September 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 Cell Pathways, Inc. as of
December 31, 1995, and 1996, and September 30, 1997 and the results of its
operations and its cash flows for the three years ended December 31, 1994,
1995 and 1996, the nine month periods ended September 30, 1996 and 1997 and
for the period from inception (August 10, 1990) to September 30, 1997, in
conformity with generally accepted accounting principles.

ARTHUR ANDERSEN LLP
Denver, Colorado

October 22, 1997

F-2
<PAGE>

CELL PATHWAYS, INC.
(A DEVELOPMENT STAGE COMPANY)

BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARES)

<TABLE>
<CAPTION>
DECEMBER 31, PRO FORMA
------------------ SEPTEMBER 30, SEPTEMBER 30,
1995 1996 1997 1997
-------- -------- ------------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash
equivalents............. $ 2,203 $ 645 $ 11,401 $ 11,401
Restricted cash (Note
2)...................... -- 194 196 196
Advances to employees.... 5 4 -- --
Prepaid expenses and
other................... 54 67 77 77
-------- -------- -------- --------
Total current assets... 2,262 910 11,674 11,674
-------- -------- -------- --------
PROPERTY AND EQUIPMENT..... 95 256 449 449
Less: Accumulated
depreciation............ (38) (71) (112) (112)
-------- -------- -------- --------
57 185 337 337
-------- -------- -------- --------
DEFERRED OFFERING COSTS.... -- -- 83 83
DEPOSITS................... 11 11 11 11
-------- -------- -------- --------
Total assets........... $ 2,330 $ 1,106 $ 12,105 $ 12,105
======== ======== ======== ========
LIABILITIES AND
STOCKHOLDERS' EQUITY
(DEFICIT)
CURRENT LIABILITIES:
Accounts payable......... $ 206 $ 159 $ 106 $ 106
Accrued liabilities...... 1,222 1,015 967 967
Note payable (Note 7).... -- 49 52 52
-------- -------- -------- --------
Total current
liabilities........... 1,428 1,223 1,125 1,125
-------- -------- -------- --------
LONG-TERM LIABILITIES:
Note payable, net of
current portion......... -- 62 23 23
COMMITMENTS AND
CONTINGENCIES
(Notes 3, 5 and 9)
REDEEMABLE PREFERRED STOCK,
$.01 par value, 61,250
shares authorized, issued
and outstanding,
redeemable for a total of
$1,092.................... 1 1 1,092 1,092
-------- -------- -------- --------
STOCKHOLDERS' EQUITY
(DEFICIT):
Convertible preferred
stock, $.01 par value,
13,000,000 shares
authorized, 2,819,333,
3,457,137 and 6,013,685
shares outstanding, with
an aggregate liquidation
preference of $12,023,
$15,819 and $32,937,
respectively............ 11,639 15,137 32,003 --
Common stock $.01 par
value, 17,000,000 shares
authorized, 1,264,612,
1,497,386 and 1,646,499
shares issued and
outstanding............. 13 15 17 77
Additional paid-in
capital................. 226 359 469 32,412
Stock subscription
receivable from issuance
of convertible preferred
stock................... (24) (3) -- --
Stock subscription
receivable from issuance
of common stock......... -- -- (37) (37)
Deficit accumulated
during the development
stage................... (10,953) (15,688) (22,587) (22,587)
-------- -------- -------- --------
Total stockholders'
equity (deficit)...... 901 (180) 9,865 9,865
-------- -------- -------- --------
Total liabilities and
stockholders' equity
(deficit)............. $ 2,330 $ 1,106 $ 12,105 $ 12,105
======== ======== ======== ========
</TABLE>

The accompanying Notes to Financial Statements are an integral part of these
statements.

F-3
<PAGE>

CELL PATHWAYS, INC.
(A DEVELOPMENT STAGE COMPANY)

STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)

<TABLE>
<CAPTION>
FOR THE PERIOD
FOR THE NINE FROM INCEPTION
FOR THE YEARS ENDED MONTHS ENDED (AUGUST 10,
DECEMBER 31, SEPTEMBER 30, 1990) TO
--------------------------- ------------------ SEPTEMBER 30,
1994 1995 1996 1996 1997 1997
------- ------- --------- ------- --------- --------------
<S> <C> <C> <C> <C> <C> <C>
EXPENSES:
Research and
development (Note 2) $(2,429) $(2,575) $ (4,163) $(2,861) $ (5,586) $(17,907)
General and
administrative....... (705) (644) (663) (439) (584) (4,189)
Provision for
redemption of the
redeemable preferred
stock................ -- -- -- -- (1,017) (1,017)
------- ------- --------- ------- --------- --------
Total expenses...... (3,134) (3,219) (4,826) (3,300) (7,187) (23,113)
Interest income....... 24 28 91 80 288 526
------- ------- --------- ------- --------- --------
NET LOSS................ $(3,110) $(3,191) $ (4,735) $(3,220) $ (6,899) $(22,587)
======= ======= ========= ======= ========= ========
Pro forma net loss per
share (unaudited).... $ (0.62) $ (0.90)
========= =========
Share used to compute
pro forma net loss
per share
(unaudited).......... 7,686,628 7,699,386
========= =========
</TABLE>

The accompanying Notes to Financial Statements are an integral part of these
statements.

F-4
<PAGE>

CELL PATHWAYS, INC.
(A DEVELOPMENT STAGE COMPANY)

STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) AND PARTNERS' INVESTMENT

FOR THE PERIOD FROM INCEPTION (AUGUST 10, 1990) TO SEPTEMBER 30, 1997
(IN THOUSANDS, EXCEPT SHARES AND PER SHARE AMOUNTS)

<TABLE>
<CAPTION>
STOCK
SUBSCRIPTION
RECEIVABLE
FROM DEFICIT
ISSUANCE ACCUMULATED
REDEEMABLE CONVERTIBLE OF DURING
PREFERRED STOCK PREFERRED STOCK COMMON STOCK ADDITIONAL CONVERTIBLE THE
PARTNERS' ---------------- ---------------- ---------------- PAID-IN PREFERRED DEVELOPMENT
INVESTMENT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL STOCK STAGE
---------- -------- ------- -------- ------- --------- ------ ---------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCES, inception
(August 10, 1990).... $ -- -- $ -- -- $ -- -- $-- $-- $-- $ --
Partner cash
contributions in
September 1990 for
Class A Partnership
units............... 406 -- -- -- -- -- -- -- -- --
Partner contribution
of interest in
research grant in
September 1990 for
Class A Partnership
units, at historical
cost................ 49 -- -- -- -- -- -- -- -- --
Net loss............. -- -- -- -- -- -- -- -- -- (253)
------ -------- ------ -------- ------ --------- ---- ---- ---- -------
BALANCES, December 31,
1990................. 455 -- -- -- -- -- -- -- -- (253)
Partner cash
contributions in
March 1991 for Class
A Partnership
units............... 406 -- -- -- -- -- -- -- -- --
Partner cash
contributions in
December 1991 for
Class B Partnership
units............... 897 -- -- -- -- -- -- -- -- --
Net loss............. -- -- -- -- -- -- -- -- -- (739)
------ -------- ------ -------- ------ --------- ---- ---- ---- -------
BALANCES, December 31,
1991................. 1,758 -- -- -- -- -- -- -- -- (992)
Partner cash
contributions in
January and April
1992 for Class B
Partnership units... 21 -- -- -- -- -- -- -- -- --
Partner cash
contributions in
December 1992 for
Class B Partnership
units............... 134 -- -- -- -- -- -- -- -- --
Partner cash
contributions in
December 1992 for
Class C Partnership
units............... 1,540 -- -- -- -- -- -- -- -- --
Partner cash
contributions in
December 1992 for
Class D Partnership
units............... 1,475 -- -- -- -- -- -- -- --
Net loss............. -- -- -- -- -- -- -- -- -- (1,391)
------ -------- ------ -------- ------ --------- ---- ---- ---- -------
BALANCES, December 31,
1992................. 4,928 -- -- -- -- -- -- -- -- (2,383)
Partner cash
contributions in
January 1993 to
March 1993 for Class
D Partnership
units............... 385 -- -- -- -- -- -- -- -- --
Exchange of interests
in the Partnership
in September 1993
for 480,459 shares
of Series A
convertible
preferred stock..... (812) -- -- 480,459 812 -- -- -- -- --
Exchange of interests
in the Partnership
in September 1993
for 467,078 shares
of Series B
convertible
preferred stock..... (868) -- -- 467,078 868 -- -- -- -- --
Exchange of interests
in the Partnership
in September 1993
for 385,525 shares
of Series C
convertible
preferred stock..... (1,540) -- -- 385,525 1,540 -- -- -- -- --
Exchange of interests
in the Partnership
in September 1993
for 339,696 shares
of Series D
convertible
preferred stock..... (1,860) -- -- 339,696 1,860 -- -- -- -- --
Exchange of interests
in the Partnership
in September 1993
for 61,250 shares of
redeemable preferred
stock............... (1) 61,250 1 -- -- -- -- -- -- --
Exchange of interests
in the Partnership
in September 1993
for 1,255,433 shares
of common stock..... (232) -- -- -- -- 1,255,433 13 219 -- --
Net loss............. -- -- -- -- -- -- -- -- -- (2,269)
------ -------- ------ -------- ------ --------- ---- ---- ---- -------
</TABLE>

F-5
<PAGE>

CELL PATHWAYS, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) AND PARTNERS' INVESTMENT--
(CONTINUED)

FOR THE PERIOD FROM INCEPTION (AUGUST 10, 1990) TO SEPTEMBER 30, 1997
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
REDEEMABLE CONVERTIBLE
PREFERRED STOCK PREFERRED STOCK COMMON STOCK ADDITIONAL
PARTNERS' --------------- ----------------- ---------------- PAID-IN
INVESTMENT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL
---------- ------- ------- --------- ------- --------- ------ ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCES, December
31, 1993.......... $-- 61,250 $ 1 1,672,758 $ 5,080 1,255,433 $13 $219
====
Issuance of common
stock for services
valued at $.74 per
share............. -- -- -- -- 9,179 -- 7
Issuance of 298,908
shares of Series E
convertible
preferred stock
for cash at $7.44
per share......... -- -- 298,908 2,225 -- -- --
Net loss........... -- -- -- -- -- -- --
------- ------- --------- ------- --------- --- ----
BALANCES, December
31, 1994.......... 61,250 1 1,971,666 7,305 1,264,612 13 226
Issuance of 617,826
shares of Series E
convertible
preferred stock
for cash at $5.72
per share......... -- -- 617,826 3,534 -- -- --
Issuance of 90,161
shares of Series E
convertible
preferred stock to
effect the price
change from $7.44
to $5.72 (Note
4)................ -- -- 90,161 -- -- -- --
Conversion of
bridge notes
payable plus
interest to
139,680 shares of
Series E
convertible
preferred stock at
a price of $5.72
per share (Note
4)................ -- -- 139,680 800 -- -- --
Net loss........... -- -- -- -- -- -- --
------- ------- --------- ------- --------- --- ----
BALANCES, December
31, 1995.......... 61,250 1 2,819,333 11,639 1,264,612 13 226
Issuance of 488,953
shares of Series E
convertible
preferred stock
for cash at
$5.72 per share, net of offering costs
of $300........... -- -- 488,953 2,498 -- -- --
Collection of
Series E
convertible stock
subscription
receivable........ -- -- -- -- -- -- --
Issuance of 148,851
shares of Series F
convertible
preferred stock
for cash at $6.72
per share......... -- -- 148,851 1,000 -- -- --
Issuance of 101,880
shares of common
stock in February
1996 as bonuses to
officers and
employees valued
at $0.58 per
share............. -- -- -- -- 101,880 1 58
Issuance of 8,166
shares of common
stock in May 1996
for consulting
services, valued
at $0.58 per
share............. -- -- -- -- 8,166 -- 5
Exercise of options
to purchase common
stock at $0.58 per
share............. -- -- -- -- 122,728 1 70
Net loss........... -- -- -- -- -- -- --
------- ------- --------- ------- --------- --- ----
BALANCES, December
31, 1996.......... 61,250 1 3,457,137 15,137 1,497,386 15 359
Issuance of
2,499,640 shares
of Series F
convertible
preferred stock
for cash at $6.72
per share, net of
offering costs of
$245 ............. -- -- 2,499,640 16,548 -- -- --
Exercise of
warrants to
purchase 55,546
shares of Series E
convertible
preferred stock at
$5.72 per share .. -- -- 55,546 318 -- -- --
Cashless exercise
of warrants to
purchase 1,362
shares of Series E
Preferred Stock... -- -- 1,362 -- -- -- --
Exercise of options
by employees and
directors at $0.58
- $0.91 per
share............. -- -- -- -- 138,099 2 110
Issuance of common
stock to director
at $6.72 per
share............. -- -- -- -- 5,507 -- 37
Issuance of common
stock to
consultant, valued
at $6.72 per
share............. -- -- -- -- 5,507 -- 37
Collection of stock subscription receivable.. -- -- -- -- -- -- --
Provision for
redemption of
redeemable
preferred stock... -- 1,091 -- -- -- -- (74)
Net loss .......... -- -- -- -- -- -- --
------- ------- --------- ------- --------- --- ----
BALANCES, September
30, 1997.......... 61,250 $ 1,092 6,013,685 $32,003 1,646,499 $17 $469
======= ======= ========= ======= ========= === ====
<CAPTION>
STOCK
SUBSCRIPTION
RECEIVABLE
FROM ISSUANCE DEFICIT
OF ACCUMULATED
CONVERTIBLE DURING THE
PREFERRED DEVELOPMENT
STOCK STAGE
------------- -----------
<S> <C> <C>
BALANCES, December
31, 1993.......... $-- $ (4,652)
Issuance of common
stock for services
valued at $.74 per
share............. -- --
Issuance of 298,908
shares of Series E
convertible
preferred stock
for cash at $7.44
per share......... (24) --
Net loss........... -- (3,110)
------------- -----------
BALANCES, December
31, 1994.......... (24) (7,762)
Issuance of 617,826
shares of Series E
convertible
preferred stock
for cash at $5.72
per share......... -- --
Issuance of 90,161
shares of Series E
convertible
preferred stock to
effect the price
change from $7.44
to $5.72 (Note
4)................ -- --
Conversion of
bridge notes
payable plus
interest to
139,680 shares of
Series E
convertible
preferred stock at
a price of $5.72
per share (Note
4)................ -- --
Net loss........... -- (3,191)
------------- -----------
BALANCES, December
31, 1995.......... (24) (10,953)
Issuance of 488,953
shares of Series E
convertible
preferred stock
for cash at
$5.72 per share, net of offering costs
of $300........... -- --
Collection of
Series E
convertible stock
subscription
receivable........ 21 --
Issuance of 148,851
shares of Series F
convertible
preferred stock
for cash at $6.72
per share......... -- --
Issuance of 101,880
shares of common
stock in February
1996 as bonuses to
officers and
employees valued
at $0.58 per
share............. -- --
Issuance of 8,166
shares of common
stock in May 1996
for consulting
services, valued
at $0.58 per
share............. -- --
Exercise of options
to purchase common
stock at $0.58 per
share............. -- --
Net loss........... -- (4,735)
------------- -----------
BALANCES, December
31, 1996.......... (3) (15,688)
Issuance of
2,499,640 shares
of Series F
convertible
preferred stock
for cash at $6.72
per share, net of
offering costs of
$245 ............. -- --
Exercise of
warrants to
purchase 55,546
shares of Series E
convertible
preferred stock at
$5.72 per share .. -- --
Cashless exercise
of warrants to
purchase 1,362
shares of Series E
Preferred Stock... -- --
Exercise of options
by employees and
directors at $0.58
- $0.91 per
share............. -- --
Issuance of common
stock to director
at $6.72 per
share............. (37) --
Issuance of common
stock to
consultant, valued
at $6.72 per
share............. -- --
Collection of stock subscription receivable.. 3 --
Provision for
redemption of
redeemable
preferred stock... -- --
Net loss .......... -- (6,899)
------------- -----------
BALANCES, September
30, 1997.......... $(37) $(22,587)
============= ===========
</TABLE>

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

F-6
<PAGE>

CELL PATHWAYS, INC.
(A DEVELOPMENT STAGE COMPANY)

STATEMENTS OF CASH FLOWS
(IN THOUSANDS)

<TABLE>
<CAPTION>
FOR THE PERIOD
FOR THE YEARS FOR THE NINE MONTHS FROM INCEPTION
ENDED DECEMBER 31, ENDED SEPTEMBER 30, (AUGUST 10,
------------------------- ---------------------- 1990) TO
1994 1995 1996 1996 1997 SEPTEMBER 30, 1997
------- ------- ------- ---------- ---------- ------------------
<S> <C> <C> <C> <C> <C> <C>
CASH FLOWS FROM
OPERATING ACTIVITIES:
Net loss.............. $(3,110) $(3,191) $(4,735) $ (3,220) $ (6,899) $(22,587)
Adjustments to
reconcile net loss to
net cash from
operating
activities--
Depreciation expense
and other............ 10 12 33 16 41 112
Issuance of common
stock for services... 7 -- 5 5 -- 12
Provision for
redemption of
redeemable preferred
stock................ -- -- -- -- 1,017 1,017
Other................. -- 9 -- 1 5 16
Decrease (increase) in
advances to
employees............ (3) 2 1 21 4 --
Decrease (Increase) in
prepaid expenses..... (29) (16) (13) 5 (10) (77)
Increase (decrease) in
accounts payable and
accrued liabilities.. 210 483 (195) (64) (64) 1,110
------- ------- ------- ---------- ---------- --------
Net cash flows from
operating
activities.......... (2,915) (2,701) (4,904) (3,236) (5,906) (20,397)
------- ------- ------- ---------- ---------- --------
CASH FLOWS FROM
INVESTING ACTIVITIES:
Purchase of
equipment............ (19) (23) (161) (120) (193) (449)
Cash (paid for)
received from
deposits............. 2 (3) -- -- -- (11)
------- ------- ------- ---------- ---------- --------
Net cash flows from
investing
activities.......... (17) (26) (161) (120) (193) (460)
------- ------- ------- ---------- ---------- --------
CASH FLOWS FROM
FINANCING ACTIVITIES:
Proceeds from issuance
of convertible
preferred stock, net
of related offering
costs................ 2,202 3,534 3,498 2,496 16,548 25,839
Proceeds from exercise
of warrants to
purchase Series E
convertible preferred
stock................ -- -- -- -- 318 318
Collection of
shareholder
receivable........... -- -- 21 -- 3 24
Cash received for
common stock options
exercised............ -- -- 71 71 107 178
Cash paid for deferred
offering costs....... -- -- -- -- (83) (83)
Proceeds from bridge
loan (Note 4)........ -- 791 -- -- -- 791
Partner cash contribu-
tions................ -- -- -- -- -- 5,312
Decrease (increase) in
restricted cash...... -- -- (194) -- (2) (196)
Borrowings............ -- -- 150 150 -- 150
Repayment of
borrowings........... -- -- (39) (27) (36) (75)
------- ------- ------- ---------- ---------- --------
Net cash flows from
financing
activities.......... 2,202 4,325 3,507 2,690 16,855 32,258
------- ------- ------- ---------- ---------- --------
Net increase (decrease)
in cash and cash
equivalents........... (730) 1,598 (1,558) (666) 10,756 11,401
CASH AND CASH
EQUIVALENTS, beginning
of period............. 1,335 605 2,203 2,203 645 --
------- ------- ------- ---------- ---------- --------
CASH AND CASH
EQUIVALENTS, end of
period................ $ 605 $ 2,203 $ 645 $ 1,537 $ 11,401 $ 11,401
======= ======= ======= ========== ========== ========
SUPPLEMENTAL
DISCLOSURES OF NONCASH
FINANCING ACTIVITIES:
Conversion of
partners' investment
to preferred stock... $ -- $ -- $ -- $ -- $ -- $ 4,927
======= ======= ======= ========== ========== ========
Conversion of bridge
loan to preferred
stock................ $ -- $ 800 $ -- $ -- $ -- $ 800
======= ======= ======= ========== ========== ========
Issuance of preferred
stock to investment
advisors............. $ -- $ -- $ 146 $ -- $ 115 $ 261
======= ======= ======= ========== ========== ========
Issuance of common
stock as payment of
management bonus .... $ -- $ -- $ 59 $ -- $ -- $ 59
======= ======= ======= ========== ========== ========
Sale of common stock
in exchange for stock
subscription
receivable........... $ -- $ -- $ -- $ -- $ 37 $ 37
======= ======= ======= ========== ========== ========
Issuance of common
stock as payment for
accounts payable..... $ -- $ -- $ -- $ -- $ 37 $ 37
======= ======= ======= ========== ========== ========
</TABLE>

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

F-7
<PAGE>

CELL PATHWAYS, INC.
(A DEVELOPMENT STAGE COMPANY)

NOTES TO FINANCIAL STATEMENTS

(1) ORGANIZATION AND BASIS OF PRESENTATION

Cell Pathways, Inc. (the "Company") is a pharmaceutical company focused on
the development and commercialization of pharmaceutical products to prevent
and treat cancer. The Company is in the development stage and has yet to
generate revenues. There is no assurance of any future revenues. The Company's
intended products are subject to long development cycles and there is no
assurance the Company will be able to successfully develop, manufacture,
obtain regulatory approval for or market its products. During the period
required to develop its products, the Company plans to continue to finance
operations through debt and equity financings (see Notes 4 and 6). There is no
assurance, however, that such additional funding will be available to the
Company when required. The Company will continue to be considered in the
development stage until such time as it generates significant revenues from
its principal operations. As of September 30, 1997, the Company had a deficit
accumulated during the development stage of $22,587,000.

The Company is a Delaware corporation and is the successor to Cell Pathways
Limited Partnership (the "Partnership"). The Partnership was formed on August
10, 1990 pursuant to the laws of the State of Illinois under the name of FGN
Pharmaceutical Research Limited Partnership. The Partnership Agreement was
amended on December 9, 1992 to provide for additional financing, admission of
a new general partner (the Company) and new limited partners, change in the
name of the Partnership and eventual conversion of the Partnership to
corporate form. On September 29, 1993, the assets and liabilities of the
Partnership were acquired by the Company in exchange for the preferred and
common stock of the Company, thereby converting the business from partnership
to corporate form. The accompanying financial statements include the accounts
of the Partnership from inception (August 10, 1990) through September 29,
1993, and the accounts of the successor Delaware corporation thereafter.

In October 1997, the Company effected a 1-for-1.8157 reverse stock split.
All share and per share amounts have been restated in the aggregate to reflect
this event. Such amounts may be adjusted upon determination of fractional
shares.

(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

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

Cash, Cash Equivalents and Restricted Cash

For purposes of the statements of cash flows, the Company considers all
highly liquid instruments with an original maturity of three months or less to
be cash equivalents. As of December 31, 1996 and September 30, 1997,
approximately $194,000 and $196,000 of cash and cash equivalents was
restricted to secure letters of credit and other indebtedness of the Company
(See Note 7).

F-8
<PAGE>

CELL PATHWAYS, INC.
(A DEVELOPMENT STAGE COMPANY)

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

Equipment

Depreciation of equipment is provided on the straight-line method over
estimated useful lives of five to seven years.

Research and Development

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

Stock Compensation

The Company accounts for stock option grants in accordance with Accounting
Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to
Employees." Under the Company's stock option plan, options may be granted at
not less than the fair market value on the date of the grant and therefore no
compensation expense is recognized for stock options granted to employees. In
1996, the Company adopted the disclosure provisions of Statement of Financial
Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based
Compensation."

Unaudited Pro Forma Net Loss Per Share

The Company's historical capital structure is not indicative of its
prospective structure due to the automatic conversion of all shares of
convertible preferred stock into common stock concurrent with the closing of
the Company's anticipated initial public offering ("IPO"). Accordingly,
historical net loss per common share is not considered meaningful as it would
differ materially from the pro forma net loss per common share and common
stock equivalent shares given the contemplated changes in the capital
structure of the Company.

Pro forma net loss per common share is computed using the weighted average
number of common shares outstanding during the period. Common equivalent
shares from stock options and warrants are excluded from the computation as
their effect is anti-dilutive, except as required by the SEC. Pursuant to
Securities and Exchange Commission Staff Accounting Bulletin No. 83, common
stock and common stock equivalent shares issued by the Company during the 12
months immediately preceding the filing of the IPO, plus shares which became
issuable during the same period as a result of the granting of options to
purchase common stock, have been included in the calculation of weighted
average number of shares of common stock as if they were outstanding for all
periods presented (using the treasury stock method). Accordingly, those common
stock and common stock equivalent shares issued during the 12 months
immediately preceding the filing of the IPO have been included in the
computation of pro forma net loss per common share. In addition, the Company
has assumed the conversion of convertible preferred stock issued into common
stock for all periods presented.

The Financial Accounting Standards Board recently issued SFAS No. 128,
"Earnings Per Share." SFAS No. 128 is effective for fiscal years ending after
December 15, 1997; early adoption is not permitted. SFAS No. 128 replaces
primary and fully diluted earnings per share with basic and diluted earnings
per share, respectively. The Company does not expect that SFAS No. 128 will
have a material effect on its reported pro forma net loss per share.

F-9
<PAGE>

CELL PATHWAYS, INC.
(A DEVELOPMENT STAGE COMPANY)

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

Unaudited Pro Forma Information

Upon closing of the Company's IPO, all of the outstanding shares of Series
A, B, C, D, E, and F convertible preferred stock will be automatically
converted into shares of common stock on a share for share basis. The
unaudited pro forma balance sheet as of September 30, 1997 reflects the
conversion of 6,013,685 shares of preferred stock into 6,013,685 shares of
common stock.

Deferred Offering Costs

The Company has deferred costs related to its proposed initial public
offering. Such costs will be offset against the proceeds of the offering upon
completion of the offering. If the offering is not completed, such costs will
be expensed.

(3) RESEARCH AND DEVELOPMENT CONTRACTS

The Company enters into clinical trial, consulting, research and other
agreements for goods and services. Under such agreements, the Company may pay
for services on an annual, monthly or project basis. Under an agreement with
the University of Arizona, the Company will pay a royalty to the University of
Arizona with regard to the sale of future products, if developed, based on
certain patents.

In 1994, the Company entered into a Clinical Trials Agreement with the
National Cancer Institute ("NCI"), pursuant to which the NCI may sponsor
certain clinical trials.

F-10
<PAGE>

CELL PATHWAYS, INC.
(A DEVELOPMENT STAGE COMPANY)

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

(4) STOCKHOLDERS' EQUITY AND PARTNERS' INVESTMENT

The Company is authorized to issue a total of 30,061,250 shares of stock,
consisting of 13,000,000 shares of $0.01 par value convertible preferred
stock, 61,250 shares of $0.01 par value redeemable preferred stock and
17,000,000 shares of $0.01 par value common stock. Convertible preferred stock
consists of the following:

<TABLE>
<CAPTION>
DECEMBER 31,
----------------------- SEPTEMBER 30,
1995 1996 1997
----------- ----------- -------------
<S> <C> <C> <C>
Series A, 480,459 shares authorized and
outstanding, entitled to a preference
in liquidation of $1,012,000.......... $ 812,000 $ 812,000 $ 812,000
Series B, 467,078 shares authorized and
outstanding, entitled to a preference
in liquidation of $1,052,000.......... 868,000 868,000 868,000
Series C, 385,525 shares authorized and
outstanding, entitled to a preference
in liquidation of $1,540,000.......... 1,540,000 1,540,000 1,540,000
Series D, 371,950 shares authorized,
339,696 shares issued and outstanding,
entitled to a preference in
liquidation of $1,860,000............. 1,860,000 1,860,000 1,860,000
Series E, 1,765,085 shares authorized,
1,146,575, 1,635,528 and 1,692,436
shares issued and outstanding,
respectively, entitled to a preference
in liquidation of $6,559,000,
$9,354,000 and $9,681,000,
respectively.......................... 6,559,000 9,057,000 9,375,000
Series F, 2,863,909 authorized, none,
148,852 and 2,648,491 issued and
outstanding, entitled to a preference
in liquidation of zero, $1,000,000 and
$17,793,000, respectively............. -- 1,000,000 17,548,000
----------- ----------- -----------
$11,639,000 $15,137,000 $32,003,000
=========== =========== ===========
</TABLE>

Each share of Series A, B, C, D, E and F convertible preferred stock is
convertible into one share of common stock at any time at the option of the
holder and is entitled to vote as if converted into common stock. Each share
of each such series of the convertible preferred stock is mandatorily
convertible into one share of common stock upon the earlier of: (i) the
affirmative vote or consent of at least 67% of the holders of such shares;
(ii) the resolution of the board of directors to such effect at a time when
fewer than 25% of the originally issued convertible preferred shares are
outstanding; or (iii) the closing of a firm commitment underwritten public
offering at a public offering price equal to or exceeding $11.98 per share of
common stock (as adjusted) resulting in aggregate proceeds to the Company
and/or the selling stockholders (before underwriter discounts and other
offering expenses) of $10 million or more.

Series A, B, C, D, E and F convertible preferred shares have per share
liquidation preferences of $2.11, $2.25, $3.99, $5.48, $5.72 and $6.72,
respectively. Series A, B, C and D correspond to similarly designated classes
of limited partnership units issued by the Partnership pursuant to financings
arranged in 1990 (Class A), 1991 (Class B) and 1992 (Classes C and D). The
ranking of

F-11
<PAGE>

CELL PATHWAYS, INC.
(A DEVELOPMENT STAGE COMPANY)

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

liquidation preferences is Series F, Series E, Series C, Series D, Series B,
Series A and then the redeemable preferred stock. In March of 1994, the
Company issued 9,179 shares of common stock to Lehman Brothers, Inc. as
partial payment for financial advisory services.

In April 1994, the Company commenced an offering of Series E convertible
preferred stock at a price of $7.44 per share. The Company issued 298,908
Series E convertible preferred shares, and warrants to purchase an additional
10,323 shares of Series E convertible preferred stock at $7.44 per share
resulting in proceeds to the Company of $2,225,000. In conjunction with the
Company's 1995 financing (see below), the Series E convertible preferred stock
was repriced to $5.72 per share, the same price as the 1995 financing.
Accordingly, the Company issued an additional 90,161 shares, and warrants to
purchase an additional 3,114 shares of Series E convertible preferred stock at
$5.72 per share.

In June through August 1995, as the first step in offering additional Series
E convertible preferred stock, the Company borrowed $791,000 from certain of
its stockholders. In August 1995, this bridge loan, together with interest at
9%, was converted into 139,680 shares of Series E convertible preferred stock
at $5.72 per share. In connection with the bridge loan, warrants to purchase
an additional 69,140 shares of Series E convertible preferred stock at $5.72
per share were issued, which are exercisable until the earlier of June 5,
1999, or the closing of an initial public offering of securities by the
Company or the sale of all or substantially all of the assets of the Company.
In August 1995, the Board of Directors authorized the issuance and sale of up
to $7 million of Series E convertible preferred stock at $5.72 per share,
including conversion of the bridge loan. During the year ended December 31,
1995, the Company issued 617,826 additional shares of Series E convertible
preferred stock and warrants to purchase an additional 46,991 shares of Series
E convertible preferred stock at $5.72 per share, resulting in proceeds to the
Company of $3,534,000; and in January through May of 1996, the Company issued
an additional 463,425 shares of Series E convertible preferred stock at $5.72
per share, resulting in proceeds to the Company of $2,650,000. This offering,
including conversion of the bridge loan, resulted in the issuance of 1,220,931
shares of Series E convertible preferred stock and warrants to purchase
116,131 shares of Series E convertible preferred stock, resulting in net
proceeds of $6,832,000. In May of 1996, the Company issued 25,528 shares of
Series E convertible preferred stock and $154,000 cash as payment for
financial advisory services.

During 1996 the Company issued 101,880 shares of common stock as bonuses to
officers and employees, and 8,166 shares of common stock were issued for
consulting services.

In December 1996, the Company commenced a private offering of Series F
convertible preferred stock and related warrants at $6.72 per share. As of
December 31, 1996, the Company had issued 148,851 shares of Series F
convertible preferred stock and warrants to purchase 7,443 additional shares
of Series F convertible preferred stock, resulting in proceeds to the Company
of $1,000,000. During 1997, the Company issued 2,482,522 additional shares of
Series F convertible preferred stock and warrants to purchase an additional
61,852 shares of Series F convertible preferred stock, resulting in net
proceeds to the Company of $16,548,000. The warrants are exercisable until the
earlier of July 20, 1999, or the sale of all or substantially all of the
assets of the Company. In addition, the Company issued 17,118 shares of Series
F convertible preferred stock as compensation for services rendered in
connection with the offering of the Series F convertible preferred stock.

The certificate of incorporation and a stockholders' agreement entered into
among the Company, the founder and certain venture capital investors in
conjunction with the December 1992 financing provide for class voting or
combined class voting under certain circumstances. The stockholders'

F-12
<PAGE>

CELL PATHWAYS, INC.
(A DEVELOPMENT STAGE COMPANY)

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

agreement provides for an agreed upon process for the election of directors
which has the effect that the signatories thereof, through the size of their
holdings, can determine which individuals become directors of the Company. The
provision for election of the directors ceases to be operative upon closing of
a firm commitment underwritten public offering at a public offering price
equal to or exceeding $11.98 per share of common stock (as adjusted) resulting
in aggregate proceeds to the Company and/or the selling stockholders (before
underwriter discounts and other offering expenses) of $10 million or more. The
stockholders' agreement also provides for registration rights and the priority
thereof, and for certain rights of first refusal and of co-sale with respect
to securities of the Company.

(5) REDEEMABLE PREFERRED STOCK

The redeemable preferred stock carries no vote and no dividend and is not
convertible into common stock. The redeemable preferred stock is mandatorily
redeemable in an aggregate amount of $1,092,000 upon the closing of any firm
commitment underwritten public offering of common stock. Such redemption may
be made either in cash, registered common stock, or a combination of the two,
at the Company's option.

The redeemable preferred stock is held by FGN, Inc., the former general
partner of the Partnership. It is anticipated that all but $75,000 of the
proceeds received by FGN, Inc. from the redemption of the redeemable preferred
stock will be paid by FGN, Inc. to certain of the founding and continuing
participants in the business. Accordingly, the Company has always expected
that upon determination that redemption was probable, the Company would record
the amount paid for redemption as compensation expense. Company preparations
during the third quarter of 1997 for a possible initial public offering of
common stock later in 1997 make it probable that the Company will redeem such
stock. Accordingly, the Company has recorded a provision for the redemption of
the preferred stock during the third quarter of 1997.

(6) STOCK OPTIONS AND WARRANTS

In 1993, the Company adopted a stock option plan which, in October 1997, was
amended and renamed the 1997 Equity Incentive Plan. Pursuant to the 1997
Equity Incentive Plan, the Company is authorized to grant Common Stock, stock
appreciation rights, or options to purchase Common Stock with respect to
1,294,266 shares of Common Stock for issuance to eligible employees, directors
and consultants. As of September 30, 1997, options with respect to 576,244
shares have been issued, 260,827 have been exercised and 281,550 shares were
outstanding. The stock options granted may be either incentive stock options
("ISO") or nonstatutory stock options ("NSO"). Such options may be granted
only at an exercise price not less than the fair market value of the shares at
the date of grant unless such option is granted pursuant to an assumption of
or a substitution for another option. The board of directors may set the rate
at which the options become exercisable and determine when the options expire,
subject to the limitations described below. The options granted may be
exercised up to ten years following the date of grant. All options will
generally become exercisable in the event the Company is sold or has other
significant changes in ownership. Generally, the options vest ratably over a
four-year period.

The Company accounts for stock options granted to employees under the 1997
Equity Incentive Plan in accordance with the intrinsic value method provided
for under APB Opinion No. 25. Under the 1997 Equity Incentive Plan, options
may be granted at not less than the fair market value on the date of the grant
and therefore no compensation expense is, or has been, recognized in respect
of stock options awarded to employees. The option pricing models recommended
by SFAS No. 123 for

F-13
<PAGE>

CELL PATHWAYS, INC.
(A DEVELOPMENT STAGE COMPANY)

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

recognition of, or disclosure of pro forma, compensation cost in respect of
employee stock options are option pricing models which have been developed for
fully transferable, traded options having no vesting requirements and which
require the input of subjective assumptions including expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options, in management's opinion,
the existing models do not necessarily provide a reliable single measure of
the fair value of its stock options. Had compensation cost for the 1997 Equity
Incentive Plan been recognized in the income statements under SFAS No. 123,
the Company's net loss would have increased to the following pro forma
amounts:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, FOR THE NINE MONTH
------------------------ PERIOD ENDED
1995 1996 SEPTEMBER 30, 1997
------------ ------------ ------------------
<S> <C> <C> <C>
Net loss:
As reported........... $ (3,191,000) $ (4,735,000) $(6,899,000)
============ ============ ===========
Pro forma
(unaudited).......... $ (3,192,000) $ (4,767,000) $(6,997,000)
============ ============ ===========
Pro forma net loss per
share:
As reported
(unaudited).......... $ (0.62) $ (0.90)
============ ===========
Pro forma
(unaudited).......... $ (0.62) $ (0.91)
============ ===========
</TABLE>

The pro forma disclosures made above do not reflect options granted prior to
January 1, 1995. This pro forma compensation cost may also not be
representative of the effects which SFAS No. 123 may have on the disclosure of
pro forma compensation cost and resulting pro forma net loss in future years.

A summary of the status of the 1993 Stock Option Plan at December 31, 1994,
1995, 1996 and September 30, 1997 and changes during the periods then ended is
presented in the table and narrative below.

<TABLE>
<CAPTION>
FOR THE NINE
MONTHS ENDED
1994 1995 1996 SEPTEMBER 30, 1997
---------------- ----------------- ------------------- -------------------
WEIGHTED- WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE EXERCISE
FIXED PRICE OPTIONS SHARES PRICE SHARES PRICE SHARES PRICE SHARES PRICE
------------------- ------ --------- ------- --------- -------- --------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Outstanding at beginning
of period............... 82,384 $0.58 89,956 $0.60 102,897 $0.60 262,145 $0.66
Granted................ 7,572 0.74 12,941 0.58 287,758 0.69 185,589 5.48
Exercised.............. -- -- -- -- (122,728) 0.58 (138,099) 0.81
Forfeited.............. -- -- -- -- (5,782) 0.58 (28,085) 0.58
Expired................ -- -- -- -- -- -- -- --
------ ------- -------- --------
Outstanding at end of
period.................. 89,956 $0.60 102,897 $0.60 262,145 $0.66 281,550 $3.82
====== ======= ======== ========
Vested and exercisable at
end of period........... 53,106 $0.58 16,132 $0.69 38,938 $0.60
======= ======== ========
Weighted average fair
value of options granted
during the period per
SFAS 123................ $0.07 $0.12 $3.99
===== ===== =====
</TABLE>

F-14
<PAGE>

CELL PATHWAYS, INC.
(A DEVELOPMENT STAGE COMPANY)

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

The following table summarizes information about employee stock options
outstanding and exercisable at September 30, 1997:

<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------- -----------------------
NUMBER OF WEIGHTED
OPTIONS AVERAGE WEIGHTED NUMBER WEIGHTED
RANGE OF OUTSTANDING AT REMAINING AVERAGE EXERCISABLE AT AVERAGE
EXERCISE SEPTEMBER 30, CONTRACTUAL EXERCISE SEPTEMBER 30, EXERCISE
PRICES 1997 LIFE IN YEARS PRICE 1997 PRICE
-------- -------------- ------------- -------- -------------- --------
<S> <C> <C> <C> <C> <C>
$0.58 88,389 8.40 $0.58 33,890 $0.58
$0.74 7,572 7.00 0.74 5,048 0.74
$0.91 -- 9.10 0.91 -- --
$1.82 46,811 9.50 1.82 -- --
$6.72 138,778 9.80 6.72 -- --
------- ------
281,550 38,938
======= ======
</TABLE>

Under the 1997 Equity Incentive Plan, the Company is authorized to grant
options with respect to 1,294,266 shares of Common Stock, of which options to
purchase 751,889 shares of Common Stock remain to be granted.

Included in the above table are options to purchase 96,381 shares of Common
Stock at $0.91 per share granted to the Company's current Chief Executive
Officer upon his employment in October 1996. Generally, the options vest
ratably over a four-year period. Pursuant to the terms of his employment
agreement, a minimum of 48,191 of these options will vest if his employment is
terminated without cause.

Options issued under the 1997 Equity Incentive Plan may be immediately
exercisable but any unvested shares exercised are held by the Company and are
subject to reacquisition by the Company should employment terminate prior to
completion of applicable vesting periods.

For purposes of the pro forma disclosure set forth above, the fair value of
each option grant is estimated on the date of grant as provided by SFAS No.
123 and using the following additional assumptions: risk-free interest rate--
6.15%; expected dividends--0%; volatility--80% and expected life of option--6
years.

In 1995, the Company adopted the 1995 Cell Pathways, Inc. Stock Award Plan
pursuant to which the Company may award shares of common stock to employees,
directors and consultants as part or all of their compensation, whether
salary, bonus or fee and whether for past services or as incentive for current
and future services. The only awards which have been made under this plan were
made during 1996 by way of bonus compensation to officers and employees of the
Company for the years 1993, 1994 and 1995. In accordance with APB Opinion No.
25, a compensation charge of $59,000 associated with the issuance of 101,889
shares of common stock having a fair market value of $0.58 per share at the
date of grant, was recognized in the year ended 1995.

In October, 1997, the Board of Directors adopted the 1997 Non-Employee
Directors' Stock Option Plan (the "Directors' Plan") covering an aggregate of
250,000 shares of Common Stock.

F-15
<PAGE>

Pursuant to the terms of the Directors' Plan, each person serving as a
director of the Company who is not an employee of the Company (a "Non-Employee
Director") shall, upon the effectiveness of the initial public offering of the
Company's Common Stock, automatically be granted an option to purchase 3,000
shares of Common Stock (the "Initial Grant"). Each person who first becomes a
Non-Employee Director after the effectiveness of the initial public offering
of the Company's Common Stock, automatically shall be granted an option to
purchase 10,000 shares of Common Stock (the "Inaugural Grant"). In addition,
on the date of each annual stockholders meeting commencing with the meeting in
1998, each Non-Employee Director who has served at least one full year as
director will automatically be granted an option to purchase 3,000 shares of
Common Stock (the "Anniversary Grant").

Options subject to an Initial Grant under the Directors' Plan will vest in
full on March 31, 1998. Options subject to an Inaugural Grant under the
Directors' Plan will vest in 3 equal, annual installments commencing on the
first anniversary of the date of the grant of the option. Options subject to
an Anniversary Grant under the Directors' Plan will vest in full on the first
anniversary of the date of the grant of the option. The vesting of all options
under the Directors' Plan is conditioned on the continued service of the
recipient as a director, employee or consultant of the Company or any
affiliate of the Company.

In October 1997, the Board approved the Employee Stock Purchase Plan (the
"Purchase Plan") covering an aggregate of 300,000 shares of Common Stock.
Under the Purchase Plan, the Board may authorize participation by eligible
employees, including officers, in periodic offerings following the adoption of
the Purchase Plan. The offering period for any offering will be no longer than
27 months.

In December 1992, the Company issued a warrant to purchase 6,664 shares of
Class D convertible preferred stock at an exercise price of approximately
$5.48 per share. The warrant expired on December 31, 1996 in accordance with
its terms.

In connection with the offerings of Series E convertible preferred stock in
1994 and 1995, the Company issued warrants to purchase an aggregate of 129,568
additional shares of Series E convertible preferred stock, exercisable at
$5.72 per share until the earlier of: (i) the closing of an initial public
offering of securities by the Company; (ii) the sale of all or substantially
all of the assets of the Company; and (iii) August 31, 1997 (in the case of
60,428 shares all of which have been exercised) or June 5, 1999 (in the case
of 69,140 shares). During 1996, warrants were exercised to purchase 81 shares
of Series E convertible preferred stock. During the nine months ended
September 30, 1997,

F-16
<PAGE>

CELL PATHWAYS, INC.
(A DEVELOPMENT STAGE COMPANY)

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

warrants to purchase 55,546 shares of Series E convertible preferred stock
were exercised for cash at $5.72 per share. Further, holders of warrants to
purchase 9,172 shares of Series E convertible preferred stock tendered their
warrants in a cashless exercise in exchange for 1,362 shares of Series E
convertible preferred stock at $6.72 per share. As of September 30, 1997,
warrants to purchase 64,770 shares of Series E convertible preferred stock
were outstanding.

In connection with the offerings of Series F convertible preferred stock,
commencing in December of 1996, the Company issued in December of 1996
warrants to purchase 7,443 shares of Series F convertible preferred stock, and
during 1997, warrants to purchase 61,852 shares of Series F convertible
preferred stock, at an exercise price of $6.72 per share, all exercisable
until the earlier of: (i) July 20, 1999; or (ii) the sale of all or
substantially all of the assets of the Company.

(7) DEBT

In March 1996, the Company borrowed $150,000 from a bank. The note bears
interest at a rate of 7.79% and is payable in equal monthly installments
through March 1999. As of September 30, 1997, the principal amount outstanding
was $75,000.

(8) INCOME TAXES

The Company accounts for income taxes under the provisions of SFAS No. 109,
"Accounting for Income Taxes." As of September 30, 1997, the Company had
approximately $17,500,000 of net operating loss carryforwards ("NOLs") for
income tax purposes available to offset future federal income tax, subject to
limitations for alternative minimum tax. The NOLs are subject to examination
by the tax authorities and expire between 2008 and 2012.

Prior to its conversion into corporate form, the business had accumulated
losses totaling approximately $3,900,000. For tax purposes these losses were
distributed to the partners in accordance with the provisions of the
Partnership Agreement. Thus, these losses, while included in the financial
statements of the Company, are not available to offset future taxable income,
if any, of the Company.

The components of the net deferred income tax asset at December 31, 1994,
1995 1996, and September 30, 1997 were as follows:

<TABLE>
<CAPTION>
AS OF DECEMBER 31
------------------------------------- AS OF SEPTEMBER 30,
1994 1995 1996 1997
----------- ----------- ----------- -------------------
<S> <C> <C> <C> <C>
Net operating loss
carryforwards.......... $ 1,400,000 $ 2,550,000 $ 4,310,000 $ 6,484,000
Less--valuation
allowance.............. (1,400,000) (2,550,000) (4,310,000) (6,484,000)
----------- ----------- ----------- -----------
$ -- $ -- $ -- $ --
=========== =========== =========== ===========
</TABLE>

The Company has not yet achieved profitable operations. Accordingly,
management believes the tax assets as of September 30, 1997 do not satisfy the
realization criteria set forth in SFAS No. 109 and has recorded a valuation
allowance for the entire net tax asset.

F-17
<PAGE>

CELL PATHWAYS, INC.
(A DEVELOPMENT STAGE COMPANY)

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

(9) COMMITMENTS AND CONTINGENCIES

In August 1993, the Company entered into a lease for laboratory facilities
located in Aurora, Colorado. The lease is for a term of five and one-half
years beginning in January 1994 and provides for a renewal option of an
additional five years at the end of the initial term. In July 1997, the
Company signed a lease for office and laboratory space in Horsham,
Pennsylvania. This lease is for a period of 10 years. The Company has an
option to purchase the Horsham facility by March 31, 1998 for $3.4 million.

Aggregate minimum rental payments under the Aurora and Horsham leases are as
follows:

<TABLE>
<S> <C>
1997.............................. $ 124,000
1998.............................. 457,000
1999.............................. 440,000
2000.............................. 440,000
2001.............................. 440,000
Thereafter........................ 2,599,000
----------
Total........................... $4,500,000
==========
</TABLE>

Rental expenses under this lease and other month-to-month leases entered
into by the Company totaled $55,000, $57,000 and $95,000 for the years ended
December 31, 1994, 1995 and 1996, respectively, and $69,000 and $84,000 during
the nine month periods ended September 30, 1996 and 1997, respectively.

In 1995, the Company entered into a contractual agreement with one of its
vendors to perform testing. Pursuant to the agreement, the Company is
committed to pay the following amounts for continuing testing activities:
$410,000 and $670,000 in 1997 and 1998, respectively.

F-18
<PAGE>

NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN OR
INCORPORATED BY REFERENCE 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 ANY OF THE UNDERWRITERS. 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 DATES AS OF WHICH INFORMATION IS GIVEN IN THIS PROSPECTUS.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER OR SOLICITATION BY ANYONE IN ANY
JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED OR IN WHICH
THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO OR TO
ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH SOLICITATION.

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

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary....................................................... 3
Risk Factors............................................................. 6
Use of Proceeds.......................................................... 18
Dividend Policy.......................................................... 18
Capitalization........................................................... 19
Dilution................................................................. 20
Selected Financial Data.................................................. 21
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 22
Business................................................................. 26
Management............................................................... 46
Certain Transactions..................................................... 56
Principal Stockholders................................................... 59
Description of Capital Stock............................................. 61
Shares Eligible for Future Sale.......................................... 64
Underwriting............................................................. 66
Legal Matters............................................................ 68
Experts.................................................................. 68
Additional Information................................................... 68
Index to Financial Statements............................................ F-1
</TABLE>

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

UNTIL , 1997 (25 DAYS AFTER THE COMMENCEMENT OF THIS OFFERING), ALL
DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK OFFERED HEREBY, WHETHER OR
NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A
PROSPECTUS. THIS DELIVERY REQUIREMENT 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.

2,500,000 SHARES

[LOGO OF CELL PATHWAYS, INC. APPEARS HERE]
CELL PATHWAYS, INC.

COMMON STOCK
($.01 PAR VALUE)

SALOMON BROTHERS INC

BANCAMERICA ROBERTSON STEPHENS

COWEN & COMPANY

PROSPECTUS

DATED , 1997
<PAGE>

PART II

INFORMATION NOT REQUIRED IN PROSPECTUS

ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.

The following table sets forth all expenses, other than the underwriting
discount and commissions, payable by the registrant in connection with the
sale of the Common Stock being registered. All the amounts shown are estimates
except for the registration fee and the NASD filing fee.

<TABLE>
<S> <C>
Registration fee................................................... $ 11,326
NASD filing fee.................................................... 4,238
Nasdaq application fee............................................. 1,000
Blue sky qualification fee and expenses............................ 7,500
Printing and engraving expenses.................................... 150,000
Legal fees and expenses............................................ 250,000
Accounting fees and expenses....................................... 85,000
Transfer agent and registrar fees.................................. 3,000
Miscellaneous...................................................... 37,936
--------
Total............................................................ $550,000
========
</TABLE>

ITEM 14. INDEMNIFICATION OF OFFICERS AND DIRECTORS.

Under Section 145 of the Delaware General Corporation Law, the Company has
broad powers to indemnify its directors and officers against liabilities they
may incur in such capacities, including liabilities under the Securities Act
of 1933, as amended (the "Securities Act").

The Company's Restated Certificate of Incorporation provides for the
elimination of liability for monetary damages for breach of the Directors'
fiduciary duty of care to the Company and its stockholders. These provisions
do not eliminate the Directors' duty of care and, in appropriate
circumstances, equitable remedies such an injunctive or other forms of
nonmonetary relief will remain available under Delaware law. In addition, each
Director will continue to be subject to liability for breach of the Director's
duty of loyalty to the Company, for acts or omissions not in good faith or
involving intentional misconduct, for knowing violations of law, for any
transaction from which the Director derived an improper personal benefit, and
for payment of dividends or approval of stock repurchases or redemptions that
are unlawful under Delaware law. The provision does not affect a Director's
responsibilities under any other laws, such as the federal securities laws or
state or federal environmental laws.

The Underwriting Agreement filed as Exhibit 1.1 to this Registration
Statement provides for indemnification by the Underwriters of the Company and
its officers and Directors for certain liabilities arising under the
Securities Act or otherwise. Insofar as indemnification for liabilities
arising under the Securities Act may be permitted to directors, officers and
controlling persons of the Company pursuant to the foregoing provisions, or
otherwise, the Company has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Securities Act and is, therefore, unenforceable.

ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.

Since September 1, 1994, the Company has sold and issued the following
unregistered securities:

(1) During the period, the Company granted stock options to employees,
consultants, directors, officers and affiliates of the Company as provided
below. From September 1, 1994 to December 31, 1994, the Company granted
stock options under the 1993 Stock Option Plan covering an aggregate of
7,572 shares of Common Stock at an exercise price of $0.74 per share. In
1995, the Company granted stock options under the 1993 Stock Option Plan
covering an aggregate of 12,941 shares of Common Stock at an exercise price
of $0.58 per share. In 1996, the Company granted stock options under the
1993 Stock Option Plan covering an aggregate of 287,758 shares of Common
Stock at an average exercise price of $0.69 per share. Since January

II-1
<PAGE>

1, 1997, the Company has granted stock options under its 1993 Stock Option
Plan covering an aggregate of 185,589 shares of Common Stock at an average
exercise price of $5.48 per share. Each of these options vests over a
period of time following its respective date of grant.

(2) On March 26, 1996, the Company awarded an aggregate of 101,880 shares
of restricted stock, pursuant to its 1995 Stock Award Plan, to Christopher
J. Blaxland, Claire M. Ganz, Floyd G. Nichols, Rifat Pamukcu, Gary A.
Piazza and Richard H. Troy.

(3) In April 1994, the Company commenced a private offering of Series E
Convertible Preferred Stock ("Series E Preferred") at a price of $7.44 per
share. Between April 1994 and July 1994, the Company sold to institutional
investors and accredited investors a total of 298,908 shares of Series E
Preferred and warrants to purchase an additional 10,323 shares of Series E
Preferred at $7.44 per share. In August 1995, in connection with repricing
the Series E Preferred to $5.72 per share, the Company's Board of Directors
authorized the issuance of additional Series E Preferred. In conjunction
with this new price, the Company issued 90,161 shares of Series E Preferred
and 3,114 warrants to purchase Series E Preferred to the previous holders
of Series E Preferred.

(4) Between August 1995 and May 1996, the Company issued to certain
stockholders 1,220,931 shares of Series E Preferred and warrants to
purchase an additional 116,131 shares of Series E Preferred at $5.72 per
share, which include 139,680 shares of Series E Preferred and warrants to
purchase an additional 69,140 shares of Series E Preferred issued in August
1995, when the Company converted a bridge loan of $791,000 evidenced by
convertible promissory notes with a 9% annual interest rate. In May 1996,
the Company issued 25,528 shares of Series E Preferred to Lehman Brothers,
Inc. and Lunn Partners, LLC as partial payment for financial advisory
services.

(5) In December 1996, the Company commenced a private offering of Series
F Convertible Preferred Stock ("Series F Preferred") at a price of $6.72
per share. Between mid-December 1996 and June 1997, the Company issued to
institutional investors and accredited investors an aggregate of 2,631,373
shares of Series F Preferred and warrants to purchase an additional 69,295
shares of Series F Preferred at $6.72 per share. In addition, the Company
issued 17,118 shares of Series F Preferred as compensation for services
rendered in connection with the offering of the Series F Preferred.

The sales and issuance of securities in the transactions described in
paragraphs (1) and (2) above were deemed to be exempt from registration under
the Securities Act by virtue of Rule 701 promulgated thereunder in that they
were offered and sold either pursuant to written compensatory benefit plans or
pursuant to a written contract relating to compensation, as provided by Rule
701.

The sales and issuances of securities in the transactions described in
paragraphs (3), (4) and (5) above were deemed to be exempt from registration
under the Securities Act by virtue of Section 4(2) thereof and/or Regulation D
promulgated under the Securities Act. The purchasers in each case represented
their intention to acquire the securities for investment only and not with a
view to the distribution thereof. Appropriate legends are affixed to the stock
certificates issued in such transactions. All recipients either received
adequate information about the Company or had access, through employment or
other relationships, to such information.

II-2
<PAGE>

ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.

(a) Exhibits.

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- -----------------------
<C> <S>
1.1** Underwriting Agreement.
3.1* Fifth Amended and Restated Certificate of Incorporation of the
Company.
3.2* Certificate of Amendment to Fifth Amended and Restated Certificate of
Incorporation of the Company.
3.3 Form of Sixth Amended and Restated Certificate of Incorporation to be
effective upon the closing of the offering.
3.4* Bylaws of the Company.
3.5 Form of Amended and Restated Bylaws of the Company to be effective
upon the closing of the offering.
4.1 Reference is made to Exhibits 3.1 through 3.5
4.2** Specimen stock certificate representing shares of Common Stock of the
Company.
5.1** Opinion of Cooley Godward LLP regarding the legality of the securities
being registered.
10.1* Third Amended and Restated Stockholders' Agreement, dated as of
December 31, 1996 among the Company and the stockholders listed on
the signature pages thereto.
10.2* 1993 Stock Option Plan, as amended.
10.3* Form of Incentive Stock Option Agreement.
10.4* Form of Non-Qualified Stock Option Agreement.
10.5* Form of Early Exercise Stock Purchase Agreement.
10.6* 1995 Stock Award Plan.
10.7* Form of Series E Preferred Stock Subscription Agreement.
10.8* Form of Series E Preferred Stock Purchase Warrant.
10.9* Note, Preferred Stock and Warrant Purchase Agreement, dated December
13, 1996, between the Company and The Goldman Sachs Group, L.P.
10.10* Stock Purchase Agreement, dated May 23, 1997, between the Company and
New York Life Insurance Company.
10.11* Form of Series F Preferred Stock Subscription Agreement.
10.12* Form of Series F Preferred Stock Purchase Warrant.
10.13* Employment Agreement, dated October 12, 1996, between the Company and
Robert J. Towarnicki.
10.14** Form of Employment Agreement between the Company and Robert J.
Towarnicki to be effective upon the closing of the offering.
10.15* Employment Agreement, dated September 1, 1993, between the Company and
Christopher J. Blaxland.
10.16** Form of Employment Agreement between the Company and Christopher J.
Blaxland to be effective upon the closing of the offering.
10.17* Employment Agreement, dated February 1, 1993, between the Company and
Rifat Pamukcu.
10.18** Form of Employment Agreement between the Company and Rifat Pamukcu to
be effective upon the closing of the offering.
10.19* Memorandum of Employment, dated January 1, 1993, between the Company
and Richard H. Troy.
10.20** Form of Employment Agreement between the Company and Richard H. Troy
to be effective upon the closing of the offering.
10.21* Agreement, dated June 30, 1994, between the Company and the Division
of Cancer Prevention and Control, National Cancer Institute.
10.22* Amendment to Agreement between the Company and the Division of Cancer
Prevention and Control, National Cancer Institute, dated September 4,
1996.
</TABLE>

II-3
<PAGE>

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- -----------------------
<C> <S>
10.23+ Research and License Agreement, dated June 26, 1991, between the
Company and the University of Arizona, as amended.
10.24* Lease, dated August 9, 1993, between the Company and WRC Properties,
Inc.
10.25* Lease, dated June 20, 1997, between the Company and Marave Associates,
L.P.
10.26 1997 Equity Incentive Plan
10.27 1997 Non-Employee Director Stock Option Plan
10.28 1997 Employee Stock Purchase Plan
11.1 Statement re Computation of Per Share Earnings.
23.1** Consent of Cooley Godward LLP (included in Exhibit 5.1).
23.2 Consent of Arthur Andersen LLP.
23.3* Consent of Brinks Hofer Gilson & Lione.
24.1* Power of Attorney (included on page II-5).
27.1 Financial Data Schedule.
</TABLE>
- --------

* Previously Filed.

** To be filed by amendment.

+The Company is applying for confidential treatment with respect to portions
of this Exhibit.

(b) Financial Statement Schedules.

<TABLE>
<CAPTION>
NUMBER DESCRIPTION
------ -----------
<S> <C>

</TABLE>

All other schedules are omitted because they are not required, are not
applicable, or the information is included in the consolidated financial
statements or notes thereto.

ITEM 17. UNDERTAKINGS.

The Company hereby undertakes to provide the Underwriters at the closing
specified in the Underwriting Agreement certificates in such denominations and
registered in such names as required by the Underwriters to permit prompt
delivery to each purchaser.

Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers, and controlling persons of
the Company pursuant to the provisions described in Item 14 or otherwise, the
Company has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Company of expenses incurred or paid by a director, officer, or controlling
person of the Company in the successful defense of any action, suit, or
proceeding) is asserted by such director, officer, or controlling person in
connection with the securities being registered, the Company will, unless in
the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act
and will be governed by the final adjudication of such issue.

The undersigned Company undertakes that: (1) for purposes of determining any
liability under the Securities Act of 1933, the information omitted from the
form of prospectus as filed as part of the registration statement in reliance
upon Rule 430A and contained in the form of prospectus filed by the Company
pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be
deemed to be part of the registration statement as of the time it was declared
effective, and (2) for the purpose of determining any liability under the
Securities Act of 1933, each post effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.

II-4
<PAGE>

SIGNATURES

In accordance with the requirements of the Securities Act of 1933, the
Company certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form S-1 and authorized this Amendment No. 1
to be signed on its behalf by the undersigned, in the City of Horsham, State of
Pennsylvania, on the 22nd day of October, 1997.

Cell Pathways, Inc.

/s/ Richard H. Troy
By: __________________________________

RICHARD H. TROY SENIOR VICE
PRESIDENT--FINANCE, LAW AND
ADMINISTRATION AND CORPORATE
SECRETARY

PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS AMENDMENT TO
THE REGISTRATION STATEMENT NO. 333-37557 HAS BEEN SIGNED BELOW BY THE FOLLOWING
PERSONS IN THE CAPACITIES AND ON THE DATES INDICATED.
<TABLE>
<CAPTION>

SIGNATURE TITLE DATE
<S> <C> <C>

/s/ Robert J. Towarnicki Chief Executive October 22, 1997
- ------------------------------------ Officer; Director
ROBERT J. TOWARNICKI (Principal
Executive Officer)

/s/ Richard H. Troy Senior Vice October 22, 1997
- ------------------------------------ President--
RICHARD H. TROY Finance, Law and
Administration;
Corporate
Secretary;
Director
(Principal
Financial and
Accounting
Officer)

/s/ Christopher J. Blaxland* President; Director October 22, 1997
- ------------------------------------
CHRISTOPHER J. BLAXLAND

/s/ William A. Boeger* Chairman of the October 22, 1997
- ------------------------------------ Board of Directors
WILLIAM A. BOEGER

/s/ Thomas M. Gibson* Director October 22, 1997
- ------------------------------------
THOMAS M. GIBSON

/s/ Robert J. Quy, Ph.D.* Director October 22, 1997
- ------------------------------------
ROBERT J. QUY, PH.D.

/s/ Peter G. Schiff* Director October 22, 1997
- ------------------------------------
PETER G. SCHIFF

/s/ Randall M. Toig, M.D.* Director October 22, 1997
- ------------------------------------
RANDALL M. TOIG, M.D.

*By /s/ Richard H. Troy
- ------------------------------------
RICHARD H. TROY
ATTORNEY-IN-FACT

</TABLE>

II-5

<PAGE>
EXHIBIT 3.3

SIXTH AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
CELL PATHWAYS, INC.

The name of the corporation is Cell Pathways, Inc. (the "Corporation").

II.

The address of the registered office of the Corporation in the State of
Delaware is 1013 Centre Road, City of Wilmington, County of New Castle, and the
name of the registered agent of the Corporation in the State of Delaware at such
address is Corporation Service Company.

III.

The purpose of the Corporation is to engage in any lawful act or activity
for which a corporation may be organized under the General Corporation Law of
the State of Delaware.

IV.

A. Upon the effectiveness of this Sixth Amended and Restated Certificate
of Incorporation, every 1.8157 outstanding shares of Common Stock of the
Corporation shall be combined into one share of Common Stock (the "Reverse
Split"). No fractional shares of Common Stock shall be issued in connection
therewith, and each stockholder otherwise entitled to receive a fractional share
shall receive the next lower whole number of shares of Common Stock.

B. Upon the effectiveness of the Reverse Split, the Corporation shall be
authorized to issue two classes of stock to be designated, respectively, "Common
Stock" and "Preferred Stock". The total number of shares that the Corporation
shall be authorized to issue is twenty-seven million (27,000,000) shares.
Twenty-five million (25,000,000) shares shall be Common Stock, each having a par
value of One Cent ($.01). Two million (2,000,000) shares shall be Preferred
Stock, each having a par value of One Cent ($.01).

C. The Preferred Stock may be issued from time to time in one or more
series. The Board of Directors is hereby authorized, by filing a certificate (a
"Preferred Stock Designation") pursuant to the Delaware General Corporation Law,
to provide for such

1.
<PAGE>

issuance, and to fix or alter from time to time the designation, powers,
preferences and rights of the shares of each such series and the qualifications,
limitations or restrictions of any wholly unissued series of Preferred Stock,
and to establish from time to time the number of shares constituting any such
series or any of them; and to increase or decrease the number of shares of any
series subsequent to the issuance of shares of that series, but not below the
number of shares of such series then outstanding. In case the number of shares
of any series shall be decreased in accordance with the foregoing sentence, the
shares constituting such decrease shall resume the status that they had prior to
the adoption of the resolution originally fixing the number of shares of such
series.

D. Subject to the rights of any Preferred Stock then outstanding, each
issued and outstanding share of Common Stock shall entitle the Holder thereof to
receive such dividends as may be declared from time to time by the Board of
Directors of the Corporation out of funds legally available therefor, and shall
entitle the Holder thereof to share ratably with other Holders of Common Stock
in all assets available for distribution in the event of any liquidation,
dissolution or winding up of the Corporation. Each issued and outstanding share
of Common Stock shall be identical to all other shares of that class, and shall
entitle the Holder thereof to cast one vote on each matter submitted to a vote
of the Corporation's stockholders. No Holder of Common Stock shall be entitled
to any cumulative voting rights or to any preemptive rights upon the issuance or
sale of any Securities.

For the management of the business and for the conduct of the affairs of
the Corporation, and in further definition, limitation and regulation of the
powers of the Corporation, of its directors and of its stockholders or any class
thereof, as the case may be, it is further provided that:

A. 1. The business and affairs of the Corporation shall be managed by or
under the direction of the Board of Directors. The number of directors that
shall constitute the whole Board of Directors shall be fixed exclusively by one
or more resolutions adopted by the Board of Directors.

2. Subject to the rights of the holders of any series of Preferred
Stock to elect additional directors under specified circumstances, following the
closing of the initial public offering pursuant to an effective registration
statement under the Securities Act covering the offer and sale of Common Stock
to the public (the "Initial Public Offering"), the directors shall be divided
into three classes designated as Class I, Class II and Class III, respectively.
Directors shall be assigned to each class in accordance with a resolution or
resolutions adopted by the Board of Directors. At the first annual meeting of
stockholders following the closing of the Initial Public Offering, the term of
office of

2.
<PAGE>

the Class I directors shall expire and Class I directors shall be elected for a
full term of three years. At the second annual meeting of stockholders following
the Closing of the Initial Public Offering, the term of office of the Class II
directors shall expire and Class II directors shall be elected for a full term
of three years. At the third annual meeting of stockholders following the
Closing of the Initial Public Offering, the term of office of the Class III
directors shall expire and Class III directors shall be elected for a full term
of three years. At each succeeding annual meeting of stockholders, directors
shall be elected for a full term of three years to succeed the directors of the
class whose terms expire at such annual meeting.

Each director shall serve beyond the term specified until his
successor is duly elected and qualified or until his death, resignation or
removal. No decrease in the number of directors constituting the Board of
Directors shall shorten the term of any incumbent director.

3. Subject to the rights of the holders of any series of Preferred
Stock, a director may be removed only for cause and only by the affirmative vote
of the holders of a majority of the voting power of all the then-outstanding
shares of voting stock of the Corporation, entitled to vote at an election of
directors (the "Voting Stock").

4. Subject to the rights of the holders of any series of Preferred
Stock, any vacancies on the Board of Directors resulting from death,
resignation, disqualification, removal or other causes and any newly created
directorships resulting from any increase in the number of directors, shall,
unless the Board of Directors determines by resolution that any such vacancies
or newly created directorships shall be filled by the stockholders, be filled
only by the affirmative vote of a majority of the directors then in office, even
though less than a quorum of the Board of Directors, and not by the
stockholders. Any director elected in accordance with the preceding sentence
shall hold office for the remainder of the full term of the director for which
the vacancy was created or occurred and until such director's successor shall
have been elected and qualified.

5. The Board of Directors shall designate and empower committees of
the Board of Directors, shall elect and empower the officers of the Corporation,
may appoint and empower other officers and agents of the Corporation, and shall
determine the time, place and notice of Board meetings, quorum and voting
requirements, and the manner of taking Board action. Subject to the other
provisions of this Article V, the Board of Directors shall determine the rights,
powers, duties, rules and procedures that shall affect the directors' power to
manage and direct the business and affairs of the Corporation. Notwithstanding
any other provision of this Certificate of Incorporation, the powers specified
in this Article V shall be exercised only by or under the direction of the Board
of Directors and may be exercised or expressed in the form of resolution, Bylaw
or

3.
<PAGE>

other form of determination or exercise; and the form of the exercise of the
power shall not derogate the status of the power exercised.

B. 1. Subject to paragraph (h) of Section 43 of the Bylaws, the Bylaws
may be altered or amended or new Bylaws adopted by the affirmative vote of at
least sixty-six and two-thirds percent (66-2/3%) of the voting power of all of
the then-outstanding shares of the Voting Stock. The Board of Directors shall
also have the power to adopt, amend, or repeal Bylaws.

2. The directors of the Corporation need not be elected by written
ballot unless the Bylaws so provide.

3. No action shall be taken by the stockholders of the Corporation
except at an annual or special meeting of stockholders called in accordance with
the Bylaws or by written consent of stockholders in accordance with the Bylaws
prior to the closing of the Initial Public Offering, and following the closing
of the Initial Public Offering no action shall be taken by the stockholders by
written consent.

4. Special meetings of the stockholders of the Corporation may be
called, for any purpose or purposes, by (i) the Chairman of the Board of
Directors, (ii) the Chief Executive Officer, or (iii) the Board of Directors
pursuant to a resolution adopted by a majority of the total number of authorized
directors (whether or not there exist any vacancies in previously authorized
directorships at the time any such resolution is presented to the Board of
Directors for adoption), and shall be held at such place, on such date, and at
such time as the Board of Directors shall fix.

5. Advance notice of stockholder nominations for the election of
directors and of business to be brought by stockholders before any meeting of
the stockholders of the Corporation shall be given in the manner provided in the
Bylaws of the Corporation.

VI.

A. A director of the Corporation shall not be personally liable to the
Corporation or its stockholders for monetary damages for any breach of fiduciary
duty as a director, except for liability (i) for any breach of the director's
duty of loyalty to the Corporation or its stockholders, (ii) for acts or
omissions not in good faith or that involve intentional misconduct or a knowing
violation of law (iii) under Section 174 of the Delaware General Corporation
Law, or (iv) for any transaction from which the director derived an improper
personal benefit. If the Delaware General Corporation Law is amended after
approval by the stockholders of this Article to authorize corporate action
further eliminating or limiting the personal liability of directors, then the
liability of a

4.
<PAGE>

director shall be eliminated or limited to the fullest extent permitted by the
Delaware General Corporation Law, as so amended.

B. Any repeal or modification of this Article VI shall be prospective and
shall not affect the rights under this Article VI in effect at the time of the
alleged occurrence of any act or omission to act giving rise to liability or
indemnification.

VII.

A. The Corporation reserves the right to amend, alter, change or repeal
any provision contained in this Certificate of Incorporation, in the manner now
or hereafter prescribed by statute, except as provided in Section B of this
Article VII, and all rights conferred upon the stockholders herein are granted
subject to this reservation.

B. Notwithstanding any other provisions of this Certificate of
Incorporation or any provision of law that might otherwise permit a lesser vote
or no vote, but in addition to any affirmative vote of the holders of any
particular class or series of the Voting Stock required by law, this Certificate
of Incorporation or any Preferred Stock Designation, the affirmative vote of the
holders of at least sixty-six and two-thirds percent (66-2/3%) of the voting
power of all of the then-outstanding shares of the Voting Stock, voting together
as a single class, shall be required to alter, amend or repeal Articles V, VI
and VII.

<PAGE>
EXHIBIT 3.5

BYLAWS

CELL PATHWAYS, INC.

(A DELAWARE CORPORATION)
<PAGE>

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
Article I. Offices........................................................................................... 1
Section 1. Registered Office............................................................................ 1
Section 2. Other Offices................................................................................ 1
Article II Corporate Seal.................................................................................... 1
Section 3. Corporate Seal............................................................................... 1
Article III. Stockholders' Meetings............................................................................ 1
Section 4. Place of Meetings............................................................................ 1
Section 5. Annual Meeting............................................................................... 2
Section 6. Special Meetings............................................................................. 4
Section 7. Notice of Meetings........................................................................... 4
Section 8. Quorum....................................................................................... 5
Section 9. Adjournment and Notice of Adjourned Meetings................................................. 5
Section 10. Voting Rights................................................................................ 6
Section 11. Joint Owners of Stock........................................................................ 6
Section 12. List of Stockholders......................................................................... 6
Section 13. Action Without Meeting....................................................................... 6
Section 14. Organization................................................................................. 7
Article IV. Directors......................................................................................... 8
Section 15. Number and Term of Office.................................................................... 8
Section 16. Powers....................................................................................... 8
Section 17. Classes of Directors......................................................................... 8
Section 18. Vacancies.................................................................................... 9
Section 19. Resignation.................................................................................. 9
Section 20. Removal...................................................................................... 9
Section 21. Meetings..................................................................................... 10
Section 22. Quorum and Voting............................................................................ 11
Section 23. Action Without Meeting....................................................................... 11
Section 24. Fees and Compensation........................................................................ 11
Section 25. Committees................................................................................... 12
Section 26. Organization................................................................................. 13
Article V. Officers.......................................................................................... 13
Section 27. Officers Designated.......................................................................... 13
Section 28. Tenure and Duties of Officers................................................................ 13
Section 29. Delegation of Authority...................................................................... 15
</TABLE>

i.
<PAGE>

TABLE OF CONTENTS
(CONTINUED)

<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
Section 30. Resignations................................................................................. 15
Section 31. Removal...................................................................................... 15
Article VI. Execution Of Corporate Instruments And Voting Of Securities Owned By The Corporation.............. 15
Section 32. Execution of Corporate Instruments........................................................... 15
Section 33. Voting of Securities Owned by the Corporation................................................ 16
Article VII. Shares of Stock................................................................................... 16
Section 34. Form and Execution of Certificates........................................................... 16
Section 35. Lost Certificates............................................................................ 17
Section 36. Transfers.................................................................................... 17
Section 37. Fixing Record Dates.......................................................................... 17
Section 38. Registered Stockholders...................................................................... 19
Article VIII. Other Securities of the Corporation............................................................... 19
Section 39. Execution of Other Securities................................................................ 19
Article IX. Dividends......................................................................................... 20
Section 40. Declaration of Dividends..................................................................... 20
Section 41. Dividend Reserve............................................................................. 20
Article X. Fiscal Year....................................................................................... 20
Section 42. Fiscal Year.................................................................................. 20
Article XI. Indemnification................................................................................... 20
Section 43. Indemnification of Directors, Executive Officers, Other Officers, Employees and Other Agents. 20
Article XII. Notices........................................................................................... 24
Section 44. Notices...................................................................................... 24
Article XIII. Amendments........................................................................................ 26
Section 45. Amendments................................................................................... 26
Article XIV. Loans to Officers................................................................................. 26
Section 46. Loans to Officers............................................................................ 26
</TABLE>

ii.
<PAGE>

BYLAWS

CELL PATHWAYS, INC.

(A DELAWARE CORPORATION)

ARTICLE I

OFFICES

SECTION 1. REGISTERED OFFICE. The registered office of the
corporation in the State of Delaware shall be in the City of Wilmington, County
of New Castle.

SECTION 2. OTHER OFFICES. The corporation shall also have and
maintain an office or principal place of business at such place as may be fixed
by the Board of Directors, and may also have offices at such other places, both
within and without the State of Delaware as the Board of Directors may from time
to time determine or the business of the corporation may require.

ARTICLE II

CORPORATE SEAL

SECTION 3. CORPORATE SEAL. The corporate seal shall consist of a die
bearing the name of the corporation and the inscription, "Corporate Seal-
Delaware." Said seal may be used by causing it or a facsimile thereof to be
impressed or affixed or reproduced or otherwise.

ARTICLE III

STOCKHOLDERS' MEETINGS

SECTION 4. PLACE OF MEETINGS. Meetings of the stockholders of the
corporation shall be held at such place, either within or without the State of
Delaware, as may be designated from time to time by the Board of Directors, or,
if not so designated, then at the office of the corporation required to be
maintained pursuant to Section 2 hereof.

1.
<PAGE>

SECTION 5. ANNUAL MEETING.

(A) The annual meeting of the stockholders of the corporation,
for the purpose of election of directors and for such other business as may
lawfully come before it, shall be held on such date and at such time as may be
designated from time to time by the Board of Directors.

(B) At an annual meeting of the stockholders, only such business
shall be conducted as shall have been properly brought before the meeting. To be
properly brought before an annual meeting, business must be: (A) specified in
the notice of meeting (or any supplement thereto) given by or at the direction
of the Board of Directors, (B) otherwise properly brought before the meeting by
or at the direction of the Board of Directors, or (C) otherwise properly brought
before the meeting by a stockholder. For business to be properly brought before
an annual meeting by a stockholder, the stockholder must have given timely
notice thereof in writing to the Secretary of the corporation. To be timely, a
stockholder's notice must be delivered to or mailed and received at the
principal executive offices of the corporation not later than the close of
business on the sixtieth (60th) day nor earlier than the close of business on
the ninetieth (90th) day prior to the first anniversary of the preceding year's
annual meeting; provided, however, that in the event that no annual meeting was
held in the previous year or the date of the annual meeting has been changed by
more than thirty (30) days from the date contemplated at the time of the
previous year's proxy statement, notice by the stockholder to be timely must be
so received not earlier than the close of business on the ninetieth (90th) day
prior to such annual meeting and not later than the close of business on the
later of the sixtieth (60th) day prior to such annual meeting or, in the event
public announcement of the date of such annual meeting is first made by the
corporation fewer than seventy (70) days prior to the date of such annual
meeting, the close of business on the tenth (10th) day following the day on
which public announcement of the date of such meeting is first made by the
corporation. A stockholder's notice to the Secretary shall set forth as to each
matter the stockholder proposes to bring before the annual meeting: (i) a brief
description of the business desired to be brought before the annual meeting and
the reasons for conducting such business at the annual meeting, (ii) the name
and address, as they appear on the corporation's books, of the stockholder
proposing such business, (iii) the class and number of shares of the corporation
that are beneficially owned by the stockholder, (iv) any material interest of
the stockholder in such business and (v) any other information that is required
to be provided by the stockholder pursuant to Regulation 14A under the
Securities Exchange Act of 1934, as amended (the "1934 Act"), in his capacity as
a proponent to a stockholder proposal. Notwithstanding the foregoing, in order
to include information with respect to a stockholder proposal in the proxy
statement and form of proxy for a stockholder's meeting, stockholders must
provide notice as required by the regulations promulgated under the 1934 Act.

2.
<PAGE>

Notwithstanding anything in these Bylaws to the contrary, no business shall be
conducted at any annual meeting except in accordance with the procedures set
forth in this paragraph (b). The chairman of the annual meeting shall, if the
facts warrant, determine and declare at the meeting that business was not
properly brought before the meeting and in accordance with the provisions of
this paragraph (b), and, if he should so determine, he shall so declare at the
meeting that any such business not properly brought before the meeting shall not
be transacted.

(C) Only persons who are nominated in accordance with the
procedures set forth in this paragraph (c) shall be eligible for election as
directors. Nominations of persons for election to the Board of Directors of the
corporation may be made at a meeting of stockholders by or at the direction of
the Board of Directors or by any stockholder of the corporation entitled to vote
in the election of directors at the meeting who complies with the notice
procedures set forth in this paragraph (c). Such nominations, other than those
made by or at the direction of the Board of Directors, shall be made pursuant to
timely notice in writing to the Secretary of the corporation in accordance with
the provisions of paragraph (b) of this Section 5. Such stockholder's notice
shall set forth (i) as to each person, if any, whom the stockholder proposes to
nominate for election or re-election as a director: (A) the name, age, business
address and residence address of such person, (B) the principal occupation or
employment of such person, (C) the class and number of shares of the corporation
that are beneficially owned by such person, (D) a description of all
arrangements or understandings between the stockholder and each nominee and any
other person or persons (naming such person or persons) pursuant to which the
nominations are to be made by the stockholder, and (E) any other information
relating to such person that is required to be disclosed in solicitations of
proxies for election of directors, or is otherwise required, in each case
pursuant to Regulation 14A under the 1934 Act (including without limitation such
person's written consent to being named in the proxy statement, if any, as a
nominee and to serving as a director if elected); and (ii) as to such
stockholder giving notice, the information required to be provided pursuant to
paragraph (b) of this Section 5. At the request of the Board of Directors, any
person nominated by a stockholder for election as a director shall furnish to
the Secretary of the corporation that information required to be set forth in
the stockholder's notice of nomination that pertains to the nominee. No person
shall be eligible for election as a director of the corporation unless nominated
in accordance with the procedures set forth in this paragraph (c). The chairman
of the meeting shall, if the facts warrant, determine and declare at the meeting
that a nomination was not made in accordance with the procedures prescribed by
these Bylaws, and if he should so determine, he shall so declare at the meeting,
and the defective nomination shall be disregarded.

3.
<PAGE>

(D) For purposes of this Section 5, "public announcement" shall
mean disclosure in a press release reported by the Dow Jones News Service,
Associated Press or comparable national news service or in a document publicly
filed by the corporation with the Securities and Exchange Commission pursuant to
Section 13, 14 or 15(d) of the 1934 Act.

SECTION 6. SPECIAL MEETINGS.

(A) Special meetings of the stockholders of the corporation may
be called, for any purpose or purposes, by (i) the Chairman of the Board of
Directors, (ii) the Chief Executive Officer, or (iii) the Board of Directors
pursuant to a resolution adopted by a majority of the total number of authorized
directors (whether or not there exist any vacancies in previously authorized
directorships at the time any such resolution is presented to the Board of
Directors for adoption), and shall be held at such place, on such date, and at
such time as the Board of Directors, shall fix.

(B) If a special meeting is called by any person or persons
other than the Board of Directors, the request shall be in writing, specifying
the general nature of the business proposed to be transacted, and shall be
delivered personally or sent by registered mail or by telegraphic or other
facsimile transmission to the Chairman of the Board of Directors, the Chief
Executive Officer, or the Secretary of the corporation. No business may be
transacted at such special meeting otherwise than specified in such notice. The
Board of Directors shall determine the time and place of such special meeting,
which shall be held not less than thirty-five (35) nor more than one hundred
twenty (120) days after the date of the receipt of the request. Upon
determination of the time and place of the meeting, the officer receiving the
request shall cause notice to be given to the stockholders entitled to vote, in
accordance with the provisions of Section 7 of these Bylaws. If the notice is
not given within sixty (60) days after the receipt of the request, the person or
persons requesting the meeting may set the time and place of the meeting and
give the notice. Nothing contained in this paragraph (b) shall be construed as
limiting, fixing, or affecting the time when a meeting of stockholders called by
action of the Board of Directors may be held.

SECTION 7. NOTICE OF MEETINGS. Except as otherwise provided by law
or the Certificate of Incorporation, written notice of each meeting of
stockholders shall be given not less than ten (10) nor more than sixty (60) days
before the date of the meeting to each stockholder entitled to vote at such
meeting, such notice to specify the place, date and hour and purpose or purposes
of the meeting. Notice of the time, place and purpose of any meeting of
stockholders may be waived in writing, signed by the person entitled to notice
thereof, either before or after such meeting, and will be waived by any
stockholder by his attendance thereat in person or by proxy, except when the
stockholder attends a

4.
<PAGE>

meeting for the express purpose of objecting, at the beginning of the meeting,
to the transaction of any business because the meeting is not lawfully called or
convened. Any stockholder so waiving notice of such meeting shall be bound by
the proceedings of any such meeting in all respects as if due notice thereof had
been given.

SECTION 8. QUORUM. At all meetings of stockholders, except where
otherwise provided by statute or by the Certificate of Incorporation, or by
these Bylaws, the presence, in person or by proxy duly authorized, of the
holders of a majority of the outstanding shares of stock entitled to vote shall
constitute a quorum for the transaction of business. In the absence of a
quorum, any meeting of stockholders may be adjourned, from time to time, either
by the chairman of the meeting or by vote of the holders of a majority of the
shares represented thereat, but no other business shall be transacted at such
meeting. The stockholders present at a duly called or convened meeting, at
which a quorum is present, may continue to transact business until adjournment,
notwithstanding the withdrawal of enough stockholders to leave less than a
quorum. Except as otherwise provided by law, the Certificate of Incorporation
or these Bylaws, all action taken by the holders of a majority of the vote cast,
excluding abstentions, at any meeting at which a quorum is present shall be
valid and binding upon the corporation; provided, however, that directors shall
be elected by a plurality of the votes of the shares present in person or
represented by proxy at the meeting and entitled to vote on the election of
directors. Where a separate vote by a class or classes or series is required,
except where otherwise provided by the statute or by the Certificate of
Incorporation or these Bylaws, a majority of the outstanding shares of such
class or classes or series, present in person or represented by proxy, shall
constitute a quorum entitled to take action with respect to that vote on that
matter and, except where otherwise provided by the statute or by the Certificate
of Incorporation or these Bylaws, the affirmative vote of the majority
(plurality, in the case of the election of directors) of the votes cast,
including abstentions, by the holders of shares of such class or classes or
series shall be the act of such class or classes or series.

SECTION 9. ADJOURNMENT AND NOTICE OF ADJOURNED MEETINGS. Any meeting
of stockholders, whether annual or special, may be adjourned from time to time
either by the chairman of the meeting or by the vote of a majority of the shares
casting votes, excluding abstentions. When a meeting is adjourned to another
time or place, notice need not be given of the adjourned meeting if the time and
place thereof are announced at the meeting at which the adjournment is taken.
At the adjourned meeting, the corporation may transact any business that might
have been transacted at the original meeting. If the adjournment is for more
than thirty (30) days or if after the adjournment a new record date is fixed for
the adjourned meeting, a notice of the adjourned meeting shall be given to each
stockholder of record entitled to vote at the meeting.

5.
<PAGE>

SECTION 10. VOTING RIGHTS. For the purpose of determining those
stockholders entitled to vote at any meeting of the stockholders, except as
otherwise provided by law, only persons in whose names shares stand on the stock
records of the corporation on the record date, as provided in Section 12 of
these Bylaws, shall be entitled to vote at any meeting of stockholders. Every
person entitled to vote or execute consents shall have the right to do so either
in person or by an agent or agents authorized by a proxy granted in accordance
with Delaware law. An agent so appointed need not be a stockholder. No proxy
shall be voted after three (3) years from its date of creation unless the proxy
provides for a longer period.

SECTION 11. JOINT OWNERS OF STOCK. If shares or other securities
having voting power stand of record in the names of two (2) or more persons,
whether fiduciaries, members of a partnership, joint tenants, tenants in common,
tenants by the entirety, or otherwise, or if two (2) or more persons have the
same fiduciary relationship respecting the same shares, unless the Secretary is
given written notice to the contrary and is furnished with a copy of the
instrument or order appointing them or creating the relationship wherein it is
so provided, their acts with respect to voting shall have the following effect:
(a) if only one (1) votes, his act binds all; (b) if more than one (1) votes,
the act of the majority so voting binds all; (c) if more than one (1) votes, but
the vote is evenly split on any particular matter, each faction may vote the
securities in question proportionally, or may apply to the Delaware Court of
Chancery for relief as provided in the General Corporation Law of Delaware,
Section 217(b). If the instrument filed with the Secretary shows that any such
tenancy is held in unequal interests, a majority or even-split for the purpose
of subsection (c) shall be a majority or even-split in interest.

SECTION 12. LIST OF STOCKHOLDERS. The Secretary shall prepare and
make, at least ten (10) days before every meeting of stockholders, a complete
list of the stockholders entitled to vote at said meeting, arranged in
alphabetical order, showing the address of each stockholder and the number of
shares registered in the name of each stockholder. Such list shall be open to
the examination of any stockholder, for any purpose germane to the meeting,
during ordinary business hours, for a period of at least ten (10) days prior to
the meeting, either at a place within the city where the meeting is to be held,
which place shall be specified in the notice of the meeting, or, if not
specified, at the place where the meeting is to be held. The list shall be
produced and kept at the time and place of meeting during the whole time thereof
and may be inspected by any stockholder who is present.

SECTION 13. ACTION WITHOUT MEETING.

(C) Unless otherwise provided in the Certificate of
Incorporation, any action required by statute to be taken at any annual or
special meeting of the stockholders,

6.
<PAGE>

or any action that may be taken at any annual or special meeting of the
stockholders, may be taken without a meeting, without prior notice and without a
vote, if a consent in writing, setting forth the action so taken, shall be
signed by the holders of outstanding stock having not less than the minimum
number of votes that would be necessary to authorize or take such action at a
meeting at which all shares entitled to vote thereon were present and voted.

(D) Every written consent shall bear the date of signature of
each stockholder who signs the consent, and no written consent shall be
effective to take the corporate action referred to therein unless, within sixty
(60) days of the earliest dated consent delivered to the corporation in the
manner herein required, written consents signed by a sufficient number of
stockholders to take action are delivered to the corporation by delivery to its
registered office in the State of Delaware, its principal place of business or
an officer or agent of the corporation having custody of the book in which
proceedings of meetings of stockholders are recorded. Delivery made to a
corporation's registered office shall be by hand or by certified or registered
mail, return receipt requested.

(E) Prompt notice of the taking of the corporate action without
a meeting by less than unanimous written consent shall be given to those
stockholders who have not consented in writing. If the action that is consented
to is such as would have required the filing of a certificate under any section
of the General Corporation Law of the State of Delaware if such action had been
voted on by stockholders at a meeting thereof, then the certificate filed under
such section shall state, in lieu of any statement required by such section
concerning any vote of stockholders, that written consent has been given in
accordance with Section 228 of the General Corporation Law of Delaware.

(F) Notwithstanding the foregoing, no such action by written
consent may be taken following the closing of the initial public offering
pursuant to an effective registration statement under the Securities Act of
1933, as amended (the "1933 Act"), covering the offer and sale of Common Stock
of the corporation (the "Initial Public Offering").

SECTION 14. ORGANIZATION.

(A) At every meeting of stockholders, the Chairman of the Board
of Directors, or, if a Chairman has not been appointed or is absent, the
President, or, if the President is absent, a chairman of the meeting chosen by a
majority in interest of the stockholders entitled to vote, present in person or
by proxy, shall act as chairman. The Secretary, or, in his absence, an Assistant
Secretary directed to do so by the President, shall act as secretary of the
meeting.

7.
<PAGE>

(B) The Board of Directors of the corporation shall be entitled
to make such rules or regulations for the conduct of meetings of stockholders as
it shall deem necessary, appropriate or convenient. Subject to such rules and
regulations of the Board of Directors, if any, the chairman of the meeting shall
have the right and authority to prescribe such rules, regulations and procedures
and to do all such acts as, in the judgment of such chairman, are necessary,
appropriate or convenient for the proper conduct of the meeting, including,
without limitation, establishing an agenda or order of business for the meeting,
rules and procedures for maintaining order at the meeting and the safety of
those present, limitations on participation in such meeting to stockholders of
record of the corporation and their duly authorized and constituted proxies and
such other persons as the chairman shall permit, restrictions on entry to the
meeting after the time fixed for the commencement thereof, limitations on the
time allotted to questions or comments by participants and regulation of the
opening and closing of the polls for balloting on matters that are to be voted
on by ballot. Unless and to the extent determined by the Board of Directors or
the chairman of the meeting, meetings of stockholders shall not be required to
be held in accordance with rules of parliamentary procedure.

ARTICLE IV

DIRECTORS

SECTION 15. NUMBER AND TERM OF OFFICE. The authorized number of
directors of the corporation shall be fixed in accordance with the Certificate
of Incorporation. Directors need not be stockholders unless so required by the
Certificate of Incorporation. If for any cause, the directors shall not have
been elected at an annual meeting, they may be elected as soon thereafter as
convenient at a special meeting of the stockholders called for that purpose in
the manner provided in these Bylaws.

SECTION 16. POWERS. The powers of the corporation shall be
exercised, its business conducted and its property controlled by the Board of
Directors, except as may be otherwise provided by statute or by the Certificate
of Incorporation.

SECTION 17. CLASSES OF DIRECTORS. Subject to the rights of the
holders of any series of Preferred Stock to elect additional directors under
specified circumstances, following the closing of the Initial Public Offering,
the directors shall be divided into three classes designated as Class I, Class
II and Class III, respectively. Directors shall be assigned to each class in
accordance with a resolution or resolutions adopted by the Board of Directors.
At the first annual meeting of stockholders following the closing of the Initial
Public Offering, the term of office of the Class I directors shall expire and
Class I directors shall be elected for a full term of three years. At the
second annual meeting of stockholders following the Closing of the Initial
Public Offering, the term of office of the

8.
<PAGE>

Class II directors shall expire and Class II directors shall be elected for a
full term of three years. At the third annual meeting of stockholders following
the Closing of the Initial Public Offering, the term of office of the Class III
directors shall expire and Class III directors shall be elected for a full term
of three years. At each succeeding annual meeting of stockholders, directors
shall be elected for a full term of three years to succeed the directors of the
class whose terms expire at such annual meeting.

Notwithstanding the foregoing provisions of this Article, each
director shall serve until his successor is duly elected and qualified or until
his death, resignation or removal. No decrease in the number of directors
constituting the Board of Directors shall shorten the term of any incumbent
director.

SECTION 18. VACANCIES. Unless otherwise provided in the Certificate
of Incorporation, any vacancies on the Board of Directors resulting from death,
resignation, disqualification, removal or other causes and any newly created
directorships resulting from any increase in the number of directors, shall
unless the Board of Directors determines by resolution that any such vacancies
or newly created directorships shall be filled by stockholders, be filled only
by the affirmative vote of a majority of the directors then in office, even
though less than a quorum of the Board of Directors. Any director elected in
accordance with the preceding sentence shall hold office for the remainder of
the full term of the director for which the vacancy was created or occurred and
until such director's successor shall have been elected and qualified. A
vacancy in the Board of Directors shall be deemed to exist under this Bylaw in
the case of the death, removal or resignation of any director.

SECTION 19. RESIGNATION. Any director may resign at any time by
delivering his written resignation to the Secretary, such resignation to specify
whether it will be effective at a particular time, upon receipt by the Secretary
or at the pleasure of the Board of Directors. If no such specification is made,
it shall be deemed effective at the pleasure of the Board of Directors. When
one or more directors shall resign from the Board of Directors, effective at a
future date, a majority of the directors then in office, including those who
have so resigned, shall have power to fill such vacancy or vacancies, the vote
thereon to take effect when such resignation or resignations shall become
effective, and each Director so chosen shall hold office for the unexpired
portion of the term of the Director whose place shall be vacated and until his
successor shall have been duly elected and qualified.

SECTION 20. REMOVAL. Subject to the rights of the holders of any
series of Preferred Stock, no director shall be removed without cause. Subject
to any limitations imposed by law, the Board of Directors or any individual
director may be removed from office at any time with cause by the affirmative
vote of the holders of a majority of the

9.
<PAGE>

voting power of all the then-outstanding shares of voting stock of the
corporation, entitled to vote at an election of directors (the "Voting Stock").

SECTION 21. MEETINGS.

(A) ANNUAL MEETINGS. The annual meeting of the Board of
Directors shall be held immediately before or after the annual meeting of
stockholders and at the place where such meeting is held. No notice of an annual
meeting of the Board of Directors shall be necessary and such meeting shall be
held for the purpose of electing officers and transacting such other business as
may lawfully come before it.

(B) REGULAR MEETINGS. Except as hereinafter otherwise provided,
regular meetings of the Board of Directors shall be held in the office of the
corporation required to be maintained pursuant to Section 2 hereof. Unless
otherwise restricted by the Certificate of Incorporation, regular meetings of
the Board of Directors may also be held at any place within or without the State
of Delaware that has been designated by resolution of the Board of Directors or
the written consent of all directors.

(C) SPECIAL MEETINGS. Unless otherwise restricted by the
Certificate of Incorporation, special meetings of the Board of Directors may be
held at any time and place within or without the State of Delaware whenever
called by the Chairman of the Board, the President or any two of the directors.

(D) CHAIRMAN OF THE BOARD OF DIRECTORS. The Board of Directors
may choose a Chairman of the Board of Directors. When present, the Chairman of
the Board of Directors shall preside at all meetings of the stockholders and the
Board of Directors. The Chairman of the Board of Directors shall perform other
duties commonly incident to his office and shall also perform such other duties
and have such other powers as the Board of Directors shall designate from time
to time.

(E) TELEPHONE MEETINGS. Any member of the Board of Directors,
or of any committee thereof, may participate in a meeting by means of conference
telephone or similar communications equipment by means of which all persons
participating in the meeting can hear each other, and participation in a meeting
by such means shall constitute presence in person at such meeting.

(F) NOTICE OF MEETINGS. Notice of the time and place of all
special meetings of the Board of Directors shall be orally or in writing, by
telephone, facsimile, telegraph or telex, during normal business hours, at least
twenty-four (24) hours before the date and time of the meeting, or sent in
writing to each director by first class mail, charges prepaid, at least three
(3) days before the date of the meeting. Notice of any meeting may be waived in
writing at any time before or after the meeting and will be

10.
<PAGE>

waived by any director by attendance thereat, except when the director attends
the meeting for the express purpose of objecting, at the beginning of the
meeting, to the transaction of any business because the meeting is not lawfully
called or convened.

(G) WAIVER OF NOTICE. The transaction of all business at any
meeting of the Board of Directors, or any committee thereof, however called or
noticed, or wherever held, shall be as valid as though had at a meeting duly
held after regular call and notice, if a quorum be present and if, either before
or after the meeting, each of the directors not present shall sign a written
waiver of notice. All such waivers shall be filed with the corporate records or
made a part of the minutes of the meeting.

SECTION 22. QUORUM AND VOTING.

(A) Unless the Certificate of Incorporation requires a greater
number and except with respect to indemnification questions arising under
Section 43 hereof, for which a quorum shall be one-third of the exact number of
directors fixed from time to time in accordance with the Certificate of
Incorporation, a quorum of the Board of Directors shall consist of a majority of
the exact number of directors fixed from time to time by the Board of Directors
in accordance with the Certificate of Incorporation; provided, however, at any
meeting whether a quorum be present or otherwise, a majority of the directors
present may adjourn from time to time until the time fixed for the next regular
meeting of the Board of Directors, without notice other than by announcement at
the meeting.

(B) At each meeting of the Board of Directors at which a quorum
is present, all questions and business shall be determined by the affirmative
vote of a majority of the directors present, unless a different vote be required
by law, the Certificate of Incorporation or these Bylaws.

SECTION 23. ACTION WITHOUT MEETING. Unless otherwise restricted by
the Certificate of Incorporation or these Bylaws, any action required or
permitted to be taken at any meeting of the Board of Directors or of any
committee thereof may be taken without a meeting, if all members of the Board of
Directors or committee, as the case may be, consent thereto in writing, and such
writing or writings are filed with the minutes of proceedings of the Board of
Directors or committee.

SECTION 24. FEES AND COMPENSATION. Directors shall be entitled to
such compensation for their services as may be approved by the Board of
Directors, including, if so approved, by resolution of the Board of Directors, a
fixed sum and expenses of attendance, if any, for attendance at each regular or
special meeting of the Board of Directors and at any meeting of a committee of
the Board of Directors. Nothing herein

11.
<PAGE>

contained shall be construed to preclude any director from serving the
corporation in any other capacity as an officer, agent, employee, or otherwise
and receiving compensation therefor.

SECTION 25. COMMITTEES.

(A) EXECUTIVE COMMITTEE. The Board of Directors may appoint an
Executive Committee to consist of one (1) or more members of the Board of
Directors. The Executive Committee, to the extent permitted by law and provided
in the resolution of the Board of Directors shall have and may exercise all the
powers and authority of the Board of Directors in the management of the business
and affairs of the corporation, and may authorize the seal of the corporation to
be affixed to all papers that may require it; but no such committee shall have
the power or authority in reference to (i) approving or adopting, or
recommending to the stockholders, any action or matter expressly required by the
General Corporation Law of Delaware to be submitted to stockholders for
approval, or (ii) adopting, amending or repealing any bylaw of the corporation.

(B) OTHER COMMITTEES. The Board of Directors may from time to
time appoint such other committees as may be permitted by law. Such other
committees appointed by the Board of Directors shall consist of one (1) or more
members of the Board of Directors and shall have such powers and perform such
duties as may be prescribed by the resolution or resolutions creating such
committees, but in no event shall such committee have the powers denied to the
Executive Committee in these Bylaws.

(C) TERM. The Board of Directors, subject to the provisions of
subsections (a) or (b) of this Bylaw, may at any time increase or decrease the
number of members of a committee or the terms of such members or terminate the
existence of a committee. The membership of a committee member shall terminate
on the date of his death or voluntary resignation from the committee or from the
Board of Directors. The Board of Directors may at any time for any reason remove
any individual committee member and the Board of Directors may fill any
committee vacancy created by death, resignation, removal or increase in the
number of members of the committee. The Board of Directors may designate one or
more directors as alternate members of any committee, who may replace any absent
or disqualified member at any meeting of the committee.

(D) MEETINGS. Unless the Board of Directors shall otherwise
provide, regular meetings of the Executive Committee or any other committee
appointed pursuant to this Section 25 shall be held at such times and places as
are determined by the Board of Directors, or by any such committee, and when
notice thereof has been given to each member of such committee, no further
notice of such regular meetings need be given thereafter. Special meetings of
any such committee may be held at any place that has

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been determined from time to time by such committee, and may be called by any
director who is a member of such committee, upon written notice to the members
of such committee of the time and place of such special meeting given in the
manner provided for the giving of written notice to members of the Board of
Directors of the time and place of special meetings of the Board of Directors.
Notice of any special meeting of any committee may be waived in writing at any
time before or after the meeting and will be waived by any director by
attendance thereat, except when the director attends such special meeting for
the express purpose of objecting, at the beginning of the meeting, to the
transaction of any business because the meeting is not lawfully called or
convened. A majority of the authorized number of members of any such committee
shall constitute a quorum for the transaction of business, and the act of a
majority of those present at any meeting at which a quorum is present shall be
the act of such committee.

SECTION 26. ORGANIZATION. At every meeting of the directors, the
Chairman of the Board of Directors, or, if a Chairman has not been appointed or
is absent, the Chief Executive Officer, or if the Chief Executive Officer is
absent, the President, or if the President is absent, the most senior Vice
President, or, in the absence of any such officer, a chairman of the meeting
chosen by a majority of the directors present, shall preside over the meeting.
The Secretary, or in his absence, an Assistant Secretary directed to do so by
the President, shall act as secretary of the meeting.

ARTICLE V

OFFICERS

SECTION 27. OFFICERS DESIGNATED. The officers of the corporation
shall include, if and when designated by the Board of Directors, the Chief
Executive Officer, the President, one or more Vice Presidents, the Secretary,
and the Treasurer, all of whom shall be elected at the annual organizational
meeting of the Board of Directors, and such other officers as the Board may
determine from time to time. The Board of Directors may also appoint one or
more Assistant Secretaries, Assistant Treasurers, Assistant Controllers and such
other officers and agents with such powers and duties as it shall deem
necessary. The Board of Directors may assign such additional titles to one or
more of the officers, such as Chief Financial Officer, Controller or General
Counsel, as it shall deem appropriate. Any one person may hold any number of
offices of the corporation at any one time unless specifically prohibited
therefrom by law. The salaries and other compensation of the officers of the
corporation shall be fixed by or in the manner designated by the Board of
Directors.

SECTION 28. TENURE AND DUTIES OF OFFICERS.

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(A) GENERAL. All officers shall hold office at the pleasure of
the Board of Directors and until their successors shall have been duly elected
and qualified, unless sooner removed. Any officer elected or appointed by the
Board of Directors may be removed at any time by the Board of Directors. If the
office of any officer becomes vacant for any reason, the vacancy may be filled
by the Board of Directors.

(B) DUTIES OF CHIEF EXECUTIVE OFFICER. The Chief Executive
Officer shall preside at all meetings of the stockholders and at all meetings of
the Board of Directors, unless the Chairman of the Board of Directors has been
appointed and is present. Unless some other officer has been elected Chief
Executive Officer of the corporation, the President shall be the chief executive
officer of the corporation. The Chief Executive Officer shall, subject to the
control of the Board of Directors, have general supervision, direction and
control of the business and officers of the corporation. The Chief Executive
Officer shall perform other duties commonly incident to his office and shall
also perform such other duties and have such other powers as the Board of
Directors shall designate from time to time.

(C) DUTIES OF PRESIDENT. The President shall perform such
duties and have such powers as the Board of Directors or the Chief Executive
Officer shall designate from time to time.

(D) DUTIES OF VICE PRESIDENTS. The Vice Presidents may assume
and perform the duties of the President in the absence or disability of the
President or whenever the office of President is vacant. The Vice Presidents
shall perform other duties commonly incident to their office and shall also
perform such other duties and have such other powers as the Board of Directors
or the President shall designate from time to time.

(E) DUTIES OF SECRETARY. The Secretary shall attend all
meetings of the stockholders and of the Board of Directors and any committee
thereof and shall record all acts and proceedings thereof in the minute book of
the corporation. The Secretary shall give notice in conformity with these Bylaws
of all meetings of the stockholders and of all meetings of the Board of
Directors and any committee thereof requiring notice. The Secretary shall
perform all other duties given him in these Bylaws and other duties commonly
incident to his office and shall also perform such other duties and have such
other powers as the Board of Directors shall designate from time to time. The
President may direct any Assistant Secretary to assume and perform the duties of
the Secretary in the absence or disability of the Secretary, and each Assistant
Secretary shall perform other duties commonly incident to his office and shall
also perform such other duties and have such other powers as the Board of
Directors or the President shall designate from time to time.

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(F) DUTIES OF FINANCIAL OFFICERS. One or more financial
officers, as designated by the Board of Directors or the Chief Executive
Officer, shall keep or cause to be kept the books of account of the corporation
in a thorough and proper manner and shall render statements of the financial
affairs of the corporation in such form and as often as required by the Board of
Directors or the Chief Executive Officer. Subject to the order of the Board of
Directors, such financial officers shall have the custody of all funds and
securities of the corporation. The financial officers shall perform other duties
commonly incident to their offices and shall also perform such other duties and
have such other powers as the Board of Directors or the President shall
designate from time to time.

SECTION 29. DELEGATION OF AUTHORITY. The Board of Directors may from
time to time delegate the powers or duties of any officer to any other officer
or agent, notwithstanding any provision hereof.

SECTION 30. RESIGNATIONS. Any officer may resign at any time by
giving written notice to the Board of Directors or to the President or to the
Secretary. Any such resignation shall be effective when received by the person
or persons to whom such notice is given, unless a later time is specified
therein, in which event the resignation shall become effective at such later
time. Unless otherwise specified in such notice, the acceptance of any such
resignation shall not be necessary to make it effective. Any resignation shall
be without prejudice to the rights, if any, of the corporation under any
contract with the resigning officer.

SECTION 31. REMOVAL. Any officer may be removed from office at any
time, either with or without cause, by the affirmative vote of a majority of the
directors in office at the time, or by the unanimous written consent of the
directors in office at the time, or by any committee or superior officers upon
whom such power of removal may have been conferred by the Board of Directors.

ARTICLE VI

EXECUTION OF CORPORATE INSTRUMENTS AND VOTING
OF SECURITIES OWNED BY THE CORPORATION

SECTION 32. EXECUTION OF CORPORATE INSTRUMENTS. The Board of
Directors may, in its discretion, determine the method and designate the
signatory officer or officers, or other person or persons, to execute on behalf
of the corporation any corporate instrument or document, or to sign on behalf of
the corporation the corporate name without limitation, or to enter into
contracts on behalf of the corporation, except where otherwise provided by law
or these Bylaws, and such execution or signature shall be binding upon the
corporation.

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Unless otherwise specifically determined by the Board of Directors or
otherwise required by law, corporate instruments or documents requiring the
corporate seal, and certificates of shares of stock of the corporation, shall be
executed, signed or endorsed by the Chief Executive Officer, or the President or
any Vice President, and by the Secretary or Treasurer or any Assistant Secretary
or Assistant Treasurer. All other instruments and documents requiring the
corporate signature, but not requiring the corporate seal, may be executed as
aforesaid or in such other manner as may be directed by the Board of Directors.

Unless authorized or ratified by the Board of Directors or within the
agency power of an officer, no officer, agent or employee shall have any power
or authority to bind the corporation by any contract or engagement or to pledge
its credit or to render it liable for any purpose or for any amount.

SECTION 33. VOTING OF SECURITIES OWNED BY THE CORPORATION. All
stock and other securities of other corporations owned or held by the
corporation for itself, or for other parties in any capacity, shall be voted,
and all proxies with respect thereto shall be executed, by the person authorized
so to do by resolution of the Board of Directors, or, in the absence of such
authorization, by the Chief Executive Officer, the President, or any Vice
President.

ARTICLE VII

SHARES OF STOCK

SECTION 34. FORM AND EXECUTION OF CERTIFICATES. Certificates for the
shares of stock of the corporation shall be in such form as is consistent with
the Certificate of Incorporation and applicable law. Every holder of stock in
the corporation shall be entitled to have a certificate signed by or in the name
of the corporation by the Chief Executive Officer, or the President or any Vice
President and by the Treasurer or Assistant Treasurer or the Secretary or
Assistant Secretary, certifying the number of shares owned by him in the
corporation. Any or all of the signatures on the certificate may be facsimiles.
In case any officer, transfer agent, or registrar who has signed or whose
facsimile signature has been placed upon a certificate shall have ceased to be
such officer, transfer agent, or registrar before such certificate is issued, it
may be issued with the same effect as if he were such officer, transfer agent,
or registrar at the date of issue. Each certificate shall state upon the face
or back thereof, in full or in summary, all of the powers, designations,
preferences, and rights, and the limitations or restrictions of the shares
authorized to be issued or shall, except as otherwise required by law, set forth
on the face or back a statement that the corporation will furnish without charge
to each stockholder who so requests the powers, designations, preferences and
relative,

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participating, optional, or other special rights of each class of stock or
series thereof and the qualifications, limitations or restrictions of such
preferences and/or rights. Within a reasonable time after the issuance or
transfer of uncertificated stock, the corporation shall send to the registered
owner thereof a written notice containing the information required to be set
forth or stated on certificates pursuant to this section or otherwise required
by law or with respect to this section a statement that the corporation will
furnish without charge to each stockholder who so requests the powers,
designations, preferences and relative participating, optional or other special
rights of each class of stock or series thereof and the qualifications,
limitations or restrictions of such preferences and/or rights. Except as
otherwise expressly provided by law, the rights and obligations of the holders
of certificates representing stock of the same class and series shall be
identical.

SECTION 35. LOST CERTIFICATES. A new certificate or certificates
shall be issued in place of any certificate or certificates theretofore issued
by the corporation alleged to have been lost, stolen, or destroyed, upon the
making of an affidavit of that fact by the person claiming the certificate of
stock to be lost, stolen, or destroyed. The corporation may require, as a
condition precedent to the issuance of a new certificate or certificates, the
owner of such lost, stolen, or destroyed certificate or certificates, or his
legal representative, to advertise the same in such manner as it shall require
or to give the corporation a surety bond in such form and amount as it may
direct as indemnity against any claim that may be made against the corporation
with respect to the certificate alleged to have been lost, stolen, or destroyed.

SECTION 36. TRANSFERS.

(A) Transfers of record of shares of stock of the corporation
shall be made only upon its books by the holders thereof, in person or by
attorney duly authorized, and upon the surrender of a properly endorsed
certificate or certificates for a like number of shares.

(B) The corporation shall have power to enter into and perform
any agreement with any number of stockholders of any one or more classes of
stock of the corporation to restrict the transfer of shares of stock of the
corporation of any one or more classes owned by such stockholders in any manner
not prohibited by the General Corporation Law of Delaware. (Del. Code Ann., tit.
8, (S) 160 (a))

SECTION 37. FIXING RECORD DATES.

(A) In order that the corporation may determine the stockholders
entitled to notice of or to vote at any meeting of stockholders or any
adjournment thereof, the Board of Directors may fix, in advance, a record date,
which record date shall not precede

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the date upon which the resolution fixing the record date is adopted by the
Board of Directors, and which record date shall not be more than sixty (60) nor
less than ten (10) days before the date of such meeting. If no record date is
fixed by the Board of Directors, the record date for determining stockholders
entitled to notice of or to vote at a meeting of stockholders shall be at the
close of business on the day next preceding the day on which notice is given, or
if notice is waived, at the close of business on the day next preceding the day
on which the meeting is held. A determination of stockholders of record entitled
to notice of or to vote at a meeting of stockholders shall apply to any
adjournment of the meeting; provided, however, that the Board of Directors may
fix a new record date for the adjourned meeting.

(B) Prior to the Initial Public Offering, in order that the
corporation may determine the stockholders entitled to consent to corporate
action in writing without a meeting, the Board of Directors may fix a record
date, which record date shall not precede the date upon which the resolution
fixing the record date is adopted by the Board of Directors, and which date
shall not be more than 10 days after the date upon which the resolution fixing
the record date is adopted by the Board of Directors. Any stockholder of record
seeking to have the stockholders authorize or take corporate action by written
consent shall, by written notice to the Secretary, request the Board of
Directors to fix a record date. The Board of Directors shall promptly, but in
all events within 10 days after the date on which such a request is received,
adopt a resolution fixing the record date. If no record date has been fixed by
the Board of Directors within 10 days of the date on which such a request is
received, the record date for determining stockholders entitled to consent to
corporate action in writing without a meeting, when no prior action by the Board
of Directors is required by applicable law, shall be the first date on which a
signed written consent setting forth the action taken or proposed to be taken is
delivered to the corporation by delivery to its registered office in the State
of Delaware, its principal place of business or an officer or agent of the
corporation having custody of the book in which proceedings of meetings of
stockholders are recorded. Delivery made to the corporation's registered office
shall be by hand or by certified or registered mail, return receipt requested.
If no record date has been fixed by the Board of Directors and prior action by
the Board of Directors is required by law, the record date for determining
stockholders entitled to consent to corporate action in writing without a
meeting shall be at the close of business on the day on which the Board of
Directors adopts the resolution taking such prior action.

(C) In order that the corporation may determine the stockholders
entitled to receive payment of any dividend or other distribution or allotment
of any rights or the stockholders entitled to exercise any rights in respect of
any change, conversion or exchange of stock, or for the purpose of any other
lawful action, the Board of Directors may fix, in advance, a record date, which
record date shall not precede the date upon

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which the resolution fixing the record date is adopted, and which record date
shall be not more than sixty (60) days prior to such action. If no record date
is fixed, the record date for determining stockholders for any such purpose
shall be at the close of business on the day on which the Board of Directors
adopts the resolution relating thereto.

SECTION 38. REGISTERED STOCKHOLDERS. The corporation shall be
entitled to recognize the exclusive right of a person registered on its books as
the owner of shares to receive dividends, and to vote as such owner, and shall
not be bound to recognize any equitable or other claim to or interest in such
share or shares on the part of any other person whether or not it shall have
express or other notice thereof, except as otherwise provided by the laws of
Delaware.

ARTICLE VIII

OTHER SECURITIES OF THE CORPORATION

SECTION 39. EXECUTION OF OTHER SECURITIES. All bonds, debentures and
other corporate securities of the corporation, other than stock certificates
(covered in Section 34), may be signed by the Chief Executive Officer, the
President or any Vice President, or such other person as may be authorized by
the Board of Directors, and the corporate seal impressed thereon or a facsimile
of such seal imprinted thereon and attested by the signature of the Secretary or
an Assistant Secretary, or the Chief Financial Officer or Treasurer or an
Assistant Treasurer; provided, however, that where any such bond, debenture or
other corporate security shall be authenticated by the manual signature, or
where permissible facsimile signature, of a trustee under an indenture pursuant
to which such bond, debenture or other corporate security shall be issued, the
signatures of the persons signing and attesting the corporate seal on such bond,
debenture or other corporate security may be the imprinted facsimile of the
signatures of such persons. Interest coupons appertaining to any such bond,
debenture or other corporate security, authenticated by a trustee as aforesaid,
shall be signed by the Treasurer or an Assistant Treasurer of the corporation or
such other person as may be authorized by the Board of Directors, or bear
imprinted thereon the facsimile signature of such person. In case any officer
who shall have signed or attested any bond, debenture or other corporate
security, or whose facsimile signature shall appear thereon or on any such
interest coupon, shall have ceased to be such officer before the bond, debenture
or other corporate security so signed or attested shall have been delivered,
such bond, debenture or other corporate security nevertheless may be adopted by
the corporation and issued and delivered as though the person who signed the
same or whose facsimile signature shall have been used thereon had not ceased to
be such officer of the corporation.

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ARTICLE IX

DIVIDENDS

SECTION 40. DECLARATION OF DIVIDENDS. Dividends upon the capital
stock of the corporation, subject to the provisions of the Certificate of
Incorporation, if any, may be declared by the Board of Directors pursuant to law
at any regular or special meeting. Dividends may be paid in cash, in property,
or in shares of the capital stock, subject to the provisions of the Certificate
of Incorporation.

SECTION 41. DIVIDEND RESERVE. Before payment of any dividend, there
may be set aside out of any funds of the corporation available for dividends
such sum or sums as the Board of Directors from time to time, in their absolute
discretion, think proper as a reserve or reserves to meet contingencies, or for
equalizing dividends, or for repairing or maintaining any property of the
corporation, or for such other purpose as the Board of Directors shall think
conducive to the interests of the corporation, and the Board of Directors may
modify or abolish any such reserve in the manner in which it was created.

ARTICLE X

FISCAL YEAR

SECTION 42. FISCAL YEAR. The fiscal year of the corporation shall be
fixed by resolution of the Board of Directors.

ARTICLE XI

INDEMNIFICATION

SECTION 43. INDEMNIFICATION OF DIRECTORS, EXECUTIVE OFFICERS, OTHER
OFFICERS, EMPLOYEES AND OTHER AGENTS.

(A) DIRECTORS AND EXECUTIVE OFFICERS. The corporation shall
indemnify its directors and executive officers (for the purposes of this Article
XI, "executive officers" shall have the meaning defined in Rule 3b-7 promulgated
under the 1934 Act) to the fullest extent not prohibited by the Delaware General
Corporation Law; provided, however, that the corporation may modify the extent
of such indemnification by individual contracts with its directors and executive
officers; and, provided, further, that the corporation shall not be required to
indemnify any director or executive officer in connection with any proceeding
(or part thereof) initiated by such person unless (i) such indemnification is
expressly required to be made by law, (ii) the proceeding was authorized by the
Board of Directors of the corporation, (iii) such indemnification is

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provided by the corporation, in its sole discretion, pursuant to the powers
vested in the corporation under the Delaware General Corporation Law or (iv)
such indemnification is required to be made under subsection (d).

(B) OTHER OFFICERS, EMPLOYEES AND OTHER AGENTS. The corporation
shall have power to indemnify its other officers, employees and other agents as
set forth in the Delaware General Corporation Law.

(C) EXPENSES. The corporation shall advance to any person who
was or is a party or is threatened to be made a party to any threatened, pending
or completed action, suit or proceeding, whether civil, criminal, administrative
or investigative, by reason of the fact that he is or was a director or
executive officer, of the corporation, or is or was serving at the request of
the corporation as a director or executive officer of another corporation,
partnership, joint venture, trust or other enterprise, prior to the final
disposition of the proceeding, promptly following request therefor, all expenses
incurred by any director or executive officer in connection with such proceeding
upon receipt of an undertaking by or on behalf of such person to repay said
amounts if it should be determined ultimately that such person is not entitled
to be indemnified under this Bylaw or otherwise.

Notwithstanding the foregoing, unless otherwise determined
pursuant to paragraph (e) of this Bylaw, no advance shall be made by the
corporation to an executive officer of the corporation (except by reason of the
fact that such executive officer is or was a director of the corporation in
which event this paragraph shall not apply) in any action, suit or proceeding,
whether civil, criminal, administrative or investigative, if a determination is
reasonably and promptly made (i) by the Board of Directors by a majority vote of
a quorum consisting of directors who were not parties to the proceeding, or (ii)
if such quorum is not obtainable, or, even if obtainable, a quorum of
disinterested directors so directs, by independent legal counsel in a written
opinion, that the facts known to the decision-making party at the time such
determination is made demonstrate clearly and convincingly that such person
acted in bad faith or in a manner that such person did not believe to be in or
not opposed to the best interests of the corporation.

(D) ENFORCEMENT. Without the necessity of entering into an
express contract, all rights to indemnification and advances to directors and
executive officers under this Bylaw shall be deemed to be contractual rights and
be effective to the same extent and as if provided for in a contract between the
corporation and the director or executive officer. Any right to indemnification
or advances granted by this Bylaw to a director or executive officer shall be
enforceable by or on behalf of the person holding such right in any court of
competent jurisdiction if (i) the claim for indemnification or advances is
denied, in whole or in part, or (ii) no disposition of such claim is made within

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ninety (90) days of request therefor. The claimant in such enforcement action,
if successful in whole or in part, shall be entitled to be paid also the expense
of prosecuting his claim. In connection with any claim for indemnification, the
corporation shall be entitled to raise as a defense to any such action that the
claimant has not met the standards of conduct that make it permissible under the
Delaware General Corporation Law for the corporation to indemnify the claimant
for the amount claimed. In connection with any claim by an executive officer of
the corporation (except in any action, suit or proceeding, whether civil,
criminal, administrative or investigative, by reason of the fact that such
executive officer is or was a director of the corporation) for advances, the
corporation shall be entitled to raise a defense as to any such action clear and
convincing evidence that such person acted in bad faith or in a manner that such
person did not believe to be in or not opposed to the best interests of the
corporation, or with respect to any criminal action or proceeding that such
person acted without reasonable cause to believe that his conduct was lawful.
Neither the failure of the corporation (including its Board of Directors,
independent legal counsel or its stockholders) to have made a determination
prior to the commencement of such action that indemnification of the claimant is
proper in the circumstances because he has met the applicable standard of
conduct set forth in the Delaware General Corporation Law, nor an actual
determination by the corporation (including its Board of Directors, independent
legal counsel or its stockholders) that the claimant has not met such applicable
standard of conduct, shall be a defense to the action or create a presumption
that claimant has not met the applicable standard of conduct. In any suit
brought by a director or executive officer to enforce a right to indemnification
or to an advancement of expenses hereunder, the burden of proving that the
director or executive officer is not entitled to be indemnified, or to such
advancement of expenses, under this Article XI or otherwise shall be on the
corporation.

(E) NON-EXCLUSIVITY OF RIGHTS. The rights conferred on any
person by this Bylaw shall not be exclusive of any other right that such person
may have or hereafter acquire under any statute, provision of the Certificate of
Incorporation, Bylaws, agreement, vote of stockholders or disinterested
directors or otherwise, both as to action in his official capacity and as to
action in another capacity while holding office. The corporation is specifically
authorized to enter into individual contracts with any or all of its directors,
officers, employees or agents respecting indemnification and advances, to the
fullest extent not prohibited by the Delaware General Corporation Law.

(F) SURVIVAL OF RIGHTS. The rights conferred on any person by
this Bylaw shall continue as to a person who has ceased to be a director,
officer, employee or other agent and shall inure to the benefit of the heirs,
executors and administrators of such a person.

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(G) INSURANCE. To the fullest extent permitted by the Delaware
General Corporation Law, the corporation, upon approval by the Board of
Directors, may purchase insurance on behalf of any person required or permitted
to be indemnified pursuant to this Bylaw.

(H) AMENDMENTS. Any repeal or modification of this Bylaw shall
only be prospective and shall not affect the rights under this Bylaw in effect
at the time of the alleged occurrence of any action or omission to act that is
the cause of any proceeding against any agent of the corporation.

(I) SAVING CLAUSE. If this Bylaw or any portion hereof shall be
invalidated on any ground by any court of competent jurisdiction, then the
corporation shall nevertheless indemnify each director and executive officer to
the full extent not prohibited by any applicable portion of this Bylaw that
shall not have been invalidated, or by any other applicable law.

(J) CERTAIN DEFINITIONS. For the purposes of this Bylaw, the
following definitions shall apply:

(I) The term "proceeding" shall be broadly construed and
shall include, without limitation, the investigation, preparation,
prosecution, defense, settlement, arbitration and appeal of, and the giving
of testimony in, any threatened, pending or completed action, suit or
proceeding, whether civil, criminal, administrative or investigative.

(II) The term "expenses" shall be broadly construed and
shall include, without limitation, court costs, attorneys' fees, witness
fees, fines, amounts paid in settlement or judgment and any other costs and
expenses of any nature or kind incurred in connection with any proceeding.

(III) The term the "corporation" shall include, in addition
to the resulting corporation, any constituent corporation (including any
constituent of a constituent) absorbed in a consolidation or merger that,
if its separate existence had continued, would have had power and authority
to indemnify its directors, officers, and employees or agents, so that any
person who is or was a director, officer, employee or agent of such
constituent corporation, or is or was serving at the request of such
constituent corporation as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust or other enterprise,
shall stand in the same position under the provisions of this Bylaw with
respect to the resulting or surviving corporation as he would have with
respect to such constituent corporation if its separate existence had
continued.

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(IV) References to a "director," "executive officer,"
"officer," "employee," or "agent" of the corporation shall include, without
limitation, situations where such person is serving at the request of the
corporation as, respectively, a director, executive officer, officer,
employee, trustee or agent of another corporation, partnership, joint
venture, trust or other enterprise.

(V) References to "other enterprises" shall include
employee benefit plans; references to "fines" shall include any excise
taxes assessed on a person with respect to an employee benefit plan; and
references to "serving at the request of the corporation" shall include any
service as a director, officer, employee or agent of the corporation that
imposes duties on, or involves services by, such director, officer,
employee, or agent with respect to an employee benefit plan, its
participants, or beneficiaries; and a person who acted in good faith and in
a manner he reasonably believed to be in the interest of the participants
and beneficiaries of an employee benefit plan shall be deemed to have acted
in a manner "not opposed to the best interests of the corporation" as
referred to in this Bylaw.

ARTICLE XII

NOTICES

SECTION 44. NOTICES.

(A) NOTICE TO STOCKHOLDERS. Whenever, under any provisions of
these Bylaws, notice is required to be given to any stockholder, it shall be
given in writing, timely and duly deposited in the United States mail, postage
prepaid, and addressed to his last known post office address as shown by the
stock record of the corporation or its transfer agent.

(B) NOTICE TO DIRECTORS. Any notice required to be given to any
director may be given by the method stated in subsection (a), or by facsimile,
telex or telegram, except that such notice other than one that is delivered
personally shall be sent to such address as such director shall have filed in
writing with the Secretary, or, in the absence of such filing, to the last known
post office address of such director.

(C) AFFIDAVIT OF MAILING. An affidavit of mailing, executed by
a duly authorized and competent employee of the corporation or its transfer
agent appointed with respect to the class of stock affected, specifying the name
and address or the names and addresses of the stockholder or stockholders, or
director or directors, to whom any such

24.
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notice or notices was or were given, and the time and method of giving the same,
shall in the absence of fraud, be prima facie evidence of the facts therein
contained.

(D) TIME NOTICES DEEMED GIVEN. All notices given by mail, as
above provided, shall be deemed to have been given as at the time of mailing,
and all notices given by facsimile, telex or telegram shall be deemed to have
been given as of the sending time recorded at time of transmission.

(E) METHODS OF NOTICE. It shall not be necessary that the same
method of giving notice be employed in respect of all directors, but one
permissible method may be employed in respect of any one or more, and any other
permissible method or methods may be employed in respect of any other or others.

(F) FAILURE TO RECEIVE NOTICE. The period or limitation of time
within which any stockholder may exercise any option or right, or enjoy any
privilege or benefit, or be required to act, or within which any director may
exercise any power or right, or enjoy any privilege, pursuant to any notice sent
him in the manner above provided, shall not be affected or extended in any
manner by the failure of such stockholder or such director to receive such
notice.

(G) NOTICE TO PERSON WITH WHOM COMMUNICATION IS UNLAWFUL.
Whenever notice is required to be given, under any provision of law or of the
Certificate of Incorporation or Bylaws of the corporation, to any person with
whom communication is unlawful, the giving of such notice to such person shall
not be required and there shall be no duty to apply to any governmental
authority or agency for a license or permit to give such notice to such person.
Any action or meeting that shall be taken or held without notice to any such
person with whom communication is unlawful shall have the same force and effect
as if such notice had been duly given. In the event that the action taken by the
corporation is such as to require the filing of a certificate under any
provision of the Delaware General Corporation Law, the certificate shall state,
if such is the fact and if notice is required, that notice was given to all
persons entitled to receive notice except such persons with whom communication
is unlawful.

(H) NOTICE TO PERSON WITH UNDELIVERABLE ADDRESS. Whenever
notice is required to be given, under any provision of law or the Certificate of
Incorporation or Bylaws of the corporation, to any stockholder to whom (i)
notice of two consecutive annual meetings, and all notices of meetings or of the
taking of action by written consent without a meeting to such person during the
period between such two consecutive annual meetings, or (ii) all, and at least
two, payments (if sent by first class mail) of dividends or interest on
securities during a twelve-month period, have been mailed addressed to such
person at his address as shown on the records of the corporation and have been
returned

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undeliverable, the giving of such notice to such person shall not be required.
Any action or meeting that shall be taken or held without notice to such person
shall have the same force and effect as if such notice had been duly given. If
any such person shall deliver to the corporation a written notice setting forth
his then current address, the requirement that notice be given to such person
shall be reinstated. In the event that the action taken by the corporation is
such as to require the filing of a certificate under any provision of the
Delaware General Corporation Law, the certificate need not state that notice was
not given to persons to whom notice was not required to be given pursuant to
this paragraph.

ARTICLE XIII

AMENDMENTS

SECTION 45. AMENDMENTS.

Subject to paragraph (h) of Section 43 of the Bylaws, the Bylaws may
be altered or amended or new Bylaws adopted by the affirmative vote of at least
sixty-six and two-thirds percent (66-2/3%) of the voting power of all of the
then-outstanding shares of the Voting Stock. The Board of Directors shall also
have the power to adopt, amend, or repeal Bylaws.

ARTICLE XIV

LOANS TO OFFICERS

SECTION 46. LOANS TO OFFICERS. The corporation may lend money to, or
guarantee any obligation of, or otherwise assist any officer or other employee
of the corporation or of its subsidiaries, including any officer or employee who
is a Director of the corporation or its subsidiaries, whenever, in the judgment
of the Board of Directors, such loan, guarantee or assistance may reasonably be
expected to benefit the corporation. The loan, guarantee or other assistance
may be with or without interest and may be unsecured, or secured in such manner
as the Board of Directors shall approve, including, without limitation, a pledge
of shares of stock of the corporation. Nothing in these Bylaws shall be deemed
to deny, limit or restrict the powers of guaranty or warranty of the corporation
at common law or under any statute.

26.

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EXHIBIT 10.26

CELL PATHWAYS, INC.

1997 EQUITY INCENTIVE PLAN

ADOPTED SEPTEMBER 13, 1993
AMENDED AND RESTATED OCTOBER 14, 1997

1. PURPOSES.

(A) The Cell Pathways, Inc. 1993 Stock Option Plan was originally
adopted by the Board of Directors of Cell Pathways, Inc., a Delaware corporation
(the "Company") in 1993, and is hereby continued, amended and restated with the
name of the Cell Pathways, Inc. 1997 Equity Incentive Plan (the "Plan"). The
purpose of the Plan is to provide a means by which selected Employees and
Directors of and Consultants to the Company, and its Affiliates, may be given an
opportunity to benefit from increases in value of the stock of the Company
through the granting of (i) Incentive Stock Options, (ii) Nonstatutory Stock
Options, (iii) stock bonuses, (iv) rights to purchase restricted stock, and (v)
stock appreciation rights, all as defined below.

(B) The Company, by means of the Plan, seeks to retain the services of
persons who are now Employees or Directors of or Consultants to the Company or
its Affiliates, to secure and retain the services of new Employees, Directors
and Consultants, and to provide incentives for such persons to exert maximum
efforts for the success of the Company and its Affiliates.

(C) The Company intends that the Stock Awards issued under the Plan
shall, in the discretion of the Board or any Committee to which responsibility
for administration of the Plan has been delegated pursuant to subsection 3(c),
be either (i) Options granted pursuant to Section 6 hereof, including Incentive
Stock Options and Nonstatutory Stock Options, (ii) stock bonuses or rights to
purchase restricted stock granted pursuant to Section 7 hereof, or (iii) stock
appreciation rights granted pursuant to Section 8 hereof. All Options shall be
separately designated Incentive Stock Options or Nonstatutory Stock Options at
the time of grant, and in such form as issued pursuant to Section 6, and a
separate certificate or certificates will be issued for shares purchased on
exercise of each type of Option.

2. DEFINITIONS.

(A) "AFFILIATE" means any parent corporation or subsidiary
corporation, whether now or hereafter existing, as those terms are defined in
Sections 424(e) and (f) respectively, of the Code.

(B) "BOARD" means the Board of Directors of the Company.

1.
<PAGE>

(D) "COMMITTEE" means a Committee appointed by the Board in accordance
with subsection 3(c) of the Plan.

(E) "COMPANY" means Cell Pathways, Inc., a Delaware corporation.

(F) "CONCURRENT STOCK APPRECIATION RIGHT" or "CONCURRENT RIGHT" means
a right granted pursuant to subsection 8(b)(2) of the Plan.

(G) "CONSULTANT" means any person, including an advisor, engaged by
the Company or an Affiliate to render consulting services and who is compensated
for such services, provided that the term "Consultant" shall not include
Directors who are paid only a director's fee by the Company or who are not
compensated by the Company for their services as Directors.

(H) "CONTINUOUS SERVICE" means that the service of an individual to
the Company, whether as an Employee, Director or Consultant, is not interrupted
or terminated. The Board or the chief executive officer of the Company may
determine, in that party's sole discretion, whether Continuous Service shall be
considered interrupted in the case of: (i) any leave of absence approved by the
Board or the chief executive officer of the Company, including sick leave,
military leave, or any other personal leave; or (ii) transfers between the
Company, Affiliates or their successors.

(I) "COVERED EMPLOYEE" means the chief executive officer and the four
(4) other highest compensated officers of the Company for whom total
compensation is required to be reported to stockholders under the Exchange Act,
as determined for purposes of Section 162(m) of the Code.

(J) "DIRECTOR" means a member of the Board.

(K) "EMPLOYEE" means any person, including Officers and Directors,
employed by the Company or any Affiliate of the Company. Neither service as a
Director nor payment of a director's fee by the Company shall be sufficient to
constitute "employment" by the Company.

(L) "EXCHANGE ACT" means the Securities Exchange Act of 1934, as
amended.

(M) "FAIR MARKET VALUE" means, as of any date, the value of the common
stock of the Company determined as follows:

(1) If the common stock is listed on any established stock
exchange or traded on the Nasdaq National Market or the Nasdaq SmallCap Market,
the Fair Market Value of a share of common stock shall be the closing sales
price for such stock (or the closing bid, if no sales were reported) as quoted
on such exchange or market (or the exchange or market with the greatest volume
of trading in the Company's common stock) on the last market trading day prior
to the day of determination, as reported in The Wall Street Journal or such
other source as the Board deems reliable.

2.
<PAGE>

(2) In the absence of such markets for the common stock, the
Fair Market Value shall be determined in good faith by the Board.

(N) "INCENTIVE STOCK OPTION" means an Option intended to qualify as an
incentive stock option within the meaning of Section 422 of the Code and the
regulations promulgated thereunder.

(O) "INDEPENDENT STOCK APPRECIATION RIGHT" or "INDEPENDENT RIGHT"
means a right granted pursuant to subsection 8(b)(3) of the Plan.

(P) "LISTING DATE" means the first date upon which any security of the
Company is listed (or approved for listing) upon notice of issuance on any
securities exchange, or designated (or approved for designation) upon notice of
issuance as a national market security on an interdealer quotation system.

(Q) "NON-EMPLOYEE DIRECTOR" means a Director who either (i) is not a
current Employee or Officer of the Company or its parent or subsidiary, does not
receive compensation (directly or indirectly) from the Company or its parent or
subsidiary for services rendered as a consultant or in any capacity other than
as a Director (except for an amount as to which disclosure would not be required
under Item 404(a) of Regulation S K promulgated pursuant to the Securities Act
("Regulation S-K")), does not possess an interest in any other transaction as to
which disclosure would be required under Item 404(a) of Regulation S-K, and is
not engaged in a business relationship as to which disclosure would be required
under Item 404(b) of Regulation S-K; or (ii) is otherwise considered a "non-
employee director" for purposes of Rule 16b-3.

(R) "NONSTATUTORY STOCK OPTION" means an Option not intended to
qualify as an Incentive Stock Option.

(S) "OFFICER" means a person who is an officer of the Company within
the meaning of Section 16 of the Exchange Act and the rules and regulations
promulgated thereunder.

(T) "OPTION" means a stock option granted pursuant to the Plan.

(U) "OPTION AGREEMENT" means a written agreement between the Company
and an Optionee evidencing the terms and conditions of an individual Option
grant. Each Option Agreement shall be subject to the terms and conditions of
the Plan.

(V) "OPTIONEE" means a person to whom an Option is granted pursuant to
the Plan or, if applicable, such other person who holds an outstanding Option.

(W) "OUTSIDE DIRECTOR" means a Director who either (i) is not a
current employee of the Company or an "affiliated corporation" (within the
meaning of the Treasury regulations promulgated under Section 162(m) of the
Code), is not a former employee of the Company or an "affiliated corporation"
receiving compensation for prior services (other than benefits under a tax
qualified pension plan), was not an officer of the Company or an "affiliated
corporation" at any time, and is not currently receiving direct or indirect
remuneration from the Company or an

3.
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"affiliated corporation" for services in any capacity other than as a Director,
or (ii) is otherwise considered an "outside director" for purposes of Section
162(m) of the Code.

(X) "PLAN" means this 1997 Equity Incentive Plan.

(Y) "RULE 16B-3" means Rule 16b-3 of the Exchange Act or any successor
to Rule 16b-3, as in effect with respect to the Company at the time discretion
is being exercised regarding the Plan.

(Z) "SECURITIES ACT" means the Securities Act of 1933, as amended.

(AA) "STOCK APPRECIATION RIGHT" means any of the various types of
rights which may be granted under Section 8 of the Plan.

(BB) "STOCK AWARD" means any right granted under the Plan, including
any Option, any stock bonus, any right to purchase restricted stock, and any
Stock Appreciation Right.

(CC) "STOCK AWARD AGREEMENT" means a written agreement between the
Company and a holder of a Stock Award evidencing the terms and conditions of an
individual Stock Award grant. Each Stock Award Agreement shall be subject to
the terms and conditions of the Plan.

(DD) "TANDEM STOCK APPRECIATION RIGHT" or "TANDEM RIGHT" means a right
granted pursuant to subsection 8(b)(1) of the Plan.

3. ADMINISTRATION.

(A) The Plan shall be administered by the Board unless and until the
Board delegates administration to a Committee, as provided in subsection 3(c).

(B) The Board shall have the power, subject to, and within the
limitations of, the express provisions of the Plan:

(1) To determine from time to time which of the persons eligible
under the Plan shall be granted Stock Awards; when and how each Stock Award
shall be granted; whether a Stock Award will be an Incentive Stock Option, a
Nonstatutory Stock Option, a stock bonus, a right to purchase restricted stock,
a Stock Appreciation Right, or a combination of the foregoing; the provisions of
each Stock Award granted (which need not be identical), including the time or
times when a person shall be permitted to receive stock pursuant to a Stock
Award; whether a person shall be permitted to receive stock upon exercise of an
Independent Stock Appreciation Right; and the number of shares with respect to
which a Stock Award shall be granted to each such person.

(2) To construe and interpret the Plan and Stock Awards granted
under it, and to establish, amend and revoke rules and regulations for its
administration. The Board, in the exercise of this power, may correct any
defect, omission or inconsistency in the Plan or in any Stock Award Agreement,
in a manner and to the extent it shall deem necessary or expedient to make the
Plan fully effective.

4.
<PAGE>

(3) To amend the Plan or a Stock Award as provided in Section
14.

(4) Generally, to exercise such powers and to perform such acts
as the Board deems necessary or expedient to promote the best interests of the
Company which are not in conflict with the provisions of the Plan.

(C) The Board may delegate administration of the Plan to a committee
of the Board composed of not fewer than two (2) members (the "Committee"), all
of the members of which Committee may be, in the discretion of the Board, Non-
Employee Directors and/or Outside Directors. If administration is delegated to
a Committee, the Committee shall have, in connection with the administration of
the Plan, the powers theretofore possessed by the Board, including the power to
delegate to a subcommittee of two (2) or more Outside Directors any of the
administrative powers the Committee is authorized to exercise (and references in
this Plan to the Board shall thereafter be to the Committee or such a
subcommittee), subject, however, to such resolutions, not inconsistent with the
provisions of the Plan, as may be adopted from time to time by the Board. The
Board may abolish the Committee at any time and revest in the Board the
administration of the Plan. Additionally, prior to the Listing Date, and
notwithstanding anything to the contrary contained herein, the Board may
delegate administration of the Plan to a committee of one or more members of the
Board and the term "Committee" shall apply to any person or persons to whom such
authority has been delegated. Notwithstanding anything in this Section 3 to the
contrary, the Board or the Committee may delegate to a committee of one or more
members of the Board the authority to grant Stock Awards to eligible persons who
(1) are not then subject to Section 16 of the Exchange Act and/or (2) are either
(i) not then Covered Employees and are not expected to be Covered Employees at
the time of recognition of income resulting from such Stock Award, or (ii) not
persons with respect to whom the Company wishes to comply with Section 162(m) of
the Code.

4. SHARES SUBJECT TO THE PLAN.

(A) Subject to the provisions of Section 13 relating to adjustments
upon changes in stock, the stock that may be issued pursuant to Stock Awards
shall not exceed in the aggregate Two Million Three Hundred Fifty Thousand
(2,350,000) shares of the Company's common stock prior to giving effect to the
Company's 1 for 1.8157 reverse stock split, and including the 511,250 shares
subject to outstanding options and the 473,600 shares issued upon exercise of
option prior to the reverse stock split. If any Stock Award shall for any
reason expire or otherwise terminate, in whole or in part, without having been
exercised in full, the stock not acquired under such Stock Award shall revert to
and again become available for issuance under the Plan. Shares subject to Stock
Appreciation Rights exercised in accordance with Section 8 of the Plan shall not
be available for subsequent issuance under the Plan.

(B) The stock subject to the Plan may be unissued shares or reacquired
shares, bought on the market or otherwise.

5.
<PAGE>

5. ELIGIBILITY.

(A) Incentive Stock Options and Stock Appreciation Rights appurtenant
thereto may be granted only to Employees. Stock Awards other than Incentive
Stock Options and Stock Appreciation Rights appurtenant thereto may be granted
only to Employees, Directors or Consultants.

(B) No person shall be eligible for the grant of an Incentive Stock
Option if, at the time of grant, such person owns (or is deemed to own pursuant
to Section 424(d) of the Code) stock possessing more than ten percent (10%) of
the total combined voting power of all classes of stock of the Company or of any
of its Affiliates unless the exercise price of such Option is at least one
hundred ten percent (110%) of the Fair Market Value of such stock at the date of
grant and such Option is not exercisable after the expiration of five (5) years
from the date of grant.

(C) Subject to the provisions of Section 13 relating to adjustments
upon changes in stock, no person shall be eligible to be granted Options and
Stock Appreciation Rights covering more than one million five hundred thousand
(1,500,000) shares of the Company's common stock in any calendar year. This
subsection 5(c) shall not apply prior to the Listing Date and, following the
Listing Date, shall not apply until (i) the earliest of: (A) the first material
modification of the Plan (including any increase to the number of shares
reserved for issuance under the Plan in accordance with Section 4); (B) the
issuance of all of the shares of common stock reserved for issuance under the
Plan; (C) the expiration of the Plan; or (D) the first meeting of stockholders
at which directors are to be elected that occurs after the close of the third
calendar year following the calendar year in which occurred the first
registration of an equity security under section 12 of the Exchange Act; or (ii)
such other date required by Section 162(m) of the Code and the rules and
regulations promulgated thereunder.

6. OPTION PROVISIONS.

Each Option shall be in such form and shall contain such terms and
conditions as the Board shall deem appropriate. The provisions of separate
Options need not be identical, but each Option shall include (through
incorporation of provisions hereof by reference in the Option or otherwise) the
substance of each of the following provisions:

(A) TERM. No Option shall be exercisable after the expiration of ten
(10) years from the date it was granted.

(B) PRICE. The exercise price of each Option shall be not less than
one hundred percent (100%) of the Fair Market Value of the stock subject to the
Option on the date the Option is granted. Notwithstanding the foregoing, an
Option (whether an Incentive Stock Option or a Nonstatutory Stock Option) may be
granted with an exercise price lower than that set forth in the preceding
sentence if such Option is granted pursuant to an assumption or substitution for
another option in a manner satisfying the provisions of Section 424(a) of the
Code.

(C) CONSIDERATION. The purchase price of stock acquired pursuant to
an Option shall be paid, to the extent permitted by applicable statutes and
regulations, either (i) in cash at the

6.
<PAGE>

time the Option is exercised, or (ii) at the discretion of the Board or the
Committee, at the time of the grant of the Option, (A) by delivery to the
Company of other common stock of the Company, (B) according to a deferred
payment arrangement, except that payment of the common stock's "par value" (as
defined in the Delaware General Corporation Law) shall not be made by deferred
payment, or other arrangement (which may include, without limiting the
generality of the foregoing, the use of other common stock of the Company) with
the person to whom the Option is granted or to whom the Option is transferred
pursuant to subsection 6(d), or (C) in any other form of legal consideration
that may be acceptable to the Board.

In the case of any deferred payment arrangement, interest shall be
compounded at least annually and shall be charged at the minimum rate of
interest necessary to avoid the treatment as interest, under any applicable
provisions of the Code, of any amounts other than amounts stated to be interest
under the deferred payment arrangement.

(D) TRANSFERABILITY. An Incentive Stock Option shall not be
transferable except by will or by the laws of descent and distribution, and
shall be exercisable during the lifetime of the person to whom the Incentive
Stock Option is granted only by such person. A Nonstatutory Stock Option shall
only be transferable by the Optionee upon such terms and conditions as are set
forth in the Option Agreement for such Nonstatutory Stock Option, as the Board
or the Committee shall determine in its discretion. The person to whom the
Option is granted may, by delivering written notice to the Company, in a form
satisfactory to the Company, designate a third party who, in the event of the
death of the Optionee, shall thereafter be entitled to exercise the Option.

(E) VESTING. The total number of shares of stock subject to an Option
may, but need not, be allotted in periodic installments (which may, but need
not, be equal). The Option Agreement may provide that from time to time during
each of such installment periods, the Option may become exercisable ("vest")
with respect to some or all of the shares allotted to that period, and may be
exercised with respect to some or all of the shares allotted to such period
and/or any prior period as to which the Option became vested but was not fully
exercised. The Option may be subject to such other terms and conditions on the
time or times when it may be exercised (which may be based on performance or
other criteria) as the Board may deem appropriate. The provisions of this
subsection 6(e) are subject to any Option provisions governing the minimum
number of shares as to which an Option may be exercised.

(F) TERMINATION OF CONTINUOUS SERVICES. In the event an Optionee's
Continuous Service terminates (other than upon the Optionee's death or
disability), the Optionee may exercise his or her Option (to the extent that the
Optionee was entitled to exercise it as of the date of termination) within such
period of time specified in the Option Agreement, or (ii) the expiration of the
term of the Option as set forth in the Option Agreement. If, at the date of
termination, the Optionee is not entitled to exercise his or her entire Option,
the shares covered by the unexercisable portion of the Option shall revert to
and again become available for issuance under the Plan. If, after termination,
the Optionee does not exercise his or her Option within the time specified in
the Option Agreement, the Option shall terminate, and the shares covered by such
Option shall revert to and again become available for issuance under the Plan.

7.
<PAGE>

An Optionee's Option Agreement may also provide that if the exercise
of the Option following the termination of the Optionee's Continuous Service
(other than upon the Optionee's death or disability) would result in liability
under Section 16(b) of the Exchange Act, then the Option shall terminate on the
earlier of (i) the expiration of the term of the Option set forth in the Option
Agreement, or (ii) the tenth (10th) day after the last date on which such
exercise would result in such liability under Section 16(b) of the Exchange Act.
Finally, an Optionee's Option Agreement may also provide that if the exercise of
the Option following the termination of the Optionee's Continuous Service (other
than upon the Optionee's death or disability) would be prohibited at any time
solely because the issuance of shares would violate the registration
requirements under the Securities Act, then the Option shall terminate on the
earlier of (i) the expiration of the term of the Option set forth in the first
paragraph of this subsection 6(f), or (ii) the expiration of a period of three
(3) months after the termination of the Optionee's Continuous Service during
which the exercise of the Option would not be in violation of such registration
requirements.

(G) DISABILITY OF OPTIONEE. In the event an Optionee's Continuous
Service terminates as a result of the Optionee's disability, the Optionee may
exercise his or her Option (to the extent that the Optionee was entitled to
exercise it as of the date of termination), but only within such period of time
specified in the Option Agreement, or the expiration of the term of the Option
as set forth in the Option Agreement. If, at the date of termination, the
Optionee is not entitled to exercise his or her entire Option, the shares
covered by the unexercisable portion of the Option shall revert to and again
become available for issuance under the Plan. If, after termination, the
Optionee does not exercise his or her Option within the time specified herein,
the Option shall terminate, and the shares covered by such Option shall revert
to and again become available for issuance under the Plan.

(H) DEATH OF OPTIONEE. In the event of the death of an Optionee
during, or within a period specified in the Option Agreement after the
termination of, the Optionee's Continuous Service, the Option may be exercised
(to the extent the Optionee was entitled to exercise the Option as of the date
of death) by the Optionee's estate, by a person who acquired the right to
exercise the Option by bequest or inheritance or by a person designated to
exercise the option upon the Optionee's death pursuant to subsection 6(d), but
only within the period specified in the Option Agreement, or the expiration of
the term of such Option as set forth in the Option Agreement. If, at the time
of death, the Optionee was not entitled to exercise his or her entire Option,
the shares covered by the unexercisable portion of the Option shall revert to
and again become available for issuance under the Plan. If, after death, the
Option is not exercised within the time specified herein, the Option shall
terminate, and the shares covered by such Option shall revert to and again
become available for issuance under the Plan.

(I) EARLY EXERCISE. The Option Agreement may, but need not, include a
provision whereby the Optionee may elect at any time during Continuous Service
to exercise the Option as to any part or all of the shares subject to the Option
prior to the full vesting of the Option. Any unvested shares so purchased may
be subject to a repurchase right in favor of the Company or to any other
restriction the Board determines to be appropriate.

8.
<PAGE>

(J) RE-LOAD OPTIONS. Without in any way limiting the authority of the
Board or Committee to make or not to make grants of Options hereunder, the Board
or Committee shall have the authority (but not an obligation) to include as part
of any Option Agreement a provision entitling the Optionee to a further Option
(a "Re-Load Option") in the event the Optionee exercises the Option evidenced by
such an Option Agreement, in whole or in part, by surrendering other shares of
Common Stock in accordance with this Plan and the terms and conditions of the
Option Agreement. Any such Re-Load Option (i) shall be for a number of shares
equal to the number of shares surrendered as part or all of the exercise price
of such Option; (ii) shall have an expiration date which is the same as the
expiration date of the Option the exercise of which gave rise to such Re-Load
Option; and (iii) shall have an exercise price which is equal to one hundred
percent (100%) of the Fair Market Value of the Common Stock subject to the Re-
Load Option on the date of exercise of the original Option. Notwithstanding the
foregoing, a Re-Load Option which is an Incentive Stock Option and which is
granted to a 10% stockholder (as described in subsection 5(b)), shall have an
exercise price which is equal to one hundred ten percent (110%) of the Fair
Market Value of the stock subject to the Re-Load Option on the date of exercise
of the original Option and shall have a term which is no longer than five (5)
years.

Any such Re-Load Option may be an Incentive Stock Option or a
Nonstatutory Stock Option, as the Board or Committee may designate at the time
of the grant of the original Option; provided, however, that the designation of
any Re-Load Option as an Incentive Stock Option shall be subject to the one
hundred thousand dollar ($100,000) annual limitation on exercisability of
Incentive Stock Options described in subsection 12(e) of the Plan and in Section
422(d) of the Code. There shall be no Re-Load Options on a Re-Load Option. Any
such Re-Load Option shall be subject to the availability of sufficient shares
under subsection 4(a) and the limits on the grants of Options under subsection
5(c) and shall be subject to such other terms and conditions as the Board or
Committee may determine which are not inconsistent with the express provisions
of the Plan regarding the terms of Options.

7. TERMS OF STOCK BONUSES AND PURCHASES OF RESTRICTED STOCK.

Each stock bonus or restricted stock purchase agreement shall be in
such form and shall contain such terms and conditions as the Board or the
Committee shall deem appropriate. The terms and conditions of stock bonus or
restricted stock purchase agreements may change from time to time, and the terms
and conditions of separate agreements need not be identical, but each stock
bonus or restricted stock purchase agreement shall include (through
incorporation of provisions hereof by reference in the agreement or otherwise)
the substance of each of the following provisions as appropriate:

(A) PURCHASE PRICE. The purchase price under each restricted stock
purchase agreement shall be such amount as the Board or Committee shall
determine and designate in such Stock Award Agreement. Notwithstanding the
foregoing, the Board or the Committee may determine that eligible participants
in the Plan may be awarded stock pursuant to a stock bonus agreement in
consideration for past services actually rendered to the Company or for its
benefit.

9.
<PAGE>

(B) TRANSFERABILITY. Rights under a stock bonus or restricted stock
purchase agreement shall be transferable by the grantee only upon such terms and
conditions as are set forth in the applicable Stock Award Agreement, as the
Board or the Committee shall determine in its discretion, so long as stock
awarded under such Stock Award Agreement remains subject to the terms of the
agreement.

(C) CONSIDERATION. The purchase price of stock acquired pursuant to a
stock purchase agreement shall be paid either: (i) in cash at the time of
purchase; (ii) at the discretion of the Board or the Committee, according to a
deferred payment arrangement, except that payment of the common stock's "par
value" (as defined in the Delaware General Corporation Law) shall not be made by
deferred payment, or other arrangement with the person to whom the stock is
sold; or (iii) in any other form of legal consideration that may be acceptable
to the Board or the Committee in its discretion. Notwithstanding the foregoing,
the Board or the Committee to which administration of the Plan has been
delegated may award stock pursuant to a stock bonus agreement in consideration
for past services actually rendered to the Company or for its benefit.

(D) VESTING. Shares of stock sold or awarded under the Plan may, but
need not, be subject to a repurchase option in favor of the Company in
accordance with a vesting schedule to be determined by the Board or the
Committee.

(E) TERMINATION OF CONTINUOUS SERVICE. In the event a Participant's
Continuous Service terminates, the Company may repurchase or otherwise reacquire
any or all of the shares of stock held by that person which have not vested as
of the date of termination under the terms of the stock bonus or restricted
stock purchase agreement between the Company and such person.

8. STOCK APPRECIATION RIGHTS.

(A) The Board or Committee shall have full power and authority,
exercisable in its sole discretion, to grant Stock Appreciation Rights under the
Plan to Employees or Directors of or Consultants to, the Company or its
Affiliates. To exercise any outstanding Stock Appreciation Right, the holder
must provide written notice of exercise to the Company in compliance with the
provisions of the Stock Award Agreement evidencing such right. Except as
provided in subsection 5(c), no limitation shall exist on the aggregate amount
of cash payments the Company may make under the Plan in connection with the
exercise of a Stock Appreciation Right.

(B) Three types of Stock Appreciation Rights shall be authorized for
issuance under the Plan:

(1) TANDEM STOCK APPRECIATION RIGHTS. Tandem Stock Appreciation
Rights will be granted appurtenant to an Option, and shall, except as
specifically set forth in this Section 8, be subject to the same terms and
conditions applicable to the particular Option grant to which it pertains.
Tandem Stock Appreciation Rights will require the holder to elect between the
exercise of the underlying Option for shares of stock and the surrender, in
whole or in part, of such Option for an appreciation distribution. The
appreciation distribution payable on the exercised Tandem Right shall be in cash
(or, if so provided, in an equivalent number of shares of

10.
<PAGE>

stock based on Fair Market Value on the date of the Option surrender) in an
amount up to the excess of (A) the Fair Market Value (on the date of the Option
surrender) of the number of shares of stock covered by that portion of the
surrendered Option in which the Optionee is vested over (B) the aggregate
exercise price payable for such vested shares.

(2) CONCURRENT STOCK APPRECIATION RIGHTS. Concurrent Rights
will be granted appurtenant to an Option and may apply to all or any portion of
the shares of stock subject to the underlying Option and shall, except as
specifically set forth in this Section 8, be subject to the same terms and
conditions applicable to the particular Option grant to which it pertains. A
Concurrent Right shall be exercised automatically at the same time the
underlying Option is exercised with respect to the particular shares of stock to
which the Concurrent Right pertains. The appreciation distribution payable on an
exercised Concurrent Right shall be in cash (or, if so provided, in an
equivalent number of shares of stock based on Fair Market Value on the date of
the exercise of the Concurrent Right) in an amount equal to such portion as
shall be determined by the Board or the Committee at the time of the grant of
the excess of (A) the aggregate Fair Market Value (on the date of the exercise
of the Concurrent Right) of the vested shares of stock purchased under the
underlying Option which have Concurrent Rights appurtenant to them over (B) the
aggregate exercise price paid for such shares.

(3) INDEPENDENT STOCK APPRECIATION RIGHTS. Independent Rights
will be granted independently of any Option and shall, except as specifically
set forth in this Section 8, be subject to the same terms and conditions
applicable to Nonstatutory Stock Options as set forth in Section 6. They shall
be denominated in share equivalents. The appreciation distribution payable on
the exercised Independent Right shall be not greater than an amount equal to the
excess of (A) the aggregate Fair Market Value (on the date of the exercise of
the Independent Right) of a number of shares of Company stock equal to the
number of share equivalents in which the holder is vested under such Independent
Right, and with respect to which the holder is exercising the Independent Right
on such date, over (B) the aggregate Fair Market Value (on the date of the grant
of the Independent Right) of such number of shares of Company stock. The
appreciation distribution payable on the exercised Independent Right shall be in
cash or, if so provided, in an equivalent number of shares of stock based on
Fair Market Value on the date of the exercise of the Independent Right.

9. CANCELLATION AND RE-GRANT OF OPTIONS.

(A) The Board or the Committee shall have the authority to effect, at
any time and from time to time, (i) the repricing of any outstanding Options
and/or any Stock Appreciation Rights under the Plan and/or (ii) with the consent
of the affected holders of Options and/or Stock Appreciation Rights, the
cancellation of any outstanding Options and/or any Stock Appreciation Rights
under the Plan and the grant in substitution therefor of new Options and/or
Stock Appreciation Rights under the Plan covering the same or different numbers
of shares of stock, but having an exercise price per share not less than the
Fair Market Value or, in the case of a 10% stockholder (as described in
subsection 5(b)) receiving a new grant of an Incentive Stock Option, not less
than one hundred ten percent (110%) of the Fair Market Value) per share of stock
on the new grant date. Notwithstanding the foregoing, the Board or the
Committee may

11.
<PAGE>

grant an Option and/or Stock Appreciation Right with an exercise price lower
than that set forth above if such Option and/or Stock Appreciation Right is
granted as part of a transaction to which section 424(a) of the Code applies.

(B) Shares subject to an Option or Stock Appreciation Right canceled
under this Section 9 shall continue to be counted against the maximum award of
Options and Stock Appreciation Rights permitted to be granted pursuant to
subsection 5(c) of the Plan. The repricing of an Option and/or Stock
Appreciation Right under this Section 9, resulting in a reduction of the
exercise price, shall be deemed to be a cancellation of the original Option
and/or Stock Appreciation Right and the grant of a substitute Option and/or
Stock Appreciation Right; in the event of such repricing, both the original and
the substituted Options and Stock Appreciation Rights shall be counted against
the maximum awards of Options and Stock Appreciation Rights permitted to be
granted pursuant to subsection 5(c) of the Plan. The provisions of this
subsection 9(b) shall be applicable only to the extent required by Section
162(m) of the Code.

10. COVENANTS OF THE COMPANY.

(A) During the terms of the Stock Awards, the Company shall keep
available at all times the number of shares of stock required to satisfy such
Stock Awards.

(B) The Company shall seek to obtain from each regulatory commission
or agency having jurisdiction over the Plan such authority as may be required to
issue and sell shares of stock upon exercise of the Stock Award; provided,
however, that this undertaking shall not require the Company to register under
the Securities Act either the Plan, any Stock Award or any stock issued or
issuable pursuant to any such Stock Award. If, after reasonable efforts, the
Company is unable to obtain from any such regulatory commission or agency the
authority which counsel for the Company deems necessary for the lawful issuance
and sale of stock under the Plan, the Company shall be relieved from any
liability for failure to issue and sell stock upon exercise of such Stock Awards
unless and until such authority is obtained.

11. USE OF PROCEEDS FROM STOCK.

Proceeds from the sale of stock pursuant to Stock Awards shall
constitute general funds of the Company.

12. MISCELLANEOUS.

(A) The Board shall have the power to accelerate the time at which a
Stock Award may first be exercised or the time during which a Stock Award or any
part thereof will vest pursuant to subsection 6(e), 7(d) or 8(b),
notwithstanding the provisions in the Stock Award stating the time at which it
may first be exercised or the time during which it will vest.

(B) Neither an Employee, Director or Consultant nor any person to whom
a Stock Award is transferred under subsection 6(d), 7(b), or 8(b) shall be
deemed to be the holder of, or to have any of the rights of a holder with
respect to, any shares subject to such Stock Award

12.
<PAGE>

unless and until such person has satisfied all requirements for exercise of the
Stock Award pursuant to its terms.

(C) Nothing in the Plan or any instrument executed or Stock Award
granted pursuant thereto shall confer upon any Employee, Director, Consultant or
other holder of Stock Awards any right to continue in the employ of the Company
or any Affiliate (or to continue acting as a Director or Consultant) or shall
affect the right of the Company or any Affiliate to terminate the employment of
any Employee with or without cause the right of the Company's Board of Directors
and/or the Company's stockholders to remove any Director as provided in the
Company's By-Laws and the provisions of the Delaware General Corporation Law
California Corporations Code, or the right to terminate the relationship of any
Consultant subject to the terms of such Consultant's agreement with the Company
or Affiliate of the Company.

(D) To the extent that the aggregate Fair Market Value (determined at
the time of grant) of stock with respect to which Incentive Stock Options are
exercisable for the first time by any Optionee during any calendar year under
all plans of the Company and its Affiliates exceeds one hundred thousand dollars
($100,000), the Options or portions thereof which exceed such limit (according
to the order in which they were granted) shall be treated as Nonstatutory Stock
Options.

(E) The Company may require any person to whom a Stock Award is
granted, or any person to whom a Stock Award is transferred pursuant to
subsection 6(d), 7(b) or 8(b), as a condition of exercising or acquiring stock
under any Stock Award, (1) to give written assurances satisfactory to the
Company as to such person's knowledge and experience in financial and business
matters and/or to employ a purchaser representative reasonably satisfactory to
the Company who is knowledgeable and experienced in financial and business
matters, and that he or she is capable of evaluating, alone or together with the
purchaser representative, the merits and risks of exercising the Stock Award;
and (2) to give written assurances satisfactory to the Company stating that such
person is acquiring the stock subject to the Stock Award for such person's own
account and not with any present intention of selling or otherwise distributing
the stock. The foregoing requirements, and any assurances given pursuant to
such requirements, shall be inoperative if (i) the issuance of the shares upon
the exercise or acquisition of stock under the Stock Award has been registered
under a then currently effective registration statement under the Securities
Act, or (ii) as to any particular requirement, a determination is made by
counsel for the Company that such requirement need not be met in the
circumstances under the then applicable securities laws. The Company may, upon
advice of counsel to the Company, place legends on stock certificates issued
under the Plan as such counsel deems necessary or appropriate in order to comply
with applicable securities laws, including, but not limited to, legends
restricting the transfer of the stock.

(F) To the extent provided by the terms of a Stock Award Agreement,
the person to whom a Stock Award is granted may satisfy any federal, state or
local tax withholding obligation relating to the exercise or acquisition of
stock under a Stock Award by any of the following means or by a combination of
such means: (1) tendering a cash payment; (2) authorizing the Company to
withhold shares from the shares of the common stock otherwise issuable to the

13.
<PAGE>

participant as a result of the exercise or acquisition of stock under the Stock
Award; or (3) delivering to the Company owned and unencumbered shares of the
common stock of the Company.

13. ADJUSTMENTS UPON CHANGES IN STOCK.

(A) If any change is made in the stock subject to the Plan, or subject
to any Stock Award (through merger, consolidation, reorganization,
recapitalization, reincorporation, stock dividend, dividend in property other
than cash, stock split, liquidating dividend, combination of shares, exchange of
shares, change in corporate structure or other transaction not involving the
receipt of consideration by the Company), the Plan will be appropriately
adjusted in the type(s) and maximum number of securities subject to the Plan
pursuant to subsection 4(a) and the maximum number of securities subject to
award to any person during any calendar year pursuant to subsection 5(c), and
the outstanding Stock Awards will be appropriately adjusted in the type(s) and
number of securities and price per share of stock subject to such outstanding
Stock Awards. Such adjustments shall be made by the Board or the Committee, the
determination of which shall be final, binding and conclusive. (The conversion
of any convertible securities of the Company shall not be treated as a
"transaction not involving the receipt of consideration by the Company".)

(B) If at any time while unexercised Options remain outstanding under
this Plan (a) any "person" (as such term is used in Sections 13(d) and 14(d) of
the Exchange Act), other than the Company or any trustee or other fiduciary
holding securities under an employee benefit plan of the Company, any person
acquiring securities from the Company solely pursuant to written agreement with
the Company, or any corporation owned, directly or indirectly by the
stockholders of the Company in substantially the same proportions as their
ownership of stock in the Company, is or becomes the "beneficial owner" (as
defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of
securities of the Company representing 20% or more of the combined voting power
of the Company's then outstanding securities, (b) during any period of two
consecutive years commencing the day after the first election of directors
following termination of the stockholder voting provisions of the Company's
Stockholders' Agreement dated as of December 10, 1992, as amended, individuals
who at the beginning of such period constitute the Board and any new director
(other than a director designated by a person who has entered into an agreement
with the Company to effect a transaction described in clauses (a) (c) or (d) of
this Section 13(b)) whose election by the board or nomination for election by
the Company's stockholders was approved by a vote of at least two-thirds of the
directors then still in office who either were directors at the beginning of the
period or whose election or nomination for election was previously so approved,
cease for any reason to constitute at least a majority thereof, (c) the
stockholders of the Company approve a merger or consolidation of the Company
with any other corporation, other than a merger or consolidation which would
result in the voting securities of the Company outstanding immediately prior
thereto continuing to represent (either by remaining outstanding or by being
converted into voting securities of the surviving entity) more than 80% of the
combined voting power of the voting securities of the Company or such surviving
entity outstanding immediately after such merger or consolidation, or (d) the
stockholders of the Company approve a plan of complete liquidation of the
Company or an

14.
<PAGE>

agreement for the sale or disposition by the Company of all or substantially all
of the Company's assets (each of (a), (b), (c) and (d) an "Acceleration Event"),
then each outstanding Option that has not theretofore become vested and/or
exercisable according to its terms shall become vested and/or exercisable. Upon
the occurrence of an Acceleration Event, the Committee shall provide for
cancellation of the unexercised portions of all Options outstanding as of the
Cancellation Date; provided, however, that if an Option has been held for less
than six months, then for purposes of such cancellation the Acceleration Event
and/or Cancellation Date shall be restricted in such manner as the Committee may
determine necessary to comply with the conditions and requirements of Rule 16b-
3. "Cancellation Date" shall mean (i) the 60th day following the occurrence of
any Acceleration Event described in clause (a) or (b) of the first sentence
hereof, and (ii) the closing of any merger, consolidation, liquidation or sale
of assets stockholder approval of which constituted an Acceleration Event under
clause (c) or (d) of the first sentence hereof. Upon cancellation of any Option
pursuant to this Section 13(b) following an Acceleration Event under clause (a),
(b) or (d) of the first sentence hereof, the Company shall make, and upon
cancellation of any Option pursuant to this Section 13(b) following an
Acceleration Event under clause (c) of the first sentence hereof, the Company
may make, in exchange therefor, a cash payment under such Option in an amount
equal to the product of the number of shares covered by the unexercised portion
of the Option multiplied by the difference between the per share exercise price
of such Option and (i) in the case of a transaction described in clause (a) or
(b) of the first sentence hereof, the highest Fair Market Value of such share at
any time during the 60-day period immediately preceding the Cancellation Date,
and (ii) in the case of a transaction described in clause (c) or (d) of the
first sentence hereof, the Fair Market Value of such share on the Cancellation
Date. The instrument evidencing any Option may also provide for acceleration of
otherwise unexercisable portions of any Option upon other specified events or
occurrences as the Committee shall determine, such as involuntary terminations
of the Optionee's employment following certain changes in the control of the
Company.

14. AMENDMENT OF THE PLAN AND STOCK AWARDS.

(A) The Board at any time, and from time to time, may amend the Plan.
However, except as provided in Section 13 relating to adjustments upon changes
in stock, no amendment shall be effective unless approved by the stockholders of
the Company within twelve (12) months before or after the adoption of the
amendment, where the amendment will:

(I) Increase the number of shares reserved for Stock Awards
under the Plan;

(II) Modify the requirements as to eligibility for participation
in the Plan (to the extent such modification requires stockholder approval in
order for the Plan to satisfy the requirements of Section 422 of the Code); or

(III) Modify the Plan in any other way if such modification
requires stockholder approval in order for the Plan to satisfy the requirements
of Section 422 of the Code or to comply with the requirements of Rule 16b 3.

(B) The Board may in its sole discretion submit any other amendment to
the Plan for stockholder approval, including, but not limited to, amendments to
the Plan intended to satisfy

15.
<PAGE>

the requirements of Section 162(m) of the Code and the regulations promulgated
thereunder regarding the exclusion of performance-based compensation from the
limit on corporate deductibility of compensation paid to certain executive
officers.

(C) It is expressly contemplated that the Board may amend the Plan in
any respect the Board deems necessary or advisable to provide eligible Employees
with the maximum benefits provided or to be provided under the provisions of the
Code and the regulations promulgated thereunder relating to Incentive Stock
Options and/or to bring the Plan and/or Incentive Stock Options granted under it
into compliance therewith.

(D) Rights and obligations under any Stock Award granted before
amendment of the Plan shall not be impaired by any amendment of the Plan unless
(i) the Company requests the consent of the person to whom the Stock Award was
granted and (ii) such person consents in writing.

(E) The Board at any time, and from time to time, may amend the terms
of any one or more Stock Award; provided, however, that the rights and
obligations under any Stock Award shall not be impaired by any such amendment
unless (i) the Company requests the consent of the person to whom the Stock
Award was granted and (ii) such person consents in writing.

15. TERMINATION OR SUSPENSION OF THE PLAN.

(A) The Board may suspend or terminate the Plan at any time. Unless
sooner terminated, the Plan shall terminate on October 12, 2007, which shall be
within ten (10) years from the date the Plan is adopted by the Board or approved
by the stockholders of the Company, whichever is earlier. No Stock Awards may
be granted under the Plan while the Plan is suspended or after it is terminated.

(B) Rights and obligations under any Stock Award granted while the
Plan is in effect shall not be impaired by suspension or termination of the
Plan, except with the written consent of the person to whom the Stock Award was
granted.

16. EFFECTIVE DATE OF PLAN.

The Plan shall become effective as determined by the Board, but no
Stock Awards granted under the Plan shall be exercised unless and until the Plan
has been approved by the stockholders of the Company, which approval shall be
within twelve (12) months before or after the date the Plan is adopted by the
Board.

16.

<PAGE>
EXHIBIT 10.27

CELL PATHWAYS, INC.

1997 NON-EMPLOYEE DIRECTORS' STOCK OPTION PLAN

ADOPTED ON OCTOBER 14, 1997

1. PURPOSE.

(A) The purpose of the 1997 Non-Employee Directors' Stock Option Plan
(the "Plan") is to provide a means by which each director of Cell Pathways,
Inc., a Delaware corporation (the "Company") who is not otherwise an employee of
the Company or of any Affiliate of the Company (each such person being hereafter
referred to as a "Non-Employee Director") will be given an opportunity to
purchase stock of the Company.

(B) The word "Affiliate" as used in the Plan means any parent
corporation or subsidiary corporation of the Company as those terms are defined
in Sections 424(e) and (f), respectively, of the Internal Revenue Code of 1986,
as amended from time to time (the "Code").

(C) The Company, by means of the Plan, seeks to secure and retain the
services of persons capable of serving as Non-Employee Directors of the Company,
and to provide incentives for such persons to exert maximum efforts for the
success of the Company.

2. ADMINISTRATION.

(A) The Plan shall be administered by the Board of Directors of the
Company (the "Board").

1.
<PAGE>

(B) The Board may delegate administration of the Plan to a committee
composed of one (1) or more members of the Board (the "Committee"). If
administration is delegated to a Committee, the Committee shall have, in
connection with the administration of the Plan, the powers theretofore possessed
by the Board, subject, however, to such resolutions, not inconsistent with the
provisions of the Plan, as may be adopted from time to time by the Board. The
Board may abolish the Committee at any time and revest in the Board the
administration of the Plan.

3. SHARES SUBJECT TO THE PLAN.

(A) Subject to the provisions of paragraph 10 relating to adjustments
upon changes in stock, the stock that may be sold pursuant to options granted
under the Plan shall not exceed in the aggregate Two Hundred Fifty Thousand
(250,000) shares of the Company's common stock (after adjustment for the reverse
split of 1 for 1.8157). If any option granted under the Plan shall for any
reason expire or otherwise terminate without having been exercised in full, the
stock not purchased under such option shall again become available for the Plan.

(B) The stock subject to the Plan may be unissued shares or reacquired
shares, bought on the market or otherwise.

4. ELIGIBILITY.

Options shall be granted only to Non-Employee Directors of the
Company.

2.
<PAGE>

5. NON-DISCRETIONARY GRANTS.

(A) Each person who is a Non-Employee Director on the date that the
registration of the initial offering of the Company's common stock for sale to
the public becomes effective (the "Effective Date") automatically shall be
granted an option to purchase Three Thousand (3000) shares of common stock of
the Company on the terms and conditions set forth herein.

(B) Each person who is, after the Effective Date, elected for the
first time to be a Non-Employee Director automatically shall, upon the date of
his or her initial election to be a Non-Employee Director by the Board or
stockholders of the Company, be granted an option to purchase Ten Thousand
(10,000) shares of common stock of the Company on the terms and conditions set
forth herein.

(C) On the date of each Annual Meeting of Stockholders of the Company,
commencing with the Annual Meeting of Stockholders occurring in 1998, each
person who has then been a Non-Employee Director for a period of at least three
hundred sixty five (365) days automatically shall be granted an option to
purchase Three Thousand (3000) shares of common stock of the Company on the
terms and conditions set forth herein.

6. OPTION PROVISIONS.

Each option shall contain the following terms and conditions:

(A) The term of each option commences on the date it is granted and,
unless sooner terminated as set forth herein, expires on the date ("Expiration
Date") ten (10) years from the date of grant. If the optionee's continuous
service with the Company, whether as a Director, or if

3.
<PAGE>

his or her status changes, as an employee of or consultant to the Company or any
Affiliate of the Company, terminates for any reason or for no reason, the option
shall terminate on the earlier of the Expiration Date or the date twelve (12)
months following the date of termination of service. In any and all
circumstances, an option may be exercised following termination of the
optionee's service with the Company and all Affiliates of the Company only as to
that number of shares as to which it was exercisable on the date of termination
of such service under the provisions of subparagraph 6(e).

(B) The exercise price of each option shall be one hundred percent
(100%) of the fair market value of the stock subject to such option on the date
such option is granted. For purposes of the Plan, "fair market value" means, as
of any date, the value of the common stock of the Company determined as follows:

(I) If the common stock is listed on any established stock
exchange or traded on the Nasdaq National Market or the Nasdaq SmallCap Market,
the fair market value of a share of common stock shall be the closing sales
price for such stock (or the closing bid, if no sales were reported) as quoted
on such exchange or market (or the exchange or market with the greatest volume
of trading in the Company's common stock) on the last market trading day prior
to the day of determination, as reported in The Wall Street Journal or such
other source as the Board deems reliable.

(II) In the absence of such markets for the common stock, the
fair market value shall be determined in good faith by the Board.

4.
<PAGE>

Notwithstanding the foregoing, for purposes of options granted
pursuant to subparagraph 5(a), "fair market value" shall mean the price per
share at which shares of common stock are first sold to the public in the
Company's initial public offering as specified in the final prospectus with
respect to that offering.

(I) Payment of the exercise price per share in cash at the
time of exercise; or

(II) Provided that at the time of the exercise the Company's
common stock is publicly traded and quoted regularly in the Wall Street Journal,
payment by delivery of shares of common stock of the Company already owned by
the optionee, held for the period required to avoid a charge to the Company's
reported earnings, and owned free and clear of any liens, claims, encumbrances
or security interest, which common stock shall be valued at fair market value on
the date preceding the date of exercise; or

(III) Payment by a combination of the methods of payment
specified in subparagraph 6(c)(i) and 6(c)(ii) above.

Notwithstanding the foregoing, this option may be exercised pursuant
to a program developed under Regulation T as promulgated by the Federal Reserve
Board which results in the receipt of cash (or check) by the Company prior to
the issuance of shares of the Company's common stock.

5.
<PAGE>

(D) An option shall not be transferable except by will or by the laws
of descent and distribution, and shall be exercisable during the lifetime of the
person to whom the option is granted only by such person or by his or her
guardian or legal representative, unless otherwise specified in the option, in
which case the option may be transferred upon such terms and conditions as are
set forth in the option, as the Board or the Committee shall determine in its
discretion, including (without limitation) pursuant to a "domestic relations
order." Notwithstanding the foregoing, the person to whom an option is granted
may, by delivering written notice to the Company, in a form satisfactory to the
Company, designate a third party who, in the event of the death of the optionee,
shall thereafter be entitled to exercise the option.

(E) Options granted under the Plan shall vest and become exercisable
as follows:

(I) An option granted pursuant to subparagraph 5(a) shall be
fully vested and exercisable on March 31, 1998, provided that the optionee has,
during the entire period prior to such vesting date, continuously served as a
Director of the Company or as an employee of or consultant to the Company or any
Affiliate of the Company, whereupon such option shall become fully vested and
exercisable in accordance with its terms.

(II) An option granted pursuant to subparagraph 5(b) shall
become vested and exercisable in three equal annual installments occurring on
the first through third anniversary dates of the date of grant of the option,
provided that the optionee has, during the entire period prior to such vesting
date, continuously served as a Director of the Company or as an employee of or
consultant to the Company or any Affiliate of the Company, whereupon such option
shall become vested and exercisable with respect to such installment in
accordance with its terms.

6.
<PAGE>

(III) An option granted pursuant to subparagraph 5(c) shall be
fully vested and exercisable one year after the date of grant of the option,
provided that the optionee has, during the entire period prior to such vesting
date, continuously served as a Director of the Company or as an employee of or
consultant to the Company or any Affiliate of the Company, whereupon such option
shall become fully vested and exercisable in accordance with its terms.

(F) The Company may require any optionee, or any person to whom an
option is transferred under subparagraph 6(d), as a condition of exercising any
such option: (i) to give written assurances satisfactory to the Company as to
the optionee's knowledge and experience in financial and business matters; and
(ii) to give written assurances satisfactory to the Company stating that such
person is acquiring the stock subject to the option for such person's own
account and not with any present intention of selling or otherwise distributing
the stock. These requirements, and any assurances given pursuant to such
requirements, shall be inoperative if (i) the issuance of the shares upon the
exercise of the option has been registered under a then-currently-effective
registration statement under the Securities Act of 1933, as amended (the
"Securities Act"), or (ii), as to any particular requirement, a determination is
made by counsel for the Company that such requirement need not be met in the
circumstances under the then-applicable securities laws.

(G) Notwithstanding anything to the contrary contained herein, an
option may not be exercised unless the shares issuable upon exercise of such
option are then registered under the Securities Act or, if such shares are not
then so registered, the Company has determined that such exercise and issuance
would be exempt from the registration requirements of the Securities Act.

7.
<PAGE>

7. COVENANTS OF THE COMPANY.

(A) During the terms of the options granted under the Plan, the
Company shall keep available at all times the number of shares of stock required
to satisfy such options.

(B) The Company shall seek to obtain from each regulatory commission
or agency having jurisdiction over the Plan such authority as may be required to
issue and sell shares of stock upon exercise of the options granted under the
Plan; provided, however, that this undertaking shall not require the Company to
register under the Securities Act either the Plan, any option granted under the
Plan, or any stock issued or issuable pursuant to any such option. If the
Company is unable to obtain from any such regulatory commission or agency the
authority which counsel for the Company deems necessary for the lawful issuance
and sale of stock under the Plan, the Company shall be relieved from any
liability for failure to issue and sell stock upon exercise of such options.

8. USE OF PROCEEDS FROM STOCK.

Proceeds from the sale of stock pursuant to options granted under the
Plan shall constitute general funds of the Company.

9. MISCELLANEOUS.

(A) Neither an optionee nor any person to whom an option is
transferred under subparagraph 6(d) shall be deemed to be the holder of, or to
have any of the rights of a holder with respect to, any shares subject to such
option unless and until such person has satisfied all requirements for exercise
of the option pursuant to its terms.

8.
<PAGE>

(B) Nothing in the Plan or in any instrument executed pursuant thereto
shall confer upon any Non-Employee Director any right to continue in the service
of the Company or any Affiliate or shall impair any right of the Company, its
Board or stockholders or any Affiliate to terminate the service of any Non-
Employee Director.

(C) No Non-Employee Director, individually or as a member of a group,
and no beneficiary or other person claiming under or through such Non-Employee
Director, shall have any right, title or interest in or to any option reserved
for the purposes of the Plan except as to such shares of common stock, if any,
as shall have been reserved for such Non-Employee Director pursuant to any
previous option grant.

(D) In connection with each option made pursuant to the Plan, it shall
be a condition precedent to the Company's obligation to issue or transfer shares
to a Non-Employee Director, or to evidence the removal of any restrictions on
transfer, that such Non-Employee Director make arrangements satisfactory to the
Company to insure that the amount of any federal or other withholding tax
required to be withheld with respect to such sale or transfer, or such removal,
is made available to the Company for timely payment of such tax.

10. ADJUSTMENTS UPON CHANGES IN STOCK.

(A) If any change is made in the stock subject to the Plan, or subject
to any option granted under the Plan, without the receipt of consideration by
the Company (through merger, consolidation, reorganization, recapitalization,
stock dividend, dividend in property other than cash, stock split, liquidating
dividend, combination of shares, exchange of shares, change in corporate
structure or other transaction not involving the receipt of consideration by the

9.
<PAGE>

Company), the Plan will be appropriately adjusted in the class(es) and maximum
number of shares subject to the Plan, and the outstanding options will be
appropriately adjusted in the class(es) and number of shares and price per share
of stock subject to such outstanding options. Such adjustments shall be made by
the Board or the Committee, the determination of which shall be final, binding
and conclusive. (The conversion of any convertible securities of the Company
shall not be treated as a "transaction not involving the receipt of
consideration by the Company".)

(B) In the event of: (1) a dissolution, liquidation or sale of all or
substantially all of the assets of the Company; (2) a merger or consolidation in
which the Company is not the surviving corporation and in which the stockholders
of the Company immediately prior to such transaction fail to hold beneficial
ownership (within the meaning of Rule 13d-3 or any successor rule or regulation
promulgated under the Securities Exchange Act of 1934, as amended (the "Exchange
Act") of securities representing at least eighty percent (80%) of the combined
voting power of the then-outstanding securities of the surviving corporation;
(3) a reverse merger in which the Company is the surviving corporation but the
shares of the Company's common stock outstanding immediately preceding the
merger are converted by virtue of the merger into other property, whether in the
form of securities, cash or otherwise, and in which the stockholders of the
Company immediately prior to such transaction fail to hold beneficial ownership
(as defined above) of securities representing at least eighty percent (80%) of
the combined voting power of the then-outstanding securities of the Company or
any corporation which then owns more than fifty percent (50%) of the combined
voting power of the Company; or (4) the acquisition by any person, entity or
group within the meaning of Section 13(d) or 14(d) of the Exchange Act, or any

10.
<PAGE>

comparable successor provisions (excluding any employee benefit plan, or related
trust, sponsored or maintained by the Company or any Affiliate of the Company)
of the beneficial ownership (within the meaning of Rule 13d-3 promulgated under
the Exchange Act, or comparable successor rule) of securities of the Company
representing at least twenty percent (20%) of the combined voting power entitled
to vote in the election of directors, then the vesting and exercisability of all
outstanding options shall be accelerated prior to such event and the options
terminated if not exercised (if applicable) after such acceleration and at or
prior to such event.

11. AMENDMENT OF THE PLAN.

(A) The Board at any time, and from time to time, may amend the Plan.
Except as provided in paragraph 10 relating to adjustments upon changes in
stock, no amendment shall be effective unless approved by the stockholders of
the Company to the extent stockholder approval is necessary for the Plan to
satisfy any Nasdaq or securities exchange listing requirements.

(B) Rights and obligations under any option granted before any
amendment of the Plan shall not be impaired by such amendment unless (i) the
Company requests the consent of the person to whom the option was granted and
(ii) such person consents in writing.

12. TERMINATION OR SUSPENSION OF THE PLAN.

(A) The Board may suspend or terminate the Plan at any time. Unless
sooner terminated, the Plan shall terminate on the tenth (10th) anniversary of
its adoption by the Board. No options may be granted under the Plan while the
Plan is suspended or after it is terminated.

11.
<PAGE>

(B) Rights and obligations under any option granted while the Plan is
in effect shall not be impaired by suspension or termination of the Plan, except
with the consent of the person to whom the option was granted.

13. EFFECTIVE DATE OF PLAN; CONDITIONS OF EXERCISE.

(A) The Plan shall become effective upon adoption by the Board of
Directors, approval by the Stockholders of the Company and the Effective Date of
the Initial Public Offering.

(B) No option granted under the Plan shall be exercised or exercisable
unless and until the condition of subparagraph 13(a) above has been met.

12.

<PAGE>
EXHIBIT 10.28

CELL PATHWAYS, INC.
EMPLOYEE STOCK PURCHASE PLAN

ADOPTED OCTOBER 14, 1997

1. PURPOSE.

(A) The purpose of the Employee Stock Purchase Plan (the "Plan") is to
provide a means by which employees of Cell Pathways, Inc., a Delaware
corporation (the "Company"), and its Affiliates, as defined in subparagraph
1(b), which are designated as provided in subparagraph 2(b), may be given an
opportunity to purchase stock of the Company.

(B) The word "Affiliate" as used in the Plan means any parent
corporation or subsidiary corporation of the Company, as those terms are defined
in Sections 424(e) and (f), respectively, of the Internal Revenue Code of 1986,
as amended (the "Code").

(C) The Company, by means of the Plan, seeks to retain the services of
its employees, to secure and retain the services of new employees, and to
provide incentives for such persons to exert maximum efforts for the success of
the Company.

(D) The Company intends that the rights to purchase stock of the
Company granted under the Plan be considered options issued under an "employee
stock purchase plan" as that term is defined in Section 423(b) of the Code.

2. ADMINISTRATION.

(A) The Plan shall be administered by the Board of Directors (the
"Board") of the Company unless and until the Board delegates administration to a
Committee, as provided in subparagraph 2(c). Whether or not the Board has
delegated administration, the Board shall have the final power to determine all
questions of policy and expediency that may arise in the administration of the
Plan.

(B) The Board shall have the power, subject to, and within the
limitations of, the express provisions of the Plan:

(I) To determine when and how rights to purchase stock of the
Company shall be granted and the provisions of each offering of such rights
(which need not be identical).

(II) To designate from time to time which Affiliates of the
Company shall be eligible to participate in the Plan.

(III) To construe and interpret the Plan and rights granted under
it, and to establish, amend and revoke rules and regulations for its
administration. The Board, in the

1.
<PAGE>

exercise of this power, may correct any defect, omission or inconsistency in the
Plan, in a manner and to the extent it shall deem necessary or expedient to make
the Plan fully effective.

(IV) To amend the Plan as provided in paragraph 13.

(V) Generally, to exercise such powers and to perform such acts
as the Board deems necessary or expedient to promote the best interests of the
Company and its Affiliates and to carry out the intent that the Plan be treated
as an "employee stock purchase plan" within the meaning of Section 423 of the
Code.

(C) The Board may delegate administration of the Plan to a Committee
composed of not fewer than two (2) members of the Board (the "Committee"). If
administration is delegated to a Committee, the Committee shall have, in
connection with the administration of the Plan, the powers theretofore possessed
by the Board, subject, however, to such resolutions, not inconsistent with the
provisions of the Plan, as may be adopted from time to time by the Board. The
Board may abolish the Committee at any time and revest in the Board the
administration of the Plan.

3. SHARES SUBJECT TO THE PLAN.

(A) Subject to the provisions of paragraph 12 relating to adjustments
upon changes in stock, the stock that may be sold pursuant to rights granted
under the Plan shall not exceed in the aggregate Three Hundred Thousand
(300,000) shares of the Company's common stock after adjustment for the reverse
split of 1 for 1.8157 (the "Common Stock"). If any right granted under the Plan
shall for any reason terminate without having been exercised, the Common Stock
not purchased under such right shall again become available for the Plan.

(B) The stock subject to the Plan may be unissued shares or reacquired
shares, bought on the market or otherwise.

4. GRANT OF RIGHTS; OFFERING.

(A) The Board or the Committee may from time to time grant or provide
for the grant of rights to purchase Common Stock of the Company under the Plan
to eligible employees (an "Offering") on a date or dates (the "Offering
Date(s)") selected by the Board or the Committee. Each Offering shall be in
such form and shall contain such terms and conditions as the Board or the
Committee shall deem appropriate, which shall comply with the requirements of
Section 423(b)(5) of the Code that all employees granted rights to purchase
stock under the Plan shall have the same rights and privileges. The terms and
conditions of an Offering shall be incorporated by reference into the Plan and
treated as part of the Plan. The provisions of separate Offerings need not be
identical, but each Offering shall include (through incorporation of the
provisions of this Plan by reference in the document comprising the Offering or
otherwise) the period during which the Offering shall be effective, which period
shall not exceed twenty-seven (27) months beginning with the Offering Date, and
the substance of the provisions contained in paragraphs 5 through 8, inclusive.

2.
<PAGE>

(B) If an employee has more than one right outstanding under the Plan,
unless he or she otherwise indicates in agreements or notices delivered
hereunder: (1) each agreement or notice delivered by that employee will be
deemed to apply to all of his or her rights under the Plan, and (2) a right with
a lower exercise price (or an earlier-granted right, if two rights have
identical exercise prices), will be exercised to the fullest possible extent
before a right with a higher exercise price (or a later-granted right, if two
rights have identical exercise prices) will be exercised.

5. ELIGIBILITY.

(A) Rights may be granted only to employees of the Company or, as the
Board or the Committee may designate as provided in subparagraph 2(b), to
employees of any Affiliate of the Company. Except as provided in subparagraph
5(b), an employee of the Company or any Affiliate shall not be eligible to be
granted rights under the Plan, unless, on the Offering Date, such employee has
been in the employ of the Company or any Affiliate for such continuous period
preceding such grant as the Board or the Committee may require, but in no event
shall the required period of continuous employment be equal to or greater than
two (2) years. In addition, unless otherwise determined by the Board or the
Committee and set forth in the terms of the applicable Offering, no employee of
the Company or any Affiliate shall be eligible to be granted rights under the
Plan, unless, on the Offering Date, such employee's customary employment with
the Company or such Affiliate is for at least twenty (20) hours per week and at
least five (5) months per calendar year.

(B) The Board or the Committee may provide that each person who,
during the course of an Offering, first becomes an eligible employee of the
Company or designated Affiliate will, on a date or dates specified in the
Offering which coincides with the day on which such person becomes an eligible
employee or occurs thereafter, receive a right under that Offering, which right
shall thereafter be deemed to be a part of that Offering. Such right shall have
the same characteristics as any rights originally granted under that Offering,
as described herein, except that:

(I) the date on which such right is granted shall be the
"Offering Date" of such right for all purposes, including determination of the
exercise price of such right;

(II) the period of the Offering with respect to such right shall
begin on its Offering Date and end coincident with the end of such Offering; and

(III) the Board or the Committee may provide that if such person
first becomes an eligible employee within a specified period of time before the
end of the Offering, he or she will not receive any right under that Offering.

(C) No employee shall be eligible for the grant of any rights under
the Plan if, immediately after any such rights are granted, such employee owns
stock possessing five percent (5%) or more of the total combined voting power or
value of all classes of stock of the Company or of any Affiliate. For purposes
of this subparagraph 5(c), the rules of Section 424(d) of the Code shall apply
in determining the stock ownership of any employee, and stock which such

3.
<PAGE>

employee may purchase under all outstanding rights and options shall be treated
as stock owned by such employee.

(D) An eligible employee may be granted rights under the Plan only if
such rights, together with any other rights granted under "employee stock
purchase plans" of the Company and any Affiliates, as specified by Section
423(b)(8) of the Code, do not permit such employee's rights to purchase stock of
the Company or any Affiliate to accrue at a rate which exceeds twenty-five
thousand dollars ($25,000) of fair market value of such stock (determined at the
time such rights are granted) for each calendar year in which such rights are
outstanding at any time.

(E) Officers of the Company and any designated Affiliate shall be
eligible to participate in Offerings under the Plan, provided, however, that the
Board may provide in an Offering that certain employees who are highly
compensated employees within the meaning of Section 423(b)(4)(D) of the Code
shall not be eligible to participate.

6. RIGHTS; PURCHASE PRICE.

(A) On each Offering Date, each eligible employee, pursuant to an
Offering made under the Plan, shall be granted the right to purchase up to the
number of shares of Common Stock of the Company purchasable with a percentage
designated by the Board or the Committee not exceeding fifteen percent (15%) of
such employee's Earnings (as defined in subparagraph 7(a)) during the period
which begins on the Offering Date (or such later date as the Board or the
Committee determines for a particular Offering) and ends on the date stated in
the Offering, which date shall be no later than the end of the Offering. The
Board or the Committee shall establish one or more dates during an Offering (the
"Purchase Date(s)") on which rights granted under the Plan shall be exercised
and purchases of Common Stock carried out in accordance with such Offering.

(B) In connection with each Offering made under the Plan, the Board or
the Committee may specify a maximum number of shares that may be purchased by
any employee as well as a maximum aggregate number of shares that may be
purchased by all eligible employees pursuant to such Offering. In addition, in
connection with each Offering that contains more than one Purchase Date, the
Board or the Committee may specify a maximum aggregate number of shares which
may be purchased by all eligible employees on any given Purchase Date under the
Offering. If the aggregate purchase of shares upon exercise of rights granted
under the Offering would exceed any such maximum aggregate number, the Board or
the Committee shall make a pro rata allocation of the shares available in as
nearly a uniform manner as shall be practicable and as it shall deem to be
equitable.

(I) an amount equal to eighty-five percent (85%) of the fair
market value of the stock on the Offering Date; or

4.
<PAGE>

(II) an amount equal to eighty-five percent (85%) of the fair
market value of the stock on the Purchase Date.

(D) For purposes of the Plan, "fair market value" means, as of any
date, the value of the common stock of the Company determined as follows:

(I) If the common stock is listed on any established stock
exchange or traded on the Nasdaq National Market or the Nasdaq SmallCap Market,
the fair market value of a share of common stock shall be the closing sales
price for such stock (or the closing bid, if no sales were reported) as quoted
on such exchange or market (or the exchange or market with the greatest volume
of trading in the Company's common stock) on the day of determination, as
reported in The Wall Street Journal or such other source as the Board deems
reliable.

(II) In the absence of such markets for the common stock, the
fair market value shall be determined in good faith by the Board.

7. PARTICIPATION; WITHDRAWAL; TERMINATION.

(A) An eligible employee may become a participant in the Plan pursuant
to an Offering by delivering a participation agreement to the Company within the
time specified in the Offering, in such form as the Company provides. Each such
agreement shall authorize payroll deductions of up to the maximum percentage
specified by the Board or the Committee of such employee's Earnings during the
Offering. "Earnings" is defined as an employee's regular salary or wages
(including amounts thereof elected to be deferred by the employee, that would
otherwise have been paid, under any arrangement established by the Company
intended to comply with Section 401(k), Section 402(e)(3), Section 125, Section
402(h), or Section 403(b) of the Code, and also including any deferrals under a
non-qualified deferred compensation plan or arrangement established by the
Company), which shall include or exclude (as provided for each Offering) the
following items of compensation: bonuses, commissions, overtime pay, incentive
pay, profit sharing, other remuneration paid directly to the employee, the cost
of employee benefits paid for by the Company or an Affiliate, education or
tuition reimbursements, imputed income arising under any group insurance or
benefit program, traveling expenses, business and moving expense reimbursements,
income received in connection with stock options, contributions made by the
Company or an Affiliate under any employee benefit plan, and similar items of
compensation, as determined by the Board or Committee. The payroll deductions
made for each participant shall be credited to an account for such participant
under the Plan and shall be deposited with the general funds of the Company. A
participant may reduce (including to zero) or increase such payroll deductions,
and an eligible employee may begin such payroll deductions, after the beginning
of any Offering only as provided for in the Offering. A participant may make
additional payments into his or her account only if specifically provided for in
the Offering and only if the participant has not had the maximum amount withheld
during the Offering.

(B) At any time during an Offering, a participant may terminate his or
her payroll deductions under the Plan and withdraw from the Offering by
delivering to the Company a notice of withdrawal in such form as the Company
provides. Such withdrawal may be elected at any

5.
<PAGE>

time prior to the end of the Offering except as provided by the Board or the
Committee in the Offering. Upon such withdrawal from the Offering by a
participant, the Company shall distribute to such participant all of his or her
accumulated payroll deductions (reduced to the extent, if any, such deductions
have been used to acquire stock for the participant) under the Offering, without
interest, and such participant's interest in that Offering shall be
automatically terminated. A participant's withdrawal from an Offering will have
no effect upon such participant's eligibility to participate in any other
Offerings under the Plan but such participant will be required to deliver a new
participation agreement in order to participate in subsequent Offerings under
the Plan.

(C) Rights granted pursuant to any Offering under the Plan shall
terminate immediately upon cessation of any participating employee's employment
with the Company and any designated Affiliate, for any reason, and the Company
shall distribute to such terminated employee all of his or her accumulated
payroll deductions (reduced to the extent, if any, such deductions have been
used to acquire stock for the terminated employee), under the Offering, without
interest.

(D) Rights granted under the Plan shall not be transferable by a
participant otherwise than by will or the laws of descent and distribution, or
by a beneficiary designation as provided in paragraph 14 and, otherwise during
his or her lifetime, shall be exercisable only by the person to whom such rights
are granted.

8. EXERCISE.

(A) On each Purchase Date specified therefor in the relevant Offering,
each participant's accumulated payroll deductions and other additional payments
specifically provided for in the Offering (without any increase for interest)
will be applied to the purchase of whole shares of stock of the Company, up to
the maximum number of shares permitted pursuant to the terms of the Plan and the
applicable Offering, at the purchase price specified in the Offering. No
fractional shares shall be issued upon the exercise of rights granted under the
Plan. The amount, if any, of accumulated payroll deductions remaining in each
participant's account after the purchase of shares which is less than the amount
required to purchase one share of stock on the final Purchase Date of an
Offering shall be held in each such participant's account for the purchase of
shares under the next Offering under the Plan, unless such participant withdraws
from such next Offering, as provided in subparagraph 7(b), or is no longer
eligible to be granted rights under the Plan, as provided in paragraph 5, in
which case such amount shall be distributed to the participant after such final
Purchase Date, without interest. The amount, if any, of accumulated payroll
deductions remaining in any participant's account after the purchase of shares
which is equal to the amount required to purchase whole shares of stock on the
final Purchase Date of an Offering shall be distributed in full to the
participant after such Purchase Date, without interest.

(B) No rights granted under the Plan may be exercised to any extent
unless the shares to be issued upon such exercise under the Plan (including
rights granted thereunder) are covered by an effective registration statement
pursuant to the Securities Act of 1933, as amended (the

6.
<PAGE>

"Securities Act") and the Plan is in material compliance with all applicable
state, foreign and other securities and other laws applicable to the Plan. If on
a Purchase Date in any Offering hereunder the Plan is not so registered or in
such compliance, no rights granted under the Plan or any Offering shall be
exercised on such Purchase Date, and the Purchase Date shall be delayed until
the Plan is subject to such an effective registration statement and such
compliance, except that the Purchase Date shall not be delayed more than twelve
(12) months and the Purchase Date shall in no event be more than twenty-seven
(27) months from the Offering Date. If on the Purchase Date of any Offering
hereunder, as delayed to the maximum extent permissible, the Plan is not
registered and in such compliance, no rights granted under the Plan or any
Offering shall be exercised and all payroll deductions accumulated during the
Offering (reduced to the extent, if any, such deductions have been used to
acquire stock) shall be distributed to the participants, without interest.

9. COVENANTS OF THE COMPANY.

(A) During the terms of the rights granted under the Plan, the Company
shall keep available at all times the number of shares of stock required to
satisfy such rights.

(B) The Company shall seek to obtain from each federal, state, foreign
or other regulatory commission or agency having jurisdiction over the Plan such
authority as may be required to issue and sell shares of stock upon exercise of
the rights granted under the Plan. If, after reasonable efforts, the Company is
unable to obtain from any such regulatory commission or agency the authority
which counsel for the Company deems necessary for the lawful issuance and sale
of stock under the Plan, the Company shall be relieved from any liability for
failure to issue and sell stock upon exercise of such rights unless and until
such authority is obtained.

(C) The Company shall have the authority to withhold applicable income
or employment taxes from the compensation paid to a participant to the extent
that the Company determines in its discretion that such withholding is required
by law, whether at the time of (i) the grant of a right under the Plan, (ii) the
time that a participant purchases stock under the plan, or (iii) otherwise.

10. USE OF PROCEEDS FROM STOCK.

Proceeds from the sale of stock pursuant to rights granted under the
Plan shall constitute general funds of the Company.

11. RIGHTS AS A STOCKHOLDER.

A participant shall not be deemed to be the holder of, or to have any
of the rights of a holder with respect to, any shares subject to rights granted
under the Plan unless and until the participant's shareholdings acquired upon
exercise of rights hereunder are recorded in the books of the Company.

7.
<PAGE>

12. ADJUSTMENTS UPON CHANGES IN STOCK.

(A) If any change is made in the stock subject to the Plan, or subject
to any rights granted under the Plan (through merger, consolidation,
reorganization, recapitalization, stock dividend, dividend in property other
than cash, stock split, liquidating dividend, combination of shares, exchange of
shares, change in corporate structure or other transaction not involving the
receipt of consideration by the Company), the Plan and outstanding rights will
be appropriately adjusted in the class(es) and maximum number of shares subject
to the Plan and the class(es) and number of shares and price per share of stock
subject to outstanding rights. Such adjustments shall be made by the Board or
the Committee, the determination of which shall be final, binding and
conclusive. (The conversion of any convertible securities of the Company shall
not be treated as a "transaction not involving the receipt of consideration by
the Company.")

(B) In the event of: (1) a dissolution or liquidation of the Company;
(2) a merger or consolidation in which the Company is not the surviving
corporation; (3) a reverse merger in which the Company is the surviving
corporation but the shares of the Company's Common Stock outstanding immediately
preceding the merger are converted by virtue of the merger into other property,
whether in the form of securities, cash or otherwise; or (4) the acquisition by
any person, entity or group within the meaning of Section 13(d) or 14(d) of the
Securities Exchange Act of 1934, as amended (the "Exchange Act") or any
comparable successor provisions (excluding any employee benefit plan, or related
trust, sponsored or maintained by the Company or any Affiliate of the Company)
of the beneficial ownership (within the meaning of Rule 13d-3 promulgated under
the Exchange Act, or comparable successor rule) of securities of the Company
representing at least fifty percent (50%) of the combined voting power entitled
to vote in the election of directors, then, as determined by the Board in its
sole discretion, (i) any surviving or acquiring corporation may assume
outstanding rights or substitute similar rights for those under the Plan, (ii)
such rights may continue in full force and effect, or (iii) participants'
accumulated payroll deductions may be used to purchase Common Stock immediately
prior to the transaction described above and the participants' rights under the
ongoing Offering terminated.

13. AMENDMENT OF THE PLAN.

(A) The Board at any time, and from time to time, may amend the Plan.
However, except as provided in paragraph 12 relating to adjustments upon changes
in stock, no amendment shall be effective unless approved by the stockholders of
the Company within twelve (12) months before or after the adoption of the
amendment, where the amendment will:

(I) Increase the number of shares reserved for rights under the
Plan;

(II) Modify the provisions as to eligibility for participation
in the Plan, but only to the extent such modification requires stockholder
approval in order for the Plan to obtain employee stock purchase plan treatment
under Section 423 of the Code or to comply with the requirements of Rule 16b-3
promulgated under the Securities Exchange Act of 1934, as amended ("Rule 16b-
3"); or

8.
<PAGE>

(III) Modify the Plan in any other way if such modification
requires stockholder approval in order for the Plan to obtain employee stock
purchase plan treatment under Section 423 of the Code or to comply with the
requirements of Rule 16b-3.

It is expressly contemplated that the Board may amend the Plan in any respect
the Board deems necessary or advisable to provide eligible employees with the
maximum benefits provided or to be provided under the provisions of the Code and
the regulations promulgated thereunder relating to employee stock purchase plans
and/or to bring the Plan and/or rights granted under it into compliance
therewith.

(B) Rights and obligations under any rights granted before amendment
of the Plan shall not be impaired by any amendment of the Plan, except with the
consent of the person to whom such rights were granted, or except as necessary
to comply with any laws or governmental regulations, or except as necessary to
ensure that the Plan and/or rights granted under the Plan comply with the
requirements of Section 423 of the Code.

14. DESIGNATION OF BENEFICIARY.

(A) A participant may file a written designation of a beneficiary who
is to receive any shares and cash, if any, from the participant's account under
the Plan in the event of such participant's death subsequent to the end of an
Offering but prior to delivery to the participant of such shares and cash. In
addition, a participant may file a written designation of a beneficiary who is
to receive any cash from the participant's account under the Plan in the event
of such participant's death during an Offering.

(B) Such designation of beneficiary may be changed by the participant
at any time by written notice. In the event of the death of a participant and
in the absence of a beneficiary validly designated under the Plan who is living
at the time of such participant's death, the Company shall deliver such shares
and/or cash to the executor or administrator of the estate of the participant,
or if no such executor or administrator has been appointed (to the knowledge of
the Company), the Company, in its sole discretion, may deliver such shares
and/or cash to the spouse or to any one or more dependents or relatives of the
participant, or if no spouse, dependent or relative is known to the Company,
then to such other person as the Company may designate.

15. TERMINATION OR SUSPENSION OF THE PLAN.

(A) The Board in its discretion, may suspend or terminate the Plan at
any time. No rights may be granted under the Plan while the Plan is suspended
or after it is terminated.

(B) Rights and obligations under any rights granted while the Plan is
in effect shall not be impaired by suspension or termination of the Plan, except
as expressly provided in the Plan or with the consent of the person to whom such
rights were granted, or except as necessary to comply with any laws or
governmental regulation, or except as necessary to ensure that the Plan and/or
rights granted under the Plan comply with the requirements of Section 423 of the
Code.

9.
<PAGE>

16. EFFECTIVE DATE OF PLAN.

The Plan shall become effective on the same day that the Company's
initial public offering of shares of common stock becomes effective (the
"Effective Date"), but no rights granted under the Plan shall be exercised
unless and until the Plan has been approved by the stockholders of the Company
within twelve (12) months before or after the date the Plan is adopted by the
Board or the Committee, which date may be prior to the Effective Date.

10.

<PAGE>
EXHIBIT 11.1

CELL PATHWAYS, INC.
STATEMENT RE: COMPUTATION OF PRO FORMA NET
LOSS PER SHARE

For the Year For the Nine
Ended Months Ended
December 31, 1996 September 30, 1997
----------------- -------------

Weighted average common
shares outstanding 1,452,592 1,465,350

Preferred shares convertible
into common 6,013,685 6,013,685

SAB 83 option shares 189,839 189,839
SAB 83 warrant shares 30,512 30,512
---------- ----------

7,686,628 7,699,386
========== ==========

Net Loss ($4,735,000) ($6,899,000)

Pro forma net loss per share $0.62 $0.90
========== ==========

<PAGE>

EXHIBIT 23.2

CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS

As independent public accountants, we hereby consent to the use of our report
dated October 22, 1997 on the financial statements included in or made part of
this registration statement.

ARTHUR ANDERSEN LLP

Denver, Colorado

October 22, 1997

<PAGE>

<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CELL
PATHWAYS, INC. AMENDMENT NO. 1 TO FORM S-1 REGISTRATION STATEMENT AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>

<S> <C> <C>
<PERIOD-TYPE> 12-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1996
<PERIOD-START> JAN-01-1996 JAN-01-1997
<PERIOD-END> DEC-31-1996 SEP-30-1997
<CASH> 645 11,401
<SECURITIES> 0 0
<RECEIVABLES> 0 0
<ALLOWANCES> 0 0
<INVENTORY> 0 0
<CURRENT-ASSETS> 910 11,674
<PP&E> 256 449
<DEPRECIATION> 71 112
<TOTAL-ASSETS> 1,106 12,105
<CURRENT-LIABILITIES> 1,223 1,125
<BONDS> 0 0
1 1,092
15,137 32,003
<COMMON> 15 17
<OTHER-SE> (15,332) (22,138)
<TOTAL-LIABILITY-AND-EQUITY> 1,106 12,105
<SALES> 0 0
<TOTAL-REVENUES> 0 0
<CGS> 0 0
<TOTAL-COSTS> 4,826 6,170
<OTHER-EXPENSES> 0 1,017
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 0 0
<INCOME-PRETAX> 4,735 6,899
<INCOME-TAX> 0 0
<INCOME-CONTINUING> 0 0
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (4,735) (6,899)
<EPS-PRIMARY> (0.62) (0.90)
<EPS-DILUTED> (0.62) (0.90)

</TABLE>