VION PHARMACEUTICALS INC, 424B4, 1999-10-26

VION PHARMACEUTICALS INC
424B4, 1999-10-26
BIOLOGICAL PRODUCTS, (NO DIAGNOSTIC SUBSTANCES)

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<PAGE>
PROSPECTUS

2,200,000 SHARES
[VION PHARMACEUTICALS, INC LOGO]

COMMON STOCK

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

This is a public offering by Vion Pharmaceuticals, Inc. of 2,200,000 shares
of common stock.

We have been approved for quotation on the Nasdaq National Market under the
symbol 'VION.' On October 25, 1999, the last reported sales price of our shares
was $5.8125 per share.

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

THESE ARE SPECULATIVE SECURITIES. BEFORE BUYING ANY SHARES YOU SHOULD READ THE
DISCUSSION OF MATERIAL RISKS OF INVESTING IN OUR COMMON STOCK IN 'RISK FACTORS'
BEGINNING ON PAGE 8.

<TABLE>
<CAPTION>
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UNDERWRITING
PRICE TO DISCOUNT AND PROCEEDS TO
PUBLIC COMMISSIONS VION
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per share.................. $5.00 $0.35 $4.65
Total...................... $11,000,000 $770,000 $10,230,000
- ----------------------------------------------------------------------------------------------------
</TABLE>

NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.

We have granted the underwriters the right to purchase up to an additional
330,000 shares of our common stock within 30 days following the date of this
prospectus to cover over-allotments. Brean Murray & Co., Inc., the
representative of the underwriters, expects to deliver the shares of common
stock to the purchasers on October 29, 1999.

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

BREAN MURRAY & CO., INC.

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

The date of this prospectus is October 25, 1999

<PAGE>
[graphics omitted]

[Pictures which outline the four stages by which the TAPET system suppresses
tumor growth. The pictures show (i) the methods by which TAPET bacteria is
introduced into the body, (ii) how TAPET bacteria find their way to the tumor,
(iii) TAPET bacteria multiplying inside the tumor, and (iv) the suppression of
tumor growth.]

<PAGE>
TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
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<S> <C>
Prospectus Summary.......................................... 4
Risk Factors................................................ 8
Note Regarding Forward-Looking Statements................... 15
Use of Proceeds............................................. 16
Price Range of Common Stock................................. 16
Dividend Policy............................................. 17
Capitalization.............................................. 17
Selected Financial Data..................................... 18
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 19
Business.................................................... 23
Management.................................................. 35
Principal Stockholders...................................... 43
Certain Transactions........................................ 45
Description of Capital Stock................................ 45
Shares Eligible For Future Sale............................. 49
Underwriting................................................ 51
Legal Matters............................................... 52
Experts..................................................... 52
Where You Can Find More Information......................... 52
Index to Financial Statements............................... F-1
</TABLE>

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

Unless we indicate otherwise in this prospectus, references to 'Vion,'
'we,' 'us' or 'our' mean Vion Pharmaceuticals, Inc. Except as otherwise
specified, all information in this prospectus:

does not give effect to 7,600,248 shares issuable upon the exercise of
outstanding stock options and warrants and 2,864,259 shares issuable upon
the conversion of outstanding shares of preferred stock as of October 25,
1999; and

assumes that the underwriters' over-allotment option is not exercised.

TAPET'r', Triapine'r', Promycin'r' and MELASYN'r' are our registered
trademarks and servicemarks.

You should rely only on the information contained in this prospectus. No
dealer, salesperson or other person is authorized to give information that is
not contained in this prospectus. This prospectus is not an offer to sell nor is
it seeking an offer to buy the shares of common stock in any jurisdiction where
the offer or sale is not permitted. The information contained in this prospectus
is correct only as of the date of this prospectus, regardless of the time of the
delivery of this prospectus or any sale of the shares.

<PAGE>
PROSPECTUS SUMMARY

You should read the following summary together with the more detailed
information, financial statements and notes to the financial statements
appearing elsewhere in this prospectus.

ABOUT VION

Vion Pharmaceuticals, Inc. is a biopharmaceutical company engaged in the
research, development and commercialization of cancer treatment technologies.
Pursuant to license agreements with Yale University, we have acquired the rights
to several patents and patent applications related to cancer treatment
technologies. Our product portfolio consists of a drug delivery platform and
three cancer therapeutics.

DRUG DELIVERY PLATFORM: TAPET'r'

We believe that our core technology, TAPET, or Tumor Amplified Protein
Expression Therapy, addresses one of the biggest challenges faced in treating
cancer: how to effectively deliver anticancer agents while having a minimal
effect on healthy, normal tissues. Administered systemically, most anticancer
drugs affect rapidly growing cells, both cancerous and normal, throughout the
body. Too often, the result is significant side effects that take a toll on
patient health, limiting the amount of treatment a patient may receive.
Therefore, a great need exists for new therapies and delivery mechanisms that
are able to deliver anticancer agents to tumors preferentially, safely and
efficiently. We believe that TAPET will meet this need.

We believe that TAPET is the first and only drug delivery technology that
uses genetically altered strains of Salmonella as a bacterial vector, or
vehicle, for delivering cancer-fighting drugs preferentially to solid tumors.
The Salmonella utilized in the TAPET system have been genetically modified to
minimize the occurrence of septic shock. As an additional safety measure, TAPET
organisms have been designed to remain fully sensitive to antibiotics.
Therefore, if there is an adverse reaction, the bacteria can be treated with
antibiotics at any time during therapy. Preclinical studies have demonstrated
these safety measures to be effective.

In preclinical studies, after injection into the body, TAPET organisms
migrated to and penetrated throughout tumors, including the necrotic, or the
deep, oxygen-starved cells of solid tumors where other anticancer drugs have
difficulty reaching. These studies showed that TAPET organisms double in
quantity every 30 to 45 minutes, thereby increasing their ability to inhibit
tumor growth and enabling the continuous delivery of anticancer drugs to tumors.
We believe that bringing a 'drug factory' preferentially to the tumor will
result in a cancer therapy that is more concentrated, more effective and less
toxic to normal tissue.

Preclinical studies have demonstrated TAPET's ability to inhibit the growth
of a broad range of solid tumors, such as melanoma and colon, lung and breast
cancer. Additionally, in these preclinical studies, TAPET organisms have been
shown to selectively accumulate in solid tumors of the lung, colon, breast,
prostate, liver, kidney and also in melanoma at ratios of greater than 1,000:1
relative to normal tissues. These types of solid tumors represent more than 60%
of all new cancer incidences in the world today. Administration of unarmed TAPET
vectors, without an anticancer drug, to mice bearing melanoma tumors inhibited
the growth of these tumors by 94% compared with untreated control animals. In
addition, the treated mice survived more than twice as long as those that did
not receive TAPET treatment.

We believe that TAPET's greatest potential application is the ability to
continuously deliver a large variety of anticancer drugs directly to tumors
while minimizing the side effects associated with current chemotherapy. Through
genetic engineering, we intend to develop TAPET vectors that manufacture and
deliver Vion-developed anticancer drugs. Some of these drugs will be generic and
non-proprietary, however, when combined with the TAPET system, they could result
in proprietary products for us. In addition, we intend to seek multiple
strategic partnerships with pharmaceutical companies to use TAPET to deliver
their proprietary anticancer drugs.

<PAGE>
Following the submission of an investigational new drug, or IND,
application to the U.S. Food and Drug Administration, we are now working under
an open IND status to prepare for and initiate Phase I intratumoral safety
studies in human patients using unarmed TAPET organisms. On October 11, 1999, we
received Institutional Review Board approval to begin Phase I safety trials at
the Cleveland Clinic under the supervision of Ronald M. Bukowski, M.D. If
successful, these safety studies will soon be followed by additional Phase I
studies of TAPET organisms delivered intravenously, as well as by an armed
vector designed to manufacture and express an anticancer drug.

ANTICANCER CELL THERAPEUTICS

Promycin'r'

Promycin, which is currently being evaluated in a multicenter Phase III
clinical trial for the treatment of head and neck cancer, is designed to improve
the treatment of solid tumors by attacking the hypoxic, or oxygen-depleted,
cancer cells that are often resistant to traditional radiation therapy. Small
quantities of hypoxic cells within a tumor often survive and proliferate after
most of the non-hypoxic malignant cells in the tumor have been eradicated by
radiation treatment. Because radiation therapy requires oxygenation of the
tissue in order to be effective, oxygen depleted cells are less susceptible to
radiation therapy and tend to form a therapeutically resistant group within
solid tumors. Preclinical studies have shown that Promycin, in conjunction with
radiation, is effective in eradicating oxygen-depleted cells.

A Phase I/II trial was conducted on 21 patients who were treated with
radiation, and in some cases, surgery, in conjunction with Promycin for certain
types of head and neck cancer. In this study, there was a 33% cancer-free
survival rate at five years versus the clinical expectation of approximately 15%
for radiation therapy alone. Based on these findings, Vion and Boehringer
Ingelheim International GmbH collaborated to initiate a Phase III trial of
Promycin in patients with head and neck cancer at 44 centers worldwide. The
trial is designed to determine the efficacy of Promycin as an adjunct to
radiation therapy for these conditions. We expect to begin evaluating Promycin
in other tumor types by the first quarter of 2000.

Triapine'r'

Triapine is designed to prevent the replication of tumor cells by blocking
a critical step in the synthesis of DNA. In preclinical trials, Triapine has
shown a broad spectrum of activity against human tumors grafted onto another
species and mouse tumors. We received clearance from the U.S. Food and Drug
Administration to proceed with a Phase I human clinical trial in January 1998.
Both single dose and multiple dose regimens are currently being evaluated in
patients with solid tumors.

Sulfonyl Hydrazine Prodrugs

Sulfonyl hydrazine prodrugs represent compounds that are designed to be
converted to unique, potent alkylating agents. Alkylating agents are highly
effective against tumors, but lack selectivity and affect many normal tissues as
well as cancer cells, causing toxic side-effects. Developing the sulfonyl
hydrazine alkylating agent as a prodrug form yields a relatively non-toxic drug
form that may be converted preferentially into the active drug, allowing it to
exploit a property of tumor cells for conversion into powerful cancer-fighting
drugs.

<PAGE>
OUR BUSINESS STRATEGY

Our product development strategy consists of two main approaches. First, we
engage in product development with respect to anticancer technologies through
in-house research and through collaboration with academic institutions. Second,
we seek partnerships with other companies to develop, and eventually market, our
products.

Our plan of operations for the next 18 months includes the following
elements:

Continue to conduct internal research and development with respect to our
core technologies and other product candidates that we may identify;

Conduct Phase III clinical studies of Promycin in the United States and
Europe for treatment of head and neck cancer;

Conduct Phase I clinical studies of Triapine in the United States for
safety and efficacy;

File IND(s) with the FDA and conduct Phase I clinical studies in the
United States and Europe for the safety and selective tumor accumulation
of several bacterial constructs using our TAPET delivery system;

Continue to support research and development being performed at Yale
University and by other collaborators; and

Continue to seek collaborative partnerships, joint ventures,
co-promotional agreements or other arrangements with third parties.

We were incorporated in Delaware on May 13, 1993 and began operations on
May 1, 1994. Our executive offices are located at 4 Science Park, New Haven,
Connecticut 06511, and our telephone number is (203) 498-4210.

THE OFFERING

<TABLE>
<S> <C>
Common stock offered by Vion................. 2,200,000 shares
Common stock outstanding before the
offering................................... 15,697,325 shares
Common stock to be outstanding after the
offering................................... 17,897,325 shares
Use of Proceeds.............................. For working capital, including for research
and development and other general corporate
purposes. See 'Use of Proceeds.'
Nasdaq SmallCap Symbol....................... VION
</TABLE>

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

The number of shares outstanding after the offering is based on the number
of shares outstanding as of October 25, 1999. Except as otherwise specified, the
information in this prospectus:

assumes that the underwriters' over-allotment option is not exercised.

<PAGE>
SUMMARY FINANCIAL DATA

<TABLE>
<CAPTION>
FOR THE
PERIOD FROM
MAY 1, 1994
SIX MONTHS (INCEPTION)
ENDED JUNE 30, THROUGH
----------------------- JUNE 30,
1996 1997 1998 1998 1999 1999
---- ---- ---- ---- ---- ----
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Contract research grants...... $ 52 $ 48 $ 309 $ 109 $ 164 $ 573
Research support.............. -- 1,223 1,647 423 1,115 3,985
Technology license revenues... -- 4,000 -- -- 50 4,050
--------- --------- ---------- ---------- ---------- --------
Total revenues........... 52 5,271 1,956 532 1,329 8,608
--------- --------- ---------- ---------- ---------- --------
Operating expenses:
Research and development...... 5,975 7,675 10,709 4,371 6,324 38,299
General and administrative.... 2,113 2,639 2,203 1,091 1,200 10,587
Non-recurring collaboration
restructuring fee........... -- 600 -- -- -- 600
--------- --------- ---------- ---------- ---------- --------
Total operating
expenses............... 8,088 10,914 12,912 5,462 7,524 49,486
--------- --------- ---------- ---------- ---------- --------
Loss from operations..... (8,036) (5,643) (10,956) (4,930) (6,195) (40,878)
Interest income.................... (437) (344) (540) (249) (127) (1,533)
Interest expense................... 10 44 62 34 21 181
--------- --------- ---------- ---------- ---------- --------
Net loss...................... (7,609) (5,343) (10,478) (4,715) (6,089) (39,526)
Preferred dividends and
accretion........................ (11,627) (1,132) (4,414) (2,676) (357) (17,530)
--------- --------- ---------- ---------- ---------- --------
Loss applicable to common
shareholders..................... $ (19,236) $ (6,475) $ (14,892) $ (7,391) $ (6,446) $(57,056)
--------- --------- ---------- ---------- ---------- --------
--------- --------- ---------- ---------- ---------- --------
Basic and diluted loss applicable
to common shareholders per
share............................ $ (2.52) $ (0.75) $ (1.24) $ (0.72) $ (0.44)
--------- --------- ---------- ---------- ----------
--------- --------- ---------- ---------- ----------
Weighted average number of shares
of common stock outstanding...... 7,641,546 8,670,717 11,977,121 10,251,896 14,567,169
--------- --------- ---------- ---------- ----------
--------- --------- ---------- ---------- ----------
</TABLE>

The 'As Adjusted' column of the following balance sheet gives effect to our
sale of 2,200,000 shares of common stock in this offering at the price set forth
on the cover page of this prospectus after deducting the underwriting discount
and estimated offering expenses.

<TABLE>
<CAPTION>
JUNE 30, 1999
--------------------
ACTUAL AS ADJUSTED
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(IN THOUSANDS)
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................... $4,506 $ 14,111
Working capital............................................. 3,002 12,607
Total assets................................................ 7,185 16,790
Redeemable preferred stock.................................. 5,013 5,013
Total shareholders' equity (deficit)........................ (789) 8,816
</TABLE>

<PAGE>
RISK FACTORS

You should carefully consider the following risk factors in addition to the
other information in this prospectus before purchasing our shares.

WE DO NOT HAVE A LONG OPERATING HISTORY AND ARE VULNERABLE TO THE UNCERTAINTIES
AND DIFFICULTIES FREQUENTLY ENCOUNTERED BY EARLY STAGE COMPANIES

To date, our activities have consisted primarily of research and
development and we have generated minimal revenues. Therefore, we are vulnerable
to the uncertainties and difficulties encountered by early stage companies, such
as our ability to:

implement sales and marketing initiatives;

attain, retain and motivate qualified personnel;

respond to actions taken by our competitors;

effectively manage our growth by building a solid base of operations and
technologies; and

move from the product development stage to the commercialization stage.

WE DO NOT HAVE MANUFACTURING OR MARKETING CAPABILITIES OF OUR OWN

We have no experience in manufacturing or marketing any therapeutic
products. We currently do not have the resources to manufacture or market
independently on a commercial scale any products that we may develop. We
currently intend to outsource some or all manufacturing requirements we may
have. We may not be able to enter into suitable arrangements for manufacturing.
If, alternatively, we decide to establish a manufacturing facility, we will
require substantial additional funds and will be required to hire significant
additional personnel and comply with the extensive FDA-mandated good
manufacturing practices that would apply to such a facility. Additionally, we
currently have no marketing or sales staff and we may not be successful in
hiring such a staff.

WE DEPEND ON OUTSIDE PARTIES FOR ASPECTS OF OUR PRODUCT DEVELOPMENT EFFORTS

Our strategy for the research, development and commercialization of our
products entails entering into various arrangements with corporate partners,
licensors, licensees, collaborators at research institutions and others. We are
dependent, therefore, upon the actions of these third parties in performing
their responsibilities. We also rely on our collaborative partners to conduct
research efforts and clinical trials, to obtain regulatory approvals and to
manufacture and market our products. In particular, we have contracted a
research organization to conduct the Phase III clinical studies of Promycin. As
a result, the amount and timing of resources to be devoted to these activities
by these other parties may not be within our control.

WE HAVE AN ACCUMULATED DEFICIT, WE ANTICIPATE THAT OUR LOSSES WILL CONTINUE AND
WE RECEIVED A GOING CONCERN OPINION FROM OUR AUDITORS

We are in the development stage and at June 30, 1999, we had an accumulated
deficit of approximately $57.1 million. The loss applicable to common
shareholders is also approximately $57.1 million. Since then, we have
experienced significant losses which we expect to continue for the foreseeable
future. We have incurred a substantial portion of our losses in connection with
research we sponsored on several product candidates pursuant to agreements with
Yale University. We continue to have substantial financial commitments to Yale
pursuant to the agreements with them. We will continue to conduct significant
research, development, testing and regulatory compliance activities which,
together with administrative expenses, are expected to result in operating
losses for at least the next several years. We also received an opinion from our
independent auditors for the fiscal year ended December 31, 1998 expressing
substantial doubt as

<PAGE>
to our ability to continue as a going concern as a result of our recurring
operating losses and need for substantial amounts of additional funding to
continue our operations.

WE ARE IN THE EARLY STAGES OF PRODUCT DEVELOPMENT AND OUR PRODUCT CANDIDATES MAY
NOT BE SUCCESSFULLY DEVELOPED

Some of our proposed products are in the early development stage and
require significant further research and development. We have not yet selected
lead drugs to use with our proposed TAPET drug delivery platform and one of our
proposed products is just beginning clinical trials. We do not expect our
products to be commercially available for a significant period of time, if ever.
Results obtained in research and testing conducted to date are not conclusive as
to whether products we are investigating will be effective or safe for their
proposed uses. Our successful development of any product is subject to the risks
of failure inherent in the development of products or therapeutic procedures
based on innovative technologies. These risks include the possibilities that:

the proposed products are found to be ineffective or unsafe, or otherwise
fail to receive necessary regulatory clearances or approvals;

the proposed products are uneconomical to market or do not achieve broad
market acceptance;

third parties hold proprietary rights that preclude us from marketing
proposed products; or

third parties market a superior or equivalent product.

THE EFFICACY AND SAFETY OF OUR TAPET TECHNOLOGY IS UNCERTAIN

TAPET uses genetically altered Salmonella bacteria for delivery of genes or
gene products to tumors. The use of bacteria in general, and Salmonella in
particular, to deliver genes or gene products is a new technology, and existing
preclinical and clinical data on the safety and efficacy of this technology are
very limited. Unacceptable side effects may be discovered during preclinical and
clinical testing of our potential products utilizing the TAPET technology.
Products utilizing the TAPET technology are not yet in human clinical trials,
and the results of preclinical studies do not always predict safety or efficacy
in humans. Possible serious side effects of TAPET include bacterial infections,
particularly the risk of septic shock, a serious and often fatal result of
bacterial infection of the blood.

WE ARE LIKELY TO REQUIRE ADDITIONAL CAPITAL TO CONTINUE OUR OPERATIONS

Our strategy is to continue to test our current anticancer therapeutics and
technologies and to discover, develop and commercialize other products for the
treatment of cancer. In order to implement our strategy, we expect to spend
significant amounts of money to:

pay our financial commitments to our current academic collaborators;

fund our research and product development programs;

enter into additional strategic/collaborative partnerships with academic
institutions;

sponsor the performance of clinical trials and other tests on our
products;

market our products; and

fund operating losses and working capital.

We required additional capital financing after our initial public offering
in 1995 and we will likely require additional capital from public or private
equity or debt sources. We anticipate that our existing available capital
resources and interest earned on available cash and short-term investments,
together with the net proceeds of this offering, will be sufficient to fund our
operating expenses and capital requirements as currently planned until at least
September 30, 2000. We may not be able to raise additional capital in the future
on terms acceptable to us or at all. Moreover,

<PAGE>
future equity financings may be dilutive to our stockholders. If alternative
sources of financing are insufficient or unavailable, we will be required to
delay, scale back or eliminate our research and product development programs or
to license third parties to commercialize products or technologies that we would
otherwise seek to develop alone. In addition, we may be unable to meet our
obligations under license agreements, research agreements or other collaborative
agreements. If we fail to make any payments required to academic collaborators
or licensors, or otherwise default under any agreement with such parties, they
will have the right to terminate their agreements with us. As a result, we would
be unable to continue development of or to commercialize all or a portion of our
product candidates licensed under these agreements.

WE DEPEND HEAVILY ON PATENTS WHICH MAY NOT ADEQUATELY PROTECT OUR TECHNOLOGIES
FROM USE BY OTHERS

Our success will depend on our ability, or the ability of our licensors, to
obtain and maintain patent protection on technologies and products, to preserve
trade secrets and to operate without infringing the proprietary rights of
others. Patent applications filed by us or on our behalf may not result in
patents being issued or, if issued, the patents may not afford protection
against competitors with similar technology. Furthermore, others may
independently develop similar technologies or duplicate any technology developed
by us. It is possible that before any of our potential products can be
commercialized, their related patents may expire, or remain in existence for
only a short period following commercialization, thus reducing any advantage of
the patent. Moreover, composition of matter patent protection, which gives
patent protection for a compound or a composition per se, may not be available
for some of our product candidates.

Our processes and potential products may conflict with patents that have
been or may be granted to competitors, universities or others. As the
biopharmaceutical industry expands and more patents are issued, the risk
increases that our processes and potential products may give rise to claims that
they infringe the patents of others. These other persons could bring legal
actions against us claiming damages and seeking to enjoin clinical testing,
manufacturing and marketing of the affected product or process. If any of these
actions are successful, in addition to any potential liability for damages, we
could be required to obtain a license in order to continue to conduct clinical
tests, manufacture or market the affected product or use the affected process.
Required licenses may not be available on acceptable terms, if at all, and the
results of litigation are uncertain. If we become involved in litigation or
other proceedings, it could consume a substantial portion of our financial
resources and the efforts of our personnel. In addition, we may have to expend
resources to protect our interests from possible infringement by others.

We are aware that BioChem Pharma has been granted an issued U.S. patent
with claims to methods of use of a compound or a group of compounds, including
3TC, for treating HBV. Under an agreement with Yale, we have rights in a patent
application with claims directed to methods for the use of 3TC or a mixture
containing 3TC for treating HBV. In November 1997, we requested that the U.S.
Patent and Trademark Office declare an Interference between the BioChem patent
and our patent application. We may not prevail in any Interference proceeding
that may be declared.

We have received correspondence from F. C. Gaskin, Inc. alleging that we
may be infringing certain of their patents relating to melanin-containing
compositions and their use. We believe this assertion has no merit.

WE RELY ON CONFIDENTIALITY AGREEMENTS TO PROTECT OUR TRADE SECRETS; DISPUTES MAY
ARISE AS TO TECHNOLOGY DEVELOPED BY OUR EMPLOYEES

We also rely on trade secrets that we may seek to protect through
confidentiality agreements with employees and other parties. If these agreements
are breached, remedies may not be available or adequate and our trade secrets
may otherwise become known to competitors. To the extent that our consultants,
key employees or other third parties apply technological information
independently developed by them or by others to our proposed projects, third
parties may own all

<PAGE>
or part of the proprietary rights to such information, and disputes may arise as
to the ownership of these proprietary rights which may not be resolved in our
favor.

WE HAVE PAID AND MUST CONTINUE TO PAY SIGNIFICANT AMOUNTS OF MONEY TO YALE, BUT
WE MAY NEVER REALIZE ANY BENEFITS FROM OUR AGREEMENTS WITH YALE

We have significant financial commitments to academic collaborators in
connection with licenses and sponsored research agreements. In particular,
through June 30, 1999, we have paid approximately $6.0 million in total to Yale,
and we continue to have substantial funding commitments to Yale whether or not
the research results in suitable product candidates. Moreover, we generally do
not have the right to control the research that Yale is conducting pursuant to
the sponsored research agreements, and the funds may not be used to conduct
research relating to products that we would like to pursue. Additionally, if the
research being conducted by Yale results in technologies that Yale has not
already licensed or agreed to license to us, we may need to negotiate additional
license agreements or we may be unable to utilize those technologies.

WE DEPEND HEAVILY ON KEY PERSONNEL

Because of the specialized scientific nature of our business, we are
dependent upon the continued efforts of our management and scientific and
technical personnel. We are also dependent upon key employees and our scientific
advisors. We do not maintain key-man life insurance on any of our employees.
Competition among biopharmaceutical and biotechnology companies for qualified
employees is intense. We may not be able to attract, retain and motivate any
additional highly skilled employees required for the expansion of our
activities. In addition, the hiring process will be time consuming and will
divert the efforts and attention of our management from our operations.

THE FDA AND COMPARABLE FOREIGN REGULATORY AUTHORITIES MAY NOT APPROVE OUR FUTURE
PRODUCTS

The FDA and comparable foreign regulatory authorities require rigorous
preclinical testing, clinical trials and other approval procedures for human
pharmaceutical products. Numerous regulations also govern the manufacturing,
safety, labeling, storage, record keeping, reporting and marketing of
pharmaceutical products. Governmental regulations may significantly delay the
marketing of our products, prevent marketing of products altogether or impose
costly requirements on our activities. A delay in obtaining or a failure to
obtain regulatory approvals for any of our drug candidates will have an adverse
effect on our business.

Government regulatory requirements vary widely from country to country, and
the time required to complete preclinical testing and clinical trials and to
obtain regulatory approvals is typically several years. The process of obtaining
approvals and complying with appropriate government regulations is time
consuming and expensive. Changes in regulatory policy or additional regulations
adopted during product development and regulatory review of information we
submit could also result in added cost, delays or rejections. Our success
substantially depends upon our ability to demonstrate the safety and
effectiveness of our drug candidates to the satisfaction of government
authorities.

EVEN IF OUR PRODUCTS RECEIVE REGULATORY APPROVAL, WE MAY STILL FACE DIFFICULTIES
IN MARKETING AND MANUFACTURING THOSE PRODUCTS

If we receive regulatory approval of any of our drug candidates, the FDA or
comparable foreign regulatory agency may, nevertheless, limit the indicated uses
of the drug candidate. A marketed product, its manufacturer and the
manufacturer's facilities are subject to continual review and periodic
inspections. The discovery of previously unknown problems with a product,
manufacturer or facility may result in restrictions on the product or
manufacturer, including withdrawal of the product from the market. The failure
to comply with applicable regulatory requirements can, among other things,
result in:

fines;

suspended regulatory approvals;

<PAGE>
refusal to approve pending applications;

refusal to permit exports from the United States;

product recalls;

seizure of products;

injunctions;

operating restrictions; and

criminal prosecutions.

THERE IS UNCERTAINTY RELATED TO HEALTHCARE REIMBURSEMENT AND REFORM MEASURES
THAT COULD AFFECT THE COMMERCIAL VIABILITY OF ANY PRODUCTS WE DEVELOP

Our success in generating revenue from sales of therapeutic products may
depend on the extent to which reimbursement for the cost of those products will
be available from government health administration authorities, private health
insurers and other organizations. Significant uncertainty exists as to the
reimbursement status of newly-approved healthcare products. If government and
third-party payors do not provide adequate coverage and reimbursement levels for
uses of our therapeutic products, the market acceptance of these products could
be adversely affected. Further, third-party insurance coverage may not reimburse
us at price levels sufficient for realization of an appropriate return on our
investment in developing new therapies or products.

Government and other third-party payors are increasingly attempting to
contain healthcare costs by limiting both coverage and the level of
reimbursement of new therapeutic products approved for marketing by the FDA and
by refusing, in some cases, to provide any coverage of uses of approved products
for disease indications other than those for which the FDA has granted marketing
approval. In addition, Congress regularly considers numerous proposals relating
to healthcare reform which, if adopted, could affect the amount paid for
pharmaceutical products and medical procedures.

WE FACE INTENSE COMPETITION IN THE MARKET FOR ANTICANCER PRODUCTS

The market for anticancer products is large and growing rapidly and will
attract new entrants. We are in competition with other pharmaceutical companies,
biotechnology companies and research and academic institutions. Many of these
companies have substantially greater financial and other resources and
development capabilities than us and have substantially greater experience in
undertaking preclinical and clinical testing of products, obtaining regulatory
approvals and manufacturing and marketing pharmaceutical products. In addition,
our competitors may succeed in obtaining approval for products more rapidly than
us and in developing and commercializing products that are safer and more
effective than those that we propose to develop. The existence of these
products, other products or treatments of which we are not aware or products or
treatments that may be developed in the future may adversely affect the
marketability of our products by rendering them less competitive or obsolete. In
addition to competing with universities and other research institutions in the
development of products, technologies and processes, we may compete with other
companies in acquiring rights to products or technologies from universities.

THE TESTING AND MARKETING OF OUR POTENTIAL PRODUCTS WILL PRESENT LIABILITY RISKS

Our business exposes us to potential product liability risks that are
inherent in the testing, manufacturing and marketing of drug products including,
but not limited to, unacceptable side effects. Such side effects and other
liability risks could give rise to viable product liability claims against us.
We do not currently have any product liability insurance. When we seek to obtain
product liability insurance, we may not be able to obtain or maintain product
liability insurance on acceptable terms and insurance may not provide adequate
coverage against potential liabilities. As a result, if we are subject to
product liability claims, we may incur significant expense defending such
claims.

<PAGE>
OUR COMPLIANCE WITH ENVIRONMENTAL LAWS MAY NECESSITATE EXPENDITURES IN THE
FUTURE

We cannot accurately predict the outcome or timing of future expenditures
that we may be required to pay in order to comply with comprehensive federal,
state and local environmental laws and regulations. We must comply with
environmental laws that govern, among other things, all emissions, waste water
discharge and solid and hazardous waste disposal, and the remediation of
contamination associated with generation, handling and disposal activities.
Environmental laws have changed in recent years and we may become subject to
stricter environmental standards in the future and face larger capital
expenditures in order to comply with environmental laws. Our limited capital
makes it uncertain whether we will be able to pay for these larger than expected
capital expenditures. Also, future developments, administrative actions or
liabilities relating to environmental matters may have a material adverse effect
on our financial condition or results of operations.

All of our operations are performed under strict environmental and health
safety controls consistent with the Occupational Safety and Health
Administration, or OSHA, the Environmental Protection Agency, or EPA, and the
Nuclear Regulatory Commission, or NRC, regulations. We cannot be certain that we
will be able to control all health and safety problems. If we cannot control
those problems, we may be held liable and may be required to pay the costs of
remediation. These liabilities and costs could be material.

EFFECTS OF ANTI-TAKEOVER PROVISIONS COULD INHIBIT THE ACQUISITION OF VION

Some of the provisions of our certificate of incorporation, bylaws and
Delaware law could, together or separately:

discourage potential acquisitions;

delay or prevent a change in control; and

limit the price that investors might be willing to pay in the future for
shares of our common stock.

In particular, our certificate of incorporation provides that our board may
issue from time to time, without stockholder approval, additional shares of
preferred stock. The issuance of preferred stock may make it more difficult for
a third party to acquire, or may discourage a third party from acquiring, voting
control of our stock. This provision could also discourage, hinder or preclude
an unsolicited acquisition, even if such acquisition is beneficial to us, and
could make it less likely that stockholders receive a premium for their shares
as a result of any such attempt. Furthermore, we are subject to Section 203 of
the Delaware General Corporation Law which generally prohibits a Delaware
corporation from engaging in any of a broad range of business combinations with
any interested stockholder for a period of three years following the date on
which the stockholder became an interested stockholder.

In addition, we have adopted a 'poison pill' pursuant to which our
stockholders may exercise rights to purchase additional shares of common stock
in the event of certain acquisitions of our common stock.

WE MAY ISSUE PREFERRED STOCK ON TERMS THAT MAY DISADVANTAGE OUR COMMON
STOCKHOLDERS

We currently have 498,194 shares of Class A Preferred Stock and 5,000
shares of 5% Redeemable Convertible Preferred Stock Series 1998 outstanding, and
the board may issue additional preferred stock without stockholder approval. The
issuance of additional shares of preferred stock by our board could decrease the
amount of earnings and assets available for distribution to our common
stockholders. Preferred stockholders could receive voting rights and rights to
payments on liquidation or of dividends or other rights that are greater than
the rights of the common stockholders.

<PAGE>
FAILURE TO OBTAIN YEAR 2000 COMPLIANCE MAY HAVE ADVERSE EFFECTS ON OUR BUSINESS
AND RESULTS OF OPERATIONS

In the event that we do not implement adequate plans to address Year 2000
compliance, our operations could be affected in several adverse ways. Failure of
a scientific instrument or laboratory facility or by any of our suppliers could
result, among other things, in the loss of experiments that would take weeks to
set up and repeat. Such delays in the progress of research could have an adverse
impact on our stock price and on our ability to raise capital, and the cost of
repeating lost experiments cannot reasonably be estimated at this time. In
addition, research delays could occur due to the impact of Year 2000 problems at
major vendors, government research funding agencies, or development partners.

OUR MANAGEMENT HAS BROAD DISCRETION AS TO THE USE OF THE PROCEEDS OF THIS
OFFERING

Our management will have broad discretion with respect to the use of
proceeds from this offering. We intend to use the net proceeds from this
offering for working capital and general corporate purposes, including
additional research and development projects, increasing marketing activities
and possible expansion through acquisitions. As a result, you must rely solely
on management's ability and discretion to apply the proceeds to these ends
effectively.

THERE MAY BE AN ADVERSE EFFECT ON THE MARKET PRICE OF OUR STOCK AS A RESULT OF
SHARES BEING AVAILABLE FOR SALE IN THE FUTURE

Sales of a substantial amount of common stock in the public market, or the
perception that these sales may occur, could adversely affect the market price
of our common stock prevailing from time to time. This could also impair our
ability to raise additional capital through the sale of our equity securities.
After this offering, we will have 17,897,325 shares of common stock outstanding,
or 18,227,325 shares if the underwriters' over-allotment option is exercised in
full. All of these shares will be freely tradeable except for any shares
purchased by an affiliate of ours, which will be subject to the limitations of
Rule 144 under the Securities Act.

There are options and warrants outstanding that are exercisable for an
aggregate of 7,600,248 shares of common stock. Options and warrants to purchase
6,037,628 shares are currently exercisable, and the remainder become exercisable
at various times through 2003. Additionally, the standstill agreement with
Boehringer Ingelheim terminates in November 1999, upon which Boehringer
Ingelheim will be free to sell up to 448,336 shares in the public market,
subject to the limitations of Rule 144.

OUR COMMON STOCK COULD BE DELISTED BY THE NASDAQ NATIONAL MARKET

We cannot assure you that we will continue to meet the criteria for
continued listing of our common stock on the Nasdaq National Market or, if
delisted from the Nasdaq National Market, the Nasdaq SmallCap Market. If we are
unable to satisfy Nasdaq's requirements and our common stock is delisted from
the Nasdaq markets, trading, if any, in the common stock would thereafter be
conducted in the over-the-counter market in the so-called 'pink sheets' or the
NASD's 'Electronic Bulletin Board.' Consequently, the liquidity of our common
stock could be impaired, not only in the number of shares which could be bought
and sold, but also through delays in the timing of transactions, reduction in
security analysts' and the news media's coverage of us and lower prices for our
common stock that might otherwise be attained.

If our shares of common stock are delisted from Nasdaq, they could become
subject to Rule 15g-9 under the Exchange Act, which imposes additional sales
practice requirements on broker-dealers that sell these securities to persons
other than established customers and accredited investors. For transactions
covered by this rule, a broker-dealer must make a special suitability
determination for the purchaser and receive the purchaser's written consent to
the transaction prior to the sale. Consequently, this rule may adversely affect
the ability of broker-dealers to sell our common stock and may adversely affect
the ability of purchasers in this offering to sell in the secondary market any
of the shares of common stock they purchase.

SEC regulations define a 'penny stock' to be any non-Nasdaq equity security
that has a market price of less than $5.00 per share or with an exercise price
of less than $5.00 per share. For any transaction involving a penny stock,
unless exempt, the rules require delivery, prior to any such transaction, of a
disclosure schedule explaining the penny stock market and the risks

<PAGE>
associated with trading in the penny stock market. If our shares are subject to
the rules on penny stocks, the market liquidity for these shares could be
severely adversely affected.

NOTE REGARDING FORWARD-LOOKING STATEMENTS

This prospectus contains forward-looking statements, as that term is
defined in the Private Securities Litigation Reform Act of 1995, and information
about our financial condition, results of operations and business that are based
on our current and future expectations. You can find many of these statements by
looking for words such as 'estimate,' 'project,' 'believe,' 'anticipate,'
'intend,' 'expect' and similar expressions. These statements reflect our current
views with respect to future events and are subject to risks and uncertainties,
including those discussed under 'Risk Factors,' that could cause our actual
results to differ materially from those contemplated in the forward-looking
statements. We caution you that no forward-looking statement is a guarantee of
future performance. You should not place undue reliance on these forward-looking
statements, which speak only as of the date of this prospectus. We do not
undertake any obligation to publicly release any revisions to these
forward-looking statements to reflect events or changes in circumstances after
the date of this prospectus or to reflect the occurrence of unanticipated events
that may cause our actual results to differ from those expressed or implied by
the forward-looking statements contained in this prospectus.

<PAGE>
USE OF PROCEEDS

We estimate that our net proceeds from the sale of the 2,200,000 shares
offered by us will be approximately $9,605,000, or $11,140,000 if the
underwriters exercise the over-allotment option in full, at an offering price of
$5.00 per share and after deducting the underwriting discounts and commissions
and estimated offering expenses payable by us.

We intend to use the net proceeds from this offering for working capital to
support the growth of our business.

The following table sets forth our estimated allocation of the net
proceeds:

<TABLE>
<S> <C>
Research & Development Expenses. 7,074,000
General & Administrative Expenses........................... 788,000
Repayment of Equipment Capital Leases....................... 229,000
Acquisition of Fixed Assets................................. 139,000
Working Capital............................................. 1,375,000
----------
Total Net Proceeds..................................... $9,605,000
----------
----------
</TABLE>

The net proceeds may also be used for the possible acquisition of
businesses and technologies that are complementary or supplementary to our
current or future business. Our ability to effect any acquisition depends on a
number of factors, including the availability of acquisition candidates or other
business opportunities. We are not currently party to any binding agreement
relating to an acquisition, however, we review and consider possible
acquisitions on an ongoing basis. Pending the use of proceeds, the proceeds from
this offering will be invested in short-term, investment grade interest bearing
securities.

PRICE RANGE OF COMMON STOCK

Our common stock has traded on the Nasdaq SmallCap Market under the symbol
'VION' since April 29, 1996. The following table sets forth the range of high
and low closing sales prices of the common stock.

<TABLE>
<CAPTION>
HIGH LOW
---- ---
<S> <C> <C>
FISCAL YEAR ENDED DECEMBER 31, 1999

Fourth quarter (through October 25, 1999).............. $6.875 $5.375
Third quarter.......................................... 6.000 4.063
Second quarter......................................... 6.938 4.500
First quarter.......................................... 7.250 4.438

FISCAL YEAR ENDED DECEMBER 31, 1998

Fourth quarter......................................... $5.000 $2.125
Third quarter.......................................... 4.266 3.000
Second quarter......................................... 5.375 3.406
First quarter.......................................... 4.000 2.938

FISCAL YEAR ENDED DECEMBER 31, 1997

Fourth quarter......................................... $5.938 $3.063
Third quarter.......................................... 5.375 3.750
Second quarter......................................... 5.000 3.750
First quarter.......................................... 5.875 3.125
</TABLE>

On October 25, 1999, the last reported sale price of our shares on the
Nasdaq SmallCap Market was $5.8125 per share. As of October 25, 1999, there were
approximately 226 holders of record of our shares of common stock.

<PAGE>
DIVIDEND POLICY

We have never paid any cash dividends on our shares. We currently intend to
retain all earnings for use in our business and do not anticipate paying cash
dividends in the foreseeable future. Additionally, we cannot pay cash dividends
on our common stock without the consent of a majority of holders of the Class A
Preferred Stock and the 5% Redeemable Convertible Preferred Stock Series 1998.

CAPITALIZATION

The following table sets forth, as at June 30, 1999, our capitalization and
our capitalization as adjusted to reflect the sale of 2,200,000 shares of our
common stock at an offering price of $5.00 per share and the application of the
estimated net proceeds from this offering. This table should be read together
with the financial statements, including their related notes, appearing
elsewhere in this prospectus.

<TABLE>
<CAPTION>
JUNE 30, 1999
----------------------
ACTUAL AS ADJUSTED
------ -----------
(IN THOUSANDS)
<S> <C> <C>
Long-term obligations, less current portions................ $ 83 $ 83
-------- --------
Redeemable preferred stock:
5% convertible preferred stock Series 1998, $0.01 par
value, 15,000 shares authorized; 5,000 shares issued
and outstanding (redemption value -- $5,250,000)...... 5,013 5,013
-------- --------
Shareholders' equity:
Preferred stock, $0.01 par value; 5,000,000 shares
authorized consisting of:
Class A convertible preferred stock, $0.01 par
value; 3,500,000 shares authorized; 493,902
shares issued and outstanding (liquidation
preference $4,939,020).......................... 5 5
Common stock, $0.01 par value; 35,000,000 shares
authorized; 15,577,022 shares issued, actual;
17,777,022 shares issued, as adjusted........... 156 178
Additional paid-in capital........................ 56,195 65,778
Deferred compensation............................. (20) (20)
Accumulated deficit............................... (57,075) (57,075)
Treasury stock (9,779 shares, at cost)............ (50) (50)
-------- --------
Total shareholders' equity (deficit)......... (789) 8,816
-------- --------
Total capitalization......................... $ 4,307 13,912
-------- --------
-------- --------
</TABLE>

The'As Adjusted' column of the table above:

does not give effect to 7,633,286 shares issuable upon the exercise
of outstanding stock options and warrants and 2,830,284 shares
issuable upon the conversion of outstanding shares of preferred
stock; and

assumes that the underwriters' over-allotment option is not
exercised.

<PAGE>
SELECTED FINANCIAL DATA

The following selected financial data for the periods ended December 31,
1994 through December 31, 1998 are derived from our audited financial
statements. The financial data for the six months ended June 30, 1998 and June
30, 1999 and the period from May 1, 1994 (inception) through June 30, 1999 are
derived from unaudited financial statements. In the opinion of management, the
unaudited financial statements include all adjustments (consisting of normal
recurring adjustments) necessary to present fairly our results of operations for
the periods then ended and our financial position as of such dates. Operating
results for the six months ended June 30, 1999 are not necessarily indicative of
the results that may be expected for the entire fiscal year. The selected
financial data should be read in conjunction with the financial statements,
related notes and 'Management's Discussion and Analysis of Financial Condition
and Results of Operations' included elsewhere in this prospectus.

<TABLE>
<CAPTION>
FOR THE FOR THE
PERIOD FROM PERIOD FROM
MAY 1, 1994 MAY 1, 1994
(INCEPTION) SIX MONTHS (INCEPTION)
THROUGH YEAR ENDED DECEMBER 31, ENDED JUNE 30, THROUGH
DECEMBER 31, ----------------------------------------- ------------------ JUNE 30,
1994 1995 1996 1997 1998 1998 1999 1999
---- ---- ---- ---- ---- ---- ---- ----
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Revenues:
Contract research
grants................ $-- $ -- $ 52 $ 48 $ 309 $ 109 $ 164 $ 573
Research support........ -- -- -- 1,223 1,647 423 1,115 3,985
Technology license
revenues.............. -- -- -- 4,000 -- -- 50 4,050
------ ------- -------- ------- -------- ------- ------- --------
Total revenues...... -- -- 52 5,271 1,956 532 1,329 8,608
------ ------- -------- ------- -------- ------- ------- --------
Operating expenses:
Research and
development........... 422 7,192 5,975 7,675 10,709 4,371 6,324 38,299
General and
administrative........ 54 2,378 2,113 2,639 2,203 1,091 1,200 10,587
Non-recurring
collaboration
restructuring fee..... -- -- -- 600 -- -- -- 600
------ ------- -------- ------- -------- ------- ------- --------
Total operationg
expenses.......... 476 9,570 8,088 10,914 12,912 5,462 7,524 49,486
------ ------- -------- ------- -------- ------- ------- --------
Loss from
operations........ (476) (9,570) (8,036) (5,643) (10,956) (4,930) (6,195) (40,878)
Interest income............. -- (84) (437) (344) (540) (249) (127) (1,533)
Interest expense............ -- 45 10 44 62 34 21 181
------ ------- -------- ------- -------- ------- ------- --------
Net loss................ (476) (9,531) (7,609) (5,343) (10,478) (4,715) (6,089) (39,526)
Preferred dividends and
accretion................. -- -- (11,627) (1,132) (4,414) (2,676) (357) (17,530)
------ ------- -------- ------- -------- ------- ------- --------
Loss applicable to common
shareholders.............. $ (476) $(9,531) $(19,236) $(6,475) $(14,892) $(7,391) $(6,446) $(57,056)
------ ------- -------- ------- -------- ------- ------- --------
------ ------- -------- ------- -------- ------- ------- --------
Basic and diluted loss
applicable to common
shareholders per share.... $(0.15) $ (1.59) $ (2.52) $ (0.75) $ (1.24) $ (0.72) $ (0.44)
------ ------- -------- ------- -------- ------- -------
------ ------- -------- ------- -------- ------- -------
Weighted average number of
shares of common stock
outstanding............... 3,174,693 6,007,154 7,641,546 8,670,717 11,977,121 10,251,896 14,567,169
--------- --------- --------- --------- ---------- ---------- ----------
--------- --------- --------- --------- ---------- ---------- ----------

<CAPTION>
DECEMBER 31, JUNE 30,
----------------------------------------- ---------
1994 1995 1996 1997 1998 1999
BALANCE SHEET DATA: ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Cash and cash equivalents................................... $ 5 $2,351 $3,788 $ 3,891 $3,821 $4,506
Working capital (deficit)................................... (372) 4,337 7,938 10,678 5,045 3,002
Total assets................................................ 8 5,464 9,881 13,580 9,269 7,185
Redeemable preferred stock.................................. -- -- -- -- 4,854 5,013
Total shareholders' equity (deficit)........................ (468) 4,963 9,072 11,959 1,504 (789)
</TABLE>

<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS

OVERVIEW

We are a development stage biopharmaceutical company. Our activities to
date have consisted primarily of research and product development sponsored by
us pursuant to license agreements with Yale University, negotiating and
obtaining other collaborative agreements, recruiting management and other
personnel, securing our facilities and raising capital through equity and debt
financings. Our revenues consist of research grants, technology license fees and
reimbursements for research expenses. We have generated minimal revenues and
have incurred substantial operating losses from our activities.

Our plan of operations for the next 18 months includes the following
elements:

Continue to conduct internal research and development with respect to our
core technologies and other product candidates that we may identify;

Conduct Phase III clinical studies of Promycin in the United States and
Europe for treatment of head and neck cancer;

Conduct Phase I clinical studies of Triapine in the United States for
safety and efficacy;

Continue to support research and development being performed at Yale
University and by other collaborators; and

Continue to seek collaborative partnerships, joint ventures,
co-promotional agreements or other arrangements with third parties.

RESULTS OF OPERATIONS

SIX MONTHS ENDED JUNE 30, 1999 COMPARED TO SIX MONTHS ENDED JUNE 30, 1998

Revenues. Revenues increased approximately 150% from $531,640 for the six
months ended June 30, 1998 to $1,329,214 for the six months ended June 30, 1999.
This was due to increased revenues from reimbursed development costs under our
collaboration agreement with Boehringer Ingelheim totaling $1,115,038 for the
six months ended June 30, 1999. In addition, reimbursements of expenses from
Small Business Innovation Research grants on TAPET and Triapine increased from
$109,199 for the six months ended June 30, 1998 to $164,176 for the six months
ended June 30, 1999.

Research and Development. Research and development expenses increased
approximately 45% from $4,371,032 for the six months ended June 30, 1998 to
$6,324,074 for the six months ended June 30, 1999 reflecting expenses related to
patient accumulation for the Promycin head and neck Phase III trial, and
expenses of TAPET preclinical development.

General and Administrative. General and administrative expenses increased
10% from $1,090,776 for the six months ended June 30, 1998 to $1,200,330 for the
six months ended June 30, 1999. This was primarily due to increased consulting
fees.

Interest Income and Expense. Interest income on invested funds decreased
49% from $249,065 for the six months ended June 30, 1998 to $127,355 for the six
months ended June 30, 1999. this decrease reflects the average invested balances
of each period. Interest expense decreased from $34,417 for the six months ended
June 30, 1998 to $20,773 for the six months ended June 30, 1999.

Preferred Dividends and Accretion. Preferred stock dividends and accretion
decreased from $2,675,786 for the six months ended June 30, 1998 to $357,368 for
the six months ended June 30,

<PAGE>
1999. The amounts included primarily represent our recording of non-cash
dividends related to the issuance of our Series 1998 Redeemable Convertible
Preferred Stock in 1998. The amounts for the six months ended June 30, 1998 also
include additional dividend requirements equal to the excess of the fair value
of the common stock issued upon conversion over the fair value of the common
stock issuable pursuant to the original conversion terms of the Class B
Convertible Preferred Stock. Since the Class B Convertible Preferred Stock was
entirely converted into common stock in August 1998, none of the dividend
requirements relating to the conversion affect the six month period ending
June 30, 1999. Additionally, the annual accretion of dividends related to the
issuance of the Series 1998 Redeemable Convertible Preferred Stock is included
in the amounts described above. Loss applicable to common shareholders decreased
from $7,391,306 to $6,445,976 as a result of the net loss and the effects of the
preferred dividends and accretion.

YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997

Revenues. Revenues decreased 63% from $5,271,133 for the year ended
December 31, 1997 to $1,955,989 for the year ended December 31, 1998. This
decrease was due to revenue of $4,000,000 we received from an initial technology
license in 1997. Revenues from reimbursed development costs under our
collaboration agreement with Boehringer Ingelheim and from the Triapine-related
grant increased from $1,222,912 for the year ended December 31, 1997 to
$1,647,202 for the year ended December 31, 1998. Additionally, for the year
ended December 31, 1998, we recognized revenues of $308,787 for reimbursements
of expenses from the Small Business Innovation Research grants compared to
$48,000 for the year ended December 31, 1997.

Research and Development. Research and development expenses increased 40%
from $7,675,486 for the year ended December 31, 1997 to $10,709,401 for the year
ended December 31, 1998. The increase in research and development expense for
the year ended December 31, 1998 reflects expenses related to patient
accumulation for the Promycin head and neck Phase III trial, and expenses of
TAPET preclinical development needed to complete filing requirements for our
INDs in the United States and Europe. We expect research and development
expenses to continue to increase in the future.

General and Administrative. General and administrative expenses decreased
17% from $2,639,486 for the year ended December 31, 1997 to $2,202,944 for the
year ended December 31, 1998. This decrease was due to investment banking fees
incurred in 1997 related to the Boehringer Ingelheim agreement and other
advisory activities directed at marketing our technology in the United States
and abroad that were not incurred in 1998. However, we expect general and
administrative expenses to increase materially in 1999 primarily due to an
increase in compensation expense paid to our new chief executive officer, and
due to severance costs to be paid to his predecessor.

Non-recurring Collaboration Restructuring Fee. For the year ended
December 31, 1997, we had a non-recurring collaboration restructuring fee of
$600,000 which was a non-cash expense for issuing 150,000 additional shares of
common stock to Yale University. In return, we amended two license agreements
pursuant to which Yale agreed to reduce amounts payable by us under those
agreements.

Interest Income. Interest income increased 57% from $343,911 for the year
ended December 31, 1997 to $540,240 for the year ended December 31, 1998. This
increase reflects the average invested balances of each period. Interest expense
increased from $43,666 for the year ended December 31, 1997 to $61,553 for the
year ended December 31, 1998, reflecting larger amounts of leased equipment and
financing charges on clinical trial insurance.

Preferred Dividends and Accretion. Preferred stock dividends and accretion
increased from $1,131,740 for the year ended December 31, 1997 to $4,414,050 for
the year ended December 31, 1998. The amounts included primarily represent our
recording of non-cash dividends related to the issuance of our Series 1998
Redeemable Convertible Preferred Stock in 1998. The amounts for the year ended
December 31, 1997 primarily represent additional dividend requirements equal to
the excess of the fair value of the common stock issued upon conversion over the
fair value of the

<PAGE>
common stock issuable pursuant to the original conversion terms of the Class B
Convertible Preferred Stock. Also included in the amounts described above is the
annual accretion of dividends related to the issuance.

YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996

Revenues. Revenues increased from $51,779 for the year ended December 31,
1996 to $5,271,133 for the year ended December 31, 1997. This increase was due
to revenues of $4,000,000 that we received from an initial technology license
and to revenues from reimbursed development costs of $1,222,912 for the year
ended December 31, 1997.

Research and Development. Research and development expenses increased 28%
from $5,975,089 for the year ended December 31, 1996 to $7,675,486 for the year
ended December 31, 1997. This increase was due to expanded preclinical
development of our TAPET technology and preparation for our Phase III trials of
Promycin.

General and Administrative. General and administrative expenses increased
25% from $2,113,077 for the year ended December 31, 1996 to $2,639,486 for the
year ended December 31, 1997. This increase was due to investment banking fees
related to the Boehringer Ingelheim agreement and other advisory activities
directed at marketing our technology in the United States and abroad.

Non-recurring Collaboration Restructuring Fee. For the year ended December
31, 1997, we had a non-recurring collaboration restructuring fee of $600,000
which was a non-cash expense for issuing 150,000 additional shares of stock to
Yale University. In return, we amended two license agreements pursuant to which
Yale agreed to reduce amounts payable by us under those agreements.

Interest Income. Interest income decreased 21% from $437,993 for the year
ended December 31, 1996 to $343,911 for the year ended December 31, 1997. This
decrease reflects the average invested balances of each period. Interest expense
increased from $10,285 for the year ended December 31, 1996 to $43,666 for the
year ended December 31, 1997, reflecting larger amounts of leased equipment each
year and financing charges on clinical trial insurance.

Preferred Dividends and Accretion. Preferred stock dividends and accretion
decreased from $11,627,404 for the year ended December 31, 1996 to $1,131,740
for the year ended December 31, 1997. The amounts included primarily represent
our recording of non-cash dividends related to the issuance of our Class A
Convertible Preferred Stock in 1996. The 1997 amounts primarily represent
additional dividend requirements equal to the excess of the fair value of the
common stock issued upon conversion over the fair value of the common stock
issuable pursuant to the original conversion terms of the Class B Convertible
Preferred Stock. Also included in the amounts described above is the annual
accretion of dividends related to each of these issuances.

LIQUIDITY AND CAPITAL RESOURCES

At June 30, 1999, we had working capital of $3,001,859. In April 1999, we
consummated a private placement of our common stock. Pursuant to the private
placement, we issued 893,915 shares of common stock at a price of approximately
$4.47 per share, for aggregate proceeds of approximately $4,000,000.

During the 12 months ending December 31, 1999, we will be required to make
payments of an aggregate of $900,152 to Yale University under sponsored research
and license agreements of which $450,076 has been paid as of June 30, 1999. In
addition, in the second quarter of 1999 we made an unrestricted grant of
$200,000 to Yale to fund additional research. We anticipate that our existing
available capital resources and interest earned on available cash and short-term
investments, together with the net proceeds of this offering, will be sufficient
to fund our operating expenses and capital requirements as currently planned
until at least September 30, 2000.

We have 1,071,232 Class A Warrants outstanding and 1,308,722 Class B
Warrants outstanding. Subject to adjustment, each Class A Warrant entitles the
holder to purchase, at an exercise price of $4.63, and each Class B Warrant
entitles the holder to purchase, at an exercise price of $6.23, one share of
common stock. In addition, the exercise of a Class A Warrant entitles the holder
to one Class B Warrant. The warrants are exercisable at any time after issuance
through August 13,

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2000. The warrants are subject to redemption by us for $.05 per warrant, upon 30
days' written notice, if the average closing bid price of the common stock
exceeds $7.30 per share with respect to the Class A Warrants and $9.80 per share
with respect to the Class B Warrants for a 30 consecutive business day period
ending within 15 days of the date of the notice of redemption. If all such
warrants are exercised, we will receive proceeds, net of any fees, of
$18,797,631. However, the common stock is not currently trading, and may not
trade, at the level that will trigger redemption of either class of warrants.

IMPACT OF THE YEAR 2000 ISSUE

The Year 2000 issue refers to potential problems with computer systems or
any equipment with computer chips or software that use dates where the date has
been stored as just two digits. On January 1, 2000, any clock or date recording
mechanism incorporating date sensitive software which uses only two digits to
represent the year may recognize a date using 00 as the Year 1900 rather than
the Year 2000. This could result in a system failure or miscalculations causing
disruption of operations, including, among other things, a temporary inability
to process transactions, perform laboratory analyses, or engage in similar
business activities.

Our exposure to potential risks from the Year 2000 issue involves
information technology, or IT, systems, scientific instrumentation, and
laboratory facilities. We have hired an information systems administrator and
have inventoried all of the software and hardware embedded in our laboratory and
facilities equipment employed in our research and development programs to
ascertain our Year 2000 compliance. We have not completed our assessment of our
internal information systems to determine the extent of any Year 2000 problem.
However, based on an initial review, we do not currently believe that we have
material exposure to the Year 2000 Issue with respect to our own information
systems, since our existing systems correctly define the Year 2000 or are
expected to correctly define Year 2000 by December 31, 1999. In addition, we
have not completed our assessment of our scientific instrumentation, and
laboratory facilities to determine the extent of any Year 2000 problem. However,
we maintain service agreements covering our critical instrumentation and
laboratory environmental equipment. Accordingly, to the extent that these
service agreements are enforceable, we do not believe that the Year 2000
presents a material exposure with regard to our critical instrumentation and
laboratory environmental equipment.

We have purchased Year 2000 upgrades to several software programs,
including our accounting programs, the cost of which has not been material. To
date, we have spent approximately $4,000 with respect to our Year 2000
assessment and estimate that our costs to complete our assessment, as well as
any corrective measures, will be approximately $26,000. We do not expect to
reach profitability on an operating basis before 2000 and therefore expect to
fund all such costs from funds we have raised or expect to raise in various
financings.

We believe we will complete our review and implement contingency plans to
deal with the Year 2000 issue in a timely manner. In the event that we do not
implement adequate plans, our operations could be affected in several adverse
ways. Failure of a scientific instrument or laboratory facility could result,
among other things, in the loss of experiments that would take weeks to set up
and repeat. These delays in the progress of research could have an adverse
impact on our stock price and on our ability to raise capital, and the cost of
repeating lost experiments cannot reasonably be estimated at this time. In
addition, research delays could occur due to the impact of Year 2000 problems at
major vendors, government research funding agencies, or development partners.

We believe we maintain adequate data backup to computers used in our
information systems and scientific instrumentation. We currently do not have a
contingency plan in the event that we or any of our key suppliers and vendors is
unable to become Year 2000 compliant. We will develop a contingency plan if we
determine we or any of our key vendors or suppliers is not likely to achieve our
compliance objectives.

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BUSINESS

GENERAL

We are a biopharmaceutical company engaged in the research, development and
commercialization of cancer treatment technologies. Our product portfolio
consists of a drug delivery platform and three cancer therapeutics. We believe
that TAPET'r', our drug delivery technology, addresses one of the biggest
challenges faced in treating cancer: how to effectively deliver anticancer drugs
to tumors without harming normal cells. TAPET uses genetically altered strains
of Salmonella bacteria as a vehicle, or vector, for delivering cancer-fighting
drugs preferentially to solid tumors. We believe that TAPET's greatest potential
application is the ability to continuously deliver a large variety of anticancer
drugs directly to tumors while minimizing the side effects associated with
current treatments.

Promycin'r' is an anticancer cell therapeutic that is designed to improve
the treatment of solid tumors by attacking the hypoxic, or oxygen-depleted,
cells. Used in conjunction with radiation therapy, Promycin may improve the
treatment of solid tumors by killing the poorly oxygenated cells of tumors that
are not readily destroyed by radiation therapy alone. Preclinical studies have
shown that Promycin, in conjunction with radiation, is effective in eradicating
oxygen-depleted cells. Promycin is currently in Phase III clinical trials.

Our other anticancer cell therapeutics include the following:

Triapine'r' is designed to prevent the replication of tumor cells by
blocking a critical step in the synthesis of DNA and, as a result, inhibit
the growth and repair of cancer cells. In preclinical research, this drug
has shown significant, broad-spectrum activity against a variety of cancer
types.

Sulfonyl hydrazine prodrugs represent compounds that are designed to be
converted into unique, potent alkylating agents. Alkylating agents are
highly effective against tumors but can also lead to toxic side effects.
Sulfonyl hydrazine prodrugs reduce these toxic side effects and allow
alkylating agents to be delivered safely and preferentially to tumor cells
for conversion into powerful cancer-fighting drugs.

OVERVIEW OF CANCER

Cancer is the second leading cause of death in the United States, exceeded
only by heart disease. Since 1990, approximately four million Americans have
died from cancer. It is a devastating disease with tremendous unmet medical
needs. The American Cancer Society estimates that 1.2 million new cases of
invasive cancer will be diagnosed in the United States in 1999 and 563,100
Americans are expected to die from cancer in 1999. Sixty percent of new cases of
cancer are expected to result in death within five years.

Cancer is characterized by uncontrolled cell division resulting in the
development of a mass of cells, commonly known as a tumor, as well as the
invasion and spreading of these cells. Cancerous tumors can arise in almost any
tissue or organ within the human body. Cancer is believed to occur as a result
of a number of factors, such as genetic predisposition, chemical agents, viruses
and irradiation. These factors result in genetic changes affecting the ability
of cells to normally regulate their growth and differentiation. When a normal
cell becomes cancerous, it can spread to various sites in the body.

Although several types of tumors can now be effectively treated with drugs,
it is only in recent years that we have begun to see improvement in the survival
rates for the most common tumors. The market for cancer therapeutics in the
United States was approximately $9.3 billion in

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1997 and is projected to total approximately $11.5 billion in 1999. We believe
that recent developments in the understanding of the processes that regulate the
proliferation of malignant cells provide opportunities to discover and develop
innovative products and approaches to treat cancer.

COMMON TREATMENT METHODS

The three most common methods of treating patients with cancer are surgery,
radiation therapy and chemotherapy. A cancer patient often receives a
combination of these methods. Surgery and radiation therapy are particularly
effective in patients in which the disease is localized and has not yet spread
to other tissues or organs. Surgery involves the removal of the tumor and
adjacent tissue. In many cases where the cancer cells have not yet spread,
surgery cannot be performed because of the inaccessible location of the tumor or
the danger of removing too much normal tissue along with the cancerous tissue.

Radiation therapy involves the exposure of the tumor and surrounding tissue
to ionizing radiation. The objective of radiation therapy is to kill the cancer
cells with ionized molecules that are created in the parts of the body exposed
to the ionizing radiation. Radiation, however, also kills or damages normal
cells. Radiation therapy can have varying levels of effectiveness, and can cause
patient weakness, loss of appetite, nausea and vomiting. Radiation can also
result in loss of normal body functions, which may include bone marrow
depression, gastrointestinal complications, kidney damage and damage to the
peripheral nervous system. In some cases, radiation-induced mutations in bone
marrow cells can lead to new secondary cancers, such as leukemia, years after
treatment for other forms of cancer.

Chemotherapy is the principal approach used for tumors that have spread.
Chemotherapy seeks to interfere with the molecular and cellular processes that
control the development, growth and survival of malignant tumor cells.
Chemotherapy involves the administration of drugs designed to kill cancer cells
or the administration of hormone analogs to either reduce the production of, or
block the action of, certain hormones that affect the growth of various tumors.
Chemotherapy, however, can also result in loss of normal body functions and can
result in patient weakness, loss of appetite, nausea and vomiting. In many
cases, chemotherapy consists of the administration of several different drugs in
combination.

RECENT ADVANCES

In recent years, there have been significant advances in molecular biology,
immunology and other related fields of biotechnology that have led to a better
understanding of how malfunctioning genes can result in the formation of tumors.
It is anticipated that these advances will lead to better ways to diagnose
cancer and to prevent tumors from forming or becoming malignant. Other research
has focused on mechanisms to efficiently deliver therapies to tumors.
Ultimately, these emerging technologies may lead to genetic-based therapies
aimed specifically at the genes that have malfunctioned and caused the cancer to
form or spread, and to therapies that can selectively deliver agents to tumors
that prevent the abnormal growth of cells.

Most current anticancer drugs, when introduced into the system by current
delivery methods, affect rapidly growing cells, both cancerous and normal,
throughout the body. The result is often significant side effects that take a
toll on a patient's health and can limit the amount of treatment a patient may
receive. Therefore, a great need exists for new therapies and delivery
strategies that preferentially deliver anticancer agents to tumors while having
minimal effects on healthy, normal tissues.

We believe that, for the foreseeable future, the principal means of
combating cancer will continue to be through the surgical removal of tumors and
the destruction of malignant cells through radiation therapy and chemotherapy,
delivered systemically or in ways that make anticancer agents preferentially
more toxic to tumors. Therefore, we intend to take a balanced approach in our
research and development efforts. We will continue to develop chemically defined

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small molecules based upon unique cellular targets discovered through
biotechnology, while also pursuing development of technologies to deliver
therapeutic agents to tumors.

OUR PRODUCT DEVELOPMENT PROGRAM

We are currently developing several products for the treatment of cancer.
The table below sets forth the development status of our core product candidates
as of September 16, 1999:

[GRAPHIC OMITTED]

'Preclinical' indicates that the product candidate selected for development
has met predetermined criteria for potency, specificity, manufacturability and
pharmacologic activity in animal and in vitro models. 'Phase I' indicates safety
and proof of concept testing in a limited patient population and toxicology
testing in animal models. 'Phase II' indicates safety, dosing and efficacy
testing in a limited patient population. 'Phase III' indicates safety, dosing
and efficacy testing in a large patient population.

DRUG DELIVERY PLATFORM: TAPET

TAPET is a drug delivery system that uses genetically altered strains of
Salmonella bacteria as a vehicle, or vector, for delivering cancer-fighting
drugs preferentially to solid tumors.

The origin of TAPET comes from the concept that malignant melanoma has some
striking similarities to normal white blood cells. Melanoma kills after
spreading throughout the body and forming solid black tumors, in a process known
as metastasis. David Bermudes, our director of microbiology, noting the
similarities between melanoma and white blood cells, conducted experiments to
determine whether parasites that are specific for white blood cells would be
effective cancer-fighting agents. Through his experience with infectious
diseases, Dr. Bermudes knew that there were a number of parasites that have
evolved to attack white blood cells, especially ones known as macrophages.
Working in petri dishes, he was able to show that several different parasites
were able to infect human melanoma cells. Among these parasites was the
bacterium Salmonella.

The Salmonella bacteria that comprise TAPET organisms were chosen as the
vector because of their ability to preferentially target and infect tumors, and
to survive in both the oxygenated and low-oxygen environments found within solid
tumors. In preclinical studies, after injection into the body, TAPET organisms
migrated to and penetrated throughout tumors. The bacteria grew in the tumor
cells at ratios in excess of 1,000:1 compared to normal tissues and multiplied
throughout the entire tumor mass, thriving even within the necrotic, or the
deep, oxygen-starved cells where other anticancer drugs generally do not reach.
The increase in the quantity of the TAPET organisms improves their ability to
inhibit tumor growth and to enable the continuous delivery of anticancer drugs
to tumors. We believe that this growth occurs because the organisms utilize

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components of DNA and proteins found in tumors and are protected within the
tumor from the body's immune system. We believe that bringing a 'drug factory'
preferentially to the tumor will result in a cancer therapy that is more
concentrated, more effective and less toxic to normal tissue.

We have also genetically altered TAPET organisms to significantly reduce
the serious toxicities associated with septic shock from normal Salmonella
bacteria. As an additional safety measure, TAPET organisms are designed to
remain fully sensitive to antibiotic therapies. Therefore, if there is an
adverse reaction, the bacteria can be treated with antibiotics at any time
during therapy. Preclinical studies have demonstrated these safety measures to
be effective.

We are developing a portfolio of TAPET organisms as a platform to deliver a
variety of cancer-fighting drugs to tumors. Our scientists have demonstrated in
animals TAPET's potential therapeutic effects on melanoma and colon, lung and
breast cancer, all of which are solid tumors. If our TAPET technology proves an
effective platform to deliver anticancer drugs and inhibit the growth of tumors
in humans, we intend to use TAPET to deliver Vion-developed, anticancer drugs.
Some of these drugs will be generic and non-proprietary, however, when combined
with the TAPET system, they could result in proprietary products for us. In
addition, we intend to seek multiple strategic partnerships with pharmaceutical
companies to use TAPET to deliver their proprietary anticancer drugs.

In preclinical studies, the altered Salmonella bacteria were injected into
tumor-ridden mice. In these studies, administration of TAPET organisms inhibited
the growth of melanoma tumors by 94% compared with untreated control animals.
Additionally, the treated mice survived more than twice as long as those that
did not receive TAPET treatment. Toxicological studies in four animal species
suggest that TAPET can be administered safely at doses that exhibit antitumor
effects in animal models.

We submitted an IND to the FDA and are now working under an open IND status
to prepare for and initiate Phase I intratumoral safety studies in human
patients using a TAPET organism that is unarmed, or without an anticancer drug.
On October 11, 1999, we received Institutional Review Board approval to begin
Phase I safety trials at the Cleveland Clinic under the direction of Ronald M.
Bukowski, M.D. If successful, these safety studies will be followed by
additional Phase I studies using TAPET organisms delivered intravenously, as
well as an armed TAPET organism designed to manufacture and express an
anticancer drug.

ANTICANCER CELL THERAPEUTICS

PROMYCIN

Promycin, is an anticancer cell therapeutic that targets oxygen-depleted
cells. Used in conjunction with radiation therapy, Promycin may improve the
treatment of solid tumors by killing the poorly oxygenated cells of tumors that
are not easily destroyed by radiation therapy alone. The intended market for
Promycin is lung, head and neck, cervical, colon, rectum and esophageal cancer.

Hypoxic tumor cells can often constitute 1%-15% of the malignant cells
contained in a tumor. Because radiation therapy requires oxygenation of the
tissue in order to be effective, hypoxic cells are less susceptible to radiation
therapy and tend to form a therapeutically resistant group within solid tumors.
We believe that even small quantities of hypoxic cells within a tumor provide
the basis for tumor cells to survive and proliferate after most of the
non-hypoxic malignant cells in the tumor have been eradicated by radiation
treatment. Hypoxic cells also exhibit resistance to most standard
chemotherapeutic agents. Preclinical studies have shown that Promycin, in
conjunction with radiation, is effective in eradicating hypoxic cells. Although
we believe that one possible explanation for the failure of radiation therapy is
the existence within tumors of hypoxic cells, to date, there is no direct proof
of this belief in humans.

A Phase I/II trial was conducted at Yale on a limited number of people. In
this initial study, of the 21 patients treated with radiation, and, in some
cases, surgery, in conjunction with Promycin for certain types of cancer of the
head and neck, there was a 33% cancer-free survival rate at five

<PAGE>
years versus the clinical expectation of approximately 15% for radiation therapy
alone. Based on these findings, we and Boehringer Ingelheim International GmbH
of Ingelheim, Germany collaborated to initiate a Phase III trial of Promycin in
patients with head and neck cancer at 44 centers worldwide. The trial is
designed to determine the efficacy of Promycin as an adjunct to radiation
therapy for these conditions. We have expanded our Phase III program to include
additional sites in Europe and the United States. We also plan to evaluate
Promycin in other tumor types.

We have obtained an exclusive license from Yale for data from Yale's
research on Promycin and the clinical studies of Promycin conducted by Yale
scientists. We have received Orphan Drug status to use Promycin to treat head
and neck and cervical cancer. The FDA grants Orphan Drug status for rare
diseases or conditions, including many cancers. The sponsor of a drug that has
obtained Orphan Drug designation and is the first to obtain approval of a
marketing application for this drug is entitled to marketing exclusivity for a
period of seven years for the designated indication.

In November 1997, we entered into an exclusive worldwide licensing
agreement with Boehringer Ingelheim for the development and marketing of
Promycin. This agreement provides us with co-promotion rights to Promycin in
North America. We will co-promote Promycin in the United States with Roxane
Laboratories, Inc., a subsidiary of Boehringer Ingelheim. Boehringer Ingelheim
has exclusive worldwide rights to market and sell Promycin outside North
America. In exchange for these rights, Boehringer Ingelheim paid us up front
licensing fees and is obligated to pay development milestones and royalties on
future sales of Promycin outside North America.

We will share the worldwide development costs with Boehringer Ingelheim.
Additionally, in connection with the licensing agreement, Boehringer Ingelheim
made an equity investment in us at a premium to the then current market price.
Under the agreement, we will manufacture and supply Promycin worldwide.

TRIAPINE

Triapine is designed to prevent the replication of tumor cells by blocking
a critical step in the synthesis of DNA. If DNA is not synthesized, cells cannot
replicate. Triapine has shown significant broad-spectrum activity in a variety
of preclinical models involving human and mouse tumors. We plan to develop
Triapine as a potential treatment for cancers such as lung, breast, colorectal,
melanoma and chronic myelogenous leukemia.

In preclinical trials, Triapine exhibited significant in vitro and in vivo
activity against human ovarian cancer grafted onto another species and in mouse
tumors for leukemia and lung cancer. We have rights, either by license and/or
assignment under a patent with claims to compositions of matter and use of
prodrug forms of Triapine as well as under a patent for a process covering the
synthesis of the compounds.

In 1998, we began Phase I human clinical testing with Triapine,
investigating its use against solid tumors. We are conducting these studies at
the University of Miami Hospital and the Arizona Clinical Research Center. We
expect to commence additional trials at Yale University in the near future. In
addition, we are developing a water soluble prodrug version of Triapine with a
therapeutic half-life that is four-to-six times longer than Triapine itself.
This prodrug would enable the development of injectable and oral dosage forms.

SULFONYL HYDRAZINE PRODRUGS

Sulfonyl hydrazine prodrugs represent compounds that are designed to be
converted to unique, potent alkylating agents. Alkylating agents, as a class,
are reactive chemicals that are highly effective against tumors and are used to
treat a variety of cancers. The interaction of alkylating agents with DNA
prevents the division of the cells. These drugs, however, lack selectivity and
affect many normal tissues as well as cancer cells, causing toxic side effects.
Sulfonyl hydrazine alkylating agents can be converted to prodrug forms, thereby
blocking the reactivity of these compounds, decreasing their toxicity and
allowing them to be delivered preferentially to tumor

<PAGE>
cells for conversion into powerful cancer-fighting drugs. We are working closely
with scientists at Yale to develop prodrug formulations of the sulfonyl
hydrazine class. We are also investigating approaches that combine these potent
cytotoxins with our TAPET technology. A cytotoxin is any substance that poisons
living cells.

We have licensed several classes of sulfonyl hydrazine prodrugs from Yale,
including various prodrugs that are the subject of eight issued patents and one
pending patent application. Each of these alkylating agent prodrugs may target a
unique property of a cancer cell, thereby destroying it. We are in the process
of evaluating several lead candidates for development. We intend to extend our
preclinical studies, which will include analytical studies, formulation and
toxicological evaluation, and, if successful, we intend to file an IND.

LICENSED PRODUCT AND PRODUCT CANDIDATES

MELASYN

MELASYN is a synthetic form of melanin that dissolves readily in water.
Melanin is a pigment formed by cells in the skin that gives skin its color and
protects it from sun damage by absorbing ultraviolet rays. We believe that
MELASYN is the first water-soluble, synthetic version of melanin, making it a
novel and useful ingredient for formulation of skin care products and cosmetics.
The simplicity of its manufacture allows MELASYN to be produced in commercial
quantities at low cost. In addition, MELASYN blends in and conforms to a
person's own skin tone without the orange color associated with most
commercially available self-tanning products.

In February 1998, we entered into an exclusive worldwide agreement for a
term of three years to license our MELASYN technology to San-Mar Laboratories, a
leading manufacturer of private label cosmetics and pharmaceuticals. Under the
terms of this agreement, we granted an exclusive worldwide license to San-Mar
for the manufacture and sale of products containing MELASYN. We will receive a
royalty on products sold by San-Mar with guaranteed minimum annual royalties of
$50,000 per year over an initial three-year period. In February 1999, a
subsidiary of San-Mar began offering introductory kits over the Internet that
include body mousse, face gel, face cream, spot concealer and moisture seal.
These are MELASYN-based products for sufferers of vitiligo, the condition of
having abnormally white or discolored areas on the skin. Beginning in July 1999,
this company also began selling MELASYN-based instant tan lotion.

We have also funded research projects relating to compounds to control
pigmentation and chemotherapeutic products for treating melanoma. To date, such
research has not provided any product candidates that we presently plan to
pursue.

NOVEL NUCLEOSIDE ANALOGS

We are developing a nucleoside analog, or synthetic molecule, known as
(beta)-L-Fd4C. (beta)-L-Fd4C is an anti-viral drug capable of inhibiting the
replication of the hepatitis B virus, or HBV, that has produced preclinical
results superior to those of competing anti-viral drugs. We expect (beta)-L-Fd4C
to last longer and require a less frequent dosage than the current treatment,
3TC. HBV is a causative agent of both acute and chronic forms of hepatitis that
affects about 300 million people worldwide. HBV also predisposes its victims to
the development of liver cancer.

In October 1996, the U.S. Patent and Trademark Office issued a patent to
Yale covering the composition of matter and method of use of (beta)-L-Fd4C for
treating HBV, and Yale has licensed to us exclusive worldwide rights to the
patent including the use of (beta)-L-Fd4C for the treatment of HBV and AIDS. Due
to the financial, personnel and facility resources required, we intend to seek a
partner to further develop these anti-HBV agents.

SPONSORED RESEARCH AND LICENSE AGREEMENTS

Yale/OncoRx Agreement. Under a license agreement with Yale, referred to as
the Yale/OncoRx Agreement, Yale granted us an exclusive, non-transferable,
worldwide license to make, have made, use, sell and practice various inventions
and research for therapeutic and diagnostic purposes. The

<PAGE>
term of the license is the expiration of any patents relating to any inventions
or, with respect to non-patented inventions or research, 17 years. Yale has
retained the right to make, use and practice the inventions and research for
non-commercial purposes. This agreement also provides that if Yale, as a result
of its own research, identifies potential commercial opportunities for the
inventions and research, Yale will give us a first option to negotiate a
commercial license for such commercial opportunities. Pursuant to this
agreement, we issued to Yale 159,304 shares of our common stock, granted
registration rights to Yale with respect to these shares and made a payment of
$50,000. In addition, Yale is entitled to royalties on sales, if any, of
resulting products and sub-licensing revenues and, with regard to one patent,
milestone payments based on the status of clinical trials and regulatory
approvals. In June 1997, we amended this license agreement as well as another
license agreement to reduce certain amounts payable by us under such agreements.
In consideration for the reduction, we issued to Yale an additional 150,000
shares of our common stock. We have agreed with Yale that we will plan and
implement appropriate research and development with respect to commercialization
of products based on the licensed inventions and research. In the event that the
agreement is terminated for breach, all rights under licenses previously granted
terminate. Accordingly, a default as to one product could affect our rights in
other products. In addition, Yale, at its sole option, can terminate any
sublicenses that we grant.

Subsequent to entering into the Yale/OncoRx Agreement, we paid
approximately $6.0 million to fund certain research at Yale, including research
in the laboratory of Dr. Yung-Chi Cheng, a member of our scientific advisory
board, and of Dr. Sartorelli, one of our directors. Yale has sole discretion to
use these funds to conduct research relating to products that it desires to
pursue. Additionally, to the extent that such research results in technologies
not covered by the Yale/OncoRx Agreement, we may be unable to utilize such
technologies unless we negotiate additional license agreements.

Yale/MelaRx Agreement. Under a research agreement with Yale, referred to as
the Yale/MelaRx Agreement, Yale has agreed to perform a research program under
the supervision of Dr. John W. Pawelek, while he is employed by Yale. The
research program has primarily involved synthetic melanin and products designed
to control the effects of ultraviolet radiation. In addition, under our TAPET
program, Dr. Pawelek is conducting certain research regarding the use of a
bacterial vector in connection with genetic therapy for melanoma. We have agreed
to reimburse Yale for its direct and indirect costs in connection with the
research program in an amount currently equal to $852,000 per year. We entered
into an additional license agreement with Yale in December 1995, under which we
received a non-transferable worldwide exclusive license to three inventions
relating to gene therapy for melanoma. Under this agreement, we paid Yale
$100,000 and have agreed to make milestone payments based on the status of
clinical trials and regulatory approvals. In addition, Yale is entitled to
royalties on sales, if any, of resulting products and sub-licensing revenues.
The term of the Yale/MelaRx Agreement ends June 30, 2001, subject to earlier
termination by us if Dr. Pawelek is no longer the principal investigator.

Under the Yale/MelaRx Agreement, we and Yale have entered into five license
agreements that grant us exclusive licenses to make, use, sell and practice the
inventions covered by various patents. Each such license agreement requires us
to pay to Yale royalties based on a percentage of net sales of the products
covered and sub-licensing income. In addition, four of the five licenses provide
that they are terminable in the event we do not exercise due diligence in
commercializing the licensed technology.

COMPETITION

Competition in the biopharmaceutical industry is intense and based
significantly on scientific and technological factors, the availability of
patent and other protection for technology and products, the ability to
commercialize technological developments and the ability to obtain governmental
approval for testing, manufacturing and marketing. Moreover, the
biopharmaceutical industry is characterized by rapidly evolving technology that
could result in the technological obsolescence of any products developed by us.
We compete with specialized biopharmaceutical firms in the United States, Europe
and elsewhere, as well as a growing number of large

<PAGE>
pharmaceutical companies that are applying biotechnology to their operations.
Most of our competitors have substantially greater financial, technical and
human resources than we have and may be better equipped to develop, manufacture
and market products. In addition, many of these companies have extensive
experience in preclinical testing and human clinical trials and in obtaining
regulatory approvals. These companies, as well as academic institutions,
governmental agencies and private research organizations, also compete with us
in recruiting and retaining highly qualified scientific personnel and
consultants.

The timing of market introduction of our potential products or of
competitors' products will be an important competitive factor. Accordingly, the
relative speed with which we can develop products, complete preclinical testing,
clinical trials and regulatory approval processes and supply commercial
quantities to market will influence our ability to bring a product to market. In
addition, we may apply for Orphan Drug designation by the FDA for our proposed
products. To the extent that a competitor of ours develops and receives Orphan
Drug designation and marketing approval for a drug to treat the same indication
prior to us, we may be precluded from marketing our product for a period of
seven years.

PATENTS, LICENSES AND TRADE SECRETS

Our policy is to protect our technology by, among other means, filing
patent applications for technology that we consider important to the development
of our business. We intend to file additional patent applications, when
appropriate, relating to new developments or improvements in our technology and
other specific products that we develop. We also rely on trade secrets and
improvements, unpatented know-how and continuing technological innovation to
develop and maintain our competitive position.

Pursuant to the Yale/MelaRx Agreement, we are the exclusive licensee of a
number of pending patent applications relating to our TAPET platform technology
which include claims for methods of diagnosing and/or treating various solid
tumor cancers, including, but not limited to, melanoma, lung cancer, breast
cancer and colon cancer. We also have rights, either by license and/or by
assignment, to pending patent applications, U.S. and foreign, relating to our
TAPET platform technology. We are also the exclusive licensee of issued U.S. and
foreign utility patents and pending patent applications relating to synthetic
melanins and methods for using synthetic melanins, such as, for sunscreening or
self-tanning agents. Of these U.S. patents and patent applications, however,
only one issued patent is relevant to our MELASYN products. Patent applications
relevant to the MELASYN products are pending in foreign countries.

In connection with a collaboration with Memorial Sloan Kettering Cancer
Center, we have filed a provisional patent application relating to non-invasive
methods to detect solid tumors in vivo using attenuated tumor-targeted bacteria.

In connection with the Yale/OncoRx Agreement, we are the exclusive licensee
of eight issued patents and one pending U.S. patent applications relating to our
sulfonyl hydrazine prodrug technology, including patents relating to treatment
of trypanosomiasis and cancer and for controlling neoplastic cell growth. We are
also the exclusive licensee of a number of issued and pending U.S. and foreign
patent applications relating to:

(beta)-L-Fd4C, its composition and its use for the treatment of HIV and
HBV infections and their use in combination with other anti-AIDS drugs;

the use of 3TC or mixtures containing 3TC for the treatment of HBV
infection;

Triapine and other ribonucleotide reductase inhibitors.

We are aware that BioChem Pharma has been granted an issued U.S. patent
with claims to methods of use of a compound or a group of compounds, including
3TC, for treating HBV. We believe that the BioChem Pharma patent (as well as
other BioChem Pharma patent applications and/or patents) is licensed to Glaxo
Group. Under the Yale/OncoRx agreement, we have rights in a patent application
with claims directed to methods for the use of 3TC or a mixture containing 3TC
for treating HBV. In November 1997, we requested that the U.S. Patent and
Trademark

<PAGE>
Office declare an Interference between the BioChem patent and the Vion patent
application. An Interference is a legal proceeding held when more than one
patent application or at least one patent application and one or more patents,
owned by different parties, contain claims to the same subject matter. An
Interference proceeding determines which one of the parties is entitled to a
patent containing claims to the common subject matter.

To date, the Patent and Trademark Office has not granted our request for an
Interference with the BioChem Pharma patent. There can be no guarantee that our
request will ever be granted. Moreover, there can be no guarantee that if our
request is granted, we will prevail in any Interference proceeding that is
declared. Even if we do prevail, Interference can be a lengthy proceeding and it
could be several years before a patent is issued.

The BioChem Pharma patent has a filing date earlier than that of the Vion
patent application. If an Interference is declared between the BioChem Pharma
patent and the Vion patent application, however, we believe that we may be able
to prove that we are entitled to priority of invention for claims to a method of
use of 3TC and/or a mixture containing 3TC for treating HBV. However, there can
be no guarantee that we will prevail and there is a substantial risk that we
will not be able to prove priority and obtain a patent.

Further, even if we were to prevail in the Interference and were to obtain
a patent with claims directed to the method of use of 3TC or a mixture
containing 3TC for treating HBV, we would only have the right to go to court to
exclude any third party, for example, BioChem Pharma, from using 3TC or a
mixture containing 3TC in a method for treating HBV. It is possible, if we were
to prevail in the Interference, other parties such as BioChem Pharma might be
willing to take a license for the right to use 3TC in a method for treating HBV.
There can be no guarantee that we would be successful in licensing such rights
at acceptable terms.

It should be noted that even if we were to prevail in the Interference, we
would not have any right to make, use, sell or import 3TC in the United States
based on any patent we could obtain by prevailing in the Interference.

In addition, we are aware that third parties, including BioChem Pharma,
Glaxo Group and Emory University have filed patent applications, some of which
have issued relating to 3TC, mixtures containing 3TC, and methods of preparation
and use of 3TC or mixtures containing 3TC as an anti-viral drug. In fact, we are
aware that both BioChem Pharma and Emory have been granted patents that have
claims directed to 3TC, itself, or a group of compounds including 3TC.
Accordingly, even if we had rights to an issued patent with claims to a method
of use of 3TC to treat HBV, we would not be able to make, use and sell or import
3TC in the United States unless we obtained a license from one or more third
parties. There can be no guarantee that we could obtain such a license or that
if available, the license would be on acceptable terms.

We or our licensors are prosecuting the patent applications related to
products we license both with the U.S. Patent and Trademark Office and various
foreign patent agencies, but we do not know whether any of our applications will
result in the issuance of any patents or, whether any issued patent will provide
significant proprietary protection or will be circumvented or invalidated.
During the course of patent prosecution, patent applications are evaluated for,
among other things, utility, novelty, nonobviousness and enablement. The U.S.
Patent and Trademark Office may require that the claims of an initially filed
patent application be amended if it is determined that the scope of the claims
include subject matter that is not useful, novel, nonobvious or enabled.
Furthermore, in certain instances, the practice of a patentable invention may
require a license from the holder of dominant patent rights. In cases where one
party believes that it has a claim to an invention covered by a patent
application or patent of a second party, the first party may attempt to provoke
an interference proceeding in the U.S. Patent and Trademark Office or such a
proceeding may otherwise be declared by the U.S. Patent and Trademark Office. In
general, in an interference proceeding, the U.S. Patent and Trademark Office
reviews the competing patents

<PAGE>
and/or patent applications to determine the validity of the competing claims,
including, but not limited to, determining priority of invention. Any such
determination would be subject to appeal in the appropriate United States
federal courts.

We cannot predict whether our or our competitors' patent applications will
result in valid patents being issued. An issued patent is entitled to a
presumption of validity. The presumption may be challenged in litigation; a
court could find any patent of ours or our competitors invalid and/or
unenforceable. Litigation, which could result in substantial cost to us, may
also be necessary to enforce our patent and proprietary rights and/or to
determine the scope and validity of others proprietary rights. We may
participate in interference proceedings that may in the future be declared by
the United States Patent and Trademark Office to determine priority of
invention. Interference and/or litigation proceedings could result in
substantial cost to us.

The patent position of biotechnology and biopharmaceutical firms generally
is highly uncertain and involves complex legal and factual questions. To date,
no consistent policy has emerged regarding the breadth of claims allowed in
biotechnology and biopharmaceutical patents.

GOVERNMENT REGULATION

Overview. Regulation by state and federal governmental authorities in the
United States and foreign countries is a significant factor in the manufacture
and marketing of our products and in our ongoing research and product
development activities. All of our products will require regulatory clearances
or approvals prior to commercialization. In particular, drugs, biologicals and
medical devices are subject to rigorous preclinical testing and other approval
requirements by the FDA pursuant to the FDC Act and the Public Health Service
Act and regulations promulgated thereunder, as well as by similar health
authorities in foreign countries. Various federal statutes and regulations also
govern or influence the testing, manufacturing, safety, labeling, packaging,
advertising, storage, registration, listing and recordkeeping related to
marketing of such products. The process of obtaining these clearances or
approvals and the subsequent compliance with appropriate federal statutes and
regulations require the expenditure of substantial resources. We cannot be
certain that any required FDA or other regulatory approval will be granted or,
if granted, will not be withdrawn.

Drugs and Biologicals. Preclinical development of diagnostic and
therapeutic drugs and biological products is generally conducted in the
laboratory to evaluate the safety and the potential efficacy of a compound by
relevant in vitro, or cell culture, and in vivo, or animal model, testing. When
a product is tested prospectively to determine its safety for purposes of
obtaining FDA approvals or clearances, such testing must be performed in
accordance with good laboratory practices for nonclinical studies. The results
of preclinical testing are submitted to the FDA as part of an IND. The IND must
become effective, informed consent must be obtained from clinical subjects, and
the study must be approved by an institutional review board before human
clinical trials can begin.

Regulatory approval often takes a number of years and involves the
expenditure of substantial resources. Approval time also depends on a number of
factors, including the severity of the disease in question, the availability of
alternative treatments and the risks and benefits demonstrated in clinical
trials. Typically, clinical evaluation involves a three-phase process. In Phase
I, clinical trials are conducted with a small number of subjects to determine
the tolerated drug dose, early safety profile, proper scheduling and the pattern
of drug distribution, absorption and metabolism. In Phase II, clinical trials
are conducted with groups of patients afflicted with a specific disease in order
to determine efficacy, dose-response relationships and expanded evidence of
safety. In Phase III, large-scale, multi-center, controlled clinical trials are
conducted in order to:

provide enough data for statistical proof of safety and efficacy;

compare the experimental therapy to existing therapies;

uncover any unexpected safety problems, such as side-effects; and

generate product labeling.

<PAGE>
In the case of drugs for cancer and other life-threatening diseases, the
initial human testing is generally conducted in patients rather than in healthy
volunteers. Because these patients are already afflicted with the target
disease, it is possible that such studies will provide results traditionally
obtained in Phase II trials. These trials are referred to as 'Phase I/II'
trials.

The results of the preclinical and clinical testing are submitted to the
FDA either as part of a new drug application, or NDA, for drugs, or a product
license application, or PLA, for biologics, for approval to commence commercial
distribution. For a biological, the manufacturer generally must also obtain
approval of an establishment license application. In responding to an NDA or
PLA, the FDA may grant marketing approval, request additional information or
deny the application if it determines that the application does not satisfy its
regulatory approval criteria. It may take several years to obtain approval after
submission of an NDA or PLA, although approval is not assured. The FDA also
normally conducts a pre-approval inspection and other occasional inspections of
an applicant's facilities to ensure compliance with current good manufacturing
practices. Further, stringent FDA regulatory requirements continue after a
product is approved for marketing, and changes to products or labeling can
require additional approvals. If any of our products is approved for marketing,
we will be subject to stringent post-marketing requirements.

We also will be subject to widely varying foreign regulations governing
clinical trials and pharmaceutical sales. Whether or not FDA approval has been
obtained, approval of a product by the comparable regulatory authorities of
foreign countries must be obtained before marketing the product in those
countries. The approval process varies from country to country and the time may
be longer or shorter than that required for FDA approval. We intend, to the
extent possible, to rely on foreign licensees to obtain regulatory approval to
market our products in foreign countries.

Orphan Drug Designation. Under the Orphan Drug Act, a sponsor may obtain
designation by the FDA of a drug or biologic as an 'orphan' drug for a
particular indication. Orphan Drug designation is granted to drugs for rare
diseases or conditions, including many cancers, with a prevalence of less than
200,000 cases in the United States. The sponsor of a drug that has obtained
Orphan Drug designation and which is the first to obtain approval of a marketing
application for such drug is entitled to marketing exclusivity for a period of
seven years for the designated indication. This means that no other company can
market the same Orphan Drug for the same indication approved by the FDA for
seven years after approval unless such company proves its drug is clinically
superior or the approved Orphan Drug marketer cannot supply demand for the drug.
Legislation is periodically considered that could significantly affect the
Orphan Drug law. We received Orphan Drug designation for Promycin in September
1995 to treat head and neck cancer and in May 1997 received FDA approval of our
request for Orphan Drug status for the use of Promycin to treat cervical cancer.
We intend to seek this designation for other products where appropriate. There
can be no assurance that future changes to the Orphan Drug Act would not
diminish the value of any Orphan Drug designation obtained by us.

Drugs for Life-Threatening Illnesses. FDA regulatory procedures established
in 1988 are intended to speed further the availability of new drugs intended to
treat life-threatening and severely debilitating illnesses. These procedures
provide for early and continuous consultation with the FDA regarding preclinical
and clinical studies necessary to gain marketing approval. This regulatory
framework also provides that if Phase I results are promising, Phase II clinical
trials may be designed that obviate the need for lengthy, expensive Phase III
testing. Notwithstanding the foregoing, approval may be denied by the FDA or
traditional Phase III studies may be required. The FDA may also seek our
agreement to perform post-approval Phase IV studies, which confirm product
safety and efficacy.

The FDA has announced that the accelerated approval concept is being
expanded for cancer drugs. The proposed changes are designed to speed drug
approvals by requiring less extensive preapproval testing in some circumstances.
Specifically, the FDA has stated that it may approve these drugs based on the
use of surrogate markers. 'Partial responses,' such as a drug's effectiveness at
short-term tumor shrinkage, that the FDA believes are clear indicators of
therapeutic effect, would be sufficient to demonstrate efficacy for these drugs.
This is in contrast to requiring the traditional 'full-endpoint' measures of
improved survival or quality of life. Other

<PAGE>
provisions of the new initiatives include proactive solicitation by the FDA of
expanded access filings for foreign-approved cancer drugs and greater patient
representation on the FDA's Oncology Drugs Advisory Committee. Although agency
officials have estimated that the changes will reduce by as much as a year the
normal development time for most cancer drugs, it is uncertain whether and how
these initiatives will actually be implemented by the FDA and whether they will
have a significant impact on the approval process for cancer drugs.

Environmental Matters. We are subject to environmental laws, including
those promulgated by OSHA, the EPA and the NRC, that govern activities or
operations that may have adverse environmental effects, such as discharges to
air and water, as well as handling and disposal practices for solid and
hazardous wastes. These laws also impose strict liability for the costs of
cleaning up, and for damages resulting from, sites of past spills, disposals or
other releases of hazardous substances and materials for the investigation and
remediation of environmental contamination at properties operated by us and at
off-site locations where we have arranged for the disposal of hazardous
substances. If it is determined that we are not in compliance with current
environmental laws, we could be subject to fines and penalties. The amount of
any such fines and penalties could be material.

Our facilities have made, and will continue to make, expenditures to comply
with current and future environmental laws. We anticipate that we could incur
additional capital and operating costs in the future to comply with existing
environmental laws and new requirements arising from new or amended statutes and
regulations. In addition, because the applicable regulatory agencies have not
yet promulgated final standards for some existing environmental programs, we
cannot at this time reasonably estimate the cost for compliance with these
additional requirements. The amount of any such compliance costs could be
material. We cannot predict the impact that future regulations will impose upon
our business.

EMPLOYEES

As of October 25, 1999, we had 45 full-time employees, including 33
scientists and technicians. We plan to hire additional employees over the next
12 months to support continuing progress in both research and development. Our
employees are not covered by any collective bargaining agreement. Additionally,
we had seven scientific consultants on a part-time basis.

PROPERTIES

Our principal facility consists of approximately 19,000 square feet of
leased laboratory and office space in New Haven, Connecticut at an annual rental
of approximately $230,000. The lease expires in May 2001, with a right to renew
for an additional five years.

LEGAL PROCEEDINGS

On August 10, 1999, Swartz Investments, L.L.C. filed a lawsuit against us
in the state court in Fulton County, Georgia, alleging non-payment of a
placement agent fee and seeking payment of such fee in the amount of $100,000,
consequential damages and interest. We believe that the allegations made in the
complaint are without merit and intend to defend them vigorously. We do not
believe that any ultimate liability arising out of this action, even a
determination that we are liable for the full amount sought, will have a
material adverse effect on our business.

<PAGE>
MANAGEMENT

OUR EXECUTIVE OFFICERS, DIRECTORS AND KEY EMPLOYEE

Our executive officers, directors and key employee are as follows:

<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Alan Kessman.............. 53 President, Chief Executive Officer and Director
Terrence W. Doyle, 57 Vice President, Research & Development
Ph.D....................
Thomas E. Klein........... 50 Vice President, Finance and Chief Financial Officer
Thomas Mizelle............ 48 Vice President, Operations and Secretary
Bijan Almassian, Ph.D..... 46 Vice President, Development
Ivan King, Ph.D........... 44 Vice President, Biology
Mario Sznol, M.D.......... 42 Vice President, Clinical Affairs
William R. Miller(1)...... 71 Chairman of the Board
Michel C. Bergerac(1)..... 67 Director
Frank T. Cary(1)(2)....... 78 Director
James L. Ferguson......... 72 Director
Alan C. Sartorelli, 67 Director
Ph.D....................
Walter B. Wriston(2)...... 80 Director
</TABLE>

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

(1) Member of the compensation committee.

(2) Member of the audit committee.

Alan Kessman has been our Chief Executive Officer since January 1999, our
President since April 1999 and has been a director since October 1998. From 1983
to 1998, Mr. Kessman was Chairman, Chief Executive Officer and President of
Executone Information Systems, Inc., a developer and marketer of voice and data
communications systems, and its subsidiary eLottery, Inc. Mr. Kessman is a
partner of PS Capital, LLC, an investment company.

Terrence W. Doyle, Ph.D. has been our Vice President, Research and
Development since the merger with OncoRx and served in the same capacity for
OncoRx from January 1994 until the merger. Dr. Doyle was an employee of the
Bristol-Myers Squibb Company from 1967 to 1993. From 1990 to 1993, Dr. Doyle was
an executive director with Bristol-Myers. Dr. Doyle is the original holder of 41
U.S. patents for anti-infective, anti-inflammatory and anti-tumor drugs and the
author of over 100 published research articles and abstracts on cancer
chemotherapy.

Thomas E. Klein has been our Vice President, Finance and Chief Financial
Officer since October 1995. From 1988 to 1994, Mr. Klein was Director of Finance
and Treasurer of Novo Nordisk of North America, Inc.

Thomas Mizelle has been our Vice President, Operations since the merger
with OncoRx and has been our Secretary since October 1995. Prior to the merger,
Mr. Mizelle was Vice President, Business Development since August 1994. From May
1990 to July 1994, Mr. Mizelle served as Senior Vice President, Vice President,
Sales and Marketing and Director of Sales of Immunex Corporation.

Bijan Almassian, Ph.D. has been our Vice President, Development since March
1997 and was named an executive officer in July 1999. From September 1995 to
March 1997, Dr. Almassian was our Director of Development. From 1994 to 1995,
Dr. Almassian was the Director of Pharmaceutical development at Genelabs
Technologies, where he was responsible for product development of several
anticancer and antiviral drugs and biologics. Before joining Genelabs, he held
several scientific positions at Genzyme/Integrated Genetics, Instrumentation
Laboratories and Orion Research.

Ivan King, Ph.D. has been our Vice President, Biology since September 1995
and became an executive officer in July 1999. From 1990 to 1995, Dr. King was a
Section Leader in the

<PAGE>
Department of Tumor Biology at Schering-Plough Research Institute in charge of
the Cell Biology and In Vivo Biology groups where he was responsible for
identifying targets, developing high throughput assays, evaluating in vitro and
in vivo activities of drug candidates and recommending candidates for clinical
development. Dr. King's first industrial position was as a Senior Research
Scientist at Bristol-Myers Squibb.

Mario Sznol, M.D. has been our Vice President, Clinical Affairs since
September 1999. From 1987 to 1999, Dr. Sznol worked for the National Cancer
Institute, or NCI, a component of the National Institutes of Health. Most
recently he was Head of the Biologics Evaluation Section, Investigational Drug
Branch, Cancer Therapy Evaluation Program. From March 1997 to October 1998, he
served as acting Chief of NCI's Investigational Drug Branch, Cancer Therapy
Evaluation Program. Prior to joining the NCI, Dr. Sznol conducted his fellowship
in Medical Oncology, Department of Neoplastic Diseases, at Mt. Sinai School of
Medicine, and his residency in Internal Medicine at Baylor College of Medicine
in Houston. Dr. Sznol is on the editorial advisory boards of both the Journal of
the National Cancer Institute and the Journal of Immunotherapy.

William R. Miller has been Chairman of our Board since April 1995. From
February 1995 until April 1995, Mr. Miller was Chairman of the Board of OncoRx
Inc., which was merged into our subsidiary (then known as MelaRx
Pharmaceuticals, Inc.) in April 1995. Mr. Miller is currently Chairman of the
Board of SIBIA Neurosciences, Inc. and a director of ImClone Systems, Inc., Isis
Pharmaceuticals, Inc., Transkaryotic Therapies, Inc., Westvaco Corporation and
Xomed Surgical Products Inc. From 1964 until 1991, Mr. Miller was employed by
Bristol-Myers Squibb Company, including as Vice Chairman of the Board commencing
in 1985.

Michel C. Bergerac has been a director since 1992. Mr. Bergerac has been
Chairman of M.C. Bergerac & Co., Inc., an investment advisory firm, since 1985.
From 1974 to 1985, Mr. Bergerac was Chairman of the Board, President and Chief
Executive Officer of Revlon, Inc.

Frank T. Cary has been a director since 1995. Mr. Cary is a director of
Celgene Corporation, Cygnus Therapeutic Systems, ICOS Corporation, Lincare,
Inc., Lexmark International Group, Inc. and Teltrend, Inc. From 1973 to 1981,
Mr. Cary was Chairman of the Board and Chief Executive Officer of IBM.

James L. Ferguson has been a director since 1995. Mr. Ferguson is a
director of ICOS Corporation. Mr. Ferguson was Chairman of the Board of General
Foods Corporation from 1974 until 1989 and President from 1973 to 1977.

Alan C. Sartorelli, Ph.D. has been a director since 1995. Dr. Sartorelli
has been a professor of pharmacology at Yale University School of Medicine since
1967 and Chairman of our Scientific Advisory Board since April 1995. Dr.
Sartorelli was chairman of the OncoRx Scientific Advisory Board from May 1993 to
April 1995 and director of Yale Comprehensive Cancer Center from 1984 to 1993.

Walter B. Wriston has been a director since 1995. Mr. Wriston is a director
of ICOS Corporation, York International Corporation and Cygnus, Inc. Mr. Wriston
retired as Chairman and Chief Executive Officer of Citicorp and its principal
subsidiary, Citibank, N.A., in 1984 after having served as Chief Executive
Officer for 17 years.

COMPENSATION OF DIRECTORS

We reimburse directors for expenses actually incurred in connection with
each meeting of the board or any committee thereof attended. We also pay the
chairman of the board $4,000 per meeting of the board attended and each other
non-employee director $1,000 for each such meeting attended. Various directors
are also entitled to automatic grants of options under our amended and restated
1993 Stock Option Plan.

<PAGE>
SCIENTIFIC ADVISORY BOARD

We have established a scientific advisory board to provide specific
expertise in areas of research and development relevant to our business. The
scientific advisory board meets periodically with our scientific and development
personnel and management to discuss our present and long-term research and
development activities. The scientific advisory board members include:

<TABLE>
<S> <C>
Alan C. Sartorelli, Ph.D...... Chairman (see 'Management' section above)

Joseph R. Bertino, M.D........ Chairman, Molecular Pharmacology and Therapeutics Program,
Sloan-Kettering Institute for Cancer Research; Professor,
Cornell University School of Medicine

Bruce Chabner, M.D............ Clinical Director, Massachusetts General Hospital Cancer
Center; Former Director, Division of Cancer Treatment at the
National Cancer Institute; Professor, Harvard Medical School

Yung-Chi Cheng, Ph.D.......... Director, Developmental Therapeutics Program, Yale
Comprehensive Cancer Center

Donald M. Crothers, Ph.D...... Chairman, Department of Chemistry, Sterling Professor of
Chemistry and Molecular Biophysics and Biochemistry, Yale
University

Samuel J. Danishefsky, Director, Laboratory for Bio-organic Chemistry, Memorial
Ph.D........................ Sloan-Kettering Research Institute; Professor, Columbia
University

Terrence W. Doyle, Ph.D....... (see 'Management' section above)

James J. Fischer, M.D., Director, Radiotherapy Program, Yale Comprehensive Cancer
Ph.D........................ Center; Robert E. Hunter Professor and Chairman, Department
of Therapeutic Radiology, Yale University School of
Medicine; Chief, Department of Therapeutic Radiology, Yale
New Haven Medical Center; Director, Radio Therapy Program
Yale Comprehensive Cancer Center.

Emil Frei III, M.D............ Physician-in-Chief Emeritus and Former Director, Dana Farber
Cancer Institute; Richard and Susan Smith Distinguished
Professor, Harvard Medical School

Mario Sznol, M.D.............. (see 'Management' section above)

George J. Todaro, M.D......... Chief Executive Officer, Cytokine Networks, Inc.; Professor,
Department of Pathology, University of Washington

David C. Ward, Ph.D........... Former Chairman, Department of Human Genetics, Yale
University School of Medicine; Professor of Biology,
Molecular Biophysics and Biochemistry, Yale University
School of Medicine
</TABLE>

<PAGE>
EXECUTIVE COMPENSATION

The following table sets forth information concerning all cash and non-cash
compensation awarded to, earned by or paid to our chief executive officer and
each of the other executive officers who earned over $100,000 and were serving
at the end of 1998, for services in all capacities to us, our subsidiaries and
predecessors.

SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
ANNUAL ------------
COMPENSATION SECURITIES
------------------ UNDERLYING
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS OPTIONS
- --------------------------- ---- ------ ----- -------
<S> <C> <C> <C> <C>
John A. Spears ....................................... 1998 $246,750 $37,013 12,000
Former President and Chief Executive Officer(1) 1997 234,557 61,000 --
1996 189,167 70,500 15,000
Terrence W. Doyle .................................... 1998 183,750 27,563 9,600
Vice President, Research and Development 1997 174,549 38,000 --
1996 154,167 42,000 12,000
Thomas E. Klein ...................................... 1998 157,500 23,625 9,600
Vice President, Finance and Chief Financial Officer 1997 148,486 33,000 --
1996 129,167 36,000 37,000
Thomas Mizelle ....................................... 1998 183,750 27,563 9,600
Vice President, Operations and Secretary 1997 173,362 38,000 --
1996 154,167 42,000 62,000
</TABLE>

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

(1) We were a party to an employment agreement with Mr. Spears. See
' -- Employment Agreements.' Mr. Spears was our Chief Executive Officer
until January 1999 and President until April 1999.

The following table sets forth the grant of stock options made during the
year ended December 31, 1998 to the persons named in the summary compensation
table:

OPTION GRANTS IN LAST FISCAL YEAR

<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED
ANNUAL RATES OF
NUMBER OF PERCENT OF TOTAL STOCK PRICE
SECURITIES OPTIONS EXERCISE APPRECIATION FOR
UNDERLYING GRANTED TO PRICE OPTION TERM(2)
OPTIONS EMPLOYEES IN PER EXPIRATION ---------------------
NAME GRANTED FISCAL YEAR(1) SHARE DATE 5% 10%
---- ------- -------------- ----- ---- -- ---
<S> <C> <C> <C> <C> <C> <C>
John A. Spears................ 12,000 5.4% $3.0313 1/29/2008 $59,280 $94,320
Terrence W. Doyle............. 9,600 4.3 3.0313 1/29/2008 47,424 75,456
Thomas E. Klein............... 9,600 4.3 3.0313 1/29/2008 47,424 75,456
Thomas Mizelle................ 9,600 4.3 3.0313 1/29/2008 47,424 75,456
</TABLE>

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

(1) Computed based on an aggregate of 221,112 shares issuable upon exercise of
options granted to employees during the year ended December 31, 1998.

(2) These amounts represent assumed rates of appreciation in the price of our
common stock during the terms of the options in accordance with rates
specified in applicable federal securities regulations. The 5% and 10%
assumed annual rates of compounded stock price appreciation do not
represent our estimate or projection of our future common stock prices.
Each option listed in the table has a 10-year term. Actual gains, if any,
on stock options exercised will depend on the future price of the common
stock. This is not a representation that the rates of appreciation
reflected in the table will be achieved.

<PAGE>
The following table sets forth information with respect to unexercised
stock options held by the persons named in the summary compensation table at
December 31, 1998. No stock options were exercised in 1998 by such persons.

AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION
VALUES

<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
SHARES UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
ACQUIRED OPTIONS AT FISCAL YEAR-END AT FISCAL YEAR-END(1)
ON VALUE --------------------------- ---------------------------
NAME EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- -------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
John A. Spears.............. -- -- 383,812 19,500 $1,538,147 $29,718
Terrence W. Doyle........... -- -- 6,000 15,600 4,875 23,775
Thomas E. Klein............. -- -- 74,750 46,850 78,313 59,713
Thomas Mizelle.............. -- -- 106,000 53,100 134,250 70,650
</TABLE>

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

(1) Computed based upon the difference between the closing price of our common
stock on December 31, 1998, which was $5.00, and the exercise price.

EMPLOYMENT AGREEMENTS

Effective January 11, 1999, we entered into an agreement with Alan Kessman
and PS Capital LLC, an entity of which Mr. Kessman is a member, pursuant to
which Mr. Kessman serves as our chief executive officer. Mr. Kessman receives a
base salary of $400,000 per year. The agreement does not provide for any
payments upon a change in control or any other severance payments. As an
inducement to enter into the agreement, on January 11, 1999, we granted to Mr.
Kessman options to purchase an aggregate of 980,000 shares of common stock. The
foregoing grants consist of (1) an option to purchase 760,000 shares at an
exercise price of $5.775, representing a 10% premium to the market price on the
date prior to the date of grant, such option to vest 25% on July 11, 2000, 50%
on July 11, 2001, 75% on July 11, 2002 and 100% on July 11, 2003 and (2) an
option to purchase 220,000 shares at an exercise price of $5.25, representing
the market price on the date prior to the date of grant, such option having
vested in full on July 11, 1999, six months from the date of grant. The option
to purchase 220,000 shares of common stock is not terminable if Mr. Kessman is
no longer acting as our Chief Executive Officer. We are currently negotiating a
new employment agreement with Mr. Kessman. Mr. Kessman has agreed to enter into
this agreement in conjunction with the closing of this offering. Pursuant to
this new agreement, which will terminate on December 31, 2003, Mr. Kessman will
receive a base salary of $400,000 per year and will be eligible for a bonus of
up to 50% of his base salary based on the achievement of specified objectives.
In the event Mr. Kessman's employment is terminated by us for any reason other
than cause or disability, or if Mr. Kessman terminates for good reason, we are
obligated to pay him the sum of two times his base salary, average annual bonus
for the prior two years and insurance costs paid to him. The proposed agreement
further provides that if Mr. Kessman's employment is terminated on or after a
change in control, he will be paid two and one-half times his base amount as
defined in the agreement.

Effective January 16, 1998, we entered into an employment agreement with
John A. Spears, then our President and Chief Executive Officer. The agreement
was for a term of three years and provided for an annual base salary of
$246,750. In the event of our termination of the employment agreement for any
reason other than 'just cause' or death, including a 'change in control,' we
were required to pay Mr. Spears his base salary for the remaining term of the
employment agreement through January 2001, subject to the obligation of Mr.
Spears to mitigate damages by seeking new employment. We also had the right at
any time after the first anniversary of the date of the agreement to terminate
the employment agreement without cause upon ten days notice, upon payment to Mr.
Spears of a single lump sum equal to one year's base salary, plus an amount
equal to the average annual cash bonus paid to Mr. Spears during the prior two
years. Mr. Spears was relieved of his obligations as Chief Executive Officer in
January 1999 and was relieved of his obligations as President and as a director
in April 1999. As a result, the employment agreement

<PAGE>
was terminated and we agreed to make bi-monthly payments to Mr. Spears in the
same amounts as his base salary due pursuant to the separation and release
agreement through the earlier of January 16, 2001 or the date on which Mr.
Spears secures full-time employment; provided, we will receive a credit against
such payments equal to 75% of any gross income earned by Mr. Spears from
providing services as a part-time employee or consultant; and provided further,
that Mr. Spears will receive a lump-sum payment of 40% of the balance of
payments otherwise payable through January 16, 2001 if he secures full-time
employment elsewhere, such amount to be payable only if we close an underwritten
public offering resulting in gross proceeds to us of at least $10 million.
Because Mr. Spears obtained a new position, we are no longer obligated for some
these payments. We also agreed to pay Mr. Spears his 1998 bonus of $37,012.50,
and Mr. Spears agreed to a lock-up provision regarding certain of the shares
underlying his stock options and further agreed to a confidentiality covenant.

SEVERANCE AGREEMENTS

Effective October 15, 1998, we entered into severance agreements with
Thomas Mizelle, our Vice President, Operations, Terrence W. Doyle, our Vice
President, Research and Development and Thomas E. Klein, our Vice President,
Finance, pursuant to which each of these officers would be entitled to certain
payments in the event such officer loses his employment during the twelve-month
period following a 'change in control.' Specifically, if a 'change in control'
occurs, the officer shall be entitled to a lump sum severance payment equal to
the sum of twelve months of the officer's monthly base salary as in effect as of
the date of termination or immediately prior to the change in control, whichever
is greater, plus the average of the last two cash bonus payments made to the
officer prior to the change in control. The officer would also be entitled to
all payments necessary to provide him with group health insurance benefits
substantially similar to those which he was receiving immediately prior to the
date of termination until the earlier of 18 months after such termination or the
date he has obtained new full-time employment. The foregoing amounts are not
payable if termination of the officer is because of his death, by us for cause,
or by the officer other than for good reason. For purposes of the severance
agreements, a 'change in control' means that (1) any person or entity becomes
the beneficial owner of our securities representing 30 percent or more of the
combined voting power of the then outstanding securities; (2) during any period
of two consecutive years, individuals who, at the beginning of such period,
constitute the board, and any new director (other than a director designated by
an acquiring person) whose election by the board or nomination for election by
our 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; or (3) our stockholders
approve a merger or consolidation (other than certain recapitalizations).

1993 AMENDED AND RESTATED STOCK OPTION PLAN

In April 1993, our board adopted the 1993 Amended and Restated Stock Option
Plan pursuant to which our employees, officers, directors, consultants and
advisers are eligible to receive incentive stock options within the meaning of
Section 422 of the Internal Revenue Code and non-qualified options. In January
1999, the board amended the plan to increase the number of shares which may be
granted under the plan to 3,000,000. This amendment was approved by our
stockholders in June 1999. The plan, which expires in April 2003, is
administered by the compensation committee of our board. The purposes of the
plan are to ensure the retention of existing executive personnel, key employees,
directors, consultants and advisors and to provide additional incentive by
permitting such individuals to participate in our ownership, and the criteria to
be utilized by the board or the compensation committee in granting options
pursuant to the plan will be consistent with these purposes. The plan also
provides for automatic grants of options to certain directors. There are
currently 43 employees, nine directors and seven consultants eligible to receive
grants under the plan.

<PAGE>
Options granted under the plan may be either incentive options or
non-qualified options. Incentive options granted under the plan are exercisable
for a period of up to 10 years from date of grant at an exercise price that is
not less than the fair market value of the common stock on the date of the
grant, except that the term of an incentive option granted under the plan to a
stockholder owning more than 10% of the outstanding voting power may not exceed
five years and its exercise price may not be less than 110% of the fair market
value of the common stock on the date of the grant. To the extent that the
aggregate fair market value, as of the date of grant, of the shares for which
incentive options become exercisable for the first time by an optionee during
the calendar year exceeds $100,000, the portion of the option that is in excess
of the $100,000 limitation will be treated as a non-qualified option.
Additionally, the aggregate number of shares of common stock that may be subject
to options granted to any person in a calendar year shall not exceed 25% of the
maximum number of shares of common stock that may be issued from time to time
under the plan. Options granted under the plan to our officers, directors or
employees may be exercised only while the optionee is employed or retained by us
or within 90 days of the date of termination of the employment relationship or
directorship. However, options that are exercisable at the time of termination
by reason of death or permanent disability of the optionee may be exercised
within 12 months of the date of termination of the employment relationship or
directorship. Upon the exercise of an option, payment may be made by cash or by
any other means that the board or the compensation committee determines. No
option may be granted under the plan after April 14, 2003.

Options may be granted only to our employees, officers, directors,
consultants and advisors as the board or the compensation committee shall select
from time to time in its sole discretion, provided that only our employees are
eligible to receive incentive options. An optionee may be granted more than one
option under the plan. The board or the compensation committee, as the case may
be, will, in its discretion, determine who will be granted options, the time or
times at which options shall be granted, the number of shares subject to each
option and whether the options are incentive options or non-qualified options.
In making this determination, consideration may be given to the value of the
services rendered by the respective individuals, their present and potential
contributions to our success and such other factors deemed relevant in
accomplishing the purpose of the plan.

Under the plan, the optionee has none of the rights of a stockholder with
respect to the shares issuable upon the exercise of the option until shares are
actually issued upon exercise of the option. No adjustment is made for dividends
or other rights for which the record date is prior to the date such stock
certificate is issued, except as provided in the plan. During the lifetime of
the optionee, an option shall be exercisable only by the optionee. No option may
be sold, pledged, assigned, hypothecated, transferred or disposed of in any
manner other than by will or by the laws of decent and distribution.

The board may amend or terminate the plan except that stockholder approval
is required to effect a change so as to increase the aggregate number of shares
that may be issued under the plan, to modify the requirements as to eligibility
to receive options, to increase materially the benefits accruing to participants
or as otherwise may be legally required. No action taken by the board may affect
any outstanding option grant without the consent of the optionee.

The provisions of our amended and restated 1993 Stock Option Plan also
provide for the automatic grant of non-qualified stock options to purchase
shares of common stock to our directors who are not our employees or principal
stockholders. Eligible directors elected after August 1995 are granted a
director option to purchase 20,000 shares of common stock on the date such
person is first elected or appointed a director. Further, commencing on the day
immediately following the date of the annual meeting of stockholders, each
eligible director, other than directors who received an initial director option
since the last annual meeting, will be granted a director option to purchase
5,000 shares of common stock on the day immediately following the date of each
annual meeting of stockholders. The size of this automatic grant for the
chairman of the board has been increased from 5,000 shares per year to 20,000
shares per year, and the size of the automatic grant for the other eligible
directors has been increased from 5,000 shares per year

<PAGE>
to 15,000 shares per year. The exercise price for each share subject to a
director option shall be equal to the fair market value of the common stock on
the date of grant. Director options will expire the earlier of 10 years after
the date of grant or 90 days after the termination of the director's service on
the board.

During the fiscal year ended December 31, 1998, Mr. Kessman was granted an
initial director option to purchase 20,000 shares of common stock at an exercise
price of $2.563 per share, and Messrs. Miller, Bergerac, Cary, Ferguson, Kent,
Sartorelli and Wriston were each granted options under the plan, which included
the automatic grant, to purchase 15,000 shares of common stock, at an exercise
price of $4.875 per share.

SENIOR EXECUTIVE OFFICER PLAN

The purpose of this plan is to secure for us and our stockholders the
benefits arising from capital stock ownership by our Chief Executive Officer,
who is expected to contribute to our future growth and success. The plan permits
grants of options to purchase shares of common stock. Options granted pursuant
to the plan shall be authorized by action of the board of directors, or a
committee designated by the board, and are non-statutory options that are not
intended to meet the requirements of Section 422 of the Internal Revenue Code of
1986, as amended. The stock subject to options granted under the plan are shares
of authorized but unissued or reacquired common stock. Subject to adjustment,
the maximum number of shares of common stock that may be issued and sold under
the plan is 980,000 shares. The maximum number of options, 980,000, were granted
to Alan Kessman, our Chief Executive Officer, in January 1999.

<PAGE>
PRINCIPAL STOCKHOLDERS

The following table sets forth, as of October 25, 1999, and as adjusted to
reflect the sale of shares in this offering, information with respect to the
beneficial ownership of our common stock by (1) each person known to us to
beneficially own 5% or more of the outstanding shares of our common stock,
(2) each of our directors, (3) our chief executive officer and each of our four
other most highly compensated executive officers and (4) all of the directors
and executive officers as a group.

Beneficial ownership is determined in accordance with the rules of the SEC,
which attribute beneficial ownership of securities to persons who possess sole
or shared voting power and/or investment power with respect to those securities.
Additionally, shares beneficially owned include shares that may be acquired
pursuant to the exercise of fully vested options and warrants that are
exercisable within 60 days of consummation of this offering. Except as otherwise
indicated, the named beneficial owner has the sole voting and investment power
over the shares listed and the address of each beneficial owner is c/o Vion
Pharmaceuticals, Inc., 4 Science Park, New Haven, Connecticut 06511.

<TABLE>
<CAPTION>
BENEFICIALLY OWNED
BENEFICIALLY OWNED BEFORE THE OFFERING AFTER THE OFFERING
------------------------------------------------------------------ --------------------------------
NUMBER OF TOTAL
NUMBER OF CLASS A NUMBER OF PERCENT OF NUMBER OF PERCENT OF
COMMON PREFERRED COMMON COMMON COMMON COMMON
NAME OF BENEFICIAL OWNER STOCK STOCK(1) STOCK STOCK STOCK STOCK
- ------------------------ ----- -------- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C>
Michel C. Bergerac(2)..... 40,000 -- 40,000 * 40,000 *
Frank T. Cary............. 62,718 -- 62,718 * 62,718 *
James L. Ferguson(3)...... 27,250 -- 27,250 * 27,250 *
Alan Kessman(4)........... 229,000 -- 229,000 1.4% 229,000 1.3%
William R. Miller(5)...... 178,156 -- 178,156 1.1% 178,156 1.0%
Alan C. Sartorelli,
Ph.D(6)................. 442,758 -- 442,758 2.8% 442,758 2.5%
Walter B. Wriston(7)...... 57,718 -- 57,718 * 57,718 *
Terrence W. Doyle,
Ph.D(8)................. 283,124 -- 283,124 1.8% 283,124 1.6%
Thomas E. Klein(9)........ 126,434 -- 126,434 * 126,434 *
Thomas Mizelle(10)........ 143,910 -- 143,910 * 143,910 *
John A. Spears............ 347,763 -- 347,763 2.2% 347,763 2.0%
Elliott Associates, L.P.
Westgate International,
L.P.
Martley International,
Inc.
c/o Elliott Associates,
L.P.
712 Fifth Avenue,
36th Floor
New York, NY
10019(11)............... 3,046,276 -- 3,046,276 17.4% 3,046,276 15.5%
Phoenix Partners L.P.
Morgens Waterfall
Vintiadis
Investments N.V.
Betje Partners
c/o Morgens Waterfall
Vintiadis & Co., Inc.
10 East 50th Street
New York, NY
10022(12)............... 302,787 211,642 890,682 5.5% 890,682 4.8%
Kingdon Capital Management
Corp.
152 West 57th Street,
50th Floor
New York, NY
10019(13)............... -- 236,110 655,861 4.0% 655,861 3.5%
All directors and
executive officers as a
group
(12 persons)(14)........ 1,715,693 -- 1,715,693 10.5% 1,715,693 9.3%
</TABLE>

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

* Less than one percent.

(1) The Class A Preferred Stock is convertible into our common stock by
dividing (i) the sum of the $10.00 per share stated value by (ii) $3.60 per
share (as adjusted from time to time for
(footnotes continued on next page)

<PAGE>
(footnotes continued from previous page)
certain events of dilution). As of July 23, 1999, each share of Class A
Preferred Stock was convertible into 2.777777 shares of our common stock.
(2) Includes 35,000 shares issuable upon exercise of options.
(3) Includes 21,250 shares issuable upon exercise of options.
(4) Includes 205,900 shares issuable upon exercise of options. Does not include
775,000 shares issuable upon exercise of options that are not immediately
exercisable.
(5) Includes 16,250 shares issuable upon exercise of options.
(6) Includes (i) 190,874 shares beneficially owned by Dr. Sartorelli's wife and
(ii) 57,260 shares held in trust for Dr. Sartorelli's grandchildren, for
which Dr. Sartorelli's wife serves as trustee, as to which Dr. Sartorelli
disclaims beneficial ownership. Does not include 57,260 shares beneficially
owned by other family members of Dr. Sartorelli, which were received as
gifts from Dr. Sartorelli. Also includes 3,750 shares issuable upon
exercise of options.
(7) Includes 3,750 shares issuable upon exercise of options.
(8) Includes 86,600 shares held by Dr. Doyle's wife and children, as to which
Dr. Doyle disclaims beneficial ownership. Also includes 11,400 shares
issuable upon exercise of options.
(9) Includes 102,750 shares issuable upon exercise of options. Also includes
1,199 shares of common stock held by Mr. Klein's wife and children.
(10) Includes 123,900 shares issuable upon exercise of options. Also includes
488 shares of common stock held by Mr. Mizelle's children.
(11) Beneficial ownership information is based upon data set forth in a Schedule
13D Amendment No. 2 filed with the SEC on April 16, 1999. Elliott
Associates, L.P. owns 625,468 shares of our common stock, 78,132 Class A
Warrants exercisable into 78,132 shares of common stock, 78,132 Class B
Warrants exercisable into 78,132 shares of common stock and 2,500 shares of
our 5% Convertible Preferred Stock Series 1998, which are convertible into
740,193 shares of common stock (including accretion through October 25,
1999). Westgate International, L.P., which has its business address at c/o
Midland Bank Trust Corporation (Cayman) Limited, P.O. Box 1109, Mary
Street, Grand Cayman, Cayman Islands, British West Indies, owns 628,709
shares of our common stock, 77,724 Class A Warrants exercisable into 77,724
shares of common stock, 77,724 Class B Warrants exercisable into 77,724
shares of common stock and 2,500 shares of our 5% Convertible Preferred
Stock Series 1998, which are convertible into 740,193 shares of common
stock (including accretion through October 25, 1999). Pursuant to the
Certificate of Designation for our 5% Convertible Preferred Stock Series
1998, the aggregate percentage ownership by Elliott Associates, L.P. and
Westgate International, L.P. of common stock is limited to 9.9% of the
common stock, although effective June 8, 1999, the threshold is being
increased from 9.9% to 19.9%. Martley International, Inc. is the investment
manager for Westgate International, L.P. and has shared voting and
dispository power over the shares held by Westgate International, L.P.
Martley International, Inc. disclaims beneficial ownership of all such
shares.
(12) Beneficial ownership information is based in part upon data set forth in a
Schedule 13G filed with the SEC on February 12, 1999. Class A Preferred
Stock consists of 105,819 shares held by Phoenix Partners L.P., 73,964
shares held by Morgens Waterfall Vintiadis Investments N.V. and 31,859
shares held by Betje Partners. Morgens, Waterfall, Vintiadis & Co., Inc. is
deemed to beneficially own all such shares by virtue of its status as
investment advisor to the foregoing entities.
(13) Consists of 141,664 shares held by M. Kingdon Offshore, N.V., 47,223 shares
held by Kingdon Partners, L.P. and 47,223 shares held by Kingdon
Associates, L.P. Kingdon Capital Management Corp. is a general partner of
Kingdon Partners, L.P. and Kingdon Associates, L.P. and is the investment
advisor to M. Kingdon Offshore, N.V. Kingdon Capital disclaims beneficial
ownership of all indicated shares.
(14) Includes 648,575 shares issuable upon exercise of options.

<PAGE>
CERTAIN TRANSACTIONS

Michael Kent, a former director, is a principal of an executive search firm
that has rendered services for us. We paid the firm $60,000 for services
rendered for the year ended December 31, 1997 and $120,000 for services rendered
for the year ended December 31, 1998.

We and Dr. Alan Sartorelli, one of our directors, who is affiliated with
Yale University, entered into a five year consulting agreement on September 29,
1995 providing for various advisory services that is renewable for one
additional year. Under the agreement, Dr. Sartorelli receives an annual fee of
$48,000.

On August 27, 1998, Elliott Associates, L.P., together with Westgate
International, L.P., two of our principal stockholders, exercised their rights
as holders of the 5% Convertible Preferred Stock Series 1998, to nominate a
candidate for election to our board of directors. That candidate, Alan Kessman,
is now our President and Chief Executive Officer, as well as a director.

In April 1999, we completed a private placement of 893,915 shares of our
common stock. 446,957 of these shares were sold to Elliott Associates, L.P. and
Westgate International, L.P., two of our principal stockholders. All shares were
sold at a price of approximately $4.47 per share, which was 90% of the average
closing price of the common stock on the Nasdaq SmallCap Market for the 10
consecutive trading days immediately prior to April 8, 1999, for aggregate
proceeds of $4,000,000.

Any future material transactions and loans with our affiliates will be made
or entered into on terms that are no less favorable to us than those that can be
obtained from unaffiliated third parties. Any forgiveness of loans will be
approved by a majority of our independent directors who do not have an interest
in the transactions and who have access to counsel. Ongoing transactions were
ratified by a majority of our independent directors who did not have an interest
in the transactions and who have had access to counsel. Past transactions which
have now closed have been ratified by at least two disinterested directors.

DESCRIPTION OF CAPITAL STOCK

Our authorized capital stock consists of 35,000,000 shares of common stock,
$.01 par value, and 5,000,000 shares of preferred stock, $.01 par value.

As of October 25, 1999, we had 15,697,325 shares of common stock
outstanding, 498,194 shares of Class A convertible preferred stock and 5,000
shares of redeemable preferred stock outstanding. Upon the closing of this
offering, and after giving effect to the issuance of 2,200,000 shares of common
stock in this offering, there will be 17,897,325 shares of common stock
outstanding.

COMMON STOCK

Subject to preferences that may be applicable to any preferred stock
outstanding at the time, holders of our common stock are entitled to receive
dividends at times and in amounts as the board may determine. The holders of our
common stock have one vote for each share they hold on all matters submitted to
a vote of the stockholders. The holders of a majority of the shares of common
stock voted can elect all of the directors nominated for election. The holders
of our common stock are not entitled to preemptive rights and our common stock
is not subject to conversion or redemption. Upon a liquidation, dissolution or
winding-up, we will distribute pro rata to the holders of our common stock our
remaining assets, after payment of liquidation preferences, if any, on any
outstanding shares of preferred stock and payment of claims of creditors. Each
outstanding share of our common stock is, and all shares of our common stock
being purchased in this offering will be, duly and validly issued, fully paid
and nonassessable.

PREFERRED STOCK

The 5,000,000 authorized shares of preferred stock may by issued in one or
more series without further stockholder action. The board is authorized to
determine the terms, limitations and

<PAGE>
relative rights and preferences of the preferred stock, to establish series of
preferred stock and to determine the variations among series. If we issue
preferred stock, it would have priority over our common stock with respect to
dividends and to other distributions, including the distribution of assets upon
liquidation. In addition, we may be obligated to repurchase or redeem it. The
board can issue preferred stock without the approval of the holders of our
common stock. The holders of preferred stock may have voting and conversion
rights, including multiple voting rights, which could adversely affect the
rights of the holders of our common stock.

CLASS A CONVERTIBLE PREFERRED STOCK

Each share of Class A Preferred Stock is immediately convertible into
2.777777 shares of our common stock and is entitled to vote on all matters on an
'as if' converted basis. The shares of Class A Preferred Stock pay semi-annual
dividends of 5% per annum, payable in additional shares of Class A Preferred
Stock, which are immediately convertible into our common stock. In the event
that the closing bid price of our common stock exceeds $10.3125 for 20 trading
days in any 30 trading day period, we can redeem the Class A Preferred Stock at
$10.00 per share plus all declared and unpaid dividends thereon. We cannot pay
cash dividends on our common stock without the consent of a majority of holders
of the Class A Preferred Stock.

REDEEMABLE CONVERTIBLE PREFERRED STOCK SERIES 1998

As of the date of this prospectus, there are 5,000 shares of our Redeemable
Convertible Preferred Stock Series 1998 issued and outstanding.

The shares of Series 1998 Preferred Stock are entitled to accrued
cumulative dividends at a rate of 5% yearly, compounded quarterly, and payable
when and as declared by the board in kind. If there is a liquidation,
dissolution or winding up, the holders of our Series 1998 Preferred Stock are
entitled to be paid $1,000 per share plus any accrued and unpaid dividends on
our Series 1998 Preferred Stock out of our available assets, before any payment
may be made to the holders of our common stock. The shares of Series 1998
Preferred Stock are non-voting. Each share of Series 1998 Preferred Stock is
convertible into common stock based on the formula of issued price plus accrued
dividends divided by $3.60.

DELAWARE ANTI-TAKEOVER LAW AND CERTAIN CHARTER PROVISIONS

Under Section 203 of the Delaware General Corporation Law, certain
'business combinations' between a Delaware corporation, whose stock generally is
publicly traded or held of record by more than 2,000 stockholders, and an
'interested stockholder' are prohibited for a three-year period following the
date that such stockholder became an interested stockholder, unless:

the corporation has elected in its certificate of incorporation or bylaws
not to be governed by the Delaware anti-takeover law (we have not made
such an election);

the business combination was approved by the board of the corporation
before the other party to the business combination became an interested
stockholder;

upon consummation of the transaction that made it an interested
stockholder, the interested stockholder owned at least 85% of the voting
stock of the corporation outstanding at the commencement of the
transaction (excluding voting stock owned by directors who are also
officers or held in employee stock plans in which the employees do not
have a right to determine confidentially whether to tender or vote stock
held by the plan); or

the business combination was approved by the board and ratified by 66 2/3%
of the voting stock which the interested stockholder did not own.

The three-year prohibition does not apply to certain business combinations
proposed by an interested stockholder following the announcement or notification
of certain extraordinary transactions involving the corporation and a person who
had not been an interested stockholder during the previous three years or who
became an interested stockholder with the approval of a majority of the
corporation's directors. The term 'business combination' is defined generally to

<PAGE>
include mergers or consolidations between a Delaware corporation and an
interested stockholder, transactions with an interested stockholder involving
the assets or stock of the corporation or its majority-owned subsidiaries and
transactions that increase an interested stockholder's percentage ownership of
stock. The term 'interested stockholder' is defined generally as a stockholder
who becomes beneficial owner of 15% or more of a Delaware corporation's voting
stock. Section 203 could have the effect of delaying, deferring or preventing a
change in control of us.

'POISON PILL' RIGHTS

On October 15, 1998, our board of directors adopted a 'poison pill' by
declaring a dividend of a right to purchase one share of common stock for each
outstanding share of our common stock. The dividend is also payable with respect
to shares of common stock sold in the offering. Each right, when it becomes
exercisable, entitles the holder to purchase from us one share of common stock
at a price of $8.00 per share, subject to adjustment.

Initially, the rights are attached to all certificates representing shares
of common stock and no separate right certificates will be distributed. The
rights will separate from the common stock upon the distribution date which is
the earliest to occur of:

The date that a person or group of affiliated or associated persons
acquires beneficial ownership of 20% or more of our common stock; or

10 days, or such later date as may be determined by our board of
directors, following the commencement of, or announcement of an intention
to make, a tender offer or exchange offer the consummation of which would
result in a person or group acquiring 20% or more of our outstanding
shares of common stock.

The person or group acquiring 20% of our common stock is referred to as an
acquiring person. An acquiring person does not include:

the company or any of our subsidiaries

any employee benefit plan of the company or any of our subsidiaries

any entity organized, appointed or established by us for or pursuant to
the terms of any employee benefit plan, or

any person, who or which, together with its affiliates and associates,
becomes the beneficial owner of 20% or more of the outstanding common
stock as a result of the acquisition of shares directly from us.

The rights are not exercisable until the distribution date and will expire
at the close of business on October 25, 2008, unless we redeem them earlier.

After the distribution date, upon the exercise of a right, the holder will
receive the number of shares of common stock having a value equal to two times
the exercise price of the right. All rights that are beneficially owned by an
acquiring person shall be void.

The rights will not become exercisable in connection with a tender or
exchange offer which is for all outstanding shares of common stock at a price
and on terms which a majority of members of the board of directors who are not
officers and who are not acquiring persons or affiliates, associates, nominees
or representatives of an acquiring person determines to be adequate and in the
best interests of Vion and our stockholders.

In the event that we are acquired in a merger or other business combination
transaction in which the holders of all of the outstanding shares of common
stock immediately prior to the consummation of the transaction are not the
holders of all of the surviving corporation's voting power, or more than 50% of
our assets or earning power is sold or transferred, in either case, with or to
an acquiring person or any affiliate or associate or any other person in which
such acquiring person, affiliate or associate has an interest or any person
acting on behalf of or in concert with such acquiring person, affiliate or
associate, or, if in such transaction all holders of shares of common stock are
not treated alike, then each holder of a right shall thereafter have the

<PAGE>
right to receive, upon exercise, common shares of the acquiring company having a
value equal to two times the exercise price of the right.

At any time prior to the earlier to occur of a person becoming an acquiring
person or the expiration of the rights, and under certain other circumstances,
we may redeem the rights at a price of $.01 per right. Additionally, following
the stock acquisition date, we may redeem the rights at a price of $.01 per
right if the redemption is in connection with a merger or other business
combination in which all holders of common stock are treated alike but which
does not involve an acquiring person or its affiliates or associates.

Until a right is exercised, the right holder will have no rights as a
stockholder including, without limitation, the right to vote or to receive
dividends.

AUTHORIZED BUT UNISSUED SHARES

The authorized but unissued shares of common stock and preferred stock are
available for future issuance without stockholder approval. We may use these
shares for a variety of corporate purposes, including future public offerings to
raise additional capital, corporate acquisitions and employee benefit plans.
This could make it more difficult or discourage an attempt to obtain control of
us by means of a proxy contest, tender offer, merger or otherwise.

LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS

The provisions of our certificate of incorporation may have the practical
effect in some cases of eliminating our stockholders' ability to collect
monetary damages from our directors. We believe that these provisions in our
certificate of incorporation and bylaws are necessary to attract and retain
qualified persons as directors and officers.

TRANSFER AGENT AND REGISTRAR

The transfer agent and registrar for our common stock is American Stock
Transfer and Trust Company.

<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE

Upon completion of this offering, we will have outstanding an aggregate of
17,897,325 shares of our common stock, assuming no exercise of the underwriters'
over-allotment option and no exercise of outstanding options or warrants. All of
these shares will be freely tradeable without restriction or further
registration under the Securities Act, unless such shares are purchased by
'affiliates' as that term is defined in Rule 144 under the Securities Act.

LOCK-UP AGREEMENTS

All of our officers and directors have signed lock-up agreements under
which they each agree not to transfer or dispose of, directly or indirectly, any
shares of our common stock or any securities convertible into or exercisable or
exchangeable for shares of our common stock, for a period of 180 days after the
date of this prospectus. Transfers or dispositions can be made sooner:

with the prior written consent of Brean Murray & Co., Inc.;

in the case of gifts or estate planning transfers where the donee signs a
lock-up agreement; or

in the case of distributions to stockholders or affiliates of the
stockholders where the recipient signs a lock-up agreement.

Elliott Associates L.P. and Westgate International L.P. have signed lock-up
agreements under which they agree, without the prior written consent of Brean
Murray & Co., Inc., not to transfer or dispose of, directly or indirectly, any
shares of our common stock or any securities convertible into or exercisable or
exchangeable for shares of our common stock for a period of 180 days after the
date of this prospectus or until the date that the fair market value of our
common stock is at least $15.00 per share, whichever is earlier. Some of the
shares of our common stock have been pledged by Elliott and Westgate, and the
agreements permit each entity to pledge additional shares. Elliott and Westgate
have each agreed to use best efforts to prevent a default under all agreements
under which it has pledged shares of our common stock and securities convertible
into or exercisable or exchangeable for shares of our common stock.

RULE 144

In general, under Rule 144 as currently in effect, beginning 90 days after
the date of this prospectus, a person who has beneficially owned shares of our
common stock for at least one year would be entitled to sell within any
three-month period a number of shares that does not exceed the greater of:

1% of the number of shares of our common stock then outstanding, which
will equal approximately 178,974 shares immediately after this offering;
or

the average weekly trading volume of our common stock on the Nasdaq
National Market during the four calendar weeks preceding the filing of a
notice on Form 144 with respect to that sale.

Sales under Rule 144 are also subject to manner of sale provisions and
notice requirements and to the availability of current public information about
us.

RULE 144(k)

Under Rule 144(k), a person who is not deemed to have been one of our
affiliates at any time during the 90 days preceding a sale, and who has
beneficially owned the shares proposed to be sold for at least two years,
including the holding period of any prior owner other than an affiliate, is
entitled to sell those shares without complying with the manner of sale, public
information, volume limitation or notice provisions of Rule 144. Therefore,
unless otherwise restricted, Rule 144(k) shares may be sold immediately upon the
completion of this offering.

<PAGE>
REGISTRATION RIGHTS

In conjunction with this offering, we have agreed to grant to Brean
Murray & Co., Inc. a warrant to purchase 220,000 shares of common stock. This
warrant will have registration rights.

STOCK OPTIONS AND WARRANTS

As of October 25, 1999, options and warrants to purchase 7,600,248 shares
of common stock were issued and outstanding, of which 6,037,628 are currently
exercisable. Of such warrants, there are 1,071,232 Class A Warrants outstanding
and 1,308,732 Class B Warrants outstanding. The Class A and Class B Warrants are
publicly traded. Each Class A Warrant entitles the holder to purchase, at an
exercise price of $4.63, subject to adjustment, one share of common stock and
one Class B Warrant, and each Class B Warrant entitles the holder to purchase,
at an exercise price of $6.23, subject to adjustment, one share of common stock.
The warrants are exercisable at any time after issuance through August 13, 2000.
The warrants are subject to redemption by us for $.05 per warrant, upon 30 days'
written notice, if the average closing bid price of the common stock exceeds
$7.30 per share with respect to the Class A Warrants and $9.80 per share with
respect to the Class B Warrants for a 30 consecutive business day period ending
within 15 days of the date of the notice of redemption. In addition, in
conjunction with this offering, we have agreed to grant to Brean Murray & Co.,
Inc. a warrant to purchase 220,000 shares of common stock.

<PAGE>
UNDERWRITING

Subject to the terms and conditions set forth in an underwriting agreement,
the underwriters named below, for which Brean Murray & Co., Inc. is acting as
representative, have agreed to purchase, and we have agreed to sell an aggregate
of 2,200,000 shares of common stock. The number of shares of common stock that
each of the underwriters severally has agreed to purchase is set forth below.

<TABLE>
<CAPTION>
NUMBER
UNDERWRITER OF SHARES
- ----------- ---------
<S> <C>
Brean Murray & Co., Inc..................................... 1,720,000
J.C. Bradford & Co.......................................... 80,000
Morgan Keegan & Co., Inc.................................... 80,000
Robinson-Humphrey Co. LLC................................... 80,000
Cruttenden Roth Incorporated................................ 40,000
Davenport & Company LLC..................................... 40,000
First Security Van Kasper................................... 40,000
Gilford Securities.......................................... 40,000
Nordberg Capital Inc........................................ 40,000
Pennsylvania Merchant Group Ltd............................. 40,000
---------
Total............................................. 2,200,000
---------
---------
</TABLE>

Upon the terms and subject to the conditions of the underwriting agreement,
we are obligated to sell, and the underwriters are obligated to purchase, all of
the shares of common stock set forth in the table above if any of the shares of
common stock are purchased. The underwriting agreement provides that we will
indemnify each underwriter against certain liabilities, including civil
liabilities under the Securities Act, or will contribute to payments that any
underwriter may be required to make in respect thereof.

The underwriters have advised us that they propose initially to offer the
common stock directly to the public at the offering price set forth on the cover
page of this prospectus and to selected dealers at a price that represents a
concession of not more than $0.21 per share. After the public offering, the
offering price and other selling terms may be changed by the underwriters. The
common stock is offered subject to receipt and acceptance by the underwriters,
and to certain other conditions, including the right to reject orders in whole
or in part.

We have granted an option to the underwriters, exercisable during the
30-day period after the date of this prospectus, to purchase up to an aggregate
of 330,000 additional shares of common stock to cover over-allotments, if any,
at the offering price set forth on the cover page of this prospectus, less
underwriting discounts and commissions. To the extent that the underwriters
exercise this option, the underwriters will have a firm commitment, subject to
certain conditions, to purchase such additional shares in approximately the same
proportion as set forth in the above table. The underwriters may purchase such
shares only to cover over-allotments made in connection with this offering.

We will agree and all our officers and directors have each agreed that we
and they will not, without the prior written consent of Brean Murray & Co.,
Inc., for a period ending 180 days after the date of this prospectus, directly
or indirectly, sell, offer, contract or grant an option to sell (including
without limitation any short sale), pledge, transfer, establish an open put
equivalent position or otherwise dispose of any shares of common stock, options
or warrants to acquire shares of common stock or securities exchangeable or
exercisable or convertible into shares of common stock held by us or them, or
publicly announce the intention to do any of the foregoing. Brean Murray & Co.,
Inc. may, in its sole discretion and at any time without prior notice, release
any or all of the shares of common stock subject to these lock-up agreements.

We have agreed to reimburse the underwriters for $125,000 of the
underwriters' accountable out-of-pocket expenses (including fees of its counsel)
in connection with the sale of the common stock offered hereby.

<PAGE>
In connection with the offering, we have agreed to sell to Brean Murray &
Co., Inc., for nominal consideration, warrants to purchase 220,000 shares of
common stock from us (10% of the number of shares offered hereby). The warrants
are exercisable, in whole or in part, at an exercise price of $6.00 per share,
which is equal to 120% of the offering price, or through cashless exercise at
any time during the four-year period commencing one year after the date of this
prospectus. The warrant agreement pursuant to which the warrants will be issued
will contain provisions providing for adjustment of the exercise price and the
number and type of securities issuable upon exercise of the warrants should any
one or more of certain specified events occur. The warrants grant to the holders
thereof certain rights of registration for the securities issuable upon exercise
of the warrants.

In connection with the offering, the underwriters may engage in passive
market making transactions in our common stock on Nasdaq immediately prior to
the commencement of sales in the offering, in accordance with Rule 103 of
Regulation M. Passive market making consists of displaying bids on Nasdaq
limited by the bid prices of independent market makers and purchases limited by
such prices and effected in response to order flow. Net purchases by a passive
market maker on each day are limited to a specified percentage of the passive
market maker's average daily trading volume in the common stock during a
specified period and must be discontinued when such limit is reached. Passive
market making may stabilize the market price of the common stock at a level
above that which might otherwise prevail and, if commenced, may be discontinued
at any time.

In connection with the offering, the underwriters and selling group
members, if any, may engage in stabilizing, syndicate short covering
transactions, penalty bids or other transactions during the offering that may
stabilize, maintain or otherwise affect the market price of the common stock at
a level above that which might otherwise prevail in the open market. Stabilizing
transactions are bids for and purchases of the common stock for the purpose of
preventing or retarding a decline in the market price of the common stock to
facilitate the offering. Syndicate short covering transactions are bids to
purchase and actual purchases of common stock on behalf of the underwriters to
provide them with enough common stock to deliver to those purchasing common
stock in the offering. A penalty bid is an arrangement that permits the
underwriters to reclaim a selling concession when the common stock originally
sold by the syndicate member is purchased in a syndicate covering transaction.
Such stabilizing, syndicate short covering transactions, penalty bids and other
transactions, if commenced, may be discontinued at any time.

LEGAL MATTERS

Certain legal matters with respect to the legality of the issuance of the
shares of common stock offered by this prospectus will be passed upon for us by
Fulbright & Jaworski L.L.P., New York, New York. Certain legal matters in
connection with the common stock offered hereby will be passed upon for the
underwriters by Piper & Marbury L.L.P., New York, New York.

EXPERTS

The financial statements as of December 31, 1998 and for each of the three
years in the period ended December 31, 1998 included in this prospectus and
elsewhere in the registration statement have been audited by Ernst & Young LLP,
independent auditors, as set forth in their report thereon appearing elsewhere
in this prospectus (which contains an explanatory paragraph describing
conditions that raise substantial doubt about our ability to continue as a going
concern as described in Note 1 to the financial statements), and are included in
reliance upon such report given upon the authority of such firm as experts in
accounting and auditing.

WHERE YOU CAN FIND MORE INFORMATION

We have filed with the SEC a registration statement on Form S-1 with
respect to the common stock being sold in this offering. This prospectus
constitutes a part of that registration statement. This prospectus does not
contain all of the information set forth in the registration statement and

<PAGE>
the exhibits and schedules to the registration statement, because some parts
have been omitted in accordance with rules and regulations of the SEC. For
further information about us and our common stock being sold in this offering,
please refer to the registration statement and the exhibits and schedules filed
as a part of the registration statement. Statements contained in this prospectus
as to the contents of any contract, agreement or any other document referred to
are not necessarily complete; reference is made in each case to the copy of the
contract or document filed as an exhibit to the registration statement. Each
statement is qualified in all respects by reference to the exhibit.

We are also subject to the informational requirements of the Securities
Exchange Act of 1934. Therefore, we file reports, proxy statements and other
information with the SEC. You can read and copy all of our filings, including
the registration statement of which this prospectus forms a part, at the SEC's
Public Reference Room at 450 Fifth Street, N.W., Washington, D.C., 20549. You
may obtain information on the operation of the SEC's Public Reference Room by
calling the SEC at 1-800-SEC-0300. In addition, all of our filings are available
on the SEC's Web site on the Internet that is located at http://www.sec.gov.

You may also request a copy of any or all of these filings, at no cost, by
writing or telephoning us at Vion Pharmaceuticals, Inc., 4 Science Park, New
Haven, Connecticut 06511, Attention: Thomas E. Klein, Vice President, Finance
and Chief Financial Officer, Telephone: (203) 498-4210.

<PAGE>
[THIS PAGE INTENTIONALLY LEFT BLANK]

<PAGE>
VION PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)

INDEX TO FINANCIAL STATEMENTS

<TABLE>
<S> <C>
Audited Financial Statements -- Years Ended December 31,
1996, 1997 and 1998
Report of Independent Auditors......................... F-2
Balance Sheet.......................................... F-3
Statement of Operations................................ F-4
Statement of Changes in Shareholders' Equity........... F-5
Statement of Cash Flows................................ F-6
Notes to Financial Statements.......................... F-7

Unaudited Interim Financial Statements -- Six Months Ended
June 30, 1998 and 1999
Balance Sheet.......................................... F-20
Statement of Operations................................ F-21
Statement of Changes in Shareholders' Equity........... F-22
Statement of Cash Flows................................ F-24
Notes to Financial Statements.......................... F-25
</TABLE>

F-1

<PAGE>
REPORT OF INDEPENDENT AUDITORS

The Board of Directors and Shareholders
VION PHARMACEUTICALS, INC.

We have audited the accompanying balance sheet of Vion Pharmaceuticals,
Inc. (a Development Stage Company) as of December 31, 1997 and 1998 and the
related statements of operations, shareholders' equity, and cash flows for each
of the three years in the period ended December 31, 1998 and the period from
May 1, 1994 (inception) to December 31, 1998. 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 Vion Pharmaceuticals, Inc.
at December 31, 1997 and 1998 and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1998 and the
period from May 1, 1994 (inception) to December 31, 1998 in conformity with
generally accepted accounting principles.

The accompanying financial statements have been prepared assuming that Vion
Pharmaceuticals, Inc. will continue as a going concern. As more fully described
in Note 1, since commencement of operations, the Company has incurred recurring
operating losses and requires substantial amounts of additional funding to
continue its operations. These conditions raise substantial doubt about the
Company's ability to continue as a going concern. The financial statements do
not include any adjustments to reflect the possible future effect on the
recoverability and classification of assets or the amounts or classification of
liabilities that may result from the outcome of this uncertainty.

/s/ ERNST & YOUNG LLP

Stamford, Connecticut
February 12, 1999

F-2

<PAGE>
VION PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEET

<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1997 1998
ASSETS ---- ----
<S> <C> <C>
Current assets:
Cash and cash equivalents.............................. $ 3,890,621 $ 3,821,234
Short-term investments (Includes $2,277,088 and
$1,129,886 restricted, repectively)................... 7,088,540 2,594,497
Accounts receivable.................................... 728,899 1,251,618
Other current assets................................... 118,752 107,198
------------ ------------
Total current assets.............................. 11,826,812 7,774,547
Property and equipment, net................................. 1,301,680 1,026,184
Security deposits........................................... 34,894 51,347
Research contract prepayments............................... 416,945 416,945
------------ ------------
Total assets...................................... $ 13,580,331 $ 9,269,023
------------ ------------

LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Obligation under capital leases -- current............. $ 274,853 $ 291,668
Accounts payable and accrued expenses.................. 874,350 2,437,682
------------ ------------
Total current liabilities......................... 1,149,203 2,729,350
Obligation under capital leases -- long term................ 472,578 180,960
------------ ------------
Total liabilities................................. 1,621,781 2,910,310
------------ ------------
Redeemable Preferred Stock:
5% convertible preferred stock Series 1998, $0.01 par
value, authorized: 15,000 shares; issued and
outstanding: 5,000 shares (redemption value
$5,125,000)........................................... -- 4,854,505
------------ ------------
Shareholders' equity
Preferred stock, $0.01 par value -- 5,000,000 shares
authorized consisting of:
Class A convertible preferred stock, $0.01 par value,
authorized:
3,500,000 shares; issued and outstanding: 757,632 in
1997 and 616,656 in 1998 (liquidation preference
$7,576,000 in 1997; $6,167,000 in 1998)............... 7,576 6,167
Class B convertible preferred stock, $0.01 par value,
authorized:
100,000 shares; issued and outstanding: 4,592 in 1997
and none in 1998...................................... 46 --
Class C convertible preferred stock, $0.01 par value,
authorized:
25,000 shares; issued and outstanding: none.......... -- --
Common stock, $0.01 par value, authorized: 35,000,000
shares; issued and outstanding: 9,833,934 in 1997 and
13,953,046 in 1998.................................... 98,339 139,530
Additional paid-in-capital............................. 47,661,639 52,024,648
Deferred compensation.................................. (72,128) (37,496)
Accumulated deficit.................................... (35,736,922) (50,628,641)
------------ ------------
11,958,550 1,504,208
------------ ------------
Total liabilities and shareholders' equity........ $ 13,580,331 $ 9,269,023
------------ ------------
------------ ------------
</TABLE>

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

F-3

<PAGE>
VION PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF OPERATIONS

<TABLE>
<CAPTION>
FOR THE
PERIOD
FROM MAY 1,
1994
YEAR ENDED (INCEPTION)
------------------------------------------ THROUGH
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1996 1997 1998 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues:
Contract research grants........... $ 51,779 $ 48,221 $ 308,787 $ 408,787
Research support................... -- 1,222,912 1,647,202 2,870,114
Technology license revenues........ -- 4,000,000 -- 4,000,000
------------ ----------- ------------ ------------
Total revenues................ 51,779 5,271,133 1,955,989 7,278,901
Operating expenses:
Research and development........... 5,975,089 7,675,486 10,709,401 27,493,176
General and administrative......... 2,113,077 2,639,486 2,202,944 9,040,826
Nonrecurring collaboration
restructuring fee................ -- 600,000 -- 600,000
Purchased research and
development...................... -- -- -- 4,481,405
Amortization of finance charges.... -- -- -- 345,439
------------ ----------- ------------ ------------
Total operating expenses...... 8,088,166 10,914,972 12,912,345 41,960,846
------------ ----------- ------------ ------------
Loss from operations.................... (8,036,387) (5,643,839) (10,956,356) (34,681,945)
Interest Income......................... (437,993) (343,911) (540,240) (1,406,188)
Interest Expense........................ 10,285 43,666 61,553 160,666
------------ ----------- ------------ ------------
Net Loss........................... (7,608,679) (5,343,594) (10,477,669) (33,436,423)
Preferred stock dividends and
accretion............................. (11,627,404) (1,131,740) (4,414,050) (17,173,194)
------------ ----------- ------------ ------------
Loss applicable to common
shareholders.......................... $(19,236,083) $(6,475,334) $(14,891,719) $(50,609,617)
------------ ----------- ------------ ------------
------------ ----------- ------------ ------------
Basic and diluted loss applicable to
common shareholders per share......... $(2.52) $(0.75) $(1.24)
------ ------ ------
------ ------ ------
</TABLE>

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

F-4

<PAGE>
VION PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
CLASS A CLASS B
CONVERTIBLE CONVERTIBLE
PREFERRED STOCK PREFERRED STOCK COMMON STOCK ADDITIONAL
------------------- --------------- --------------------- PAID-IN DEFERRED
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL COMPENSATION
------ ------ ------ ------ ------ ------ ------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Common stock issued for
cash -- July 1994....... -- $ -- -- $-- 2,693,244 $ 26,932 $ -- $ --
Common stock issued for
services -- August
1994.................... 159,304 1,593
Net loss.................
--------- ------- ------ ---- ---------- -------- ----------- ----------
Balance -- December 31,
1994.................... -- -- -- -- 2,852,548 28,525 -- --
--------- ------- ------ ---- ---------- -------- ----------- ----------
Stock options issued for
compensation -- February
1995.................... 540,000
Reverse acquisition of
MelaRx Pharmaceuticals,
Inc. -- April 1995...... 2,000,000 20,000 4,300,000
Shares repurchased
pursuant to employment
agreements -- April
1995.................... (274,859) (2,749)
Private placement of
common stock -- April
1995.................... 76,349 763 205,237
Warrants issued with
bridge notes -- April
1995.................... 200,000
Initial public offering
of units of one common
share, one Class A
warrant and one Class B
warrant at $4.00 per
unit -- August 1995 and
September 1995.......... 2,875,000 28,750 9,667,460
Issuance of common
stock................... 1,250 13 488
Receipts from sale of
unit purchase option.... 250
Net loss.................
--------- ------- ------ ---- ---------- -------- ----------- ----------
Balance at December 31,
1995.................... -- -- -- -- 7,530,288 75,302 14,913,435 --
--------- ------- ------ ---- ---------- -------- ----------- ----------
Issuance of Class A
convertible preferred
stock................... 1,250,000 12,500 22,890,075
Conversion of Class A
convertible preferred
stock................... (164,970) (1,650) 458,255 4,582 (2,932)
Class A convertible
preferred stock
dividend................ 21,998 220 255,661
Issuance of common
stock................... 29,418 294 102,426
Compensation associated
with stock option
grants.................. 190,407 (190,407)
Amortization of deferred
compensation............ 83,647
Net loss.................
--------- ------- ------ ---- ---------- -------- ----------- ----------
Balance at December 31,
1996.................... 1,107,028 11,070 -- -- 8,017,961 80,178 38,349,072 (106,760)
--------- ------- ------ ---- ---------- -------- ----------- ----------
Conversion of Class A
convertible preferred
stock................... (396,988) (3,970) 1,102,757 11,028 (7,058)
Class A convertible
preferred stock
dividend................ 47,592 476 623,038
Issuance of Class B
convertible preferred
stock................... 4,850 49 4,851,662
Conversion of Class B
convertible preferred
stock................... (258) (3) 64,642 647 (644)
Accretion of dividend
payable on Class B
convertible preferred
stock................... 138,365
Extension/reissuance of
underwriter warrants.... 168,249
Exercise of warrants..... 238 3 (6)
Issuance of common
stock................... 598,336 5,983 3,463,818
Exercise of stock
options................. 50,000 500 19,500
Compensation associated
with stock option
grants.................. 55,643
Amortization of deferred
compensation............ 34,632
Net loss.................
--------- ------- ------ ---- ---------- -------- ----------- ----------
Balance at December 31,
1997.................... 757,632 7,576 4,592 46 9,833,934 98,339 47,661,639 (72,128)
--------- ------- ------ ---- ---------- -------- ----------- ----------
Conversion of Class B
convertible preferred
stock................... (4,592) (46) 1,205,178 12,052 (12,006)
Accretion of dividend
payable on Class B
convertible preferred
stock................... 286,776
Premium on conversion
dividend on Class B
convertible preferred
stock................... 585,898 5,859 2,043,532
Conversion of Class A
convertible preferred
stock................... (174,981) (1,749) 486,062 4,860 (3,111)
Class A convertible
preferred stock
dividend................ 34,005 340 329,206
Discount on Series 1998
convertible preferred
stock................... 1,597,218
Series 1998 convertible
preferred stock
accretion............... --
Common stock issued in
exchange for
cancellation of
outstanding warrants.... 1,792,952 17,929 8,441,442
(8,502,064)
Exercise of stock
options................. 32,750 328 119,854
Exercise of warrants..... 16,272 163 10,910
Compensation associated
with stock option
grants.................. 51,252
Amortization of deferred
compensation............ 34,632
Net loss.................
--------- ------- ------ ---- ---------- -------- ----------- ----------
Balance at December 31,
1998.................... 616,656 $6,167 -- $-- 13,953,046 $139,530 $52,024,648 $ (37,496)
--------- ------- ------ ---- ---------- -------- ----------- ----------
--------- ------- ------ ---- ---------- -------- ----------- ----------

TOTAL
ACCUMULATED SHAREHOLDERS'
DEFICIT EQUITY
------- ------
<S> <C> <C>
Common stock issued for
cash -- July 1994....... $ (19,877) $ 7,055
Common stock issued for
services -- August
1994.................... (1,176) 417
Net loss................. (475,946) (475,946)
------------ -----------
Balance -- December 31,
1994.................... (496,999) (468,474)
------------ -----------
Stock options issued for
compensation -- February
1995.................... 540,000
Reverse acquisition of
MelaRx Pharmaceuticals,
Inc. -- April 1995...... 4,320,000
Shares repurchased
pursuant to employment
agreements -- April
1995.................... 2,029 (720)
Private placement of
common stock -- April
1995.................... 206,000
Warrants issued with
bridge notes -- April
1995.................... 200,000
Initial public offering
of units of one common
share, one Class A
warrant and one Class B
warrant at $4.00 per
unit -- August 1995 and
September 1995.......... 9,696,210
Issuance of common
stock................... 501
Receipts from sale of
unit purchase option.... 250
Net loss................. (9,530,535) (9,530,535)
------------ -----------
Balance at December 31,
1995.................... (10,025,505) 4,963,232
------------ -----------
Issuance of Class A
convertible preferred
stock................... (11,371,523) 11,531,052
Conversion of Class A
convertible preferred
stock................... --
Class A convertible
preferred stock
dividend................ (255,881) --
Issuance of common
stock................... 102,720
Compensation associated
with stock option
grants.................. --
Amortization of deferred
compensation............ 83,647
Net loss................. (7,608,679) (7,608,679)
------------ -----------
Balance at December 31,
1996.................... (29,261,588) 9,071,972
------------ -----------
Conversion of Class A
convertible preferred
stock................... --
Class A convertible
preferred stock
dividend................ (623,514) --
Issuance of Class B
convertible preferred
stock................... (369,861) 4,481,850
Conversion of Class B
convertible preferred
stock................... --
Accretion of dividend
payable on Class B
convertible preferred
stock................... (138,365) --
Extension/reissuance of
underwriter warrants.... 168,249
Exercise of warrants..... (3)
Issuance of common
stock................... 3,469,801
Exercise of stock
options................. 20,000
Compensation associated
with stock option
grants.................. 55,643
Amortization of deferred
compensation............ 34,632
Net loss................. (5,343,594) (5,343,594)
------------ -----------
Balance at December 31,
1997.................... (35,736,922) 11,958,550
------------ -----------
Conversion of Class B
convertible preferred
stock................... --
Accretion of dividend
payable on Class B
convertible preferred
stock................... (286,776) --
Premium on conversion
dividend on Class B
convertible preferred
stock................... (2,049,391) --
Conversion of Class A
convertible preferred
stock................... --
Class A convertible
preferred stock
dividend................ (329,546) --
Discount on Series 1998
convertible preferred
stock................... (1,597,218) --
Series 1998 convertible
preferred stock
accretion............... (151,119) (151,119)
Common stock issued in
exchange for
cancellation of
outstanding warrants....
(42,693)
Exercise of stock
options................. 120,182
Exercise of warrants..... 11,073
Compensation associated
with stock option
grants.................. 51,252
Amortization of deferred
compensation............ 34,632
Net loss................. (10,477,669) (10,477,669)
------------ -----------
Balance at December 31,
1998.................... $(50,628,641) $ 1,504,208
------------ -----------
------------ -----------
</TABLE>

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

F-5

<PAGE>
VION PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF CASH FLOWS

<TABLE>
<CAPTION>
FOR THE
PERIOD FROM
MAY 1, 1994
FOR THE YEAR ENDED (INCEPTION)
DECEMBER 31, THROUGH
----------------------------------------- DECEMBER 31,
1996 1997 1998 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss.................................... $ (7,608,679) $(5,343,594) $(10,477,669) $(33,436,423)
Adjustments to reconcile net loss to net
cash used in operating activities
Purchased research and development..... -- -- -- 4,481,405
Amortization of financing costs........ -- -- -- 345,439
Depreciation and amortization.......... 125,838 303,746 496,776 951,982
Increase in other current assets....... (87,810) (741,016) (511,165) (1,357,830)
Increase in other assets............... (176,906) 192,670 (16,453) (466,577)
Increase in accounts payable and
accrued expenses..................... 185,054 380,223 1,563,332 2,403,150
Extension/reissuance of placement agent
warrants............................. -- 168,249 -- 168,249
Stock issued for services.............. -- 600,000 -- 600,417
Stock options issued for
compensation......................... 83,647 90,275 85,884 799,806
------------ ----------- ------------ ------------
Net cash used in operating
activities...................... (7,478,856) (4,349,447) (8,859,295) (25,510,382)
------------ ----------- ------------ ------------
Cash flows used for investing activities:
Purchase of marketable securities........... (11,796,338) (8,121,720) (2,498,422) (24,707,588)
Maturities of marketable securities......... 9,459,000 5,661,626 6,992,465 22,113,091
Cash portion of MelaRx acquisition.......... -- -- -- 4,061
Acquisition of fixed assets................. (262,907) (299,131) (221,280) (1,033,733)
------------ ----------- ------------ ------------
Net cash provided by (used in)
investing activities................. (2,600,245) (2,759,225) 4,272,763 (3,624,169)
------------ ----------- ------------ ------------
Cash flows provided by financing activities:
Initial public offering..................... -- -- -- 9,696,210
Net proceeds from issuance of common
stock..................................... 2,720 2,889,801 77,489 3,283,566
Net proceeds from issuance of preferred
stock..................................... 11,531,052 4,481,850 4,703,386 20,716,288
Repurchase of common stock.................. -- -- -- (720)
Net proceeds from bridge financing.......... -- -- -- 1,704,269
Repayments of bridge financing.............. -- -- -- (2,000,000)
Advances from stockholders.................. -- -- -- 250,000
Repayments to stockholders.................. -- -- -- (250,000)
Exercise of warrants........................ -- (3) 11,073 11,070
Receipts from sale of unit purchase
option.................................... -- -- -- 250
Repayment of equipment capital leases....... (17,235) (160,724) (274,803) (455,148)
------------ ----------- ------------ ------------
Net cash provided by financing
activities........................... 11,516,537 7,210,924 4,517,145 32,955,785
------------ ----------- ------------ ------------
Net (decrease) increase in cash.................. 1,437,436 102,252 (69,387) 3,821,234
Cash and cash equivalents at beginning of
period......................................... 2,350,933 3,788,369 3,890,621 --
------------ ----------- ------------ ------------
Cash and cash equivalents at end of period....... $ 3,788,369 $ 3,890,621 $ 3,821,234 $ 3,821,234
------------ ----------- ------------ ------------
------------ ----------- ------------ ------------
</TABLE>

Supplemental schedule of noncash investing and financing activities:

Capital lease obligations of $239,866, $593,489 and $22,899 were
incurred for the years ended December 31, 1996, December 31, 1997 and
December 31, 1998, respectively, when the company entered into leases
for laboratory and office equipment.

An investor of the Company did not exercise the option to require the
Company to repurchase shares of preferred stock for $100,000, and the
investor received 23,859 shares of common stock during 1996, which
had been converted from previously held preferred stock.

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

F-6

<PAGE>
VION PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS

1. THE COMPANY

Vion Pharmaceuticals, Inc., formerly OncoRx, Inc., (the 'Company') was
incorporated in May 1993 and began operations on May 1, 1994. The Company is in
the development stage and is principally devoted to the research and development
and commercialization of cancer treatment technologies.

In April 1995, the Company merged into OncoRx Research Corp. a previously
unaffiliated company ('Research'). The stockholders of the Company were issued
shares of common and preferred stock of MelaRx Pharmaceuticals Inc. ('MelaRx'),
the 100% owner of Research, in exchange for all of the outstanding shares of the
Company. On April 20, 1995, the Company merged into OncoRx Research Corp., a
wholly-owned subsidiary of MelaRx, which was renamed OncoRx, Inc. after the
merger. The stockholders of the Company were issued 2,654,038 common and 23,859
preferred shares of MelaRx in exchange for 2,000,000 shares of common stock of
the Company valued at $2.16 per share (fair value). In August 1995, the Company
completed an initial public offering ('IPO') (see Note 5) resulting in net
proceeds to the Company of approximately $9,696,000.

As the shareholders of the Company obtained a majority interest in the
merged company for accounting purposes, the Company is treated as the acquirer.
Therefore, the transaction is recorded as a purchase in the Company's financial
statements which include the results of operations of the Company from inception
and MelaRx from the date of acquisition. The excess of cost over the fair value
of MelaRx's net tangible assets, $4,481,405, was treated as purchased research
and development and expensed immediately.

The accompanying financial statements are prepared assuming the Company
will continue as a going concern; however, at its current and planned rate of
spending, the Company's cash, cash equivalents and short-term investments are
not sufficient to allow it to continue operations through the 1999 calendar
year. The Company requires other sources of capital in order to meet such
budgeted expenditures and to continue its operations throughout the year. The
Company is seeking to enter into significant strategic partnerships with
pharmaceutical companies for the development of its core technologies, through
which it would anticipate receiving some of the substantial revenues and
financing required to continue operations beyond the year end. The Company is
also seeking to raise funds through additional means, including (1) private and
public placements of its securities; (2) spin-off, refinancing, or partial sale
or disposition of its rights to certain of its non-core technologies; and
(3) equipment lease financing. No assurance can be given that the Company will
be successful in arranging financing through any of these alternatives.

Failure to obtain such financing will require the Company to delay,
renegotiate, or omit payment on its outside research funding commitments causing
it to substantially curtail its operations, resulting in a material adverse
effect on the Company. The financial statements do not include any adjustments
to reflect the possible future effect on the recoverability and classification
of assets or the amounts or classification of liabilities that may result from
the outcome of this uncertainty.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

CASH EQUIVALENTS

The Company considers all highly liquid investments with a maturity of
three months or less at the date of purchase to be cash equivalents.

F-7

<PAGE>
VION PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

FAIR VALUE OF FINANCIAL INSTRUMENTS

The estimated fair value of amounts reported in the financial statements
have been determined by using available market information and appropriate
valuation methodologies. All current assets and current liabilities are carried
at cost, which approximates fair value, because of their short-term nature.

SHORT-TERM INVESTMENTS

The Company accounts for short-term investments in accordance with
Statement of Financial Accounting Standards No. 115, 'Accounting for Certain
Investments in Debt and Equity Securities.' The Company's investments in debt
securities, which typically mature in one year or less, are classified as
available for sale and are carried at fair value, which approximates cost plus
accrued interest at December 31, 1997 and 1998.

PROPERTY AND EQUIPMENT

Property and equipment is stated at cost. Depreciation of equipment is
computed under the straight-line method over the estimated useful lives of the
assets (three to seven years). Leasehold improvements are carried at cost and
depreciated on a straight line basis over the shorter of the life of the lease
or the estimated useful lives of the assets.

INCOME TAXES

The Company accounts for income taxes under the liability method in
accordance with Statement of Financial Accounting Standards No. 109, 'Accounting
for Income Taxes' (SFAS 109). Under this method, deferred income taxes are
recognized for the tax consequences of 'temporary differences' by applying
enacted statutory tax rates applicable to future years to differences between
the financial statement carrying amounts and the tax bases of assets and
liabilities.

DEFINED CONTRIBUTION PLAN

The Company sponsors a defined contribution plan (the 'Plan') that covers
all employees who meet the eligibility conditions set forth in the Plan.
Employee contributions to the Plan are voluntary and are based on eligible
compensation, as defined therein. In accordance with the terms of the Plan, no
Company contributions are made to the Plan.

SMALL BUSINESS INNOVATION RESEARCH GRANT

On September 27, 1996 the Company was awarded a Small Business Innovation
Research ('SBIR') grant for the Inhibitors of Ribonucleotide Reductase program.
The award was for reimbursable direct costs of up to $100,000.

The SBIR grant expired on March 30, 1997. The Company recognized $51,779
and $48,221 of revenue from the SBIR grant for reimbursement of expenses
incurred for the years ended December 31, 1996 and 1997, respectively.

During 1998 the Company was awarded a SBIR grant from the National Cancer
Institute for the Reduced Toxicity of Tumor-Targeted Salmonella for $100,000,
which was fully utilized, and an award for $373,565 for the Inhibitors of
Ribonucleotide Reductase programs. The SBIR grants reimburse the company for
allowable expenses and are recorded as contract research grants in the statement
of operations.

F-8

<PAGE>
VION PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

USE OF ESTIMATES

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

PER SHARE DATA

The following table sets forth the computation of basic and diluted
earnings per share:

<TABLE>
<CAPTION>
1996 1997 1998
---- ---- ----
<S> <C> <C> <C>
Numerator:
Net loss............................... $ (7,608,679) $(5,343,594) $(10,477,669)
Preferred stock dividends and
accretion............................ (11,627,404) (1,131,740) (4,414,050)
------------ ----------- ------------
Numerator for basic and diluted loss
applicable to common shareholders per
share................................ $(19,236,083) $(6,475,334) $(14,891,719)
Denominator:
Denominator for basic and diluted loss
applicable to common shareholders per
share................................ 7,641,546 8,670,717 11,977,121
Basic and diluted loss applicable to
common shareholders per share........ $(2.52) $(0.75) $(1.24)
</TABLE>

For additional disclosures regarding warrants and Class A, B and Series
1998 Convertible Preferred Stock, see Note 5. For additional disclosures
regarding stock options, see Note 6. These potentially dilutive securities were
not included in diluted loss applicable to common shareholders per share as the
effect would be antidilutive.

3. PROPERTY AND EQUIPMENT

The following is a summary of property and equipment as of December 31:

<TABLE>
<CAPTION>
1997 1998
---- ----
<S> <C> <C>
Office equipment..................................... $ 177,331 $ 208,498
Furniture and fixtures............................... 163,251 170,482
Laboratory equipment................................. 202,762 322,998
Leasehold improvements............................... 285,765 325,512
Leased equipment under capital lease................. 927,777 950,676
---------- ----------
1,756,886 1,978,166
Less accumulated depreciation........................ (455,206) (951,982)
---------- ----------
Net property and equipment........................... $1,301,680 $1,026,184
---------- ----------
---------- ----------
</TABLE>

4. RESEARCH AND LICENSE AGREEMENTS

BOEHRINGER INGELHEIM AGREEMENT

F-9

<PAGE>
VION PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

have exclusive worldwide rights to market and sell Promycin outside the United
States and Canada. The Company is responsible for the manufacturing and supply
of Promycin worldwide.

In exchange for these rights, the Company received $4.0 million in upfront
technology access fees and net proceeds of $2,869,801 from the sale of 448,336
shares of common stock at a premium to the then current market price. BI also
reimbursed the Company for certain initial development costs and will share in
future worldwide development costs.

The Company had cash equivalents and short-term investments of $10,979,161
at December 31, 1997 and $6,415,731 at December 31, 1998. These balances include
$2,777,088 and $1,129,886 of restricted investments for Promycin development
expenses at December 31, 1997 and 1998 respectively. Pursuant to the BI
Agreement, the Company must use the BI license fee of $4.0 million exclusively
for Promycin development expenses. The Company recorded $1,222,912 and
$1,647,202 of Promycin development expenses as research support revenue under
the agreement during 1997 and 1998, respectively. Included in the Company's
total current assets as of December 31, 1998 is $1,189,369 in receivables from
BI.

COVANCE AGREEMENT

During the quarter ended June 30, 1997, the Company entered into a Clinical
Development Agreement (the 'Agreement') with Covance Clinical Research Unit Ltd.
and Covance Inc. ('Covance'). Pursuant to the Agreement, the Company is
contracting to Covance the selection and management of clinical sites and the
preparation of clinical trial reports arising from clinical trials performed by
Covance regarding the Company's product candidate Promycin for the inclusion in
a regulatory submission. The Company has incurred expenses of $1,633,974 and
$2,610,213 for the years ended December 31, 1997 and 1998, respectively, under
this agreement which has been expensed as incurred as research and development.
Included in the Company's total current liabilities at December 31, 1998 are
payables to Covance Development Service Corporation for $1,589,588.

YALE/MELARX AGREEMENT

Pursuant to a License Agreement between the Company and Yale University
('Yale'), as amended and restated as of August 1, 1992, the Company has obtained
rights to a synthetic form of melanin which the Company has named MELASYN. In
the first quarter of 1998, the Company terminated an agreement with Creative
Polymers pursuant to which Creative Polymers had agreed to be the exclusive
selling agent for MELASYN, and agreed to license its MELASYN technology in an
exclusive worldwide agreement with San-Mar Laboratories, a leading manufacturer
of private label cosmetics and pharmaceuticals. Under the terms of the
agreement, Vion granted an exclusive worldwide license to San-Mar for the
manufacture and sales of products containing MELASYN. Vion will receive a
royalty on products sold by San-Mar with guaranteed minimum annual royalties of
$50,000 per year over an initial three-year period.

The Company has agreed to reimburse Yale for its costs in connection with
the research projects performed under the direction and supervision of Dr. John
Pawelek of the Department of Dermatology in an amount currently equal to
$852,000 per year. Technology licensed by the Company from research conducted
under this agreement includes the inventions collectively known as TAPET. The
agreement is for a term ending June 30, 2001, subject to earlier termination as
defined. The Company also has an option to obtain an exclusive license for any
inventions that result from research projects by Yale which are relating to
synthetic melanin funded by the Company.

The Company and Yale entered into a License Agreement dated December 15,
1995 pursuant to which the Company received a nontransferable worldwide
exclusive license, expiring over the

F-10

<PAGE>
VION PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

lives of the patents, to three inventions relating to gene therapy for melanoma.
Pursuant to this agreement, the Company has paid Yale a $100,000 fee, and has
agreed to pay future milestone payments based on the status of clinical trials
and regulatory approvals. In addition, Yale is entitled to royalties on sales,
if any, of resulting products and sublicensing revenues.

YALE/ONCORX AGREEMENT

Pursuant to a License Agreement dated August 31, 1994, as amended, Yale
granted the Company an exclusive, nontransferable, worldwide license to make,
have made, use, sell and practice certain inventions and research for
therapeutic and diagnostic purposes. The term of the license is the expiration
of any patents relating to any inventions or, with respect to nonpatented
inventions or research, 17 years. Yale is entitled to royalties on sales, if
any, of resulting products and sublicensing revenues and, with regard to one
patent, milestone payments based on the status of clinical trials and regulatory
approvals.

YALE SUBSCRIPTION ASSIGNMENT AND ASSUMPTION AGREEMENT

On June 4, 1992, the Company entered into a Subscription, Assignment and
Assumption Agreement (the 'SAAA') with Yale. Pursuant to the agreement as
amended and extended, the Company is to provide funding for certain research in
the field of dermatology by Yale. The agreement was renewed in June 1998 for a
three-year period and provides for quarterly payments to Yale in accordance with
agreed upon annual budgets. The payments are recorded as expense when incurred.
The Company was granted exclusive licenses to inventions in countries where
patents are effective and nonexclusive licenses elsewhere expiring over the
lives of the patents and 20 years, respectively. The Company is obligated to pay
royalties on sales of licensed products.

5. SHAREHOLDERS' EQUITY

On April 20, 1995, 2,000,000 shares of common stock valued at $2.16 per
share were issued in conjunction with the merger with MelaRx (see Note 1).
Shortly prior to the consummation of the Merger, the Company issued 76,349
shares of common stock for net proceeds of $206,000 after deducting placement
fees of $14,000.

On August 17, 1995 and September 6, 1995, the Company completed an IPO of
2,875,000 units, consisting of an aggregate of 2,875,000 shares of common stock,
2,875,000 redeemable Class A Warrants and 2,875,000 redeemable Class B Warrants
at a price of $4.00 per unit. Each Class A Warrant entitles the holder to
purchase one share of common stock and one Class B Warrant. Each Class B Warrant
entitles the holder to purchase one share of common stock. These warrants are
exercisable through August 13, 2000. The net proceeds to the Company of the IPO
were approximately $9,696,000 before repayment of the bridge financing noted
below.

In conjunction with the Company's IPO, the Company granted the underwriter
an option, exercisable until August 14, 2000, to purchase up to 250,000 units at
$5.20 per unit, subject to adjustment.

Commencing with its IPO, and including the gross proceeds therefrom, the
Company has raised a gross amount of $33,850,000 to date, through the issuance
of common and preferred stock.

BRIDGE FINANCING

In April 1995, the Company issued $2,000,000 in 10% promissory notes and
warrants to purchase 1,000,000 shares of common stock at $3.00 per share for net
proceeds of $1,704,000. The promissory notes were recorded net of a discount of
$200,000, attributable to the fair value of the

F-11

<PAGE>
VION PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

bridge warrants. The notes were paid at the closing of the IPO of the Company's
securities described above, and the warrants, which are exercisable over four
years, were converted into Class A Warrants at that time.

PRIVATE PLACEMENT OF CLASS A CONVERTIBLE PREFERRED STOCK

On May 22, 1996, the Company completed a private placement of 1,250,000
shares of Class A Convertible Preferred Stock, at $10.00 per share, resulting in
net proceeds to the Company of $11,531,052. Each share of Class A Preferred
Stock is immediately convertible into 2.777777 shares of the Company's common
stock and is entitled to vote on all matters on an 'as if' converted basis. The
Company recorded an imputed one-time non-cash dividend of approximately $11.4
million as a result of the difference between the conversion price and the
quoted market price of the Company's common stock as of the date of issuance as
required by the Financial Accounting Standards Board Emerging Issues Task Force
D-60 'Accounting for the Issuance of Convertible Preferred Stock and Debt
Securities with a Nondetachable Conversion Feature' (EITF D-60). The $11.4
million has been recognized as a charge against accumulated deficit with a
corresponding increase in additional paid-in capital. The imputed non-cash
dividend has been included in the dividend requirement on Preferred Stock and
the loss applicable to common shareholders. In connection with the foregoing
transaction, the Company also issued to the placement agent warrants,
exercisable over a five-year period, to purchase an aggregate of 546,875 shares
of the Company's common stock at prices ranging from $3.96 to $12.00. The shares
of Class A Preferred Stock pay semi-annual dividends of 5% per annum, payable in
additional shares of Class A Preferred Stock, which are immediately convertible
into common stock of the Company. The Company has recorded non-cash dividends as
a charge against the accumulated deficit and a credit to additional paid-in
capital based on the quoted market price of the common stock as of the date of
the issuance of the preferred dividends of $255,881 in 1996, $623,514 in 1997
and $329,546 in 1998. The non-cash dividend has been included in the dividend
requirement on Preferred Stock and the loss applicable to common shareholders.
The issue contains a provision for a 15% one-time dividend payable in additional
Class A Preferred Stock if the Company redeems the issue within 3 years. In the
event that the closing bid price of the Company's common stock exceeds $10.3125
for 20 trading days in any 30 trading day period, the Company can redeem the
Class A Preferred Stock at the issue price plus all declared and unpaid
dividends thereon. If all of the 616,656 outstanding shares of the Company's
Class A Preferred Stock were thusly redeemed, their redemption value would be
$6,166,560. The issuance of the Class A Preferred Stock at closing also
triggered certain antidilution adjustment provisions of the Company's
outstanding warrants, resulting in the issuance of additional warrants. The
Company cannot pay cash dividends on Common Stock without the consent of a
majority of holders of the Class A Preferred Stock.

PRIVATE PLACEMENT OF CLASS B CONVERTIBLE PREFERRED STOCK

F-12

<PAGE>
VION PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

the Company's common stock for thirty consecutive business days ending on the
private placement closing date and was not entitled to dividends. Conversions of
Class B Preferred Stock from January 1, 1998 through August 10, 1998 resulted in
Class C dividends representing 180,141 shares of common stock valued at
$622,749. In addition, the Company recorded accretion of 37,168 shares of common
stock valued at $138,365 in 1997, and 61,078 shares of common stock valued at
$263,737 through August 10, 1998. These dividends were recorded as a charge
against accumulated deficit, with a corresponding increase in paid-in capital.
The dividends have been included in the dividend requirement on Preferred Stock
and the loss applicable to common shareholders.

On August 11, 1998, the Company reached agreement with each of the holders
of its Class B Convertible Preferred Stock such that the holders of the Class B
Preferred Stock would convert an aggregate of 2,892 shares of Class B Preferred
Stock, constituting all of the outstanding Class B Preferred Stock, into an
aggregate of 1,070,423 shares of common stock. This included Class C dividends
representing 304,188 shares of common stock valued at $1,069,525, and accretion
of 6,553 shares of common stock valued at $23,039. As part of this agreement, an
additional 101,569 common shares were issued to holders of the Class B Preferred
Stock. In accordance with Financial Accounting Standards Board Emerging Issues
Task Force D-42 'The Effect on the Calculation of Earnings Per Share for the
Redemption or Induced Conversion of Preferred Stock' (EITF D-42), the excess of
the fair value of the common stock issued upon conversion over the fair value of
the common stock issuable pursuant to the original conversion terms ($357,117),
has been added to the dividend requirement to arrive at loss applicable to
common shareholders. In addition, holders of the Class B Preferred Stock waived
their 'anti-dilution' rights arising from the issuance of the Series 1998
Preferred Stock.

PRIVATE PLACEMENT OF 5% REDEEMABLE CONVERTIBLE PREFERRED STOCK SERIES 1998

On June 30, 1998, the Company completed a private placement of 5,000 shares
of non-voting 5% Redeemable Convertible Preferred Stock Series 1998 ('Series
1998 Preferred Stock'). The Series 1998 Preferred Stock was issued at $1,000 per
share, resulting in net proceeds to the Company of $4,703,386. The shares of
Series 1998 Preferred Stock accrue dividends of 5% per annum payable in-kind.
Each share of Series 1998 Preferred Stock is convertible into Common Stock based
on the formula of issued price plus accrued dividends divided by $3.60.
Dividends other than non-cash dividends paid in-kind with respect to other
classes or series of preferred stock require consent of two-thirds majority
interest of the holders of Series 1998 Preferred Stock. The Series 1998
Preferred Stock is mandatorily redeemable at $1,000 per share plus dividends on
June 30, 2003. In connection with the sale of the Series 1998 Preferred Stock,
the Company imputed a one-time non-cash dividend of approximately $1.6 million
as a result of the difference between the conversion price and the quoted market
price of the Company's common stock at the date of issuance as required by EITF
D-60. Such amount was recognized upon issuance of the Series 1998 Preferred
Stock as a charge against the accumulated deficit with a corresponding increase
to additional paid-in capital. The imputed non-cash dividend has been included
in the dividend requirement on Preferred Stock and the loss applicable to common
shareholders. The dividend requirement on Preferred Stock also reflects the
amortization of the costs of completing the offering and the accretion of the 5%
per annum dividend. The issuance of the Series 1998 Preferred Stock at closing
also triggered certain antidilution adjustment provisions of the Company's
outstanding warrants, resulting in the issuance of additional warrants.

WARRANT EXCHANGE OFFER

On May 19, 1998, the Company commenced an offer to exchange each
outstanding Class A Warrant, at the option of the holder, for either (A) 0.438
shares of common stock or (B) 0.254

F-13

<PAGE>
VION PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

shares of common stock and $0.66 in cash. The Company simultaneously offered to
exchange each outstanding Class B Warrant, at the holder's option, for either
(A) 0.212 shares of common stock or (B) 0.123 shares of common stock and $0.32
in cash. The Exchange Offer was not conditioned upon the exchange of a minimum
number of Class A Warrants or Class B Warrants. As a result of the Exchange
Offer 3,209,806 Class A Warrants and 1,881,835 Class B Warrants were exchanged
for 1,395,027 and 397,925 shares of the Company's Common Stock and $39,007 and
$3,686 in cash, respectively.

ANTIDILUTION ADJUSTMENT

As a result of the sale on May 22, 1996 of 1,250,000 shares of Class A
Convertible Preferred Stock, an adjustment was made to the exercise price of the
Class A Warrants and the Class B Warrants and there was a corresponding
distribution of additional Class A Warrants and Class B Warrants. Specifically,
on July 12, 1996 (the 'Payment Date'), each holder of a Class A Warrant at the
close of business on July 3, 1996 (the 'Record Date') was issued an additional
0.1 Class A Warrant and the exercise price of the Class A Warrants was reduced
from $5.20 to $4.73. In addition, on the Payment Date, each holder of a Class B
Warrant on the close of business on the Record Date was issued an additional 0.1
Class B Warrant and the exercise price of the Class B Warrants was reduced from
$7.00 to $6.37.

Subsequently, as a result of the sale on June 30, 1998 of 5,000 shares of
Series 1998 Preferred Stock, an additional adjustment was made to the exercise
price of the Class A Warrants and the Class B Warrants with a corresponding
distribution of additional Class A Warrants and Class B Warrants. Specifically,
on September 8, 1998 (the 'Payment Date') each holder of a Class A Warrant at
the close of business on August 26, 1998 (the 'Record Date') received an
additional 0.02 (2 per 100 outstanding) Class A Warrants and the exercise price
of the Class A Warrants was reduced from $4.73 to $4.63. In addition, on the
Payment Date each holder of a Class B Warrant on the close of business on the
Record Date received an additional 0.02 (2 per 100 outstanding) Class B Warrants
and the exercise price of the Class B Warrants was reduced from $6.37 to $6.23.

ISSUANCE AND EXTENSION OF PLACEMENT AGENT WARRANTS

In connection with its role as placement agent for two private financings
of the Company's predecessor MelaRx, Inc., D.H. Blair Investment Banking
Corporation was issued warrants to purchase 56,504 and 11,929 shares of common
stock at $3.56 per share, expiring August 20, 1997 and November 1, 1997;
respectively, warrants to purchase 23,632 shares at $4.44 per share, expiring
March 3, 1998, and warrants to purchase 110,421 shares at $4.44 per share,
expiring July 5, 1998. The warrants to purchase 56,504 shares of common stock at
$3.56 per share initially expired on October 31, 1997; however, the Company
agreed to reissue the expired warrants and extend the expiration date of all
such warrants to July 5, 1998. The extension, which was approved by the Board of
Directors in 1997, resulted in an expense of $168,249. As of July 5, 1998,
warrants to purchase 94,336 shares elected a 'cashless' exercise into 13,949
shares of common stock; warrants to purchase 108,150 shares expired.

ISSUANCE OF COMMON STOCK TO YALE UNIVERSITY

Effective July 24, 1997, the Company and Yale amended two license
agreements between the parties pursuant to which Yale agreed to reduce certain
amounts payable by the Company under such agreements. As a result, the Company
issued 150,000 shares of common stock to Yale valued at $600,000.

F-14

<PAGE>
VION PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

6. EMPLOYEE STOCK OPTION PLAN

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

In July 1995, the Board of Directors of the Company adopted the Amended and
Restated 1993 Stock Option Plan (the 'Option Plan'). The Option Plan originally
provided for the granting of incentive stock options or non-qualified stock
options to employees, officers, directors, and consultants of the Company, to
purchase up to an aggregate of 534,750 shares of common stock. On January 31,
1996, the Board of Directors adopted, subject to stockholder approval, an
amendment to the plan increasing the number of shares which may be issued under
the plan from 534,750 to 1,000,000. The amendment to the Option Plan was adopted
by the stockholders at the Company's annual meeting on April 18, 1996. On
January 29, 1997, the Board of Directors adopted an amendment to the Option Plan
increasing the number of shares which may be issued under the Option Plan from
1,000,000 to 1,500,000 which was approved by the stockholders at the Company's
annual meeting on April 16, 1997. Incentive options granted under the Option
Plan are exercisable for a period of up to ten years from the date of grant at
an exercise price which is not less than the fair market value of the common
stock on the date of the grant except that the term of an incentive option
granted under the Option Plan to a stockholder owning more than 10% of the
outstanding voting power may not exceed five years and its exercise price may
not be less than 110% of the fair market value of the Common Stock on the date
of grant. Options granted to date under the Option Plan become exercisable in no
less than four equal annual installments commencing no earlier than the first
anniversary of the date of grant. No option may be granted under the Option Plan
after April 14, 2003.

Through December 31, 1996, 1997 and 1998, options to purchase an aggregate
of 896,750, 1,033,050 and 1,394,162 shares, respectively, had been granted under
the Option Plan. The Company recognized $55,643, $51,252 and $55,643 of
compensation expense in 1998, 1997 and 1996, respectively, for options granted
under the Option Plan which was a result of stock options granted to
non-employees. The Company recognized $83,647 of compensation expense in 1996
for options granted under the Option Plan which was a result of stock options
granted to non-employees and the issuance of certain stock options subject to
approval by the shareholders of the Company resulting in compensation expense of
$51,907 and $31,740, respectively.

The provisions of the Option Plan provide for the automatic grant of
non-qualified stock options to purchase shares of common stock ('Director
Options') to directors of the Company who are not employees or principal
stockholders of the Company ('Eligible Directors'). Eligible Directors of the
Company elected subsequent to the public offering are granted a Director Option
to purchase 20,000 shares of common stock on the date such person is first
elected or appointed a director (an 'Initial Director Option'). Each Eligible
Director, other than directors who received an Initial Director Option since the
last annual meeting, is granted a Director Option to purchase 5,000 shares of
Common Stock ('Automatic Grant') on the day immediately following the date of
each annual meeting of stockholders, as long as such director is a member of the
Board of Directors. The exercise price for each share subject to a Director
Option shall be equal to the fair market value of the common stock on the date
of grant. Director Options are exercisable in four equal annual installments,
commencing one year from the date of grant. Director Options expire the earlier
of ten years after the date of grant or ninety days after the termination of the
director's service on the Board of Directors. The number of director options
issued were 140,000

F-15

<PAGE>
VION PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

and 35,000 in 1998 and 1997, respectively. Of the Director Options issued in
1998, options for 20,000 shares represent an initial Director Option and options
for 120,000 shares represent Automatic Grants.

Pro forma information regarding net income and earnings per share is
required by Statement 123, and has been determined as if the Company had
accounted for its employee stock options under the fair value method of that
Statement. The fair value for these options granted under the Option Plan was
estimated at the date of grant using a Black-Scholes option pricing model with
the following weighted average assumptions for 1996, 1997 and 1998,
respectively: risk-free interest rates of 6.28%, 5.77% and 4.70%; volatility
factors of the expected market price of the Company's common stock of .563, .490
and .806; and a weighted average expected life of the option of 7 years. The
Company has assumed no dividend yield in 1996, 1997 and 1998 because it did not
pay cash dividends on its common stock and does not expect to pay cash dividends
in the foreseeable future.

The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.

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

<TABLE>
<CAPTION>
1996 1997 1998
---- ---- ----
<S> <C> <C> <C>
Pro forma net loss................................... $ (7,824,863) $(5,650,169) $(10,925,090)
Pro forma dividends and accretion.................... (11,627,404) (1,131,740) (4,414,050)
------------ ----------- ------------
Pro forma loss applicable to common shareholders..... $(19,452,267) $(6,781,909) $(15,339,140)
Pro forma basic and diluted loss applicable to common
shareholders per share:............................ $(2.55) $(0.78) $(1.28)
</TABLE>

A summary of the Company's stock option activity under the Option Plan, and
related information for the years ended December 31 follows:

<TABLE>
<CAPTION>
1996 1997 1998
------------------ ------------------ ------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
OPTIONS EXERCISE OPTIONS EXERCISE OPTIONS EXERCISE
(000) PRICE (000) PRICE (000) PRICE
----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C>
Outstanding -- beginning
of year........................ 533 $3.86 885 $3.93 981 $4.00
Granted.......................... 364 4.06 136 4.53 361 3.71
Exercised........................ -- -- -- -- (30) 3.77
Forfeited........................ (12) 4.25 (40) 4.26 (50) 4.28
----- ----- -----
Outstanding -- end of year....... 885 $3.93 981 $4.00 1,262 $3.91
----- ----- -----
----- ----- -----
Exercisable at end of year....... 221 $3.71 422 $3.83 571 $3.94
Weighted average fair
value of options granted
during the year................ $2.60 $2.65 $3.97
----- ----- -----
----- ----- -----
</TABLE>

F-16

<PAGE>
VION PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

A summary of the Company's ranges of exercise prices and weighted average
remaining contractual life of options outstanding and of weighted average
exercise price of options currently exercisable under the Option Plan as of
December 31, 1998 follows:

<TABLE>
<CAPTION>
NUMBER OF NUMBER OF WEIGHTED AVERAGE
OUTSTANDING WEIGHTED AVERAGE OPTIONS WEIGHTED AVERAGE REMAINING CONTRACTUAL
SHARES EXERCISE PRICE OF EXERCISABLE EXERCISE PRICE OF LIFE OF
RANGE (000) OPTIONS OUTSTANDING (000) OPTIONS EXERCISABLE OPTIONS OUTSTANDING
----- ----- ------------------- ----- ------------------- -------------------
<S> <C> <C> <C> <C> <C>
$3.625-$5.625........ 1,191 $4.08 522 $4.25 7.48 years
$2.219-$2.400........ 26 2.26 6 2.40 1.67 years
$.40................. 43 .40 43 .40 7.98 years
</TABLE>

<TABLE>
<CAPTION>
NUMBER OF NUMBER OF WEIGHTED AVERAGE
OUTSTANDING WEIGHTED AVERAGE OPTIONS WEIGHTED AVERAGE REMAINING CONTRACTUAL
SHARES EXERCISE PRICE OF EXERCISABLE EXERCISE PRICE OF LIFE OF
RANGE (000) OPTIONS OUTSTANDING (000) OPTIONS EXERCISABLE OPTIONS OUTSTANDING
----- ----- ------------------- ----- ------------------- -------------------
<S> <C> <C> <C> <C> <C>
$3.625-$5.625........ 932 $4.18 373 $4.24 7.88 years
$2.40................ 6 2.40 6 2.40 2.67 years
$.40................. 43 .40 43 .40 2.67 years
</TABLE>

A summary of the Company's stock option activity outside the Option Plan,
and related information for the years ended December 31 follows:

<TABLE>
<CAPTION>
1996 1997 1998
------------------ ------------------ ------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
OPTIONS EXERCISE OPTIONS EXERCISE OPTIONS EXERCISE
(000) PRICE (000) PRICE (000) PRICE
----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C>
Outstanding -- beginning
of year........................ 404 $.21 398 $.21 348 $.18
Granted.......................... -- -- -- --
Exercised........................ (6) .40 (50) .40 (1) .40
Forfeited........................ -- -- -- --
--- --- ---
Outstanding -- end of year....... 398 $.21 348 $.18 347 $.18
--- --- ---
--- --- ---
Exercisable at end of year....... 398 $.21 348 $.18 347 $.18
</TABLE>

A summary of the Company's ranges of exercise prices and weighted average
remaining contractual life of options outstanding and of weighted average
exercise price of options currently exercisable outside the Option Plan as of
December 31, 1998 follows:

<TABLE>
<CAPTION>
WEIGHTED AVERAGE
NUMBER OF WEIGHTED AVERAGE NUMBER OF WEIGHTED AVERAGE REMAINING
OUTSTANDING EXERCISE PRICE OF OPTIONS EXERCISE PRICE OF CONTRACTUAL LIFE
SHARES OPTIONS EXERCISABLE OPTIONS OF OPTIONS
RANGE (000) OUTSTANDING (000) EXERCISABLE OUTSTANDING
- ----- ----- ----------- ----- ----------- -----------
<S> <C> <C> <C> <C> <C>
$5.00................ .5 $5.00 .5 $5.00 1.67 years
$ .40................ 61 .40 61 .40 1.67 years
$ .13................ 286 .13 286 .13 5.00 years
</TABLE>

F-17

<PAGE>
VION PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

7. INCOME TAXES

At December 31, 1998, the Company had available for federal income tax
purposes net operating loss carryforwards of approximately $6,360,000 and a
general business credit of $621,000 expiring in 2010 through 2013. The
difference between the deficit accumulated during the development stage for
financial reporting purposes and the net operating loss carryforwards for tax
purposes is primarily due to certain costs which are not currently deductible
for tax purposes, preferred stock dividends and differences in accounting and
tax basis resulting from the merger described in Note 1. Significant differences
have resulted from amortizing previously capitalized research and development
expenses. The ability of the Company to realize a future tax benefit from a
portion of its net operating loss carryforwards and general business credits may
be limited due to changes in ownership of the Company. The U.S. statutory rate
is 34%; however, the Company has recorded no provision or benefit for income
taxes in the financial statements due to recurring losses. Accordingly, the
Company has provided a full valuation allowance against its deferred tax assets.
The valuation allowance increased by $3,401,800, $2,033,517 and $4,330,671
during 1996, 1997 and 1998, respectively.

Significant components of the Company's deferred tax assets and liabilities
are as follows:

<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1997 1998
---- ----
<S> <C> <C>
Deferred tax assets:
Operating loss carryforwards........................... $ 988,629 $ 2,561,162
Research and development costs......................... 6,110,481 8,610,163
General business tax credit............................ 346,407 621,326
AMT tax credit......................................... -- 9,966
----------- ------------
Total deferred tax assets................................... 7,445,517 11,802,617
Total deferred tax liabilities.............................. -- (26,429)
----------- ------------
Total deferred tax assets and liabilities................... 7,445,517 11,776,188
Valuation allowance for deferred tax assets and
liabilities............................................... (7,445,517) (11,776,188)
----------- ------------
Total net deferred tax assets............................... $ -- $ --
----------- ------------
----------- ------------
</TABLE>

8. COMMITMENTS AND CONTINGENCIES

The Company is the lessee of equipment under capital leases expiring in
2000. Effective February 1, 1996, the Company entered into a noncancelable
operating lease for its facility expiring in 1999. Effective April 1, 1996, the
Company entered into noncancelable operating leases for laboratory and office
equipment expiring in 2000. The future minimum lease payments under the capital
and operating leases as of December 31, 1998 are as follows:

<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASE LEASE
----- -----
<S> <C> <C>
Year ending December 31:
1999................................................... $322,198 $209,873
2000................................................... 183,890 184,237
2001................................................... 5,681 76,092
Thereafter............................................. -- --
-------- --------
Total minimum lease payments................................ 511,769 $470,202
--------
--------
Less amount representing interest........................... 39,141
--------
Present value of minimum lease payments..................... $472,628
--------
--------
</TABLE>

F-18

<PAGE>
VION PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

The cost of assets under capital leases amounted to $927,777 at December
31, 1997 and $950,676 at December 31, 1998. Accumulated amortization relating to
the leased equipment amounted to $185,204 at December 31, 1997 and $483,782 at
December 31, 1998. Amortization expense included in depreciation expense,
relating to the leased equipment, amounted to $20,692, $159,791 and $298,578,
$483,782, respectively, for the year ended December 31, 1996, the year ended
December 31, 1997, the year ended December 31, 1998 and the period from May 1,
1994 (inception) through December 31, 1998

Rent expense amounted to $181,093, $249,799, $270,298, and $738,955,
respectively, for the year ended December 31, 1996, the year ended December 31,
1997, the year ended December 31, 1998, and the period from May 1, 1994
(inception) through December 31, 1998.

On December 10, 1997 the Company entered into a sale and leaseback
agreement with FINOVA Technology Finance, Inc. The cost of assets under the
capital lease is $360,284 which is being depreciated over the lease term of 3
years.

Under the terms of an employment agreement, the Company is obligated to pay
the president of the Company an annual salary of $246,750 through January 2001.

A former director of the Company is a party to a Consulting and Finder's
Agreement dated June 4, 1992 and amended February 17, 1995 ('Agreement') with
the Company. This Agreement entitles him to receive an annual fee equal to 10%
of the net after-tax profits of the Company attributable to the sale or
licensing of products or technology licensed pursuant to the Company's agreement
with Yale (see Note 4), until the cumulative total of such fees equal
$3,000,000. Such fee continues to be payable not withstanding the director's
death or incapacity until the $3,000,000 has been paid.

The Company has various commitments relating to its research agreements
(see Note 4).

9. RELATED PARTY TRANSACTIONS

A director of the Company is a principal of a management consulting firm
that has rendered various consulting services for the Company. The Company paid
the firm $120,000, $60,000 and $120,000 for services rendered for the years
ended December 31, 1996, 1997 and 1998, respectively.

The Company and one of its directors, who is affiliated with Yale
University, entered into a five year consulting agreement on September 29, 1995
which is renewable for one additional year, providing for various advisory
services. Under the agreement, the director receives an annual fee of $48,000.

10. SUBSEQUENT EVENT

In connection with the retention its Chief Executive Officer, the Company
granted options to purchase an aggregate amount of 980,000 shares of the
Company's Common Stock. The options have exercise prices ranging from the fair
market value on the date of grant to 110% of the fair market value on the date
of grant.

F-19

<PAGE>
VION PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEET

<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1998 1999
---- ----
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents (includes $14,848
restricted -- 1999)................................... $ 3,821,234 $ 4,505,895
Short-term investments (includes $1,129,886
restricted)........................................... 2,594,497 --
Accounts receivable.................................... 1,251,618 1,309,541
Other current assets................................... 107,198 64,503
------------ ------------
Total current assets.............................. 7,774,547 5,879,939
Property and equipment, net................................. 1,026,184 829,982
Security deposits........................................... 51,347 58,566
Research contract prepayments............................... 416,945 416,945
------------ ------------
Total assets...................................... $ 9,269,023 $ 7,185,432
------------ ------------

LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Obligation under capital leases -- current............. $ 291,668 $ 235,795
Accounts payable and accrued expenses.................. 2,437,682 2,642,285
------------ ------------
Total current liabilities......................... 2,729,350 2,878,080
Obligation under capital leases -- long term........... 180,960 83,230
------------ ------------
Total liabilities................................. 2,910,310 2,961,310
Redeemable preferred stock:
5% convertible preferred stock Series 1998, $0.01 par
value, authorized: 15,000 shares; issued and
outstanding: 5,000 shares
(redemption value $5,125,000 in 1998 and $5,250,000
in 1999).............................................. 4,854,505 5,012,709
Shareholders' equity
Preferred stock, $0.01 par value -- 5,000,000 shares
authorized consisting of:
Class A convertible preferred stock, $0.01 par value,
authorized: 3,500,000 shares; issued and outstanding:
616,656 in 1998 and 493,902 in 1999 (liquidation
preference $6,167,000 in 1998; $4,939,020 in 1999).... 6,167 4,940
Common stock, $0.01 par value, authorized: 35,000,000
shares; issued: 13,953,046 in 1998 and 15,577,022 in
1999.................................................. 139,530 155,770
Additional paid-in-capital............................. 52,024,648 56,195,006
Deferred compensation.................................. (37,496) (20,180)
Accumulated deficit.................................... (50,628,641) (57,074,617)
Treasury stock (9,779 shares at cost in 1999).......... -- (49,506)
------------ ------------
1,504,208 (788,587)
------------ ------------
Total liabilities and shareholders' equity........ $ 9,269,023 $ 7,185,432
------------ ------------
------------ ------------
</TABLE>

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

F-20

<PAGE>
VION PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)

STATEMENT OF OPERATIONS

<TABLE>
<CAPTION>
FOR THE
PERIOD FROM
MAY 1, 1994
THREE MONTHS ENDED SIX MONTHS ENDED (INCEPTION)
JUNE 30, JUNE 30, THROUGH
------------------------- ------------------------- JUNE 30,
1998 1999 1998 1999 1999
---- ---- ---- ---- ----
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues:
Contract research
grants.................. $ 109,199 $ 102,230 $ 109,199 $ 164,176 $ 572,963
Research support.......... 147,599 855,570 422,441 1,115,038 3,985,152
Technology license
revenues................ -- -- -- 50,000 4,050,000
----------- ----------- ----------- ----------- ------------
Total revenues....... 256,798 957,800 531,640 1,329,214 8,608,115

Operating expenses:
Research and
development............. 2,097,510 3,976,273 4,371,032 6,324,074 33,817,250
General and
administrative.......... 459,067 695,729 1,090,776 1,200,330 10,241,156
Nonrecurring collaboration
restructuring fee....... -- -- -- -- 600,000
Purchased research and
development............. -- -- -- -- 4,481,405
Amortization of finance
charges................. -- -- -- -- 345,439
Interest Income................ (106,191) (66,989) (249,065) (127,355) (1,533,543)
Interest Expense............... 15,712 9,166 34,417 20,773 181,439
----------- ----------- ----------- ----------- ------------
Net loss............. $(2,209,300) $(3,656,379) $(4,715,520) $(6,088,608) $(39,525,031)
----------- ----------- ----------- ----------- ------------
Preferred dividends and
accretion.................... $(2,045,322) $ (276,495) $(2,675,786) $ (357,368) $(17,530,562)
----------- ----------- ----------- ----------- ------------
Loss applicable to common
shareholders................. $(4,254,622) $(3,932,874) $(7,391,306) $(6,445,976) $(57,055,593)
----------- ----------- ----------- ----------- ------------
----------- ----------- ----------- ----------- ------------
Basic and diluted loss
applicable to common
shareholders per share....... $(0.40) $(0.26) $(0.72) $(0.44)
------ ------ ------ ------
------ ------ ------ ------
</TABLE>

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

F-21

<PAGE>
VION PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
CLASS A CLASS B
CONVERTIBLE CONVERTIBLE
PREFERRED STOCK PREFERRED STOCK
----------------------------------- ---------------
SHARES AMOUNT SHARES AMOUNT
------ ------ ------ ------
<S> <C> <C> <C> <C>
Common stock issued for cash -- July 1994................... 0 $ 0 0 $ 0
Common stock issued for services -- August 1994.............
Net loss....................................................
------------------------- ------- ------ ---
Balance -- December 31, 1994................................ 0 0 0 0
------------------------- ------- ------ ---
Stock options issued for compensation -- February 1995......
Reverse acquisition of MelaRx Pharmaceuticals, Inc. -- April
1995.......................................................
Shares repurchased pursuant to employment
agreements -- April 1995...................................
Private placement of common stock -- April 1995.............
Warrants issued with bridge notes -- April 1995.............
Initial public offering of units of one common share,
one Class A warrant and one Class B warrant at
$4.00 per unit -- August 1995 and September 1995...........
Issuance of common stock....................................
Receipts from sale of unit purchase option..................
Net loss....................................................
------------------------- ------- ------ ---
Balance at December 31, 1995................................ 0 0 0 0
------------------------- ------- ------ ---
Issuance of Class A convertible preferred stock............. 1,250,000 12,500
Conversion of Class A convertible preferred stock........... (164,970) (1,650)
Class A convertible preferred stock dividend................ 21,998 220
Issuance of common stock....................................
Compensation associated with stock option grants............
Amortization of deferred compensation.......................
Net loss....................................................
------------------------- ------- ------ ---
Balance at December 31, 1996................................ 1,107,028 $11,070 0 $ 0
------------------------- ------- ------ ---
Conversion of Class A convertible preferred stock........... (396,988) (3,970)
Class A convertible preferred stock dividend................ 47,592 476
Issuance of Class B convertible preferred stock............. 4,850 49
Conversion of Class B convertible preferred stock........... (258) (3)
Accretion of dividend payable on Class B convertible
preferred stock............................................
Extension/reissuance of underwriter warrants................
Exercise of warrants........................................
Issuance of common stock....................................
Exercise of stock options...................................
Compensation associated with stock option grants............
Amortization of deferred compensation.......................
Net loss....................................................
------------------------- ------- ------ ---
Balance at December 31, 1997................................ 757,632 $7,576 4,592 $46
------------------------- ------- ------ ---

COMMON STOCK ADDITIONAL
-------------------------- PAID-IN DEFERRED
SHARES AMOUNT CAPITAL COMPENSATION
------ ------ ------- ------------
<S> <C> <C> <C> <C>
Common stock issued for cash -- July 1994................... 2,693,244 $ 26,932 $ 0 $ 0
Common stock issued for services -- August 1994............. 159,304 1,593
Net loss....................................................
---------- -------- ----------- ---------
Balance -- December 31, 1994................................ 2,852,548 28,525 0 0
---------- -------- ----------- ---------
Stock options issued for compensation -- February 1995...... 540,000
Reverse acquisition of MelaRx Pharmaceuticals, Inc. -- April
1995....................................................... 2,000,000 20,000 4,300,000
Shares repurchased pursuant to employment
agreements -- April 1995................................... (274,859) (2,749)
Private placement of common stock -- April 1995............. 76,349 763 205,237
Warrants issued with bridge notes -- April 1995............. 200,000
Initial public offering of units of one common share,
one Class A warrant and one Class B warrant at
$4.00 per unit -- August 1995 and September 1995........... 2,875,000 28,750 9,667,460
Issuance of common stock.................................... 1,250 13 488
Receipts from sale of unit purchase option.................. 250
Net loss....................................................
---------- -------- ----------- ---------
Balance at December 31, 1995................................ 7,530,288 75,302 14,913,435 0
---------- -------- ----------- ---------
Issuance of Class A convertible preferred stock............. 22,890,075
Conversion of Class A convertible preferred stock........... 458,255 4,582 (2,932)
Class A convertible preferred stock dividend................ 255,661
Issuance of common stock.................................... 29,418 294 102,426
Compensation associated with stock option grants............ 190,407 (190,407)
Amortization of deferred compensation....................... 83,647
Net loss....................................................
---------- -------- ----------- ---------
Balance at December 31, 1996................................ 8,017,961 $ 80,178 $38,349,072 $(106,760)
---------- -------- ----------- ---------
Conversion of Class A convertible preferred stock........... 1,102,757 11,028 (7,058)
Class A convertible preferred stock dividend................ 623,038
Issuance of Class B convertible preferred stock............. 4,851,662
Conversion of Class B convertible preferred stock........... 64,642 647 (644)
Accretion of dividend payable on Class B convertible
preferred stock............................................ 138,365
Extension/reissuance of underwriter warrants................ 168,249
Exercise of warrants........................................ 238 3 (6)
Issuance of common stock.................................... 598,336 5,983 3,463,818
Exercise of stock options................................... 50,000 500 19,500
Compensation associated with stock option grants............ 55,643
Amortization of deferred compensation....................... 34,632
Net loss....................................................
---------- -------- ----------- ---------
Balance at December 31, 1997................................ 9,833,934 $ 98,339 $47,661,639 $ (72,128)
---------- -------- ----------- ---------

TOTAL
ACCUMULATED TREASURY STOCKHOLDERS'
DEFICIT STOCK EQUITY
------- ----- ------
<S> <C> <C> <C>
Common stock issued for cash -- July 1994................... $ (19,877) $ 0 $ 7,055
Common stock issued for services -- August 1994............. (1,176) 417
Net loss.................................................... (475,946) (475,946)
------------ -------- -----------
Balance -- December 31, 1994................................ (496,999) 0 (468,474)
------------ -------- -----------
Stock options issued for compensation -- February 1995...... 540,000
Reverse acquisition of MelaRx Pharmaceuticals, Inc. -- April
1995....................................................... 4,320,000
Shares repurchased pursuant to employment
agreements -- April 1995................................... 2,029 (720)
Private placement of common stock -- April 1995............. 206,000
Warrants issued with bridge notes -- April 1995............. 200,000
Initial public offering of units of one common share,
one Class A warrant and one Class B warrant at
$4.00 per unit -- August 1995 and September 1995........... 9,696,210
Issuance of common stock.................................... 501
Receipts from sale of unit purchase option.................. 250
Net loss.................................................... (9,530,535) (9,530,535)
------------ -------- -----------
Balance at December 31, 1995................................ (10,025,505) 0 4,963,232
------------ -------- -----------
Issuance of Class A convertible preferred stock............. (11,371,523) 11,531,052
Conversion of Class A convertible preferred stock........... (0)
Class A convertible preferred stock dividend................ (255,881) 0
Issuance of common stock.................................... 102,720
Compensation associated with stock option grants............ 0
Amortization of deferred compensation....................... 83,647
Net loss.................................................... (7,608,679) (7,608,679)
------------ -------- -----------
Balance at December 31, 1996................................ $(29,261,588) $ 0 $ 9,071,972
------------ -------- -----------
Conversion of Class A convertible preferred stock........... (0)
Class A convertible preferred stock dividend................ (623,514) 0
Issuance of Class B convertible preferred stock............. (369,861) 4,481,850
Conversion of Class B convertible preferred stock........... 0
Accretion of dividend payable on Class B convertible
preferred stock............................................ (138,365) 0
Extension/reissuance of underwriter warrants................ 168,249
Exercise of warrants........................................ (3)
Issuance of common stock.................................... 3,469,801
Exercise of stock options................................... 20,000
Compensation associated with stock option grants............ 55,643
Amortization of deferred compensation....................... 34,632
Net loss.................................................... (5,343,594) (5,343,594)
------------ -------- -----------
Balance at December 31, 1997................................ $(35,736,922) $ 0 $11,958,550
------------ -------- -----------
</TABLE>

(continued on next page)

F-22

<PAGE>
VION PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
(continued)
<TABLE>
<CAPTION>
CLASS A CLASS B
CONVERTIBLE CONVERTIBLE
PREFERRED STOCK PREFERRED STOCK
----------------------------------- ---------------
SHARES AMOUNT SHARES AMOUNT
------ ------ ------ ------
<S> <C> <C> <C> <C>
Conversion of Class B convertible preferred stock........... (4,592) $(46)
Accretion of dividend payable on Class B convertible
preferred stock............................................
Premium on Conversion dividend on class B convertible
preferred stock............................................
Conversion of Class A convertible preferred stock........... (174,981) $(1,749)
Class A convertible preferred stock dividend................ 34,005 340
Discount on Series 1998 convertible preferred stock.........
Series 1998 convertible preferred stock accretion...........
Common stock issued in exchange for cancellation of
outstanding warrants.......................................
Exercise of stock options...................................
Exercise of warrants........................................
Compensation associated with stock option grants............
Amortization of deferred compensation.......................
Net loss....................................................
------------------------- ------- ------ ---
Balance at December 31, 1998................................ 616,656 $6,167 0 $ 0
------------------------- ------- ------ ---
Conversion of Class A convertible preferred stock........... (136,744) (1,367)
Class A convertible preferred stock dividend................ 13,990 140
Series 1998 convertible preferred stock accretion...........
Exercise of stock options...................................
Common stock issued in exchange for cancellation of
outstanding warrants.......................................
Exercise of warrants........................................
Issuance of common stock....................................
Amortization of deferred compensation.......................
Net loss....................................................
------------------------- ------- ------ ---
Balance at June 30, 1999 (unaudited)........................ 493,902 $4,940 0 $ 0
------------------------- ------- ------ ---
------------------------- ------- ------ ---

COMMON STOCK ADDITIONAL
-------------------------- PAID-IN DEFERRED
SHARES AMOUNT CAPITAL COMPENSATION
------ ------ ------- ------------
<S> <C> <C> <C> <C>
Conversion of Class B convertible preferred stock........... 1,205,178 $ 12,052 $ (12,006)
Accretion of dividend payable on Class B convertible
preferred stock............................................ 286,776
Premium on Conversion dividend on class B convertible
preferred stock............................................ 585,898 5,859 2,043,532
Conversion of Class A convertible preferred stock........... 486,062 4,860 (3,111)
Class A convertible preferred stock dividend................ 329,206
Discount on Series 1998 convertible preferred stock......... 1,597,218
Series 1998 convertible preferred stock accretion........... 0
Common stock issued in exchange for cancellation of
outstanding warrants....................................... 1,792,952 17,929 8,441,442
(8,502,064)
Exercise of stock options................................... 32,750 328 119,854
Exercise of warrants........................................ 16,272 163 10,910
Compensation associated with stock option grants............ 51,252
Amortization of deferred compensation....................... $ 34,632
Net loss....................................................
---------- -------- ----------- ---------
Balance at December 31, 1998................................ 13,953,046 $139,530 $52,024,648 $ (37,496)
---------- -------- ----------- ---------
Conversion of Class A convertible preferred stock........... 379,851 3,799 (2,432)
Class A convertible preferred stock dividend................ 199,024
Series 1998 convertible preferred stock accretion...........
Exercise of stock options................................... 323,812 3,238 49,268
Common stock issued in exchange for cancellation of
outstanding warrants....................................... 102 1 473
Exercise of warrants........................................ 26,296 263 (263)
Issuance of common stock.................................... 893,915 8,939 3,924,288
Amortization of deferred compensation....................... 17,316
Net loss....................................................
---------- -------- ----------- ---------
Balance at June 30, 1999 (unaudited)........................ 15,577,022 $155,770 $56,195,006 $ (20,180)
---------- -------- ----------- ---------
---------- -------- ----------- ---------

TOTAL
ACCUMULATED TREASURY STOCKHOLDERS'
DEFICIT STOCK EQUITY
------- ----- ------
<S> <C> <C> <C>
Conversion of Class B convertible preferred stock........... $ 0
Accretion of dividend payable on Class B convertible
preferred stock............................................ $ (286,776) 0
Premium on Conversion dividend on class B convertible
preferred stock............................................ (2,049,391) 0
Conversion of Class A convertible preferred stock........... 0
Class A convertible preferred stock dividend................ (329,546) 0
Discount on Series 1998 convertible preferred stock......... (1,597,218) 0
Series 1998 convertible preferred stock accretion........... (151,119) (151,119)
Common stock issued in exchange for cancellation of
outstanding warrants.......................................
(42,693)
Exercise of stock options................................... 120,182
Exercise of warrants........................................ 11,073
Compensation associated with stock option grants............ 51,252
Amortization of deferred compensation....................... 34,632
Net loss.................................................... (10,477,669) (10,477,669)
------------ -------- -----------
Balance at December 31, 1998................................ $(50,628,641) $ 0 $ 1,504,208
------------ -------- -----------
Conversion of Class A convertible preferred stock........... 0
Class A convertible preferred stock dividend................ (199,164) 0
Series 1998 convertible preferred stock accretion........... (158,204) (158,204)
Exercise of stock options................................... (49,506) 3,000
Common stock issued in exchange for cancellation of
outstanding warrants....................................... 474
Exercise of warrants........................................ 0
Issuance of common stock.................................... 3,933,227
Amortization of deferred compensation....................... 17,316
Net loss.................................................... (6,088,608) (6,088,608)
------------ -------- -----------
Balance at June 30, 1999 (unaudited)........................ $(57,074,617) $(49,506) $ (788,587)
------------ -------- -----------
------------ -------- -----------
</TABLE>

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

F-23

<PAGE>
VION PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF CASH FLOWS

<TABLE>
<CAPTION>
FOR THE
PERIOD FROM
MAY 1, 1994
(INCEPTION)
FOR THE SIX MONTHS THROUGH
ENDED JUNE 30, JUNE 30,
------------------------- ------------
1998 1999 1999
---- ---- ----
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss......................................... $(4,715,520) $(6,088,608) $(39,525,031)
Adjustments to reconcile net loss to cash flows
used in operating activities
Purchased research and development.......... -- -- 4,481,405
Amortization of financing costs............. -- -- 345,439
Depreciation and amortization............... 245,936 248,950 1,200,932
(Increase) decrease in other current
assets.................................... 604,850 (15,228) (1,373,058)
(Increase) decrease in other assets......... (4,200) (7,219) (473,796)
Increase (decrease) in accounts payable and
accrued expense........................... 22,306 204,603 2,607,753
Accretion on Class B preferred stock........ -- -- --
Extension/reissuance of placement agent
warrants.................................. -- -- 168,249
Stock issued for services................... -- -- 600,417
Stock options issued for compensation....... 42,942 17,316 817,122
----------- ----------- ------------
Net cash (used in) operating
activities........................... (3,803,686) (5,640,186) (31,150,568)
----------- ----------- ------------
Cash flows used for investing activities:
Purchase of marketable securities........... -- -- (24,707,588)
Maturities of marketable securities......... 3,124,725 2,594,497 24,707,588
Cash portion of MelaRx acquisition.......... -- -- 4,061
Acquisition of fixed assets................. (54,808) (52,748) (1,086,481)
----------- ----------- ------------
Net cash provided by (used in)
investing activities................. 3,069,917 2,541,749 (1,082,420)
----------- ----------- ------------
Cash flows provided by financing activities:
Initial public offering..................... -- -- 9,696,210
Net proceeds from issuance of common
stock..................................... (39,189) 3,936,701 7,220,267
Net proceeds from issuance of preferred
stock..................................... 4,738,796 -- 20,716,288
Repurchase of common stock.................. -- -- (720)
Net proceeds from bridge financing.......... -- -- 1,704,269
Repayments of bridge financing.............. -- -- (2,000,000)
Advances from stockholders.................. -- -- 250,000
Repayments to stockholders.................. -- -- (250,000)
Exercise of warrants........................ 4,730 -- 11,070
Receipts from sale of unit purchase
option.................................... -- -- 250
Repayment of equipment capital lease........ (150,139) (153,603) (608,751)
----------- ----------- ------------
Net cash provided by (used in)
financing activities................. 4,554,198 3,783,098 36,738,883
----------- ----------- ------------
Net increase in cash.................................. 3,820,429 684,661 4,505,895
Cash and cash equivalents at beginning of period...... 3,890,621 3,821,234 0
----------- ----------- ------------
Cash and cash equivalents at end of period............ $ 7,711,050 $ 4,505,895 $ 4,505,895
----------- ----------- ------------
----------- ----------- ------------
</TABLE>

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

F-24

<PAGE>
VION PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS

(NOTE A) -- THE COMPANY

Vion Pharmaceuticals, Inc. (the 'Company') is a development stage
biopharmaceutical company engaged in the research, development and
commercialization of cancer treatment technologies. The Company, formerly
OncoRx, Inc., was incorporated in May 1993 and began operations on May 1, 1994.

In April 1995, the Company merged into OncoRx Research Corp., a previously
unaffiliated company ('Research'). The shareholders of the Company were issued
shares of common and preferred stock of MelaRx Pharmaceuticals Inc. ('MelaRx'),
the 100% owner of Research, in exchange for all of the outstanding shares of the
Company. The stockholders of the Company were issued 2,654,038 common and 23,859
preferred shares of MelaRx in exchange for 2,000,000 shares of common stock of
the Company valued at $2.16 per share (fair value). In August 1995, the Company
completed an initial public offering resulting in net proceeds to the Company of
approximately $9,696,000.

As the shareholders of the Company, which was renamed OncoRx, Inc. after
the merger, obtained a majority interest in the merged company, for accounting
purposes the Company is treated as the acquirer. Therefore, the transaction is
recorded as a purchase in the Company's financial statements which include the
results of operations of the Company from inception and MelaRx from the date of
acquisition. The excess of cost over the fair value of MelaRx's net tangible
assets, $4,481,405, was treated as purchased research and development and
expensed immediately.

The accompanying financial statements are prepared assuming the Company
will continue as a going concern; however, at its current and planned rate of
spending, the Company's cash, cash equivalents and short-term investments are
not sufficient to allow it to continue operations through the 1999 calendar
year. The Company requires other sources of capital in order to meet such
budgeted expenditures and to continue its operations throughout the year. The
Company is seeking to enter into significant strategic partnerships with
pharmaceutical companies for the development of its core technologies, through
which it would anticipate receiving some of the revenues and financing required
to continue operations beyond the year end. The Company is seeking to raise
funds through additional means, including (1) private and public sale of its
securities; (2) spin-off, refinancing, or partial sale or disposition of its
rights to certain of its non-core technologies; and (3) equipment lease
financing.

(NOTE B) -- BASIS OF PRESENTATION

The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-QSB. Accordingly, they do not
include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included. Operating results for the
three-month and six-month periods ended June 30, 1999 are not necessarily
indicative of the results that may be expected for the year

F-25

<PAGE>
VION PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

ending December 31, 1999. For further information, refer to the financial
statements and footnotes thereto included in the Company's Annual Report for the
fiscal year ended December 31, 1998 on Form 10-KSB/A Amendment No. 1 (File
No. 0-26534).

(NOTE C) -- SHAREHOLDERS' EQUITY

In conjunction with the Company's IPO, the Company granted the underwriter
an option, exercisable until August 14, 2000, to purchase up to 250,000 units at
$5.20 per unit, subject to adjustment.

Commencing with its IPO, and including the gross proceeds therefrom, the
Company has raised a gross amount of $37,850,000 to date, through the issuance
of common and preferred stock.

PRIVATE PLACEMENT OF CLASS A CONVERTIBLE PREFERRED STOCK

On May 22, 1996, the Company completed a private placement of 1,250,000
shares of Class A Convertible Preferred Stock, at $10.00 per share, resulting in
net proceeds to the Company of $11,531,052. Each share of Class A Preferred
Stock is immediately convertible into 2.777777 shares of the Company's common
stock and is entitled to vote on all matters on an 'as if' converted basis. The
Company recorded an imputed one-time non-cash dividend of approximately $11.4
million as a result of the difference between the conversion price and the
quoted market price of the Company's common stock as of the date of issuance as
required by the Financial Accounting Standards Board Emerging Issues Task
Force D-60 'Accounting for the Issuance of Convertible Preferred Stock and Debt
Securities with a Nondetachable Conversion Feature' (EITF D-60). The $11.4
million has been recognized as a charge against accumulated deficit with a
corresponding increase in additional paid-in capital. The imputed non-cash
dividend has been included in the dividend requirement on Preferred Stock and
the loss applicable to common shareholders. In connection with the foregoing
transaction, the Company also issued to the placement agent warrants,
exercisable over a five year period, to purchase an aggregate of 546,875 shares
of the Company's common stock at prices ranging from $3.96 to $12.00. The shares
of Class A Preferred Stock pay semi-annual dividends of 5% per annum, payable in
additional shares of Class A Preferred Stock, which are immediately convertible
into common stock of the Company. The Company has recorded non-cash dividends as
a charge against the accumulated deficit and a credit to additional paid-in
capital based on the quoted market price of the common stock as of the date of
the issuance of the preferred dividends of $623,514 in 1997, $329,546 in 1998
and $199,164 in 1999. The non-cash dividend has been included in the dividend
requirement on Preferred Stock and the loss applicable to common shareholders.
The issue contains a provision for a 15% one time dividend payable in additional
Class A Preferred Stock if the Company redeems the issue within 3 years. In the
event that the closing bid price of the Company's common stock exceeds $10.3125
for 20 trading days in any 30 trading day period, the Company can redeem the
Class A

F-26

<PAGE>
VION PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

Preferred Stock at the issue price plus all declared and unpaid dividends
thereon. If all of the 493,902 outstanding shares of the Company's Class A
Preferred Stock were thusly redeemed, their redemption value would be
$4,939,020. The issuance of the Class A Preferred Stock at closing also
triggered certain antidilution adjustment provisions of the Company's
outstanding warrants, resulting in the issuance of additional warrants. The
Company cannot pay cash dividends on common stock without the consent of a
majority of holders of the class A Preferred Stock.

PRIVATE PLACEMENT OF CLASS B CONVERTIBLE PREFERRED STOCK

On August 20, 1997, the Company completed a private placement of 4,850
shares of non-voting Class B Convertible Preferred Stock, at $1,000 per share,
resulting in net proceeds to the Company of $4,481,450. Shares of Class B
Preferred Stock are convertible into shares of common stock including an
accretion of 8% per annum. For the three and six-month periods ended June 30,
1998 the Class B accretion totaled $142,386 and $263,548, respectively. Shares
of the Class B Preferred Stock were also be eligible, under certain
circumstances, to receive dividends paid in Class C Preferred Stock. The
Class C Preferred Stock was convertible into shares of common stock at the
average closing bid price of the Company's common stock for thirty consecutive
business days ending on the private placement closing date and was not entitled
to dividends. Conversions of Class B Preferred Stock in the three and six-month
periods ended June 30, 1998 resulted in additional dividends of Class C
Preferred Stock representing 21,386 and 177,036 shares of common stock valued at
$101,707 and $611,009, respectively. These dividends and the Class B accretion
were recorded as a charge against accumulated deficit, with a corresponding
increase to additional paid-in capital for the period ending June 30, 1998.
These dividends and accretion have been included in the dividend requirement on
Preferred Stock and the loss applicable to common shareholders. On August 11,
1998, the Company reached agreement with each of the holders of its Class B
Preferred Stock that the holders would convert all of the outstanding shares of
Class B Preferred Stock into an aggregate of 867,806 shares of common stock.

PRIVATE PLACEMENT OF 5% CONVERTIBLE PREFERRED STOCK SERIES 1998

On June 30, 1998, the Company completed a private placement of 5,000 shares
of non-voting 5% Redeemable Convertible Preferred Stock Series 1998 ('Series
1998 Preferred Stock'). The Series 1998 Preferred Stock was issued at $1,000 per
share, resulting in net proceeds to the Company of $4,703,386. The shares of
Series 1998 Preferred Stock accrue dividends of 5% per annum payable in-kind.
Each share of Series 1998 Preferred Stock is convertible into common stock based
on the formula of issued price plus accrued dividends divided by $3.60.
Dividends other than non-cash dividends paid in-kind with respect to other
classes or series of preferred stock require consent of two-thirds majority
interest of the holders of Series 1998 Preferred Stock. The Series 1998
Preferred Stock is mandatorily redeemable at $1,000 per share plus dividends on
June 30, 2003. In connection with the sale of the Series 1998 Preferred Stock,
the Company imputed a one-time non-cash dividend of approximately $1.6 million
as a result of the difference between the conversion price and the quoted market
price of the Company's common stock at the date of issuance as required by
EITF D-60. Such amount was recognized upon issuance of the Series 1998 Preferred
Stock as a charge against the accumulated deficit with a corresponding increase
to additional paid-in capital. The imputed non-cash dividend has been included
in the dividend requirement on Preferred Stock and the loss applicable to common
shareholders. The dividend requirement on Preferred Stock also reflects the
amortization of the costs of completing the offering and the accretion of the 5%
per annum dividend. The issuance of the Series 1998 Preferred Stock at closing
also triggered certain antidilution adjustment provisions of the Company's
outstanding warrants, resulting in the issuance of additional warrants (see
Note E).

F-27

<PAGE>
VION PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

PRIVATE PLACEMENT OF COMMON STOCK -- APRIL 1999

In April 1999, the Company consummated a private placement of the Company's
common stock. Pursuant to the private placement, the Company issued 893,915
shares of common stock at a price of approximately $4.47 per share (the
'Purchase Price'), for aggregate proceeds of approximately $4,000,000.

Subject to certain exceptions, if at any time during the twelve-month
period following the closing of the private placement, the Company issues or
agrees to issue any common stock at a price per share which is less than the
Purchase Price, or if the Company issues or agrees to issue any rights, options,
warrants or other securities which are directly or indirectly convertible into
or exchangeable for common stock for a consideration per share of common stock
deliverable upon conversion or exchange of such rights, options, warrants or
other securities which is less than the Purchase Price (any such new issuance
price per share being referred to as the 'New Issue Price'), then the Company
shall immediately thereafter issue to the investors in the private placement, on
a pro rata basis, additional registered, listed shares of common stock such that
the total number of shares of common stock issued pursuant to the private
placement will equal at least $4,000,000 divided by the New Issue Price. The
foregoing provisions will cease to be effective after the date, if any, upon
which the Company completes a private placement or public offering of its common
stock at a price per share in excess of the Purchase Price and also resulting in
gross proceeds equal to or greater than $11,000,000.

(NOTE D) -- WARRANT EXCHANGE OFFER

On May 19, 1998, the Company commenced an offer to exchange each
outstanding Class A Warrant, at the option of the holder, for either (A) 0.438
shares of the Company's common stock or (B) 0.254 shares of common stock and
$0.66 in cash. The Company simultaneously offered to exchange each outstanding
Class B Warrant, at the holder's option, for either (A) 0.212 shares of common
stock or (B) 0.123 shares of common stock and $0.32 in cash. The Exchange Offer
was not conditioned upon the exchange of a minimum number of Class A Warrants or
Class B Warrants. As a result of the Exchange Offer 3,209,806 Class A Warrants
and 1,881,835 Class B Warrants were exchanged for 1,395,027 and 397,925 shares
of the Company's common stock and $39,007 and $3,686 in cash, respectively.

(NOTE E) -- ANTIDILUTION ADJUSTMENT

As a result of the sale on May 22, 1996 of 1,250,000 shares of Class A
Convertible Preferred Stock, an adjustment was made to the exercise price of the
Class A Warrants and the Class B Warrants and there was a corresponding
distribution of additional Class A Warrants and Class B Warrants. Specifically,
on July 12, 1996 (the 'Payment Date') each holder of a Class A Warrant at the
close of business on July 3, 1996 (the 'Record Date') was issued an additional
0.1 Class A Warrant and the exercise price of the Class A Warrants was reduced
from $5.20 to $4.73. In addition, on the Payment Date each holder of a Class B
Warrant on the close of business on the Record Date was issued an additional 0.1
Class B Warrant and the exercise price of the Class B Warrants was reduced from
$7.00 to $6.37.

F-28

<PAGE>
VION PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

on the close of business on the Record Date received an additional 0.02 (2 per
100 outstanding) Class B Warrants and the exercise price of the Class B Warrants
was reduced from $6.37 to $6.23.

(NOTE F) -- RESEARCH AND LICENSE AGREEMENTS

BOEHRINGER INGELHEIM AGREEMENT

On November 24, 1997, the Company and Boehringer Ingelheim International
GmbH of Germany ('BI') entered into an exclusive worldwide licensing agreement
for the development and marketing of Promycin'r' (porfiromycin), an anticancer
cell therapeutic. The agreement provides the Company with exclusive co-promotion
rights to Promycin in the United States and Canada. BI will have exclusive
worldwide rights to market and sell Promycin outside the United States and
Canada. The Company is responsible for the manufacturing and supply of Promycin
worldwide.

In exchange for these rights, the Company received $4,000,000 in technology
access fees and net proceeds of $2,869,801 from the sale of 448,336 shares of
common stock at a premium to the then current market price. BI has also
reimbursed the Company for certain initial development costs to date and will
share in future worldwide development costs.

The Company has cash equivalents and short-term investments of $4,505,895
at June 30, 1999. This balance includes $14,848 of restricted investments for
future Promycin development expenses from the original $4,000,000 received in
1997 from BI. The Company recorded $1,115,038 of reimbursed Promycin development
expenses as revenue during the first six months of 1999.

COVANCE AGREEMENT

During the quarter ended June 30, 1997, the Company entered into a Clinical
Development Agreement (the 'Agreement') with Covance Clinical Research Unit Ltd.
and Covance Inc. ('Covance'). Pursuant to the Agreement, the Company is
contracting to Covance the selection and management of clinical sites and the
preparation of clinical trial reports arising from clinical trials performed by
Covance regarding the Company's product candidate Promycin for the inclusion in
a regulatory submission. The Company has incurred estimated and actual expenses
of $1,578,822 for the six months ended June 30, 1999 under this agreement which
has been expensed as incurred as research and development. Included in the
company's total current liabilities at June 30, 1999 are payables to Covance
Development Service Corporation for $1,760,034.

(NOTE G) -- PER SHARE DATA

The following table sets forth the computation of basic and diluted
earnings per share:

<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------- -------------------------
1998 1999 1998 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Numerator:
Net loss......................... $(2,209,300) $(3,656,379) $(4,715,520) $(6,088,608)
Preferred dividends and
accretion...................... (2,045,322) (276,495) (2,675,786) (357,368)
----------- ----------- ----------- -----------
Numerator for basic and diluted loss
applicable to common shareholders
per share........................... $(4,254,622) $(3,932,874) $(7,391,306) $(6,445,976)
Denominator:
Denominator for basic and diluted
loss applicable to common
shareholders per share......... 10,612,282 14,895,158 10,251,896 14,567,169
Basic and diluted loss applicable to
common shareholders per share....... $(0.40) $(0.26) $(0.72) $(0.44)
</TABLE>

F-29

<PAGE>
VION PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

For additional disclosures regarding warrants and Class A, B and Series
1998 Convertible Preferred Stock, see Note C, D, E and F. These potentially
dilutive securities were not included in diluted loss per share applicable to
common shareholders as the effect would be antidilutive. Under the Financial
Accounting Standards Board Statement No. 128, which the Company has adopted, the
dilutive effect of stock options has been excluded.

(NOTE H) -- SMALL BUSINESS INNOVATION RESEARCH GRANTS

On February 27, 1998 and April 22, 1998, the Company was awarded a Small
Business Innovation Research ('SBIR') grant from the National Cancer Institute
for the Reduced Toxicity of Tumor-Targeted Salmonella and the Inhibitors of
Ribonucleotide Reductase ('IRR') programs, respectively. The awards were for
reimbursable direct costs of up to $100,000 and $373,565, respectively, and
expired on August 31, 1998 and April 30, 1999. The Company recognized $100,000
and $316,068 of revenue on these two grants, respectively, for reimbursement of
expenses incurred for the duration of the grants through June 30, 1999. An
automatic extension was granted on the IRR grant to utilize the amount remaining
on the IRR grant. In addition to the extension, a new twelve-month IRR grant was
approved on April 7, 1999 for $374,764. As of June 30, 1999 the Company
recognized $56,894 in revenues from this new grant.

F-30

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<PAGE>
[Picture of penetration of the three regions of a tumor by various anticancer
agents. Picture shows that TAPET organisms penetrate further into tumors than
other agents.]

<PAGE>

[VION PHARMACEUTICALS, INC LOGO]

STATEMENT OF DIFFERENCES
------------------------

The registered trademark symbol shall be expressed as..................... 'r'