<PAGE>

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                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                            ------------------------
                                   FORM 10-K

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

                  FOR THE FISCAL YEAR ENDED DECEMBER 31, 2001

                        COMMISSION FILE NUMBER 00024889
                            ------------------------

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

<Table>
<S>                            <C>                            <C>
          DELAWARE                 702 ELECTRONIC DRIVE                23-2969600
(State or other jurisdiction         HORSHAM, PA 19044              (I.R.S. Employer
              of                   (Address of principal           Identification No.)
      incorporation or              executive offices)
         organization)
</Table>

                                 (215) 706-3800
                        (Registrant's telephone number,
                              including area code)
                            ------------------------
          Securities registered pursuant to section 12(b) of the Act:

                                      NONE

          Securities registered pursuant to section 12(g) of the Act:

                    COMMON STOCK, $ .01 PAR VALUE PER SHARE
                        PREFERRED STOCK PURCHASE RIGHTS
                                (TITLE OF CLASS)

     Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 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 [ ]

     Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not 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-K or any amendment to this
Form 10. [X]

     The aggregate market value of the voting stock held by non-affiliates of
the Registrant as of March 7, 2002 was approximately $135,375,000 based upon the
last reported sales price of the Registrant's Common Stock on the Nasdaq
National Market.

     As of March 7, 2002 there were 31,170,166 shares of the Registrant's Common
Stock outstanding, not including 1,700,000 shares committed to be issued in
settlement of litigation.
                            ------------------------
                      DOCUMENTS INCORPORATED BY REFERENCE

     Portions of the Proxy Statement relating to the Annual Meeting of
Stockholders to be held on May 29, 2002, are incorporated by reference into Part
III of this report. Other documents incorporated by reference are listed in the
Exhibit Index.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<PAGE>

                                     PART I

ITEM 1.  BUSINESS

     Certain statements in this report, and oral statements made in respect of
this report, constitute "forward-looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995. Such statements are those
which express plan, anticipation, intent, contingency or future development
and/or otherwise are not statements of historical fact. These statements are
subject to risks and uncertainties, known and unknown, which could cause actual
results and developments to differ materially from those expressed or implied in
such statements. Such risks and uncertainties relate to, among other factors:
the absence of approved products; history of operating losses and the need for
further financing; dependence on the development, regulatory approval and market
acceptance of one or more of our product candidates for one or more significant
disease indications; early stage of development; the costs, delays and
uncertainties inherent in scientific research, basic pharmaceutical research,
drug development, clinical trials and the regulatory approval process, with
respect to both our current product candidates and our future product
candidates, if any; the risk that the Company does not conduct the clinical
studies it may have planned to conduct or does not pursue development plans it
may have planned to pursue; uncertainty that additional studies, if any, may not
be positive; limitations on, or absence of, the predictive value of data
obtained in laboratory tests, animal models and human clinical trials when
planning additional steps in product development; uncertainty of obtaining
regulatory approval of any compound for any disease indication whether due to
adequacy of the development program, changing regulatory requirements or
otherwise; the risk that the U.S. Food and Drug Administration ("FDA") will stop
or further delay the Phase III lung cancer study or any other study as a result
of safety or otherwise; the risk that clinical studies do not result in the
safety and efficacy necessary to obtain regulatory approvals; the risks of
conducting clinical trials, including the risk of conducting clinical trials of
our drugs in combination with other drug therapies; the commercial risk and risk
of liability in marketing and selling Gelclair(TM) Concentrated Oral Gel,
including the risk that prescribers do not prescribe the product and sales do
not materialize, the risks associated with product launch, manufacturing and
marketing risks, and the risk that the Company's sales of Gelclair(TM) are less
than the Company's minimum purchase obligations; the commercial risk and risk of
liability in providing marketing services promoting Nilandron(R) (nilutamide)
manufactured by Aventis Pharmaceuticals, Inc. ("Aventis"), including the risk
that Aventis' sales of Nilandron(R) do not exceed the threshold entitling the
Company to a percentage of gross margin; the risk that the Company may enter
into, or may fail to enter into, licensing, partnership or collaborative
arrangements or strategic alliances which accord to other companies rights with
respect to one or more Company compounds, technologies or programs or in which
the Company acquires new rights and obligations; the volatility of the market
price of our Common Stock; our ability to sell securities registered under the
shelf registration statement; acceptance of any product candidates by physicians
and providers of healthcare reimbursement; the actions of competitors; the pace
of technological changes in the biopharmaceutical industry; dependence upon
third parties; the validity, scope and enforceability of patents; the risk of
pending or future class action securities litigation; potential product
liability claims; and availability and adequacy of insurance.

     These and other risks are detailed in our reports filed from time to time
under the Securities Act and/or the Securities Exchange Act, including the
sections entitled "Business," "Risk Factors," "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and "Other Events" in
our annual reports on Form 10-K, quarterly reports on Form 10-Q and periodic
reports on Form 8-K and in such registration statements on Form S-3 as we may
file from time to time. You are encouraged to read these filings as they are
made. They are available over the Internet from the SEC in its EDGAR database at
http://www.sec.gov and from the Company. Be sure to read the "Risk Factors" in
this Item 1 (and also the discussion of the related subject matters appearing in
this Item 1).

     Given the uncertainties affecting pharmaceutical companies in the
development stage, you are cautioned not to place undue reliance on any such
forward-looking statements, any of which may turn out to be wrong due to
inaccurate assumptions, unknown risks, uncertainties or other factors. No
forward-looking statement can be guaranteed; actual future results may vary
materially.

                                        1
<PAGE>

     Both forward-looking statements and statements of historic fact must be
understood in the context of the risks referred to above which characterize our
development stage business. We undertake no obligation to update or revise the
statements made herein or the risk factors that may relate thereto.

OVERVIEW

     Cell Pathways, Inc. ("CPI" or "we" or the "Company") is a development stage
pharmaceutical company focused on the research and development of products to
treat cancer and to prevent cancer, the commercialization of such products, and
the marketing and selling of oncology-related products made by others. Our
technology may prove to have applicability beyond the treatment and prevention
of cancer. We will be considered to be in the development stage until we receive
approval for, and generate significant revenues from, the marketing and selling
of one or more of our pharmaceutical drug candidates, or until we generate
significant revenues from our marketing and/or selling of products manufactured
by third parties.

     Our technology is based upon the discovery of a novel mechanism which we
believe, based on our research, can be targeted to induce selective apoptosis,
or programmed cell death, in precancerous and cancerous cells without affecting
apoptosis in normal cells. We have created a new class of selective apoptotic
anti-neoplastic drugs ("SAANDs") and have synthesized many new chemical
compounds in this new class.

     Our product development program focused initially on compounds likely to be
helpful in treating precancerous lesions such as colonic polyps and cervical
dysplasia. Attention next turned to the prevention of the recurrence of prostate
cancer and breast cancer. Clinical trials subsequently expanded into the direct
treatment of prostate and lung cancer. More recently, we have made arrangements
for clinical trials of our first generation compound in combination with leading
cancer chemotherapeutic agents of major pharmaceutical companies in trials in
lung, prostate and breast cancers, and have commenced clinical development of
our second compound as a single agent in cancer indications.

     Clinical trials of our first generation compound, Aptosyn(R)(exisulind)
(previously known as FGN-1(TM) (exisulind) and Prevatac(TM) (exisulind),
commenced in 1994. By 1997, clinical development of Aptosyn(R) (exisulind) had
expanded to include several cancer and precancer indications. In August 1999, we
submitted to the U.S. Food and Drug Administration ("FDA") a New Drug
Application ("NDA") seeking marketing approval for Aptosyn(R) (exisulind) for
the precancerous orphan drug indication of familial adenomatous polyposis
("FAP"). In September 2000, the FDA issued a "not approvable" letter with
respect to the NDA for FAP. The future of the FAP program is uncertain. The
continuing development of Aptosyn(R) (exisulind), either as a single agent or in
combination with leading cancer chemotherapeutic agents of major pharmaceutical
companies, is discussed below under "Products in Development."

     We began the clinical trial program of our second compound, CP461, in 1999.
By the end of 2001, CP461 was in pilot Phase IIa trials to investigate its
safety and efficacy in three cancer indications. Description of the clinical
trial program of CP461 is set forth below under "Products in Development."
Aptosyn(R) (exisulind) and CP461 are the only CPI product candidates which we
expect to be studying in clinical trials during 2002. No pharmaceutical product
may be marketed in the United States without FDA approval. There can be no
assurance that the FDA will approve any of our product candidates for marketing
for any indication or, as to when, if ever, any such approval would occur.

     In anticipation of eventually marketing our products with our own sales
force, we entered into an agreement to market an approved cancer therapy,
Nilandron(R) (nilutamide), in 2000 and commenced promoting that product in the
third quarter of 2000. Nilandron(R) (nilutamide) was developed and is sold by
Aventis Pharmaceuticals, Inc. ("Aventis") as a hormone therapy for advanced
prostate cancer. In the first quarter of 2002 we entered into an agreement with
Sinclair Pharmaceuticals Ltd. ("Sinclair") of the United Kingdom to be the
exclusive distributor in North America of their product, Gelclair(TM)
Concentrated Oral Gel, an oral gel approved for treating oral mucositis, which
affects many cancer patients receiving chemotherapy and radiation therapy.

                                        2
<PAGE>

BUSINESS STRATEGY

     Our primary objectives are to be a leader in the development of
pharmaceutical products to treat and prevent cancer, and to market such products
whether developed by us or by others. If our technology proves to have
applicability beyond the fields of cancer and precancer, we will evaluate our
course in light of such developments. To meet our primary objectives we intend
to:

     - Pursue clinical development of Aptosyn(R) (exisulind), with emphasis on
       cancer indications.

     - Pursue clinical development of CP461 in cancer indications.

     - Develop Aptosyn(R) (exisulind), CP461 and other SAANDs as part of
       combination therapy with leading chemotherapeutic agents.

     - Use our proprietary technology to develop additional SAANDs for cancer
       therapy and for cancer chemoprevention.

     - Market products directly to focused physician groups. We are currently
       marketing Nilandron(R)(nilutamide) under an agreement with its
       manufacturer, Aventis, and, commencing in the second quarter of 2002, we
       plan to begin marketing and selling Gelclair(TM) Concentrated Oral Gel
       under an agreement with its manufacturer, Sinclair.

     - Develop strategic pharmaceutical industry collaborations for research,
       development and/or commercialization.

     - Selectively and opportunistically acquire or in-license technologies,
       products and/or companies devoted to the treatment, prevention,
       palliation and/or diagnosis of cancer.

CARCINOGENESIS

     Cancer results from a sequence of changes involving the genes of cells.
This sequence eventually leads to abnormal and uncontrolled cell proliferation.
This multi-stage process is known as carcinogenesis and generally results from a
combination of factors which occur over a period of years. Certain factors, such
as inherited genetic defects, are present at birth. Other factors that may
contribute to carcinogenesis include environmental exposures and the aging
process. Carcinogenesis is first recognized clinically when abnormal cells
become detectable by a screening procedure or reach a size or location
sufficient to create clinical signs and symptoms. The clinical emergence may
occur many years following the events which first initiated carcinogenesis.
Generally, cells characterized by abnormal growth that may lead to cancer but
have not yet invaded surrounding tissue are termed precancerous.

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

                                        3
<PAGE>

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

                  EXAMPLES OF EPITHELIAL PRECANCEROUS LESIONS

<Table>
<Caption>
                                                                       CONVENTIONAL
TYPE OF LESION                           RELATED CANCER             METHOD OF DIAGNOSIS
--------------                           --------------             -------------------
<S>                                      <C>              <C>
Actinic Keratosis                         Skin            Visual examination
Adenomatous Colonic Polyp                 Colorectal      Endoscopy (sigmoidoscopy or
                                                          colonoscopy)
Barrett's Esophagus                       Esophageal      Endoscopy (esophagogastroscopy)
Bronchial or Lung Dysplasia               Lung            Sputum cytology
Cervical Intraepithelial Neoplasia        Cervical        Papanicolau (Pap) smear
Prostatic Intraepithelial Neoplasia       Prostate        Prostate Specific Antigen (PSA) and
                                                          digital rectal examination
Transitional Cell Carcinoma in situ       Bladder         Cystoscopy
  (earliest stage)
</Table>

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

     CANCER.  The American Cancer Society estimates that over 1,268,000 new
cases of cancer were diagnosed and approximately 553,400 cancer deaths occurred
in the U.S. in 2001. Cancer is the second leading cause of death in the U.S.
Approximately 10 million people living in the U.S. have a history of cancer. Due
in part to the development of new diagnostic procedures, the highest number of
new cancer diagnoses are currently occurring in the prostate, breast, lung and
colon/rectum, representing approximately 50% of all new cancer cases.

     Cancer is generally treated by attempting to remove the cancerous cells,
either by surgery or by chemical or radiation therapies. Most currently
available chemotherapies and radiation therapies target all rapidly dividing
cells, both cancerous and healthy. These therapies can result in serious side
effects. The limited efficacy and harmful side effects of existing cancer
treatments and the costs associated with managing these side effects continue to
drive the search for new therapies.

CPI TECHNOLOGY

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

                                        4
<PAGE>

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

     CONVENTIONAL INDUCTION OF APOPTOSIS IN CANCER THERAPY.  Radiation therapy
and many existing chemotherapeutic agents act on proliferating cells by
disrupting cellular DNA synthesis to induce apoptosis. Once significant damage
occurs to the DNA, a process is initiated that is controlled by gatekeeper
proteins such as p53, Rb and NFkB tumor suppressors and modulated by various
proteins such as Fas, bax and bcl-2. This process results in the activation of
caspases, a family of enzymes called proteases, that results in triggering the
actual apoptotic cascade of cellular breakdown processes including chromosomal
condensation, DNA fragmentation, loss of mitochondrial gradients and membrane
blebbing. The end result of apoptosis is the dismantling of the cell into
apoptotic vesicles, which are cleared by the body. The apoptotic mechanism
identified by CPI does not appear to involve a dependency on p53 or NFkB which
is associated with many chemotherapeutic agents.

     DISCOVERY OF NOVEL APOPTOTIC MECHANISM.  Our research focuses on the
discoveries described below. We plan to continue this research in pursuit of our
oncology-related goals, including a third generation compound for the clinic; we
may not succeed. We believe we have discovered a mechanism that may regulate
apoptosis in cancer cells. Research suggests that two key elements of this
mechanism include cyclic GMP ("cGMP"), which is generated by enzymatic
conversion of GTP to cGMP by guanyl cyclase initiated by naturally-occurring
triggers, and is degraded also enzymatically by the enzymes cGMP
phosphodiesterases ("PDE"). The balance of synthesis and degradation plays a key
role in controlling the intracellular levels of cGMP. These elements are known
in normal cells but do not control apoptosis in normal cells. We believe, based
on a study of cells extracted from more than 50 human colon tumors, that
premalignant and malignant neoplastic tissues have a higher level of cGMP PDE
immunoactivity than neighboring normal tissue. We believe that this may prevent
neoplastic cells from responding to normal signals that trigger apoptosis. When
the activity of this cGMP PDE is elevated, as in neoplastic cells, cGMP levels
are reduced and potential activation of a critical downstream protein, protein
kinase G, is interrupted. Research suggests this is an adaptive mechanism
associated with mutations forcing cells toward dysplasia. Although we have a
high degree of confidence in our research findings to date, further research may
alter these findings or lead to new research insights which adversely impact our
research efforts.

     SELECTIVE INDUCTION OF APOPTOSIS BY CPI COMPOUNDS.  Research suggests that
our compounds, including Aptosyn(R) (exisulind) and CP461, may inhibit the
activity of cGMP PDE in neoplastic cells. Our compounds appear to reduce cGMP
PDE activity, thereby preventing it from degrading cGMP. Research suggests that
cGMP activates PKG to trigger critical downstream proteins which lead to the
subsequent activation of caspases. As in the case of some conventional cancer
treatments, caspases then trigger a cascade of events leading to increased
apoptosis. Two previously unknown substrates for PKG have been identified by CPI
research that, we believe, form the basis of apoptosis regulation in cancer
cells and not in normal tissues. These proteins are beta catenin and MEKK1. Beta
catenin serves a structural role in all cells but, we believe, becomes an over
abundant transcription factor in cancer cells driving resistance to apoptosis.
MEKK1 is a well-known regulator of MAP kinases that function to force cell
growth. MEKK1 activates Jun kinase (JNK) in cancer cells to induce apoptosis.
Our research shows that CPI compounds cause the reduction of beta catenin and
activate JNK and thus initiate apoptosis in neoplastic colon cells.

     RESEARCH AND DEVELOPMENT ACTIVITIES.  Our scientists have identified
intracellular proteins targeted by Aptosyn(R) (exisulind) and made significant
progress in characterizing the target proteins indicated above and several
others as well. We have developed pharmaceutical, immunological and molecular
biologic probes that may be used to identify additional indications to be
targeted and to develop diagnostic tools. We will continue to work to identify
additional elements involved in regulating the newly identified apoptotic
mechanism. We plan to investigate the potential applicability of its novel
apoptotic mechanism to hyperproliferative,

                                        5
<PAGE>

hypoproliferative and other disease conditions. We may not succeed in attaining
our research and development goals.

     Using our understanding of chemical structure and biological activity
(including advanced computer modeling efforts), we developed and expanded a new
class of selective apoptotic anti-neoplastic drugs (SAANDs). Within this new
class of SAANDs, we identified thousands of new chemical compounds in various
different chemical families and classes. We test selected new compounds for
inhibitory effects on the growth of cancer cells in vitro for the induction of
apoptosis and for activity against intracellular targets, including cGMP PDE.
Many of the newly synthesized compounds display greater apoptotic potency than
Aptosyn(R) (exisulind) in these tests.

     A number of our compounds have shown activity against in vitro cultures of
immortalized cell lines of transplantable human cancers of the breast, colon,
lung and prostate. Preliminary results of studies with our compounds in
short-lived primary cultures of human cancers obtained from individual patients
have shown activity against breast cancer. Using these data, we have evaluated
several new chemical entities ("NCEs"). We filed an investigational new drug
application ("IND") in December 1998 with respect to CP461 as our second product
development candidate. We plan to continue our evaluation of other compounds as
potential product development candidates. Significant additional preclinical and
clinical trials are necessary to determine the activity and utility of any
product development candidate. Please also read the section under "Risk Factors"
below which discusses our early stage of development, the absence of developed
products and the uncertainty of clinical trials.

     We plan to leverage our understanding of the structure-activity
relationship of our compounds, and to expand our proprietary chemical library,
through a variety of evolving discovery techniques that may include, from time
to time, combinatorial chemistry and high-throughput screening. We have
contracted from time to time with outside firms to create or purchase targeted
chemical libraries including diverse chemical classes. We screen such compounds
to identify additional classes of compounds of interest and potential lead
compounds.

PRODUCTS IN DEVELOPMENT

     We are developing a family of product candidates, SAANDs, targeted at the
treatment and management of precancerous lesions and cancer. Our first
generation compound, Aptosyn(R) (exisulind), is a sulfone derivative of the
nonsteroidal anti-inflammatory drug ("NSAID") sulindac. Aptosyn(R) (exisulind)
is not an NSAID and lacks the COX 1 and COX 2 inhibitory activity that is
associated with the serious upper gastrointestinal ulceration and bleeding and
kidney injury observed with NSAID use.

     We began clinical studies of Aptosyn(R) (exisulind) in 1994. In August
1999, the Company submitted an NDA to the FDA seeking approval to market
Aptosyn(R) (exisulind) for FAP, a rare precancerous condition that puts those
afflicted at high risk of developing colon cancer. In September 2000, the FDA
issued a "not approvable" letter with respect to the NDA for FAP. The focus of
the Company's continuing development of Aptosyn(R)(exisulind) is in cancer
rather than in precancerous conditions. In 2001, the Company began enrolling
patients in a 600-patient Phase III trial comparing the combination of
Aptosyn(R) (exisulind) and Taxotere(R)(docetaxel) against Taxotere(R)
(docetaxel) plus placebo in non-small cell lung cancer patients who have failed
a prior platinum-containing regimen.

     We began clinical studies of CP461 in 1999. Pilot Phase IIa studies of
CP461 in three cancer indications commenced in 2001. While we may select a third
candidate for clinical development by the end of 2002, Aptosyn(R) (exisulind)
and CP461 are the only two product candidates which we currently have in
clinical studies.

     We intend to continue to conduct clinical trials of Aptosyn(R) (exisulind),
CP461 and, with time, other SAANDs compounds for several cancer and precancer
indications. We may not be able to conduct sufficient clinical trials, or to
obtain favorable results in clinical trials, to support the filing and approval
of an NDA seeking marketing approval of any compound for any indication. FDA
approval is required for marketing a

                                        6
<PAGE>

drug in the United States. There can be no assurance that the FDA will ever
approve any of our product candidates for marketing.

     The clinical testing of Aptosyn(R) (exisulind) has involved only a limited
number of patients. The clinical testing of CP461 did not start until April
1999. Results obtained from studying a compound in any clinical trial are not
necessarily predictive of the results of the same compound (or of any other
compound) in other clinical trials, whether for the same indication or for other
indications. Please also read, below, the section under "Risk Factors" which
discusses our early stage of development, the absence of developed products and
the uncertainty of clinical trials.

     Numerous steps are required before a drug may be marketed in the U.S. These
steps include: (i) preclinical laboratory and animal tests; (ii) submission to
the FDA of an IND for an exemption which must become effective before human
clinical trials commence; (iii) human clinical trials to establish the safety
and efficacy of the drug; (iv) submission of a detailed NDA to the FDA; and (v)
FDA approval of the NDA. The number and type of clinical trials which may be
necessary to gain marketing approval from the FDA may depend upon the nature of
the disease indication, the size of the patient population, the nature of the
proposed therapy, the results of previous clinical trials, the availability of
other approved therapies and other factors.

     Clinical trials involve the administration of the investigational drug to
patients. Clinical trials typically are conducted in three phases that generally
are conducted sequentially. Drugs are first tested in Phase I for safety, side
effects, dosage tolerance, metabolism and clinical pharmacology. Phase II
involves tests in a larger but still limited patient population to determine the
efficacy of the drug for specific indications, to determine optimal dosage and
to identify possible side effects and safety risks. Phase III trials are
generally undertaken to evaluate the safety and efficacy of a drug candidate and
the overall risks and benefits of the drug in relationship to the treated
disease in light of other available therapies. Clinical trials may overlap in
design and objective. There can be no assurance that Phase I, Phase II or Phase
III testing will be completed successfully within any specified time period, if
at all. Furthermore, the Company and/or the FDA may suspend clinical trials at
any time if it decides that patients are being exposed to a significant health
risk or that there are other concerns about the validity of the trial or for
other reasons.

     In general, the FDA requires at least two adequate and well-controlled
clinical studies demonstrating efficacy in order to approve an NDA. Under the
Food and Drug Modernization Act of 1997 ("FDAMA"), the FDA may determine that
data from one such clinical trial may be sufficient. The FDA may request
additional information, such as long term toxicity studies or other long-term
studies relating to product safety or efficacy. Notwithstanding the submission
of such data, the FDA ultimately may decide that the application does not
satisfy its regulatory criteria for approval. Finally, the FDA may require
additional clinical tests following NDA approval.

     CLINICAL DEVELOPMENT OF SAANDS FOR CANCER

     The clinical portion of our product development program commenced with the
filing of an IND for Aptosyn(R) (exisulind) in December 1993. Our initial
efforts were directed at precancerous lesions such as the colonic polyps of FAP
patients. By 1997, we had expanded our clinical program to include treatment of
cancer. Currently, the treatment of cancer has become the focus of our clinical
programs.

     CLINICAL DEVELOPMENT OF APTOSYN(R) (EXISULIND) FOR CANCER

     Laboratory studies suggest that Aptosyn(R) (exisulind) arrests or slows the
progression of certain cancerous lesions. Based on the novel mechanism of
activity, we believe that Aptosyn(R) (exisulind) may be clinically useful either
as stand-alone therapy or in combination with radiation or conventional
chemotherapy in the treatment of cancers and the prevention of recurrence. Since
the mechanism of activity whereby Aptosyn(R) (exisulind) induces apoptosis
differs from that of conventional therapies, we believe that Aptosyn(R)
(exisulind) may arrest or slow the progress of cancer in cells that are
resistant to radiation or conventional chemotherapy. Results of clinical trials
of Aptosyn(R) (exisulind) in the treatment of any precancer indication

                                        7
<PAGE>

may not be predictive of the results that may be obtained from trials of
Aptosyn(R) (exisulind) for the treatment of cancer.

     LUNG CANCER.  Aptosyn(R) (exisulind) has shown some positive results in the
prevention of chemically-induced and implanted human lung cancer in rodents. We
initiated a study of the safety and efficacy of Aptosyn(R) (exisulind) in
patients with advanced lung cancer in December 1997. This exploratory study
initially included six patients and concluded with 16 patients.

     In the first quarter of 2001, we commenced enrollment in a Phase III
randomized placebo-controlled study of a regimen of Taxotere(R)(docetaxel) in
combination with Aptosyn(R) (exisulind) versus Taxotere(R) (docetaxel) in
combination with placebo in non-small cell lung cancer patients who have failed
a prior platinum-containing regimen. In early October 2001, after enrollment of
approximately 200 patients, FDA placed enrollment of new patients on clinical
hold pending completion of a planned interim safety analysis by an Independent
Data and Safety Monitoring Board (DSMB) and the FDA. Treatment of the 200
enrolled patients continued. In November 2001, following the interim safety
review, the DSMB recommended resuming enrollment of new patients to this study.
In early December 2001, the FDA lifted the clinical hold to new patient accrual
and enrollment to this study resumed.

     In general, the FDA requires at least two adequate and well-controlled
clinical studies demonstrating safety and efficacy in order to approve an NDA.
In certain cases, convincing results from one study may suffice. FDA policies
and practices are subject to frequent change. Please read the section below
entitled "Governmental Regulation" and the sections below under "Risk Factors"
devoted to government regulation and the uncertainties of clinical trials and of
the regulatory process. Currently the Company is conducting one Phase III study
of Aptosyn(R) (exisulind) in combination with Taxotere(R) (docetaxel).

     Lung cancer may be diagnosed by general practitioners or internists.
Oncologists manage the chemotherapeutic treatment of lung cancer.

     PROSTATE CANCER.  In vitro and in vivo studies suggest that Aptosyn(R)
(exisulind) inhibits growth of prostate cancer cells, including one type of
prostate cancer cell that is resistant to conventional chemotherapeutic drugs.
In August 1998, we completed enrollment of 96 patients in a one-year Phase
II/III clinical study for the prevention of prostate cancer recurrence. This
study involved men who had had a prostatectomy and had rising PSA levels. Rising
PSA levels are often a sign of recurrent prostate cancer that is not detectable
by current imaging or diagnostic methods. The endpoint of this study was the
arrest or delay in the elevation of PSA. The primary analysis of this study
showed a statistically significant difference in mean change in PSA levels from
baseline between drug and placebo groups: PSA levels continued to rise in the
placebo group, while in the drug-treated group PSA levels stabilized.

     Although a rising level of PSA is not itself a disease condition, it is
widely regarded in the medical community as a surrogate marker indicative of the
presence of prostate cancer. To our knowledge, no drug has yet been approved by
the FDA for the treatment of prostate cancer solely on the basis of data with
respect to PSA levels. Prevailing thought suggests that to achieve FDA approval,
efficacy must be shown in a clinical endpoint such as survival or tumor
regression.

     There is an ongoing Phase I/II study of the combination Aptosyn(R)
(exisulind) with Taxotere(R) (docetaxel) in hormone refractory prostate cancer
which is intended to assess the safety and efficacy of the combination in this
patient population. This study is supported by Aventis (see Collaborations with
Major Pharmaceutical Companies for Clinical Development of Aptosyn(R)
(exisulind) below). The Company has not commenced a Phase III combination
therapy study in this indication, due, in part, to the fact that Taxotere(R)
(docetaxel) has not received FDA approval for this specific indication, although
Taxotere(R) (docetaxel) is in widespread use in this patient population.

     According to the American Cancer Society, there were approximately 198,100
new cases of prostate cancer in the U.S. in 2001. Prostate cancer is commonly
diagnosed and treated by urologists, of whom there are approximately 9,000 in
the U.S.. Oncologists, of whom there are approximately 7,000 in the U.S., manage
the chemotherapeutic treatment of prostate cancer. Our sales force currently
markets Nilandron(R) (nilutamide) to urologists and oncologists.
                                        8
<PAGE>

     BREAST CANCER.  We have observed that Aptosyn(R) (exisulind) and other CPI
compounds show dose-related inhibitory effects in several in vitro breast cancer
cell systems, in in vivo chemically-induced cancer models and in in vitro
studies with primary breast cancer tissues removed from patients.

     In the first quarter of 2002, we initiated enrollment in a Phase II
combination therapy breast cancer trial of Aptosyn(R) (exisulind) and
Taxotere(R) (docetaxel), supported by Aventis, which is intended to determine
response rates in patients with metastatic breast cancer who may or may not have
received prior chemotherapy, to evaluate the side effect profile of the
combination of the two drugs, and to determine the effect on time to disease
progression.

     As of the first quarter of 2001, we commenced enrollment in a Phase II
combination therapy breast cancer trial, in cooperation with Roche Laboratories,
Inc. ("Roche") which is intended to evaluate the safety, efficacy and
pharmacokinetic interactions of Aptosyn(R) (exisulind) and Xeloda(R)
(capecitabine) in patients with metastatic breast cancer (see Collaborations
with Major Pharmaceutical Companies for Clinical Development of Aptosyn(R)
(exisulind) below).

     According to the American Cancer Society, there were approximately 193,700
new cases of breast cancer in the U.S. in 2001. Gynecologists usually diagnose
breast cancer, while oncologists manage the chemotherapeutic treatment.

     We are not in a position to know at this time if or when an NDA for
Aptosyn(R) (exisulind) will be filed for any cancer indication (whether alone or
in combination with a cancer chemotherapeutic compound of another pharmaceutical
company), or whether these clinical trials will show positive results, or which
additional clinical trials may be required for the submission of an NDA for a
particular cancer indication, or (if an NDA is filed) when or if the FDA will
find that Aptosyn(R) (exisulind), on the basis of any or all of the studies
which have been conducted or may hereafter be conducted, is sufficiently safe
and effective to warrant marketing approval by the FDA for any such indication.

     COLLABORATIONS WITH MAJOR PHARMACEUTICAL COMPANIES FOR CLINICAL DEVELOPMENT
     OF APTOSYN(R) (EXISULIND) IN COMBINATION WITH APPROVED CHEMOTHERAPEUTIC
     AGENTS

     In each of the collaborations with major pharmaceutical companies,
investigators have designed studies which have been reviewed by CPI and the
respective cooperating company. Under the cooperations, product rights will be
retained by each party for its respective product and the parties will share
access to the data.

     There is an ongoing Phase II study of the combination Aptosyn(R)
(exisulind) with weekly Taxotere(R) (docetaxel) as second line treatment for
patients with non-small cell lung cancer which is intended to assess the safety
and efficacy of the combination. This study is supported by Aventis.

     In the first quarter of 2001, we commenced enrollment in a Phase I/II
combination therapy lung cancer study, supported by Aventis, which is intended
to assess the toxicity profile of Aptosyn(R) (exisulind) in combination with
Taxotere(R) (docetaxel) and carboplatin in previously untreated patients with
metastatic non-small cell lung cancer, to evaluate the potential pharmacokinetic
interactions of the combination of the drugs, and to evaluate antitumor efficacy
of the combination with regard to time to tumor progression and/or treatment
failure. This study is ongoing.

     In the first quarter of 2001, we commenced enrollment in a Phase I/II
combination therapy lung cancer study, with the cooperation of GlaxoSmithKline
("Glaxo"), to determine the maximally tolerated dose of Aptosyn(R) (exisulind)
with a fixed dose of Navelbine(R) (vinorelbine tartrate injection) in previously
untreated elderly patients with advanced non-small cell lung cancer, and to
determine response rate, overall survival rate and toxicity profile. This study
is ongoing.

     In the first quarter of 2001, we commenced enrollment in a Phase I/II
combination therapy lung cancer study, with the cooperation of Eli Lilly and
Company ("Lilly"), which is intended to study Aptosyn(R) (exisulind) in
combination with Gemzar(R) (gemcitabine HCI) in patients with refractory or
recurrent non-small cell lung cancer. This study is intended to evaluate the
time to disease progression in patients who progressed through first-line
therapy (refractory) or patients who developed progressive disease more than

                                        9
<PAGE>

three months from completion of first-line therapy (recurrent), and also to
determine the response rate and toxicity profile. This study is ongoing.

     In the second quarter of 2001, we commenced enrollment in a Phase I/II
combination therapy lung cancer study, with the cooperation of Bristol Myers
Squibb ("BMS"), investigating Aptosyn(R) (exisulind) in combination with
TAXOL(R) (paclitaxel) plus Paraplatin(R) (carboplatin) as a first-line treatment
for patients with advanced non-small cell lung cancer. This Phase I/II study is
designed to evaluate escalating doses of Aptosyn(R) (exisulind) in combination
with a standard regimen of TAXOL(R) (paclitaxel) plus Paraplatin(R)
(carboplatin). This study is ongoing.

     In the first quarter of 2001, we commenced enrollment in a Phase II
combination therapy breast cancer trial, in cooperation with Roche which is
intended to evaluate the safety, efficacy and pharmacokinetic interactions of
Aptosyn(R) (exisulind) and Xeloda(R) (capecitabine) administered together in
patients with metastatic breast cancer and to determine the antitumor activity
of the combination therapy as measured by objective response. This study is
ongoing.

     CLINICAL DEVELOPMENT OF CP461 FOR CANCER INDICATIONS

     Preclinical toxicology and efficacy studies of CP461 support its potential
for anti-cancer activity against a broad range of human cancer cell lines. The
preclinical studies also appear to support the potential of CP461 to selectively
induce apoptosis in abnormal cells and inhibit the formation of precancerous
lesions without affecting apoptosis in normal healthy cells.

     The Company filed an IND for CP461 in December 1998. A single dose safety
and pharmacokinetic study in normal volunteers was completed in July 1999 and
demonstrated good tolerability in study subjects following oral administration.
Plasma levels of CP461 exceeded those predicted to be necessary to achieve
anti-cancer effects, based on preclinical studies. No clinically significant
drug-related side-effects were observed at doses given in this study.

     Results from a multiple dose safety, pharmacokinetic and preliminary
efficacy study in late stage cancer patients led us to choose doses of 400-800
mg of CP461 for our first three pilot Phase II clinical studies.

     In August 2001, we announced initiation of pilot Phase IIa studies of CP
461 in three cancer indications. Preliminary interim data with respect to each
of these three studies as of January 2002 is summarized below.

     CHRONIC LYMPHOCYTIC LEUKEMIA (CLL).  Investigators initially enrolled 15
previously untreated patients at a 400 mg total daily dose (200 mg twice daily)
in the Phase IIa study of CP461 in CLL. Early indications of anticancer
activity, combined with acceptable safety, prompted a decision to enroll six
additional patients in the study at a total daily dose of 800 mg (400 mg twice
daily). Investigational Review Board ("IRB") approval for the 800 mg total daily
dose was received in late 2001. At interim evaluation of the 15 patients
enrolled at 400 mg, four experienced a major hematologic response (a greater
than 50% decrease in absolute lymphocyte count), three experienced a minor
hematologic response (a 25%-50% decrease in absolute lymphocyte count), six had
stability of disease, and two exhibited disease progression. The responding
patients had been treated with CP461 for periods of up to 30 weeks. In each of
the responding patients, a hematologic response was initially observed within
two to six weeks from the onset of treatment.

     HORMONE-REFRACTORY PROSTATE CANCER.  In the Phase IIa study of
hormone-refractory (late-stage) patients with measurable metastatic disease,
investigators had enrolled eight patients, out of a total of 19 intended
patients, at a total daily dose of 400 mg (200 mg twice daily). At an interim
evaluation of six patients evaluable for response (those who received at least
eight weeks of treatment), one patient demonstrated a 50% reduction in liver
metastasis, a 40% reduction in PSA and an improvement in one of the two lesions
on bone scan. The principal investigator on this study concluded that the data
supported increasing the dosage of CP461 to 800 mg per day in this trial.

     RENAL CELL (KIDNEY) CARCINOMA.  Investigators had enrolled 19 patients at a
total daily dose of 400 mg (200 mg twice daily) in the Phase IIa study of
heavily pretreated patients with advanced renal carcinoma. At interim evaluation
of 16 evaluable patients, six had experienced stable disease. On the basis of
these results,

                                        10
<PAGE>

the investigators planned to treat additional patients with advanced renal
carcinoma who have had less extensive prior treatment at a total daily dose of
800 mg (400 mg twice daily).

     In each of these pilot Phase IIa studies, CP461 was shown to date to have
been generally well-tolerated. The most common treatment-related adverse events
reported were mild/moderate fatigue, sweating, loss of appetite, nausea and
reversible elevation of liver enzymes.

     CLINICAL DEVELOPMENT OF APTOSYN(R) (EXISULIND) FOR PRECANCEROUS LESIONS

     The development of a drug candidate for precancerous lesions is not well
understood. With limited exceptions, the FDA has not approved any drug for
precancerous lesions. The FDA may require that a drug candidate developed for
precancerous lesions be shown effective not only in reducing precancerous
lesions or other precancerous symptoms, but also in preventing or reducing the
incidence of cancer in the studied population. This may require clinical trials
following large numbers of patients over very long periods of time. Our initial
efforts were directed at precancerous lesions such as the colonic polyps of FAP
patients. By 1997, we had expanded our clinical program to include cancer
itself. As described above, the major portion of our resources is currently
being committed to cancer trials.

     FAMILIAL ADENOMATOUS POLYPOSIS (FAP).  Our clinical program began with the
testing of Aptosyn(R) (exisulind) in the precancerous polyps of FAP patients.
FAP is an inherited disease characterized by the development of hundreds to
thousands of adenomatous polyps in the colon and the progression to colon cancer
if left untreated. This disease can be confirmed within a family by genetic
testing. Most FAP patients must be endoscopically screened beginning in their
teenage years and must have a substantial portion of their large intestine
removed by age 20. Even with this treatment, these patients continue to develop
polyps in the remaining rectal tissue and are typically monitored by endoscopy
two to four times each year. It is anticipated that polyps will be removed at
each examination. Our clinical program has been testing Aptosyn(R) (exisulind)
in adult patients who previously have had most of their large intestine removed,
leaving the rectum intact (sub-total colectomy), and in the pediatric population
whose colons have not been removed. It is estimated that FAP occurs in between
8,000 and 36,000 persons in the U.S.

     During 1995-1998 we conducted open label polyp regression studies
evaluating Aptosyn(R) (exisulind) in the regression of existing polyps, and
potential prevention of new polyps. Eighteen adult FAP patients commenced taking
Aptosyn(R) (exisulind) in these polyp regression studies. Reduction in the
number and size of exophytic (i.e., raised over the surface) precancerous rectal
polyps was observed to be correlated to dosage, with 600 milligrams per day
appearing to have a more pronounced effect than 400 milligrams per day. Each of
the 12 patients who received 500 milligrams per day or more from the outset of
the studies was observed to reduce his number of exophytic polyps, indicating
both regression of existing polyps and prevention of new polyps. Examination of
certain regressing polyps following drug treatment showed increases in the rate
of apoptosis as compared with the rate of apoptosis of untreated polyps at the
beginning of the study. At the same time, the rate of apoptosis in nearby normal
tissue measured unchanged, suggesting that Aptosyn(R) (exisulind) induces
apoptosis in neoplastic cells without affecting apoptosis in normal cells.

     During 1997-2000 we conducted a double-blind, placebo-controlled study, and
extensions studies, of Aptosyn(R) (exisulind) in polyp prevention in adult FAP
patients. The analysis of all 65 patients who completed the initial one-year
study (regardless of whether they met the inclusion criteria of the study)
showed a reduction in new polyp formation in drug treated patients. However, the
reduction did not achieve statistical significance; we believe this may be due
to the variations introduced by virtue of the fact that several centers included
patients in the study who did not meet the study's inclusion/exclusion criteria.
In the patient group determined to have met the eligibility criteria of the
study -- those who form between approximately 10 and approximately 40 polyps per
year -- Aptosyn(R) (exisulind) demonstrated a statistically significant
reduction in new polyp formation when compared to placebo. Of the 34 patients
meeting these eligibility criteria, the 15 patients on Aptosyn(R) (exisulind)
showed a statistically significant reduction in new polyp formation of
approximately 50% as compared with the 19 patients on placebo. Adverse events
observed in this study included reversible elevations of liver enzymes (most
frequently managed by dose modification or interruption) and episodes of severe
abdominal pain, due in some patients to cholecystitis or pancreatitis occurring

                                        11
<PAGE>

most often in patients with underlying biliary disease (gallstones or tumors
impinging on their bile ducts). In the majority of these patients, these events
did not preclude completion of treatment. Of the 65 patients who completed the
polyp prevention study, 55 elected to participate in, and 47 completed a
one-year extension study. The 25 former placebo patients who crossed over to
Aptosyn(R) (exisulind) experienced during the one-year extension study a 49%
reduction in their polyp formation rate. The 22 patients who continued on
Aptosyn(R) (exisulind) experienced declines in their polyp formation rate to 54%
below the already reduced rate they had demonstrated during the first year on
drug.

     We commenced an NDA filing for Aptosyn(R) (exisulind) for FAP in 1998, with
submission to the FDA of the chemistry section of the NDA in November and
submission of the pharmacology/toxicology section of the NDA in December. In
August 1999, we submitted the third, or clinical, section of the NDA to formally
complete the NDA submission. In October 1999 and June 2000, we submitted
additional data with respect to continuing FAP trials. On September 25, 2000,
the FDA issued a "not approvable" letter for the NDA for FAP. The future of the
FAP program is uncertain.

     SPORADIC ADENOMATOUS COLONIC POLYPS (SAP).  Sporadic adenomatous colonic
polyps are relatively common precancerous lesions occurring in the large
intestine. These polyps are histologically, microscopically and genetically
indistinguishable from the polyps of FAP. More than 30% of people in the U.S.
over the age of 50 have sporadic adenomatous colonic polyps. Most of these
people will develop only one or two polyps and, once the polyps are removed,
will not require significant ongoing medical attention. There are, however,
subgroups of people at higher than usual risk of developing colorectal cancer
who should be monitored frequently. These patients include people with close
relatives that have had colorectal cancer, people over age 60 and people with
multiple polyps or polyps which are large or severely dysplastic or which recur
frequently.

     In September 1997, we completed a two-month safety and pharmacokinetic
study of Aptosyn(R) (exisulind) in 18 patients who had a history of either
sporadic adenomatous colonic polyps or cervical dysplasia. We then initiated a
one-year multi-center study in the regression of sporadic colonic polyps. This
study, initiated in December 1997, was a double-blind, placebo-controlled study
to evaluate the safety and efficacy of different doses of Aptosyn(R) (exisulind)
for the treatment of existing sporadic adenomatous colonic polyps. Since the
polyps developed by patients may in 40-50% of cases prove to be hyperplastic
(generally considered to be benign and to lack the potential to transform into
cancer) rather than adenomatous (precancerous), the study enrolled 281 patients.
Of the 155 adenomatous polyp patients entering the study, 41 discontinued prior
to completion of the required one-year of therapy, 12 for adverse events (two
patients in the placebo group and five patients in each exisulind group). The
remaining 114 patients fulfilled the three prospectively defined criteria to be
deemed evaluable: they completed the full year of the study; they completed
three colonic endoscopies (baseline, six-month and study termination) and their
remaining polyps were not hyperplastic.

     The efficacy measurements for the evaluable patients in this one-year,
single-agent study included: 1) the difference in the median change in
adenomatous polyp size from baseline between the placebo-treated and
exisulind-treated groups, 2) the number of patients that demonstrated a complete
or partial response [a $50% reduction in size of the index polyp] to treatment,
and 3) the progression of disease [$ 25% increase in size of the index polyp].

     The results of analyses of all three of these efficacy parameters in
patients on Aptosyn(R) (exisulind) 200 mg twice a day (bid) showed improvement
and were statistically significant compared to patients on placebo. The average
polyp size was reduced by 35% on Aptosyn(R) (exisulind) 200 mg bid, while
patients on placebo demonstrated a 5% increase in polyp size. Aptosyn(R)
(exisulind) 100 mg bid results were not different from placebo. Aptosyn(R)
(exisulind) was generally well tolerated by the 186 patients treated with
Aptosyn(R) (exisulind) during the study. Consistent with previous studies,
adverse events observed in the Aptosyn(R) (exisulind) treated patients included
dyspepsia and reversible liver enzyme elevations (both lower in frequency than
in the previously reported prostate cancer trial of Aptosyn(R) (exisulind), and
abdominal pain, occasionally severe.

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<PAGE>

     While the results of the foregoing trial are scientifically promising,
registration-directed trials in the sporadic adenomatous polyp indication would
be significantly larger, perhaps requiring the enrollment of a thousand or more
patients, and would take many years to conduct. The Company is evaluating the
regulatory and competitive environment and is unlikely to pursue regulatory
approval for use of Aptosyn(R) (exisulind) in SAP. The population at risk for
developing SAP includes all people over 50. A drug targeted for widespread
application in a relatively healthy population will require an extensive safety
and efficacy database for FDA approval. As of this time the major portion of our
resources is being committed to the cancer trials described above.

     In conjunction with the foregoing section "Products in Development," please
read in the "Risk Factors" section below the portions which discuss our early
stage of development, the absence of developed products, the uncertainty of
clinical trials, technological uncertainty and regulatory uncertainty, as well
as those portions which discuss extensive government regulation and the lack of
assurance of necessary FDA and other regulatory approvals.

AGREEMENTS TO MARKET PRODUCTS MANUFACTURED BY OTHER COMPANIES

     NILANDRON(R) (NILUTAMIDE).  In July 2000, we entered into a marketing and
promotion agreement with Aventis (the "Nilandron Agreement") granting us the
exclusive rights to market Nilandron(R) (nilutamide) to urologists in the U.S.
and Puerto Rico for use in patients who suffer from prostate cancer.
Nilandron(R) (nilutamide) is a hormonal therapy that blocks the production of
testosterone and is used to increase survival time and promote disease
regression in men with advanced prostate cancer. Utilizing our existing
relationship with Innovex, Inc., a leading provider of contract sales and
marketing solutions in the healthcare industry, we hired and trained a contract
sales force and commenced promoting Nilandron(R) (nilutamide) in the third
quarter of 2000. Under the terms of the Nilandron Agreement, we engage in
marketing and promotional services for Nilandron(R) (nilutamide), we are
responsible for the expenses of this marketing and promotion activity, and we
receive a percentage of the gross margin on Aventis sales, if any, of
Nilandron(R) (nilutamide) in excess of a pre-established gross margin threshold.
We recognized revenue from the Nilandron Agreement of $942,231 in 2001 and
$329,694 for the last four months of 2000. The term of the Nilandron Agreement
is from September 1, 2000 to December 31, 2002, subject to earlier termination
as set forth in the agreement. The Nilandron Agreement also provides Aventis
with the right to convert to a nonexclusive agreement upon 90 days' written
notice to the Company.

     GELCLAIR(TM) CONCENTRATED ORAL GEL.  In January, 2002 we signed an
agreement with Sinclair (the "Gelclair Agreement") of Godalming, Surrey, England
to become the exclusive distributor of Gelclair(TM) Concentrated Oral Gel in
North America. We plan to market and sell Gelclair(TM) Concentrated Oral Gel
initially in the oncology market for use in inflammation and ulceration of the
mouth and throat (referred to as oral mucositis or stomatitis) caused by
chemotherapy or radiation therapy. We are evaluating opportunities to market and
sell Gelclair(TM) Concentrated Oral Gel within oral surgery and other dental
markets.

     The FDA granted 510(k) clearance to market Gelclair(TM) Concentrated Oral
Gel in December 2001 for use in the management of pain and relief of pain by
adhering to the mucosal surface of the mouth, soothing oral lesions of various
etiologies. These applications include oral mucositis/stomatitis (which may be
caused by chemotherapy or radiation therapy), irritation due to oral surgery and
traumatic ulcers caused by braces or ill-fitting dentures or disease.
Gelclair(TM) Concentrated Oral Gel is also indicated for treatment of diffuse
aphthous ulcers. The product, which is a clear viscous gel, is applied by
rinsing in the mouth for a short period of time, forming a coating over the
mucosal surface of the mouth and thereby soothing the pain and discomfort from
oral lesions.

     Oral mucositis is an inflammation and ulceration of the lining of the mouth
and throat most commonly associated with chemotherapy or radiation therapy for
cancer. Cancer patients often identify oral mucositis as one of the most
debilitating side effects of chemotherapy or radiation therapy. Symptoms of oral
mucositis may include painful ulcerations, redness, and swelling in the mouth.
More severe symptoms include extreme pain that may prevent the patient from
eating and necessitate hospitalization and intravenous nutrition, serious risk
of infection and the interruption of cancer therapy.

                                        13
<PAGE>

     Sources estimate that approximately 300,000 cancer patients in the U.S.
suffer from oral mucositis associated with cancer treatment. Oral mucositis
affects almost all patients receiving radiation therapy for head and neck cancer
as well as patients receiving radiation therapy in the upper half of the chest.
The incidence of mucositis in patients receiving cancer chemotherapy varies in
accordance with a number of risk factors which include age, condition of oral
health and hygiene, disease condition, and type, dosage and frequency of
chemotherapeutic treatment.

     In an open-label study of 30 patients with mucositis, severe aphthous
ulcers or pain from oral surgery, the short and medium term impact of
Gelclair(TM) Concentrated Oral Gel on oral discomfort and pain was evaluated.
All patients took Gelclair(TM) Concentrated Oral Gel and reported a substantial
reduction in oral discomfort within 5-7 hours of initial treatment. Patients
experienced a 92% reduction in mean overall oral scores 5-7 hours after initial
treatment. Also, 87% of patients reported that Gelclair(TM) Concentrated Oral
Gel improved overall pain and discomfort associated with eating or drinking over
a 7-10 day period.

     The term of the Gelclair Agreement is for 10 years with provision for
extension and/or termination under certain circumstances. Under the Gelclair
Agreement, we are the exclusive distributor of Gelclair(TM) Concentrated Oral
Gel for the U.S., Canada and Mexico. Sinclair is responsible for filing
applications for marketing approval of Gelclair(TM) Concentrated Oral Gel in
Canada and Mexico. We will purchase product from Sinclair pursuant to forecasts
to be adjusted from time to time, subject to minimum annual purchase
requirements. Product launch is expected in the second quarter of 2002. We have
committed to purchase $2 million of inventory in conjunction with the product
launch and to order an additional $2 million of inventory in the fourth quarter
of 2002. Minimum annual purchase requirements in 2003 and 2004 are $3 million
and $5 million, respectively. The agreement also provides for future potential
payments to Sinclair of up to $3 million depending on achievements related to
sales, patent and clinical trial milestones. Our sales force will market to the
oncology marketplace. For the oral surgery and dental marketplace we may market
through arrangements with a third party.

THIRD-PARTY ARRANGEMENTS

     We contract with university-based researchers and commercial vendors
throughout the U.S., Europe and other areas who furnish cell biology studies, in
vivo pharmacological studies, in vivo drug candidate screening, animal
toxicological studies, scale-up and synthesis of promising new compounds,
manufacture of clinical and commercial supplies, conduct and monitoring of
clinical studies, laboratory analysis and/or other goods and services incident
to the development of the our business. Please read the "Risk Factors" sections
below which discuss reliance on third parties.

     The Nilandron Agreement with Aventis is dependent upon Aventis' continuing
to manufacture and sell Nilandron(R) (nilutamide), as well as upon future mutual
agreement to extend the term of the Nilandron Agreement beyond the end of 2002.
The ten-year Gelclair Agreement for our exclusive distribution of Gelclair(TM)
Concentrated Oral Gel in North America is dependent upon Sinclair's continuing
to manufacture and supply Gelclair(TM) Concentrated Oral Gel in accordance with
specifications and in adequate quantities, as well as our fulfillment of our
minimum annual purchase requirements and other obligations under the agreement.
These third parties are subject to FDA regulations including regulations
regarding Good Manufacturing Practices with respect to the manufacture of the
products subject to our marketing arrangements. See Government Regulation and
Risk Factors below for a discussion of regulations and the risks associated with
failure to comply with these regulations.

     In June 1991, CPI entered into a research and license agreement with the
University of Arizona (the "University"). Under the agreement, we agreed to
attempt to commercialize at least one product while the University agreed to
conduct a research program in support of our efforts. The agreement, as amended,
provided for us to establish a budget for the research program with the
University on an annual basis and for us to be licensed under all patents based
on inventions developed by the University's employees in conjunction with us. We
have agreed to pay to the University a royalty based on sales of products, if
any based on each such patent family; this would apply to Aptosyn(R) (exisulind)
and CP461. The research portion of the agreement expired on June 26, 2000.

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<PAGE>

COLLABORATIVE NATURE OF THE PHARMACEUTICAL INDUSTRY

     Our industry requires highly specialized expertise in a wide variety of
disciplines and is characterized by collaborative and cooperative endeavors
among participants. This dynamic involves the receipt of assistance from third
parties, the payment of royalties or other value in exchange for this
assistance, and the risks of dependence upon third parties. Intra-industry
discussion and interchange is an ongoing process, covering subject matters
ranging from basic research to strategic alliance; a strategic alliance may
substantially broaden or narrow the scope of a company's activities or otherwise
affect the ability of a company to control and direct its own affairs. We have
participated in this process for years and intend to continue to do so. The
arrangements discussed in the two immediately preceding subsections above, and
in the subsection "Marketing and Sales" below, are illustrative of this process.
The Company may enter into, or may refuse or fail to enter into, licensing,
partnership or collaborative arrangements or strategic alliances which accord to
other companies rights with respect to one or more Company compounds,
technologies or programs or in which the Company acquires new rights and
obligations. During intra-industry discussions, agendas may substantially
broaden or may substantially narrow from those anticipated at the outset; most
frequently, discussions serve only as information exchange and do not lead to
transactions of any kind. The fact of intra-industry discussion activity should
not be misunderstood as an indication that our business, strategies or prospects
are about to change; on the other hand, the unpredictable nature of ubiquitous
industry interchange may lead to developments which neither we nor others may be
in a position to anticipate. As discussed above under "Business Strategy," we
intend to develop industry collaborations and relationships to achieve our
objectives. However, we are not in a position to predict what, if any,
collaborations, alliances or transactions we may enter into in addition to those
described elsewhere in this description of our business.

ADVISORY BOARD

     We are assisted in our research and development activities by our
Scientific Advisory Board ("SAB"). The SAB is composed of physicians and
scientists who review our research and development, discuss technological
advances relevant to our business and otherwise assist us on scientific and
clinical matters. The members of the SAB are appointed by our management. The
SAB meets periodically. Certain members meet in smaller groups or meet with us
individually as requested to address selected topics. Dr. Rifat Pamukcu, our
Chief Scientific Officer and Executive Vice President, Research and Development,
served as co-chair of our SAB prior to joining CPI in 1993, and continues to
participate in all SAB meetings. W. Joseph Thompson, Ph.D., our Vice President,
Research, serves as Co-Chair for SAB meetings. We compensate non-employee SAB
members in either cash or stock options or both for their services; we also
reimburse them for expenses incurred when traveling to and attending meetings.
Non-employee SAB members have commitments or consulting contracts with other
organizations and companies, some of which are competitors or potential
competitors; such commitments may limit the availability of such members to us.
None of these individuals is expected to devote more than a small portion of his
time to our affairs. The members of the SAB are listed below.

                           SCIENTIFIC ADVISORY BOARD

<Table>
<Caption>
                   NAME                                     PROFESSIONAL AFFILIATION
                   ----                                     ------------------------
<S>                                         <C>
Dennis Ahnen, M.D. .......................  Professor of Medicine, University of Colorado School of
                                            Medicine; Director of Cancer Prevention and Control,
                                            University of Colorado Cancer Center
David S. Alberts, M.D. ...................  Associate Dean of Research, Director of Cancer
                                            Prevention and Control Program, and Professor of
                                            Medicine and Pharmacology, Arizona Cancer Center,
                                            University of Arizona
Randall W. Burt, M.D. (Chairman)..........  Senior Director for Prevention and Outreach, Huntsman
                                            Cancer Institute at the University of Utah, Professor of
                                            Medicine and Chief, Division of Gastroenterology,
                                            University of Utah School of Medicine;
</Table>

                                        15
<PAGE>


            SCIENTIFIC ADVISORY BOARD (CONTINUED)

<Table>
<Caption>
                   NAME                                     PROFESSIONAL AFFILIATION
                   ----                                     ------------------------
<S>                                         <C>
Stephen K. Carter, M.D. ..................  Consultant; formerly in clinical, regulatory, research
                                            and development positions at Sugen, Inc., Boehringer
                                            Pharmaceuticals, Bristol-Myers Squibb, and the National
                                            Cancer Institute
Sharron H. Francis, Ph.D. ................  Professor, Department Molecular Physiology and
                                            Biophysics, Vanderbilt University School of Medicine
Anil Kumar Rustgi, M.D. ..................  T. Grier Miller Associate Professor of Medicine and
                                            Genetics, University of Pennsylvania School of Medicine
Alan C. Sartorelli, Ph.D. ................  Alfred Gilman Professor of Pharmacology, Yale University
                                            School of Medicine; Director of Yale Comprehensive
                                            Cancer Center
Joan H. Schiller, M.D., F.A.C.P. .........  Professor, Department of Medicine, Section of Medical
                                            Oncology, University of Wisconsin, Madison, WI.
Richard Schilsky, M.D.....................  Associate Dean for Clinical Research, Professor of
                                            Medicine, Biological Sciences Division and the Pritzker
                                            School of Medicine, Director of University of Chicago
                                            Cancer Research Center
George W. Sledge, M.D. ...................  Professor, Departments of Medicine and Pathology and
                                            Ballve Lantero Professor of Oncology, Indiana
                                            University.
Daniel D. Von Hoff, M.D. .................  Director, Arizona Cancer Center; Professor of Medicine,
                                            The Arizona Health Sciences Center, Tucson; Co-Director
                                            of Research, U.S. Oncology, Inc.
Louis M. Weiner, M.D. ....................  Chairman of the Department of Medical Oncology, Division
                                            of Medical Science at Fox Chase Cancer Center; Professor
                                            in the Department of Medicine, Temple University School
                                            of Medicine
I. Bernard Weinstein, M.D. ...............  Frode Jensen Professor of Medicine, Professor of
                                            Genetics and Development and Public Health, Columbia
                                            University; Director Emeritus, Herbert Irving
                                            Comprehensive Cancer Center, Columbia University
</Table>

PATENTS, TRADEMARKS AND PROPRIETARY TECHNOLOGY

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

     We hold title or exclusive licenses to several issued U.S. patents and
pending patent applications relating to the therapeutic uses of Aptosyn(R)
(exisulind) in the treatment of neoplasia, precancerous lesions and/or other
indications. A composition of matter patent is not available to us (or anyone
else) because the sulfone derivative of sulindac, now named exisulind, was
described in the scientific and patent literature over 20 years ago. Thus, our
current patent rights relating to Aptosyn(R) (exisulind) are limited to a series
of patents and patent applications pertaining to various specific uses of
Aptosyn(R) (exisulind). We have also been issued or hold exclusive licenses to
various foreign patents (including patents in various European countries,
Australia, Canada, Korea and Japan) and pending applications relating to the use
of Aptosyn(R) (exisulind) in pharmaceutical compositions for the treatment of
neoplasia, precancerous lesions and/or other indications. In Europe, our patent
rights relating to Aptosyn(R) (exisulind) are directed to the use of Aptosyn(R)
(exisulind) in the manufacture of pharmaceutical compositions for the treatment
of precancerous lesions. We also hold title or exclusive licenses to several
pending U.S. and international patent applications relating to uses of exisulind
in combination with certain existing conventional chemotherapeutics.

                                        16
<PAGE>

     We also hold title or exclusive licenses to patents and pending
applications relating to CP461, its composition of matter and various of its
therapeutic uses.

     In addition, we hold title or exclusive licenses to many patents and patent
applications on other compounds, or therapeutic methods involving such
compounds, for the treatment of colonic polyps, precancerous lesions and/or
neoplasia. We also have patents and patent applications on methods for screening
compounds for their usefulness in selectively inducing apoptosis. We have also
filed patent applications relating to diagnostic methodologies, and patent
applications relating to certain business methods and packaged pharmaceuticals
with descriptive material describing and relating to the mechanisms of action.

     We intend to file additional applications, as appropriate, for patents on
new compounds, products, or processes discovered or developed through
application of our technology.

     Research is an on-going process. Whether a new development or discovery
could be successfully patented is a very complicated question and depends on the
facts as they develop over time. Thus, we cannot provide assurance that our
continuing research activities will discover or develop patentable products or
processes, or that patents will issue from any of the currently pending patent
applications, or that claims granted on issued patents will be sufficient in
their validity, breadth and enforceability to protect our technology or
competitive commercial advantage. Potential competitors or other researchers in
the field may have filed patent applications, been issued patents, published
articles or otherwise created prior art that could restrict or block our efforts
to obtain additional patents. Similarly, we cannot predict whether our issued
patents or pending patent applications, if issued, will be challenged,
invalidated, circumvented or breached by others, or whether judicial protection
and enforcement will be available to us to counteract such actions by others, or
whether the rights granted thereunder will provide us with proprietary
protection or competitive advantages. Our patent rights also depend in part on
our compliance with technology and patent licenses upon which our patent rights
are based and upon the validity of assignments of patent rights from consultants
and other inventors that are not or were not employed by us.

     Competitors may manufacture and sell our potential products in those
countries where we have not filed for patent protection or where patent
protection may be unavailable, not obtainable or ultimately not enforceable. The
ability of such competitors to do this is usually governed by the patent laws of
the countries in which the product is sold. If clinical uses of exisulind are
discovered beyond those set forth in our patent claims, we may not be able to
enforce our patent rights against companies marketing exisulind for such other
clinical uses.

     Our success will also depend, in part, on our not infringing patents issued
to others. Pharmaceutical companies, biotechnology companies, universities,
research institutions and others may have filed patent applications or have
received, or may obtain, issued patents in the U.S. or elsewhere relating to
aspects of our technology. It is uncertain whether the issuance of any
third-party patents will require us to alter our products or processes, obtain
licenses or cease certain activities. Some third-party applications or patents
may conflict with our issued patents or pending applications. Such conflict
could result in a significant reduction of the coverage of our issued or
licensed patents. In addition, if patents are issued to other companies which
contain blocking, dominating or conflicting claims and such claims are
ultimately determined to be valid, we may be required to obtain licenses to
these patents or to develop or obtain alternative technology. If any licenses
are required, we might not be able to obtain any such licenses on commercially
favorable terms, if at all; and if these licenses are not obtained, we might be
prevented from pursuing the development of certain of its potential products.
Our failure to obtain a license to any technology that we may require to
commercialize our products may have a material adverse impact on our business,
financial condition and results of operations.

     Litigation may be necessary to enforce any patents issued or licensed to
us. Litigation may be necessary to determine the scope and validity of the
proprietary rights of others. Litigation could result in substantial costs to us
which may have a material adverse effect on our business, financial condition
and results of operations.

     Under the abbreviated new drug application ("ANDA") provisions of U.S. law,
after four years from the date marketing approval is granted to us by the FDA
for a patented drug, a generic drug company may submit

                                        17
<PAGE>

an ANDA to the FDA to obtain approval to market in the U.S. a generic version of
the drug patented by us. If approval were given to the generic drug company, we
would be required to promptly initiate patent litigation to prevent the
marketing of such a generic version prior to the normal expiration of the
patent. We cannot provide assurance that our issued or licensed patents would be
held valid by a court of competent jurisdiction. In addition, if our competitors
file patent applications in the U.S. that claim technology also claimed by us,
we may have to participate in interference proceedings to determine priority of
invention. These proceedings, if initiated by the U.S. Patent and Trademark
Office, could result in substantial cost to us, even if the eventual outcome is
favorable to us. An adverse outcome with respect to a third-party claim or in an
interference proceeding could subject us to significant liabilities, require
disputed rights to be licensed from third parties, or require us to cease using
such technology, any of which could have a material adverse effect on our
business, financial condition and results of operations.

     We also rely on trade secrets to protect technology, especially where
patent protection is not believed to be appropriate or obtainable or where
patents have not been issued. We attempt to protect our proprietary technology
and processes, in part, by confidentiality agreements and assignment of
invention agreements with our employees and confidentiality agreements with our
consultants and certain contractors. We cannot provide assurance that these
agreements will not be breached, that we would have adequate remedies for any
breach, or that our trade secrets will not otherwise become known or be
independently discovered by competitors. If our trade secrets or other
intellectual property should become known to our competitors, this could result
in a material adverse effect on our business, financial condition and results of
operations. To the extent that we or our consultants or research collaborators
use intellectual property owned by others in work for us, disputes may arise as
to the rights to related or resulting know-how and inventions.

     Aptosyn(R) is our registered trademark for exisulind. We have filed to
perfect foreign trademark rights in the mark. While we have searched for
confusingly similar marks and believe that Aptosyn(R) (exisulind) is available
for use on our product under prevailing standards of trademark law, there can be
no guarantee that that mark will survive any challenges by others, or that
others have not perfected or attempted to perfect rights in a confusingly
similar mark. In the event of a successful challenge to our adoption and use of
Aptosyn(R) (exisulind), we could be forced to change our proposed mark in one or
more countries in the world.

COMPETITION

     The industry in which we compete is very competitive. It is characterized
by extensive research and development efforts and rapid technological progress.
New developments occur and are expected to continue to occur at a rapid pace.
Discoveries or commercial developments by our competitors may render some or all
of our potential products obsolete, subject to competition or non-competitive.
This would have a material adverse effect on our business, financial condition
and results of operations. Our competitive position also depends on our ability
to attract and retain qualified scientific and other personnel, develop
effective proprietary products, implement development and marketing plans,
obtain patent protection and secure adequate capital resources.

     We face competition in our specific areas of focus. In the fields of cancer
therapy and the prevention of precancerous and cancerous lesions, other products
and procedures are in use or in development that may compete directly with the
products that we are seeking to develop and market for cancer treatment or
cancer prevention. Surgery, radiation, chemotherapeutic agents and compounds
that interfere with hormone activities have been in use for years in the
treatment of cancer. Nolvadex(R) (tamoxifen citrate) has been granted limited
approval for use in the prevention of breast cancer. The arthritis drug
Celebrex(R) (celecoxib) has been granted approval for the regression of polyps
in FAP patients. We are aware of clinical trials in which a number of
pharmaceutical and nutritional agents are being examined for their potential
usefulness in the treatment of precancerous lesions and cancer. These include
studies of additional chemotherapeutic agents, monoclonal antibodies, hormone
blockers, cyclooxegenase inhibitors, thalidomide and other anti-angeogenesis
agents in the treatment of cancer; studies of NSAID-like compounds,
cyclooxygenase inhibitors, difluoromethylornithine ("DFMO") and natural
nutrients in the treatment of FAP and sporadic colonic polyps; studies of
retinoids and DFMO in the treatment of cervical dysplasia; and studies of
tamoxifen for the prevention of breast cancer. Additional compounds being tested
in various epithelial lesions include
                                        18
<PAGE>

compounds related to aspirin, various vitamins and nutritional supplements,
oltipraz, N-acetyl cysteine and compounds that interfere with hormone
activities. The studies are being conducted by pharmaceutical and biotechnology
companies, major academic institutions and government agencies. There are other
agents, including certain prescription drugs, that have been observed to have an
effect in the general area of cGMP PDE; although we are not aware that any third
party has demonstrated the preclinical utility of these compounds in the
treatment of precancerous or cancerous lesions, there can be no assurance that
such existing or new agents will not ultimately be found to be useful, and
therefore competitive with our future products.

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

     We will face competition based on a number of factors: product efficacy and
safety; the timing and scope of regulatory approvals; availability of supply;
marketing and sales capability; reimbursement coverage; price; and patent
position. Our competitors may develop safer and more effective products. Our
competitors may obtain patent protection or intellectual property rights that
limit our ability to commercialize products. Our competitors may develop or
commercialize products earlier than we. Our issued patents or pending patent
applications, if issued, may be challenged, invalidated or circumvented and the
rights granted thereunder may not provide proprietary protection or competitive
advantage to us.

     Competition will affect not only such products as we may develop ourselves
but also those products manufactured by others and marketed by us. In the field
of treatment for prostate cancer, substantial competition exists for
Nilandron(TM) (nilutamide) which we commenced marketing for Aventis in September
of 2000. In the field of oral mucositis, we must anticipate substantial
competition for Gelclair(TM) Concentrated Oral Gel (manufactured by Sinclair)
which we plan to commence distributing in the second quarter of 2002. We must
also expect competition for any additional product which we may market and sell
in the future. Such competition may be expected to reduce or restrain the
revenues which otherwise might be produced in respect of the product marketed.

GOVERNMENT REGULATION

     Our activities are subject to extensive governmental regulation. In
particular, the research, design, testing, manufacturing, labeling, marketing,
distribution and advertising of products such as our proposed products are
subject to extensive regulation by governmental regulatory authorities in the
U.S. and other countries. The drug development and approval process is generally
lengthy, expensive and subject to unanticipated delays.

     The FDA and comparable agencies in foreign countries impose substantial
requirements on the introduction of new pharmaceutical products through lengthy
and detailed preclinical and clinical testing procedures, sampling activities
and other costly and time-consuming compliance procedures. A new drug may not be
marketed in the U.S. until it has undergone rigorous testing and has been
approved by the FDA. The drug may then be marketed only for the specific
indications, uses, formulation, dosage forms and strengths approved by the FDA.
Similar requirements are imposed by foreign regulators upon the marketing of a
new drug in their respective countries.

     Satisfaction of such regulatory requirements, which includes demonstrating
to the satisfaction of the FDA that the relevant product is both safe and
effective, typically takes several years or more depending upon the type,
complexity and novelty of the product. It also requires the expenditure of
substantial resources. Preclinical studies must be conducted in conformance with
the FDA's Good Laboratory Practice ("GLP") regulations. Our compounds require
extensive clinical trials and FDA review as new drugs. Clinical trials are
                                        19
<PAGE>

vigorously regulated and must meet requirements for FDA review and oversight and
requirements under Good Clinical Practice ("GCP") guidelines. We may encounter
problems in clinical trials which would cause us or the FDA to delay or suspend
clinical trials. In 2001, the FDA required suspension of the enrollment of new
patients in our Phase III lung cancer trial pending completion of an interim
safety analysis by a Data Safety and Monitoring Board and FDA; enrollment of new
patients was thereby interrupted and delayed by about two months. Any future
delay or suspension could be longer and could have a material adverse effect on
our business, financial condition and results of operations. The steps required
before a drug may be marketed in the U.S. include: (i) preclinical laboratory
and animal tests; (ii) submission to the FDA of an application for an IND
exemption, which must become effective before human clinical trials may
commence; (iii) human clinical trials to establish the safety and efficacy of
the drug; (iv) submission of a detailed NDA to the FDA; and (v) FDA approval of
the NDA. In addition to obtaining FDA approval for each product, each domestic
establishment where the drug is to be manufactured must be registered with the
FDA. Domestic manufacturing establishments must comply with the FDA's Good
Manufacturing Practices regulations and are subject to periodic inspections by
the FDA. Foreign manufacturing establishments manufacturing drugs intended for
sale in the U.S. also must comply with Good Manufacturing Practice regulations
and are subject to periodic inspection by the FDA or by local authorities under
agreement with the FDA.

     Preclinical tests include laboratory evaluation of product chemistry and
animal studies to assess the metabolic and pharmacologic activity and potential
safety and efficacy of the product. Preclinical tests must be conducted by
laboratories that comply with FDA regulations regarding GLP. The results of
preclinical tests are submitted to the FDA as part of an IND, which must become
effective before the sponsor may conduct clinical trials in human subjects.
Unless the FDA objects to an IND, the IND becomes effective 30 days following
its receipt by the FDA. There is no certainty that submission of an IND will
result in FDA authorization of the commencement of clinical trials. A separate
IND application may be required by the FDA, in its sole discretion, as to each
indication. Our cancer prevention and therapeutic studies for Aptosyn(R)
(exisulind) are being conducted under our IND application filed in December
1993. Clinical trials of CP461 are proceeding under our IND filed in December
1998.

     Clinical trials involve the administration of the investigational drug to
patients. Every clinical trial must be conducted under the review and oversight
of an institutional review board ("IRB") at each institution participating in
the trial. The IRB evaluates, among other things, ethical factors, the safety of
human subjects and the possible liability of the institution. Clinical trials
typically are conducted in phases, which generally are conducted sequentially,
but which may overlap. Clinical trials test for efficacy and safety, side
effects, dosage, tolerance, metabolism and clinical pharmacology. Initial tests
involve the introduction of the drug to a small group of subjects to test for
safety, dosage tolerance, pharmacology and metabolism. Subsequent trials involve
a larger but still limited patient population to determine the efficacy of the
drug for specific indications, to determine optimal dosage and to identify
possible side effects and safety risks. Larger-scale trials may then be
undertaken to evaluate the safety and effectiveness of the drug, usually, though
not necessarily, in comparison with a placebo or an existing treatment.

     There are many uncertainties in the overall clinical trial process. All
phases of testing may not be completed successfully within any specified time
period, if at all. The FDA may increase, decrease or re-characterize the number
and phases of trials required for approval. The FDA may suspend clinical trials
at any time if it decides that patients are being exposed to a significant
health risk.

     The results of the preclinical studies and clinical trials are submitted to
the FDA as part of an NDA for approval of the marketing of the drug. The NDA
also includes information pertaining to the chemistry, formulation and
manufacture of the drug and each component of the final product, as well as
details relating to the sponsoring company. In prior years, the NDA review
process has taken from one to two years on average to complete, although reviews
of treatments for cancer and other life-threatening diseases may be accelerated.
The process may take substantially longer if the FDA has questions or concerns
about a product. In general, the FDA requires at least two adequate and
well-controlled clinical studies demonstrating safety and efficacy in order to
approve an NDA. However, under FDAMA the FDA may determine that data from one
study is adequate. The FDA may, however, request additional information, such as
long-term toxicity studies or other studies relating to product safety, and may
increase, decrease or re-characterize the number and phases of
                                        20
<PAGE>

trials required for approval. Notwithstanding the submission of requested data,
the FDA ultimately may decide that the application does not satisfy its
regulatory criteria for approval. Finally, the FDA may require additional
clinical tests following NDA approval.

     We may not succeed in developing drugs that prove to be safe and effective
in treating or preventing cancer. The development of such drugs will require the
commitment of substantial resources to conduct the preclinical development and
clinical trials necessary to bring such compounds to market. Drug research and
development by its nature is uncertain. There is a risk of delay or failure at
any stage, and the time required and cost involved in successfully accomplishing
our objectives cannot be predicted. Actual drug research and development costs
could exceed budgeted amounts, which could have a material adverse effect on our
business, financial condition and results of operations.

     As discussed above, we submitted an NDA for Aptosyn(R) (exisulind) for the
indication of FAP in August 1999. The FDA issued a "not approvable" letter with
respect to that NDA in September 2000. We cannot predict when, if ever, we will
submit another NDA for Aptosyn(R) (exisulind), for CP461 or for any other
compound currently under development. See the discussion of Aptosyn(R)
(exisulind) and CP461 above under "Products in Development."

     No new drug may be marketed in the U.S. until it has been approved by the
FDA. We have already encountered delay and rejection in the approval process; we
may encounter further delay and rejection. The FDA may make policy changes
during the period of product development or the period of FDA regulatory review
of an NDA. A delay in obtaining, or failure to obtain, approval would have a
material adverse effect on our business, financial condition and results of
operations. Even if regulatory approval were obtained, it would be limited as to
the indicated uses for which the product may be promoted or marketed.

     A marketed product, its manufacturer and the facilities in which it is
manufactured are subject to continual review and periodic inspections. If
marketing approval were granted, we would be required to comply with FDA
requirements for manufacturing, labeling, advertising, record keeping and
reporting of adverse experiences and other information. In addition, we would be
required to comply with federal and state anti-kickback and other health care
fraud and abuse laws that pertain to the marketing of pharmaceuticals. Failure
to comply with regulatory requirements and other factors could subject us to
regulatory or judicial enforcement actions, including, but not limited to,
product recalls or seizures, injunctions, withdrawal of the product from the
market, civil penalties, criminal prosecution, refusals to approve new products
and withdrawal of existing approvals, as well as enhanced product liability
exposure, any of which could have a material adverse effect on our business,
financial condition and results of operations.

     Potential future sales of our products outside the U.S. will be subject to
foreign regulatory requirements governing clinical trials, marketing approval,
manufacturing and pricing. Non-compliance with these requirements could result
in enforcement actions and penalties or could delay introduction of our products
in certain countries.

     Our clinical trial strategy for the development of drugs for the prevention
of precancerous lesions assumed that, for precancer trials, the FDA will accept
reduction in the formation of precancerous lesions as an endpoint. To date, the
FDA has not approved any compounds which are solely chemoprevention compounds,
and there can be no assurance that the FDA will approve such compounds in the
future. Should the FDA require us to demonstrate the efficacy of Aptosyn(R)
(exisulind) in the reduction of certain cancers or in overall mortality rates
resulting from certain cancers, our clinical trial strategy for precancerous
conditions would be materially and adversely affected. Significant additional
time and funding would be required to demonstrate such efficacy. For these and
other reasons, we may not be able to successfully develop a safe and efficacious
chemoprevention product. If we do succeed in obtaining approval for a cancer
chemopreventive product, the product may not be commercially viable or accepted
in the market place.

     In 1988 and again in 1992, the FDA issued regulations intended to expedite
the development, evaluation and marketing of new therapeutic products to treat
life-threatening and severely debilitating illnesses for which no satisfactory
alternative therapies exist. One program under these regulations provides for
early consultation between the sponsor and the FDA in the design of both
preclinical studies and clinical trials.

                                        21
<PAGE>

Another program provides for accelerated approval based on a surrogate endpoint.
This does not mean that any future products CPI may develop will be eligible for
evaluation by the FDA under these regulations. Nor does this mean that
Aptosyn(R) (exisulind) or any future products we may develop, if eligible for
these programs, will be approved for marketing sooner than would be
traditionally expected, if ever. Regulatory approval granted under these
regulations may be restricted by the FDA as necessary to ensure the safe use of
the drug. In addition, post-marketing clinical studies may be required. If
Aptosyn(R) (exisulind) or any of our future products do not perform
satisfactorily in such post-marketing clinical studies, they would likely be
required to be withdrawn from the market.

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

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

     Health care reform legislation, if enacted, could result in significant
change in the financing and regulation of the health care business. Also,
legislation affecting coverage and reimbursement under Medicare, Medicaid and
other government medical assistance programs has been enacted and modified from
time to time. The future course of legislation is unpredictable. Changes
adversely affecting drug pricing, drug reimbursement and prescription benefits,
among other changes, could have a materially adverse effect on our business,
financial condition and results of operations at that time.

     The considerations discussed above apply not only to products which we
intend to develop but also to products manufactured by others which we market
now or may market in the future, including Nilandron(R) (nilutamide) and
Gelclair(TM) Concentrated Oral Gel.

MANUFACTURING

     We have no facilities for the manufacture, formulation or finishing of
products for clinical or commercial use. We rely on third parties to produce our
compounds for research, clinical and commercial purposes (both bulk drug and
final pharmaceutical forms). We will need to develop our own facilities or
continue to contract with third parties for the production of products, if any,
that we may develop for our own account or in connection with collaborative
arrangements in which we have retained manufacturing rights. See under "Risk
Factors" below the section discussing our lack of manufacturing experience and
our reliance on contract manufacturers and suppliers.

MARKETING AND SALES

     We have established our own marketing organization. In the third quarter of
2000, we also established a third-party sales force through an agreement with
Innovex. During the first quarter of 2002 we converted the third-party sales
force to our own sales force. We market Nilandron(R) (nilutamide) in the U.S.
and Puerto Rico. In January 2002 we became the exclusive distributor of
Gelclair(TM) Concentrated Oral Gel in North America. The sales force consists of
approximately 15 people who have been promoting Nilandron(R)
                                        22
<PAGE>

(nilutamide) to urologists and oncologists. Our plan is that the sales force
will promote Gelclair(TM) Concentrated Oral Gel to oncologists upon its
introduction which is anticipated for the latter part of the second quarter
2002. To date, none of our own products have been approved for marketing. We
intend to evaluate and consider alternatives for marketing and selling our
products when they are approved, if ever. We may market and sell our products on
our own or through a third-party sales force and/or, if appropriate, through
co-marketing or other agreements with other companies.

     We have entered into distribution agreements for Aptosyn(R) (exisulind) in
Canada and Israel. If we receive approvals to market our products in
international markets, we anticipate marketing our products internationally by
entering into strategic alliance agreements with organizations that have local
resources and expertise. See under "Risk Factors" below the section discussing
our lack of sales and marketing experience and our dependence on third parties.

EMPLOYEES

     As of March 7, 2002, CPI employed approximately 77 persons full-time.

EXECUTIVE OFFICERS

     ROBERT J. TOWARNICKI, 50, has served as Chief Executive Officer and a
Director of CPI since October 1996; as President of CPI since January 1998; and
as Chairman of the Board of Directors since May 31, 2000. Prior to joining CPI,
from 1992 to 1996, he served as President, Chief Operating Officer, a director
and most recently as Executive Vice President of Integra LifeSciences
Corporation, the publicly-held parent firm for a group of biotechnology and
medical device companies, including Collatech, Inc., ABS LifeSciences Inc.,
Telios Pharmaceuticals, Inc. and Vitaphore Corporation. From 1991 to 1992, he
served as Founder, President and Chief Executive Officer of MediRel, Inc. From
1989 to 1991, he was General Manager of Focus/MRL, Inc. From 1985 to 1989, he
was Vice President of Development and Operations for Collagen Corporation and
from 1974 to 1985, he held a variety of operations management positions at
Pfizer, Inc. and Merck & Co., Inc. Mr. Towarnicki was a Ph.D. candidate in
Pharmaceutical Chemistry at Temple University School of Pharmacy and received
his M.S. and B.S. degrees from Villanova University.

     RIFAT PAMUKCU, M.D., 44, has served as CPI's Chief Scientific Officer since
inception of the enterprise in 1990; as Vice President, Research and Development
since 1993; as Senior Vice President since 1997; as Executive Vice President
since July 2000; and as a member of the Board of Directors since September 2000.
Dr. Pamukcu is a co-founder of CPI. Prior to joining CPI full time in 1993, from
1989 to March 1993, he was Assistant Professor of Medicine at the University of
Cincinnati and co-chair of CPI's Scientific Advisory Board. He continued as an
Adjunct Assistant Professor of Medicine at the University of Cincinnati from
1993 to 1995. He was a postdoctoral fellow from 1986 to 1989 in the Division of
Gastroenterology at the University of Chicago. Dr. Pamukcu received a B.A. in
Biology from Johns Hopkins University in 1979 and an M.D. degree from the
University of Wisconsin School of Medicine in 1983. He has authored over 95
journal article, textbook chapters and scientific abstracts. He is an inventor
on over 180 issued or pending patent applications.

     ROBERT E. BELLET, M.D., 59, has served as Senior Vice President, Clinical
and Regulatory Affairs, since joining CPI in July 2000. Dr. Bellet came to Cell
Pathways from Aventis Pharmaceuticals (formerly Rhone-Poulenc Rorer) where he
was initially Associate Director, Research and Development, Oncology
(Taxotere(R)) and subsequently Director, Medical Affairs, Oncology. Prior to the
pharmaceutical industry, Dr. Bellet held a number of full-time academic and
clinical research positions in oncology at the Fox Chase Cancer Center and
Jefferson Medical College. He is a Fellow of the American College of Clinical
Pharmacology and the American College of Physicians. Dr. Bellet is a Board
Certified Medical Oncologist and member of the American Association for Cancer
Research and the American Society of Clinical Oncology. He has authored 60
journal articles and textbook chapters.

     MARTHA E. MANNING, ESQ., 47, has served as Senior Vice President, General
Counsel and Secretary since joining CPI in October 2000. From 1993 to 1999 she
served as General Counsel and Secretary of U.S. Bioscience, Inc., as a Vice
President from 1993-1996, as a Senior Vice President from 1996-1998 and as an
Executive Vice President from 1998-1999. From 1988 to 1993 she served as General
Counsel of The Wistar
                                        23
<PAGE>

Institute, a premier biomedical research institution. From 1983 to 1988 she was
an associate of the law firm of Morgan, Lewis & Bockius. She served as a
financial analyst with the U.S. Department of the Treasury from 1978 to 1980.
She received a J.D. from the University of Pennsylvania Law School and B.B.A.
from the University of Massachusetts.

     BRIAN J. HAYDEN, 50, has served as Vice President, Finance and Chief
Financial Officer of CPI since November 1997 and as Treasurer since June 1998.
Prior to joining CPI, during 1996 and 1997 he served as Vice President of
Finance and Administration for NeoStrata, Inc., a dermatology company, and Vice
President and Chief Financial Officer of Micrus Corporation, a medical device
company. From 1992 to 1996, he served as Vice President, Finance, Chief
Financial Officer and Treasurer of Biomatrix, Inc. From 1976 to 1992, Mr. Hayden
served in senior financial management positions in the pharmaceutical,
biotechnology and health care industries, including Hoffmann-La Roche, Inc. From
1973 to 1976 he served on the audit staff of Coopers and Lybrand LLP. Mr. Hayden
received a B.B.A. in Accounting from Loyola University of Chicago and completed
graduate courses at Seton Hall University.

     LLOYD G. GLENN, 46, has served as Vice President, Marketing of CPI since
June 1998 and as Vice President, Sales and Marketing since January 2000. Prior
to joining CPI, from 1995 to 1998, he served as Vice President of Marketing for
Athena Neurosciences, Inc., the Neurological Division of Elan. From 1983 to
1994, he served in a series of sales management positions, ultimately serving as
Senior Product Manager for the Pharmaceutical Division of Allergan, Inc. His
additional past experience includes positions at Block Drug, from 1982 to 1983,
and Airwork, a subsidiary of Purex, Inc. from 1981 to 1982. Mr. Glenn received
his B.S. degree in marketing from Brigham Young University.

                                        24
<PAGE>

                                  RISK FACTORS

     The following risk factors relate to the business of the Company and
qualify the statements made in this report about the business of the Company.
These factors, among others, could cause actual results to differ materially
from those contained in forward-looking statements made in this report and/or
presented elsewhere by management from time to time. The subheadings below
identify the risks discussed but cannot do so completely. Each subsection may
relate to more than one aspect of the Company's business. Accordingly, each risk
factor should be considered carefully in evaluating the business of the Company
and any investment in the Company. These risk factors should be read in
conjunction with the related descriptions of the business of the Company
contained in this report, particularly those set forth above in this Item 1.
Attention is also directed to the SEC filings of the Company on Forms 10-K,
10-Q, 8-K and S-3, particularly the sections entitled "Business Description,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," "Risk Factors" and "Other Events."

     Prospective investors should carefully consider the following risk factors
and the other information included in this report, including the documents
incorporated by reference in this report, before deciding to invest in the
common stock.

WE HAVE A HISTORY OF NET LOSSES AND MAY NEVER BECOME PROFITABLE.

     We are a development stage pharmaceutical company. Our business has
experienced significant operating losses since its inception in 1990. We have
not received any revenue from the sale of our own products (none has been
approved for marketing), have received only immaterial revenues from rendering
marketing services to promote Nilandron(R) (nilutamide), made and sold by
Aventis Pharmaceuticals, Inc., ("Aventis") and intend to start selling
Gelclair(TM) Concentrated Oral Gel, manufactured by Sinclair Pharmaceuticals
Ltd. ("Sinclair"), in the second quarter of 2002. As of December 31, 2001, we
had an accumulated deficit of $123,284,737. We expect to incur additional
operating losses for at least the next several years and expect cumulative
losses to increase substantially as research and development efforts and
preclinical and clinical testing expand. If we succeed in obtaining marketing
approval for any of our product candidates, we will incur significant
manufacturing and marketing costs. Among other things, our ability to achieve
profitability is dependent on our ability, alone or with others, to:

     - obtain additional financing;

     - successfully complete the development of our product candidates;

     - obtain the required regulatory approvals;

     - successfully manufacture and market, or have others successfully
       manufacture and market, our own product candidates;

     - successfully market any products we may in-license from third parties;
       and

     - gain market acceptance for our product candidates.

     We may never achieve profitability.

WE ARE AT AN EARLY STAGE OF DEVELOPMENT AND HAVE NO PRODUCTS APPROVED FOR SALE;
ONLY TWO OF OUR PRODUCT CANDIDATES HAVE BEEN SUBJECT TO CLINICAL STUDIES; THE
FDA HAS ISSUED A "NOT APPROVABLE" LETTER WITH RESPECT TO OUR NEW DRUG
APPLICATION, OR NDA, FOR USE OF THE FIRST PRODUCT CANDIDATE, APTOSYN(R)
(EXISULIND), IN FAMILIAL ADENOMATOUS POLYPOSIS, OR FAP; AND OUR LONG-TERM
VIABILITY WILL BE IMPAIRED IF WE ARE UNABLE TO OBTAIN REGULATORY APPROVAL FOR,
OR SUCCESSFULLY MARKET, OUR PRODUCT CANDIDATES.

     We have only two product candidates that have been subject to clinical
trials: Aptosyn(R) (exisulind) and CP461. Our business is significantly
dependent upon the successful development and approval of these product
candidates for one or more cancerous or precancerous disease conditions.

     The first disease condition for which we have been clinically testing
Aptosyn(R) (exisulind) is FAP, an inherited disease characterized by the
development of hundreds to thousands of polyps in the colon and the
                                        25
<PAGE>

progression to colon cancer if left untreated. In August 1999, we submitted a
NDA to the FDA for Aptosyn(R) (exisulind) in the treatment of FAP. On September
25, 2000, the FDA issued a "not approvable" letter finding that the information
presented as to the safety and efficacy of Aptosyn(R) (exisulind) for the
treatment of FAP was not adequate for approval for that indication. The future
of the FAP program is uncertain.

     A separate NDA must be filed with respect to each disease indication for
which marketing approval of a drug is sought. Each such NDA, in turn, requires
the successful completion of lengthy clinical trials demonstrating the safety
and efficacy of the drug for that particular indication. We may not successfully
complete the clinical trials necessary for a further NDA filing for Aptosyn(R)
(exisulind) or for an NDA filing for CP461. Even if we do file one or more NDAs,
we may not receive regulatory approval of any of them. If we are not able to
obtain FDA approval for any indication with substantial market potential, our
ability to ever become profitable would be impaired.

     We are conducting early-stage clinical trials of CP461. These clinical
trials may fail to yield data that are favorable or useful for purposes of
further developing this product candidate and ultimately seeking regulatory
approval for marketing it. We have not developed any other compound to the
extent necessary to commence clinical trials.

     We are investigating Aptosyn(R) (exisulind) and CP461 in combination with
other approved chemotherapeutic agents. While we have scientific rationale for
the combinations under investigation, there can be no assurance that the
combinations will be more effective than the single approved chemotherapeutic
agent for the disease indication being investigated. The combination of these
agents may not result in increased efficacy and may even interfere with the
efficacy of the chemotherapeutic agent being combined with our products. There
is also risk that the combinations may result in unexpected toxicity, or
increase side effects associated with the individual drugs to an unacceptable
level.

     Preclinical and clinical studies of our product candidates may not display
the safety and efficacy necessary to obtain regulatory approvals. Drug
development is a highly uncertain process. Pharmaceutical and biotechnology
companies have suffered significant setbacks in advanced clinical trials, even
after experiencing promising results in earlier trials. Data obtained from tests
are susceptible to varying interpretations which may delay, limit or prevent
regulatory approval. Assessing clinical trial results of combination therapy
studies may be more difficult and may add additional complexity to
interpretation of those results. Regulatory authorities may refuse or delay
approval as a result of many other factors, including changes in regulatory
policy during the period of product development. Product candidates that appear
to be promising at earlier stages of development may not reach the market or be
marketed successfully for a number of reasons, including the following:

     - researchers may find during later preclinical testing or clinical trials
       that the product candidate is ineffective or has harmful side effects;

     - variability in the number and types of patients available for clinical
       studies;

     - new information about the mechanisms by which a drug candidate works may
       adversely affect its development;

     - one or more competing products may be approved for the same or a similar
       disease condition, raising the hurdles to approval of the product
       candidate;

     - the product candidate may fail to receive necessary regulatory approval
       or clearance;

     - the product candidate may be too difficult to manufacture on a large
       scale;

     - the product candidate may be too expensive to manufacture or market;

     - the product candidate may not achieve broad market acceptance;

     - others may hold proprietary rights that will prevent the product
       candidate from being marketed; or

     - others may market equivalent or superior products.

                                        26
<PAGE>

     Our ability to market Aptosyn(R) (exisulind) in a disease indication is
dependent on our ability to provide the FDA with sufficient data to support
approval of an NDA for that disease indication. We cannot assure that we will
ever be able to provide such information. With respect to CP461, and any other
compound that we may decide to develop, development may not be complete and
marketing of such product candidates may not occur for at least several years,
if at all. We have limited experience in managing clinical trials, and delays or
terminations of clinical trials we undertake in the future could impair our
development of product candidates. In our Phase III lung cancer study of
Aptosyn(R) (exisulind) in combination with Taxotere(R) (docetaxel) the FDA held
up enrollment of new patients for about two months pending interim safety
analysis of those already enrolled and treated. Delays or terminations of any
clinical trials could result from a number of factors, including adverse events,
stringent enrollment criteria, slow rate of enrollment, size of the patient
population, having to compete with other clinical trials for eligible patients,
geographical considerations and others.

     The area of cancer prevention is not thoroughly understood. With limited
exceptions, the FDA has not approved any drug for the prevention of precancerous
lesions or cancer. The FDA sometimes revises its views as to the prerequisites
for drug approvals in these areas, and such revisions could adversely affect our
programs. The FDA may require that a drug candidate intended to treat
precancerous lesions or prevent cancer be shown to be effective not only in
reducing precancerous lesions or other precancerous symptoms, but also in
preventing actual cancer, which may require clinical trials following large
numbers of patients over long periods of time.

     We and our collaborators may not succeed in our research and product
development efforts and we may not be successful in marketing any approved
products. Moreover, after commercial introduction of a new product, discovery of
problems through adverse event reporting could result in restrictions on the
product, including recall or withdrawal from the market and, in certain cases,
civil or criminal penalties resulting from actions by regulatory authorities or
damages from product liability judgments. Products introduced into the market
are subject to the risk that physicians may choose not to use the products and
providers of health care reimbursement may choose not to reimburse for the use
of the products. If we are unable to complete clinical trials, obtain regulatory
approval or successfully market our products, our long-term viability will be
threatened.

OUR BUSINESS WILL BE HARMED IF WE FAIL TO OBTAIN THE CAPITAL NECESSARY TO FUND
OUR OPERATIONS. ISSUING NEW SHARES TO RAISE CAPITAL WILL DILUTE CURRENT
STOCKHOLDERS' OWNERSHIP.

     We believe that our available cash will be sufficient to fund operations
into the first quarter of 2003. We will need to raise substantial additional
funds to continue our business activities. Among other things, we anticipate
that we will devote expenditures to the following:

     - continuing current clinical studies, and initiating additional clinical
       studies, relating to Aptosyn(R) (exisulind) in connection with our
       attempt to obtain future FDA approval of Aptosyn(R) (exisulind) in one or
       more disease indications;

     - continuing current clinical studies, and initiating additional clinical
       studies, relating to CP461 in connection with our attempt to obtain
       future FDA approval of CP461 in or more disease indications;

     - preclinical studies relating to Aptosyn(R) (exisulind), CP461 and
       additional compounds for cancerous and precancerous disease conditions;

     - regulatory approval processes;

     - drug development and formulation;

     - production of product candidates for clinical trials;

     - basic research; and

     - establishment and support of sales, marketing and distribution
       capabilities.

                                        27
<PAGE>

     The amount of capital we may need depends on many factors, including:

     - the progress of our research and development programs;

     - the progress of preclinical testing;

     - the progress of clinical testing of Aptosyn(R) (exisulind), CP461 and
       other compounds;

     - whether the FDA approves any NDA for Aptosyn(R) (exisulind), CP461 or any
       other SAAND with regard to any indication;

     - the time and costs involved in obtaining regulatory approvals;

     - the costs relating to patents and other intellectual property;

     - our ability to establish collaborative arrangements;

     - the effect of any changes or development in our existing collaborative
       relationships;

     - the effect of competing technological and market developments;

     - our ability to successfully commercialize an approved product candidate;
       and

     - our ability to successfully market the products of others, including
       Nilandron(R) (nilutamide) and Gelclair(TM) Concentrated Oral Gel.

     We do not know whether additional financing will be available on acceptable
terms when needed. We may seek to raise funds through public or private equity
offerings or debt financings or through corporate collaborations and licensing
arrangements.

     If we raise additional capital by issuing equity securities, our
stockholders' percentage ownership will be reduced, and our stockholders may
experience substantial dilution. At the time we are trying to raise capital,
market conditions may be adverse. Any equity securities, or equity or debt
securities convertible into Common Stock, issued may also provide rights,
privileges or preferences superior to the Common Stock. If we raise additional
funds by issuing debt securities, we may be subject to significant restrictions
on our operations. Also, any debt securities may be convertible into Common
Stock and cause additional dilution through such conversion. If we raise
additional funds through collaborations and licensing arrangements, we may be
required to relinquish some rights to our technologies or product candidates, or
grant licenses on terms that are not favorable to us.

     If adequate funds are not available on acceptable terms, our ability to
fund our operations, develop products or technologies or otherwise respond to
competitive pressures could be significantly delayed or limited and we may have
to reduce or cease our operations. If additional funds become available, there
can be no assurance that we can accurately predict the time and costs required
to complete development programs or that we will not substantially exceed our
budgets or that revenue forecasts, if made, will not prove inaccurate.

THE EXERCISE OF OUTSTANDING WARRANTS AND STOCK OPTIONS COULD CAUSE SUBSTANTIAL
DILUTION.

     As of December 31, 2001, our outstanding equity securities included:

     - warrants, outstanding or issuable, to purchase 4,503,249 shares of our
       Common Stock for an exercise price of $12.00 per share; and

     - options, exercisable at various exercise prices between $0.32 and $49.88,
       to purchase 3,822,900 shares of our Common Stock.

     Investors in our Common Stock could experience substantial dilution of
their investment if these warrants and options are exercised.

                                        28
<PAGE>

FUTURE SALES OF SHARES MAY DEPRESS THE PRICE OF OUR COMMON STOCK.

     If stockholders sell a substantial number of shares of our Common Stock in
the public market, or if the Company issues and sells new shares, or if
investors perceive that these sales might occur, the market price of our Common
Stock could decrease. Such a decrease could make it difficult for us to raise
capital by selling our stock in the future. To the extent additional shares of
capital stock are issued, investors purchasing our Common Stock or securities
convertible into common stock may incur additional dilution.

OUR BUSINESS MAY BE HARMED BY PENDING OR FUTURE LITIGATION.

     Following our announcement on February 1, 1999 that we anticipated a delay
in filing a NDA for Aptosyn(R) (exisulind) for FAP, our stock price dropped.
Shortly thereafter, five stockholder class actions were filed against the
Company on behalf of purchasers of our stock during the period October 7, 1998
to February 2, 1999. This litigation was settled in 2001 with payment by our
insurance company of $3.75 million. Following our announcement on September 22,
2000 that the FDA had advised us that our NDA for FAP was not approvable, our
stock price dropped again. In March, April and May of 2001, eleven stockholder
class actions were filed against the Company on behalf of purchasers of our
stock during the period October 27, 1999 to September 22, 2000. In February
2002, agreement in principle was reached to settle this litigation with the
issuance of 1.7 million shares of Common Stock by the Company and the payment of
$2 million. In connection with this settlement, the Company's insurance company
has agreed to pay the Company $2 million. Settlement of the second litigation
requires approval of the court, and there is no assurance that such approval
will be received. Similar litigation may be instituted against the Company in
the future at any time that there is a substantial drop in the market price of
our stock, regardless of the reason for the drop. The second litigation
described above (if the settlement is not approved by the court or otherwise
does not become final) and any future litigation could result in substantial
expense and diversion of our attention from our business and could result in
substantial damage awards which could have a material adverse impact on our
business. There can be no assurance that the Company will be successful in its
defense of any such litigation, regardless of how unmeritorious such litigation
may be, nor can there be any assurance that insurance will be either available,
applicable or sufficient to cover the costs of judgment, settlement or conduct
of the litigation.

IF WE ARE UNABLE TO PROTECT OUR PROPRIETARY TECHNOLOGY, OR TO AVOID INFRINGING
THE RIGHTS OF OTHERS, OUR ABILITY TO COMPETE EFFECTIVELY WILL BE IMPAIRED.

     Our intellectual property consists of patents, licenses, trade secrets and
trademarks. Our success depends in part on our ability to:

     - obtain and maintain patents and other intellectual property;

     - establish and maintain trademarks;

     - maintain our trade secrets;

     - operate without infringing the proprietary rights of others; and

     - otherwise maintain adequate protection of our intellectual property for
       our technologies and products in the U.S. and other countries.

     We have several patents and pending U.S. patent applications relating to
the therapeutic uses of Aptosyn(R) (exisulind). However, the composition of
matter patent for exisulind, which is desirable because it gives patent
protection for a drug's chemical compound, is not available because exisulind
was described in scientific and patent literature over 20 years ago. Therefore,
if clinical uses of exisulind are discovered beyond those covered by our patent
claims, we may not be able to enforce our patent rights against companies
marketing the compound with respect to these other clinical uses. In general,
patent protection currently lasts only approximately 17-20 years, depending on
the filing date of the patent application, the issuance date of the patent and,
sometimes, the time required for FDA approval. However, it can take many more
years than offered by patent protection to transform a drug discovery through
testing and development into a commercially viable product. Moreover, patent
applications filed by us or on our behalf may not result in

                                        29
<PAGE>

patents being issued to us. Even if a patent is issued, the patent may not
afford protection against competitors with similar technology. Others may
independently develop similar technologies or duplicate our technology. It is
possible that before any of our potential product candidates can be
commercialized, the related patents may expire, or remain in existence for only
a short period following commercialization, thus reducing the advantage of the
patent.

     Our commercial success depends in part on avoiding infringing patents and
proprietary rights of third parties and developing and maintaining a proprietary
position with regard to our own technologies and product candidates. The patent
positions of pharmaceutical companies, including our patent position, involve
complex legal and factual questions. Whether a company will be able to enforce
its patent cannot always be predicted with certainty. Even if we obtain patents,
we may lose part or all of them as a result of challenges by competitors. We
cannot be sure that relevant patents have not been issued, or that relevant
publications or actions by others have not occurred, that could block our
ability to obtain patents or to operate as we would like. Others may develop
similar technologies or duplicate technologies that we have developed or claim
that we are infringing their patents. As a result of these factors, we may need
to obtain patent licenses from others. However, we may be unable to obtain
patent licenses on acceptable terms. Moreover, our rights under any patent
licenses depend on maintaining our obligations to the licensor under the
applicable license agreement, and we may be unable to do so.

     Extensive litigation regarding patents and other intellectual property
rights characterizes our industry. We may become involved in litigation or
interference proceedings declared by the U.S. Patent and Trademark Office, or
oppositions or other intellectual property proceedings outside of the U.S. If
any of our competitors have filed patent applications or obtained patents that
claim inventions that we also claim, we may have to participate in an
interference proceeding to determine priority of invention and, therefore, who
has the right to a patent for these inventions or discoveries in the U.S. If a
litigation or interference proceeding is initiated, we may have to spend
significant amounts of time and money to defend our intellectual property rights
or to defend infringement claims of others. Litigation or interference
proceedings could divert our management time and effort. Even unsuccessful
claims against us could result in significant legal fees and other expenses,
diversion of management time and disruption in our business. Any of these events
could harm our ability to compete and adversely affect our business.

     An adverse ruling arising out of any intellectual property dispute could
invalidate or diminish our intellectual property position. An adverse ruling
could also subject us to significant liability for damages, prevent us from
using processes or products, or require us to license disputed rights from third
parties. Costs associated with licensing arrangements entered into to resolve
litigation or an interference may be substantial and could include ongoing
royalties. We may not be able to obtain any necessary licenses on satisfactory
terms.

     In addition, we rely on trade secrets to protect technology. We attempt to
protect our proprietary technology by requiring our employees to execute
confidentiality and assignment of invention agreements. We also require our
consultants and certain contractors to execute confidentiality agreements.
However, these agreements could be breached and, in the event they are breached,
our remedies may be inadequate. In addition, our trade secrets may otherwise
become known or independently discovered by our competitors. Our business
requires the use of consultants and research collaborators in connection with
the development of our product candidates. These arrangements involve the
exposure of our trade secrets to the scrutiny of others, which increases the
risk that we may lose our trade secrets. If we lose any of our trade secrets,
our business and ability to compete could be harmed.

WE MAY NOT BE ABLE TO KEEP PACE WITH TECHNOLOGICAL CHANGES IN THE
BIOPHARMACEUTICAL INDUSTRY, WHICH MAY PREVENT US FROM COMMERCIALIZING OUR
PRODUCT CANDIDATES.

     Our business is characterized by extensive research efforts and rapid
technological progress. New developments in molecular biology, medicinal
chemistry and other fields of biology and chemistry are expected to continue at
a rapid pace in both industry and academia. Research and discoveries by others
may render some or all of our programs or product candidates non-competitive or
obsolete. Our business strategy is

                                        30
<PAGE>

based, in part, upon the application of our technology platform to discover and
develop pharmaceutical products to prevent cancer or treat cancer through the
use of selective apoptosis, which means causing cell death in precancerous and
cancerous cells. This strategy is subject to the risks inherent in the
development of new products using new and emerging technologies and approaches.

     Unforeseen problems may develop with our technologies or applications.
Further research may alter our research findings or lead to new research
insights which adversely impact our research efforts. We may not be able to
successfully address technological challenges that we encounter in our research
and development programs and may not ultimately develop commercially feasible
products.

WE FACE INTENSE COMPETITION WHICH COULD HARM OUR BUSINESS AND OPERATING RESULTS.

     Our industry is very competitive. It is characterized by extensive research
and development efforts and rapid technological progress. Discoveries and
commercial developments by our competitors may render some or all of our product
candidates obsolete. Many of our potential competitors have longer operating
histories, greater name recognition, and substantially greater financial,
technical and marketing resources than we have. These competitors may succeed in
discovering and developing pharmaceutical products more rapidly than we do or
pharmaceutical products that are safer, more effective or less costly than any
that we may develop. Competing products may obtain regulatory approval sooner
and may be marketed more successfully than our product candidates.

     There are many entities, both public and private, including well-known,
large pharmaceutical companies, chemical companies, biotechnology companies,
government agencies and research institutions, engaged in developing
pharmaceuticals for applications similar to those targeted by us. We also
compete with these organizations in recruiting and retaining qualified
scientific and management personnel.

     In the fields of cancer therapy and the prevention of precancerous and
cancerous lesions, other products and procedures are in use or in development
that may compete directly with the products that we are seeking to develop and
market for cancer treatment or cancer prevention. Surgery, radiation,
chemotherapeutic agents and compounds that interfere with hormone activities
have been in use for years in the treatment of cancer. Nolvadex(R) (tamoxifen)
has been granted approval for reducing the incidence of breast cancer in women
at high risk for breast cancer. Celebrex(R) (celecoxib) has been granted
approval for use in the reduction in the number of adenomatous (or precancerous)
colorectal polyps in FAP patients as an addition to usual care (e.g., endoscopic
surveillance, surgery, etc.). A number of other pharmaceutical and nutritional
agents are being examined for their potential usefulness in the treatment of
precancerous lesions and cancer. The manufacturers of many of these products
have far greater resources and experience than we do.

     Aggressive industry competition must also be expected to affect our efforts
to market Nilandron(R) (nilutamide) and Gelclair(TM) Concentrated Oral Gel and
to limit our revenues from these marketing efforts.

OUR BUSINESS WOULD BE ADVERSELY AFFECTED IF THIRD PARTIES UPON WHOM WE PLACE
SUBSTANTIAL RELIANCE FAIL TO PERFORM THEIR OBLIGATIONS PROPERLY.

     We depend on third-party contractors to perform many activities on our
behalf, including the following:

     - basic laboratory research studies;

     - animal toxicology studies;

     - animal efficacy studies;

     - human clinical trials;

     - bulk drug and finished product manufacture for our product candidates;

     - drug manufacture for the products we market for others, Nilandron(R)
       (nilutamide) and Gelclair(TM) Concentrated Oral Gel;

     - drug assay and characterization;

                                        31
<PAGE>

     - product formulation and finishing;

     - strategic consulting;

     - commercialization planning; and

     - product distribution.

     Subject to limited exceptions in foreign markets, we do not have any
relationships with other pharmaceutical companies for the commercialization of
our own products under development. We cannot assure that we will be able to
negotiate cooperative arrangements relating to commercialization or any other
aspect of our development and marketing of products in the future should we
choose to do so. To the extent that we do not make arrangements with third
parties, we must rely on our own limited resources. Any arrangements that we
enter into may not be maintained, may not be performed properly by the third
parties or may not prove to be successful. The failure of any third party to
comply with applicable government regulations could substantially harm our
development and marketing efforts and delay or prevent regulatory approval of
our product candidates. If these third parties fail to perform their obligations
properly and in compliance with applicable regulations, we may be compelled to
delay our development efforts, and our business could be harmed.

WE MUST OBTAIN REGULATORY APPROVAL TO MARKET OUR PRODUCT CANDIDATES IN THE U.S.
AND FOREIGN JURISDICTIONS.

     We must obtain regulatory approval before marketing or selling our product
candidates. In the U.S., we must obtain approval from the FDA for each product
candidate that we intend to commercialize. The drug development process is
typically lengthy and expensive, and FDA approval is highly uncertain. Clinical
studies which show favorable results may not be adequate for regulatory
approval. We or our third-party manufacturers must pass a pre-approval
inspection of manufacturing facilities by the FDA before the product can obtain
marketing approval. Products distributed outside the U.S. are also subject to
foreign government regulation.

     On September 25, 2000, the FDA issued a "not approvable" letter with
respect to the NDA that we submitted in August 1999 for Aptosyn(R) (exisulind)
for the FAP indication. The NDA for FAP may never be approved, and the future of
the FAP program is uncertain.

     None of our other product candidates has received regulatory approval to be
commercially marketed and sold. If we fail to obtain regulatory approval, we
will be unable to market and sell any of our product candidates. Because of the
risks and uncertainties in biopharmaceutical development, our product candidates
could take a significantly longer time to gain regulatory approval than we
expect or may never gain approval. If regulatory approval is delayed, our
business would be harmed.

     The process of obtaining FDA and other required regulatory approvals,
including foreign approvals, often takes many years and can vary substantially
based upon the type, complexity and novelty of the product candidates involved.
This approval process is extremely expensive and uncertain. We cannot guarantee
that any of our product candidates will be approved for marketing by the FDA.
Even if regulatory approval of a product candidate is granted, we cannot be
certain that we will be able to obtain the labeling claims necessary or
desirable for the promotion of that product candidate.

EVEN IF OUR PRODUCT CANDIDATES RECEIVE REGULATORY APPROVAL, WE MAY STILL FACE
DEVELOPMENT AND REGULATORY DIFFICULTIES RELATING TO THE DRUG PRODUCTS IN THE
FUTURE.

     If we receive regulatory approval of any of our product candidates, the FDA
or a comparable foreign regulatory agency may grant such approval only for a
limited indication. In addition, a marketed product, its manufacturer and the
manufacturer's facilities are subject to continual review and periodic
inspections by regulatory agencies. The discovery of previously unknown problems
with a product, manufacturer or facility

                                        32
<PAGE>

may result in restrictions on the product or manufacturer, including withdrawal
of the product from the market. The failure to comply with applicable regulatory
requirements can, among other things, result in:

     - warning letters;

     - fines and other civil penalties;

     - suspended regulatory approvals;

     - refusal to approve pending applications or supplements to approved
       applications;

     - refusal to permit exports from the U.S.

     - product recalls;

     - seizure of products;

     - injunctions;

     - operating restrictions;

     - total or partial suspension of production; and

     - criminal prosecutions.

     Even if we obtain regulatory approval, we may be required to undertake
post-approval trials. In addition, side effects identified or better understood
after a drug is on the market or the occurrence of manufacturing problems could
result in withdrawal of approval, or require reformulation of the drug,
additional preclinical testing or clinical trials, changes in labeling of the
product, and/or additional marketing applications.

     If we receive FDA approval, we will be subject to ongoing FDA obligations
and continued regulatory review. In particular, we or third-party manufacturers
that we use will be required to adhere to requirements pertaining to the FDA's
current Good Manufacturing Practices requirement, commonly known as GMP. Under
current Good Manufacturing Practices, we are required to manufacture our
products and maintain our records in a prescribed manner with respect to
manufacturing, testing and quality control activities. We will also be subject
to ongoing FDA requirements for submission of safety and other post-market
information. Similar regulatory requirements are in place in foreign countries
for similar products approved in those countries. Our failure, or our
third-party manufacturer's failure, to comply with the FDA and other applicable
regulators could cause our business to be significantly harmed.

REIMBURSEMENT FOR ANY OF OUR FUTURE PRODUCTS MAY NOT BE AVAILABLE, WHICH MAY
HARM OUR RESULTS OF OPERATIONS.

     Our ability to commercialize our products successfully will depend, in
part, on the extent to which reimbursement for the cost of our products and
related treatments will be available from government health administration
authorities, such as Medicare and Medicaid in the U.S., private health insurers
and other organizations. Significant uncertainty exists as to the reimbursement
status of newly approved health care products, particularly for indications for
which there is no current effective treatment or for which medical care
typically is not sought. Adequate third-party coverage may not be available to
enable us to maintain price levels sufficient to realize an appropriate return
on our investment in product research and development. If adequate coverage and
reimbursement levels are not provided by government and third-party payors for
use of our products, our products may fail to achieve market acceptance and our
results of operations will be harmed.

     Our future revenues, profitability and access to capital will also be
affected by the continuing efforts of governmental and private third-party
payors to contain or reduce the costs of health care through various means.
There have been a number of federal, state and foreign proposals to control the
cost of drugs through legislation or regulation. We are unsure of the form that
any legislation on the subject may have or what actions federal, state, foreign,
and private payors may take in response to any enacted legislation. Therefore,
we cannot predict the effect of any implemented reform on our business.

                                        33
<PAGE>

IF WE ARE UNABLE TO MANUFACTURE OR CONTRACT WITH THIRD PARTIES TO MANUFACTURE
PRODUCT CANDIDATES IN SUFFICIENT QUANTITIES AND AT AN ACCEPTABLE COST, WE MAY BE
UNABLE TO COMPLETE CLINICAL TRIALS AND COMMERCIALIZE THESE PRODUCT CANDIDATES.

     Our completion of any preclinical trials for our product candidates
involving large quantities of chemical compounds, or any future clinical trials
and commercialization of product candidates, will require access to, or
development of, facilities to manufacture a sufficient supply of our product
candidates. We do not have the facilities or experience to manufacture the
quantities of product candidates necessary for any such trials or commercial
purposes on our own and do not intend to develop or acquire facilities for the
manufacture of such quantities of product candidates in the foreseeable future.
We have entered into agreements with third-party manufacturers for the
manufacture of Aptosyn(R) (exisulind) and intend to rely on third-party contract
manufacturers for our other product candidates. However, except with respect to
Aptosyn(R) (exisulind) and CP461, we have not tested the manufacturing processes
for our product candidates in quantities needed for clinical trials or
commercial sales.

     Our manufacturing strategy presents the following risks:

     - we may not be able to locate acceptable manufacturers or enter into
       favorable long-term agreements with them;

     - we may not be able to interest multiple sources of supply and may be
       dependent on sole source or limited sources, in which case we may not be
       able to negotiate favorable agreements or may suffer business dislocation
       if sole or limited sources should fail to perform;

     - third parties may fail to successfully manufacture our product candidates
       or to manufacture them in a cost effective and/or timely manner;

     - delays in scale-up to commercial quantities could delay clinical studies,
       regulatory submissions and commercialization of product candidates;

     - we may not have intellectual property rights, or may have to share
       intellectual property rights, to many improvements in the manufacturing
       processes or new manufacturing processes for our product candidates;

     - our product candidates require a long lead time to manufacture and the
       manufacturing process is complex; and

     - manufacturers of our product candidates are subject to current Good
       Manufacturing Practices, and similar foreign standards, and we do not
       have control over compliance with these regulations by third-party
       manufacturers.

     Any of these factors could delay clinical trials or commercialization of
our product candidates, entail higher costs and result in our being unable to
effectively sell any products.

IF WE ARE UNABLE TO OBTAIN RAW AND INTERMEDIATE MATERIALS NEEDED TO MANUFACTURE
OUR PRODUCTS IN SUFFICIENT AMOUNTS OR ON ACCEPTABLE TERMS, OUR BUSINESS WOULD
SUFFER.

     We, or the manufacturers with whom we contract, may not be able to maintain
adequate relationships with current or future suppliers of raw or intermediate
materials for use in manufacturing our products. If our current manufacturing
sources and suppliers are unable or unwilling to make these materials available
to us in required quantities or on acceptable terms, we would likely incur
significant costs and delays to qualify alternative manufacturing sources and
suppliers. If we are unable to identify and contract with alternative contract
manufacturers when needed, our business could be harmed.

                                        34
<PAGE>

IF WE ARE UNABLE TO BUILD SALES, MARKETING AND DISTRIBUTION CAPABILITIES OR
ENTER INTO AGREEMENTS WITH THIRD PARTIES TO PERFORM THESE FUNCTIONS, WE WILL NOT
BE ABLE TO COMMERCIALIZE ANY OF OUR PRODUCT CANDIDATES.

     We currently have limited sales and marketing capabilities. In order to
commercialize any of our product candidates, we must either internally develop
extensive sales, marketing and distribution capabilities or make arrangements
with third parties to perform these services.

     To market any of our drug products directly, we will have to successfully
develop a marketing and sales force with technical expertise and supporting
distribution capabilities or our business prospects would be impaired. To
promote any of our drug products through third parties, we would have to locate
suitable third parties for these functions and enter into agreements with them
on acceptable terms. If we enter into co-promotion or other licensing
arrangements, any product revenues would likely be lower than if we directly
marketed and sold our products, and any revenues we may receive would depend
upon the efforts of third parties, which efforts may not be successful. If these
third parties do not succeed in carrying out their contractual duties, our
business would suffer.

WE MAY SUSTAIN LOSSES IN MARKETING AND/OR SELLING PRODUCTS MANUFACTURED BY
OTHERS.

     In September 2000, we began marketing and promoting the product
Nilandron(R) (nilutamide), a hormonal therapy for advanced prostate cancer which
is manufactured and sold to the market by Aventis. In the second quarter of
2002, we plan to commence marketing and selling Gelclair(TM) Concentrated Oral
Gel which is manufactured by Sinclair and sold to us as exclusive distributor in
North America. In the future we may enter into agreements to market additional
products manufactured by others. The risks of these activities include:

     - physicians may not prescribe the products we market or sell;

     - patients may not use the products we market or sell;

     - price competition and/or product competition may constrain or reduce
       revenues;

     - Sales and marketing expense may exceed margins received on products sold
       and fees received on products marketed;

     - we may fail to successfully market, and Aventis may fail to successfully
       sell, Nilandron(R) (nilutamide) in quantities in excess of the thresholds
       necessary to entitle us to receive a percentage of the gross margin with
       respect to such excess sales;

     - we may fail to successfully market and sell Gelclair(TM) Concentrated
       Oral Gel in quantities equal to or in excess of our minimum purchase
       requirements of Gelclair(TM) Concentrated Oral Gel from Sinclair;

     - customers may fail to pay for product;

     - we may be exposed to product liabilities not effectively covered by
       indemnification or insurance;

     - suppliers and manufacturers may fail to manufacture or to manufacture in
       accordance with specifications, or may fail to deliver product, or may
       otherwise default;

     - FDA or foreign regulatory authorities may inspect manufacturing
       facilities making these products and find that the facilities do no
       comply with Good Manufacturing Practice requirements and may as a result
       stop the facilities from manufacturing products until such facilities can
       be brought into compliance; and

     - we may breach any of our obligations and forfeit our right to continue to
       market and distribute these products.

     Any of these factors could expose us to commercial losses and/or
liabilities which, depending on the magnitude and circumstances, could have a
material adverse effect on us.

                                        35
<PAGE>

WE MAY BREACH THE AGREEMENTS UNDER WHICH WE LICENSE COMMERCIALIZATION OR
DEVELOPMENT RIGHTS TO PRODUCTS OR TECHNOLOGIES AND MAY THEREBY LOSE LICENSE
RIGHTS THAT ARE IMPORTANT.

     We license rights to products and technology that are relevant to our
business. These include rights to the products we market, Nilandron(R)
(nilutamide) and Gelclair(TM) Concentrated Oral Gel, as well as intellectual
property rights which may arise during the course of our development programs.
We are subject to various obligations with respect to marketing efforts, care of
products, insurance, publicity, intellectual property and other matters relating
to commercialization or to development. If we fail to comply with any of these
requirements, or otherwise breach a license agreement or contract, the licensor
or other contracting party may have the right to terminate the license or
contract in whole or in part or to terminate the exclusive nature of the
arrangement. In such event we would not only lose all or part of the benefit of
the arrangement but also may be exposed to potential liabilities for breach in
the form of damages or obligation to license technology.

WE DEPEND ON KEY PERSONNEL; IF WE ARE NOT ABLE TO RETAIN THESE EMPLOYEES OR
RECRUIT ADDITIONAL QUALIFIED PERSONNEL, OUR BUSINESS WOULD BE HARMED.

     Because of the specialized scientific nature of our business, we are highly
dependent upon qualified scientific, technical and managerial personnel. We also
rely on consultants and advisors to assist us in formulating our research and
development strategy. There is intense competition for qualified personnel in
the pharmaceutical field. We may not be able to attract and retain the qualified
personnel or consultants necessary for the development of our business. The loss
of the services of existing personnel, as well as the failure to recruit
additional key scientific, technical and managerial personnel in a timely
manner, would harm our research and development programs and our business. The
law provides only limited protection against competition by key employees who
leave the company. We do not maintain key man life insurance on any of our
employees.

IF WE ENGAGE IN ANY ACQUISITION OR BUSINESS COMBINATION, WE WILL INCUR A VARIETY
OF RISKS THAT COULD ADVERSELY AFFECT OUR BUSINESS OPERATIONS OR OUR
STOCKHOLDERS.

     From time to time we have considered, and we will continue to consider in
the future, if and when any appropriate opportunities become available,
strategic business initiatives intended to further the development of our
business. These initiatives may include acquiring businesses, technologies or
products or entering into a business combination with another company. If we do
pursue such a strategy, we could, among other things:

     - issue equity securities that would dilute our stockholders' percentage
       ownership;

     - incur substantial debt, which may place constraints on our operations;

     - spend substantial operational, financial and management resources in
       integrating new businesses, technologies and products;

     - assume substantial actual or contingent liabilities; or

     - merge with, or otherwise enter into a business combination with, another
       company, in which our stockholders would receive cash or shares of the
       other company, or a combination of both, on terms that our stockholders
       might not deem desirable.

     - We are not in a position to predict what, if any, collaborations,
       alliances or transactions may result or how, when or if they will have a
       material effect on the Company or the development of our business.

WE MAY BE SUED FOR PRODUCT LIABILITY.

     Because we are involved in the drug discovery and development process, our
business exposes us to potential product liability risks as our product
candidates are clinically tested and when and if our drug candidates are
commercialized. We may not be able to avoid product liability claims. This
applies not only to our own products but also to products that we may market for
others, including Nilandron(R) (nilutamide), which we market for Aventis, and
Gelclair(TM) Concentrated Oral Gel manufactured by Sinclair. Product liability
insurance for the pharmaceutical industry is generally expensive, if it is
available at all. If we are
                                        36
<PAGE>

unable to obtain sufficient insurance coverage on reasonable terms or to
otherwise protect against potential product liability claims, we may be unable
to commercialize our product candidates. We currently have product and clinical
trial liability insurance in the amount of $10 million, but there can be no
assurance that we will be able to maintain such insurance or that such insurance
is adequate. If a plaintiff brings a successful product liability claim against
us in excess of our insurance coverage, if any, our business could be harmed.

WE MAY BE SUBJECT TO SUBSTANTIAL LIABILITIES IN CONNECTION WITH THE HANDLING AND
DISPOSAL OF HAZARDOUS MATERIALS.

     Our research and development involves the controlled use of hazardous
materials, chemicals and various radioactive compounds. We cannot completely
eliminate the risk of accidental contamination or injury from these materials.
In the event of contamination or injury, for which we do not have liability
insurance coverage, we could be held liable for resulting damages, which could
exceed our resources. In addition, if we develop manufacturing capacity, we may
incur substantial costs in complying with environmental regulations.
Furthermore, we do not have mass tort insurance coverage or environmental
insurance coverage, so that liabilities resulting from claims involving our
handling or disposal of hazardous materials could severely damage our business.

OUR COMMON STOCK PRICE WILL LIKELY CONTINUE TO BE HIGHLY VOLATILE.

     Our stock price, like the market price of the stock of other
development-stage pharmaceutical companies, has been highly volatile. Companies
may be sued when their stock price drops. Our stock price dropped substantially
after we made an announcement on February 1, 1999 that we anticipated a delay in
filing the NDA for Aptosyn(R) (exisulind) for FAP. Our stock price also dropped
substantially on September 25, 2000 after we announced that the FDA had informed
us that the FDA was issuing a "not approvable" letter in connection with the
pending NDA for FAP. Separate stockholder class actions were filed against the
Company after each of these declines in our stock price. Our stock price has
also fluctuated substantially in response to statements which have appeared in
the media. Other factors that may have a significant impact on our stock price
include:

     - announcements of technical innovations or new commercial products by us
       or our competitors;

     - regulatory events relating to our product candidates;

     - public concern as to the safety or other implications of pharmaceutical
       products;

     - patent or proprietary rights developments;

     - results of preclinical studies or clinical trials;

     - conditions affecting the pharmaceutical industry; and/or

     - stock market conditions.

WE DO NOT INTEND TO PAY CASH DIVIDENDS.

     We have never paid any cash dividends and do not anticipate paying cash
dividends in the foreseeable future.

OUR CERTIFICATE OF INCORPORATION, BYLAWS AND STOCKHOLDER RIGHTS PLAN, AND
CERTAIN PROVISIONS OF DELAWARE LAW, COULD DISCOURAGE A THIRD PARTY FROM MAKING A
TAKEOVER OFFER THAT COULD BE BENEFICIAL TO OUR STOCKHOLDERS.

     Various provisions of our certificate of incorporation and bylaws and
Delaware law could delay or prevent a third party from acquiring shares of our
Common Stock or replacing members of our board of directors. Our certificate of
incorporation provides for the division of our board of directors into three
classes and for the ability of the board of directors to issue preferred stock
without stockholder approval. Under this authority, the board of directors
adopted, in December 1998, a stockholder rights plan, which could have the
effect of delaying or preventing us from consummating a transaction that would
result in a change of control, even if a

                                        37
<PAGE>

change of control were in the best interests of our stockholders. In addition,
Delaware law restricts the ability of stockholders to take action to acquire
control of us through specified business combination transactions.

     These provisions may discourage a future acquisition of our company even if
our stockholders would receive an attractive value for their shares or if a
significant number of our stockholders believed such a proposed transaction to
be in their best interest. As a result, stockholders who desire to participate
in such a transaction may not have the opportunity to do so.

ITEM 2.  PROPERTIES

     CPI leases approximately 40,000 square feet of laboratory and office space
in Horsham, Pennsylvania under a ten-year lease which expires in 2008 and which
contains two five-year renewal options.

ITEM 3.  LEGAL PROCEEDINGS

     On November 21, 2001, the United States District Court for the Eastern
District of Pennsylvania entered a final order dismissing the stockholder class
action filed against the Company and certain of its officers and directors in
1999. The complaint in the class action had alleged that the Company had made
false and misleading statements prior to February 1, 1999 about the efficacy and
near term commercialization of the Company's lead drug candidate which had the
effect of artificially inflating the price of the Company's Common Stock during
the class period of October 7, 1998 to February 2, 1999. The class action was
dismissed pursuant to the terms of a stipulation of settlement. The settlement
amount, $3.75 million, was funded by the Company's primary insurance company in
mid-2001.

     In March, April and May of 2001, eleven additional stockholder class
actions were filed in the United States District Court for the Eastern District
of Pennsylvania against the Company and certain of its officers and directors
seeking unspecified damages. The lawsuits alleged that the Company and its
officers made false and misleading statements about the Company's lead drug
candidate which caused artificial inflation of the Company's stock price during
the class period of October 27, 1999 to September 22, 2000, when the Company
announced that the FDA had informed the Company that it would be receiving a
"not approvable" letter for its new drug application for its leading drug
candidate. In February 2002, agreement in principle was reached to settle this
litigation for the issuance of 1.7 million shares of Common Stock by the Company
and the payment of $2 million. In connection with the settlement, the Company's
insurance company has agreed to pay $2 million to the Company. This settlement
is subject to execution of a final agreement and court approval, after which
notice and an opportunity to object must be furnished to the class. There is no
assurance that the settlement will be approved or completed in a timely fashion
or at all.

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

     NONE.

                                        38
<PAGE>

                                    PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

     Since November 4, 1998, the Company's Common Stock has traded on the Nasdaq
Stock Market(R) under the symbol CLPA. Prior to November 4, 1998, the Company's
Common Stock was not publicly traded. The following table sets forth for the
period indicated the high and low closing prices per share of Common Stock as
reported by the Nasdaq Stock Market(R).

<Table>
<Caption>
2001                                                 HIGH       LOW
----                                                -------   -------
<S>                                                 <C>       <C>
First Quarter.....................................  $ 7.500   $ 3.875
Second Quarter....................................  $ 8.160   $ 3.594
Third Quarter.....................................  $ 6.890   $ 3.290
Fourth Quarter....................................  $ 7.620   $ 3.000
</Table>

<Table>
<Caption>
2000                                                 HIGH       LOW
----                                                -------   -------
<S>                                                 <C>       <C>
First Quarter.....................................  $66.000   $ 9.000
Second Quarter....................................  $38.625   $17.625
Third Quarter.....................................  $37.625   $ 7.016
Fourth Quarter....................................  $10.750   $ 3.250
</Table>

     As of February 28, 2002, there were approximately 1,300 holders of record
of the Common Stock. This does not reflect beneficial stockholders who hold
their stock in nominee or "street" name through various brokerage firms.

     During 2001, the Company did not sell any securities which were not
registered under the Securities Act of 1933.

DIVIDENDS

     The Company has never paid cash dividends on its Common Stock and does not
expect to pay cash dividends on its Common Stock for the foreseeable future.

                                        39
<PAGE>

ITEM 6.  SELECTED FINANCIAL DATA

<Table>
<Caption>
                                                           YEAR ENDED DECEMBER 31,
                                  -------------------------------------------------------------------------
                                      2001            2000           1999           1998           1997
                                  -------------   ------------   ------------   ------------   ------------
<S>                               <C>             <C>            <C>            <C>            <C>
CONSOLIDATED STATEMENT OF
  OPERATIONS DATA:
REVENUES........................  $     942,231   $    329,694   $         --   $         --   $         --
EXPENSES:
  Research and development......     17,765,243     22,257,805     16,254,858     16,052,232      8,756,499
  Selling, general and
    administrative..............      7,756,128      7,246,582      4,849,162      4,253,537      1,967,057
  Litigation settlement and
    expense.....................      8,492,000             --             --             --             --
                                  -------------   ------------   ------------   ------------   ------------
      Operating loss............    (33,071,140)   (29,174,693)   (21,104,020)   (20,305,769)   (10,723,556)
INTEREST INCOME, net............      1,666,705      2,257,885      1,470,298        960,333        426,644
                                  -------------   ------------   ------------   ------------   ------------
NET LOSS........................  $ (31,404,435)  $(26,916,808)  $(19,633,722)  $(19,345,436)  $(10,296,912)
                                  =============   ============   ============   ============   ============
  Basic and diluted net loss per
    Common share................  $       (1.01)  $      (0.96)  $      (0.79)  $      (3.04)  $      (3.63)
                                  =============   ============   ============   ============   ============
  Shares used in computing basic
    and diluted net loss per
    Common share................     31,108,939     28,003,649     24,772,256      6,369,006      2,838,814
                                  =============   ============   ============   ============   ============
</Table>

<Table>
<Caption>
                                                                DECEMBER 31,
                                  -------------------------------------------------------------------------
                                      2001            2000           1999           1998           1997
                                  -------------   ------------   ------------   ------------   ------------
<S>                               <C>             <C>            <C>            <C>            <C>
CONSOLIDATED BALANCE SHEET DATA:
  Cash, cash equivalents and
    short-term investments......  $  27,713,915   $ 49,528,407   $ 32,013,118   $ 37,232,404   $  8,460,839
  Working capital...............     23,317,839     46,191,753     29,106,239     33,804,194      5,384,546
  Total assets..................     33,621,488     54,081,593     35,278,971     40,232,699     10,978,653
  Long-term debt................        180,330        457,800         33,917        159,897          9,259
  Redeemable Preferred Stock....             --             --             --             --      1,092,000
  Common Stock..................        311,482        310,734        261,059        242,796         29,901
  Convertible Preferred Stock...             --             --             --             --     32,158,000
  Deficit accumulated during the
    Development stage...........   (123,284,737)   (91,880,302)   (64,963,494)   (45,329,772)   (25,984,336)
  Total stockholders' equity....  $  25,533,641   $ 48,628,910   $ 31,462,742   $ 36,132,118   $  6,622,429
</Table>

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS

     Cell Pathways, Inc. was incorporated in Delaware in July 1998 as a
subsidiary of, and, as of November 3, 1998, the successor to, a Delaware
corporation of the same name. As the context requires, the "Company" or "CPI" is
used herein to signify the successor and/or the predecessor corporations.

     Certain statements in this report, and oral statements made in respect of
this report, constitute "forward-looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995. Such statements are those
which express plan, anticipation, intent, contingency or future development
and/or otherwise are not statements of historical fact. These statements are
subject to risks and uncertainties, known and unknown, which could cause actual
results and developments to differ materially from those expressed or implied in
such statements. Such risks and uncertainties relate to, among other factors;
the absence of approved products; history of operating losses and the need for
further financing; dependence on the development, regulatory approval and market
acceptance of one or more of our product candidates for one or more significant
disease indications; early stage of development; the costs, delays and
uncertainties inherent in scientific research, basic pharmaceutical research,
drug development, clinical trials and the regulatory approval process, with
respect to both our current product candidates and our future product
candidates, if any; the risk that the Company does not conduct the clinical
studies it may have planned to conduct or does not pursue development plans it
may have planned to pursue; uncertainty that additional studies, if any, may

                                        40
<PAGE>

not be positive; limitations on, or absence of, the predictive value of data
obtained in laboratory tests, animal models and human clinical trials when
planning additional steps in product development; uncertainty of obtaining
regulatory approval of any compound for any disease indication whether due to
adequacy of the development program, changing regulatory requirements or
otherwise; the risk that the U.S. Food and Drug Administration ("FDA") will stop
or further delay the phase III lung cancer study or any other study as a result
of safety or otherwise; the risk that clinical studies do not result in the
safety and efficacy necessary to obtain regulatory approvals; the risks of
conducting clinical trials including the risk of conducting clinical trials of
our drugs in combination with other drug therapies; the commercial risk and risk
of liability in marketing and selling Gelclair(TM) Concentrated Oral Gel,
including the risk that prescribers do not prescribe the product and sales do
not materialize, the risks associated with product launch, manufacturing and
marketing risks, and the risk that the Company's sales of Gelclair(TM) are less
than the Company's minimum purchase obligations; the commercial risk and risk of
liability in providing marketing services promoting Nilandron(R) (nilutamide)
manufactured by Aventis Pharmaceuticals, Inc. ("Aventis") including the risk
that Aventis' sales of Nilandron(R) do not exceed the threshold entitling the
Company to a percentage of gross margin; the risk that the Company may enter
into, or may fail to enter into, licensing, partnership or other collaborative
arrangements or strategic alliances which accord to other companies rights with
respect to one or more Company compounds, technologies or programs or in which
the Company acquires new rights and obligations; the volatility of the market
price of our Common Stock; our ability to sell securities registered under the
shelf registration statement; acceptance of any product candidates by physicians
and providers of healthcare reimbursement; the actions of competitors; the pace
of technological changes in the biopharmaceutical industry; dependence upon
third parties; the validity, scope and enforceability of patents; the risk of
pending or future class action securities litigation; potential product
liability claims; and availability and adequacy of insurance.

     These and other risks are detailed in our reports filed from time to time
under the Securities Act and/or the Securities Exchange Act, including the
sections entitled "Business," "Risk Factors," "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and "Other Events' in
our annual reports on Form 10-K, quarterly reports on Form 10-Q and periodic
reports on Form 8-K and in such registration statements on Form S-3 as we may
file from time to time. You are encouraged to read these filings as they are
made. They are available over the Internet from the SEC in its EDGAR database at
http://www.sec.gov and from the Company. Be sure to read the "Risk Factors" in
Item 1 (and also the discussion of the related subject matters appearing in Item
1).

     Given the uncertainties affecting pharmaceutical companies in the
development stage, you are cautioned not to place undue reliance on any such
forward-looking statements, any of which may turn out to be wrong due to
inaccurate assumptions, unknown risks, uncertainties or other factors. No
forward-looking statement can be guaranteed; actual future results may vary
materially.

     Both forward-looking statements and statements of historic fact must be
understood in the context of the risks referred to above which characterize our
development-stage business. We undertake no obligation to update or revise the
statements made herein or the risk factors that may relate thereto.

OVERVIEW

     Cell Pathways, Inc. is a development stage pharmaceutical company focused
on the research and development of products to treat and prevent cancer, the
future commercialization of such products and the marketing and selling of
oncology-related products produced by others. From the inception of the
Company's business in 1990, operating activities have related primarily to
conducting research and development, raising capital and recruiting personnel
and, commencing in September 2000, the marketing of a product made by another
company. The Company's initial investigational new drug application ("IND") was
filed with the U.S. Food and Drug Administration ("FDA") in December 1993 for
human clinical trials of the Company's first product candidate, Aptosyn(R)
(exisulind). The Company filed an IND for its second product candidate, CP461,
in December 1998. In August 1999, the Company submitted to the FDA a new drug
application ("NDA") for use of Aptosyn(R) in treating familial adenomatous
polyposis, an orphan drug indication. In September 2000, the Company received a
"not approvable" letter from the FDA for this NDA. The Company
                                        41
<PAGE>

currently is focusing its development resources on Aptosyn(R) and CP461 in
various cancer indications. In March 2001, the Company initiated a phase III
randomized, placebo controlled, double-blind multi-center study of 600 patients
with advanced non-small cell lung cancer ("NSCLC"), refractory to standard
platinum-containing combination chemotherapy, designed to evaluate Aptosyn(R) in
combination with Taxotere(R) versus Taxotere(R) and placebo. In October 2001,
the FDA put this study on clinical hold to new patient accrual pending
completion of a planned interim safety analysis. Patients already enrolled on
the protocol were allowed to continue treatment. Subsequent reviews by both the
independent data and safety monitoring board ("DSMB") and the FDA resulted in
the lifting of the clinical hold in December 2001 at which time the Company
resumed enrollment of new patients. In the third quarter of 2001, the Company
initiated pilot phase IIa studies of CP461 in various cancer indications.

     On November 3, 1998, CPI completed a financing through the acquisition of
Tseng Labs, Inc. ("Tseng") (a publicly held company with no continuing
operations) in which CPI issued to Tseng stockholders approximately 5.5 million
shares of CPI Common Stock and received net proceeds of approximately $26.4
million. In October 1999, the Company issued 1.555 million shares of Common
Stock for net proceeds of approximately $13.5 million. During the year ended
December 31, 2000, the Company received approximately $23.1 million from the
issuance of 3.2 million shares of Common Stock and approximately $20.8 million
primarily from the exercise of previously issued Common Stock warrants and
options. Common Stock outstanding at December 31, 2001 was 31.1 million shares.

     In July 2000, the Company entered into an exclusive marketing and promotion
agreement (the "Nilandron Agreement") with Aventis to market Nilandron(R)
(nilutamide) to urologists in the U.S. and Puerto Rico for use in patients who
suffer from prostate cancer. The Company began to market Nilandron(R) in
September of 2000. Under the terms of the Nilandron Agreement, the Company is
responsible for its marketing and promotion expenses and receives a percentage
of the gross margin on Aventis' sales, if any, in excess of a pre-established
gross margin threshold. The Company recognized revenue under the Nilandron
Agreement of $942,231 in 2001 and $329,694 for the four months it was marketed
in 2000.

     In January 2002, the Company entered into a ten-year exclusive distribution
agreement (the "Gelclair Agreement") with Sinclair Pharmaceuticals Ltd.
("Sinclair") to promote and distribute Gelclair(TM) Concentrated Oral Gel in
North America (USA, Canada and Mexico). Gelclair(TM) is an oral gel formulation
for the management and relief of inflammation and ulceration of the mouth caused
by chemotherapy or radiotherapy treatments. The Company plans to promote
Gelclair(TM) in the oncology market through the use of its sales force. Under
the Gelclair Agreement, the Company has paid Sinclair $1 million for the
exclusive right to market and distribute Gelclair(TM) in North America.
Additionally, the Company has committed to inventory purchases of $4 million, $3
million and $5 million in 2002, 2003 and 2004, respectively, and could be
responsible for milestone payments totaling $3 million related to the
achievement of certain sales, patent and clinical trial milestones. The Company
will purchase Gelclair(TM) from Sinclair and resell to North American markets,
with any revenues derived from the sale of Gelclair(TM) being recognized by the
Company.

     The Company has not received any revenue from the sale of its products, and
none of its product candidates has been approved for marketing. The Company's
income has been limited to interest income from investments and revenues from
the Nilandron Agreement beginning in the fourth quarter of 2000, and its primary
source of capital has been the sale of its equity securities, including the
transaction with Tseng. Net losses were $31,404,435, $26,916,808 and $19,633,722
for the years ended December 2001, 2000 and 1999, respectively. As of December
31, 2001, the accumulated deficit was $123,284,737 and the cash, cash
equivalents and short-term investments were $27,713,915. The Company anticipates
that it will continue to incur additional operating losses for the next several
years and that it will need to raise additional capital to sustain its
operations. Should appropriate sources of funding not be available on terms
acceptable to the Company, management would take action which could include the
delay of certain clinical trials and research activities until such time as
appropriate sources of funding were available. There can be no assurance that
any of the Company's product candidates will be approved for marketing, that
profitability will be attained or, if profitability is achieved, that the
Company will remain profitable on a quarterly or annual basis in the future. The
Company's operating results will fluctuate from quarter to quarter. Some of
these fluctuations may be significant and, as a result, quarter to quarter
comparisons may not be meaningful.
                                        42
<PAGE>

RESULTS OF OPERATIONS

     Year Ended December 31, 2001 Compared with Year Ended December 31,
2000.  Revenues were $942,231 and $329,694 for the years ended December 31, 2001
and December 31, 2000, respectively, related to the Nilandron Agreement. The
Company began promoting Nilandron(R) to urologists in September 2000.

     Total expenses for the year ended December 31, 2001, including a litigation
charge of $8,492,000, were $34,013,371, an increase of $4,508,984 or 15.3% from
the same period in 2000. Research and development ("R&D") expenses for the year
ended December 31, 2001 were $17,765,243, a decrease of $4,492,562 or 20.2% from
the same period in 2000. This decrease was primarily due to reductions in 2001
of purchases of research materials for Aptosyn(R) offset partially by increases
in clinical development expenses in 2001. Selling, general and administrative
("SG&A") expenses were $7,756,128 for the year ended December 31, 2001, an
increase of $509,546 or 7.0% from the same period in 2000. This increase was
primarily due to higher personnel expenses and a full year's marketing expenses
for Nilandron(R) in 2001 versus four months of activity for the year ended
December 31, 2000 as a result of the launch of Nilandron(R) in September 2000,
offset partially by a reduction in pre-commercialization expenses for Aptosyn(R)
in 2001.

     In February 2002, the Company reached an agreement in principle to settle
its class action litigation. The December 31, 2001 financial statements include
a charge of $8,492,000 for the settlement of this litigation and related
expenses. The agreement provides for the Company to issue a fixed number of 1.7
million shares of its Common Stock and the payment of $2 million. In connection
with the settlement, the Company's insurance company has agreed to pay $2
million to the Company. The litigation charge recorded in the fourth quarter of
2001 represents the fair value of the 1.7 million shares to be issued of $7.8
million and estimated legal costs of $655,000. Until such time as the settlement
is approved by the court, the Company will adjust the above value of the 1.7
million shares based on the then current fair value of the shares. Such
adjustments will result in non-cash income or expense in subsequent interim
periods.

     Interest income, net of interest expense of $103,883, was $1,666,705 for
the year ended December 31, 2001, a decrease of $591,180 or 26.2% from the same
period in 2000, primarily due to lower average cash balances and lower interest
rates.

     Year Ended December 31, 2000 Compared with Year Ended December 31,
1999.  Revenues related to the Nilandron Agreement, which the Company began
promoting in September 2000, were $329,694 for the year ended December 31, 2000.

     Total expenses for the year ended December 31, 2000 were $29,504,387, an
increase of $8,400,367 or 39.8% from the same period in 1999. R&D expenses for
the year ended December 31, 2000 were $22,257,805, an increase of $6,002,947 or
36.9% from the same period in 1999. This increase was primarily due to purchases
of research materials for Aptosyn(R) for clinical trials and anticipated
commercial supply needs, an increase in personnel, and expenses to support the
development of Aptosyn(R) and CP461. SG&A expenses were $7,246,582 for the year
ended December 31, 2000, an increase of $2,397,420 or 49.4% from the same period
in 1999. This increase was primarily due to expenses associated with
preparations for the commercialization of Aptosyn(R) and expenses associated
with the hiring, training and support of a sales organization to promote
Nilandron(R).

     Interest income, net of interest expense of $48,592, was $2,257,885 for the
year ended December 31, 2000, an increase of $787,587 or 53.6% from the same
period in 1999, primarily due to higher average cash balances.

LIQUIDITY AND CAPITAL RESOURCES

     The Company has financed its operations since inception primarily with the
net proceeds received from the sale of equity securities, including the
transaction with Tseng. Financing activities have generated net proceeds of
approximately $140.6 million from inception through December 31, 2001.

     At December 31, 2001, the Company had cash, cash equivalents and short-term
investments of $27,713,915 a decrease of $21,814,492 from the comparable
balances at December 31, 2000, primarily due to

                                        43
<PAGE>

the funding of operations. The Company invests its excess cash primarily in low
risk, highly liquid money market funds and U.S. government securities. At
December 31, 2001 the Company had a portion of its excess cash invested in U.S.
government securities with original maturities in excess of three months,
thereby requiring such investments to be classified as short-term investments.
At December 31, 2001, the Company had $463,499 in a restricted cash account
pledged for a security deposit under the lease of its Horsham, Pennsylvania
facility.

     In November 2000, the Company sold 3,200,000 shares of Common Stock in a
private placement, mainly to institutional investors, at a price of $7.375 per
share, resulting in net proceeds of approximately $23.1 million. With each share
of Common Stock purchased, the Company issued a warrant to purchase one and
thirty five one-hundredths (1.35) shares of the Company's Common Stock at $12.00
per share. The warrants are exercisable until June 30, 2002. The Company paid
one of the placement agents a fee of $413,800 and another placement agent
warrants to purchase 73,750 shares of Common Stock at an exercise price of
$12.00 per share as a fee. In addition, the Company has an agreement to grant
warrants to the placement agents of the private placement equal to 5.0% of the
total warrants exercised by the purchasers which the respective placement agents
brought to the offering. Under the agreement, warrants to purchase up to 109,499
shares of Common Stock may be issued. The warrants issued to the placement
agents are exercisable until the later of (i) June 30, 2002 or (ii) 30 days
after the exercise of the warrants by the purchasers.

     During 2000, the Company made loans to two of its officers that totaled
$632,954. During 2001 the Company made additional loans to one of its officers
totaling $256,000. As of December 31, 2001, the loans to the two officers, plus
accrued interest of $55,443, are still outstanding.

     During 2000, the Company secured an $800,000 equipment loan for the
financing of past and future acquisitions of laboratory and office equipment.
This loan is payable over a thirty six month period and is secured by the
respective laboratory and office equipment. During 2001 and 2000, the Company
made payments of $241,912 and $100,286 respectively toward the repayment of
principal.

     In 2001, the Company purchased approximately $236,188 in laboratory,
computer and office equipment, office furniture and leasehold improvements for
its research laboratories and offices in its Horsham facility.

     The Company leases approximately 40,000 square feet of laboratory and
office space in Horsham, Pennsylvania with a ten-year term expiring in 2008
which contains two five-year renewal options. The Company believes its
facilities will be adequate for the foreseeable future.

     On November 21, 2001, the United States District Court for the Eastern
District of Pennsylvania entered a final order dismissing the stockholder class
action filed against the Company and certain of its officers and directors in
1999. The complaint in the class action had alleged that the Company had made
false and misleading statements prior to February 1, 1999 about the efficacy and
near term commercialization of the Company's lead drug candidate which had the
effect of artificially inflating the price of the Company's Common Stock during
the class period of October 7, 1998 to February 2, 1999. The class action was
dismissed pursuant to the terms of a stipulation of settlement. The settlement
amount, $3.75 million, was funded by the Company's primary insurance company in
mid-2001.

     In March, April and May of 2001, eleven additional stockholder class
actions were filed in the United States District Court for the Eastern District
of Pennsylvania against the Company and certain of its officers and directors
seeking unspecified damages. The lawsuits alleged that the Company and its
officers made false and misleading statements about the Company's lead drug
candidate which caused artificial inflation of the Company's stock price during
the class period of October 27, 1999 to September 22, 2000, when the Company
announced that the FDA had informed the Company that it would be receiving a
"not approvable" letter for its NDA for its leading drug candidate. In February
2002, an agreement in principle was reached to settle this litigation for the
issuance of 1.7 million shares of Common Stock by the Company and the payment of
$2 million. In connection with the settlement, the Company's insurance company
has agreed to pay $2 million to the Company. This settlement is subject to
execution of a final agreement and court approval, after which notice and an
opportunity to object must be furnished to the class. There is no assurance that
the settlement will be approved or completed in a timely fashion or at all. As
of December 31, 2001, the Company has

                                        44
<PAGE>

recorded the fair value of the 1.7 million shares of Common Stock of $7,837,000
as an increase to additional paid-in capital and recorded a charge to the
litigation settlement expense for the fair value of the Common Stock and the
estimated legal costs of $655,000. In addition, the Company has accrued the $2
million to be paid by the Company's insurance company as a liability and
recorded a corresponding asset due from the insurance company.

     Under the Gelclair Agreement, the Company has paid Sinclair $1 million for
the exclusive right to market and distribute Gelclair(TM) in North America.
Additionally, the Company has committed to inventory purchases of $4 million, $3
million and $5 million in 2002, 2003 and 2004, respectively, and could be
responsible for milestone payments totaling $3 million related to the
achievement of certain sales, patent and clinical trial milestones.

     The Company anticipates the annual expenditures for preclinical studies,
clinical trials, product development, research, selling and marketing, and
general and administrative expenses will increase significantly in future years.
CPI anticipates that it will need to raise additional capital. There can be no
assurance that CPI will be able to successfully complete the clinical
development of Aptosyn(R), CP461 or any other drug candidate for any indication,
that the FDA will grant approval of any drug candidate for any indication, or
that the other developments or expansions in CPI's research, development and
commercialization and sales and marketing programs will ultimately lead to
revenues or profitability for the Company.

     CPI cannot predict the date of its first product approval, if any, the rate
of revenue generated from initial product sales, if achieved, the level of
expense which may be associated with such initial product sales, or the level of
revenue and expense associated with the marketing and/or selling of products
made by others. The Company anticipates that it will require additional
financing in the future to continue its research and development programs. Until
such time as CPI is able to generate sufficient revenue, if ever, CPI plans to
finance its anticipated growth and development largely through equity or debt
financing and/or strategic or corporate alliances. CPI believes, based on its
current operating plans, that its existing, cash, cash equivalents and
short-term investments balance of approximately $27.7 million as of December 31,
2001, together with interest earned on these balances, will be adequate to fund
operations into the first quarter of 2003. However, there can be no assurance
that the Company will not require additional funding prior to that time, as the
Company must adapt to changing circumstances arising from within the Company's
programs and from outside the Company. There can be no assurance that additional
equity or debt financing or corporate collaborations will be available on terms
acceptable to CPI, if at all. Should appropriate sources of funding not be
available on terms acceptable to the Company, management would take action which
could include the delay of certain clinical trials and research activities until
such time as appropriate sources of funding was available. Any additional equity
financing would be dilutive to stockholders. Debt financing, if available, may
include restrictive covenants and also may be dilutive. Corporate alliances
would generally require the Company to give up certain marketing rights or other
rights to its potential products and technology. If additional funds should be
needed but are not available, the Company may be required to modify its
operations significantly or to obtain funds by entering into collaborative
arrangements or other arrangements on unfavorable terms. The failure by CPI to
raise capital on acceptable terms if and when needed would have a material
adverse effect on CPI's business, financial condition and results of operations.

CRITICAL ACCOUNTING POLICIES

     Financial Reporting Release No. 60, which was recently released by the
Securities and Exchange Commission, requires all companies to include a
discussion of critical accounting policies or methods used in the preparation of
financial statements. Note 2 of the Notes to our Consolidated Financial
Statements includes a summary of our significant accounting policies and methods
used in the preparation of our consolidated financial statements. While, the
preparation of our consolidated financial statements requires us to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and the reported amounts of expenses during the reporting period, we
do not believe the Company's financial statements are significantly affected by
complex accounting policies and methods, given our stage of development. In
addition, Financial Reporting Release No. 61 was recently released by the
Securities and Exchange

                                        45
<PAGE>

Commission to require all companies to include a discussion to address, among
other things, liquidity, off-balance sheet arrangements, contractual obligations
and commercial commitments.

     REVENUE RECOGNITION

     We recognize revenue under the Nilandron Agreement in the period in which
marketing services are performed if Aventis' sales of Nilandron(R)for that
period exceed specified thresholds. In January 2002, we entered into the
Gelclair Agreement to market and distribute Gelclair(TM) in North America. We
anticipate commencing sales of Gelclair(TM) in the second quarter of 2002. While
we have not finalized the sales terms for Gelclair(TM), the recognition of
revenue from the sale of Gelclair(TM) could be subject to certain pricing
allowances or rights of product return granted to potential customers. To the
extent that we offer such terms to our customers, this could have an impact on
our revenue recognition policy for sales of Gelclair(TM).

COMMITMENTS

     As outlined in Note 12 of the Notes to our Consolidated Financial
Statements, we have entered into various contractual obligations and commercial
commitments. The following table summarizes these contractual obligations as of
December 31, 2001:

<Table>
<Caption>
                              LESS THAN      1 TO 3       4 TO 5      AFTER 5
CONTRACTUAL OBLIGATION          1 YEAR       YEARS        YEARS        YEARS         TOTAL
----------------------        ----------   ----------   ----------   ----------   -----------
<S>                           <C>          <C>          <C>          <C>          <C>
Long-term debt..............  $  277,000   $  180,000   $       --   $       --   $   457,000
Capital lease obligations...      41,000       62,000           --           --       103,000
Operating leases............     945,000    1,950,000    2,018,000    1,587,000     6,500,000
Purchase commitments for
  Gelclair(TM)..............   4,000,000    8,000,000           --           --    12,000,000
</Table>

INFLATION

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

INCOME TAXES

     As of December 31, 2001, CPI has net operating loss carryforwards ("NOLs")
for income tax purposes available to offset future federal income tax, subject
to limitations, including limitations for alternative minimum tax. In addition,
the Company has other significant deferred tax assets which will also offset
future income tax. As the Company has not yet achieved profitable operations,
management believes the tax assets do not satisfy the realization criteria of
Statement of Financial Accounting Standards ("SFAS") No. 109 "Accounting for
Income Taxes" and therefore the Company has recorded a valuation allowance for
the entire amount of its net tax asset as of December 31, 2001. (See Note 11 of
Notes to Consolidated Financial Statements included elsewhere in this report.)

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

ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     INTEREST RATE RISK.  The Company's exposure to market risk for changes in
interest rates primarily relates to the Company's investment portfolio. The
Company is averse to principal loss and seeks to limit default risk, market risk
and reinvestment risk. In particular, the Company does not use derivative
financial instruments in its investment portfolio, places its investments with
high quality issuers and, except for investments with the U.S. Government,
limits the amount of credit exposure to any one issuer. The Company mitigates
default risk

                                        46
<PAGE>

by investing in only the safest and highest credit quality securities,
predominantly those of the U.S. Government, and by positioning its portfolio to
respond appropriately to a significant reduction in a credit rating of any
investment issuer, guarantor or depository. The portfolio includes only
marketable securities with active secondary or resale markets to ensure
portfolio liquidity and has historically been invested in securities which have
original maturities of less than three months to ensure principal preservation.
As of December 31, 2001 and 2000, the Company was invested in U.S. government
securities and money market funds, which were classified as cash equivalents and
short term investments in 2001 and cash equivalents in 2000 in the Company's
financial statements. The investments had principal (or notional) amounts of
$24.9 million and $42.7 million , respectively, which were equal to their fair
value, average interest rates of 2.8% and 5.8%, respectively, and maturities of
less than one year.

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

     The Registrant's financial statements and notes thereto, together with the
Report of Independent Public Accountants thereon, appear at pages F-1 through
F-22 of this report and are incorporated herein by reference.

ITEM 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

     None.

                                        47
<PAGE>

                                    PART III

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

     (a) The information required by Item 10 for directors of the Company is
contained in the Company's definitive Proxy Statement with respect to the
Company's Annual Meeting of Stockholders, to be filed with the Securities and
Exchange Commission within 120 days following the end of the Company's fiscal
year, and is incorporated herein by reference thereto.

     (b) The information required by Item 10 for Executive Officers of the
Company is set forth in Part 1 of this report and is incorporated herein by
reference thereto.

ITEM 11.  EXECUTIVE COMPENSATION

     The information required by Item 11 is contained in the Company's
definitive Proxy Statement with respect to the Company's Annual Meeting of
Stockholders, to be filed with the Securities and Exchange Commission within 120
days following the end of the Company's fiscal year, and is incorporated herein
by reference thereto.

ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     The information required by Item 12 is contained in the Company's
definitive Proxy Statement with respect to the Company's Annual Meeting of
Stockholders, to be filed with the Securities and Exchange Commission within 120
days following the end of the Company's fiscal year, and is incorporated herein
by reference thereto.

ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     The information required by Item 13 is contained in the Company's
definitive Proxy Statement with respect to the Company's Annual Meeting of
Stockholders, to be filed with the Securities and Exchange Commission within 120
days following the end of the Company's fiscal year, and is incorporated herein
by reference thereto.

                                        48
<PAGE>

                                    PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.

<Table>
<C>    <S>
(a)
 1.    LIST OF FINANCIAL STATEMENTS
       See page F-1 of this report, which includes an index to
       consolidated financial statements.
 2.    LIST OF FINANCIAL STATEMENT SCHEDULES
       None.
 3.    LIST OF EXHIBITS
 3.1   Certificate of Incorporation as amended November 2, 1998
       (incorporated by reference to Exhibit 3.1 to the
       Registrant's Report on Form 10-K for 1998 filed with the
       Securities and Exchange Commission (the "1998 10-K")).
 3.2   Amendment to Certificate of Incorporation by way of
       Certificate of Designation, Preferences and Rights of Series
       A Junior Participating Preferred Stock (incorporated by
       reference to Exhibit 3.2 to the 1998 10-K).
 3.3   Amendment to Certificate of Incorporation increasing the
       number of authorized shares of Common Stock and Preferred
       Stock (incorporated by reference to Exhibit 3.3 to
       Registrant's Quarterly Report on Form 10-Q filed with the
       Securities and Exchange Commission on August 2, 2000).
 3.4   Bylaws of Cell Pathways, Inc. (incorporated by reference to
       Exhibit 3.2 to the Registrant's Registration Statement on
       Form S-4 (No. 333-59557) filed with the Securities and
       Exchange Commission on July 22, 1998 (the "July 1998 S4")).
 4.1   Reference is made to Exhibits 3.1, 3.2, 3.3 and 3.4.
 4.2   Specimen certificate of Registrant (incorporated by
       reference to Exhibit 4.2 to the July 1998 S-4).
 4.3   Rights Agreement dated as of December 3, 1998 between
       Registrant and Registrar and Transfer Company (incorporated
       by reference to Exhibit 4 to the Registrant's Current Report
       on Form 8-K filed with the Securities and Exchange
       Commission on December 18, 1998).
 4.4   Form of Warrant issued in Private Placement, November 9,
       2000 (incorporated by reference to Exhibit 4 to Registrant's
       Registration Statement on Form S-3 (No. 333-50514), filed
       with the Securities and Exchange Commission on November 22,
       2000 (the "November 2000 S-3")).
10.1   Lease, dated June 25, 1998, between Cell Pathways, Inc. and
       ARE-702 Electronic Drive, L.P. (incorporated by reference to
       Exhibit 10.2 to the July 1998 S-4).
10.2   Research and License Agreement, dated June 26, 1991, between
       Cell Pathways, Inc. and the University of Arizona, as
       amended (incorporated by reference to Exhibit 10.23 to
       Registrant's Registration Statement on Form S-1 (No.
       333-37557), filed October 9, 1997, or amendments thereto
       (the "October 1997 S-1")).
10.3   Form of Purchase Agreement in Private Placement, November 9,
       2000 (incorporated by reference to Exhibit 10.1 to the
       November 2000 S-3).
10.4*  Distribution Agreement, dated January 22, 2002, between Cell
       Pathways, Inc. and Sinclair Pharmaceuticals Ltd.

EXECUTIVE COMPENSATION PLANS AND ARRANGEMENTS
10.5   1997 Equity Incentive Plan of Cell Pathways, Inc, as amended
       (incorporated by reference to Exhibit 10.6 to the
       Registrant's Report on Form 10-K for 2000 filed with the
       Securities and Exchange Commission (the "2000 10-K")).
10.6   Form of Incentive Stock Option Agreement (incorporated by
       reference to Exhibit 10.7 to the 2000 10-K).
10.7   Form of Non-Qualified Stock Option Agreement (incorporated
       by reference to Exhibit 10.8 to the 2000 10-K).
</Table>

                                        49
<PAGE>
<Table>
<C>    <S>
10.8   1997 Non-Employee Director Stock Option Plan of Cell
       Pathways, Inc. (incorporated by reference to Exhibit 10.5 to
       the July 1998 S-4).
10.9   Form of Stock Option Agreement (incorporated by reference to
       Exhibit 10.6 to the July 1998 S-4).
10.10  1997 Employee Stock Purchase Plan of Cell Pathways, Inc.
       (incorporated by reference to Exhibit 10.28 to the October
       1997 S-1).
10.11  1995 Stock Award Plan of Cell Pathways, Inc. (incorporated
       by reference to Exhibit 10.6 to the October 1997 S-1).
10.12  Employment Agreement, dated October 12, 1996, between Cell
       Pathways, Inc. and Robert J. Towarnicki (incorporated by
       reference to Exhibit 10.13 to the October 1997 S-1).
10.13  Change in Control Agreement, dated as of November 30, 2000,
       between Cell Pathways, Inc. and Robert J. Towarnicki
       (incorporated by reference to Exhibit 10.14 to the 2000
       10-K).
10.14  Employment Agreement, dated February 1, 1993, between Cell
       Pathways, Inc. and Rifat Pamukcu (incorporated by reference
       to Exhibit 10.17 to the October 1997 S-1).
10.15  Change in Control Agreement, dated as of November 30, 2000,
       between Cell Pathways, Inc. and Rifat Pamukcu (incorporated
       by reference to Exhibit 10.16 to the 2000 10-K).
10.16  Employment Agreement, dated as of October 12, 2000, between
       Cell Pathways, Inc. and Martha E. Manning (incorporated by
       reference to Exhibit 10.17 to the 2000 10-K).
10.17  Change in Control Agreement, dated as of November 30, 2000,
       between Cell Pathways, Inc. and Martha E. Manning
       (incorporated by reference to Exhibit 10.18 to the 2000
       10-K).
10.18  Employment Agreement, dated as of July 12 2000, between Cell
       Pathways, Inc. and Robert E. Bellet, M.D. (incorporated by
       reference to Exhibit 10.19 to the 2000 10-K).
10.19  Change in Control Agreement, dated as of November 30, 2000,
       between Cell Pathways, Inc. and Robert E. Bellet, M.D.
       (incorporated by reference to Exhibit 10.20 to the 2000
       10-K)
10.20  Employment Agreement, dated as of November 6, 1997, between
       Cell Pathways, Inc. and Brian J. Hayden (incorporated by
       reference to Exhibit 10.21 to the 2000 10-K).
10.21  Change in Control Agreement, dated as of November 30, 2000,
       between Cell Pathways, Inc. and Brian J. Hayden
       (incorporated by reference to Exhibit 10.22 to the 2000
       10-K).
10.22  Employment Agreement, dated as of November 29, 2000, between
       Cell Pathways, Inc. and Lloyd Glenn (incorporated by
       reference to Exhibit 10.23 to the 2000 10-K).
10.23  Change in Control Agreement, dated as of November 30, 2000,
       between Cell Pathways, Inc. and Lloyd Glenn (incorporated by
       reference to Exhibit 10.24 to the 2000 10-K).
10.24  Restricted Stock Grant, dated December 14, 2001, between
       Cell Pathways, Inc. and Robert E. Bellet, M.D.
10.25  Non-Qualified Stock Option Agreement, dated January 11,
       2002, between Cell Pathways, Inc. and Brian J. Hayden.
22.1   Subsidiaries.
23.1   Consent of Arthur Andersen LLP.
99.1   Issuer Letter Concerning Auditor Representation.
--
* Confidential Treatment Requested

(b)    REPORT ON FORM 8-K
       None
</Table>

                                        50
<PAGE>

                                   SIGNATURES

     Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the Registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.

                                      CELL PATHWAYS, INC.

                                      By:      /s/ ROBERT J. TOWARNICKI
                                         ---------------------------------------
                                          Robert J. Towarnicki
                                         President and Chief Executive Officer

March 22, 2002

     Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.

<Table>
<Caption>
                   SIGNATURE                                    TITLE                        DATE
                   ---------                                    -----                        ----
<C>                                               <S>                                   <C>

            /s/ ROBERT J. TOWARNICKI              Chairman of the Board of              March 22, 2002
------------------------------------------------  Directors, President and Chief
             (Robert J. Towarnicki)               Executive Officer (Principal
                                                  Executive Officer)

             /s/ WILLIAM A. BOEGER                Director                              March 22, 2002
------------------------------------------------
              (William A. Boeger)

            /s/ D. BRUCE BURLINGTON               Director                              March 22, 2002
------------------------------------------------
             (D. Bruce Burlington)

               /s/ PAUL J. DUGGAN                 Director                              March 22, 2002
------------------------------------------------
                (Paul J. Duggan)

              /s/ THOMAS M. GIBSON                Director                              March 22, 2002
------------------------------------------------
               (Thomas M. Gibson)

               /s/ RIFAT PAMUKCU                  Director, Executive Vice President    March 22, 2002
------------------------------------------------  and Chief Scientific Officer
                (Rifat Pamukcu)

            /s/ JUDITH A. HEMBERGER               Director                              March 22, 2002
------------------------------------------------
             (Judith A. Hemberger)

              /s/ LOUIS M. WEINER                 Director                              March 22, 2002
------------------------------------------------
               (Louis M. Weiner)

              /s/ BRIAN J. HAYDEN                 Chief Financial Officer and Vice      March 22, 2002
------------------------------------------------  President, Finance (Principal
               (Brian J. Hayden)                  Financial and Accounting Officer)
</Table>

                                        51
<PAGE>

                      CELL PATHWAYS, INC. AND SUBSIDIARIES
                         (A DEVELOPMENT STAGE COMPANY)

                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

<Table>
<Caption>
                                                                  PAGE
                                                                  ----
<S>                                                           <C>
Report of Independent Public Accountants....................  F-2
Consolidated Balance Sheets as of December 31, 2001 and
  2000......................................................  F-3
Consolidated Statements of Operations for the years ended
  December 31, 2001, 2000 and 1999 and for the period from
  inception (August 10, 1990) to December 31, 2001..........  F-4
Consolidated Statement of Stockholders' Equity (Deficit) and
  Partners'
  Investment for the period from inception (August 10, 1990)
     to December 31, 2001...................................  F-5 to F-9
Consolidated Statements of Cash Flows for the years ended
  December 31, 2001, 2000 and 1999 and the period from
  inception (August 10, 1990) to December 31, 2001..........  F-10 to F-11
Notes to Consolidated Financial Statements..................  F-11 to F-22
</Table>

                                       F-1
<PAGE>

                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To Cell Pathways, Inc. and subsidiaries:

     We have audited the accompanying consolidated balance sheets of Cell
Pathways, Inc. (a Delaware corporation in the development stage) and
subsidiaries as of December 31, 2001 and 2000, and the related consolidated
statements of operations, stockholders' equity (deficit) and partners'
investment, and cash flows for each of the three years in the period ended
December 31, 2001 and for the period from inception (August 10, 1990) to
December 31, 2001. 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 auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.

     In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Cell Pathways, Inc. and
subsidiaries as of December 31, 2001 and 2000 and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2001 and for the period from inception (August 10, 1990) to
December 31, 2001, in conformity with accounting principles generally accepted
in the United States.

/S/ ARTHUR ANDERSEN LLP

Philadelphia, Pennsylvania
February 25, 2002

                                       F-2
<PAGE>

                      CELL PATHWAYS, INC. AND SUBSIDIARIES
                         (A DEVELOPMENT STAGE COMPANY)

                          CONSOLIDATED BALANCE SHEETS

<Table>
<Caption>
                                                                      DECEMBER 31,
                                                              ----------------------------
                                                                  2001            2000
                                                              -------------   ------------
<S>                                                           <C>             <C>
ASSETS
CURRENT ASSETS:
  Cash and cash equivalents.................................  $   2,905,767   $ 49,528,407
  Short-term investments....................................     24,808,148             --
  Accounts receivable.......................................        318,450        329,694
  Prepaid expenses and other................................      1,130,971      1,328,535
  Due from insurance company (Note 12)......................      2,000,000             --
                                                              -------------   ------------
     Total current assets...................................     31,163,336     51,186,636
EQUIPMENT, FURNITURE AND LEASEHOLD IMPROVEMENTS, net........        992,856      1,183,287
RESTRICTED CASH.............................................        463,499        676,216
NOTES RECEIVABLE FROM OFFICERS..............................        944,397        642,256
OTHER ASSETS................................................         57,400        393,198
                                                              -------------   ------------
                                                              $  33,621,488   $ 54,081,593
                                                              =============   ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
  Current portion of note payable...........................  $     277,473   $    241,915
  Current installments of obligation under capital lease....         40,493         38,218
  Accounts payable..........................................        847,552      1,033,202
  Accrued compensation......................................        764,843        256,565
  Accrued litigation settlement and expense.................      2,642,822             --
  Other accrued liabilities.................................      3,272,314      3,424,983
                                                              -------------   ------------
     Total current liabilities..............................      7,845,497      4,994,883
                                                              -------------   ------------
NOTE PAYABLE................................................        180,330        457,800
                                                              -------------   ------------
OBLIGATION UNDER CAPITAL LEASE..............................         62,020             --
                                                              -------------   ------------
COMMITMENTS AND CONTINGENCIES (NOTE 12)
STOCKHOLDERS' EQUITY:
Preferred Stock, $.01 par value, 10,000,000 shares
  authorized; none issued and outstanding...................             --             --
Common Stock $.01 par value, 150,000,000 shares authorized;
  31,148,255 and 31,073,457 shares issued and outstanding...        311,482        310,734
Additional paid-in capital (Note 12)........................    148,631,231    140,235,478
Stock subscription receivable from issuance of Common
  Stock.....................................................        (50,683)       (37,000)
Deferred compensation.......................................        (73,652)            --
Deficit accumulated during the development stage............   (123,284,737)   (91,880,302)
                                                              -------------   ------------
     Total stockholders' equity.............................     25,533,641     48,628,910
                                                              -------------   ------------
                                                              $  33,621,488   $ 54,081,593
                                                              =============   ============
</Table>

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

                                       F-3
<PAGE>

                      CELL PATHWAYS, INC. AND SUBSIDIARIES
                         (A DEVELOPMENT STAGE COMPANY)

                     CONSOLIDATED STATEMENTS OF OPERATIONS

<Table>
<Caption>
                                                                                        PERIOD
                                             YEAR ENDED DECEMBER 31,                FROM INCEPTION
                                    ------------------------------------------    (AUGUST 10, 1990)
                                        2001           2000           1999       TO DECEMBER 31, 2001
                                    ------------   ------------   ------------   --------------------
<S>                                 <C>            <C>            <C>            <C>
REVENUES..........................  $    942,231   $    329,694   $         --      $   1,271,925

EXPENSES:
  Research and development........    17,765,243     22,257,805     16,254,858         93,406,236
  Selling, general and
     administrative...............     7,756,128      7,246,582      4,849,162         29,677,917
  Litigation settlement and
     expense (Note 12)............     8,492,000             --             --          8,492,000
                                    ------------   ------------   ------------      -------------
     Operating loss...............   (33,071,140)   (29,174,693)   (21,104,020)      (130,304,228)
INTEREST INCOME, net..............     1,666,705      2,257,885      1,470,298          7,019,491
                                    ------------   ------------   ------------      -------------
NET LOSS..........................  $(31,404,435)  $(26,916,808)  $(19,633,722)     $(123,284,737)
                                    ============   ============   ============      =============
Basic and diluted net loss per
  Common share....................  $      (1.01)  $      (0.96)  $      (0.79)
                                    ============   ============   ============
Shares used in computing basic and
  diluted net loss per Common
  share...........................    31,108,939     28,003,649     24,772,256
                                    ============   ============   ============
</Table>

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

                                       F-4
<PAGE>

                      CELL PATHWAYS, INC. AND SUBSIDIARIES

                         (A DEVELOPMENT STAGE COMPANY)

     CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT) AND PARTNERS'
                                   INVESTMENT

      FOR THE PERIOD FROM INCEPTION (AUGUST 10, 1990) TO DECEMBER 31, 2001
<Table>
<Caption>

                                                            REDEEMABLE            CONVERTIBLE
                                                          PREFERRED STOCK       PREFERRED STOCK           COMMON STOCK
                                             PARTNERS'    ---------------   -----------------------   --------------------
                                            INVESTMENT    SHARES   AMOUNT    SHARES       AMOUNT       SHARES      AMOUNT
                                            -----------   ------   ------   ---------   -----------   ---------   --------
<S>                                         <C>           <C>      <C>      <C>         <C>           <C>         <C>
BALANCE, Inception (August 10, 1990)......  $        --      --     $ --           --   $        --          --   $     --
Partner cash contributions in September
 1990 for Class A Partnership Units.......      406,000      --       --           --            --          --         --
Partner contribution of interest in
 research grant in September 1990 for
 Class A Partnership Units, at historical
 cost.....................................       48,638      --       --           --            --          --         --
Net loss..................................           --      --       --           --            --          --         --
                                            -----------   ------    ----    ---------   -----------   ---------   --------
BALANCE, December 31, 1990................      454,638      --       --           --            --          --         --
Partner cash contributions in March 1991
 for Class A Partnership Units............      406,000      --       --           --            --          --         --
Partner cash contributions in December
 1991 for Class B Partnership Units.......      896,563      --       --           --            --          --         --
Net loss..................................           --      --       --           --            --          --         --
                                            -----------   ------    ----    ---------   -----------   ---------   --------
BALANCE, December 31, 1991................    1,757,201      --       --           --            --          --         --
Partner cash contributions in January and
 April 1992 for Class B Partnership
 Units....................................       21,812      --       --           --            --          --         --
Partner cash contributions in December
 1992 for Class B Partnership Units.......      133,300      --       --           --            --          --         --
Partner cash contributions in December
 1992 for Class C Partnership Units.......    1,540,000      --       --           --            --          --         --
Partner cash contributions in December
 1992 for Class D Partnership Units.......    1,475,027      --       --           --            --          --         --
Net loss..................................           --      --       --           --            --          --         --
                                            -----------   ------    ----    ---------   -----------   ---------   --------
BALANCE, December 31, 1992................    4,927,340      --       --           --            --          --         --
Partner cash contributions in January 1993
 to March 1993 for Class D Partnership
 Units....................................      385,015      --       --           --            --          --         --
Exchange of interests in the Partnership
 in September 1993 for 872,000 shares of
 Series A Convertible Preferred Stock.....     (812,000)     --       --      872,400       812,000          --         --
Exchange of interests in the Partnership
 in September 1993 for 848,100 shares of
 Series B Convertible Preferred Stock.....     (868,000)     --       --      848,100       868,000          --         --
Exchange of interests in the Partnership
 in September 1993 for 700,000 shares of
 Series C Convertible Preferred Stock.....   (1,540,000)     --       --      700,000     1,540,000          --         --
Exchange of interests in the Partnership
 in September 1993 for 616,808 shares of
 Series D Convertible Preferred Stock.....   (1,860,042)     --       --      616,808     1,860,042          --         --
Exchange of interests in the Partnership
 in September 1993 for 61,250 shares of
 Redeemable Preferred Stock...............         (613)  61,250     613           --            --          --         --
Exchange of interests in the Partnership
 in September 1993 for 2,279,500 shares of
 Common Stock.............................     (231,700)     --       --           --            --   2,279,500     22,795
Net loss..................................  $        --      --     $ --           --   $        --          --   $     --
                                            -----------   ------    ----    ---------   -----------   ---------   --------

<Caption>
                                                              STOCK           STOCK
                                                          SUBSCRIPTION     SUBSCRIPTION
                                                           RECEIVABLE       RECEIVABLE                     DEFICIT
                                                              FROM             FROM                      ACCUMULATED
                                            ADDITIONAL     ISSUANCE OF     ISSUANCE OF                    DURING THE
                                             PAID-IN       CONVERTIBLE        COMMON        DEFERRED     DEVELOPMENT
                                             CAPITAL     PREFERRED STOCK      STOCK       COMPENSATION      STAGE
                                            ----------   ---------------   ------------   ------------   ------------
<S>                                         <C>          <C>               <C>            <C>            <C>
BALANCE, Inception (August 10, 1990)......   $     --       $     --           $--            $--        $         --
Partner cash contributions in September
 1990 for Class A Partnership Units.......         --             --            --             --                  --
Partner contribution of interest in
 research grant in September 1990 for
 Class A Partnership Units, at historical
 cost.....................................         --             --            --             --                  --
Net loss..................................         --             --            --             --            (252,116)
                                             --------       --------           ---            ---        ------------
BALANCE, December 31, 1990................         --             --            --             --            (252,116)
Partner cash contributions in March 1991
 for Class A Partnership Units............         --             --            --             --                  --
Partner cash contributions in December
 1991 for Class B Partnership Units.......         --             --            --             --                  --
Net loss..................................         --             --            --             --            (738,204)
                                             --------       --------           ---            ---        ------------
BALANCE, December 31, 1991................         --             --            --             --            (990,320)
Partner cash contributions in January and
 April 1992 for Class B Partnership
 Units....................................         --             --            --             --                  --
Partner cash contributions in December
 1992 for Class B Partnership Units.......         --             --            --             --                  --
Partner cash contributions in December
 1992 for Class C Partnership Units.......         --             --            --             --                  --
Partner cash contributions in December
 1992 for Class D Partnership Units.......         --             --            --             --                  --
Net loss..................................         --             --            --             --          (1,391,531)
                                             --------       --------           ---            ---        ------------
BALANCE, December 31, 1992................         --             --            --             --          (2,381,851)
Partner cash contributions in January 1993
 to March 1993 for Class D Partnership
 Units....................................         --             --            --             --                  --
Exchange of interests in the Partnership
 in September 1993 for 872,000 shares of
 Series A Convertible Preferred Stock.....         --             --            --             --                  --
Exchange of interests in the Partnership
 in September 1993 for 848,100 shares of
 Series B Convertible Preferred Stock.....         --             --            --             --                  --
Exchange of interests in the Partnership
 in September 1993 for 700,000 shares of
 Series C Convertible Preferred Stock.....         --             --            --             --                  --
Exchange of interests in the Partnership
 in September 1993 for 616,808 shares of
 Series D Convertible Preferred Stock.....         --             --            --             --                  --
Exchange of interests in the Partnership
 in September 1993 for 61,250 shares of
 Redeemable Preferred Stock...............         --             --            --             --                  --
Exchange of interests in the Partnership
 in September 1993 for 2,279,500 shares of
 Common Stock.............................    208,905             --            --             --                  --
Net loss..................................   $     --       $     --           $--            $--        $ (2,269,099)
                                             --------       --------           ---            ---        ------------
</Table>

The accompanying Notes to Consolidated Financial Statements are an integral part
                               of this statement.

                                       F-5
<PAGE>

                      CELL PATHWAYS, INC. AND SUBSIDIARIES

                         (A DEVELOPMENT STAGE COMPANY)

     CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT) AND PARTNERS'
                           INVESTMENT -- (CONTINUED)

      FOR THE PERIOD FROM INCEPTION (AUGUST 10, 1990) TO DECEMBER 31, 2001
<Table>
<Caption>

                                                         REDEEMABLE            CONVERTIBLE
                                                       PREFERRED STOCK       PREFERRED STOCK           COMMON STOCK
                                          PARTNERS'    ---------------   -----------------------   --------------------
                                         INVESTMENT    SHARES   AMOUNT    SHARES       AMOUNT       SHARES      AMOUNT
                                         -----------   ------   ------   ---------   -----------   ---------   --------
<S>                                      <C>           <C>      <C>      <C>         <C>           <C>         <C>
BALANCE, December 31, 1993.............  $        --   61,250    $613    3,037,308   $ 5,080,042   2,279,500   $ 22,795
Issuance of Common Stock for services
 valued at $0.41 per share.............           --      --       --           --            --      16,667        167
Issuance of 542,761 shares of Series E
 Convertible Preferred Stock for cash
   at $4.10 per share..................           --      --       --      542,761     2,225,320          --         --
Net loss...............................                   --       --           --            --          --         --
                                         -----------   ------    ----    ---------   -----------   ---------   --------
BALANCE, December 31, 1994.............           --   61,250     613    3,580,069     7,305,362   2,296,167     22,962
Issuance of 1,121,800 shares of Series
 E
 Convertible Preferred Stock for cash
   at $3.15 per share..................           --      --       --    1,121,800     3,533,670          --         --
Issuance of 163,701 shares of Series E
 Convertible Preferred Stock to effect
   the price change from $4.10 to
   $3.15...............................           --      --       --      163,701            --          --         --
Conversion of bridge notes payable plus
 interest to 253,633 shares of Series E
 Convertible Preferred Stock at a price
   of $3.15 per share..................           --      --       --      253,633       800,199          --         --
Net loss...............................           --      --       --           --            --          --         --
                                         -----------   ------    ----    ---------   -----------   ---------   --------
BALANCE, December 31, 1995.............           --   61,250     613    5,119,203    11,639,231   2,296,167     22,962
Issuance of 887,661 shares of Series E
 Convertible Preferred Stock for cash
   at $3.15 per share, net of offering
   costs of $298,313...................           --      --       --      887,661     2,497,819          --         --
Collection of Series E Convertible
 Preferred Stock subscription
 receivable............................           --      --       --           --            --          --         --
Issuance of 270,270 shares of Series F
 Convertible Preferred Stock for cash
   at $3.70 per share..................           --      --       --      270,270     1,000,000          --         --
Issuance of 185,000 shares of Common
 Stock in February 1996 as bonuses to
 officers and employees valued at $0.32
 per share.............................           --      --       --           --            --     185,000      1,850
Issuance of 14,828 shares of Common
 Stock in May 1996 for consulting
 services, valued at $0.32 per share...           --      --       --           --            --      14,828        148
Exercise of warrants to purchase 148
 shares of Series E Convertible
 Preferred Stock at $3.15 per share....           --      --       --          148           466          --         --
Exercise of options to purchase Common
 Stock at $0.32 per share..............           --      --       --           --            --     222,850      2,229
Net loss...............................  $        --      --     $ --           --   $        --          --   $     --
                                         -----------   ------    ----    ---------   -----------   ---------   --------

<Caption>
                                                           STOCK           STOCK
                                                       SUBSCRIPTION     SUBSCRIPTION
                                                        RECEIVABLE       RECEIVABLE                     DEFICIT
                                                           FROM             FROM                      ACCUMULATED
                                         ADDITIONAL     ISSUANCE OF     ISSUANCE OF                    DURING THE
                                          PAID-IN       CONVERTIBLE        COMMON        DEFERRED     DEVELOPMENT
                                          CAPITAL     PREFERRED STOCK      STOCK       COMPENSATION      STAGE
                                         ----------   ---------------   ------------   ------------   ------------
<S>                                      <C>          <C>               <C>            <C>            <C>
BALANCE, December 31, 1993.............   $208,905       $     --           $--            $--        $ (4,650,950)
Issuance of Common Stock for services
 valued at $0.41 per share.............      6,667             --            --             --                  --
Issuance of 542,761 shares of Series E
 Convertible Preferred Stock for cash
   at $4.10 per share..................         --        (23,501)           --             --                  --
Net loss...............................         --             --            --             --          (3,110,446)
                                          --------       --------           ---            ---        ------------
BALANCE, December 31, 1994.............    215,572        (23,501)           --             --          (7,761,396)
Issuance of 1,121,800 shares of Series
 E
 Convertible Preferred Stock for cash
   at $3.15 per share..................         --           (125)           --             --                  --
Issuance of 163,701 shares of Series E
 Convertible Preferred Stock to effect
   the price change from $4.10 to
   $3.15...............................         --             --            --             --                  --
Conversion of bridge notes payable plus
 interest to 253,633 shares of Series E
 Convertible Preferred Stock at a price
   of $3.15 per share..................         --             --            --             --                  --
Net loss...............................         --             --            --             --          (3,190,824)
                                          --------       --------           ---            ---        ------------
BALANCE, December 31, 1995.............    215,572        (23,626)           --             --         (10,952,220)
Issuance of 887,661 shares of Series E
 Convertible Preferred Stock for cash
   at $3.15 per share, net of offering
   costs of $298,313...................         --             --            --             --                  --
Collection of Series E Convertible
 Preferred Stock subscription
 receivable............................         --         20,505            --             --                  --
Issuance of 270,270 shares of Series F
 Convertible Preferred Stock for cash
   at $3.70 per share..................         --             --            --             --                  --
Issuance of 185,000 shares of Common
 Stock in February 1996 as bonuses to
 officers and employees valued at $0.32
 per share.............................     57,350             --            --             --                  --
Issuance of 14,828 shares of Common
 Stock in May 1996 for consulting
 services, valued at $0.32 per share...      4,596             --            --             --                  --
Exercise of warrants to purchase 148
 shares of Series E Convertible
 Preferred Stock at $3.15 per share....         --             --            --             --                  --
Exercise of options to purchase Common
 Stock at $0.32 per share..............     69,084             --            --             --                  --
Net loss...............................   $     --       $     --           $--            $--        $ (4,735,204)
                                          --------       --------           ---            ---        ------------
</Table>

The accompanying Notes to Consolidated Financial Statements are an integral part
                               of this statement.

                                       F-6
<PAGE>

                      CELL PATHWAYS, INC. AND SUBSIDIARIES
                         (A DEVELOPMENT STAGE COMPANY)

     CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT) AND PARTNERS'
                           INVESTMENT -- (CONTINUED)
      FOR THE PERIOD FROM INCEPTION (AUGUST 10, 1990) TO DECEMBER 31, 2001
<Table>
<Caption>

                                                          REDEEMABLE              CONVERTIBLE
                                                        PREFERRED STOCK         PREFERRED STOCK          COMMON STOCK
                                         PARTNERS'    -------------------   -----------------------   -------------------
                                         INVESTMENT   SHARES     AMOUNT      SHARES       AMOUNT       SHARES     AMOUNT
                                         ----------   ------   ----------   ---------   -----------   ---------   -------
<S>                                      <C>          <C>      <C>          <C>         <C>           <C>         <C>
BALANCE, December 31, 1996.............    $  --      61,250   $      613   6,277,282   $15,137,516   2,718,845   $27,189
Issuance of 4,538,675 shares of Series
 F
 Convertible Preferred Stock for cash
   at $3.70 per share, net of offering
   costs of $249,239...................       --         --            --   4,538,675    16,547,859          --       --
Exercise of warrants to purchase
 149,462 shares of Series E Convertible
 Preferred stock at $3.15 per share....       --         --            --     149,462       470,805          --       --
Exercise of warrants to purchase 492
 shares of Series F Convertible
 Preferred stock at $3.70 per share....       --         --            --         492         1,820          --       --
Cashless exercise of warrants to
 purchase 2,476 shares of Series E
 Convertible Preferred Stock...........       --         --            --       2,476            --          --       --
Exercise of options by employees and
 directors at $0.32 - $0.50 per
 share.................................       --         --            --          --            --     251,250    2,512
Issuance of Common Stock to director at
 $3.70 per share.......................       --         --            --          --            --      10,000      100
Issuance of Common Stock to consultant
 at $3.70 per share....................       --         --            --          --            --      10,000      100
Collection of stock subscription
 receivable............................       --         --            --          --            --          --       --
Provision for redemption of Redeemable
 Preferred Stock.......................       --         --     1,091,387          --            --          --       --
Net loss...............................    $  --         --    $       --          --   $        --          --   $   --
                                           -----      ------   ----------   ---------   -----------   ---------   -------

<Caption>
                                                           STOCK           STOCK
                                                       SUBSCRIPTION     SUBSCRIPTION
                                                        RECEIVABLE       RECEIVABLE                     DEFICIT
                                                           FROM             FROM                      ACCUMULATED
                                         ADDITIONAL     ISSUANCE OF     ISSUANCE OF                    DURING THE
                                          PAID-IN       CONVERTIBLE        COMMON        DEFERRED     DEVELOPMENT
                                          CAPITAL     PREFERRED STOCK      STOCK       COMPENSATION      STAGE
                                         ----------   ---------------   ------------   ------------   ------------
<S>                                      <C>          <C>               <C>            <C>            <C>
BALANCE, December 31, 1996.............   $346,602        $(3,121)        $     --         $ --       $(15,687,424)
Issuance of 4,538,675 shares of Series
 F
 Convertible Preferred Stock for cash
   at $3.70 per share, net of offering
   costs of $249,239...................         --             --               --           --                 --
Exercise of warrants to purchase
 149,462 shares of Series E Convertible
 Preferred stock at $3.15 per share....         --             --               --           --                 --
Exercise of warrants to purchase 492
 shares of Series F Convertible
 Preferred stock at $3.70 per share....         --             --               --           --                 --
Cashless exercise of warrants to
 purchase 2,476 shares of Series E
 Convertible Preferred Stock...........         --             --               --           --                 --
Exercise of options by employees and
 directors at $0.32 - $0.50 per
 share.................................    109,462             --               --           --                 --
Issuance of Common Stock to director at
 $3.70 per share.......................     36,900             --          (37,000)          --                 --
Issuance of Common Stock to consultant
 at $3.70 per share....................     36,900             --               --           --                 --
Collection of stock subscription
 receivable............................         --          3,121               --           --                 --
Provision for redemption of Redeemable
 Preferred Stock.......................    (74,000)            --               --           --                 --
Net loss...............................   $     --        $    --         $     --         $ --       $(10,296,912)
                                          --------        -------         --------         ----       ------------
</Table>

The accompanying Notes to Consolidated Financial Statements are an integral part
                               of this statement.

                                       F-7
<PAGE>

                      CELL PATHWAYS, INC. AND SUBSIDIARIES
                         (A DEVELOPMENT STAGE COMPANY)

     CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT) AND PARTNERS'
                           INVESTMENT -- (CONTINUED)
      FOR THE PERIOD FROM INCEPTION (AUGUST 10, 1990) TO DECEMBER 31, 2001
<Table>
<Caption>

                                                           REDEEMABLE                CONVERTIBLE
                                                         PREFERRED STOCK           PREFERRED STOCK             COMMON STOCK
                                         PARTNERS'    ---------------------   --------------------------   ---------------------
                                         INVESTMENT   SHARES      AMOUNT        SHARES         AMOUNT        SHARES      AMOUNT
                                         ----------   -------   -----------   -----------   ------------   ----------   --------
<S>                                      <C>          <C>       <C>           <C>           <C>            <C>          <C>
BALANCE, December 31, 1997.............    $  --       61,250   $ 1,092,000    10,968,387   $ 32,158,000    2,990,095   $ 29,901
Issuance of 4,645,879 shares of Series
 G
 Convertible Preferred Stock at $4.75
   per Share, net of offering costs of
   $663,921............................       --           --            --     4,645,879     21,404,004           --         --
Exercise of warrants to purchase 65,076
 shares of Series E Convertible
 Preferred Stock at $3.15 per share....       --           --            --        65,076        204,987           --         --
Exercise of options by employees at
 $0.32 - $8.09 per share...............       --           --            --            --             --       65,500        655
Redemption of Redeemable Preferred
 Stock for $546,051 and 33,052 shares
 of Common Stock.......................       --      (61,250)   (1,092,000)           --             --       33,052        331
Conversion of Preferred Stock to Common
 Stock triggered by the transaction
 with Tseng Labs, Inc. ................       --           --            --   (15,679,342)   (53,766,991)  15,679,342    156,793
Issuance of Common Stock in exchange
 for the Common Stock of Tseng Labs,
 Inc., net of transaction costs of
 $1,907,354............................       --           --            --            --             --    5,510,772     55,108
Exercise of Series F warrants to
 purchase 150 shares of Common Stock at
 $3.70 per share.......................       --           --            --            --             --          150          2
Exercise of Series G warrants to
 purchase 615 shares of Common Stock at
 $4.75 per share.......................       --           --            --            --             --          615          6
Non-employee stock option expense......       --           --            --            --             --           --         --
Net loss...............................       --           --            --            --             --           --         --
                                           -----      -------   -----------   -----------   ------------   ----------   --------
BALANCE, December 31, 1998.............       --           --            --            --             --   24,279,526    242,796
Exercise of options by employees at
 $0.32 - $8.09.........................       --           --            --            --             --       48,061        481
Exercise of Series F warrants to
 purchase 125,201 shares of Common
 Stock at $3.70 per share..............       --           --            --            --             --      125,201      1,252
Exercise of Series G warrants to
 purchase 79,378 shares of Common Stock
 at $4.75 per share....................       --           --            --            --             --       79,378        793
Issuance of 1,555,000 shares of Common
 Stock at $9.00 per share, net of
 offering costs of $415,855............       --           --            --            --             --    1,555,000     15,550
Issuance of 18,728 shares of Common
 Stock at $6.32 - $9.67 under the
 Employee Stock Purchase Plan..........       --           --            --            --             --       18,728        187
Non-employee stock option expense......       --           --            --            --             --           --         --
Net loss...............................    $  --           --   $        --            --   $         --           --   $     --
                                           -----      -------   -----------   -----------   ------------   ----------   --------

<Caption>
                                                            STOCK           STOCK
                                                        SUBSCRIPTION     SUBSCRIPTION
                                                         RECEIVABLE       RECEIVABLE                     DEFICIT
                                                            FROM             FROM                      ACCUMULATED
                                         ADDITIONAL      ISSUANCE OF     ISSUANCE OF                    DURING THE
                                           PAID-IN       CONVERTIBLE        COMMON        DEFERRED     DEVELOPMENT
                                           CAPITAL     PREFERRED STOCK      STOCK       COMPENSATION      STAGE
                                         -----------   ---------------   ------------   ------------   ------------
<S>                                      <C>           <C>               <C>            <C>            <C>
BALANCE, December 31, 1997.............  $   455,864       $    --         $(37,000)        $ --       $(25,984,336)
Issuance of 4,645,879 shares of Series
 G
 Convertible Preferred Stock at $4.75
   per Share, net of offering costs of
   $663,921............................           --            --               --           --                 --
Exercise of warrants to purchase 65,076
 shares of Series E Convertible
 Preferred Stock at $3.15 per share....           --            --               --           --                 --
Exercise of options by employees at
 $0.32 - $8.09 per share...............      262,739            --               --           --                 --
Redemption of Redeemable Preferred
 Stock for $546,051 and 33,052 shares
 of Common Stock.......................      545,618            --               --           --                 --
Conversion of Preferred Stock to Common
 Stock triggered by the transaction
 with Tseng Labs, Inc. ................   53,610,198            --               --           --                 --
Issuance of Common Stock in exchange
 for the Common Stock of Tseng Labs,
 Inc., net of transaction costs of
 $1,907,354............................   26,364,894            --               --           --                 --
Exercise of Series F warrants to
 purchase 150 shares of Common Stock at
 $3.70 per share.......................          553            --               --           --                 --
Exercise of Series G warrants to
 purchase 615 shares of Common Stock at
 $4.75 per share.......................        2,915            --               --           --                 --
Non-employee stock option expense......       13,313            --               --           --                 --
Net loss...............................           --            --               --           --        (19,345,436)
                                         -----------       -------         --------         ----       ------------
BALANCE, December 31, 1998.............   81,256,094            --          (37,000)          --        (45,329,772)
Exercise of options by employees at
 $0.32 - $8.09.........................      276,260            --               --           --                 --
Exercise of Series F warrants to
 purchase 125,201 shares of Common
 Stock at $3.70 per share..............      461,992            --               --           --                 --
Exercise of Series G warrants to
 purchase 79,378 shares of Common Stock
 at $4.75 per share....................      376,252            --               --           --                 --
Issuance of 1,555,000 shares of Common
 Stock at $9.00 per share, net of
 offering costs of $415,855............   13,563,595            --               --           --                 --
Issuance of 18,728 shares of Common
 Stock at $6.32 - $9.67 under the
 Employee Stock Purchase Plan..........      170,933            --               --           --                 --
Non-employee stock option expense......       97,051            --               --           --                 --
Net loss...............................  $        --       $    --         $     --         $ --       $(19,633,722)
                                         -----------       -------         --------         ----       ------------
</Table>

The accompanying Notes to Consolidated Financial Statements are an integral part
                               of this statement.

                                       F-8
<PAGE>

                      CELL PATHWAYS, INC. AND SUBSIDIARIES
                         (A DEVELOPMENT STAGE COMPANY)

     CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT) AND PARTNERS'
                           INVESTMENT -- (CONTINUED)
      FOR THE PERIOD FROM INCEPTION (AUGUST 10, 1990) TO DECEMBER 31, 2001
<Table>
<Caption>

                                                        REDEEMABLE        CONVERTIBLE
                                                      PREFERRED STOCK   PREFERRED STOCK       COMMON STOCK         ADDITIONAL
                                         PARTNERS'    ---------------   ---------------   ---------------------     PAID-IN
                                         INVESTMENT   SHARES   AMOUNT   SHARES   AMOUNT     SHARES      AMOUNT      CAPITAL
                                         ----------   ------   ------   ------   ------   ----------   --------   ------------
<S>                                      <C>          <C>      <C>      <C>      <C>      <C>          <C>        <C>
BALANCE, December 31, 1999.............     $--         --      $--       --      $--     26,105,894   $261,059   $ 96,202,177
Exercise of options by employees at
 $0.32 - $24.10........................      --         --       --       --       --        324,202      3,242      2,013,365
Exercise of Common Stock warrants to
 purchase 1,270,000 shares of Common
 Stock at $6.60 and $14.00 per share...      --         --       --       --       --      1,270,000     12,700     17,730,300
Exercise of Series G warrants to
 purchase 147,800 shares of Common
 Stock at $4.75 per share..............      --         --       --       --       --        147,800      1,478        700,573
Issuance of 3,200,000 shares of Common
 Stock at $7.375 per share, net of
 offering costs of $478,896............      --         --       --       --       --      3,200,000     32,000     23,089,104
Issuance of 25,561 shares of Common
 Stock at $7.92, $9.66 and $22.10 under
 the Employee Stock Purchase Plan......      --         --       --       --       --         25,561        255        346,396
Non-employee stock option expense......      --         --       --       --       --             --         --        153,563
Net loss...............................      --         --       --       --       --             --         --             --
                                            ---         --      ---       --      ---     ----------   --------   ------------
BALANCE, December 31, 2000.............      --         --       --       --       --     31,073,457    310,734    140,235,478
Exercise of options by employees and a
 director at $0.32 - $4.75.............      --         --       --       --       --         31,979        320        106,343
Restricted stock award to officer......      --         --       --       --       --         10,000        100         74,800
Amortization of deferred
 compensation..........................      --         --       --       --       --             --         --             --
Issuance of 32,819 shares of Common
 Stock at $5.19 and $5.95 under the
 Employee Stock Purchase Plan..........      --         --       --       --       --         32,819        328        167,211
Interest on promissory note to
 director..............................      --         --       --       --       --             --         --             --
Non-employee stock option expense......      --         --       --       --       --             --         --        210,399
Settlement of litigation through
 agreement to Issue Common Stock (Note
 12)...................................      --         --       --       --       --             --         --      7,837,000
Net loss...............................      --         --       --       --       --             --         --             --
                                            ---         --      ---       --      ---     ----------   --------   ------------
BALANCE, December 31, 2001.............     $--         --      $--       --      $--     31,148,255   $311,482   $148,631,231
                                            ===         ==      ===       ==      ===     ==========   ========   ============

<Caption>
                                              STOCK           STOCK
                                          SUBSCRIPTION     SUBSCRIPTION
                                           RECEIVABLE       RECEIVABLE                      DEFICIT
                                              FROM             FROM                       ACCUMULATED
                                           ISSUANCE OF     ISSUANCE OF                    DURING THE
                                           CONVERTIBLE        COMMON        DEFERRED      DEVELOPMENT
                                         PREFERRED STOCK      STOCK       COMPENSATION       STAGE
                                         ---------------   ------------   ------------   -------------
<S>                                      <C>               <C>            <C>            <C>
BALANCE, December 31, 1999.............        $--           $(37,000)      $     --     $ (64,963,494)
Exercise of options by employees at
 $0.32 - $24.10........................         --                 --             --                --
Exercise of Common Stock warrants to
 purchase 1,270,000 shares of Common
 Stock at $6.60 and $14.00 per share...         --                 --             --                --
Exercise of Series G warrants to
 purchase 147,800 shares of Common
 Stock at $4.75 per share..............         --                 --             --                --
Issuance of 3,200,000 shares of Common
 Stock at $7.375 per share, net of
 offering costs of $478,896............         --                 --             --                --
Issuance of 25,561 shares of Common
 Stock at $7.92, $9.66 and $22.10 under
 the Employee Stock Purchase Plan......         --                 --             --                --
Non-employee stock option expense......         --                 --             --                --
Net loss...............................         --                 --             --       (26,916,808)
                                               ---           --------       --------     -------------
BALANCE, December 31, 2000.............         --            (37,000)            --       (91,880,302)
Exercise of options by employees and a
 director at $0.32 - $4.75.............         --                 --             --                --
Restricted stock award to officer......         --                 --        (74,900)               --
Amortization of deferred
 compensation..........................         --                 --          1,248                --
Issuance of 32,819 shares of Common
 Stock at $5.19 and $5.95 under the
 Employee Stock Purchase Plan..........         --                 --             --                --
Interest on promissory note to
 director..............................         --            (13,683)            --                --
Non-employee stock option expense......         --                 --             --                --
Settlement of litigation through
 agreement to Issue Common Stock (Note
 12)...................................         --                 --             --                --
Net loss...............................         --                 --             --       (31,404,435)
                                               ---           --------       --------     -------------
BALANCE, December 31, 2001.............        $--           $(50,683)      $(73,652)    $(123,284,737)
                                               ===           ========       ========     =============
</Table>

The accompanying Notes to Consolidated Financial Statements are an integral part
                               of this statement.

                                       F-9
<PAGE>

                      CELL PATHWAYS, INC. AND SUBSIDIARIES
                         (A DEVELOPMENT STAGE COMPANY)

                     CONSOLIDATED STATEMENTS OF CASH FLOWS

<Table>
<Caption>
                                                                                              PERIOD FROM
                                                                                               INCEPTION
                                                       YEAR ENDED DECEMBER 31,             (AUGUST 10, 1990)
                                              ------------------------------------------          TO
                                                  2001           2000           1999       DECEMBER 31, 2001
                                              ------------   ------------   ------------   -----------------
<S>                                           <C>            <C>            <C>            <C>
OPERATING ACTIVITIES:
  Net loss..................................  $(31,404,435)  $(26,916,808)  $(19,633,722)    $(123,284,737)
Adjustments to reconcile net loss to net
  cash used in operating activities-
  Settlement of litigation through agreement
    to issue Common Stock (Note 12).........     7,837,000             --             --         7,837,000
  Depreciation expense and amortization.....       533,148        826,138        532,549         2,279,852
  Loss on disposal of assets................        19,152             --             --            19,152
  Interest income on notes receivable from
    officers................................       (46,141)        (9,302)            --           (55,443)
  Interest on promissory note to director...       (13,683)            --             --           (13,683)
  Amortization of deferred compensation.....         1,248             --             --             1,248
  Issuance of Common Stock for services
    rendered................................            --             --             --            48,578
  Issuance of Common Stock options for
    services rendered.......................       210,399        153,563         97,051           474,326
  Provision for redemption of Redeemable
    Preferred Stock.........................            --             --             --         1,017,387
  Write-off of deferred offering costs......            --             --             --           469,515
  (Increase) decrease in accounts
    receivable..............................        11,244       (329,694)            --          (318,450)
  Other.....................................            --             --             --            68,399
  (Increase) decrease in prepaid and other
    current assets..........................       197,564       (453,102)      (362,959)         (812,345)
  Increase in due from insurance company....    (2,000,000)            --             --        (2,000,000)
  (Increase) decrease in other assets.......       335,798       (162,543)       128,360            93,367
  Increase (decrease) in accounts payable
    and accrued liabilities.................       169,959      1,078,698       (158,372)        2,263,718
  Increase in accrued litigation settlement
    and expense.............................     2,642,822             --             --         2,642,822
                                              ------------   ------------   ------------     -------------
    Net cash flows used in operating
      activities............................   (21,505,925)   (25,813,050)   (19,397,093)     (109,269,294)
                                              ------------   ------------   ------------     -------------
INVESTING ACTIVITIES:
  Purchase of equipment and leasehold
    improvements............................      (236,188)      (489,770)      (518,570)       (5,644,328)
  Sale of leasehold improvements............            --             --             --         3,000,000
  Increase in notes receivable from
    officers................................      (256,000)      (632,954)            --          (888,954)
  Cash paid for deposits....................            --             --        (16,000)          (50,767)
  Purchase of short-term investments........   (24,808,148)            --             --       (24,808,148)
                                              ------------   ------------   ------------     -------------
    Net cash flows used in investing
      activities............................   (25,300,336)    (1,122,724)      (534,570)      (28,392,197)
                                              ------------   ------------   ------------     -------------
</Table>

                                       F-10
<PAGE>
                      CELL PATHWAYS, INC. AND SUBSIDIARIES
                         (A DEVELOPMENT STAGE COMPANY)

              CONSOLIDATED STATEMENTS OF CASH FLOWS -- (CONTINUED)

<Table>
<Caption>
                                                                                              PERIOD FROM
                                                                                               INCEPTION
                                                       YEAR ENDED DECEMBER 31,             (AUGUST 10, 1990)
                                              ------------------------------------------          TO
                                                  2001           2000           1999       DECEMBER 31, 2001
                                              ------------   ------------   ------------   -----------------
<S>                                           <C>            <C>            <C>            <C>
FINANCING ACTIVITIES:
  Proceeds from issuance of Common Stock,
    net of related offering costs...........            --     23,121,104     13,579,145        36,700,249
  Proceeds from issuance of Common Stock
    under the employee stock purchase
    plan....................................       167,539        346,651        171,120           685,311
  Proceeds from issuance of Convertible
    Preferred Stock, net of related offering
    costs...................................            --             --             --        47,185,046
  Proceeds from the transaction with Tseng
    Labs, Inc...............................            --             --             --        27,966,372
  Proceeds from exercise of Series E, F, G
    and Common Stock warrants to purchase
    stock...................................            --     18,445,051        840,289        19,966,894
  Decrease in stockholder receivable........            --             --             --            23,626
  Cash received for Common Stock options
    exercised...............................       106,663      2,016,607        276,741         2,846,691
  Redemption of Redeemable Preferred
    Stock...................................            --             --             --          (546,051)
  Proceeds from bridge loan.................            --             --             --           791,000
  Partner cash contributions................            --             --             --         5,312,355
  (Increase) decrease in restricted cash....       212,717        (36,106)       (28,938)         (463,499)
  Principal payments under capital lease
    obligation..............................       (61,386)      (141,959)      (125,980)         (358,539)
  Proceeds from borrowings..................            --        800,000             --           950,000
  Repayment of borrowings...................      (241,912)      (100,285)            --          (492,197)
                                              ------------   ------------   ------------     -------------
    Net cash flows provided by financing
      activities............................       183,621     44,451,063     14,712,377       140,567,258
                                              ------------   ------------   ------------     -------------
Net increase (decrease) in cash and cash
  equivalents...............................   (46,622,640)    17,515,289     (5,219,286)        2,905,767
CASH AND CASH EQUIVALENTS, beginning of
  period....................................    49,528,407     32,013,118     37,232,404                --
                                              ------------   ------------   ------------     -------------
CASH AND CASH EQUIVALENTS, end of period....  $  2,905,767   $ 49,528,407   $ 32,013,118     $   2,905,767
                                              ============   ============   ============     =============
</Table>

The accompanying Notes to Consolidated Financial Statements are an integral part
                              of these statements.
                                       F-11
<PAGE>

                      CELL PATHWAYS, INC. AND SUBSIDIARIES
                         (A DEVELOPMENT STAGE COMPANY)

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                               DECEMBER 31, 2001

1.  ORGANIZATION AND BASIS OF PRESENTATION:

     Cell Pathways, Inc. was incorporated in Delaware in July 1998 as a
subsidiary of, and as of November 3, 1998 successor to, a Delaware corporation
of the same name. As the context requires, "Company" is used herein to signify
the successor and/or the predecessor corporations (See Note 3).

     The Company is a development stage pharmaceutical company focused on the
research and development of products to treat and prevent cancer, the future
commercialization of such products and the marketing and selling of
oncology-related products produced by others. The Company has not generated any
revenues from the sale of its products to date, nor is there any assurance of
any future product revenues from the development of its products. The Company's
intended products are subject to long development cycles and there is no
assurance the Company will be able to successfully develop, manufacture, obtain
regulatory approval for or market its products. During the period required to
develop its products, the Company plans to continue to finance operations
through debt and equity financings and corporate alliances. There is no
assurance, however, that such additional funding will be available on terms
acceptable to the Company, if at all. In September 2000, the Company commenced
the marketing of a product made by another company. The Company will continue to
be considered in the development stage until such time as it generates
significant revenues from operations, whether through the marketing of its own
products or through the sales and marketing of products manufactured by third
parties. Management believes that the Company's existing cash, cash equivalents
and short-term investments will be adequate to fund operations into the first
quarter of 2003, based on projected revenue and expenditure levels. As of
December 31, 2001, the Company had a deficit accumulated during the development
stage of $123,284,737. Should appropriate sources of funding not be available on
terms acceptable to the Company, management would take action which could
include the delay of certain clinical trials and research activities until such
time as appropriate sources of funding was available.

     On November 3, 1998, the Company completed a financing through the
acquisition of Tseng Labs, Inc. ("Tseng") (a publicly held company with no
continuing operations) in which the Company issued to Tseng stockholders
approximately 5.5 million shares of the Company's Common Stock and received net
proceeds of approximately $26.4 million (See Note 3). The accompanying
consolidated financial statements include the accounts of the Company from
inception (August 10, 1990) and the accounts of Tseng after November 3, 1998.

     In July 2000, the Company entered into an exclusive marketing and promotion
agreement (the "Nilandron Agreement") with Aventis Pharmaceuticals, Inc.
("Aventis") to market Nilandron(R) (nilutamide) to urologists in the United
States and Puerto Rico for use in patients who suffer from prostate cancer. The
Company began to market and promote Nilandron(R) in September 2000 through the
use of a dedicated third-party sales force. Under the terms of the Nilandron
Agreement, the Company is responsible for its marketing and promotion expenses
and receives from Aventis a percentage of the gross margin on Aventis' sales in
excess of a pre-established gross margin threshold, if any. For the year ended
December 31, 2001, the Company recognized revenue under the Nilandron Agreement
of $942,231 related to the results of the marketing efforts.

     In January 2002, the Company entered into a ten-year exclusive distribution
agreement (the "Gelclair Agreement") with Sinclair Pharmaceuticals Ltd.
("Sinclair") to promote and distribute Gelclair(TM) Concentrated Oral Gel in
North America (USA, Canada and Mexico). Gelclair(TM) is an oral gel care
formulation for the management and relief of inflammation and ulceration of the
mouth caused by chemotherapy or radiotherapy treatments. The Company plans to
promote Gelclair(TM) in the oncology market through the use of its own sales
force. Under the Gelclair Agreement, the Company has paid Sinclair $1 million
for the exclusive right to market and distribute Gelclair(TM) in North America
which will be capitalized and amortized over the 10 year term of the Gelclair
Agreement. Additionally, the Company has committed to inventory purchases of
                                       F-12
<PAGE>
                      CELL PATHWAYS, INC. AND SUBSIDIARIES
         NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

1.  ORGANIZATION AND BASIS OF PRESENTATION -- (CONTINUED)

$4 million, $3 million and $5 million in 2002, 2003 and 2004, respectively, and
could be responsible for milestone payments totaling $3 million related to the
achievement of certain sales, patent and clinical trial milestones. The Company
will purchase Gelclair(TM) from Sinclair and resell to North American markets,
with any revenues derived from the sale of Gelclair(TM) being recognized by the
Company.

2.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

  Principles of Consolidation

     The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries. All significant inter-company accounts and
transactions have been eliminated.

  Management's Use of Estimates

     The preparation of financial statements in conformity with accounting
principles generally accepted in the United States 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 such estimates.

  Cash, Cash Equivalents and Restricted Cash

     For purposes of the statements of cash flows, the Company considers all
highly liquid instruments with an original maturity of three months or less to
be cash equivalents. As of December 31, 2001 and December 31, 2000,
approximately $463,000 and $676,000, respectively, of cash and cash equivalents
were restricted to secure letters of credit for security deposits on the
Company's leases (See Note 12).

  Short-term Investments

     As of December 31, 2001 the Company had approximately $24.8 in short-term
investments invested in US government securities with original maturities
greater than three months at two financial institutions.

  Equipment, Furniture and Leasehold Improvements

     Equipment, furniture and leasehold improvements are recorded at cost.
Depreciation of equipment and furniture is provided on the straight-line method
over estimated useful lives of two to five years. Leasehold improvements are
amortized over the shorter of the useful life or the life of the related lease.

  Fair Value of Financial Instruments

     The Company's financial instruments consist primarily of cash and cash
equivalents, short-term investments, accounts receivable, accounts payable,
accrued expenses and debt instruments. Management believes the carrying values
of these assets and liabilities are considered to be representative of their
respective fair values.

  Revenue Recognition

     The Company recognizes revenue under the Nilandron Agreement in the period
in which marketing services are performed, if Aventis' sales of Nilandron(R) for
that period exceed specified thresholds.

  Research and Development

     Costs incurred in connection with research and development activities are
expensed as incurred.

                                       F-13
<PAGE>
                      CELL PATHWAYS, INC. AND SUBSIDIARIES
         NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

2.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)

  Supplemental Cash Flow Information

     For the years ended December 31, 2001, 2000 and 1999, the Company paid
interest of $103,883, $48,592 and $29,991, respectively, and paid no income
taxes. During the year ended December 31, 2001, the Company financed
approximately $126,000 of equipment purchases through capital leases.

  Stock Compensation

     The Company accounts for stock option grants in accordance with Accounting
Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to
Employees." Under the Company's stock option plans, options are granted at the
fair market value on the date of the grant, and therefore no compensation
expense is recognized for stock options granted to employees. In 1996, the
Company adopted the disclosure provisions of Statement of Financial Accounting
Standards ("SFAS") No. 123, "Accounting for Stock-Based Compensation."

  Basic and Diluted Net Loss Per Common Share

     The Company presents basic and diluted net loss per Common share pursuant
to SFAS No. 128, "Earnings per Share." SFAS No. 128 requires dual presentation
of basic and diluted net loss per Common share. "Basic" net loss per Common
share equals net loss divided by the weighted average Common shares outstanding
during the period. "Diluted" net loss per Common share equals net loss divided
by the sum of the weighted average Common shares outstanding during the period
plus Common Stock equivalents. The Company's basic and diluted net loss per
share amounts are the same since the assumed exercise of stock options and
warrants are anti-dilutive due to the Company's losses. The amount of Common
Stock equivalents excluded from the calculation of diluted net loss per share
was 6,121,405, 5,445,620 and 3,640,842 during the years ended December 31, 2001,
2000 and 1999, respectively. In addition, the weighted average Common Stock
outstanding excludes 1,700,000 shares to be issued in connection with the
settlement of litigation (Note 12).

  Comprehensive Income

     The Company follows the provisions of SFAS No. 130, "Reporting
Comprehensive Income" which establishes standards for reporting and display of
comprehensive income (loss) in a full set of general-purpose financial
statements. Comprehensive income (loss) is defined as the total of net income
(loss) and all other non-owner changes in equity. For all years presented, the
Company's comprehensive loss consists only of the Company's net loss.

3.  TRANSACTION WITH TSENG:

     In June 1998, Cell Pathways, Inc., a Delaware corporation, and Tseng, a
Utah corporation, entered into an agreement and plan of reorganization (the
"Reorganization Agreement"). The Reorganization Agreement provided for (i) the
formation of Cell Pathways Holding, Inc., a Delaware corporation ("CPHI"), (ii)
the merger of Tseng Sub, Inc., a wholly-owned subsidiary of CPHI, with and into
Tseng, (iii) the merger of CPI Sub, Inc., a wholly-owned subsidiary of CPHI,
with and into Cell Pathways, Inc. and (iv) the issuance of approximately 23% of
the then outstanding shares of the Common Stock of CPHI to the Tseng
stockholders and approximately 77% of the then outstanding shares of the Common
Stock of CPHI to the Cell Pathways, Inc. stockholders. In connection with this
transaction, the Company raised net proceeds of approximately $26.4 million (See
Note 1). As a result of the aforementioned transactions, Tseng and Cell
Pathways, Inc., subsequently renamed Cell Pathways Pharmaceuticals, Inc.
("CPP"), became wholly-owned subsidiaries of CPHI, subsequently renamed Cell
Pathways, Inc. ("CPI"). The transaction closed November 3, 1998 and was
accounted for as a reorganization of CPP into CPI with the sale of approximately
23% of CPI Common

                                       F-14
<PAGE>
                      CELL PATHWAYS, INC. AND SUBSIDIARIES
         NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

3.  TRANSACTION WITH TSENG -- (CONTINUED)

Stock in exchange for Tseng's net assets. The historical financial statements of
the combined Company are the historical financial statements of CPP.

4.  EQUIPMENT, FURNITURE AND LEASEHOLD IMPROVEMENTS:

     Equipment, furniture and leasehold improvements consisted of the following:

<Table>
<Caption>
                                                           DECEMBER 31,
                                                     -------------------------
                                                        2001          2000
                                                     -----------   -----------
<S>                                                  <C>           <C>
Furniture and fixtures.............................  $   331,316   $   355,614
Computer equipment and software....................      527,873     1,019,861
Laboratory equipment...............................    1,379,704     1,428,397
Leasehold improvements.............................      194,727       126,119
                                                     -----------   -----------
                                                       2,433,620     2,929,991
Less accumulated depreciation and amortization.....   (1,440,764)   (1,746,704)
                                                     -----------   -----------
                                                     $   992,856   $ 1,183,287
                                                     ===========   ===========
</Table>

     Depreciation expense was $533,148, $826,138 and $532,549 for 2001, 2000,
and 1999 respectively.

5.  NOTES RECEIVABLE FROM OFFICERS:

     During the year ended December 31, 2000, the Company made loans to two of
its officers that totaled $632,954. During the year ended December 31, 2001, the
Company made additional loans to one of its officers that totaled $256,000. As
of December 31, 2001, the loans to two officers are still outstanding and are
recorded on the balance sheet at their principal amount, $888,954, plus accrued
interest. The loans bear interest at a rate of 6% annually, are repayable five
years from the date of issuance and are secured by subordinate mortgages on real
property.

6.  OTHER ACCRUED LIABILITIES:

     Other accrued liabilities consisted of the following:

<Table>
<Caption>
                                                            DECEMBER 31,
                                                       -----------------------
                                                          2001         2000
                                                       ----------   ----------
<S>                                                    <C>          <C>
Accrued research materials...........................  $  170,000   $1,500,000
Accrued consultant fees..............................     278,727      130,409
Accrued research expenses............................     967,713      786,127
Accrued sales contract and taxes.....................     399,095      390,983
Accrued insurance....................................     365,444           --
Other................................................   1,091,335      617,464
                                                       ----------   ----------
                                                       $3,272,314   $3,424,983
                                                       ==========   ==========
</Table>

7.  STOCKHOLDERS' EQUITY:

     In November 2000, the Company sold 3,200,000 shares of Common Stock in a
private placement, mainly to institutional investors at a price of $7.375 per
share, resulting in net proceeds of approximately $23,116,000. With each share
of Common Stock purchased, the Company issued a warrant to purchase one and
thirty five one-hundredths (1.35) shares of the Company's Common Stock at $12.00
per share. The warrants are exercisable until June 30, 2002. The Company paid
one of the placement agents a fee of $413,800 and another
                                       F-15
<PAGE>
                      CELL PATHWAYS, INC. AND SUBSIDIARIES
         NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

7.  STOCKHOLDERS' EQUITY -- (CONTINUED)

placement agent warrants to purchase 73,750 shares of Common Stock at an
exercise price of $12.00 per share as a fee. In addition, the Company has an
agreement to grant warrants to the placement agents of the private placement
equal to 5.0% of the total warrants exercised by the purchasers which the
respective placement agents brought to the offering. Under the agreement,
warrants to purchase up to 109,499 shares of Common Stock may be issued. The
warrants issued to the placement agents are exercisable until the later of (i)
June 30, 2002 or (ii) 30 days after the exercise of the warrants by the
purchasers.

     In October 1999, the Company sold 1,555,000 shares of Common Stock in a
private placement to institutional investors at a price of $9.00 per share,
resulting in net proceeds of approximately $13,579,000. With each share of
Common Stock purchased, the Company issued one warrant for the purchase of the
Company's Common Stock at $14.00 per share. As of December 31, 2000, 1,230,000
warrants were exercised by the purchasers for total proceeds of $17,220,000 and
an additional 35,000 warrants were exercised by the placement agent as their
fee, for total proceeds of $490,000. All unexercised warrants expired on
December 31, 2000.

     In connection with the settlement of litigation, the Company will issue 1.7
million shares of Common Stock in 2002 (Note 12).

8.  STOCKHOLDERS' RIGHTS PLAN:

     On December 3, 1998, the Company's Board of Directors authorized the
adoption of a stockholders' rights plan. Under the plan, rights to purchase
stock, at a rate of one right for each share of Common Stock held, were
distributed to holders of record on December 15, 1998 and automatically attach
to shares issued thereafter. Under the plan, the rights attach to the Common
Stock and are not represented by separate rights certificates until, and
generally become exercisable only after, a person or group (i) acquires 15% or
more of the Company's outstanding Common Stock or (ii) commences a tender offer
that would result in such a person or group owning 15% or more of the Company's
Common Stock. When the rights first become exercisable, a holder will be
entitled to buy from the Company a unit consisting of one one-hundredth of a
share of Series A Junior Participating Preferred Stock of the Company at a
purchase price of $90. However, if any person acquires 15% or more of the
Company's Common Stock other than pursuant to a qualified offer, each right not
owned by a 15% or more stockholder would become exercisable for Common Stock of
the Company (or in certain circumstances, other consideration) having a market
value equal to twice the exercise price of the right. The rights expire on
December 14, 2008, except as otherwise provided in the plan.

9.  STOCK OPTIONS, WARRANTS AND PURCHASE PLAN:

     The Company's 1993 Stock Option Plan, which was amended in 1997 and renamed
the 1997 Equity Incentive Plan (the "Plan") and subsequently amended in 2000,
authorizes the Company to grant to eligible employees, directors and consultants
Common Stock, stock appreciation rights, or options to purchase shares of Common
Stock, not to exceed 5.6 million shares in the aggregate, including all grants
since inception of the Plan in 1993. As of December 31, 2001, 1,400,779 shares
of Common Stock remained eligible for future grants under the Plan. The Board of
Directors sets the rate at which the options become exercisable and determines
when the options expire, subject to the limitations described below. Options
granted through June 1999 may, to the extent vested, be exercised up to ten
years following the date of grant. Options granted after June 1999 may, to the
extent vested, be exercised up to the earlier of ten years from the date of
grant or 90 days after termination of services. All options held by persons
continuing in the employ of the Company will generally become exercisable in the
event the Company is sold or has other significant changes in ownership.
Generally, options to employees vest ratably over a four-year or 50-month
period. Options granted under the Plan through July 1997 may be immediately
exercisable, but any unvested shares exercised are held by the Company and are
subject to reacquisition by the Company should employment terminate prior to
completion of applicable vesting periods.
                                       F-16
<PAGE>
                      CELL PATHWAYS, INC. AND SUBSIDIARIES
         NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

9.  STOCK OPTIONS, WARRANTS AND PURCHASE PLAN -- (CONTINUED)

     In October 1997, the Board of Directors adopted and the stockholders
approved the 1997 Non-Employee Directors' Stock Option Plan (the "Directors'
Plan") covering an aggregate of 453,925 shares of Common Stock. Pursuant to the
terms of the Directors' Plan, each person who first becomes a non-employee
director automatically shall be granted an option to purchase 18,157 shares of
Common Stock (the "Inaugural Grant"). On the date of each annual stockholders
meeting commencing with the meeting in 1998, each non-employee director who has
served at least one full year as a director is automatically granted an option
to purchase 5,447 shares of Common Stock (the "Anniversary Grant"). In addition,
the Company granted options to purchase 27,235 shares of Common Stock at the
inception of the Directors' Plan. Options subject to an Inaugural Grant under
the Directors' Plan will vest in three equal, annual installments commencing on
the first anniversary of the date of the grant of the option. Options subject to
an Anniversary Grant under the Directors' Plan will vest in full on the first
anniversary of the grant date of the option. In addition, certain grants made at
the inception of the Directors' Plan vested on March 31, 1998. The vesting of
all options under the Directors' Plan is conditioned on the continued service of
the recipient as a director, employee or consultant of the Company or any
affiliate of the Company. As of December 31, 2001, 249,358 shares of Common
Stock remained eligible for future option grants under the Directors' Plan.

     The Company accounts for stock options granted to employees under the Plan
in accordance with the intrinsic value method provided for under APB Opinion No.
25. Under the Plan, options may be granted at the fair market value on the date
of the grant and therefore no compensation expense is, or has been, recognized
in respect of stock options awarded to employees. In accordance with the
provisions of SFAS No. 123, the Company discloses fair value compensation cost
in respect of employee stock options using the Black-Scholes option pricing
model. Had compensation cost for the Plan been recognized in the consolidated
statements of operations under SFAS No. 123, the Company's net loss would have
increased to the following pro forma amounts:

<Table>
<Caption>
                                             YEAR ENDED DECEMBER 31,
                                     ----------------------------------------
                                         2001          2000          1999
                                     ------------  ------------  ------------
<S>                                  <C>           <C>           <C>
Net loss:
  As reported......................  $(31,404,435) $(26,916,808) $(19,633,722)
                                     ============  ============  ============
  Pro forma........................  $(36,270,264) $(30,420,337) $(20,398,272)
                                     ============  ============  ============
Basic and diluted net loss per
  Common Share:
  As reported......................       $(1.01)       $(0.96)       $(0.79)
                                     ============  ============  ============
  Pro forma........................       $(1.17)       $(1.09)       $(0.82)
                                     ============  ============  ============
</Table>

     The weighted average fair value of the stock options granted during 2001,
2000 and 1999 was $5.02, $10.01 and $6.64, respectively. The fair value of each
option grant is estimated on the date of grant using the Black-Scholes option
pricing model with the following weighted average assumptions:

<Table>
<Caption>
                                                      2001      2000      1999
                                                     -------   -------   -------
<S>                                                  <C>       <C>       <C>
Risk-free interest rate............................     4.31%     5.22%     6.56%
Expected dividend yield............................        0%        0%        0%
Expected life......................................  6 years   6 years   6 years
Expected volatility................................       75%      195%       75%
</Table>

                                       F-17
<PAGE>
                      CELL PATHWAYS, INC. AND SUBSIDIARIES
         NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

9.  STOCK OPTIONS, WARRANTS AND PURCHASE PLAN -- (CONTINUED)

     Information relative to the Company's stock options under all plans is as
follows:

<Table>
<Caption>
                                                                           WEIGHTED
                                                                           AVERAGE        PROCEEDS
                                                        EXERCISE PRICE  EXERCISE PRICE      UPON
                                             OPTIONS     (PER SHARE)     (PER SHARE)      EXERCISE
                                            ---------   --------------  --------------   -----------
<S>                                         <C>         <C>             <C>              <C>
BALANCE AS OF DECEMBER 31, 1998...........  1,771,049   $0.32 - $24.10      $5.69        $10,078,576
  Granted.................................    179,679    6.81 -  11.00       9.35          1,679,132
  Exercised...............................    (48,061)   0.32 -   8.09       5.76           (276,741)
  Forfeited...............................     (9,000)   6.60 -  12.13       7.11            (63,974)
                                            ---------   --------------                   -----------
BALANCE AS OF DECEMBER 31, 1999...........  1,893,667    0.32 -  24.10       6.03         11,416,993
  Granted.................................  1,919,682    5.45 -  49.88      10.26         19,700,719
  Exercised...............................   (324,202)   0.32 -  24.10       6.24         (2,021,610)
  Forfeited...............................    (56,501)   4.13 -  25.94      10.54           (595,571)
                                            ---------   --------------                   -----------
BALANCE AS OF DECEMBER 31, 2000...........  3,432,646    0.32 -  49.88       8.30         28,500,531
  Granted.................................    807,695    3.29 -   8.16       7.16          5,783,877
  Exercised...............................    (31,979)   0.32 -   4.75       3.34           (106,663)
  Forfeited...............................   (385,462)   0.32 -  36.25      10.65         (4,105,264)
                                            ---------   --------------                   -----------
BALANCE AS OF DECEMBER 31, 2001...........  3,822,900   $0.32 - $49.88      $7.87        $30,072,481
                                            =========   ==============      -----        ===========
</Table>

     The weighted average remaining contractual life of all options outstanding
at December 31, 2001 is 8.0 years.

     The following table summarizes information about the Company's stock
options outstanding and exercisable at December 31, 2001 based upon each
exercise price:

<Table>
<Caption>
                                              OPTIONS OUTSTANDING                     OPTIONS EXERCISABLE
                                 ---------------------------------------------   -----------------------------
                                    NUMBER OF        WEIGHTED       WEIGHTED                        WEIGHTED
                                     OPTIONS          AVERAGE        AVERAGE         NUMBER          AVERAGE
                                   OUTSTANDING       REMAINING      EXERCISE       EXERCISABLE      EXERCISE
                                 AT DECEMBER 31,    CONTRACTUAL       PRICE      AT DECEMBER 31,      PRICE
   RANGE OF EXERCISE PRICES           2001         LIFE IN YEARS   (PER SHARE)        2001         (PER SHARE)
   ------------------------      ---------------   -------------   -----------   ---------------   -----------
<S>                              <C>               <C>             <C>           <C>               <C>
$ 0.32 - $ 1.00................       148,543           4.8          $ 0.69           148,125        $ 0.69
  3.29 -   3.90................       310,314           5.5            3.69           288,814          3.71
  4.75 -   5.45................     1,308,500           8.6            5.38           428,720          5.25
  6.22 -   6.81................       646,933           6.8            6.57           481,161          6.60
  7.49 -   9.03................       881,614           9.3            7.70           116,080          8.22
  9.25 -  12.13................       288,788           7.9           11.84           147,467         11.78
 12.69 -  32.13................       183,708           8.0           26.22            93,868         25.22
$36.25 - $49.88................        54,500           8.2           46.29            23,420         46.53
                                    ---------                                       ---------
                                    3,822,900                        $ 7.87         1,727,655        $ 7.38
                                    =========                        ------         =========        ------
</Table>

     In accordance with the terms of the Plan, on December 14, 2001 one of the
Company's officers was granted 10,000 shares of restricted Common Stock. Under
the terms of the restricted stock agreement, the shares of restricted Common
Stock do not vest until the earlier of FDA approval of one of the Company's drug
candidates or five years from the date of grant. The Company has recorded the
fair value of the restricted Common Stock as deferred compensation in the
stockholders' equity section of the consolidated balance sheet which is being
amortized over the five year vesting period of the award. The Company recognized
compensation expense of $1,248 in its consolidated statements of operations for
the year ended December 31, 2001 related to amortization of this restricted
stock grant.

                                       F-18
<PAGE>
                      CELL PATHWAYS, INC. AND SUBSIDIARIES
         NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

9.  STOCK OPTIONS, WARRANTS AND PURCHASE PLAN -- (CONTINUED)

     In October 1997, the Board of Directors adopted and the stockholders
approved the Employee Stock Purchase Plan (the "Purchase Plan") covering an
aggregate of 544,710 shares of Common Stock. Under the Purchase Plan, the Board
of Directors may authorize participation by eligible employees, including
officers, in periodic offerings following the adoption of the Purchase Plan. The
offering period for any offering will be no longer than 27 months.

     As of November 4, 1998, employees became eligible to participate in the
Purchase Plan if they are employed by the Company or an affiliate of the Company
designated by the Board of Directors. Employees who participate in an offering
can have up to 15% of their earnings withheld pursuant to the Purchase Plan and
applied, on specified dates determined by the Board of Directors, to the
purchase of shares of Common Stock. The price of Common Stock purchased under
the Purchase Plan will be not less than 85% of the lower of the fair market
value of the Common Stock on the commencement date of each offering period or
the relevant purchase date. Employees may end their participation in the
offering at any time during the offering period, and participation ends
automatically on termination of employment with the Company. The Purchase Plan
will terminate at the Board of Directors' direction. As of December 31, 2001,
the Company has issued 77,108 shares under the Purchase Plan.

     In 2000, the Company, in conjunction with the private placement of Common
Stock, issued warrants to purchase 4,320,000 shares of Common Stock at an
exercise price of $12.00 per share. As of December 31, 2001, these warrants were
still outstanding. The Company also made an agreement to grant warrants to the
placement agents of the private placement equal to 5.0% of the total warrants
exercised by the purchasers which the placement agent brought to the offering.
Under the agreement, warrants to purchase up to 109,499 shares of Common Stock
may be issued at an exercise price of $12.00 per share. The Company also paid
one of the placement agents a fee of 73,750 shares of Common Stock warrants at
an exercise price of $12.00 per share. The warrants issued to the placement
agent are exercisable until the later of (i) June 30, 2002 or (ii) 30 days after
the exercise of the warrants by the purchasers.

10.  DEBT:

     During 2000, the Company financed certain fixed asset purchases with a note
payable of $800,000, secured by certain laboratory and office equipment. The
note bears interest at 13.8% and is repayable in monthly payments of principal
and interest of $26,959 over 36 months, through July 2003.

     As of December 31, 2001, the remaining principal payments were as follows:

<Table>
<S>                                                           <C>
2002........................................................  $ 277,473
2003........................................................    180,330
                                                              ---------
                                                                457,803
Less - current portion......................................   (277,473)
                                                              ---------
                                                              $ 180,330
                                                              =========
</Table>

11.  INCOME TAXES:

     The Company accounts for income taxes under the provisions of SFAS No. 109,
"Accounting for Income Taxes." As of December 31, 2001, the Company had
approximately $85,050,000 of net operating loss carryforwards ("NOLs") for
income tax purposes available to offset future federal income tax, subject to
limitations for alternative minimum tax. The NOLs are subject to examination by
the tax authorities and expire between 2008 and 2020.

     Prior to its conversion into corporate form, the business had accumulated
losses totaling approximately $3,900,000. For tax purposes these losses were
distributed to the partners in accordance with the provisions of

                                       F-19
<PAGE>
                      CELL PATHWAYS, INC. AND SUBSIDIARIES
         NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

11.  INCOME TAXES: -- (CONTINUED)

the partnership agreement of the Company's predecessor partnership. Thus, these
losses, while included in the financial statements of the Company, are not
available to offset future taxable income, if any, of the Company.

     The Tax Reform Act of 1986 contains provisions that may limit the NOLs
available to be used in any given year upon the occurrence of certain events,
including significant changes in ownership interest. A change in ownership of a
company of greater than 50% within a three-year period results in an annual
limitation on the Company's ability to utilize its NOLs from tax periods prior
to the ownership change. The Company believes that the transaction with Tseng
(See Note 3) triggered such limitation. However, the Company does not expect
such limitation to have a significant impact on its operations.

     The components of the net deferred income tax asset at December 31, 2001
and 2000 were as follows:

<Table>
<Caption>
                                                           DECEMBER 31,
                                                   ----------------------------
                                                       2001            2000
                                                   ------------    ------------
<S>                                                <C>             <C>
Gross deferred tax asset:
Net operating loss carryforwards.................  $ 32,978,000    $ 25,078,000
Capitalized research and development
  expenditures...................................     1,752,000       2,102,000
Capitalized start-up costs.......................    10,913,000       7,610,000
Litigation settlement and expense................     2,665,000              --
Accruals not currently deductible................       560,000         499,000
Other............................................     2,961,000       2,152,000
                                                   ------------    ------------
                                                     51,829,000      37,441,000
Less valuation allowance.........................   (51,829,000)    (37,441,000)
                                                   ------------    ------------
                                                   $         --    $         --
                                                   ============    ============
</Table>

     The Company has not yet achieved profitable operations. Accordingly,
management believes the tax assets as of December 31, 2001 do not satisfy the
realization criteria set forth in SFAS No. 109 and has recorded a valuation
allowance for the entire net tax asset.

12.  COMMITMENTS AND CONTINGENCIES:

  Leases

     In June 1998, the Company entered into a ten-year lease for office and
laboratory space in Horsham, Pennsylvania. This lease contains two five-year
renewal terms.

     In May 2001, the Company also entered into a 36-month capital lease
agreement to lease equipment to be used in the research and development
activities of the Company. The equipment acquired under the lease at a cost of
$125,681, less accumulated amortization of $24,438 is included in equipment in
the accompanying consolidated balance sheets as of December 31, 2001. The
interest rate on this capital lease is 8.2%.

                                       F-20
<PAGE>
                      CELL PATHWAYS, INC. AND SUBSIDIARIES
         NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

12.  COMMITMENTS AND CONTINGENCIES -- (CONTINUED)

     Aggregate minimum annual payments under the Company's lease commitments are
as follows as of December 31, 2001:

<Table>
<Caption>
                                                         CAPITAL     OPERATING
                                                          LEASES       LEASES
                                                         --------    ----------
<S>                                                      <C>         <C>
2002...................................................  $ 47,400    $  944,700
2003...................................................    47,400       972,000
2004...................................................    18,433       978,000
2005...................................................        --       995,100
2006...................................................        --     1,022,400
Thereafter.............................................        --     1,587,300
                                                         --------    ----------
          Total minimum lease payments.................   113,233    $6,499,500
                                                                     ==========
Less: Interest.........................................   (10,720)
                                                         --------
Present value of net minimum lease payments............  $102,513
                                                         ========
</Table>

     Rental expense under the operating leases and other month-to-month leases
entered into by the Company totaled approximately $1,051,191, $1,118,166 and
$939,000 for the years ended December 31, 2001, 2000 and 1999, respectively.

  Contracts

     The Company contracts with a number of university-based researchers and
commercial vendors who provide various research, clinical and product
development activities. Such arrangements are generally cancelable at any time.

     In March 2001, the Company entered into a clinical research agreement with
a clinical research organization ("CRO") in which the Company may be
responsible, from time to time, to make milestone payments to the CRO based on
the achievement of pre-agreed recruitment goals. The Company records the expense
of such milestone payments on the date that the milestone objective is achieved.
As of December 31, 2001, there were no milestone objectives achieved. In January
2002, a recruitment milestone objective was achieved which resulted in a
$618,200 payment to the CRO which will be recorded in the first quarter of 2002.

  Litigation

     On November 21, 2001, the United States District Court for the Eastern
District of Pennsylvania entered a final order dismissing the stockholder class
action filed against the Company and certain of its officers and directors in
1999. The complaint in the class action had alleged that the Company had made
false and misleading statements prior to February 1, 1999 about the efficacy and
near term commercialization of the Company's lead drug candidate which had the
effect of artificially inflating the price of the Company's Common Stock during
the class period of October 7, 1998 to February 2, 1999. The class action was
dismissed pursuant to the terms of a stipulation of settlement. The settlement
amount, $3.75 million, was funded by the Company's primary insurance carrier in
mid-2001.

     In March, April and May of 2001, eleven additional stockholder class
actions were filed in the United States District Court for the Eastern District
of Pennsylvania against the Company and certain of its officers and directors
seeking unspecified damages. The lawsuits allege that the Company and its
officers made false and misleading statements about the Company's lead drug
candidate which caused artificial inflation of the Company's stock price during
the class period of October 27, 1999 to September 22, 2000, when the Company
announced that the FDA had informed the Company that it would be receiving a
"not approvable" letter for its new drug application for its leading drug
candidate. In February 2002, an agreement in principle was

                                       F-21
<PAGE>
                      CELL PATHWAYS, INC. AND SUBSIDIARIES
         NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

12.  COMMITMENTS AND CONTINGENCIES -- (CONTINUED)

reached to settle this litigation for the issuance of 1.7 million shares of
Common Stock by the Company and the payment of $2 million. In connection with
the settlement, the Company's insurance company has agreed to pay $2 million to
the Company. This settlement is subject to execution of a final agreement and
court approval, after which notice and an opportunity to object must be
furnished to the class. There is no assurance that the settlement will be
approved or completed in a timely fashion or at all. As of December 31, 2001,
the Company has recorded the fair value of the 1.7 million shares of Common
Stock of $7,837,000 as an increase to additional paid-in capital and recorded a
charge to litigation settlement expense for the fair value of the Common Stock
and the estimated legal costs of $655,000. In addition, the Company has accrued
the $2 million to be paid by the Company's insurance company as a liability and
recorded a corresponding asset due from the insurance company. Until such time
as the settlement is approved by the court, the Company will adjust the above
value of the 1.7 million shares based on the then current fair value of the
shares. Such adjustments will result in non-cash income or expense in subsequent
interim periods.

13.  SUPPLEMENTAL QUARTERLY FINANCIAL DATA (UNAUDITED):

     Summarized quarterly financial data for the years ended December 31, 2001
and 2000 is as follows:

<Table>
<Caption>
                                                                      2001
                                           ----------------------------------------------------------
                                            MARCH 31        JUNE 30      SEPTEMBER 30    DECEMBER 31
                                           -----------    -----------    ------------    ------------
<S>                                        <C>            <C>            <C>             <C>
Revenues.................................  $   316,973    $        --    $   306,808     $    318,450
Research and development expenses........    3,782,214      3,415,882      5,210,684        5,356,463
Selling, general and administrative
  expenses...............................    1,942,632      1,920,761      1,723,016        2,169,719
Litigation settlement and expense........           --             --             --        8,492,000
                                           -----------    -----------    -----------     ------------
  Operating loss.........................   (5,407,873)    (5,336,643)    (6,626,892)     (15,699,732)
Interest Income, net.....................      641,006        459,129        378,021          188,549
                                           -----------    -----------    -----------     ------------
Net loss.................................  $(4,766,867)   $(4,877,514)   $(6,248,871)    $(15,511,183)
                                           ===========    ===========    ===========     ============
Basic and diluted net loss per Common
  share..................................  $     (0.15)   $     (0.16)   $     (0.20)    $      (0.50)
                                           ===========    ===========    ===========     ============
</Table>

<Table>
<Caption>
                                                                      2000
                                           ----------------------------------------------------------
                                            MARCH 31        JUNE 30      SEPTEMBER 30    DECEMBER 31
                                           -----------    -----------    ------------    ------------
<S>                                        <C>            <C>            <C>             <C>
Revenues.................................  $        --    $        --    $        --     $    329,694
Research and development expenses........    5,379,962      5,237,800      5,909,609        5,730,434
Selling, general and administrative
  expenses...............................    1,631,211      2,455,667      2,098,450        1,061,254
                                           -----------    -----------    -----------     ------------
  Operating loss.........................   (7,011,173)    (7,693,467)    (8,008,059)      (6,461,994)
Interest Income, net.....................      474,201        539,756        528,642          715,286
                                           -----------    -----------    -----------     ------------
Net loss.................................  $(6,536,972)   $(7,153,711)   $(7,479,417)    $ (5,746,708)
                                           ===========    ===========    ===========     ============
Basic and diluted net loss per Common
  share..................................  $     (0.24)   $     (0.26)   $     (0.27)    $      (0.19)
                                           ===========    ===========    ===========     ============
</Table>

                                       F-22