CYTOCLONAL PHARMACEUTICS INC /DE, 10KSB40, 1998-04-15

CYTOCLONAL PHARMACEUTICS INC /DE
10KSB40, 1998-04-15
PHARMACEUTICAL PREPARATIONS

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549
------------------------

FORM 10-KSB

/X/ ANNUAL REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 (FEE REQUIRED)

FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997

/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

FOR THE TRANSITION PERIOD FROM ______________ TO ______________

COMMISSION FILE NUMBER 0-26918
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CYTOCLONAL PHARMACEUTICS INC.

(Name of small business issuer in its charter)

DELAWARE 75-2402409
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)

9000 HARRY HINES BOULEVARD, SUITE 330, 75235
DALLAS, TEXAS (Zip Code)
(Address of principal executive offices)

Issuer's Telephone Number, including Area Code (214) 353-2922

Securities registered under Section 12(b) of the Exchange Act:

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<S> <C>
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
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N/A N/A
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Securities registered under Section 12(g) of the Exchange Act:

COMMON STOCK $.01 PAR VALUE

(Title of Class)

Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. Yes /X/ No
/ /.

Check if there is no disclosure of delinquent filers in response to Item 405
of Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. /X/

State issuer's revenues for its most recent fiscal year. $107,000 (Interest
Income)

State the aggregate market value of the voting stock held by non-affiliates
computed by reference to the price at which the stock was sold, or the average
bid and asked price of such stock, as of March 24, 1998. $58,962,906.62.

State the number of shares outstanding of each of the issuer's classes of
common equity, as of March 24, 1998: 8,872,182 shares of Common Stock, $.01 par
value.

Transitional Small Business Disclosure Format: Yes / / No /X/.

DOCUMENTS INCORPORATED BY REFERENCE

N/A

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ITEM 1. DESCRIPTION OF BUSINESS

GENERAL

Cytoclonal Pharmaceutics Inc. ("CPI" or the "Company") is a development
stage biopharmaceutical company focusing on the development of diagnostic and
therapeutic products for the identification, treatment and prevention of cancer
and infectious diseases. To date, the Company has been involved solely in
research and development activities relating to several products that are at
various stages of development. The Company's research and development activities
relate principally to its proprietary fungal paclitaxel production system, its
diagnostic and imaging lung cancer products, Human Gene Discovery Program and
its Vaccine program. Taxol-TM- (the brand name for Paclitaxel) has been
designated by the National Cancer Institute as the most important cancer drug
introduced in the past ten years.

The Company's strategy is to focus on its (i) Fungal Paclitaxel Production
System Program since Paclitaxel has been approved by the FDA as a treatment for
refractory (treatment resistant) breast cancer, ovarian cancer and Kaposi's
Sarcoma; (ii) Human Gene Discovery Program, including a proprietary cancer
related gene ("LCG gene") and related monoclonal antibody ("MAb") addressing the
need for diagnosis and treatment of lung cancer, the second most common form of
cancer, and (iii) Vaccine program. Other programs which involve tumor necrosis
factor--polyethylene glycol ("TNF-PEG"), a fusion protein ("IL-T"), a potential
anti-leukemia drug ("IL-P") and anti-sense therapeutics are being pursued at
modest levels. These other programs may serve as platforms for future products
and/or alternatives to the two primary programs if unforeseen problems develop.
In addition, several of the technologies under development are complementary and
could possibly potentiate each other.

The Company was created in 1991 to acquire rights to certain proprietary
cancer and viral therapeutic technology ("Wadley Technology") developed at the
Wadley Institutes in Dallas, Texas ("Wadley"). See "--Collaborative
Agreements--WadTech." Through its own research and development efforts and
agreements with other research institutions and biotechnology companies, the
Company has acquired and/or developed additional proprietary technology and
rights. The Company has not developed any commercial products, will require
significant additional financing to complete development and obtain regulatory
approvals for its proposed products which, if ever received, can take several
years.

In February 1996, the Company obtained exclusive rights to a technology and
pending patent developed at the University of California, Los Angeles for the
Paclitaxel treatment of polycystic kidney disease. The patent claims were
allowed in August 1997.

In June 1996, the Company entered into a Patent License Agreement (the
"Regents Agreement") with the Board of Regents of the University of Texas System
("Regents") whereby the Company received an exclusive royalty-bearing license to
manufacture, have manufactured, use, sell and/or sublicense products related to
a U.S. Patent Application entitled "A Method for Ranking Sequences to Select
Target Sequence Zones of Nucleus Acids." The technology has identified optimum
regions within genes to bind anti-sense products. Anti-sense products are under
development to control genes involved in human diseases such as cancer,
diabetes, or AIDS. A patent application has been filed on this technology. This
discovery potentially has broad applications to many human and viral genes
involved in human disease.

The Company was originally incorporated in the state of Texas in September
1991 as Bio Pharmaceutics, Inc. In November 1991, the Company changed its name
to Cytoclonal Pharmaceutics Inc. The

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Company was reincorporated in Delaware by merger into a wholly-owned Delaware
subsidiary in January 1992.

RESEARCH AND DEVELOPMENT PROGRAMS

FUNGAL PACLITAXEL PRODUCTION SYSTEM PROGRAM

Scientists at the Company in collaboration with the inventors of the fungal
Paclitaxel technology (the "Fungal Paclitaxel Technology"), have developed a
system for the production of Paclitaxel (the "Fungal Paclitaxel Production
System") utilizing microbial fermentation. Microbial fermentation is considered
one of the most cost effective systems for drug production. The Company's
objective under this program is to become a low-cost, high volume producer of
Paclitaxel.

Presently, Paclitaxel is made from the inner bark and needles of the
slow-growing Pacific yew tree. Supplies of Paclitaxel are limited and it is
expensive. The Fungal Paclitaxel Technology licensed by the Company utilizes a
Paclitaxel producing micro-organism, specifically the fungus Taxomyces
andreanae. This fungus was initially isolated from a Pacific yew tree and has
been adapted to grow independently from the yew tree utilizing fermentation
processes. Detailed chemical analysis of the Paclitaxel produced by the fungus
indicates chemical equivalency to Taxol-TM- produced from the Pacific yew tree.
Science, 260, 214-216 (1993).

The Paclitaxel producing fungus was discovered by Dr. Gary Strobel from
Montana State University ("MSU"), Dr. Andrea Stierle from MSU and Montana
College of Mineral Science and Technology ("MCMST") and Dr. Donald Stierle of
MCMST. Drs. Stierle and Dr. Strobel assigned their rights to the Fungal
Paclitaxel Technology to Research & Development Institute, Inc. ("RDI"), a
non-profit corporation which manages intellectual property for MSU and MCMST.
RDI was issued a U.S. patent on the Fungal Paclitaxel Technology on June 21,
1994 covering the method of isolating the fungus which produces Paclitaxel, the
use of the fungus to make Paclitaxel, and the method of producing Paclitaxel
from the fungus. In June 1993, RDI granted the Company worldwide exclusive
rights to the Fungal Paclitaxel Technology and technologies related thereto. See
"--Collaborative Agreements--RDI." It has been reported that over ten companies,
including several major pharmaceutical companies, were competing to license this
technology. The Company believes that the experience of Dr. Arthur Bollon, the
Company's Chairman, President and Chief Executive Officer, in the area of fungi,
which originated from his Post-Doctoral Fellowship at Yale University, combined
with the research and development activities of the Company in anti-cancer
products, contributed to the Company obtaining the Fungal Paclitaxel Technology.

The Fungal Paclitaxel Production System also produces certain compounds
called Taxanes which can be precursors to Paclitaxel or related compounds like
Taxotere. These compounds are under investigation by several entities, including
Rhone-Poulenc Rorer Pharmaceuticals, Inc., which is developing Taxotere as a
therapeutic for use in the treatment of lung cancer.

Development efforts are continuing with respect to the Fungal Paclitaxel
Production System with the goal of generating commercial quantities of
Paclitaxel at reduced cost. Scientists at the Company, in conjunction with the
inventors of the Fungal Paclitaxel Technology, have increased the level of
Paclitaxel production over 3,000 fold from the initial levels of production
under the Fungal Paclitaxel Production System. Media, growth conditions and
strain improvements continue to be used to improve the Fungal Paclitaxel
Production System. The Company's participation in this development program is
under the direction of Dr. Rajinder Sidhu, Director of the Company's Fungal
Paclitaxel Program, and Dr. Arthur Bollon, the Company's Chairman. In February
1996, the Company entered into two license agreements with the Regents of the
University of California, granting to the Company exclusive rights to: (1) a
pending patent, entitled Inhibition of Cyst Formation By Cytoskeletal Specific
Drugs that makes use of various drugs, one of which is Paclitaxel and (2)
technology in the field of Pharmacological Treatment for Polycystic Kidney
Disease. See "UCLA License Agreements".

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Furthermore, in July 1996, the Company entered into an exclusive license
agreement with Washington State University granting the Company the exclusive
rights to a gene isolated from the Yew tree by Dr. Rodney Croteau. The gene
codes for the enzyme Taxadiene Synthase which is involved in a critical step for
Paclitaxel production. The gene and a related gene region isolated by the
Company is expected to be utilized to further increase the efficiency of
Paclitaxel synthesis by the fungus. Manipulation of genes by genetic engineering
have greatly improved production of pharmaceutical products such as antibiotics
and human interferon and insulin.

The National Cancer Institute ("NCI") has recognized Taxol-TM- as one of the
most important cancer drugs discovered in the past decade. Paclitaxel, although
not a cure for cancer, promotes the assembly of cellular microtubules so fast
growing cells such as cancer cells are unable to divide and proliferate. This
mode of action is in contrast to most cancer drugs which target the cell nucleus
or DNA. Paclitaxel has proven to be effective in treating refractory
(treatment-resistant) ovarian and breast cancers and, in preliminary clinical
trials, has shown potential for treating refractory non-small cell lung cancer
("NSCLC") and certain other cancers. Due to its different mode of action,
Paclitaxel is being tested in combination therapy with other cancer therapeutic
drugs.

Evidence to date has shown that Paclitaxel is generally well tolerated by
patients with reduced side effects compared to other chemotherapy treatments.
Considering that no currently available anticancer agents are free from
toxicity, Paclitaxel's comparative safety profile suggests substantial
improvements in quality of life for patients who must undergo chemotherapy.
Nevertheless, hypersensitivity reactions and other side effects have been noted
during Paclitaxel administration. Reactions are characterized by transient
hypotension and an allergic type response, which appear to cease upon stopping
drug administration. Premedication effectively minimizes or eliminates this
problem, although side effects may nevertheless limit Paclitaxel use in some
patients. In addition, Paclitaxel has been shown to produce peripheral
neuropathy (loss of sensation or pain and tingling in the extremities) and
neutropenia (low white blood cell counts), which also may, in certain cases,
limit Paclitaxel's use.

In June 1991, the NCI formalized a Collaborative Research and Development
Agreement ("CRADA") for development of Paclitaxel with Bristol-Myers Squibb
Company, Inc. ("Bristol-Myers") as its pharmaceutical manufacturing and
marketing partner. This CRADA granted to Bristol-Myers the exclusive use of
NCI's clinical data relating to Paclitaxel in seeking approval from the FDA,
which significantly shortened the approval process and prevented any other party
from obtaining FDA approval using the NCI data. Bristol-Myers received FDA
approval for the commercial sale of its Paclitaxel as a treatment for refractory
ovarian cancer in April 1994. Since December 1992, Bristol-Myers has been the
sole source of Paclitaxel for commercial purposes. It is the Company's
understanding that Bristol-Myers is currently conducting clinical trials
required for FDA approval of Paclitaxel for treating other cancers.

The five year exclusive Paclitaxel rights of Bristol-Myers Squibb (BMY)
expired in December 1997. Companies can submit Abbreviated New Drug Applications
("ANDA's") for the approval of Paclitaxel produced by other methods which
generate a Paclitaxel which is bioequivalent to the commercial Paclitaxel
approved by the FDA. It is a goal of the Company to file an ANDA for generic
Paclitaxel, either alone or with a strategic partner. Bearing on submission of
an ANDA for Paclitaxel is a recently issued patent to BMY covering a three hour
infusion of Paclitaxel which is presently the delivery mode for Paclitaxel. The
relationship between this infusion patent and ANDA submissions are under
analysis by several parties. Additional indications for Paclitaxel utility are
under analysis and Orphan Drug status for Paclitaxel treatment of Kaposi's
Sarcoma was given to BMY in August 1997 and involved a seven year exclusivity.
Under regulations of the FDA, approval of a generic drug from a new production
source can be submitted by an ANDA where the generic drug from the new source
contains the same active ingredient as that in the pioneer drug. In addition,
information must be submitted showing similar indications, routes of
administration, dosage form and strength, and that the generic drug is
"bioequivalent" to the pioneer drug. Also included in the ANDA submission is
information concerning manufacturing, processing and packaging required in NDA
applications. Additional safety and efficacy information is usually not
required. However,

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there can be no assurance that the Company will not be required to submit such
information or that any ANDA submitted by the Company will be approved. To date,
the Company has not submitted an ANDA submission to the FDA with respect to
Paclitaxel, and there can be no assurance that any such submission will be made,
and if made, whether the FDA will approve such submission.

Alternative production systems for Paclitaxel, such as plant cell culture,
complete synthesis and improved processing of yew tree material, are under
investigation by others and there can be no assurance that such alternative
methods will not be developed prior to the Company's proposed method or that
they will not prove more efficient and cost effective than the method being
developed by the Company.

HUMAN GENE DISCOVERY PROGRAM/LUNG CANCER PROGRAM

The Company's Human Gene Discovery Program focuses on identifying and
isolating human genes by utilizing biological markers employing MAbs and
analyzing cellular activities associated with the cause or treatment of various
diseases. Genes play an important role in the development of a variety of
therapeutics, diagnostics and other products and services. Proteins expressed by
genes are the targets of many drugs. As a result, the identification of proteins
can play an important role in the development of drugs and drug screens. The
identification of genes that code for proteins that may be missing or defective
can enable the development of therapeutics for genetic diseases. In addition,
identification of genes that may predispose a person to a particular disease may
enable the development of diagnostic tests for the disease.

One of the central features of the Company's Human Gene Discovery Program is
its proprietary human gene expression libraries and its Retroselection-TM-
approach to isolating human genes with a defined function. Currently, these
libraries consist of over 50,000 human gene clones isolated by the Company
through extracting expressed messenger RNA from human tissue and cells in
different development stages and in normal and diseased states. By comparing the
genes expressed from tissue in different physiological states (e.g., diseased
and normal), the Company hopes to identify genes that are expressed during
different stages of a disease and that could serve as components of diagnostic
tests or as targets for therapeutic drugs. Thus, the Company's Human Gene
Discovery Program concentrates on gene products with associated biological or
medical use as opposed to only DNA sequences. At present the Company is focusing
on creating MAb and DNA probes products for diagnostic and imaging applications.

The Company is developing a proprietary MAb (the "LCG MAb") which recognizes
a specific protein (the "LCG protein") on the surface of some lung cancer cells,
such as NSCLC which is believed to represent approximately 65% of lung cancers.
In addition, the cancer related human gene ("LCG gene") that makes this surface
protein, has been isolated by CPI scientists by a process CPI calls
Retroselection. The specificity of the LCG protein to some lung cancers is based
on studies on biopsy material, biodistribution studies on animal model systems
and Phase I clinical trials. A U.S. patent for the LCG gene, filed by the
Company in July 1994, was issued on December 31, 1996.

The LCG gene and LCG MAb are being developed by the Company as a potential
diagnostic product to test in vitro serum, tissue or respiratory aspirant
material for presence of cells which may indicate a predisposition or early sign
of lung cancer. The LCG MAb is also being developed as an in vivo imaging agent
for lung cancer. An imaging agent may assist physicians in establishing the
location of a cancer and if the cancer has spread to other sites in the body. In
Phase I human clinical trials performed at Wadley, the LCG MAb made from mouse
cells and labeled with a radioactive marker showed strong specificity in 5 of 6
patients. In these trials, the LCG MAb bound to the lung cancer but was not
detectable for normal lung cells. These clinical studies will be expanded with a
human-related form of the LCG MAb which is presently under development by the
Company. Working with cells in culture, the Company is studying whether the LCG
gene itself may be potentially useful as a DNA probe to test for the presence of
the LCG gene expression where the LCG protein has not been made or has been made
at low levels.

Additional potential products under development using the LCG gene and LCG
MAb are products for the delivery of therapeutic drugs such as Paclitaxel and/or
TNF-PEG to the cancer. The involvement of

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the LCG gene in the formation and metabolism of the lung cancer is also under
investigation. In addition, the LCG protein could possibly be used as an antigen
for a vaccine against NSCLC. The Company has deferred plans to initiate testing
in animal model systems and conducting clinical trials since successful
development of vaccine applications will take significant additional research
and development efforts and expenditures.

The Human Gene Discovery Program is also being used to isolate additional
novel cancer related genes utilizing specific MAbs for breast and ovarian cancer
and melanoma which are proprietary to the Company. A U.S. patent for the
melanoma MAb was issued to WadTech and assigned to the Company. A U.S. patent
for a melanoma antigen issued to the Company in August, 1997. See
"--Collaborative Agreements--WadTech."

The Human Gene Discovery Program is conducted under the direction of Dr.
Richard Torczynski, along with Dr. Bollon. Dr. Torczynski and Dr. Bollon have
extensive experience isolating human genes including IFN-WA, a novel interferon,
and the LCG gene. The human-related form of the LCG MAb is under the direction
of Dr. Susan Berent.

OTHER PROGRAMS

In addition to its Fungal Paclitaxel Production System Program and Human
Gene Discovery Program/ Lung Cancer Program, the Company is pursuing other
programs at modest levels which may serve as platforms for the development of
future products and/or alternatives to such primary programs. These include
Vaccine Program, Anti-sense Therapeutics Program, TNF-PEG: Broad Range
Anticancer Drug Program, IL-T: Prevention of Radiation and Chemotherapy Damage
Program and IL-P Anti-leukemic Product Program.

VACCINE PROGRAM. The main objective of the Company's vaccine program is to
develop genetically engineered live vaccines for diseases that are life
threatening. CPI's current strategy consists of (i) identifying bacterial host
strains that are the best suited for delivering recombinant immunogens and
cancer markers; (ii) developing proprietary cloning and expression vectors that
can transfer, maintain and express recombinant immunogens and cancer markers in
the delivery system; and (iii) cloning genes for specific immunogens or cancer
markers into the vectors and testing the vaccine system in appropriate animal
models and, if successful, commencing clinical trials.

The Company has identified three host strains of mycobacteria that appear
well suited for expressing and delivering protein and lipid antigens.
Furthermore, CPI has constructed plasmid and phage based cloning vectors and
developed reproducible transformation techniques for the host strains. These
vectors have large cloning capacities and are highly efficient in
transformation. Potential antigens for cancer markers are the proprietary LCG
gene and other cancer genes for breast cancer and melanoma which are under
development by the Company. The Company's goal is to license, as licensor and
licensee, new cancer specific marker genes and to enter into strategic
partnerships to develop vaccines for infectious diseases, such as tuberculosis.

These vaccine studies are under the direction of Dr. Labidi, who is director
of the Company's vaccine program. Dr. Labidi, who received his Ph.D. in
Microbiology from the Pasteur Institute, in Paris, France, was one of the early
investigators to establish the plasmid profile of several mycobacterium species
and was the first to isolate, characterize and sequence the mycobacterium
plasmid pAL5000 which has contributed to mycobacterium cloning and expression
vectors. Working with the Company and Dr. Labidi is Dr. Hugo David, a consultant
to the Company and a member of its Scientific Advisory Board. Dr. David was
formerly the head of the tuberculosis program at the Center for Disease Control
(CDC) in the U.S. and at the Pasteur Institute. The Company is establishing
research support for Dr. David's work on a new vaccine for tuberculoses.

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ANTI-SENSE THERAPEUTICS PROGRAM. Anti-sense has the potential of regulating
genes involved in various disease states. The Company is sponsoring anti-sense
research and development under the direction of Dr. Donald Gray, Professor of
Molecular and Cell Biology at University of Texas at Dallas. The Company had a
right of first refusal for an exclusive worldwide license for the technology
developed in connection with these research activities, which rights the Company
exercised in June 1996 and has obtained an exclusive world-wide license for
certain anti-sense technology developed by Dr. Gray. Pursuant to this program,
Dr. Gray has developed, and a patent application has been submitted covering,
proprietary technology which may improve the efficiency of anti-sense reagents
potentially applicable to a broad spectrum of diseases. The capability has
recently been computerized, which will be contained in a related patent
continuation-in-part [status]. See "--Collaborative Agreements--University of
Texas."

TNF-PEG: BROAD RANGE ANTICANCER DRUG PROGRAM. TNF is a natural immune
protein (cytokine) made by human cells. It has been found to kill in vitro a
high percentage of different cancer cells compared to normal cells and is one of
the most potent anticancer agents tested in animals. CPI has TNF technology,
including TNF analogs, which the Company believes are proprietary and which were
developed at Wadley utilizing a genetically engineered bacteria and developed
further by Lymphokine Partners Limited, a partnership set up by an affiliate of
Wadley and Phillips Petroleum Company (the "Wadley/Phillips Partnership"). CPI
acquired this technology from Wadley Technologies, Inc. ("WadTech"). See
"--Collaborative Agreements--WadTech." Phase I and II human clinical trials were
performed at Wadley using 23 patients with different kinds of cancer. These
studies, as well as studies on TNF technology developed by others, showed no
therapeutic benefit from TNF in humans because of the high toxicity of TNF at
therapeutic doses and its relatively short half life (approximately 30 minutes)
at lower doses.

Pursuant to a research collaboration (the "Enzon Agreement") with Enzon,
Inc. ("Enzon"), the Company and Enzon are developing an anticancer agent
combining the Company's TNF technology with Enzon's patented polyethylene glycol
("PEG") technology. See "--Collaborative Agreements--Enzon." The PEG process
involves chemically attaching PEG, a relatively non-reactive and non-toxic
polymer, to proteins and certain other biopharmaceuticals for the purpose of
enhancing their therapeutic value. Attachment of PEG helps to disguise the
proteins and to reduce their recognition by the immune system, thereby generally
lowering potential immunogenicity. Both the increased molecular size and lower
immunogenicity result in extended circulating blood life, in some cases from
minutes to days. The PEG technology is a proven technology covered by patents
held by Enzon. To the Company's knowledge, Enzon has two products on the market
using PEG, namely, PEG-adenosine deaminase, for treatment of the immune
deficiency disease know as the "bubble boy," and PEG-Asparaginase, a cancer
chemotherapeutic drug. In preliminary animal studies at Sloan-Kettering
Institute for Cancer Research ("Sloan-Kettering"), a TNF-PEG construct has been
tested in an animal cancer model system and was shown to kill tumors with
possibly reduced toxicity. See "--Collaborative Agreements--Sloan-Kettering."
The results of these studies will be confirmed and expanded and, if the TNF-PEG
does result in longer half life and reduced toxicity, an IND for clinical trials
is expected to be submitted by the Company and/or Enzon. There can, however, be
no assurance that similar results will be found in humans. The Enzon Agreement
also involves directing TNF-PEG to human cancers using Enzon's proprietary
single chain antibodies.

The Enzon Agreement involves equal sharing of revenue from sales of TNF-PEG
if both parties contribute equally to its development, which is CPI's intention.
There can, however, be no assurance that the Company will have the financial
resources to meet such obligations. The Enzon Agreement also specifies that
Enzon will work with only CPI on the construction of TNF-PEG, unless CPI
consents to Enzon working with a third party. See "--Collaborative
Agreements--Enzon."

IL-T: PREVENTION OF RADIATION AND CHEMOTHERAPY DAMAGE PROGRAM. This program
involves a novel protein called IL-T. CPI and the Wadley/Phillips Partnership
constructed IL-T through genetic engineering by fusing together parts of two
human immune proteins ("cytokines"), Interleukin and TNF. The Company is testing
various combinations of cytokines for improved protection against radiation and
chemotherapy damage. The IL-T protein has been tested in animal studies for
protection against radiation damage at

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Sloan-Kettering and these studies are expected to continue. Following animal
studies confirmation of protection against radiation damage could potentially
lead to filing an investigational new drug ("IND") application with the FDA
followed by Phase I clinical trials. Products proprietary to others have shown
protection against radiation damage and to potentiate weakened immune cells. The
Company has filed a patent application for IL-T. See "--Collaborative
Agreements--WadTech" and "--Collaborative Agreements--Sloan-Kettering."

IL-P ANTI-LEUKEMIC PRODUCT PROGRAM. Through its joint venture with Pestka
Biomedical Laboratories, Inc. ("Pestka"), the Company is participating in the
development of a novel anti-leukemic drug known as ("IL-P"). This research and
development involves the application of certain phosphorylation technology
developed at Pestka and licensed to the joint venture to interleukin-2. Various
constructs of IL-P have been tested at Pestka and the Company expects to provide
additional funding to the joint venture for the continuation of such tests. See
"--Collaborative Agreements--Cytomune."

For the fiscal years ended December 31, 1997 and 1996, the Company incurred
$1,469,000 and $1,576,000 00 of research and development expenses, respectively.

COLLABORATIVE AGREEMENTS

WADTECH

In October 1991, the Company entered into a purchase agreement with WadTech
(the "WadTech Agreement"), whereby the Company acquired certain of WadTech's
right, title and interest in and to the Wadley Technology, including technology
developed by Wadley, and acquired by WadTech upon dissolution of the
Wadley/Phillips Partnership and licensed to WadTech by Phillips Petroleum
Company ("Phillips"). The Wadley Technology includes, but is not limited to,
technology related to TNF, IL-T, a novel interferon designated IFN-WA, and
select melanoma, ovarian, breast, colon and lung cancer MAbs. See "--Research
and Development Programs--Human Gene Discovery Program/Lung Cancer Program" and
"--Research and Development Programs--Other Programs--TNF/PEG: Broad Anticancer
Drug Program."

Pursuant to the WadTech Agreement, the Company agreed to (i) pay WadTech the
sum of $1,250,000 (the "Fixed Sum"), (ii) pay WadTech royalties on sales of
products incorporating the Wadley Technology and a percentage of all royalties
and other consideration paid to the Company by any licensees of the Wadley
Technology, all of which are to be applied toward the Fixed Sum, (iii) assume
WadTech's obligations under a license agreement entered into in March 1989
between the Wadley/Phillips Partnership and Phillips (the "Phillips Agreement"),
namely the obligation to pay royalties of up to 3.75% on sales products produced
using Phillips recombinant yeast expression system, and (iv) pay to WadTech
minimum annual royalties of $31,250 for the year beginning October 1, 1996,
$62,500 for the year beginning October 1, 1997 and $125,000 for each year
thereafter. The WadTech Agreement provides that the royalties and other sums
payable by the Company to WadTech are at a higher rate until the Fixed Sum has
been paid in full. The term of the WadTech Agreement is for 99 years but may be
terminated earlier by WadTech if the Company fails to cure a default in its
payment obligations or breaches any material term or condition of the agreement.

In order to secure the Company's obligation to pay the Fixed Sum to WadTech,
the Company and WadTech entered into a Security Agreement (the "Security
Agreement"), pursuant to which WadTech retains a security interest in all of the
Wadley Technology until the Fixed Sum is paid in full to WadTech. The Security
Agreement also provides that in the event of a default (which includes failure
of the Company to perform any material obligation under the WadTech Agreement),
WadTech would have the right to license the Wadley Technology to a third party
or sell the Wadley Technology through a foreclosure sale.

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RDI

In June 1993, the Company entered into a license agreement (the "Paclitaxel
License Agreement") with RDI, a non-profit entity which manages the intellectual
property of MSU and MCMST, granting to the Company worldwide exclusive rights to
the Fungal Paclitaxel Technology. Pursuant to the Paclitaxel License Agreement,
the Company made an initial payment of $150,000 to RDI and has agreed to pay RDI
royalties on sales of products using the Fungal Paclitaxel Technology and a
percentage of royalties paid to the Company by sublicensees of the Fungal
Paclitaxel Technology in minimum amounts of $25,000 for the first year, $50,000
for the second year, $75,000 for the third year, and $100,000 for all years
thereafter that the license is retained. The Company also granted to RDI stock
options to purchase up to 20,000 shares of the Company's Common Stock at $2.50
per share exercisable over four years. The Company and RDI also entered into a
Research and Development Agreement (the "Paclitaxel R&D Agreement") effective
the date of the RDI License Agreement. The Paclitaxel R&D Agreement provides for
RDI to perform research and development at MSU relating to the Fungal Paclitaxel
Production System. Pursuant to the Paclitaxel R&D Agreement, the Company has
agreed to make payments of $250,000 per year for four years. The Company has, to
date, paid a total of $1,400,000 under both RDI agreements. In February 1995,
the Company and RDI amended the RDI License Agreement and Paclitaxel R&D
Agreement to include technology applicable to commercial products, in addition
to Paclitaxel and Paclitaxel related technology, identified and developed from
organisms/products supplied to CPI by Dr. Gary Strobel, Dr. Andrea Stierle
and/or Dr. Donald Stierle pursuant to the Paclitaxel License Agreement and
Paclitaxel R&D Agreement. These additional technologies could include, but are
not limited to, anti-cancer, anti-viral, anti-fungal or any other activities
which could result in any commercial products.

In February 1995, the Company entered into a license agreement (the "FTS-2
License Agreement") with RDI, granting to the Company worldwide exclusive rights
to practice all intellectual property rights relating to a fungal strain
identified as "FTS-2" (the "FTS-2 Rights") which contains a cytotoxic activity
for a breast cancer line and related activities. In October 1995, the Company
entered into a license agreement (the "Tbp-5 License Agreement") with RDI,
granting to the Company worldwide exclusive rights to practice all intellectual
property rights relating to a fungal strain identified as "Tbp-5" (the "Tbp-5
Rights"; the FTS-2 Rights and the Tbp-5 Rights are collectively referred to
herein as the "Intellectual Property Rights") which contains a cytotoxic
activity for a breast cancer cell line. Pursuant to the FTS-2 License Agreement
and the Tbp-5 License Agreement, the Company has agreed to pay RDI royalties on
sales of products or services using the Intellectual Property Rights and a
percentage of royalties paid to the Company by sublicensees using the
Intellectual Property Rights.

UCLA LICENSE AGREEMENTS

In February 1996, the Company entered into two license agreements with the
Regents of the University of California, granting to the Company exclusive
rights to: (1) a pending patent, entitled Inhibition of Cyst Formation By
Cytoskeletal Specific Drugs ("UCLA License Agreement I") that makes use of
various drugs, one of which is Paclitaxel and (2) technology in the field of
Pharmacological Treatment for Polycystic Kidney Disease ("UCLA License Agreement
II"). Pursuant to the UCLA License Agreement I, the Company paid a license issue
fee of $5,000 and has agreed to pay the University of California $10,000 upon
issuance of a patent. Pursuant to the UCLA License Agreement II, the Company
paid a license issue fee of $5,000 and has agreed to pay the University of
California $5,000 upon issuance of a patent. The Company must pay a yearly
license maintenance fee on both licenses until the Company is commercially
selling a product based on the technology derived from these UCLA License
Agreements, at which time a royalty based on net sales will be due.

ENZON

In July 1992, the Company and Enzon entered into the Enzon Agreement
providing for the conduct of a collaborative research and development program to
develop an anticancer agent by combining the

9
<PAGE>
Company's TNF technology with Enzon's PEG technology. Pursuant to this
agreement, each party agreed to fund its own development costs associated with
the initial stage, roughly the first year, of the program. The agreement
provides that if both parties agree to continue the TNF-PEG program jointly each
party shall share equally in the cost of such research and development and the
profits therefrom. If one party decides not to proceed or later is unable to
share jointly, the continuing party will receive exclusive (even as to the other
party) worldwide licenses in the applicable technology of the other party and
will pay the other party royalties. The term of the Enzon Agreement is 15 years
for each product developed under the program from the date of FDA approval to
market such product. The Company and Enzon also entered into a similar agreement
in March 1992 relating to combining various target proteins to be developed by
the Company with Enzon's PEG-technology pursuant to which agreement Enzon funded
certain of the Company's initial research and development activities thereunder.
To the extent this earlier agreement applied to TNF, it was superseded by the
Enzon Agreement. Currently, the primary focus of the parties is on the Enzon
Agreement and the TNF-PEG technology.

SLOAN-KETTERING

Pursuant to a Research Agreement effective April 8, 1994 between the Company
and the Sloan-Kettering, Sloan-Kettering has agreed to continue evaluating the
IL-T fusion protein to determine whether such protein protects mice against
radiation and chemotherapy. In connection with such activities, Sloan-Kettering
has agreed to provide all necessary personnel, equipment supplies and facilities
in completion of the protocol set forth in the agreement for a budget not to
exceed $35,000. Inventions resulting from Sloan-Kettering's research which were
not contemplated by the parties, if any, will be the property of
Sloan-Kettering; however, Sloan-Kettering must grant the Company the right of
first refusal to acquire a world-wide exclusive license to develop and
commercialize any such invention upon mutually agreeable terms. The term of the
agreement is through completion of the protocol.

CYTOMUNE

Cytomune, Inc. ("Cytomune") is a joint venture (50:50) between CPI and
Pestka. A novel anti-leukemic drug, IL-P, is in development utilizing
proprietary technology developed by Dr. Sidney Pestka. Dr. Pestka developed
interferon for commercial use for Hoffmann-La Roche, Inc. The objective of the
joint venture is to develop IL-P for the diagnosis and treatment of leukemia.
For their respective interests in the joint venture the Company contributed
$233,000 and certain technology and Pestka contributed exclusive rights to
phosphorylation technology as applied to interleukin-2. Pestka has performed
research and development for Cytomune relating to IL-P using this technology.
Additional funding is not required but, if provided, will permit such research
and development to continue.

UNIVERSITY OF TEXAS

In June 1992, the Company and the University of Texas at Dallas ("UTD")
entered into an agreement, which has been amended, pursuant to which UTD
performs certain research and development activities relating to anti-sense
compounds and related technology for use in humans as therapeutic and diagnostic
products. Pursuant to the agreement, UTD provides all necessary personnel,
equipment supplies and facilities in consideration for an amended budget not to
exceed $240,240. Inventions under the agreement, if any, will be the property of
UTD; however, UTD must grant the Company the right of first refusal to acquire a
license to develop and commercialize any intellectual property resulting from
the agreement for a royalty to be negotiated, not to exceed eight percent of the
net sales (as defined in the agreement) of commercialized products. The Company
is not required to pay any upfront fee or any minimum royalty. The agreement has
been extended through May 1998 in consideration for the Company's agreement to
increase the original funding commitment from $150,240 to $240,240 of which
amount the Company has paid $216,533 as of March 17, 1998. In June 1996, the
Company entered into a Patent License Agreement (the "Regents Agreement") with
the Board of Regents of the University of Texas

10
<PAGE>
System ("Regents") whereby the Company received an exclusive royalty-bearing
license to manufacture, have manufactured, use, sell and/or sublicense products
related to a U.S. Patent Application entitled "A Method for Ranking Sequences to
Select Target Sequence Zones of Nucleus Acids." The technology has identified
optimum regions within genes to bind Anti-sense products. Anti-sense products
are under development to control genes involved in human diseases such as
cancer, diabetes, or AIDS. This discovery potentially has broad applications to
many human and viral genes involved in human disease. The Company is required to
pay Regents certain royalties and sublicensing fees. The Regents Agreement shall
be in full force and effect until patent rights have expired or 20 years,
whichever is longer. However, the Regents Agreement will terminate (i)
automatically if the Company's obligations to pay royalties and sublicensing
fees are not satisfied within 30 days after the Company receives written notice
of its failure to make such payment; (ii) upon 90 days' written notice if the
Company or Regents shall breach or default on any obligation under the Regents
Agreement; and (iii) upon 60 days' written notice by the Company. In addition,
Regents may terminate the exclusivity of the Regents Agreement at any time after
June 1999 and may terminate the license completely at any time after June 2001
if the Company fails to provide Regents with written evidence that it has
commercialized or is actively attempting to commercialize the licensed product.
There can be no assurance that any revenues will be derived by the Company as a
result of the agreement or that the Regents will not be in a position to
exercise its termination rights.

HELM AG

The Company entered into a marketing agreement, effective in November 1994,
with Helm AG, a world-wide distributor of pharmaceutical and related products,
granting Helm AG the right, in certain parts of Europe, to market the technology
and/or products of, and arrange business introductions for, the Company on a
commission basis. The agreement is terminable by either party on six months'
notice. To date, the Company has no products available for distribution and thus
no revenues have been derived from such agreement. There can be no assurance
that any revenues will be derived by the Company from this agreement in the
future.

WSURF

In July 1996, the Company entered into an agreement with the Washington
State University Research Foundation ("WSURF") whereby the Company received an
exclusive, world-wide license to use and/or sublicense patented technology or
prospective patented technology (the "WSURF Technology") related to genes for
enzymes and the associated gene products, including the enzymes, in the
biosynthetic pathway for Paclitaxel. The Company is required to pay WSURF
license fees of $7,500 per year as well as certain royalties and sublicensing
fees. This Agreement shall be in full force and effect until the last to expire
of the patents licensed under the WSURF Technology. However, the Company may
terminate the agreement on 90 days notice provided that all amounts due to WSURF
are paid. WSURF may terminate the agreement immediately if the Company ceases to
carry on its business or on 90 days notice if the Company is in default in
payment of fees and/or royalties, is in breach of any provisions of the
agreement, provides materially false reports or institutes bankruptcy,
insolvency, liquidation or receivership proceedings. There can be no assurance
that any revenues will be derived by the Company as a result of the agreement.

11
<PAGE>
PATENTS, LICENSES AND PROPRIETARY RIGHTS

The Company has rights to a number of patents and patent applications. In
1991, the Company entered into the WadTech Agreement, whereby it was assigned
two issued United States patents (expiring, under current law, in 2006 and 2007,
respectively), three pending United States patent applications and six pending
foreign patent applications held by WadTech. A. U.S. patent for the LCG gene,
filed by the Company in July 1994, was issued on December 31, 1996. Pursuant to
the Paclitaxel License Agreement, the Company has been granted an exclusive
license to the technology contained in the Fungal Paclitaxel Production System,
including one issued United States patent, one United States patent application
with allowed claims and foreign patent applications. In addition, UTD has filed
a patent application relating to certain anti-sense technology with respect to
which, pursuant to the agreement between the Company and UTD, the Company has a
right of first refusal to acquire a license to develop and commercialize
products using such technology. Pursuant to the UCLA License Agreement I, the
Company has been granted an exclusive license to technology involving the
"Inhibition of Cyst Formation By Cytoskeletal Specific Drugs" and related patent
of which the claims have been allowed by the U.S. Patent and Trademark Office in
August 1997.

The Company's policy is to protect its technology by, among other things,
filing patent applications for technology it considers important in the
development of its business. In addition to filing patent applications in the
United States, the Company has filed, and intends to file, patent applications
in foreign countries on a selective basis. The Company has filed patent
applications relating to its IL-T and Lung Cancer Gene technologies and is
preparing to file additional patent applications, relating primarily to
technologies for vaccines and Paclitaxel production. Although a patent has a
statutory presumption of validity in the United States, the issuance of a patent
is not conclusive as to such validity or as to the enforceable scope of the
claims of the patent. There can be no assurance that the Company's issued
patents or any patents subsequently issued to or licensed by the Company will
not be successfully challenged in the future. The validity or enforceability of
a patent after its issuance by the patent office can be challenged in
litigation. If the outcome of the litigation is adverse to the owner of the
patent, third parties may then be able to use the invention covered by the
patent, in some cases without payment. There can be no assurance that patents in
which the Company has rights will not be infringed or successfully avoided
through design innovation.

There can be no assurance that patent applications owned by or licensed to
the Company will result in patents being issued or that the patents will afford
protection against competitors with similar technology. It is also possible that
third parties may obtain patent or other proprietary rights that may be
necessary or useful to the Company. In cases where third parties are first to
invent a particular product or technology, it is possible that those parties
will obtain patents that will be sufficiently broad so as to prevent the Company
from using certain technology or from further developing or commercializing
certain products. If licenses from third parties are necessary but cannot be
obtained, commercialization of the related products would be delayed or
prevented. The Company is aware of patent applications and issued patents
belonging to competitors and it is uncertain whether any of these, or patent
applications filed of which the Company may not have any knowledge, will require
the Company to alter its potential products or processes, pay licensing fees or
cease certain activities.

The Company also relies on unpatented technology, trade secrets and
information and no assurance can be given that others will not independently
develop substantially equivalent information and techniques or otherwise gain
access to the Company's technology or disclose such technology, or that the
Company can meaningfully protect its rights in such unpatented technology, trade
secrets and information. The Company requires each of its employees to execute a
confidentiality agreement at the commencement of an employment relationship with
the Company. The agreements generally provide that all inventions conceived by
the individual in the course of employment or in the providing of services to
the Company and all confidential information developed by, or made known to, the
individual during the term of the relationship shall be the exclusive property
of the Company and shall be kept confidential and not

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<PAGE>
disclosed to third parties except in limited specified circumstances. There can
be no assurance, however, that these agreements will provide meaningful
protection for the Company in the event of unauthorized use or disclosure of
such confidential information.

COMPETITION

All of the Company's proposed products will face competition from existing
therapies. The development by others of novel treatment methods for those
indications for which the Company is developing compounds could render the
Company's compounds non-competitive or obsolete. This competition potentially
includes all of the pharmaceutical concerns in the world that are developing
pharmaceuticals for the diagnosis and treatment of cancer. Competition in
pharmaceuticals is generally based on performance characteristics, price and
timing of market introduction of competitive products. Acceptance by hospitals,
physicians and patients is crucial to the success of a product. Price
competition may become increasingly important as a result of an increased focus
by insurers and regulators on the containment of health care costs. In addition,
the various federal and state agencies have enacted regulations requiring
rebates of a portion of the purchase price of many pharmaceutical products.

Most of the Company's existing or potential competitors have substantially
greater financial, technical and human resources than the Company and may be
better equipped to develop, manufacture and market products. In addition, many
of these companies have extensive experience in pre-clinical testing, human
clinical trials and the regulatory approval process. These companies may develop
and introduce products and processes competitive with or superior to those of
the Company. See "--Research and Development Programs--Fungal Paclitaxel
Production System Program" for a discussion of a CRADA granted to Bristol-Myers.

The Company's competition also will be determined in part by the potential
indications for which the Company's compounds are developed. For certain of the
Company's potential products, an important factor in competition may be the
timing of market introduction of its own or competitive products. Accordingly,
the relative speed with which the Company can develop products, complete the
clinical trials and regulatory approval processes and supply commercial
quantities of the products to the market are expected to be important
competitive factors. The Company expects that competition among products
approved for sale will be based on, among other things, product efficacy,
safety, reliability, availability, price and patent position.

The Company's competitive position also depends upon its ability to attract
and retain qualified personnel, obtain patent protection or otherwise develop
proprietary products or processes and secure sufficient capital resources for
the often lengthy period between technological conception and commercial sales.

GOVERNMENT REGULATION

The production and marketing of the Company's products and its research and
development activities are subject to regulation for safety and efficacy by
numerous governmental authorities in the United States and other countries. In
the United States, drugs and pharmaceutical products are subject to rigorous FDA
review. The Federal Food, Drug, and Cosmetic Act, the Public Health Service Act
and other federal statutes and regulations govern or influence the testing,
manufacture, safety, labeling, storage, record keeping, approval, advertising
and promotion of such products. Non-compliance with applicable requirements can
result in fines, recall or seizure of products, total or partial suspension of
production, refusal of the government to approve product license applications or
allow the Company to enter into supply contracts and criminal prosecution. The
FDA also has the authority to revoke product licenses and establishment licenses
previously granted.

In order to obtain FDA approval of a new product, the Company must submit
proof of safety, purity, potency and efficacy. In most cases such proof entails
extensive pre-clinical, clinical and laboratory tests. The testing, preparation
of necessary applications and processing of those applications by the FDA is

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<PAGE>
expensive and may take several years to complete. There is no assurance that the
FDA will act favorably or quickly in making such reviews, and significant
difficulties or costs may be encountered by the Company in its efforts to obtain
FDA approvals that could delay or preclude the Company from marketing any
products it may develop. The FDA may also require post-marketing testing and
surveillance to monitor the effects of approved products or place conditions on
any approvals that could restrict the commercial applications of such products.
Product approvals may be withdrawn if compliance with regulatory standards is
not maintained or if problems occur following initial marketing. With respect to
patented products or technologies, delays imposed by the governmental approval
process may materially reduce the period during which the Company will have the
exclusive right to exploit them.

The time period between when a promising new compound is identified and when
human testing is initiated is generally referred to as the pre-clinical
development period. During this time, a manufacturing process is identified and
developed to be capable of producing the compound in an adequately pure and well
characterized form for human use. Production of compounds for use in humans is
governed by a series of FDA regulations known as Good Manufacturing Practices
("GMP"), which govern all aspects of the manufacturing process. The FDA has
published a "Points to Consider" guidance document with respect to the
manufacture of MAbs for human use.

The FDA approval process for a new and unfamiliar term or drug involves
completion of pre-clinical studies and the submission of the results of these
studies to the FDA in an investigational new drug application ("IND").
Pre-clinical studies involve laboratory evaluation of product characteristics
and animal studies to assess the efficacy and safety of the product.
Pre-clinical studies are regulated by the FDA under a series of regulations
called the Good Laboratory Practices ("GLP") regulations. Violations of these
regulations can, in some cases, lead to invalidation of the studies, requiring
those studies to be replicated.

Once the IND is approved, human clinical trials may be conducted. Human
clinical trials are typically conducted in three sequential phases, but the
phases may overlap. Phase I trials consist of testing the product in a small
number of volunteers, primarily for safety at one or more doses. In Phase II, in
addition to safety, the efficacy of the product is evaluated in a patient
population somewhat larger than Phase I trials. Phase III trials typically
involve additional testing for safety and clinical efficacy in an expanded
population at geographically dispersed test sites. A clinical plan, or
"protocol," accompanied by the approval of the institution participating in the
trials, must be submitted to the FDA prior to commencement of each clinical
trial. The FDA may order the temporary or permanent discontinuation of a
clinical trial at any time.

To date an IND was submitted for the LCG-MAb clinical trials at Wadley. The
Company intends to file an IND for a humanized form of the LCG-MAb followed by
clinical trials. The results of the pre-clinical and clinical testing are
submitted to the FDA in the form of a New Drug Application ("NDA") or, in the
case of a biologic, such as LCG-MAb and other MAbs, as part of a product license
application ("PLA"). In a process which generally takes several years, the FDA
reviews this application and once, and if, it decides that adequate data is
available to show that the new compound is both safe and effective, approves the
drug or biologic product for marketing. The amount of time taken for this
approval process is a function of a number of variables including the quality of
the submission and studies presented, the potential contribution that the
compound will make in improving the treatment of the disease in question and the
workload at the FDA. There can be no assurance that any new drug will
successfully proceed through this approval process or that it will be approved
in any specific period of time.

The FDA may, during its review of an NDA or PLA, ask for the production of
additional test data. If the FDA does ultimately approve the product, it may
require post-marketing testing, including potentially expensive Phase IV
studies, and surveillance to monitor the safety and effectiveness of the drug.
In addition, the FDA may in some circumstances impose restrictions on the use of
the drug that may be difficult and expensive to administer and may seek to
require prior approval of promotional materials.

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<PAGE>
Manufacture of a biologic product must be in a facility covered by an
FDA-approved Establishment License Application. Manufacture, holding, and
distribution of both biologic and non-biologic drugs must be in compliance with
GMPs. Manufacturers must continue to expend time, money, and effort in the area
of production and quality control and record keeping and reporting to ensure
full compliance with those requirements. The labeling, advertising, and
promotion of a drug or biologic product must be in compliance with FDA
regulatory requirements. Failures to comply with applicable requirements
relating to manufacture, distribution, or promotion can lead to FDA demands that
production and shipment cease, and, in some cases, that products be recalled, or
to enforcement actions that can include seizures, injunctions, and criminal
prosecution. Such failures can also lead to FDA withdrawal of approval to market
the product.

The FDA may designate a biologic or drug as an Orphan Drug for a particular
use, in which event the developer of the biologic or drug may request grants
from the government to defray the costs of certain expenses related to the
clinical testing of such drug and be entitled to a seven year marketing
exclusivity period.

The Company's ability to commercialize its products successfully may also
depend in part on the extent to which reimbursement for the cost of such
products and related treatment will be available from government health
administration authorities, private health insurers and other organizations.
Such third-party payors are increasingly challenging the price of medical
products and services. Several proposals have been made that may lead to a
government-directed national health care system. Adoption of such a system could
further limit reimbursement for medical products and services. Significant
uncertainty exists as to the reimbursement status of newly approved health care
products, and there can be no assurance that adequate third-party coverage will
be available to enable the Company to maintain price levels sufficient to
realize an appropriate return on this investment in product development.

The Company is also subject to regulation by the Occupational Safety and
Health Administration ("OSHA") and the Environmental Protection Agency ("EPA")
and to regulation under the Toxic Substances Control Act, the Resource
Conservation and Recovery Act and other regulatory statutes, and may in the
future be subject to other federal, state or local regulations. Either or both
of OSHA or the EPA may promulgate regulations that may affect the Company's
research and development programs. The Company is unable to predict whether any
agency will adopt any regulation which would have a material adverse effect on
the Company's operations.

Sales of pharmaceutical products outside the United States are subject to
foreign regulatory requirements that vary widely from country to country.
Whether or not FDA approval has been obtained, approval of a product by
comparable regulatory authorities of foreign countries must be obtained prior to
the commencement of marketing the product in those countries. The time required
to obtain such approval may be longer or shorter than that required for FDA
approval.

MANUFACTURING AND MARKETING

Neither the Company nor any of its officers or employees has pharmaceutical
marketing experience. Furthermore, the Company has never manufactured or
marketed any products and the Company does not have the resources to manufacture
or market on a commercial scale any products that it may develop. The Company's
long-term objective is to manufacture and market certain of its products and to
rely on independent third parties for the manufacture of certain of its other
products. For the foreseeable future, the Company will be required to rely on
corporate partners or others to manufacture or market products it develops,
although no specific arrangements have been made. No assurance can be given that
the Company will enter into any such arrangements on acceptable terms.

MANUFACTURING. While the Company intends to select manufacturers that
comply with GMP and other regulatory standards, there can be no assurance that
these manufacturers will comply with such standards, that they will give the
Company's orders the highest priority or that the Company would be able

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<PAGE>
to find substitute manufacturers, if necessary. In order for the Company to
establish a manufacturing facility, the Company will require substantial
additional funds and will be required to hire and retain significant additional
personnel and comply with the extensive GMP regulations of the FDA applicable to
such a facility. No assurance can be given that the Company will be able to make
the transition successfully to commercial production, should it choose to do so.

MARKETING. Despite the Company's strategy to develop products for sale to
concentrated markets, significant additional expenditures and management
resources will be required to develop an internal sales force, and there can be
no assurance that the Company will be successful in penetrating the markets for
any products developed. For certain products under development, the Company may
seek to enter into development and marketing agreements which grant exclusive
marketing rights to its corporate partners in return for royalties to be
received on sales, if any. Under certain of these agreements, the Company's
marketing partner may have the responsibility for all or a significant portion
of the development and regulatory approval. In the event that the marketing and
development partner fails to develop a marketable product or fails to market a
product successfully, the Company's business may be adversely affected. The sale
of certain products outside the United States will also be dependent on the
successful completion of arrangements with future partners, licensees or
distributors in each territory. There can be no assurance that the Company will
be successful in establishing any additional collaborative arrangements, or
that, if established, such future partners will be successful in commercializing
products.

PRODUCT LIABILITY INSURANCE

The testing, marketing and sale of human health care products entail an
inherent risk of allegations of product liability, and there can be no assurance
that product liability claims will not be asserted against the Company. The
Company intends to obtain product liability insurance for its ongoing clinical
trials. Such coverage may not be adequate as and when the Company further
develops products. There can be no assurance that the Company will be able to
obtain, maintain or increase its insurance coverage in the future on acceptable
terms or that any claims against the Company will not exceed the amount of such
coverage.

HUMAN RESOURCES

As of March 17, 1998, the Company had 13 full-time employees, 10 of whom
were engaged directly in research and development activities and three of whom
were in executive and administrative positions. The Company's employees are not
governed by any collective bargaining agreement and the Company believes that
its relationship with its employees is good.

ITEM 2. DESCRIPTION OF PROPERTY

The Company occupies an aggregate of approximately 10,200 square feet of
both office and laboratory space in Dallas, Texas at two separate facilities.
The Company leases approximately 4,800 square feet of office and laboratory
space pursuant to a lease agreement expiring in August 1998. In addition, the
Company occupies an additional approximate 5,400 square feet of office and
laboratory space pursuant to a lease assigned to the Company by the
Wadley/Phillips Partnership and which lease term has been extended until
December 1998. The Company's lease payments for the fiscal year ended December
31, 1997 were approximately $140,000. See Note J of Notes to Financial
Statements.

ITEM 3. LEGAL PROCEEDINGS

As of the date hereof, the Company is not a party to any material legal
proceedings.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS

None.

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PART II

ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

The Company's Common Stock, Class C Warrants and Class D Warrants are traded
in the over-the-counter market on the Nasdaq SmallCap Market System under the
symbols CYPH, CYPHW and CYPHZ, respectively, since November 2, 1995. The
following table sets forth the high and low bid prices for the Common Stock as
reported by the National Association of Securities Dealers, Inc. for the periods
indicated. The prices set forth below represent quotes between dealers and do
not include commissions, mark-ups or mark-downs, and may not necessarily
represent actual transactions.

<TABLE>
<CAPTION>
COMMON STOCK CLASS C WARRANTS CLASS D WARRANTS
------------------ ------------------- ------------------
HIGH LOW HIGH LOW HIGH LOW
------ ------ ------- ------- ------- ------
<S> <C> <C> <C> <C> <C> <C>
FISCAL 1996
First Quarter................. 4 1/2 4 1/8 1 11/16 1 3/16 13/16 1/2
Second Quarter................ 6 1/4 4 2 3/8 1 7/16 1 1/16 1/2
Third Quarter................. 4 3/8 3 1/8 1 13/16 1 1/8 11/16 5/16
Fourth Quarter................ 3 3/4 2 1 3/8 5/8 1/2 5/32
FISCAL 1997
First Quarter................. 4 7/16 2 1/8 1 7/8 11/16 11/16 5/32
Second Quarter................ 3 1/4 2 1/2 1 3/8 5/8 1/4
Third Quarter................. 10 1/16 2 7/16 5 7/8 9/16 2 11/16 3/16
Fourth Quarter................ 11 1/2 5 7/8 9 3/8 2 13/16 5 1 3/8
</TABLE>

The Company believes that as of March 17, 1998, there were in excess of 300
beneficial holders of its Common Stock.

The Company has never paid cash dividends on its Common Stock and does not
anticipate paying cash dividends on its Common Stock in the foreseeable future.

ITEM 6. PLAN OF OPERATION

The Company was organized and commenced operations in September 1991. The
Company is in the development stage, and its efforts have been principally
devoted to research and development activities and organizational efforts,
including the development of products for the treatment of cancer and infectious
diseases, recruiting its scientific and management personnel and advisors and
raising capital.

The Company's plan of operation for the next 12 months will consist of
research and development and related activities aimed at:

- further development of the Paclitaxel production from the Fungal
Paclitaxel Production System using fermentation technologies, strain
improvements and utilizing Paclitaxel-specific genes. See
"Business--Research and Development Programs--Fungal Paclitaxel Production
System Program."

- further development of the Paclitaxel treatment of polycystic kidney
disease, a potential new Paclitaxel indication.

- further development of a diagnostic test using the patented LCG gene and
related MAb to test in vitro serum, tissue or respiratory aspirant
material for the presence of cells which may indicate a predisposition to,
or early sign of, lung or other cancers. See "Business--Human Gene
Discovery Program/Lung Cancer Program."

- further analysis of the TNF-PEG technology as an anti-cancer agent in
animal studies. See "Business--Research and Development Programs--Other
Programs--TNF-PEG: Broad Range Anticancer Drug Program."

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- testing proprietary vectors which have been constructed for the expression
of specific proteins that may be utilizable for vaccines for different
diseases. See "Business--Research and Development Programs--Other
Programs--IL-T: Prevention of Radiation and Chemotherapy Damage Program."

- further development of the anti-sense technology currently being conducted
at the University of Texas at Dallas. See "Business--Research and
Development Programs--Other Programs--Anti-sense Therapeutics Program."

- developing a humanized antibody specific for the protein associated with
the LCG gene and, if successful, submission of an IND for clinical trials.
See "Business--Research and Development Programs--Human Gene Discovery
Program/Lung Cancer Program."

- making modest improvements to the Company's laboratory facilities.

- hiring approximately additional research technicians and a financial vice
president.

- seeking to establish strategic partnerships for the development,
marketing, sales and manufacturing of the Company's proposed products. See
"Business--Manufacturing and Marketing."

The actual research and development and related activities of the Company
may vary significantly from current plans depending on numerous factors,
including changes in the costs of such activities from current estimates, the
results of the Company's research and development programs, the results of
clinical studies, the timing of regulatory submissions, technological advances,
determinations as to commercial potential and the status of competitive
products. The focus and direction of the Company's operations will also be
dependent upon the establishment of collaborative arrangements with other
companies, the availability of financing and other factors.

The Company incurred net losses of $2,691,000, $2,890,000 and $3,252,000 for
the twelve months ended December 1995, 1996 and 1997, respectively. The increase
in net loss for 1996 from 1995 was primarily attributable to an increase in
research and development expenses and general and administrative expenses
partially offset by interest income generated from the proceeds of the Company's
initial public offering of November 1995 and a decrease in interest expense. The
increase in net losses from 1997 to 1996 was attributable to decrease in
interest income and an increase in general and administrative expenses. The
Company expects to incur additional losses in the foreseeable future.

The Company incurred general and administrative expenses of $1,138,000,
$1,530,000 and $1,888,000 for the twelve months ended December 1995, 1996 and
1997, respectively. The increase in 1996 was primarily attributable to increased
public relations expenses, legal and professional fees and a full year's premium
for Director's and Officer's liability insurance. Also contributing to the 1996
increase was increased expenses for technology marketing, travel and consulting
fees. The increase in 1996 was partially offset by a decrease in financing
costs. Included in the general and administrative expenses for 1996 was a
non-cash charge of $130,000 related to the valuation of stock options issued to
consultants of the Company. The increase from 1996 to 1997 was attributable to
increased legal and professional fees, as well as, increased consulting fees and
travel expenses. Included in general and administrative expenses for 1997 was a
non-cash charge of $133,000 related to the valuation of stock options issued to
consultants of the Company.

The Company incurred research and development expenses of $1,181,000,
$1,576,000 and $1,469,000 for the twelve months ended December 1995, 1996 and
1997, respectively. The increases from 1995 to 1996 was attributable to an
increase in the expenses for laboratory supplies and equipment and an increase
in research salaries. Also contributing to the 1996 increase was expenses for
contract research and development and license fees. Included in the research and
development expenses for 1996 was a non-cash charge of $42,000 related to the
valuation of warrants issued to the Washington State University Research
Foundation. The decrease from 1996 to 1997 was attributable to the completion of
the Company's funding

18
<PAGE>
obligation to Research and Development, Inc., partially offset by increased
expenses for contract research and development at Washington State University
and increased rent expenses.

During the period from April 2 through April 13, 1998, the Company received
net proceeds of $4,539,048 from the sale of units consisting of 631,796 shares
of Common Stock and Class E Warrants to purchase 315,917 shares of Common Stock
at exercise prices per share from $9.82 to $10.39, subject to adjustment upon
the occurrence of certain events.

The Company believes that it has sufficient capital to finance the Company's
plan of operation for approximately 12 months. However, there can be no
assurance that the Company will generate sufficient revenues, if any, to fund
its operations after such period or that any required financings will be
available, through bank borrowings, debt or equity offerings, or otherwise, on
acceptable terms or at all.

ITEM 7. FINANCIAL STATEMENTS

The following consolidated financial statements of the Company are included
in Item 7: (See page F-1)

Balance sheet as at December 31, 1997.

Statements of operations--Year ended December 31, 1997 and 1996 and for
the period from September 11, 1991 (Inception) through December 31,
1997.

Statements of stockholder's equity--Year ended December 31, 1997, 1996,
1995, 1994,1993 and 1992 and for the period from September 11, 1991
(Inception) through December 31, 1991.

Statements of cash flows--Year ended December 31, 1997 and 1996 and for
the period from September 11, 1991 (Inception) through December 31,
1997.

Notes to consolidated financial statements.

All other schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission are not required under the
related instructions or are not applicable and therefore have been omitted.

ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES

None.

19
<PAGE>
PART III

ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT

EXECUTIVE OFFICERS, DIRECTORS AND PRINCIPAL SCIENTISTS

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

<TABLE>
<CAPTION>
NAME AGE POSITION
- ----------------------------------------- --- ------------------------------------------------------
<S> <C> <C>
Arthur P. Bollon, Ph.D.(1)............... 55 Chairman, President and Chief Executive Officer

Ira J. Gelb, M.D.(1)..................... 69 Director

Irwin C. Gerson(1)....................... 68 Director

Walter M. Lovenberg, Ph.D................ 63 Director

Daniel Shusterman, J.D................... 34 Vice President of Operations, Treasurer and Chief
Financial Officer

Susan L. Berent, Ph.D.................... 45 Director of Gene & Protein Engineering and Computer
Systems, Co-Director Molecular Immunology and Gene
Expression Systems

Hakim Labidi, Ph.D....................... 40 Director of Vaccine Program

Rajinder Singh Sidhu, Ph.D............... 49 Director of Fungal Paclitaxel Program, Co-Director of
Gene Expression Systems

Richard M. Torczynski, Ph.D.............. 42 Director of Human Gene Discovery, Mammalian Expression
System and Diagnostic Development, Co-Director of
Molecular Immunology
</TABLE>

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

(1) Members of Audit and Compensation Committees

ARTHUR P. BOLLON, PH.D., a founder of the Company, has, since the Company's
inception in 1991, served as Chairman of the Board of Directors, President,
Chief Executive Officer and, until March 1995, Treasurer. Dr. Bollon received
his Ph.D. from the Institute of Microbiology at Rutgers University and was a
Post Doctoral Fellow at Yale University. He has served as consultant to a number
of major companies (including Merck, Sharp & Dohme and Diamond Shamrock) and has
previously served on the Board of Directors and Advisory Boards of several
biotechnology companies, including Viragen, Inc., Wadley Biosciences Corp. and
American Bio-netics, Inc. From 1987 to 1991, Dr. Bollon served as President and
Chief Executive Officer of the Wadley/Phillips Partnership. Prior to that time,
he was Director of Genetic Engineering and Chairman of the Department of
Molecular Genetics at Wadley Institutes of Molecular Medicine. In his capacities
at the Wadley/Phillips Partnership and Wadley Institutes, Dr. Bollon has played
a leading role in bringing the technology that forms the basis of CPI from
conception to reality.

IRA J. GELB, M.D. has been a director of the Company since April 1994. Dr.
Gelb received his M.D. from New York University School of Medicine in 1951.
After finishing his training in cardiology at the Mount Sinai Hospital in New
York City in 1957, he continued his association with that institution until his
retirement in 1992. During this period, he was appointed Attending Cardiologist
and Associate Clinical Professor at the Mount Sinai School of Medicine. Other
appointments included Adjunct Associate Clinical Professor of Cardiology at
Cornell Medical School, Adjunct Clinical Professor of Cardiology at New York
Medical College, Cardiology Consultant at Lawrence Hospital, Bronxville, N.Y.
and United Hospital, Portchester, N.Y. Dr. Gelb is a past President of the
American Heart Association, Westchester-Putnam Chapter and was a Senior
Assistant Editor with the American Journal of Cardiology from 1968-1983, when be
became a founding editor of the Journal of the American College of Cardiology
(the "JACC"). Dr. Gelb continued as a Senior Assistant Editor of JACC until his
retirement in 1992. Since that time, he

20
<PAGE>
has served on the boards of various pharmaceutical companies. Dr. Gelb has been
an Adjunct Professor, Department of Chemistry and Biochemistry at Florida
Atlantic University and a member of its Foundation Board, since October 1996 and
its Steering Committee, since 1997. Since December 1996 he has also been a
member of the Board of Directors of the American Heart Association--Boca Raton
Division. In 1998, Boca Raton Community Hospital added Dr. Gelb as a member to
its Foundation Board. Since 1992, Dr. Gelb has been an Honorary Lecturer at The
Mount Sinai School of Medicine.

IRWIN C. GERSON has been a director since March 1995. Since January 1998
Mr. Gerson has been Chairman Emeritus of Lowe McAdmans Healthcare. Prior
thereto, from 1996 until December 1997, he had been Chairman of Lowe McAdams
Healthcare and prior thereto he had been, since 1986, Chairman and Chief
Executive Officer of William Douglas McAdams, Inc., one of the largest
advertising agencies in the U.S. specializing in pharmaceutical communications
to healthcare professionals. Mr. Gerson received his B.S. in pharmacy from
Fordham University and an MBA from the NYU Graduate School of Business
Administration. In 1992, Mr. Gerson received an honorary Doctor of Humane
Letters from the Albany College of Pharmacy. Mr. Gerson serves as a Trustee of
Long Island University, Chairman of The Council of Overseers--Arnold and Marie
Schwartz College of Pharmacy, member of the Board of Trustees of the Albany
College of Pharmacy and, from 1967 through 1974, was a lecturer on sales
management pharmaceutical marketing at the Columbia College School of Pharmacy.
Mr. Gerson also serves as a Member of the Board of Governors, New York Council,
American Association of Advertising Agencies, a Director (and past chairman) of
Business Publications Audit ("BPA"), a Director of the Connecticut Grand Opera,
a Director of the Stamford Chamber Orchestra, and is a director of Andrx Corp.,
a NASDAQ traded company. Mr. Gerson previously served as Director of the
foundation of Pharmacists and Corporate Americans for AIDS Education, the
Pharmaceutical Advertising Council, Penn Dixie Industries, Continental Steel
Corporation, the Nutrition Research Foundation and as a Trustee of the
Chemotherapy Foundation.

WALTER M. LOVENBERG, PH.D. has been a director since August 1995. Dr.
Lovenberg was an Executive Vice President and member of the Board of Directors
of Marion Merrell Dow Inc. from 1989 through August 1993. Dr. Lovenberg served
as the President of the Marion Merrell Dow Research Institute from 1989 to 1993
and Vice President from 1986 through 1989. Prior to joining Marion Merrell Dow
(1958-1985), he was a Senior Scientist and Chief of Biochemical Pharmacology at
the National Institutes of Health. Dr. Lovenberg has been President of Lovenberg
Associates, Inc. since 1993. He is currently CEO of Helicon Therapeutics Inc., a
private company, and also a member of the Board of Directors of OSI
Pharmaceuticals, Inc. (NASDAQ), Xenometrix Inc. and Inflazyme Pharmaceutics,
Inc. (Vancouver Exchange). Dr. Lovenberg received his Ph.D. from George
Washington University and his B.S. and M.S. from Rutgers University. Dr.
Lovenberg, who serves as Executive Editor of Analytical Biochemistry and Editor
(USA) of Neurochemistry International, is a consulting editor to several other
scientific journals. He has been the recipient of many awards, including a
Fulbright-Hays Senior Scholar Award and a Public Health Service Superior Service
Award. Dr. Lovenberg is a member of the American College of
Neuropsychopharmacology, the American Society of Neurochemistry and the American
Society of Biochemistry and Molecular Biology.

DANIEL SHUSTERMAN, J.D. was named Vice President of Operations of the
Company in 1994 and Treasurer and Chief Financial Officer in March 1995, after
having served as Director of Operations since he joined the Company in 1991. Mr.
Shusterman received his M.S. degree with an emphasis on biotechnology from the
University of Texas in 1988. He was Director of Operations at Wadley/Phillips
Partnership for three years prior to joining CPI. Mr. Shusterman is a registered
Patent Agent and received his J.D. from Texas Wesleyan University School of Law
in 1993 and has been a member of the Texas bar since 1994. In addition to his
role as a V.P. of Operations, he is contributing to the implementation of an
intellectual property protection and maintenance system at CPI.

21
<PAGE>
SUSAN L. BERENT, PH.D. has been with the Company since 1991 as Director of
Gene and Protein Engineering and Computer Systems. Dr. Berent received her Ph.D
in Biological Chemistry from the University of Michigan and completed a
postdoctoral fellowship at the Department of Molecular Genetics, Wadley
Institutes of Molecular Medicine. She was appointed to Senior Scientist at
Wadley in 1984 and maintained that position in the Wadley/Phillips Partnership
until she joined the Company in 1991. Dr. Berent is an expert in protein
chemistry, DNA libraries, cytokines such as TNF, and production systems.

HAKIM LABIDI, PH.D. has been with the Company since 1991 as Director of the
Vaccine Program. Dr. Labidi received his Ph.D. in Microbiology at the Pasteur
Institute in Paris, France and has been a senior scientist at CPI since 1991.
Prior to joining the Company, Dr. Labidi was a Senior Research Investigator and
Assistant Professor at the University of Texas from 1987 to 1989 and an
Associate Professor at Kuwait University from 1989 until 1991. Dr. Labidi was
the first to isolate and sequence a plasmid from mycobacterium.

RAJINDER SINGH SIDHU, PH.D. has been with the Company since 1991 as
Director of the Fungal Program and Co-Director of Gene Expression Systems. Dr.
Sidhu received his Ph.D. degree in Microbiology from Haryana Agricultural
University in Hissar, India, and completed a postdoctoral fellowship at Osaka
University in Japan. He was appointed to Senior Scientist at Wadley in 1984 and
maintained that position in the Wadley/Phillips Partnership until he joined the
Company. Dr. Sidhu is an expert on gene fusion and engineering, fungal genes and
secretion, cytokines such as TNF, and production systems.

RICHARD M. TORCZYNSKI, PH.D. has been with the Company since 1991 as
Director of Human Gene Discovery, Mammalian Expression System and Diagnostic
Development, and Co-Director of Molecular Immunology. Dr. Torczynski received
his Ph.D. degree in Biology from the University of Texas and completed his
research fellowship under the direction of Dr. Arthur Bollon. He was appointed
to Senior Scientist at Wadley in 1984 and maintained that position in
Wadley/Phillips Partnership. Dr. Torczynski is an expert on certain specialized
gene libraries, monoclonal antibodies and cytokines such as interferon.

The Board of Directors currently consists of four members. All directors
hold office until the next annual meeting of stockholders and until their
successors are duly elected and qualified. Officers are elected to serve,
subject to the discretion of the Board of Directors, until their successors are
appointed.

Directors receive fees of $1,000 per month. Dr. Gelb has, to date, also
received options to purchase 104,000 shares of Common Stock, of which 50,000 are
exercisable at $4.125 per share, 10,000 are exercisable at $3.75 per share,
5,000 are exercisable at $5.00 per share, 4,000 are exercisable at $3.9375 per
share, 20,000 are exercisable at $2.6875 per share and 15,000 are exercisable at
$4.3175 per share. Mr. Gerson has, to date, received options to purchase 100,000
shares of Common Stock of which 50,000 are exercisable at $4.125 per share,
6,000 are exercisable at $4.375 per share, 5,000 are exercisable at $5.00 per
share, 4,000 are exercisable at $3.9375 per share, 20,000 are exercisable at
$2.6875 per share and 15,000 are exercisable at $4.3175 per share. Dr. Lovenberg
has, to date, received options to purchase 100,000 shares of Common Stock of
which 50,000 are exercisable at $4.125 per share, 11,000 are exercisable at
$5.00 per share and 4,000 are exercisable at $3.9375 per share, 20,000 are
exercisable at $2.6875 and 15,000 are exercisable at $4.3175 per share. See
"Executive Compensation" for information regarding stock option grants to Dr.
Bollon. Directors are also reimbursed for expenses actually incurred in
connection with their attendance at meetings of the Board of Directors.

The Company's Certificate of Incorporation includes certain provisions
permitted pursuant to Delaware law whereby officers and directors of the Company
are to be indemnified against certain liabilities. The Company's Certificate of
Incorporation also limits, to the fullest extent permitted by Delaware law, a
director's liability for monetary damages for breach of fiduciary duty,
including gross negligence, except liability for (i) breach of the director's
duty of loyalty, (ii) acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of the law, (iii) the unlawful
payment of a dividend

22
<PAGE>
or unlawful stock purchase or redemption and (iv) any transaction from which the
director derives an improper personal benefit. Delaware law does not eliminate a
director's duty of care and this provision has no effect on the availability of
equitable remedies such as injunction or rescission based upon a director's
breach of the duty of care. In addition, the Company has obtained an insurance
policy providing coverage for certain liabilities of its officers and directors.

The Company has been advised that it is the position of the Securities and
Exchange Commission that insofar as the foregoing provision may be invoked to
disclaim liability for damages arising under the Securities Act, such provision
is against public policy as expressed in the Securities Act and is therefore
unenforceable.

SCIENTIFIC ADVISORS/CONSULTANTS

The Company also maintains a Scientific Advisory Board currently consists of
individuals having extensive experience in the fields of molecular genetics,
chemistry, oncology and microbiology. At the Company's request, the scientific
advisors review and evaluate the Company's research programs and advise the
Company with respect to technical matters in fields in which the Company is
involved.

All of the scientific advisors are employed by other entities and some have
consulting agreements with entities other than the Company, some of which
entities may in the future compete with the Company. Four of the current
scientific advisors receive $1,000 per month from the Company. The scientific
advisors are expected to devote only a small portion of their time to the
Company and are not expected to participate actively in the day-to-day affairs
of the Company. Certain of the institutions with which the scientific advisors
are affiliated may adopt new regulations or policies that limit the ability of
the scientific advisors to consult with the Company. It is possible that any
inventions or processes discovered by the scientific advisors will remain the
property of such persons or of such persons' employers. In addition, the
institutions with which the scientific advisors are affiliated may make
available the research services of their personnel, including the scientific
advisors, to competitors of the Company pursuant to sponsored research
agreements.

ITEM 10. EXECUTIVE COMPENSATION

The following summary compensation table sets forth the aggregate
compensation paid or accrued by the Company to the Chief Executive Officer and
to the four most highly compensated executive officers other than the Chief
Executive Officer whose annual compensation exceeded $100,000 for the fiscal
year ended December 31, 1997 (collectively, the "Named Executive Officers") for
services during the fiscal years ended December 31, 1997, December 31, 1996 and
December 31, 1995:

SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS
---------------------------------------------------- -------------
ALL OTHER STOCK OPTIONS
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION(1) #
- ------------------------------------------------ --------- ---------- ---------- ----------------- -------------
<S> <C> <C> <C> <C> <C>
Arthur P. Bollon................................ 1997 $ 180,856 -- $ 6,000 95,000
Chairman and Chief 1996 $ 165,951 -- $ 6,000 150,000
Executive Officer 1995 $ 140,019 -- $ 6,000 --
</TABLE>

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

(1) Consisting of car allowances.

23
<PAGE>
EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT
AND CHANGE-IN-CONTROL ARRANGEMENTS

Arthur P. Bollon, Ph.D. is employed under an extension effective November 7,
1995 to his 1992 employment agreement with the Company, which agreement has been
extended until November 6, 2000. As extended, the agreement provides for the
payment to Dr. Bollon of a base salary of $165,000 per year with annual
increases of not less that 5% per year. In addition, in the event Dr. Bollon is
terminated without just cause or due to a Disability (as defined in the
employment agreement), the employment agreement provides that Dr. Bollon shall
receive severance payments of equal monthly installments at the base rate until
the earlier of the expiration of the term or the expiration of 36 months. Dr.
Bollon also receives a car expense allowance of $500 per month under the
employment agreement. In November 1992, the Company granted Dr. Bollon options
to purchase 200,000 shares of Common Stock, at an exercise price of $1.65 per
share. In April 1996 the Company granted Dr. Bollon options to purchase 50,000
shares of Common Stock at an exercise price of $4.125 per share. In December
1996, the Company granted Dr. Bollon options to purchase 100,000 shares of
Common Stock at an exercise price of $2.25 per share and in January 1997 the
Company granted Dr. Bollon options to acquire 50,000 shares of common Stock at
an exercise price of $2.375 per share. In June 1997 the Company granted Dr.
Bollon options to acquire 20,000 shares of Common Stock, at an exercise price of
$2.6875 per share and in September 1997 the Company granted Dr. Bollon options
to acquire 25,000 shares of Common Stock, at an exercise price of $4.3125 per
share. All such options are exercisable to the extent of 40% after six months of
continuous employment from the grant date and to the extent of an additional 20%
on and after each of the first three anniversaries of the grant date. In March
1995, the Company's Board of Directors approved an amendment to Dr. Bollon's
employment agreement, effective November 7, 1995, to extend the term until
November 6, 2000 and to increase his base salary to $165,000 per annum. See
"--Stock Options."

Each of the Company's executive officers and the Company's principal
scientists have entered into confidentiality and patent assignment agreements
with the Company.

STOCK OPTIONS

In October 1992, the Board of Directors of the Company adopted the
Cytoclonal Pharmaceutics Inc. 1992 Stock Option Plan (the "1992 Plan"). Under
the 1992 Plan, as amended, 520,000 shares of Common Stock were reserved for
issuance to officers, employees, consultants and advisors of the Company. As of
December 31, 1997, 3,000 shares are available for future grant and options to
acquire 367,500 shares remain outstanding under the 1992 Plan. The exercise
prices of such options range from $1.65 to $5.00 per share. The 1992 Plan
provides for the grant of incentive stock options intended to qualify as such
under Section 422 of the Internal Revenue Code of 1986, as amended, and
nonstatutory stock options which do not so qualify. In April 1996, the Board of
Directors of the Company adopted the Cytoclonal Pharmaceutics Inc. 1996 Stock
Option Plan (the "1996 Plan"). Under the 1996 Plan, as amended, 750,000 shares
of Common Stock were reserved for issuance to officers, employees, consultants
and advisors of the Company. As of December 31, 1997, 85,000 shares are
available for future grant and options to acquire 665,000 shares remain
outstanding under the 1996 Plan. The exercise prices of such options range from
$2.25 to $4.375 per share. The 1996 Plan provides for the grant of incentive
stock options intended to qualify as such under Section 422 of the Internal
Revenue Code of 1986, as amended, and nonstatutory stock options which do not so
qualify.

The 1992 Plan and the 1996 Plan are administered by the Board of Directors.
Subject to the limitations set forth in the 1992 Plan and the 1996 Plan, the
Board has the authority to determine to whom options will be granted, the term
during which options granted under the 1992 and the 1996 Plan may be exercised,
the exercise price of options and the rate at which options may be exercised and
may vest. The maximum term of each incentive stock option granted under the 1992
and the 1996 Plan is ten years. The exercise price of shares of Common Stock
subject to options qualifying as incentive stock options may not be less than
the fair market value of the Common Stock on the date of the grant. The exercise
price of

24
<PAGE>
incentive options granted under the 1992 and the 1996 Plan to any participant
who owns stock possessing more than 10% of the total combined voting power of
all classes of outstanding stock of the Company must be at least equal to 110%
of the fair market value on the date of grant. Any incentive stock options
granted to such participants must also expire within five years from the date of
grant. Under the 1992 Plan, the exercise price of both incentive stock options
and nonstatutory stock options is payable in cash or, at the discretion of the
Board, in Common Stock or a combination of cash and Common Stock. Under the 1996
Plan, the exercise price of options is payable in cash or such other means which
the Board determines are consistent with such Plan and with applicable laws and
regulations.

The following table sets forth certain information with respect to options
granted during the year ended December 31, 1997 to the Named Executive Officer:

OPTION GRANTS IN LAST FISCAL YEAR

<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
----------------------------------------------------------------
% OF TOTAL
OPTIONS EXERCISE OF
GRANTED TO BASE
OPTIONS EMPLOYEES IN PRICE EXPIRATION
NAME GRANTED(#) FISCAL YEAR ($/SH) DATE
- -------------------------------------------------- ----------- --------------- ----------- ---------------------
<S> <C> <C> <C> <C>
Arthur P. Bollon.................................. 50,000 16.7 2.375 January 3, 2007
Ph.D. 20,000 6.7 2.6875 June 28, 2007
25,000 8.3 4.3125 September 9, 2007
</TABLE>

The following table sets forth certain information with respect to each
exercise of stock options during the fiscal year ended December 31, 1997 by the
Named Executive Officer and the number and value of unexercised options held by
such Named Executive Officer as of December 31, 1997:

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

<TABLE>
<CAPTION>
VALUE OF
NUMBER OF UNEXERCISED
UNEXERCISED IN-THE-MONEY
OPTIONS AT OPTIONS AT
SHARES FY-END(#) FY-END(#)
ACQUIRED ON VALUE EXERCISABLE/ EXERCISABLE/
NAME EXERCISE(#) REALIZED($) UNEXERCISABLE UNEXERCISABLE(1)
- ---------------------------------- ----------------- ----------------- ----------------- ----------------------
<S> <C> <C> <C> <C>
Arthur P. Bollon, Ph.D............ 0 0 318,000/127,000 $ 1,528,500/$489,313
</TABLE>

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

(1) Based on the fair market value of the Company's Common Stock on December 31,
1997, as determined by the Company's Board of Directors.

25
<PAGE>
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following table sets forth certain information regarding ownership of
Common Stock for (i) each person known by the Company to own beneficially five
percent or more of the outstanding shares of the Company's Common Stock, (ii)
each director of the Company, (iii) each of the executive officers named under
"Executive Compensation," and (iv) all officers and directors (including
nominees) of the Company as a group as of March 24, 1998:

<TABLE>
<CAPTION>
COMMON STOCK
---------------------------------------------
AMOUNT AND NATURE OF
NAME AND ADDRESS OF BENEFICIAL
BENEFICIAL OWNER(1) OWNERSHIP(2) PERCENT OF CLASS(2)
- ------------------------------------------------------------ ---------------------- ---------------------
<S> <C> <C>
Janssen-Meyers Associates, L.P.............................. 1,609,500 (3) 18.1
Bruce Meyers................................................ 869,500 (4) 9.8
Peter W. Janssen............................................ 740,000 (5) 8.3
Kinder Investments, L.P..................................... 540,500 (6) 6.0
Arthur P. Bollon, Ph.D...................................... 532,400 (7) 5.8
Ira Gelb, M.D............................................... 60,000 (8) *
Irwin Gerson................................................ 61,200 (9) *
Walter Lovenberg, Ph.D...................................... 62,500(10) *
Directors and executive officers as a group
(5 persons)............................................... 749,100(11) 7.9
</TABLE>

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

* less than 1%

A person is deemed to be a beneficial owner of any securities of which that
person has the right to acquire beneficial ownership of such securities
within 60 days. Except as otherwise indicated, each of the persons named has
sole voting and investment power with respect to the shares shown below.

(1) Except as otherwise indicated, the address of each beneficial owner is c/o
the Company, 9000 Harry Hines Boulevard, Dallas, Texas 75235.

(2) Calculated on the basis of 8,872,182 shares of Common Stock outstanding
except that shares of Common Stock underlying options or warrants
exercisable within 60 days of the date hereof are deemed to be outstanding
for purposes of calculating the beneficial ownership of securities of the
holder of such options or warrants. This calculation excludes shares of
Common Stock issuable upon the conversion of Series A Preferred Stock.

(3) The address for Janssen-Meyers Associates, L.P. ("JMA") is 17 State Street,
New York, New York 10004. Messrs. Meyers and Janssen are each 50%
stockholders and the sole officers and directors of the corporate general
partner of JMA. The aggregate number of shares of Common Stock and Series A
Preferred Stock, respectively, owned by Messrs. Meyers and Janssen, are also
set forth as though owned by JMA. Does not include a unit purchase option
held by JMA which is not currently exercisable nor exercisable within 60
days of the date hereof for an aggregate of 196,638 shares of Common Stock.

(4) Mr. Meyers' address is c/o Janssen-Meyers Associates, L.P., 17 State Street,
New York, New York 10004. Consists of 849,500 shares of Common Stock, and
20,000 shares of Series A Preferred Stock (which are convertible into 20,000
shares of Common Stock). Does not include a unit purchase option for 119,463
shares of Common Stock which is not currently exercisable by him nor
exercisable within 60 days of the date hereof nor a unit purchase option for
196,638 held by JMA which is also not currently exercisable nor exercisable
within 60 days of the date hereof.

(5) Mr. Janssen's address is c/o Janssen-Meyers Associates, L.P., 17 State
Street, New York, New York 10004. Does not include a unit purchase option
for 119,463 shares of Common Stock which is not currently exercisable by him
nor exercisable within 60 days of the date hereof nor unit purchase

26
<PAGE>
option for 196,638 held by JMA which is also not currently exercisable nor
exercisable within 60 days of the date hereof.

(6) The address for Kinder Investments, L.P. is 1500 Hempstead Turnpike, East
Meadow, New York 11554. Kinder Investments, L.P. is a Delaware limited
partnership, the general partner of which is Peyser Associates, LLP, whose
managing partner is Brian Wasserman. Consists of 500,500 shares of Common
Stock and Class A Warrants to acquire 40,000 shares of Common Stock which
are currently exercisable.

(7) Consists of 2,000 shares owned by Mr. Bollon individually and 182,400 shares
owned jointly by Mr. Bollon and his wife. In addition, includes options to
purchase 348,000 shares of Common Stock which are currently exercisable or
exercisable within 60 days of the date hereof. Does not include options to
purchase 97,000 shares of Common Stock not exercisable within 60 days of the
date hereof.

(8) Consists of options to purchase 60,000 shares which are currently
exercisable or exercisable within 60 days of the date hereof. Does not
include options to purchase 40,000 shares of Common Stock not exercisable
within 60 days of the date hereof.

(9) Consists of options to purchase 61,200 shares which are currently
exercisable or exercisable within 60 days of the date hereof. Does not
include options to purchase 38,800 shares of Common Stock which are not
exercisable within 60 days of the date hereof.

(10) Consists of 2,500 shares of Common Stock and options to purchase 60,000
shares which are currently exercisable or exercisable within 60 days of the
date hereof. Does not include options to purchase 40,000 shares of Common
Stock which are not exercisable within 60 days of the date hereof.

(11) Consists of 186,900 shares of Common Stock and options to purchase an
aggregate of 562,200 shares of Common Stock which are currently exercisable
or exercisable within 60 days of the date hereof. Does not include options
to purchase 242,000 shares of Common Stock not exercisable within 60 days of
the date hereof.

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The Company completed a bridge financing in April 1995 (the "Bridge
Financing") and an initial public offering of its securities in December 1995
(the "IPO"). Janssen-Meyers Associates, L.P. ("JMA") acted as placement agent
for the Bridge Financing and as underwriter of the IPO and in consideration
thereof, received fees of $203,750 and $1,092,500, respectively, plus
non-accountable expense allowances of $61,125 and $345,000, respectively. In
addition, JMA was granted, in connection with its services as placement agent
for the Bridge Financing, a (i) five-year right of first refusal to act as agent
for offerings of securities by the Company and certain of its shareholders and
(ii) the right to receive certain fees in connection with any merger and
acquisition pursuant to an agreement with the Company. In connection with its
services as underwriter of the IPO, JMA was granted options to purchase 159,285
units ("Units") at a price equal to $8.25 per Unit, each Unit consisting of one
share of Common Stock, one redeemable Class C Warrant and one redeemable Class D
Warrant. Bruce Meyers is a principal of JMA and was Vice Chairman of the Board
of Directors and Vice President in charge of Business Development for the
Company until his resignation from the Company in April 1995. In December 1996
the Company and JMA executed a one year non-exclusive investment banking
agreement with the Company which provides for a monthly fee of $5,000 payable by
the Company to JMA, this agreement has been extended through December 31, 1998.

ITEM 13. EXHIBITS, LIST AND REPORTS ON FORM 8-K

(a) Exhibits

<TABLE>
<S> <C>
3.1 Certificate of Incorporation, as amended(1)
</TABLE>

27
<PAGE>
<TABLE>
<S> <C>
3.2 By-laws(1)

4.1 Specimen certificates representing Class C Warrants, Class D Warrants and Common
Stock(1)

4.2 Form of Warrant Agreement with warrant certificates between the Company,
Janssen/Meyers Associates, L.P. and American Stock Transfer and Trust Company(1)

4.3 Form of Unit Purchase Option(1)

4.4 Warrant Certificate issued to the Washington State University Research Foundation
previously filed as an exhibit to the Company's Registration Statement on Form
SB-2 (File No. 333-13409) and is incorporated by reference herein.

10.1 Form of Consulting Agreement between the Company and Janssen-Meyers Associates,
L.P.(1)

10.2 Employment Agreement dated March 1, 1992 between the Company and Arthur P.
Bollon, Ph.D.(1)

10.3 Employment Agreement dated March 1, 1992 between the Company and Bruce Meyers, as
amended(1)

10.4 Employment Agreement effective November 7, 1995 between the Company and Daniel
Shusterman(1)

10.5 1992 Stock Option Plan, as amended(1)

10.6 Form of Stock Option Agreement(1)

10.7 Lease Agreement dated September 1, 1993 between the Company and Mutual Benefit
Life Insurance Company In Rehabilitation(1)

10.8 Lease Agreement dated October 1, 1991 between the Company and J.K. and Susie
Wadley Research Institute and Blood Bank, as amended(1)

10.9 Purchase Agreement dated October 10, 1991 between the Company and Wadley
Technologies, Inc. ("Wadley")(1)

10.10 Security Agreement dated October 10, 1991 between the Company and Wadley(1)

10.11 License Agreement dated March 15, 1989 between the Company and Phillips Petroleum
Company, as amended(1)

10.12 License Agreement dated June 10, 1993 between the Company and Research &
Development Institute, Inc. ("RDI"), as amended, relating to the Fungal
Paclitaxel Production System(1)

10.13 Research and Development Agreement effective June 10, 1993 between the Company
and RDI, as amended(1)

10.14 License Agreement dated February 22, 1995 between the Company and RDI, as
amended, relating to FTS-2(1)

10.15 Research, Development and License Agreement dated March 26, 1992 between the
Company and Enzon, Inc. ("Enzon"), as amended(1)

10.16 Research, Development and License Agreement dated July 13, 1992 between the
Company and Enzon relating to the Company's tumor necrosis factor technology(1)

10.17 Agreement effective June 30, 1992 between the Company and University of Texas at
Dallas ("UTD"), as amended(1)

10.18 Research Agreement effective April 8, 1994 between the Company and
Sloan-Kettering Institute for Cancer Research(1)

10.19 Joint Venture Agreement dated September 17, 1992 between the Company and Pestka
Biomedical laboratories, Inc. ("Pestka")(1)

10.20 Stock Purchase Agreement dated September 17, 1992 between the Company and
Pestka(1)

10.21 License Agreement dated September 17, 1992 between Cytomune, Inc. and Pestka(1)
</TABLE>

28
<PAGE>
<TABLE>
<S> <C>
10.22 Research and Development Agreement dated September 17, 1992 between Cytomune,
Inc. and Pestka(1)

10.23 Marketing Agreement dated as of November 1, 1994 between Helm AG and the
Company(1)

10.24 Extension Agreement with RDI dated June 5, 1995(1)

10.25 Third Amendment to Lease Agreement dated April 30, 1995(1)

10.26 Form of Subordinated Note Extension(1)

10.27 Form of Note Extension(1)

10.28 September 25, 1995 RDI Extension(1)

10.29 October 25, 1995 RDI Extension (1)

10.30 Amendment to License Agreement dated June 10, 1993, as amended, and Research and
Development Agreement effective June 10, 1993, as amended, both agreements
between the Company and RDI(2)

10.31 License Agreement No. W960206 effective February 27, 1996 between the Company and
The Regents of the University of California(2)

10.32 License Agreement No. W960207 effective February 27, 1996 between the Company and
The Regents of the University of California(2)

10.33 License Agreement with the Washington State University, dated July 2, 1996(3)*

10.34 Amendment to Agreement, effective June 30, 1992, as amended, between the Company
and the University of Texas at Dallas(3)

10.35 1996 Stock Option Plan previously filed as Exhibit 4 to the Company's Form S-8
and is incorporated by reference herein.

10.36 Patent License Agreement between The University of Texas System and the Company
previously filed as Exhibit 4.5 to the Company's Registration Statement on Form
SB-2 (File No. 333-13409) and is incorporated by reference herein.

11 Statement re: Computation of per share earnings

21 List of Subsidiaries--None

23 Consent of Independent Auditors

27 Financial Data Schedule.
</TABLE>

(b) Reports on Form 8-K.

No reports on Form 8-K were filed during the last quarter of the fiscal
year ended December 31, 1997.

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

* This exhibit is subject to a confidential treatment request pursuant to
Securities Exchange Act Rule 24b-2.

(1) Filed as exhibits to the Company's Registration Statement on Form SB-2 (File
No. 33-91802) and are incorporated by reference herein.

(2) These exhibits were filed as exhibits to the Company's Annual Report on Form
10-KSB for the year ended December 31, 1995.

(3) These exhibits were filed as exhibits to the Company's Post-Effective
Amendment No. 1 to Form SB-2 (File No. 33-91802) and are incorporated by
reference herein.

29
<PAGE>
CYTOCLONAL PHARMACEUTICS INC.
(A DEVELOPMENT STAGE COMPANY)

CONTENTS

<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Independent auditors' report............................................................................... F-2

Balance sheet as of December 31, 1997...................................................................... F-3

Statements of operations for each of the years in the two-year period ended December 31, 1997 and for the
period from September 11, 1991 (inception) through December 31, 1997..................................... F-4

Statements of changes in stockholders' equity (capital deficiency) for the period from September 11, 1991
(inception) through December 31, 1991 and for each of the years in the six-year period ended December 31,
1997..................................................................................................... F-5

Statements of cash flows for each of the years in the two-year period ended December 31, 1997 and for the
period from September 11, 1991 (inception) through December 31, 1997..................................... F-6

Notes to financial statements.............................................................................. F-7
</TABLE>

F-1
<PAGE>
[LETTERHEAD]

INDEPENDENT AUDITORS' REPORT

Board of Directors and Stockholders
Cytoclonal Pharmaceutics Inc.
Dallas, Texas

We have audited the accompanying balance sheet of Cytoclonal Pharmaceutics
Inc. (a development stage company) as of December 31, 1997, and the related
statements of operations, changes in stockholders' equity (capital deficiency)
and cash flows for each of the years in the two-year period ended December 31,
1997 and for the period September 11, 1991 (inception) through December 31,
1997. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.

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

In our opinion, the financial statements enumerated above present fairly, in
all material respects, the financial position of Cytoclonal Pharmaceutics Inc.
at December 31, 1997, and results of its operations and its cash flows for each
of the years in the two-year period ended December 31, 1997 and for the period
September 11, 1991 (inception) through December 31, 1997 in conformity with
generally accepted accounting principles.

/s/ RICHARD A. EISNER & COMPANY, LLP

Richard A. Eisner & Company, LLP

New York, New York
February 6, 1998

with respect to Note K[2]
April 13, 1998

F-2
<PAGE>
CYTOCLONAL PHARMACEUTICS INC.
(A DEVELOPMENT STAGE COMPANY)

BALANCE SHEET

DECEMBER 31, 1997

ASSETS

<TABLE>
<S> <C>
Current assets:
Cash and cash equivalents (Note B[6])........................................ $ 1,849,000
Prepaid expenses and other current assets.................................... 35,000
-----------
Total current assets....................................................... 1,884,000
Equipment, net (Notes B[1] and E).............................................. 127,000
Patent rights, less accumulated amortization of $463,000 (Notes B[2] and C).... 787,000
Other assets................................................................... 4,000
-----------
$ 2,802,000
-----------
-----------

LIABILITIES

Current liabilities:
Accounts payable and accrued expenses (Note F)............................... $ 460,000
Current portion of royalties payable (Note C)................................ 94,000
-----------
Total current liabilities.................................................. 554,000
Royalties payable (Note C)..................................................... 1,125,000
-----------
1,679,000
-----------
Commitments and other matters (Notes C, D, J, and K)

STOCKHOLDERS' EQUITY (Note G):
Preferred stock--$.01 par value, 10,000,000 shares authorized;
934,563 shares of Series A convertible preferred issued and outstanding
(liquidation value $2,336,000)............................................... 9,000
Common stock--$.01 par value, 30,000,000 shares authorized;
8,793,998 shares issued and outstanding...................................... 88,000
Additional paid-in capital..................................................... 16,130,000
Deficit accumulated during the development stage............................... (15,104,000)
-----------
1,123,000
-----------
$ 2,802,000
-----------
-----------
</TABLE>

See notes to financial statements

F-3
<PAGE>
CYTOCLONAL PHARMACEUTICS INC.
(A DEVELOPMENT STAGE COMPANY)

STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
SEPTEMBER 11,
1991
(INCEPTION)
YEAR ENDED DECEMBER 31, THROUGH
---------------------------- DECEMBER 31,
1997 1996 1997
------------- ------------- --------------
<S> <C> <C> <C>
Operating expenses:
Research and development.......................................... $ 1,469,000 $ 1,576,000 $ 7,776,000
General and administrative........................................ 1,888,000 1,530,000 7,214,000
------------- ------------- --------------
3,357,000 3,106,000 14,990,000
------------- ------------- --------------
Other (income) expenses:
Interest (income)................................................. (107,000) (216,000) (526,000)
Interest expense.................................................. 2,000 561,000
------------- ------------- --------------
(105,000) (216,000) 35,000
------------- ------------- --------------
Net loss............................................................ $ (3,252,000) $ (2,890,000) $ (15,025,000)
------------- ------------- --------------
------------- ------------- --------------
Basic and diluted loss per common share............................. $ (.42) $ (.42)
------------- -------------
------------- -------------
Weighted average number of shares outstanding--basic and diluted
loss per share (Note B[5])........................................ 8,268,000 7,640,000
------------- -------------
------------- -------------
</TABLE>

See notes to financial statements

F-4
<PAGE>
CYTOCLONAL PHARMACEUTICS INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (CAPITAL DEFICIENCY) (NOTE G)

<TABLE>
<CAPTION>
DEFICIT
CONVERTIBLE ACCUMULATED TREASURY STOCK
PREFERRED STOCK COMMON STOCK ADDITIONAL DURING -------------------
------------------ ------------------ PAID-IN DEVELOPMENT COMMON
SHARES AMOUNT SHARES AMOUNT CAPITAL STAGE SHARES AMOUNT TOTAL
--------- ------- --------- ------- ----------- ------------ -------- --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Common stock issued, no par... 3,200,000 $ 1,000 $ 1,000
Value assigned to 300,000
warrants ($0.01 per
warrant), issued in
conjunction with a bridge
loan........................ 3,000 3,000
Exchange of shares of no par
shares for $.01 par value
shares...................... $32,000 47,000 $ (79,000) 0
Net loss for the period
September 11, 1991
(inception) through December
31, 1991.................... (218,000) (218,000)
--------- ------- ----------- ------------ -----------
Balance--December 31, 1991.... 3,200,000 32,000 51,000 (297,000) (214,000)
Stock issued in connection
with private placement of
100 units ($50,000 per unit)
less expenses of $649,000... 1,000,000 $10,000 2,000,000 20,000 4,321,000 4,351,000
Common stock issued, $1.65 per
share (Note D[2])........... 20,000 33,000 33,000
Net loss for the year......... (1,317,000) (1,317,000)
--------- ------- --------- ------- ----------- ------------ -----------
Balance--December 31, 1992.... 1,000,000 10,000 5,220,000 52,000 4,405,000 (1,614,000) 2,853,000
Value assigned to 20,000
options ($0.65 per option)
issued and charged to
reasearch and development
(Note D[1])................. 13,000 13,000
Preferred dividend (cash and
stock)...................... 48,611 1,000 (123,000) (122,000)
Net loss for the year......... (2,392,000) (2,392,000)
--------- ------- --------- ------- ----------- ------------ -----------
Balance--December 31, 1993.... 1,048,611 11,000 5,220,000 52,000 4,295,000 (4,006,000) 352,000
Value assigned to warrants
issued in private placement
of debt securities ($0.17
and $0.1 per warrant) (Note
G[4])....................... 187,000 187,000
Preferred dividend (stock).... 104,869 1,000 (1,000) 0
Net loss for the year......... (2,265,000) (2,265,000)
--------- ------- --------- ------- ----------- ------------ -----------
Balance--December 31, 1994.... 1,153,480 12,000 5,220,000 52,000 4,481,000 (6,271,000) (1,726,000)
Value assigned to warrants
issued in private placement
of debt securities ($0.18
per warrant) (note G[4]).... 82,000 82,000
Preferred dividend (stock).... 115,307 1,000 (1,000) 0
Simultaneous exercise of
options ($1.825 per share)
and purchase of treasury
stock ($4.00 per share)..... 80,000 1,000 145,000 (36,500 ) $(146,000) 0
Retirement of treasury
stock....................... (36,500) (146,000) 36,500 146,000 0
Issuance of common stock in
initial public offering (net
of costs of $2,135,000)
($5.00 per unit)............ 2,300,000 23,000 9,342,000 9,365,000
Net loss for the year......... (2,691,000) (2,691,000)
--------- ------- --------- ------- ----------- ------------ -------- --------- -----------
Balance--December 31, 1995.... 1,268,787 13,000 7,563,500 76,000 13,903,000 (8,962,000) 0 0 5,030,000
Preferred dividend (stock).... 126,888 1,000 (1,000) 0
Preferred stock converted to
common stock................ (167,046) (2,000 ) 167,046 2,000 0
Value assigned to 20,000
($2.29) and 100,000 ($0.84)
options issued for
professional services....... 130,000 130,000
Value assigned to 36,000
warrants ($1.17) issued and
charged to research and
development................. 42,000 42,000
Net loss for the year......... (2,890,000) (2,890,000)
--------- ------- --------- ------- ----------- ------------ -------- --------- -----------
Balance--December 31, 1996.... 1,228,629 12,000 7,730,546 78,000 14,074,000 (11,852,000) 0 0 2,312,000
Preferred dividend (stock).... 122,788 1,000 (1,000) 0
Preferred stock converted to
common...................... (466,854) (5,000 ) 466,854 5,000 0
Exercise of unit purchase
option...................... 50,000 1,000 250,000 2,000 497,000 500,000
Exercise of warrants.......... 277,098 2,000 1,309,000 1,311,000
Exercise of options........... 69,500 1,000 118,000 119,000
Value assigned to 10,000
($1.45) and 40,000 ($2.88)
options issued for
professional services....... 133,000 133,000
Net loss for the year......... (3,252,000) (3,252,000)
--------- ------- --------- ------- ----------- ------------ -------- --------- -----------
Balance--December 31, 1997.... 934,563 $9,000 8,793,998 $88,000 $16,130,000 $(15,104,000) 0 $ 0 $ 1,123,000
--------- ------- --------- ------- ----------- ------------ -------- --------- -----------
--------- ------- --------- ------- ----------- ------------ -------- --------- -----------
</TABLE>

See notes to financial statements

F-5
<PAGE>
CYTOCLONAL PHARMACEUTICS INC.
(A DEVELOPMENT STAGE COMPANY)

STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
SEPTEMBER 11,
1991
(INCEPTION)
YEAR ENDED DECEMBER 31, THROUGH
---------------------------- DECEMBER 31,
1997 1996 1997
------------- ------------- --------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss.......................................................... $ (3,252,000) $ (2,890,000) $ (15,025,000)
Adjustments to reconcile net loss to net cash used in operating
activities:.....................................................
Depreciation and amortization................................... 116,000 115,000 685,000
Amortization of debt discount................................... 269,000
Amortization of debt costs...................................... 554,000
Value assigned to warrants and options.......................... 133,000 172,000 321,000
Equity in loss of joint venture................................. 16,000 23,000 232,000
Changes in:
Other assets.................................................. (3,000) (43,000)
Accounts payable and accrued expenses......................... 123,000 74,000 432,000
------------- ------------- --------------
Net cash used in operating activities....................... (2,864,000) (2,509,000) (12,575,000)
------------- ------------- --------------
Cash flows from investing activities:
Purchase of equipment............................................. (44,000) (75,000) (240,000)
Investment in joint venture....................................... (233,000)
------------- ------------- --------------
Net cash used in investing activities....................... (44,000) (75,000) (473,000)
------------- ------------- --------------
Cash flows from financing activities:
Net proceeds from sales of preferred and common stock............. 13,750,000
Proceeds from bridge loans, net of expenses....................... 2,684,000
Repayment of bridge loans......................................... (3,238,000)
Principal payments of equipment notes............................. (76,000)
Dividends paid.................................................... (122,000)
Payment of royalties.............................................. (31,000) (31,000)
Proceeds from exercise of options and warrants.................... 1,430,000 1,430,000
Proceeds from exercise of unit purchase option.................... 500,000 500,000
------------- --------------
Net cash provided by financing activities................... 1,899,000 14,897,000
------------- --------------
Net increase (decrease) in cash and cash equivalents................ (1,009,000) (2,584,000) 1,849,000
Cash and cash equivalents at beginning of period.................... 2,858,000 5,442,000
------------- ------------- --------------
Cash and cash equivalents at end of period.......................... $ 1,849,000 $ 2,858,000 $ 1,849,000
------------- ------------- --------------
------------- ------------- --------------
Supplemental disclosures of cash flow information:
Cash paid for interest............................................ $ 2,000
Noncash investing activities:
Equipment acquired included in accounts payable and accrued
expenses...................................................... $ 28,000 $ 10,000
</TABLE>

See notes to financial statements

F-6
<PAGE>
CYTOCLONAL PHARMACEUTICS INC.
(A DEVELOPMENT STAGE COMPANY)

NOTES TO FINANCIAL STATEMENTS

DECEMBER 31, 1997

NOTE A--THE COMPANY

Cytoclonal Pharmaceutics Inc. (the "Company") was incorporated on November
18, 1991. In December 1991, a Texas corporation, Cytoclonal Pharmaceutics Inc.
(formerly Bio Pharmaceutics, Inc.) was merged into the Company. The accompanying
financial statements include the operations of the Texas corporation from its
inception on September 11, 1991. The Company is in the development stage and its
efforts are devoted to the research and development of various therapeutic and
diagnostic pharmaceutical products for the prevention of cancer, viral and
immune diseases.

NOTE B--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

[1] EQUIPMENT:

Equipment is stated at cost. Depreciation is provided using the
straight-line method over the estimated useful lives of the assets which range
from five to seven years. Leasehold improvements are amortized over the lesser
of the economic useful life of the improvement or term of the lease whichever is
shorter.

[2] PATENT RIGHTS AND COSTS:

Purchased patents which were acquired in October 1991 are stated at cost and
are being amortized on the straight-line method over 17 years, the life of the
patents, and charged to research and development expense. Approximately 90% of
these costs were allocated to issued patents.

[3] RESEARCH AND DEVELOPMENT:

Research and development costs are charged to expense as incurred.

[4] CONCENTRATION OF CREDIT RISK:

Financial instruments which potentially subject the Company to concentration
of credit risk consist principally of cash and cash equivalents which are at one
financial institution.

[5] LOSS PER COMMON SHARE:

In 1997, the Financial Accounting Standards Board issued Statement No. 128
"Earnings Per Share". Statement No. 128 replaced the calculation of primary and
fully diluted earnings per share with basic and diluted earnings per share.
Unlike primary earnings per share, basic earnings per share excludes any
dilutive effects of options, warrants and convertible securities. Dilutive
earnings per share is very similar to the previously reported fully diluted
earnings per share. In accordance with Statement No. 128, which was adopted by
the Company in 1997 and retroactively applied to 1996, basic and diluted net
loss per common share is based on the net loss increased by dividends on
preferred stock ($234,000 in 1997 and $307,000 in 1996) divided by the weighted
average number of common shares outstanding during the years. No effect has been
given to outstanding options, warrants or convertible preferred stock in the
diluted computation as their effect would be antidilutive.

F-7
<PAGE>
CYTOCLONAL PHARMACEUTICS INC.
(A DEVELOPMENT STAGE COMPANY)

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1997

NOTE B--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
[6] CASH EQUIVALENTS:

The Company considers all highly liquid short-term investments purchased
with a maturity of three months or less to be cash equivalents.

[7] STOCK-BASED COMPENSATION:

In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation." SFAS No. 123 encourages, but does not require, companies to
record compensation cost for stock-based employee compensation plans at fair
value. The Company has elected to continue to account for its stock-based
compensation plans using the intrinsic value method prescribed by Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees"
("APB No. 25"). Under the provisions of APB No. 25, compensation cost for stock
options is measured as the excess, if any, of the quoted market price of the
Company's common stock at the date of the grant over the amount an employee must
pay to acquire the stock.

[8] FAIR VALUE OF FINANCIAL INSTRUMENTS:

The carrying value of cash, accounts payable and accrued expenses
approximates their fair value due to the short period to maturity of these
instruments.

[9] USE OF ESTIMATES:

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

NOTE C--AGREEMENT WITH WADLEY TECHNOLOGIES, INC. ("WADTECH")

On October 10, 1991 the Company entered into an agreement to acquire certain
patent rights, technology and know-how (the "Technology") from Wadtech for the
fixed sum of $1,250,000 and ongoing royalties.

The agreement provides for the payment of royalties of up to 6.25% of gross
selling price of products incorporating the Technology and up to 50% of all
compensation received by the Company for sales by sublicensees of any products
covered by the Technology, which will be applied to reducing the fixed sum of
$1,250,000, until the fixed sum is paid. Thereafter the agreement provides for
the payment of royalties of up to 3.75% of gross selling price of products
incorporating the Technology and up to 50% of all compensation received by the
Company for sales by sublicensees of any products covered by the Technology. The
agreement also provides for minimum royalty payments of $31,250, $62,500 and
$125,000 during each twelve-month period beginning October 1, 1996, 1997 and
1998, respectively. Thereafter, during each twelve-month period beginning
October 1, 1999 the agreement provides for minimum royalty payments of $125,000.
As of December 31, 1997 the Company has made payments of $31,250.

F-8
<PAGE>
CYTOCLONAL PHARMACEUTICS INC.
(A DEVELOPMENT STAGE COMPANY)

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1997

NOTE C--AGREEMENT WITH WADLEY TECHNOLOGIES, INC. ("WADTECH") (CONTINUED)
The Company granted Wadtech a security interest in the Technology until the
fixed sum is paid. The agreement continues for 99 years from October 10, 1991
and the Company has the option to terminate the agreement without cause on three
months notice to Wadtech.

NOTE D--COLLABORATION AGREEMENTS

[1] AGREEMENTS WITH RESEARCH AND DEVELOPMENT INSTITUTE, INC. ("RDI"):

During June 1993 the Company entered into a research and license agreement
with RDI of Montana State University pursuant to which the Company finances and
RDI conducts research and development at Montana State University in the field
of taxol producing organisms. In connection with the agreement, RDI has granted
the Company an exclusive license and licensing rights to its patents and
know-how throughout the world to develop and market products relating to the
technology for a payment of $150,000.

The Company has agreed to finance research to be conducted under the
agreement and is obligated to pay RDI an aggregate fixed fee of $250,000 per
annum for four years commencing in 1993. In addition, the Company has agreed to
pay RDI royalties of up to 6% of net sales of products derived under the
agreement with minimum royalty payments as follows: $25,000 in June 1994,
$50,000 in June 1995, $75,000 in June 1996 and $100,000 in June 1997 and
thereafter. The Company has the option to extend the research under mutually
agreeable terms. In connection with the agreement, in 1993, the Company issued
an option to RDI to purchase 20,000 shares of the Company's common stock at
$2.50 per share. The Company valued these options at approximately $13,000 which
was charged to research and development.

[2] AGREEMENTS WITH PESTKA BIOMEDICAL LABORATORIES, INC. ("PESTKA"):

In September 1992 the Company formed a corporate joint venture with Pestka
for the purpose of developing, manufacturing and marketing a therapeutic drug
for blood related cancers such as leukemia and lymphomas. The agreement provides
for the Company to contribute $233,000, which was paid during 1992, and certain
technology and for Pestka to grant the joint venture an exclusive, worldwide
license to certain patents and proprietary rights. The stockholders of Pestka
purchased 20,000 shares of the Company's common stock for a price of $1.65 per
share. The investment in the joint venture is accounted for on the equity
method. As of December 31, 1997, the Company's share of cumulative losses from
the venture loss equal to its investment and accordingly, the investment has no
carrying amount in the accompanying balance sheet. The equity in loss of joint
venture, included in research and development costs, was approximately $16,000
for the year ended December 31, 1997 and $23,000 for the year ended December 31,
1996. The corporate stockholders have no further obligations to fund the joint
venture.

Under a related agreement, Pestka agreed to perform certain research and
development, as defined, for the joint venture, for $233,000.

[3] AGREEMENTS WITH ENZON, INC. ("ENZON"):

In March and July 1992, the Company entered into agreements with Enzon to
jointly fund, research, develop, test and market anti-cancer drugs. Terms of the
agreements provide for the Company (i) to

F-9
<PAGE>
CYTOCLONAL PHARMACEUTICS INC.
(A DEVELOPMENT STAGE COMPANY)

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1997

NOTE D--COLLABORATION AGREEMENTS (CONTINUED)
undertake research and development using certain technology owned and developed
by Enzon; and (ii) to grant Enzon an exclusive, worldwide license to certain
technology owned and royalties and/or allocation of profits and losses from the
sale of the products. The agreements terminate on a product-by-product basis 15
years from the first approval to market each such product. In 1992 Enzon paid
the Company $50,000; such payment was recorded as a reduction of research and
development costs.

NOTE E--EQUIPMENT

Equipment at December 31, 1997 is summarized as follows:

<TABLE>
<S> <C>
Office equipment.................................................. $ 36,000
Furniture and fixtures............................................ 16,000
Computers and laboratory equipment................................ 286,000
Leasehold improvements............................................ 8,000
---------
Total........................................................... 346,000

Less accumulated depreciation and amortization.................... 219,000
---------
Net............................................................... $ 127,000
---------
---------
</TABLE>

NOTE F--ACCOUNTS PAYABLE AND ACCRUED EXPENSES

Accounts payable and accrued expenses at December 31, 1997 consists of the
following:

<TABLE>
<S> <C>
Professional fees................................................. $ 73,000
Equipment......................................................... 28,000
Payroll and related expenses...................................... 171,000
Licensors and contractors......................................... 150,000
Occupancy costs................................................... 12,000
Other............................................................. 26,000
---------
$ 460,000
---------
---------
</TABLE>

NOTE G--STOCKHOLDERS' EQUITY

[1] PUBLIC OFFERING:

In November 1995, the Company effected an initial public offering of its
securities. A total of 2,300,000 units, each comprised of one share of common
stock, one redeemable Class C warrant and one redeemable Class D warrant were
sold for $5.00 a unit, yielding net proceeds of approximately $9,365,000 after
underwriting commissions and other expenses of the offering.

F-10
<PAGE>
CYTOCLONAL PHARMACEUTICS INC.
(A DEVELOPMENT STAGE COMPANY)

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1997

NOTE G--STOCKHOLDERS' EQUITY (CONTINUED)
[2] STOCK SPLIT:

In August 1995 the Company effected a reverse stock split of one share of
common stock for 2.5 shares of common stock held and an identical reverse split
for the preferred stock. The accompanying financial statements have been
adjusted to give retroactive effect to the reverse stock split.

[3] PREFERRED STOCK:

On January 6, 1992 the Board of Directors designated 4,000,000 shares of
preferred stock as Series A convertible preferred stock. The holders of Series A
preferred stock are entitled to (i) convert on a one-for-one basis to common
stock subject to adjustment, as defined, (ii) voting rights equivalent to voting
rights of common stockholders, (iii) receive dividends equal to $.25 per share
payable on or about January 15 each year in cash or newly-issued shares of
Series A preferred or a combination thereof (iv) liquidation preferences of
$2.50 per preferred share and (v) certain demand and piggyback registration
rights with respect to the common shares issuable upon conversion.

The Company, at its option has the right to redeem all or any portion of the
Series A convertible preferred stock at $2.50 per share plus accrued and unpaid
dividends.

[4] WARRANTS:

At December 31, 1997 shares of common stock were reserved for issuance upon
exercise of warrants as follows:

<TABLE>
<CAPTION>
WARRANT EXERCISE NUMBER OF
TYPE PRICE EXPIRATION DATE SHARES RESERVED
- --------- ----------- ------------------ ---------------
<S> <C> <C> <C>
Class A $ 3.75 November 2000 155,000
Class B $ 4.375 November 2000 251,044
Class C $ 6.50 November 2000 2,224,358
Class D $ 8.75 November 2000 4,675,642
</TABLE>

The Class A and Class B warrants were issued in connection with two bridge
financings completed in August 1994, and April 1995 where the Company issued an
aggregate of $3,037,500 in notes bearing interest at 9% per annum (effective
rate 18% to 24%) which were repaid in 1995 from the net proceeds of the initial
public offering.

Effective November 1996, the Class C and Class D warrants are subject to
redemption at $.05 per warrant on 30 days prior written notice provided the
average of the closing bid prices of the common stock for any period of 30
consecutive business days ending within 15 business days of the date on which
the notice of redemption is given shall have exceeded $9.10 per share for
redemption of the Class C warrants and $12.25 per share for redemption of the
Class D warrants.

Each Class C warrant entitles the holder to purchase a unit consisting of
one share of common stock and one redeemable Class D detachable warrant. Each
Class D warrant entitles the holder to purchase one share of common stock.

F-11
<PAGE>
CYTOCLONAL PHARMACEUTICS INC.
(A DEVELOPMENT STAGE COMPANY)

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1997

NOTE G--STOCKHOLDERS' EQUITY (CONTINUED)
[5] STOCK OPTIONS:

During 1992 the Board of Directors and the stockholders of the Company
approved a Stock Option Plan (the "1992 Plan") which provides for the granting
of options to purchase up to 520,000 shares of common stock, pursuant to which
officers, directors, key employees and the Company's Scientific Advisory Board
are eligible to receive incentive and/or nonstatutory stock options.

During 1996 the Board of Directors and the stockholders of the Company
approved the 1996 Stock Option Plan (the "1996 Plan") which provides for the
granting of incentive and nonstatutory options for up to 750,000 shares of
common stock to officers, employees, directors and consultants of the Company.

Options granted under the 1992 plan and the 1996 plan are exercisable for a
period of up to 10 years from date of grant at an exercise price which is not
less than the fair value on date of grant, except that the exercise period of
options granted to a stockholder owning more than 10% of the outstanding capital
stock may not exceed five years and their exercise price may not be less than
110% of the fair value of the common stock at date of grant. Options generally
vest 40% after six months of employment and thereafter 20% annually on
anniversary date of grant.

Stock option activity under the 1992 plan and the 1996 plan is summarized as
follows:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------
1997 1996
----------------------- ----------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
EXERCISE EXERCISE
SHARES PRICE SHARES PRICE
---------- ----------- --------- -----------
<S> <C> <C> <C> <C>
Options outstanding at beginning of year............... 753,500 $ 2.67 440,000 $ 2.01
Granted................................................ 350,000 $ 3.57 335,000 $ 3.47
Exercised.............................................. (69,500) $ 1.71
Cancelled.............................................. (1,500) $ 3.94 (21,500) $ 1.81
---------- ---------
Options outstanding at end of year..................... 1,032,500 $ 3.04 753,500 $ 2.67
---------- ---------
---------- ---------
Options exercisable at end of year..................... 604,700 $ 2.57 475,500 $ 2.28
---------- ---------
---------- ---------
</TABLE>

F-12
<PAGE>
CYTOCLONAL PHARMACEUTICS INC.
(A DEVELOPMENT STAGE COMPANY)

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1997

NOTE G--STOCKHOLDERS' EQUITY (CONTINUED)
The following table presents information relating to stock options
outstanding at December 31, 1997.

<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------------------------- ----------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
RANGE OF EXERCISE REMAINING EXERCISE
EXERCISE PRICE SHARES PRICE LIFE IN YEARS SHARES PRICE
- ---------------------------------------------- ---------- ----------- ------------- --------- -----------
<S> <C> <C> <C> <C> <C>
$1.65 -$2.6875............................... 548,500 $ 2.04 6.92 418,500 $ 1.90
$3.25 -$4.125................................ 257,000 $ 3.98 8.21 160,600 $ 3.98
$4.3125-$5.00................................. 227,000 $ 4.38 9.19 25,600 $ 4.79
---------- ----- --- --------- -----
Total......................................... 1,032,500 $ 3.04 7.74 604,700 $ 2.57
---------- ----- --- --------- -----
---------- ----- --- --------- -----
</TABLE>

As of December 31, 1997, 3,000 options are available for future grant under
the 1992 Plan and 85,000 options are available under the 1996 Plan.

The weighted-average fair value at date of grant for options granted during
1997 and 1996 was $2.34 and $2.16 per option, respectively. The fair value of
options at date of grant was estimated using the Black-Scholes option pricing
model utilizing the following assumptions:

<TABLE>
<CAPTION>
1997 1996
------------------ ------------------
<S> <C> <C>
Risk-free interest rates.................................. 6.38% to 6.55% 6.3% to 6.8%
Expected option life in years............................. 10 10
Expected stock price volatility........................... 44%-51% 33%-53%
Expected dividend yield................................... 0% 0%
</TABLE>

Had the Company elected to recognize compensation cost based on the fair
value of the options at the date of grant as prescribed by SFAS No. 123, net
loss in 1997 and 1996 would have been approximately ($3,593,000) and (3,185,000)
or $(.46) and $(.46) per share, respectively.

[6] OTHER OPTIONS AND WARRANTS:

In connection with its private offerings to sell preferred and common stock,
during the year ended December 31, 1992, the placement agent has an option to
purchase 10 units; each unit consists of 10,000 shares of preferred stock and
20,000 shares of common stock. The option was exercised on February 21, 1997 at
a price of $50,000 per unit and the Company received aggregate proceeds of
$500,000 and issued 50,000 preferred shares and 250,000 common.

In connection with its bridge financings, the placement agent received
options to purchase 506,250 warrants at $.10 per warrant. These warrants are
exercisable into an aggregate of 202,500 shares of common stock through November
2000 at a price of $3.75 per share.

In connection with its initial public offering the Company sold to the
underwriter, at a nominal amount, a unit purchase option to purchase up to an
aggregate of 200,000 additional units at $8.25. The

F-13
<PAGE>
CYTOCLONAL PHARMACEUTICS INC.
(A DEVELOPMENT STAGE COMPANY)

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1997

NOTE G--STOCKHOLDERS' EQUITY (CONTINUED)
units purchasable upon exercise of the unit purchase option are identical to the
units offered in the initial public offering except that the warrants included
therein are not subject to redemption by the Company. These units become
exercisable November 1998 for a two year period.

In February and August 1996, the Company granted options to purchase 100,000
and 20,000 shares of common stock at $4.25 and $3.25 per share, respectively, as
compensation for professional services. The Company determined the fair value of
these options to be approximately $130,000 which was charged to operations.

In July 1996 the Company granted a licensor (Note J[4]) warrants to purchase
36,000 shares of common stock at $4.25 per share. An aggregate of 12,000
warrants per annum are exercisable commencing July 1999 and expire July 2002.
The Company determined the fair value of these warrants to be approximately
$42,000 which was charged to research and development.

In February and September 1997 the Company granted options to purchase
10,000 and 40,000 shares of common stock at $4.38 and $4.31 per share,
respectively, as compensation for professional services. The Company determined
the fair value of these options to be approximately $133,000 which was charged
to operations.

NOTE H--RELATED PARTY TRANSACTION

In connection with certain of the private placements during 1995,
Janssen-Meyers Associates, L.P. ("JMA"), an affiliate of a former officer, acted
as placement agent and received $118,000, as compensation.

Effective December 1996, the Company entered into a one-year agreement with
JMA, a stockholder of the Company, whereby the Company will receive financial
and investment banking services for a consulting fee of $5,000 per month plus
commissions, as defined. During 1997, the Company paid $60,000 under this
agreement.

NOTE I--INCOME TAXES

At December 31, 1997 the Company had approximately $14,200,000 of net
operating loss carryforwards for federal income tax purposes which expire
through 2012.

At December 31, 1997 the Company has a deferred tax asset of approximately
$4,900,000 representing the benefits of its net operating loss carryforward and
certain expenses not currently deductible. The Company's deferred tax asset has
been fully reserved by a valuation allowance since realization of its benefit is
uncertain. The difference between the statutory tax rate of 34% and the
Company's effective tax rate of 0% is substantially due to the increase in the
valuation allowance of $1,000,000 (1997) and $1,000,000 (1996). The Company's
ability to utilize its net operating loss carryforwards may be subject to an
annual limitation in future periods pursuant to Section 382 of the Internal
Revenue Code of 1986, as amended.

F-14
<PAGE>
CYTOCLONAL PHARMACEUTICS INC.
(A DEVELOPMENT STAGE COMPANY)

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1997

NOTE J--COMMITMENTS AND OTHER MATTERS

[1] LEASES:

The Company is obligated to pay $113,000 for office and laboratory space
under leases expiring through December 31, 1998.

Rent expense was approximately $140,000 and $123,000 for the years ended
December 31, 1997 and 1996, respectively.

[2] EMPLOYMENT AGREEMENTS:

The Company has employment agreements with two officers which provide for
annual base salaries of $165,000 and $75,000 (subject to annual increases of not
less than 5% per year and bonuses at the discretion of the Board of Directors),
for a period of five years and three years, respectively, commencing November
1995.

[3] CONTRACT RESEARCH:

The Company had contracted with an institution to conduct research through
May 31, 1996 at a cost of approximately $150,000. In April 1996 this agreement
was extended to May 31, 1998 providing for additional funding of $90,000
(aggregate $240,000). As of December 31, 1997 the Company has incurred
approximately $202,000 of such costs.

[4] CONSULTING AGREEMENTS:

During 1996 the Company entered into an agreement with a consulting firm
whereby the Company has agreed to pay a fee of $3,000 per month and to grant
warrants to purchase 75,000 shares of common stock at $4.25 per share in return
for financial advisory services. The warrants become exercisable in the event a
transaction introduced to the Company by the consulting firm is consummated, at
which time the Company will record a noncash charge representing the fair value
of the warrants.

During 1997 the Company entered into an agreement with a consulting firm
whereby the Company has agreed to pay a fee of $25,000 in return for certain
investor relation services. In the event the C warrants are exercised the
Company has agreed to pay an additional fee of $17,000, a monthly service fee of
$7,000 for twelve months and to grant options to purchase 100,000 shares of
common stock at $9.00 per share at which time the Company will record a noncash
charge representing the fair value of options. In the event the D warrants are
exercised the Company has agreed to pay an additional $3,000 per month for
twelve months and to grant options to purchase 100,000 shares of common stock at
$9.00 per share at which time the Company will record a noncash charge
representing the fair value of options.

In March 1997 the Company entered into an agreement with a scientific
advisor whereby the Company has agreed to pay a fee of $1,000 per month until
terminated by either party in return for consulting services.

F-15
<PAGE>
CYTOCLONAL PHARMACEUTICS INC.
(A DEVELOPMENT STAGE COMPANY)

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1997

NOTE J--COMMITMENTS AND OTHER MATTERS (CONTINUED)
[5] OTHER:

In February 1996, the Company entered into two license agreements
("Agreements") with the Regents of the University of California, granting to the
Company exclusive rights to certain technology and patent rights. Pursuant to
the Agreements, the Company paid license fees of $10,000 and has agreed to pay
$10,000 upon issuance of each patent. In addition, the Company must pay a yearly
license maintenance fee on both licenses until the Company is commercially
selling a product based on the technology derived from these License Agreements,
at which time a royalty based on net sales will be due.

In July 1996, the Company entered into an agreement with Washington State
University Research Foundation ("WSURF") whereby the Company received an
exclusive, world-wide license to use and/or sublicense patented technology or
prospective patented technology (the "WSURF Technology"). The Company is
required to pay WSURF license fees of $7,500 per year commencing on July 1, 1997
as well as certain royalties and sublicensing fees. This Agreement shall be in
full force and effect until the last to expire of the patents licensed under the
WSURF Technology, subject to termination by either party as defined. In
conjunction with this agreement the Company granted WSURF 36,000 warrants (Note
G[6]).

NOTE K--SUBSEQUENT EVENTS

[1] PREFERRED STOCK DIVIDEND:

During January 1998, the Board of Directors declared a 10% dividend on
Series A preferred stock.

[2] PRIVATE PLACEMENT:

During the period from April 2 through April 13, 1998, the Company received
net proceeds of $4,539,048 from the sale of Units consisting of 631,796 shares
of common stock and Class E warrants to purchase 315,917 shares of common stock
at exercise prices per share from $9.82 to $10.39, subject to adjustment upon
the occurrence of certain events.

F-16
<PAGE>
SIGNATURES

In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.

<TABLE>
<S> <C> <C>
CYTOCLONAL PHARMACEUTICS INC.

By: /s/ ARTHUR P. BOLLON, PH.D.
-----------------------------------------
Arthur P. Bollon, Ph.D.,
Dated: March 30, 1998 PRESIDENT
</TABLE>

In accordance with the Exchange Act, this report has been signed below by
the following on behalf of the registrant and in capacities and on the dates
indicated.

SIGNATURE CAPACITY DATE
- ------------------------------ -------------------------- -------------------

Chairman, President, Chief
/s/ ARTHUR P. BOLLON, PH.D Executive Officer and
- ------------------------------ Director (principal March 30, 1998
Arthur P. Bollon, Ph.D executive officer)

/s/ IRA GELB, M.D.
- ------------------------------ Director March 30, 1998
Ira Gelb, M.D.

/s/ IRWIN C. GERSON
- ------------------------------ Director March 30, 1998
Irwin C. Gerson

/s/ WALTER M. LOVENBERG,
PH.D.
- ------------------------------ Director March 30, 1998
Walter M. Lovenberg, Ph.D.

Vice President Operations,
/s/ DANIEL SHUSTERMAN, J.D. Treasurer and Chief
- ------------------------------ Financial Officer March 30, 1998
Daniel Shusterman, J.D. (principal financial and
accounting officer)

<PAGE>

EXHIBIT 11

CYTOCLONAL PHARMACEUTICS INC.
COMPUTATION OF NET (LOSS) PER COMMON SHARE

<TABLE>
Year Ended December 31,
------------------------------
1996 1997
------------ ------------
<S> <C> <C>
Net (loss) ($2,890,000) ($3,252,000)

Add cumulative preferred dividend (307,000) (234,000)
------------ ------------

NET (LOSS) USED FOR COMPUTATION ($3,197,000) ($3,486,000)
------------ ------------
------------ ------------

Weighted average number of common shares
outstanding 7,640,000 8,268,000
------------ ------------
------------ ------------

Net (loss) per common share ($0.42) ($0.42)
------------ ------------
------------ ------------
</TABLE>

<PAGE>

CONSENT OF INDEPENDENT AUDITORS

We hereby consent to the incorporation by reference in the Registration
Statements on Form S-8 (No. 333-37049), Form S-8 (No. 333-11691) and Form S-3
(No. 333-25323) of Cytoclonal Pharmaceutics Inc. of our report dated
February 6, 1998, except for Note K[2] as to which the date is April 13,
1998, which is included in the annual report on Form 10-KSB for the year
ended December 31, 1997.

/s/ Richard A. Eisner & Company, LLP

New York, New York
April 14, 1998

<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000

<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 1,849
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 1,884
<PP&E> 346
<DEPRECIATION> 219
<TOTAL-ASSETS> 2,802
<CURRENT-LIABILITIES> 554
<BONDS> 0
0
9
<COMMON> 88
<OTHER-SE> 1,026
<TOTAL-LIABILITY-AND-EQUITY> 2,802
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 3,357
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,252)
<EPS-PRIMARY> (.42)
<EPS-DILUTED> (.42)

</TABLE>