<PAGE>
 
 
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                                 ------------
                                   FORM 10/A
                                
                             (AMENDMENT NO. 2)     
                  GENERAL FORM FOR REGISTRATION OF SECURITIES
                     PURSUANT TO SECTION 12(b) OR 12(g) OF
                      THE SECURITIES EXCHANGE ACT OF 1934
 
                            Cell Therapeutics, Inc.
- --------------------------------------------------------------------------------
             (Exact name of registrant as specified in its charter)
 
                 Washington                                 91-1533912
- --------------------------------------------        ---------------------------
  (State of incorporation or organization)               (I.R.S. Employer
                                                        Identification No.)
 
    201 Elliott Avenue West, Suite 400,                        98119
            Seattle, Washington                     ---------------------------
- --------------------------------------------                (Zip Code)
  (Address of principal executive offices)
 
Registrant's telephone number, including area code        (206) 282-7100
                                     ------------------------------------------
 
Securities to be registered pursuant to Section 12(b) of the Act:
 
                                      None
 
Securities to be registered pursuant to Section 12(g) of the Act:
 
                           Common Stock, no par value
                                (Title of Class)
 

<PAGE>
 
  This Registration Statement contains forward-looking statements which
involve risks and uncertainties. When used in this Registration Statement, the
words "believes," "anticipates," "expects" and similar expressions are
intended to identify such forward-looking statements. The Company's actual
results may differ significantly from the results discussed in the forward-
looking statements. Factors that might cause such a difference include, but
are not limited to, those discussed in "Item 1. -- Business -- Risk Factors."
Readers are cautioned not to place undue reliance on these forward-looking
statements, which speak only as of the date hereof. The Company undertakes no
obligation to publicly release the results of any revisions to these forward-
looking statements which may be made to reflect events or circumstances after
the date hereof or to reflect the occurrence of unanticipated events. 
 
ITEM 1. BUSINESS.
GENERAL
 
  Cell Therapeutics, Inc. ("CTI" or the "Company") focuses on the discovery,
development and commercialization of small molecule drugs that modulate the
production of cell membrane lipids called phosphatidic acids ("PAs") for the
treatment of cancer and inflammatory and immune diseases. Company scientists
have demonstrated that certain PAs constitute part of cellular stress
activated pathways involved in many such disease states and conditions. Unlike
existing therapeutic approaches which generally affect normal cellular
functions, the Company believes that drugs based on its proprietary technology
may be able to selectively regulate abnormal cellular responses. Such
selectivity could result in the development of more disease-specific
therapies, with safety and efficacy profiles superior to those of existing
therapeutics.

  The Company's principal business strategy is to focus its development
activities on therapeutic areas that represent large market opportunities not
adequately served by existing therapeutics. The Company has advanced the
following products into clinical trials:

    Lisofylline for Oncology. Lisofylline is a synthetic small molecule
  drug which is being developed primarily as an adjunct to current cancer
  treatment modalities to reduce the toxicities associated with radiation
  and chemotherapy. The Company has completed one Phase II/III trial and
  has one Phase II/III trial ongoing. The completed phase II/III trial,
  which included 60 patients, investigated the effect of two doses of
  Lisofylline on the rate of blood cell recovery, transfusion
  requirements, and the incidence of infection, toxicity, and mortality
  in cancer patients undergoing high dose radiation and/or chemotherapy
  followed by bone marrow transplantation ("BMT"). The results of the
  completed Phase II/III trial indicated that Lisofylline statistically
  reduced the duration of absolute neutropenia (number of days with fewer
  than 100 infection-fighting white blood cells ("WBCs") per microliter
  of blood), the incidence of serious and fatal infection and mortality.
  The Company is planning to commence a pivotal Phase III trial for these
  indications by the end of 1996. The Company expects that the principal
  endpoints will include the incidence of serious and fatal infection and
  mortality.Based on its clinical trial results, the Company is also
  planning to commence a Phase II/III trial for mucositis (acute toxicity
  to the cells lining the mouth, stomach and intestinal tract) by the end
  of 1996.

    CT-2584 for Oncology. CT-2584 is the Company's novel small molecule
  drug which in preclinical testing killed a wide variety of tumor cells,
  including chemotherapy-resistant tumor cells, with no bone marrow or
  gastrointestinal toxicity. The Company initiated a Phase I/Ib trial in
  the United Kingdom in November 1995 and in the United States in June
  1996 for patients with advanced cancers, including chemotherapy-
  resistant colon, prostate and ovarian cancers.

    Lisofylline for Inflammatory Disease. The Company believes that
  Lisofylline may also be effective in the prevention and treatment of
  acute lung injury ("ALI"), systemic inflammation and multi-organ
  failure ("MOF") among patients who have experienced traumatic injuries.
  The Company has completed one Phase II/III trial and one pilot Phase II
  trial. The Company is planning to commence a pivotal Phase III trial by
  the second quarter of 1997 to determine the effect of Lisofylline on
  ALI, MOF and mortality among patients who have experienced traumatic
  injuries.
 
 
                                       2

<PAGE>
 
  In the United States, the Company has seven issued patents and 81 pending
patent applications, of which nine have been allowed, covering a variety of
new chemical entities, pharmaceutical compositions, synthetic processes,
methods of use, research tools, and diagnostics. CTI intends to file
additional patent applications with respect to improvements in its core
technology and to specific products and processes that it develops.

  Cell Therapeutics, Inc. was incorporated in Washington in September 1991.
The Company has not received any revenue from the sale of products to date and
does not expect to receive revenues from the sale of products for at least the
next several years. The Company's executive offices are located at 201 Elliott
Avenue West, Seattle, Washington 98119, and its telephone number is (206) 282-
7100.
 
RISK FACTORS

  Dependence on Core Technology; Technological Changes and Uncertainty. The
Company currently relies exclusively upon its lipid-based small molecule
technology for the discovery, development and commercialization of drugs for
the treatment of cancer and inflammatory and immune diseases. The Company's
drug candidates under development, including Lisofylline and CT-2584, modulate
the production of certain cell membrane lipids called phosphatidic acids
("PAs") or the proteins they may regulate. The Company believes that such
species of PA are not utilized for normal cellular function, and that the
Company's drug candidates will not interfere with normal cellular processes.
There can be no assurance that the Company's therapeutic approaches or drug
candidates will be proven effective against diseases, nor can there be any
assurance that the species of PA or stress activated pathways targeted by the
Company's drug candidates do not serve a currently unidentified purpose which
might be adversely affected by the mechanism of action of the Company's drug
candidates. No assurance can be given that unforeseen problems will not
develop with the Company's technologies or applications, or that commercially
feasible products will ultimately be developed by CTI. There can be no
assurance that research and discoveries by others will not render some or all
of CTI's programs or products noncompetitive or obsolete or that the Company
will be able to keep pace with technological developments or other market
factors. Technological changes or medical advancements could diminish or
eliminate the commercial viability of the Company's focus on cell membrane
lipids in regulating cellular processes. The failure to commercialize such
products would have a material adverse effect on the Company. See "--
Competition." 
 
  No Assurance of Successful Product Development. CTI has no products
commercially available for sale and does not expect to have any products
commercially available for sale for at least the next several years, if ever.
The time frame for achievement of market success for any potential product is
long and uncertain. Lisofylline and CT-2584, CTI's lead drug candidates, are
currently in clinical trials for certain applications. However, the results
obtained to date in preclinical and clinical studies of Lisofylline and in
preclinical studies of CT-2584 are not necessarily indicative of results that
will be obtained during future clinical testing. In recent years, many
biotechnology and drug discovery companies have found that early preclinical
and clinical results are not reproduced in subsequent clinical trials. The
Company's research and development programs for products other than
Lisofylline and CT-2584 are at an early stage. Preclinical in vitro and animal
studies are not necessarily indicative of results that may be obtained during
human clinical testing. Many potential therapeutic products indicate positive
in vitro results which are not subsequently reproduced in humans. Any
additional product candidates will require significant research, development,
preclinical and clinical testing, regulatory approval and commitments of
resources prior to commercialization. There can be no assurance that the
Company's research will lead to the discovery of additional product candidates
or that Lisofylline, CT-2584 or any other products will be successfully
developed, prove to be safe and efficacious in clinical trials, meet
applicable regulatory standards, be capable of being produced in commercial
quantities at acceptable costs or be successfully or profitably marketed. If
clinical testing of Lisofylline is not successfully completed, or if
Lisofylline does not meet applicable regulatory requirements or is not
successfully marketed, the Company may not have the financial resources to
continue research and development activities of other product candidates.
There can be no assurance as to the extent to which any products developed by
CTI will be able to penetrate the potential market for a particular therapy or
indication or gain market acceptance among health care providers, third-party
payors or patients.
 
                                       3

<PAGE>
 
  History and Continuation of Losses; Early Stage of Development. CTI
commenced operations on February 1, 1992, and has not received any revenue
from the sale of products to date, nor does it expect to receive revenues from
the sale of products for at least the next several years. CTI has incurred net
losses since inception and had an accumulated deficit of approximately $62.3
million as of March 31, 1996. These losses are primarily attributable to
research and development efforts, including preclinical studies and clinical
trials.

  The Company expects to continue to incur significant additional operating
losses over the next several years as its research, development and clinical
trial efforts expand. CTI is in the development stage and its operations are
subject to all of the risks inherent in the establishment of a new business
enterprise. The likelihood of the success of CTI must be considered in light
of the problems, expenses and delays frequently encountered in connection with
the development of pharmaceutical products, the utilization of unproven
technology and the competitive environment in which CTI operates. CTI is
working on a number of costly long-term development projects, which involve
experimental and unproven technology, and may ultimately prove unsuccessful.
There can be no assurance that CTI will have sufficient funds or be able to
complete successfully its research and development, obtain regulatory approval
for, or manufacture or market any products in the future. In addition, as a
result of CTI's limited operating history and the fact that it does not
currently have any marketable products, CTI expects to incur substantial
operating losses for a number of years. The amount of net losses and the time
required by the Company to reach profitability are highly uncertain. There can
be no assurance that it will be able to develop additional revenue sources or
that its operations will become profitable. See "Item 2.--Financial
Information--Management's Discussion and Analysis of Financial Condition and
Results of Operations." 

  Need for Substantial Additional Funds. CTI will require substantial funds to
conduct its existing and planned preclinical and clinical trials, to establish
manufacturing and marketing capabilities for any products it may develop, and
to continue research and development activities. CTI's current cash and cash
equivalents will not be sufficient to fund CTI's operations through the
commercialization of its first product. The Company expects that its existing
capital resources, together with the interest earned thereon, will enable the
Company to maintain its current and planned operations at least through the
first quarter of 1997. No assurance can be given that changes will not occur
that will consume available capital resources before such time. The Company
will need to raise substantial additional capital to fund its operations
beyond such time. Furthermore, as time progresses, unless additional capital
is obtained, the Company will be forced to narrow the focus of its research
and development programs. See "Item 2.--Financial Information--Management's
Discussion and Analysis of Financial Condition and Results of Operations."

  The Company's future capital requirements will depend on, and could increase
as a result of, many factors, including continued scientific progress in its
research and development programs, the magnitude of such programs, the
progress of preclinical and clinical testing, the time and costs involved in
obtaining regulatory approvals, the costs involved in preparing, filing,
prosecuting, maintaining, enforcing and defending patent claims, competing
technological and market developments, the terms of any collaborative
arrangements that the Company may enter into, the ability of the Company to
establish research, development and commercialization arrangements pertaining
to the Company's products, the cost of establishing manufacturing facilities,
the cost of commercialization activities, and the demand for the Company's
products if and when approved.

  The Company intends to raise additional funds through additional equity or
debt financings, research and development financings, collaborative
relationships, or otherwise. Because of these long-term capital requirements,
CTI may seek to access the public or private equity markets whenever
conditions are favorable, even if it does not have an immediate need for
additional capital at that time. There can be no assurance that any such
additional funding will be available to CTI, or, if available, that it will be
on acceptable terms. If additional funds are raised by issuing equity
securities, further dilution to stockholders may result. If adequate funds are
not available, CTI may be required to delay, reduce the scope of, or eliminate
one or more of its research, development and clinical activities or to seek to
obtain funds through arrangements with collaborative partners or others that
may require CTI to relinquish rights to certain of its technologies, product
candidates or products that the Company would otherwise seek to develop or
commercialize itself. See "Item 2.--Financial Information--Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Liquidity and Capital Resources." 
 
                                       4

<PAGE>
 
  No Assurance of FDA Approval; Comprehensive Government Regulation. The FDA
and comparable agencies in foreign countries impose substantial requirements
through lengthy and detailed laboratory and clinical testing procedures, and
other costly and time-consuming procedures, to determine that such
therapeutics are safe and efficacious prior to the introduction of human
therapeutics. Obtaining approvals to market drugs typically takes several
years or more (with no assurance that such approval will ever be obtained) and
varies substantially based upon the type, complexity and novelty of the drug.
In addition, delays or rejections may be encountered based upon changes in the
policies of regulatory authorities for drug approval during the period of drug
development and regulatory review of each submitted new drug application. The
results obtained in preclinical and early clinical studies are not necessarily
indicative of results that will be obtained during future clinical testing.
There can be no assurance that results obtained to date will continue as
testing and trials progress or that such products will be approved by the FDA
or other regulatory authorities for commercial sale.
 
  In addition to the substantial time commitment required, the regulatory
process, which includes preclinical testing and clinical trials of each
compound to establish its safety and efficacy, requires the expenditure of
substantial resources. Preclinical studies must be conducted in conformity
with the FDA's good laboratory practices. Clinical trials must meet
requirements for institutional review board oversight and informed consent, as
well as FDA prior review, oversight and good clinical practices. The Company's
experience in conducting clinical trials is limited. Data obtained from
preclinical studies and clinical trials are susceptible to varying
interpretations which could delay, limit or prevent regulatory approval.
Furthermore, studies conducted with alternative designs or alternative patient
populations could produce results which vary from those obtained by the
Company. There can be no assurance that the Company's data or its
interpretation of its data will be accepted by governmental regulators or the
medical community.
 
  Government regulation also affects the manufacture and marketing of
pharmaceutical products. Any future FDA or other governmental approval of
products developed by CTI may entail significant limitations on the indicated
uses for which such products may be marketed. Approved products will be
subject to additional testing and surveillance programs required by the
regulatory agencies. In addition, product approvals may be withdrawn or
limited for noncompliance with regulatory standards or the occurrence of
unforeseen problems following initial marketing. Failure to comply with
applicable regulatory requirements can result in, among other things, fines,
suspensions of approvals, seizures or recalls of products, operating
restrictions or criminal proceedings. In the event that CTI were to
manufacture therapeutic products on a pilot or commercial scale, CTI would be
required to adhere to applicable standards for manufacturing practices, engage
in extensive record keeping and reporting, and submit its manufacturing
facilities to periodic inspections by state and federal agencies, including
the FDA and comparable agencies in other countries.

  The effect of government regulation may be to considerably delay or prevent
the marketing of any product that CTI may develop and/or to impose costly
procedures upon CTI's activities, the result of which may be to furnish an
advantage to its competitors. There can be no assurance that regulatory
approval for any products developed by CTI will be granted on a timely basis
or at all. Any such delay in obtaining or failure to obtain such approvals
would adversely affect CTI's ability to market the proposed products and earn
product revenue. CTI is unable to predict the extent and impact of regulation
resulting from future federal, state or local legislation or administrative
actions, or whether such government regulation may have a material adverse
effect on CTI. See "--Government Regulation."

  Outside the United States, the Company's ability to market a product is
contingent upon receiving marketing authorizations from the appropriate
regulatory authorities. The requirements governing the conduct of clinical
trials, marketing authorization, pricing and reimbursement vary widely from
country to country. At present, foreign marketing authorizations are applied
for at a national level, although within the European Community ("EC") certain
registration procedures are available to companies wishing to market a product
in more than one EC member state. If the regulatory authority is satisfied
that adequate evidence of safety, quality and efficacy has been presented, a
marketing authorization will be granted. This foreign regulatory approval
process includes all of the risks associated with FDA approval set forth
above. See "--Government Regulation."
 
                                       5

<PAGE>
 
  Dependence on Others; Collaborators. The successful commercialization of the
Company's products in certain markets will be dependent, among other things,
on the establishment of commercial arrangements with others in such markets.
Such arrangements could include the granting of marketing, manufacturing or
other rights to third parties in exchange for royalties, milestone development
payments or other payments. There can be no assurance that any such
arrangements will be established. If the Company is not able to establish such
arrangements, it could encounter delays in introducing its products into
certain markets or find that the development, manufacture or sale of its
products in such markets is adversely affected. While the Company believes
that parties to any such arrangements will have an economic motivation to
succeed in performing their contractual responsibilities, the amount and
timing of resources they devote to these activities will not be within the
Company's control. There can be no assurance that the Company will enter into
any such arrangements on acceptable terms or that any such parties will
perform their obligations as expected or that any revenue will be derived from
such arrangements. See "--Collaborations."
 
  In February 1996 the Company entered into an agreement with Schering AG
("Schering") pursuant to which, among other things, the Company and Schering
would collaborate in the funding, research, development and commercialization
of Lisofylline and CT-2584 on the terms and conditions specified therein. Upon
execution of the agreement, Schering paid the Company a $3,000,000 non-
refundable signing fee. The remainder of the agreement was contingent upon
Schering finding the clinical trial results and related data from the
Company's Phase II/III BMT trial (the "Trial Data") acceptable within thirty
days after its receipt. The Company furnished Schering with the Trial Data in
late February 1996. On April 2, 1996, after a mutual extension of the thirty-
day review period, Schering informed the Company that it did not wish to
activate the agreement. Although the agreement did not require Schering to
specify in detail its reasons for not activating the agreement, Schering
informed the Company that its decision was based on, among other factors, (i)
its view that one of the endpoints of the Phase II/III BMT trial, white blood
cell recovery, was not met and (ii) its view that the Trial Data regarding
mortality rate and incidence of serious and fatal infection were difficult to
interpret and that, as a result, Schering could not determine that the data
was meaningful. See "--Development Program--Oncology" and "--Collaborations."
 
  As a result of Schering's decision not to activate the agreement and
following the Company's review of the Trial Data, the Company revised its
planned expenditures for 1996 and 1997, resulting in a reduction of
approximately $11.4 million. These reductions consisted primarily of the
elimination of expenses which would have been incurred at Schering's request
in connection with seeking regulatory approval for Lisofylline and CT-2584 in
Europe and Japan, and certain planned research activities that would have been
sponsored by Schering under the Agreement. These reduced expenditures also
reflect the Company's decision to delete a 2 mg/kg (low dose) component from
the Company's planned pivotal Phase III trial for Lisofylline following the
Company's review of the Trial Data.
   
  As part of its ongoing business, the Company engages in discussions with
potential collaborators from time to time regarding the development,
manufacturing and commercialization of Lisofylline, CT-2584 and other products
under development. Although there can be no assurance that the Company will
enter into any such collaborative arrangement on acceptable terms, the Company
believes that Schering's decision not to activate the agreement will not have
a material adverse impact on the Company's ability to enter into any such
collaborative arrangement on favorable terms.     
 
  Substantial Competition. CTI faces substantial competition from a variety of
sources, both direct and indirect. CTI faces direct competition from many
companies focusing on areas such as cell signal transduction, surface receptor
technology, transcription factors and gene therapies. There are many
companies, both public and private, including well-known pharmaceutical
companies, chemical companies and specialized genetic engineering companies,
engaged more generally in developing synthetic pharmaceutical and
biotechnological products for the same therapeutic applications as those which
are the subject of the Company's research and development efforts. In some
instances, such products have already entered clinical trials or received
approval from the FDA. In addition, many of these competitors have
significantly greater experience than CTI in undertaking preclinical testing
and clinical trials of new pharmaceutical products and obtaining FDA and other
 
                                       6

<PAGE>
 
regulatory approvals. The Company will also be competing with companies that
have substantially greater capital, research and development, manufacturing,
marketing and sales capabilities. Moreover, certain academic institutions,
governmental agencies and other research organizations are conducting research
in areas in which the Company is working. These institutions are becoming
increasingly aware of the commercial value of their findings and are becoming
more active in seeking patent protection and licensing arrangements to collect
royalties for the use of technology that they have developed. These
institutions may also market competitive commercial products on their own or
through joint ventures and will compete with the Company in recruiting highly
qualified scientific personnel. Other companies may succeed in developing
products that are more effective or less costly than any that may be developed
by CTI and may also prove to be more successful than CTI at marketing such
products. Competition may increase further as a result of the potential
advances in the commercial applicability of genetic engineering technologies
and organic chemistry. See "--Competition." 
 
  Ability to Protect Intellectual Property. CTI's success will depend in part
on its ability to obtain patent protection for its products and technologies
in the United States and other countries, effectively preserve its trade
secrets, enforce its rights against third parties which may infringe on its
technology and operate without infringing on the proprietary rights of third
parties. The patent positions of biotechnology and pharmaceutical companies
can be highly uncertain and involve complex legal and factual questions. CTI
intends to file applications as appropriate for patents covering both its
products and processes. There can be no assurance that any patents will issue
from any present or future applications or, if patents do issue, that such
patents will be issued on a timely basis or that claims allowed on issued
patents will be sufficient to protect the Company's technology. In addition,
there can be no assurance that the patents issued to CTI will not be
challenged, invalidated or circumvented or that the rights granted thereunder
will provide proprietary protection or commercial advantage to the Company.
With respect to such issued U.S. patents or any patents that may issue in the
future, there can be no assurance that they will effectively protect the
technology involved, foreclose the development of competitive products by
others or otherwise be commercially valuable.

  The commercial success of the Company will also depend in part on the
Company's neither infringing the patents or proprietary rights of third
parties nor breaching any technological licenses which relate to the Company's
technologies and potential products. In general, the development of
therapeutic products is intensely competitive and many pharmaceutical
companies, biotechnology companies, universities and research institutions
have filed and will continue to file patent applications and receive patents
in this field. If patents are issued to other entities that contain
competitive or conflicting claims with respect to technology pursued by CTI
and such claims are ultimately determined to be valid, no assurance can be
given that CTI will be able to obtain licenses to these patents at a
reasonable cost or develop or obtain alternative technology or compounds. In
such case, the Company could be precluded from using technology that is the
subject matter of such patents, which could have a material adverse effect on
the Company. In order to enforce any patents issued to the Company or
determine the scope and validity of other parties' proprietary rights, the
Company may have to engage in litigation, which would result in substantial
cost to, and diversion of efforts by, the Company. If the outcome of any such
litigation is adverse to the Company, the Company's business could be
adversely affected. In addition, if the Company elects or is required to
participate in interference proceedings declared by the U.S. Patent and
Trademark Office, substantial cost to the Company could result. See "--Patents
and Proprietary Rights." 
 
  The Company is aware of certain patents belonging to third parties that
could be interpreted broadly to compromise the Company's freedom to make and
sell Lisofylline in the United States for use in preventing lung injury
following traumatic injury or sepsis. The Company believes, upon the advice of
patent counsel, that the manufacture, use and sale of Lisofylline does not
infringe any valid claim of such third party patents. See "Legal Matters." If
such patents were to restrict the use of Lisofylline for such indications, the
Company may be required to obtain a license from such parties. There can be no
assurance that any such license would be available to the Company upon
reasonably acceptable terms, if at all. If the Company were so required to
obtain a license from such parties, and if the Company were unable to obtain
such a license on reasonably acceptable terms, the Company would be materially
and adversely affected. The Company could also face significant costs
associated with any litigation relating to such patents.
 
                                       7

<PAGE>
 
  In order to protect its proprietary technology and processes, CTI also
relies on confidentiality and material transfer agreements with its corporate
partners, employees, consultants, outside scientific collaborators and
sponsored researchers and other advisors. There can be no assurance that these
agreements will not be breached, that the Company will have adequate remedies
for breach or that the Company's trade secrets will not otherwise become known
or independently discovered by competitors.

  Reliance on Third Party Manufacturers; Manufacture of Products in Commercial
Quantities. The manufacturing of sufficient quantities of new drugs is a time
consuming, complex and unpredictable process. The Company currently has no
facilities for the manufacture of clinical trial or commercial quantities of
any of its products. The Company currently relies on third parties to
manufacture compounds for preclinical testing and clinical trials. No
assurance can be given that the Company will be able to make the transition to
commercial production. CTI may need to develop additional manufacturing
resources, or may seek to enter into collaborative arrangements with other
parties which have established manufacturing capabilities or may elect to have
third parties manufacture its products on a contract basis. All manufacturing
facilities must comply with applicable regulations of the FDA. The Company has
established a quality control and quality assurance program, including a set
of standard operating procedures and specifications, designed to ensure that
the Company's products are manufactured in accordance with current Good
Manufacturing Practices ("cGMP") and other applicable domestic and foreign
regulations. However, the Company is dependent upon contract manufacturers to
comply with such procedures and regulations. There can be no assurance that
these manufacturers will meet the Company's requirements for quality, quantity
or timeliness. See "--Manufacturing." 

  Absence of Sales and Marketing Organization. The Company has no experience
in sales, marketing or distribution. To directly market any of its potential
products, the Company must obtain access to marketing and sales forces with
technical expertise and with supporting distribution capability. If the
Company develops any products with commercial potential, CTI may need to
develop marketing and additional sales resources, or may seek to enter into
collaborative arrangements with other parties which have established marketing
and sales capabilities or may choose to pursue the commercialization of such
products on its own. There can be no assurance that the Company or, to the
extent the Company enters into any commercialization arrangements with third
parties, such third parties, will establish adequate sales and distribution
capabilities or be successful in gaining market acceptance for products. See
"--Marketing." 

  Attraction and Retention of Key Employees and Consultants. The Company is
highly dependent on the principal members of its scientific and management
staff, the loss of whose services might impede the achievement of research and
development objectives. Recruiting and retaining qualified scientific
personnel to perform research and development work are critical to CTI's
success. Although CTI believes it will be successful in attracting and
retaining skilled and experienced scientific and technical personnel, there
can be no assurance that CTI will be able to attract and retain such personnel
on acceptable terms. In addition, if CTI reaches the point where its
activities require additional expertise in clinical testing, in obtaining
regulatory approvals, and in production and marketing, there will be increased
demands on CTI's resources and infrastructure. The inability to obtain
additional qualified personnel could materially and adversely affect prospects
for CTI's success. There is intense competition for qualified scientists and
managerial personnel from numerous pharmaceutical and biotechnology companies,
as well as academia, government organizations, research institutions and other
entities. There can be no assurance that CTI will be able to attract and
retain the qualified personnel necessary for the development of its business.
Loss of the services of or failure to recruit key managerial scientific and
technical personnel could have a material adverse effect on CTI's research and
product development programs. CTI maintains a $3 million key man life
insurance policy for Dr. James A. Bianco, the principal founder of the Company
and its President and Chief Executive Officer. In addition, CTI relies on
consultants and advisors, including its scientific and clinical advisors, to
assist the Company in formulating its research and development strategy. All
of CTI's consultants and advisors are employed by employers other than the
Company, or are self-employed, and have commitments to or consulting or
advisory contracts with other entities that may limit their availability to
the Company. See "--Human Resources" and "Item 5.--Directors and Executive
Officers." 

  Product Liability; Insurance. CTI's business exposes it to potential product
liability risks which are inherent in the testing, manufacturing and marketing
of human pharmaceutical products. Although the Company

                                       8

<PAGE>
 
is insured against such risks up to a $20 million annual aggregate limit in
connection with human clinical trials, there can be no assurance that the
Company's present product liability insurance coverage is adequate or that the
Company will be able to maintain such insurance on acceptable terms. The
Company has no products commercially available for sale and has not procured
product liability insurance covering claims in connection with commercially
marketed products. There can be no assurance that the Company will be able to
obtain comparable insurance on commercially reasonable terms if and when it
commences the commercial marketing of any products or that such insurance will
provide adequate coverage against potential liabilities. A successful product
liability claim in excess of the Company's insurance coverage could have a
material adverse effect on the Company and may prevent the Company from
obtaining adequate product liability insurance in the future on commercially
reasonably terms.
 
  Uncertainty of Pharmaceutical Pricing and Reimbursement. Sales of CTI's
proposed products will be dependent in part on the availability and extent of
reimbursement for the cost of such products and related treatments from third-
party health care payors, such as government and private insurance plans.
Significant uncertainty exists as to the reimbursement status of newly
approved health care products. Government and other third-party payors are
increasingly attempting to contain healthcare costs by limiting both coverage
and the level of reimbursement for new medical products and services and by
refusing, in some cases, to provide any coverage of uses of approved products
for disease indications other than those for which the FDA has granted
marketing approval. If CTI succeeds in bringing any of its proposed products
to the market, there can be no assurance that any such products will be
considered cost-effective or that third-party reimbursement will be available
or will be sufficient to enable CTI to sell its proposed products on a
competitive basis and to maintain price levels sufficient to realize an
appropriate return on its investment in product development. If adequate
coverage and reimbursement levels are not provided by government and other
third-party payors, the market acceptance of CTI's products will be adversely
affected. In addition, legislation and regulations affecting the pricing of
pharmaceuticals may change in ways adverse to CTI before any of the Company's
proposed products are approved for marketing. While CTI cannot predict whether
any such legislative or regulatory proposals will be adopted, the adoption of
such proposals could have a material adverse effect on CTI's business,
financial condition and prospects.
 
  Use of Hazardous Materials. The Company's research and development involves
the controlled use of hazardous materials, chemicals and various radioactive
compounds. Although the Company believes that its safety procedures for
handling and disposing of such materials comply with the standards prescribed
by state and federal regulations, the risk of accidental contamination or
injury from these materials cannot be completely eliminated. In the event of
such accident, the Company could be held liable for any damages that result
and any such liability could exceed the resources of the Company. Although the
Company has insurance covering certain risks associated with the use of
hazardous materials, there can be no assurance that it will be able to
maintain such insurance on acceptable terms or that insurance will provide
adequate coverage against potential environmental liabilities. The Company may
incur substantial costs to comply with environmental regulations if the
Company develops manufacturing capacity.
   
  Concentration of Ownership. Directors and officers of CTI, and their
affiliates, beneficially own 7,675,568 shares of the Company's Common Stock
(including shares of Common Stock issuable upon conversion of CTI's Series A
Convertible Preferred Stock (the "Convertible Preferred Stock") and shares of
Common Stock subject to options or warrants exercisable or convertible within
60 days of June 1, 1996) representing approximately 28.02% of the voting power
of the Company's outstanding securities. Such concentration of ownership may
have the effect of delaying, deferring or preventing a change in control of
the Company. See "Item 4.--Security Ownership of Certain Beneficial Owners and
Management."     
 
  Absence of Public Market; Likely Volatility of Stock Price. There is no
existing public market for the Common Stock, and there can be no assurance as
to the liquidity of any markets that may develop for the Common Stock or, if a
liquid trading market develops, that it will be sustained. In addition, there
can be no assurance as to the ability of holders of Common Stock to sell their
securities, or the price at which holders
 
                                       9

<PAGE>
 
would be able to sell their securities. Future trading prices of the Common
Stock will depend on may factors, including, among other things, the Company's
operating results and the market for similar securities. The Company does not
intend to apply for listing of the Common Stock on any securities exchange or
over-the- counter market prior to a public offering. No assurance can be given
that the Company will ever effect a public offering of its securities, or that
a public market will otherwise develop or be sustained in the future. If a
public market does develop for the Common Stock, investors should be aware
that the market prices for securities of pharmaceutical and biotechnology
companies have been highly volatile and the market from time to time has
experienced significant price and volume fluctuations that are unrelated to
the operating performance of such companies. It is likely that the market
price of the Common Stock will be highly volatile. Factors such as
announcements of technological innovations or new commercial products by the
Company, its collaborative partners or the Company's present or potential
competitors, announcements by the Company of results of preclinical testing
and clinical trials, developments or disputes concerning patent or other
proprietary rights, developments in the Company's relationships with
collaborative partners, adverse litigation, changes in reimbursement policies,
adverse legislation, regulatory decisions, or public concern regarding the
safety, efficacy or other implications of the drugs sought to be developed or
biotechnology in general and economic and other external factors, as well as
period-to-period fluctuations in the Company's operating results and general
market conditions, may have a significant impact on the future price of the
Common Stock. 

  Shares Eligible for Future Sale; Registration Rights; Possible Adverse
Effect on Future Market Price. Sales of a substantial number of shares of
Common Stock in the public market could adversely affect the market price of
the shares of Common Stock. Of the 17,300,574 shares of Common Stock
outstanding as of June 1, 1996 (excluding 9,544,700 shares of Common Stock
issuable upon conversion of 95,447.004 shares of the Company's Series A
Convertible Preferred Stock (the "Convertible Preferred Stock")) 9,951,387
shares which have been held by non-affiliates for more than three years are
eligible for immediate sale in the public market without restriction, and an
additional 6,778,977 shares will become eligible for sale beginning
approximately 90 days after the effective date of this Registration Statement,
subject to the provisions of Rules 144 and 701 under the Securities Act of
1933, as amended (the "Securities Act"). The remaining 570,210 shares of
Common Stock (and 9,544,700 shares of Common Stock issuable upon conversion of
the Convertible Preferred Stock) have been held for less than two years and
will become eligible for sale under Rule 144 at various dates thereafter as
the holding period and other requirements of Rule 144 are satisfied. The
Company may in the future elect to file one or more registration statements on
Form S-8 enabling certain option holders to sell shares for which options are
exercisable. The Company is obligated to register approximately 11,505,898
shares of Common Stock (including 9,544,700 shares of Common Stock issuable
upon conversion of 95,447.004 shares of Convertible Preferred Stock) and
warrants to purchase 272,675 shares of Common Stock for sale to the public
beginning 180 days after the closing of an initial public offering of the
Company's Common Stock. See "Item 6.--Executive Compensation--Stock Option
Plans," "Item 9.--Market Price of and Dividends on the Registrant's Common
Equity and Related Stockholder Matters" and " Item 11.--Description of
Registrant's Securities to be Registered--Registration Rights." 

  Class of Senior Securities. The Company has 95,447.004 shares of Convertible
Preferred Stock outstanding, which are convertible into an aggregate 9,544,700
shares of Common Stock. Holders of Convertible Preferred Stock are entitled to
significant preferences over holders of Common Stock, including liquidation
and dividend preferences. In any proposed acquisition or liquidation of the
Company, the holders of the Convertible Preferred Stock have certain
significant preferential rights on distribution of the resulting proceeds. In
addition to having the right to vote with the Common Stock on an as-converted
basis, the holders of the Convertible Preferred Stock have the right to vote
as a separate class to elect one additional Director to the Board of
Directors. The affirmative vote of the holders of at least 66.67% of the
outstanding shares of Convertible Preferred Stock is required for the Company
to amend the Company's Articles of Incorporation so as to adversely affect the
rights or preferences of the Convertible Preferred Stock or to authorize or
issue equivalent or senior classes or series of stock. The exercise of these
voting rights could be detrimental to the holders of the Common Stock. See
"Item 11.--Description of Registrant's Securities to be Registered--Preferred
Stock." 

                                      10

<PAGE>
 
SCIENTIFIC OVERVIEW
 
  Cell communication occurs through a complex process that commences when
"first messengers" outside the cell, such as hormones, cytokines and growth
factors, recognize and bind to receptors embedded in the cell membrane. The
first messenger initiates a series of chemical reactions within the cell,
known as signal transduction, which result in cellular responses. In the
1970s, scientists discovered that, in response to extracellular binding of
first messengers, certain cell membrane lipids are chemically altered to form
"second messengers" which transduce chemical information from the cell
membrane to the cell nucleus. Certain second messenger systems are essential
for normal day-to-day cellular processes, and are often referred to as
"housekeeping pathways" or "physiologic pathways."

  Company scientists have demonstrated that certain cell membrane lipids,
called PAs, are a type of second messenger which the Company believes may be
involved in regulating cell growth and inflammation. Certain PAs appear only
to be produced in response to the presence of cell-damaging stimuli, and
unlike housekeeping pathways, such second messenger systems do not appear to
be utilized for normal cellular processes. The Company believes that cell-
damaging stimuli, such as radiation, chemotherapy or oxidative injury, cause
their toxic side effects by altering certain cell membrane phospholipids,
which lead to the activation of other downstream second messengers, such as
stress activated protein kinase ("SAPK"). Such second messengers carry the
cell damaging signal to the cell nucleus, resulting in the activation of
transcription factors responsible for the production of multiple inflammatory
substances (cytokines). Such second messenger systems are often referred to as
"stress activated pathways."

  The Company has demonstrated that there are several species of PA which may
modulate different downstream kinases and transcription factors. The Company
believes that certain species of PA produced in cancer cells appear to
facilitate their unregulated growth and ability to spread (metastasis). The
Company also believes that certain species of PA may be necessary for the
activation of inflammatory cytokines, and that other species of PA may be
necessary for the activation of T-cells, leading to certain immune responses.
Modulation of such species of PA may provide a novel approach to the
development of more effective and less toxic anti-cancer, anti-inflammatory
and immunosuppressive agents. Because such species of PA do not appear to be
utilized by cells for normal cellular function, therapeutics which target such
PAs and the related stress activated pathways are not expected to interfere
with normal cellular function. The Company believes such therapeutics have the
potential to offer greater specificity and safety than pharmaceuticals which
inhibit physiologic second messenger pathways or other activities in a cell
which may be necessary for normal cellular function.
 
BUSINESS STRATEGY
 
  The Company's business strategy is to:
 
  Target large markets which are not adequately served by existing
therapeutics. The Company focuses its drug development activities on cancer
and inflammatory and immune diseases--three therapeutic areas that represent
large market opportunities not adequately served by existing therapeutics. The
Company's two cancer products in clinical trials, Lisofylline and CT-2584,
target the toxic side effects of current cancer treatment modalities and
chemotherapy-resistant cancer cells, respectively. Lisofylline is also in
clinical trials as an agent to treat ALI, systemic inflammation and MOF,
conditions for which no effective therapies currently exist.
 
  Apply proprietary technology to create a unique drug discovery platform for
new product opportunities. The Company's strategy is to leverage its
proprietary technology to identify distinct species of PA and correlate such
PAs with certain disease states and conditions. The Company believes that its
technology provides a unique platform for future drug discoveries.

  Maximize product opportunities by entering into collaborative
relationships. The Company believes that by evaluating the potential efficacy
of products through early to mid-stage clinical development, the Company can
best assess the potential value of its products before seeking potential
development and/or commercialization partners. CTI is collaborating with an
affiliate of BioChem Pharma Inc. ("BioChem Pharma") for the 
 
                                      11

<PAGE>
 
development and commercialization of Lisofylline and CT-2584 in Canada, and
may enter into additional collaborative relationships with respect to the
late-stage development, manufacturing and commercialization of other drug
candidates. The Company intends to develop its own sales and marketing
infrastructure in the United States to commercialize its portfolio of oncology
products, either on its own or with collaborators. With respect to the
commercialization of its oncology products outside the United States, and with
respect to the worldwide commercialization of its portfolio of products for
inflammatory and immune disease, the Company's strategy is to pursue
commercialization arrangements with collaborators.

  Expand and protect proprietary technology and products. In the United
States, the Company has seven issued patents and 80 pending patent
applications, of which nine have been allowed (including five pending patent
applications covering the pharmaceutical composition and oncology, anti-
inflammatory and other methods of use for Lisofylline and one pending patent
application covering the chemical compounds and pharmaceutical compositions of
CT-2584, CT-3578 and CT-3501). CTI intends to file additional patent
applications with respect to improvements in its core technology and to
specific products and processes that it develops.
 
PRODUCTS UNDER DEVELOPMENT
 
  The following table summarizes the potential market applications and current
development status for the Company's products under development:
 

<TABLE>
<CAPTION>
 DEVELOPMENT
   PROGRAM        PRODUCT DESCRIPTION                   DEVELOPMENT STATUS
- -----------------------------------------------------------------------------------------
 <C>          <S>                            <C>
 ONCOLOGY
  Lisofylline Cancer therapy adjunct for     Phase II/III trial for BMT completed;
               the acceleration of blood     Phase II/III trial for AML ongoing;
               cell recovery and the re-     Pivotal Phase III trial for BMT
               duction of infection,          expected to begin by the end of 1996;
               mucositis and mortality       Phase II/III trial for mucositis expected to
               following high dose radia-     begin by the end of 1996
               tion and/or chemotherapy
  CT-2408R    Oral Lisofylline analog        Preclinical
  CT-2584     Chemotherapeutic agent         Phase I/Ib trials in progress
               targeting chemotherapy-re-
               sistant tumor cells
  CT-2412     Chemotherapy and radiation     Lead compound
               sensitizer for p53- and Rb-
               deleted or mutated tumor
               cells
  CT-3501     Angiogenesis inhibitor         Screening
- -----------------------------------------------------------------------------------------
 INFLAMMATION
  Lisofylline Agent for the prevention and   Phase II/III trial completed;
               treatment of ALI, systemic    Pilot Phase II trial completed;
               inflammation and MOF fol-     Pivotal Phase III trial expected to
               lowing traumatic injury        begin by the second quarter of 1997
- -----------------------------------------------------------------------------------------
 IMMUNOLOGY
  CT-3578     Agent for the treatment of     Lead compound
               acute
               organ transplant rejection
</TABLE>

- -------------------------------------------------------------------------------
  SCREENING refers to the identification of therapeutic candidates as lead
  compounds.
     
  LEAD COMPOUND refers to a compound that exhibits pharmacological properties
  which are evaluated in vitro and/or in animal models prior to commencement
  of preclinical testing.     
  PRECLINICAL testing includes pharmacology and toxicology studies in vitro
  and in animal models, formulation work and manufacturing scale-up in
  preparation for submission of an IND.
 
                                      12

<PAGE>
 
DEVELOPMENT PROGRAM--ONCOLOGY
 
  Cancer is the second leading cause of death in the United States, resulting
in over 550,000 deaths annually. The National Cancer Advisory Board reports
that more than 8 million people in the United States have cancer, and projects
that cancer will surpass heart disease as the leading cause of death in the
United States by the end of the decade. Four types of cancer--prostate, colon,
breast and lung--account for almost 60% of the new cancer cases reported each
year in the United States.
 
  The most common methods of treating patients with cancer include surgery,
radiation, drug therapy such as chemotherapy, and supportive care therapy. A
cancer patient often receives a combination of several of these treatment
modalities depending upon the type and extent of the disease. Radiation
therapy involves the exposure of tumor cells to x-rays, gamma rays or other
high energy particles which get absorbed by the tumor and by surrounding
normal tissues. These high energy particles generate "free oxygen radicals" (a
highly reactive form of oxygen) in the exposed tissues, resulting in cell
damage and death of both normal and cancerous cells. Chemotherapy involves the
use of chemical agents which are toxic to rapidly dividing or growing cells,
such as cancer cells and certain other normal cells, including bone marrow
cells, hair follicle cells, and the cells lining the mouth, stomach and
intestinal tract. Supportive care therapy involves the use of a therapeutic
agent as an adjunct to the primary therapy in order to lessen the toxicities
associated with such primary therapy.
 
  The Company seeks to assemble a portfolio of drugs that address three of the
major unmet needs in the treatment of patients with cancer. These products
include (i) Lisofylline--a supportive care agent intended to reduce the
incidence of infection, mucositis and mortality among patients receiving high
doses of radiation and/or chemotherapy, (ii) CT-2584--a novel anti-cancer drug
for the treatment of patients with chemotherapy-resistant cancers, and (iii)
CT-2412--a therapeutic compound with the potential ability to restore
radiation and chemotherapy sensitivity among cancers that have deleted or
mutated p53 or retinoblastoma protein ("Rb") tumor suppressor genes.
 
 Lisofylline
 
  The predominant acute toxicities of cancer treatments such as radiation and
chemotherapy are bone marrow suppression with neutropenia (a reduction in
infection fighting white blood cells ("WBCs")), thrombocytopenia (a reduction
in platelets, cells that cause clotting and are necessary to prevent
bleeding), anemia (reduction in oxygen carrying red blood cells ("RBCs")) and
mucositis (acute toxicity to the cells lining the mouth, stomach and
intestinal tract). Neutropenia, mucositis and thrombocytopenia make up 80% of
the toxicities resulting from current anti-cancer treatment regimens. Since
the ability to deliver a full dose of chemotherapy on time during each
scheduled cycle of therapy is a major determinant in the success of the
treatment, dose-limiting side effects are directly responsible for placing the
patient at risk, not only for infection and bleeding, but also for treatment
failure.
 
  Unlike anemia and thrombocytopenia for which physicians can transfuse RBCs
and platelets, there are no supportive care measures that adequately treat or
prevent mucositis. Since the mouth and intestines harbor potentially lethal
bacteria, fungi and viruses, mucositis is a major contributing factor to life-
threatening infections that follow cancer therapies. Existing WBC growth
factors, such as Neupogen (G-CSF), only treat the neutropenia induced by
cancer therapy but fail to treat other acute toxicities of cancer treatments
such as thrombocytopenia and mucositis. Similarly, existing RBC growth
factors, such as Epogen (EPO), only treat anemia. Despite these limitations,
worldwide sales of G-CSF and EPO exceeded $936 million and $882 million,
respectively in 1995.
 
  In preclinical animal models, Lisofylline prevented the production of
inhibitors of blood cell regeneration and accelerated the recovery of all
three types of blood cells (WBCs, RBCs and platelets) following high dose
radiation and/or chemotherapy. The Company believes that the potential ability
of Lisofylline to accelerate stem cell recovery in bone marrow and in the
gastrointestinal tract, leading to rapid recovery of WBCs, RBCs and platelets,
along with decreased duration and severity of mucositis, resulting in
decreased risk of infection and mortality, presents a superior therapeutic
profile when compared to existing supportive care agents.
 
                                      13

<PAGE>
 
  More than 320 patients have participated in clinical trials for Lisofylline
for oncology and inflammatory disease indications. The Company has completed
one Phase II/III trial and has one ongoing Phase II/III trial for oncology
indications. The Company is planning to commence a pivotal Phase III trial
among patients undergoing high dose radiation and/or chemotherapy followed by
BMT by the end of 1996 and is also planning to commence a Phase II/III trial
for mucositis by the end of 1996.

  The Phase II/III trial completed in the first quarter of 1996 consisted of a
60 patient multi-center double blinded placebo controlled trial which
investigated the effect of two different doses (2 mg/kg and 3 mg/kg) of
Lisofylline on the rate of blood cell recovery, transfusion requirements, and
the incidences of infection, toxicity and mortality in cancer patients
undergoing high dose radiation and/or chemotherapy followed by BMT. On an
intent to treat analysis at 100 days following BMT, this study demonstrated
that administration of 3 mg/kg (high dose) of Lisofylline resulted in a
statistically significant reduction in mortality (p = 0.022), incidence of
serious and fatal infections (p = 0.002), and the duration of absolute
neutropenia (p = 0.047) (defined as the number of days following BMT with
fewer than 100 neutrophils per microliter of blood) when compared to placebo
recipients or patients randomized to receive 2 mg/kg (low dose) of
Lisofylline. In addition, there was a strong trend toward a reduction in the
incidence of severe mucositis (p = 0.1) among high dose Lisofylline recipients
compared to placebo recipients or patients randomized to receive the low dose
of Lisofylline. Although certain endpoints of the trial regarding neutrophil
and platelet recovery and transfusion requirements were not met, patients
attaining higher blood levels of Lisofylline did experience a more rapid
recovery of neutrophils and platelets, and required fewer transfusions, than
patients with lower blood levels of Lisofylline. No adverse side effects
attributable to Lisofylline were detected in this trial.
 
  The table below summarizes the results of the Phase II/III BMT trial of
Lisofylline in patients 100 days after receiving high dose radiation and/or
chemotherapy followed by BMT:
 

<TABLE>   
<CAPTION>
                                                LISOFYLLINE
                                                  3mg/kg    PLACEBO p VALUE(1)
                                                ----------- ------- ----------
      <S>                                       <C>         <C>     <C>
      Mortality rate...........................   11%       44%       0.022
      Incidence of serious and fatal infec-
       tions...................................   0%        44%       0.002
      Duration of absolute neutropenia (2).....   3 days    6 days    0.047
      Incidence of severe mucositis............   22%       44%       0.1
      Median days of fever.....................   1         1         n/s
      Median days to neutrophil recovery (3)...   15        15        n/s
      Median days to platelet recovery (4).....   18        14        n/s
      Median number of RBC transfusions........   2         2.5       n/s
      Median number of platelet transfusions...   5         4         n/s
</TABLE>

- --------
  n/s   Not statistically significant
  (1)   A p value of less than or equal to 0.05 is considered statistically
        significant. A p value of less than or equal to 0.15 demonstrates a
        trend toward statistical significance. 

  (2)   Duration of absolute neutropenia is defined as the number of days
        following BMT with fewer than 100 neutrophils per microliter of blood.

  (3)   Days to neutrophil recovery is defined as the number of days following
        BMT to achieve a neutrophil count of greater than 500 neutrophils per
        microliter of blood.
  (4)   Days to platelet recovery is defined as the number of days following
        BMT to achieve a platelet count of greater than 20,000 platelets per
        microliter of blood.

  As stated above under "--Risk Factors--Dependence on Others; Collaborators,"
Schering informed the Company that its decision not to activate a
collaboration agreement with the Company was based on, among other factors,
(i) its view that one of the endpoints of the Phase II/III BMT trial, white
blood cell recovery, was not met and (ii) its view that the clinical trial
results and related data regarding mortality rate and incidence of serious and
fatal infection were difficult to interpret and that, as a result, Schering
could not determine that the data was meaningful.
 
                                      14

<PAGE>
 
  Based on the results of its Phase II/III BMT trial, the Company anticipates
starting a 100 patient pivotal Phase III trial in 1996 for Lisofylline among
patients undergoing high dose radiation and/or chemotherapy followed by BMT.
This study will look to confirm the Company's Phase II/III BMT trial results.
The Company expects that the principal endpoints will include the incidence of
serious and fatal infection and mortality. The Company also anticipates that
this trial will yield information about the drug's impact on the incidence of
severe mucositis. The Company is planning to commence a Phase II/III trial in
late 1996 to examine the effect of Lisofylline on the incidence and severity
of mucositis among cancer patients receiving high dose radiation and/or
chemotherapy.
 
  The Company has an ongoing Phase II/III trial which was initiated in April
1995 among patients with newly diagnosed adult myelogenous leukemia ("AML")
undergoing treatment with high dose chemotherapy. This study will examine the
effects of Lisofylline on blood cell recovery, infection and mortality. When
completed, this study will have included approximately 50 patients. The
Company anticipates that enrollment for this trial will be completed by the
end of 1996.
 
 CT-2408R
 
  Lisofylline is currently being developed for intravenous administration. The
Company has demonstrated in animals that Lisofylline can also be administered
as a subcutaneous ("SQ") injection. The Company has also developed CT-2408R,
which is an analog of Lisofylline that has the potential to be administered
orally. Because SQ dosing is physiologically similar to intravenous
administration, the regulatory approval process may be faster for an SQ
formulation than for an oral analog of Lisofylline.
 
 CT-2584
 
  Chemotherapy resistance is a major impediment to the effective treatment of
certain cancers. Approximately 50% of all cancer patients undergo
chemotherapy. Of these patients, 90% (45% of all cancer patients) have tumors
that will develop resistance to chemotherapy. Resistance emerges as tumor
cells are exposed to currently available chemotherapeutic agents. Because the
majority of existing chemotherapeutic agents operate by the same mechanism of
action, the Company believes that drugs with unique mechanisms of action may
reduce the incidence of chemotherapy resistant tumors and, as a result, may be
effective in killing tumors.
 
  CT-2584 is the Company's novel small molecule drug for treatment of patients
with chemotherapy-resistant cancers, including prostate, colon, lung and
breast cancer. The Company believes that CT-2584 is a highly specific
chemotherapeutic agent that works through a unique mechanism of action which
targets the process by which cancer cells grow and spread throughout the body.
Unlike normal growing cells, such as bone marrow cells, tumor cells contain
higher levels of a specific species of PA. This species of PA appears to be
involved in the unregulated cell growth characteristic of cancer cells.
Company scientists have isolated an enzyme called phosphotidylcholine
phospholipase-D ("PC-PLD"), which appears to be responsible for the production
of this species of PA. CT-2584 directly overactivates tumor cell PC-PLD,
resulting in the destruction of tumor cell mitochondria. Because normal cells
do not produce appreciable quantities of this species of PA, CT-2584 does not
appear to affect normal cell mitochondria function and, as such, has not
demonstrated toxicity to normal cells at concentrations which are effective in
killing cancer cells.
 
  In preclinical testing, CT-2584 demonstrated toxicity to all tumor cell
lines tested and to human tumor biopsy samples. These cell lines and samples
involved prostate, brain, colon, breast, lung and ovarian cancers, as well as
certain leukemias and lymphomas. In addition, tumors that were resistant to
high levels of standard chemotherapies were rendered up to 9,000-fold more
sensitive to those agents in the presence of low concentrations of CT-2584.
CT-2584 also significantly inhibited cancer cell induced new blood vessel
formation (angiogenesis) at drug levels below which cancer cell-killing is
observed. CT-2584 was non-toxic to normal bone marrow and gastrointestinal
cells in animal models at concentrations 5-10 times higher than concentrations
which were effective in killing cancer cells.
 
                                      15

<PAGE>
 
  In November 1995, the Company initiated a Phase I/Ib trial in the United
Kingdom among patients with advanced colon and other types of cancer. In
February 1996, the Company filed an Investigational New Drug application
("IND"), and in June 1996 the Company initiated a parallel Phase I/Ib trial in
the United States for patients with advanced cancers, including patients with
chemotherapy-resistant colon, prostate and ovarian cancers.
 
CT-2412
 
  The Company has developed a series of second generation compounds which have
the potential ability to restore radiation and chemotherapy sensitivity among
cancers that have deleted or mutated p53 or retinoblastoma protein ("Rb")
tumor suppressor genes. One central function of the p53 and Rb tumor
suppressor genes is to bind to DNA and regulate genes that control cell
growth. Deletion or mutation of these genes occurs in over 60% of all cancers
and contributes to the failure of conventional cancer treatment. Current known
experimental approaches to restoring functional p53 and Rb tumor suppressor
genes utilize gene therapy techniques to insert normal p53 or Rb genes into
cancer cells. Such approaches are presently limited by the ineffective
transfer rates of normal genes to cancer cells.

  Company scientists and their collaborators have discovered that the deletion
or mutation of p53 and Rb tumor suppressor genes may modulate stress activated
pathways such as the SAPK pathway. The Company believes that the development
of compounds which suppress the activation of the SAPK pathway may represent a
novel pharmacologic approach to restoring and enhancing radiation and
chemotherapy sensitivity among tumors with deleted or mutated p53 or Rb tumor
suppressor genes. CT-2412 is among a family of small molecules which, in lead
compound testing, has been demonstrated to increase over 10,000-fold the
sensitivity of p53- and Rb- deleted or mutated cancer cells to the effects of
radiation and/or chemotherapy.
 
CT-3501
 
  CTI is screening CT-3501 as a potential lead compound to inhibit
angiogenesis among cancer patients. CTI is also investigating CT-3501 as an
agent to prevent metastasis or tumor recurrence among ovarian, colon and lung
cancer patients undergoing surgical resection or radiation treatment.
 
DEVELOPMENT PROGRAM--INFLAMMATORY DISEASE
 
  Traumatic injury and related complications, such as acute lung injury
("ALI") and multi-organ failure ("MOF"), are one of the leading causes of
death for people under the age of 45, as well as being a significant cost to
society with an estimated $14 billion per year spent on care of motor vehicle
injury patients alone. ALI following trauma is thought to result from
oxidative injury at the time of blood and fluid resuscitation in patients who
have experienced traumatic injuries. This oxidative injury results in a
widespread systemic inflammatory response ("SIRS") followed by MOF. No
specific therapies currently exist to treat or prevent ALI, SIRS or MOF.
Current therapeutic approaches to ALI focus on supportive mechanical
ventilation.
 
 Lisofylline

  In addition to its application in cancer patients, the Company believes that
Lisofylline may also be an effective agent to treat ALI, systemic inflammation
and MOF among patients who have experienced traumatic injuries. Preclinical
animal testing has indicated that Lisofylline inhibited SIRS and the MOF that
frequently accompanies SIRS. In the first quarter of 1995, the Company
completed a 53-patient multi-center double blinded placebo controlled Phase
II/III trial of Lisofylline among patients with advanced kidney or skin cancer
receiving the anti-cancer agent Interleukin-2 ("IL-2"). IL-2 is highly toxic,
and the treatment often results in systemic inflammatory side effects which
may lead to MOF and death. The purpose of this study was to examine if
Lisofylline could be effective in reducing MOF in patients receiving IL-2. The
results of this study demonstrated that during their first cycle of therapy
following eight doses of IL-2, 70% of patients treated with Lisofylline
tolerated full doses of IL-2 as compared with 38% of placebo recipients
(p = 0.002). Despite receiving more intensive IL-2 treatment, Lisofylline
recipients experienced significantly less IL-2 induced toxicity than placebo
recipients (p = 0.036) at the end of the first week of IL-2 treatment.
 
                                      16

<PAGE>
 
  The Company has completed a pilot Phase II study of Lisofylline among 13
patients with life-threatening infections, systemic inflammation and MOF.
Twelve patients were evaluable for endpoint analysis. In the first 14 days,
Lisofylline recipients experienced a 40% improvement from baseline in median
MOF scores compared to placebo recipients. In addition, all patients receiving
Lisofylline survived through day 28 compared to 64% of placebo recipients.

  The Company is preparing a pivotal Phase III trial for Lisofylline among
patients experiencing traumatic injuries who are at risk of developing
systemic inflammation, lung injury and death. This study will examine the
effect of Lisofylline on the incidence and severity of ALI, MOF and mortality.
The Company anticipates initiating this trial by the second quarter of 1997.

DEVELOPMENT PROGRAM--IMMUNE DISEASE
 
 CT-3578
 
  CT-3578 is a member of a class of developmental candidates for the
prevention of organ transplant rejection and the treatment of immune diseases.
Early in vitro and preclinical animal testing suggested that CT-3578 may
induce tolerance to foreign antigens. Tolerance occurs when an antigen,
previously recognized by the body's immune system as "foreign," accepted as
non-foreign or "self." A therapeutic agent which induces tolerance may allow
patients to accept organ transplants from genetically different donors without
the need for lifelong immunosuppressive therapy and its accompanying side
effects. Preclinical in vitro studies demonstrate that CT-3578 has the
potential to be more effective than cyclosporine-A in inhibiting T-cell
activation. Cyclosporine-A is the leading commercially available
immunosuppressive drug, with estimated worldwide sales in excess of $1 billion
in 1994. The Company believes that CT-3578 may be a safe, selective agent in
the treatment or prevention of organ transplant rejection and graft vs. host
disease.
 
PROPRIETARY DRUG DISCOVERY TECHNOLOGY

  CTI's proprietary drug discovery technology consists of three components:
(i) high resolution technology for quantitative measuring of specific species
of lipids; (ii) cloning of critical lipid regulatory enzymes; and (iii) using
the cloned enzymes to validate targets and to develop high throughput screens
capable of analyzing large chemical libraries. 
 
  CTI has developed proprietary technology that has enabled it to determine
the effects of a variety of physical and chemical stimuli, growth factors,
cytokines and oncogene induced events on the production of species of PA and
the enzymes which control their production and degradation. Standard industry
techniques for measuring lipid second messengers are time consuming and often
inadequate for measuring lipids like PA which are produced in relatively small
quantities following stimulation and are degraded within seconds of their
production. Moreover, separation of specific species of PA is difficult. CTI
possesses several proprietary lipid analytical technologies, including its
proprietary ChiRx technology, which can identify each species of PA produced
in response to a variety of stimuli in various cell types. In addition, the
Company has acquired unique and powerful high performance thin layer
chromatography capabilities which allow for the separation of species of PA
into a homogenous and purified fraction. This technology enables the
separation of many distinct PA species, thus providing a qualitative and
quantitative methodology to examine the effects of CTI's compounds.
 
  Company scientists have identified, isolated and cloned several enzymes
which control the production or degradation of different species of PA.
Through application of genetic, molecular and biochemical techniques, the
Company can determine the relationship between the PA species controlled by
these enzymes and disease processes or conditions. Once established, high
throughput assays can be developed against which the Company can screen its
small molecule compounds to detect their effects on specific species of PA.
 
  Company chemists integrate this information into a directed chemical
synthetic effort which involves rational molecular modeling. Once a new
chemical entity is synthesized, it is tested in a series of biological systems
to examine its effects on modulating specific species of PA and other
downstream stress activated second messengers and the resulting abnormal
cellular responses. Once optimized, compounds are screened for
 
                                      17

<PAGE>
 
maximum specificity and safety and then undergo further optimization as
developmental candidates for selection as lead compounds for preclinical
studies.
 
  The Company's scientists have identified seven distinct species of PA and
believe other species of PA may exist. In addition, the Company has identified
several chemical entities which the Company believes may regulate the
activation of controlling enzymes responsible for the production of such PAs.
 
COLLABORATIONS
 
 BioChem Pharma Collaboration
 
  In March 1995, CTI entered into a collaboration agreement with BioChem
Pharma for the development and commercialization of Lisofylline and CT-2584 in
Canada. Under the collaboration agreement (the "BioChem Collaboration
Agreement"), BioChem Pharma will be responsible for obtaining regulatory
approval for Lisofylline and CT-2584 in Canada. Although BioChem Pharma will
have no obligation to conduct any research and development activities, it will
have the right to have CTI perform clinical trials in Canada at BioChem
Pharma's expense. BioChem Pharma will have the exclusive right to
commercialize Lisofylline and CT-2584 in Canada, subject to the payment of
royalties to CTI. CTI will also receive payments under the BioChem
Collaboration Agreement if certain milestones are achieved. BioChem Pharma may
terminate the BioChem Collaboration Agreement with respect to any product at
any time for any reason upon 30 days' notice. In connection with the BioChem
Collaboration Agreement, BioChem Pharma agreed to purchase 7,462.687 shares of
Convertible Preferred Stock in the Company's 1995 Private Placement for an
aggregate purchase price of $2.5 million.
 
 Schering AG
 
  In February 1996 the Company entered into an agreement with Schering AG
("Schering") pursuant to which, among other things, the Company and Schering
would collaborate in the funding, research, development and commercialization
of Lisofylline and CT-2584 on the terms and conditions specified therein. Upon
execution of the agreement, Schering paid the Company a $3,000,000 non-
refundable signing fee. The remainder of the agreement was contingent upon
Schering finding the clinical trial results and related data from the
Company's Phase II/III BMT trial (the "Trial Data") acceptable within thirty
days after its receipt. The Company furnished Schering with the Trial Data in
late February 1996. On April 2, 1996, after a mutual extension of the thirty-
day review period, Schering informed the Company that it did not wish to
activate the agreement. Although the agreement did not require Schering to
specify in detail its reasons for not activating the agreement, Schering
informed the Company that its decision was based on, among other factors,
(i) its view that one of the endpoints of the Phase II/III BMT trial, white
blood cell recovery, was not met and (ii) its view that the Trial Data
regarding mortality rate and incidence of serious and fatal infection were
difficult to interpret and that, as a result, Schering could not determine
that the data was meaningful. See "--Risk Factors--Dependence on Others;
Collaborators" and "--Development Program--Oncology."
 
  As a result of Schering's decision not to activate the agreement and
following the Company's review of the Trial Data, the Company revised its
planned expenditures for 1996 and 1997, resulting in a reduction of
approximately $11.4 million. These reductions consisted primarily of the
elimination of expenses which would have been incurred at Schering's request
in connection with seeking regulatory approval for Lisofylline and CT-2584 in
Europe and Japan, and certain planned research activities that would have been
sponsored by Schering under the Agreement. These reduced expenditures also
reflect the Company's decision to delete a 2mg/kg (low dose) component from
the Company's planned pivotal Phase III trial for Lisofylline following the
Company's review of the Trial Data.
   
  As part of its ongoing business, the Company engages in discussions with
potential collaborators from time to time regarding the development,
manufacturing and commercialization of Lisofylline, CT-2584 and other products
under development. Although there can be no assurance that the Company will
enter into any such     
 
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<PAGE>
 
collaborative arrangement on acceptable terms, the Company believes that
Schering's decision not to activate the agreement will not have a material
adverse impact on the Company's ability to enter into any such collaborative
arrangement on favorable terms. See "--Risk Factors--Dependence on Others;
Collaborators."
 
PATENTS AND PROPRIETARY RIGHTS
 
  CTI has dedicated significant resources to protect its intellectual
property. In the United States, the Company has seven issued patents and 81
pending patent applications, including divisional patent applications and
continuations-in-part, covering a variety of new chemical entities,
pharmaceutical compositions, synthetic processes, methods of use, research
tools and diagnostics. Nine of the Company's pending patent applications have
received notices of allowance, including five pending patent applications
covering the pharmaceutical composition and oncology, anti-inflammatory and
other methods of use for Lisofylline and one pending patent application
covering the chemical compounds and pharmaceutical compositions of CT-2584,
CT-3578 and CT-3501. CTI intends to file additional patent applications, when
appropriate, with respect to improvements in its core technology and to
specific products and processes that it develops. Generally it is CTI's policy
to file foreign counterparts in countries with significant pharmaceutical
markets and a patent enforcement infrastructure. CTI has filed foreign
counterparts of certain of its issued and pending patent applications in many
countries. There can be no assurance that any patents will issue from any
present or future applications or, if patents do issue, that such patents will
be issued on a timely basis or that claims allowed on issued patents will be
sufficient to protect the Company's technology. In addition, there can be no
assurance that the patents issued to CTI will not be challenged, invalidated
or circumvented or that the rights granted thereunder will provide proprietary
protection or commercial advantage to the Company. With respect to such issued
U.S. patents or any patents that may issue in the future, there can be no
assurance that they will effectively protect the technology involved,
foreclose the development of competitive products by others or otherwise be
commercially valuable.
 
  The commercial success of the Company will also depend in part on the
Company's neither infringing patents or proprietary rights of third parties
nor breaching any technological licenses which relate to the Company's
technologies and potential products. In general, the development of
therapeutic products is intensely competitive and many pharmaceutical
companies, biotechnology companies, universities and research institutions
have filed and will continue to file patent applications and receive patents
in this field. If patents are issued to other entities that contain
competitive or conflicting claims with respect to the technology and compounds
pursued by CTI and such claims are ultimately determined to be valid, no
assurance can be given that CTI would be able to obtain licenses to these
patents at a reasonable cost or develop or obtain alternative technology or
compounds.
 
  The Company is aware of certain patents belonging to third parties that
could be interpreted broadly to compromise the Company's freedom to make and
sell Lisofylline in the United States for use in preventing lung injury
following traumatic injury or sepsis. The Company believes, upon advice of
patent counsel, that the manufacture, use and sale of Lisofylline does not
infringe any valid claim of such third party patents. See "Legal Matters." If
such patents were to restrict the use of Lisofylline for such indications, the
Company may be required to obtain a license from such parties. There can be no
assurance that any such license would be available to the Company upon
reasonably acceptable terms, if at all. The Company could also face
significant costs associated with any litigation relating to such patents. See
"--Risk Factors--Ability to Protect Intellectual Property."
 
  CTI has sought and intends to aggressively seek patent protection in the
United States, Europe and Japan to protect any products that it may develop.
CTI also intends to seek patent protection or rely upon trade secrets to
protect certain of its enabling technologies that will be used in discovering
and evaluating new drugs which could become marketable products. However,
there can be no assurance that such steps will effectively protect the
technology involved. To protect any such trade secrets and other proprietary
information, CTI relies on confidentiality and material transfer agreements
with its corporate partners, employees, consultants, outside scientific
collaborators and sponsored researchers and other advisors. There can be no
assurance that these agreements will not be breached, that the Company will
have adequate remedies for breach or that the
 
                                      19

<PAGE>
 
Company's trade secrets will not otherwise become known or independently
discovered by competitors. CTI also has its employees, members of its
Scientific Advisory Board and Clinical Advisory Board, and its consultants
enter into agreements requiring disclosure to CTI of ideas, developments,
discoveries or inventions conceived during employment or during consulting and
assignment to CTI of proprietary rights to such matters related to the
business and technology of CTI. The extent to which efforts by others will
result in patents and the effect on CTI of the issuance of such patents is
unknown. Further, to enforce any patents issued to the Company or determine
the scope and validity of other parties' proprietary rights, the Company may
have to engage in litigation, which would result in substantial cost to, and
diversion of efforts by, the Company. There can be no assurance that the
Company's issued or licensed patents would be held valid. An adverse outcome
could subject the Company to significant liabilities to third parties, require
disputed rights to be licensed from third parties or require the Company to
cease or modify its use of such technology, any of which could have a material
adverse effect on the Company. If the Company elects or is required to
participate in interference proceedings declared by the U.S. Patent and
Trademark Office to determine priority of invention, substantial cost to the
Company could result even if the eventual outcome is favorable to the Company.

  There can be no assurance that others will not independently develop
substantially equivalent proprietary information or otherwise obtain access to
CTI's know-how or that others will not be issued patents which may prevent the
sale of Company products or require licensing and the payment of significant
fees or royalties by CTI for the pursuit of its business. Trade secrets and
other unpatented proprietary information of CTI may be difficult to protect,
notwithstanding confidentiality agreements with CTI's employees and
consultants. See "--Risk Factors--Ability to Protect Intellectual Property."

MANUFACTURING
 
  Lisofylline is currently being manufactured by third party vendors on a fee
for service basis. The Company is presently engaged in negotiations with
qualified third party manufacturers for bulk intermediate and bulk
pharmaceutical chemical production to support the Company's future clinical
trials and future market demands. CTI believes it has developed a process for
manufacturing Lisofylline in its own laboratories and those of external
manufacturers that would enable its manufacture in commercial quantities.
Although CTI currently does not have the capability to manufacture products
under current Good Manufacturing Practices ("cGMP") prescribed by the FDA, it
is seeking to develop such capacity with manufacturing relationships. The
Company has selected manufacturers which it believes comply with cGMP and
other regulatory standards. The Company currently uses two external suppliers
for solid-phase chemical manufacture of Lisofylline bulk drug and two
suppliers for fill-finish. The Company has established a quality control and
quality assurance program, including a set of standard operating procedures
and specifications, designed to ensure that the Company's products are
manufactured in accordance with cGMP and other applicable domestic and foreign
regulations. However, the Company is dependent upon contract manufacturers to
comply with such procedures and regulations. There can be no assurance that
these manufacturers will meet the Company's requirements for quality, quantity
or timeliness.
 
  CTI intends to develop facilities for manufacturing certain key intermediate
products in the synthesis of Lisofylline and certain of its other
pharmaceutical compounds, such as CT-2584. The Company does not intend for
this facility to be a cGMP facility but rather a facility for conducting
process scale-up, research and development and production of bulk intermediate
compounds utilized in the final manufacture of Lisofylline, CT-2584 or any
future drug candidates. CTI has signed a Memorandum of Understanding with the
Port of Seattle (the "Port") which contemplates site development and
construction of a building by the Port to be leased by CTI for a bulk
manufacturing facility near Seattle, Washington. Pursuant to the terms of the
Memorandum of Understanding, CTI would lease such facility from the Port for
an initial period of 15 years with two five-year options to extend such lease
for an additional 10 years and an option to lease an adjacent 10- to 15-acre
parcel. CTI would make lease payments to the Port based on an agreed upon rate
of return on the fair market value of the land and on the development and
construction costs incurred by the Port, which costs are to be amortized over
the term of the lease or such earlier period selected by CTI. The Port
proposes to finance such development through Industrial Development District
funding, which may require a vote of the general electorate of King
 
                                      20

<PAGE>
 
County, Washington. The obligations of CTI and the Port under the Memorandum
of Understanding are subject to several conditions and contingencies,
including CTI's receipt of FDA approval for the marketing and commercial sale
of Lisofylline.

  If CTI is unable to finance a bulk manufacturing facility or determines not
to do so, CTI may need to enter into collaborative relationships with other
parties which have established manufacturing capabilities or contract with
third parties for the manufacture of any products it may develop. If CTI does
so it will be dependent upon such collaborators or third parties to timely
supply it with products manufactured in compliance with cGMP or similar
standards imposed by foreign regulators. Collaborators and contract
manufacturers may violate cGMP upon occasion and the FDA has intensified its
oversight of manufacturers. There can be no assurance that the FDA would not
take action against a collaborator or a contract manufacturer who violates
cGMP. In addition, if CTI is unable to enter into collaborative relationships
or obtain or retain third party manufacturing on commercially acceptable
terms, it may be delayed in its ability to commercialize products or may not
be able to commercialize its products as planned. No assurance can be given
that the Company, either alone or together with collaborators or third party
contract manufacturers, will be able to make the transition to commercial
production. See "--Risk Factors--Reliance on Third Party Manufacturers;
Manufacture of Products in Commercial Quantities."
 
MARKETING
 
  CTI has no experience in marketing, sales or distribution. The Company
believes, however, that the United States oncology market is accessible by a
limited marketing staff due to the concentrated market of prescribing
physicians. Approximately 5,000 oncologists control the vast majority of
prescriptions for cancer therapeutics. The Company intends to develop its own
sales and marketing infrastructure in the United States to commercialize its
portfolio of oncology products, either on its own or, to the extent the
Company enters into any commercialization arrangements, with collaborators.
With respect to the commercialization of its oncology products outside the
United States, and with respect to the worldwide commercialization of its
portfolio of products for inflammatory and immune disease, the Company's
strategy is to pursue commercialization arrangements with collaborators.

  If the Company develops any products with commercial potential, CTI will
need to develop marketing and sales resources, and may seek to enter into
collaborative arrangements with third parties which have established marketing
and sales capabilities or may choose to pursue the commercialization of such
products on its own. There can be no assurance that the Company or any such
collaborator will establish adequate sales and distribution capabilities or be
successful in gaining market acceptance for products. In accordance with its
business plan, CTI has initiated discussions with several major pharmaceutical
companies for potential strategic alliances. There can be no assurance that
CTI will enter into any such alliances or that the terms of any such alliances
will be favorable to CTI. See "--Risk Factors--Dependence on Others;
Collaborators" and "--Risk Factors--Absence of Sales and Marketing
Organization."
 
COMPETITION
 
  Competition in the pharmaceutical and biotechnology industries is intense.
CTI faces competition from a variety of sources, both direct and indirect. CTI
believes there may be several pharmaceutical or biotechnology companies that
focus on cell membrane lipids in regulating cellular processes. Many other
companies compete indirectly with CTI for the same therapeutic indications but
with different approaches by focusing, for example, on signal transduction,
cell receptor technology, transcription factors and gene therapies. CTI also
competes with other large pharmaceutical companies that produce and market
synthetic compounds and with other specialized biotechnology firms in the
United States, Japan, Europe and elsewhere. Many of the Company's existing or
potential competitors have substantially greater financial, technical and
human resources than the Company and may be better equipped to develop,
manufacture and market products.
 
  CTI expects to encounter significant competition for the principal
pharmaceutical products it plans to develop. Companies that complete clinical
trials, obtain required regulatory approvals and commence
 
                                      21

<PAGE>
 
commercial sales of their products before their competitors may achieve a
significant competitive advantage. Accordingly, the relative speed with which
the Company or any future collaborators can develop products, complete
preclinical testing and clinical trials and approval processes, and supply
commercial quantities of the products to the market are expected to be
important competitive factors. A number of biotechnology and pharmaceutical
companies are developing new products for the treatment of the same diseases
being targeted by CTI. In some instances, such products have already entered
clinical trials or received FDA approval.
 
  Significant levels of research in biotechnology, medicinal chemistry and
pharmacology occur in universities and other nonprofit research institutions.
These entities have become increasingly active in seeking patent protection
and licensing revenues for their research results. They also compete with CTI
in recruiting skilled scientific talent.

  CTI believes that its ability to compete successfully will be based on its
ability to create and maintain scientifically advanced technology, develop
proprietary products, attract and retain scientific personnel, obtain patent
or other protection for its products, obtain required regulatory approvals and
manufacture and successfully market its products either alone or through
outside parties. Many of CTI's competitors have substantially greater
financial, marketing and human resources than CTI. CTI will continue to seek
licenses with respect to technology related to its field of interest and may
face competition with respect to such efforts. See "--Risk Factors--No
Assurance of Successful Product Development," "--Risk Factors--Substantial
Competition" and "--Risk Factors--Ability to Protect Intellectual Property."

GOVERNMENT REGULATION
 
  FDA Regulation and Product Approval. Regulation by governmental authorities
in the United States and other countries is a significant factor in the
development, production and marketing of CTI's proposed products. It is
anticipated that all of CTI's products will require regulatory approval by
governmental agencies prior to commercialization. In particular, human
therapeutic products are subject to rigorous preclinical and clinical testing
and other approval procedures in the United States by the FDA and similar
health authorities in foreign countries. Various federal statutes and
regulations also govern or influence the testing, manufacturing, quality
control, safety, labeling, storage, record-keeping and marketing of such
products. The process of obtaining these approvals and the subsequent
compliance with appropriate federal and foreign statutes and regulations
require the expenditure of substantial resources. Any failure by CTI or its
collaborators or licensees to obtain, or any delay in obtaining, regulatory
approval could adversely affect the marketing of any product that CTI may hope
to develop and its ability to receive revenues therefrom. The Company has
neither applied for nor received regulatory approval to market any products.
 
  The steps required before a pharmaceutical agent may be marketed in the
United States include (i) preclinical laboratory, in vivo and formulation
studies, (ii) the submission to the FDA of an Investigational New Drug
Application ("IND"), which must become effective before human clinical trials
may commence, (iii) adequate and well-controlled human clinical trials to
establish the safety and efficacy of the proposed drug in its intended
indication, (iv) the submission of a New Drug Application ("NDA") to the FDA,
and (v) the FDA approval of the NDA.
 
  In order to clinically test, produce and market products for diagnostic or
therapeutic use, a company must comply with mandatory procedures and safety
standards established by the FDA and comparable agencies in foreign countries.
Before beginning human clinical testing of a potential new drug, a company
must file an IND and receive clearance from the FDA. The IND is a summary of
the preclinical studies which were carried out to characterize the drug,
including toxicity and safety studies, as well as an in-depth discussion of
the human clinical studies which are being proposed.
 
  Human clinical trials are typically conducted in three sequential phases
which may overlap. Phase I involves the initial introduction of the drug into
healthy human subjects or patients where the product is tested for safety,
dosage tolerance, absorption, metabolism, distribution and excretion. Phase II
involves studies in a limited patient
 
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<PAGE>
 
population to (i) identify possible adverse effects and safety risks, (ii)
determine the efficacy of the product for specific, targeted indications, and
(iii) determine dosage tolerance and optimal dosage. When Phase II evaluation
demonstrates that the product is effective and has an acceptable safety
profile, Phase III trials are undertaken to further evaluate dosage and
clinical efficacy and to further test for safety in an expanded patient
population at geographically dispersed clinical study sites. The regulatory
authority or the sponsor may suspend clinical trials at any point in this
process if either entity concludes that clinical subjects are being exposed to
an unacceptable health risk, or for other reasons.
 
  The results of product development, preclinical studies and clinical studies
are submitted to the FDA as part of an NDA for approval of the marketing and
commercial shipment of the product. The FDA may deny an NDA if applicable
regulatory criteria are not satisfied, or may require additional clinical
data. Even if such data is submitted, the FDA may ultimately decide that the
NDA does not satisfy the criteria for approval. Once issued, a product
approval may be withdrawn if compliance with regulatory standards is not
maintained or if problems occur after the product reaches the market. In
addition, the FDA may require testing and surveillance programs to monitor the
effect of approved products which have been commercialized, and it has the
power to prevent or limit further marketing of a product based on the results
of these post-marketing programs.

  Satisfaction of these FDA requirements, or similar requirements by foreign
regulatory agencies, typically takes several years and the time needed to
satisfy them may vary substantially, based upon the type, complexity and
novelty of the drug product. The effect of government regulation may be to
delay or to prevent marketing of potential products for a considerable period
of time and to impose costly procedures upon the Company's activities. There
can be no assurance that the FDA or any other regulatory agency will grant
approval for any products being developed by the Company on a timely basis, or
at all. Success in preclinical or early stage clinical trials does not assure
success in later stage clinical trials. Data obtained from preclinical and
clinical activities are susceptible to varying interpretations which could
delay, limit or prevent regulatory approval. If regulatory approval of a
product is granted, such approval may impose limitations on the indicated uses
for which a product may be marketed. Further, even if regulatory approval is
obtained, later discovery of previously unknown problems with a product may
result in restrictions on the product, including withdrawal of the product
from the market. Delay in obtaining or failure to obtain regulatory approvals
would have a material adverse affect on the Company's business. Marketing the
Company's products abroad will require similar regulatory approvals and is
subject to similar risks. In addition, the Company is unable to predict the
extent of adverse government regulations that might arise from future United
States or foreign governmental action. See "--Risk Factors--No Assurance of
FDA Approval; Comprehensive Government Regulation."
 
  Facilities and manufacturing techniques used for the manufacture of products
for clinical use or for sale must be operated in conformity with cGMP
regulations, the FDA regulations governing the production of pharmaceutical
products. CTI intends to operate its facilities or to arrange for the
manufacture of products at facilities which are operated, as required, in
accordance with cGMP where necessary.
 
  Before the Company's products can be marketed outside of the United States,
they are subject to regulatory approval similar to that required in the United
States, although the requirements governing the conduct of clinical trials,
product licensing, pricing and reimbursement vary widely from country to
country. No action can be taken to market any product in a country until an
appropriate application has been approved by the regulatory authorities in
that country. The current approval process varies from country to country, and
the time spent in gaining approval varies from that required for FDA approval.
In certain European countries, the sales price of a product must also be
approved. The pricing review period often begins after market approval is
granted. No assurance can be given that, even if a product is approved by a
regulatory authority, satisfactory prices will be approved for such product.
 
  The FDA's policies may change and additional government regulations may be
promulgated which could prevent or delay regulatory approval of the Company's
potential products. Moreover, increased attention to the containment of health
care costs in the United States and in foreign markets could result in new
government
 
                                      23

<PAGE>
 
regulations which could have a material adverse effect on the Company's
business. The Company is unable to predict the likelihood of adverse
governmental regulation which might arise from future legislative or
administrative action, either in the United States or abroad.

  Third Party Reimbursement and Health Care Reform. The commercial success of
the Company's products under development will be substantially dependent upon
the availability of government or private third-party reimbursement for the
use of such products. There can be no assurance that Medicare, Medicaid,
health maintenance organizations and other third-party payors will authorize
or otherwise budget such reimbursement. Such governmental and third party
payors are increasingly challenging the prices charged for medical products
and services. If the Company succeeds in bringing one or more products to
market, there can be no assurance that such products will be viewed as cost-
effective or that reimbursement will be available to consumers or will be
sufficient to allow the Company's products to be marketed on a competitive
basis. Furthermore, federal and state regulations govern or influence the
reimbursement to health care providers of fees and capital equipment costs in
connection with medical treatment of certain patients. In response to concerns
about the rising costs of advanced medical technologies, the current
administration of the federal government has publicly stated its desire to
reform health care, including the possibility of price controls and revised
reimbursement policies. There can be no assurance that actions taken by the
administration, if any, with regard to health care reform will not have a
material adverse effect on the Company. If any actions are taken by the
administration, such actions could adversely affect the prospects for future
sales of the Company's products. Further, to the extent that these or other
proposals or reforms have a material adverse effect on the Company's ability
to secure funding for its development or on the business, financial condition
and profitability of other companies that are prospective collaborators for
certain of the Company's product candidates, the Company's ability to develop
or commercialize its product candidates may be adversely affected. See "--Risk
Factors--Uncertainty of Pharmaceutical Pricing and Reimbursement."
 
  Given recent government initiatives directed at lowering the total cost of
health care throughout the United States, it is likely that the United States
Congress and state legislatures will continue to focus on health care reform
and the cost of prescription pharmaceuticals and on the reform of the Medicare
and Medicaid systems. The Company cannot predict the likelihood of passage of
federal and state legislation related to health care reform or lowering
pharmaceutical costs. In certain foreign markets pricing of prescription
pharmaceuticals is already subject to government control. Continued
significant changes in the nation's health care system could have a material
adverse effect on the Company's business.
 
  Environmental Regulation. In connection with its research and development
activities and its manufacturing materials and products, the Company is
subject to federal, state and local laws, rules, regulations and policies
governing the use, generation, manufacture, storage, air emission, effluent
discharge, handling and disposal of certain materials, biological specimens,
and wastes. Although the Company believes that it has complied with these
laws, regulations and policies in all material respects and has not been
required to take any significant action to correct any noncompliance, there
can be no assurance that the Company will not be required to incur significant
costs to comply with environmental and health and safety regulations in the
future. The Company's research and development involves the controlled use of
hazardous materials, including but not limited to certain hazardous chemicals
and radioactive materials. Although the Company believes that its safety
procedures for handling and disposing of such materials comply with the
standards prescribed by state and federal regulations, the risk of accidental
contamination or injury from these materials cannot be eliminated. In the
event of such an accident, the Company could be held liable for any damages
that result and any such liability could exceed the resources of the Company.
 
HUMAN RESOURCES

  As of June 1, 1996, CTI employed 100 individuals full-time (including 36
holding doctoral or other advanced degrees). In recruiting additional staff
members, CTI expects to receive continued input from its consultants and
members of its Scientific Advisory Board and Clinical Advisory Board.
 
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<PAGE>
 
  CTI's policy is to have each employee and consultant enter into an agreement
which contains provisions prohibiting the disclosure of confidential
information to anyone outside CTI and requires disclosure to CTI of ideas,
developments, discoveries or inventions conceived during employment and
assignment to CTI of proprietary rights to such matters related to the
business and technology of CTI. The extent to which this policy will
effectively protect CTI's proprietary technology and trade secrets is unknown.
See "--Patents and Proprietary Rights."

  CTI has assembled a Scientific Advisory Board ("SAB") composed of leaders in
the fields of immunology, cell and molecular biology, and synthetic and
medicinal chemistry, and a Clinical Advisory Board ("CAB") composed of leaders
in the fields of hematology, oncology, immunology, cell and molecular biology,
critical care and medicinal chemistry. The SAB assists CTI in identifying
scientific and product development opportunities, in reviewing with management
the progress of CTI's specific projects, and in recruiting and evaluating
CTI's scientific staff. The CAB assists CTI in determining clinical regulatory
strategy and trial results and identifying optimal indications for CTI's
products. Although CTI expects to receive guidance from the members of its SAB
and CAB, all of such members are employed on a full-time basis by others and,
accordingly, are not likely to devote more than a small portion of their time
to CTI. See "Item 5.--Directors and Executive Officers--Scientific Advisory
Board," and "Item 5.--Directors and Executive Officers--Clinical Advisory
Board."
 
                                      25

<PAGE>
 
ITEM 2.FINANCIAL INFORMATION.
 
SELECTED FINANCIAL DATA

  The selected financial data set forth below with respect to the Company's
statements of operations for each of the three years in the period ended
December 31, 1995, and with respect to the balance sheets at December 31, 1994
and 1995, are derived from the financial statements of the Company included
elsewhere in this Registration Statement that have been audited by Ernst &
Young LLP, independent auditors, and is qualified by reference to such
financial statements and the notes related thereto. The balance sheet data at
December 31, 1992 and 1993 and the statement of operations data for the year
ended December 31, 1992 are derived from audited financial statements of the
Company not included in this Registration Statement. The selected financial
data set forth below with respect to the Company's statements of operations
for the three months ended March 31, 1995 and 1996 and for the period from
September 4, 1991 (date of incorporation) to March 31, 1996, and with respect
to the balance sheet data at March 31, 1996, are derived from unaudited
financial statements of the Company included elsewhere in this Registration
Statement. The unaudited financial data includes all adjustments (consisting
only of normal recurring adjustments) that the Company considers necessary for
a fair presentation of the financial position at such date and the results of
operations for these periods. The results of operations for the three months
ended March 31, 1996 are not necessarily indicative of the results for any
future period or for the full year ending December 31, 1996. The data set
forth below should be read in conjunction with "--Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the financial
statements and the notes related thereto included elsewhere in this
Registration Statement.

<TABLE>
<CAPTION>
                                                                                      PERIOD FROM
                                                                                      SEPTEMBER 4,
                                                                    THREE MONTHS     1991 (DATE OF
                              YEAR ENDED DECEMBER 31, (1)         ENDED MARCH 31,    INCORPORATION)
                          --------------------------------------  -----------------   TO MARCH 31,
                            1992      1993      1994      1995      1995     1996         1996
                          --------  --------  --------  --------  --------  -------  --------------
                                         (IN THOUSANDS, EXCEPT PER SHARE DATA)
<S>                       <C>       <C>       <C>       <C>       <C>       <C>      <C>
STATEMENTS OF OPERATIONS
 DATA:
Revenues:
  Collaboration
   agreements...........  $    --   $    --   $    --   $    100  $    --   $ 3,000     $  3,100
Operating expenses:
  Research and
   development..........     3,926    11,862    14,368    14,211     3,331    3,496       47,863
  General and
   administrative.......     1,661     4,052     5,283     6,539     1,292    1,862       19,399
                          --------  --------  --------  --------  --------  -------     --------
    Total operating
     expenses...........     5,587    15,914    19,651    20,750     4,623    5,358       67,262
                          --------  --------  --------  --------  --------  -------     --------
Loss from operations....    (5,587)  (15,914)  (19,651)  (20,650)   (4,623)  (2,358)     (64,162)
Other income (expense):
  Investment income.....       292       723       616     1,167       111      300        3,100
  Interest expense......       (29)     (137)     (464)     (509)     (129)    (136)      (1,276)
                          --------  --------  --------  --------  --------  -------     --------
Net loss................  $ (5,324) $(15,328) $(19,499) $(19,992) $ (4,641) $(2,194)    $(62,338)
                          ========  ========  ========  ========  ========  =======     ========
Net loss per share (2)..  $ (0.56)  $ (1.00)  $ (1.18)  $  (1.20) $ (0.28)  $ (0.13)
                          ========  ========  ========  ========  ========  =======
Number of shares used in
 computation of net loss
 per share..............     9,430    15,332    16,507    16,699    16,520   17,268
                          ========  ========  ========  ========  ========  =======
</TABLE>

 

<TABLE>
<CAPTION>
                                      AS OF DECEMBER 31,               AS OF
                              --------------------------------------   MARCH
                                1992      1993      1994      1995    31, 1996
                              --------  --------  --------  --------  --------
                                             (IN THOUSANDS)
<S>                           <C>       <C>       <C>       <C>       <C>
BALANCE SHEETS DATA:
Cash, cash equivalents and
 securities available-for-
 sale.......................  $ 28,648  $ 27,452  $  9,131  $ 21,906  $ 19,403
Working capital.............    27,563    23,387     4,094    18,342    15,929
Total assets................    33,422    35,230    17,278    28,048    25,600
Long-term obligations, less
 current portion............       319     3,635     2,620     2,606     2,396
Deficit accumulated during
 development stage..........    (5,324)  (20,652)  (40,151)  (60,119)  (62,330)
Total stockholders' equity..    31,851    28,848    10,051    21,858    19,668
</TABLE>

- -------
(1) Although the Company was incorporated in 1991, it did not commence
    operations until February 1992. As a result, there were no financial
    statements for the Company for 1991.
(2) See Note 1 of Notes to Financial Statements for information concerning the
    computation of net loss per share.
 
                                      26

<PAGE>
 

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
 
 OVERVIEW
 
  Since commencement of operations in 1992, the Company has been engaged in
research and development activities, including conducting preclinical studies
and clinical trials, and recruiting its scientific and management personnel,
establishing laboratory facilities and raising capital. The Company has not
received any revenue from the sale of products to date and does not expect to
receive revenues from the sale of products for at least the next several
years.
 
  As of March 31, 1996, the Company had incurred aggregate net losses of
approximately $62.3 million since its inception. The Company expects to
continue to incur significant additional operating losses over the next
several years as its research, development and clinical trial efforts expand.
Operating losses may fluctuate from quarter to quarter as a result of
differences in the timing of expenses incurred and revenues recognized. To
date, the Company's operations have been funded primarily from the sale of
equity securities, which have raised aggregate net proceeds of approximately
$80.8 million.
 
 RESULTS OF OPERATIONS
 
 Quarter ended March 31, 1996 compared with quarter ended March 31, 1995

  During the quarter ended March 31, 1996, the Company received a $3.0 million
non-refundable signing fee from Schering. The Company's agreement with
Schering terminated in April 1996. See "Item 1.--Business--Collaborations."
The Company did not have any operating revenue during the quarter ended
March 31, 1995.
 
  Research and development expenses increased to approximately $3.5 million
for the quarter ended March 31, 1996 from approximately $3.3 million for the
quarter ended March 31, 1995. This increase was primarily due to expanded
research, development and clinical activities with respect to Lisofylline. The
Company expects that research and development expenses will increase
significantly in 1996 and future years as the Company expands its research and
development programs and undertakes additional clinical trials.
 
  General and administrative expenses increased to approximately $1.9 million
for the quarter ended March 31, 1996 from approximately $1.3 million for the
quarter ended March 31, 1995. This increase is primarily due to legal costs
associated with the Schering arrangement discussed above and to operating
expenses associated with supporting the Company's increased research,
development and clinical activities. General and administrative expenses are
expected to increase to support the Company's expected increase in research,
development and clinical trial efforts.
 
  Investment income principally comprises interest income from investment of
the Company's cash reserves. Interest expense results primarily from the
financing of laboratory and other equipment. Investment income net of interest
expense increased to approximately $164,000 for the quarter ended March 31,
1996 from a net interest expense of approximately $(18,000) for the quarter
ended March 31, 1995. This increase was primarily associated with interest
earnings on a higher average balance of cash reserves between the quarters.
 
 Year ended December 31, 1995 compared with year ended December 31, 1994
 
  Revenue from the BioChem Pharma collaboration totalled $100,000 in 1995, all
of which was received in the fourth quarter of 1995. The Company did not have
any operating revenue during 1994.
 
  Research and development expenses decreased to approximately $14.2 million
in 1995 from approximately $14.4 million in 1994. This decrease was primarily
due to a reduction in manufacturing costs associated with Lisofylline. This
decrease was partially offset by costs of approximately $1.2 million incurred
in connection with the purchase of all the intellectual property of Lipomed
Corporation in October 1995, which was accounted for as in-process research
and development expense.
 
 
                                      27

<PAGE>
 
  General and administrative expenses increased to approximately $6.5 million
in 1995 from approximately $5.3 million in 1994. This increase was primarily
due to operating expenses associated with supporting the Company's increased
research, development and clinical activities, including business development,
marketing studies and recruitment of additional personnel.
 
  Investment income net of interest expense increased to approximately
$658,000 in 1995 from approximately $152,000 in 1994. This increase was
associated with interest earnings on a higher average balance of cash reserves
resulting from a private placement of equity securities in 1995.
 
 Year ended December 31, 1994 compared with year ended December 31, 1993
 
  The Company did not have any revenue during 1994 or 1993.
 
  Research and development expenses increased to approximately $14.4 million
in 1994 from approximately $11.9 million in 1993. This increase was primarily
due to employment of additional research staff, increased costs related to
expanded research activities, and preclinical and manufacturing costs
associated with the Company's anti-cancer compound CT-2584. These increased
costs were partially offset by a reduction in preclinical and manufacturing
costs associated with the production of Lisofylline inventory used for
clinical trials.
 
  General and administrative expenses increased to approximately $5.3 million
in 1994 from approximately $4.1 million in 1993. This increase was primarily
due to hiring additional personnel and to operating expenses associated with
supporting the Company's increased research, development and clinical
activities.
 
  Investment income net of interest expense decreased to approximately
$152,000 in 1994 from approximately $586,000 in 1993. This decrease resulted
from a lower average balance of cash reserves during 1994 and increased
interest expense incurred during 1994 in connection with a secured note issued
in September 1993.
 
 LIQUIDITY AND CAPITAL RESOURCES
 
  The Company has financed its operations since inception through the sale of
equity securities, long-term obligations and convertible debt. As of March 31,
1996, the Company had raised aggregate net proceeds of approximately $83.8
million from such financing activities, including $30.5 million from the sale
of Convertible Preferred Stock in 1995, $49.3 million from the sale of Common
Stock in 1992 and 1993, and $850,000 from a bridge loan which was subsequently
converted to equity. In addition, the Company financed the purchase of
approximately $10.3 million of property and equipment through financing
agreements, of which approximately $3.1 million remained outstanding as of
March 31, 1996.
 
  The Company's principal sources of liquidity are its cash balances, cash
equivalents and securities available-for-sale, which totaled approximately
$19.4 million as of March 31, 1996. The Company invests in U.S. government
obligations and other highly rated liquid debt instruments.
 
  The Company expects that its capital requirements will increase as the
Company expands its research and development programs and undertakes
additional clinical trials. In connection with such expansion, the Company
expects to incur substantial expenditures for hiring additional management,
scientific and administrative personnel, for planned expansion of its
facilities, and for the purchase or lease of additional equipment.

  The Company does not expect to generate a positive cash flow from operations
for several years due to substantial additional research and development
costs, including costs related to drug discovery, preclinical testing,
clinical trials, manufacturing costs and operating expenses associated with
supporting such activities. CTI will require substantial funds to conduct its
existing and planned preclinical and clinical trials, to establish
manufacturing and marketing capabilities for any products it may develop, and
to continue research and 
 
                                      28

<PAGE>
 
development activities. CTI's current cash and cash equivalents will not be
sufficient to fund CTI's operations through the commercialization of its first
product. The Company expects that its existing capital resources, together
with the interest earned thereon, will enable the Company to maintain its
current and planned operations at least through the first quarter of 1997. No
assurance can be given that changes will not occur that will consume available
capital resources before such time. The Company will need to raise substantial
additional capital to fund its operations beyond such time. The Company's
future capital requirements will depend on, and could increase as a result of,
many factors, including continued scientific progress in its research and
development programs, the magnitude of such programs, the progress of
preclinical testing and clinical trials, the time and costs involved in
obtaining regulatory approvals, the costs involved in preparing, filing,
prosecuting, maintaining, enforcing and defending patent claims, competing
technological and market developments, the terms of any collaborative
arrangements that the Company may enter into, the ability of the Company to
establish research, development and commercialization arrangements pertaining
to the Company's products, the cost of establishing manufacturing facilities,
the cost of commercialization activities and the demand for the Company's
products if and when approved.
 
  The Company intends to raise additional funds through additional equity or
debt financings, research and development financings, collaborative
relationships, or otherwise. Because of these long-term capital requirements,
CTI may seek to access the public or private equity markets whenever
conditions are favorable, even if it does not have an immediate need for
additional capital at that time. There can be no assurance that additional
financing will be available to CTI, or, if available, that it will be on
acceptable terms. If additional funds are raised by issuing equity securities,
further dilution to stockholders may result. If adequate funds are not
available, the Company may be required to delay, reduce the scope of, or
eliminate one or more of its research, development and clinical activities or
to seek to obtain funds through arrangements with collaborative partners or
others that may require the Company to relinquish rights to certain of its
technologies, product candidates or products that the Company would otherwise
seek to develop or commercialize itself. See "Item 1.--Business--Risk
Factors--History and Continuation of Losses; Early Stage of Development,"
"Item 1.--Business--Risk Factors--Need for Substantial Additional Funds" and
"Item 1.--Business--Risk Factors--Dependence on Others; Collaborators."
   
  On April 26, 1996, CTI filed a registration statement on Form S-1 with the
Securities and Exchange Commission (the "Commission") in connection with a
planned initial public offering (the "Offering") of the Company's Common
Stock. Such registration statement has not been declared effective by the
Commission, and on June 27, 1996 the Company announced that it was postponing
the Offering until further notice.     
 
  At March 31, 1996, the Company had net operating loss carryforwards of
approximately $59.5 million and research and development credit carryforwards
of approximately $1.7 million. These carryforwards begin to expire in 2007.
See Note 10 of Notes to Financial Statements.
 
                                      29

<PAGE>
 
I
TEM 7.CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
 
  The Company was organized in September 1991 by Dr. Bianco, Dr. Singer, Mr.
Bianco and George J. Todaro, M.D. Dr. Bianco, Dr. Singer, Mr. Bianco and Dr.
Todaro purchased 1,038,500 shares, 904,500 shares, 502,500 shares and 904,500
shares of Common Stock, respectively, at $0.01194 per share. In August 1993,
the Company repurchased 211,198 shares of Common Stock from Dr. Todaro for
$2,522.
 
  In December 1993, CTI loaned Dr. Bianco $200,000 at 5.35% annual interest.
The promissory note provides for a single payment of principal and interest on
the earlier of July 1, 1997 or the third anniversary of the effective date of
the initial underwritten public offering of CTI's Common Stock. The loan is
secured by a pledge of shares of Common Stock owned by Dr. Bianco.
 
  CTI has entered into several transactions with D. Blech & Company,
Incorporated, and its affiliates (collectively, "Blech & Co."). David Blech, a
founder and former director of CTI, was the sole stockholder and Chief
Executive Officer of Blech & Co. These transactions include sales agency
agreements in connection with two private placements in which Blech & Co.
served as a sales agent. Pursuant to such agreements, Blech & Co. received
selling commissions of $2,309,863, warrants exercisable for five years to
purchase 617,437 shares of Common Stock and reimbursement for certain expenses
and legal fees. On December 29, 1994, Blech & Co. sold 350,712 of such
warrants to a third party, which warrants were subsequently exchanged for
140,285 shares of Common Stock in connection with CTI's warrant exchange
offer. See "Description of Capital Stock--Warrants." CTI also entered into a
loan agreement pursuant to which Mr. Blech agreed to provide CTI with a line
of credit. The outstanding balance under such line of credit was converted
into 175,184 shares of Common Stock at a price of $5.00 per share in August
1992.
 
  In February 1992, The Edward Blech Trust, of which Mr. Blech's minor son is
the sole beneficiary, purchased 2,700,000 shares of CTI's Common Stock at a
price of $.01194 per share. Mr. Blech disclaims beneficial ownership of the
shares held by this trust. In October 1993, two charitable remainder trusts of
which Mr. Blech is a beneficiary purchased two units as part of a private
placement at a price of $225,000 per unit. Each unit consisted of 25,000
shares of CTI's Common Stock and warrants to purchase 12,500 shares at a price
of $11.00 per share. In January 1995, The Edward Blech Trust transferred
2,700,000 shares of Common Stock to Biotechnology Investment Group, L.L.C.
("BIG"), a Delaware limited liability company managed by Collinson Howe
Venture Partners ("CHVP"). See "Item 4.--Security Ownership of Certain
Beneficial Owners and Management."
 
  On September 22, 1994, Blech & Co. suspended operations because of
noncompliance with the Securities and Exchange Commission's net capital
requirements for broker-dealers. Mr. Blech is not currently a director or
officer of CTI, and neither Mr. Blech nor Blech & Co. has any contractual
relationship with CTI other than as a stockholder.
 
  CTI entered into a consulting agreement with David H. Smith, M.D. on
February 18, 1992. Pursuant to the agreement, Dr. Smith agreed to serve as
Chairman of the Board of Directors for two consecutive one-year terms, if
elected. In June 1994, CTI and Dr. Smith agreed to extend the consulting
agreement until such time as either party may choose to terminate it on 30
days' written notice. This agreement was terminated upon Dr. Smith's
resignation from the Board of Directors on January 1, 1996. The agreement also
provided for Dr. Smith to provide CTI with advisory services beyond his duties
as chairman. Dr. Smith did not receive any compensation for his agreement to
serve as a consultant. CTI entered into a stock subscription agreement with
Dr. Smith in February 1992 pursuant to which Dr. Smith purchased 400,000
shares of Common Stock at a price of $.01194 per share. Pursuant to the
subscription agreement, CTI issued to Dr. Smith, on August 11, 1992, five-year
warrants to purchase 200,000 additional shares of Common Stock at $5.00 per
share with the same registration rights as were granted to the sales agents in
connection with the 1992 Private Placement. Dr. Smith exchanged such warrants
for 80,000 shares of Common Stock in connection with CTI's warrant exchange
offer. See "Item 11.--Description of Registrant's Securities to be
Registered--Warrants." In April 1992, Dr. Smith purchased 625,000 shares of
CTI's Common Stock at a price of $3.20 per share. In October 1993, Dr. Smith
purchased
 
                                      30

<PAGE>
 
50,000 shares of Common Stock at $9.00 per share and warrants to purchase
25,000 shares of Common Stock at $11.00 per share. In March 1995, Dr. Smith
purchased 4,477.6122 shares of Convertible Preferred Stock, for an aggregate
purchase price of $1,500,000, in the Company's 1995 Private Placement.
 
  In March 1995, an affiliate of Mr. Curnock Cook and Rothschild Asset
Management Limited purchased 22,388,061 shares of Convertible Preferred Stock,
for an aggregate purchase price of $7,500,000, in the Company's 1995 Private
Placement. The holders of the outstanding shares of Convertible Preferred
Stock voting as a separate class are entitled to elect one Director to the
Board of Directors. At the 1996 Annual Meeting of Stockholders Mr. Curnock
Cook was elected as a Director by the holders of the outstanding shares of
Convertible Preferred Stock voting as a separate class.
   
  In March 1995, Kummell Investments Limited ("Kummell") purchased 14,925.374
shares of Convertible Preferred Stock, for an aggregate purchase price of
$5,000,000, in the 1995 Private Placement. In June 1995, Kummell purchased an
additional 12,686.5672 shares of Convertible Preferred Stock for an aggregate
purchase price of $4,250,000. In connection with the June 1995 transaction,
the Company agreed that it would take all necessary action to nominate a
designee of Kummell to serve as a Director until the 1996 Annual Meeting of
Stockholders. In July 1995, the Company nominated Mr. Morris, as a designee of
Kummell, to the Board of Directors to serve until the 1996 Annual Meeting of
Stockholders. Mr. Morris is the Chief Executive Officer of Morningside
Ventures, which coordinates and manages a private venture capital portfolio
for Kummell.     
 
  In May 1994, CTI entered into an employment agreement with Dr. Schwarz. The
agreement provides that in connection with his relocation, Dr. Schwarz be
reimbursed for capital loss on the sale of his former residence in the form of
a forgivable loan in an amount not to exceed $150,000. The loan shall be
forgiven in three annual installments, subject to Dr. Schwarz's continued
employment with CTI, with any unforgiven portion becoming immediately due and
payable within six months of any termination of Dr. Schwarz's employment. See
"Item 6.--Executive Compensation--Employment Agreements."
 
  In December 1995, Dr. Link purchased 20,000 shares of Common Stock for an
aggregate purchase price of $67,000.
       
       
                                      31

<PAGE>
 
                                   SIGNATURES
 
  Pursuant to the requirements of Section 12 of the Securities Exchange Act of
1934, the Registrant has duly caused this Registration Statement to be signed
on its behalf by the undersigned, thereto duly authorized.
 
                                          Cell Therapeutics, Inc.
Dated: June 27, 1996     
 
                                                 /s/ James A. Bianco, M.D.
                                          By: _________________________________
                                              James A. Bianco, M.D. President
                                                and Chief Executive Officer
 
                                       32