<PAGE>
 
   AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 31, 1997
                                                      REGISTRATION NO. 333-
 
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
 
                      SECURITIES AND EXCHANGE COMMISSION
                            WASHINGTON, D.C. 20549
                                 -----------
                                   FORM S-1
                            REGISTRATION STATEMENT
                                     UNDER
                          THE SECURITIES ACT OF 1933
                                 -----------
                            CELL THERAPEUTICS, INC.
            (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
                                 -----------
       WASHINGTON                    2384                    91-1533912
    (STATE OR OTHER           (PRIMARY STANDARD           (I.R.S. EMPLOYER
    JURISDICTION OF               INDUSTRIAL             IDENTIFICATION NO.)
    INCORPORATION OR         CLASSIFICATION CODE
     ORGANIZATION)                 NUMBER)
                                 -----------
                      201 ELLIOTT AVENUE WEST, SUITE 400
                           SEATTLE, WASHINGTON 98119
                                (206) 282-7100
  (ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
                   REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
                                 -----------
                                JAMES A. BIANCO
                     PRESIDENT AND CHIEF EXECUTIVE OFFICER
                            CELL THERAPEUTICS, INC.
                      201 ELLIOTT AVENUE WEST, SUITE 400
                           SEATTLE, WASHINGTON 98119
                                (206) 282-7100
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
                       OF AGENT FOR SERVICE OF PROCESS)
                                 -----------
                                  COPIES TO:
 
          MICHAEL J. KENNEDY                       SCOTT T. SMITH
            MICHAEL S. DORF                       KAREN A. DEMPSEY
          SHEARMAN & STERLING               PILLSBURY MADISON & SUTRO LLP
   555 CALIFORNIA STREET, SUITE 2000             2700 SAND HILL ROAD
    SAN FRANCISCO, CALIFORNIA 94104         MENLO PARK, CALIFORNIA 94025
            (415) 616-1100                         (415) 233-4500
                                 -----------
  APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
                                 -----------
  If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [_]
 
  If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
 
  If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
 
  If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
                                 -----------

                        CALCULATION OF REGISTRATION FEE

<TABLE>
- -------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------
<CAPTION>
                                              PROPOSED       PROPOSED
 TITLE OF EACH CLASS OF        AMOUNT         MAXIMUM        MAXIMUM      AMOUNT OF
    SECURITIES TO BE           TO BE       OFFERING PRICE   AGGREGATE    REGISTRATION
       REGISTERED          REGISTERED (1)  PER SHARE (2)  OFFERING PRICE     FEE
- -------------------------------------------------------------------------------------
 <S>                      <C>              <C>            <C>            <C>
 Common Stock, no par
  value (including
  associated Preferred
  Stock Purchase
  Rights)...............  3,450,000 shares     $16.00      $55,200,000     $16,728
- -------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------
</TABLE>

(1) Includes 450,000 shares which the Underwriters have the option to purchase
    to cover any over-allotments.
(2) Estimated solely for the purpose of calculating the registration fee in
    accordance with Rule 457(a) under the Securities Act.
                                 -----------
 
  THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THE REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------

<PAGE>
 
                            CELL THERAPEUTICS, INC.
 
                             CROSS REFERENCE SHEET
 
                                 ------------
 
                   PURSUANT TO ITEM 501(B) OF REGULATION S-K
                 SHOWING THE LOCATION IN THE PROSPECTUS OF THE
                   INFORMATION REQUIRED BY PART I OF FORM S-1
 

<TABLE>
<CAPTION>
     ITEM NUMBER AND HEADING IN FORM S-
          1 REGISTRATION STATEMENT                  LOCATION IN PROSPECTUS
     ----------------------------------             ----------------------
 <C> <S>                                  <C>
  1.   Forepart of the Registration
        Statement and Outside Front       
        Cover Page of Prospectus.....     Forepart of the Registration Statement and
                                           Outside Front Cover Page of Prospectus    
  2.   Inside Front and Outside Back
        Cover Pages of Prospectus....     Inside Front and Outside Back Cover Pages
                                           of Prospectus
  3.   Summary Information, Risk
        Factors, and Ratio of
        Earnings to Fixed Charges....     Prospectus Summary; Risk Factors
  4.   Use of Proceeds...............     Prospectus Summary; Use of Proceeds
  5.   Determination of Offering          Outside Front Cover Page of Prospectus;
        Price........................      Underwriting
  6.   Dilution......................     Risk Factors; Dilution
  7.   Selling Security Holders......     Not Applicable
  8.   Plan of Distribution..........     Outside Front Cover Page of Prospectus;

                                           Underwriting
  9.   Description of Securities to       
        be Registered................     Outside Front Cover Page of Prospectus;    
                                           Prospectus Summary; Description of Capital
                                           Stock                                      
 10.   Interests of Named Experts and
        Counsel......................     Legal Matters
 11.   Information with Respect to        
        the Registrant...............     Outside and Inside Front Cover Page of     
                                           Prospectus; Prospectus Summary; Risk      
                                           Factors; Use of Proceeds; Dividend Policy;
                                           Capitalization; Dilution; Selected        
                                           Financial Data; Management's Discussion   
                                           and Analysis of Financial Condition and   
                                           Results of Operations; Business;          
                                           Management; Certain Transactions;         
                                           Principal Shareholders; Description of    
                                           Capital Stock; Shares Eligible for Future 
                                           Sale; Consolidated Financial Statements    
 12.   Disclosure of Commission
        Position on Indemnification
        for Securities Act
        Liabilities..................     Not Applicable
</TABLE>


<PAGE>
 
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A         +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE   +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY  +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT        +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR   +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE      +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE    +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF  +
+ANY SUCH STATE.                                                               +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
                 Subject to Completion, Dated February  , 1997
PROSPECTUS
                                3,000,000 Shares
 
                       [LOGO OF CELL THERAPEUTICS, INC.]
                            Cell Therapeutics, Inc.
                                  Common Stock
 
                                   --------
 
  All of the 3,000,000 shares of Common Stock offered hereby (the "Offering")
are being sold by Cell Therapeutics, Inc. ("cti" or the "Company"). Prior to
this Offering, there has been no public market for the Common Stock of the
Company. It is currently estimated that the initial public offering price will
be between $14.00 and $16.00 per share. See "Underwriting" for a discussion of
the factors to be considered in determining the initial public offering price.
Application has been made to have the Common Stock approved for quotation on
the Nasdaq National Market under the symbol "CTIC."
 
  Johnson & Johnson Development Corporation, an existing shareholder and an
affiliate of one of the Company's collaborative partners, has agreed to
purchase a number of shares of Common Stock equal to ten percent of the shares
sold at the closing of this Offering directly from the Company (the "Johnson &
Johnson Stock Purchase") in a private placement at a per share price equal to
the initial public offering price. The Johnson & Johnson Stock Purchase will
not be registered in this Offering, and such shares will be purchased
concurrent with the closing of this Offering. See "Johnson & Johnson Stock
Purchase," "Business--Collaborations" and "Underwriting."
 
  THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK. SEE "RISK
FACTORS," BEGINNING ON PAGE 6.
 
THESE  SECURITIES HAVE NOT BEEN APPROVED  OR DISAPPROVED BY THE  SECURITIES AND
 EXCHANGE  COMMISSION  OR   ANY  STATE  SECURITIES  COMMISSION   NOR  HAS  THE
  SECURITIES  AND EXCHANGE  COMMISSION  OR  ANY  STATE SECURITIES  COMMISSION
   PASSED  UPON   THE  ACCURACY   OR  ADEQUACY   OF  THIS   PROSPECTUS.  ANY
   REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
 
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                            Price to      Underwriting Discounts    Proceeds to
                                             Public         and Commissions(1)       Company(2)
- -----------------------------------------------------------------------------------------------
<S>                                    <C>                <C>                    <C>
Per Share.............................        $                    $                    $
- -----------------------------------------------------------------------------------------------
Total(3)..............................       $                    $                    $
</TABLE>

 
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
1. For information regarding indemnification of the Underwriters, see
   "Underwriting."
2. Before deducting expenses of the Offering payable by the Company, estimated
   at $850,000.
3. The Company has granted the Underwriters an option, exercisable within 30
   days from the date hereof, to purchase up to 450,000 additional shares of
   Common Stock on the same terms as set forth above, solely to cover over-
   allotments, if any. If such option is exercised in full, the total Price to
   Public will be $    , the Underwriting Discounts and Commissions will be
   $     and the Proceeds to the Company will be $    . Including the Johnson &
   Johnson Stock Purchase, the total Proceeds to Company will be $    , or
   $     if the Underwriters over-allotment option is exercised in full. See
   "Underwriting."
 
                                   --------
 
  The shares of Common Stock offered by the Underwriters are subject to prior
sale, receipt and acceptance by them and subject to the right of the
Underwriters to reject any order in whole or in part and to certain other
conditions. It is expected that delivery of such shares will be made through
the offices of UBS Securities LLC, 299 Park Avenue, New York, New York on or
about March  , 1997.
 
                                   --------
 
UBS Securities
         Montgomery Securities
                                                Raymond James & Associates, Inc.
 
March   , 1997

<PAGE>
 
 
 
 
                               [GRAPHIC TO COME]
 
 
                                 ------------
 
  IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVERALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK
OF THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET, IN
THE OVER-THE-COUNTER MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY
BE DISCONTINUED AT ANY TIME.

<PAGE>
 

                               PROSPECTUS SUMMARY
 
  The following summary is qualified in its entirety by the more detailed
information and the Consolidated Financial Statements and Notes thereto
appearing elsewhere in this Prospectus. This Prospectus contains forward-
looking statements which involve risks and uncertainties. The Company's actual
results may differ significantly from the results discussed in these forward-
looking statements. Factors that might cause such a difference include, but are
not limited to, those discussed in "Risk Factors" and "Management's Discussion
and Analysis of Financial Condition and Results of Operations." As used in this
Prospectus, unless otherwise indicated or the context otherwise requires, all
references to "cti" or the "Company" include Cell Therapeutics, Inc. and its
wholly-owned subsidiary, CTI Technologies, Inc. and all references to "Johnson
& Johnson" include Johnson & Johnson and its wholly-owned subsidiaries Ortho
Biotech, Inc., The R.W. Johnson Pharmaceutical Research Institute (a division
of Ortho Pharmaceutical Corporation) and Johnson & Johnson Development
Corporation, or any of such entities, but does not include any other subsidiary
of Johnson & Johnson.
 

                                  THE COMPANY
 
  Cell Therapeutics, Inc. ("cti" or the "Company") focuses on the discovery,
development and commercialization of small molecule drugs for the treatment of
cancer and inflammatory and immune diseases. The Company is conducting Phase
III clinical trials for its lead product candidate, Lisofylline, which is being
developed to prevent or reduce treatment-related toxicities, specifically
infection, mucositis and treatment-related mortality, among cancer patients
receiving high dose radiation and/or chemotherapy. In November 1996 cti entered
into a Collaboration and License Agreement with Johnson & Johnson for the joint
development and commercialization of Lisofylline. Since its inception, the
Company has invested more than $60 million developing its products and building
a unique drug discovery platform based on its proprietary technology in
phospholipid chemistry.
 
Oncology
 
  Cancer is the second leading cause of death in the United States with
approximately 1.4 million new cases diagnosed each year. At some point in their
disease treatment, 70 percent of all cancer patients will receive radiation
therapy and 50 percent of all newly diagnosed cancer patients will receive
chemotherapy. Despite their benefits for treating cancer, there are significant
limitations of, and complications associated with, radiation and chemotherapy
which result in a high rate of treatment failure. The principal causes of
treatment failure include treatment-related toxicities, multidrug resistance
and tumor resistance to radiation. The Company is focusing its oncology
development efforts on a portfolio of drugs that it believes will address the
three principal causes of cancer treatment failure: (i) Lisofylline--a
supportive care agent being investigated to prevent or reduce the incidence of
serious and fatal infections, mucositis (damage to the epithelial cells lining
the mouth, stomach and intestinal tract) and treatment-related mortality among
patients receiving high dose radiation and/or chemotherapy, (ii) CT-2584--a
novel anti-cancer drug under investigation for the treatment of patients with
multidrug resistant tumors and (iii) tumor sensitizing agents being
investigated to enhance sensitivity to radiation among tumors that have deleted
or mutated tumor suppression genes.
 
  Lisofylline. Lisofylline is a synthetic small molecule drug in Phase III
clinical trials among cancer patients receiving high dose radiation and/or
chemotherapy. Unlike blood cell growth factors or chemotherapy protecting
agents, Lisofylline is being developed to prevent or reduce the incidence of
serious and fatal infections, mucositis and treatment-related mortality. More
than 400 people have participated in over 15 clinical trials of Lisofylline to
date. The Company has completed a Phase II trial in which Lisofylline resulted
in a statistically significant reduction in mortality and the incidence of
serious and fatal infections in cancer patients undergoing high dose radiation
and/or chemotherapy followed by bone marrow transplantation ("BMT"). Based on
the results of this trial, in the third quarter of 1996 the Company initiated a
pivotal Phase III trial to more fully assess the safety and effectiveness of
Lisofylline. The Company is also conducting Phase II and Phase III trials to
investigate
 
                                       3

<PAGE>
 
the effects of Lisofylline on the incidence of infection and mortality among
patients with newly diagnosed acute myelogenous leukemia ("AML") undergoing
high dose induction chemotherapy. Lisofylline is also being developed to
prevent or reduce severe mucositis, for which cti is planning to commence a
Phase II/III trial in the second half of 1997.
 
  CT-2584. CT-2584 is cti's novel small molecule drug under investigation for
the treatment of patients with multidrug resistant cancers, including sarcomas,
prostate, colon, lung and breast cancer. The Company initiated parallel Phase I
trials at the Christie Hospital in the United Kingdom in November 1995 and at
the Memorial Sloan Kettering Cancer Research Center in the United States in May
1996 for patients with advanced cancers. More than 20 patients have been
treated with CT-2584 as of January 1, 1997 at four different dose levels
without exhibiting bone marrow or gastrointestinal toxicity. Based on
preliminary results from these trials, the Company currently anticipates
starting disease-specific Phase II trials in the United States in the second
half of 1997.
 
Inflammatory Disease
 
  The Company believes that, in addition to its oncology applications,
Lisofylline may be effective as an agent to prevent or reduce the incidence and
severity of acute lung injury ("ALI") and mortality among patients requiring
mechanical ventilation for respiratory failure following pneumonia, multiple
traumatic injuries or sepsis. The Company has completed a Phase II feasibility
study in patients suffering from septic shock. In January 1997 the National
Heart, Lung and Blood Institute notified the Company that it had selected
Lisofylline for investigation in a Phase II/III trial among patients
experiencing ALI. This trial is expected to begin in the second half of 1997.
 
Corporate Collaboration
 
  In November 1996 the Company entered into a Collaboration and License
Agreement with Ortho Biotech, Inc. and The R.W. Johnson Pharmaceutical Research
Institute (a division of Ortho Pharmaceutical Corporation), each of which are
wholly-owned subsidiaries of Johnson & Johnson (collectively, "Johnson &
Johnson"), for the joint development and commercialization of Lisofylline.
Johnson & Johnson has committed to fund 60 percent of cti's budgeted
development expenses. The Company and Johnson & Johnson will co-promote
Lisofylline in the United States, and each will share equally in any resulting
operating profits and losses. Johnson & Johnson will make additional payments
to, and equity investments in, cti if certain milestones are achieved in the
development and commercialization of Lisofylline. Johnson & Johnson has the
exclusive right to develop and market Lisofylline, at its own expense, for
markets other than the United States and Canada, subject to specified royalty
payments to cti. At signing, Johnson & Johnson paid a $5.0 million license fee
to and made a $5.0 million equity investment in cti, and has agreed to
purchase, concurrent with the closing of this Offering, a number of shares of
Common Stock equal to ten percent of the shares sold at the closing of this
Offering.
 
  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.
 
                                  ------------
 
  Except as otherwise specified, all information in this Prospectus assumes (i)
no exercise of the Underwriters' over-allotment option, (ii) a 1-for-3 1/2
reverse stock split of the Common Stock which will be effected prior to the
effective date of this Offering, (iii) the sale of 300,000 shares of Common
Stock to Johnson & Johnson concurrent with the closing of this Offering at an
assumed price of $15.00 per share, and (iv) the automatic conversion of all of
the outstanding shares of the Company's Series A Convertible Preferred Stock
and Series B Convertible Preferred Stock (collectively, the "Convertible
Preferred Stock") upon the closing of this Offering. See "Underwriting,"
"Johnson & Johnson Stock Purchase" and "Description of Capital Stock."
 
  cti(R) is a registered trademark of the Company. This Prospectus contains
trademarks and service marks of companies other than cti.
 
                                       4

<PAGE>
 
                                  THE OFFERING
 

<TABLE>
 <C>                                                   <S>
 Common Stock Offered by the Company.................   3,000,000 shares
 Johnson & Johnson Stock Purchase....................     300,000 shares (1)
 Common Stock Outstanding after this Offering........  12,846,824 shares (2)
 Use of Proceeds.....................................  For clinical trials and other
                                                       research and development activities,
                                                       general corporate purposes and
                                                       working capital. See "Use of
                                                       Proceeds."
 Proposed Nasdaq National Market Symbol..............  CTIC
</TABLE>

 
                      SUMMARY CONSOLIDATED FINANCIAL DATA
                     (in thousands, except per share data)

<TABLE>
<CAPTION>
                                                              PERIOD FROM
                                                             SEPTEMBER 4,
                                                             1991 (DATE OF
                               YEARS ENDED DECEMBER 31,     INCORPORATION)
                              ----------------------------  TO DECEMBER 31, 
                                1994      1995      1996         1996
                              --------  --------  --------  ---------------
<S>                           <C>       <C>       <C>       <C>             
CONSOLIDATED STATEMENTS OF
 OPERATIONS DATA:
Revenues....................  $    --   $    100  $  9,121     $  9,221
Research and development ex-
 pense......................    14,368    14,606    16,109       60,871
General and administrative
 expense....................     5,283     6,144     7,602       24,743
                              --------  --------  --------     --------
  Total operating expenses..    19,651    20,750    23,711       85,614
Loss from operations........   (19,651)  (20,650)  (14,590)     (76,393)
Other income (expense)......       152       658       662        2,321
                              --------  --------  --------     --------
Net loss....................  $(19,499) $(19,992) $(13,928)    $(74,072)
                              ========  ========  ========     ========
Pro forma net loss per
 share(3)...................                      $  (1.63)
                                                  ========
Shares used in computation
 of pro forma net loss per
 share......................                         8,527
</TABLE>


<TABLE>
<CAPTION>
                                                         DECEMBER 31, 1996
                                                       -----------------------
                                                       ACTUAL   AS ADJUSTED(4)
                                                       -------  --------------
<S>                                                    <C>      <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash, cash equivalents and securities available-for-
 sale................................................. $30,987     $ 76,487
Working capital.......................................  26,300       71,800
Total assets..........................................  37,002       82,502
Long-term obligations, less current portion...........   2,005        2,005
Deficit accumulated during development stage.......... (74,083)     (74,083)
Total shareholders' equity............................  30,053       75,553
</TABLE>

 
- --------
 
(1) Johnson & Johnson has agreed to purchase a number of shares of Common Stock
    equal to ten percent of the shares sold at the closing of this Offering
    directly from the Company in a private placement that will occur concurrent
    with the closing of this Offering (the "Johnson & Johnson Stock Purchase")
    at a per share price equal to the initial per share price to public set
    forth on the cover of this Prospectus. See "Johnson & Johnson Stock
    Purchase."
(2) Excludes (i) 1,208,608 shares of Common Stock issuable upon exercise of
    stock options outstanding as of December 31, 1996 at a weighted average
    exercise price of $11.78 per share and (ii) 77,907 shares of Common Stock
    issuable upon exercise of warrants outstanding as of December 31, 1996 at a
    weighted average exercise price of $19.12 per share. See "Management--Stock
    Option Plans" and "Description of Capital Stock."
(3) Computed on the basis described in Note 1 of Notes to Consolidated
    Financial Statements.
(4) As adjusted to reflect the net proceeds from the sale of the 3,000,000
    shares of Common Stock offered hereby and receipt by the Company of the
    estimated net proceeds therefrom, based upon an assumed initial public
    offering price of $15.00 per share and after deducting estimated
    underwriting discounts and commissions and estimated offering expenses
    payable by the Company. Also adjusted to reflect the Johnson & Johnson
    Stock Purchase. See "Use of Proceeds" and "Johnson & Johnson Stock
    Purchase."
 
                                       5

<PAGE>
 

                                 RISK FACTORS
 
  Prospective investors in the shares of Common Stock offered hereby should
carefully consider the following risk factors, in addition to the other
information contained in this Prospectus. This Prospectus contains forward-
looking statements which involve risks and uncertainties. When used in this
Prospectus, 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 below and in "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
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.
 
  Dependence on Single Drug Candidate. The Company's lead drug candidate is
Lisofylline. A Phase II clinical trial of Lisofylline in cancer patients
undergoing high dose radiation and/or chemotherapy followed by bone marrow
transplantation ("BMT") was completed in the first quarter of 1996, and the
Company initiated a pivotal Phase III trial of Lisofylline for BMT in the
third quarter of 1996. The Company is also conducting ongoing Phase II and
Phase III trials of Lisofylline among patients with newly diagnosed acute
myelogenous leukemia ("AML") undergoing high dose chemotherapy. There can be
no assurance that such Phase III trials will be successfully completed, that
further clinical studies will not be needed, or that any such clinical trials
will lead to FDA approval. Furthermore, there can be no assurance that the
Company will be successful in its efforts to develop Lisofylline for other
indications, including mucositis and inflammatory disease. The remainder of
the Company's drug candidates are still in research and development,
preclinical trials or early stage clinical trials. Any additional product
candidates will require significant research, development, preclinical and
clinical testing, regulatory approval and commitments of resources prior to
commercialization. The Company is, therefore, dependent on the successful
completion of its Phase III trials and filing for and obtaining regulatory
approvals of Lisofylline to generate revenues while it continues the research,
development and regulatory approval processes for its other drug candidates.
Although the Company is currently seeking to develop other drug candidates and
to expand the number of drug candidates it has under development, there can be
no assurance that it will be successful in such development or expansion. If
Lisofylline does not successfully complete clinical testing and meet
applicable regulatory requirements or is not successfully manufactured or
marketed, the Company may not have the financial resources to continue
research and development of other product candidates. See "Risk Factors--No
Assurance of FDA Approval; Comprehensive Government Regulation", "Business--
Products under Development" and "--Collaborations."
 
  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. To date, the Company's resources have been
dedicated primarily to the research and development of potential
pharmaceutical products that the Company believes regulate the production
and/or degradation of phospholipids such as phosphatidic acids ("PAs") or
oxidized lipids such as hydroperoxyoctadeceadieneoic acids ("HPODEs"). The
physiology of cancer, inflammatory and immune disease is complex, and the role
of PAs and HPODEs, and the stress-activated pathways ("SAPs") which they
appear to activate, is not fully known. Although preclinical and clinical data
to date suggest that the species of PAs and HPODEs targeted by the Company's
products under development play an important role in the cellular inflammatory
and injurious response to cell-damaging stimuli such as radiation,
chemotherapy and oxidative injury, there can be no assurance that the
Company's therapeutic approaches are correct or that its drug candidates will
be proven safe or effective. The Company believes that the elevation and
production of PAs and HPODEs and the activation of SAPs do not appear to be
primarily utilized for normal cellular processes, and that the Company's drug
candidates will not substantially interfere with normal cellular processes at
therapeutically-relevant levels. There can be no assurance that the PAs or
HPODEs or the SAPs believed to be targeted by the Company's drug candidates do
not serve a currently unidentified beneficial 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
 
                                       6

<PAGE>
 
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.
 
  No Assurance of Successful Product Development; Uncertainties Related to
Clinical Trials. The Company 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, are currently in clinical trials for certain indications.
However, the results obtained to date in preclinical and clinical studies of
Lisofylline and in preclinical studies and preliminary clinical trial results
of CT-2584 are not necessarily indicative of results that will be obtained
during future clinical testing. A number of companies in the pharmaceutical
industry, including biotechnology companies, have suffered significant
setbacks in advanced clinical trials, even after reporting promising results
in earlier trials. In addition, clinical trial results may be subject to
different interpretations. For example, in February 1996 the Company entered
into an agreement with Schering AG ("Schering") for the development and
commercialization of Lisofylline and CT-2584. This agreement was contingent
upon Schering finding the clinical trial results and related data from the
Company's Phase II BMT trial acceptable. In April 1996 Schering informed the
Company that it did not wish to activate the agreement based on, among other
factors, (i) its view that one of the endpoints of the Phase II 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 "Business--Products under Development--
Oncology" and Note 11 of Notes to Consolidated Financial Statements. There can
be no assurance that the Company and its collaborators will agree on the
interpretation of the Company's future clinical trial results or that the
Company's clinical trials will demonstrate sufficient safety and efficacy
necessary to obtain the requisite regulatory clearance or will result in
marketable products.
 
  The Company's research and development programs for products other than
Lisofylline and CT-2584 are at an early stage of development. 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. 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.
 
  The rate of completion of the Company's clinical trials is dependent upon,
among other factors, the rate of patient enrollment. Patient enrollment is a
function of many factors, including the size of the patient population, the
nature of the protocol, the proximity of patients to clinical sites and the
eligibility criteria for the study. Delays in planned patient enrollment may
result in increased costs, delays or termination of clinical trials, which
could have a material adverse effect on the Company's business, financial
condition and results of operations. There can be no assurance that the
Company will be able to submit a new drug application as scheduled if clinical
trials are completed, or that any such application will be reviewed and
cleared by the FDA in a timely manner, or at all.
 
  There can be no assurance that unacceptable toxicities or side effects will
not occur at any dose level at any time in the course of toxicological studies
or of clinical trials of the Company's potential products. The appearance of
any such unacceptable toxicities or side effects in toxicology studies or in
clinical trials could cause the Company or regulatory authorities to
interrupt, limit, delay or abort the development of any of the Company's
potential products and could ultimately prevent their clearance by the FDA or
foreign regulatory authorities for any or all targeted indications. Even after
being cleared by the FDA or foreign regulatory authorities, a product may
later be shown to be unsafe or to not have its purported effect, thereby
preventing
 
                                       7

<PAGE>
 
widespread use or requiring withdrawal from the market. There can be no
assurance that any potential products under development by the Company will be
safe or effective when administered to patients.
 
  History and Continuation of Losses; Early Stage of Development. The Company
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. The Company has
incurred net losses since inception and had an accumulated deficit of
approximately $74.1 million as of December 31, 1996. These losses are
primarily attributable to research and development efforts, including
preclinical studies and clinical trials.
 
  To date, the Company's operations have been funded primarily through the
sale of equity securities, which has raised aggregate net proceeds of
approximately $103.0 million. The Company expects that its revenue sources for
at least the next several years will consist primarily of future expense
reimbursements and milestone payments under its collaboration agreements with
Johnson & Johnson and with an affiliate of BioChem Pharma, Inc. ("BioChem
Pharma"), and of interest income.
 
  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. The Company 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. The Company 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, since cti does not currently have any
marketable products, it 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 "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
 
  Need for Substantial Additional Funds. The Company 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. The Company
expects that its existing capital resources, together with the net proceeds of
this Offering and the Johnson & Johnson Stock Purchase and the interest earned
thereon, combined with anticipated funding from Johnson & Johnson under the
Collaboration Agreement, will enable the Company to maintain its current and
planned operations at least through the end of 1998. Furthermore, the Company
will need to raise substantial additional capital to fund its operations
beyond such time. See "--Reliance on Relationship with Johnson & Johnson,"
"Use of Proceeds," "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Business--Collaborations."
 
  The Company's future capital requirements will depend on, and could increase
as a result of, many factors, including the continuation of the collaboration
with Johnson & Johnson, 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, changes in collaborative relationships, the terms of
any additional collaborative arrangements that the Company may enter into, the
ability of the Company to establish research, development and
commercialization arrangements pertaining to products other than those covered
by existing collaborative arrangements, 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
 
                                       8

<PAGE>
 
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 shareholders 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 "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources."
 
  Reliance on Relationship with Johnson & Johnson. The Company is dependent on
the future payments from Johnson & Johnson to continue the development and
commercialization of Lisofylline as presently planned. Under the terms of the
Collaboration and License Agreement (the "Collaboration Agreement") between
Johnson & Johnson and the Company, Johnson & Johnson has committed to fund 60
percent of cti's budgeted development expenses incurred in connection with
obtaining regulatory approval for Lisofylline in the United States. Johnson &
Johnson will be responsible for obtaining regulatory approval for Lisofylline
outside of the United States and Canada at its own expense. Although cti and
Johnson & Johnson will co-promote Lisofylline in the United States, Johnson &
Johnson will have primary responsibility for commercializing Lisofylline.
There can be no assurance that Johnson & Johnson will be able to establish
effective sales and distribution capabilities or will be successful in gaining
market acceptance for Lisofylline or that Johnson & Johnson will devote
sufficient resources to the commercialization of products under the
Collaboration Agreement.
 
  Although Johnson & Johnson has committed to fund up to $12.0 million of
cti's budgeted development expenses for each of the calendar years 1997 and
1998, Johnson & Johnson may terminate the Collaboration Agreement at any time
based upon material safety or tolerability issues related to Lisofylline upon
30 days' notice, and for any reason after November 8, 1997, subject to a six
month notice period. Johnson & Johnson would have no further obligation to
fund cti's development expenses related to Lisofylline following such
termination, however, the financial and other obligations of Johnson & Johnson
(other than Johnson & Johnson's obligation to make additional payments to, and
equity investments in, cti if certain development milestones are achieved)
would continue during such six month notice period. If Johnson & Johnson were
to terminate its participation in the Collaboration Agreement, the Company
would not be able to continue the development of Lisofylline as presently
planned, and the Company's financial condition would be materially and
adversely affected. If adequate funds were not then available from other
sources, the Company would be required to delay, reduce the scope of, or
eliminate one or more of its research, development and clinical activities or
seek to obtain funds through arrangements with collaborative partners or
others on terms which may be less favorable to cti than the Collaboration
Agreement. See "--Need for Substantial Additional Funds" and "Business--
Collaborations."
 
  No Assurance of FDA Approval; Comprehensive Government
Regulation. Regulatory approval to market human therapeutics must be obtained
from the FDA and comparable health authorities in foreign countries. This
process requires lengthy and detailed laboratory and clinical testing and
other costly and time-consuming procedures, which must establish that such
therapeutics are safe and efficacious. Obtaining regulatory approval to market
drugs typically takes one or more years after the completion of clinical
trials and the filing of a New Drug Application ("NDA") (with no assurance
that such approval will ever be obtained). The time involved for regulatory
review varies substantially based upon the type, complexity and novelty of the
drug. In addition, delays or rejections may be encountered based upon existing
and changing 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 ever 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
 
                                       9

<PAGE>
 
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 and acceptance of Investigational New Drug
applications ("IND"), continued FDA 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 drug products. Any future FDA or other governmental approval of
drug products developed by cti may entail significant limitations on the
indicated uses for which such products may be marketed. Approved drug 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, cti would be required to adhere to
applicable standards for current Good Manufacturing Practices ("GMP")
prescribed by the FDA, 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. The Company 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 "Business--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 Union ("EU") certain
registration procedures are available to companies wishing to market a product
in more than one EU member state. This foreign regulatory approval process
includes all of the risks associated with FDA approval set forth above. See
"Business--Government Regulation."
 
  Ability to Protect Intellectual Property. The Company'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. The Company 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.
 
                                      10

<PAGE>
 
  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.
 
  The Company is aware of certain patents belonging to third parties that
could be interpreted broadly to compromise the Company's freedom to 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 by cti does not
infringe any valid claim of such third party patents. 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 for such indications, 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.
 
  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. See "Business--Patents and
Proprietary Rights."
 
  Substantial Competition. The Company faces substantial competition from a
variety of sources, both direct and indirect. The Company 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 regulatory approvals. The Company also competes with
companies that have substantially greater capital, research and development,
manufacturing, marketing and sales capabilities. Moreover, certain academic
institutions, governmental agencies and other public and private 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
 
                                      11

<PAGE>
 
the commercial applicability of genetic engineering technologies and organic
chemistry. There can be no assurance that the Company's competitors will not
develop more effective or more affordable products or achieve earlier patent
protection or product commercialization than cti. See "Business--Competition."
 
  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
internal facilities for the manufacture of any of its products for clinical or
commercial production. The Company currently relies on third parties to
manufacture compounds for preclinical testing and clinical trials. The Company
has recently entered into a manufacture and supply agreement with ChiRex, Ltd.
("ChiRex") for the manufacture and supply of Lisofylline bulk drug and
corresponding intermediates for the Company's requirements for ongoing and
future clinical trials and commercial requirements during launch and
commercialization. Under the terms of the Collaboration Agreement with Johnson
& Johnson, the Company will be responsible for the manufacture of Lisofylline
for development and commercialization purposes until November 8, 1999.
Thereafter, Johnson & Johnson will assume responsibility for the manufacture
of Lisofylline. However, Johnson & Johnson may elect to assume responsibility
for the manufacture of Lisofylline at any time prior to such date. Lisofylline
has never been manufactured on a commercial scale, and no assurance can be
given that the Company, together with Johnson & Johnson will be able to make
the transition to commercial production. The Company 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 other third parties such as ChiRex
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 Johnson & Johnson and
contract manufacturers including ChiRex to comply with such procedures and
regulations. There can be no assurance that Johnson & Johnson or these
manufacturers will meet the Company's requirements for quality, quantity or
timeliness. See "Business--Manufacturing."
 
  Absence of Sales and Marketing Organization. The Company has no experience
in marketing, sales 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. To this end,
the Company has entered into a collaboration with Johnson & Johnson which
permits cti to co-promote Lisofylline with Johnson & Johnson in the United
States while providing that Johnson & Johnson will have primary responsibility
for commercializing Lisofylline. If the Company develops additional products
with commercial potential outside of the Johnson & Johnson collaboration, cti
may need to develop marketing and additional sales resources, 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, Johnson & Johnson or, to the extent the Company enters into any
commercialization arrangements with any other third parties, such other third
parties, will establish adequate sales and distribution capabilities or be
successful in gaining market acceptance for products.
 
  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 or other rights to third parties in exchange
for royalties, milestone development payments or other payments. There can be
no assurance that any such additional arrangements will be established. If the
Company is not able to establish such arrangements, it would encounter delays
in introducing its products into certain markets. 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 "Business--Marketing."
 
                                      12

<PAGE>
 
  Management of Growth. The Company's success will depend in part on its
ability to expand its operations as the Company begins to commercialize its
potential drug products. Such growth is expected to place a significant strain
on the Company's managerial, operational and financial resources. The
Company's ability to manage growth effectively will require it to continue to
implement and improve its operational and financial systems and to expand,
train and manage its employee base. These demands are expected to require the
addition of new management personnel and the development of additional
expertise by existing management personnel. There can be no assurance that the
Company will be able to effectively manage the expansion of its operations,
that its systems, procedures or controls will be adequate to support the
Company's operations or that Company management will be able to exploit
opportunities for the Company's products or proprietary technology. There can
be no assurance that the Company will be successful in adding technical
personnel as needed to meet the staffing requirements of the Company's
collaboration with Johnson & Johnson or any additional collaborative
relationships into which the Company may enter. An inability to manage growth,
if any, could have a material adverse effect on the Company's business,
results of operations, financial condition and cash flow.
 
  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. 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
"Business--Human Resources" and "Management."
 
  Product Liability; Insurance. The Company'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 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 clinical trials 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
reasonable 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 health care 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
 
                                      13

<PAGE>
 
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 would 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.
 
  Concentration of Ownership. Directors and officers of cti, and their
affiliates, beneficially own 1,871,149 shares of the Company's Common Stock
(including shares of Common Stock issuable upon conversion of the Company's
Series A Convertible Preferred Stock and shares of Common Stock subject to
options or warrants exercisable or convertible within 60 days of January 15,
1997) representing approximately 19.16% 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
"Principal Shareholders."
 
  No Prior Public Market; Likely Volatility of Stock Price. Prior to the
Offering, there has been no public market for the Common Stock, and there can
be no assurance that a liquid trading market for the Common Stock will develop
or, if one develops, that it will be sustained after the Offering. The initial
public offering price of the Common Stock will be determined by negotiations
among the Company and the representatives of the Underwriters and may not be
indicative of the prices that will prevail in the public market. See
"Underwriting." Future trading prices of the Common Stock will depend on many
factors, including, among other things, the Company's operating results and
the market for similar securities. 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 or
others of results of preclinical testing and clinical trials, developments or
disputes concerning patent or other proprietary rights, developments in the
Company's relationships with Johnson & Johnson or future collaborative
partners, acquisitions, litigation, changes in reimbursement policies, adverse
legislation, regulatory decisions, releases of reports by security analysts,
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 after this Offering could adversely affect
the market price of the shares of Common Stock. Of the 12,846,824 shares of
Common Stock to be outstanding upon completion of this Offering and the
Johnson & Johnson Stock Purchase, the 3,000,000 shares offered hereby (plus
any additional shares sold upon exercise of the Underwriters' over-allotment
option) will be freely transferable without restrictions under the Securities
Act of 1933, as amended (the "Securities Act"), unless they are held by
"affiliates" of the Company, as that term is used under the Securities Act and
the regulations promulgated thereunder. Taking into consideration the effect
of certain "lock-up" agreements
 
                                      14

<PAGE>
 
entered into by all officers, directors and certain other shareholders of the
Company, an additional           shares which have been held by non-affiliates
for more than three years will be eligible for immediate sale in the public
market without restriction, and an additional         shares will become
eligible for sale beginning approximately 90 days after the Effective Date,
subject to the provisions of Rules 144 and 701 under the Securities Act.
Shareholders of the Company holding in the aggregate approximately     shares
of Common Stock have agreed, pursuant to certain "lock-up" agreements, not to
sell or otherwise dispose of such shares for a period of 180 days after the
Effective Date without the prior written consent of UBS Securities LLC. At the
end of such 180-day period, approximately     shares of Common Stock will be
eligible for immediate sale in the public market without restrictions. The
remaining         shares of Common Stock will have been held for less than two
years upon the expiration of such lock-up agreements 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. In addition, holders of stock
options and warrants convertible or exercisable for an aggregate of     shares
of Common Stock have entered into 180-day lock-up agreements and     of such
shares may be sold 180 days after the Effective Date upon exercise. The
Company intends to file one or more registration statements on Form S-8
enabling certain option holders to sell shares for which options are
exercisable upon the expiration of the lock-up agreements. The Company is
obligated to register approximately 5,473,688 shares of Common Stock and
warrants to purchase 77,907 shares of Common Stock for sale to the public
beginning 180 days after the closing of this Offering. See "Management--Stock
Option Plans," "Description of Capital Stock--Registration Rights," "Shares
Eligible for Future Sale" and "Underwriting."
 
  Anti-Takeover Provisions; Possible Issuance of Preferred Stock; Rights
Plan. The Company's Restated Articles of Incorporation and Bylaws contain
provisions that may make it more difficult for a third party to acquire, or
discourage acquisition bids for, cti. These provisions could limit the price
that certain investors might be willing to pay in the future for shares of
Common Stock. In addition, shares of the Company's preferred stock may be
issued in the future without further shareholder approval and upon such terms
and conditions, and having such rights, privileges and preferences, as the
Board of Directors may determine. The rights of the holders of Common Stock
will be subject to, and may be adversely affected by, the rights of any
holders of preferred stock that may be issued in the future. The issuance of
preferred stock, while providing desirable flexibility in connection with
possible acquisitions and other corporate purposes, could have the effect of
making it more difficult for a third party to acquire, or discouraging a third
party from acquiring, a majority of the outstanding voting stock of cti. The
Company has no present plans to issue any shares of preferred stock. In
addition, the Company has adopted a Rights Agreement that, along with certain
provisions of the Company's Restated Articles of Incorporation, have the
effect of discouraging certain transactions involving a change of control of
the Company. See "Description of Capital Stock."
 
  Dilution. There will be immediate, substantial dilution of the shares of
Common Stock purchased pursuant to this Offering. Based upon an assumed
initial public offering price of $15.00 per share, new investors purchasing
shares of Common Stock pursuant to this Offering will experience immediate
dilution of $9.12 per share. See "Dilution."
 
                                      15

<PAGE>
 

                                USE OF PROCEEDS
 
  The net proceeds to the Company from the sale of the 3,000,000 shares of
Common Stock offered hereby are estimated to be approximately $41.0 million
($47.3 million if the Underwriters' over-allotment option is exercised in
full), assuming an initial public offering price of $15.00 per share and after
deducting estimated underwriting discounts and commissions and estimated
offering expenses payable by the Company. In addition, the proceeds to the
Company from the Johnson & Johnson Stock Purchase are estimated to be
approximately $4.5 million. See "Johnson & Johnson Stock Purchase." The
combined net proceeds to the Company from this Offering and the Johnson &
Johnson Stock Purchase are estimated to be $45.5 million ($   million if the
Underwriters' over-allotment option is exercised in full), after deducting
estimated underwriting discounts and commissions and estimated expenses
payable by the Company.
 
  The Company intends to use the substantial majority of the net proceeds of
this Offering and the Johnson & Johnson Stock Purchase to fund its research
and development activities with respect to the Company's Lisofylline and CT-
2584 programs, including preclinical testing, clinical trials and process
development activities, and to fund other research and development activities.
The amounts actually expended for research and development activities and the
timing of such expenditures will depend upon numerous factors, including the
progress of the Company's research and development programs, the results of
preclinical and clinical trials, the timing of regulatory submissions and
approvals, if any, technological advances, determinations as to the commercial
potential of the Company's compounds, and the status and timing of competitive
products. The amount of expenditures will also depend upon the continued
participation of Johnson & Johnson in the Collaboration Agreement, the timing
and availability of alternative methods of financing the Company's research
and development activities and preclinical and clinical trials, and the
establishment of collaborative agreements with other companies. In addition,
the Company's research and development expenditures will vary as product
development programs are added, expanded or discontinued. A variety of other
factors, some of which are beyond the Company's control, could affect the
application of the proceeds.
 
  The balance of the net proceeds of this Offering and the Johnson & Johnson
Stock Purchase is expected to be used to improve facilities, to purchase
capital equipment and for general corporate purposes. The Company has not
identified precisely the amount it plans to spend on these specific programs
or the timing of such expenditures. Pending such uses, the Company intends to
invest the net proceeds from this Offering and the Johnson & Johnson Stock
Purchase in U.S. government obligations and other highly rated liquid debt
instruments. The Company may also from time to time consider the acquisition
of other companies, technologies or products that complement the business of
the Company, although no agreements or understandings are in effect with
respect to any such transactions at this time. See "Risk Factors--Need for
Substantial Additional Funds" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
 
                       JOHNSON & JOHNSON STOCK PURCHASE
 
  In connection with the execution of the Collaboration Agreement, Johnson &
Johnson Development Corporation ("JJDC"), a wholly-owned subsidiary of Johnson
& Johnson, has granted to the Company an option (the "Johnson & Johnson
Option") to sell to JJDC a number of shares of Common Stock equal to not more
than ten percent of the number of shares of Common Stock sold by cti at the
closing of this Offering, at a price per share equal to the initial per share
price to public set forth on the cover of this Prospectus. The Company has
exercised the Johnson & Johnson Option in full, and JJDC is committed to
purchase, in a private placement that will occur concurrent with the closing
of this Offering, 300,000 shares of Common Stock at an aggregate purchase
price of $4.5 million, assuming the sale of 3,000,000 shares of Common Stock
at the closing of this Offering at an initial public offering price of $15.00
per share. Upon the closing of this Offering and the Johnson & Johnson Stock
Purchase, JJDC will own approximately 5.65% of the Common Stock. The closing
of this Offering is not conditioned upon the closing of the Johnson & Johnson
Stock Purchase.
 
 
                                      16

<PAGE>
 

                                DIVIDEND POLICY
 
  The Company has not declared or paid any cash dividends on its capital stock
since its inception. The Company currently intends to retain all of its cash
and any future earnings to finance the growth and development of its business
and therefore does not anticipate paying any cash dividends in the foreseeable
future. Any future determination to pay cash dividends will be at the
discretion of the Board of Directors and will be dependent upon the Company's
financial condition, results of operations, capital requirements and such
other factors as the Board of Directors deems relevant.
 

                                CAPITALIZATION
 
  The following table sets forth, at December 31, 1996, (i) the actual
capitalization of the Company; (ii) the pro forma capitalization of the
Company giving effect to the automatic conversion of all outstanding shares of
Convertible Preferred Stock at December 31, 1996 into 4,603,352 shares of
Common Stock upon the closing of this Offering; and (iii) the pro forma
capitalization of the Company as adjusted to reflect the sale of 3,000,000
shares of Common Stock offered hereby and the receipt by the Company of the
estimated net proceeds therefrom (after deducting estimated underwriting
discounts and commissions and estimated offering expenses payable by the
Company and the sale of 300,000 shares of Common Stock pursuant to the Johnson
& Johnson Stock Purchase), in each case assuming an initial public offering
price of $15.00 per share:
 

<TABLE>
<CAPTION>
                                                       DECEMBER 31, 1996
                                                 ------------------------------
                                                                     PRO FORMA
                                                  ACTUAL  PRO FORMA AS ADJUSTED
                                                 -------- --------- -----------
                                                         (in thousands)
<S>                                              <C>      <C>       <C>
Long-term obligations, less current portion..... $  2,005 $  2,005    $ 2,005
Shareholders' equity:
  Preferred stock, 10,000,000 shares authorized
   (of which 146,193.272 shares have been
   designated as Series A Convertible Preferred
   Stock, without par value, 14,925.373 shares
   have been designated as Series B Convertible
   Preferred Stock, without par value, and
   100,000 shares have been designated as Series
   C Preferred Stock, without par value);
   146,193.272 shares of Series A Convertible
   Preferred Stock, 14,925.373 shares of Series
   B Convertible Preferred Stock and no shares
   of Series C Convertible Preferred Stock
   issued and outstanding, actual; no shares of
   preferred stock issued and outstanding, pro
   forma and pro forma as adjusted..............   52,326      --         --
  Common Stock, no par value, 100,000,000 shares
   authorized; 4,943,472 shares issued and
   outstanding, actual; 9,546,824 shares issued
   and outstanding, pro forma; and 12,846,824
   shares issued and outstanding, pro forma as
   adjusted (1).................................   51,810  104,136    149,636
  Deficit accumulated during development stage.. (74,083) (74,083)    (74,083)
                                                 -------- --------    -------
    Total shareholders' equity..................   30,053   30,053     75,553
                                                 -------- --------    -------
    Total capitalization........................ $ 37,002 $ 37,002    $82,502
                                                 ======== ========    =======
</TABLE>

- --------
(1) Excludes (i) 1,208,608 shares of Common Stock issuable upon exercise of
    stock options outstanding as of December 31, 1996 at a weighted average
    exercise price of $11.78 per share and (ii) 77,907 shares of Common Stock
    issuable upon exercise of warrants outstanding as of December 31, 1996 at
    a weighted average exercise price of $19.12 per share. See "Management--
    Stock Option Plans" and "Description of Capital Stock."
 
                                      17

<PAGE>
 
                                   DILUTION
 
  The pro forma net tangible book value of the Company as of December 31,
1996, after giving effect to the Johnson & Johnson Stock Purchase, was
$34,553,720, or approximately $3.51 per share of Common Stock. "Pro forma net
tangible book value per share" represents the amount of the Company's total
tangible assets after giving effect to the Johnson & Johnson Stock Purchase,
less total liabilities, divided by the number of shares of Common Stock
outstanding plus the number of shares sold in the Johnson & Johnson Stock
Purchase and after giving effect to the automatic conversion of all
outstanding shares of Convertible Preferred Stock at December 31, 1996 into
4,603,352 shares of Common Stock upon the closing of this Offering. Net
tangible book value dilution per share represents the difference between the
amount per share paid by purchasers of shares of Common Stock in the Offering
made hereby and the pro forma net tangible book value per share of Common
Stock immediately after completion of the Offering. After giving effect to the
sale by the Company of the 3,000,000 shares of Common Stock offered hereby
(based upon an assumed initial public offering price of $15.00 per share and
after deducting estimated underwriting discounts and commissions and estimated
offering expenses payable by the Company), the pro forma net tangible book
value of the Company as of December 31, 1996 would have been $75,553,720, or
$5.88 per share of Common Stock. This represents an immediate increase in net
tangible book value per share of $2.37 to existing shareholders and an
immediate dilution in net tangible book value of $9.12 per share to investors
in this Offering.
 
  The following table illustrates this per share dilution:
 

<TABLE>
   <S>                                                            <C>   <C>
   Assumed initial public offering price per share...............       $15.00
     Pro forma net tangible book value per share as of December
      31, 1996................................................... $3.51
     Increase per share attributable to investors in this Offer-
      ing........................................................  2.37
                                                                  -----
   Pro forma net tangible book value per share after this Offer-
    ing..........................................................         5.88
                                                                        ------
   Dilution per share to investors in this Offering..............       $ 9.12
                                                                        ======
</TABLE>

 
  The following table summarizes, on a pro forma basis as of December 31,
1996, the total consideration paid and the average price per share paid by
existing shareholders, by Johnson & Johnson pursuant to the Johnson & Johnson
Stock Purchase, and by investors purchasing shares offered hereby. The
calculations in the table with respect to shares of Common Stock purchased by
Johnson & Johnson and investors in this Offering reflect an assumed initial
public offering price of $15.00 per share (before deducting the estimated
underwriting discounts and commissions and estimated offering expenses payable
by the Company).
 

<TABLE>
<CAPTION>
                           SHARES PURCHASED  TOTAL CONSIDERATION
                          ------------------ -------------------- AVERAGE PRICE
                            NUMBER   PERCENT    AMOUNT    PERCENT   PER SHARE
                          ---------- ------- ------------ ------- -------------
<S>                       <C>        <C>     <C>          <C>     <C>
Existing shareholders ..   9,546,824   74.3% $110,816,851   69.1%    $ 11.61
Johnson & Johnson Stock
 Purchase...............     300,000    2.3     4,500,000    2.8       15.00
Investors in this Offer-
 ing....................   3,000,000   23.4    45,000,000   28.1       15.00
                          ----------  -----  ------------  -----
  Total.................  12,846,824  100.0% $160,316,851  100.0%
                          ==========  =====  ============  =====
</TABLE>

 
  The preceding tables assume no exercise of (i) stock options outstanding as
of December 31, 1996 to purchase 1,208,608 shares of Common Stock at a
weighted average exercise price of $11.78 per share and (ii) warrants
outstanding as of December 31, 1996 to purchase 77,907 shares of Common Stock
at a weighted average exercise price of $19.12 per share. If all such options
and warrants were exercised in full, there would be an immediate increase in
pro forma net tangible book value per share after this Offering of $0.58 to
existing shareholders, and the dilution to investors in this Offering would be
$8.54 per share.
 
                                      18

<PAGE>
 
                            SELECTED FINANCIAL DATA
 
  The selected financial data set forth below with respect to the Company's
consolidated statements of operations for each of the three years in the
period ended December 31, 1996 and for the period from September 4, 1991 (date
of incorporation) to December 31, 1996, and with respect to the consolidated
balance sheets at December 31, 1995 and 1996, are derived from the
consolidated financial statements of the Company included elsewhere in this
Prospectus 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 consolidated balance sheet data at December 31, 1992,
1993 and 1994 and the consolidated statement of operations data for the years
ended December 31, 1992 and 1993 are derived from audited financial statements
of the Company not included in this Prospectus. 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 Consolidated Financial
Statements and Notes thereto appearing elsewhere in this Prospectus.
 

<TABLE>
<CAPTION>
                                                                            PERIOD FROM
                                                                           SEPTEMBER 4,
                                                                           1991 (DATE OF
                                  YEARS ENDED DECEMBER 31,                INCORPORATION)
                         -----------------------------------------------  TO DECEMBER 31,
                          1992      1993      1994      1995      1996         1996
                         -------  --------  --------  --------  --------  ---------------
                                      (in thousands, except per share data)
<S>                      <C>      <C>       <C>       <C>       <C>       <C>             
CONSOLIDATED STATEMENTS
 OF OPERATIONS DATA:
Revenues:
  Collaboration
   agreements........... $   --   $    --   $    --   $    100  $  9,121     $  9,221
Operating expenses:
  Research and
   development..........   3,926    11,862    14,368    14,606    16,109       60,871
  General and
   administrative.......   1,661     4,052     5,283     6,144     7,602       24,743
                         -------  --------  --------  --------  --------     --------
    Total operating
     expenses...........   5,587    15,914    19,651    20,750    23,711       85,614
                         -------  --------  --------  --------  --------     --------
Loss from operations....  (5,587)  (15,914)  (19,651)  (20,650)  (14,590)     (76,393)
Other income (expense):
  Investment income.....     292       723       616     1,167     1,174        3,974
  Interest expense......     (29)     (137)     (464)     (509)     (512)      (1,653)
                         -------  --------  --------  --------  --------     --------
Net loss................ $(5,324) $(15,328) $(19,499) $(19,992) $(13,928)    $(74,072)
                         =======  ========  ========  ========  ========     ========
Pro forma net loss per
 share (1)..............                                        $  (1.63)
                                                                ========
Shares used in computa-
 tion of pro forma net
 loss per share.........                                           8,527
</TABLE>

 

<TABLE>
<CAPTION>
                                             DECEMBER 31,
                              -----------------------------------------------
                                1992      1993     1994      1995      1996
                              --------  --------  -------  --------  --------
                                            (in thousands)
<S>                           <C>       <C>       <C>      <C>       <C>
CONSOLIDATED BALANCE SHEETS
 DATA:
Cash, cash equivalents and
 securities available-for-
 sale........................ $ 28,648  $ 27,452  $ 9,131  $ 21,906  $ 30,987
Working capital..............   27,563    23,387    4,094    18,342    26,300
Total assets.................   33,422    35,230   17,278    28,048    37,002
Long-term obligations, less
 current portion.............      319     3,635    2,620     2,606     2,005
Deficit accumulated during
 development stage...........   (5,324)  (20,652) (40,151)  (60,119)  (74,083)
Total shareholders' equity...   31,851    28,848   10,051    21,858    30,053
</TABLE>

 
- --------
(1) See Note 1 of Notes to Consolidated Financial Statements for information
    concerning the computation of pro forma net loss per share.
 
                                      19

<PAGE>
 

                    MANAGEMENT'S DISCUSSION AND ANALYSIS OF
                 FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
  This Prospectus contains forward-looking statements which involve risks and
uncertainties. When used in this Prospectus, 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 below and in "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.
 
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.
 
  In the fourth quarter of 1995 the Company began to receive revenue under a
collaboration agreement with BioChem Pharma, and in the fourth quarter of 1996
the Company began to receive revenue under the Collaboration Agreement with
Johnson & Johnson. The Company expects that its revenue sources for at least
the next several years will consist primarily of future expense reimbursements
and milestone payments under its collaboration agreements with Johnson &
Johnson and BioChem Pharma, and of interest income. The timing and amounts of
such revenues will likely fluctuate. The Company will be required to conduct
significant research, development and clinical activities during the next
several years to fulfill its obligations under the Collaboration Agreement
with Johnson & Johnson. There can be no assurance that Johnson & Johnson will
not terminate the Collaboration Agreement in accordance with its terms. See
"Business--Collaborations."
 
  As of December 31, 1996 the Company had incurred aggregate net losses of
approximately $74.1 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
$103.0 million.
 
RESULTS OF OPERATIONS
 
 Years Ended December 31, 1996 and 1995
 
  During the year ended December 31, 1996 the Company recorded a $5.0 million
non-refundable license fee and $871,000 in development cost reimbursement from
Johnson & Johnson in connection with the Collaboration Agreement and a
$250,000 milestone payment from BioChem Pharma in connection with a
collaboration agreement. The Company also received a $3.0 million non-
refundable signing fee from Schering AG in connection with a collaboration
agreement which was terminated by Schering AG in April 1996. See "Risk
Factors--No Assurance of Successful Product Development; Uncertainties Related
to Clinical Trials" and Note 11 of Notes to Consolidated Financial Statments.
During the year ended December 31, 1995 the Company received a milestone
payment of $100,000 under the collaboration agreement with BioChem Pharma. See
"Business--Collaborations."
 
  Research and development expenses increased to approximately $16.1 million
for the year ended December 31, 1996 from approximately $14.6 million for the
year ended December 31, 1995. This increase was primarily due to expanded
manufacturing, preclinical and clinical-related development activities with
respect to Lisofylline, which
 
                                      20

<PAGE>
 
increase 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. The Company expects that research and development
expenses will increase significantly in future years as the Company expands
its research and development programs and undertakes additional clinical
trials, including research, development and clinical activities undertaken
pursuant to the Collaboration Agreement with Johnson & Johnson.
 
  General and administrative expenses increased to approximately $7.6 million
for the year ended December 31, 1996 from approximately $6.1 million for the
year ended December 31, 1995. This increase was primarily due to transaction
costs associated with the collaboration agreement with Schering AG, which was
terminated by Schering AG in April 1996, transaction costs associated with the
Collaboration Agreement with Johnson & Johnson, offering costs associated with
the Company's withdrawn registration statement in 1996, and 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 was
approximately $1.2 million for each of the years ended December 31, 1996 and
1995, as average cash balances and interest earned thereon was little changed
between years. Interest expense was approximately $500,000 for both the year
ended December 31, 1996 and 1995.
 
 Years Ended December 31, 1995 and 1994
 
  Revenue from the BioChem Pharma collaboration totalled $100,000 in 1995, all
of which was received in the third quarter of 1995. The Company did not have
any operating revenue during 1994.
 
  Research and development expenses increased to approximately $14.6 million
in 1995 from approximately $14.4 million in 1994. This increase was primarily
due to 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,
partially offset by a reduction in manufacturing costs associated with
Lisofylline.
 
  General and administrative expenses increased to approximately $6.1 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.
 
LIQUIDITY AND CAPITAL RESOURCES
 
  The Company has financed its operations since inception primarily through
the sale of equity securities. As of December 31, 1996 the Company had raised
aggregate net proceeds of approximately $103.0 million from such financing
activities, including $30.5 million and $16.9 million from the sale of Series
A Convertible Preferred Stock in 1995 and 1996, respectively, $5.0 million
from the sale of Series B Convertible Preferred Stock to Johnson & Johnson in
1996, $49.3 million from the sale of Common Stock in 1992 and 1993, $850,000
from a bridge loan which was subsequently converted to equity, and
approximately $400,000 from the exercise of stock options and warrants. The
Company expensed approximately $320,000 in deferred offering costs related to
its withdrawn initial public offering in 1996. As of December 31, 1996 the
Company has recorded approximately $360,000 of deferred offering costs related
to its currently planned offering. In addition, the Company financed the
purchase of approximately $11.3 million of property and equipment through
financing
 
                                      21

<PAGE>
 
agreements, of which approximately $2.8 million remained outstanding as of
December 31, 1996. In November 1996 Johnson & Johnson agreed to purchase a
number of shares of Common Stock equal to ten percent of the shares sold at the
closing of this Offering directly from the Company in a private placement that
will occur concurrent with the closing of this Offering at a per share price
equal to the initial public offering price. Assuming an initial public offering
price of $15.00 per share, the Johnson & Johnson stock purchase will result in
proceeds to the Company of $4.5 million. See "Johnson & Johnson Stock
Purchase."
 
  The Company's principal sources of liquidity are its cash balances, cash
equivalents and securities available-for-sale, which totaled approximately
$31.0 million as of December 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. The Company expects that its existing capital resources,
together with the net proceeds of this Offering and the Johnson & Johnson Stock
Purchase and the interest earned thereon, combined with anticipated funding
from Johnson & Johnson under the Collaboration Agreement, will enable the
Company to maintain its current and planned operations at least through the end
of 1998. In the event that Johnson & Johnson were to terminate its
participation in the Collaboration Agreement prior to such date, cti expects
that it would eliminate certain presently planned development activities.
Furthermore, 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 the
continuation of the collaboration with Johnson & Johnson, 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, changes in
collaborative relationships, the terms of any additional collaborative
arrangements that the Company may enter into, the ability of the Company to
establish research, development and commercialization arrangements pertaining
to products other than those covered by existing collaborative arrangements,
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,
the Company 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 the Company, or, if available, that it will be
on acceptable terms. If additional funds are raised by issuing equity
securities, further dilution to shareholders 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 "Risk Factors--History and
Continuation of Losses; Early Stage of Development," "--Need for Substantial
Additional Funds," "--Reliance on Relationship with Johnson & Johnson" and "--
Dilution."
 
  At December 31, 1996 the Company had available for Federal income tax
purposes net operating loss carryforwards of approximately $70 million and
research and development credit carryforwards of approximately $1.8 million.
These carryforwards begin to expire in 2007. The Company's ability to utilize
its net operating loss and research and development credit carryforwards is
subject to an annual limitation in future periods pursuant to the "change in
ownership" rates under Section 382 of the Internal Revenue Code of 1986. See
Note 10 of Notes to Consolidated Financial Statements.
 
                                       22

<PAGE>
 

 
                                  BUSINESS
 
  This Prospectus contains forward-looking statements which involve risks and
uncertainties. When used in this Prospectus, 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 "Risk Factors" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations." 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.
 
GENERAL
 
  The Company focuses on the discovery, development and commercialization of
small molecule drugs for the treatment of cancer and inflammatory and immune
diseases. The Company is conducting Phase III clinical trials for its lead
product candidate, Lisofylline, which is being developed to prevent or reduce
treatment-related toxicities, specifically infection, mucositis and treatment-
related mortality, among cancer patients receiving high dose radiation and/or
chemotherapy. In November 1996 cti entered into a Collaboration and License
Agreement with Johnson & Johnson for the joint development and
commercialization of Lisofylline. The Company is focusing its oncology
development efforts on a portfolio of drugs that it believes will address the
three principal causes of cancer treatment failure: (i) Lisofylline--a
supportive care agent being investigated to prevent or reduce the incidence of
serious and fatal infections, mucositis (damage to the epithelial cells lining
the mouth, stomach and intestinal tract) and treatment-related mortality among
patients receiving high dose radiation and/or chemotherapy, (ii) CT-2584--a
novel anti-cancer drug under investigation for the treatment of patients with
multidrug resistant tumors and (iii) tumor sensitizing agents being
investigated to enhance sensitivity to radiation among tumors that have
deleted or mutated tumor suppression genes. The Company believes that, in
addition to its oncology applications, Lisofylline may be effective as an
agent to prevent or reduce the incidence and severity of acute lung injury
("ALI") and mortality among patients requiring mechanical ventilation for
respiratory failure following pneumonia, multiple traumatic injuries, or
sepsis. Since its inception, the Company has invested more than $60 million
developing its products and building a unique drug discovery platform based on
its proprietary technology in phospholipid chemistry.
 
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 cellular receptors, some of which are embedded
in the cell membrane. The first messenger initiates a series of biochemical
events 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 molecules, including cell
membrane lipids, are chemically altered to form "second messengers" which
participate in transducing chemical information from the cell membrane to the
cell nucleus. Certain signal transduction pathways are essential for normal
day-to-day cellular processes, and are often referred to as "housekeeping
pathways" or "physiologic pathways." These housekeeping pathways are involved
in the normal growth and replenishment of cells in the body, such as blood
cells and the cells lining the intestinal tract. In contrast, there are also
signal transduction pathways, termed "stress-activated pathways" or "SAPs,"
which are part of the cellular response to injury following exposure to cell-
damaging stimuli such as radiation, chemotherapy or oxidative injury and which
are also activated in many disease states.
 
 
  The Company believes that such cell-damaging stimuli cause a number of their
toxic effects by altering the chemical composition of certain cell membrane
lipids and phospholipids, resulting in the production of biologically reactive
phospholipids termed phosphatidic acids ("PAs") and oxidized lipids termed
hydroperoxyoctadecadienoic acids ("HPODEs"). These phospholipids and oxidized
lipids in turn activate stress-related signaling pathways within the cell
which carry the cell-damaging message to the cell nucleus, resulting in the
activation of transcription factors. The activation of these transcription
factors may in turn lead to the (i) production of inflammatory cytokines and
the resulting activation of inflammatory and immune responses, (ii) production
of cytokines and chemokines which inhibit the growth and renewal of the stem
cells in the bone marrow and of the cells lining the intestinal tract and
(iii) promotion of cell membrane damage leading to cell death.
 
                                      23

<PAGE>
 
  PA elevation, appearance of HPODEs and activation of SAPs are associated
with many disease states and do not appear to be primarily utilized for normal
cellular processes. The Company believes that therapeutics which regulate the
production and/or degradation of phospholipids or oxidized lipids such as PAs
and HPODEs and which regulate the activation of SAPs may offer greater
specificity and safety profiles for the treatment of oncologic, inflammatory
and immune diseases than pharmaceuticals that modulate the housekeeping
pathways necessary for normal day-to-day cellular function.
 
  The diagram below demonstrates the different cellular responses resulting
from the activation of housekeeping pathways and stress-activated pathways:
 
    [DIAGRAM DEPICTING THE DIFFERENT CELLULAR RESPONSES RESULTING FROM THE
      ACTIVATION OF HOUSEKEEPING PATHWAYS AND STRESS-ACTIVATED PATHWAYS]

 
       HOUSEKEEPING PATHWAYS              STRESS-ACTIVATED PATHWAYS
 
 
  The process by which growth          These are also signal production
factors outside a cell transmit      pathways termed "stress-activated
their chemical signals inside the    pathways," or "SAPs," which are
cell is termed "signal               part of the cellular response to
transduction." Certain signal        injury following exposure to cell
transduction pathways, such as the   damaging stimuli such as
mitogen-activated pathway ("MAP")    radiation, chemotherapy or
are essential for normal day-to-     oxidative injury. Activation of
day cellular processes such as the   stress-activated pathways may lead
normal growth and replenishment of   to inflammation and tissue injury.
cells in the body. These pathways
are often referred to as
"housekeeping pathways."
 
                                      24

<PAGE>
 
PRODUCTS UNDER DEVELOPMENT
 
  The following table summarizes the potential therapeutic indications,
current development status and current collaborators for the Company's
products under development:
 
 

<TABLE>
<CAPTION>
  DEVELOPMENT           POTENTIAL
    PROGRAM      THERAPEUTIC INDICATIONS         DEVELOPMENT   STATUS(1)      COLLABORATORS(2)
- -----------------------------------------------------------------------------------------------
  <C>          <S>                            <C>                             <C>
  ONCOLOGY
   Lisofylline Prevent or reduce infection,   Pivotal Phase III trial for BMT Johnson & Johnson
                mucositis and treatment-       ongoing                        BioChem Pharma
                related mortality following   Phase II trial for AML ongoing
                high dose radiation and/or    Pivotal Phase III trial for
                chemotherapy                   AML ongoing
   CT-2584     Anti-cancer agent targeting    Phase I trials ongoing          BioChem Pharma
                multidrug resistant tumors
   CT-2412     Tumor sensitizer               Research lead                   --
- -----------------------------------------------------------------------------------------------
  INFLAMMATION
   Lisofylline Prevent or reduce acute lung   Phase II trial completed        Johnson & Johnson
                injury and mortality among                                    BioChem Pharma
                patients requiring
                mechanical ventilation for
                respiratory failure
- -----------------------------------------------------------------------------------------------
  IMMUNOLOGY
   CT-3578     Treatment of acute organ       Research lead                   --
                transplant rejection
- -----------------------------------------------------------------------------------------------
</TABLE>

 (1) Research lead refers to a compound that exhibits pharmacological
     properties which are evaluated in vitro and in animal models prior to
     the commencement of the additional pharmacology and toxicology studies,
     formulation work and manufacturing scale-up required to submit an IND.
     See "--Government Regulation" for a description of the phases of human
     clinical trials.
 (2) See "--Collaborations" for a description of cti's collaboration
     agreements and commercial rights to such products.
 
 
ONCOLOGY
 
 Overview
 
  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 eight 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. Approximately 1.4 million new
cases of cancer are diagnosed each year in the United States. The most
commonly used methods for treating cancer patients include surgery, radiation
and drug chemotherapy. A cancer patient often receives a combination of these
treatment modalities depending upon the type and extent of the disease. At
some point in their disease treatment, 70 percent of all cancer patients will
receive radiation therapy and 50 percent of all newly diagnosed cancer
patients will receive chemotherapy. Despite their benefits for treating
cancer, there are significant limitations of, and complications associated
with, radiation and chemotherapy which result in a high rate of treatment
failure. For example, less than ten percent of patients treated with
chemotherapy are cured. The principal causes of treatment failure include
treatment-related toxicities, multidrug resistance and tumor resistance to
radiation.
 
  Treatment-Related Toxicities. Despite their benefits for treating cancer,
radiation and chemotherapy treatment result in toxicities that limit the use
of potentially more effective doses. These treatment-related toxicities are
directly responsible for placing patients at risk for serious and often life-
threatening infections and other undesirable side effects. Radiation and
chemotherapy are toxic to rapidly dividing cells, which include not only
cancer cells but also certain normal cells such as bone marrow cells, hair
follicle cells and the epithelial
 
                                      25

<PAGE>
 
cells lining the mouth, stomach and intestinal tract. The most common and
problematic of the severe side effects attributable to radiation and
chemotherapy are neutropenia--bone marrow suppression of infection-fighting
white blood cells ("WBCs") and mucositis--damage to the epithelial cells
lining the mouth, stomach and intestinal tract. Epithelial cells form an
important barrier, preventing potentially lethal bacterial, fungal and viral
organisms which reside in the intestinal tract from entering the sterile blood
stream and organs. Damage from radiation or chemotherapy to intestinal
epithelial cells disrupts this important barrier, allowing infectious
pathogens to gain access to the systemic blood circulation. When neutropenia
and mucositis occur together, patients are at high risk for serious and fatal
infections. Patients often require supportive care agents as an adjunct to the
primary therapy in order to lessen the toxicities associated with radiation
and chemotherapy.
 
  More than 575,000 patients receive chemotherapy each year in the United
States, with more than 20 percent developing severe neutropenia and mucositis.
WBC growth factors such as Neupogen(R) (G-CSF), marketed by Amgen Inc., target
the fever and neutropenia (two surrogate markers that indicate risk for
developing infection) induced by radiation and chemotherapy, but in most
studies have failed to prevent serious or fatal infections, have had no impact
on survival, and have failed to treat other acute toxicities of cancer
treatment such as mucositis. Despite these limitations, Neupogen generated
worldwide sales in excess of $1 billion in 1996. There are currently no
supportive-care measures that adequately treat or prevent mucositis.
 
  Multidrug Resistance. Multidrug resistance to conventional chemotherapeutic
agents is a major impediment to the effective treatment of certain cancers.
Approximately 90 percent of all cancer patients undergoing chemotherapy (40
percent to 45 percent of all new cancer cases) express or will develop
multidrug resistance. Because most chemotherapeutic agents share a similar
mechanism of action, once a tumor develops resistance to a single therapeutic
agent, it becomes resistant to a broad range of chemotherapeutic drugs.
 
  Tumor Resistance to Radiation. Radiation therapy kills tumor cells by
generating highly reactive and toxic oxygen free radicals, resulting in damage
to cell replication machinery (e.g., DNA). Tumors are classified as being
sensitive (e.g., lymphomas) or resistant (e.g., colon or skin cancers) to
radiation therapy. Almost 50 percent of certain cancer cell types, such as
prostate, lung and bladder cancer, are resistant to radiation therapy at the
time of diagnosis. Mechanisms by which tumor cells develop resistance to
radiation include mutations or deletions in so-called tumor suppression genes
(e.g., p53) that control cell replication, abnormal regulation of proteins
which inhibit programmed cell death, such as bcl-2, or mechanisms by which DNA
is repaired during cell replication. The p53 tumor suppression gene is mutated
or deleted in more than 50 percent of newly diagnosed cancers and is a major
contributor to the failure of radiation therapy among such malignancies.
 
  The Company is focusing its oncology development efforts on a portfolio of
drugs that it believes will address the three principal causes of cancer
treatment failure. These include (i) Lisofylline--a supportive care agent
being investigated to prevent or reduce the incidence of serious and fatal
infections, mucositis and treatment-related mortality among patients receiving
high doses of radiation and/or chemotherapy, (ii) CT-2584--a novel anti-cancer
drug being investigated for the treatment of patients with multidrug resistant
tumors and (iii) tumor sensitizing agents including CT-2412--a research lead
with the potential ability to enhance sensitivity to radiation among tumors
that have deleted or mutated p53 tumor suppression genes, which the Company
believes will increase the effectiveness of radiation treatment on such
tumors.
 
 Lisofylline
 
  Lisofylline is a synthetic small molecule drug in Phase III clinical trials
among cancer patients receiving high dose radiation and/or chemotherapy.
Unlike blood cell growth factors or chemotherapy protecting agents,
Lisofylline is being developed to prevent or reduce the incidence of serious
and fatal infections, mucositis and treatment-related mortality. The Company
believes that the use of Lisofylline may permit the safer delivery of higher,
potentially more effective doses of radiation and chemotherapy. The Company is
collaborating with Johnson & Johnson to jointly develop and commercialize
Lisofylline. See "--Collaborations."
 
  The Company's development strategy for Lisofylline is to initially target
life threatening situations where Lisofylline might be used and where no
comparable treatment alternatives exist. The Company is conducting or
 
                                      26

<PAGE>
 
plans to conduct pivotal Phase III clinical trials of Lisofylline in patients
who receive ablative, or bone marrow destroying, doses of chemotherapy who
require BMT, patients with newly diagnosed AML who receive standard high dose
induction chemotherapy or patients with solid tumors such as head and neck or
breast cancers who receive dose-intensive radiation and/or chemotherapy.
Common to each of these three categories of anti-cancer treatment (ablative,
induction and dose-intensive) is the occurrence of neutropenia and the
breakdown of the epithelial barrier cells lining the mouth, stomach and
intestinal tract, placing patients at a high risk of life threatening
infections, severe mucositis and mortality.
 
  For BMT and AML, the Company intends to pursue approval under FDA
initiatives intended to provide accelerated review and approval of therapies
intended to treat patients suffering from serious, life-threatening or
severely debilitating diseases and that provide a meaningful therapeutic
benefit to patients over existing treatments. The Company believes that this
strategy may shorten the time to market, accelerate product adoption by
oncologists and provide a platform for product line extensions in less urgent,
but clinically meaningful applications such as mucositis. However, there can
be no assurance that Lisofylline will be evaluated for regulatory approval on
such accelerated basis. See "--Government Regulation."
 
  In 1995 more than 20,000 patients in the United States were treated with
ablative doses of chemotherapy requiring BMT or peripheral blood stem cell
("PBSC") replacement. This type of chemotherapy regimen is one of the fastest
growing types of cancer treatments in the United States, with an estimated
annual growth rate of 20 percent to 30 percent. In 1995 in the United States
approximately 75,000 patients received induction-type chemotherapy regimens
for the treatment of leukemias, such as AML, and lymphomas, and almost 200,000
patients received dose-intensive chemotherapy for a variety of solid tumor
types.
 
  Clinical Trials--BMT. In the first quarter of 1996 the Company completed a
60 patient, multi-center, double blind placebo controlled Phase II 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 and the incidences of fever,
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 of Lisofylline resulted in a statistically significant reduction in
mortality (p = 0.022), the incidence of serious and fatal infections (p =
0.005), and the duration of absolute neutropenia (p = 0.046) (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 of Lisofylline. In addition, there was a strong trend toward a reduction
in the overall incidence of mucositis (p = 0.08) and in the incidence of
severe mucositis (p = 0.104) among higher dose Lisofylline recipients compared
to placebo recipients or patients randomized to receive the lower dose of
Lisofylline. Certain endpoints of the trial regarding neutrophil and platelet
recovery, the duration of fever and transfusion requirements were not met. No
serious adverse side effects attributable to Lisofylline were detected in this
trial.
 
  The table below summarizes those results of the Phase II BMT trial of
Lisofylline in patients 100 days after receiving high dose radiation and/or
chemotherapy followed by BMT which the Company plans to more fully assess in
its Phase III clinical trials:
 

<TABLE>
<CAPTION>
                                                LISOFYLLINE
                                                 3MG/KG(1)  PLACEBO P VALUE(2)
                                                ----------- ------- ----------
      <S>                                       <C>         <C>     <C>
      Mortality rate...........................   11%       44%       0.022
      Incidence of serious and fatal infec-
       tions...................................   0%        39%       0.005
      Duration of absolute neutropenia (3).....   3 days    6 days    0.046
      Incidence of severe mucositis............   22%       44%       0.104
</TABLE>

- --------
  (1) Patients receiving a 2mg/kg dose of Lisofylline did not demonstrate
      statistically significant results when compared with placebo
      recipients.
  (2) 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.
  (3) Duration of absolute neutropenia is defined as the number of days
      following BMT with fewer than 100 neutrophils per microliter of blood.
 
                                      27

<PAGE>
 
  In the third quarter of 1996 the Company initiated a 106 patient, multi-
center, double blind placebo controlled pivotal Phase III trial for
Lisofylline in patients undergoing high dose radiation and/or chemotherapy
followed by BMT. This trial utilizes a 3 mg/kg dose of Lisofylline. The
primary endpoints of this study are neutropenia-related infection and
mortality. Based on the Company's discussions with the FDA, if the endpoints
of this study are met with statistical significance, the Company believes that
the results of this trial, together with the results of the completed Phase II
BMT trial and the safety data from the ongoing Phase II AML trial, would be
adequate to provide a basis for an NDA for Lisofylline for BMT indications.
The Company is also planning to commence an additional 80 patient Phase III
trial which will examine the effect of a 5 mg/kg dose of Lisofylline on
patients with cancer receiving BMT from unrelated donors. In addition to being
at high risk for serious and fatal infections, these patients have a high
incidence of severe mucositis and cancer treatment-related deaths. This study
will determine the effect of higher doses of Lisofylline on infection and
mucositis and provide supportive dosing and efficacy data for mucositis
applications of Lisofylline. If effective, the Company believes that the use
of Lisofylline may increase the number of patients who are eligible to receive
BMT from unrelated donors. See "Risk Factors--No Assurance of Successful
Product Development; Uncertainties Related to Clinical Trials."
 
  Clinical Trials--AML. The Company has ongoing a 75 patient, single center,
double blind placebo controlled Phase II trial of Lisofylline (3mg/kg) among
patients with newly diagnosed AML undergoing standard high dose induction
chemotherapy. This trial, which is being conducted in the United States at the
M.D. Anderson Cancer Center, will examine the effects of Lisofylline on the
incidence of infection and mortality, both of which are serious side effects
of induction chemotherapy in AML. Sixty-four evaluable patients have been
enrolled to date.
 
  In the fourth quarter of 1996 the Company initiated an 80 patient, multi-
center, double blind placebo controlled pivotal Phase III trial of Lisofylline
among patients with newly-diagnosed AML undergoing standard high dose
induction chemotherapy. This trial will examine the effect of a 3mg/kg dose of
Lisofylline on the incidence of infection and mortality among such patients.
The Company believes that if the Phase II AML trial demonstrates that
Lisofylline reduces infection and mortality with statistical significance, the
results of the Phase II AML trial, together with the results of the completed
Phase II BMT trial and, if positive, the ongoing Phase III BMT trial, may be
adequate to provide a basis for a supplemental NDA for Lisofylline for AML
indications.
 
  Clinical Trials--Mucositis. The Company intends to commence in the second
half of 1997 a 100 patient, multi-center, double blind placebo controlled
Phase II/III trial comparing a 3mg/kg dose of Lisofylline administered four
times daily to a 6mg/kg dose Lisofylline administered two times daily and to
placebo among patients with solid tumors receiving dose-intensive radiation
and/or chemotherapy at risk for developing severe mucositis and infection.
 
  Mechanism of Action. Following exposure to radiation, chemotherapy or
oxidative injury, oxygen free radicals (a highly reactive form of oxygen) are
generated. These oxygen free radicals are "soaked up" both in the blood stream
and in cell membranes by a pool of lipids termed "oxidizable lipids" to
produce highly reactive oxidized lipids such as HPODEs. These oxidized lipids
have been shown to have immediate effects on cell membranes, resulting in
membrane perturbation or disruption which may lead to cell damage or cell
death among the barrier cells lining the intestine or respiratory tract. As
such, HPODEs may contribute to the early breakdown in barrier function
observed following radiation, chemotherapy or oxidative injury. In addition to
the direct effects that HPODEs may have on cell membranes, they may also lead
to the activation of a number of SAPs within the cell.
 
  While the biomolecular target for Lisofylline is presently unknown, its
therapeutic activity appears to be due to the result of Lisofylline's effect
on oxidizable lipids, including those in the cell membrane, and the activation
of SAPs. Lisofylline decreases the pool of oxidizable lipids, while increasing
neutral, less oxidizable lipid pools, and decreases the production of HPODEs
and other oxidized lipids in a dose dependent manner following radiation or
chemotherapy. In doing so, Lisofylline appears to inhibit the early, immediate
effects of HPODEs on cell membranes and appears to prevent the activation of
SAPs and the ensuing cellular inflammatory and injurious response.
 
                                      28

<PAGE>
 
  The Company believes that the effects of Lisofylline on oxidizable lipids
and on the activation of SAPs may represent a critical upstream point of
intervention in the initiation of the cellular stress response. By modulating
the production of such oxidized lipids and phospholipids and the activation of
SAPs, Lisofylline may be able to prevent the early and late damage to the
epithelial barrier cells lining the mouth, stomach and intestinal tract,
resulting in a reduction in infection, mucositis and mortality following high
dose anti-cancer treatment. Because epithelial barrier cells also line the
lung tissue in the respiratory tract, cells which are susceptible to oxidative
injury, the Company believes that Lisofylline may also be effective for
preventing or reducing ALI in patients requiring mechanical ventilation for
respiratory failure. See "--Inflammatory Disease."
 
  The Company is utilizing its proprietary lipid technology as a platform to
investigate structure-function relationships with respect to the Lisofylline
chemical moiety. The Company is developing chemical analogs of Lisofylline,
such as CT-2408R, which has the potential to be administered orally.
 
 CT-2584
 
  CT-2584 is the Company's novel small molecule drug under investigation for
the treatment of patients with multidrug (e.g., chemotherapy) resistant
cancers, including sarcomas, prostate, colon, lung and breast cancer. The
Company believes that CT-2584 has a unique mechanism of action which may allow
the drug to be (i) toxic to cancers which have multidrug resistance to
conventional chemotherapeutic agents, (ii) more toxic to cancer cells than to
non-cancerous cells, (iii) not susceptible to multidrug resistance and (iv)
anti-angiogenic.
 
  The Company's development strategy for CT-2584 is to initially target
multidrug resistant cancers, such as sarcomas, for which first line treatments
are lacking or ineffective and where such applications may qualify for
accelerated regulatory approval. The Company believes that targeting
therapeutic applications of the drug where alternative treatments are lacking
or ineffective may also accelerate market acceptance. The Company intends to
pursue line extensions of CT-2584 to be used as a second line therapy for
cancers such as prostate, colon, lung and breast cancers which frequently
express or acquire multidrug resistance to conventional first line
chemotherapeutic agents, resulting in treatment failure. Because CT-2584's
mechanism for tumor cell killing appears to be unique, and because it does not
possess the toxicities of conventional anti-cancer agents, the Company
believes that CT-2584 may ultimately be used alongside conventional
chemotherapeutic agents as a first line therapy for a variety of cancer types.
 
  Preclinical and Clinical Trials. In preclinical testing, CT-2584
demonstrated toxicity to all tumor cell lines tested and to human tumor biopsy
samples. These cell lines and samples included sarcomas, prostate, brain,
colon, breast, lung and ovarian cancers, as well as certain leukemias and
lymphomas. Tumors that were multidrug resistant to high levels of conventional
chemotherapeutic agents were rendered 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.
 
  In November 1995 the Company initiated a Phase I trial, co-sponsored by the
Cancer Research Campaign, at the Christie Hospital in the United Kingdom among
patients with advanced cancers including colon cancer. In May 1996 the Company
initiated a parallel Phase I trial at the Memorial Sloan Kettering Cancer
Research Center in the United States for patients with advanced cancers
including prostate and ovarian cancer. More than 20 patients have been treated
with CT-2584 as of January 1, 1997 at four different dose levels without
exhibiting the bone marrow or gastrointestinal toxicities observed with
conventional high dose anti-cancer treatment regimens. A maximum tolerated
dose level has not been achieved to date. The majority of patients enrolled in
this trial have tumor types which are known to express multidrug resistance.
As of January 1, 1997 seven patients with refractory cancers have experienced
disease stabilization or disease regression following more than two cycles of
CT-2584 therapy. Based on these preliminary results, the Company anticipates
starting disease-specific Phase II trials in the United States in the second
half of 1997.
 
                                      29

<PAGE>
 
  Mechanism of Action. CT-2584's unique mechanism of action of tumor cell
killing is believed to result from the effects it has on tumor cell
phospholipids such as PA. Unlike normal growing cells, such as bone marrow
cells, tumor cells overproduce PAs through the activation of an enzyme called
phosphatidylcholine phospholipase-D ("PC-PLD"). CT-2584 appears to
overactivate tumor cell PC-PLD, and this enzyme may be its biochemical target
in effecting tumor cell killing. Because of its unique mechanism of action,
CT-2584 appears to inactivate or bypass multidrug resistance mechanisms and
does not appear to be susceptible to multidrug resistance. Company scientists
have cloned PC-PLD, and the Company intends to establish high throughput
assays based on PC-PLD and its other proprietary technologies to discover more
potent or selective analogs of CT-2584.
 
 Tumor Sensitizing Agents
 
  The Company has recently focused a drug discovery effort on the development
of agents which would enhance the effectiveness of radiation. The Company
believes that its drug discovery and core technology platform may provide a
novel approach to the development of tumor sensitizing agents. The Company is
investigating the role of cell membrane lipids and phospholipids and their
contribution to the mechanisms by which tumors express or develop resistance
to radiation. The Company has identified compounds, including CT-2412, which
have the potential ability to enhance sensitivity to radiation in certain
resistant cancers, including those which have deleted or mutated p53 tumor
suppression genes.
 
INFLAMMATORY DISEASE
 
  Acute lung injury ("ALI") may be caused by or associated with many diseases
or conditions, but is most frequently observed following mechanical
ventilation for pneumonia, multiple traumatic injuries and sepsis. More than
one million patients are at risk each year in the United States for developing
ALI. ALI, when severe, leads to a condition termed Adult Respiratory Distress
Syndrome ("ARDS"). ALI can be fatal in up to 35 percent of the patients who
develop ARDS. There are no specific therapies to prevent or treat the
estimated 150,000 new cases of ALI diagnosed each year. ALI results from
oxidative injury to the epithelial barrier cells which line the respiratory
tract following exposure to high levels of oxygen in connection with
mechanical ventilation and/or following resuscitation with blood transfusions
after multiple traumatic injury. In each setting, oxidative injury to the
epithelial cell membranes lining the lung causes a breakdown in the normal
barrier function, leading to the inability to provide adequate oxygen to the
blood stream and organs and resulting in multiorgan failure ("MOF") and death.
 
  In addition to its potential oncology applications, Lisofylline is also
under investigation by cti as an agent to prevent or reduce the incidence and
severity of ALI and mortality among patients requiring mechanical ventilation
for respiratory failure following pneumonia, multiple traumatic injuries or
sepsis. The mechanisms underlying the toxicity to gastrointestinal barrier
cells observed in the oncology setting may also operate to cause the toxicity
to respiratory barrier cells observed in the critical care setting. The
Company's development strategy for Lisofylline in critical-care applications
is to target patient populations at high risk for developing ALI, where early
intervention is feasible and clinically meaningful endpoints can be assessed
after relatively short (14-28 days) duration of drug treatment.
 
  Clinical Trials. The Company has completed a 13 patient, multi-center,
double blind placebo controlled Phase II feasibility study of Lisofylline in
patients suffering from septic shock randomized to receive a low dose
(1.5mg/kg) of Lisofylline or placebo. This study examined the safety and
pharmacokinetics of Lisofylline given to critically ill patients. Of the 12
patients evaluable for endpoint analysis, Lisofylline recipients experienced a
40 percent improvement from baseline in median MOF scores compared to placebo
recipients. All patients receiving Lisofylline survived to day 28 compared to
67 percent of placebo recipients.
 
  In January 1997 the National Heart, Lung and Blood Institute (the "NHLBI"),
through its ARDS Network, notified the Company that, after reviewing the
preclinical and clinical data to date, it had selected Lisofylline for
investigation in a multi-center, double blind placebo controlled Phase II/III
trial among patients experiencing
 
                                      30

<PAGE>
 
ALI. The ARDS Network was established by the NHLBI in cooperation with the FDA
to accelerate the investigation and approval of novel therapies for lung
injury. This trial is expected to begin in the second half of 1997. The trial
will examine the effect of a 3mg/kg dose of Lisofylline on the duration of
mechanical ventilation and early mortality among patients who develop ALI.
 
  Mechanism of Action. The Company believes that following exposure to high
levels of inspired oxygen by mechanical ventilation or following blood
transfusion resuscitation after multiple traumatic injury, the generation of
reactive oxygen free radicals converts oxidizable lipids to oxidized lipids
such as HPODEs. See""--Oncology--Lisofylline--Mechanism of Action." These
HPODEs exert their damaging effects on cell membrane lipids and phospholipids
which may lead to the activation of SAPs, resulting in cellular inflammation
and injury. In addition, HPODEs may also cause an immediate disturbance in the
integrity of the cells lining the respiratory tract, allowing the undesired
movement of proteins and fluids into the lung air spaces, and decreasing the
ability of oxygen in the lung to cross into the bloodstream and reach the
tissues.
 
  In animal studies, Lisofylline prevented the occurrence of lung injury
and/or mortality following exposure to high levels of inspired oxygen,
resuscitation following blood loss and shock, and following severe systemic
bacterial infections. In clinical studies, Lisofylline decreased the pool of
oxidizable lipids and decreased HPODE generation and the activation of SAPs
and subsequent production of multiple inflammatory cytokines. The Company
believes that the effects of Lisofylline on such lipids and on the activation
of SAPs may represent a critical upstream point of intervention in the
initiation of the complex biochemical cascade that leads to cellular and
systemic inflammation, cell injury and cell death.
 
IMMUNE DISEASE
 
  The Company is investigating a class of novel compounds which inhibit the PA
regulating enzyme diacylglycerol kinase ("DAG Kinase"), and which have been
identified for potential use in the prevention of organ transplant rejection
and in the treatment of immune diseases. Early in vitro testing suggests that
one of these compounds, CT-3578, unlike currently used immunosuppressives
including cyclosporine A, leads to non-responsiveness of the immune system to
specific foreign antigens. The Company believes that such a compound could
induce tolerance to a specific foreign antigen and thus allow patients to
accept organ transplants from genetically different donors without the need
for long-term immunosuppressive therapy.
 
PROPRIETARY DRUG DISCOVERY TECHNOLOGY
 
  The Company's proprietary drug discovery technology consists of three
components: (i) technology for quantitative measuring of specific species of
lipids and phospholipids; (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.
 
  The Company has developed proprietary technology that enables it to
determine the effects of a variety of physical and chemical stimuli (such as
radiation and chemotherapy), growth factors, cytokines and oncogene-induced
events on the production of oxidized lipids such as HPODEs, various species of
PAs and the enzymes which control their production and degradation. Standard
industry techniques for measuring lipid second messengers and structural lipid
membrane components are time consuming and often inadequate for measuring
lipids and phospholipids like HPODEs and PAs, which are produced in relatively
small quantities following stimulation and are degraded rapidly after their
production. Moreover, separation of specific species of oxidized lipids and
PAs is difficult. The Company possesses several proprietary lipid analytical
technologies which can identify different oxidized lipids and different
species of PA produced in response to a variety of stimuli in various cell
types. These technologies provide a qualitative and quantitative methodology
to examine the effects of cti compounds on a variety of such lipids and
phospholipids that are involved in normal and/or pathological functions in
certain cells.
 
  The Company believes that PAs have different functions within cells,
depending on how they are made and their biochemical species. In order to
further investigate the role of these phospholipids in cellular response
mechanisms and to provide a platform to develop novel targets for drug
development, Company scientists have
 
                                      31

<PAGE>
 
cloned several of the critical enzymes that produce or metabolize (degrade)
PAs. The following table lists the human enzymes cloned by the Company, their
biological effects and implied areas of indication:
 

<TABLE>
<CAPTION>
          CLONED ENZYME                 BIOLOGICAL EFFECT        DISEASE AREA
          -------------                 -----------------        ------------
 <C>                              <S>                            <C>
 PC-PLD (phosphatidylcholine-     Cancerous transformation,      Cancer
  phospholipase-D)                angiogenesis
 LPAAT (lyso-PA acyl transferase) Stress activated protein       Inflammation
                                  kinase ("SAPK") activation;
                                  TNFa, Interleukin-6 ("IL-6")
                                  release
 CDS (cytidyl diphosphate-        SAPK activation; TNFa, IL-6    Inflammation
  diacylgycerol synthase)         release
</TABLE>

 
  An additional PA regulating enzyme, diacylglycerol kinase ("DAG-Kinase"),
has been identified as a target enzyme for modifying the immune response and
is inhibited by cti's lead immunosuppressive compound, CT-3578.
 
  Through application of genetic, molecular and biochemical techniques, the
Company may be able to determine the relationship between the PA species
controlled by these enzymes and abnormal cellular functions which are thought
to be related to disease processes. The Company believes that PA modulating
enzymes, when coupled with high throughput screens and combinatorial diversity
libraries, may provide it with unique therapeutic targets for drug development
for oncological, inflammatory and immune diseases.
 
  The Company has also developed certain proprietary technologies that permit
the qualitative and quantitative analysis of a variety of complex lipids for
their content of oxidizable and oxidized lipid components such as HPODEs. The
Company believes that such technologies may be utilized in conjunction with
its chemical libraries and novel cloned enzymes to elucidate the relationship
of such complex oxidized lipids to conditions such as cancer, inflammatory and
immune disease. From these studies, the Company intends to indentify
additional novel targets for future drug development.
 
STRATEGY
 
  The key elements of the Company's business strategy are 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 intends to develop its oncology product portfolio by integrating its
understanding of cancer disease management with novel products derived from
its internal research and discovery efforts. The Company's two potential
cancer drugs in clinical trials, Lisofylline and CT-2584, target the toxic
side effects of current cancer treatment modalities and multidrug resistant
cancer cells, respectively. Lisofylline is also in clinical trials as an agent
for the prevention or reduction of ALI and mortality among patients requiring
mechanical ventilation for respiratory failure, conditions for which no
effective therapies currently exist. The Company believes that these agents,
if effective, may provide additional treatment options and opportunities which
are not presently available to health care providers and their patients. The
Company intends to further develop its product portfolio to exploit these
potential opportunities through internal research and discovery efforts,
inlicensing or product acquisitions.
 
  Maximize product opportunities by entering into late-stage collaborative
relationships. The Company believes that by developing its products through
mid- to late-stage clinical development before seeking potential development
and/or commercialization partners, the Company is better positioned to
(i) assess the potential value of its products, (ii) evaluate the
commercialization requirements for such products and (iii) if advantageous,
choose a suitable collaborative partner on more favorable terms than would be
available if the Company were to enter into collaborative relationships for
products in early-stage clinical or preclinical development. The Company is
collaborating with Johnson & Johnson for the worldwide (excluding Canada)
development and commercialization of Lisofylline and with BioChem Pharma for
the development and commercialization of Lisofylline and CT-2584 in Canada.
 
                                      32

<PAGE>
 
  Accelerate regulatory approval, market penetration and acceptance. The
Company's intends initially to launch its products for life threatening or
potentially life saving indications, followed by product line extensions to
less urgent indications. The Company believes that this strategy will
accelerate the regulatory review and approval of its products and facilitate
their acceptance for use and adoption by health care providers and third party
payors. The Company intends to initially pursue approval for Lisofylline for
BMT and AML, and CT-2584 for sarcomas, under FDA initiatives intended to
provide accelerated review and approval of therapies intended to treat patients
suffering from serious, life-threatening or severely debilitating diseases and
that provide a meaningful therapeutic benefit to patients over existing
treatments. Once approval has been obtained for the initial indication, cti
will seek to extend the use of Lisofylline in less urgent, but clinically
meaningful applications such as mucositis. However, there can be no assurance
that any of the Company's products will be evaluated for regulatory approval on
such an accelerated basis.
 
  Focused sales and marketing efforts. The Company intends to develop its own
sales and marketing infrastructure in the United States to co-promote
Lisofylline with Johnson & Johnson as permitted under the Collaboration
Agreement and to launch and commercialize its portfolio of other potential
oncology products, either on its own or jointly with Johnson & Johnson or other
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 diseases, the
Company's strategy is to pursue commercialization arrangements with
collaborators, including its collaboration with Johnson & Johnson.
 
  Apply and protect proprietary technology to create a unique drug discovery
platform for new product opportunities. The Company is leveraging its
proprietary technology to create a unique platform for future drug discoveries.
The Company believes that PA modulating enzymes, when coupled with high
throughput screens and combinatorial diversity libraries, may provide the
Company with unique therapeutic targets for drug development for cancer and
inflammatory and immune diseases.
 
COLLABORATIONS
 
 Johnson & Johnson
 
  In November 1996 the Company entered into a Collaboration and License
Agreement (the "Collaboration Agreement") with Ortho Biotech, Inc. and The R.W.
Johnson Pharmaceutical Research Institute (a division of Ortho Pharmaceutical
Corporation), each of which are wholly-owned subsidiaries of Johnson & Johnson
(collectively, "Johnson & Johnson"), for the joint development and
commercialization of Lisofylline. Upon execution of the Collaboration
Agreement, Johnson & Johnson paid to cti a $5.0 million nonrefundable license
fee. Under the Collaboration Agreement, cti is responsible for the development
of Lisofylline in the United States, and Johnson & Johnson has committed to
fund 60 percent of cti's budgeted development expenses incurred in connection
with obtaining regulatory approval for Lisofylline in the United States. For
each of 1997 and 1998 Johnson & Johnson has agreed, subject to certain
termination rights, to fund up to $12.0 million of cti's budgeted development
expenses per year. Any development expenses in excess of such currently
budgeted agreed upon amounts will be funded solely by cti unless otherwise
mutually agreed. Johnson & Johnson will be responsible for obtaining regulatory
approval for Lisofylline for markets outside of the United States and Canada at
its own expense.
 
  The Company and Johnson & Johnson will co-promote Lisofylline in the United
States, and each will share equally in any resulting operating profits and
losses recognized. Although cti and Johnson & Johnson will co-promote
Lisofylline in the United States, Johnson & Johnson will have primary
responsibility for commercializing Lisofylline. See "--Marketing." Johnson &
Johnson has the exclusive right to develop and market Lisofylline, at its own
expense, for markets other than the United States and Canada, subject to
specified royalty payments to cti. Johnson & Johnson will make additional
payments to, and equity investments in, cti if certain milestones are achieved
in the development and commercialization of Lisofylline.
 
  The collaboration with Johnson & Johnson initially covers the development of
Lisofylline to prevent or reduce the toxic side effects among cancer patients
receiving high dose radiation and/or chemotherapy followed by BMT (the "BMT
Indication") through December 31, 1998. The collaboration also covers the
development
 
                                       33

<PAGE>
 
of Lisofylline for the treatment of patients with AML undergoing high dose
chemotherapy (the "AML Indication") through June 30, 1997. Johnson & Johnson
has an option to continue to participate in the development of Lisofylline for
the AML Indication following the completion of cti's ongoing Phase II AML
trial. Johnson & Johnson also has certain options to expand the collaboration
to include the development of Lisofylline for any other indication for which
Lisofylline is being developed by cti. In the event that Johnson & Johnson
exercises any such option, it would be required to fund 60 percent of cti's
budgeted development expenses incurred in connection with the development of
Lisofylline for such indication, including expenses incurred prior to the
exercise of such option, and would also be required to pay additional license
fees and milestone payments to cti. Thereafter, any development expenses in
excess of the then agreed upon budgeted amounts for any such additional
indication would be funded solely by Johnson & Johnson unless otherwise
mutually agreed. If Johnson & Johnson does not exercise such option with
respect to any such indication, cti would be free to develop Lisofylline for
such indication either on its own or in collaboration with third parties.
Johnson & Johnson also has the option to sponsor research at cti with respect
to discovering compounds structurally related to Lisofylline.
 
  The Company is dependent on the future payments from Johnson & Johnson to
continue the development and commercialization of Lisofylline as presently
planned. Johnson & Johnson may terminate the Collaboration Agreement at any
time and for any reason after November 8, 1997, subject to a six month notice
period. Johnson & Johnson would have no further obligation to fund cti's
development expenses related to Lisofylline following such termination,
however, the financial and other obligations of Johnson & Johnson (other than
Johnson & Johnson's obligation to make additional payments to, and equity
investments in, cti if certain development milestones are achieved) would
continue during such six month notice period. In addition, Johnson & Johnson
has the right to terminate the Collaboration Agreement at any time based on
material safety or tolerability issues related to Lisofylline upon 30 days'
notice. In the event of a termination of the Collaboration Agreement by
Johnson & Johnson, cti would regain all development and commercialization
rights. Without Johnson & Johnson's continued collaborative support, cti would
not be able to continue the development of Lisofylline as presently planned,
and the Company's financial condition would be materially and adversely
affected. See "Risk Factors--Reliance on Relationship with Johnson & Johnson."
 
  In accordance with the terms of a Stock Purchase Agreement entered into
between the Company and Johnson & Johnson Development Corporation ("JJDC"), a
wholly-owned subsidiary of Johnson & Johnson, in connection with the
Collaboration Agreement, JJDC purchased shares of cti's Series B Convertible
Preferred Stock for an aggregate purchase price of $5.0 million. Pursuant to
the Stock Purchase Agreement, cti is entitled to require JJDC to purchase
additional shares of Common Stock upon the closing of this Offering and,
subsequent to the offering, upon achievement of certain milestones. JJDC has
agreed to purchase a number of shares of Common Stock equal to ten percent of
the shares sold at the closing of this Offering directly from the Company in a
private placement that will occur concurrent with the closing of this Offering
at a per share price equal to the initial public offering price. See "Johnson
& Johnson Stock Purchase" and "Certain Transactions."
 
 BioChem Pharma
 
  In March 1995 the Company 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. The Company 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 shares
of Series A Convertible Preferred Stock in the Company's 1995 Private
Placement for an aggregate purchase price of $2.5 million.
 
                                      34

<PAGE>
 
PATENTS AND PROPRIETARY RIGHTS
 
  The Company has dedicated significant resources to protect its intellectual
property. In the United States, the Company has eleven issued patents and 73
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, discovery,
research tools and diagnostics. Twelve of the Company's issued or allowed
patents and pending patent applications cover the pharmaceutical composition,
commercial synthetic manufacturing process and oncology, anti-inflammatory and
other methods of use for Lisofylline and one pending patent application covers
the chemical compounds and pharmaceutical compositions of CT-2584 and CT-3578.
The Company 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
granting and enforcement infrastructure. The Company has filed 56 foreign
national patent applications in 14 countries and the European Patent Office,
including 17 counterparts of certain of its issued and pending U.S. patent
applications for Lisofylline and eleven counterparts of certain of its issued
and pending U.S. patent applications for CT-2584 and CT-3578. 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 technology 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 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 by cti does not
infringe any valid claim of such third party patents. 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 for such indications. 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."
 
  The Company has sought and intends to aggressively seek patent protection in
the United States, Europe and Japan to protect any products that it may
develop. The Company 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 Company's trade
secrets will not otherwise become known or independently discovered by
competitors. The Company 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,
 
                                      35

<PAGE>
 
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
 
  The Company currently does not have the internal facilities to manufacture
products under current Good Manufacturing Practices ("cGMP") prescribed by the
FDA. The Company seeks to develop such capacity through manufacturing
relationships. The Company has qualified and selected manufacturers which it
believes comply with cGMP and other regulatory standards, and Lisofylline is
currently being manufactured by third party vendors on a fee for service
basis. In January 1997 the Company entered into a supply agreement with
ChiRex, Ltd. ("ChiRex"), a British manufacturer of pharmaceutical
intermediates and active ingredients, for the manufacture and supply of
Lisofylline and corresponding intermediate compounds. Under the terms of the
agreement, ChiRex will manufacture and supply Lisofylline bulk drug and a key
intermediate compound in sufficient quantities to meet the Company's
requirements for ongoing and future clinical trials and commercial
requirements during launch and commercialization. ChiRex is obligated to
comply with all regulatory requirements and policies concerning cGMP for all
phases of production. The agreement will expire on December 31, 2001, but may
be terminated by cti upon 12 months written notice prior to such date.
 
  The Company 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. Under the terms of the
Collaboration Agreement with Johnson & Johnson, the Company will be
responsible for the manufacture of Lisofylline for development and
commercialization purposes until November 8, 1999. Thereafter, Johnson &
Johnson will assume responsibility for the manufacture of Lisofylline.
However, Johnson & Johnson may elect to assume responsibility for the
manufacture of Lisofylline at any time prior to such date. The Company
currently uses ChiRex for the manufacture of Lisofylline bulk drug and uses
three suppliers for clinical trial quantities of the finished drug product.
Following commercial launch of Lisofylline, the Company expects that it will
continue to use ChiRex to manufacture Lisofylline bulk drug and expects that
OMJ Pharmaceuticals, Inc., an affiliate of Johnson & Johnson, will be the
Company's primary supplier for the finished drug product pursuant to the
Collaboration Agreement.
 
  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
and expects to continue to be dependent upon Johnson & Johnson and contract
manufacturers such as ChiRex to comply with such procedures and regulations.
There can be no assurance that Johnson & Johnson or these manufacturers will
meet the Company's requirements for quality, quantity or timeliness.
Lisofylline has never been manufactured on a commercial scale, and no
assurance can be given that the Company, together with Johnson & Johnson or
such other third party contract manufacturers, will be able to make the
transition to commercial production.
 
                                      36

<PAGE>
 
  If the Company develops other products with commercial potential outside of
the Johnson & Johnson collaboration, cti will need to develop additional
manufacturing resources, and may seek to enter into additional collaborative
arrangements with other parties which have established manufacturing
capabilities or may elect to have a third party such as ChiRex manufacture its
products on a contract basis. 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. The Company will
be dependent upon such collaborators or third parties to supply it in a timely
manner 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. Such
actions may include requiring such collaborator or contract manufacturer to
cease manufacturing activities. See "Risk Factors--Reliance on Third Party
Manufacturers; Manufacture of Products in Commercial Quantities."
 
MARKETING
 
  The Company intends to develop its own sales and marketing infrastructure in
the United States to commercialize its portfolio of oncology products,
including the oncology products that the Company plans to co-promote with
Johnson & Johnson pursuant to the Collaboration Agreement and any other
oncology products that the Company may commercialize, 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.
 
  The Company 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. Under the Collaboration
Agreement, Johnson & Johnson will have primary responsibility for
commercializing Lisofylline. To assist in commercializing Lisofylline for the
BMT Indication, cti will employ medical affairs and marketing personnel who
will work with Johnson & Johnson's sales force to provide various medical and
marketing support functions. In connection with the launch and
commercialization of Lisofylline for all other indications, cti will be
permitted to provide its own field sales force to co-promote Lisofylline under
the direction and control of Johnson & Johnson. See "--Collaborations."
 
  If the Company develops additional products with commercial potential
outside of the Johnson & Johnson collaboration, cti may need to develop
marketing and additional 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, Johnson &
Johnson or, to the extent the Company enters into any commercialization
arrangements with any other third partries, such other third parties, will
establish adequate sales and distribution capabilities or be successful in
gaining market acceptance for products. 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--Absence of Sales and Marketing
Organization."
 
COMPETITION
 
  Competition in the pharmaceutical and biotechnology industries is intense.
The Company faces competition from a variety of sources, both direct and
indirect. The Company 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. The Company also competes with other large
pharmaceutical companies that produce and market synthetic
 
                                      37

<PAGE>
 
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. Smaller companies may also prove to be significant
competitors, particularly through collaborative arrangements with large
pharmaceutical and established biotechnology companies. Many of these
competitors have significant products that have been approved or are in
development and operate large, well funded research and development programs.
 
  The Company 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 commercial sales of
their products before their competitors may achieve a significant competitive
advantage. Accordingly, the relative speed with which the Company and Johnson
& Johnson 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 academic institutions, governmental agencies and other
public and private 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 and retaining
skilled scientific talent.
 
  The Company 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. The Company will continue
to seek licenses with respect to technology related to its field of interest
and may face competition with respect to such efforts. There can be no
assurance that the Company's competitors will not develop more effective or
more affordable products, or achieve earlier patent protection or product
commercialization than the Company. See "Risk Factors--No Assurance of
Successful Product Development; Uncertainties Related to Clinical Trials," "--
Substantial Competition" and "--Ability to Protect Intellectual Property."
 
GOVERNMENT REGULATION
 
 Drug Approval Process
 
  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. 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,
 
                                      38

<PAGE>
 
(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. Approval of a local
institutional review board ("IRB") and informed consent of trial subjects is
also required.
 
  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 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 may be
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 multiple clinical study
sites. A pivotal Phase III trial is an adequate and well-controlled study
which provides the primary basis for determining whether there is "substantial
evidence" to support the claims of effectiveness for new drugs and forms the
basis for an NDA. 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, that the study is
not being conducted in compliance with applicable regulatory requirements, or
for other reasons. See "Risk Factors--No Assurance of Successful Product
Development; Uncertainties Related to Clinical Trials."
 
  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 approval of an NDA if
applicable regulatory criteria are not satisfied, or may require additional
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."
 
                                      39

<PAGE>
 
  The FDA has implemented accelerated review and approval procedures for
certain pharmaceutical agents that have been studied for their safety and
effectiveness in treating serious, life-threatening or severely debilitating
diseases, and that provide a meaningful therapeutic benefit to patients over
existing treatments. Products intended to remove a serious or life-threatening
toxicity of cancer treatment may potentially qualify for review under these
procedures. The Company believes that Lisofylline may qualify for this
accelerated review and approval process and designed its pivotal Phase III BMT
trial with the objective of securing accelerated approval. The FDA has granted
the Company priority review status for its planned NDA for Lisofylline for BMT
indications. However, significant uncertainty exists as to the extent to which
these will result in accelerated review and approval. Further, the FDA retains
considerable discretion in determining eligibility for accelerated review and
approval and is not bound by discussions that an applicant may have with FDA
staff. Accordingly, the FDA could employ such discretion to deny eligibility
of Lisofylline as a candidate for accelerated review or require additional
clinical trials or other information before approving Lisofylline. In
addition, the approval of a product under the accelerated approval procedures
is subject to various conditions, including the requirement to verify clinical
benefit in postmarketing studies and the authority on the part of the FDA to
withdraw approval under streamlined procedures if such studies do not verify
clinical benefit or under various other circumstances. The Company cannot
predict the ultimate impact, if any, of the accelerated approval process on
the timing or likelihood of FDA approval of Lisofylline or any of its other
potential products.
 
  Facilities and manufacturing procedures 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. The Company 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; however, no assurance can be provided
that such manufacture will successfully comply with cGMPs. In addition, the
FDA also regulates promotion, marketing and distribution of drug products, and
inspects drug manufacturers to evaluate compliance with regulatory
requirements. Among other things, the FDA evaluates truthfulness and accuracy
of materials submitted to it, or otherwise prepared by a drug manufacturer,
and may take legal or regulatory action against companies or their products if
such materials contain any untrue statement of a material fact.
 
  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 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.
 
  No assurance can be provided that the Company's INDs or NDAs will be
successfully reviewed by the FDA, or that similar applications will be
successfully reviewed by foreign regulatory authorities. Further, the FDA and
foreign authorities may at any time take legal or regulatory action against a
product or the Company if it concludes that cti has not complied with
applicable laws and regulations or that earlier evaluations of a product's
safety or effectiveness may not have been adequate or appropriate. Such action
may include, but is not limited to, restrictions on manufacture and shipment
of products, seizure of products, injunctions and civil and criminal
penalties. 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 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.
 
                                      40

<PAGE>
 
 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. See "Risk Factors--Use of Hazardous
Materials."
 
FACILITIES
 
  The Company leases approximately 65,000 square feet of space at 201 Elliott
Avenue West in Seattle, Washington for its executive office, laboratory and
administrative operations. The lease expires January 31, 2003, with two
consecutive five-year renewal options at the then prevailing market rent. The
Company's existing and planned facilities are believed to be adequate to meet
its present requirements, and the Company currently believes that suitable
additional space will be available to it, when needed, on commercially
reasonable terms. See "--Manufacturing."
 
                                       41

<PAGE>
 
LEGAL PROCEEDINGS
 
  The Company is not a party to any material legal proceedings.
 
HUMAN RESOURCES
 
  As of January 1, 1997 cti employed 106 individuals full-time (including 35
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.
 
  The Company'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."
 
  The Company 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 "Management--Scientific Advisory Board," and
"Management--Clinical Advisory Board."
 
                                       42

<PAGE>
 

                                  MANAGEMENT
 
EXECUTIVE OFFICERS AND DIRECTORS
 
  The following table sets forth certain information with respect to the
directors and executive officers of cti as of January 31, 1997:
 

<TABLE>
<CAPTION>
 NAME                               AGE POSITION
 ----                               --- --------
 <C>                                <C> <S>
 Max E. Link, Ph.D.(1).............  56 Chairman of the Board of Directors
 James A. Bianco, M.D.(1)..........  40 President, Chief Executive Officer and
                                         Director
 Jack W. Singer, M.D...............  54 Executive Vice President, Research
                                         Program Chairman and Director
 Louis A. Bianco...................  44 Executive Vice President, Finance and
                                         Administration
 Maurice J. Schwarz, Ph.D..........  57 Executive Vice President, Product
                                         Development
 Robert A. Lewis, M.D. ............  51 Executive Vice President, Chief
                                         Scientific Officer
 Susan O. Moore....................  48 Executive Vice President, Human
                                         Resource Development
 Jack M. Anthony...................  50 Executive Vice President, Marketing and
                                         Business Development
 Dalton W. Weekley.................  54 Managing Director, Project Planning and
                                         Controls
 Jack L. Bowman(2).................  64 Director
 Jeremy L. Curnock Cook(1)(2)......  47 Director
 Wilfred E. Jaeger, M.D.(2)(3).....  41 Director
 David W. Martin, Jr., M.D.........  56 Director
 Terrence M. Morris(2)(3)..........  49 Director
 Phillip M. Nudelman, Ph.D.(1)(3)..  61 Director
</TABLE>

- --------
(1)Member of the Executive Committee.
(2)Member of the Compensation Committee.
(3)Member of the Audit Committee.
 
  Dr. Link joined the Board of Directors in July 1995 as its Vice Chairman and
has served as Chairman of the Board of Directors since January 1996. In
addition, Dr. Link has held a number of executive positions with
pharmaceutical and healthcare companies. Most recently, he served as Chief
Executive Officer of Corange, Limited, from May 1993 until June 1994. Prior to
joining Corange, Limited, Dr. Link served in a number of positions within
Sandoz Pharma Ltd., including Chief Executive Officer, from 1990 until April
1992, and Chairman, from April 1992 until May 1993. Dr. Link currently serves
on the boards of directors of Alexion Pharmaceuticals, Inc., Human Genome
Sciences, Inc., Procept, Inc. and Protein Design Labs, Inc. Dr. Link received
his Ph.D. in Economics from the University of St. Gallen.
 
  Dr. Bianco is the principal founder of cti and has been cti's President and
Chief Executive Officer since February 1992 and a Director of cti since the
Company's inception in September 1991. Prior to joining cti, Dr. Bianco was an
Assistant Professor of Medicine at the University of Washington, Seattle, and
an Assistant Member in the clinical research division of the Fred Hutchinson
Cancer Research Center ("FHCRC"), the world's largest bone marrow transplant
center. From 1990 to 1992, Dr. Bianco was the director of the Bone Marrow
Transplant Program at the Veterans Administration Medical Center in Seattle.
Dr. Bianco received his B.S. degree in Biology and Physics from New York
University and his M.D. from Mount Sinai School of Medicine.
 
  Dr. Singer is a founder and Director of cti and currently serves as cti's
Executive Vice President, Research Program Chairman. He has been a Director of
cti since the Company's inception in September 1991. From April 1992 to July
1995, Dr. Singer was cti's Executive Vice President, Research and Development.
Prior to joining cti, Dr. Singer was Professor of Medicine at the University
of Washington and full Member of the FHCRC. From 1975 to 1992, he was the
Chief of Medical Oncology at the Veterans Administration Medical Center in
Seattle. In addition, from 1978 to 1992, he served as director for the
National Transplant Board for the Veterans Administration. Dr. Singer has
authored approximately 220 scientific publications in the areas of cell
biology,
 
                                      43

<PAGE>
 
hematopoiesis and BMT. Prior to joining cti, he headed the Growth Factor
Research Program at the FHCRC. Dr. Singer received his B.A. degree in
Mathematics from Columbia College and his M.D. from State University of New
York, Downstate Medical College. His clinical training was performed at the
University of Chicago and at the University of Washington.
 
  Mr. Bianco is a founder of cti and has been cti's Executive Vice President,
Finance and Administration since February 1, 1992, and a Director of cti from
the Company's inception in September 1991 to April 1992 and from April 1993 to
April 1995. From January 1989 through January 1992, Mr. Bianco was a Vice
President at Deutsche Bank Capital Corporation in charge of risk management.
Mr. Bianco is a Certified Public Accountant and received his M.B.A. from New
York University.
 
  Dr. Schwarz has been cti's Executive Vice President, Product Development
since May 1994. Dr. Schwarz held a variety of product development positions at
Ciba-Geigy for 26 years prior to joining cti, most recently as Vice President
of Pharmaceutical and Analytical Development and Chairman of the Development
Operations Board at Ciba-Geigy Pharmaceuticals Division. Dr. Schwarz received
his B.A. and Ph.D. degrees in chemistry from the University of Oregon.
 
  Dr. Lewis has been cti's Executive Vice President, Chief Scientific Officer
since April 1996. Prior to joining cti, from September 1994 to May 1995, he
was Senior Vice President and Director, Preclinical Research and Development
at Syntex-Roche. From February 1992 to September 1994 he was President,
Discovery Research at Syntex. From February 1986 to February 1992, he held
various Senior and Executive Vice Presidential offices at Syntex. While at
Syntex, he held associate professorships at Stanford University and at the
University of California, San Francisco, where he also held an adjunct
professorship from 1992 to 1994. Prior to joining Syntex, Dr. Lewis was
Associate Professor of Medicine at Harvard Medical School. Dr. Lewis received
his M.D. from the University of Rochester and B.S. degree in chemistry from
Yale University.
 
  Ms. Moore has been cti's Executive Vice President, Human Resource
Development since July 1995. From March 1993 to July 1995, Ms. Moore was cti's
Vice President of Human Resources. Prior to joining cti, Ms. Moore was self-
employed as a compensation consultant. From 1991 to December 1992, Ms. Moore
was the Director of Human Resources of ICOS Corporation, a biotechnology
company.
 
  Mr. Anthony has been cti's Executive Vice President, Marketing and Business
Development since January 1997. From April 1996 to January 1997 he was cti's
Vice President of Marketing and Business Development. Prior to joining cti,
Mr. Anthony was Vice President of Marketing and Business Development at Inhale
Therapeutic Systems, a drug delivery company, from October 1994 to April 1996.
From August 1989 to October 1994 he was Vice President of Marketing and
Business Development and of Applied Immune Sciences (AIS), a cell and gene
therapy concern. From 1973 to 1989 Mr. Anthony held various executive
management positions at Baxter Healthcare Corporation lastly as Vice
President, Blood Therapy Group.
 
  Mr. Weekley has been cti's Managing Director, Project Planning and Controls
since July 1995. From April 1994 to July 1995, Mr. Weekley was cti's Director
of Planning Support Services. Prior to joining cti, he was an Executive
Director/Senior Consultant of Milestone Computing, Inc., a management
consulting firm.
 
  Mr. Bowman has been a Director of cti since April 1995. From 1987 until
January 1994, Mr. Bowman was a company group chairman at Johnson & Johnson,
having primary responsibility for a group of companies in the diagnostic,
blood glucose monitoring and pharmaceutical businesses. From 1980 to 1987, Mr.
Bowman held various positions at American Cyanamid Company, most recently as
Executive Vice President. Mr. Bowman was a member of the Board of Trustees of
The Johns Hopkins University and serves on the Board of Directors of NeoRx
Corporation, CytRx Corporation, PharmaGenics, Inc. and Cellegy
Pharmaceuticals, Inc.
 
  Mr. Curnock Cook has been a Director of cti since March 1995. He has been
Head of the Rothschild Bioscience Unit and a director of Rothschild Asset
Management Limited since 1987. He is a director of several British companies,
including The International Biotechnology Trust, plc, Biocompatibles
International, plc, Therexsys, Ltd. and Vanguard Medica Group, plc. He also
serves on the Boards of Directors of Creative Biomolecules, Inc., Targeted
Genetics, Corp., Sugen Inc. and Ribozyme Pharmaceuticals, Inc. in the United
States.
 
                                      44

<PAGE>
 
  Dr. Jaeger has been a Director of cti since September 1992. He is a founding
general partner of Three Arch Partners, a venture capital firm which focuses
on health care investments. Prior to joining Three Arch Partners in 1993, he
was a partner at Schroder Venture Advisers (presently named Collinson Howe
Venture Partners) and The Phoenix Partners. Dr. Jaeger received his M.D. from
the University of British Columbia in Vancouver, B.C., Canada, in 1981. He
practiced medicine for six years before earning an M.B.A. from Stanford
University. Dr. Jaeger is also a director of Intensiva Healthcare Corporation
and several privately held companies.
 
  Dr. Martin has been a Director of cti since July 1995. From April 1995 to
November 1996, he was President and a director, and from January 1996 to
November 1996 he was also Chief Executive Officer, of Lynx Therapeutics, Inc.
From January 1994 to April 1995, he was President of Chiron Therapeutics and a
Senior Vice President of Chiron Corporation. From 1991 through 1993, he was an
Executive Vice President of the DuPont Merck Pharmaceutical Company. From 1982
to 1990, Dr. Martin held various positions at Genentech, Inc., most recently
as Senior Vice President Research and Development. He is currently a director
of Varian Associates, Inc.
 
  Mr. Morris has been a Director of cti since July 1995. He is the Chief
Executive Officer of T. Morris & Company (d/b/a Morningside Ventures), which
coordinates and manages a private venture capital portfolio for Kummell
Investments Limited, an international investment concern based in Hong Kong.
Mr. Morris has served as Chief Executive Officer of Morningside Ventures since
1991. His previous positions include product line manager at Baxter Healthcare
and strategy consultant with the Boston Consulting Group. Mr. Morris is a
director of several privately held companies.
 
  Dr. Nudelman has been a Director of cti since March 1994. Since 1990 he has
been the President and Chief Executive Officer of Group Health Cooperative of
Puget Sound, a health maintenance organization. Dr. Nudelman received his B.S.
degree in Microbiology, Zoology and Pharmacy from the University of
Washington, and holds an M.B.A. and a Ph.D. in Health Systems Management from
Pacific Western University. Dr. Nudelman is a member of the American Hospital
Association House of Delegates, Regional Policy Board, and chairs the
Governing Counsel for Health Care Systems. Dr. Nudelman serves on the Boards
of Directors of Advanced Technology Laboratories, Inc., SpaceLabs Medical,
Inc., Cytran Ltd. and Intensiva Healthcare Corporation.
 
  The Board of Directors of cti is divided into three approximately equal
classes of Directors serving staggered three-year terms and until their
successors are elected and qualified. As a result, approximately one-third of
the total number of Directors will be elected every year. The current terms of
Drs. Bianco, Singer and Jaeger expire in 1997, the current terms of Dr.
Nudelman and Mr. Bowman expire in 1998, the current term of Mr. Curnock Cook
expires in 1998 or, if earlier, the first annual meeting following the
conversion of the Series A Convertible Preferred Stock in accordance with its
terms, and the current terms of Drs. Link and Martin and Mr. Morris expire in
1999. Executive Officers of cti serve at the discretion of the Board of
Directors. Under cti's Bylaws, the number of Directors constituting the entire
Board of Directors may be decreased or increased by majority action of either
the Board of Directors or the shareholders, but no decrease in the number of
Directors may have the effect of shortening the term of any incumbent
Director. Currently, the Board of Directors has fixed the number of Directors
at nine. James A. Bianco and Louis A. Bianco are brothers. Mr. Curnock Cook
was elected as a Director by the holders of the Series A Convertible Preferred
Stock, who are entitled to vote as a separate class to elect one Director to
the Board of Directors. See "Certain Transactions."
 
SCIENTIFIC ADVISORY BOARD
 
  The Company has a Scientific Advisory Board and plans to make arrangements
from time to time with other scientists to work with cti's management and the
Scientific Advisory Board. The Scientific Advisory Board is chaired by Dr.
Michael R. Hanley. Scientific Advisory Board members are expected to meet as a
board with management and key scientific employees of cti on a semi-annual
basis and in smaller groups or individually from time to time on an informal
basis. The Scientific Advisory Board members assist 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. Members of cti's Scientific Advisory Board are leaders
in the fields of immunology, cell and molecular biology, and synthetic and
medicinal chemistry.
 
                                      45

<PAGE>
 
  Current Members of cti's Scientific Advisory Board include:
 
  Michael R. Hanley, Ph.D. is the Chairman of cti's Scientific Advisory Board.
He is a Professor, Department of Biological Chemistry, at the University of
California, Davis School of Medicine. He is a noted authority in cell
communication processes and proto-oncogenes, as well as an expert in
phosopholipid signaling mechanisms in the central nervous system focusing on
regulation of neurotransmitter receptors. Dr. Hanley has authored over 80
manuscripts and has served as an editorial member for several journals,
including Molecular and Cellular Neurobiology and Nature.
 
  Irwin M. Arias, M.D. is a Professor and Chairman of the Department of
Physiology at Tufts University School of Medicine. He is a noted authority in
the physiology of multidrug resistance proteins. He is the recipient of
numerous awards and honors.
 
  Bruce Beutler, M.D. is an Associate Professor of Medicine at the University
of Texas Southwestern Medical Center and an Associate Investigator at the
Howard Hughes Medical Institute. He is internationally recognized for his work
on Tumor Necrosis Factor ("TNF") and has authored over 95 manuscripts, reviews
and books on TNF, its characterization, signaling, mechanisms of action and
activity in a variety of preclinical and clinical settings. Dr. Beutler serves
as the President of the International Congress on TNF and Related Cytokines
and Consulting editor for Journal of Clinical Investigation.
 
  Edward A. Dennis, Ph.D. is the Vice Chair of Medical Biochemistry at the
University of California, San Diego. He is a noted authority on
phospholipases, cell signaling, and phospholipid metabolism. Dr. Dennis serves
on the Scientific Advisory Board and Management Committee of, and chairs the
Management Executive Board of, the Keystone Symposia. He sits on the Editorial
Board of the Journal of Cellular Biochemistry and on the Publications
Committee of the American Society for Biochemistry and Molecular Biology. He
has authored over 185 manuscripts.
 
  Edwin Krebs, M.D. is a Professor Emeritus, Department of Pharmacology and
Biochemistry, at the University of Washington in Seattle and a Senior
Investigator Emeritus at the Howard Hughes Medical Institute. He is a
recognized authority on the mechanisms of action of second messengers,
including protein kinases and phosphorylation reactions. He is the recipient
of numerous awards and honors and has authored 297 manuscripts. In 1992, Dr.
Krebs was awarded the Nobel Prize in Physiology of Medicine for his work on
second messenger pathways.
 
  Wouter H. Moolenaar, Ph.D. is the Head of the Division of Cellular
Biochemistry at the Netherlands Cancer Institute. He is an expert in
phospholipid signal transduction, focusing on their role in responses to
growth factors and in cell differentiation. He has authored over 60
manuscripts and several chapters pertaining to the role of phosphatidic acid
in cell signaling.
 
  Klaus Resch, M.D. is a noted authority in membrane phospholipid
biochemistry, their role in immune system activation and inflammation. He is a
Professor and the Head of the Institute for Molecular Pharmacology of the
Hanover Medical School, Medizinische Hochschule Hannover, and a former Vice
President of the German Society for Pharmacology and Toxicology. He has
authored over 250 scientific publications.
 
  The Company has entered into consulting agreements with each member of the
Scientific Advisory Board. These agreements generally have a three-year term
and may be terminated by either party upon 30 days' written notice. These
agreements also generally restrict the consultant from competing with cti
during the term of the agreement. These agreements contain provisions
prohibiting the disclosure of confidential information to anyone outside of
cti and require disclosure to cti of ideas, developments, discoveries or
inventions conceived during consulting and assignment to cti of proprietary
rights to such matters related to the business and technology of cti. Each
consultant is required to serve on cti's Scientific Advisory Board and provide
such other consulting services as cti may reasonably request. Each Scientific
Advisory Board member is paid an annual fee and is granted an option to
purchase Common Stock.
 
 
                                      46

<PAGE>
 
CLINICAL ADVISORY BOARD
 
  The Company has a Clinical Advisory Board which meets with cti's management
and the Scientific Advisory Board not less than three times per year and in
smaller groups or individually from time to time on an informal basis. The
Clinical Advisory Board members assist cti in determining its clinical
regulatory strategy and trial results and identifying optimal indications for
its products. Members of cti's Clinical Advisory Board are leaders in the
fields of hematology, oncology, immunology, cell and molecular biology,
critical care and medicinal chemistry.
 
  Current members of cti's Clinical Advisory Board include:
 
  E. Donnall Thomas, M.D. is the Chairman of cti's Clinical Advisory Board. He
is the former Associate Director of Clinical Research and presently a
Professor Emeritus at the FHCRC. Dr. Thomas was a founding Member of the
FHCRC. His research has spanned a wide array of fields from radiation biology
to developmental immunology, and from cancer causing genes to gene transfer
therapies. For his pioneering work in BMT, Dr. Thomas was awarded the Nobel
Prize for Medicine in 1990. His work demonstrated the feasibility and clinical
effectiveness of marrow transplant therapy, and he has contributed to the
training of a significant majority of the physicians now performing BMTs
worldwide. Among the other honors awarded to Dr. Thomas in recognition of his
medical research are the American Cancer Society Award for Distinguished
Service in Basic Research and the Kettering Prize of the General Motors Cancer
Research Foundation. He is a member of the U.S. National Academy of Sciences.
 
  Karen H. Antman, M.D. is the Chief of the Division of Medical Oncology,
College of Physicians & Surgeons of Columbia University. Dr. Antman is an
expert in emerging treatment strategies for solid tumors, notably breast
cancer and sarcomas. From 1994 to 1995 she served as President of the American
Society of Clinical Oncology (ASCO). Since 1993 Dr. Antman has served on the
Sarcoma Committee of the Southwest Oncology Group, and has been its
chairperson since 1995. From 1993 to 1994 she was program committee chair of
the American Association for Cancer Research (AACR). She is on the editorial
board of several prestigious journals, including Associate Editor of The New
England Journal of Medicine. She has authored over 100 manuscripts and
textbooks.
 
  Frederick Appelbaum, M.D. is the Director of Clinical Research and Senior
Vice President of the FHCRC. He is a recognized authority in the treatment of
patients with leukemia and lymphoma. He serves on several editorial boards and
national committees, including the FDA Advisory Committee on Biologics; is
Chairman of the Southwest Oncology Group Leukemia Committee; and serves on the
Board of Directors of the American Society for Blood and Marrow
Transplantation. He has authored more than 450 manuscripts.
 
  H. Franklin Bunn, M.D. is the Director of the Hematology Division of the
Brigham and Women's Hospital and Professor of Medicine at Harvard Medical
School. His research interest focuses on blood cell production and regulation.
He is the recipient of numerous awards and honors and is Chairman of the
Advisory Committee of the American Society of Hematology.
 
  O. Michael Colvin, M.D. is the Director of the Duke Comprehensive Cancer
Center at Duke University Medical Center. Dr. Colvin is an expert in
therapeutic drug modeling and rational drug design. His work led to the
discovery of several chemotherapeutic agents. He was previously Chief of the
Division of Pharmacology and Experimental Therapeutics at The Johns Hopkins
Oncology Center. He has authored over 100 manuscripts.
 
  Milo Gibaldi, Ph.D. is the Gibaldi Endowed Professor of Pharmaceutics of the
School of Pharmacy at the University of Washington, with past faculty
appointments at Columbia University and the State University of New York at
Buffalo. His expertise in drug metabolism has led to consultantships with such
pharmaceutical firms as Hoffman-LaRoche, Ciba-Geigy and Glaxo. Dr. Gibaldi has
also served on the U.S. Food and Drug Administration's Panel on Generic Drugs.
His research has focused on gastrointestinal absorption of drugs and the
development of stable formulations for therapeutic compounds.
 
                                      47

<PAGE>
 
  William P. Peters, M.D., Ph.D. is a Director of the Meyer L. Prentis
Comprehensive Cancer Center of Metropolitan Detroit and the President and
Chief Executive Officer of the Karmanos Cancer Institute. He is a recognized
leader in the use of dose-intensive chemotherapy regimens with peripheral
blood stem cell support as a cost-effective approach to the treatment of
cancer. He has published extensively and is the recipient of many honors and
awards, among them the American Cancer Society Clinical Fellowship Award and
the R. Wayne Rundles Award for Excellence in Cancer Research.
 
  Thomas A. Raffin, M.D. is the Chief of the Division of Pulmonary and
Critical Care Medicine of the Stanford University Medical Center. He is a
recognized authority on mechanisms of ALI, MOF and Systemic Inflammatory
Response Syndrome ("SIRS") among critically ill patients. He serves on
numerous editorial boards and societies, including the Editorial Board of
Chest and Critical Care Medicine, the American Thoracic Society and the
Society of Critical Care Medicine. He has authored more than 175 manuscripts
and 60 chapters.
 
  Merle A. Sande, M.D. is a Professor and the Chairman of the Department of
Medicine at the University of Utah, School of Internal Medicine. He is a noted
authority in infectious disease and serves on the editorial boards of several
journals, including Journal of Infectious Disease and Infection and Immunity.
He is a member of the AIDS Task Force and is the Chairman of the AIDS
Subcommittee of the Infectious Disease Society of America.
 
  Thomas E. Starzl, M.D., Ph.D. is the Director of the Transplantation
Institute of the University of Pittsburgh. He is a noted expert in the field
of immunology and solid organ transplantation. He is the recipient of numerous
awards and was founding President of several prestigious societies, including
the American Society of Transplant Surgeons. He has authored approximately
1,400 manuscripts and more than 160 book chapters.
 
  The Company has entered into consulting agreements with each member of the
Clinical Advisory Board. These agreements generally have a three-year term and
may be terminated by either party upon 30 days' written notice. These
agreements also generally restrict the consultant from competing with cti
during the term of the agreement. These agreements contain provisions
prohibiting the disclosure of confidential information to anyone outside of
cti and require disclosure to cti of ideas, developments, discoveries or
inventions conceived during consulting and assignment to cti of proprietary
rights to such matters related to the business and technology of cti. Each
consultant is required to serve on cti's Clinical Advisory Board and provide
such other consulting services as cti may reasonably request. Each Clinical
Advisory Board Member is paid an annual fee and is granted an option to
purchase Common Stock.
 
                                      48

<PAGE>
 

EXECUTIVE COMPENSATION
 
  The following table sets forth all compensation paid for the years ended
December 31, 1995 and 1996 to the Company's Chief Executive Officer and the
four other most highly compensated executive officers who were serving as
executive officers at December 31, 1996 (collectively, the "Named Executive
Officers"):
 
                          SUMMARY COMPENSATION TABLE
 

<TABLE>
<CAPTION>
                                                                             LONG-TERM
                                                                            COMPENSATION
                                                ANNUAL COMPENSATION          AWARDS(1)
                                         ---------------------------------- ------------
                                                                  OTHER      SECURITIES      ALL
                                                                 ANNUAL      UNDERLYING     OTHER
NAME AND                                                         COMPEN-      OPTIONS/     COMPEN-
PRINCIPAL POSITION               YEAR    SALARY ($) BONUS ($) SATION ($)(2)   SARS (#)    SATION ($)
- ------------------               ----    ---------- --------- ------------- ------------  ----------  
<S>                              <C>     <C>        <C>       <C>           <C>           <C>         
James A. Bianco, M.D............ 1996     358,032    27,475         --         85,714       72,223(4)
President and Chief              1995     315,984       --          --        137,955(3)     7,402(5)
 Executive Officer
Jack W. Singer, M.D. ........... 1996     248,976       --          --         28,571       10,524(5)
Executive Vice President,        1995     248,976       --          --         20,957(3)     9,762(5)
 Research Program Chairman
Louis A. Bianco................. 1996     263,088    10,000         --         21,428       55,367(4)
Executive Vice President,        1995     232,195       --          --         55,098(3)     6,772(5)
 Finance and Administration
Maurice J. Schwarz, Ph.D........ 1996     187,500    12,936         --         28,571       65,619(6)
Executive Vice President,        1995     187,500       --        8,200(6)     28,571(3)    45,802(6)
 Product Development
Robert A. Lewis, M.D............ 1996(7)  181,512       --        6,964(7)     67,142       26,144(7)
Executive Vice President,
 Chief Scientific Officer
</TABLE>

 
- --------
(1) The Company did not make any long-term incentive plan payments to any of
    the Named Executive Officers in 1995 and 1996.
(2) Other annual compensation in the form of perquisites and other personal
    benefits has been omitted where the aggregate amount of such perquisites
    and other personal benefits constituted the lesser of $50,000 or 10% of
    the total annual salary and bonus for the Named Executive Officer for the
    applicable year.
(3) In April 1995, the Board of Directors approved the repricing of
    outstanding options to $11.725 per share by exchanging such outstanding
    options for a fewer number of options pursuant to a Black-Scholes formula.
    All other terms and conditions of the options remained unchanged. Grants
    for the year ended December 31, 1995 include options which were initially
    granted in prior years and have been repriced and exchanged for a fewer
    number of options in 1995 as follows: Dr. Bianco, 64,285 options were
    repriced and exchanged for 57,857 options; Dr. Singer, 14,285 options were
    repriced and exchanged for 12,857 options; Mr. Bianco, 42,857 options were
    repriced and exchanged for 36,428 options; and Dr. Schwarz, 21,428 options
    were repriced and exchanged for 17,142 options.
(4) All other compensation represents payment of unused sick leave for Dr.
    Bianco and Mr. Bianco accrued during 1992, 1993 and 1994, pursuant to the
    terms of their employment agreements then in effect, aggregating $64,526
    and $47,415, respectively, and reimbursement for long-term disability
    insurance premiums of $7,697 and $7,952, respectively.
(5) Represents reimbursement for long-term disability insurance premiums.
(6) All other compensation includes the amount of loan principal and interest
    forgiven in 1995 and 1996 of $42,210 and $60,789, respectively, in
    connection with Dr. Schwarz's relocation to the Seattle area and $3,592
    and $4,830 of relocation expenses which were reimbursed in 1995 and 1996,
    respectively. Other annual compensation represents amounts reimbursed for
    the payment of income taxes on the reimbursement of Dr. Schwarz's
    relocation expenses in 1994. See "Employment Agreements."
(7) Includes compensation for employment beginning on April 1, 1996, the date
    on which Dr. Lewis joined the Company as Executive Vice President, Chief
    Scientific Officer. All other compensation represents reimbursement of
    relocation expenses. Other annual compensation represents amounts
    reimbursed for the payment of income taxes on the reimbursement of Dr.
    Lewis' relocation expenses.
 
                                      49

<PAGE>
 
  The following table sets forth for each of the Named Executive Officers the
number of options granted during the year ended December 31, 1996 and the
potential realizable value of such grants:
 
                      OPTIONS GRANTED IN LAST FISCAL YEAR

<TABLE>
<CAPTION>
                                      INDIVIDUAL GRANTS
                         --------------------------------------------
                                                                      POTENTIAL REALIZABLE
                                                                        VALUE AT ASSUMED
                          NUMBER OF  % OF TOTAL                           ANNUAL RATES
                         SECURITIES   OPTIONS                            OF STOCK PRICE
                           UNDER-    GRANTED TO                         APPRECIATION FOR
                            LYING    EMPLOYEES   EXERCISE                OPTION TERM(3)
                           OPTIONS   IN FISCAL    PRICE    EXPIRATION ---------------------
NAME                     GRANTED (1)  YEAR (%)  ($/SH) (2)    DATE     5% ($)     10% ($)
- ----                     ----------- ---------- ---------- ---------- --------- -----------
<S>                      <C>         <C>        <C>        <C>        <C>       <C>
James A. Bianco, M.D....   85,714       16.9%    $11.725    11/19/06  $ 632,141 $ 1,601,995
Jack W. Singer, M.D.....   28,571        5.6%     11.725    11/07/06    210,711     533,992
Louis A. Bianco.........   21,428        4.2%     11.725    11/07/06    158,032     400,489
Maurice J. Schwarz,
 Ph.D...................   28,571        5.6%     11.725    11/07/06    210,711     533,992
Robert A. Lewis, M.D....    2,857          *      11.725    03/29/06     21,070      53,397
                           42,857        8.5%     11.725    04/01/06    316,070     800,997
                           21,428        4.2%     11.725    11/07/06    158,032     400,489
</TABLE>

- --------
 * Less than one percent.
(1) Options were granted under the 1994 Equity Incentive Plan (the "1994
    Plan").
(2) Stock options were granted at an exercise price equal to 100% of the
    estimated fair value of the Company's Common Stock, as determined by the
    Board of Directors on the date of grant.
(3) Potential realizable value is based on the assumption that the Common
    Stock appreciates at the annual rates shown (compounded annually) from the
    date of grant until the expiration of the option term. These assumed rates
    of appreciation are mandated by the rules of the Securities and Exchange
    Commission and do not represent the Company's estimate or projection of
    the future Common Stock price. There can be no assurance that any of the
    values reflected in this table will be achieved.
 
  The following table sets forth for each of the Named Executive Officers, the
fiscal year-end number and value of unexercised options. No options were
exercised by any of the Named Executive Officers during 1996.
 
 AGGREGATED OPTION EXERCISES IN LATEST FISCAL YEAR AND FISCAL YEAR-END OPTION
                                    VALUES
 

<TABLE>
<CAPTION>
                           NUMBER OF SECURITIES      VALUE OF UNEXERCISED
                                UNDERLYING           IN-THE-MONEY OPTIONS
                          UNEXERCISED OPTIONS AT      AT FISCAL YEAR-END
                            FISCAL YEAR-END (#)           1996 ($)(1)
                         ------------------------- -------------------------
NAME                     EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ----                     ----------- ------------- ----------- -------------
<S>                      <C>         <C>           <C>         <C>
James A. Bianco, M.D....   85,574       138,095        $ 0          $ 0
Jack W. Singer, M.D.....   16,195        33,333          0            0
Louis A. Bianco.........   43,669        32,857          0            0
Maurice J. Schwarz,
 Ph.D...................   15,238        41,904          0            0
Robert A. Lewis, M.D....    2,857        64,285          0            0
</TABLE>

- --------
(1) Based on the estimated fair value of the underlying securities at December
    31, 1996, the fiscal year end, no options were "in-the-money."
 
COMPENSATION OF DIRECTORS
 
  Directors who are also employees of the Company are not paid an annual
retainer nor compensated for serving on the Board. Non-employee Directors are
paid $2,000 per meeting of the Board or committees, up to a maximum of $10,000
per Director each calendar year. All Directors are reimbursed for their
expenses incurred in attending Board meetings. In addition, each non-employee
Director is entitled to certain automatic option grants under the 1994 Plan.
See "--Stock Option Plans."
 
                                      50

<PAGE>
 
  In December 1996 the Board approved the grant to each non-employee Director
of a 10-year, fully vested nonstatutory stock option to purchase 14,285 shares
of Common Stock, other than Dr. Link, who was granted an option to purchase
28,570 shares of Common Stock. Such option grants will not be effective until
approved by the shareholders at the 1997 Annual Meeting of Shareholders. The
exercise price of such options is $11.725. The Board also formally eliminated
a $10,000 annual cash retainer for non-employee directors which had been
previous company policy. See Note 9 of Notes to Consolidated Financial
Statements.
 
EMPLOYMENT AGREEMENTS
 
  Dr. Bianco, President and Chief Executive Officer, entered into an
employment agreement with cti, effective December 17, 1996 which agreement
will expire on December 31, 1999. The agreement provides that Dr. Bianco would
receive a base salary at an annual rate of $393,835 in 1997 or such greater
amount as the Board of Directors shall determine. The agreement provides that,
in the event that cti terminates Dr. Bianco's employment without cause or Dr.
Bianco terminates his employment for cause, cti shall, at such time, pay Dr.
Bianco an amount equal to twenty-four months' base salary, all of Dr. Bianco's
stock options in cti shall immediately become vested and cti shall continue to
provide certain benefits through the term of the agreement. The agreement also
provides for the forgiveness over the term of the agreement of certain
indebtedness of Dr. Bianco to cti. See "Certain Transactions." In addition,
the agreement provides that Dr. Bianco is entitled to four weeks of paid
vacation per year and that any unused vacation time shall be paid in cash upon
the termination of Dr. Bianco's employment for any reason or at such earlier
time as required to avoid forfeiture of accrued but unused vacation time. The
employment agreement restricts Dr. Bianco from competing with cti for the term
of the agreement and for two years after termination of his employment with
cti, unless cti shall have terminated Dr. Bianco's employment without cause or
Dr. Bianco shall have terminated his employment for cause. The agreement also
provides that, in the event a "Change in Ownership" (as defined in Dr.
Bianco's employment contract) occurs, then all stock options of Dr. Bianco
shall immediately become vested.
 
  Mr. Bianco, Executive Vice President, Finance and Administration, entered
into a three-year employment agreement with cti, effective February 1, 1992,
which agreement was extended for an additional three-year period to expire on
January 31, 1998 by a letter agreement dated May 27, 1994. Effective January
1, 1997, cti's Board of Directors increased Mr. Bianco's annual base salary to
$298,080. His employment agreement provides that this base salary is subject
to annual increases in proportion to increases in the CPI, plus 10% of the
CPI-adjusted annual base salary, or such greater amount as the Board of
Directors shall determine. The agreement provides that, in the event that cti
terminates Mr. Bianco's employment without cause or Mr. Bianco terminates his
employment for cause, cti shall, at such time, pay Mr. Bianco an amount equal
to the total base salary otherwise payable through the expiration of the term
of the agreement or six months' base salary, whichever is greater, and shall
continue to provide certain benefits through the term of the agreement. The
agreement also provides that Mr. Bianco is entitled to four weeks of paid
vacation per year and that any unused vacation time and sick leave shall be
paid in cash upon the termination of Mr. Bianco's employment for any reason.
 
  Dr. Schwarz, Executive Vice President, Product Development, entered into a
two-year employment agreement with cti effective May 2, 1994, which is
renewable automatically for successive one-year terms subject to certain
termination provisions contained in the agreement. The agreement provides that
Dr. Schwarz initially would receive an annual base salary of $187,500, subject
to periodic increases based on performance. In the event cti terminates Dr.
Schwarz's employment without cause, cti shall pay Dr. Schwarz such amounts
owing for the remaining term of the agreement. The agreement further 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 three months of
any termination of Dr. Schwarz's employment. See "Certain Transactions."
 
  Dr. Lewis, Executive Vice President, Chief Scientific Officer, has a two-
year severance agreement with cti, effective April 1, 1996. The agreement
provides that, in the event that Dr. Lewis is terminated by cti without cause
or that Dr. Lewis terminates his employment for good reason, cti shall
continue to pay Dr. Lewis his monthly base
 
                                      51

<PAGE>
 
salary and benefits through the expiration of the term of the agreement. The
inventions and proprietary information agreement restricts Dr. Lewis from
competing with cti for two years after his termination of employment with cti.
 
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
 
  During the last completed fiscal year, the Compensation Committee consisted
of Dr. Jaeger and Messrs. Curnock Cook and Bowman. None of these individuals
was at any time during the last completed fiscal year, or at any other time,
an officer or employee of the Company. In March 1995 The International
Biotechnology Trust plc ("IBT"), which is 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 $7.5 million 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
Shareholders 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 September 1996 IBT purchased an additional 14,925.373 shares of Series A
Convertible Preferred Stock for an aggregate purchase price of $5.0 million.
See "Certain Transactions."
 
STOCK OPTION PLANS
 
  In January 1994 the Board of Directors adopted, and in February 1994 the
shareholders of the Company approved, the Company's 1994 Equity Incentive Plan
(the "1994 Plan"). A total of 582,685 shares of Common Stock were initially
reserved for issuance under the 1994 Plan and a predecessor plan, the
Company's 1992 Stock Option Plan (the "1992 Plan"). In May 1995 and April 1996
the shareholders of the Company approved the adoption of amendments to the
1994 Plan to increase the aggregate number of shares authorized for issuance
thereunder by 246,887 shares and 507,143 shares, respectively, bringing the
total number of shares reserved under the 1994 Plan to 1,336,715 shares of
Common Stock. As of December 31, 1996, 6,706 options have been exercised, 10-
year options to purchase 1,208,608 shares were granted and outstanding, and
options to purchase 121,401 shares of Common Stock remained available for
future grants under the 1994 Plan.
 
  The 1994 Plan provides for (i) the grant of incentive stock options
("ISOs"), nonstatutory stock options ("NSOs") and stock appreciation rights
("SARs"), (ii) the award of stock bonuses (iii) the sale of stock, and (iv)
any other equity-based or equity-related awards which the plan administrator
determines to be consistent with the purpose of the 1994 Plan and the
interests of the Company to employees (including officers) and independent
consultants. The 1994 Plan also provides for the automatic grant of NSOs to
non-employee Directors pursuant to the formula described below. The 1994 Plan
supersedes the 1992 Plan, pursuant to which the Board of Directors was
authorized to issue ISOs and NSOs upon terms and conditions similar to the
1994 Plan. Options granted under the 1992 Plan remain valid under the terms of
the 1992 Plan. The number of shares available for future grants under the 1994
Plan will be increased by the number of shares for which options granted under
the 1992 Plan expire, terminate or are canceled.
 
  The 1994 Plan is administered by the Compensation Committee of the Board of
Directors (the "Committee"). The Committee determines the persons to whom
awards will be made, the exercise or purchase price of each award, the number
of shares to be covered by each option, the term of each option, the times at
which each award may be exercised, and whether each option granted under the
1994 Plan is an ISO or a NSO. The exercise price of ISOs and NSOs granted by
the Committee must be at least 100% of the fair market value of the underlying
shares on the date of the grant, except that the exercise price of ISOs
granted to an optionee holding more than 10% of the combined voting power of
all classes of the Company's stock ("10% Shareholders") must be at least 110%
of the fair market value of the underlying shares on the date of the grant.
The Committee sets the vesting schedule for and the term of options granted
under the 1994 Plan, subject to the limitations that (i) options granted to
directors and officers of the Company may not be exercised within six months
after the grant thereof, (ii) the term of ISOs may not exceed 10 years and
(iii) the term of ISOs granted to 10% Shareholders may not exceed five years.
The Committee may also advance the lapse of any waiting period, accelerate any
exercise date, waive or modify any restriction with respect to an award or
give an employee an election to surrender an existing award in exchange for
the grant of a new award.
 
                                      52

<PAGE>
 
  Options granted under the 1994 Plan are nontransferable. In the event of the
death or other termination of an optionee's employment with the Company, the
1994 Plan provides that the optionee's options may be exercised for a period
of three months to one year thereafter. The 1994 Plan also provides that upon
any termination of employment, the Committee may extend the exercise period
for any period up to the expiration date of the option and may increase the
portion of the option that is exercisable.
 
  The purchase price for shares of Common Stock purchased on exercise of
options granted under the 1994 Plan must be paid in cash, including cash that
may be the proceeds of a loan from the Company or, with the consent of the
Committee, in whole or in part in shares of Common Stock of the Company. With
the consent of the Committee, an optionee may request the Company to apply the
shares to be received on exercise of a portion of an option to satisfy the
exercise price for additional portions of the option.
 
  Under the 1994 Plan, each non-employee Director is automatically granted a
10-year, fully vested nonstatutory stock option to purchase 2,857 shares of
Common Stock upon his or her election to the Board of Directors for the first
time. In addition, each non-employee Director is automatically granted a 10-
year, fully vested nonstatutory stock option to purchase 1,904 shares of
Common Stock on each anniversary of his or her immediately preceding election
to the Board of Directors. The exercise price of such options is 100% of the
fair market value of the shares of Common Stock on the date of grant.
 
  The Committee may grant SARs either alone or in connection with a stock
option. An SAR entitles the holder to payment from the Company of an amount
equal to the excess, on the date of exercise, of the fair market value of one
share over its fair market value on the date of grant (or, if granted in
connection with an option, the exercise price per share under the option to
which the SAR relates), multiplied by the number of shares covered by the
portion of the SAR or option that is surrendered. The Committee may also award
stock bonuses or issue shares for consideration subject to such terms,
conditions and restrictions as the Committee may determine, including
restrictions concerning transferability and forfeiture of the shares awarded.
No cash consideration will be paid in connection with SARs and stock bonuses
other than tax withholding amounts. Where shares are issued for consideration,
such consideration may not be less than 75% of the fair market value of the
shares on the date of issuance.
 
  The 1994 Plan provides for automatic acceleration of the vesting of options
and SARs granted under the 1994 Plan if a merger, consolidation,
reorganization, plan of exchange or liquidation results in the Company's
shareholders receiving cash, stock or other property in exchange for their
shares, except as specified below. Option holders will have the right during
the 30-day period immediately prior to any such event to exercise their
options or SARs without any limitation on exercisability. The 1994 Plan
requires the purchase of options and SARs granted to officers or Directors
following the expiration of the required six-month holding period. The 1994
Plan provides that, if the Company's shareholders receive stock of another
corporation in exchange for shares of the Company in any merger,
consolidation, reorganization or plan of exchange, all options granted under
the 1994 Plan will be converted into options to purchase shares of the stock
of the other corporation and all SARs will be converted into SARs measured by
the stock of the other corporation. The 1994 Plan also allows the Committee to
accelerate the vesting of the options and SARs granted under the 1994 Plan and
to grant the option holders a 30 day period prior to such event to exercise
their options or SARs, as provided above.
 
  The 1994 Plan also allows the Committee to accelerate the vesting of all
options and SARs granted thereunder (including options and SARs granted to
officers and Directors in the six months prior to such event) upon the
occurrence of a "Change in Control." A "Change in Control" is defined as (a)
the acquisition, directly or indirectly, by any individual, entity or group of
beneficial ownership of securities representing 50.1% or more of either the
then outstanding shares of Common Stock or the combined voting power in the
election of Directors of then outstanding voting securities of the Company,
(b) individuals who, as of the effective date of the 1994 Plan, constitute the
Board of Directors (the "Incumbent Board") (including any individual whose
subsequent election or nomination was approved by a vote of at least a
majority of the Directors then comprising the Incumbent Board) cease for any
reason to constitute at least a majority of the Board of Directors or (c)
approval by the shareholders of the Company of certain reorganizations,
mergers or consolidations, or of certain liquidations, dissolutions or
dispositions of all or substantially all of the assets of the Company.
 
                                      53

<PAGE>
 
  The Committee may make awards under the 1994 Plan that have terms and
conditions that vary from those specified in the 1994 Plan when such awards
are granted in substitution for, or in connection with the assumption of,
existing awards made by another corporation and assumed or otherwise agreed to
be provided for by the Company in connection with a corporate merger or other
similar transaction to which the Company or an affiliated company is a party.
The Committee may also specify the terms and provisions of other equity-based
or equity-related awards not described in the 1994 Plan which the Committee
determines to be consistent with the purpose of the 1994 and the interests of
the Company.
 
  The 1994 Plan may be amended by the Board of Directors at any time and will
terminate on January 1, 2004 unless terminated earlier by the Board of
Directors. No options may be granted after the termination of the 1994 Plan.
However, options granted under the 1994 Plan will remain valid under the 1994
Plan until their respective expiration dates.
 
  As of December 31, 1996 the 10-year options to purchase 1,208,608 shares of
Common Stock which are outstanding pursuant to the 1992 Plan and the 1994 Plan
were granted to 144 employees (excluding executive officers), consultants and
Directors, and generally vest in equal annual installments on the first three
or four anniversaries of the date of grant. In April 1995 the Board of
Directors approved the repricing of outstanding options to $11.725 per share
by offering to exchange such outstanding options for a fewer number of options
pursuant to a Black-Scholes formula. Subsequently, options for 434,664 shares,
with initial exercise prices of $17.50 and $31.50 per share, were exchanged
for 377,121 options with a price of $11.725 per share. All other terms and
conditions of the options remained unchanged.
 
EMPLOYEE STOCK PURCHASE PLAN
 
  In March 1996 the Board of Directors adopted, and in April 1996 the
shareholders of the Company approved, the Company's 1996 Employee Stock
Purchase Plan (the "Purchase Plan"). The Purchase Plan is intended to
encourage ownership of the Company's Common Stock by employees of the Company
and to provide additional incentive for the employees to promote the success
of the business of the Company. A maximum of 285,714 shares of Common Stock
have been reserved for purchase under the Purchase Plan. As of December 31,
1996, no options to purchase shares of Common Stock have been granted and no
shares of Common Stock have been purchased under the Purchase Plan.
 
  Employees of the Company or any of its subsidiaries who customarily work
more than twenty hours per week and more than five months per calendar year,
and who have been employed by the Company or any of its subsidiaries for at
least one year may participate in the Purchase Plan. The Purchase Plan is
administered by the Compensation Committee of the Board of Directors (the
"Committee"). The Purchase Plan provides for the automatic grant of options to
purchase shares of Common Stock ("Options"). The Options are granted on the
first day of an offering period, which lasts approximately six months. Payroll
deductions are accumulated in an account for each participant, based on the
amounts specified by the participant in an enrollment form. At the end of the
offering period, the participant's account balance is used to purchase shares
of Common Stock pursuant to the Option. The purchase price of shares of Common
Stock under an Option will equal 85% of the average of the fair market value
of the shares at the beginning and at the end of the offering period. Options
may not be assigned or transferred. No participant may purchase shares having
a fair market value exceeding $25,000 in any calendar year. A participant may
withdraw from an offering period at any time without affecting his or her
eligibility to participate in future offering periods.
 
  There are no tax consequences to either the participant or the Company when
the Option is issued. When shares are issued upon the exercise of the Option,
there are no tax consequences to the participant (except to the extent any
excess in the fair market value of the Common Stock over the exercise price
constitutes a tax preference item which requires payment of the alternative
minimum tax) or the Company. A participant's Option will terminate and his or
her accumulated account balance will be returned if such participant ceases to
be employed by the Company.
 
 
                                      54

<PAGE>
 
  If a participant disposes of shares purchased under the Purchase Plan at
least two years after the first day of the applicable offering period and at
least one year after the date of purchase, the participants will recognize
ordinary income in the year of disposition equal to the amount of the
discount. The amount of ordinary income recognized by a participant will be
added to the participant's basis in the shares. Any additional gain recognized
upon the disposition will be long-term capital gain. The Company will not
generally be entitled to a deduction if the participant complies with these
holding periods.
 
  If a participant disposes of shares purchased under the Purchase Plan within
two years from the first day of the applicable offering period or within one
year from the date of purchase (a "disqualifying disposition"), the
participant will recognize ordinary income in the year of such disposition
equal to the amount by which the fair market value of the shares on the date
the shares were purchased exceeded the purchase price. The amount of ordinary
income will be added to the participant's basis in the shares, and any
additional gain or resulting loss recognized on the disposition of the shares
will be a capital gain or loss. The Company will be entitled to a deduction in
the year of the disqualifying disposition equal to the amount of ordinary
income recognized by the participant as a result of the disposition.
 
  The Purchase Plan provides that in the event of a "Change in Control," the
Committee will either provide for the immediate exercise of the Options to the
extent of accumulated payroll balances or provide for a successor to adopt the
Purchase Plan. For purposes of the Purchase Plan, events constituting a
"Change in Control" are (i) the direct or indirect sale or exchange by the
shareholders of the Company of all or substantially all of the shares of
Common Stock of the Company where the shareholders of the Company before the
sale or exchange do not retain, directly or indirectly, at least a majority of
the beneficial interest in the voting stock of the Company, (ii) a merger in
which the shareholders of the Company before such merger do not retain,
directly or indirectly, at least a majority of the beneficial interest in the
voting stock of the Company or (iii) the sale, exchange or transfer of all or
substantially all of the Company's assets. The Board of Directors may
terminate or amend the Purchase Plan at any time. No termination of or
amendment to the Purchase Plan may materially adversely affect the rights of a
participant in the Purchase Plan without such participant's consent.
 
  In the event any change is made to the stock issuable under the Purchase
Plan by reason of any stock split, stock dividend, combination of shares or
recapitalization, appropriate adjustment will be made to the share reserve of
the Purchase Plan and the number of shares that a participant may purchase
with respect to an Option.
 
                                      55

<PAGE>
 

                             CERTAIN TRANSACTIONS
 
  In December 1993 cti loaned Dr. Bianco $200,000 at 5.35% annual interest.
The promissory note originally provided 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. In December 1996 Dr. Bianco entered into an employment agreement with
the Company which provides for the forgiveness of one-third of the loan on
each anniversary of the agreement. The unpaid portion of the loan will
accelerate and become due and payable in the event that cti terminates Dr.
Bianco's employment for cause or Dr. Bianco terminates his employment without
cause. The unpaid portion of the loan will be forgiven in the event that cti
terminates Dr. Bianco's employment without cause, Dr. Bianco terminates his
employment for cause, dies or becomes disabled, a "Change in Ownership" (as
defined in Dr. Bianco's employment agreement) occurs or cti's public market
capitalization equals or exceeds $500 million. See "Management--Employment
Agreements." The loan is secured by a pledge of 5,715 shares of Common Stock
owned by Dr. Bianco.
 
  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 three months of any termination of Dr. Schwarz's employment.
See "Management--Employment Agreements."
 
  In March 1995 The International Biotechnology Trust plc ("IBT"), which is an
affiliate of Mr. Curnock Cook and Rothschild Asset Management Limited,
purchased 22,388,061 shares of Series A Convertible Preferred Stock, for an
aggregate purchase price of $7.5 million, in the Company's 1995 Private
Placement. The holders of the outstanding shares of Series A 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 Shareholders Mr.
Curnock Cook was elected as a Director by the holders of the outstanding
shares of Series A Convertible Preferred Stock voting as a separate class. In
September 1996 IBT purchased an additional 14,925.373 shares of Series A
Convertible Preferred Stock for an aggregate purchase price of $5.0 million.
 
  In March 1995 Kummell Investments Limited ("Kummell") purchased 14,925.374
shares of Series A Convertible Preferred Stock, for an aggregate purchase
price of $5.0 million, in the 1995 Private Placement. In June 1995 Kummell
purchased an additional 12,686.5672 shares of Series A Convertible Preferred
Stock for an aggregate purchase price of $4.25 million. 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 September 1996 Kummell purchased an additional
14,925.373 shares of Series A Convertible Preferred Stock for an aggregate
purchase price of $5.0 million. In connection with the September 1996
transaction, the Company agreed that (i) it will take all necessary action to
nominate a designee of Kummell at the 1999 Annual Meeting of Stockholders to
serve as a Director until the 2002 Annual Meeting of Stockholders, and (ii) if
prior to the 1999 Annual Meeting of Stockholders Mr. Morris shall cease to be
a Director, it will take all necessary action to nominate a designee of
Kummell as a Director to fill the vacancy created by Mr. Morris' termination.
Such agreement will terminate upon the closing of this Offering.
 
  In December 1995 Dr. Link purchased 5,714 shares of Common Stock for an
aggregate purchase price of $67,000.
 
  In November 1996 Johnson & Johnson Development Corporation ("JJDC"), a
wholly-owned subsidiary of Johnson & Johnson, purchased 14,925.373 shares of
Series B Convertible Preferred Stock, for an aggregate purchase price of $5.0
million, pursuant to a Stock Purchase Agreement entered into between cti and
JJDC in connection with the execution of the Collaboration Agreement. Pursuant
to the Stock Purchase Agreement, cti is entitled to require JJDC to purchase
additional shares of Common Stock upon the closing of this Offering and,
 
                                      56

<PAGE>
 
subsequent to the offering, upon achievement of certain milestones. JJDC has
also agreed to purchase a number of shares of Common Stock equal to ten
percent of the shares sold at the closing of this Offering directly from the
Company in a private placement that will occur concurrent with the closing of
this Offering at a per share price equal to the initial public offering price.
See "Johnson & Johnson Stock Purchase" and "Business--Collaborations."
 
                                      57

<PAGE>
 
                            PRINCIPAL SHAREHOLDERS
 
  The following table sets forth certain information regarding beneficial
ownership of Common Stock, as of January 15, 1997 (after giving effect to the
automatic conversion of all outstanding shares of Convertible Preferred Stock
at January 15, 1997 into Common Stock upon the closing of this Offering), by
(i) each shareholder known by the Company to be the beneficial owner of more
than 5% of its outstanding shares of Common Stock, (ii) each of the Company's
Directors and the Named Executive Officers and (iii) all Directors and
executive officers as a group:
 

<TABLE>
<CAPTION>
                                                                 PERCENTAGE
                                                                OWNERSHIP (1)
                                                            ---------------------
NAME AND ADDRESS             NUMBER OF SHARES                BEFORE     AFTER
OF BENEFICIAL OWNER       BENEFICIALLY OWNED (1)            OFFERING OFFERING (2)
- -------------------       ----------------------            -------- ------------
<S>                       <C>                               <C>      <C>
Kummell Investments Lim-        1,239,511                    12.98%      9.65%
 ited...................
 c/o Morningside Group
 1188 Centre Street
 Newton Center, MA 02159
The International               1,066,098                    11.17       8.30
 Biotechnology Trust plc
 (3) ...................
 c/o Rothschild Asset
 Management Limited
 Five Arrows House
 St. Swithen's Lane
 London, England EC4N
 8NR
Collinson Howe Venture            945,268                     9.89       7.35
 Partners (4)...........
 1055 Washington Boule-
 vard
 Stamford, CT 06901
Biotechnology Investment          814,073                     8.53       6.34
 Group, L.L.C. (5)......
 c/o Collinson Howe Ven-
 ture Partners
 1055 Washington Boule-
 vard
 Stamford, CT 06901
Johnson & Johnson Devel-          426,439(Before Offering)    4.47
 opment Corporation
 (6)....................
 One Johnson & Johnson            726,439(After Offering)                5.65
 Plaza
 New Brunswick, NJ 08933
James A. Bianco, M.D.**           359,232                     3.73       2.78
 (7)....................
Jack L. Bowman** (8)....            6,666                        *          *
Jeremy L. Curnock Cook**        1,070,860                    11.21       8.33
 (9)....................
Wilfred E. Jaeger,                  6,476                        *          *
 M.D.** (10)............
Max E. Link, Ph.D.**               10,476                        *          *
 (11)...................
David W. Martin Jr.,                4,762                        *          *
 M.D.** (12)............
Terrence M. Morris**                4,762                        *          *
 (13)...................
Phillip M. Nudelman,                6,095                        *          *
 Ph.D.** (14)...........
Jack W. Singer, M.D.**            215,944                     2.26       1.68
 (15)...................
Louis A. Bianco (16)....          146,179                     1.52       1.13
Maurice J. Schwarz,                15,238                        *          *
 Ph.D. (17).............
Robert A. Lewis, M.D.               2,857                        *          *
 (18)...................
All Directors and
 Executive Officers as a
 group
 (15 persons) (19)......        1,871,149                    19.16      14.32
</TABLE>

 
                                      58

<PAGE>
 
- --------
  * Less than 1%
  ** Denotes Director of the Company
 (1) Beneficial ownership is determined in accordance with the rules of the
     Securities and Exchange Commission and generally includes voting or
     investment power with respect to securities. Shares of Common Stock
     subject to options or warrants currently exercisable or convertible, or
     exercisable or convertible within 60 days of January 15, 1997, are deemed
     outstanding for computing the percentage of the person holding such
     option or warrant but are not deemed outstanding for computing the
     percentage of any other person. Except as indicated in the footnotes to
     this table and pursuant to applicable community property laws, the
     persons named in the table have sole voting and investment power with
     respect to all shares of Common Stock beneficially owned.
 (2) Percentage of beneficial ownership after the Offering also gives effect
     to the Johnson & Johnson Stock Purchase. See "Johnson & Johnson Stock
     Purchase."
 (3) Consists of 1,066,098 shares of Common Stock beneficially owned by The
     International Biotechnology Trust plc, a company formed under the laws of
     England ("IBT") managed by Rothschild Asset Management Limited
     ("Rothschild"). Rothschild has or shares voting and investment power with
     respect to the shares held by IBT and may be deemed to be the beneficial
     owner of such shares. Mr. Curnock Cook is a director of IBT and
     Rothschild, and may be deemed to be the beneficial owner of any shares
     beneficially owned by each of IBT and Rothschild. Mr. Curnock Cook
     disclaims beneficial ownership of shares beneficially owned by IBT and
     Rothschild except to the extent of his proportionate interest therein.
     See footnote (9) below.
 (4) Collinson Howe Venture Partners ("CHVP") is a venture capital investment
     management firm which is the managing member of Biotechnology Investment
     Group, L.L.C., a Delaware limited liability company ("BIG"), and is the
     investment advisor to Schroder Ventures Limited Partnership ("SVLP"),
     Schroder Ventures U.S. Trust ("SVUST") and Schroders Incorporated ("SI").
     As such, CHVP has or shares voting and investment power with respect to
     the shares held by BIG, SVLP, SVUST and SI and may be deemed to be the
     beneficial owner of such shares. The shares listed above consist of (i)
     814,073 shares of Common Stock held by BIG, 66,184 shares of Common Stock
     held by SVLP, 16,546 shares of Common Stock held by SVUST and 35,608
     shares of Common Stock held by SI, and (ii) an additional 8,229, 2,057
     and 2,571 shares of Common Stock issuable upon exercise of options
     beneficially owned by SVLP, SVUST and SI, respectively, pursuant to an
     agreement with Dr. Jaeger. See footnotes (5) and (10) below.
 (5) BIG is a limited liability company which was created to acquire, hold,
     protect, manage and dispose of equity, debt and derivative securities of
     biotechnology and other companies. 771,429 of the shares of Common Stock
     held by BIG were acquired in January 1995 from The Edward Blech Trust
     ("EBT"). The sole beneficiary of EBT is the minor child of David Blech, a
     founder, former director and shareholder of the Company. The present
     members of BIG are (i) the managing member, CHVP, an investment
     management firm of which Jeffrey J. Collinson is President, sole director
     and majority shareholder, (ii) EBT, and (iii) Wilmington Trust Company
     ("WTC"), as voting trustee under a voting trust agreement (the "Voting
     Trust Agreement") among WTC, BIG and BIO Holdings L.L.C. ("Holdings").
     The managing member of BIG is CHVP. The members of BIG share voting and
     investment power with respect to all shares held of record by BIG. All of
     the shares held of record by BIG have been pledged as collateral to
     Citibank, N.A. ("Citibank") to secure indebtedness owed to such bank.
     Each of Citibank and Holdings has the right pursuant to the Voting Trust
     Agreement to direct certain actions of WTC as a member of BIG. WTC, as
     the member holding a majority interest in Holdings, has the right to
     direct the actions of Holdings under the Voting Trust Agreement.
     Citibank, pursuant to a separate voting trust agreement among WTC, David
     Blech and Holdings, has the right to direct the actions of WTC as a
     member of Holdings with respect to the rights of Holdings under the
     Voting Trust Agreement. By virtue of their status as members of BIG, each
     of CHVP and EBT may be deemed to be the beneficial owner of all shares
     held of record by BIG. By virtue of his status as the majority owner and
     controlling person of CHVP, Jeffrey J. Collinson may also be deemed the
     beneficial owner of all shares held of record by BIG. Each of CHVP, EBT
     and Mr. Collinson disclaims beneficial ownership of shares held by BIG
     except to the extent of such person's proportionate interest therein.
 (6) Number of shares beneficially owned after the Offering includes 300,000
     shares of Common Stock purchased by JJDC concurrent with the closing of
     this Offering. See "Johnson & Johnson Stock Purchase."
 (7) Includes 85,574 shares issuable upon exercise of options that are
     currently exercisable or exercisable within 60 days of January 15, 1997.
     Does not include 138,095 shares issuable upon exercise of options not yet
     vested. 52,381 of such options vest in equal installments on December 5,
     1997 and 1998, and 85,714 of such options vest in equal installments on
     November 19, 1997, 1998 and 1999.
 (8) Consists of 6,666 shares issuable upon exercise of options that are
     currently exercisable or exercisable within 60 days of January 15, 1997.
     Does not include 3,809 shares issuable upon exercise of options not yet
     vested. Such options vest in equal installments on May 22, 1997 and 1998.
 (9) Includes 1,066,098 shares of Common Stock beneficially owned by IBT. IBT
     is managed by Rothschild and Rothschild has or shares voting and
     investment power with respect to the shares held by IBT and may be deemed
     to be the beneficial owner of such shares. Mr. Curnock Cook is a director
     of IBT and Rothschild and may be deemed to be the beneficial owner of any
     shares beneficially owned by each of IBT and Rothschild. Mr. Curnock Cook
     disclaims
 
                                      59

<PAGE>
 
     beneficial ownership of shares beneficially owned by IBT and Rothschild
     except to the extent of his proportionate interest therein. Also includes
     an immediately exercisable option to purchase 4,762 shares of Common
     Stock. See footnote (3) above and "Certain Transactions."
(10) Consists of 6,476 shares issuable upon exercise of options that are
     currently exercisable or exercisable within 60 days of January 15, 1997.
     Does not include 12,857 shares issuable upon exercise of options
     beneficially owned by affiliates of CHVP pursuant to an agreement with
     Dr. Jaeger. Dr. Jaeger, a director of the Company, is a former partner at
     CHVP. Dr. Jaeger disclaims beneficial ownership of shares of Common Stock
     beneficially owned by affiliates of CHVP. See footnote (4) above.
(11) Includes an immediately exercisable option to purchase 1,904 shares of
     Common Stock.
(12) Consists of an immediately exercisable option to purchase 4,762 shares of
     Common Stock.
(13) Consists of an immediately exercisable option to purchase 4,762 shares of
     Common Stock.
(14) Consists of 6,095 shares issuable upon exercise of options that are
     currently exercisable or exercisable within 60 days of January 15, 1997.
     Does not include 3,809 shares issuable upon exercise of options not yet
     vested. Such options vest in equal installments on May 22, 1997 and 1998.
(15) Includes 16,195 shares issuable upon exercise of options that are
     currently exercisable or exercisable within 60 days of January 15, 1997.
     Does not include 33,333 shares issuable upon exercise of options not yet
     vested. 4,762 of such options vest in equal installments on December 5,
     1997 and 1998, and 28,571 of such options vest in equal installments on
     November 7, 1997, 1998 and 1999.
(16) Includes 43,669 shares issuable upon exercise of options that are
     currently exercisable or exercisable within 60 days of January 15, 1997.
     Does not include 32,857 shares issuable upon exercise of options not yet
     vested. 11,429 of such options vest in equal installments on December 5,
     1997 and 1998, and 21,428 of such options vest in equal installments on
     November 7, 1997, 1998 and 1999.
(17) Consists of 15,238 shares issuable upon exercise of options that are
     currently exercisable or exercisable within 60 days of January 15, 1997.
     Does not include 41,904 shares issuable upon exercise of options not yet
     vested. 5,714 of such options vest on June 1, 1997, 7,619 of such options
     vest in equal installments on December 5, 1997 and 1998, and 28,571 of
     such options vest in equal installments on November 7, 1997, 1998 and
     1999.
(18) Consists of an immediately exercisable option to purchase 2,857 shares of
     Common Stock. Does not include 64,285 shares issuable upon exercise of
     options not yet vested. 28,585 of such options vest on April 1, 1998,
     14,271 of such options vest on April 1, 1999, and 21,429 of such options
     vest in equal installments on November 7, 1997, 1998, and 1999.
(19) Includes an aggregate of 220,562 shares of Common Stock issuable upon
     exercise of options that are currently exercisable or exercisable within
     60 days of January 15, 1997. See footnotes (7) through (18). Excludes,
     with respect to each of Mr. Bowman, Mr. Curnock Cook, Dr. Jaeger, Dr.
     Martin, Mr. Morris and Dr. Nudelman, 14,285 shares of Common Stock, and
     with respect to Dr. Link, 28,570 shares of Common Stock, which will
     become issuable upon exercise of outstanding options following the
     approval of such option grants by the Company's shareholders at the 1997
     Annual Meeting of Shareholders. See Note 9 of Notes to Consolidated
     Financial Statements.
 
                                      60

<PAGE>
 

                         DESCRIPTION OF CAPITAL STOCK
 
  Upon the closing of this Offering, the authorized capital stock of the
Company will consist of 100,000,000 shares of Common Stock, no par value, and
10,000,000 shares of Preferred Stock, 100,000 of which have been designated as
Series C Preferred Stock ("Series C Preferred"), and 9,900,000 of which are
undesignated.
 
COMMON STOCK
 
  Each holder of Common Stock is entitled to one vote for each share held of
record on all matters submitted to a vote of the shareholders. In all matters
other than the election of Directors or as otherwise required by law, when a
quorum is present at any shareholders' meeting, the affirmative vote of the
majority of shares present in person or represented by proxy shall decide any
question before such meeting. Directors are elected by a plurality of the
votes of the shares present in person or represented by proxy at a
shareholders' meeting. The Board of Directors of cti is divided into three
approximately equal classes of Directors serving staggered three-year terms.
As a result, approximately one-third of the total number of Directors will be
elected every year. See "Management--Executive Officers and Directors." The
holders of Common Stock are not entitled to cumulative voting rights with
respect to the election of Directors, and, as a consequence, minority
shareholders will not be able to elect Directors on the basis of their votes
alone. Subject to preferences that may be applicable to any then outstanding
shares of Preferred Stock, holders of Common Stock are entitled to receive
ratably such dividends as may be declared by the Board of Directors out of
funds legally available therefor. See "Dividend Policy." In the event of a
liquidation, dissolution or winding up of the Company, holders of the Common
Stock would be entitled to share ratably in all assets remaining after payment
of liabilities and the satisfaction of any liquidation preference of any then
outstanding series of Preferred Stock. Holders of Common Stock have no
preemptive rights and no right to convert their Common Stock into any other
securities. There are no redemption or sinking fund provisions applicable to
the Common Stock. All outstanding shares of Common Stock are, and all shares
of Common Stock to be outstanding upon completion of this Offering will be,
fully paid and nonassessable.
 
  As of December 31, 1996, there were outstanding 12,846,824 shares of Common
Stock (after giving effect to (i) the automatic conversion of all outstanding
shares of Convertible Preferred Stock into 4,603,352 shares of Common Stock
upon the closing of this Offering and (ii) the sale of 300,000 shares of
Common Stock to JJDC concurrently with the closing of this Offering), held of
record by approximately 591 shareholders, outstanding options to purchase an
aggregate of 1,208,608 shares of Common Stock and outstanding warrants to
purchase an aggregate of 77,907 shares of Common Stock. See "Management--Stock
Option Plans."
 
PREFERRED STOCK
 
  The Board of Directors has the authority, without further vote or action by
the shareholders, to issue up to 10,000,000 shares of Preferred Stock (less
any shares of Preferred Stock then outstanding or reserved for issuance) in
one or more series and to fix the designations and powers, preferences and
rights, if any, and qualifications, limitations or other restrictions thereof,
including, without limitation, the dividend rate (and whether dividends are
cumulative), conversion rights, if any, voting rights, rights and terms of
redemption (including sinking fund provisions, if any), redemption price and
liquidation preferences of any wholly unissued series of Preferred Stock and
the number of shares constituting any such series and the designation thereof.
Although the Company has no current plans to issue any shares of Preferred
Stock, the issuance of Preferred Stock or of rights to purchase Preferred
Stock could be used to delay or discourage an unsolicited acquisition
proposal. In addition, the possible issuance of Preferred Stock could
discourage a proxy contest, make more difficult the acquisition of a
substantial block of the Company's Common Stock or limit the price that
investors might be willing to pay in the future for shares of the Company's
Common Stock.
 
  The Company believes that the Preferred Stock will provide the Company with
increased flexibility in structuring possible future financings and
acquisitions, and in meeting other corporate needs that might arise. Having
such authorized shares available for issuance will allow the Company to issue
shares of Preferred Stock
 
                                      61

<PAGE>
 
without the expense and delay of a special shareholders' meeting. The
authorized shares of Preferred Stock, as well as shares of Common Stock, will
be available for issuance without further action by shareholders, unless such
action is required by applicable law, the terms of any series of Preferred
Stock then outstanding or the rules of any stock exchange on which the
Company's securities may be listed.
 
  Immediately prior to the closing of this Offering, there will be outstanding
161,118.6453 shares of Convertible Preferred Stock. Upon the closing of this
Offering, each share of Convertible Preferred Stock will automatically convert
into 28.5714 shares of Common Stock for a total of 4,603,352 shares of Common
Stock. An additional 100,000 shares of Preferred Stock are designated as
Series C Preferred and are reserved for issuance pursuant to the Company's
Rights Agreement. See "--Antitakeover Restrictions--Rights Agreement." There
are no shares of Series C Preferred outstanding as of the date of this
Prospectus.
 
WARRANTS
 
  In September 1995 cti completed an exchange offer (the "Warrant Exchange")
to exchange shares of its Common Stock for its outstanding warrants to
purchase shares of Common Stock. In connection with the Warrant Exchange, the
Company issued (i) 5,612 shares of Common Stock in exchange for warrants to
purchase 190,992 shares at an exercise price of $38.50 per share which were
issued to purchasers in the 1993 Private Placement (the "Unit Warrants"); (ii)
68,871 shares of Common Stock in exchange for warrants to purchase 182,786
shares at exercise prices ranging from $17.50 to $31.50 per share which were
issued to sales agents in connection with the 1992 Private Placement and the
1993 Private Placement (the "Sales Agent Warrants"); (iii) 22,858 shares of
Common Stock in exchange for warrants to purchase 57,143 shares at an exercise
price of $17.50 per share which were issued to David H. Smith, M.D., a former
Chairman of the Board of Directors of the Company (the "Smith Warrants"); and
(iv) 7,228 shares of Common Stock in exchange for warrants to purchase 12,432
shares at an exercise price of $12.8975 per share which were issued to Aberlyn
Capital Management Limited Partnership at an initial exercise price of $15.40
per share in connection with an equipment leasing transaction (the "Lease
Warrants").
 
  As of December 31, 1996, there were outstanding Sales Agent Warrants to
purchase 68,901 shares of Common Stock at an exercise price of $17.50 per
share and Sales Agent Warrants to purchase 9,006 shares of Common Stock at an
exercise price of $31.50 per share. The Sales Agent Warrants will expire
between August 11, 1997 and February 7, 1999. The exercise prices of the Sales
Agent Warrants are subject to proportional adjustment in the event of stock
splits and stock dividends.
 
REGISTRATION RIGHTS
 
  After this Offering, the holders of 5,473,699 shares of Common Stock and the
holders of warrants to purchase 77,907 shares of Common Stock (collectively,
the "Registrable Securities") or their respective transferees will be entitled
to certain registration rights with respect to such shares of Common Stock
under the Securities Act.
 
  Pursuant to a registration agreement entered into in connection with the
1993 Private Placement (the "1993 Registration Agreement"), the holders of
471,390 shares of Common Stock, including 5,612 shares of Common Stock issued
in exchange for Unit Warrants to purchase 190,992 shares of Common Stock in
connection with the Warrant Exchange (collectively, the "1993 Registrable
Securities"), are entitled to certain registration rights with respect to the
1993 Registrable Securities. Pursuant to the 1993 Registration Agreement, the
Company will be required to use its best efforts to effect the registration of
the 1993 Registrable Securities under the Securities Act not later than six
months after the final closing date of this Offering (the "IPO Closing Date")
and to keep such registration effective pursuant to Rule 415 under the
Securities Act until May 31, 1999.
 
  Pursuant to the Sales Agent Warrants and the Smith Warrants, the holders of
such warrants have certain demand and piggyback registration rights with
respect to such warrants and the shares of Common Stock issuable
 
                                      62

<PAGE>
 
upon exercise of such warrants, including the shares of Common Stock issued in
exchange for such warrants in connection with the Warrant Exchange
(collectively, the "Warrant Securities"). The holders of the Warrant
Securities hold 91,729 shares of Common Stock and warrants to purchase 77,907
shares of Common Stock. The holders of the Warrant Securities may, beginning
six months to one year following the completion of an initial public offering
of the Company's Common Stock, require the Company to file up to an aggregate
of three registration statements permitting the sale of the Warrant Securities
and to maintain the effectiveness of such registration statements for at least
nine months. In addition the Company is required to file a registration
statement on Form S-3 with respect to the Warrant Securities, at such time as
it is eligible to do so, and to use its best efforts to effect such
registration and maintain the effectiveness of such registration statement for
a specified period of time, subject to certain conditions and limitations.
Further, if the Company shall register any of its securities under the
Securities Act, the holders of the Warrant Securities are entitled to notice
of and inclusion in such registration, subject to the right of the managing
underwriters to limit the number of shares to be included in such
registration.
 
  Pursuant to the Lease Warrants, the holder of the 7,228 shares of Common
Stock issued in exchange for the Lease Warrants in connection with the Warrant
Exchange has certain demand registration rights with respect to such shares of
Common Stock (the "Lease Warrant Securities"). The holder of the Lease Warrant
Securities may, beginning one year following the completion of an initial
public offering of the Company's Common Stock, require the Company to file one
registration statement permitting the sale of the Lease Warrant Securities and
to maintain the effectiveness of such registration statement for at least nine
months.
 
  Pursuant to registration agreements entered into with the holders of the
Series A Convertible Preferred Stock (the "Series A Registration Rights
Agreements"), the holders of 146,193.2723 shares of Series A Convertible
Preferred Stock that will automatically convert into an aggregate of 4,176,913
shares of Common Stock upon the closing of this Offering (such shares of
Common Stock being referred to herein as the "Series A Registrable
Securities") are entitled to certain registration rights with respect to the
Series A Registrable Securities. Pursuant to the Series A Registration
Agreements, the Company will be required to use its best efforts to effect the
registration of the Series A Registrable Securities under the Securities Act
not later than six months after the IPO Closing Date and to keep such
registration effective pursuant to Rule 415 under the Securities Act until
March 22, 1998, in the case of 2,727,023 Series A Registrable Securities
issuable upon conversion of the 95,447.004 shares of Series A Convertible
Preferred Stock issued in 1995 (the "1995 Registrable Securities"), and until
September 17, 1999, in the case of the 1,449,890 Series A Registrable
Securities issuable upon conversion of the 50,746.2683 shares of Series A
Convertible Preferred Stock issued in 1996 (the "1996 Registrable
Securities"). In addition, pursuant to the Series A Registration Agreements,
if the Company shall not have effected the registration of all 1995
Registrable Securities by March 31, 1997, the holders of a majority in
interest of 1995 Registrable Securities shall have the right (but only once)
to make a written request to the Company for registration of all 1995
Registrable Securities, and if the Company shall not have effected the
registration of all 1996 Registrable Securities by September 17, 1999, the
holders of a majority in interest of 1996 Registrable Securities shall have
the right (but only once) to make a written request to the Company for
registration of all 1996 Registrable Securities.
 
  Pursuant to a Stock Purchase Agreement entered into with Johnson & Johnson
Development Corporation ("JJDC"), a wholly-owned subsidiary of Johnson &
Johnson, in connection with the Collaboration Agreement (the "Johnson &
Johnson Stock Purchase Agreement"), JJDC is entitled to certain registration
rights with respect to the 300,000 shares of Common Stock to be purchased by
JJDC concurrent with the closing of this Offering pursuant to the Johnson &
Johnson Stock Purchase, the 426,439 shares of Common Stock issuable upon the
automatic conversion of the Series B Convertible Preferred Stock, and any
additional shares of Common Stock that cti may require JJDC to purchase upon
the achievement of certain milestones (collectively, the "Johnson & Johnson
Registrable Securities"). Pursuant to the Johnson & Johnson Stock Purchase
Agreement, the Company will be required to use its best efforts to effect the
registration of the Johnson & Johnson Registrable Securities under the
Securities Act not later than the first to occur of twelve months after the
IPO Closing Date, September 30, 1998 or the registration of any Series A
Registrable Securities, and to keep such registration statement effective
pursuant to Rule 415 under the Securities Act for the longer of 120 days after
the
 
                                      63

<PAGE>
 
date of actual purchase by JJDC of Johnson & Johnson Registrable Securities,
120 days after the expiration of the "lock-up" agreement to which JJDC is a
party (see "Underwriting") and any period during which the Company shall keep
any registration statement effective pursuant to any of the agreements
referred to above. Further, if at any time subsequent to the twelfth month
after the IPO Closing Date the Company shall register any of its securities
under the Securities Act, JJDC is entitled to notice of and inclusion in such
registration, subject to the right of the managing underwriters to limit the
number of shares to be included in such registration.
 
  Subject to certain limitations, the Company is required to bear all
expenses, other than underwriting discounts and commissions, incurred in
connection with the registration of the 1993 Registrable Securities, the
Warrant Securities, the Lease Warrant Securities, the Series A Registrable
Securities and the Johnson & Johnson Registrable Securities (collectively, the
"Registrable Securities") pursuant to the agreements described above. The
Company and the holders of the Registrable Securities have agreed to indemnify
each other for certain liabilities arising out of material misstatements and
omissions made by the other party in any registration statement covering
Registrable Securities.
 
  If shareholders, by exercising their registration rights, cause a large
number of shares to be sold in the public market, such sales may have an
adverse effect on any future market price for the Common Stock. In addition,
the existence of such registration rights and the existence of an effective
registration statement over an extended period of time may have an adverse
effect on the Company's efforts to raise needed capital.
 
ANTITAKEOVER RESTRICTIONS
 
 Statutory and Charter Provisions
 
  Washington law contains certain provisions that may have the effect of
delaying, deterring or preventing a change in control of the Company. Chapter
23B.17 of the Washington Business Corporation Act (the "WBCA") prohibits,
subject to certain exceptions, a merger, sale of assets or liquidation of the
Company involving an "interested shareholder" (defined as a person or group of
affiliated persons who own beneficially 20% or more of the Company's voting
securities) unless the transaction is determined to be at a "fair price" or
otherwise approved by a majority of the Company's disinterested Directors or
is approved by holders of two-thirds of the Company's outstanding voting
securities, other than those held by the interested shareholder. A Washington
corporation may, in its articles of incorporation, exempt itself from coverage
of this provision, but the Company has not done so. In addition, Chapter
23B.19 of the WBCA prohibits the Company, with certain exceptions, from
engaging in certain significant business transactions with an "acquiring
person" (defined as a person or group of persons who acquire 10% or more of
the Company's voting securities without the prior approval of the Company's
Board of Directors) for a period of five years following the acquiring
person's share acquisition date. The prohibited transactions include, among
others, a merger or consolidation with, disposition of assets to, or issuance
or redemption of stock to or from, the acquiring person, or otherwise allowing
the acquiring person to receive any disproportionate benefit as a shareholder.
The Company may not exempt itself from coverage of this statute. These
statutory provisions may have the effect of delaying, deterring or preventing
a change in control of the Company.
 
  The Company's Board of Directors is divided into three approximately equal
classes of Directors serving staggered three-year terms. In addition, the
Company's Restated Articles of Incorporation provide that Directors may be
removed from office only at a meeting of shareholders called expressly for
that purpose and only for cause. The Company's Restated Articles of
Incorporation limit "cause" to willful misfeasance having a material adverse
effect on the Company or conviction of a felony, provided that any action by a
Director shall not constitute "cause" if, in good faith, the Director believed
the action to be in or not opposed to the best interests of the Company or if
the Director is entitled to be indemnified with respect to such action under
applicable law, the Company's Restated Articles of Incorporation or Bylaws, or
a contract with the Company. Further, the Company's Bylaws require a
shareholder to provide notice to the Company of such shareholder's intent to
nominate a person or persons for election as Directors not later than 90 days
prior to the date one year from the date of the immediately preceding annual
meeting of shareholders or, in the case of an election to be held at a special
meeting of shareholders for the election of Directors, the close of business
on the tenth day following the
 
                                      64

<PAGE>
 
date on which notice of such meeting is first given to shareholders. A
shareholder must also provide the Company with notice of such shareholder's
intent to make any proposal at an annual meeting of shareholders not later
than 90 days prior to the date one year from the date of the immediately
preceding annual meeting of shareholders. These provisions may have the effect
of deterring hostile takeovers or delaying changes in control or management of
cti.
 
RIGHTS AGREEMENT
 
  Effective November 11, 1996 the Company's Board of Directors declared a
dividend of one preferred share purchase right (a "Right") for each
outstanding share of Common Stock, to shareholders of record as of the close
of business November 21, 1996 and for each share of Common Stock issued
thereafter pursuant to a Rights Agreement between the Company and Harris Trust
Company of California, as Rights Agent (the "Rights Agreement"). One Right
will be issued for each share of Common Stock issued in connection with the
Offering. Each Right entitles the registered holder thereof to purchase from
the Company one one-thousandth of a share (a "Unit") of Series C Preferred, at
a price of $175.00 per Unit, subject to adjustment under certain circumstances
set forth in the Rights Agreement. Upon the occurrence of certain events
generally associated with an unsolicited attempt to take over cti, the Rights
(except for Rights held by an Acquiring Person (as defined in the Rights
Agreement)) will become exercisable and will cease to trade with the Common
Stock. Upon the acquisition without the consent of the Company's Board of
Directors and 15 percent or more of the outstanding shares of Common Stock or
announcement of a tender offer or exchange offer for shares in excess of 15
percent or more of the outstanding shares of Common Stock, each Right (except
for Rights held by an Acquiring Person) will be converted into a right to
purchase at the then-current exercise price of the Right that number of shares
of Common Stock having a market value of two times the exercise price of the
Right or, in the event of a merger of cti into an Acquiring Person, securities
of the Acquiring Person having a market value of two times the exercise price
of the Right. Under certain conditions, cti may elect to redeem the Rights for
a nominal amount or to exchange the Rights not held by an Acquiring Person for
Common Stock on a one-for-one basis.
 
  The Rights are designed to protect and maximize the outstanding equity
interests of the Company in the event of an unsolicited attempt by an acquiror
to take over cti in a manner not approved by the Company's Board of Directors.
Takeover attempts frequently include coercive tactics to deprive a
corporation's board of directors and its shareholders of any real opportunity
to determine the destiny of the corporation. The Rights have been declared by
the Company's Board of Directors in order to deter such tactics.
 
  The Rights are not intended to prevent a takeover of cti and will not do so.
Nevertheless, the Rights may have the effect of rendering it more difficult or
discouraging an acquisition of cti deemed undesirable by the Company's Board
of Directors. The Rights may cause substantial dilution to a person or group
that attempts to acquire the Company on terms or in a manner not approved by
the Company's Board of Directors, except pursuant to an offer conditioned upon
the negation, purchase or redemption of the Rights.
 
  In connection with its adoption of the Rights Agreement, the Company
reserved for issuance 100,000 shares of Series C Preferred. The Series C
Preferred will only be issued in the event Rights issued pursuant to the
Rights Agreement are converted into shares of Series C Preferred. Holders of
shares of Series C Preferred have preference over all other holders of
Preferred Stock in the payment of dividends and upon any distributions. Each
share of Series C Preferred would entitle the holder thereof to 1,000 votes on
all matters submitted to a vote of the shareholders and would vote together
with the holders of the Common Stock as one class. Each share of Series C
Preferred would also be entitled to quarterly dividend payments equal to the
greater of (i) $1,000 and (ii) 1,000 times any quarterly dividend declared per
share of Common Stock. In the event dividends on the Series C Preferred are in
arrears in an amount equal to six quarterly dividends, the holders of the
Series C Preferred obtain special voting rights pertaining to the election of
directors. Additionally, while any dividends or distributions on the Series C
Preferred are in arrears, the Company's right to make distributions on or
redeem shares of any class of capital stock ranking on parity with or junior
to the Series C Preferred is restricted.
 
                                      65

<PAGE>
 
  In the event of the liquidation, dissolution or winding up of the Company,
holders of Series C Preferred would receive the greater of (i) all accrued and
unpaid dividends plus a $1,000 preference per share and (ii) the amount equal
to the aggregate amount per share to be distributed to holders of Common
Stock, and thereafter would be entitled to receive per share an aggregate
payment equal to 1,000 times the aggregate amount per share to be distributed
to holders of Common Stock. In the event of any consolidation, merger, share
exchange or other similar transaction by the Company, each share of Series C
Preferred would be exchanged or changed into an amount per share equal to
1,000 times the aggregate amount of stock, securities, cash and/or property
into which each share of Common Stock is changed or exchanged. The shares of
Series C Preferred would not be redeemable and would rank junior to all series
of any other class of Preferred Stock issued from time to time. The issuance
of Series C Preferred could adversely affect the voting power of holders of
Common Stock and could have the effect of delaying, deferring or preventing a
change in control of the Company. The Company would only issue the Series C
Preferred in the event the Rights issued under the Rights Agreement are
converted into shares of Series C Preferred.
 
TRANSFER AGENT AND REGISTRAR
 
  The Transfer Agent and Registrar for cti's Common Stock is Harris Trust
Company of California.
 
                        SHARES ELIGIBLE FOR FUTURE SALE
 
  Upon completion of this Offering and the Johnson & Johnson Stock Purchase,
the Company will have 12,846,824 shares of Common Stock outstanding, assuming
no exercise of the Underwriters' over-allotment option and no exercise of
outstanding options and warrants. Of these shares, the 3,000,000 shares of
Common Stock sold in this Offering will be freely transferable without
restriction under the Securities Act unless they are held by "affiliates" or
"underwriters" of the Company, as these terms are used under the Securities
Act and the regulations promulgated thereunder. The remaining 9,846,824 shares
of Common Stock are "restricted securities" as the term is defined by Rule 144
promulgated under the Securities Act (the "Restricted Shares") and may not be
sold publicly unless they are registered under the Securities Act or are sold
pursuant to Rule 144 or another exemption from registration. Of the Restricted
Shares, 3,844,046 shares are held by affiliates and are subject to lock-up
agreements (as described below under "Underwriting") expiring 180 days
following the date of this Prospectus. Of the 6,002,778 Restricted Shares held
by non-affiliates who are not subject to lock-up agreements,      shares will
have been held for more than three years and will be eligible for immediate
sale in the public market without restriction under Rule 144(k) (as described
below) as of the date of this Prospectus (the "Effective Date"), and an
additional     shares will be eligible for sale under Rules 144 and 701 under
the Securities Act as of the Effective Date. Of the      Restricted Shares
held by non-affiliates who are subject to lock-up agreements,      shares will
be eligible for immediate sale in the public market without restriction under
Rule 144(k) or subject to Rules 144 and 701 upon the expiration of such lock-
up agreements. The remaining Restricted Shares will 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 provisions of Rule 144 are satisfied.
In addition, holders of warrants and options exercisable for an aggregate of
    shares of Common Stock have entered into 180-day lock-up agreements, and
    of such shares may be sold 180 days after the Effective Date.
 
  In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated), including an affiliate, who has beneficially
owned shares for at least two years is entitled to sell, within any three-
month period, a number of shares (including both restricted and unrestricted
shares held by affiliates) that does not exceed the greater of (i) one percent
(1%) of the then outstanding Common Stock (approximately 128,468 shares
immediately after this Offering) or (ii) the average weekly trading volume in
the Common Stock during the four calendar weeks preceding such sale, subject
to the filing of a Form 144 with respect to such sale and certain other
limitations and restrictions. In addition, a person who is not deemed to have
been an affiliate of the Company at any time during the three months preceding
a sale, and who has beneficially owned the shares
 
                                      66

<PAGE>
 
proposed to be sold for at least three years, would be entitled to sell such
shares under Rule 144(k) without regard to the volume limitations described
above or certain other restrictions of Rule 144. The Securities and Exchange
Commission has proposed certain amendments to Rule 144 and Rule 144(k) that
would reduce the applicable requisite holding periods to one year and two
years, respectively.
 
  Under Rule 701, any employee, officer or director of or consultant to the
Company who purchased shares pursuant to a written compensatory plan or
contract, including the 1992 Plan and the 1994 Plan, who is not an affiliate
of the Company, is entitled to sell such shares without having to comply with
the public information, holding period, volume limitation or notice provisions
of Rule 144 and permits affiliates to sell such shares without having to
comply with the Rule 144 holding period restrictions.
 
  The Company intends to file one or more registration statements under the
Securities Act to register Common Stock to be issued pursuant to the exercise
of options, including options granted or to be granted under the 1992 Plan,
the 1994 Plan and the Purchase Plan, thus permitting the resale of such shares
by non-affiliates in the public market without restriction under the
Securities Act. Such registration statement will become effective immediately
upon filing. At December 31, 1996, options to purchase an aggregate of
1,410,042 shares of Common Stock were outstanding under the 1992 Plan and the
1994 Plan, and no options to purchase Common Stock were outstanding under the
Purchase Plan. See "Management--Stock Option Plans."
 
  The holders of approximately 5,473,699 shares of Common Stock upon the
closing of this Offering and 77,907 shares of Common Stock issuable upon the
exercise of outstanding warrants and their permitted transferees are entitled
to certain registration rights for their shares. See "Description of Capital
Stock--Registration Rights."
 
  Prior to this Offering, there has been no public market for the securities
of the Company. No predictions can be made of the effect, if any, that the
sale or availability for sale of shares of additional Common Stock will have
on the market price of the Common Stock. Nevertheless, sales of a substantial
number of such shares by existing shareholders or by shareholders purchasing
in this Offering could have a negative impact on the market price of the
Common Stock.
 
                                      67

<PAGE>
 

                                 UNDERWRITING
 
  Subject to the terms and conditions of the Underwriting Agreement, the
underwriters named below (the "Underwriters"), for whom UBS Securities LLC,
Montgomery Securities and Raymond James & Associates, Inc. are acting as
representatives (the "Representatives"), have agreed to purchase from the
Company the following respective numbers of shares of Common Stock:
 

<TABLE>
<CAPTION>
                                                                       NUMBER OF
   UNDERWRITERS                                                         SHARES
   ------------                                                        ---------
   <S>                                                                 <C>
   UBS Securities LLC.................................................
   Montgomery Securities..............................................
   Raymond James & Associates, Inc....................................
                                                                       ---------
       Total.......................................................... 3,000,000
                                                                       =========
</TABLE>

 
  The Underwriting Agreement provides that the obligations of the Underwriters
are subject to certain conditions precedent, including the absence of any
material adverse change in the Company's business and the receipt of certain
certificates, opinions and letters from the Company and its counsel. The
nature of the Underwriters' obligation is such that they are committed to
purchase all shares of Common Stock offered hereby if any of such shares are
purchased. The Underwriting Agreement contains certain provisions whereby if
any Underwriter defaults in its obligation to purchase shares, and the
aggregate obligations of the Underwriters so defaulting do not exceed 10% of
the shares offered hereby, the remaining Underwriters, or some of them, must
assume such obligations.
 
  The Representatives have advised the Company that the Underwriters propose
to offer the shares of Common Stock directly to the public at the offering
price set forth on the cover of this Prospectus, and to certain dealers at
such price less a concession not in excess of $   per share. The Underwriters
may allow and such dealers may reallow a concession not in excess of $   per
share to certain other dealers. After the public offering of the shares of
Common Stock, the offering price and other selling terms may be changed by the
Underwriters.
 
  The Company has granted to the Underwriters an option, exercisable no later
than 30 days after the date of this Prospectus, to purchase up to 450,000
additional shares of Common Stock to cover over-allotments, if any, at the
public offering price set forth on the cover page of this Prospectus, less the
underwriting discounts and commissions. To the extent that the Underwriters
exercise this option, each of the Underwriters will have a firm commitment to
purchase approximately the same percentage thereof which the number of shares
of Common Stock to be purchased by it shown in the above table bears to the
total number of shares of Common stock offered hereby. The Company will be
obligated, pursuant to the option, to sell such shares to the Underwriters to
the extent the option is exercised.
 
  The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act.
 
  The officers, directors and certain other shareholders of the Company, who
beneficially own an aggregate of         shares of Common Stock (including
4,603,352 shares of Common stock issuable
 
                                      68

<PAGE>
 
upon the automatic conversion of all outstanding shares of Convertible
Preferred Stock upon the closing of this Offering and 300,000 shares of Common
Stock to be purchased by Johnson & Johnson concurrent with the closing of this
Offering) and warrants to purchase      shares of Common Stock prior to this
Offering, have agreed, pursuant to certain "lock up" agreements, that they
will not, without the prior written consent of UBS Securities LLC, offer, sell
or otherwise dispose of any shares of Common Stock, options or warrants to
acquire shares of Common Stock or securities exchangeable for or convertible
into shares of Common Stock owned by them for a period of 180 days after the
effective date of this Offering. The Company has agreed that it will not,
without the prior written consent of UBS Securities LLC, offer, sell or
otherwise dispose of any shares of Common Stock, options or warrants to
acquire shares of Common Stock or securities exchangeable for or convertible
into shares of Common Stock for a period of 180 days after the date of this
Prospectus.
 
  The Representatives have advised the Company that the Underwriters do not
intend to confirm sales to any accounts over which they exercise discretionary
authority.
 
  Johnson & Johnson Development Corporation ("JJDC"), a wholly-owned
subsidiary of Johnson & Johnson, has granted to the Company an option (the
"Johnson & Johnson Option") to sell to JJDC a number of shares of Common Stock
equal to not more than ten percent of the number of shares of Common Stock
sold by cti in this Offering at the public offering price. The Company has
exercised Johnson & Johnson Option in full, and JJDC is committed to purchase,
in a private placement that will occur concurrent with the closing of this
Offering, 300,000 shares of Common Stock at an aggregate purchase price of
$4.5 million, assuming the sale of 3,000,000 shares of Common Stock at the
closing of this Offering at an initial public offering price of $15.00 per
share. The Johnson & Johnson Stock Purchase will not be registered in this
Offering or be covered by the Underwriting Agreement, and the Underwriters
will not receive any fee in connection with the sale of such shares. See
"Johnson & Johnson Stock Purchase."
 
  Prior to this Offering, there has been no public market for the Common
Stock. The initial public offering price will be negotiated among the Company
and the Representatives. Among the factors to be considered in determining the
initial public offering price of the Common Stock, in addition to prevailing
market and economic conditions, are certain financial information of the
Company, the history of, and the prospects for, the Company and the industry
in which it competes, an assessment of the Company's management, its past and
present operations, the prospects for, and timing of, future revenues of the
Company, the present stage of the Company's development, and the above factors
in relations to market values and various valuation measures of other
companies engaged in activities similar to the Company. The initial public
offering price set forth on the cover page of this Prospectus should not,
however, be considered an indication of the actual value of the Common Stock.
Such price is subject to change as a result of market conditions and other
factors. There can be no assurance that an active trading market will develop
for the Common Stock or that the Common Stock will trade in the public market
subsequent to this Offering at or above the initial offering price.
 
  Application has been made to have the Common Stock approved for quotation on
the Nasdaq National Market under the symbol "CTIC."
 

                                 LEGAL MATTERS
 
  The validity of the shares of Common Stock offered hereby will be passed
upon for the Company by Shearman & Sterling, San Francisco, California.
Certain legal matters with respect to information contained in this Prospectus
under the captions "Risk Factors--Ability to Protect Intellectual Property"
and "Business--Patents and Proprietary Rights" will be passed upon by Foley &
Lardner, Washington, D.C., patent counsel to the Company. Pillsbury Madison &
Sutro LLP, Menlo Park, California is acting as counsel for the Underwriters in
connection with certain legal matters relating to the shares of Common Stock
offered hereby. Michael J. Kennedy, a partner of Shearman & Sterling, is
Secretary of the Company.
 
                                      69

<PAGE>
 

                                    EXPERTS
 
  The consolidated financial statements of Cell Therapeutics, Inc. at December
31, 1995 and 1996, and for each of the three years in the period ended
December 31, 1996 and for the period from September 4, 1991 (date of
inception) to December 31, 1996, appearing in this Prospectus and Registration
Statement have been audited by Ernst & Young LLP, independent auditors, as set
forth in their report thereon appearing elsewhere herein and in the
Registration Statement, and are included in reliance upon such report given
upon the authority of such firm as experts in accounting and auditing.
 
                             AVAILABLE INFORMATION
 
  The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith, files reports, proxy statements and other information with the
Securities and Exchange Commission (the "Commission"). This Registration
Statement, including exhibits thereto, and such reports, proxy statements and
other information filed by the Company with the Commission can be inspected
and copied at the public reference facilities maintained by the Commission at
Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549 and
at its Regional Offices located at Seven World Trade Center, Suite 1300, New
York, New York 10048 and Citicorp Center, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661-2511. Copies of such material can be obtained at
prescribed rates from the Public Reference Section of the Commission, 450
Fifth Street, N.W., Washington, D.C. 20549. The Commission maintains a World
Wide Web site that contains reports, proxy and information statements and
other information regarding registrants that file electronically with the
Commission. The address of the site is http://www.sec.gov.
 
  The Company has filed with the Commission a registration statement on Form
S-1 (the "Registration Statement") under the Securities Act with respect to
the shares of the Common Stock of the Company being offered hereby. This
Prospectus, which constitutes a part of the Registration Statement, does not
contain all the information set forth in the Registration Statement, certain
items of which are contained in schedules and exhibits to the Registration
Statement as permitted by the rules and regulations of the Commission.
Statements made in this Prospectus concerning the contents of any documents
referred to herein are not necessarily complete. With respect to each such
document filed with the Commission as an exhibit to the Registration
Statement, reference is made to the exhibit for a more complete description,
and each such statement shall be deemed qualified in its entirety by such
reference.
 
                                      70

<PAGE>
 
                            CELL THERAPEUTICS, INC.
                         (A DEVELOPMENT STAGE COMPANY)
 
                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
 

<TABLE>
<CAPTION>
                                                                            PAGE
                                                                            ----
<S>                                                                         <C>
Report of Ernst & Young LLP, Independent Auditors.......................... F-2
Consolidated Balance Sheets................................................ F-3
Consolidated Statements of Operations...................................... F-4
Consolidated Statements of Shareholders' Equity............................ F-5
Consolidated Statements of Cash Flows...................................... F-6
Notes to Consolidated Financial Statements................................. F-7
</TABLE>

 
                                      F-1

<PAGE>
 

               REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
 
The Board of Directors and Shareholders
Cell Therapeutics, Inc.
 
  We have audited the accompanying consolidated balance sheets of Cell
Therapeutics, Inc. (a development stage company) as of December 31, 1995 and
1996, and the related consolidated statements of operations, shareholders'
equity, and cash flows for each of the three years in the period ended
December 31, 1996 and for the period from September 4, 1991 (date of
incorporation) to December 31, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
 
  We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
 
  In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Cell Therapeutics, Inc. (a
development stage company) at December 31, 1995 and 1996, and the results of
its operations and its cash flows for each of the three years in the period
ended December 31, 1996 and for the period from September 4, 1991 (date of
incorporation) to December 31, 1996, in conformity with generally accepted
accounting principles.
 
Seattle, Washington
January 24, 1997, except for paragraphs 2 and 3 of Note 12, as to which the
 date is       , 1997
 
- -------------------------------------------------------------------------------
 
  The foregoing report is in the form that will be signed upon completion of
the reverse stock split described in paragraph 2 of Note 12 to the financial
statements.
 
                                          Ernst & Young LLP
 
Seattle, Washington
January 24, 1997

 
                                      F-2

<PAGE>
 
                            CELL THERAPEUTICS, INC.
                         (A DEVELOPMENT STAGE COMPANY)
 
                          CONSOLIDATED BALANCE SHEETS
 

<TABLE>
<CAPTION>
                                                                    PRO FORMA
                                                                  SHAREHOLDERS'
                                                                    EQUITY AT
                                            DECEMBER 31,          DECEMBER 31,
                                      --------------------------      1996
                                          1995          1996        (NOTE 12)
                                      ------------  ------------  -------------
                                                                   (UNAUDITED)
<S>                                   <C>           <C>           <C>
ASSETS
Current assets:
  Cash and cash equivalents.......... $  6,931,592  $  5,483,515
  Securities available-for-sale......   14,974,430    25,503,049
  Prepaid expenses and other current
   assets............................       20,080       256,892
                                      ------------  ------------
Total current assets.................   21,926,102    31,243,456
Property and equipment, net..........    5,713,227     5,117,936
Notes receivable from officers, less
 current portion.....................      221,722       172,698
Other assets.........................      187,244       467,603
                                      ------------  ------------
Total assets......................... $ 28,048,295  $ 37,001,693
                                      ============  ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
  Accounts payable................... $  1,057,428  $    651,130
  Accrued expenses...................    1,412,424     3,065,297
  Current portion of long-term obli-
   gations...........................    1,114,520     1,226,971
                                      ------------  ------------
Total current liabilities............    3,584,372     4,943,398
Long-term obligations, less current
 portion.............................    2,605,698     2,004,575
Commitments                                    --            --
Shareholders' equity:
  Preferred Stock:
    Authorized shares--10,000,000:
     Series A Convertible Preferred
      Stock, no par value:
      Designated shares--150,000 and
       146,193.272 at December 31,
       1995 and 1996, respectively
      Issued and outstanding shares--
       95,447.004 and 146,193.272 at
       December 31, 1995 and 1996,
       respectively (no shares pro
       forma) (liquidation preference
       $335 per share aggregating
       $48,974,746 at December 31,
       1996).........................   30,496,204    47,366,204  $        --
     Series B Convertible Preferred
      Stock, no par value:
      Designated shares--14,925.373
      Issued and outstanding shares--
       14,925.373 at December 31,
       1996 (no shares pro forma)
       (liquidation preference $335
       per share aggregating
       $5,000,000 at December 31,
       1996).........................          --      4,960,000           --
     Series C Preferred Stock, no par
      value:
      Designated shares--100,000
      No shares issued and
       outstanding (liquidation
       preference $1,000 per share)..          --            --            --
  Common Stock, no par value:
    Authorized shares--100,000,000
    Issued and outstanding shares--
     4,933,410 and 4,943,472 at
     December 31, 1995 and 1996,
     respectively (9,546,824 shares
     pro forma)......................   51,481,481    51,810,160   104,136,364
  Deficit accumulated during develop-
   ment stage........................  (60,119,460)  (74,082,644)  (74,082,644)
                                      ------------  ------------  ------------
Total shareholders' equity...........   21,858,225    30,053,720  $ 30,053,720
                                      ------------  ------------  ============
Total liabilities and shareholders'
 equity.............................. $ 28,048,295  $ 37,001,693
                                      ============  ============
</TABLE>

 
                            See accompanying notes.
 
                                      F-3

<PAGE>
 
                            CELL THERAPEUTICS, INC.
                         (A DEVELOPMENT STAGE COMPANY)
 
                     CONSOLIDATED STATEMENTS OF OPERATIONS
 

<TABLE>
<CAPTION>
                                                                     PERIOD FROM
                                                                    SEPTEMBER 4,
                                                                    1991 (DATE OF
                                YEAR ENDED DECEMBER 31,            INCORPORATION)
                         ----------------------------------------  TO DECEMBER 31,
                             1994          1995          1996           1996
                         ------------  ------------  ------------  ---------------
<S>                      <C>           <C>           <C>           <C>
Revenues:
  Collaboration
   agreements........... $        --   $    100,000  $  9,120,806   $  9,220,806
Operating expenses:
  Research and
   development..........   14,368,089    14,605,947    16,108,821     60,870,651
  General and
   administrative.......    5,283,263     6,144,650     7,601,796     24,743,279
                         ------------  ------------  ------------   ------------
                           19,651,352    20,750,597    23,710,617     85,613,930
                         ------------  ------------  ------------   ------------
Loss from operations....  (19,651,352)  (20,650,597)  (14,589,811)   (76,393,124)
Other income (expense):
  Investment income.....      616,223     1,167,369     1,174,219      3,973,759
  Interest expense......     (464,154)     (509,247)     (512,597)    (1,652,462)
                         ------------  ------------  ------------   ------------
Net loss................ $(19,499,283) $(19,992,475) $(13,928,189)  $(74,071,827)
                         ============  ============  ============   ============
Pro forma (unaudited):
  Net loss per share....                             $      (1.63)
                                                     ============
  Shares used in
   computation of net
   loss per share.......                                8,526,525
</TABLE>

 
 
                            See accompanying notes.
 
                                      F-4

<PAGE>
 
                            CELL THERAPEUTICS, INC.
                         (A DEVELOPMENT STAGE COMPANY)
                CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

<TABLE>
<CAPTION>
                                                         PREFERRED STOCK                  DEFICIT        DEFERRED
                                          --------------------------------------------- ACCUMULATED    COMPENSATION
                      COMMON STOCK               SERIES A               SERIES B           DURING     AND TECHNOLOGY
                  ----------------------  ----------------------- --------------------- DEVELOPMENT     LICENSING
                   SHARES      AMOUNT       SHARES      AMOUNT      SHARES     AMOUNT      STAGE          COSTS         TOTAL
                  ---------  -----------  ----------- ----------- ---------- ---------- ------------  -------------- ------------
<S>               <C>        <C>          <C>         <C>         <C>        <C>        <C>           <C>            <C>
December 1991
issuance of
common stock to
founders at
$0.04179 per
share (including
182,143 shares
contributed by
founders for
compensation and
technology)...... 1,914,313  $    87,612          --  $       --         --  $      --  $        --        $(7,612)  $     80,000
 April 1992
 proceeds
 received from
 issuance of
 shares at $11.20
 per share and
 57,143 warrants
 at $0.07 each to
 the chairman of
 the Board of
 Directors.......   178,572    2,004,000          --          --         --         --           --            --       2,004,000
 Net proceeds
 from the
 issuance of
 common stock in
 August through
 December 1992
 via private
 placement equity
 offering at
 $17.50 per
 share, net of
 offering costs
 of $3,467,352... 2,225,139   35,083,440          --          --         --         --           --            --      35,083,440
 Net loss for the
 year ended
 December 31,
 1992............       --           --           --          --         --         --    (5,323,737)          --      (5,323,737)
 Fair value of
 stock
 contributed by
 founders for
 compensation and
 technology......       --           --           --          --         --         --           --          7,612          7,612
                  ---------  -----------  ----------- ----------- ---------- ---------- ------------    ----------   ------------
Balance at
December 31,
1992............. 4,318,024   37,175,052          --          --         --         --    (5,323,737)          --      31,851,315
 August 1993
 Repurchase of
 common stock at
 $0.04179 per
 share and July
 1993
 cancellation of
 1,072 shares....   (61,415)      (2,522)         --          --         --         --           --            --          (2,522)
 Net proceeds
 from the
 issuance of
 common stock and
 warrants in
 October and
 November 1993
 via private
 placement equity
 offering at
 $31.50 per unit,
 net of offering
 costs of
 $1,486,383......   438,540   12,326,885          --          --         --         --           --            --      12,326,885
 Net loss for the
 year ended
 December 31,
 1993............       --           --           --          --         --         --   (15,328,143)          --     (15,328,143)
                  ---------  -----------  ----------- ----------- ---------- ---------- ------------    ----------   ------------
Balance at
December 31,
1993............. 4,695,149   49,499,415          --          --         --         --   (20,651,880)          --      28,847,535
 Net proceeds
 from the
 issuance of
 common stock and
 warrants in
 February 1994
 via private
 placement equity
 offering at
 $31.50 per unit,
 net of offering
 costs of
 $85,823.........    25,001      701,677          --          --         --         --           --            --         701,677
 Proceeds from
 stock options
 exercised in
 July 1994 at
 $17.50 per
 share...........        79        1,375          --          --         --         --           --            --           1,375
 Net loss for the
 year ended
 December 31,
 1994............       --           --           --          --         --         --   (19,499,283)          --     (19,499,283)
                  ---------  -----------  ----------- ----------- ---------- ---------- ------------    ----------   ------------
Balance at
December 31,
1994............. 4,720,229   50,202,467          --          --         --         --   (40,151,163)          --      10,051,304
 Net proceeds
 from the
 issuance of
 Series A
 convertible
 preferred stock
 in March through
 June 1995 via
 private
 placement equity
 offering at
 $335.00 per
 share, net of
 offering costs
 of $1,478,541...       --           --    95,447.004  30,496,204        --         --           --            --      30,496,204
 Exchange of
 warrants for
 common stock in
 September 1995
 valued at
 $11.725 per
 share...........   104,418          --           --          --         --         --           --            --             --
 Issuance of
 common stock for
 purchased
 research and
 development in
 October 1995 at
 $11.725 per
 share...........    98,574    1,155,750          --          --         --         --           --            --       1,155,750
 Proceeds from
 issuance of
 stock and stock
 options
 exercised in
 February through
 December 1995 at
 $11.725 and
 $17.50 per
 share...........    10,189      123,264          --          --         --         --           --            --         123,264
 Net loss for the
 year ended
 December 31,
 1995............       --           --           --          --         --         --   (19,992,475)          --     (19,992,475)
 Unrealized gains
 on securities
 available-for-
 sale............       --           --           --          --         --         --        24,178           --          24,178
                  ---------  -----------  ----------- ----------- ---------- ---------- ------------    ----------   ------------
Balance at
December 31,
1995............. 4,933,410   51,481,481   95,447.004  30,496,204        --         --   (60,119,460)          --      21,858,225
 Net proceeds
 from the
 issuance of
 Series A
 convertible
 preferred stock
 in September and
 October 1996 via
 private
 placement equity
 offering at
 $335.00 per
 share, net of
 offering costs
 of $130,000.....       --           --    50,746.268  16,870,000        --         --           --            --      16,870,000
 Net proceeds
 from the
 issuance of
 Series B
 convertible
 preferred stock
 in November 1996
 via private
 placement equity
 offering at
 $335.00 per
 share, net of
 offering costs
 of $40,000......       --           --           --          --  14,925.373  4,960,000          --            --       4,960,000
 Exchange of
 warrants for
 common stock in
 February 1996
 valued at
 $11.725 per
 share...........       151          --           --          --         --         --           --            --             --
 Proceeds from
 stock options
 exercised in
 January through
 November 1996 at
 $11.725 per
 share...........     1,974       23,121          --          --         --         --           --            --          23,121
 Proceeds from
 common stock
 warrants
 exercised in May
 1996 at $38.50
 per share.......     7,937      305,558          --          --         --         --           --            --         305,558
 Net loss for the
 year ended
 December 31,
 1996............       --           --           --          --         --         --   (13,928,189)          --     (13,928,189)
 Unrealized
 losses on
 securities
 available-for-
 sale............       --           --           --          --         --         --       (34,995)          --         (34,995)
                  ---------  -----------  ----------- ----------- ---------- ---------- ------------    ----------   ------------
Balance at
 December 31,
 1996............ 4,943,472  $51,810,160  146,193.272 $47,366,204 14,925.373 $4,960,000 $(74,082,644)      $   --    $ 30,053,720
                  =========  ===========  =========== =========== ========== ========== ============    ==========   ============
</TABLE>

 
                            See accompanying notes.
 
                                      F-5

<PAGE>
 
                            CELL THERAPEUTICS, INC.
                         (A DEVELOPMENT STAGE COMPANY)
 
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
 

<TABLE>
<CAPTION>
                                                                      PERIOD FROM
                                                                     SEPTEMBER 4,
                                                                     1991 (DATE OF
                                 YEAR ENDED DECEMBER 31,            INCORPORATION)
                          ----------------------------------------  TO DECEMBER 31,
                              1994          1995          1996           1996
                          ------------  ------------  ------------  ---------------
<S>                       <C>           <C>           <C>           <C>
OPERATING ACTIVITIES
Net loss................  $(19,499,283) $(19,992,475) $(13,928,189)  $(74,071,827)
Adjustments to reconcile
 net loss to net cash
 used in operating
 activities:
 Depreciation and amor-
  tization..............     1,617,438     1,718,765     1,658,475      6,461,261
 Noncash research and
  development expense...           --      1,155,750           --       1,155,750
 Noncash interest ex-
  pense.................           --            --            --          25,918
 Noncash rent expense...        33,396        33,396        54,216        494,288
 Investment premium am-
  ortization............       119,110        22,500       111,315        522,061
 Changes in assets and
  liabilities:
 Prepaid expenses.......       166,123        (2,789)     (236,812)      (256,892)
 Notes receivable from

  officers..............       (11,022)      (10,700)      (46,200)      (267,922)
 Other assets...........      (143,476)        9,208      (201,679)      (483,604)
 Accounts payable.......       330,197       329,525      (406,298)       651,130
 Accrued expenses.......       906,428      (245,376)    1,652,873      3,065,297
                          ------------  ------------  ------------   ------------
Total adjustments.......     3,018,194     3,010,279     2,585,890     11,367,287
                          ------------  ------------  ------------   ------------
Net cash used in operat-
 ing activities.........   (16,481,089)  (16,982,196)  (11,342,299)   (62,704,540)
INVESTING ACTIVITIES
Purchases of securities
 available-for-sale.....    (7,555,482)  (13,165,743)  (27,113,929)   (76,026,027)
Proceeds from sales of
 securities available-
 for-sale...............    11,034,146     3,856,167           --      14,890,313
Proceeds from maturities
 of securities avail-
 able-for-sale..........     2,048,016     1,059,296    16,439,000     35,099,787
Purchase of property and
 equipment..............    (1,654,517)     (204,424)   (1,046,640)   (11,334,936)
Dispositions of property
 and equipment..........       114,993        36,476           --         151,469
                          ------------  ------------  ------------   ------------
Net cash provided by
 (used in) investing ac-
 tivities...............     3,987,156    (8,418,228)  (11,721,569)   (37,219,394)
FINANCING ACTIVITIES
Sales of common stock to
 founders...............           --            --            --          80,000
Proceeds from borrowings
 from shareholder.......           --            --            --         850,000
Sale of Series A Pre-
 ferred Stock via pri-
 vate placement, net of
 offering costs.........           --     30,496,204    16,870,000     47,366,204
Sale of Series B Pre-
 ferred Stock via pri-
 vate placement, net of
 offering costs.........           --            --      4,960,000      4,960,000
Sale of common stock via
 private placements, net
 of offering costs......       701,677        67,000           --      49,307,084
Repurchase of common
 stock..................           --            --            --          (2,522)
Proceeds from common
 stock options exer-
 cised..................         1,375        56,264        23,121         80,760
Proceeds from common
 stock warrants exer-
 cised..................           --            --        305,558        305,558
Repayment of long-term
 obligations............    (3,940,830)   (2,954,434)   (1,159,188)    (8,471,269)
Change in deferred of-
 fering costs...........      (458,726)      458,726           --             --
Proceeds from the issu-
 ance of long-term obli-
 gations................     3,515,334     1,800,000       616,300     10,931,634
                          ------------  ------------  ------------   ------------
Net cash provided by
 (used in) financing ac-
 tivities...............      (181,170)   29,923,760    21,615,791    105,407,449
                          ------------  ------------  ------------   ------------
Net increase (decrease)
 in cash and cash equiv-
 alents.................   (12,675,103)    4,523,336    (1,448,077)     5,483,515
Cash and cash equiva-
 lents at beginning of
 period.................    15,083,359     2,408,256     6,931,592            --
                          ------------  ------------  ------------   ------------
Cash and cash equiva-
 lents at end of peri-
 od.....................  $  2,408,256  $  6,931,592  $  5,483,515   $  5,483,515
                          ============  ============  ============   ============
SUPPLEMENTAL SCHEDULE OF
 NONCASH INVESTING AND
 FINANCING ACTIVITIES
Acquisition of equipment
 pursuant to capital
 lease obligations......  $        --   $        --   $     85,532   $    362,425
                          ============  ============  ============   ============
Conversion of convert-
 ible debt and related
 accrued interest into
 common stock...........  $        --   $        --   $        --    $    875,918
                          ============  ============  ============   ============
SUPPLEMENTAL DISCLOSURE
 OF CASH FLOW
 INFORMATION
Cash paid during the pe-
 riod for interest......  $    476,845  $    529,847  $    514,534   $  1,626,025
                          ============  ============  ============   ============
</TABLE>

 
                            See accompanying notes.
 
                                      F-6

<PAGE>
 
                            CELL THERAPEUTICS, INC.
                         (A DEVELOPMENT STAGE COMPANY)
 
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
                               DECEMBER 31, 1996
 
 1.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 

 Description of Business
 
  Cell Therapeutics, Inc. (the "Company") focuses on the discovery,
development, and commercialization of small molecule drugs for the treatment
of cancer and inflammatory and immune diseases. The Company's principal
business strategy is to focus its development activities on therapeutic areas
that represent large market opportunities which are not adequately served by
existing therapies. The Company incorporated on September 4, 1991, but did not
commence operations until February 1992.
 
  The Company operates in a highly regulated and competitive environment. The
manufacturing and marketing of pharmaceutical products require approval from
and are subject to ongoing oversight by the Food and Drug Administration in
the United States and by comparable agencies in other countries. Obtaining
approval for a new therapeutic product is never certain and may take several
years and involve expenditure of substantial resources. Competition in
researching, developing, and marketing pharmaceutical products is intense. Any
of the technologies covering the Company's existing products under development
could become obsolete or diminished in value by discoveries and developments
of other organizations.
 
 Principles of Consolidation
 
  The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiary. All intercompany transactions and balances
are eliminated in consolidation.
 
 Cash and Cash Equivalents
 
  The Company considers all highly liquid debt instruments with maturities of
three months or less at the time acquired to be cash equivalents. Cash
equivalents represent short-term investments consisting of investment-grade
corporate and government obligations, carried at cost, which approximates
market value.
 
 Securities Available-for-Sale
 
  Management determines the appropriate classification of debt securities at
the time of purchase. Management currently classifies its investment portfolio
as available-for-sale and carries the securities at fair value based on quoted
market prices with unrealized gains and losses included within the deficit
accumulated during development stage. The amortized cost of debt securities in
this category is adjusted for amortization of premiums and accretion of
discounts to maturity. Such amortization and accretion are included in
investment income. Realized gains and losses and declines in value judged to
be other than temporary on available-for-sale securities are included in
investment income. The cost of securities sold is based on the specific
identification method. Interest on securities classified as available-for-sale
is included in investment income.
 
 Management of Credit Risk
 
  The Company is subject to concentration of credit risk from its cash
investments. Under the Company's investment guidelines, credit risk is managed
by diversification of the investment portfolio and by the purchase of
investment-grade securities.
 
 Collaboration Agreement Receivables and Revenues
 
  Collaboration agreement receivables represent amounts earned, but not yet
collected, under collaboration and license agreements. Collaboration agreement
revenues are recognized as the earnings process is completed, based on the
provisions of each agreement.
 
                                      F-7

<PAGE>
 
                            CELL THERAPEUTICS, INC.
                         (A DEVELOPMENT STAGE COMPANY)
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 1.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
 
 Property and Equipment
 
  Property and equipment, including assets pledged as security in financing
agreements, are carried at cost, less accumulated depreciation and
amortization. Leasehold improvements are amortized over the lesser of the
useful life or the term of the applicable lease using the straight-line
method. Depreciation commences at the time assets are placed in service and is
computed using the straight-line method over the estimated useful lives of the
assets (three to five years).
 
 Deferred Offering Costs
 
  The Company records legal and other issuance costs related to its offerings
of stock as deferred offering costs until the offerings are completed and the
costs are netted against gross proceeds.
 
 Stock-Based Compensation
 
  The Company has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees," and related interpretations in
accounting for its employee stock options. Generally, stock compensation, if
any, is measured as the difference between the exercise price of a stock
option and the fair market value of the Company's stock at the date of grant,
which is then amortized over the related vesting period. The value of stock
options granted to consultants is recorded as an expense and amortized over
the lives of the respective contracts.
 
 Net Loss Per Share
 
  Net loss per share is computed using the weighted average number of shares
of common stock outstanding. Common stock equivalents from preferred stock,
stock options, and warrants are excluded from the computation as their effect
is antidilutive, except that, in accordance with Securities and Exchange
Commission requirements, common and common equivalent shares issued during the
12-month period prior to the filing of the proposed initial public offering
have been included in the calculation as if they were outstanding for all
periods, using the treasury stock method and the assumed initial public
offering price. Net loss per share for the years ended December 31, 1994, 1995
and 1996, and the number of shares used in the computation of the net loss per
share, are as follows:
 

<TABLE>
<CAPTION>
                                                 YEAR ENDED DECEMBER 31,
                                              -------------------------------
                                                1994       1995       1996
                                              ---------  ---------  ---------
      <S>                                     <C>        <C>        <C>
      Net loss per share..................... $   (3.72) $   (3.78) $   (2.55)
                                              =========  =========  =========
      Shares used in computation of net loss
       per share............................. 5,235,477  5,290,325  5,458,170
                                              =========  =========  =========
</TABLE>

 
 Pro Forma Net Loss Per Share
 
  Unaudited pro forma net loss per share is computed based on the number of
shares plus the number of common shares issuable upon conversion of all
outstanding shares of Series A and Series B Convertible Preferred Stock.
 
 Use of Estimates
 
  The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
 
                                      F-8

<PAGE>
 
                            CELL THERAPEUTICS, INC.
                         (A DEVELOPMENT STAGE COMPANY)
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 1.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
 
 Reclassifications
 
  Certain prior year items have been reclassified to conform to the current
year presentation.
 
 2.  SECURITIES AVAILABLE-FOR-SALE
 
  Securities available-for-sale consist of the following as of December 31:
 

<TABLE>
<CAPTION>
                                                    1995
                                ---------------------------------------------
                                              GROSS      GROSS
                                 AMORTIZED  UNREALIZED UNREALIZED
                                   COST       GAINS      LOSSES   FAIR VALUE
                                ----------- ---------- ---------- -----------
   <S>                          <C>         <C>        <C>        <C>
   U.S. Government obliga-
    tions...................... $ 2,026,138  $   272    $   --    $ 2,026,410
   Corporate obligations.......  12,924,114   29,639     (5,733)   12,948,020
                                -----------  -------    -------   -----------
                                $14,950,252  $29,911    $(5,733)  $14,974,430
                                ===========  =======    =======   ===========
</TABLE>

 

<TABLE>
<CAPTION>
                                                    1996
                                ---------------------------------------------
                                              GROSS      GROSS
                                 AMORTIZED  UNREALIZED UNREALIZED
                                   COST       GAINS      LOSSES   FAIR VALUE
                                ----------- ---------- ---------- -----------
   <S>                          <C>         <C>        <C>        <C>
   U.S. Government obliga-
    tions...................... $   920,704  $ 1,214    $    --   $   921,918
   Corporate obligations.......  24,593,162   25,577     (37,608)  24,581,131
                                -----------  -------    --------  -----------
                                $25,513,866  $26,791    $(37,608) $25,503,049
                                ===========  =======    ========  ===========
</TABLE>

 
  As of December 31, 1995 and 1996, the securities available-for-sale had
contractual maturities of less than one year. Expected maturities will differ
from contractual maturities because issuers of the securities may have the
right to prepay obligations without prepayment penalties.
 
 3.  PROPERTY AND EQUIPMENT
 
  Property and equipment are composed of the following as of December 31:
 

<TABLE>
<CAPTION>
                                                           1995        1996
                                                        ----------- -----------
   <S>                                                  <C>         <C>
   Leasehold improvements.............................. $ 4,288,000 $ 4,296,136
   Lab equipment.......................................   3,468,103   3,642,378
   Furniture and office equipment......................   2,577,024   3,441,253
                                                        ----------- -----------
                                                         10,333,127  11,379,767
   Less accumulated depreciation and amortization......   4,619,900   6,261,831
                                                        ----------- -----------
                                                        $ 5,713,227 $ 5,117,936
                                                        =========== ===========
</TABLE>

 
  As of December 31, 1995 and 1996, furniture and office equipment included
$276,893 and $362,425, respectively, of equipment acquired under capitalized
leases. Accumulated depreciation related to this equipment totaled $147,545
and $217,179 at December 31, 1995 and 1996, respectively. Annual maturities of
the capital lease obligations for 1997 and 1998, respectively, approximate
$96,000 and $35,000.
 
 4.  EQUITY OFFERINGS
 
  In 1992, the Company completed its first private placement equity offering.
Total gross proceeds amounted to $38,550,792, representing 2,225,139 shares of
the Company's common stock, including the required conversion of amounts
advanced (principal and interest of $850,000 and $25,918, respectively) from a
principal shareholder aggregating 50,053 shares.
 
                                      F-9

<PAGE>
 
                            CELL THERAPEUTICS, INC.
                         (A DEVELOPMENT STAGE COMPANY)
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 4.  EQUITY OFFERINGS (CONTINUED)
 
  In 1993, the Company concluded a second round of equity financing through a
private offering of common stock and warrants at $31.50 per unit. Each unit
consisted of one share of common stock and a warrant to purchase one-half
share of common stock. The warrants had an exercise price of $38.50 per share
and expired in 1996. Total gross proceeds of the second round of equity
financing amounted to $13,813,268, representing 438,540 shares of common stock
and warrants to purchase 219,258 shares of common stock, including 21,256
shares of common stock and warrants to purchase 10,627 shares of common stock
sold to the sales agents and their affiliates (including an affiliated sales
agent, whose chief executive officer was a principal shareholder of the
Company).
 
  Offering costs related to the first and second offerings included $2,052,268
and $228,982, respectively, paid to the affiliated sales agent. In connection
with the offerings, the sales agents received warrants to purchase 215,769
shares of common stock at $17.50 per share, expiring in 1997 (including
warrants to purchase 167,800
shares of common stock issued to the affiliated sales agent) and warrants to
purchase 42,423 shares of common stock at $31.50 per share, expiring in 1998
(including warrants to purchase 7,538 shares of common stock issued to the
affiliated sales agent).
 
  In 1994, the Company sold additional units of common stock and warrants
under terms equivalent to those of the second round of equity financing. The
Company received gross proceeds of $787,500, representing 25,001 shares of
common stock and warrants to purchase 12,500 shares of common stock at $38.50
per share, which expired in 1996. Offering costs included $28,613 paid to the
affiliated sales agent. In addition, the sales agents received warrants to
purchase 2,500 shares of common stock at $31.50 per share, expiring in 1999
(including warrants to purchase 1,071 shares of common stock issued to the
affiliated sales agent).
 
  In 1995, the Company concluded a third round of equity financing through a
private offering of Series A Convertible Preferred Stock at $335 per share.
Total gross proceeds of the offering amounted to $31,974,745, representing
95,447.004 shares of Series A Convertible Preferred Stock. In 1996, the
Company concluded a fourth round of equity financing through a private
offering of Series A Convertible Preferred Stock at $335 per share. Total
gross proceeds of the offering amounted to $17,000,000, representing
50,746.268 shares of Series A Convertible Preferred Stock. Holders of Series A
Convertible Preferred Stock have preferential rights to noncumulative
dividends ($33.50 per share per annum) when and if declared by the Board of
Directors, and a liquidation preference of $335 per share. Each share of
Series A Convertible Preferred Stock is convertible into 28.5714 shares of
common stock at a conversion price of $11.725 per share (the "Conversion
Price"), subject to adjustment upon the occurrence of certain dilutive events,
and is automatically converted into common stock upon the occurrence of
certain events, including the closing of an initial public offering of the
Company's common stock at a price per share of not less than $17.50 and an
aggregate offering price of not less than $20 million. The shares of common
stock issuable upon conversion of the Series A Convertible Preferred Stock
have certain registration rights. The Series A Convertible Preferred Stock has
the right to vote with the common stock on an as-converted basis and, voting
as a separate class, is entitled to elect one director. As of December 31,
1996, the Company had reserved 4,176,913 shares of common stock for issuance
upon the conversion of the Series A Convertible Preferred Stock.
 
  In 1996, the Company sold 14,925.373 shares of Series B Convertible
Preferred Stock to Johnson & Johnson Development Corporation at $335 per share
in a private placement. Total gross proceeds of the sale amounted to
$5,000,000. The Series B Convertible Preferred Stock has the same rights,
preferences and conversion features as the Series A Convertible Preferred
Stock, but is subordinate to it with respect to payment of dividends and
liquidation preference. The shares of common stock issuable upon conversion of
the Series B Convertible Preferred Stock have certain registration rights. The
Series B Convertible Preferred Stock has the right to vote with the common
stock on an as-converted basis. As of December 31, 1996, the Company had
reserved 426,439 shares of common stock for issuance upon conversion of the
Series B Convertible Preferred Stock. See Note 11.
 
 
                                     F-10

<PAGE>
 
                            CELL THERAPEUTICS, INC.
                         (A DEVELOPMENT STAGE COMPANY)
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 4.  EQUITY OFFERINGS (CONTINUED)
 
  In November 1996, the Board of Directors approved a shareholder rights plan
whereby a Right attaches to each share of common stock. Upon the occurrence of
certain acquisition related events, each Right entitles the holder of each
outstanding share of common stock to purchase one one-thousandth of a share (a
"Unit") of Series C Preferred Stock at $175 per Unit, subject to adjustment.
Upon exercise, each holder of a Right will have the right to receive value
equal to two times the exercise price of the Right. A total of 100,000 shares
of Series C Preferred Stock are reserved for issuance upon exercise of the
Rights.
 
 5.  CONSULTING AND EMPLOYMENT AGREEMENTS
 
 Directors, Officers, and Employees
 
  The Company has employment agreements with its President and Chief Executive
Officer and one other founding officer. The agreements expire in 1999 and
1998, respectively, and provide for annual base salaries (approximately
$692,000 in the aggregate as of December 31, 1996), minimum annual and cost-
of-living increases, and discretionary incentive bonus awards.
 
  In December 1993, the Board of Directors authorized a loan of $200,000 to
the Company's President and Chief Executive Officer. The loan accrues interest
at 5.35%. On each of December 17, 1997, 1998, and 1999, the Company shall
forgive one-third of the principal amount of the loan together with accrued
interest. The portion of this loan which is to be forgiven in 1997 is included
in other current assets. Forgiveness of amounts remaining due under the loan
will be forfeited upon certain termination-related circumstances and will be
accelerated upon certain events, including a change in ownership of the
Company, or upon the Company's attaining a minimum public market
capitalization. The loan is secured by 5,715 shares of common stock.
 
  In 1992, the Company granted its then chairman warrants to purchase 57,143
shares of common stock at $17.50 per share.
 
  In 1994, the Company authorized a non-interest bearing loan of up to
$150,000 to its Executive Vice President, Product Development in connection
with relocation. In 1995 and 1996, $145,000 was advanced under the terms of
the loan, of which $40,000 and $57,000 was forgiven and treated as
compensation expense in 1995 and 1996, respectively.
 
  In 1996, the Company advanced a $35,000 non-interest bearing loan to its
Executive Vice President, Marketing and Business Development in connection
with his relocation. The Company shall forgive one-half of the loan on each of
April 8, 1997 and 1998. The portion of this loan to be forgiven in 1997 is
included in other current assets.
 
  The Company has also entered into severance agreements with certain of its
officers having terms of one or two years.
 
  In addition to the employment and severance agreements with the corporate
officers discussed above, the Company has entered into employment agreements
with certain employees, whose employment agreement terms generally range from
three to four years. The employment agreements can be terminated with cause,
as defined in the agreements, upon 30 days' notice.
 
 Advisory Boards
 
  The Company has entered into consulting agreements with the members of its
Scientific and Clinical Advisory Boards ("Advisory Boards") providing for
aggregate annual fees of approximately $108,000, the issuance of 22,860 shares
of common stock (a component of the 296,429 pool shares discussed in Note 8)
and options to purchase 88,571 shares of common stock at $11.725 to $17.50 per
share, all of which vest ratably over two to three years from the date of
appointment. The consulting agreements with members of the Advisory Boards are
cancelable upon 30 days' notice.
 
                                     F-11

<PAGE>
 
                            CELL THERAPEUTICS, INC.
                         (A DEVELOPMENT STAGE COMPANY)
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 6.  CONTRACTUAL ARRANGEMENTS AND COMMITMENTS
 
 Licensed Technology
 
  In March 1992, the Company entered into agreements with the Fred Hutchinson
Cancer Research Center ("FHCRC") under the terms of which the Company has
received worldwide licenses and options to technology, or technology claimed,
for five U.S. patent applications. The Company paid initial license fees
totalling $100,000 and issued 76,572 shares of common stock valued at $3,200
to the FHCRC for such technology. The initial license fee and value of the
stock granted to the FHCRC were expensed as in-process research and
development. The Company is obligated to pay royalties on revenues resulting
from future sales of products employing the technology and on revenues
received from sublicenses for the technology, with minimum annual royalties of
$50,000 prior to, and $100,000 after, the first commercial sale of such
products. The agreements are for a term equal to the later of 15 years or the
expiration of the last issued patent included within the licensed technology,
unless terminated earlier for certain specified events, including the failure
of the Company to take reasonable efforts to engage in research and
development with respect to the licensed technology.
 
 Facilities Lease
 
  The Company has executed noncancelable operating leases for office and
laboratory space that generally expire the first quarter of 2003, with two
five-year renewal options at the then-current market rates. The lessor
provided $450,000 for leasehold improvements and rent concessions, which is
being amortized over the initial lease term. Rent expense amounted to
$977,778, $993,471, and $995,866 for the years ended December 31, 1994, 1995,
and 1996, respectively.
 
  Future minimum annual rental payments under the leases approximate the
following for the years ended December 31:
 

<TABLE>
             <S>                            <C>
             1997.......................... $1,014,000
             1998..........................  1,133,000
             1999..........................  1,143,000
             2000..........................  1,143,000
             2001..........................  1,143,000
             Thereafter....................  1,239,000
                                            ----------
                                            $6,815,000
                                            ==========
</TABLE>

 
 7.  LONG-TERM OBLIGATIONS
 
  Long-term obligations consisted of the following at December 31:

<TABLE>
<CAPTION>
                                                            1995       1996
                                                         ---------- ----------
   <S>                                                   <C>        <C>
   Master financing agreements:
     Due December 1998, monthly payments of $55,827,
      including interest at 14.7%....................... $1,616,295 $1,154,281
     Due December 1998, monthly payments of $45,820,
      including interest at 17.6%.......................  1,274,342    921,289
     Due December 1996, monthly payments of $21,944,
      including interest at 17.6%.......................    239,847        --
     Due August 1999, monthly payments of $20,523,
      including
      interest at 16.1%.................................        --     531,336
   Capital lease obligations............................    149,667    130,352
   Deferred rent........................................    440,067    494,288
                                                         ---------- ----------
                                                          3,720,218  3,231,546
   Less current portion.................................  1,114,520  1,226,971
                                                         ---------- ----------
                                                         $2,605,698 $2,004,575
                                                         ========== ==========
</TABLE>

 
                                     F-12

<PAGE>
 
                            CELL THERAPEUTICS, INC.
                         (A DEVELOPMENT STAGE COMPANY)
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 7.  LONG-TERM OBLIGATIONS (CONTINUED)
 
  In December 1994, the Company entered into a master financing agreement with
a financing company, whereby the Company borrowed $2,015,334 in exchange for
granting the lessor a security interest in approximately the same net book
value of specific fixed assets and warrants to purchase 12,432 shares of
common stock at $12.8975 per share.
 
  In July 1995, the Company entered into master financing agreements with
another finance company, whereby the Company borrowed $1,450,000 over 42
months and $350,000 over 18 months. In June 1996, the Company borrowed an
additional $616,300 over 38 months from this finance company. For each
borrowing, the Company granted the lessor a security interest in approximately
the same net book value of specified fixed assets.
 
  Annual maturities of the master financing agreements for 1997 through 1999,
respectively, approximate $1,128,000, $1,323,000, and $155,000.
 
 8.  CAPITAL STOCK
 
  In connection with the formation of the Company, certain shareholders
contributed 296,429 shares of common stock to a pool to be issued to the
FHCRC, the Scientific Advisory Board ("SAB"), and key employees. (Refer to
Notes 5 and 6 with regards to the stock issued to the SAB and the FHCRC.) From
this pool, 76,572, 22,860, 49,282, and 114,286 shares were distributed to the
FHCRC, SAB, key employees and its former chairman of the Board of Directors,
respectively. As of December 31, 1992, 33,429 undistributed shares reverted
back to the contributing shareholders. The shares issued to key employees were
subject to forfeiture and cancellation in the event such individuals'
employment agreements were terminated. The restrictions on the stock expired
in 1996.
 
  In August 1993, the Company repurchased 60,343 shares of common stock at
$0.04179 per share from one of its founders pursuant to a stock repurchase
agreement.
 
 Common Stock Reserved
 
  A summary of common stock reserved for issuance is as follows as of December
31:
 

<TABLE>
<CAPTION>
                                                              1995      1996
                                                            --------- ---------
        <S>                                                 <C>       <C>
        Series A Preferred Stock..........................  2,727,023 4,176,913
        Stock Options.....................................    824,840 1,330,009
        Series B Preferred Stock..........................         --   426,439
        Employee Stock Purchase Plan......................         --   285,714
        Warrants..........................................    119,050    77,907
                                                            --------- ---------
                                                            3,670,913 6,296,982
                                                            ========= =========
</TABLE>

 
 9.  STOCK OPTIONS AND WARRANTS
 
 Stock Options
 
  In 1994, shareholders approved the 1994 Equity Incentive Plan (the "1994
Plan") in replacement of the 1992 Stock Option Plan (the "1992 Plan"). The
1994 Plan provides for (a) the grant of incentive stock options (with terms
not to exceed ten years), nonstatutory stock options and stock appreciation
rights, (b) the award of stock bonuses, (c) the sale of stock, and (d) any
other equity-based or equity-related awards which the Plan Administrator
determines to be consistent with the purpose of the 1994 Plan and the
interests of the Company. Option-vesting schedules are specified by the Plan
Administrator. The number of shares available for future grant
 
                                     F-13

<PAGE>
 
                            CELL THERAPEUTICS, INC.
                         (A DEVELOPMENT STAGE COMPANY)
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 9.  STOCK OPTIONS AND WARRANTS (CONTINUED)
 
under the 1994 Plan is the number of shares of common stock available for
issuance under the 1992 Plan at the time of approval of the 1994 Plan
(177,993), plus such shares for which options previously granted under the
1992 Plan may expire, terminate, or be canceled. The 1994 Plan also provides
for the automatic grant of nonstatutory options to nonemployee directors.
 
  In May 1995 and April 1996, shareholders approved share increases of 246,887
and 507,143, respectively, in the number of shares reserved for issuance under
the 1994 Plan. As of December 31, 1996, the Company had reserved 1,330,009
shares of common stock for issuance under the 1992 and 1994 Plans, of which
488,336 were exercisable at an average price of $11.85 per share, and 121,401
were available for future grant.
 
  In April 1995, the Board of Directors approved the repricing of outstanding
options to $11.725 per share by exchanging such outstanding options for a
fewer number of options pursuant to a Black-Scholes formula. Subsequently,
options for 434,664 shares, with prices of $17.50 and $31.50 per share, were
exchanged for 377,121 options with a price of $11.725 per share. All other
terms and conditions of the options remained unchanged. These amounts have
been included as granted and canceled options in the summary activity table as
shown below. The pro forma net loss under SFAS 123 noted below includes
$672,884 and $143,707 in 1995 and 1996, respectively, related to this option
repricing.
 
  A summary of the activity related to the 1992 and 1994 Plans follows:

<TABLE>
<CAPTION>
                                                        SHARES       AVERAGE
                                                         UNDER    EXERCISE PRICE
                                                        OPTION      PER SHARE
                                                       ---------  --------------
   <S>                                                 <C>        <C>
   Balance December 31, 1993, unexercised.............   404,692     $20.37
     Granted..........................................    61,970      31.50
     Canceled.........................................   (10,923)     23.14
     Exercised........................................       (79)     17.50
                                                       ---------
   Balance December 31, 1994, unexercised.............   455,660      21.84
     Granted..........................................   815,086      11.725
     Canceled.........................................  (504,499)     21.42
     Exercised........................................    (4,653)     12.11
                                                       ---------
   Balance December 31, 1995, unexercised.............   761,594      11.81
     Granted..........................................   505,923      11.725
     Canceled.........................................   (56,935)     11.83
     Exercised........................................    (1,974)     11.725
                                                       ---------
   Balance December 31, 1996, unexercised............. 1,208,608      11.78
                                                       =========
</TABLE>

  The weighted average fair value of options granted during 1996 was $2.34.
 
  Exercise prices for options outstanding at December 31, 1996 range from
$11.725 to $17.50 per share, with an average remaining maximum term of
approximately 8.5 years.
 
  In 1996, the Company adopted the accounting provisions of Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" (SFAS 123). SFAS 123 encourages, but does not require, entities
to adopt the fair value of accounting for their stock-based compensation
plans. Under this method, compensation cost for stock-based compensation plans
is measured at the grant date based on the fair value of the award and is
recognized over the vesting period. Fair value is determined using minimum
value option pricing models that take into account (1) the stock price at the
grant date, (2) the exercise price, (3) a four-year expected life of the
options, (4) no expected dividends, and (5) risk free interest rates ranging
from 5.4% to 7.8%, and 5.2%
 
                                     F-14

<PAGE>
 
                            CELL THERAPEUTICS, INC.
                         (A DEVELOPMENT STAGE COMPANY)
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 9.  STOCK OPTIONS AND WARRANTS (CONTINUED)
 
to 6.2%, during 1995 and 1996, respectively, over the expected life of the
options. In accordance with the provisions of SFAS 123, the Company applies
Accounting Principles Board Opinion No. 25 and related interpretations in
accounting for its stock option plans and, accordingly, does not recognize
compensation cost for options granted with exercise prices equal to or greater
than fair value. Although not reflective of the effects of reported net income
in future years until the rules of SFAS 123 are applied to all outstanding non
vested options, if the Company elected to recognize compensation cost based on
the fair value of the options granted at grant date as prescribed by SFAS 123,
net loss and pro forma net loss per share would have been increased as follows
for the years ended December 31:
 

<TABLE>
<CAPTION>
                                        1995                        1996
                              --------------------------  --------------------------
                              AS REPORTED    PRO FORMA    AS REPORTED    PRO FORMA
                              ------------  ------------  ------------  ------------
     <S>                      <C>           <C>           <C>           <C>
     Net loss................ $(19,992,475) $(20,812,869) $(13,928,189) $(14,536,137)
     Historical net loss per
      share.................. $      (3.78) $      (3.93) $      (2.55) $      (2.66)
</TABLE>

 
  Historical net loss per share is computed as described in Note 1.
 
  In December 1996, the Board of Directors approved the grant of an aggregate
of 114,280 ten year fully vested nonstatutory options to non employee
directors at an exercise price of $11.725 per share, subject to approval by
shareholders at the 1997 Annual Meeting of Shareholders. These options will be
recorded as granted upon shareholder approval. The Company will record
compensation expense on the date of shareholder approval for the amount by
which fair market value at that date exceeds the exercise price.
 
 Warrants
 
  During 1995, the Company offered to exchange shares of common stock for
outstanding warrants to purchase common stock, issuing 104,569 shares of
common stock in exchange for warrants to purchase 443,353 shares of common
stock. During 1996, the Company concluded its offer to exchange shares of
common stock for outstanding warrants of common stock, issuing 151 shares of
common stock in exchange for warrants to purchase 377 shares of common stock.
 
  A summary of the warrants to purchase common stock which remain outstanding
(and for which common stock is reserved for issuance) is as follows as of
December 31, 1996:
 

<TABLE>
<CAPTION>
            SHARES OF
             COMMON                 PRICE PER SHARE OF
              STOCK                    COMMON STOCK                            EXPIRATION
            ---------               ------------------                         ----------
            <S>                     <C>                                        <C>
             68,901                       $17.50                                  1997
              7,935                        31.50                                  1998
              1,071                        31.50                                  1999
             ------
             77,907
             ======
</TABLE>

 
 Employee Stock Purchase Plan
 
  In April 1996 the shareholders approved the adoption of the 1996 Employee
Stock Purchase Plan (the "Purchase Plan"). A maximum of 285,714 shares of the
Company's common stock will be reserved for purchase under the Purchase Plan,
under which eligible employees may purchase a limited number of shares of the
Company's common stock at 85% of fair market value. As of December 31, 1996,
no shares of the Company's common stock have been purchased under the Purchase
Plan.
 
                                     F-15

<PAGE>
 
                            CELL THERAPEUTICS, INC.
                         (A DEVELOPMENT STAGE COMPANY)
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
10.  INCOME TAXES
 
  The Company follows Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes," which requires an asset and liability approach
for financial accounting and reporting for income taxes. The standard requires
that deferred tax liabilities and assets be adjusted currently for effects of
changes in tax laws or rates.
 
  As of December 31, 1996, the Company had net operating tax loss
carryforwards of approximately $70 million and research and development credit
carryforwards of approximately $1.8 million. The carryforwards begin to expire
in the year 2007. Due to prior rounds of equity financing (see Note 4) and the
Company's proposed initial public offering of common stock (see Note 12), the
Company has incurred and will incur "ownership changes" pursuant to applicable
regulations in effect under the Internal Revenue Code of 1986, as amended.
Accordingly, the Company's use of losses incurred through the date of these
ownership changes will be limited during the carryforward period. The Company
estimates that use of the loss carryforwards would be limited to approximately
$8 million per year. To the extent that any single year loss is not utilized
to the full amount of the limitation, such unused loss is carried over to
subsequent years until the earlier of its utilization or the expiration of the
relevant carryforward period.
 
  Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. The Company has
recognized a valuation allowance equal to the deferred tax assets due to the
uncertainty of realizing the benefits of the assets. The Company's valuation
allowance increased $7,332,000, $6,928,000 and $4,785,000 during 1994, 1995
and 1996, respectively. Significant components of the Company's deferred tax
liabilities and assets as of December 31 are as follows:
 

<TABLE>
<CAPTION>
                                                           1995        1996
                                                        ----------- -----------
   <S>                                                  <C>         <C>
   Deferred tax assets:
     Net operating loss carryforwards.................  $19,535,000 $23,914,000
     Research and development tax credit
      carryforwards...................................    1,667,000   1,752,000
     Accruals on financial statements in excess of tax
      returns.........................................      301,000     444,000
     Depreciation in financial statements in excess of
      tax returns.....................................      149,000     327,000
                                                        ----------- -----------
   Net deferred tax assets............................  $21,652,000 $26,437,000
                                                        =========== ===========
   Valuation allowance for deferred tax assets........  $21,652,000 $26,437,000
                                                        =========== ===========
</TABLE>

 
11.  SIGNIFICANT AGREEMENTS
 
  On March 7, 1995, the Company and BioChem Therapeutic Inc. ("BioChem"), a
wholly owned subsidiary of BioChem Pharma, Inc., signed collaboration and
supply agreements (the "BioChem Collaboration Agreement" and the "BioChem
Supply Agreement", respectively). The BioChem Collaboration Agreement grants
an exclusive license to enable BioChem to seek Canadian regulatory approval
for, and to use and sell, the Company's Lisofylline and/or CT-2584 compounds
(and compositions thereof) (collectively, the "CTI Compounds") in Canada.
 
  Under the BioChem Collaboration Agreement, BioChem purchased 7,462.687
shares of Series A Convertible Preferred Stock for $2,500,000 in the Company's
third private equity offering. See Note 4. In addition, the Company is
entitled to receive payments for each of the CTI Compounds upon the
satisfaction of specified product development milestones and royalties on all
sales, if any. The BioChem Collaboration Agreement terminates upon the
expiration of the last to expire patents covering the CTI Compounds or, absent
a patent, upon the tenth anniversary of the first commercial sale of such CTI
Compound. The Company recorded milestone payments of $100,000 and $250,000
under the BioChem Collaboration Agreement in 1995 and 1996, respectively.
 
                                     F-16

<PAGE>
 
                            CELL THERAPEUTICS, INC.
                         (A DEVELOPMENT STAGE COMPANY)
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
11. SIGNIFICANT AGREEMENTS (CONTINUED)
 
  Under the BioChem Supply Agreement, the Company is to supply to BioChem the
CTI Compounds at a percentage mark-up above cost. The BioChem Supply Agreement
terminates 20 years from the date of termination of the BioChem Collaboration
Agreement with respect to each of the CTI Compounds.
 
  In October 1995, the Company purchased all of the intellectual property of
Lipomed Corporation ("Lipomed") from its shareholders and expensed the
purchase price as in-process research and development expense. The purchase
price was $1,155,750 consisting of 98,574 shares of common stock. The
agreement also provides for a possible future payment to Lipomed of $100,000
upon the occurrence of certain events.
 
  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
nonrefundable 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 bone marrow transplantation ("BMT") trial acceptable within
thirty days after its receipt. The Company furnished Schering with this 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 based on, among other factors, (i) its view that one
of the endpoints of the Phase II 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.
 
  In November 1996, the Company entered into a collaboration and license
agreement with Ortho Biotech Inc. and the R.W. Johnson Pharmaceutical Research
Institute (a division of Ortho Pharmaceutical Corporation) each of which are
wholly-owned subsidiaries of Johnson & Johnson (collectively, "Johnson &
Johnson") for the joint development and commercialization of Lisofylline. Upon
execution of the collaboration agreement, Johnson & Johnson paid to the
Company a $5,000,000 nonrefundable license fee. In addition, Johnson & Johnson
Development Corporation ("JJDC"), a wholly-owned subsidiary of Johnson &
Johnson, purchased 14,925.373 shares of the Company's newly issued Series B
Convertible Preferred Stock at $335 per share for an aggregate purchase price
of $5,000,000. See Note 4.
 
  Under the collaboration agreement, the Company will be responsible for
development of Lisofylline in the United States. The Company will also be
responsible for the manufacture of Lisofylline for development and
commercialization purposes until November 1999, and Johnson & Johnson will be
responsible for the manufacture of Lisofylline thereafter, unless Johnson &
Johnson elects to assume such responsibility prior to such date. Johnson &
Johnson has agreed to fund 60% of the Company's budgeted development expenses
incurred in connection with obtaining regulatory approval for Lisofylline in
the United States. For each of 1997 and 1998 Johnson & Johnson has agreed,
subject to certain termination rights, to fund up to $12,000,000 of the
Company's budgeted development expenses per year. Any development expenses in
excess of such currently budgeted agreed upon amounts will be funded solely by
the Company unless otherwise mutually agreed. Johnson & Johnson will be
responsible for obtaining regulatory approval for Lisofylline for markets
outside of the United States and Canada at its own expense. The Company
recorded $870,806 of collaboration agreement revenues related to the
reimbursement of development expenses by Johnson & Johnson in 1996.
 
  The Company and Johnson & Johnson will co-promote Lisofylline in the United
States and each will share equally in any resulting operating profits and
losses. Although the Company and Johnson & Johnson will co-promote Lisofylline
in the United States, Johnson & Johnson will have primary responsibility for
commercializing Lisofylline. Johnson & Johnson will have the exclusive right
to develop and market Lisofylline, at its own expense, for markets outside of
the United States and Canada, subject to specified royalty payments
 
                                     F-17

<PAGE>
 
                            CELL THERAPEUTICS, INC.
                         (A DEVELOPMENT STAGE COMPANY)
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
11. SIGNIFICANT AGREEMENTS (CONTINUED)
 
to the Company. The Company will receive additional equity, license, milestone
and similar payments under the agreement if certain milestones are achieved in
the development and commercialization of Lisofylline.
 
  The collaboration with Johnson & Johnson initially covers the development of
Lisofylline to prevent or reduce the toxic side effects among cancer patients
receiving high dose radiation and/or chemotherapy followed by BMT (the "BMT
Indication") through December 31, 1998. The collaboration also covers the
development of Lisofylline for the treatment of patients with acute
myelogeneous leukemia ("AML") undergoing high dose chemotherapy (the "AML
Indication") through June 30, 1997. Johnson & Johnson has an option to continue
to participate in the development of Lisofylline for the AML Indication
following the completion of the Company's ongoing Phase II AML trial. Johnson &
Johnson also has certain options to expand the collaboration to include the
development of Lisofylline for any other indication for which Lisofylline is
being developed by the Company. In the event that Johnson & Johnson exercises
any such option, it would be required to fund 60% of the Company's budgeted
development expenses incurred in connection with the development of Lisofylline
for such indication, including expenses incurred prior to the exercise of such
option, and would also be required to pay additional license fees and milestone
payments to the Company. Thereafter, any development expenses in excess of the
then agreed-upon budgeted amounts for any such additional indication would be
funded solely by Johnson & Johnson unless otherwise mutually agreed. If Johnson
& Johnson does not exercise such option with respect to any such indication,
the Company would be free to develop Lisofylline for such indication either on
its own or in collaboration with third parties. Johnson & Johnson also has the
option to sponsor research at the Company with respect to discovering compounds
structurally related to Lisofylline.
 
  In connection with the execution of the collaboration agreement, JJDC, a
wholly-owned subsidiary of Johnson & Johnson, has granted to the Company an
option (the "Johnson & Johnson Option") to sell to JJDC a number of shares of
common stock equal to not more than ten percent of the number of shares of
common stock sold by the Company at the initial closing of its currently
proposed initial public offering, at a price per share equal to the initial
public offering price in such proposed offering. See Note 12.
 
12. SUBSEQUENT EVENTS
 
 Supply Agreement
 
  In January 1997, the Company entered into a supply agreement with ChiRex,
Ltd. ("ChiRex"), a British manufacturer of pharmaceutical intermediates and
active ingredients, for the manufacture and supply of Lisofylline and
corresponding intermediate compounds. Under the terms of the agreement, ChiRex
will manufacture and supply Lisofylline bulk drug product and a key
intermediate compound in sufficient quantities to meet the Company's
requirements for ongoing and future clinical trials and commercial requirements
during launch and commercialization. The agreement will expire on December 31,
2001, but may be terminated by the Company upon 12 months' written notice prior
to such date.
 
 Initial Public Offering and Related Events
 
  On January 23, 1997, the Company's Board of Directors authorized the Company
to file a Registration Statement with the Securities and Exchange Commission to
permit the Company to proceed with an initial public offering of its common
stock (the "Offering"). In connection with the Offering, the Company's Board of
Directors approved a reverse stock split of the outstanding shares of common
stock on the basis of one new share of common stock for every three and one-
half outstanding shares of common stock. The reverse stock split is expected to
be approved by the shareholders in March 1997, and will become effective at the
time an amendment to the Company's Restated Articles of Incorporation is filed
with the Secretary of State of the State
 
                                      F-18

<PAGE>
 
                            CELL THERAPEUTICS, INC.
                         (A DEVELOPMENT STAGE COMPANY)
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
12. SUBSEQUENT EVENTS (CONTINUED)
 
of Washington. All outstanding common and common equivalent shares and per-
share amounts in the accompanying financial statements and related notes to
financial statements have been retroactively adjusted to give effect to the
reverse stock split.
 
  In addition, in connection with the Offering the Company is soliciting the
consent of the holders of the Convertible Preferred Stock to the automatic
conversion of all of the outstanding shares of Convertible Preferred Stock
upon the closing of the Offering. Upon the closing of Offering, all of the
outstanding shares of Series A Convertible Preferred Stock will automatically
convert into 4,176,913 shares of common stock and all of the outstanding
shares of Series B Convertible Preferred Stock will automatically convert into
426,439 shares of common stock (in each case subject to adjustment upon the
occurrence of certain dilutive events). Unaudited pro forma shareholders'
equity at December 31, 1996, as adjusted for the assumed conversion of the
Series A and Series B Convertible Preferred Stock, is set forth in the
accompanying balance sheet.
 
  On January 23, 1997, the Company's Board of Directors authorized the Company
to exercise the Johnson & Johnson Option in full. Upon the exercise of the
Johnson & Johnson Option, JJDC will be committed to purchase, in a private
placement that will occur concurrent with the closing of the Offering, 300,000
shares of common stock at an aggregate purchase price of $4.5 million,
assuming the sale of 3,000,000 shares of common stock at the closing of the
Offering at an initial public offering price of $15.00 per share. See Note 11.
 
                                     F-19

<PAGE>
 
 
    [DIAGRAM DEPICTING THE DIFFERENT CELLULAR RESPONSES RESULTING FROM THE
      ACTIVATION OF HOUSEKEEPING PATHWAYS AND STRESS-ACTIVATED PATHWAYS]

 
       HOUSEKEEPING PATHWAYS              STRESS-ACTIVATED PATHWAYS
 
 
  The process by which growth          These are also signal production
factors outside a cell transmit      pathways termed "stress-activated
their chemical signals inside the    pathways," or "SAPs," which are
cell is termed "signal               part of the cellular response to
transduction." Certain signal        injury following exposure to cell
transduction pathways, such as the   damaging stimuli such as
mitogen-activated pathway ("MAP")    radiation, chemotherapy or
are essential for normal day-to-     oxidative injury. Activation of
day cellular processes such as the   stress-activated pathways may lead
normal growth and replenishment of   to inflammation and tissue injury.
cells in the body. These pathways
are often referred to as
"housekeeping pathways."

<PAGE>
 
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
 
  No dealer, salesperson or any other person has been authorized to give any
information or make any representation not contained in this Prospectus in
connection with the offer made by this Prospectus and, if given or made, such
information or representation must not be relied upon as having been
authorized by the Company or the Underwriters. This Prospectus does not
constitute an offer to sell or a solicitation of an offer to buy any of the
securities offered hereby by anyone in any jurisdiction in which such offer or
solicitation is not authorized or in which the person making such offer or
solicitation is not qualified to do so or to anyone to whom it is unlawful to
make such offer or solicitation. Neither the delivery of this Prospectus nor
any sale made hereunder shall, under any circumstances, create any implication
that the information herein is correct as of any time subsequent to the date
of this Prospectus or that there has been no change in the affairs of the
Company since such date.
 
                                 ------------
 
 
                              Table of Contents
 

<TABLE>
<CAPTION>
                                                                          Page
                                                                          ----
<S>                                                                       <C>
Prospectus Summary.......................................................   3
Risk Factors.............................................................   6
Use of Proceeds..........................................................  16
Johnson & Johnson Stock Purchase.........................................  16
Dividend Policy..........................................................  17
Capitalization...........................................................  17
Dilution.................................................................  18
Selected Financial Data..................................................  19
Management's Discussion and Analysis of Financial Condition and Results
 of Operations...........................................................  20
Business.................................................................  23
Management...............................................................  43
Certain Transactions.....................................................  56
Principal Shareholders...................................................  58
Description of Capital Stock.............................................  61
Shares Eligible for Future Sale..........................................  66
Underwriting.............................................................  68
Legal Matters............................................................  69
Experts..................................................................  70
Available Information....................................................  70
Index to Consolidated Financial Statements............................... F-1
</TABLE>

 
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
 
                               3,000,000 Shares
 
 
                       [LOGO OF CELL THERAPEUTICS, INC.]
 
                            Cell Therapeutics, Inc.
 
                                 Common Stock
 
                            -----------------------
                                  PROSPECTUS
 
                                March   , 1997
                            -----------------------
 
 
                                UBS Securities
 
                             Montgomery Securities
 
                       Raymond James & Associates, Inc.
 
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------

<PAGE>
 

 
                                   PART II
 
                    INFORMATION NOT REQUIRED IN PROSPECTUS
 

ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
 
  The following table sets forth all expenses, other than the underwriting
discounts and commissions, payable by the Registrant in connection with the
sale of the Common Stock being registered. All the amounts shown are estimates
except for the SEC registration fee and the NASD filing fee.
 

<TABLE>
      <S>                                                              <C>
      SEC Registration Fee............................................ $ 16,728
      NASD Filing Fee.................................................    6,020
      Nasdaq National Market Listing Fee..............................   50,000
      Transfer Agent and Registrar Fees and Expenses..................        *
      Printing and Engraving Expenses.................................        *
      Legal Fees and Expenses.........................................        *
      Accounting Fees and Expenses....................................  125,000
      Blue Sky Fees and Expenses......................................        *
      Miscellaneous Expenses..........................................        *
                                                                       --------
        TOTAL......................................................... $850,000
                                                                       ========
</TABLE>

- --------
* To be supplied by amendment.
 

ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
 
  Sections 23B.08.500 through 23B.08.600 of the Washington Business
Corporation Act (the "WBCA") authorize a court to award, or a corporation's
board of directors to grant, indemnification to directors and officers on
terms sufficiently broad to permit indemnification under certain circumstances
for liabilities arising under the Securities Act of 1933, as amended (the
"Securities Act"). Article IX of the Registrant's Restated Bylaws (Exhibit 3.6
hereto) provides for indemnification of the Registrant's directors, officers,
employees and agents to the maximum extent permitted by Washington law. The
directors and officers of the Registrant also may be indemnified against
liability they may incur for serving in such capacity pursuant to a liability
insurance policy maintained by the Company for such purpose.
 
  Section 23B.08.320 of the WBCA authorizes a corporation to limit a
director's liability to the corporation or its shareholders for monetary
damages for acts or omissions as a director, except in certain circumstances
involving intentional misconduct, knowing violations of law or illegal
corporate losses or distributions, or any transaction from which the director
personally receives a benefit in money, property or services to which the
director is not legally entitled. Article VI of the Registrant's Restated
Articles of Incorporation (Exhibit 3.1 hereto) contains provisions
implementing, to the fullest extent permitted by Washington law, such
limitations on a director's liability to the Registrant and its shareholders.
 
  The Registrant has entered into an indemnification agreement with each of
its executive officers and directors in which the Registrant agrees to hold
harmless and indemnify the officer or director to the fullest extent permitted
by Washington law. The Registrant agrees to indemnify the officer or director
against any and all losses, claims, damages, liabilities or expenses incurred
in connection with any actual, pending or threatened action, suit, claimor
proceeding, whether civil, criminal, administrative or investigative and
whether formal or informal, in which the officer or director is, was or
becomes involved by reason of the fact that the officer or director is or was
a director, officer, employee, trustee or agent of the Registrant or any
related company, partnership or enterprise, including service with respect to
an employee benefit plan, whether the basis of such proceeding is alleged
action (or inaction) by the officer or director in an official capacity and
any action, suit, claim or proceeding instructed by or at the direction of the
officer or director unless such action, suit, claim or proceeding is or was
authorized by the Registrant's Board of Directors. No indemnity pursuant to
the
 
                                     II-1

<PAGE>
 
indemnification agreements shall be provided by the Registrant on account of
any suit in which a final, unappealable judgment is rendered against the
officer or director for an accounting of profits made from the purchase or
sale by the officer or director of securities of the Registrant in violation
of the provisions of Section 16(b) of the Securities Exchange Act of 1934, as
amended, and amendments thereto, or for damages that have been paid directly
to the officer or director by an insurance carrier under a policy of
directors' and officers' liability insurance maintained by the Registrant.
 
  The Underwriting Agreement filed as Exhibit 1.1 to this Registration
Statement provides for indemnification by the Underwriters of the Registrant
and its officers and directors, and by the Registrant of the Underwriters, for
certain liabilities arising under the Securities Act or otherwise.
 

ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
 
  Set forth below is certain information as to all securities issued by the
Company since March 1, 1994 which were not registered under the Securities
Act. As to all such securities except those issued in connection with stock
splits, conversions and exchanges (as to which there was no "sale" within the
meaning of the Securities Act), exemption was claimed under Section 4(2) of
the Securities Act, or Regulation D promulgated thereunder, as transactions by
an issuer not involving a public offering. The recipients of securities in
each such transaction represented their intentions to acquire the securities
for investment only and not with a view to or for sale in connection with any
distribution thereof and appropriate legends were affixed to the share
certificates and warrants issued in such transactions. The information below
gives effect to a 1-for-2 reverse stock split effected in February 1994 and a
1-for-3 1/2 reverse stock split which will be effected prior to the effective
date of this Registration Statement.
 
    (1) In December 1994 the Registrant issued warrants to purchase 12,432
  shares of Common Stock at an initial exercise price of $15.40 per share to
  Aberlyn Capital Management Limited Partnership in connection with an
  equipment lease transaction. The exercise price of such warrants was
  subsequently reduced to $12.8975 per share. Such warrants were subsequently
  exchanged for 7,228 shares of Common Stock in the transaction described in
  paragraph (4) below.
 
    (2) Between March 1995 and April 1995 the Registrant sold an aggregate of
  76,789.5116 shares of Series A Convertible Preferred Stock to a group of
  accredited investors for cash in the aggregate of $25,724,485. Each share
  of Series A Convertible Preferred Stock will automatically convert into
  28.5714 shares of Common Stock upon the closing of this Offering.
 
    (3) In June 1995 the Registrant sold an aggregate of 18,657.4924 shares
  of Series A Convertible Preferred Stock to a group of accredited investors
  consisting of Kummell Investments Limited, The Phoenix Partners II Limited
  Partnership and The Phoenix Partners III Limited Partnership, for cash in
  the aggregate of $6,250,260. Each share of Series A Convertible Preferred
  Stock will automatically convert into 28.5714 shares of Common Stock upon
  the closing of this Offering.
 
    (4) In September 1995 the Registrant issued (i) 5,612 shares of Common
  Stock in exchange for warrants to purchase 190,992 shares of Common Stock
  at an exercise price of $38.50 per share which were issued to purchasers in
  a private placement transaction between October 1993 and February 1994;
  (ii) 68,720 shares of Common Stock in exchange for warrants to purchase
  182,409 shares of Common Stock at exercise prices ranging from $17.50 to
  $31.50 per share which were issued to sales agents in connection with
  certain private placement transactions between August and December 1992 and
  between October 1993 and February 1994; (iii) 22,858 shares of Common Stock
  in exchange for warrants to purchase 57,143 shares of Common Stock at an
  exercise price of $17.50 per share which were issued to David H. Smith,
  M.D., a former Chairman of the Board of Directors of the Registrant; and
  (iv) 7,228 shares of Common Stock in exchange for the warrants described in
  paragraph (1) above. In February 1996 the registrant issued an additional
  151 shares of Common Stock in exchange for warrants to purchase 377 shares
  of Common Stock at an exercise price of $17.50 per share which were issued
  to sales agents in connection with certain private placement transactions,
  including a private placement transaction between October 1993 and February
  1994.
 
 
                                     II-2

<PAGE>
 
    (5) In October 1995 the Registrant issued an aggregate of 98,574 shares
  of Common Stock to six shareholders of Lipomed Corporation ("Lipomed") as
  consideration for all of the intellectual property of Lipomed.
 
    (6) In December 1995 the Registrant sold 5,715 shares of Common Stock to
  Max E. Link, Ph.D. for $67,000 in cash.
 
    (7) In May 1996 the Company sold 7,937 shares of Common Stock to a
  warrant holder for $305,558 in cash upon exercise of warrants to purchase
  shares of Common Stock at an exercise price of $38.50 per share.
 
    (8) Between September 1996 and October 1996 the Registrant sold an
  aggregate of 50,746.2683 shares of Series A Convertible Preferred Stock to
  a group of accredited investors consisting of Kummell Investments Limited,
  The International Biotechnology Trust plc, W.R. Smith II, Vulcan Ventures
  Inc., The Phoenix Partners III Limited Partnership and New York Life
  Insurance Company for cash in the aggregate of $17,000,000. Each share of
  Series A Convertible Preferred Stock will automatically convert into
  28.5714 shares of Common Stock upon the closing of this Offering.
 
    (9) In November 1996 the Registrant sold 14,925.373 shares of Series B
  Convertible Preferred Stock to Johnson & Johnson Development Corporation
  for $5,000,000 in cash. Each share of Series B Convertible Preferred Stock
  will automatically convert into 28.5714 shares of Common Stock upon the
  closing of this Offering.
 
    (10) As of December 31, 1996 the Registrant had granted incentive stock
  options and non-statutory stock options to employees, directors and
  consultants under its 1992 Stock Option Plan (the "1992 Plan") and 1994
  Equity Incentive Plan (the "1994 Plan"), covering an aggregate of 1,208,608
  shares of Common Stock, at an average exercise price of approximately
  $11.76 per share. The Registrant has sold an aggregate of 6,706 shares of
  its Common Stock to employees, directors and consultants of the Registrant
  for aggregate consideration of $80,760 pursuant to the exercise of stock
  options under the 1992 Plan and the 1994 Plan.
 

ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
 
 (a) Exhibits
 

<TABLE>
<CAPTION>
 EXHIBIT
  NUMBER                            DESCRIPTION
 --------                           -----------
 <C>      <S>                                                               
   1.1++  Form of Underwriting Agreement between UBS Securities LLC,
           Montgomery Securities, Raymond James & Associates, Inc., and
           the Registrant
   3.1(1) Registrant's Restated Articles of Incorporation
   3.2(1) Registrant's Articles of Amendment to Restated Articles of
           Incorporation Establishing a Series of Preferred Stock (Series
           A Convertible Preferred Stock)
   3.3    Registrant's Articles of Amendment to Restated Articles of
           Incorporation Reducing the Number of Authorized Shares of
           Series A Convertible Preferred Stock
   3.4    Registrant's Articles of Amendment to Restated Articles of
           Incorporation Establishing a Series of Preferred Stock (Series
           B Convertible Preferred Stock)
   3.5    Registrant's Articles of Amendment to Restated Articles of
           Incorporation Establishing a Series of Preferred Stock (Series
           C Preferred Stock)
   3.6    Form of Articles of Amendment to Restated Articles of
           Incorporation of Cell Therapeutics, Inc. Effecting a Reverse
           Stock Split.
   3.7(5) Registrant's Restated Bylaws
   4.1(2) Specimen Common Stock Certificate
   4.2(3) Form of Rights Agreement dated as of November 11, 1996, between
           the Registrant and Harris Trust Company of California, which
           includes the Form of Rights Certificate as Exhibit A, the
           Summary of Rights to Purchase Preferred Stock as Exhibit B and
           the Form of Certificate of Designation of the Series C
           Preferred Stock as Exhibit C
</TABLE>

 
                                     II-3

<PAGE>
 

<TABLE>
<CAPTION>
 EXHIBIT
  NUMBER                               DESCRIPTION
 --------                              -----------
 <C>      <S>
  5.1++   Opinion of Shearman & Sterling
 10.1(2)  Lease Agreement between David A. Sabey and Sandra L. Sabey and the
           Registrant, dated March 27, 1992, as amended March 31, 1993 and
           October 13, 1993
 10.2     Third Amendment to Lease Agreement between David A. Sabey and Sandra
           L. Sabey and the Registrant, dated as of September 10, 1996.
 10.3(1)  Assignment of Lease between Manlove Travel and the Registrant, dated
           April 23, 1993
 10.4     Letter Agreement between David A. Sabey, Sandra L. Sabey and the
           Registrant, dated as of September 6, 1996, amending the Assignment
           of Lease.
 10.5     Employment Agreement between the Registrant and James A. Bianco,
           dated as of December 17, 1996
 10.6(2)  Employment Agreement between the Registrant and Louis A. Bianco,
           dated as of February 1, 1992, as amended May 27, 1994
 10.7(1)  Employment Agreement between the Registrant and Maurice J. Schwarz,
           dated May 2, 1994
 10.8(1)  Severance Agreement between the Registrant and Robert A. Lewis, dated
           April 1, 1996
 10.9     Form of Strategic Management Team Severance Agreement.
 10.10(1) Promissory Note between James A. Bianco, M.D. and the Registrant,
           dated December 23, 1993
 10.11(1) Stock Pledge Agreement between James A. Bianco, M.D. and the
           Registrant, dated December 23, 1993
 10.12(1) 1994 Equity Incentive Plan, as amended
 10.13(1) 1992 Stock Option Plan, as amended
 10.14(1) 1996 Employee Stock Purchase Plan
 10.15(1) Form of Sales Agent Warrant for the 1992 Private Placement
 10.16(1) Warrant, dated November 25, 1992, between the Registrant and David H.
           Smith, M.D.
 10.17(1) Registration Agreement between the Registrant and the other parties
           included therein, dated as of November 23, 1993
 10.18(1) Form of Sales Agent Warrant for the 1993 Private Placement
 10.19(1) Subscription Agreement between the Registrant and the other parties
           included therein, dated as of March 21, 1995
 10.20(1) Registration Rights Agreement between the Registrant and the other
           parties included therein, dated as of March 21, 1995
 10.21(5) Registration Rights Agreement between the Company and the other
           parties included therein, dated as of September 17, 1996, as amended
           by Amendment No. 1 thereto dated as of October 11, 1996.
 10.22(5) Letter Agreement between the Company and Kummell Investments Limited,
           dated September 17, 1996.
 10.23(2) Collaboration Agreement by and between BioChem Therapeutic Inc. and
           the Registrant, dated March 7, 1995, as amended November 30, 1995
           and December 6, 1995
 10.24(2) Supply Agreement by and between BioChem Therapeutic Inc. and the
           Registrant, dated March 7, 1995
 10.25+   Supply Agreement by and between ChiRex, Ltd. and the Registrant,
           dated January 21, 1997
 10.26+   Collaboration and License Agreement, dated as of November 8, 1996, by
           and between the Registrant and Ortho Biotech Inc. and The R.W.
           Johnson Pharmaceutical Research Institute, a division of Ortho
           Pharmaceutical Corporation
 10.27+   Stock Purchase Agreement, dated as of November 8, 1996, by and
           between the Registrant and Johnson & Johnson Development Corporation
</TABLE>

 
 
                                      II-4

<PAGE>
 

<TABLE>
<CAPTION>
 EXHIBIT
  NUMBER                               DESCRIPTION
 --------                              -----------
 <C>      <S>
 10.28(1) Master Lease Agreement, dated as of December 28, 1994 between the
           Registrant and Aberlyn Capital Management Limited Partnership
 10.29(1) Common Stock Purchase Warrant, dated December 28, 1994 between the
           Registrant and Aberlyn Capital Management Limited Partnership
 10.30(1) Loan and Security Agreement, dated as of May 30, 1995, between the
           Registrant and Financing for Science International, Inc.
 10.31(4) Loan and Security Agreement, dated as of June 28, 1996, between the
           Registrant and Financing for Science International, Inc.
 10.32(1) Asset Purchase Agreement, dated of October 17, 1995, between Lipomed
           Corporation, its Stockholders and the Registrant, as amended
 10.33(2) Form of Scientific Advisory Board Consulting Agreement
 10.34(2) Form of Clinical Advisory Board Consulting Agreement
 11.1     Computation of net loss and pro forma net loss per share
 22.1     Subsidiaries of the Registrant
 23.1     Consent of Ernst & Young LLP, independent auditors (included on page
           II-9 of this Registration Statement)
 23.2++   Consent of Shearman & Sterling (included in its opinion filed as
           Exhibit 5.1)
 23.3++   Consent of Foley & Lardner
 24.1     Powers of Attorney (included on pages II-7 and II-8 of this
           Registration Statement)
 27.1     Financial Data Schedule
</TABLE>

- --------
 +Confidential treatment requested.
++To be supplied by amendment.
(1) Incorporated by reference to exhibits to the Registrant's Registration
    Statement on Form S-1 (No. 33-4154).
(2) Incorporated by reference to exhibits to the Registrant's Registration
    Statement on Form 10.
(3) Incorporated by reference to exhibits to the Registrant's Registration
    Statement on Form 8-A.
(4) Incorporated by reference to exhibits to the Registrant's Quarterly Report
    on Form 10-Q for the quarter ended June 30, 1996.
(5) Incorporated by reference to exhibits to the Registrant's Quarterly Report
    on Form 10-Q for the quarter ended September 30, 1996.
 
 (b) Financial Statement Schedules
 
    None.
 
    All schedules have been omitted since they are either not required, are
  not applicable, or the required information is shown in the financial
  statements or related notes.
 

ITEM 17. UNDERTAKINGS
 
  1. Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the Registrant pursuant to the foregoing provisions, or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in Act and
will be governed by the final adjudication of such issue.
 
                                     II-5

<PAGE>
 
  2. The undersigned Registrant hereby undertakes that:
 
    (1) For purposes of determining any liability under the Securities Act of
  1933, the information omitted from the form of Prospectus filed as part of
  this registration statement in reliance upon Rule 430A and contained in the
  form of Prospectus filed by the Registrant pursuant to Rule 424(b)(1) or
  (4) or 497(h) under the Securities Act shall be deemed to be part of this
  registration statement as of the time it was declared effective.
 
    (2) For the purpose of determining any liability under the Securities Act
  of 1933, each post-effective amendment that contains a form of Prospectus
  shall be deemed to be a new registration statement relating to the
  securities offered therein, and the offering of such securities at that
  time shall be deemed to be the initial bona fide offering thereof.
 
                                     II-6

<PAGE>
 

                                   SIGNATURES
 
  PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
HAS DULY CAUSED THIS REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF SEATTLE, STATE OF
WASHINGTON, ON JANUARY 30, 1997.
 
                                          Cell Therapeutics, Inc.
 
                                                /s/ James A. Bianco, M.D.
                                          By: _________________________________
                                              JAMES A. BIANCO, M.D. PRESIDENT
                                                AND CHIEF EXECUTIVE OFFICER
 
                               POWER OF ATTORNEY
 
  KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below hereby constitutes and appoints James A. Bianco and Louis A. Bianco, and
each of them acting individually, as such person's attorney-in-fact, each with
full power of substitution or resubstitution, for such person in any and all
capacities, to sign any and all amendments to this Registration Statement and
any registration statement relating to the offering covered by this
Registration Statement and filed pursuant to Rule 462(b) under the Securities
Act of 1933, as amended, and to file the same, with exhibits thereto and other
documents in connection therewith, with the Securities and Exchange Commission,
hereby ratifying and confirming our signatures as they may be signed by our
said attorney or his substitute or substitutes to any and all amendments to
said Registration Statement.
 
  PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS REGISTRATION
STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE CAPACITIES AND ON THE
DATES INDICATED.
 
              SIGNATURE                         TITLE                DATE
 
       /s/ Max E. Link, Ph.D            Chairman of the          January 31,
- -------------------------------------    Board and Director          1997
          MAX E. LINK, PH.D
 
     /s/ James A. Bianco, M.D.          President, Chief         January 31,
- -------------------------------------    Executive Officer           1997
        JAMES A. BIANCO, M.D.            and Director
                                         (Principal
                                         Executive Officer)
 
        /s/ Louis A. Bianco             Executive Vice           January 31,
- -------------------------------------    President, Finance          1997
           LOUIS A. BIANCO               and Administration
                                         (Principal
                                         Financial Officer
                                         and Principal
                                         Accounting Officer)
 
     /s/ Jack W. Singer, M.D.           Director                 January 31,
- -------------------------------------                                1997
        JACK W. SINGER, M.D.
 
        /s/ Jack L. Bowman              Director                 January 31,
- -------------------------------------                                1997
           JACK L. BOWMAN
 
 
                                      II-7

<PAGE>
 
 
              SIGNATURE                         TITLE                DATE
 
    /s/ Jeremy L. Curnock Cook          Director                 January 31,
- -------------------------------------                                1997
       JEREMY L. CURNOCK COOK
 
    /s/ Wilfred E. Jaeger, M.D.         Director                 January 31,
- -------------------------------------                                1997
       WILFRED E. JAEGER, M.D.
 
  /s/ David W. Martin, Jr., M.D.        Director                 January 22,
- -------------------------------------                                1997
     DAVID W. MARTIN, JR., M.D.
 
      /s/ Terrence M. Morris            Director                 January 31,
- -------------------------------------                                1997
         TERRENCE M. MORRIS
 
  /s/ Phillip M. Nudelman, Ph.D.        Director                 January 31,
- -------------------------------------                                1997
     PHILLIP M. NUDELMAN, PH.D.
 
                                      II-8

<PAGE>
 
               CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
 
  We consent to the reference to our firm under the captions "Selected
Financial Data" and "Experts" and to the use of our report dated January 24,
1997, except for paragraphs 2 and 3 of Note 12, as to which the date is      ,
1997, in the Registration Statement (Form S-1) and related Prospectus of Cell
Therapeutics, Inc. for the registration of 3,450,000 shares of its Common
Stock.
 
Seattle, Washington
 
- --------------------------------------------------------------------------------
 
  The foregoing consent is in the form that will be signed upon the completion
of the reverse stock split described in paragraph 2 of Note 12 to the financial
statements.
 
                                          Ernst & Young LLP
 
Seattle, Washington
January 31, 1997
 
                                      II-9

<PAGE>
 

                                 EXHIBIT INDEX
 

<TABLE>
<CAPTION>
                                                                   SEQUENTIALLY
 EXHIBIT                                                             NUMBERED
  NUMBER                   DOCUMENT DESCRIPTION                        PAGE
 --------                  --------------------                    ------------
 <C>      <S>                                                      <C>
  1.1++   Form of Underwriting Agreement between UBS Securities
           LLC, Montgomery Securities, Raymond James &
           Associates, Inc., and the Registrant
  3.1(1)  Registrant's Restated Articles of Incorporation
  3.2(1)  Registrant's Articles of Amendment to Restated
           Articles of Incorporation Establishing a Series of
           Preferred Stock (Series A Convertible Preferred
           Stock)
  3.3     Registrant's Articles of Amendment to Restated
           Articles of Incorporation Reducing the Number of
           Authorized Shares of Series A Convertible Preferred
           Stock
  3.4     Registrant's Articles of Amendment to Restated
           Articles of Incorporation Establishing a Series of
           Preferred Stock (Series B Convertible Preferred
           Stock)
  3.5     Registrant's Articles of Amendment to Restated
           Articles of Incorporation Establishing a Series of
           Preferred Stock (Series C Preferred Stock)
  3.6     Form of Articles of Amendment to Restated Articles of
           Incorporation of Cell Therapeutics, Inc. Effecting a
           Reverse Stock Split.
  3.7(5)  Registrant's Restated Bylaws
  4.1(2)  Specimen Common Stock Certificate
  4.2(3)  Form of Rights Agreement dated as of November 11,
           1996, between the Registrant and Harris Trust Company
           of California, which includes the Form of Rights
           Certificate as Exhibit A, the Summary of Rights to
           Purchase Preferred Stock as Exhibit B and the Form of
           Certificate of Designation of the Series C Preferred
           Stock as Exhibit C
  5.1++   Opinion of Shearman & Sterling
 10.1(2)  Lease Agreement between David A. Sabey and Sandra L.
           Sabey and the Registrant, dated March 27, 1992, as
           amended March 31, 1993 and October 13, 1993
 10.2     Third Amendment to Lease Agreement between David A.
           Sabey and Sandra L. Sabey and the Registrant, dated
           as of September 10, 1996.
 10.3(1)  Assignment of Lease between Manlove Travel and the
           Registrant, dated April 23, 1993
 10.4     Letter Agreement between David A. Sabey, Sandra L.
           Sabey and the Registrant, dated as of September 6,
           1996, amending the Assignment of Lease.
 10.5     Employment Agreement between the Registrant and James
           A. Bianco, dated as of December 17, 1996
 10.6(2)  Employment Agreement between the Registrant and Louis
           A. Bianco, dated as of February 1, 1992, as amended
           May 27, 1994
 10.7(1)  Employment Agreement between the Registrant and
           Maurice J. Schwarz, dated May 2, 1994
 10.8(1)  Severance Agreement between the Registrant and Robert
           A. Lewis, dated April 1, 1996
 10.9     Form of Strategic Management Team Severance Agreement.
 10.10(1) Promissory Note between James A. Bianco, M.D. and the
           Registrant, dated December 23, 1993
 10.11(1) Stock Pledge Agreement between James A. Bianco, M.D.
           and the Registrant, dated December 23, 1993
 10.12(1) 1994 Equity Incentive Plan, as amended
 10.13(1) 1992 Stock Option Plan, as amended
 10.14(1) 1996 Employee Stock Purchase Plan
 10.15(1) Form of Sales Agent Warrant for the 1992 Private
           Placement
 10.16(1) Warrant, dated November 25, 1992, between the
           Registrant and David H. Smith, M.D.
 10.17(1) Registration Agreement between the Registrant and the
           other parties included therein, dated as of November
           23, 1993
</TABLE>


<PAGE>
 

<TABLE>
<CAPTION>
                                                               SEQUENTIALLY
 EXHIBIT                                                         NUMBERED
  NUMBER                 DOCUMENT DESCRIPTION                      PAGE
 --------                --------------------                  ------------
 <C>      <S>                                                  <C>          
 10.18(1) Form of Sales Agent Warrant for the 1993 Private
           Placement
 10.19(1) Subscription Agreement between the Registrant and
           the other parties included therein, dated as of
           March 21, 1995
 10.20(1) Registration Rights Agreement between the
           Registrant and the other parties included
           therein, dated as of March 21, 1995
 10.21(5) Registration Rights Agreement between the Company
           and the other parties included therein, dated as
           of September 17, 1996, as amended by Amendment
           No. 1 thereto dated as of October 11, 1996.
 10.22(5) Letter Agreement between the Company and Kummell
           Investments Limited, dated September 17, 1996.
 10.23(2) Collaboration Agreement by and between BioChem
           Therapeutic Inc. and the Registrant, dated March
           7, 1995, as amended November 30, 1995, and
           December 6, 1995
 10.24(2) Supply Agreement by and between BioChem
           Therapeutic Inc. and the Registrant, dated
           March 7, 1995
 10.25+   Supply Agreement by and between ChiRex, Ltd. and
           the Registrant, dated January 21, 1997
 10.26+   Collaboration and License Agreement, dated as of
           November 8, 1996, by and between the Registrant
           and Ortho Biotech Inc. and The R.W. Johnson
           Pharmaceutical Research Institute, a division of
           Ortho Pharmaceutical Corporation
 10.27+   Stock Purchase Agreement, dated as of November 8,
           1996, by and between the Registrant and Johnson &
           Johnson Development Corporation
 10.28(1) Master Lease Agreement, dated as of December 28,
           1994 between the Registrant and Aberlyn Capital
           Management Limited Partnership
 10.29(1) Common Stock Purchase Warrant, dated December 28,
           1994 between the Registrant and Aberlyn Capital
           Management Limited Partnership
 10.30(1) Loan and Security Agreement, dated as of May 30,
           1995, between the Registrant and Financing for
           Science International, Inc.
 10.31(4) Loan and Security Agreement, dated as of June 28,
           1996, between the Registrant and Financing for
           Science International, Inc.
 10.32(1) Asset Purchase Agreement, dated of October 17,
           1995, between Lipomed Corporation, its
           Stockholders and the Registrant, as amended
 10.33(2) Form of Scientific Advisory Board Consulting
           Agreement
 10.34(2) Form of Clinical Advisory Board Consulting
           Agreement
 11.1     Computation of net loss and pro forma net loss per
           share
 22.1     Subsidiaries of the Registrant
 23.1     Consent of Ernst & Young LLP, independent auditors
           (included on page II-9 of this Registration
           Statement)
 23.2++   Consent of Shearman & Sterling (included in its
           opinion filed as Exhibit 5.1)
 23.3++   Consent of Foley & Lardner
 24.1     Powers of Attorney (included on pages II-7 and II-
           8 of this Registration Statement)
 27.1     Financial Data Schedule
</TABLE>

 
- --------
 + Confidential treatment requested.
++ To be supplied by amendment.
(1) Incorporated by reference to exhibits to the Registrant's Registration
    Statement on Form S-1 (No. 333-4154).
(2) Incorporated by reference to exhibits to the Registrant's Registration
    Statement on Form 10.
(3) Incorporated by reference to exhibits to the Registrant's Registration
    Statement on Form 8-A.
(4) Incorporated by reference to exhibits to the Registrant's Quarterly Report
    on Form 10-Q for the quarter ended June 30, 1996.
(5) Incorporated by reference to exhibits to the Registrant's Quarterly Report
    on Form 10-Q for the quarter ended September 30, 1996.





<PAGE>
 
================================================================================
                                                                     Exhibit 3.3
                              STATE of WASHINGTON

                [SEAL OF THE STATE OF WASHINGTON APPEARS HERE]

                              SECRETARY of STATE

        I, RALPH MUNRO, Secretary of State of the State of Washington and 
custodian of its seal, hereby issue this

                           CERTIFICATE OF AMENDMENT

                                      to

                            CELL THERAPEUTICS, INC.

a Washington Profit corporation. Articles of Amendment were filed for record in 
this office on the date indicated below.


UBI Number: 601 339 038                       Date: November 07, 1996

[SEAL OF THE STATE OF 
WASHINGTON APPEARS HERE]           Given under my hand and the Seal of the 
                                   State of Washington at Olympia, the State 
                                   Capital


                                   /s/ Ralph Munro
                                   ------------------------------------------
                                   Ralph Munro, Secretary of State
                                                           2-446543-7

================================================================================


<PAGE>
 
                             ARTICLES OF AMENDMENT

                                      TO
                      RESTATED ARTICLES OF INCORPORATION
                                      OF
                            CELL THERAPEUTICS, INC.
                   REDUCING THE NUMBER OF AUTHORIZED SHARES
                                      OF
                     SERIES A CONVERTIBLE PREFERRED STOCK


     Cell Therapeutics, Inc., a Washington corporation, by James A. Bianco,
M.D., its duly elected and qualified President, hereby provides the following
information and delivers to the Secretary of State of the State of Washington
for filing, in duplicate, these Articles of Amendment pursuant to RCW
23B.06.020(5), RCW 23B.10.020, and RCW 23B.10.060.

     1.   Name.  The name of the corporation is Cell Therapeutics, Inc.

     2.   Text of Amendments. Pursuant to the
 corporation's Restated Articles of
Incorporation, the amendment reduces the number of authorized shares the
corporation's Series A Convertible Preferred Stock. As of the date of the
amendment there are 146,193.2723 shares of the corporation's Series A
Convertible Preferred Stock outstanding. The amendment will restate Section 1 of
Paragraph (a) of Article 2 in its entirety. Following is the text of the
amendment adopted:

          "SECTION 1.  DESIGNATION AND AMOUNT.  There is hereby established a
     series of preferred stock of the Corporation which shall be designated as
     the Series A Convertible Preferred Stock (herein the "Preferred").  The
     number of shares of Preferred shall be 146,193.2723."

     3.   Adoption.  The foregoing amendment to the Restated Articles of
Incorporation of the Corporation was duly adopted pursuant to the Washington
Business Corporation Act at a meeting of the Board of Directors of the
Corporation held on October 15, 1996.  Pursuant to the Washington Business
Corporation Act and the Corporation's Restated Articles of Incorporation, no
shareholder action was required to effect these amendments.

<PAGE>
 
     IN WITNESS WHEREOF, the Corporation has caused these Articles of Amendment
to Restated Articles of Incorporation to be executed in duplicate as of 
November 7, 1996.


                              CELL THERAPEUTICS



                              By: /s/ James A. Bianco,
                                 ---------------------------------------
                                      James A. Bianco, M.D.
                                      President

Attest:

 /s/ Michael J. Kennedy
- -------------------------------
     Michael J. Kennedy
     Secretary

                                       2



<PAGE>
 
================================================================================
                                                                     Exhibit 3.4
                              STATE of WASHINGTON

                [SEAL OF THE STATE OF WASHINGTON APPEARS HERE]

                              SECRETARY of STATE

        I, RALPH MUNRO, Secretary of State of the State of Washington and 
custodian of its seal, hereby issue this

                           CERTIFICATE OF AMENDMENT

                                      to

                            CELL THERAPEUTICS, INC.

a Washington Profit corporation. Articles of Amendment were filed for record in 
this office on the date indicated below.


UBI Number: 601 339 038                       Date: November 07, 1996

[SEAL OF THE STATE OF 
WASHINGTON APPEARS HERE]           Given under my hand and the Seal of the 
                                   State of Washington at Olympia, the State 
                                   Capital


                                   /s/ Ralph Munro
                                   ------------------------------------------
                                   Ralph Munro, Secretary of State
                                                   2-4465-43-7

================================================================================

<PAGE>
 
                             ARTICLES OF AMENDMENT

                                      TO
                      RESTATED ARTICLES OF INCORPORATION
                                      OF
                            CELL THERAPEUTICS, INC.
                   ESTABLISHING A SERIES OF PREFERRED STOCK


          Cell Therapeutics, Inc., a Washington corporation, by James A. Bianco,
M.D., its duly elected and qualified President, hereby provides the following
information and delivers to the Secretary of State of the State of Washington
for filing, in duplicate, these Articles of Amendment Establishing a Series of
Preferred Stock, pursuant to RCW 23B.06.020, RCW 23B.10.020, and RCW 23B.10.060.

          1.  Name.  The name of the Corporation is Cell Therapeutics, Inc.

          2.  Text of Amendments.  Pursuant to the
 Corporation's Restated
Articles of Incorporation, the amendments establish the designation,
preferences, limitations and relative rights of a series of Preferred Stock.
The amendments will comprise "Paragraph (b) --Series B Convertible Preferred
Stock" of Article 2.  Following is the text of each amendment adopted:

              "SECTION 1. DESIGNATION AND AMOUNT. There is hereby established a
series of preferred stock of the Corporation which shall be designated as the
Series B Convertible Preferred Stock (herein the "Series B Preferred"). The
number of shares of Series B Preferred shall be 14,925.373.

              SECTION 2.  RANK. All shares of Series B Preferred shall rank
junior, both as to payment of dividends and as to distributions of assets upon
liquidation, dissolution or winding up of the Corporation, whether voluntary or
involuntary, to all of the Corporation's now issued Series A Convertible
Preferred Stock (the "Series A Preferred"). All shares of Series B Preferred
shall rank prior, both as to payment of dividends and as to distributions of
assets upon liquidation, dissolution or winding up of the Corporation, whether
voluntary or involuntary, to all of the Corporation's now or hereafter issued
Common. The term "Common" shall mean the Common Stock, without par value, of the
Corporation as the same exists at the date hereof or as such stock may be
constituted from time to time.

              SECTION 3.  DIVIDENDS.  No dividends or other distributions shall
be made with respect to the Series B Preferred until all dividends on the Series
A Preferred have been paid or set apart. The holders of the Series B Preferred
shall be entitled to receive, when, as and if declared by the Board of
Directors, out of funds legally available

<PAGE>
 
therefor, dividends at the rate of $33.50 per share per annum on each
outstanding share of Series B Preferred, payable in preference and priority to
any payment of any dividend on the Common.  No dividends or other distributions
shall be made with respect to the Common, until all dividends on the Series B
Preferred have been paid or set apart.  Such dividends on the Series B Preferred
shall not be cumulative and no right to such dividends shall accrue to holders
of Series B Preferred unless and until declared by the Board of Directors.

          SECTION 4.  LIQUIDATION PREFERENCE.  In the event of any liquidation,
dissolution, or winding up of the Corporation, either voluntary or involuntary,
distributions to the shareholders of the Corporation shall be made in the
following manner:

               (a)    After payment of the "Preference Amount" (as defined in
     Paragraph (a) -- Series A Convertible Preferred Stock" of Article 2 of  the
     Corporation's Restated Articles of Incorporation, and referred to herein as
     the "Series A Preference Amount") has been made to the holders of the
     Series A Preferred, the holders of Series B Preferred then outstanding
     shall be entitled to receive, prior and in preference to any distribution
     of any of the assets or surplus funds of the Corporation to the holders of
     the Common, by reason of their ownership of such stock, an amount for each
     share of Series B Preferred then held by them equal to $335.00
     appropriately adjusted for any combinations, consolidations, stock
     distributions or stock dividends or splits with respect to such shares plus
     all declared but unpaid dividends thereon (hereinafter such amount shall be
     referred to as the "Series B Preference Amount").  If upon the occurrence
     of such event of liquidation, dissolution or winding up, the assets and
     property legally available to be distributed among the holders of the
     Series B Preferred shall be insufficient to permit the payment to such
     holders of the Series B Preference Amount, then the entire assets and
     property of the Corporation legally available for distribution shall be
     distributed ratably among the holders of the Series B Preferred in
     accordance with the Series B Preference Amount.

               (b)    After payment has been made to the holders of the Series A
     Preferred and the holders of the Series B Preferred of the full amounts to
     which they shall be entitled as aforesaid, all remaining assets available
     for distribution, if any, shall be distributed ratably among the holders of
     the Common, the Series A Preferred and the Series B Preferred in proportion
     to the shares of Common then held by them and the shares of Common which
     they then have the right to acquire upon conversion of the shares of Series
     A Preferred and Series B Preferred, as the case may be, then held by them.

               (c)    For purposes of this Section 4, a merger or consolidation
     of the Corporation with or into any other corporation or corporations, or
     the merger of any other corporation or corporations into the Corporation,
     in which consolidation or merger the shareholders of the Corporation
     receive distributions in cash or securities of another corporation or
     corporations as a result of such consolidation or merger, or a sale of all
     or substantially all of the assets of the Corporation, shall not be treated
     as

                                       2

<PAGE>
 
     a liquidation, dissolution or winding up of the Corporation, unless both
     (i) the shareholders of this Corporation receive in such consolidation,
     merger or sale of assets less than fifty percent (50%) of the voting equity
     securities of the successor or surviving corporation and (ii) the amount of
     cash and/or securities received by the shareholders of this Corporation is
     less than the total liquidation preference of the Series B Preferred as set
     forth in Section 4(a), in which case such consolidation, merger or sale of
     assets shall be treated as a liquidation, dissolution or winding up.  The
     valuation of any securities or other property other than cash received by
     the Corporation in any transaction covered by this Section 4(c) shall be
     computed at the fair value thereof at the time of receipt as determined in
     good faith by the Board of Directors.

               (d)    The holders of Series B Preferred shall have no priority
     or preference with respect to distributions made by the Corporation in
     connection with the repurchase of shares of Common issued to or held by
     employees, directors or consultants upon termination of their employment or
     services pursuant to agreements providing for the right of said repurchase
     between the Corporation and such persons.

          SECTION 5.  CONVERSION.  The holders of the Series B Preferred shall
have conversion rights (the "Conversion Rights") as follows:

               (a)    Right to Convert.  Each share of Series B Preferred shall
                      ----------------                                       
     be convertible, at the option of the holder thereof, at any time after the
     date of issuance of such share, at the office of the Corporation or any
     transfer agent for the Series B Preferred into such number of fully paid
     and nonassessable shares of Common as is determined by dividing $335.00 by
     the Series B Conversion Price (as hereinafter defined) in effect at the
     time of conversion.  The Series B Conversion Price shall initially be
     $3.35, subject to adjustment as provided in subsection (d) below.

               (b)    Automatic Conversion.
                      -------------------- 

                      (i)     Each share of Series B Preferred shall
     automatically be converted into shares of Common at the then effective
     Series B Conversion Price (after making any adjustment required by Section
     5(d)) upon the closing of a firm commitment underwritten public offering
     pursuant to an effective registration statement under the Securities Act of
     1933, as amended (the "Securities Act"), covering the offer and sale of
     Common for the account of the Corporation to the public at a price per
     share (prior to underwriter discounts and commissions and other offering
     expenses) of not less than $5.00 (subject to adjustment in the event of any
     recapitalization, stock split, stock dividend or other similar event) and
     an aggregate offering price to the public of not less than $20,000,000. In
     the event of the automatic conversion of the Series B Preferred upon a
     public offering as aforesaid, the person(s) entitled to receive the Common
     issuable upon such automatic conversion of Series B Preferred shall not be
     deemed to have converted such Series B Preferred

                                       3

<PAGE>
 
     until immediately prior to the closing of such sale of securities, and
     after giving effect to any adjustment of the Series B Conversion Price
     required by Section 5(d).

                      (ii)    Each share of Series B Preferred shall
     automatically be converted into shares of Common at the then effective
     Series B Conversion Price upon the written consent of holders of not less
     than 66.67% of the then outstanding shares of Series B Preferred voting
     together as a single class.

                      (iii)   Each share of Series B Preferred shall
     automatically be converted into shares of Common at the then effective
     Series B Conversion Price immediately prior to the closing of any merger or
     consolidation of the Corporation that is not treated as a liquidation,
     dissolution or winding up under Section 4(c) if the shareholders of the
     Corporation receive distributions of equity securities of another
     corporation as a result of such consolidation or merger and (i) such class
     of equity securities has been continuously registered under Section 12 of
     the Securities Exchange Act of 1934, as amended, over the six month period
     ending with the closing of such merger or consolidation, (ii) such equity
     securities are listed on the New York Stock Exchange or any other national
     securities exchange, or are quoted on the Nasdaq National Market, (iii) the
     average Closing Price per share of such class of equity securities as
     calculated for the last 30 trading days (the "Trading Period") ending on
     the fifth trading day prior to the closing of such merger or consolidation
     equals or exceeds $5.00, (iv) such class of equity securities has an
     aggregate market float of not less than $20,000,000, and (v) such equity
     securities are issued in a transaction of the type specified in paragraph
     (a) of Rule 145 under the Securities Act and are registered on Form S-4 or
     an equivalent form promulgated under the Securities Act. As used herein,
     the term "Closing Price" for any day in question shall be the last reported
     sales price regular way or, in case no such reported sales take place on
     such day, the average of the closing bid and asked prices regular way for
     such day, in each case on the New York Stock Exchange Composite Tape or, if
     not listed on the New York Stock Exchange, on the principal national
     securities exchange on which such equity securities are listed or admitted
     to trading or, if not listed or admitted to trading on a national
     securities exchange, the last sale price regular way for such equity
     securities as published by the Nasdaq National Market ("Nasdaq"), or if no
     such sale takes place on such day, the average between the closing bid and
     asked prices for such class of equity securities as published by Nasdaq.
     The term "trading day" shall mean a day on which the market used for
     calculating the Closing Price is open for the transaction of business and
     on which there has been at least one share of Common traded.

               (c)    Mechanics of Conversion.  No fractional shares of Common
                      -----------------------                                 
     shall be issued upon conversion of Series B Preferred.  In lieu of any
     fractional shares to which the holder would otherwise be entitled, the
     Corporation shall pay cash equal to such fraction multiplied by the then
     effective Series B Conversion Price for such series of Series B Preferred.
     Any declared but unpaid dividends on any share of

                                       4

<PAGE>
 
     Series B Preferred that is converted into Common pursuant to this Section 5
     shall, simultaneously upon conversion of such share of Series B Preferred,
     automatically be converted into such number of fully paid and nonassessable
     shares of Common as is determined by dividing the amount of declared but
     unpaid dividends on such converted share of Series B Preferred by the
     Series B Conversion Price in effect at the time of conversion.  Before any
     holder of Series B Preferred shall be entitled to convert the same into
     full shares of Common, he shall surrender the certificate or certificates
     therefor, duly endorsed, at the office of the Corporation or of any
     transfer agent for the Series B Preferred, and shall give written notice to
     the Corporation at such office that he elects to convert the same;
     provided, however, that in the event of an automatic conversion pursuant to
     --------  -------                                                          
     Section 5(b), the outstanding shares of all Series B Preferred shall be
     converted automatically without any further action by the holders of such
     shares and whether or not the certificates representing such shares are
     surrendered to the Corporation or its transfer agent; provided, further,
                                                           --------  ------- 
     that the Corporation shall not be obligated to issue certificates
     evidencing the shares of Common issuable upon such automatic conversion
     unless either the certificates evidencing such shares of Series B Preferred
     are delivered to the Corporation or its transfer agent as provided above,
     or the holder notifies the Corporation or its transfer agent that such
     certificates have been lost, stolen or destroyed and executes an agreement
     satisfactory to the Corporation to indemnify the Corporation from any loss
     incurred by it in connection with such certificates.

               The Corporation shall, as soon as practicable after such
     delivery, or after such agreement and indemnification, issue and deliver at
     such office to such holder of Series B Preferred, a certificate or
     certificates for the number of shares of Common to which he shall be
     entitled as aforesaid and a check payable to the holder in the aggregate
     amount of any cash amounts payable as the result of a conversion into
     fractional shares of Common.  Such conversion shall be deemed to have been
     made immediately prior to the close of business on the date of such
     surrender of the shares of Series B Preferred to be converted, or in the
     case of automatic conversion on the date of the closing of the offering or
     the effective date of such written consent (as the case may be), and the
     person or persons entitled to receive the shares of Common issuable upon
     such conversion shall be treated for all purposes as the record holder or
     holders of such shares of Common on such date.

               Upon the conversion of any outstanding shares of Series B
     Preferred into Common pursuant to this Section 5, all such shares of Series
     B Preferred shall resume the status of authorized but unissued shares of
     Series B Preferred.

               (d)    Adjustments to Series B Conversion Price.
                      ---------------------------------------- 

                      (1) In the event the Corporation at any time or from time
     to time effects a subdivision or combination of its outstanding Common into
     a greater or lesser number of shares without a proportionate and
     corresponding subdivision or

                                       5

<PAGE>
 
     combination of its outstanding Series B Preferred, then and in each such
     event the Series B Conversion Price shall be decreased or increased
     proportionately.

                      (2) In the event the Corporation at any time or from time
     to time shall make or issue, or fix a record date for the determination of
     holders of Common entitled to receive, a dividend or other distribution
     payable in additional shares of Common or other securities or rights
     (hereinafter referred to as "Common Stock Equivalents") convertible into or
     entitling the holder thereof to receive additional shares of Common without
     payment of any consideration by such holder for such Common Stock
     Equivalents or the additional shares of Common, then and in each such event
     the maximum number of shares (as set forth in the instrument relating
     thereto without regard to any provisions contained therein for a subsequent
     adjustment of such number) of Common issuable in payment of such dividend
     or distribution or upon conversion or exercise of such Common Stock
     Equivalents shall be deemed to be issued and outstanding as of the time of
     such issuance or, in the event such a record date shall have been fixed, as
     of the close of business on such record date. In each such event the Series
     B Conversion Price shall be proportionately decreased as of the time of
     such issuance or, in the event such a record date shall have been fixed, as
     of the close of business on such record date.

                      (3) If at any time after the first date of which a share
     of Series B Preferred is first issued ("Original Issue Date"), the
     Corporation shall issue or sell Equity Securities, as defined in subsection
     (i) below, at a consideration per share that is less than the Series B
     Conversion Price in effect immediately prior to the time of such issue or
     sale (the "Lower Price"), then forthwith upon such issue or sale, the
     Series B Conversion Price of each share of Series B Preferred shall be
     adjusted to a price (calculated to the nearest cent) determined by
     multiplying such Series B Conversion Price as in effect immediately prior
     to issuance or sale by a fraction:

                      (A) the numerator of which is an amount equal to the sum
          of (x) the number of shares of Common outstanding immediately prior to
          such issue or sale, (y) the number of shares of Common issuable upon
          conversion or exchange of any obligations or of any shares of stock of
          the Corporation outstanding immediately prior to such issue or sale,
          and (z) an amount equal to the aggregate "consideration actually
          received" by the Corporation upon such issue or sale divided by the
          then existing Series B Conversion Price, and

                      (B) the denominator of which is the sum of the number of
          shares of Common outstanding immediately after such issue or sale and
          the number of shares of Common issuable upon conversion or exchange of
          any obligations or of any shares of stock of the Corporation
          outstanding immediately after such issue or sale.

          For purposes hereof the following provisions shall be applicable:

                                       6

<PAGE>
 
                      (i)     The term "Equity Securities" shall mean any shares
     of Common, or any obligation, any share of stock or other security of the
     Corporation convertible into or exchangeable or exercisable for Common, or
     any security of the Corporation convertible into or exchangeable or
     exercisable for such convertible or exchangeable securities, except for (1)
     Common issued or issuable after the Original Issue Date to officers,
     directors, full-time employees or consultants of the Corporation pursuant
     to stock grant, stock purchase and/or stock option plans or any other stock
     incentive program, agreement or arrangement approved by the Board of
     Directors, (2) shares of Common issued upon exercise of warrants to
     purchase Common that may be hereinafter issued in connection with debt
     financings or equipment lease financing transactions, (3) shares issued
     pursuant to Section 5(d)(1), 5(d)(2), (4) shares of Common issued upon
     conversion of the Series B Preferred and (5) shares of Common issued as a
     dividend or distribution on the Series B Preferred; provided, however, that
                                                         --------  -------
     the aggregate number of shares of Common that the Corporation may issue or
     sell at a Lower Price that would be excluded from the definition of "Equity
     Securities" pursuant to clauses (1) and (2) of this subsection (i) shall
     not exceed 750,000 shares.

                      (ii)    In the case of an issue or sale for cash of shares
     of Common the "consideration actually received" by the Corporation therefor
     shall be deemed to be the amount of cash received, before deducting
     therefrom any commissions or expenses paid by the Corporation.

                      (iii)   In case of the issuance (otherwise than upon
     conversion or exchange of obligations or shares of stock of the
     Corporation) of additional shares of Common for a consideration other than
     cash or a consideration partly other than cash, the amount of the
     consideration other than cash received by the Corporation for such shares
     shall be deemed to be the fair value of such consideration as determined in
     good faith by the Board of Directors.

                      (iv)    In case of the issuance by the Corporation in any
     manner of any rights to subscribe for or to purchase shares of Common, or
     any options for the purchase of shares of Common or stock convertible into
     Common, all shares of Common or stock convertible into Common to which the
     holders of such rights or options shall be entitled to subscribe for or
     purchase pursuant to such rights or options shall be deemed "issued" and
     "outstanding" as of the date of the offering of such rights or the granting
     of such options, as the case may be, and the minimum aggregate
     consideration named in such rights or options for the shares of Common or
     stock convertible into Common covered thereby, plus the consideration, if
     any, received by the Corporation for such rights or options, shall be
     deemed to be the "consideration actually received" by the Corporation (as
     of the date of the offering of such rights or the granting of such options,
     as the case may be) for the issuance of such shares.

                                       7

<PAGE>
 
                      (v)     In case of the issuance or issuances by the
     Corporation in any manner of any obligations or of any shares of stock of
     the Corporation that shall be convertible into or exchangeable for Common,
     all shares of Common issuable upon the conversion or exchange of such
     obligations or shares shall be deemed "issued" and "outstanding" as of the
     date such obligations or shares are issued, and the amount of the
     "consideration actually received" by the Corporation for such additional
     shares of Common shall be deemed to be the total of (1) the amount of
     consideration received by the Corporation upon the issuance of such
     obligations or shares, as the case may be, plus (2) the minimum aggregate
     consideration, if any, other than such obligations or shares, receivable by
     the Corporation upon such conversion or exchange, except in adjustment of
     dividends.

                      (vi)    The amount of the "consideration actually
     received" by the Corporation upon the issuance of any rights or options
     referred to in subsection (iv) above or upon the issuance of any
     obligations or shares which are convertible or exchangeable as described in
     subsection (v) above, and the amount of the consideration, if any, other
     than such obligations or shares so convertible or exchangeable, receivable
     by the Corporation upon the exercise, conversion or exchange thereof shall
     be determined in the same manner provided in subsections (ii) and (iii)
     above with respect to the consideration received by the Corporation in case
     of the issuance of additional shares of Common; provided, however, that if
     such obligations or shares of stock so convertible or exchangeable are
     issued in payment or satisfaction of any dividend upon any stock of the
     Corporation other than Common, the amount of the "consideration actually
     received" by the Corporation upon the original issuance of such obligations
     or shares of stock so convertible or exchangeable shall be deemed to be the
     fair value of such obligations or shares of stock, as of the date of the
     adoption of the resolution declaring such dividend, as determined by the
     Board of Directors at or as of that date. On the expiration of any rights
     or options referred to in subsection (iv), or the termination of any right
     of conversion or exchange referred to in subsection (v), or any change in
     the number of shares of Common deliverable upon exercise of such options or
     rights or upon conversion of or exchange of such convertible or
     exchangeable securities, the Series B Conversion Price then in effect shall
     forthwith be readjusted to such Series B Conversion Price as would have
     been obtained had the adjustments made upon the issuance of such option,
     right or convertible or exchangeable securities been made upon the basis of
     the delivery of only the number of shares of Common actually delivered or
     to be delivered upon the exercise of such rights or options or upon the
     conversion or exchange of such securities.

                      (vii)   In the event this Corporation shall declare a
     distribution payable in securities of other persons, evidences of
     indebtedness issued by this Corporation or other persons or options or
     rights not referred to in this Section 5(d)(3), then, in each such case,
     the holders of the Series B Preferred shall be entitled to the
     distributions provided for in Section 3 above, and no adjustment to the
     Series B

                                       8

<PAGE>
 
     Conversion Price provided for in this Section 5(d)(3) shall be applicable.

                      (4)     Except as provided in Section 6(b), the
     Corporation will not, by amendment of its Articles of Incorporation or
     through any reorganization, transfer of assets, consolidation, merger,
     dissolution, issue or sale of securities or any other voluntary action,
     avoid or seek to avoid the observance or performance of any of the terms to
     be observed or performed hereunder by the Corporation but will at all times
     in good faith assist in the carrying out of all the provisions of this
     Section 5(d) and in the taking of all such action as may be necessary or
     appropriate in order to protect the Conversion Rights of the holders of the
     Series B Preferred against impairment.

                      (5)     Upon the occurrence of each adjustment or
     readjustment of the Series B Conversion Price for any series pursuant to
     Section 5(d), the Corporation at its expense shall promptly compute such
     adjustment or readjustment in accordance with the terms hereof and furnish
     to each holder of shares of such series of Series B Preferred a certificate
     setting forth such adjustment or readjustment and showing in detail the
     facts upon which such adjustment or readjustment is based. The Corporation
     shall, upon the written request at any time of any holder of Series B
     Preferred, furnish or cause to be furnished to such holder a like
     certificate setting forth (i) such adjustments and readjustments, (ii) the
     Series B Conversion Price at the time in effect, and (iii) the number of
     shares of Common and the amount, if any, of other property which at the
     time would be received upon the conversion of Series B Preferred.

                      (6)     In the event that this Corporation shall propose
     at any time:

                      (i)     to declare any dividend or distribution upon its
     Common, whether in cash, property, stock or other securities, whether or
     not a regular cash dividend and whether or not out of earnings or earned
     surplus;

                      (ii)    to offer for subscription pro rata to the holders
     of any class or series of its stock any additional shares of stock of any
     class or series or other rights;

                      (iii)   to effect any reclassification or recapitalization
     of its Common outstanding involving a change in the Common; or

                      (iv)    to merge or consolidate with or into any other
     corporation, or sell, lease or convey all or substantially all its property
     or business, or to liquidate, dissolve or wind up;

     then, in connection with each such event, the Corporation shall send to the
     holders of

                                       9

<PAGE>
 
     the Series B Preferred at least twenty (20) days prior written notice of
     the date on which a record shall be taken for such dividend, distribution
     or subscription rights (and specifying the date on which the holders of
     Common shall be entitled thereto) or for determining rights to vote in
     respect of the matters referred to in (iii) and (iv) above; and in the case
     of the matters referred to in (iii) and (iv) above, at least twenty (20)
     days prior written notice of the date when the same shall take place (and
     specifying the date on which the holders of Common shall be entitled to
     exchange their Common for securities or other property deliverable upon the
     occurrence of such event).  Each such notice shall be given by first class
     mail, postage prepaid, addressed to the holders of Series B Preferred at
     the address for each such holder as shown on the books of the Corporation.

          SECTION 6.  VOTING RIGHTS.

               (a)    Except as otherwise required by law, each share of Series
     B Preferred issued and outstanding shall have the number of votes equal to
     the number of shares of Common into which such share of Series B Preferred
     could be converted at the record date for determination of the shareholders
     entitled to vote on such matters, or, if no such record date is
     established, at the date such vote is taken or any written consent of
     shareholders is solicited, such votes to be counted together with all other
     shares of stock of the Corporation having general voting power and not
     separately as a class. The holder of each share of Series B Preferred shall
     be entitled to notice of any shareholders' meeting in accordance with the
     bylaws of the Corporation. Fractional votes by the holders of Series B
     Preferred shall not, however, be permitted and any fractional voting rights
     shall (after aggregating all shares into which shares of Series B Preferred
     held by each holder could be converted) be rounded to the nearest whole
     number. The holders of Series B Preferred shall not be entitled to
     cumulative voting rights.

               (b)    So long as any shares of Series B Preferred shall be
     outstanding, the Corporation shall not, without first obtaining the
     affirmative vote or written consent of the holders of at least 66.67% of
     such outstanding shares of Series B Preferred, voting together as a single
     class:

                      (i)     amend the Corporation's Articles of Incorporation
     so as to adversely affect the voting powers or other rights or preferences
     of the Series B Preferred;

                      (ii)    authorize or issue shares of any class or series
     of stock not authorized herein having any preference or priority as to
     dividends or assets superior to or on a parity with any such preference or
     priority of the Series B Preferred, or authorize or issue shares of stock
     of any class or any bonds, debenture, notes or other obligations
     convertible into or exchangeable for, or having rights to purchase, any
     shares of stock of the Corporation having any preference or priority as

                                       10

<PAGE>
 
     to dividends or assets superior to or on a parity with any such preference
     or priority of the Series B Preferred; or

                      (iii)   reclassify any shares of Common or any other
     shares of the Corporation into shares having any preference or priority as
     to dividends or assets superior to or on a parity with any such preference
     or priority of the Series B Preferred."


     3.   Adoption.  The foregoing amendments to the Restated Articles of
Incorporation of the Corporation were duly adopted pursuant to the Washington
Business Corporation Act at a meeting of the Board of Directors of the
Corporation held on November 7, 1996.  Pursuant to the Washington Business
Corporation Act and the Corporation's Restated Articles of Incorporation, no
shareholder action was required to effect these amendments.

     IN WITNESS WHEREOF, the Corporation has caused these Articles of Amendment
to Restated Articles of Incorporation to be executed in duplicate as of November
7, 1996.


                              CELL THERAPEUTICS



                              By: /s/ James A. Bianco,
                                 ----------------------------------------
                                      James A. Bianco, M.D.
                                      President

Attest:

 /s/ Michael J. Kennedy
- ------------------------------- 
     Michael J. Kennedy
     Secretary

                                       11



<PAGE>
 
                           STATE of WASHINGTON                      Exhibit 3.5

                [SEAL OF THE STATE OF WASHINGTON APPEARS HERE]

                              SECRETARY of STATE

     I, RALPH MUNRO, Secretary of State of the State of Washington and custodian
of its seal, hereby issue this


                           CERTIFICATE OF AMENDMENT

                                      to

                            CELL THERAPEUTICS, INC.


a Washington Profit corporation. Articles of Amendment were filed for record in 
this office on the date indicated below.





UBI Number: 601 339 038                                  Date: November 07, 1996



[SEAL OF THE STATE OF WASHINGTON APPEARS HERE]

                                   Given under my hand and the Seal of the State
                                   of Washington at Olympia, the State Capital

                                   /s/ Ralph Munro
                                   ---------------------------------------------
                                   Ralph Munro, Secretary of State
                                                     2-446543-7

<PAGE>
 
                             ARTICLES OF AMENDMENT

                                      TO
                      RESTATED ARTICLES OF INCORPORATION
                                      OF
                            CELL THERAPEUTICS, INC.
                   ESTABLISHING A SERIES OF PREFERRED STOCK


          Cell Therapeutics, Inc., a Washington corporation, by James A. Bianco,
M.D., its duly elected and qualified President, hereby provides the following
information and delivers to the Secretary of State of the State of Washington
for filing, in duplicate, these Articles of Amendment Establishing a Series of
Preferred Stock, pursuant to RCW 23B.06.020, RCW 23B.10.020, and RCW 23B.10.060.

          1.  Name.  The name of the Corporation is Cell Therapeutics, Inc.

          2.  Text of Amendments.  Pursuant to the
 Corporation's Restated
Articles of Incorporation, the amendments establish the designation,
preferences, limitations and relative rights of a series of Preferred Stock.
The amendments will comprise "Paragraph (c) --Series C Convertible Preferred
Stock" of Article 2.  Following is the text of each amendment adopted:

              SECTION 1.  DESIGNATION AND AMOUNT.  There is hereby established a
series of preferred stock of the Corporation which shall be designated as
"Series C Preferred Stock" and the number of shares constituting such series
shall be 100,000.

              SECTION 2. DIVIDENDS AND DISTRIBUTIONS. (A) Subject to the prior
and superior rights of the holders of any shares of any other series of
Preferred Stock or any other shares of preferred stock of the Corporation
ranking prior and superior to the shares of Series C Preferred Stock with
respect to dividends, each holder of one one-thousandth (1/1,000) of a share (a
"Unit") of Series C Preferred Stock shall be entitled to receive, when, as and
if declared by the Board of Directors out of funds legally available for that
purpose, (i) quarterly dividends payable in cash on the last day of March, June,
September and December in each year (each such date being a "Quarterly Dividend
Payment Date"), commencing on the first Quarterly Dividend Payment Date after
the first issuance of such Unit of Series C Preferred Stock, in an amount per
Unit (rounded to the nearest cent) equal to the greater of (a) $1.00 or (b)
subject to the provision for adjustment hereinafter set forth, the aggregate per
share amount of all cash dividends declared on shares of the Common Stock since
the immediately preceding Quarterly Dividend Payment Date, or, with respect to
the first Quarterly Dividend Payment Date, since the first issuance of a Unit of
Series C Preferred Stock, and (ii) subject to the provision for adjustment
hereinafter set forth, quarterly distributions (payable in kind) on each
Quarterly Dividend Payment Date in

<PAGE>
 
an amount per Unit equal to the aggregate per share amount of all non-cash
dividends or other distributions (other than a dividend payable in shares of
Common Stock or a subdivision of the outstanding shares of Common Stock, by
reclassification or otherwise) declared on shares of Common Stock since the
immediately preceding Quarterly Dividend Payment Date, or with respect to the
first Quarterly Dividend Payment Date, since the first issuance of a Unit of
Series C Preferred Stock.  In the event that the Corporation shall at any time
after November 8, 1996 (the "Rights Declaration Date") (i) declare any dividend
on outstanding shares of Common Stock payable in shares of Common Stock, (ii)
subdivide outstanding shares of Common Stock or (iii) combine outstanding shares
of Common Stock into a smaller number of shares, then in each such case the
amount to which the holder of a Unit of Series C Preferred Stock was entitled
immediately prior to such event pursuant to the preceding sentence shall be
adjusted by multiplying such amount by a fraction the numerator of which shall
be the number of shares of Common Stock that are outstanding immediately after
such event and the denominator of which shall be the number of shares of Common
Stock that were outstanding immediately prior to such event.

          (B) The Corporation shall declare a dividend or distribution on Units
of Series C Preferred Stock as provided in paragraph (A) above immediately after
it declares a dividend or distribution on the shares of Common Stock (other than
a dividend payable in shares of Common Stock); provided, however, that, in the
                                               --------  -------              
event no dividend or distribution shall have been declared on the Common Stock
during the period between any Quarterly Dividend Payment Date and the next
subsequent Quarterly Dividend Payment Date, a dividend of $1.00 per Unit on the
Series C Preferred Stock shall nevertheless be payable on such subsequent
Quarterly Dividend Payment Date.

          (C) Dividends shall begin to accrue and shall be cumulative on each
outstanding Unit of Series C Preferred Stock from the Quarterly Dividend Payment
Date next preceding the date of issuance of such Unit of Series C Preferred
Stock, unless the date of issuance of such Unit is prior to the record date for
the first Quarterly Dividend Payment Date, in which case, dividends on such Unit
shall begin to accrue from the date of issuance of such Unit, or unless the date
of issuance is a Quarterly Dividend Payment Date or is a date after the record
date for the determination of holders of Units of Series C Preferred Stock
entitled to receive a quarterly dividend and before such Quarterly Dividend
Payment Date, in either of which events such dividends shall begin to accrue and
be cumulative from such Quarterly Dividend Payment Date.  Accrued but unpaid
dividends shall not bear interest. Dividends paid on Units of Series C Preferred
Stock in an amount less than the aggregate amount of all such dividends at the
time accrued and payable on such Units shall be allocated pro rata on a unit-by-
unit basis among all Units of Series C Preferred Stock at the time outstanding.
The Board of Directors may fix a record date for the determination of holders of
Units of Series C Preferred Stock entitled to receive payment of a dividend or
distribution declared thereon, which record date shall be no more than 30 days
prior to the date fixed for the payment thereof.

                                       2

<PAGE>
 
              SECTION 3.  VOTING RIGHTS. The holders of Units of Series C
Preferred Stock shall have the following voting rights:

          (A) Subject to the provision for adjustment hereinafter set forth,
each Unit of Series C Preferred Stock shall entitle the holder thereof to one
vote on all matters submitted to a vote of the stockholders of the Corporation.
In the event the Corporation shall at any time after the Rights Declaration Date
(i) declare any dividend on outstanding shares of Common Stock payable in shares
of Common Stock, (ii) subdivide outstanding shares of Common Stock or (iii)
combine the outstanding shares of Common Stock into a smaller number of shares,
then in each such case the number of votes per Unit to which holders of Units of
Series C Preferred Stock were entitled immediately prior to such event shall be
adjusted by multiplying such number by a fraction the numerator of which shall
be the number of shares of Common Stock outstanding immediately after such event
and the denominator of which shall be the number of shares of Common Stock that
were outstanding immediately prior to such event.

          (B) Except as otherwise provided herein or by law, the holders of
Units of Series C Preferred Stock and the holders of shares of Common Stock
shall vote together as one class on all matters submitted to a vote of
stockholders of the Corporation.

          (C) (i)  If at any time dividends on any Units of Series C Preferred
Stock shall be in arrears in an amount equal to six quarterly dividends thereon,
then during the period (a "default period") from the occurrence of such event
until such time as all accrued and unpaid dividends for all previous quarterly
dividend periods and for the current quarterly dividend period on all Units of
Series C Preferred Stock then outstanding shall have been declared and paid or
set apart for payment, all holders of Units of Series C Preferred Stock, voting
separately as a class, shall have the right to elect two Directors.

          (ii)  During any default period, such voting rights of the holders of
Units of Series C Preferred Stock may be exercised initially at a special
meeting called pursuant to subparagraph (iii) of this Section 3(C) or at any
annual meeting of stockholders, and thereafter at annual meetings of
stockholders, provided that neither such voting rights nor any right of the
holders of Units of Series C Preferred Stock to increase, in certain cases, the
authorized number of Directors may be exercised at any meeting unless one-third
of the outstanding Units of Preferred Stock shall be present at such meeting in
person or by proxy.  The absence of a quorum of the holders of Common Stock
shall not affect the exercise by the holders of Units of Series C Preferred
Stock of such rights.  At any meeting at which the holders of Units of Series C
Preferred Stock shall exercise such voting rights initially during an existing
default period, they shall have the right, voting separately as a class, to
elect Directors to fill up to two vacancies in the Board of Directors, if any
such vacancies may then exist, or, if such right is exercised at an annual
meeting, to elect two Directors.  If the number which may be so elected at any
special meeting does not amount to the required number, the holders of the
Series C Preferred Stock shall have the right to make such increase in the
number of Directors as shall be necessary to permit the election by them of

                                       3

<PAGE>
 
the required number.  After the holders of Units of Series C Preferred Stock
shall have exercised their right to elect Directors during any default period,
the number of Directors shall not be increased or decreased except as approved
by a vote of the holders of Units of Series C Preferred Stock as herein provided
or pursuant to the rights of any equity securities ranking senior to the Series
C Preferred Stock.

          (iii)  Unless the holders of Series C Preferred Stock shall, during an
existing default period, have previously exercised their right to elect
Directors, the Board of Directors may order, or any stockholder or stockholders
owning in the aggregate not less than 25% of the total number of the Units of
Series C Preferred Stock outstanding may request, the calling of a special
meeting of the holders of Units of Series C Preferred Stock, which meeting shall
thereupon be called by the Secretary of the Corporation.  Notice of such meeting
and of any annual meeting at which holders of Units of Series C Preferred Stock
are entitled to vote pursuant to this paragraph (C)(iii) shall be given to each
holder of record of Units of Series C Preferred Stock by mailing a copy of such
notice to him at his last address as the same appears on the books of the
Corporation.  Such meeting shall be called for a time not earlier than 20 days
and not later then 60 days after such order or request or in default of the
calling of such meeting within 60 days after such order or request, such meeting
may be called on similar notice by any stockholder or stockholders owning in the
aggregate not less than 25% of the total number of outstanding Units of Series C
Preferred Stock.  Notwithstanding the provisions of this paragraph (C)(iii), no
such special meeting shall be called during the 60 days immediately preceding
the date fixed for the next annual meeting of the stockholders.

          (iv)  During any default period, the holders of shares of Common Stock
and Units of Series C Preferred Stock, and other classes or series of stock of
the Corporation, if applicable, shall continue to be entitled to elect all the
Directors until holders of the Units of Series C Preferred Stock shall have
exercised their right to elect two Directors voting as a separate class, after
the exercise of which right (x) the Directors so elected by the holders of Units
of Series C Preferred Stock shall continue in office until their successors
shall have been elected by such holders or until the expiration of the default
period, and (y) any vacancy in the Board of Directors may (except as provided in
paragraph (C)(ii) of this Section 3) be filled by vote of a majority of the
remaining Directors theretofore elected by the holders of the class of capital
stock which elected the Director whose office shall have become vacant.
References in this paragraph (C) to Directors elected by the holders of a
particular class of capital stock shall include Directors elected by such
Directors to fill vacancies as provided in clause (y) of the foregoing sentence.

          (v)  Immediately upon the expiration of a default period, (x) the
right of the holders of Units of Series C Preferred Stock as a separate class to
elect Directors shall cease, (y) the term of any Directors elected by the
holders of Units of Series C Preferred Stock as a separate class shall
terminate, and (z) the number of Directors shall be such number as may be
provided for in the Articles or by-laws irrespective of any increase made
pursuant to the provisions of paragraph (C)(ii) of this Section 3 (such number
being subject, however, to change thereafter in any manner provided by law or in
the Articles or by-laws).  Any

                                       4

<PAGE>
 
vacancies in the Board of Directors effected by the provisions of clauses (y)
and (z) in the preceding sentence may be filled by a majority of the remaining
Directors.

          (vi)  The provisions of this paragraph (C) shall govern the election
of Directors by holders of Units of Preferred Stock during any default period
notwithstanding any provisions of the Articles to the contrary, including,
without limitation, the provisions of Article THIRD of the Articles.

                (D) Except as set forth herein, holders of Units of Series C
Preferred Stock shall have no special voting rights and their consents shall not
be required (except to the extent they are entitled to vote with holders of
shares of Common Stock as set forth herein) for taking any corporate action.

                SECTION 4. CERTAIN RESTRICTIONS. (A) Whenever quarterly
dividends or other dividends or distributions payable on Units of Series C
Preferred Stock as provided in Section 2 are in arrears, thereafter and until
all accrued and unpaid dividends and distributions, whether or not declared, on
outstanding Units of Series C Preferred Stock shall have been paid in full, the
Corporation shall not

                (i)   declare or pay dividends on, make any other distributions
          on, or redeem or purchase or otherwise acquire for consideration any
          shares of junior stock;

                (ii)  declare or pay dividends on or make any other
          distributions on any shares of parity stock, except dividends paid
          ratably on Units of Series C Preferred Stock and shares of all such
          parity stock on which dividends are payable or in arrears in
          proportion to the total amounts to which the holders of such Units and
          all such shares are then entitled;

                (iii) redeem or purchase or otherwise acquire for consideration
          shares of any parity stock, provided, however, that the Corporation
                                      --------  -------
          may at any time redeem, purchase or otherwise acquire shares of any
          such parity stock in exchange for shares of any junior stock;

                (iv)  purchase or otherwise acquire for consideration any Units
          of Series C Preferred Stock, except in accordance with a purchase
          offer made in writing or by publication (as determined by the Board of
          Directors) to all holders of such Units.

                (B) The Corporation shall not permit any subsidiary of the
          Corporation to purchase or otherwise acquire for consideration any
          shares of stock of the Corporation unless the Corporation could, under
          paragraph (A) of this Section 4, purchase or otherwise acquire such
          shares at such time and in such manner.

                SECTION 5. REACQUIRED SHARES. Any Units of Series C Preferred
Stock purchased or otherwise acquired by the Corporation in any manner
whatsoever shall be

                                       5

<PAGE>
 
retired and cancelled promptly after the acquisition thereof.  All such Units
shall, upon their cancellation, become authorized but unissued Units of
Preferred Stock and may be reissued as part of a new series of Preferred Stock
to be created by resolution or resolutions of the Board of Directors, subject to
the conditions and restrictions on issuance set forth herein.

          SECTION 6.  LIQUIDATION, DISSOLUTION OR WINDING UP.  (A)  Upon any
voluntary or involuntary liquidation, dissolution or winding up of the
Corporation, no distribution shall be made (i) to the holders of shares of
junior stock unless the holders of Units of Series C Preferred Stock shall have
received, subject to adjustment as hereinafter provided in paragraph (B), the
greater of either (a) $1.00 per Unit plus an amount equal to accrued and unpaid
dividends and distributions thereon, whether or not earned or declared, to the
date of such payment, or (b) the amount equal to the aggregate per share amount
to be distributed to holders of shares of Common Stock, or (ii) to the holders
of shares of parity stock, unless simultaneously therewith distributions are
made ratably on Units of Series C Preferred Stock and all other shares of such
parity stock in proportion to the total amounts to which the holders of Units of
Series C Preferred Stock are entitled under clause (i)(a) of this sentence and
to which the holders of shares of such parity stock are entitled, in each case
upon such liquidation, dissolution or winding up.

          (B) In the event the Corporation shall at any time after the Rights
Declaration Date (i) declare any dividend on outstanding shares of Common Stock
payable in shares of Common Stock, (ii) subdivide outstanding shares of Common
Stock, or (iii) combine outstanding shares of Common Stock into a smaller number
of shares, then in each such case the aggregate amount to which holders of Units
of Series C Preferred Stock were entitled immediately prior to such event
pursuant to clause (i)(b) of paragraph (A) of this Section 6 shall be adjusted
by multiplying such amount by a fraction the numerator of which shall be the
number of shares of Common Stock that are outstanding immediately after such
event and the denominator of which shall be the number of shares of Common Stock
that were outstanding immediately prior to such event.

          SECTION 7.  CONSOLIDATION, MERGER, ETC.  In case the Corporation shall
enter into any consolidation, merger, combination or other transaction in which
the shares of common stock are exchanged for or converted into other stock or
securities, cash and/or any other property, then in any such case Units of
Series C Preferred Stock shall at the same time be similarly exchanged for or
converted into an amount per Unit (subject to the provision for adjustment
hereinafter set forth) equal to the aggregate amount of stock, securities, cash
and/or any other property (payable in kind), as the case may be, into which or
for which each share of Common Stock is converted or exchanged.  In the event
the Corporation shall at any time after the Rights Declaration Date (i) declare
any dividend on outstanding shares of Common Stock payable in shares of Common
Stock, (ii) subdivide outstanding shares of Common Stock, or (iii) combine
outstanding Common Stock into a smaller number of shares, then in each such case
the amount set forth in the immediately preceding sentence with respect to the
exchange or conversion of Units of Series C Preferred Stock shall be adjusted by
multiplying such amount by a fraction the numerator of which

                                       6

<PAGE>
 
shall be the number of shares of Common Stock that are outstanding immediately
after such event and the denominator of which shall be the number of shares of
Common Stock that were outstanding immediately prior to such event.

          SECTION 8.   REDEMPTION.  The Units of Series C Preferred Stock shall
not be redeemable.

          SECTION 9.   RANKING. The Units of Series C Preferred Stock shall rank
junior to all other series of the Preferred Stock and to any other class of
preferred stock that hereafter may be issued by the Corporation as to the
payment of dividends and the distribution of assets, unless the terms of any
such series or class shall provide otherwise.

          SECTION 10.  AMENDMENT.  The Articles, including, without limitation,
this resolution, shall not hereafter be amended, either directly or indirectly,
or through merger or consolidation with another corporations in any manner that
would alter or change the powers, preferences or special rights of the Series C
Preferred Stock so as to affect them adversely without the affirmative vote of
the holders of a majority or more of the outstanding Units of Series C Preferred
Stock, voting separately as a class.

          SECTION 11.  FRACTIONAL SHARES.  The Series C Preferred Stock may be
issued in Units or other fractions of a share, which Units or fractions shall
entitle the holder, in proportion to such holder's fractional shares, to
exercise voting rights, receive dividends, participate in distributions and to
have the benefit of all other rights of holders of Series C Preferred Stock.

          SECTION 12.  CERTAIN DEFINITIONS.  As used herein with respect to the
Series C Preferred Stock, the following terms shall have the following meanings:

          (A) The term "Common Stock" shall mean the class of stock designated
as the common stock, no par value, of the Corporation at the date hereof or any
other class of stock resulting from successive changes or reclassification of
such common stock.

          (B) The term "junior stock" (i) as used in Section 4, shall mean the
Common Stock and any other class or series of capital stock of the Corporation
hereafter authorized or issued over which the Series C Preferred Stock has
preference or priority as to the payment of dividends and (ii) as used in
Section 6, shall mean the Common Stock and any other class or series of capital
stock of the Corporation over which the Series C Preferred Stock has preference
or priority in the distribution of assets on any liquidation, dissolution or
winding up of the Corporation.

          (C) The term "parity stock" (i) as used in Section 4, shall mean any
class or series of stock of the Corporation hereafter authorized or issued
ranking pari passu with the Series C Preferred Stock as to the payment of
        ---- -----                                                       
dividends and (ii) as used in Section 6, shall mean any class or series of
capital stock ranking pari passu with the Series C Preferred
                      ---- -----                            

                                       7

<PAGE>
 
Stock in the distribution of assets on any liquidation, dissolution or winding
up of the Corporation.


     3.   Adoption.  The foregoing amendments to the Restated Articles of
Incorporation of the Corporation were duly adopted pursuant to the Washington
Business Corporation Act at a meeting of the Board of Directors of the
Corporation held on November 7, 1996.  Pursuant to the Washington Business
Corporation Act and the Corporation's Restated Articles of Incorporation, no
shareholder action was required to effect these amendments.

     IN WITNESS WHEREOF, the Corporation has caused these Articles of Amendment
to Restated Articles of Incorporation to be executed in duplicate as of November
7, 1996.


                              CELL THERAPEUTICS



                              By: /s/ James A. Bianco
                                 --------------------------------
                                   James A. Bianco, M.D.
                                   President

Attest:

  /s/ Michael J. Kennedy
 ----------------------------
     Michael J. Kennedy
     Secretary

                                       8



<PAGE>
 
                                                                     EXHIBIT 3.6

                                    FORM OF
                             ARTICLES OF AMENDMENT

                                       TO
                       RESTATED ARTICLES OF INCORPORATION
                                       OF
                            CELL THERAPEUTICS, INC.
                        EFFECTING A REVERSE STOCK SPLIT


   Cell Therapeutics, Inc. a Washington corporation, by James A. Bianco, M.D.,
its duly elected and qualified President, hereby provides the following
information and delivers to the Secretary of State of the State of Washington
for filing these Articles of Amendment pursuant to RCW 23B.10.060.

   1.     NAME.  The name of the Corporation is Cell Therapeutics, Inc.

   2.     TEXT OF AMENDMENT.  The Restated Articles of Incorporation are hereby
amended by changing Section 1 of the Article II thereof to read as follows:

          "1.  Classes.  The Corporation shall be authorized to issue two
               -------                                                   
      classes of shares of stock to be designated, respectively, "Common Stock"
      and "Preferred Stock."  The total number of shares which the Corporation
      shall have authority to issue is One Hundred Ten Million (110,000,000);
      the total number of authorized shares of Common Stock shall be One Hundred
      Million (100,000,000), and the total number of authorized shares of
      Preferred Stock shall be Ten Million (10,000,000)."

   3.     ADOPTION.  The foregoing amendment to the Restated Articles of
Incorporation of the Corporation was duly adopted by unanimous
 written consent
of the Board of Directors of the Corporation on January 22, 1997 and was duly
approved by the shareholders of the Corporation on February 28, 1997 in
accordance with the provisions of RCW 23B.10.030 and RCW 23B.10.040.

   4.     EFFECTING THE REVERSE STOCK SPLIT.  Upon the date these Articles of
Amendment are filed with the Secretary of State of the State of Washington, each
three and one-half shares of issued and outstanding shares of Common Stock of
this Corporation shall be automatically reclassified into one share of Common
Stock of this Corporation, thereby giving effect to a one-for-three and one-half
reverse stock split (the "Reverse Stock Split"). Furthermore, all outstanding
rights and obligations (including option plans, stock options and the exercise
price thereof, stock purchase warrants and the exercise prices thereof and the
conversion terms of the Corporation's shares of outstanding Series A Convertible
Preferred Stock and Series B Convertible Preferred Stock) relating to this
Corporation's Common Stock shall be mathematically adjusted to reflect the
Reverse Stock Split so that the proportionate ratio of such rights and
obligations to the reclassified shares will be equal to the proportionate ratio

                                       1
 


<PAGE>
 
of such rights and obligations to the shares outstanding immediately prior to
such reclassification. In lieu of the issuance of any fractional shares that
would otherwise result from the Reverse Stock Split, the Corporation shall issue
to any shareholder that would otherwise receive fractional shares one whole
share, the additional shares thereby issued being taken from authorized but
theretofore unissued shares of Common Stock. Following the effectiveness of this
Amendment, certificates representing the shares of Common Stock to be
outstanding thereafter shall be exchanged for certificates now outstanding
pursuant to procedures adopted by the Corporation's Board of Directors and
communicated to those who are to receive new certificates.

   IN WITNESS WHEREOF, the Corporation has caused these Articles of Amendment to
Restated Articles of Incorporation Effecting a Reverse Stock Split to be
executed as of _______________, 1997.



                              CELL THERAPEUTICS, INC.



                              By:___________________________
                                    James A. Bianco, M.D.
                                    President


Attest:

____________________________ 
     Michael J. Kennedy
     Secretary

                                       2




<PAGE>
 
                                                                    EXHIBIT 10.2
 
                      THIRD AMENDMENT TO LEASE AGREEMENT

     THIS THIRD AMENDMENT TO LEASE AGREEMENT ("Third Amendment") is entered into
by and between DAVID A. SABEY AND SANDRA L. SABEY, husband and wife 
("Landlord") and CELL THERAPEUTICS, INC., a Washington corporation ("Tenant"), 
with respect to the following facts:

                                   RECITALS
                                   --------

     A.   Landlord and Tenant are parties to that certain: 1) Lease Agreement
dated March 27, 1992, as amended, modified or supplemented by the certain First
Amendment to Lease Agreement dated March 31, 1993, Second Amendment to Lease
Agreement dated October 13, 1993; and 2) the Assignment of Lease dated April 23,
1993, whereby Tenant was assigned and assumed certain space in the Building
(collectively the "Lease Agreement"). Defined terms used herein, unless
otherwise expressly defined, shall have the meaning as set forth in the Lease
Agreement.

     B. Pursuant to Section 47 of the Lease Agreement (as added by the First
Amendment to the Lease Agreement), Landlord shall deliver and Tenant shall take
possession of the Additional Expansion Space upon the expiration of the current
tenant's lease of the Additional Expansion Space. Landlord has notified Tenant
of the availability of Additional Expansion Space and Tenant
 has notified
Landlord of its acceptance of the Additional Expansion Space.

     C.   Tenant desires to lease from Landlord and Landlord desires to lease to
Tenant, certain trade fixtures, equipment and improvements ("Trade
Improvements"), currently located in the Additional Expansion Space.

     D.   Landlord and Tenant are executing this Amendment to acknowledge
specific terms of Tenant's lease of the Additional Expansion Space, lease of
Trade Improvements in the Additional Expansion Space and to further amend the
Lease in accordance with terms set forth herein below.

                                  AMENDMENTS
                                  ----------

     NOW THEREFORE, in consideration of the mutual covenants of the parties, 
Landlord and Tenant hereby agree as follows:

1.   Premises. Paragraph 1.b of the Lease Agreement is hereby amended in its 
     entirety to read as follows:

     b.   Premises: The premises shall consist of:

          .  a Storage Area (approximately 3,410 net rentable square feet),
             Maintenance Office Space (398 square feet), and Storage Tank Space
             (64 square feet), located in the north garage servicing the
             Building as outlined on the attached floor plan, Exhibit A-1;

                                  Page 1 of 7

<PAGE>
 
          .  the Third (3rd) Floor (23,162 net rentable square feet, which
             includes 17,372 net rentable square feet, which for purposes of
             this Lease Agreement is referred to as the "Tenant Space", and 5790
             net rentable square feet, which is the Additional Expansion Space),
             located in the Building as outlined on the attached floor plan,
             Exhibit A-4;

          .  the Fourth (4th) Floor (18,304 net rentable square feet) located in
             the Building as outlined on the attached floor plan, Exhibit A-5;
             and
 
          .  the Fifth (5th) Floor (18,304 net rentable square feet) located in 
             the Building as outlined on the attached floor plan, Exhibit A-6.

     Upon execution of this Third Amendment, Tenant shall occupy a total of
     60,977 net rentable square feet in the Building (Premises Area). This
     includes 1,207 net rentable square feet on the First (1st) Floor
     ("Hazardous Material Space"), located in the Building as outlined on the
     attached floor plan, Exhibit A-2, and the subject of an Assignment of
     Lease, dated April 23, 1993, between Tenant and Manlove Travel, Inc. The
     above total 60,977 net rentable square feet excludes the Storage Area,
     Maintenance Office Space and Storage Tank Space, specified above.

 2.  Percentage of Building.  Paragraph 1.c. is amended in its entirety to read
     as follows:

     c.   Tenant's Percentage of the Building: Tenant's percentage of the
          Building shall mean forty-six and six tenths percent (46.6%),
          calculated by dividing the Premises Area (60,977 net rentable square
          feet) by the area of the Building (130,949 square feet).

 3.  Base Rent:  Paragraph 1.h.(i) is amended in its entirety to read as 
     follows:

     h.   Annual Base Rent: Beginning on August 1, 1996, and continuing until
          the fifth (5th) anniversary of the Rent Commencement Date (January 31,
          1998), the Annual Base Rent shall be as follows:


<TABLE> 
<CAPTION> 
           SPACE ID                           NET RENTABLE     ANNUAL RATE     ANNUAL BASE RENT 
           <S>                                <C>              <C>             <C>             
           Storage Area                           3,410             $10          $   34,100.00 
           Maintenance Space                        398             $10          $    3,980.00 
           Tank Storage Space                        64               0                      0  
           1st Floor - Hazard. Mat. Space         1,207             $16          $   19,312.00
           3rd Floor - Tenant Space              17,372             $16          $  277,952.00
           3rd Floor - Additional Exp. Space      5,790             $16          $   92,640.00
           4th Floor                             18,304             $16          $  292,864.00
           5th Floor                             18,304             $16          $  292,864.00
                                                 =============================================
                                    TOTALS:      64,849                          $1,013,712.00 

</TABLE>
 

                                  Page 2 of 7


<PAGE>
 
          Beginning on February 1, 1998 and continuing until the Expiration Date
          (January 31, 2003), the Annual Base Rent Shall be as follows:


<TABLE> 
<CAPTION> 
           Space ID                             Net Rentable     Annual Rate      Annual Base Rent  
           <S>                                  <C>              <C>              <C>               
           Storage Area                             3,410            $12           $   40,920,00     
           Maintenance Space                          398            $12           $    4,776.00     
           Tank Storage Space                          64              0                       0     
           1st Floor - Hazard. Mat. Space           1,207            $18           $   21,726.00     
           3rd Floor - Tenant Space                17,372            $18           $  312,696.00      
           3rd Floor - Additional Exp. Space        5,790            $18           $  104,220.00
           4th Floor                               18,304            $18           $  329,472.00
           5th Floor                               18,304            $18           $  329,472.00
                                                   =============================================
                                   TOTALS:         64,849                          $1,143,282.00
</TABLE>
 

          Commencing August 1, 1996, the Annual Base Rent shall be paid in
          twelve (12) equal installments on or before the first (1st) day of
          each month during the Lease Term.

 4.   Additional Expansion Space. Section 47 of the Lease Agreement shall be 
      amended in its entirety to read:

 47.  Additional Expansion Space.

      a.  Tenant Occupancy. Landlord shall deliver the Additional Expansion
          Space to Tenant on September 1, 1996; provided, however, Tenant may
          enter the Expansion Space prior to the delivery date for the purposes
          of architectural, design or engineering review. Landlord's delivery of
          the Additional Expansion Space shall be in it's "AS IS" condition as
          of the date of delivery and Landlord shall not be required to make
          alterations, additions, or improvements to the Additional Expansion
          Space; except that Landlord shall seal the stairwell presently located
          within the Additional Expansion Space, eliminating access between the
          second floor and the Additional Expansion Space.

      b.  Base Service Year. For purposes of determining Additional Rent for the
          Additional Expansion Space, the Additional Expansion Space shall have
          a Base Service Year of 1992.

      c.  Trade Improvements. Landlord hereby agrees to lease to Tenant and
          Tenant hereby agrees to lease from Landlord, the Trade Improvements
          serving the Expansion Space all on the following terms and conditions:

          i.     Term. Tenant shall lease from Landlord the Trade Improvements
                 commencing on September 1, 1996, and terminating on the
                 Expiration Date, unless earlier terminated in accordance with
                 the Lease. It is the intent of the parties that the term of the
                 lease for the Trade Improvements be co-terminous with the lease
                 of the Premises.

                                  Page 3 of 7








<PAGE>
 
     ii.  Condition and Uses. Landlord shall deliver the Trade Improvements in
          their "AS IS, WHERE IS" condition, without representation or warranty
          of any kind whatsoever, whether express or implied, including without
          limitation, warranty for habitability, suitability or for particular
          use and Landlord shall not be required to make any allegations,
          repairs or improvements to the Trade Improvements. Notwithstanding the
          foregoing, Landlord represents to Tenant that to the best of their
          knowledge, the Trade Improvements have been adequately maintained and
          repaired by the prior tenant and owner, Oncomembrane, Inc. and is in
          reasonably good working order, normal wear and tear excepted. Tenant
          hereby agrees that with respect to its use of the Personal Property,
          it will comply with all of the terms of the Lease, including without
          limitation, Section 6 of the Lease.

     iii. Repair, Maintenance and Alterations. Tenant hereby agrees to maintain
          and repair, at Tenant's sole cost and expense, the Trade Improvements
          at all times during the term hereof. Tenant shall maintain the Trade
          Improvements at all times in good repair. Tenant shall make no
          alterations or modifications to the Trade Improvements without the
          prior written consent of the Landlord. In addition to the foregoing,
          Tenant agrees that all other terms and conditions of the Lease shall
          apply to the Trade Improvements and its repair or maintenance, unless
          directly contrary to the foregoing terms in this paragraph.

     iv.  Taxes and Insurance. Tenant shall pay, before delinquency any and all
          Real Property Taxes (as defined in the Lease) on the Trade
          Improvements and provide Landlord with evidence of such payment.
          Tenant shall maintain Liability and property damage insurance on the
          Trade Improvements at all times during the term hereof in accordance
          with the requirements of Section 16 of the Lease.

     v.   Removal of Property and Surrender. Tenant shall not remove the Trade
          Improvements from the Premises without the prior written consent of
          the Landlord. Upon termination of the Lease, Tenant shall surrender
          the Trade Improvements to the Landlord in good working condition and
          repair, normal wear and tear excepted.

d.   Mechanical System. The Additional Expansion Space is serviced by mechanical
     and physical systems (collectively, "Mechanical System"), specifically air
     handling unit(s), boilers, chillers, natural gas, electricity and vacuum
     that also will continue to provide service to the first and second floors
     of the Building. Notwithstanding the terms of this paragraph, Tenant shall
     continue to be responsible for maintaining mechanical equipment (e.g., air
     handling unit and exhaust fans) located in the small mechanical room on the
     roof of the second floor of the Building which services the Organic
     Chemistry Lab of the Additional Expansion Space (labeled "OCL" on Exhibit 
     A-4).

                                  Page 4 of 7

<PAGE>
 
          Tenant agrees to an equitable allocation of the costs and expenses of
          maintaining, repairing and replacing the Mechanical System between
          Tenant and first and second floor tenants, on a pro-rata, square
          footage basis, so long as the Mechanical System serves the first and
          second floors and the Additional Expansion Space. Landlord and Tenant
          agree to cooperate in good faith to work with the first and second
          floor tenant with respect to the equitable allocation of costs and
          expenses and the use of the Mechanical System by the first and second
          floor tenant. Tenant acknowledges that the first or second floor
          tenant (currently Pathogenesis Inc.) shall maintain, repair and
          replace the Mechanical System for the benefit of Tenant and the first
          or second floor tenant. Tenant shall reimburse Pathogenesis Inc., the
          successor first or second floor tenant or Landlord (in the event
          Landlord has undertaken maintenance and repair responsibility) on a
          pro-rata square foot basis, for any and all maintenance, repair or
          replacement costs. Tenant shall pay Pathogenesis, Inc. (or the party
          maintaining the Mechanical System) such costs on a monthly basis based
          on estimates. All costs and expenses shall be reconciled on an annual
          basis.

          Tenant shall have the option of disconnecting certain of the
          Mechanical Systems servicing the Additional Expansion Space and
          instead servicing all or a portion of the Additional Expansion Space
          with Tenant's mechanical systems currently servicing other space in
          the Building leased by Tenant under the lease. In such event, tenants
          pro-rata square footage allocation of costs for maintaining and
          repairing the Mechanical Systems shall be reduced accordingly.

 5.   Parking:  Paragraph l.j. is amended in its entirety to read as follows:

      j.  Parking: Tenant shall lease 82 parking stalls (plus 1 additional space
          for each 750 feet of expansion space) in and under cover of the
          Building, or in the adjacent building commonly known as the P-I
          Building, on an unassigned basis at $100.00 per space and adjusted to
          the prevailing monthly market rates as established by Landlord every
          three (3) years. Landlord will, if reasonably possible, accommodate
          Tenant's preference as to location of the parking stalls. The leasing
          of parking stalls by Tenant shall be subject to such rules and
          regulations as Landlord or its parking operator may adopt from time to
          time. Landlord shall also assist Tenant in locating twenty-five (25)
          additional parking stalls located within one block of the Building
          (plus 1 additional space for each 750 feet of expansion space). These
          additional stalls shall be provided at Tenant's sole cost and expense.

 6.   Miscellaneous. The additional Expansion Space shall be subject to all
      other terms and conditions of the Lease Agreement, including without
      limitation, the option to extend the Lease Term, determination of Annual
      Base Rent and Additional Rent during extension terms, Landlords rights to
      approve build out of the Additional Expansion Space and the terms and
      conditions with respect to assignment and subletting the Premises.

                                  Page 5 of 7

<PAGE>
 
 7.   Amendment.  Except as expressly modified and amended herein, the Lease 
Agreement shall remain in full force and effect.

      DATED this 10 day of September, 1996
                 --        ---------

      LANDLORD:                DAVID A. SABEY AND SANDRA L. SABEY


                               /s/ David A. Sabey
                               -----------------------------------
                               David A. Sabey individually and
                               as attorney-in-fact for
                               Sandra L. Sabey

STATE OF WASHINGTON )
                    ) ss
COUNTY OF KING      )

      On this day personally appeared before me DAVID A. SABEY to me known to be
the individual described in and who executed the within and foregoing 
instrument, and acknowledged that he signed the same as his free and voluntary 
act and deed, for the uses and purposes therein mentioned.

      DATED this 9 day of Sept., 1996
                 -        -----

                               /s/ Mary A. Hall
                               -----------------------------------
        [SEAL APPEARS HERE]    Notary Public in and for the State of Washington,
                               residing at Seattle
                                           -----------------------.
                               My Commission Expires: 12-19-97
                                                     -------------.
                                            MARY A. HALL
                               -----------------------------------
                                            (print name)

                                  Page 6 of 7

<PAGE>
 
     TENANT:                   CELL THERAPEUTICS, INC.


                               By: /s/ J. Bianco
                                   --------------------
                               Its: President and CEO
                                    -------------------

STATE OF WASHINGTON )
                    ) ss
COUNTY OF KING      )
          ----------

     On this 10th day of September, 1996, before me, the undersigned, a Notary 
             ----        ---------
Public in and for the State of Washington, duly commissioned and sworn, 
personally appeared James A. Bianco, MD, to be known to be the President and CEO
                    -------------------                        -----------------
of the corporation that executed the foregoing instrument, and acknowledged the 
said instrument to be the free and voluntary act and deed of said corporation, 
for the uses and purposes therein mentioned, and on oath stated that he was 
authorized to execute the said instrument.

     Witness my hand and official seal hereto affixed the day and year first 
above written.

                               /s/ Sally Teeters
                               ------------------------------------------------
                               Notary Public in and for the State of Washington,
                               residing at Everett
                                           ------------------------------------.
                               My Commission Expires: August 7, 1997
                                                      -------------------------.
                                             Sally Teeters
                               ------------------------------------------------
                                              (print name)




<PAGE>
 
                                                                    EXHIBIT 10.4
 
                              [LETTERHEAD OF CTI]

September 6, 1996

HAND DELIVERED
- --------------
Mr. David A. Sabey
Sabey Corporation
101 Elliott Avenue West, Suite 330
Seattle, WA 98119

Re:  Lease Amendment
     ---------------

Dear Dave:

Cti acknowledges that the Office Lease Agreement dated March 29, 1985, as 
amended (Lease) and assigned to cti under the Assignment of Lease (Assignment) 
dated April 23, 1993, should be further amended.

Accordingly, paragraph 1.l should read:

     1.l  Description. Landlord hereby leases to Tenant and Tenant hereby rents
          from Landlord those certain Premises, shown in Exhibit A and located
          in the City of Seattle, County of King, Washington, commonly known as
          Suite 110, Elliott Park, 201 Elliott Avenue West and described as that
          certain material storage space comprising 1,207 sq. ft. of net
          rentable square feet, said Premises being situated upon real property
          more particularly described on Exhibit "B", attached hereto and by
          this reference made a part hereof.

Furthermore, your April 26, 1996, letter sets forth the lease rates of $16 
through January 31, 1998 and $18 from February 1, 1998 through January 31, 2003,
per rentable square foot.  Thus, the annual rent for the space shall be $19,312 
(through January 31, 1998) and $21,726 (from February 1, 1998 through January
 
31, 2003).

<PAGE>
 
Mr. David A. Sabey
September 6, 1996
Page 2

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

Please acknowledge your agreement with this amendment by signing and dating the 
duplicate original of this letter and returning one original to us for our 
permanent records.

Best regards.

Sincerely,

CELL THERAPEUTICS, INC.

/s/ James Bianco
James A. Bianco, MD
President and Chief Executive Officer

JAB/ast

ACCEPTED AND AGREED BY:

SABEY CORPORATION

/s/ David A. Sabey                            9 SEPT 1996
- -------------------------------               -------------------------
David A. Sabey individually and               Date
as attorney-in-fact for
Sandra L. Sabey




<PAGE>
 
                                                                    EXHIBIT 10.5
 
                             EMPLOYMENT AGREEMENT
                             --------------------

          THIS EMPLOYMENT AGREEMENT (the "Agreement") is entered into as of the 
17th day of December, 1996, by and between JAMES A. BIANCO, M.D. ("Employee"), 
and CELL THERAPEUTICS, INC., a Washington corporation (the "Company").  In 
consideration of the mutual covenants and conditions set forth herein, the 
parties hereby agree as follows:

          1.   Employment.  The Company hereby employs Employee to serve as its 
               ----------
President and Chief Executive Officer and Employee hereby accepts such 
employment.  In his capacity as President and Chief Executive Officer, Employee 
shall be responsible for developing and presenting Company strategies and 
potential products or technologies, negotiating licensing and sublicensing 
agreements, an directing product research and overall corporate direction.  
Employee's duties will also include coordinating planning leading to the 
development of research facilities and business offices, in addition to 
overseeing daily operations of the physical/corporate plant.  As President and 
Chief Executive Officer, Employee agrees to perform such other duties during the
term hereof as the Board of Directors of the Company shall, from time to time, 
reasonably direct.  Employee
 agrees to utilize his skills and to render 
services to the best of his ability on a full-time basis during the term of this
Agreement; provided that the Employee may engage, with the prior written consent
           --------
of the Board of Directors, in other ventures that do not violate the covenant 
not to compete contained in Section 9 and do not materially interfere with the 
performance of the Employee's duties hereunder.

          2.   Term.  Unless earlier terminated pursuant to the provisions of 
               ----
Section 6 below, Employee's employment hereunder shall be for a period 
commencing on the date hereof (the "Effective Date") and continuing through and 
including December 31, 1999.  Prior to the expiration of the Term, the parties 
shall in good faith negotiate the terms of any extension thereof.

          3.   Compensation.
               ------------

               Base Salary.  For all services rendered by Employee under this 
               -----------
Agreement, Employee shall receive a salary at an annual rate of $358,032 for 
1996 and $393,835 for 1997 (effective January 1, 1997), as increased under 
Section 3b ("Base Salary"), or such higher annual rate as the Board of Directors
of the Company may from time to time establish in its sole discretion.

          b.   Annual Bonuses.  Employee shall receive such annual bonuses as 
               --------------
may be declared from time to time by the Board of Directors in its sole 
discretion.

          c.   Stock Option Plans.  The Company has adopted stock option and/or 
               ------------------
stock purchase plans for the benefit of certain employees of the Company.  
Employee shall be

<PAGE>
 
entitled to participate in such plans, consistent with the terms of such plans 
and applicable law.

          d.   Loan Forgiveness.  Notwithstanding anything to the contrary 
               ----------------
contained in that certain promissory note dated December 23, 1993 made by the 
Employee in favor of the Company (the "Note"), the parties agree that the Note 
shall be amended to provide that, on each anniversary of the Effective Date of 
this Agreement, the Company shall forgive one-third of the principal amount of 
the loan which is evidenced by the Note together with the interest accruing 
thereunder pursuant to the terms of the Note; provided that in the event that 
                                              --------
the employment of Employee terminates prior to the forgiveness of all of the 
obligations under the Note for any reason other than by the Company without
cause or by the Employee for cause (as such terms are defined in Section 6a and
Section 6c, respectively) or as a result of death or disability (as defined in
Section 6f below) of Employee, the unpaid principal amount and the interest
accruing thereunder shall become immediately due and payable.  In the event that
(i) the employment of Employee is terminated by the Company without cause or by
the Employee for cause or as a result of death or disability of Employee, (ii) a
Change in Ownership (as defined in Section 14) occurs, or (iii) following a
public offering (a "Public Offering") of stock of the Company pursuant to an
effective registration statement under the Securities Act of 1933, as amended
(the "Securities Act"), the market capitalization of the Company equals or
exceeds $500 million, the unpaid principal amount and the interest accruing
thereunder shall be forgiven.  The Company shall pay to the Employee such
additional compensation as is necessary (after taking into account all federal,
state and local income taxes payable by the Employee as a result of the
cancellation of indebtedness described above. The amount of such payment shall
be determined by an accounting firm jointly selected by the Company and the
Employee and paid by the Company, and which may be the Company's independent
auditors.

          Upon the cancellation or payment of all the obligations under the 
Note, the Company's security interest in the shares of common stock of the 
Company pledged to the Company pursuant to the Stock Pledge Agreement dated 
December 23, 1993 by and between the Employee, the Company and Bogle & Gates, as
escrow agent, shall terminate.

          4.   Benefits.
               --------

          a.   Medical/Health Insurance.  The Company shall provide Employee 
               ------------------------
with Company paid medical and dental insurance for Employee, his spouse and 
dependents in accordance with such policies as shall be maintained by the 
Company, which shall be comparable to that currently enjoyed by Employee.

          b.   Vacation/Sick Leave.  Employee shall be entitled to vacation and 
               -------------------
sick leave in accordance with Company policy, provided Employee shall be 
                                              --------
entitled to (i) a minimum of four (4) weeks vacation annually during the Term, 
and (ii) a minimum of four (4) days of paid sick leave for each ten (10) weeks 
of consecutive employment.  Any unused vacation time shall be paid in a cash 
lump sum payment promptly after Employee's termination of employment, regardless
of the reason for such termination, or at such earlier time as required by
Company vacation policy to avoid forfeiture of accrued but unused vacation time.


<PAGE>
 
          c.   Life/Disability Insurance.  The Company shall provide, at Company
               -------------------------
expense, universal (or other non-term) life insurance for the benefit of
Employee in amounts no less than $5 million. The Company's benefit plan for
executive officers shall provide, at Employee's expense, disability insurance
for the benefit of Employee and his beneficiaries through a company reasonably
acceptable to Employee. Employee's Base Salary shall be increased by the amount
of the annual premiums for such coverage. The Company shall cause its records to
reflect that the premiums for the disability policy have been paid by the
Employee, including Form W-2 prepared by the Company. The above benefits are
subject to the same being available to the Company at reasonable cost and any
limitations resulting from Employee's physical condition.

          d.   Expense Reimbursement.  The Company shall pay or reimburse 
               ---------------------
Employee for all reasonable travel and other expenses incurred or paid by 
Employee in connection with the performance of services under this Agreement 
upon presentation of expense vouchers and such other supporting information as 
the Company may from time to time reasonably request.

          e.   Health Club Membership.  The Company shall reimburse the Employee
               ----------------------
for one health club membership, including any initiation fee and dues incurred 
in connection therewith.

          5.   Warranties and Indemnification.  Employee represents to the 
               ------------------------------
Company that Employee is free to enter into this Agreement and that Employee has
no commitment, arrangement or understanding to or with any third party which 
restrains or is in conflict with this Agreement; or which would operate to 
prevent Employee from performing the services to the Company which Employee 
hereby has agreed to provide.  Employee agrees to indemnify and hold the Company
harmless from and against any and all liabilities or claims, including costs, 
expenses and reasonable attorney's fees arising out of any acts by Employee 
which, the foregoing representation or warranty to the contrary notwithstanding,
shall be in violation of or shall constitute a breach of any such commitment, 
arrangement or understanding.

          6.   Termination.
               -----------

          a.   By the Company with Cause.  The Company may terminate Employee's 
               -------------------------
employment hereunder at any time during the Term upon written notice to Employee
for cause, and except as provided below, the salary and benefits referred to in 
Sections 3 and 4 above shall cease upon the effective date of any such 
termination for cause.  As used herein, with respect to termination by the 
Company, the term "cause" shall mean (i) any material breach hereof by Employee 
which is not cured within thirty (30) days following notice of such breach given
by the Company, provided that no such prior notice and opportunity to cure need 
                --------
be given where such breach, or similar breach, has been the subject of such a 
notice and cure period on more than two prior occasions; or (ii) conviction of 
Employee for commitment of a felony; or (iii) any act of Employee, which in the
reasonable judgment of two-thirds of the Board of Directors of the Company,
constitutes willful dishonesty, larceny, fraud or gross

<PAGE>
 
negligence by Employee in the performance of his duties to the Company, or 
willful misrepresentation to shareholders, directors or officers of the Company.

          b.   By the Company without Cause.  The Company may, by action of 
               ----------------------------
two-thirds of the Board of Directors, terminate Employee's employment at any 
time upon thirty (30) days' prior written notice and without cause; provided 
that prior to the effective date of termination, the Company shall pay to
Employee an amount equal to twenty-four (24) months' Base Salary then payable to
Employee. In addition, the Company shall continue to provide Employee the
benefits described in Section 4a, at the same or greater levels, through the
expiration of the term of this Agreement as set forth at Section 2 above or the
Company shall reimburse the Employee for his cost in obtaining substantially
equivalent benefits for the specified time period.

          c.   By the Employee with Cause.  Employee may terminate his 
               --------------------------
employment hereunder at any time upon written notice to the Company for cause.  
The amounts identified in Section 6b shall be paid to Employee as of the 
effective date of termination, together with the continuing benefits described 
therein, as Employee's sole remedy with respect to his termination of employment
(but not limiting Employee's remedies with respect to any defamatory conduct).  
As used herein with respect to termination by Employee prior to a Change in 
Ownership (as defined in Section 14 below), "cause" shall mean (i) any material 
breach hereof by the Company which is not cured within thirty (30) days 
following notice of such breach given by Employee; (ii) repeated and consistent 
bad faith attempts to bring about Employee's resignation through obstruction by 
the Company of the operations and programs of Employee in his capacity hereunder
which are not cured within thirty (30) days following notice of such acts given 
by Executive; (iii) the removal of Employee from the position of President of 
Chief Executive Officer, or the appointment of another person to perform the
duties ordinarily associated with such position(s) without the formal removal of
Employee's title(s); (iv) the transfer of Employee or the relocation of the
principal offices from which the activities of the Company are conducted to an
area more than fifty (50) miles outside the City of Seattle, Washington; or (v)
the failure of a Successor (as defined in Section 14 below) to assume and agree
to be bound by the terms of this Agreement. As used herein with respect to
termination by Employee on or following a Change in Ownership (as defined in
Section 14 below), "cause" shall mean (i) any breach hereof by the Company; (ii)
bad faith attempts to bring about Employee's resignation through obstruction by
the Company of the operations and programs of Employee in his capacity hereunder
which are not cured within thirty (30) days following notice of such acts given
by Executive; (iii) the diminution of, or adverse change in, the duties, status
or responsibilities of Employee whether or not the formal removal of Employee's
title(s) has occurred; (iv) the transfer of Employee or the relocation of the
principal offices from which the activities of the Company are conducted to an
area more than fifty (50) miles outside the City of Seattle, Washington; or (v)
the failure of a Successor (as defined in Section 14 below) to assume and agree
to be bound by the terms of this Agreement.

          d.   By the Employee without Cause.  If Employee terminates his 
               -----------------------------
employment without cause, such termination shall be treated as a termination 
with cause by Company, as provided in Section 6(a) above.

<PAGE>
 
          e.   Disputes.  With respect to disputes involving the existence of 
               --------
"cause" hereunder, each party hereunder consents to submit itself to personal 
jurisdiction of the United States District Court in the Western District of 
Washington and state courts in the Seattle Washington area.  Notwithstanding the
foregoing, on or following a Change in Ownership, the determination as to 
whether "cause" exists shall be made by Employee in good faith.

          f.   Death and Disability.  This Agreement and Employee's employment 
               --------------------
and salary shall in any event terminate upon the death of Employee or the 
inability of Employee to perform the duties and functions of his position for a 
period of 120 days during any twelve (12) consecutive month period due to 
sickness or disability ("disability"), after which period Employee shall 
commence receiving benefits under the Company's short- and long-term disability
policies in accordance with their terms.

          g.   Acceleration of Vesting.  In the event this Agreement is 
               -----------------------
terminated by Employer without cause, or by Employee with cause, or Employee
dies or is disabled, all stock and stock options of employee in the Company
shall immediately become vested.

          h.   Life Insurance.  In the event this Agreement is terminated by 
               --------------
Employer or by Employee, or if Employee's employment otherwise terminates, 
Employee shall have the right to purchase all life insurance policies maintained
by the Company on the life of Employee at a cost of One Dollar ($1.00), plus any
administrative charges required by the insurance company to assign the 
policy(ies) to Employee.  If any of such policies have a cash surrender value, 
such cash surrender value existing  ninety (90) days prior to the termination 
shall be transferred with the policy to Employee.

          i.   Gross-Up.  Notwithstanding anything in this Agreement to the 
               --------
contrary, if any amounts due to the Employee under this Agreement and any other 
plan or program of the Company (collectively, the "Total Payments") will be 
subject to the tax (the "Excise Tax") imposed by Section 4999 of the Internal
Revenue Code of 1986, as amended (the "Code"), the Company shall pay the
Employee an additional amount (the "Gross-Up Payment") such that the net amount
retained by the Employee, after deduction of any Excise Tax on the Total
Payments and any federal, state and local income tax and Excise Tax upon the
payment provided for by this subsection, shall be equal to the Total Payments.
For purposes of determining the amount of the Gross-Up Payment, the Employee
shall be deemed to pay federal income taxes at the highest marginal rate of
federal income taxation in the calendar year in which the Gross-Up Payment is to
be made and state and local income taxes at the highest marginal rate of
taxation in the state and locality of the Employee's residence on the date of
termination, net of the maximum reduction in federal income taxes which could be
obtained from deduction of such state and local taxes. In the event that the
Excise Tax is subsequently determined to be less than the amount taken into
account hereunder at the time of termination of the Employee's employment, the
Employee shall repay to the Company at the time that the amount of such
reduction in Excise Tax is finally determined the portion of the Gross-Up
Payment attributable to such reduction (plus the portion of the Gross-Up Payment
attributable to the Excise Tax and federal and state and local income tax
imposed on the

<PAGE>
 
Gross-Up Payment being repaid by the Employee if such repayment results in a 
reduction in Excise Tax and/or a federal and state and local income tax 
deduction) plus interest on the amount of such repayment at the rate provided in
Section 1274(b)(2) of the Code.  In the event that the Excise Tax is determined 
to exceed the amount taken into account hereunder at the time of the termination
of the Employee's employment (including by reason of any payment the existence 
or amount of which cannot be determined at the time of the Gross-Up Payment), 
the Company shall make an additional gross-up payment in respect of such excess
(plus any interest payable with respect to such excess) at the time that the
amount of such excess is finally determined. The determinations to be made with
respect to this Section 6i shall be made by an accounting firm jointly selected
by the Company and the Employee and paid by the Company, and which may be the
Company's independent auditors.

          7.  Confidentiality.
              ---------------

          a.   Employee acknowledges that the Company's business and future 
success depends on the preservation of the trade secrets and other confidential 
information of the Company and its affiliates, suppliers and customers (the 
"Secrets").  The Secrets include existing, to-be-developed or acquired products,
processes, techniques, methods, computer programs, know-how, trade secrets, 
customers, suppliers, developments, patents, equipment, or business information 
made, sold, used developed or practiced by the Company in its business or 
proprietary to the Company or its affiliates, suppliers or customers.  "Secrets"
do not include any of the above information or medium generally known to the
industry or which comes to the attention of Employee through sources other than
the Company.  It is anticipated that all employees of the Company, including
Employee, will mark all items containing Secrets with prominent confidentiality
notices in accordance with policies to be adopted by the Company.  Employee
agrees to protect and to preserve as confidential during and after the term of
his employment all of the Secrets at any time known to Employee or in his
possession or control (whether wholly or partially developed by Employee or
provided to Employee, and whether embodied in a tangible medium or merely
remembered).

          b.   Employee shall neither use nor intentionally allow any other 
person to use any of the Secrets in any way, except for the benefit of the 
Company.  All tangible items embodying or disclosing any portion of the Secrets 
shall be and remain the property of the Company and shall be returned to the 
Company upon the termination of Employee's employment.  At such time, Employee 
shall also assemble all tangible items of work in progress, notes, plans, and 
other materials related in any way to Employee's employment, and will promptly 
deliver such items to the Company.  The failure to mark any item with
confidentiality notice(s) shall not ipso facto, cause such item to be excluded
                                    ----------
from classification as a Secret for purposes of this Section 7.

          c.  Employee's covenants in this paragraph shall supplement, and shall
not supplant, any other rights or remedies the Company may have under applicable
law for the protection of its properties and trade secrets.

          8.   Inventions.
               ----------

<PAGE>
 
          a.   "Invention(s)" shall mean discoveries, designs, programs, 
improvements, developments, new concepts, methods, agents materials, and ideas 
whether patentable or not, and products, processes and know-how related to the 
use or production thereof.

          b.   Employee agrees that any Invention which Employee has made or may
make during the term of this Agreement shall be treated as part of the Company's
Secrets and shall be the sole and exclusive property of the Company, whether or 
not (i) patent applications or copyright registrations are filed thereon, 
(ii) the Invention is utilized by the Company, or (iii) the Invention is 
conceived or developed by Employee individually or jointly with others.  
However, Employee has no obligation to assign to the Company any Invention for 
which no Company Secrets and no equipment, supplies, or facilities of the 
Company were used and which was developed entirely on Employee's own time, 
unless:

          (i)    the Invention relates directly to the business of the Company,

          (ii)   the Invention relates to actual or demonstrably anticipated 
     research or development work of the Company,or

          (iii)  the Invention directly results from any work performed by 
     Employee for the Company.

          c.   Whenever requested by the Company, Employee agrees to assist and 
cooperate with the Company, at the Company's expense, in the obtaining, 
maintaining and enforcing of United States and foreign patents and copyright 
registrations for any Invention which is to be the property of the Company as 
provided above.  This assistance and cooperation shall include, but is not 
limited to:

          (i)    making application for United States foreign patents or 
     copyright registrations on any Invention if so requested by the Company;

          (ii)   assigning all of Employee's right, title and interest in and to
     such Invention and any patent applications or copyright registrations
     thereon to the company or its designee; and

          (iii)  executing all documents and rendering all assistance as may be 
     reasonably necessary to protect the rights of the Company or its designee 
     and to vest in the Company or its designee all rights to any such 
     Invention, patent application, patent copyright, or copyright registration.

          d.   Attached hereto as Exhibit A is a list of all issued patents, 
                                  ---------
pending patent applications, registered copyrights, and other inventions which 
Employee has owned or has developed prior to being retained by the Company.  Any
copyright, patent, pending application, or prospective patent application thus 
listed and not otherwise expressly assigned

<PAGE>
 
in writing by Employee to the Company will be excluded from the terms of this 
Agreement.

          9.   Covenant Not to Compete.
               -----------------------

          a.   Applicability.  This Section 9 shall apply following the 
               -------------
termination of Employee's employment only in the event such termination is 
(i) by Employer for cause as defined in Section 6a above, or (ii) by Employee 
without cause as defined in Section 6c above.

          b.  Covenant.  For a period beginning on the date of this Agreement 
              --------
and ending two years following the date of termination of Employee's employment.
Employee hereby agrees that he will not, directly or indirectly, enter into the
employment of, render services to or acquire any interest whatsoever in (whether
for his own account as an individual proprietor, or as a partner, associate,
shareholder, officer, director, consultant, trustee or otherwise), any person or
entity engaged in any operations in competition in any area of the world with
any aspect of the business of the Company as presently conducted and as said
business may evolve in the ordinary course of business between the date of this
Agreement and the termination of Employee's employment hereunder (including
products under active development at such time); provided, however, that nothing
                                                 --------  -------
herein shall prevent the purchase or ownership by Employee of shares of stock in
a nominal amount by way of investment in any publicly-held corporation or
prevent the employment of or the rendering of services by Employee where he does
not contribute to the development or sale of products which compete with
products of the Company with whose development or sale the Employee was directly
involved.  In addition, nothing herein shall prevent Employee from practicing
and carrying on research as a physician.  Employee agrees that he will, during
the term of his employment with the Company, promptly and fully disclose to the
Company any business opportunity coming to Employee's attention, or conceived or
developed in whole or in part by Employee, which relates to the Company's
business or demonstrably anticipated business. Employee will not at any time
exploit such business opportunities for his own gain or that of any person or
entity other than the Company.

          10.  Remedies.  Employee acknowledges that damages for breach of his
               --------
covenants under Sections 7, 8 and 9 above will be difficult to determine and 
inadequate to remedy the harm which may be caused thereby, and therefore agrees 
that the Company may petition or seek to enjoin a putative violation by 
temporary or permanent injunction.  Any available injunctive relief shall be in 
addition to and not in place of any other remedies available at law or equity.  
Employee believes that the provisions of this Agreement are reasonable and that 
Employee is capable of gainful employment without breaching this Agreement.  
However, should any court or tribunal decline to enforce any provision of
Section 9 or 10 of this Agreement as written, the parties hereby agree that this
Agreement shall, to the extent applicable to that circumstance before such
court, be deemed to be modified to restrict Employee's competition with the
Company to the maximum extent of time, scope and geography which the court shall
find enforceable, and such provisions shall be so enforced.

          11.  Entire Agreement; Modification.  The provisions contained herein
               ------------------------------

<PAGE>
 
constitute the entire Agreement between the parties and supersede any prior 
agreement between the parties with respect to the subject matter hereof and any 
waiver, alteration or modification of any provisions of this Agreement, or the 
replacement of this Agreement, shall not be valid unless in writing and signed
by all the parties signing hereunder.

     12.  Governing Law.  This Agreement shall be governed and construed in 
          -------------
accordance with the laws of the State of Washington.

     13.  Agreement Not Assignable.  Employee may not assign any of his rights 
          ------------------------
or delegate any of his duties hereunder.  Subject to Section 6c, the Company may
assign this Agreement to any of its Affiliates at any time owned by, owning or 
under common ownership with the Company.  In the event of such an assignment by 
the Company, such affiliates shall be deemed substituted for the Company at each
place where "the Company" appears herein; provided, however, the Company shall
                                          --------  -------
not be released from its obligations hereunder. Furthermore, the assignment of
this Agreement by the Company shall not enlarge the business activities 
considered to be conducted by the Company for purposes of Sections 7, 8, and 9
hereof. Subject to the foregoing, this Agreement shall bind the parties and
their respective heirs, successors, assigns and personal representatives.

     14.  Change in Ownership.  Upon (a) the sale or transfer of all or 
          -------------------
substantially all of the assets of the Company or of more than fifty percent
(or, following a Public Offering, forty percent) of the outstanding stock of any
voting class of the Company's stock to any single person or entity (in any one
or more of a series of related transactions), or (b) the merger (such sale,
transfer or merger being, a "Change in Ownership") of the Company with or into
any other entity (except a wholly owned subsidiary or a parent owning all of the
outstanding stock of the Company) (such single person or entity being, a
"Successor"), then all stock or stock options of Employee in the Company shall
immediately become vested.

     15.  Attorneys' Fees. In any action to enforce his rights hereunder in the
          ---------------
event of the termination of the Employee's employment by the Company without 
cause or by the Employee for cause, the Employee shall be reimbursed by the 
Company for his costs of enforcement, including, without limitation, reasonable
attorneys' fees.

     16.  Jurisdiction and Venue.  The parties each irrevocably consents and 
          ----------------------
submits to the personal jurisdiction of the State and Federal courts sitting in 
King County, Washington, and agrees that any action, suit or proceeding in 
connection with this Agreement shall be brought in such courts to the exclusion 
of all other courts, other than actions to enforce judgments or orders entered 
in such courts sitting in King County.

    17.  Notices.  All notices required or permitted hereunder shall be given in
         -------
writing and delivered in person, transmitted by facsimile, or sent by registered
or certified mail, postage prepaid, or reliable courier service to the parties
at the respective addresses set forth on the signature page hereof, or such
other address as a party may specify by notice for all subsequent notices to
it hereunder. Notices will be effective upon the earlier of receipt or

<PAGE>
 
the second business day after mailing.

     18.  No Waiver. No waiver or modification of any of the terms of provisions
          ---------
hereof shall be valid unless in writing signed by the party against which the 
enforcement of such waiver or modification is sought, nor shall any waiver or 
failure to enforce any right hereunder be deemed to be a waiver of the same or 
any other right in any other instance.

     Signed by the parties as of the date first written above.

                  
                               CELL THERAPEUTICS, INC.



                               By: /s/ Jack Bowman


                                   Its:

                        
                               EMPLOYEE

                               JAMES A. BIANCO, M.D.


              Address:         10453 Maplewood Place S.W.
                               Seattle, Washington 98146

              Signature:       /s/ James Bianco

<PAGE>
 


                                   EXHIBIT A
                                   ---------

                        Issued Patents, Pending Patent
                   Applications, Registered Copyrights, Etc.
                   ----------------------------------------



<PAGE>
 
                                                                    EXHIBIT 10.9

                                    FORM OF
                           STRATEGIC MANAGEMENT TEAM
                              SEVERANCE AGREEMENT

     SEVERANCE AGREEMENT, dated as of _______________, by and between CELL 
THERAPEUTICS, INC., a Washington corporation ("CTI"), and [NAME](the 
"EXECUTIVE"); 

     WHEREAS, CTI recognizes the Executive's expertise in connection with 
Executive's employment by CTI;

     WHEREAS, CTI desires to provide certain severance pay to Executive upon the
terms and conditions below, if the Executive's employment in position as [TITLE]
is terminated for the reasons set forth herein; and

     NOW, THEREFORE, in consideration of the following premises, mutual
agreements and covenants and other good and valuable consideration, the receipt
and adequacy of which are hereby acknowledged, the parties, intending to be
legally bound hereby, agree as follows:

Definition of Terms.
- -------------------     

Termination for "CAUSE" shall mean termination of the Executive's employment by
CTI because of the Executive's: (A) conviction for, or guilty plea to, a felony
or a crime involving moral turpitude, which shall include independently verified
unremedied substance abuse involving drugs or alcohol; (B) action or inaction,
which in the reasonable judgment of a majority of the Board of Directors of CTI,
constitutes willful dishonesty,
 larceny, fraud or gross negligence by Executive
in the performance of Executive's duties to CTI, or willful misrepresentation to
shareholders, directors or officers of CTI; (C) material failure to comply with
the provisions of the parties' Inventions and Proprietary Information Agreement
(attached); (D) willful and repeated failure, after 10 business days notice, to
correct materially unsatisfactory or unacceptable work performance (including,
but not limited to, technical or managerial incompetence, misrepresentation or
concealment, negligent acts or omissions or willful misconduct); or (F) failure,
after notice, to materially meet such business objectives as shall be mutually
agree to by the parties.

Resignation for "GOOD REASON" shall mean the resignation of the Executive after 
the following: (A) notice in writing is given to Executive of Executive of 
Executive's relocation, without the Executive's consent, to a place of business 
outside the Greater Puget Sound area, or (B) a substantial diminution of the 
Executive's responsibilities and compensation from those responsibilities in 
effect on the date hereof, disregarding change in title and any alterations in 
Executive's responsibilities which CTI imposes in response to any unsatisfactory
or unacceptable work performance by Executive.

"SEVERANCE DATE" shall mean the date specified in a written notice of
termination from CTI to the Executive or the date which is the later of CTI's
actual receipt of Executive's written notice of resignation or the effective
date of resignation.

                                      -1-


<PAGE>
 
"SEVERANCE END DATE" shall mean a date one (1) year from the Executive's 
Severance Date.

"SEVERANCE PAY" shall only mean the Executive's base salary at the Severance 
Rate.

"SEVERANCE RATE" shall mean only the Executive's base salary in effect 
immediately prior to the Severance Date and shall not include any commissions or
bonuses (unless already determined and awarded prior to the Severance Date), 
vacation pay, sick leave, or the like whatsoever.

1.  Termination of Employment.  Subject to the Executive's continuing 
    -------------------------
    obligations under the parties' Inventions and Proprietary Information
    Agreement (attached):

    (a)  Termination for Cause; Death; Disability; Resignation Without Good
         ------------------------------------------------------------------
         Reason. If the Executive's employment is terminated by CTI for Cause
         ------
         (as defined herein), or if the Executive resigns from employment
         hereunder, other than for Good Reason (as defined herein) or as a
         result of such Executive's death or disability (as defined in CTI's
         disability plan applicable to the Executive), the Executive shall be
         entitled only to receive: i) Severance Pay through and including the
         Severance Date; and ii) pay for all vacation time accrued as of the
         Severance Date.

    (b)  Termination Without Cause; Resignation for Good Reason. If the
         ------------------------------------------------------
         Executive's employment is terminated by CTI without Cause, or if the
         Executive resigns from Executive's employment for Good Reason, the
         Executive shall be entitled to receive Severance Pay plus pay for all
         vacation time accrued as of the Severance Date, such payment rendered
         as a series of payments in accordance with CTI's normal payroll
         procedures from the Severance Date to the Severance End Date. CTI shall
         continue to pay premiums to maintain any life insurance for Executive,
         existing and paid for by CTI as of the Severance Date until the
         Severance End Date. In addition, CTI shall reimburse the Executive for
         any costs incurred by the Executive in electing COBRA continuation
         coverage for the Executive and Executive's covered dependents under
         CTI's medical plan only for the period from the Severance Date until
         the earlier of: (1) a date twelve (12) months after the Severance Date;
         (2) a date on which the Executive is covered under the medical plan of
         another employer, which does not exclude pre-existing conditions; or
         (3) the Severance End Date. At Executive's sole cost and expense,
         Executive may elect to exercise any disability insurance conversion
         originally available to Executive under the then existing group or
         individual disability insurance policies. In the event of a breach of
         the Inventions and Proprietary Information Agreement, in addition to
         any other remedy available to CTI, CTI's obligation under this Section
         1(b) shall terminate immediately.

         The Executive shall have no right under this Agreement or otherwise to
         receive any bonus, stock options, or other compensation awarded or
         benefits provided, determined or paid subsequent to the Severance Date
         to other employees of CTI, pro rata or otherwise. However, if Executive
         is terminated by CTI without Cause or the Executive resigns from
         Executive's employment for Good Reason, all unvested

                                      -2-

<PAGE>
 
          stock option shares to which the Executive may have rights on the
          Severance Date shall accelerate and immediately vest, and if and only
          if, CTI is a privately held company on the Executive's Severance Date,
          CTI shall recommend to the Board of Directors to extend an exercise
          period from three (3) months to two (2) years after the Severance Date
          for stock options other than any incentive stock options in which the
          Executive may have rights on the Severance Date; provided however,
          should CTI stock become publicly traded during any extended stock
          option exercise period granted hereunder, Executive may only exercise
          stock options in which Executive may have rights during the three (3)
          month period following the date a corresponding S-8 registration
          statement is declared effective; or ii) the last day of the extended
          stock option exercise period. The decision to accept CTI's
          recommendation to extend the exercise period shall be within the sole
          discretion of the Board of Directors. If CTI Common Stock is publicly
          traded on the Severance Date, any exercise period will remain as
          provided for in the parties' corresponding Stock Option Agreement(s).

2.   Agreement Termination; Employment at Will.  This Agreement shall terminate
     -----------------------------------------
     on the date of termination of the Executive's employment or, if applicable,
     the Severance End Date, but Executive's obligations under the attached
     Inventions and Proprietary Information Agreement shall continue in
     accordance with the terms and conditions therein.  Although this Agreement
     sets forth certain rights and obligations of CTI and Executive if
     Executive's employment is terminated without Cause by CTI or if
     the Executive resigns for Good Reason from CTI, nothing in this Severance
     Agreement is intended to limit CTI's right or ability to terminate the
     Executive's employment with or without Cause at any time or the Executive's
     ability to resign Executive's employment with or without Good Reason.  No
     term of this Severance Agreement shall be construed to conflict with or
     lessen Employee's obligations under the parties' Inventions and Proprietary
     Information Agreement (attached).

3.   Amendment; Waiver; Assignment.  This Agreement may not be modified, amended
     -----------------------------
     or waived in any manner except by an instrument in writing signed by both 
     parties.  Any such modification, amendment or waiver on the part of CTI 
     shall have been previously approved by the Board.  The waiver by either 
     party of compliance with any provision of this Agreement by the other party
     shall not operate or be construed as a waiver of any other provision of
     this Agreement or of any subsequent breach by such party of any provision
     of this Agreement.  This Agreement shall be binding upon any successor to 
     CTI, by merger or otherwise.  CTI may assign this Agreement to any of its 
     affiliates.  Executive may not assign the Agreement.

4.   Withholding.  Payments to the Executive of all compensation contemplated 
     -----------
     under this Agreement shall be subject to all applicable legal requirements
     with respect to the withholding of taxes and similar deductions.
     Additionally, if the Executive owes any moneys to CTI on the Severance
     Date, Executive's signature below constitutes Executive's written consent
     to deduct from any Severance Pay amounts that the Executive owes CTI.

                                      -3-

<PAGE>
 
5.   Governing Law.  THIS AGREEMENT SHALL BE GOVERNED BY AND INTERPRETED, 
     -------------
     CONSTRUED AND ENFORCED IN ACCORDANCE WITH THE LAWS OF THE STATE OF
     WASHINGTON APPLICABLE TO CONTRACTS EXECUTED IN AND TO BE PERFORMED ENTIRELY
     WITHIN SUCH STATE, WITHOUT REGARD TO THE PRINCIPLES THEREOF REGARDING
     CONFLICT OF LAWS.

6.   Supersedes Previous Agreements.  This Agreement supersedes all prior or 
     ------------------------------
     contemporaneous negotiations, commitments, agreements and writings with
     respect to the subject matter hereof.  All such other negotiations, 
     commitments, agreements and writings shall have no further force or effect,
     and the parties to any such other negotiation, commitment, agreement or
     writing shall have no further rights or obligations thereunder.

7.   Voluntary Agreement.  Executive understands the significance and 
     -------------------
     consequences of this Agreement and acknowledges that CTI has not coerced
     Executive's acceptance thereof, and has signed this Agreement only after
     full reflection and analysis.  Executive expressly confirms that the 
     Agreement is to be given full force and effect according to all of its
     terms.  Executive was advised to seek legal counsel prior to signing the 
     Agreement.

     IN WITNESS WHEREOF, this Agreement has been executed by a duly authorized 
officer of CTI and by the Executive's individual capacity as of the date first 
written above.


CELL THERAPEUTICS, INC.



By:                                              By:
    ---------------------------------------          --------------------------
        [TYPED NAME]                                     [TYPED NAME]

Title:                                           Title:
       ------------------------------------             -----------------------

Date:                                            Date:
      -------------------------------------            ------------------------

Address: 201 Elliott Avenue West, Suite 400      Address:
         ----------------------------------               ---------------------
         Seattle, WA 98119
         ----------------------------------               ---------------------

                                      -4-



<PAGE>
 
                                                                   EXHIBIT 10.25

                                                    Portions of this Exhibit
                                                    have been omitted pursuant
                                                    to a request for
                                                    confidential treatment. The
                                                    omitted portions are marked
                                                    ***** and have been filed
                                                    separately with the
                                                    Commission.

                                SUPPLY AGREEMENT


This Agreement is made the 21st day of January, 1997 between CELL THERAPEUTICS,
INC., whose registered office is at 201 Elliott Avenue West, Suite 400, Seattle,
Washington, 98119, USA ("Company"), and CHIREX, LTD., of Dudley, Cramlington,
Northumberland, NE23 7QG, ENGLAND ("Supplier").

                                    RECITALS

     WHEREAS, Company has developed a proprietary therapeutic agent,
lisofylline, and will require certain quantities of the Compound and other
intermediates used in manufacturing the Compound;

Company has developed a proprietary, commercial synthetic process for preparing
the Compound and other intermediates;

Supplier has certain technical expertise in and physical facilities for
commercial manufacturing of organic compounds;

Company desires that Supplier manufacture for Company, on an exclusive basis
during the initial term of the contract, the Compound (and corresponding
intermediates) in sufficient quantities to meet at least Company's needs for
pilot and validation lots, and commercial product
 launch and market supplies for
production years subsequent to New Drug Application ("NDA") approval; and

Supplier is willing to provide manufacturing services to Company for the
Compound and intermediates.

                                   AGREEMENTS

     NOW THEREFORE, in consideration of the premises and mutual promises
hereinafter set forth, the parties agree as follows:

(The information below marked by ***** has been omitted by a request for 
confidential treatment. The omitted portion has been separately filed with the 
Commission.)

1.   Definitions
     -----------

     COMPOUND is Company's proprietary compound, lisofylline, having a chemical
     --------
     name, ***** 

     CCA is the key intermediate *****, having a chemical name, *****.
     ---

                                  Page 1 of 21

<PAGE>
 
     cGMP are current Good Manufacturing Practices, specifically as defined in
     ----                                                                     
     United States Code of Federal Regulations, Title 21, (S) 210 and 211,
     related FDA guidelines, and as interpreted by Company.

     EFFECTIVE TERMINATION DATE is the date written notice of termination is
     --------------------------                                             
     provided to the other party.

     EXPIRATION DATE is December 31, 2001, unless earlier terminated in
     ---------------                                                   
     accordance with the terms and conditions as set forth in Paragraph 3, Term
     and Termination.

     INTELLECTUAL PROPERTY (IP) includes, but is not limited to, patentable
     ---------------------                                                 
     inventions, trade secrets and know how.

     OFFICIAL COPY is an exact duplicate, having an appropriate certifying mark
     -------------                                                             
     (and signature), of original documents that are generated and held in
     Supplier's permanent files.

     PROJECT PLAN FOR PILOT LOTS (PROJECT PLAN) will be independently agreed to
     ------------------------------------------                                
     by the parties.  The Project Plan defines the detailed scope of work and is
     a comprehensive compilation of the technical specifications and compliance
     requirements that govern the manufacturing, testing, packaging and labeling
     of pilot lots of  Compound and/or intermediates prepared by Supplier for
     Company.

     VALIDATION LOT PLAN will be independently agreed to by the parties.  The
     -------------------                                                     
     Validation Lot Plan defines the detailed scope of work and is a
     comprehensive compilation of the technical specifications and compliance
     requirements that govern the manufacturing, testing, packaging and labeling
     of validation lots of Compound and/or intermediates prepared by Supplier
     for Company.

     COMMERCIAL OPERATION PLAN will be independently agreed to by the parties.
     -------------------------                                                 
     The Commercial Operation Plan defines the detailed scope of work and is a
     comprehensive compilation of the technical specifications and compliance
     requirements that govern the manufacturing, testing, packaging and labeling
     of commercial lots of Compound and or intermediates prepared by Supplier
     for Company.

     WORK-IN-PROGRESS is work commenced by Supplier for Company that Supplier
     ----------------                                                        
     has not yet completed, and may comprise, without limitation, engineering
     costs, raw materials, intermediate products, or manufacturing services for
     preparing Compound and/or intermediates.

                                  Page 2 of 21

<PAGE>
 
2.   Agreement Scope
     ---------------

     a. Generally, Supplier will manufacture for Company and Company agrees to
        purchase the following quantities of the Compound and a key
        intermediate, CCA:

(The information below marked by ***** has been omitted by a request for 
confidential treatment. The omitted portion has been separately filed with the 
Commission.)

        i.   At least ***** (Project Plan);

        ii.  At least *****, using CCA prepared by Supplier (Project Plan); and

        iii. At least *****, using CCA produced by Supplier. The parties
             forecast that a target quantity of 5 manufacturing-scale lots is
             required to ensure production of 3 consecutively validated lots
             (Validation Lot Plan).

        More specifically, the Project and Validation Lot Plans set forth
        technical detail regarding: the synthetic process for manufacturing and
        isolating Compound, CCA and other relevant intermediates; operational
        requirements for pilot lots and validation lots; and Supplier's and
        Company's activities and responsibilities in connection with Supplier's
        manufacture of pilot and validated lots of Compound and CCA. Both
        parties shall independently agree to and execute the Project and
        Validation Lot Plans.

     b. In addition to preparing the above pilot and validation lots of Compound
        and CCA, Supplier will manufacture and supply commercial quantities of
        Compound and CCA.  The Commercial Operation Plan sets forth technical
        detail regarding:  the synthetic process for manufacturing and isolating
        Compound, CCA and other relevant intermediates in commercial scale lots;
        operational requirements for manufacturing commercial material; and
        Supplier's and Company's activities and responsibilities in connection
        with Supplier's manufacture of commercial quantities of Compound and CCA
        for Company.

     c. At present, Supplier and Company have not established specific,
        commercial production quantities, but the following table provides
        current estimated commercial quantities through the 2001 production year
        (1998-2001), subject to modification in accordance with the procedures
        set forth in Paragraph 11, Commercial Forecasting.  Paragraph 11 also
        specifically establishes a  mechanism by which Company and Supplier will
        prepare and revise annual forecasts for commercial supplies of Compound.
        Subject to the provisions

                                  Page 3 of 21

<PAGE>
 
        herein, Company and Supplier agree that Supplier will manufacture the
        Compound (and corresponding intermediates) for Company on an exclusive
        basis through the 2000 production year.

(The information below marked by ***** has been omitted by a request for 
confidential treatment. The omitted portion has been separately filed with the 
Commission.)


<TABLE>
<S>                   <C>       <C>        <C>        <C>
YEAR                  1998      1999       2000       2001
- ---------------------------------------------------------------
ESTIMATED QUANTITY    *****     *****      *****      *****
- ---------------------------------------------------------------
</TABLE>


3.   Term and Termination
     --------------------

     This Agreement shall commence upon complete execution by both parties, and
     unless terminated sooner in accordance with the terms and conditions set
     forth below, shall remain in full force and effect until the Expiration
     date.  Thereafter, Company may renew this Agreement for successive one (1)
     year periods.  Company shall provide written notice to Supplier of
     Company's intent to renew no more than twelve (12) months and no less than
     six (6) months prior to the Expiration date.  Within thirty (30) days of
     Company's written notice to Supplier, Supplier will provide written notice
     to Company that it agrees to Company's renewal period.

     Either party may terminate this Agreement, upon twelve (12) months written
     notice to the other party; provided however that Supplier may not terminate
     this Agreement prior to supplying Company's commercial requirements for
     Compound through December 31, 2000.

(The information below marked by ***** has been omitted by a request for 
confidential treatment. The omitted portion has been separately filed with the 
Commission.)

     Upon termination, where practical and without compromising the integrity or
     quality of the Work-in-Progress, Supplier will not create additional Work-
     in-Progress and will use its best efforts to minimize expense to Company in
     bringing the Work-in-Progress to a logical conclusion, as mutually agreed
     upon by Supplier and Company.  Company agrees to purchase and Supplier
     agrees to sell, *****, available quantities of Compound and/or
     intermediates held in storage by Supplier on the Effective Termination
     Date.

     Company will remain liable for costs of services rendered through the
     Effective Termination Date and costs for services required to complete
     Work-in-Progress.

4.   Manufacturing Standards
     -----------------------

     Supplier will perform all work hereunder for Company in accordance with
     strict application of current laboratory research and manufacturing
     standards, as reflected by standards contained in the Project, Validation
     Lot and Commercial Operation Plans.  Supplier will strictly comply with all
     current United States governmental regulatory requirements and policies
     concerning cGMP (as 

                                  Page 4 of 21

<PAGE>
 
     interpreted by Company) for all phases of production (pilot, validation and
     commercial lots).

5.   Material Warranty
     -----------------

     Supplier warrants that it will exercise extreme care and high standards  to
     achieve the desired results in accordance with standards and procedures
     agreeable to and accepted by the parties.  In the event the material is
     non-conforming and the Material Review Board determines that the Supplier
     is responsible for the non-conformance in accordance with the provisions of
     Paragraph 6.d, Material Non-Conformance, Supplier and Company shall
     mutually agree to one (or a combination of) the following remedies:  a)
     Supplier replacing non-conforming material with conforming material at no
     additional cost to Company; b) Supplier remediating unacceptable
     performance at no additional expense to Company; or c) Supplier refunding
     or crediting to Company any fees paid or payable by Company in connection
     with Supplier's unacceptable performance.

     In the event material is non-conforming and the Material Review Board
     determines that the Company is responsible for the non-conformance in
     accordance with the provisions of Paragraph 6d, Material Non-Conformance,
     the Company shall make payment to the Supplier of all fees due to the
     Supplier under this Agreement in respect of such non-conforming material.

     Should United States regulatory requirements change during the course of
     Supplier's performance of manufacturing services hereunder, Supplier will
     make every reasonable effort to meet the new requirements.  In the event
     that modified regulatory requirements necessitate revisions in the
     manufacturing process, Supplier will submit to Company a revised technical
     proposal and cost estimate, for which, if necessary, the parties will
     further negotiate and to which the parties will mutually agree.

6.   Documentation, Specifications, Release and Delivery
     ---------------------------------------------------

     a.  Manufacturing Documentation
         ---------------------------

         Prior to or in conjunction with delivery of any material manufactured
         for Company, Supplier will provide Official Copies of at least the
         following documentation to Company:

         i.   A complete copy of all relevant and completed Batch Production
              Records for each manufacturing run of Compound, and all
              intermediates;

                                  Page 5 of 21

<PAGE>
 
         ii.  If applicable, complete and accurate Deviation Reports, containing
              all relevant information set forth in the Project, Validation Lot
              and Commercial Operation Plans;

         iii. Raw material specifications, which include a complete list of raw
              material suppliers;

         iv.  Complete copies of all documentation for test procedures applied
              to intermediate materials, CCA and Compound;

         v.   Testing results for analysis conducted on all raw and intermediate
              materials. Raw material analysis shall include vendor's
              certificate of analysis or Supplier shall conduct an agreed
              analysis on any raw material not bearing a vendor's certificate of
              analysis per raw material specifications as agreed to by Company
              and Supplier;

         vi.  A Test Result Summary for any material (Compound, CCA) delivered,
              which will contain at least the following information:

              .  Material name;
              .  Batch/lot numbers;
              .  Manufacture date;
              .  Specification limits;
              .  Actual test results;
              .  Test procedure numbers; and
              .  Authorized signature(s).

     b.  Manufacturing and Testing Specifications
         ----------------------------------------

         Prior to commencing manufacturing runs, Company will provide to
         Supplier all manufacturing specifications for the Compound, CCA or
         other intermediate material. Supplier will: i) ensure that its
         manufacturing processes comply with all relevant manufacturing
         specifications; ii) utilize only Company-approved Master Production
         Records; and iii) will maintain appropriate documentation to comply
         with all applicable US FDA regulatory requirements for cGMP.

     c.  Material Release
         ----------------

         Company is responsible for reviewing, evaluating and releasing both CCA
         and Compound manufactured by Supplier according to Company's
         specifications and procedures. However, Supplier is responsible for
         conducting all necessary analytical testing on material produced by
         Supplier for Company,

                                  Page 6 of 21

<PAGE>
 
         which is set forth in documentation establishing the analytical methods
         contained in the Project, Validation Lot or Commercial Operation Plans
         (by inclusion or reference therein).

         If Supplier intends to utilize a third party to conduct a portion or
         all of the analytical testing, Company shall have an opportunity to
         evaluate and approve the third party prior to the third party
         commencing work in support of Supplier's performance hereunder. In any
         event, Company reserves the right to repeat a portion of or all tests
         conducted by Supplier prior to Company's release of material to confirm
         that the material meets established specifications.

     d.  Material non-conformance
         ------------------------

         In the event that Company cannot release the material in accordance
         with the foregoing procedures or if the material is released and
         Company, Supplier or a third party later discovers that the material is
         not in compliance with material specifications, the material shall be
         non-conforming.

         Company and Supplier will establish a Material Review Board (MRB)
         composed of members of Company's Compliance and Manufacturing
         Operations Units, and Supplier's Quality Assurance and Manufacturing
         Departments to investigate and assess the circumstances of the non-
         conformance. Based on the MRB's evaluation and assessment, the MRB will
         establish a cause for the non-conformance. Company and Supplier will
         ascertain responsibility for the cause of the non-conformance, and the
         responsible party(ies) shall bear the financial obligation for the non-
         conformance, and Company and Supplier have rights and obligations as
         set forth in Paragraph 5, Material Warranty.

         In the event that the MRB is unable to resolve discrepancies among test
         results relied upon by Company for release of material manufactured by
         Supplier, Company and Supplier agree to submit the material to a
         mutually-agreed third party to verify disputed test results of Company
         or Supplier, using validated analytical methods previously utilized by
         both Company and Supplier. Company and Supplier agree to share equally
         in the cost of obtaining such verified results. Based on an analysis of
         these results, Company will either purchase material or have the option
         of enforcing its rights as defined in Paragraph 5 Material Warranty.

                                  Page 7 of 21

<PAGE>
 
     e.  Shipping
         --------

         Company will notify Supplier of intended shipments for material
         released by Company. Except as provided herein with respect to non-
         conforming product, title and risk of loss as to all materials shipped
         shall pass upon transfer by Supplier to such carrier at the
         manufacturing facility. Company will establish all shipment, packaging,
         labeling and storage requirements, with which Supplier will comply. The
         Project, Validation Lot or Commercial Plans will include these specific
         requirements. Supplier will ship Compound, CCA or other intermediates
         or material to a location specified in writing by Company. Company
         shall be responsible for paying all shipping costs, tariffs and duties
         assessed and due. Supplier will provide storage for packaged material,
         without charge, until Company provides shipping instructions to
         Supplier. Company will provide shipping instructions to Supplier for
         finished lots of Compound not more than ninety (90) days from the date
         Company releases finished lots of Compound. Supplier will maintain
         adequate business insurance to cover material replacement in the event
         of material loss during Supplier's manufacture or material storage up
         to a maximum of $750,000.

7.   Independent Contractor and Third Party Subcontractors
     -----------------------------------------------------

     Supplier is an independent contractor, not an employee or agent of Company,
     and will be solely responsible for maintaining its labor force and
     operations.  Company and Supplier do not intend to create any partnership,
     joint venture, employment or agency relationship pursuant to this
     Agreement.  Except upon the prior written consent of Company, Supplier
     shall have no right to bind Company by contract, or otherwise to transact
     any business in Company's name or on Company's behalf, in any manner or
     form, or to make any promises or representations on its behalf.  Supplier
     will not represent to anyone that it is an agent of Company or otherwise
     authorized to bind or commit Company in any way.

     Supplier shall remain directly responsible for Supplier's performance
     hereunder, even though Supplier may utilize third party contractors that it
     deems have the requisite expertise and skill to meet Supplier's performance
     obligations under this Agreement.  Should Supplier utilize third party
     personnel other than those to whom Company has agreed, Supplier will
     provide Company with an opportunity to review and confirm Supplier's
     selection.  Should Company object to Supplier's candidate, Company and
     Supplier will negotiate to identify other, more suitable personnel.

                                  Page 8 of 21

<PAGE>
 
8.   Document Retention, Facility Access and Notice to Company
     ---------------------------------------------------------

     a.  Document Retention
         ------------------

         Supplier agrees to assist Company in its submission and maintenance
         post approval of the New Drug Application (NDA) for Compound and will
         compile, organize and retain all information necessary to support
         Company's regulatory requirements for Compound, and will provide
         Official Copies of relevant documentation within a mutually agreed
         period. Supplier will maintain a current Type I Facility Drug Master
         File and will provide to Company a Letter of Authorization to cross-
         reference the Drug Master File. All cGMP-related documentation and data
         (relating to Compound, CCA and other intermediates, including, without
         limitation, material samples, slides, records, and other documents
         and/or materials generated by Supplier on Company's behalf) shall be
         retained by Supplier unless otherwise indicated by the Company. Company
         shall notify Supplier in writing as to the disposition of any such
         documentation, data and information retained by Supplier prior to such
         action. All documentation or material furnished to Supplier by Company
         and used in connection with Supplier's performance under this
         Agreement, will be returned to Company upon the first to occur of: 1)
         completion of any specific project; or 2) termination of this
         Agreement, except for one (1) archival copy and required material
         samples which must be retained at least 5 years past approval of the
         NDA.

     b.  Facility Access
         ---------------

         Upon giving prior written notice to Supplier, Company or its authorized
         designees shall have the right to inspect Supplier's facilities and
         documentation at normal business hours to ensure compliance with this
         Agreement, including applicable regulatory requirements. Company may
         review or request copies of regulatory or cGMP data at any time.

         Supplier will not unreasonably withhold access by Company to data,
         documentation, material, laboratories or facilities, wherever located,
         if such access is required for verification of Supplier's performance
         hereunder or in connection with government regulatory agency requests.

     c.  Notice to Company
         -----------------

         Supplier will immediately notify Company's Director of a duly
         authorized regulatory agency's (federal, state or municipal)
         communication, visit, investigation or inquiry of Supplier's process or
         facilities and relating to Company's Compound (Event), and Supplier's
         written confirmation thereof 

                                  Page 9 of 21

<PAGE>
 
         shall not be later than twenty-four (24) hours from Supplier's first
         knowledge of the Event. Supplier's notice shall provide Company's
         Director of Compliance with the following information:

         i.   The agency;

         ii.  Purpose of communication, visit, investigation or inquiry;

         iii. Name(s) of inspector(s) and credential number; and

         iv.  A copy of form(s) issued by inspector, if any.

         Communications to Supplier by the FDA regarding Supplier's Type I DMF
         will require notification of the Company's Director of Regulatory
         Affairs, both orally and in writing, within 24 hours of receipt of such
         communication.

         In addition, Supplier will handle Confidential and Proprietary
         Information in accordance with the provisions of Paragraph 13,
         Confidentiality. Supplier shall obtain Company's approval prior to
         Supplier providing to any third party copies of documentation which
         contain information related to Company.

         Company will assist Supplier in responding to the communication, visit,
         investigation or inquiry relating to Company's Compound.

         In addition to the foregoing, Supplier will notify Company's Director
         of Manufacturing Operations orally and in writing of any interruption
         in Supplier's manufacturing activities that relates to or affects
         Supplier's performance under this Agreement and could likely affect
         delivery schedules. Supplier's notice shall not be later than twenty-
         four (24) hours from Supplier's first knowledge of the manufacturing
         interruption.

9.   Licensing and Permitting
     ------------------------

     Supplier shall be responsible for applying for and obtaining all federal
     and local licenses and permits required in connection with its manufacture
     of Compound, CCA and other intermediates.  In this regard, Company shall
     provide all reasonable assistance to Supplier.  In addition, Supplier shall
     bear the cost of all license and permit fees.

                                 Page 10 of 21

<PAGE>
 
10.  Production Results
     ------------------

     Each month, Supplier will provide to Company, particularly in connection
     with Supplier's manufacture of commercial quantities of Compound,
     Supplier's status and quantities of inventories of raw materials,
     intermediates and Compound.  In addition, at the conclusion of production
     runs, as defined in the Project, Validation Lot and Commercial Operation
     Plans.  Supplier will provide a final Campaign Report for the production
     runs, as requested by Company.

11.  Commercial Forecasting
     ----------------------

(The information below marked by ***** has been omitted by a request for 
confidential treatment. The omitted portion has been separately filed with the 
Commission.)

     Commencing in June 1997 and continuing ***** thereafter through the end
     of the Agreement term, Company and Supplier will meet to prepare commercial
     production and delivery forecasts.  The parties intend that the *****
     meetings will provide timely notice of potential conflicts in Company's
     needs for Compound and Supplier's scheduling and production vacancies or
     restrictions.  Based on these discussions, Company and Supplier will agree
     to a "rolling" production and delivery schedule for each successive 12-
     month period.

(The information below marked by ***** has been omitted by a request for 
confidential treatment. The omitted portion has been separately filed with the 
Commission.)

     In June 1997, Company and Supplier will agree to an initial ***** forecast,
     which will commit both parties to production, delivery and payment
     obligations for the *****. Thereafter, at each quarterly meeting, Company
     and Supplier will commit to production, delivery and payment obligations
     for the ***** and establish a forecast for the *****. The commercial
     forecasting procedures discussed herein are subject to any provisions of
     Paragraph 3, Term and Termination.

(The information below marked by ***** has been omitted by a request for 
confidential treatment. The omitted portion has been separately filed with the 
Commission.)

     Following each ***** meeting with Supplier, Company will issue a Purchase
     Order for Supplier's committed production and delivery, reflecting
     Supplier's and Company's current commitment. Product deliveries made
     thereafter will be applied against outstanding Purchase Orders, as
     specified by Company.

12.  Costs and Payments
     ------------------

     Generally, Company and Supplier agree to a fixed price for Supplier's
     manufacture of pilot plant and validation lots for both the Compound and
     the CCA intermediate.  Commercial Compound prices will be based on a per-
     kilo, volume-adjusted manufacturing price, which take into account specific
     inflation, currency and yield adjustments (resulting from gained process
     efficiencies or technical advances in manufacturing).  Supplier is liable
     for paying all necessary taxes, licensing fees and other assessments in
     connection with manufacturing material hereunder.  All invoices will be
     billed in US dollars (USD $).

                                 Page 11 of 21

<PAGE>

(The information below marked by ***** has been omitted by a request for 
confidential treatment. The omitted portion has been separately filed with the 
Commission.)
 
     Specifically, Company will be liable to Supplier for the *****


                          PILOT LOTS OF CCA                           

(The information below marked by ***** has been omitted by a request for 
confidential treatment. The omitted portion has been separately filed with the 
Commission.)

                                     *****


                                 Page 12 of 21

<PAGE>
 
(The information below marked by ***** has been omitted by a request for 
confidential treatment. The omitted portion has been separately filed with the 
Commission.)

                                     *****


                                 Page 13 of 21

<PAGE>
 
(The information below marked by ***** has been omitted by a request for 
confidential treatment. The omitted portion has been separately filed with the 
Commission.)

     Company and Supplier agree that ***** of the total payment--less
     ***** as discussed below--will be due to Supplier net ***** upon receipt of
     Supplier's invoice to Company. Supplier will invoice Company (in USD $) for
     the CCA intermediate and Compound produced during pilot plant or validation
     lot operations upon providing documentation to the Company as set forth in
     Paragraph 6a, Manufacturing Documentation. However, Company will reimburse
     Supplier for all ***** set forth above as they are incurred by Supplier.
     Reimbursement for ***** will be due net ***** upon receipt of Supplier's
     invoice.

(The information below marked by ***** has been omitted by a request for 
confidential treatment. The omitted portion has been separately filed with the 
Commission.)

     Within ***** of Company's receipt of all completed production records (as
     specified in Paragraph 6.a, Manufacturing Documentation) Company will issue
     a Certificate of Analysis and product release document, provided that the
     corresponding documentation conforms with agreed specifications and
     standards as set forth in the Project Plan and Validation Lot Plan.
     Supplier will then invoice the Company for the remaining ***** balance
     which will be due net ***** upon receipt of Supplier's invoice. Company's
     payment of any outstanding dues will not serve to waive any rights it may
     have in law or as specifically stated herein, should delivered material not
     meet established standards.

(The information below marked by ***** has been omitted by a request for 
confidential treatment. The omitted portion has been separately filed with the 
Commission.)

     Price for manufacturing commercial Compound lots and payment schedules will
     be discussed upon commencement of the ***** forecasting meeting as
     discussed in Paragraph 11, Commercial Forecasting. Supplier and Company
     will agree to manufacturing rates by the end of the ***** for the upcoming
     calendar year and will revise manufacturing rates accordingly. Factors that
     affect manufacturing rates will include:

(The information below marked by ***** has been omitted by a request for 
confidential treatment. The omitted portion has been separately filed with the 
Commission.)

                                     *****

                                 Page 14 of 21

<PAGE>
 
(The information below marked by ***** has been omitted by a request for 
confidential treatment. The omitted portion has been separately filed with the 
Commission.)

     Company may increase Supplier's production of Compound intermediates above
     levels required to meet Company's forecasted needs for Compound.  If so
     requested,  Supplier will manufacture designated intermediates and will
     store this material without charge for future conversion to Compound.  In
     this event, Supplier may invoice Company, at a mutually agreed price, for
     manufacturing the additional requested inventory of intermediates.  Unless
     otherwise stated, all invoices from Supplier will be due net ***** from
     Company's receipt of the invoice.

     The cost for any capital improvements that Supplier and Company deem
     necessary for the manufacture of material under the Commercial Operation
     Plan shall be an itemized cost in the cost structure for manufacturing
     during the initial term of Supplier's commercial production for the
     Company.

     The parties agree that in the event a dispute arises regarding the accuracy
     of Supplier's costs, Company may appoint an independent financial auditor,
     at Company's sole expense, to review Supplier's records at reasonable and
     convenient times to verify Supplier's calculations.  Said independent
     financial auditor shall be permitted to verify and report to Company on the
     accuracy of Supplier's price.  Based on the findings of this independent
     auditor, Company and Supplier will negotiate and agree to commercial
     manufacturing price adjustments.

13.  Confidentiality
     ---------------

     Supplier shall remain bound by the terms and conditions of the Confidential
     Disclosure Agreement between Company and Supplier, dated March 22, 1994,
     and amended April 25, 1996 (collectively, CDA), which is incorporated by
     reference in its entirety and attached hereto as Exhibit A.  Company and
     Supplier agree that the Confidentiality Period set forth in the CDA shall
     be extended to run ten (10) years from the date of termination of this
     Agreement.

                                 Page 15 of 21

<PAGE>
 
14.  Intellectual Property
     ---------------------

     IP created during performance under and specifically in connection with
     this Agreement which is conceived:

       i.   Solely by Company's personnel shall be owned by the Company (Company
            IP);

       ii.  Solely by Supplier's personnel shall be owned by Supplier (Supplier
            IP); and

       iii. Jointly by Company's and Supplier's personnel shall be jointly
            owned by Company and Supplier (Joint IP).

     Inventorship in IP that is created and developed during performance under
     this Agreement shall be determined by Company, in consultation with
     Supplier, according to United States patent law and the Washington State
     Uniform Trade Secrets Act.

     Patents covering Supplier IP shall be prepared, filed and prosecuted solely
     by counsel selected by Supplier and reviewed and approved by Company (which
     approval shall not be unreasonably withheld), but at Company's sole cost
     and expense.  Supplier shall provide Company with copies of all such patent
     applications and relevant communications therefor, including, but not
     limited to, patent office correspondence.  Prior to filing a patent
     application or filing or responding to any outstanding communication in the
     Supplier IP patent application, Supplier will make all reasonable effort to
     provide Company with thirty (30) days notice to review and provide comment.

     Patents for Company and Joint IP shall be prepared, filed and prosecuted
     solely by counsel selected by Company and at Company's sole cost and
     expense.  In the case of Company IP, Company will timely notify Supplier
     that Company has filed a patent application covering Company IP.

     In the case of  Joint IP, Company shall provide Supplier with copies of all
     such Joint IP patent applications and relevant communications, including,
     but not limited to, correspondence from or to counsel or a patent office.
     Prior to filing a patent application or filing or responding to any
     outstanding communication from counsel or a patent office in connection
     with a Joint IP patent application, Company will provide Supplier with
     thirty (30) days notice to review and provide comment.

                                 Page 16 of 21

<PAGE>
 
15.  Intellectual Property Rights
     ----------------------------

     If during the course of performing work under this Agreement,  Supplier or
     Joint IP is created and developed which is pertinent to the synthesis of
     Compound or an intermediate, Supplier will assign all its rights in
     Supplier or Joint IP to Company, but shall retain a non-exclusive, royalty-
     free license to use Supplier or Joint IP in applications which do not
     compete with the synthesis of Company's Compound or intermediates.

     The parties acknowledge that Supplier owns or may own (or may have license
     rights in) manufacturing technology (Supplier Technology) that may offer
     certain manufacturing advantages if utilized in Supplier's performance
     under this Agreement.  In the event that Supplier and Company agree that
     incorporating such Supplier Technology into Company's process for
     manufacturing Compound, CCA and/or intermediates is prudent and warranted,
     Supplier will use reasonable efforts to obtain Company's ability to utilize
     Supplier Technology, on reasonable terms to be negotiated.

     Furthermore, should Company integrate Supplier Technology into Company's
     process for manufacturing Compound, CCA and/or intermediates and Company
     subsequently requires the manufacturing services of a third party, Company
     will obtain Supplier's authorization for a third party's use of the
     Supplier Technology, on reasonable terms to be negotiated.

16.  Publication and Promotion
     -------------------------

     Supplier may only publish details of the synthesis or manufacture of
     Compound, CCA or intermediates upon obtaining prior written permission of
     Company.

     The text of any press release or other communication to be published in the
     media concerning the subject matter of this Agreement, Compound or the
     parties' relationship shall require the approval of both Company and
     Supplier.  Company shall have the right to request removal of confidential
     information and may require that publication be delayed up to a maximum of
     three (3) months from first notification of such publication to enable
     Company to protect its Intellectual Property rights.

     Supplier agrees not to use or imply Company's name for advertising, self-
     promotion purposes, raising capital, recommending investments, which, inter
     alia, implies endorsement by Company, and will only reference Company's
     name after obtaining Company's prior written permission.

                                 Page 17 of 21

<PAGE>
 
17.  Indemnification
     ---------------

     a. Supplier to Company
        -------------------

        Supplier shall indemnify, defend and hold harmless Company, its
        officers, directors, employees, and agents against any liability,
        obligation, loss, damage, penalty, action, judgment, suit, expenses
        (including reasonable attorney's fees) or disbursements of any kind and
        nature whatsoever arising out of: (i) any breach by Supplier of its
        obligations under this Agreement; (ii) a patent infringement claim
        relating to manufacturing technology provided by Supplier; or (iii)
        personal injury resulting from an adverse reaction of the Compound,
        which is due to Supplier's breach of Material Warranty, determined in
        accordance with the provisions of paragraph 6(d), provided that Company
        gives reasonable notice to Supplier of such claim, suit or action and
        such liability, obligation, loss, damage, penalty, action or judgment is
        not the result of Company's negligent act or omission or willful
        misconduct.

        Provided Supplier properly protects the interests of Company and
        Supplier and Company do not have conflicting defenses, Supplier shall
        have exclusive control of the defense of any such action and settlement
        or compromise negotiations, except that prior to accepting any
        settlement or compromise, Supplier will inform Company in writing of the
        terms of the anticipated settlement or compromise. Company will provide
        Supplier, at Supplier's expense with reasonable assistance in defending
        any claim, suit or action. Such assistance shall not be deemed a waiver
        of Company's indemnification rights hereunder.

     b. Company to Supplier
        -------------------

        Company shall indemnify, defend and hold harmless Supplier, its
        officers, directors, employees, and agents against any liability,
        obligation, loss, damage, penalty, action, judgment, suit, expenses
        (including reasonable attorney's fees) or disbursements of any kind and
        nature whatsoever arising out of: (i) any breach by Company of its
        obligations under this Agreement; (ii) a patent infringement claim
        relating to the Compound, intermediates and/or manufacturing technology
        provided by Company; or (iii) personal injury resulting from an adverse
        reaction of the Compound, which is not caused by Supplier's breach of
        Material Warranty, determined in accordance with the provisions of
        paragraph 6(d), provided that Supplier gives reasonable notice to
        Company of such claim, suit or action and such liability, obligation,
        loss, damage, penalty, action or judgment is not the result of
        Supplier's negligent act or omission or willful misconduct.

                                 Page 18 of 21

<PAGE>
 
        Provided Company properly protects the interests of Supplier and Company
        and Supplier do not have conflicting defenses, Company shall have
        exclusive control of the defense of any such action and settlement or
        compromise negotiations, except that prior to accepting any settlement
        or compromise, Company will inform Supplier in writing of the terms of
        the anticipated settlement or compromise. Supplier will provide Company,
        at Company's expense with reasonable assistance in defending any claim,
        suit or action. Such assistance shall not be deemed a waiver of
        Supplier's indemnification rights hereunder.

18.  Notices
     -------

     All notices required or permitted to be given under this Agreement shall be
     in writing and shall be delivered personally, sent by secure facsimile or
     mailed prepaid to the persons named and addresses set forth below.

     If to Company:      Director of Manufacturing Operations
                         Cell Therapeutics, Inc.
                         201 Elliott Avenue West, Suite 400
                         Seattle, Washington 98119
                         Telephone No.:  (206) 282-7100
                         Facsimile No.:   (206) 284-6206

     If to Supplier:     Chairman and CEO
                         ChiRex Ltd.
                         Dudley, Cramlington
                         Northumberland, NE23 7QG
                         ENGLAND
                         Telephone No.:  0191 250 0471
                         Facsimile No.:   0191 250 1154

19.  Applicable Law and Jurisdiction
     -------------------------------

     This Agreement shall be construed in accordance with, and its performance
     shall be governed by, the laws of the State of Washington, exclusive of
     choice of law provisions.

20.  Force Majeure
     -------------

     If Supplier cannot perform its obligations hereunder by reason of
     impediment such as Acts of God, war, rebellion, tumult, riot, civil
     commotion, insurrection, political disturbance, strike, lock-out, fire,
     flood, interruption of transportation, embargo, shortage of raw materials,
     instruction of the authorities or any other 

                                 Page 19 of 21

<PAGE>
 
     cause or event of similar nature affecting Supplier and over which Supplier
     has no control, Supplier shall have the right to postpone performance of
     such obligation for the duration of such impediment. Supplier shall
     immediately notify Company (no later than twenty-four (24) hours from
     Supplier's first knowledge of the impediment) and provide an anticipated
     duration of the impediment. In addition, Supplier shall subsequently notify
     Company as quickly as possible of its cessation.

     In the case of Force Majeure affecting Supplier, should Supplier not be
     able to resume performance hereunder within two (2) weeks of the occurrence
     of the impediment, Company shall be entitled to obtain Compound or other
     materials from an alternative supplier.  Materials obtained from another
     source will accordingly reduce commercial forecasts.  Company will remain
     liable to Supplier only for fees and expenses of material manufactured by
     Supplier satisfying all requirements of this Agreement and shipped to
     Company in accordance with the provision of Paragraph 6.e, Shipping through
     the occurrence of the impediment.  Supplier shall cooperate and make all
     effort to assist Company in transferring technology for manufacturing of
     Compound to the other source for material.

21.  Amendments
     ----------

     Any amendments, changes, or revisions to this Agreement must be proposed in
     writing by either party, and accepted in writing by the other party before
     they shall become effective and binding.

22.  Assignment
     ----------

     This Agreement being for specialized manufacturing services, Supplier shall
     not assign, transfer or convey this Agreement or any moneys due or to
     become due hereunder without the prior written consent of Company; however,
     this Agreement shall enure to benefit Company, its assigns, subsidiaries or
     successors in business.

23.  Entire Agreement
     ----------------

     This Agreement (all Exhibits and documents attached hereto and referenced
     herein) represents the entire understanding and agreement between Company
     and Supplier.  In the event that a conflict arises between this Agreement
     and printed terms and conditions on any subsequently prepared document
     concerning performance of the parties under this Agreement, the terms and
     conditions provided in this Agreement shall prevail, unless the document
     satisfies the requirements herein for amendments to this Agreement.

                                 Page 20 of 21

<PAGE>
 
     IN WITNESS WHEREOF, the parties by their authorized representatives have
     set their hands on the day first above written.

CELL THERAPEUTICS, INC.                 CHIREX LTD.


By:  /s/ Maurice J. Schwarz              By:   /s/ Alan R. Clark
   ---------------------------------        -----------------------------------
     Maurice J. Schwarz                        Alan R. Clark

Title:    EVP, Product Development       Title:    Chairman CEO
          --------------------------           --------------------------------

Address:  201 Elliott Avenue West        Address:  Dudley, Cramlington
          --------------------------               ----------------------------
          Seattle, Washington  98119               Northumberland, NE237QG
          --------------------------               ----------------------------
          USA                                      ENGLAND
          --------------------------               ----------------------------



          The remaining portion of this page left intentionally blank.

                                 Page 21 of 21



<PAGE>
 
                                                                   EXHIBIT 10.26

                                                        Portions of this Exhibit
                                                        have been omitted
                                                        pursuant to a request
                                                        for confidential
                                                        treatment. The omitted
                                                        portions are marked
                                                        ***** and have been
                                                        filed separately with
                                                        the Commission.


                      COLLABORATION AND LICENSE AGREEMENT

                         dated as of November 8, 1996

                                by and between

                            CELL THERAPEUTICS, INC.

                                      and

                              ORTHO BIOTECH INC.

                                      and

              THE R.W. JOHNSON PHARMACEUTICAL RESEARCH INSTITUTE




(The information below marked by ***** has been 
omitted by a request for confidential treatment. 
The omitted portion has been separately filed 
with the Commission.)


<PAGE>
 
                               TABLE OF CONTENTS


<TABLE>
<CAPTION>
                                                                            PAGE

<C>            <S>                                                           <C>
                                   ARTICLE I

                                  DEFINITIONS
                                  -----------

SECTION 1.01.  Definitions................................................    2


                              ARTICLE II

                              MANAGEMENT
                              ----------

SECTION 2.01.  Steering Committee.........................................   13
SECTION 2.02.  Meetings of the Steering Committee.........................   13
SECTION 2.03.  Functions and Powers of the Steering Committee.............   14
SECTION 2.04.  Steering Committee Actions.................................   15
SECTION 2.05.  Obligations of Parties.....................................   15
SECTION 2.06.  Limitations of Powers of Committees........................   16
SECTION 2.07.  Formation of Joint Development Committee and Joint
               Commercialization Committee................................   16
SECTION 2.08.  Accounting.................................................   16


                                  ARTICLE III

                 INITIAL LICENSING FEE AND MILESTONE PAYMENTS
                 --------------------------------------------

SECTION 3.01.  Initial Licensing Fee......................................   16
SECTION 3.02.  Milestone Payments.........................................   17


                                  ARTICLE IV

                                  DEVELOPMENT

                                  -----------

SECTION 4.01.  Formation of JDC...........................................   19
SECTION 4.02.  Responsibilities of JDC....................................   20
SECTION 4.03.  Lead Development Party.....................................   21
SECTION 4.04.  Right to Engage Third Parties..............................   21
SECTION 4.05.  Development Plan and Development Budget....................   22
SECTION 4.06.  Development Efforts........................................   23
SECTION 4.07.  Drug Approval Applications.................................   24
SECTION 4.08.  Costs of Development.......................................   25
</TABLE>


<PAGE>
 

<TABLE>
<C>            <S>                                                           <C>
SECTION 4.09.  Election by a Party to Terminate Its Participation in
               Development for Safety or Tolerability Reasons.............   27
SECTION 4.10.  Development Coordination in Canada.........................   28


                                   ARTICLE V

                                    OPTIONS
                                    -------

                  I.     OPTION TO CONDUCT SPONSORED RESEARCH
                         ------------------------------------

SECTION 5.01.  Sponsored Research.........................................   28
SECTION 5.02.  Dedicated Researchers......................................   30
SECTION 5.03.  ORTHO Funding..............................................   30

                       II.     ORTHO FIRST OFFER RIGHTS
                               ------------------------

SECTION 5.04.  ORTHO Option to Expand the Field...........................   31
SECTION 5.05.  License Fee and Milestone Payments for Additional
               Indications................................................   32
SECTION 5.06.  Commercialization of Potential New Indications.............   33
SECTION 5.07.  Election by a Party to Discontinue Sharing Expenses for an
               Additional Indication......................................   34


                                  ARTICLE VI

                                   LICENSES
                                   --------
SECTION 6.01.  Patent License to ORTHO to Conduct Development.............   34
SECTION 6.02.  Patent License to CTI to Conduct Development...............   35
SECTION 6.03.  Patent License to ORTHO to Conduct Commercialization.......   35
SECTION 6.04.  Patent License to CTI to Conduct Commercialization.........   35
SECTION 6.05.  Exclusive Know-how License To ORTHO........................   36
SECTION 6.06.  Exclusive Know-how License to CTI..........................   36
SECTION 6.07.  Sublicensing...............................................   36
SECTION 6.08.  Third Party Technology.....................................   37
SECTION 6.09.  Development Milestones for the Royalty Bearing Territory...   37
SECTION 6.10.  Covenant Not to Sue by Affiliates..........................   38
</TABLE>


                                      ii

<PAGE>
 

<TABLE>
<C>            <S>                                                           <C>
                                  ARTICLE VII

                               COMMERCIALIZATION
                               -----------------

(The information below marked by ***** has been omitted by a request for
confidential treatment. The omitted portion has been separately filed with the
Commission.)

SECTION 7.01.  Responsibilities of JCC....................................   38
SECTION 7.02.  ORTHO as Lead Marketing Party..............................   39
SECTION 7.03.  Commercialization Efforts..................................   41
SECTION 7.04.  Commercialization Plan and Budget..........................   41
SECTION 7.05.  Launch Plan................................................   42
SECTION 7.06.  Commercialization in Royalty Bearing Territory.............   43
SECTION 7.07.  Control Over Advertising...................................   43
SECTION 7.08.  Allowable Expenses and Allowable Operating Expenses........   44
SECTION 7.09.  Sales Efforts in the Co-Promotion Territory................   44
SECTION 7.10.  Training Program...........................................   44
SECTION 7.11.  Pricing, Pricing Approvals and Product Distribution........   44
SECTION 7.12.  Product Recalls............................................   45
SECTION 7.13.  Tax Considerations.........................................   45
SECTION 7.14.  Discounted Sales...........................................   45
SECTION 7.15.  Co-Promotion Mechanism.....................................   45
(The information below marked by ***** has been omitted by a request for
confidential treatment. The omitted portion has been separately filed with the
Commission.)
SECTION 7.16.  *****......................................................   46


                                 ARTICLE VIII

                         PROFIT SHARING AND ROYALTIES
                         ----------------------------

SECTION 8.01.  Share of Operating Profits or Losses.......................   46
SECTION 8.02.  Co-Promotion Reports and Payments..........................   47
SECTION 8.03.  Term.......................................................   47
SECTION 8.04.  Royalty Bearing Products...................................   47
SECTION 8.05.  Sales by Sublicensees......................................   49
SECTION 8.06.  Royalty Reports and Payments...............................   49
SECTION 8.07.  Payments...................................................   49
SECTION 8.08.  Taxes......................................................   49
SECTION 8.09.  Foreign Exchange...........................................   49
SECTION 8.10.  Payments to or Reports by Affiliates.......................   49
SECTION 8.11.  No Overlapping Royalties...................................   50


                                  ARTICLE IX

                            MANUFACTURE AND SUPPLY
                            ----------------------

SECTION 9.01.  Manufacture and Supply.....................................   50
</TABLE>


                                      iii

<PAGE>
 

<TABLE>
<C>            <S>                                                           <C>
SECTION 9.02.  Process Development, Manufacturing Approvals...............   50
SECTION 9.03.  Quality Testing............................................   50
SECTION 9.04.  Shipment of Collaboration Compound.........................   51
SECTION 9.05.  Warranties.................................................   51
SECTION 9.06.  Manufacture and Supply After Initial Three Year Period.....   51
SECTION 9.07.  Manufacture and Supply of Collaboration Products...........   52
SECTION 9.08.  Specifications.............................................   52
SECTION 9.09.  Transfer Pricing...........................................   52
SECTION 9.10.  Inventory; Shortage of Supply; Coordination with Third
               Party Manufacturers........................................   53
SECTION 9.11.  Termination of Participation...............................   53


                                   ARTICLE X

                                CONFIDENTIALITY
                                ---------------

SECTION 10.01.  Confidentiality; Exceptions...............................   53
SECTION 10.02.  Authorized Disclosure.....................................   54
SECTION 10.03.  Survival..................................................   55
SECTION 10.04.  Termination of Prior Agreement............................   55
SECTION 10.05.  Publications..............................................   55
SECTION 10.06.  Publicity Review..........................................   55


                                  ARTICLE XI

             OWNERSHIP OF INTELLECTUAL PROPERTY AND PATENT RIGHTS
             ----------------------------------------------------

SECTION 11.01.  Ownership.................................................   56
SECTION 11.02.  Disclosure of Patentable Inventions.......................   56
SECTION 11.03.  Patent Filings............................................   56
SECTION 11.04.  Third Party Patent Rights.................................   57
SECTION 11.05.  Enforcement Rights........................................   57
SECTION 11.06.  Defense and Settlement of Third Party Claims..............   59
SECTION 11.07.  Patent and Trademark Expenses.............................   60
SECTION 11.08.  Assignment of Joint Patents...............................   60
SECTION 11.09.  Trademarks................................................   61
</TABLE>


                                      iv

<PAGE>
 

<TABLE>
<C>            <S>                                                           <C>
                                  ARTICLE XII

                  REPRESENTATIONS AND WARRANTIES; EXCLUSIVITY
                  -------------------------------------------

SECTION 12.01.  Representations and Warranties............................   61
SECTION 12.02.  Performance by Affiliates.................................   62
SECTION 12.03.  Exclusivity...............................................   62


                                 ARTICLE XIII

                            INFORMATION AND REPORTS
                            -----------------------

SECTION 13.01.  Information and Reports During Development and
                Commercialization.........................................   62
SECTION 13.02.  Complaints................................................   63
SECTION 13.03.  Adverse Drug Experiences..................................   63
SECTION 13.04.  Records of Revenues and Expenses..........................   64


                                  ARTICLE XIV

                             TERM AND TERMINATION
                             --------------------

SECTION 14.01.  Term......................................................   65
SECTION 14.02.  Termination for Material Breach...........................   65
SECTION 14.03.  Termination by ORTHO......................................   69
SECTION 14.04.  Effect of Termination by ORTHO Pursuant to
                Section 14.03.............................................   69
SECTION 14.05.  Surviving Rights..........................................   70
SECTION 14.06.  Accrued Rights, Surviving Obligations.....................   71
SECTION 14.07.  Change of Control.........................................   71


                                  ARTICLE XV

                                INDEMNIFICATION
                                ---------------

SECTION 15.01.  Indemnification for Royalty Bearing Products..............   72
SECTION 15.02.  Indemnification For Collaboration Products................   73
SECTION 15.03.  Indemnification For Independent Products..................   73
</TABLE>


                                       v

<PAGE>
 

<TABLE>
<C>            <S>                                                           <C>
                                  ARTICLE XVI

                              DISPUTE RESOLUTION
                              ------------------

SECTION 16.01.  Disputes..................................................   74
SECTION 16.02   Alternative Dispute Resolution............................   75
SECTION 16.03.  Arbitration Procedures....................................   75
SECTION 16.04.  Survivability.............................................   76
SECTION 16.05.  Jurisdiction..............................................   76


                                 ARTICLE XVII

                                 MISCELLANEOUS
                                 -------------

SECTION 17.01.  Assignment................................................   76
SECTION 17.02.  Retained Rights...........................................   77
SECTION 17.03.  Research and Development Entities.........................   77
SECTION 17.04.  Consents Not Unreasonably Withheld or Delayed.............   77
SECTION 17.05.  Force Majeure.............................................   77
SECTION 17.06.  Further Actions...........................................   78
SECTION 17.07.  No Trademark Rights.......................................   78
SECTION 17.08.  Notices...................................................   78
SECTION 17.09.  Waiver....................................................   79
SECTION 17.10.  Severability..............................................   79
SECTION 17.11.  Ambiguities...............................................   79
SECTION 17.12.  Governing Law.............................................   79
SECTION 17.13.  Headings..................................................   80
SECTION 17.14.  Counterparts..............................................   80
SECTION 17.15.  Entire Agreement; Amendments..............................   80
SECTION 17.16.  Independent Contractors...................................   80

                                   EXHIBITS

EXHIBIT A      -     Determination of Certain Accounting Terms
EXHIBIT B      -     Financial Statement Format
EXHIBIT C      -     Lisofylline Product Genus
EXHIBIT D-1    -     CTI Patents
EXHIBIT D-2    -     ORTHO Patents
EXHIBIT E      -     Form of Royalty Report
</TABLE>


                                      vi

<PAGE>
 
                                                                       EXECUTION
                                                                          COPY
                                                                          ----

                      COLLABORATION AND LICENSE AGREEMENT
                      -----------------------------------


          COLLABORATION AND LICENSE AGREEMENT (the "Agreement"), dated as of
November 8, 1996 (the "Effective Date"), by and between CELL THERAPEUTICS, INC.,
a Washington corporation having its principal place of business at 201 Elliott
Avenue West, Suite 400, Seattle, Washington 98119 (hereinafter referred to as
"CTI") and ORTHO BIOTECH INC., a New Jersey corporation having its principal
place of business at 700 U.S. Route 202 South, Raritan, New Jersey 08869 and THE
R. W. JOHNSON PHARMACEUTICAL RESEARCH INSTITUTE, a division of ORTHO
PHARMACEUTICAL CORPORATION, a Delaware corporation having its principal office
at U.S. Route 202, Raritan, New Jersey 08869 (hereinafter collectively referred
to as "ORTHO").  CTI and ORTHO are sometimes referred to herein individually as
a "Party" and collectively as the "Parties", and all references to "CTI" and
"ORTHO" shall include their respective Affiliates, where appropriate under the
terms of this Agreement.

                              W I T N E S S E T H:
                              - - - - - - - - - - 

          WHEREAS, ORTHO is a part of a multinational health care company with
research, development and marketing activities worldwide which desires to obtain
additional potential drug products to sell for Oncology and possible other
indications;

          WHEREAS, CTI is a late-stage development biotechnology company which
has discovered and is developing a compound, Lisofylline, which, among other
things, is a toxicity modifier for use in reducing the side effects associated
with the use of different types of anti-cancer treatments such as radiation or
chemotherapy.  CTI has conducted, and is conducting, several clinical trials of
Lisofylline, and is planning additional clinical trials and commercial
activities;

          WHEREAS, the Parties intend to establish a collaboration for the
development and commercialization of Lisofylline for Oncology indications, and
possibly other indications, throughout the world.  In connection therewith, CTI
desires to grant to ORTHO, and ORTHO desires to obtain, rights to Co-Promote (as
hereinafter defined) Lisofylline in the United States and to manufacture,
develop and market Lisofylline for such Oncology and possible other indications
in the rest of the world (other than Canada), all on the terms and conditions
set forth in this Agreement;

          WHEREAS, the Parties intend to record, characterize and report their
activities under this Agreement as separate activities of each of the Parties;

                                       1

<PAGE>
 
          NOW, THEREFORE, in consideration of the foregoing recitals and the
mutual covenants and agreements contained herein, the parties hereto, intending
to be legally bound, do hereby agree as follows:


                                   ARTICLE I

                                  DEFINITIONS
                                  -----------

          SECTION 1.01.  Definitions.  The following terms, when capitalized,
                         -----------                                         
shall have the following meanings (such meanings to be equally applicable to
both the singular and plural forms of the terms defined) as used in this
Agreement:

          "Additional Indication" means, any Potential New Indication with
           ---------------------                                          
respect to which ORTHO has elected to exercise its option pursuant to Section
5.04(a), (b) or (c).

          "Advertising" means the advertising and promotion of Collaboration
           -----------                                                      
Products in the Co-Promotion Territory through any means, including, without
limitation, (i) television and radio advertisements; (ii) advertisements
appearing in journals, newspapers, magazines or other media; (iii) seminars and
conventions; (iv) packaging design; (v) professional education programs; (vi)
samples, visual aids and other selling materials; (vii) hospital formulary
committee presentations; and (viii) presentations to state and other
governmental formulary committees; provided, however, that Advertising shall
exclude General Public Relations.

          "Affiliate" means any person, corporation, partnership, firm, joint
           ---------                                                         
venture or other entity which, directly or indirectly, through one or more
intermediaries, controls, is controlled by, or is under common control with, CTI
or ORTHO, as the case may be.  As used in this definition, "control" means the
possession of the power to direct or cause the direction of the management and
policies of an entity, whether through the ownership of the outstanding voting
securities or by contract or otherwise.

(The information below marked by ***** has been omitted by a request for
confidential treatment. The omitted portion has been separately filed with the
Commission.)

          "Allowable Expenses" means those expenses incurred after the
           ------------------                                         
commercial launch of a Collaboration Product which are generally consistent with
a Commercialization Plan and Commercialization Budget and are specifically
attributable to Collaboration Products in the Co-Promotion Territory, and shall
consist of ***** where permitted hereunder.

(The information below marked by ***** has been omitted by a request for
confidential treatment. The omitted portion has been separately filed with the
Commission.)

          "Allowable Operating Expenses" shall include *****, *****. Allowable
           ----------------------------
Operating Expenses shall exclude *****.

                                       2

<PAGE>
 
          "AML Indication" means the use of a Collaboration Product for the
           --------------                                                  
treatment of patients with Acute Myelogenous Leukemia undergoing high-dose
chemotherapy.

          "AML Milestone Payments" shall have the meaning set forth in 
           ----------------------
Section 3.02(b).

          "BMT Approval Date" means the date on which CTI shall have received
           -----------------                                                 
Regulatory Approval for the first BMT Indication for a Collaboration Product in
the Co-Promotion Territory.

          "BMT Indication" means the use of a Collaboration Product as a
           --------------                                               
toxicity modifier for use in reducing the side effects in cancer patients
undergoing high-dose radiation and/or chemotherapy followed by bone marrow or
stem cell support.

          "BMT Milestone Payments" shall have the meaning set forth in 
           ----------------------
Section 3.02(a).

          "BioChem Pharma" shall mean, collectively BioChem Pharma Inc. and 
           -------------- 
BioChem Therapeutic, Inc.

          "Change of Control" of a Party means the occurrence of any of the
           -----------------                                               
following with respect to such Party at any time after the date hereof:

          (a) any Third Party (other than an Affiliate on the date hereof) shall
     have become the beneficial owner of securities representing ***** or more
     of the aggregate voting power of the then outstanding voting securities of
     such Party; or

          (b) any sale by such Party of: (i) ORTHO; or (ii) all or substantially
     all of such Party's pharmaceutical and/or healthcare assets; or (iii) all
     or substantially all of such Party's assets other than its pharmaceutical
     and/or healthcare assets.

          For the purposes of this definition, the term "Party" expressly
includes JOHNSON & JOHNSON ("J&J"), a New Jersey corporation and parent of
ORTHO, and any other direct or indirect parent corporation of ORTHO.

          "Collaboration Compound" means Lisofylline and any Eligible Compound.
           ----------------------                                              

          "Collaboration Product" means a product in finished dosage form
           ---------------------                                         
including or incorporating any form or dosage of a Collaboration Compound for
use in the Field, other than an Independent Product.

          "Combination Product" means a Collaboration Product containing a
           -------------------                                            
Collaboration Compound and one or more additional active ingredients.

                                       3

<PAGE>
 
          "Commercialization" and "Commercialize" shall refer to all activities
           -----------------       -------------                               
undertaken pursuant to an approved Commercialization Plan relating to the
manufacture, marketing and sale of a Collaboration Product.

          "Commercialization Budget" shall have the meaning set forth in Section
           ------------------------                                             
7.04.

          "Commercialization Plan" shall have the meaning set forth in Section
           ----------------------                                             
7.04.

          "Confidential Information" shall have the meaning set forth in Section
           ------------------------                                             
10.01.

          "Co-Promote" means a co-participation including manufacturing to
           ----------                                                     
jointly promote Collaboration Products through ORTHO, CTI and their respective
sales forces under a single trademark in the Co-Promotion Territory.

          "Co-Promotion Territory" means the United States, its territories and
           ----------------------                                              
possessions.

          "Control" or "Controlled" shall refer to possession of the ability to
           -------      ----------                                             
grant a license or sublicense of patent rights, know-how or other intangible
rights as provided for herein without violating the terms of any agreement or
other arrangement with any Third Party.

(The information below marked by ***** has been omitted by a request for
confidential treatment. The omitted portion has been separately filed with the
Commission.)

          "Cost of Capital Allowance" means the amount recoverable by ORTHO
           -------------------------                                       
under this Agreement for the use of its Utilized Capital allocated to the
business of this collaboration related to Collaboration Products in the Co-
Promotion Territory after the first commercial launch of a Collaboration
Product.  ORTHO's cost of capital shall be determined *****.

          "Cost of Goods Sold" means the cost of Collaboration Product inventory
           ------------------                                                   
sold and other manufacturing costs incurred with respect to Collaboration
Products in the Co-Promotion Territory during the period.  Cost of Goods Sold
shall be calculated in the manner set forth in Exhibit A.

          "CTI Know-how" means proprietary Information which is within the
           ------------                                                   
Control of CTI and relates to the research, development, manufacture, use,
importation, sale or offer for sale of Collaboration Compounds or Collaboration
Products.  Notwithstanding anything herein to the contrary, CTI Know-how shall
exclude CTI Patents.

          "CTI Patent" means a Patent which covers the research, development,
           ----------                                                        
manufacture, use, importation, sale or offer for sale of Collaboration Compounds
within the Field or Collaboration Products, which Patent is owned or Controlled
by CTI, including CTI's interest in any Joint Patents.

                                       4

<PAGE>
 
          "Development" and "Develop" shall refer to all activities relating to
           -----------       -------                                           
obtaining Regulatory Approval of a Collaboration Product, and all activities
relating to developing the ability to manufacture the same.  This includes
preclinical testing, toxicology, formulation, bulk production, fill/finish,
manufacturing process development, manufacturing, quality assurance and quality
control technical support, clinical studies, regulatory affairs and outside
counsel regulatory legal services.  Similar activities related to Potential New
Indications prior to their designation as Additional Indications, and similar
activities related to Eligible Compounds prior to their designation as
Collaboration Compounds, shall be in the category of Pre-Selection Activities
rather than Development.  Development shall not include a Party's costs incurred
in connection with the construction of a manufacturing facility.

          "Development Budget" shall have the meaning set forth in Section 4.05.
           ------------------                                                   

(The information below marked by ***** has been omitted by a request for
confidential treatment. The omitted portion has been separately filed with the
Commission.)

          "Development Expenses" means the expenses incurred by a Party or for
           --------------------                                               
its account which are generally consistent with a Development Plan and
Development Budget and are specifically attributable to the Development of a
Collaboration Product (including royalties paid to a Third Party not otherwise
recovered as a Cost of Goods Sold). Development Expenses shall include, but are
not limited to, *****.

          "Development Indications" means all therapeutic indications for which
           -----------------------                                             
Collaboration Products are being Developed or Commercialized as of the Effective
Date.  Development Indications as of the Effective Date consist of the BMT
Indication and the AML Indication.

          "Development Plan" shall have the meaning set forth in Section 4.05.
           ----------------                                                   

(The information below marked by ***** has been omitted by a request for
confidential treatment. The omitted portion has been separately filed with the
Commission.)

          "Direct Administrative Expenses" means the administrative costs
           ------------------------------                                
incurred by a Party or for its account ***** that are actually directly engaged
in the Development or Commercialization of Collaboration Products. Direct
Administrative Expenses shall be calculated in the manner set forth in Exhibit
A. Administrative expenses incurred by a Party or for its account which are not
specifically attributable to employees and information systems that are directly
engaged in the Development or Commercialization of Collaboration Products shall
not be recoverable as a Direct Administrative Expense or otherwise.

                                       5

<PAGE>
 
          "Distribution Expenses" means the costs incurred by a Party or for its
           ---------------------                                                
account, specifically attributable to the distribution of a Collaboration
Product in the Co-Promotion Territory, to be calculated in the manner set forth
in Exhibit A.

          "Drug Approval Application" means an application for Regulatory
           -------------------------                                     
Approval required to be approved before commercial sale or use of a Product as a
drug in a regulatory jurisdiction.

          "Effective Date" shall have the meaning set forth in the Recitals to
           --------------                                                     
this Agreement.

          "Eligible Compound" means any chemical compound (other than
           -----------------                                         
Lisofylline) created, developed, discovered or Controlled by CTI or an Affiliate
of CTI having a structure falling within the genus for Lisofylline described in
Exhibit C, including any of the same covered by a CTI Patent or by CTI Know-how.

          "Equalization Payment" means the amount payable by one Party to the
           --------------------                                              
other to share the Operating Profit or Losses between the Parties as shown on
Exhibit B.  By way of example, in a total Operating Profits situation,  if ORTHO
has an Operating Profit of 40 and CTI has an Operating Loss of 10, then the
Equalizing Payment made by ORTHO to CTI will be 25.  In a total Operating Losses
situation, if ORTHO has an Operating Loss of 40 and CTI has an Operating Loss of
10, the Equalization Payment made by CTI to ORTHO will be 15.

          "Ex-Manufacturer Selling Price" means the invoice price to wholesalers
           -----------------------------                                        
(or their equivalent) less all cash discounts taken for prompt cash payment for
a Collaboration Product.
- -
          "Excepted Commercialization Matters" shall have the meaning set forth
           ----------------------------------                                  
in Section 7.01(b).

          "Excepted Development Matters" shall have the meaning set forth in
           ----------------------------                                     
Section 4.02(b).

          "FDA" means the United States Food and Drug Administration, or any
           ---                                                              
successor agency.

          "Field" means, at any date of determination, the development, use,
           -----                                                            
manufacture, distribution, marketing and sale of Collaboration Compounds and
Collaboration Products for the prevention and treatment of all Development
Indications and Additional Indications for human medical uses.

                                       6

<PAGE>
 
          "Financial Statements" means the form of Financial Statement shown and
           --------------------                                                 
described in Exhibit B.

          "General Public Relations" means any public relations activity
           ------------------------                                     
(including a press release or image piece) which (i) promotes generally the
business of a company or deals in a general manner with the activities of such
company in a general pharmaceutical market (e.g., the Oncology health care
market); and (ii) mentions in an incidental manner the fact that such company or
its Affiliates markets or sells one or more Collaboration Products or provides
other incidental information concerning one or more Collaboration Products.

          "GMPs" means manufacturing practices in conformity with the FDA's
           ----                                                            
regulations governing good manufacturing practices set forth in 21 C.F.R. Part
210 et seq.
    -- --- 
 
          "Independent Product" means a product including or incorporating any
           -------------------                                                
form or dosage of a Collaboration Compound for human medical uses which is
developed and/or commercialized by a Party after the other Party has either (i)
terminated its participation in Development pursuant to Section 4.09(c) hereof
or (ii) elected to discontinue sharing Development Expenses or Pre-Marketing
Expenses pursuant to Section 5.07 hereof.

          "Information" means (i) techniques and data within the Field relating
           -----------                                                         
to Collaboration Compounds, Collaboration Products and Eligible Compounds,
including, but not limited to, inventions, practices, methods, knowledge, know-
how, skill, experience, test data including pharmacological, toxicological,
preclinical and clinical test data, analytical and quality control data,
marketing, pricing, distribution, cost, sales and manufacturing data or
descriptions and (ii) compounds, compositions of matter, assays and biological
materials within the Field relating to Collaboration Compounds, Collaboration
Products and Eligible Compounds.

          "Initial Development Plan and Budget" means the initial Development
           -----------------------------------                               
Plan and Budget concerning the Development of Lisofylline for Development
Indications during the period commencing with the Effective Date and ending on
(i) in the case of the BMT Indication December 31, 1998 and (ii) in the case of
the AML Indication, June 30, 1997, which Initial Development Plan and
Development Budget has been agreed to by the Parties and is attached to a
separate letter exchanged between the Parties concurrently herewith.

          "Initial R&D Plan" shall have the meaning set forth in Section
           ----------------                                             
5.01(a).

          "Joint Commercialization Committee" or "JCC" means the committee
           ---------------------------------      ---                     
established pursuant to Section 2.07 below.

          "Joint Development Committee" or "JDC" means the committee established
           ---------------------------      ---                                 
pursuant to Section 2.07 below.

                                       7

<PAGE>
 
          "Joint Patent" shall have the meaning set forth in Section 11.03(a).
           ------------                                                       

          "Launch Budget" shall have the meaning set forth in Section 7.05.
           -------------                                                   

          "Launch Plan" shall have the meaning set forth in Section 7.05.
           -----------                                                   

          "Lead Development Party" shall mean the Party responsible hereunder
           ----------------------                                            
for the Development of a Collaboration Product, and the execution of the
Development Plan related thereto, as further described in Section 4.03 hereof.

          "Lisofylline" means that certain compound designated (R)(-)-1-(5-
           -----------                                                    
hydroxyhexyl)-3,7-dimethylxanthine.

          "Losses" shall have the meaning set forth in Section 15.01(a).
           ------                                                       

          "Major Market Country" means each of France, Germany, Italy and the
           --------------------                                              
United Kingdom.

          "Manufacturing Party" shall be any Party responsible for the (i)
           -------------------                                            
manufacturing and supply of Collaboration Compounds and Collaboration Products
for use during Development and (ii) commercial manufacture and supply of
Collaboration Products.

          "Marketing Expenses" means the costs which are generally consistent
           ------------------                                                
with a Commercialization Budget and Commercialization Plan and  are incurred
after the first commercial launch of a Collaboration Product and are
specifically attributable to the sale, promotion, advertising, and marketing of
such Collaboration Product in the Co-Promotion Territory.  Marketing Expenses
shall be calculated in the manner set forth in Exhibit A.

          "Material Breach" shall have the meaning set forth in Section
           ---------------                                             
14.02(f).

          "Milestone Payment" shall mean, collectively, the BMT Milestone
           -----------------                                             
Payments, the AML Milestone Payments, the Mucositis Milestone Payments and the
SIRS Milestone Payments.

          "Mucositis Indication" means the use of a Collaboration Product as a
           --------------------                                               
toxicity modifier for use in reducing acute toxicity to the cells lining the
mouth, stomach and intestinal tract in cancer patients undergoing high-dose
radiation and/or chemotherapy to treat solid or hematological tumors.

          "Mucositis Milestone Payments" shall have the meaning set forth in
           ----------------------------                                     
Section 3.02(c).

                                       8

<PAGE>
 
          "Net Sales" means the amount invoiced by a Party or an Affiliate for
           ---------                                                          
sales of Collaboration Products to a Third Party in the Co-Promotion Territory
less:  (i) discounts, including cash discounts, rebates, chargebacks, and
retroactive price reductions or allowances actually allowed or granted from the
billed amount (as adjusted pursuant to Section 7.14) and fees paid to
distributors (other than to a distributor that is an Affiliate of such Party),
(ii) credits or allowances actually granted upon claims, rejections or returns
of such sales of Collaboration Products, including recalls, regardless of the
Party requesting such recalls, (iii) taxes, duties or other governmental charges
levied on or measured by the billing amount when included in billing, as
adjusted for rebates, chargebacks, such reductions and refunds.

          "Net Sublicense Revenues" means all revenues or other consideration
           -----------------------                                           
received from Third Parties as consideration for sublicensing of the
manufacture, distribution, use or sale of Collaboration Products in the Co-
Promotion Territory, less the expenses directly attributable to supplying goods
and services to such sublicensees to enable their performance of the
sublicenses.

          "Non-Manufacturing Party" shall be any Party that is not a
           -----------------------                                  
Manufacturing Party.

          "Oncology" means therapeutic uses for anti-cancer treatments and
           --------                                                       
supportive care indications associated with the cancer or following chemotherapy
and/or radiation.

(The information below marked by ***** has been omitted by a request for
confidential treatment. The omitted portion has been separately filed with the
Commission.)
 
          "Operating Profits or Losses" means the profits or losses resulting
           ---------------------------                                       
from the Commercialization of Collaboration Products in the Co-Promotion
Territory and shall be equal to *****.  A separate determination of Net Sales
and Operating Profits or Losses shall be made for each Collaboration Product as
outlined in Exhibit B.  In the event multiple Collaboration Products are being
marketed under this Agreement, the individual statements of Operating Profits or
Losses shall then be combined into a single statement of Operating Profits or
Losses for purposes of overall accounting between the Parties.

          "ORTHO Know-how" means proprietary Information which is within the
           --------------                                                   
Control of ORTHO and relates to the research, development, manufacture, use,
importation, sale or offer for sale of Collaboration Compounds or Collaboration
Products.  Notwithstanding anything herein to the contrary, ORTHO Know-how shall
exclude ORTHO Patents.

          "ORTHO Patent" means a Patent which covers the research, development
           ------------                                                       
manufacture, use, importation, sale or offer for sale of Collaboration Compounds
within the Field or Collaboration Products, which Patent is owned or Controlled
by ORTHO, including ORTHO's interest in any Joint Patents.

                                       9

<PAGE>
 
          "Patent" means United States and foreign patents, applications and
           ------                                                           
provisional applications for United States and foreign patents, and all
reexaminations, reissues, extensions, term restorations, divisionals,
continuations and continuations-in-part thereof.

          "Patent and Trademark Expenses" means the fees, expenses and
           -----------------------------                              
disbursements of outside counsel, and payments to Third Party agents incurred in
connection with the preparation, filing, prosecution and maintenance of CTI
Patents, ORTHO Patents and trademarks covering Collaboration Compounds within
the Field and Collaboration Products, including the costs of patent interference
and opposition proceedings.

          "Phase II AML Trial" means CTI's Phase II/III clinical trial currently
           ------------------                                                   
designated under protocol 1016 and includes all modifications thereto (including
a change in protocol number).

          "Phase III Clinical Trials" has the meaning ascribed thereto in 21
           -------------------------                                        
C.F.R. (S) 312.21(c).

          "Phase IIIB Clinical Trials" means product support clinical trials of
           --------------------------                                          
a Collaboration Product (i.e., a clinical trial which the JDC determines is not
required for receipt of Regulatory Approval but which may be useful in providing
additional drug profile data) commenced before receipt of Regulatory Approval in
the country where such trial is being conducted.  These trials shall be
considered a part of Commercialization.

          "Phase IV Clinical Trials" means product support clinical trials of a
           ------------------------                                            
Collaboration Product commenced after receipt of Regulatory Approval in the
country where such trial is being conducted.  These trials shall be considered a
part of Commercialization.

          "Post-Launch Product R&D Expenses" means the costs of Phase IV
           --------------------------------                             
Clinical Trials and ongoing product support (including manufacturing and quality
assurance technical support, and laboratory and clinical efforts directed toward
the further understanding of product safety and efficacy) and medical affairs
(including regulatory support necessary for product maintenance) which are
specifically attributable to a Collaboration Product in the Co-Promotion
Territory where such Collaboration Product has been launched, excluding costs
that are included within Costs of Goods Sold or Development Expenses.  Post-
Launch Product R&D Expenses shall be calculated in the manner set forth in
Exhibit A.

          "Potential New Indication" means any indication other than a
           ------------------------                                   
Development Indication or an Additional Indication.

          "Pre-Marketing" and "Pre-Marketing Activities" means all
           -------------       ------------------------           
Commercialization activities undertaken prior to and in preparation for the
launch of a Collaboration Product in the Co-Promotion Territory, consistent with
a Commercialization Plan and prior to the first commercial launch of such
Collaboration Product in the Co-Promotion Territory.

                                       10

<PAGE>
 
Pre-Marketing Activities shall include advertising, education, sales force
training, Phase IIIB Clinical Trials, trademark selection, filing, prosecution
and enforcement and other activities included within the Commercialization Plan
prior to the first commercial launch of such Collaboration Product in the Co-
Promotion Territory.

          "Pre-Marketing Expenses" means the costs (and related regulatory
           ----------------------                                         
fees), excluding Development Expenses, specifically attributable to the Pre-
Marketing of a Collaboration Product.

          "Pre-Selection Activities" or "Pre-Selection" means the scientific,
           ------------------------      -------------                       
technical and clinical activities undertaken to discover and/or evaluate a
Potential New Indication as a candidate for inclusion as an Additional
Indication hereunder, including screening, chemistry, pharmacology,
pharmacokinetics, toxicology, formulation, process development, manufacture
(including manufacture of bulk drug substance and fill/finish) for clinical
trials, and clinical pharmacology.

          "Pre-Selection Expenses" means the expenses incurred by a Party or for
           ----------------------                                               
its account specifically attributable to Pre-Selection Activities.

          "Products" means Collaboration Products, Royalty Bearing Products and
           --------                                                            
Independent Products, collectively.

          "R&D Subcommittee" shall have the meaning set forth in Section
           ----------------                                             
5.01(a).

          "Regulatory Agent" means that Party designated by an appropriate
           ----------------                                               
authorization to the FDA or its regulatory equivalent to be the primary contact
with and receiving party of all correspondence from the FDA in connection with
any regulatory matter or filing.

          "Regulatory Approval"  means any approvals (including pricing and
           -------------------                                             
reimbursement approvals), product and/or establishment licenses, registrations
or authorizations of any federal, state or local regulatory agency, department,
bureau or other governmental entity, necessary for the manufacture, use,
storage, importation, export, transport or sale of Collaboration Products in a
regulatory jurisdiction.

          "Royalty Bearing Product" means a Collaboration Product marketed
           -----------------------                                        
directly or indirectly by ORTHO in the Royalty Bearing Territory pursuant to
Section 7.06.

          "Royalty Bearing Sales" means the amount invoiced by a Party, an
           ---------------------                                          
Affiliate or their permitted sublicensees for sales of a Royalty Bearing
Product, an Independent Product or (pursuant to Section 14.02) a Collaboration
Product to a Third Party, less (i) discounts, including cash discounts, rebates,
chargebacks, and retroactive price reductions or allowances actually allowed or
granted from the billed amount (as adjusted pursuant to Section 7.14),

                                       11

<PAGE>
 
and fees paid to distributors (other than a distributor that is an Affiliate of
such Party), (ii) credits or allowances actually granted upon claims, rejections
or returns of such sales of such Products, including recalls, regardless of the
Party requesting such recalls, (iii) freight, postage, shipping and insurance
charges paid for delivery of such Products, to the extent billed, (iv) taxes,
duties or other governmental charges levied on or measured by the billing amount
when included in billing, as adjusted for rebates, chargebacks and refunds, and
(v) provisions for uncollectible accounts determined in accordance with such
Party's normal accounting procedures consistently applied within and across its
pharmaceutical operating units.

          "Royalty Bearing Territory" means the world, excluding the Co-
           -------------------------                                   
Promotion Territory and Canada.

          "Royalty Percentage" shall have the meaning set forth in Section
           ------------------                                             
8.04(b).

          "Safety" means adverse experiences which are significant, serious or
           ------                                                             
life threatening and have a toxicological effect on one or more body tissues.

          "Selling Expenses" shall have the meaning set forth in Exhibit A.
           ----------------                                                

          "SIRS Indication" means the use of a Collaboration Product for the
           ---------------                                                  
inhibition and treatment of systemic inflammatory response syndrome.

          "SIRS Milestone Payment" shall have the meaning set forth in Section
           ----------------------                                             
3.02(d).

          "Sponsored Research Program" shall have the meaning set forth in
           --------------------------                                     
Section 5.01(a).

          "Steering Committee" means the committee described in Section 2.01.
           ------------------                                                

          "Tangible Advertising" means (a) all Advertising described in clause
           --------------------                                               
(i) or (ii) of the definition of the term "Advertising" and (b) all Advertising
embodied in a writing or other tangible material.

          "Third Party" means any entity other than CTI or ORTHO and their
           -----------                                                    
respective Affiliates.

          "Tolerability" means adverse drug experiences which are unpleasant to
           ------------                                                        
such an extent that they can materially and adversely affect market potential or
market penetration of a Collaboration Compound or Collaboration Product, but
which do not necessarily require discontinuation of drug therapy.

                                       12

<PAGE>
 
(The information below marked by ***** has been omitted by a request for
confidential treatment. The omitted portion has been separately filed with the
Commission.)

          "Utilized Capital" means the amount of ORTHO's capital specifically
           ----------------                                                  
attributable to the support of a particular Collaboration Product in the Co-
Promotion Territory, and shall consist solely of the amount of ORTHO's
consolidated net working capital dedicated to the carrying cost of *****, and
shall specifically exclude any of the same related to *****.


                                   ARTICLE II

                                   MANAGEMENT
                                   ----------

          SECTION 2.01.  Steering Committee.  CTI and ORTHO shall create, within
                         ------------------                                     
sixty (60) days after the Effective Date (or such later time as may be mutually
agreed to by the Parties), a Steering Committee.  The Steering Committee shall
have an equal number of representatives from each Party and the size of the
Steering Committee shall not exceed a total of four (4) members.  Members of the
Steering Committee shall be composed of senior personnel of the Parties.  One
member of the Steering Committee selected by CTI and one member of the Steering
Committee selected by ORTHO shall have appropriate experience in pharmaceutical
product research and development.  One member of the Steering Committee selected
by CTI and one member of the Steering Committee selected by ORTHO shall have
appropriate executive experience.  Members of the Steering Committee shall serve
on such terms and conditions as shall be determined by the Party selecting such
person for membership on the Steering Committee.  An alternate member designated
by a Party may serve temporarily in the absence of a permanent member designated
by such Party.

          SECTION 2.02.  Meetings of the Steering Committee.  The Steering
                         ----------------------------------               
Committee:

          (a)  shall hold meetings at such times and places as shall be
determined by a majority of the entire membership of the Steering Committee, but
in no event shall such meetings be held less frequently than once every six (6)
months;

          (b) may conduct meetings in person or by telephone conference,
                                                                        
provided that, any decision made during a telephone conference meeting is
- --------                                                                 
evidenced in a conformed writing signed by one of the members of the Steering
Committee from each of the Parties;

          (c) shall keep minutes reflecting actions taken at meetings;

          (d) may act without a meeting if prior to such action a written
consent thereto is signed by all members of the Steering Committee; and

          (e) may amend or expand upon the foregoing procedures for its internal
operation by unanimous written consent.

                                       13

<PAGE>
 
          SECTION 2.03.  Functions and Powers of the Steering Committee.  The
                         ----------------------------------------------      
activities of the Parties under this Agreement shall be managed by the Steering
Committee to the extent set forth herein.  The Steering Committee shall perform
the following functions:

          (a) coordinate the long-range strategy and planning for the
Development and Commercialization of Collaboration Products in the Co-Promotion
Territory for all Development Indications and any and all Additional Indications
in the manner contemplated by this Agreement;

          (b) attempt to settle disputes or disagreements that are unresolved by
the JDC relating to Excepted Development Matters which are referred to it by the
JDC pursuant to Section 4.02(b) or other Development matters which are referred
to it by either Party pursuant to Section 16.01;

          (c) attempt to settle disputes or disagreements that are unresolved by
the JCC relating to Excepted Commercialization Matters which are referred to it
by the JCC pursuant to Section 7.01(b), other matters which are referred to it
by CTI pursuant to Section 7.01(b), or other Commercialization matters which are
referred to it by either Party pursuant to Section 16.01;

          (d) subject to Section 4.05(d), review, modify and approve the
Development Budgets submitted to it by the JDC pursuant to Article IV;

          (e) review planned pricing and manufacturing decisions by the JCC, as
further provided herein;

          (f) review and approve a proposal by either Party (i) to stop a Phase
I clinical trial or Phase II clinical trial of a Collaboration Product because
of Safety or Tolerability, (ii) to stop a Phase III Clinical Trial of a
Collaboration Product for any reason other than in accordance with its protocol,
or (iii) to terminate its participation in Development of a Collaboration
Product under Section 4.09;

          (g) if ORTHO exercises its option(s) pursuant to Section 5.04 to
expand the Field to include Additional Indications, review and approve the
Development Budgets submitted to it by the JDC pursuant to Section 4.05(b); and

          (h) perform such other functions as appropriate to further the
purposes of this Agreement as determined by the Parties.

          SECTION 2.04.  Steering Committee Actions.  Actions to be taken by the
                         --------------------------                             
Steering Committee pursuant to the terms of this Agreement shall be taken only
following the unanimous vote of the members of the Steering Committee.  The
Steering Committee shall attempt to have all decisions approved by all members
of the Steering Committee.  If the

                                       14

<PAGE>
 
members of the Steering Committee cannot reach a unanimous decision with respect
to Development matters related to a Development Indication referred to it for
approval within sixty (60) days following such referral, the final decision on
such matters shall be made by CTI, except for Excepted Development Matters.  If
the Steering Committee cannot reach a unanimous decision with respect to
Development matters related to an Additional Indication referred to it for
approval within sixty (60) days following such referral, the final decision in
such matters shall be made by ORTHO, except for Excepted Development Matters.
If the members of the Steering Committee cannot reach a unanimous decision with
respect to any of the Excepted Development Matters which have been referred to
it pursuant to Section 4.02(b) for resolution or approval by the JDC, the status
quo shall be maintained with respect to Excepted Development Matters items (i)
and (ii) in Section 4.02(b).  As to Excepted Development Matter item (iii) in
Section 4.02(b), the clinical trial shall be terminated if the Steering
Committee does not reach another decision after prompt consideration.  If the
members of the Steering Committee cannot reach a unanimous decision with respect
to a Commercialization matter referred to it for approval within sixty (60) days
following such referral, the final decision on such matter shall be made by
ORTHO, except for Excepted Commercialization Matters as provided in Section
7.01(b).  Except as provided for above in this Section 2.04, if the Steering
Committee fails to reach agreement on a matter before it for decision, the
matter shall be referred to executive officers of the Parties pursuant to
Section 16.01.  The manner described in this Section 2.04 to resolve disputes
regarding Excepted Development matters and Excepted Commercialization Matters
shall be the sole mechanism for resolving such Matters under this Agreement.  If
either CTI or ORTHO wishes to seek a nonbinding opinion from a Third Party with
respect to any issue before the Steering Committee for decision, it may do so at
its own expense; provided, however, that if both Parties agree to seek such
                 --------  -------                                         
opinion, such expense shall be shared equally by the Parties.

          SECTION 2.05.  Obligations of Parties.  CTI and ORTHO shall provide
                         ----------------------                              
the Steering Committee and its authorized representatives with reasonable access
during regular business hours to all records and documents relating to this
Agreement which it may reasonably require in order to perform its obligations
hereunder; provided, however, that if such documents are under a bona fide
           --------  -------                                              
obligation of confidentiality to a Third Party then a Party may withhold access
thereto to the extent necessary to satisfy such obligation.

                                       15

<PAGE>
 
          SECTION 2.06.  Limitations of Powers of Committees.
                         ----------------------------------- 

          (a)   The Steering Committee shall have only such powers as are
specifically delegated to it hereunder.  Except as set forth in Section 2.03,
the Steering Committee shall not be involved with the day-to-day management of
the collaboration under this Agreement.

          (b) Notwithstanding the creation of the Steering Committee, the JDC,
the JCC, or any subcommittees thereof, each Party to this Agreement shall retain
the rights, powers, and discretion granted to it hereunder, and such committees
and subcommittees shall not be delegated or vested with any such rights, powers,
or discretion unless such delegation or vesting is expressly provided for herein
or the Parties expressly so agree in writing.  Such committees or subcommittees
shall not have the power to amend or modify this Agreement, which may be amended
or modified only as provided in Section 17.15.

          SECTION 2.07.  Formation of Joint Development Committee and Joint
                         --------------------------------------------------
Commercialization Committee . The Parties shall establish the JDC and the JCC
- ----------------------------                                                 
within thirty (30) days after the Effective Date as more fully set forth in
Articles IV and VII hereof.

          SECTION 2.08. Accounting.
                        ---------- 

          (a)   For the purposes of determining all costs and expenses
hereunder, any cost or expense allocated by either Party to a particular
category for a particular Collaboration Product shall not also be allocated to
another category for such Collaboration Product, and any cost or expense
allocated to a particular Collaboration Product in a particular country shall
not be allocated to another Collaboration Product of such Party or the same
Collaboration Product in a different country.

          (b) Each Party agrees to determine Net Sales, Royalty Bearing Sales,
Allowable Expenses, Development Expenses, Pre-Marketing Expenses, Pre-Selection
Expenses and all other costs and expenses hereunder with respect to
Collaboration Products, Royalty Bearing Products and Independent Products
consistent with the definitions thereof contained herein and using its standard
accounting procedures, consistent with United States generally accepted
accounting principles, to the extent practical as if such Products were solely
owned products of such Party, except as specifically provided in this Agreement.
Each Party shall keep reasonably detailed records of the foregoing from which
the material components of such items can be derived.


                                  ARTICLE III
                  INITIAL LICENSING FEE AND MILESTONE PAYMENTS
                  --------------------------------------------

          SECTION 3.01.  Initial Licensing Fee.  As partial payment for the
                         ---------------------                             
patent licenses granted by CTI pursuant to Section 6.01 hereof, ORTHO shall pay
to CTI a license

                                       16

<PAGE>
 
fee equal to five million dollars ($5,000,000) upon execution of this Agreement.
This fee shall be nonrefundable and shall be noncreditable against any future
obligations of ORTHO under this Agreement.

          SECTION 3.02.  Milestone Payments.
                         ------------------ 

          (a) BMT Milestone Payments.  ORTHO shall make the following payments
              ----------------------                                          
("BMT Milestone Payments") to CTI within ten (10) business days after the first
achievement of each of the following milestones (or, in the event that any such
milestone is achieved by CTI, within ten (10) business days after CTI shall have
given ORTHO notice that such milestone has been achieved):

(The information below marked by ***** has been omitted by a request for
confidential treatment. The omitted portion has been separately filed with the
Commission.)


<TABLE>
<CAPTION>
 
                                       BMT MILESTONES                                    PAYMENT
          ------------------------------------------------------------------------   ---------------
<C>       <S>                                                                        <C>
(i)       The acceptance by the FDA for filing of the first Drug                          *****
          Approval Application for a Collaboration Product for a BMT                    
          Indication in the United States.                                              
(ii)      Regulatory Approval for the first BMT Indication for a                          *****
          Collaboration Product in the United States.                                   
(iii)     Regulatory Approval for the first BMT Indication for a                          *****
          Collaboration Product in a Major Market Country.                              
(iv)      Regulatory Approval for the first BMT Indication for a                          *****
          Collaboration Product in Japan.
</TABLE>
 

          (b) AML Milestone Payments. In the event that ORTHO shall have
exercised its option pursuant to Section 4.05(b) to continue Development of
Collaboration Products for an AML Indication, ORTHO shall make the following
milestone payments ("AML Milestone Payments") to CTI within ten (10) business
days after the first achievement of each of the following milestones (or, in the
event that any such milestone is achieved by CTI, within ten (10) business days
after CTI shall have given ORTHO notice that such milestone has been achieved):

(The information below marked by ***** has been omitted by a request for
confidential treatment. The omitted portion has been separately filed with the
Commission.)


<TABLE>
<CAPTION> 
                                       AML MILESTONES                                    PAYMENT
          ------------------------------------------------------------------------   ---------------
<C>       <S>                                                                        <C> 
(i)       The commencement of a Phase III Clinical Trial, or the                          *****
          conversion of a clinical trial into a Phase II/III clinical trial,            
          for a Collaboration Product for an AML Indication, but not                    
          prior to the time that ORTHO has accepted the updated June                    
          30, 1997 Development Plan for the AML Indication.                             
</TABLE>
 

                                       17

<PAGE>
 
(The information below marked by ***** has been omitted by a request for
confidential treatment. The omitted portion has been separately filed with the
Commission.)
 

<TABLE> 
<C>       <S>                                                                        <C> 
(ii)      If ORTHO has not accepted the Development Plan in                               *****
          subsection 3.02(i) above, then upon completion of a Phase III                 
          Clinical Trial, or a Phase II/III Clinical Trial not requiring                
          further Phase III Clinical Trials, for a Collaboration Product                
          for an AML Indication, but not prior to sixty (60) days after                 
          ORTHO has received all of the data from said trial and gives                  
          notice that ORTHO wishes to continue development of the                       
          Collaboration Product for an AML Indication.                                  

(iii)     If payment of (i) or (ii) is made, then Regulatory Approval                     *****
          for the first AML Indication for a Collaboration Product in                   
          the United States.                                                            

(iv)      If payment of (i) or (ii) is made, then Regulatory Approval                     *****
          for the first AML Indication for a Collaboration Product in a                 
          Major Market Country.                                                         

(v)       If payment of (i) or (ii) is made, then Regulatory Approval                     *****
          for the first AML Indication for a Collaboration Product in
          Japan.
</TABLE>


          (c) Mucositis Milestone Payments.  In the event that ORTHO shall have
              ----------------------------                                     
exercised its option pursuant to Section 5.04 to include a Mucositis Indication
as an Additional Indication, ORTHO shall make the following milestone payments
("Mucositis Milestone Payments") to CTI within ten (10) business days after the
first achievement of each of the following milestones (or, in the event that any
such milestone is achieved by CTI, within ten (10) business days after CTI shall
have given ORTHO notice that such milestone has been achieved):

(The information below marked by ***** has been omitted by a request for
confidential treatment. The omitted portion has been separately filed with the
Commission.)


<TABLE>
<CAPTION>
                                MUCOSITIS MILESTONES                                     PAYMENT
          --------------------------------------------------------------             ---------------
<S>       <C>                                                                        <C>
(i)       The acceptance by the FDA for filing of the first Drug                          *****
          Approval Application for a Collaboration Product for a                        
          Mucositis Indication in the United States.                                    
                                                                                       
(ii)      The filing with the relevant regulatory agency or authority                     *****
          of ORTHO's first Drug Approval Application for a                              
          Collaboration Product for a Mucositis Indication in the first              
          Major Market Country which accepts such filing.                               
                                                                                       
(iii)     The filing with the relevant regulatory agency or authority                     *****
          of ORTHO's first Drug Approval Application for a                              
          Collaboration Product for a Mucositis Indication in Japan.                 
</TABLE>


                                       18

<PAGE>
 
(The information below marked by ***** has been omitted by a request for
confidential treatment. The omitted portion has been separately filed with the
Commission.)
 

<TABLE> 
<C>       <S>                                                                        <C> 
(iv)      Regulatory Approval for the first Mucositis Indication for a                    *****
          Collaboration Product in the United States.                                 
(v)       Regulatory Approval for the first Mucositis Indication for a                    *****
          Collaboration Product in a Major Market Country.                            
(vi)      Regulatory Approval for the first Mucositis Indication for a                    *****
          Collaboration Product in Japan.                                 
</TABLE>


          (b) SIRS Milestone Payments. In the event that ORTHO shall have
exercised its option pursuant to Section 5.04 to include a SIRS Indication as an
Additional Indication, ORTHO shall make the following payments ("SIRS Mile stone
Payments") to CTI within ten (10) business days after the first achievemen t of
each of the following milestones (or, in the event that any such milestone is
achieved by CTI, within ten (10) business days after CTI shall have given ORTHO
notice that such milestone has been achieved):

(The information below marked by ***** has been omitted by a request for
confidential treatment. The omitted portion has been separately filed with the
Commission.)


<TABLE>
<CAPTION>
 
                                    SIRS MILESTONES                                      PAYMENT
          -------------------------------------------------------------------        ---------------
<S>       <C>                                                                        <C>
(i)       The commencement of a Phase III Clinical Trial, or the                          *****
          conversion of a clinical trial into a Phase II/III clinical trial,            
          for a Collaboration Product for a SIRS Indication.                            
(ii)      The acceptance by the FDA for filing of the first Drug                          *****
          Approval Application for a Collaboration Product for a SIRS                  
          Indication in the United States.                                             
(iii)     Regulatory Approval for the first SIRS Indication for a                         *****
          Collaboration Product in the United States.                                  
(iv)      Regulatory Approval for the first SIRS Indication for a                         *****
          Collaboration Product in a Major Market Country.                              
(v)       Regulatory Approval for the first SIRS Indication for a                         *****
          Collaboration Product in Japan.                                                 
</TABLE>


                                   ARTICLE IV

                                  DEVELOPMENT
                                  -----------

          SECTION 4.01.  Formation of JDC.  Within thirty (30) days after the
                         ----------------                                    
Effective Date (or such later time as may be mutually agreed to by the Parties),
the Parties shall establish the JDC. The JDC shall consist of an equal number of
representatives of CTI and ORTHO to be agreed upon by the Parties from time to
time. Either Party may designate

                                       19

<PAGE>
 
a substitute for a member unable to be present at a meeting.  One of the ORTHO
members of the JDC, chosen at the sole discretion of ORTHO, along with one of
the CTI members of the JDC, chosen at the sole discretion of CTI, shall serve as
co-chair of the JDC.  Regardless of the number of representatives from each
Party on the JDC, each Party shall have one vote on any issue in dispute.
Meetings of the JDC shall be held at least quarterly and may be called by either
Party with not less than ten (10) business days notice to the other unless such
notice is waived, and meetings shall be held at the office of the Party not
calling the meeting, unless otherwise agreed. The JDC may be convened, polled or
consulted from time to time by means of telecommunication or correspondence.
Each Party will disclose to the other proposed agenda items reasonably in
advance of each meeting of the JDC.  Each Party shall bear its own costs for
participation in the JDC.


          SECTION 4.02.  Responsibilities of JDC.
                         ----------------------- 

          (a)   The JDC shall oversee the Development of (i) Collaboration
Products for Development Indications, and (ii) to the extent ORTHO exercises its
option(s) under Section 5.04 to expand the Field to include Additional
Indications, Collaboration Products for such Additional Indications, in order to
obtain Regulatory Approvals in the Co-Promotion Territory as set forth in this
Article IV.  The JDC will also oversee the preparation of Development Plans and
Development Budgets and submit them to the Steering Committee for review and as
required, approval and will facilitate the flow of Information with respect to
Development being conducted for each Collaboration Product for each Development
Indication and Additional Indication, if any.  In addition, as part of an
approved Commercialization Budget and/or an approved Launch Budget, the JDC will
provide such support with respect to Phase IIIB Clinical Trials and Phase IV
Clinical Trials as may be reasonably requested by the JCC.

          (b) Decisions shall be made by the JDC by consensus after an open
discussion of the matters as to which decisions are being made.  If the JDC
fails to reach consensus as to any matter involving Development, excepting (i)
increasing a Development Budget, other than pursuant to Section 4.05 (ii)
altering a Development Plan in any material respect, including changing the
indications for which a Collaboration Product is being developed, or (iii)
terminating a Phase III Clinical Trial prior to completion in accordance with
its protocol ("Excepted Development Matters"), the decision of CTI will be final
and determinative with respect to all Development Indications and matters
related thereto and so long as such decision does not contradict or modify the
terms of this Agreement.   If the JDC fails to reach consensus as to any matter
involving Additional Indications, the decision of ORTHO will be final and
determinative so long as such decision does not contradict or modify the terms
of this Agreement.  Excepted Development Matters shall be referred to the
Steering Committee for resolution pursuant to Section 2.04.

                                       20

<PAGE>
 
          (c) The JDC will have the power to form subcommittees with appropriate
representation from CTI and ORTHO, including the R&D Subcommittee pursuant to
Section 5.01 in the event that ORTHO exercises its option to commence the
Sponsored Research Program as provided therein.

          (d) During clinical trials for any Collaboration Products, the JDC and
JCC shall work together to assure a smooth transition from Development of such
Collaboration Product to Commercialization of such Collaboration Product,
including without limitation, product indications, product positioning and Pre-
Marketing activities.  In addition, the JDC shall keep the JCC informed of
proposed changes in the formulation of Collaboration Products and the progress
of all clinical trials being conducted.

          SECTION 4.03.  Lead Development Party.
                         ---------------------- 

          CTI will be the lead Development Party with respect to obtaining
Regulatory Approval for all Collaboration Products in the Co-Promotion Territory
and, as a result, shall be obligated and responsible for carrying out
Development pursuant to each Development Plan.  CTI will assemble its
development team and commence reporting to the JDC within thirty (30) days
following the Effective Date.  ORTHO agrees to carry out such Development tasks
as are reasonably requested by CTI and accepted by ORTHO.  ORTHO agrees to apply
its expertise to assist CTI in all aspects of each Development Plan.  ORTHO will
be the lead Development Party with respect to obtaining Regulatory Approval for
all Royalty Bearing Products in the Royalty Bearing Territory, and, acting in
this capacity, shall have the right to act independently of the JDC; provided,
                                                                     -------- 
however, that ORTHO shall not take any action in connection with obtaining
- -------                                                                   
Regulatory Approval for a Royalty Bearing Product in the Royalty Bearing
Territory that would materially and adversely affect CTI's ability to conduct
Development pursuant to the Development Plan.

          SECTION 4.04.  Right to Engage Third Parties.  (a)  In the course of
                         -----------------------------                        
its business, CTI regularly uses Third Parties to perform certain Development
activities.  CTI may continue to do so during the course of this Agreement and
expenses relating to such Third Party Development will be included in
Development Expenses; provided, however, that CTI shall enter into such Third
                      --------  -------                                      
Party contracts on an arm's-length basis at reasonable rates customary in the
U.S. pharmaceutical industry.

          (b) CTI shall notify ORTHO in writing fifteen (15) days prior to
entering into a material contract with a Third Party to perform any Development
activities, unless such contract may be cancelled or terminated by CTI without
penalty on less than sixty (60) days notice.  During the fifteen (15) day period
following such notice from CTI, ORTHO shall have the right to offer to perform
itself such Development activities that CTI proposed to contract to a Third
Party.  If ORTHO decides to offer to perform such Development activities, it
shall notify CTI in writing during such fifteen (15) day period and shall
include with such notice the terms of its offer to perform such Development
activities.  CTI shall

                                       21

<PAGE>
 
have no obligation to accept such offer, but shall consider such offer in good
faith and negotiate towards entering into an agreement with ORTHO if ORTHO's
offer and capabilities are economically equivalent to those of such Third Party.
All other things being equal, CTI shall accept ORTHO's offer if it is less
expensive than such Third Party's offer.

          SECTION 4.05.  Development Plan and Development Budget.
                         --------------------------------------- 

          (a)  The Development of each Collaboration Product in the Co-Promotion
Territory for each Development Indication and Additional Indication, if any,
shall be governed by a development plan ("Development Plan") and development
budget ("Development Budget"), which shall provide for Development of
Collaboration Products for Development Indications and Additional Indications,
if any, in the Co-Promotion Territory and, together with updates, shall (except
as provided in Section 5.04) be prepared by CTI after discussion and
consultation with ORTHO and the JCC, for Development Budget approval by the
Steering Committee.

(The information below marked by ***** has been omitted by a request for
confidential treatment. The omitted portion has been separately filed with the
Commission.)

          (b) The Parties have agreed upon and approved the Initial Development
Plan and Budget.  After the completion of the Phase II AML Trial, CTI shall
provide ORTHO with all of the raw data related to the Phase II AML Trial and a
draft clinical trial report (which shall be compiled from a secured and audited
database and shall include patient listing statistics, methods and procedures)
prepared by CTI with respect to the Phase II AML Trial (such data and report
being collectively referred to herein as the "AML Trial Information").  The AML
Trial Information shall be accompanied by a draft revised Development Plan and
Development Budget for the AML Indication.  ORTHO shall have the right,
exercisable upon delivery of written notice to CTI not later than sixty (60)
days following the date that the AML Trial Information is presented to ORTHO, to
continue Development of Collaboration Products for an AML Indication hereunder
for the period after June 30, 1997.  In the event that ORTHO makes such
election, it shall pay to CTI an amount equal to sixty percent (60%) of all
expenses that were incurred by CTI in connection with the Development of
Collaboration Products for an AML Indication on or after the Effective Date to
the date of determination, other than any such amounts that were included in the
Initial Development Plan and Budget and previously paid on a 60% basis by ORTHO,
plus interest on such amount at an annual rate equal to *****.  If ORTHO elects
to exercise its option pursuant to this Section 4.05(b) to continue Development
of Collaboration Products for an AML Indication, then ORTHO shall make the AML
Milestone Payments to CTI pursuant to Section 3.02(b) hereof as provided
therein.  If any of the milestones set forth in Section 3.02(b) shall have been
achieved prior to the date that ORTHO shall have exercised its option pursuant
to Section 4.05(b) to continue Development of Collaboration Products for an AML
Indication hereunder, then ORTHO shall make the AML Milestone Payments which
correspond to such achieved milestones concurrently with the exercise of such
option.

          (c) With respect to Collaboration Products for Additional Indications,
the initial Development Plan and initial Development Budget for each such
Additional Indication

                                       22

<PAGE>
 
shall be agreed between the Parties pursuant to Section 5.04, and each
subsequent Development Plan and Development Budget for each such Additional
Indication shall be proposed by the JDC and submitted to the Steering Committee
for review and Development Budget approval.

(The information below marked by ***** has been omitted by a request for
confidential treatment. The omitted portion has been separately filed with the
Commission.)

          (d) Each Development Plan shall describe the proposed overall program
of Development for the subject Collaboration Product for the particular
Development Indication or Additional Indication, as the case may be, in the Co-
Promotion Territory, including preclinical studies, toxicology, formulation,
process development, clinical studies and regulatory plans and other elements of
obtaining Regulatory Approval in the Co-Promotion Territory, and shall include
projected timelines for obtaining such Regulatory Approval.  The Development
Plan shall include a summary of estimated Development Expenses of the program
expected during the Development process through obtaining Regulatory Approval in
the Co-Promotion Territory for each proposed indication and route of delivery,
and shall also include a detailed Development Budget for all Development
activities proposed for the following ***** months.

(The information below marked by ***** has been omitted by a request for
confidential treatment. The omitted portion has been separately filed with the
Commission.)

          (e) Each Development Plan and Development Budget shall be updated
annually by CTI after discussion and consultation with ORTHO and the JCC, and
submitted by ***** of each calendar year to the Steering Committee for review
and Development Budget approval.  Each updated Development Budget shall be based
on the corresponding updated Development Plan and shall be prepared in
accordance with generally accepted accounting principles.  The rate of any cost
increases shall be reasonable and customary as measured by an agreed-upon index
such as the All Urban Consumer Price Index.  The Steering Committee shall
provide comments on each such updated Development Plan and Development Budget
within thirty (30) days following its submission to them and within ninety (90)
days following such original submission the Steering Committee shall either
approve the Development Budget submitted by the JDC or approve a modified
Development Budget prepared by the Steering Committee consistent with the
objectives for the Collaboration Products and the aims of the collaboration.  If
the Steering Committee fails to approve any change in the Development Budget or
a material change in the Development Plan of the type described in Section
4.02(b)(ii), the Development Budget and Development Plan shall remain at its
previously approved level or previous unmodified form.

          SECTION 4.06.  Development Efforts.  CTI and ORTHO each agree to
                         -------------------                              
collaborate diligently in the development of Collaboration Products and to use
commercially reasonable and diligent efforts to develop and bring Collaboration
Products to market in the Co-Promotion Territory as soon as practicable.  Each
Party further agrees to execute and substantially perform the obligations
assumed by it under the Development Plan within the Development Budget and to
cooperate with the other Party in carrying out the Development Plan.

                                       23

<PAGE>
 
          SECTION 4.07.  Drug Approval Applications.
                         -------------------------- 

          (a)  Co-Promotion Territory.  Consistent with the Development Plan but
               ----------------------                                           
subject to the remainder of this Section 4.07, CTI shall be responsible for
preparing and filing Drug Approval Applications and seeking Regulatory Approvals
for Collaboration Products in the Co-Promotion Territory, including preparing
all reports necessary as part of a Drug Approval Application.  All such Drug
Approval Applications shall be filed in the name of CTI, and a copy of each such
Drug Approval Application shall be simultaneously provided to ORTHO.  CTI shall
be responsible for prosecuting such Drug Approval Applications and ORTHO shall
have the right of cross-reference.  In connection with all Drug Approval
Applications being prosecuted by CTI under this Section 4.07(a), CTI agrees to
provide ORTHO with a copy (which may be wholly or partly in electronic form) of
all filings to regulatory agencies that it makes hereunder.  The Parties shall
consult and cooperate in the preparation of each Drug Approval Application and
in obtaining Regulatory Approvals within the Co-Promotion Territory. CTI shall
provide ORTHO with reasonable advance notice of any scheduled meeting with any
regulatory agency relating to any Drug Approval Application, and ORTHO shall
have the right to participate in any such meeting.  CTI shall promptly furnish
ORTHO with copies of all material correspondence CTI has had with any regulatory
agency, and contact reports concerning material conversations or material
meetings with any regulatory agency, in each case relating to any such Drug
Approval Application.  Upon receipt of Regulatory Approval of the Drug Approval
Application for the first Collaboration Product hereunder, CTI shall submit an
appropriate document to the regulatory agency designating ORTHO as the
Regulatory Agent and thereafter ORTHO shall assume primary responsibility for
dealings with the regulatory agency with respect thereto, including filing all
supplements and other documents with such agency with respect to such existing
Drug Approval Application.  In the event that any regulatory agency threatens or
initiates any action to remove a Collaboration Product from the market in the
Co-Promotion Territory, ORTHO shall notify CTI of such communication within one
business day of receipt by ORTHO.  In connection with all Drug Approval
Applications with respect to which ORTHO is Regulatory Agent, ORTHO agrees to
provide CTI with a copy (which may be wholly or partly in electronic form) of
all filings to regulatory agencies that it makes hereunder.  The Parties shall
consult and cooperate in the preparation of each such Drug Approval Application
and in obtaining Regulatory Approvals within the Co-Promotion Territory.  ORTHO
shall provide CTI with reasonable advance notice of any scheduled meeting with
any regulatory agency relating to any such Drug Approval Application and CTI
shall have the right to participate in any such meeting.  ORTHO shall promptly
furnish CTI with copies of all material correspondence or material meetings with
any regulatory agency in each case relating to any such Drug Approval
Application.

          As between Parties, CTI shall be the legal and beneficial owner of all
Drug Approval Applications and related approvals in the Co-Promotion Territory.
Upon receipt of regulatory approval of each subsequent separate Drug Approval
Application with respect to a

                                       24

<PAGE>
 
Collaboration Product the process described above shall be repeated and CTI
shall appoint ORTHO as Regulatory Agent upon approval thereof.  CTI shall have
the right of cross-reference with respect to all Drug Approval Applications for
which ORTHO is Regulatory Agent.  In furtherance of the desire of the Parties
that each have access to all relevant information and the fact that, as
Regulatory Agent and as a function of ORTHO having responsibility hereunder for
the maintenance and monitoring of all safety and similar data with respect to
Collaboration Products, CTI shall have the right to have one or more of its
employees be resident at ORTHO's place of business where access to such data is
generally made available to the relevant ORTHO employees performing such safety
and monitoring functions.  All costs of such employees shall be CTI's, provided
                                                                       --------
ORTHO shall train such employees in whatever procedures are required to enable
such employees to have such informational access with respect to Collaboration
Products, and provided further that such employees shall be subject to all ORTHO
              -------- -------                                                  
security, safety and other relevant policies applicable to ORTHO employees.

          (b) Royalty Bearing Territory.  ORTHO shall be responsible for
              -------------------------                                 
preparing and filing Drug Approval Applications and seeking Regulatory Approvals
for Collaboration Products in the Royalty Bearing Territory, including preparing
all reports necessary as part of a Drug Approval Application.  ORTHO shall be
responsible for prosecuting all such Drug Approval Applications, and CTI shall
have the right of cross reference.  In connection with all Drug Approval
Applications being prosecuted by ORTHO hereunder, ORTHO agrees to provide CTI
with a copy (which may be wholly or partly in electronic form) of all filings to
regulatory agencies in each Major Market Country that it makes hereunder.
Within thirty  (30) days following the end of each calendar quarter ORTHO shall
report to CTI regarding the status of each pending and proposed Drug Approval
Application in the Royalty Bearing Territory.  In the event that any regulatory
agency threatens or initiates any action to remove such Collaboration Product
from the market in any country in the Royalty Bearing Territory, ORTHO shall
notify CTI of such communication within one business day of receipt by ORTHO.

          SECTION 4.08.  Costs of Development.
                         -------------------- 

          (a) General.  All Development Expenses incurred pursuant to an
              -------                                                   
approved Development Plan for a Collaboration Product shall be shared by the
Parties in the Co-Promotion Territory in the manner as set forth in this Article
IV.

(The information below marked by ***** has been omitted by a request for 
confidential treatment. The omitted portion has been separately filed with the 
Commission.)

          (b) Sharing.  Except as is provided in subsection (f) below, ORTHO
              -------                                                       
shall fund sixty percent (60%) of all Development Expenses for Collaboration
Products in the Co-Promotion Territory.  CTI shall be solely responsible for the
remaining forty percent (40%) of such Development Expenses.  ORTHO's maximum
responsibility for Development Expenses shall not be greater than ***** for the
period commencing with the Effective Date and ending on December 31, 1996, and
twelve million dollars ($12,000,000) for each of calendar years 1997 and 1998,
in each case plus sixty

                                       25

<PAGE>
 
percent (60%) of any additional Development Expenses that may be incurred by CTI
pursuant to a Development Budget agreed upon by the Parties pursuant to Section
4.05(b) in connection with any Collaboration Product for any Additional
Indication as to which ORTHO shall have exercised its option pursuant to Section
5.04.

          (c) Royalty Bearing Territory.  ORTHO shall bear all Development
              -------------------------                                   
Expenses for Collaboration Products that are specifically related to the
Development, manufacture, use and/or sale of a Collaboration Product in the
Royalty Bearing Territory.  As provided in Section 13.01, Information developed
by CTI relating to the Development of Collaboration Products in the Co-Promotion
Territory can be used by ORTHO for the Development of such Collaboration
Products in the Royalty Bearing Territory without further charge (other than
reasonable duplicating, postage and related out-of-pocket costs).

(The information below marked by ***** has been omitted by a request for
confidential treatment. The omitted portion has been separately filed with the
Commission.)

          (d) Advance Payments.  Within ten days after the Effective Date, ORTHO
              ----------------                                                  
shall make an advance payment to CTI equal to ***** of the budgeted Development
Expenses from the Effective Date through December 31, 1996.  Thereafter, ORTHO
shall advance to CTI, on ***** of each calendar year, ***** of the budgeted
Development Expenses for the first calendar quarter of such calendar year, based
on the most recently approved Development Budget.

          (e) Regular Payments.  Each Party shall calculate and maintain records
              ----------------                                                  
of Development Expenses incurred by it in accordance with procedures to be
agreed upon between the Parties, which shall include an appropriate procedure
for netting payments owed to each under this Section 4.08(e).  Each Party shall
report quarterly to the other Party on its Development Expenses, with such
reports to be submitted within thirty (30) days after the end of each calendar
quarter.  Each Party shall repay to the other Party its share (less any amounts
which have been paid in advance pursuant to Section 4.08(d)) within forty-five
(45) days of its receipt of each such report.

          (f) Overruns.  Notwithstanding the provisions of Section 4.08(b), CTI
              --------                                                         
shall be solely responsible for any Development Expenses for a Collaboration
Product for a Development Indication exceeding during a calendar year the most
recently approved Development Budget for such year and such overage shall be
charged to its account, unless the overage is the result of actions of ORTHO (in
which case ORTHO shall bear the expense), or is approved unanimously by the
Steering Committee (in which cases ORTHO shall be responsible for sixty percent
(60%) of such Development Expenses and CTI shall be responsible for forty
percent (40%) of such Development Expenses).

          (g) Increase with Respect to Additional Indications.  Notwithstanding
              -----------------------------------------------                  
anything contained in this Agreement to the contrary, in the event that the JDC
shall have failed to reach a consensus as to the Development Budget for an
Additional Indication, and ORTHO shall have exercised its rights under this
Agreement to increase the Development Budget for such Additional Indication,
ORTHO shall be solely responsible for any

                                       26

<PAGE>
 
Development Expenses for such Collaboration Product for such Additional
Indication exceeding during a calendar year the most recent Development Budget
for such Collaboration Product for such Additional Indication that was agreed to
by a unanimous vote of the JDC.

          SECTION 4.09.  Election by a Party to Terminate Its Participation in
                         -----------------------------------------------------
Development for Safety or Tolerability Reasons.
- ---------------------------------------------- 

          (a) Termination of Participation in Development.  In the event that
              -------------------------------------------                    
(i) issues regarding the Safety of Lisofylline arise during the Development of a
Collaboration Product which are materially and adversely different from the
Safety profile of Lisofylline existing as of the Effective Date or (ii) clinical
data obtained after the Effective Date reveal a materially and adversely
different Tolerability profile for Lisofylline from such profile as it existed
as of the Effective Date, each Party shall have the right to terminate its
participation in the worldwide Development of a Collaboration Products as
provided below in Section 4.09(c).

          (b) Steering Committee Review of Termination of Participation in
              ------------------------------------------------------------
Development.  The Party desiring to terminate its participation in Development
- -----------                                                                   
pursuant to Section 4.09(a) shall notify the Steering Committee of its desire to
so terminate and the Steering Committee shall consider such Party's notice
within ten (10) days after receipt thereof and make a decision within such ten
(10) day period.  If the Steering Committee decides unanimously not to so
terminate, then the terminating Party may not terminate.  If there is no such
unanimous agreement at the Steering Committee, the terminating Party may
thereupon terminate as aforesaid.

          (c) Effect of Termination of Participation in Development.  In the
              -----------------------------------------------------         
event one Party's participation in Development of a Collaboration Product is
terminated pursuant to this Section 4.09, then (i) such termination shall be
effective thirty (30) days following review and decision by the Steering
Committee pursuant to Section 4.09(b), (ii) the terminating Party shall not be
responsible for any Development Expenses related to such Collaboration Product
after termination is effective, (iii) subject to Section 12.03, the
nonterminating Party may thereafter proceed with development and
commercialization of the Product in question as an Independent Product, either
alone or in conjunction with Third Parties, and (iv) the terminating Party shall
grant exclusive worldwide licenses (even as to the granting Party) under CTI
Patents or ORTHO Patents, as applicable, Joint Patents and know-how Controlled
by such Party to the non-terminating Party for the continued development and
commercialization of the Product in question, shall transfer any related Drug
Approval Applications or Regulatory Approvals (including transfer of all
relevant data and information relevant to regulatory authorities), and otherwise
cooperate to enable the non-terminating Party under this Section 4.09 to
continue said development and commercialization.  In the event a termination of
participation in Development of a Collaboration Product occurs under this
Section 4.09, such Independent Product shall thereafter bear a royalty equal to
that payable for Independent Products under

                                       27

<PAGE>
 
Section 5.07(b).  Such royalty shall be payable until the aggregate amount of
royalties paid in respect of such Independent Product shall equal the aggregate
amount of Development Expenses attributable to such Independent Product paid by
the Party receiving such royalty.

          (d) Termination Rights Not Exclusive.  The rights set forth in this
              --------------------------------                               
Section 4.09 to terminate participation in Development for Safety or
Tolerability reasons shall be separate from, and in addition to, the rights of
ORTHO to terminate this Agreement pursuant to Section 14.03.

          SECTION 4.10.  Development Coordination in Canada.  Notwithstanding
                         ----------------------------------                  
anything contained in this Agreement to the contrary, but subject to any
information covered by a confidentiality agreement with a Third Party, CTI may
provide any Information that is relevant to the Development of Collaboration
Products to BioChem Pharma that CTI is required to provide pursuant to its
existing Collaboration Agreement, dated as of March 7, 1995, as amended on
November 30, 1995 and December 6, 1995 between CTI and BioChem Pharma; provided,
                                                                       -------- 
however, that CTI shall not provide any Confidential Information that CTI shall
- -------                                                                        
have received from ORTHO to BioChem Pharma unless and until BioChem Pharma shall
have entered into a confidentiality agreement containing provisions as
protective as those of Article X hereof.


                                   ARTICLE V

                                    OPTIONS
                                    -------

                  I.     OPTION TO CONDUCT SPONSORED RESEARCH
                         ------------------------------------

          SECTION 5.01.  Sponsored Research.
                         ------------------ 

(The information below marked by ***** has been omitted by a request for
confidential treatment. The omitted portion has been separately filed with the
Commission.)

          (a) ORTHO may at any time elect to sponsor research and development
activities to be performed by CTI with respect to identifying, discovering,
creating, optimizing and/or synthesizing Eligible Compounds (the "Sponsored
Research Program").  Within ***** after ORTHO's election to implement the
Sponsored Research Program, the Parties, working together in good faith, shall
attempt to agree upon and approve a plan regarding the general scope of the
research to be carried out under the Sponsored Research Program, together with
reasonable detail regarding resource allocation, research direction and focus
and related matters, for the first one (1) year of the Sponsored Research
Program (such plan, if so agreed, being the "Initial R&D Plan"). If the Parties
are unable to agree on such plan, then no Sponsored Research Program shall
commence, and neither Party shall have any obligations under Section 5.01, 5.02
or 5.03 hereof. The Sponsored Research Program will be managed by CTI under the
oversight of a subcommittee of the JDC (the "R&D Subcommittee") comprised of
equal numbers of qualified CTI and

                                       28

<PAGE>
 
ORTHO appointees (but no more than two (2) each) and chaired by an ORTHO
appointee.  CTI agrees to undertake the research and development activities
described in the Initial R&D Plan (and any subsequent research plans adopted
pursuant to subsection (c) below) unless otherwise agreed by the R&D
Subcommittee and any such other activities under the Sponsored Research Program
as are reasonably requested by the R&D Subcommittee.  No material change shall
be made to the Initial R&D Plan or any subsequent research plan adopted pursuant
to subsection 5.01(c) below without the unanimous consent of the R&D
Subcommittee.  The research and development activities to be performed by CTI
hereunder shall be conducted at and/or coordinated from the facilities of CTI
under the supervision and direction of the director of the Sponsored Research
Program.  CTI shall be responsible for the administrative management and fiscal
control of the research activities performed by CTI in support of the Sponsored
Research Program, subject to compliance with the Initial R&D Plan and any
subsequent research plans adopted pursuant to subsection (c) below and to the
provisions of this Section 5.01 generally.

(The information below marked by ***** has been omitted by a request for
confidential treatment. The omitted portion has been separately filed with the
Commission.)

          (b) The R&D Subcommittee will meet as often as the Parties consider
necessary but in no event less than quarterly for the purpose of monitoring
progress and suggesting changes to the Initial R&D Plan and any subsequently
adopted research plans, as appropriate. CTI shall provide the R&D Subcommittee,
and, if requested, ORTHO, within ***** completion of each calendar quarter of
the Sponsored Research Program and at other times if reasonably requested, with
written progress reports summarizing the current status and progress of CTI's
activities under the Sponsored Research Program and any issues relating thereto,
and shall otherwise be reasonably available to meet to discuss the status and
progress of the Sponsored Research Program. ORTHO shall have the right to
arrange to visit CTI at its offices and laboratories and to discuss the
Sponsored Research Program and its results in detail with the technical
employees and consultants of CTI, provided that such visits shall be during
                                  --------                          
normal business hours and shall not unreasonably interrupt the operations of
CTI. CTI shall retain separate dedicated laboratory notebooks of all research
and development performed by CTI pursuant to the Sponsored Research Program.
ORTHO shall have the right to audit such laboratory notebooks not more
frequently than twice per one year term of the Sponsored Research Program and
once in the one year period following the termination of the Sponsored Research
Program on reasonable advance notice to CTI. Such laboratory notebooks shall be
retained for a period of ***** following the termination of the Sponsored
Research Program, and if any Patent applications relating to the Program have
been filed, then such laboratory notebooks shall be retained until the
expiration of such Patents.

(The information below marked by ***** has been omitted by a request for
confidential treatment. The omitted portion has been separately filed with the
Commission.)

          (c) The initial term of the Sponsored Research Program shall commence
on the date specified in the Initial R&D Plan and shall terminate on the first
anniversary thereof.  ORTHO shall be entitled to elect to renew the Sponsored
Research Program for additional one year periods, exercisable upon delivery of
written notice to CTI in each case not later than ***** prior to the expiration
date of each term of the Sponsored Research Program. During the ***** prior to
the expiration date of each term of the

                                       29

<PAGE>
 
Sponsored Research Program, the Parties shall discuss and endeavor to agree upon
research and development plans for the next term of the Sponsored Research
Program.

          SECTION 5.02.  Dedicated Researchers.  CTI shall, as soon as is
                         ---------------------                           
practicable after the date specified in the Initial R&D Plan, assemble a team of
scientists, clinicians, engineers, technical associates and assistants and other
personnel under the supervision and direction of the director of the Sponsored
Research Program.  CTI will devote the number of qualified scientists required
pursuant to the Initial R&D Plan, working full-time on the Sponsored Research
Program throughout the completion of the Sponsored Research Program, such
resources to be allocated as described in the Initial R&D Plan or subsequent
research plans or as determined by the R&D Subcommittee.  No material deviation
from the resource allocation set out in the Initial R&D Plan or any subsequent
research plan adopted pursuant to subsection 5.01(c) may be made without the
unanimous consent of the R&D Subcommittee.  For purposes of this Agreement, the
phrase "full-time" shall mean forty (40) hours per week, excluding holidays, and
a "qualified scientist" is one with a Ph.D. or M.D. and who possesses the
requisite knowledge and experience to carry on research of the kind indicated
based on standards generally applicable in the United States pharmaceutical
industry.

          SECTION 5.03.  ORTHO Funding.
                         ------------- 

          (a) ORTHO shall reimburse CTI quarterly for its research activities
in connection with the Sponsored Research Program at an actual annual rate per
qualified scientist working full time as agreed by the Parties.  CTI shall
calculate and maintain records of expenses incurred by it in connection with the
Sponsored Research Program, which records shall identify in reasonable detail
such expenses undertaken pursuant to the Sponsored Research Program, in
accordance with procedures to be agreed upon between the Parties.  CTI shall
report quarterly to ORTHO on such expenses, with such reports to be submitted
within forty five (45) days after the end of each calendar quarter and sixty
(60) days after the end of each calendar year.  The reimbursement payment
required by this Section 5.03(a) shall be paid by ORTHO within thirty (30) days
following receipt of such notice.

(The information below marked by ***** has been omitted by a request for
confidential treatment. The omitted portion has been separately filed with the
Commission.)

          (b) Notwithstanding ORTHO's funding of the Sponsored Research Program,
CTI shall own, or hold exclusive rights to, the entire right, title and interest
in and to all inventions and know-how developed by CTI employees and consultants
pursuant to the Sponsored Research Program, and all patent rights deriving
therefrom, subject to ORTHO's rights under this Agreement.  Such patent rights
and know-how shall not constitute "CTI Patents" or "CTI Know-how" under this
Agreement merely by virtue of ORTHO's funding of the Sponsored Research Program.
Other than the options granted to ORTHO under Section 5.04 and the Royalty
specified in the next sentence, ORTHO shall have no right, title or interest in
such patent rights or know-how arising solely out of ORTHO's funding of the
Sponsored Research Program.  CTI shall pay to ORTHO a Royalty of ***** of Net
Sales of

                                       30

<PAGE>
 
(The information below marked by ***** has been omitted by a request for
confidential treatment. The omitted portion has been separately filed with the
Commission.)
 
R&D Products (as defined in the succeeding sentence) on a country-by-country
basis for the greater of (i) ***** from the first commercial sale of an R&D
Product in such country and (ii) the last to expire of any valid and enforceable
CTI Patent which covers the use or sale of such R&D Product in such country. As
used in this Section 5.03(b), "R&D Product" means a chemical compound discovered
pursuant to the Sponsored Research Program that is subsequently commercialized
as a pharmaceutical product by CTI or an assignee.

                        II.  ORTHO FIRST OFFER RIGHTS.
                             ------------------------ 
              SECTION 5.04.  ORTHO Option to Expand the Field.
                             -------------------------------- 

(The information below marked by ***** has been omitted by a request for
confidential treatment. The omitted portion has been separately filed with the
Commission.)

          (a)  In the event that CTI wishes to have research and development
activities carried out in respect of any Collaboration Compound for any
Potential New Indication, with a view to including such Potential New Indication
as an Additional Indication, CTI shall make a written proposal to ORTHO setting
forth in reasonable detail the scope of the research and development activities
proposed by CTI, together with all data available to CTI relating thereto.  Such
presentation shall be accompanied by a draft development plan and development
budget for one or more potential Collaboration Products including or
incorporating such Collaboration Compound for such Potential New Indication.
ORTHO shall have the right with respect to each such proposal, exercisable upon
delivery of written notice to CTI not later than ***** following the date that
such Potential New Indication is presented to ORTHO, to include such Potential
New Indication as an Additional Indication hereunder. With respect to each such
Additional Indication as to which ORTHO makes such election, it shall pay to CTI
an amount equal to sixty percent (60%) of all Pre-Selection Expenses directly
attributable to such Additional Indication from the Effective Date hereof.

(The information below marked by ***** has been omitted by a request for
confidential treatment. The omitted portion has been separately filed with the
Commission.)

          (b)  In the event that ORTHO shall have failed to exercise its option
under subsection 5.04(a) with respect to any Potential New Indication, CTI shall
be free to conduct research and development activities in respect of such
Collaboration Compound for such Potential New Indication at its own expense.
Such research and development activities shall constitute "Pre-Selection
Activities" hereunder.  Prior to commencing clinical trials for such
Collaboration Compound for such Potential New Indication, CTI shall make a
written proposal to ORTHO setting forth in reasonable detail the scope of the
clinical development activities proposed by CTI, together with all data
available to CTI relating thereto.  Such presentation shall be accompanied by a
draft development plan and development budget for one or more potential
Collaboration Products including or incorporating such Collaboration Compound
for such Potential New Indication, and a report setting forth in reasonable
detail all Pre-Selection Expenses directly attributable to such Additional
Indication.  ORTHO shall have the right with respect to each such proposal,
exercisable upon delivery of written notice to CTI not later than *****
following the date that such Potential New Indication is presented to ORTHO, to
include such Potential New Indication as an Additional Indication hereunder.
With respect to each such Additional Indication as to which ORTHO makes

                                       31

<PAGE>
 
(The information below marked by ***** has been omitted by a request for 
confidential treatment. The omitted portion has been separately filed with the 
Commission.)

such election, it shall pay to CTI an amount equal to (i) sixty percent (60%) of
all Pre-Selection Expenses directly attributable to such Additional Indication
from the Effective Date hereof plus (ii) interest on such amount at an annual
rate equal to ***** from the Effective Date hereof.

          (c) In the event that ORTHO shall have failed to exercise its option
under subsection 5.04(b) with respect to any Potential New Indication, CTI shall
be free to conduct clinical development activities in respect of such
Collaboration Compound for such Potential New Indication at its own expense.
Such clinical development activities shall constitute "Pre-Selection Activities"
hereunder.  Within five (5) business days of the receipt of Regulatory Approval
from the FDA with respect to a product including or incorporating such
Collaboration Compound for such Potential New Indication, CTI shall provide
ORTHO with a copy of such Drug Approval Application with respect to such product
including or incorporating such Collaboration Compound for such Potential New
Indication, together with a report setting forth in reasonable detail all Pre-
Selection Expenses directly attributable to such Potential New Indication.
ORTHO shall have the right with respect to each such proposal, exercisable upon
delivery of written notice to CTI not later than thirty (30) days following the
date that such Potential New Indication is presented to ORTHO, to include such
Potential New Indication as an Additional Indication hereunder.  With respect
to each such Additional Indication as to which ORTHO makes such election, it
shall pay to CTI an amount equal to (i) sixty percent (60%) of all Pre-Selection
Expenses directly attributable to such Additional Indication from the Effective
Date hereof plus (ii) interest on such amount at an annual rate equal to *****
from the Effective Date hereof.

          (d) If ORTHO exercises such option within any of the periods set forth
in subsections 5.04(a), (b) or (c) above, the Parties shall, within the next
thirty (30) days, agree upon a definitive development plan and development
budget in respect of such Additional Indication, such plan and budget to be
consistent in scope with the Initial Development Plan and Development Budget.
Upon exercise of such option, the Potential New Indication as to which such
option shall have been exercised shall constitute an "Additional Indication"
hereunder, such Additional Indication shall become a "Development Indication"
hereunder, and the development plan and development budget agreed between the
Parties shall become the "Development Plan" and "Development Budget" with
respect to such Additional Indication.

          SECTION 5.05.  License Fee and Milestone Payments for Additional
                         -------------------------------------------------
Indications.
- ----------- 

(The information below marked by ***** has been omitted by a request for 
confidential treatment. The omitted portion has been separately filed with the 
Commission.)

          (a) If, on or prior to the BMT Approval Date, ORTHO shall have
exercised one or more options pursuant to Section 5.04 to include a Potential
New Indication (other than a Mucositis Indication) as an Additional Indication
hereunder, then ORTHO shall pay to CTI a one-time license fee equal to *****
within ten (10)

                                       32

<PAGE>
 
business days following the BMT Approval Date as partial payment for the
expansion of the Field.

(The information below marked by ***** has been omitted by a request for 
confidential treatment. The omitted portion has been separately filed with the 
Commission.)

          (b) If as of the BMT Approval Date ORTHO shall not have exercised any
option pursuant to Section 5.04 to include a Potential New Indication (other
than a Mucositis Indication) as an Additional Indication hereunder, and if
thereafter ORTHO shall exercise an option pursuant to Section 5.04 to include a
Potential New Indication (other than a Mucositis Indication) as an Additional
Indication hereunder, then ORTHO shall concurrently with the first exercise of
such option pay to CTI a one-time license fee equal to ***** as partial payment
for the expansion of the Field.

          (c) If ORTHO elects to exercise an option pursuant to Section 5.04 to
include a Mucositis Indication as an Additional Indication hereunder, then ORTHO
shall make the Mucositis Milestone Payments to CTI pursuant to Section 3.02(c)
hereof.  If any of the milestones set forth in Section 3.02(c) shall have been
achieved prior to the date that ORTHO shall have exercised an option pursuant to
Section 5.04 to include a Mucositis Indication as an Additional Indication
hereunder, then ORTHO shall make the Mucositis Milestone Payments which
correspond to such achieved milestones concurrently with the exercise of such
option.

          (d) If ORTHO elects to exercise an option pursuant to Section 5.04 to
include a SIRS Indication as an Additional Indication hereunder, then ORTHO
shall make the SIRS Milestone Payments to CTI pursuant to Section 3.02(d)
hereof.  If any of the milestones set forth in Section 3.02(d) shall have been
achieved prior to the date that ORTHO shall have exercised an option pursuant to
Section 5.04 to include a SIRS Indication as an Additional Indication hereunder,
then ORTHO shall make the SIRS Milestone Payments which correspond to such
achieved milestones concurrently with the exercise of such option.

          (e) Other than the Milestone Payments set forth in this Section 5.05
and the Milestone Payments set forth in Section 3.02, there are no other
Milestone Payments due under the provisions of this Agreement.

          SECTION 5.06.  Commercialization of Potential New Indications.  CTI
                         ----------------------------------------------      
shall not commercialize any product including or incorporating any Collaboration
Compound for any Potential New Indication, nor shall CTI assign or license any
of its rights in any such product for such Potential New Indication to any Third
Party, until ORTHO shall have failed to exercise its option under subsection
5.04(c) within the applicable time period.  Following ORTHO's failure to
exercise its option under subsection 5.04(c) within the applicable time period,
CTI shall be free to (i) commercialize such product for such Potential New
Indication, and (ii) assign or license to any Third Party any or all of its
rights to such  Product for such Potential New Indication, in each case without
any further obligation to ORTHO with respect thereto.  Notwithstanding the
foregoing, CTI may license its rights to

                                       33

<PAGE>
 
any Collaboration Compounds for any Development Indications, Additional
Indications or Potential New Indications outside of the Co-Promotion Territory
and the Royalty Bearing Territory to Third Parties pursuant to the terms of
agreements entered into between CTI and such Third Parties prior to the
Effective Date.

          SECTION 5.07.  Election by a Party to Discontinue Sharing Expenses for
                         -------------------------------------------------------
an Additional Indication.
- ------------------------ 

          (a)   Without prejudice to Section 5.04, either Party may at any time
during the Development or Commercialization of a Collaboration Product for an
Additional Indication elect to discontinue sharing the Development Expenses and
Pre-Marketing Expenses of such Collaboration Product for such Additional
Indication, by providing six (6) months' written notice. The terminating Party
shall continue to be obligated during the termination notice period to perform
all of its obligations under this Agreement with respect to such Additional
Indication, but not its obligations under Section 3.02. Following such election,
all rights in and to such Collaboration Product shall revert irrevocably to the
other Party (the "Independent Party"), and the Independent Party may at its
expense continue to develop and commercialize such Collaboration Product for
such Additional Indication as an Independent Product, either alone or in
conjunction with Third Parties, subject to Section 12.03 hereof.

(The information below marked by ***** has been omitted by a request for 
confidential treatment. The omitted portion has been separately filed with the 
Commission.)

          (b) The Independent Party pursuant to this Section 5.07 shall owe to
the other Party a royalty of ***** of Royalty Bearing Sales of Independent
Products on a country-by-country basis for ***** from the first commercial sale
of such Independent Products in said country. Such royalty shall be payable
until the aggregate amount of royalties paid in respect of such Independent
Product shall equal ***** or for a period of *****, whichever is later.

                                   ARTICLE VI

                                    LICENSES
                                    --------

          SECTION 6.01.  Patent License to ORTHO to Conduct Development.  CTI
                         ----------------------------------------------      
grants to ORTHO an exclusive (except as to CTI) paid-up, worldwide license, with
a right to sublicense as described in Section 6.07, under the CTI Patents to
conduct Development in accordance with the terms of this Agreement with respect
to Collaboration Products and an exclusive (even as to CTI) license to develop
Independent Products in accordance with the terms of this Agreement.

          A list of the CTI Patents identified as of the Effective Date is
attached hereto as Exhibit D-1.  Such list shall be modified from time to time
to reflect any changes to CTI Patents and shall be expanded from time to time to
include any Patents owned or Controlled

                                       34

<PAGE>
 
by CTI relevant to the Development of Additional Indications or the discovery or
evaluation of Collaboration Compounds or Eligible Compounds; provided, however,
                                                             --------  ------- 
that CTI shall have no obligation to modify or expand such list with respect to
any Independent Product being developed or commercialized by ORTHO, unless
otherwise required by the other provisions of this Agreement.

          SECTION 6.02.  Patent License to CTI to Conduct Development.  ORTHO
                         --------------------------------------------        
grants to CTI an exclusive (except as to ORTHO) paid-up, worldwide license, with
a right to sublicense as described in Section 6.07, under the ORTHO Patents to
conduct Development in accordance with the terms of this Agreement with respect
to Collaboration Products and an exclusive (even as to ORTHO) license to develop
Independent Products in accordance with the terms of this Agreement.

          A list of the ORTHO Patents identified as of the Effective Date is
attached hereto as Exhibit D-2.  Such list shall be modified from time to time
to reflect any changes to ORTHO Patents and shall be expanded from time to time
to include any Patents owned or Controlled by ORTHO relevant to the Development
of Additional Indications or the discovery or evaluation of Collaboration
Compounds or Eligible Compounds; provided, however, that ORTHO shall have no
                                 --------  -------                          
obligation to modify or expand such list with respect to any Independent Product
being developed or commercialized by CTI.

          SECTION 6.03.  Patent License to ORTHO to Conduct Commercialization.
                         ----------------------------------------------------  
CTI grants to ORTHO an exclusive (except as to CTI) worldwide license in the 
Co-Promotion Territory and the Royalty Bearing Territory, with a right to
sublicense as described in Section 6.07, under the CTI Patents to conduct
Commercialization (including the right to make, have made, use, import, offer,
distribute, sell, offer for sale and have sold) in the Co-Promotion Territory
and the Royalty Bearing Territory in accordance with the terms of this Agreement
with respect to Collaboration Products and to commercialize (including the right
to make, have made, use, import, offer, distribute, sell, offer for sale and
have sold) Independent Products in accordance with the terms of this Agreement.
Such licenses with respect to Royalty Bearing Products and Independent Products
shall be subject to royalty payments as provided herein.  Such licenses shall be
exclusive (even as to CTI) in the Co-Promotion Territory and the Royalty Bearing
Territory, except that CTI shall retain the right to conduct manufacturing, Pre-
Marketing Activities, Commercialization and related activities to the extent
specifically provided for in this Agreement.

          SECTION 6.04.  Patent License to CTI to Conduct Commercialization.
                         --------------------------------------------------  
ORTHO grants to CTI an exclusive (except as to ORTHO) license in the Co-
Promotion Territory, with a right to sublicense as described in Section 6.07,
under the ORTHO Patents to conduct manufacturing, Pre-Marketing Activities,
Commercialization in the Co-Promotion Territory and related activities with
respect to Collaboration Products to the extent specifically provided for in
this Agreement.  Subject to the royalty payments provided herein, ORTHO grants
to CTI an exclusive (even as to ORTHO) worldwide license, with a

                                       35

<PAGE>
 
right to sublicense as described in Section 6.07, under the ORTHO Patents to
commercialize (including the right to make, have made, use, import, distribute,
sell, offer for sale, and have sold) Independent Products.

          SECTION 6.05.  Exclusive Know-how License To ORTHO.  Subject to
                         -----------------------------------             
Article X, CTI grants ORTHO a paid-up, exclusive (except as to CTI) license in
the Co-Promotion Territory and the Royalty Bearing Territory, with a right to
sublicense as described in Section 6.07, to use CTI Know-how solely for the
purposes of developing, manufacturing, having manufactured, using, selling,
offering for sale and importing Collaboration Products in the Co-Promotion
Territory and the Royalty-Bearing Territory.  ORTHO covenants and agrees not to
develop, make, have made, use, sell, offer for sale, have sold or import any
product using the CTI Know-how other than with respect to activities expressly
contemplated hereby.  Such license shall be exclusive (even as to CTI) in the
Co-Promotion Territory and Royalty Bearing Territory with respect to the
manufacture, use, sale and importation of Collaboration Products, except that
CTI shall retain the right to conduct manufacturing, Pre-Marketing Activities,
Commercialization and related activities to the extent specifically provided for
in this Agreement.  CTI covenants and agrees not to grant any license to any
Third Party to use CTI Know-how for the purposes of developing, manufacturing,
having manufactured, using, selling, offering for sale and importing
Collaboration Products.

          SECTION 6.06.  Exclusive Know-how License to CTI.  Subject to Article
                         ---------------------------------                     
X, ORTHO grants CTI a paid-up, exclusive license in the Co-Promotion Territory,
with a right to sublicense as described in Section 6.07, to use ORTHO Know-how
solely for the purposes of developing, manufacturing, having manufactured,
using, selling, offering for sale and importing Collaboration Products in the
Co-Promotion Territory.  CTI covenants and agrees not to develop, make, have
made, use, sell, offer for sale, have sold or import any product using the ORTHO
Know-how other than with respect to activities expressly contemplated hereby.
ORTHO covenants and agrees not to grant any license to any Third Party to use
ORTHO Know-how for the purposes of developing, manufacturing, having
manufactured, using, selling, offering for sale and importing Collaboration
Products.

          SECTION 6.07.  Sublicensing.  Neither Party may grant sublicenses
                         ------------                                      
under Sections 6.01 through 6.06 except with the express prior written approval
of the Party that owns or Controls the subject Patents or Know-how (which
consent will not be unreasonably withheld or delayed); provided, however, that
                                                       --------  -------      
(i) ORTHO may sublicense a Third Party to sell or have sold Collaboration
Product in the Royalty Bearing Territory, (ii) ORTHO may proceed with
distribution and sale of a Collaboration Product in the Royalty Bearing
Territory through its usual and customary distributors performing their usual
and customary distribution activities for ORTHO without CTI's prior written
approval of any necessary sublicenses in connection therewith, and (iii) with
respect to Independent Products, the Party having a license with respect to such
Independent Products shall have a right to sublicense

                                       36

<PAGE>
 
under such license with respect to such Independent Products without approval of
the other Party.

          SECTION 6.08.  Third Party Technology.
                         ---------------------- 

(The information below marked by ***** has been omitted by a request for 
confidential treatment. The omitted portion has been separately filed with the 
Commission.)

          (a) The licenses granted under Sections 6.01 through 6.06 include
sublicenses of Third Party technology to the extent that such sublicenses can be
so licensed.  Any royalties payable to Third Parties in connection with sales of
Collaboration Products shall be considered an Allowable Expense with respect to
the sale of Collaboration Products in the Co-Promotion Territory, and deducted
from Royalty Percentages with respect to the sale of Royalty Bearing Products
and Independent Products, as provided under Section 8.04(b), but not below
*****.

          (b) The licenses granted under Section 6.01 through 6.06, to the
extent they include sublicenses of Third Party technology, shall be subject to
the terms and conditions of the license agreement pursuant to which the
sublicense is granted.  As of the Effective Date hereof there are no such
agreements in place.

          ORTHO shall not agree to any sublicense, settlement or other
arrangement with any Third Party with respect to Third Party intellectual
property rights that would reduce the royalty otherwise payable to CTI under
Section 8.04(b) or would include any payment to such Third Party as an Allowable
Expense hereunder without CTI's prior written consent.  If CTI does not grant
such consent and Ortho believes that the conduct of the business contemplated
hereby in the Co-Promotion Territory and in the Royalty Bearing Territory may
result in liability by virtue of such Third Party having a "dominant" or
"blocking" right, ORTHO and CTI shall promptly submit the issue to resolution by
one outside patent attorney mutually agreeable to the Parties.  If such attorney
concludes that there is a material risk of infringement, then ORTHO may proceed
with such sublicense, settlement or arrangement, with the amount and terms
thereof being agreed to by the Parties.

(The information below marked by ***** has been omitted by a request for 
confidential treatment. The omitted portion has been separately filed with the 
Commission.)

          SECTION 6.09.  Development Milestones for the Royalty Bearing
                         ----------------------------------------------
Territory. Unless the Parties shall otherwise agree in writing, all of ORTHO's
- ---------                                                                     
rights as to the Royalty Bearing Territory with respect to any Collaboration
Product under this Agreement shall, at CTI's option, be converted to a non-
exclusive license if ORTHO or its Affiliates or sublicensees fail to file a Drug
Approval Application for such Collaboration Product in at least one Major Market
Country within ***** ***** of the filing of a Drug Approval Application for
such Collaboration Product in the Co-Promotion Territory that the FDA has
accepted for filing; provided, however, that, if ORTHO demonstrates that such
                     -------- --------                                       
regulatory authority requires a substantially different data package than that
submitted to the FDA with such Drug Approval Application, or if ORTHO
demonstrates that its failure to file a Drug Approval Application as set forth
above is entirely due to events or circumstances that are not reasonably within
ORTHO's control, the Parties will discuss in good faith an extension to such
deadline.

                                       37

<PAGE>
 
          SECTION 6.10.  Covenant Not to Sue by Affiliates.  ORTHO, on behalf of
                         ---------------------------------                      
itself and its Affiliates, covenants and agrees that during the term hereof
neither it nor any of its Affiliates will take any action against CTI or any CTI
Affiliate related to the Collaboration Compounds or Collaboration Products based
upon CTI or its Affiliates allegedly being in violation or infringement of any
ORTHO or ORTHO Affiliate patent, know-how or other intellectual property right.


                                  ARTICLE VII

                               COMMERCIALIZATION
                               -----------------

          SECTION 7.01.  Responsibilities of JCC.
                         ----------------------- 

          (a)   The purpose of the JCC shall be to (i) oversee the
Commercialization of Collaboration Products in the Co-Promotion Territory,
including the annual budgeting and forecasting, commercial manufacturing, pre-
marketing, medical affairs, Phase IIIB Clinical Trials, Phase IV Clinical
Trials, Post Launch Product R&D, liaison, marketing, sales and distribution of
Collaboration Products, (ii) monitor, review and comment on costs incurred by
the Parties in the commercial manufacture, marketing, sale and distribution of
Collaboration Products in the Co-Promotion Territory (including, without
limitation, Cost of Goods Sold), (iii) review and comment on the
Commercialization Plans and Launch Plans and the selection of trademarks for
Collaboration Products in the Co-Promotion Territory, (iv) receive and provide
to the Parties all sales, pricing, and financial reports pertaining to Pre-
Marketing and Commercialization of Collaboration Products in the Co-Promotion
Territory, (v) review the principal indications and delivery routes recommended
by JDC for all Collaboration Products in the Co-Promotion Territory, (vi) review
and comment on ORTHO's pricing recommendations in the Co-Promotion Territory,
and (vii) facilitate the flow of Information with respect to the
Commercialization of each Collaboration Product in the Co-Promotion Territory.
Subject to the provisions of Section 7.01(b) regarding Excepted
Commercialization Matters, ORTHO shall make the final decision on all matters
relating to the Commercialization of any Collaboration Product including all
day-to-day decisions.  Each party will disclose to the other proposed agenda
items reasonably in advance of each meeting of the JCC.  Each party shall bear
its own costs for participation in the JCC.

          (b)   Decisions shall be reached by the JCC by consensus after an open
discussion of the matters as to which decisions are being made.  If the JCC
fails to reach consensus as to any matter involving Commercialization, the
decision of ORTHO will be final and determinative, so long as such decision does
not contradict or modify the terms of this Agreement, except with regard to (i)
a decision to recall a Collaboration Product, which shall be decided pursuant to
Section 7.12, (ii) a dispute related to pricing of a Collaboration Product in
the Co-Promotion Territory, which shall be referred to the executive officers of
the Parties pursuant to Section 7.11, or (iii) increasing a Commercialization
Budget in any

                                       38

<PAGE>
 
material respect ("Excepted Commercialization Matters").  If CTI committee
members believe that a JCC decision is seriously detrimental to Collaboration
Product Development or Commercialization or to CTI's interests, they may present
this viewpoint in written form simultaneously to ORTHO's JCC members and to the
Steering Committee for review.  If the Steering Committee does not unanimously
agree with CTI's view, ORTHO's view shall prevail and be followed.

          (c) The JCC will have the power to form subcommittees with appropriate
representation from CTI, ORTHO and appropriate Third Parties.

          (d) During clinical trials for any Collaboration Products, the JCC in
full collaboration with the JDC shall coordinate activities to assure a smooth
transition from Development to Commercialization.

          (e) The JCC shall not be involved with the commercialization of (i)
Independent Products or (ii) Royalty Bearing Products in the Royalty Bearing
Territory.

          SECTION 7.02.  ORTHO as Lead Marketing Party.
                         ----------------------------- 

          (a) ORTHO will be the lead marketing Party with respect to all
Collaboration Products in the Co-Promotion Territory, and as a result, shall be
obligated and responsible for carrying out Commercialization in the Co-Promotion
Territory pursuant to each Commercialization Plan.  ORTHO will assemble its
product team and commence reporting to the JCC within sixty (60) days following
the Effective Date.  CTI agrees to carry out the Commercialization
responsibilities referred to in Section 7.02(b) and such other Commercialization
responsibilities reasonably requested by the JCC.

          (b) It is recognized that the Parties bring particular strengths to
the ongoing Commercialization of Collaboration Products, and CTI and ORTHO will
co-participate in the sale of all Collaboration Products in the Co-Promotion
Territory.  ORTHO will assign to CTI a role in Commercialization functions and
activities, both during Development and following Collaboration Product launch,
as described below:

               (i) It is expected that from the Effective Date throughout the
     marketing of Collaboration Products, CTI will provide personnel for the
     ORTHO product teams, participating in the development of all strategies and
     performing assigned activities relating to the following marketing
     functions as part of the Commercialization Plans and Launch Plans in the
     Co-Promotion Territory:

                                       39

<PAGE>
 
               .    Medical Symposia
               .    Scientific Exhibits
               .    Opinion Leader Program Development
               .    Medical Education Program Development

(The information below marked by ***** has been omitted by a request for 
confidential treatment. The omitted portion has been separately filed with the 
Commission.)

               (ii) In preparation for the launch of a Collaboration Product
     for a BMT Indication in the Co-Promotion Territory, CTI will field a
     dedicated field sales force of ***** experienced, scientifically competent
     "Medical Science Liaisons" and *****. The Medical Science Liaisons will be
     responsible for conducting the following activities in local or regional
     territories under ORTHO's direction and control:

               .    Opinion Leader Liaison
               .    Collaboration on ORTHO's Phase IV Clinical Trials
               .    Speaker Program Coordination
               .    Medical Education
               .    Regional Symposia Coordination
               .    Staffing Scientific Exhibits
               .    Technical Assistance to ORTHO's Sales Force

               (iii) The CTI dedicated field sales force shall be under ORTHO's
     direction and control and shall be compensated by CTI, but on the same
     scale and cash basis as like employees of ORTHO involved in the launch and
     sale of a Collaboration Product for a BMT Indication.

(The information below marked by ***** has been omitted by a request for 
confidential treatment. The omitted portion has been separately filed with the 
Commission.)

               (iv)  In connection with the launch and Commercialization of
     Collaboration Products for all Development Indications other than the BMT
     Indication, and for all Additional Indications, the JCC shall allocate
     personnel to marketing and selling efforts from each Party.  In connection
     with the Commercialization of a Collaboration Product for an AML
     Indication, CTI shall have the right to initially contribute up to *****
     persons (including the ***** Medical Science Liaisons referred to in
     subclause (ii) above) to participate in marketing and sales efforts under
     the direction of the JCC.  Thereafter, in connection with the
     Commercialization of all Collaboration Products (excluding the BMT
     Indication but including the AML Indication), CTI shall have the right to
     have ***** of the field force by year ***** after the launch of the first
     such Collaboration Product.  Such personnel will be added over that *****
     year period subject to the approval of the JCC.

               (v)   CTI activities will be performed in accordance with each
     approved Commercialization Plan and Commercialization Budget and each
     approved Launch Plan and Launch Budget.  All marketing activities that have
     not been assigned to CTI will be the responsibility of ORTHO unless
     determined otherwise by the JCC.

                                       40

<PAGE>
 
     The hiring by CTI of field force personnel for carrying out a
     Commercialization Plan shall be subject to the approval of the JCC.

          SECTION 7.03.  Commercialization Efforts.  With respect to the Co-
                         -------------------------                         
Promotion Territory, ORTHO agrees to use commercially reasonable and diligent
efforts to prepare the Commercialization Plans, Commercialization Budgets,
Launch Plans and Launch Budgets hereunder.  Such commercially reasonable and
diligent efforts shall be consistent with the efforts used by ORTHO in preparing
commercialization plans and budgets and commercializing their own pharmaceutical
products.  Each Party agrees to exert the efforts necessary and reasonable to
execute and substantially carry out the Commercialization Plans and Launch Plans
within the Commercialization Budgets and Launch Budgets and to cooperate
diligently with each other in carrying out the Commercialization Plans.  In
addition, with regard to the determination of all pricing, sampling and discount
strategies for Collaboration Products, ORTHO shall use a similar and no less
rigorous approach than that used in determining such strategies for its own
pharmaceutical products.

(The information below marked by ***** has been omitted by a request for 
confidential treatment. The omitted portion has been separately filed with the 
Commission.)

          SECTION 7.04.  Commercialization Plan and Budget.  ORTHO, after taking
                         ---------------------------------                      
into consideration CTI's comments, shall develop and the JCC shall review, to
the extent reasonably practical given the stage of development of each
Collaboration Product and consistent with ORTHO's reasonable business practice,
a commercialization plan ("Commercialization Plan") for each Collaboration
Product for the Co-Promotion Territory, which shall include but not be limited
to (i) market dynamics, market strategies, estimated launch dates in the Co-
Promotion Territory, a sales and expense forecast (including at least ***** of
estimated sales and expenses) in the Co-Promotion Territory, manufacturing plans
and expected product profile based upon the Development Plan, (ii) a market plan
(including Advertising forecasts and pricing strategies pertaining to discounts,
samples and nominal price sales) for the Co-Promotion Territory; it being
understood that such market plan will evolve over time and shall be similar to
existing market plans developed at such time by ORTHO within the Co-Promotion
Territory, (iii) a commercialization budget ("Commercialization Budget") for
each Collaboration Product, initially for the Development Indications, for the
Co-Promotion Territory, including the Third Parties to be utilized and the
arrangements with them that have been or are proposed to be agreed upon.  Each
Commercialization Budget shall include a budget of the expenses expected to be
incurred in connection with performing the Commercialization Plan, including
Pre-Marketing Expenses and Allowable Operating Expenses in the Co-Promotion
Territory.

(The information below marked by ***** has been omitted by a request for 
confidential treatment. The omitted portion has been separately filed with the 
Commission.)

          The first Commercialization Plan shall be in the form of an initial
outline and the first Commercialization Budget shall be in the form of an
estimated budget.  ORTHO shall submit such outline of the first
Commercialization Plan and an estimated Commercialization Budget for a
Collaboration Product for a BMT Indication to the JCC for review and approval by
a date to be established by the JCC taking into account ORTHO's and CTI's annual
budget planning calendars.  It is understood that such outlines may contain open
issues and identify areas wherein more information is needed to complete the
outlines

                                       41

<PAGE>
 
(The information below marked by ***** has been omitted by a request for 
confidential treatment. The omitted portion has been separately filed with the 
Commission.)

and estimated Commercialization Budgets and to prepare a more complete
Commercialization Plan and Budget for Collaboration Products for such
Development Indications.  Thereafter, by ***** of each subsequent year, ORTHO,
after taking into consideration CTI's comments, including CTI's notice regarding
its contribution to the dedicated field force, will prepare a more complete
Commercialization Plan and Commercialization Budget for submission to the JCC
for its review and approval.  The Commercialization Plan and Commercialization
Budget shall be approved by the JCC no later than ***** of each year.  It is
understood that each Commercialization Plan and Commercialization Budget will
become more comprehensive as the project evolves.  For any subsequent
Collaboration Products, ORTHO shall prepare and submit to the JCC an outline of
an initial Commercialization Plan and an estimated Commercialization Budget for
the Co-Promotion Territory for each such Collaboration Product for review and
approval.  Such Commercialization Plan and Commercialization Budget shall be
updated and refined on each subsequent ***** as described above in
connection with Collaboration Products for a BMT Indication.  ORTHO shall make
all final decisions with respect to Commercialization Plans and Budgets except
as is provided in Section 7.01(b).

          Any significant change in a Commercialization Plan or
Commercialization Budget during the course of the year will be communicated
promptly to the JCC.  In addition, ORTHO shall provide an update on each
Commercialization Plan and Commercialization Budget to the JCC in a manner
consistent (with respect to timing and content) with such updates as are
reported internally by ORTHO on its existing products at such time.

(The information below marked by ***** has been omitted by a request for 
confidential treatment. The omitted portion has been separately filed with the 
Commission.)

          SECTION 7.05.  Launch Plan.  Each Commercialization Plan shall be
                         -----------                                       
updated, in advance of the launch of the applicable Collaboration Product in the
Co-Promotion Territory, to include a launch plan ("Launch Plan") and launch
budget ("Launch Budget") for such launch, the period *****, if practicable,
before said launch, and the ***** period following the launch date.  Each such
Launch Plan and Launch Budget shall be developed by ORTHO, after taking into
consideration CTI's comments, and presented to the JCC for Launch Plan and
Launch Budget review and approval, with ORTHO having the final decision at the
JCC as described in Section 2.04.  The JCC shall have sixty (60) days to review
and approve such Budget.  Each calendar year after its preparation, if not yet
executed, each Launch Plan and Launch Budget for each Collaboration Product in
the Co-Promotion Territory shall be updated by ORTHO and the updated Launch
Budget submitted to the JCC for approval.

          It is understood that determining a date for Regulatory Approval and
thus a launch date is difficult.  The failure to accurately estimate the launch
date shall not constitute a breach hereunder.

                                       42

<PAGE>
 
          Each Launch Plan shall include (i) updated market and sales forecasts
in units and estimated revenues of Collaboration Product, (ii) estimated
resource requirements and (iii) such other matters deemed appropriate by ORTHO.

          SECTION 7.06.  Commercialization in Royalty Bearing Territory.
                         ---------------------------------------------- 

          (a)  Subject to Sections 6.09, 13.02 and 13.03, the commercialization
of Royalty Bearing Products in the Royalty Bearing Territory shall be conducted
independently by ORTHO and/or its Affiliates.  On an annual basis, ORTHO shall
report to the JCC regarding its planned commercialization activities with
respect to each Royalty Bearing Product in each Major Market Country and Japan
and the status of such commercialization activities.

          (b) ORTHO may at any time by delivery of written notice to CTI elect
to abandon its commercialization activities with respect to any country in the
Royalty Bearing Territory.  Upon such abandonment, (i) all licenses granted by
CTI to ORTHO with respect to such country shall terminate, (ii) ORTHO shall
grant to CTI a fully paid-up, royalty-free, exclusive (even as to ORTHO)
license, with a right to sublicense, under the ORTHO Patents to conduct
manufacturing, Pre-Marketing Activities, Commercialization and related
activities with respect to Collaboration Products in such country, and (iii)
ORTHO shall have no further obligation to conduct Commercialization activities
in such country.  Any abandonment pursuant to this Section 7.06(b) shall not
constitute a Material Breach under this Agreement.

          (c) In the event that ORTHO decides not to market in any country in
the Royalty Bearing Territory, ORTHO shall have the right, but not the
obligation, to license such rights to a Third Party.  ORTHO shall report all
sales made by a sublicensee as if such sublicensee's sales were ORTHO sales in
the Royalty Bearing Territory and shall pay to CTI royalties on such sales in
accordance with the provisions of Article VIII of this Agreement.

          SECTION 7.07.  Control Over Advertising.
                         ------------------------ 

          (a)   Neither Party shall engage in any Tangible Advertising or use
any label, package, literature or other written material directly related to a
Collaboration Product in the Co-Promotion Territory unless the specific form and
content thereof is approved by the JCC.  With respect to Tangible Advertising
directly related to a Collaboration Product, to the extent such materials
identify or otherwise make reference to either of the Parties, CTI and ORTHO
shall both be presented and described with equal prominence, as permitted by the
applicable laws and regulations of the Co-Promotion Territory.  All product
labeling, documentary information, promotional material and oral presentations
(where practical) regarding the detailing and promoting of Collaboration
Products shall display the names and logos of CTI and ORTHO with equal
prominence.

                                       43

<PAGE>
 
          (b) General Public Relations on the part of either Party need not be
approved by the JCC, but all representations and statements pertaining to
Collaboration Products which appear in General Public Relations of CTI or ORTHO
shall be subject to the approval of the JCC.

(The information below marked by ***** has been omitted by a request for 
confidential treatment. The omitted portion has been separately filed with the 
Commission.)

          SECTION 7.08.  Allowable Expenses and Allowable Operating Expenses.
                         ---------------------------------------------------
CTI shall be responsible for ***** of all Allowable Expenses and Allowable
Operating Expenses in the Co-Promotion Territory, and ORTHO shall be responsible
for ***** of all Allowable Expenses and Allowable Operating Expenses in the 
Co-Promotion Territory. An accounting of Allowable Expenses and Allowable
Operating Expenses incurred by CTI and ORTHO within a Commercialization Plan and
Commercialization Budget shall be submitted by CTI to ORTHO, and ORTHO to CTI,
within ***** of the end of each calender quarter and within ***** of the end of
each calender year in which such expenses were incurred. ORTHO shall repay CTI
within ***** of its receipt of such report, if any sum is due to CTI, and shall
be paid by CTI within the same time period if any sum is due from CTI.

          SECTION 7.09.  Sales Efforts in the Co-Promotion Territory.  As part
                         -------------------------------------------          
of the Commercialization Plan for the Co-Promotion Territory for each year, the
JCC shall determine the targeted level of gross sales and estimated Net Sales of
the applicable Collaboration Product for the calendar year covered by such
Commercialization Plan.

          SECTION 7.10.  Training Program.  ORTHO will ensure that adequate
                         ----------------                                  
training programs are developed for personnel involved in the Commercialization
of Collaboration Products in the Co-Promotion Territory.  CTI shall play an
appropriate role, as determined by the JCC, in the preparation of such training
materials and conduct of training.  ORTHO shall submit to the JCC all training
materials to be utilized in the Commercialization of Collaboration Products in
the Co-Promotion Territory.  The Parties agree to utilize such training programs
on an ongoing basis to assure a consistent, focused promotional strategy.
Training shall be carried out at a time to be determined by the JCC.  The costs
of transporting, housing and maintaining a Party's personnel to be trained shall
be borne by such Party exclusively.  The costs of designing and implementing
such training program shall be considered Pre-Marketing Expenses or Marketing
Expenses, as the case may be.  All reasonable direct costs associated with a
national launch meeting specifically called for a Collaboration Product shall be
considered Allowable Operating Expenses.

          SECTION 7.11.  Pricing, Pricing Approvals and Product Distribution.
                         ---------------------------------------------------  
If CTI does not agree with the recommended prices proposed by ORTHO in the Co-
Promotion Territory with respect to a Collaboration Product, it may prepare its
own analysis of the market potential and recommended price for such
Collaboration Product and present such analysis and recommendation to the
Steering Committee.  If following the submissions from both Parties the Parties
are unable to agree on the prices for such Collaboration Product, the analyses
and recommendations of both Parties will be referred to a joint executive review

                                       44

<PAGE>
 
panel composed of the Chief Executive Officer of CTI and an appropriate ORTHO
executive representative.  If the joint executive review panel is unable to
agree on a price after reviewing the submissions from CTI and ORTHO, then the
representative from ORTHO referenced in the preceding sentence shall set the
applicable prices, which shall not be lower than the prices initially proposed
by ORTHO.  The above described mechanism shall be the sole method for resolving
disputes as to price(s), and shall not be subject to Sections 16.02 and 16.03.
ORTHO shall obtain for Collaboration Products pricing approvals as may be
required and shall be responsible for distribution of each Collaboration Product
in the Co-Promotion Territory.

          SECTION 7.12.  Product Recalls.  As an exception to the general
                         ---------------                                 
authority of ORTHO under this Article VII, if ORTHO commences an internal
product quality investigation, it shall promptly notify and consult with CTI
regarding such investigation.  Further, if either Party believes that a recall
of a Collaboration Product is necessary, such Party shall notify and consult
with the other Party within one working day of its determination, and both
Parties shall cooperate to allow such recall to occur under the direction of the
Steering Committee.  In the event of a dispute about whether to recall a
Collaboration Product, the decision of ORTHO shall prevail.

          SECTION 7.13.  Tax Considerations.  Either Party may take advantage of
                         ------------------                                     
tax considerations which benefit it and not the other Party.  In the event that
a Party takes advantage of a tax consideration in connection with a
Collaboration Product in the Co-Promotion Territory which benefits it and not
the other Party, no compensation to the other Party shall be required.

(The information below marked by ***** has been omitted by a request for 
confidential treatment. The omitted portion has been separately filed with the 
Commission.)

          SECTION 7.14.  Discounted Sales.  *****.

          SECTION 7.15.  Co-Promotion Mechanism.
                         ---------------------- 

          (a)   Sales by ORTHO.  All sales of Collaboration Products in the Co-
                --------------                                                
Promotion Territory shall be booked by ORTHO. If, during the term of this
Agreement,

                                       45

<PAGE>
 
CTI receives orders from customers for a Collaboration Product, it shall refer
such orders to ORTHO.

          (b)   Processing of Orders for Collaboration Products.  (i)  All
                -----------------------------------------------
orders for Collaboration Products received and accepted by ORTHO during the term
of this Agreement shall be executed by ORTHO in a reasonably timely manner
consistent with the general practices applied by it in executing orders for
other pharmaceutical products sold by it.

          (ii)  ORTHO shall have the discretion to reject any order received by
it for a Collaboration Product; provided, however, that ORTHO shall not reject
such orders on an arbitrary basis, but only with reasonable justification and
consistent with the general policies applied by it with respect to orders for
other pharmaceutical products sold by it.

          (iii) ORTHO shall comply with all laws applicable to the sale of a
Collaboration Product.

(The information below marked by ***** has been omitted by a request for 
confidential treatment. The omitted portion has been separately filed with the 
Commission.)

          SECTION 7.16. *****  


                                  ARTICLE VIII

                          PROFIT SHARING AND ROYALTIES
                          ----------------------------

          SECTION 8.01.  Share of Operating Profits or Losses.  CTI and ORTHO
                         ------------------------------------                
shall share equally in Operating Profits or Losses from sales of Collaboration
Products in the Co-Promotion Territory.

                                       46

<PAGE>
 
          SECTION 8.02.  Co-Promotion Reports and Payments.  Within thirty (30)
                         ---------------------------------                     
days of the end of each calendar quarter and sixty (60) days of the end of the
fourth quarter of each full calendar year following the launch of each
Collaboration Product in the Co-Promotion Territory, each Party shall report to
ORTHO and the JCC as outlined in Exhibit B its revenues and individual Allowable
Expense items (with appropriate supporting information) involved in the
computation of Operating Profits or Losses and recognized during such quarter
with respect to each such Collaboration Product.  Within fifteen (15) days after
receipt of such reports, ORTHO shall provide for each Collaboration Product one
Financial Statement for the Co-Promotion Territory to the JCC, and the JCC shall
promptly direct the payment of an Equalization Payment between the Parties with
respect to each Collaboration Product.  The reports and Equalization Payments
for each of the first three quarters of each fiscal year may be based on
estimated operating profits and losses for such quarters to the extent such
estimates are included in such Party's books and records.  The reports and
Equalization Payments for the fourth quarter of each fiscal year may include
reconciliations and year-end adjustments with respect to previous quarters.  The
payment required by this Section 8.02 shall be made in any event within forty-
five (45) days of the due date of the receipt described in the first sentence of
this paragraph.  The Financial Statements required hereunder shall be in the
format shown on Exhibit B attached hereto.

          SECTION 8.03.  Term.  The Parties shall share Operating Profits or
                         ----                                               
Losses hereunder with respect to each Collaboration Product in the Co-Promotion
Territory until each such Collaboration Product is permanently withdrawn from
and is no longer being sold in the Co-Promotion Territory.

          SECTION 8.04.  Royalty Bearing Products.
                         ------------------------ 

          (a) ORTHO shall pay to CTI a royalty equal to the applicable Royalty
Percentage set forth below on all Royalty Bearing Products in the Royalty
Bearing Territory.

          (b) Royalties shall be equal to the percentage of annual Royalty
Bearing Sales set forth below (the "Royalty Percentage"):

(The information below marked by ***** has been omitted by a request for 
confidential treatment. The omitted portion has been separately filed with the 
Commission.)

          Annual Royalty Bearing Sales   Royalty Percentage
          ----------------------------   ------------------
          *****

(The information below marked by ***** has been omitted by a request for 
confidential treatment. The omitted portion has been separately filed with the 
Commission.)

          (c) In the event that Collaboration Products are sold in the form of
Combination Products containing one or more active ingredients, other than the
Collaboration Product, Net Sales or Royalty Bearing Sales for such Combination
Products will be calculated by multiplying actual Net Sales or Royalty Bearing
Sales of such Combination Products by *****.  If on a country-by-country
basis the other active component or components in the Combination Product are
not sold separately in said country by ORTHO or an Affiliate, Net Sales or
Royalty Bearing Sales, for the purpose of determining royalties on the
Combination Product shall be calculated by multiplying actual Net Sales or
Royalty

                                       47

<PAGE>
 
(The information below marked by ***** has been omitted by a request for 
confidential treatment. The omitted portion has been separately filed with the 
Commission.)

 
Bearing Sales of such Combination Product by the fraction *****.  If on a
country-by-country basis neither the Collaboration Product nor a product
containing the other active ingredient is sold separately in said country by
ORTHO or an Affiliate, Net Sales or Royalty Bearing Sales for purposes of
determining royalties on the Combination Products shall be calculated as above,
except that *****.

(The information below marked by ***** has been omitted by a request for 
confidential treatment. The omitted portion has been separately filed with the 
Commission.)

          (d) Except where expressly provided otherwise in this Agreement, all
royalties to a Party shall be paid, on a country-by-country basis, from the date
of the first commercial sale of each Royalty Bearing Product and Independent
Product in a particular country until the later of (i) ***** from the first
commercial sale in such country and (ii) the last to expire of any valid and
enforceable (A) CTI Patents and (B) ORTHO Patents or Joint Patents, as
applicable, which covers the use or sale of the Royalty Bearing Product or
Independent Product in such country, subject to the following:

(The information below marked by ***** has been omitted by a request for 
confidential treatment. The omitted portion has been separately filed with the 
Commission.)

          If a Royalty Bearing Product is sold in any country in which CTI does
not have valid patent coverage which would prevent the sale of a generic form of
such Royalty Bearing Product, the royalty obligation set forth in Section
8.04(a) above with respect to Royalty Bearing Sales attributable to the sale of
such Royalty Bearing Product in such country shall be reduced by ***** of the
royalty that would otherwise be payable with respect to Royalty Bearing Sales
attributable to the sale of such Royalty Bearing Product in such country, until
CTI is granted such valid and enforceable patent coverage of such Royalty
Bearing Product in such country.

          If a Royalty Bearing Product is being sold in any country with respect
to which a Third Party is entitled to receive royalties pursuant to Section 6.08
hereof, then the royalty obligation set forth in Section 8.04(a) above with
        ----                                                               
respect to Royalty Bearing Sales attributable to the sale of such Royalty
Bearing Products in such country shall be reduced by the amount of the royalty
payable to such Third Party, but not below ***** of the amount of the royalty
that would, absent such payment, be otherwise payable under Section 8.04(a).

          (e) Subject to Section 9.11, ORTHO may discontinue commercialization
of a Royalty Bearing Product or ORTHO or CTI may discontinue Commercialization
of an Independent Product at any time.

          (f)  Upon expiration of the royalty term for a Royalty Bearing Product
in a country as described above, ORTHO shall thereafter have an exclusive, paid-
up license to make, have made, use, sell, offer for sale, have sold and import
that Royalty Bearing Product in that country.

          SECTION 8.05.  Sales by Sublicensees.  In the event either Party,
                         ---------------------                             
subject to the provisions of this Agreement, grants licenses or sublicenses to
others to make or sell Royalty Bearing Products or Independent Products, such
licenses or sublicenses shall include an obligation for the licensee or the
sublicensee to account for and report its Royalty Bearing

                                       48

<PAGE>
 
Sales of such Royalty Bearing Products or Independent Products on the same basis
as if such sales were Royalty Bearing Sales by the Party, and such Party shall
pay royalties to the other Party as if the Royalty Bearing Sales of the
sublicensee were Royalty Bearing Sales of the Party granting the license or
sublicense.

          SECTION 8.06.  Royalty Reports and Payments.  A report summarizing the
                         ----------------------------                           
Royalty Bearing Sales of any Royalty Bearing Products and/or Independent
Products during the relevant quarter on a country-by-country basis shall be
delivered to the receiving Party within sixty (60) days following the end of
each calendar quarter and sixty (60) days following the end of each calendar
year for which royalties are due from the selling Party.  Such royalty report
shall be in the format shown on Exhibit E attached hereto and the royalty
payment due therewith shall be remitted concurrently with said report.

          SECTION 8.07.  Payments.  Any payments due under this Agreement shall
                         --------                                              
be made by check sent to the address of the receiving party set forth in Section
17.08 or by wire transfer to a designated bank account of the receiving Party.

          SECTION 8.08.  Taxes.  The Party receiving royalties shall pay any and
                         -----                                                  
all taxes levied on account of royalties it receives under this Agreement.  If
laws or regulations require that taxes be withheld, the selling Party will (i)
deduct those taxes from the remittable royalty, (ii) timely pay the taxes to the
proper taxing authority, and (iii) send proof of payment to the other Party
within thirty (30) days of receipt of confirmation of payment from the relevant
taxing authority.  The selling Party agrees to take all lawful and reasonable
efforts to minimize such taxes to the other Party.

          SECTION 8.09.  Foreign Exchange.  For the purpose of computing Royalty
                         ----------------                                       
Bearing Sales for Products sold in a currency other than United States Dollars,
such currency shall be converted into United States Dollars in accordance with
the Party's customary and usual translation procedures consistently applied.

          SECTION 8.10.  Payments to or Reports by Affiliates.  Any payment
                         ------------------------------------              
required under any provision of this Agreement to be made to either Party or any
report required to be made by any Party shall be made to or by an Affiliate of
that Party if designated by that Party as the appropriate recipient or reporting
entity.

          SECTION 8.11.  No Overlapping Royalties.  Notwithstanding any other
                         ------------------------                            
provision of this Agreement, in no event shall any royalty provided for under
any Section of this Agreement be paid with respect to any sale of a
Collaboration Product, Independent Product or Royalty-Bearing Product to the
extent a royalty has been paid pursuant to any other Section of this Agreement
with respect to such sale.

                                       49

<PAGE>
 
                                 ARTICLE IX

                             MANUFACTURE AND SUPPLY
                             ----------------------

          SECTION 9.01.  Manufacture and Supply.  For a three (3) year period
                         ----------------------                              
from the Effective Date of this Agreement, CTI will manufacture, or arrange for
manufacture of, Collaboration Compounds in bulk form for use during the
Development of Collaboration Products as provided for in Article IV and, if
required for Commercialization of Collaboration Products, under Article VII
hereof.  Payments to Third Party manufacturers for such and directly related
costs will be a Development Expense.

          SECTION 9.02.  Process Development, Manufacturing Approvals.  CTI will
                         --------------------------------------------           
use commercially reasonable and diligent efforts to develop a process for the
manufacture of Collaboration Compounds and to scale up that process to a scale
sufficient to manufacture and supply the anticipated demand for Collaboration
Compounds.  The continued development of the process for the manufacture of
Collaboration Compounds as well as the scale up of that process and all material
issues incident to the development to produce Collaboration Compounds for
commercial purposes in sufficient quantity and in a timely manner will be within
the purview of the JDC.  The costs associated with the development and scale up
of a process to manufacture Collaboration Compounds will be a Development
Expense.  Subject to ORTHO's rights and obligations under Section 4.07(b), CTI
will use commercially reasonable and diligent efforts to make necessary filings
to obtain, or to cause a Third Party manufacturer of Collaboration Compounds to
make necessary filings to obtain Regulatory Approval for the manufacture of
Collaboration Compounds as part of the approval of a Drug Approval Application
for each Collaboration Product in the Co-Promotion Territory.  Such filings
shall include the filing of a Drug Master File in the United States and the
equivalent thereof in the Major Market Countries.  Once such filings are made,
no changes to the process for the manufacture of Collaboration Compounds shall
be made without the prior written approval of ORTHO.

          SECTION 9.03.  Quality Testing.  CTI shall perform quality control
                         ---------------                                    
tests and assays on all Collaboration Compounds in accordance with the
specifications.  Furthermore, CTI shall provide ORTHO with a Certificate of
Analysis and a Certificate of Compliance for each batch of Collaboration
Compound delivered to ORTHO.  The Certificate of Compliance shall certify that
each batch was reviewed and meets all regulatory requirements.  The Certificate
of Analysis shall certify that each batch was tested and meets all
specifications.  CTI shall permit ORTHO's designated representatives to inspect
and visit from time to time the facilities at which Collaboration Compounds are
manufactured, stored or tested for the purpose of determining compliance with
this Agreement, as well as all pertinent regulatory requirements.  Such
inspections shall occur during regular business hours upon reasonable notice.

                                       50

<PAGE>
 
          SECTION 9.04.  Shipment of Collaboration Compound.  Collaboration
                         ----------------------------------                
Compounds will be shipped to location(s) designated by ORTHO.  CTI shall use
reasonable efforts to deliver Collaboration Compounds on the dates specified by
ORTHO.

          SECTION 9.05.  Warranties.  Each Party with respect to Collaboration
                         ----------                                           
Compounds and/or Collaboration Products ("Materials") it manufactures and/or
                                          ---------                         
ships hereby represents and warrants that (a) Materials manufactured and
supplied hereunder will, on the date of shipment, comply with the specifications
as then in effect; (b) it shall manufacture, store and ship Materials in
compliance with all applicable Federal, state and local laws and governmental
regulations, including, without limitation, the current good manufacturing
practices regulations of the FDA; and (c) when shipped, Materials will not be
adulterated or misbranded within the meaning of the Federal Food, Drug &
Cosmetic Act and the regulations promulgated thereunder.  Upon receipt of a
shipment of Materials, the receiving Party may determine whether such shipment
meets the specifications and applicable regulatory requirements. The receiving
Party shall notify the other Party in writing promptly if any Materials fails to
meet said specifications and requirements.  If the supplying Party has not
received such written notice within ninety (90) days after any Material has been
received, then such shall be deemed to have met the specifications.  Upon
receipt of any such written notice of non-conformance, the supplying Party shall
either acknowledge that the subject Material does not meet the specifications or
resample the lot or batch in question and have said samples tested by an
independent laboratory agreeable to the receiving Party.  If such samples fail
to meet the specifications, then the supplying Party shall at the receiving
Party's option either replace the non-conforming Material at no additional cost
as soon as reasonably possible or refund the receiving Party's payments for said
non-conforming Materials.

          SECTION 9.06.  Manufacture and Supply After Initial Three Year Period.
                         ------------------------------------------------------ 

          (a)   After the period three (3) years from the Effective Date of this
Agreement, ORTHO shall be responsible for the manufacture and supply of
Collaboration Compounds for Development and Commercialization of Collaborative
Products.  ORTHO shall use commercially reasonable and diligent efforts to
manufacture or have manufactured Collaborative Compounds in sufficient quantity
to permit the manufacture of Collaboration Products for Development and
Commercialization. ORTHO also agrees to supply in a timely manner to CTI,
Collaboration Compounds in a quantity sufficient to satisfy CTI's obligations to
BioChem Pharma pursuant to the Collaboration Agreement referred to in Section
4.10 hereof and the existing Supply Agreement, dated as of March 7, 1995,
between CTI and BioChem Pharma.

          (b) Notwithstanding anything set forth in Section 9.01(a) to the
contrary, ORTHO may at any time by delivery of written notice to CTI elect to
become the Manufacturing Party of Collaboration Compounds hereunder.  Such
election shall become effective on the date specified in such notice.  In the
event that ORTHO shall elect to become the Manufacturing Party prior to the
third anniversary of the Effective Date of this

                                       51

<PAGE>
 
Agreement, ORTHO shall indemnify and hold CTI harmless against any costs,
expenses or fees that CTI may become subject to as a result of the termination
of any supply agreements existing as of the Effective Date between CTI and any
Third Party manufacturer of any Collaboration Compound.

          SECTION 9.07.  Manufacture and Supply of Collaboration Products.
                         ------------------------------------------------ 

          (a) Within ninety (90) days from the Effective Date of this Agreement,
ORTHO shall assume responsibility for the manufacture and supply of
Collaboration Products for use in Development and Commercialization in
accordance with the provisions of this Agreement.  ORTHO will use commercially
reasonable and diligent efforts to develop processes and procedures to
manufacture Collaboration Products and to scale up said processes and procedures
to a scale sufficient to supply the anticipated demand for Collaboration
Products in the Co-Promotion Territory and the Royalty Bearing Territory.
Within the ninety (90) day period from the Effective Date of this Agreement, all
clinical supplies of Collaboration Product shall be supplied by CTI at its
actual cost.

          (b) The costs associated with the scale-up of processes and procedures
to manufacture Collaboration Products for the Co-Promotional Territory will be a
Commercialization expense.

          SECTION 9.08.  Specifications.  The Parties agree that the manufacture
                         --------------                                         
of Collaboration Compounds and Collaboration Products must be in full compliance
with all aspects of then current GMPs for bulk product and final vial production
and shall be subject to a joint audit by CTI and ORTHO (whether together or
through a designee) of bulk drug substance manufacture, final drug product
manufacture including aseptic filling operations and analytical testing and the
data resulting therefrom.

(The information below marked by ***** has been omitted by a request for 
confidential treatment. The omitted portion has been separately filed with the 
Commission.)

          SECTION 9.09.  Transfer Pricing.  With respect to Collaboration
                         ----------------                                
Compounds it supplies, CTI shall be entitled to charge *****.  With respect to
Collaboration Products it supplies for sale or use in the Co-Promotion
Territory, ORTHO shall be entitled to charge its *****.  With respect to
Collaboration Compounds to be supplied by ORTHO pursuant to the last sentence of
Section 9.06(a), ORTHO shall be entitled to charge *****. Each party will use 
reasonable efforts, consistent with GMPs, its obligations hereunder and
applicable laws, to minimize ***** over the term of this Agreement.

          SECTION 9.10.  Inventory; Shortage of Supply; Coordination with Third
                         ------------------------------------------------------
Party Manufacturers.
- ------------------- 

          (a)  The JCC will decide on an appropriate level of inventory for each
Collaboration Product prior to the launch of such Collaboration Product.

                                       52

<PAGE>

(The information below marked by ***** has been omitted by a request for 
confidential treatment. The omitted portion has been separately filed with the 
Commission.)
 
          (b)  In the event that ORTHO is unable to manufacture sufficient
quantities of Collaboration Products for use in the Co-Promotion Territory, the
Non-Manufacturing Party shall have the right to offer to produce itself a
sufficient quantity of such Collaboration Products as the JCC shall determine
appropriate.  If the Non-Manufacturing Party does not exercise its right to so
produce such Collaboration Products, the Parties shall negotiate in good faith
an allocation between the Co-Promotion Territory and the Royalty Bearing
Territory of the available Collaboration Product and Royalty Bearing Product as
well as that to be subsequently manufactured.
 
          SECTION 9.11.  Termination of Participation.  If the Manufacturing
                         ----------------------------                       
Party with respect to any Collaboration Product elects to terminate its
participation in the Development and Commercialization of such Collaboration
Product pursuant to Section 4.09 or 5.07, it shall immediately provide to the
Non-Manufacturing Party, if such Party so requests, all process and
manufacturing technology, material and data and provide access to regulatory
filings sufficient to enable the Non-Manufacturing Party concurrently to produce
and supply such Non-Manufacturing Party's requirements of such Collaboration
Product.  Until the earlier of (i) the date the Non-Manufacturing Party is able
to manufacture and supply its own requirements of such Collaboration Product and
(ii) *****, the obligation of the Manufacturing Party to manufacture and supply
such Collaboration Product shall remain in effect, but the Manufacturing Party
shall be paid by the Non-Manufacturing Party the applicable transfer price for
supply of such Collaboration Product determined in accordance with Section 9.09.
The Manufacturing Party shall provide reasonable assistance to the Non-
Manufacturing Party with respect to such transfer so as to permit the Non-
Manufacturing Party to begin manufacturing and supplying its requirements as
soon as possible to minimize any disruption in the continuity of supply. In
addition, the Manufacturing Party shall provide a right of reference and access
to the Non-Manufacturing Party to all of the Manufacturing Party's appropriate
regulatory filings for the manufacture of such Collaboration Product.


                                   ARTICLE X

                                CONFIDENTIALITY
                                ---------------

(The information below marked by ***** has been omitted by a request for 
confidential treatment. The omitted portion has been separately filed with the 
Commission.)


          SECTION 10.01.  Confidentiality; Exceptions.  Except to the extent
                          ---------------------------                       
expressly authorized by this Agreement or otherwise agreed in writing, the
Parties agree that, for the term of this Agreement and for ***** thereafter, the
receiving Party shall keep confidential and shall not publish or otherwise
disclose or use for any purpose other than as provided for in this Agreement any
Information and other information and materials furnished to it by the other
Party pursuant to this Agreement or any Information developed during the course
of the collaboration hereunder, or any provisions of this Agreement that are the
subject of an effective order of the Securities Exchange Commission granting
confidential treatment pursuant to the Securities Act of 1934, as amended
(collectively,

                                       53

<PAGE>
 
"Confidential Information"), except to the extent that it can be established by
 ------------------------                                                      
the receiving Party that such Confidential Information:

          (a) was already known to the receiving Party, other than under an
obligation of confidentiality, at the time of disclosure by the other Party;

          (b) was generally available to the public or otherwise part of the
public domain at the time of its disclosure to the receiving Party;

          (c) became generally available to the public or otherwise part of the
public domain after its disclosure and other than through any act or omission of
the receiving Party in breach of this Agreement; or

          (d) was disclosed to the receiving Party, other than under an
obligation of confidentiality, by a Third Party who had no obligation to the
disclosing Party not to disclose such information to others.

          SECTION 10.02.  Authorized Disclosure.  Each Party may disclose
                          ---------------------                          
Confidential Information hereunder to the extent such disclosure is reasonably
necessary in filing or prosecuting patent applications, prosecuting or defending
litigation, complying with applicable governmental regulations or conducting
pre-clinical or clinical trials, provided that if a Party is required by law or
regulation to make any such disclosures of the other Party's Confidential
Information it will, except where impracticable for necessary disclosures, for
example in the event of medical emergency, give reasonable advance notice to the
other Party of such disclosure requirement and, except to the extent
inappropriate in the case of patent applications, will use its reasonable
efforts to secure confidential treatment of such Confidential Information
required to be disclosed.  In addition, and with prior notice to the other Party
of each Third Party with whom a confidential disclosure agreement is being
entered into, each Party shall be entitled to disclose, under a binder of
confidentiality containing provisions as protective as those of this Article X,
Confidential Information to any Third Party for the purpose of carrying out the
purposes of this Agreement.  Nothing in this Article X shall restrict any Party
from using for any purpose any Confidential Information independently developed
by it during the course of the collaboration hereunder, or from using
Confidential Information that is specifically derived from pre-clinical or
clinical trials to carry out marketing, sales or professional services support
functions as is customary in the pharmaceutical industry.

(The information below marked by ***** has been omitted by a request for 
confidential treatment. The omitted portion has been separately filed with the 
Commission.)

          SECTION 10.03.  Survival.  This Article X shall survive the
                          --------                                   
termination or expiration of this Agreement for a period of *****

(The information below marked by ***** has been omitted by a request for 
confidential treatment. The omitted portion has been separately filed with the 
Commission.)

          SECTION 10.04.  Termination of Prior Agreement.  This Agreement
                          ------------------------------                 
supersedes the Confidentiality Agreement between CTI and ORTHO dated as of
October 1, 1992.  All Information exchanged between the Parties under that
Agreement shall be deemed

                                       54

<PAGE>
 
Confidential Information and shall be subject to the terms of this Article X,
and shall be included within the definitions of CTI Know-how and ORTHO Know-how.

          SECTION 10.05.  Publications.  Prior to the launch of any
                          ------------                             
Collaboration Product in the Co-Promotion Territory, the JDC, and after launch,
the JCC, will determine the overall strategy for publication in support of such
Collaboration Products in the Co-Promotion Territory.  Each Party shall provide
to the other the opportunity to review any proposed publications or
presentations which relate to Collaboration Compounds within the Field or
Collaboration Products as early as reasonably practical, but at least forty-five
(45) days prior to their intended submission for publication (except with the
consent of the other party).  The reviewing Party will provide the publishing
Party with its response to the publishing Party's request within thirty (30)
days of receipt of such request.  The failure of the reviewing Party to respond
to such a request within such thirty (30) day period shall be deemed to be an
approval of such request and the publishing Party shall then be free to proceed
with said publication.

          SECTION 10.06.  Publicity Review.  Subject to the further provisions
                          ----------------                                    
of this Section, no Party shall originate any written publicity, news release,
or other announcement or statement relating to this Agreement or to performance
hereunder or the existence of an arrangement between the Parties (collectively,
"Written Disclosure"), without the prior prompt review and written approval of
 ------------------                                                           
the other, which approval shall not be unreasonably withheld or delayed.
Notwithstanding the foregoing provisions of this Section 10.06, any Party may
make any public Written Disclosure it believes in good faith based upon the
advice of counsel is required by applicable law or any listing or trading
agreement concerning its publicly traded securities, provided that prior to
making such Written Disclosure, the disclosing Party shall provide the other
Party with a copy of the materials proposed to be disclosed and provide the
receiving Party with an opportunity to promptly review the proposed Written
Disclosure.  To the extent that the receiving Party reasonably requests that any
information in the materials proposed to be disclosed be deleted, the disclosing
Party shall request confidential treatment of such information pursuant to Rule
406 of the Securities Act of 1933 or Rule 26b-2 of the Securities Exchange Act
of 1934, as applicable (or any other applicable regulation relating to the
confidential treatment of information), so that there be omitted from the
materials that are publicly filed any information that the receiving Party
reasonably requests to be deleted.  The terms of this Agreement may also be
disclosed to (i) government agencies where required by law, or (ii) Third
Parties with the prior written consent of the other Party, which consent shall
not be unreasonably withheld or delayed, so long as such disclosure is made
under a binder of confidentiality and so long as highly sensitive terms and
conditions such as financial terms are extracted from the Agreement or not
disclosed upon the request of the other Party.  All Written Disclosures shall be
factual and as brief as is reasonable under the circumstances.  Upon request by
either Party, the Parties agree to prepare a mutually agreed press release and
question and answer document with respect to this Agreement.  Each Party agrees
that

                                       55

<PAGE>
 
all Written Disclosures and oral statements relating hereto shall be consistent
with the answers specified in such question and answer document.

                                   ARTICLE XI

              OWNERSHIP OF INTELLECTUAL PROPERTY AND PATENT RIGHTS
              ----------------------------------------------------

          SECTION 11.01.  Ownership.  Each Party shall solely own, and it alone
                          ---------                                            
shall have the right to apply for, Patents within and outside of the United
States for any inventions made solely by that Party's employees or consultants
in the course of performing work under this Agreement.  Inventions made jointly
by employees or consultants of CTI and ORTHO shall be owned jointly by CTI and
ORTHO, and each Party shall retain full joint ownership under any Patents
resulting therefrom, with full joint ownership rights in any field and, to the
extent not inconsistent with Article VI and the other terms of this Agreement,
the right to sublicense without the consent of the other Party, without
accounting.  The law of joint ownership of inventions of the United States shall
apply to any joint ownership of Patents outside the United States claiming joint
inventions of the Parties.

          SECTION 11.02.  Disclosure of Patentable Inventions.  In addition to
                          -----------------------------------                 
the disclosures required under Article XIII, each Party shall provide to the
other any invention disclosure submitted in the normal course and disclosing an
invention within the Field arising in the course of the collaboration during the
term of this Agreement.  Such invention disclosures shall be provided to the
other Party promptly after submission and in no event later than ten (10) days
after the end of the calendar quarter in which the disclosure was submitted.

          SECTION 11.03.  Patent Filings.
                          -------------- 

          (a)   Each Party, at its sole discretion and responsibility, shall
prepare, file, prosecute and maintain Patents to cover discoveries and
inventions made solely by its own employees or consultants relating to any
Product and use reasonable efforts to file initially all such applications in
the United States or the appropriate forum under the circumstances.  The JDC
will determine which Party shall file, prosecute and maintain Patents to cover
inventions relating to the discovery, evaluation, manufacture, use or sale of
Collaboration Compounds within the Field or Collaboration Products that are made
jointly by personnel of CTI and ORTHO in the course of the collaboration (herein
referred to as "Joint Patents").  The determination of the countries in the
Royalty Bearing Territory in which to file Joint Patents shall be made by ORTHO.
ORTHO shall have the right to direct and control all material actions relating
to the prosecution or maintenance of Joint Patents in the Royalty Bearing
Territory, including conflict proceedings, reexaminations, reissuance,
oppositions and revocation proceedings.

                                       56

<PAGE>
 
          (b)   The Party which is responsible for filing a Joint Patent will be
termed the "filing Party." The filing Party shall keep the other Party apprised
of the status of each Joint Patent and shall seek the advice of the other Party
with respect to patent strategy and draft applications and shall give reasonable
consideration to any suggestions or recommendations of the other Party
concerning the preparation, filing, prosecution, maintenance and defense
thereof.  The Parties shall cooperate reasonably in the prosecution of all Joint
Patents and Patents covering Collaboration Products and shall share all material
information relating thereto, including all material communications from patent
offices, promptly after receipt of such information.  If the Parties are unable
to agree as to who is the filing Party or as to any aspect of patent prosecution
of a Joint Patent or a Patent covering a Collaboration Product, each Party shall
be free to take whatever action it deems appropriate to protect the joint
invention or Collaboration Product, including the filing of patent applications
subject to prior notification of the other Party.  If, during the term of this
Agreement, the filing Party intends to allow any Patent covering a Collaboration
Product to lapse or become abandoned without having first filed a substitute,
the filing Party shall, whenever practicable, notify the other Party of such
intention at least sixty (60) days prior to the date upon which such Patent
shall lapse or become abandoned, and the other Party shall thereupon have the
right, but not the obligation, to assume responsibility for the prosecution,
maintenance and defense thereof.

          (c)   The Parties agree to use reasonable efforts to ensure that any
Patent filed outside of the United States prior to a filing in the United States
will be in a form sufficient to establish the date of original filing as a
priority date for the purposes of a subsequent filing in the United States.

          SECTION 11.04.  Third Party Patent Rights.  Except as expressly
                          -------------------------                      
provided in Section 12.01, neither Party makes any warranty with respect to the
validity, perfection or dominance of any Patent or other proprietary right or
with respect to the absence of rights in Third Parties which may be infringed by
the manufacture or sale of any Product.  Each Party agrees to bring to the
attention of the other Party any Patent or Patent application it discovers, or
has discovered, and which relates to the subject matter of this Agreement.

          SECTION 11.05.  Enforcement Rights.
                          ------------------ 

          (a)   Notification of Infringement.  If either Party learns of any
                ----------------------------                                
infringement or threatened infringement by a Third Party of the CTI Patents,
ORTHO Patents, or Joint Patents, such Party shall promptly notify the other
Party and shall provide such other Party with all available evidence of such
infringement.

(The information below marked by ***** has been omitted by a request for 
confidential treatment. The omitted portion has been separately filed with the 
Commission.)

          (b)  Enforcement in the Co-Promotion Territory.  The Steering
               -----------------------------------------               
Committee will determine the appropriate course of action to pursue with respect
to infringement of any CTI Patents, ORTHO Patents or Joint Patents covering the
manufacture, use, importation, sale or offer for sale of Collaboration Products
being developed or marketed in the

                                       57

<PAGE>
 
(The information below marked by ***** has been omitted by a request for 
confidential treatment. The omitted portion has been separately filed with the 
Commission.)

Co-Promotion Territory.  Costs of patent enforcement and related recoveries with
respect to infringement in the Co-Promotion Territory shall be charged to the
collaboration as Allowable Operating Expenses. If the Steering Committee is
unable to decide on a joint action with respect to any infringement, each Party
may proceed in such manner as the law permits.  If one Party brings any such
action or proceeding, the other Party agrees to be joined as a party plaintiff,
if necessary, to prosecute the action or proceeding and to give the first Party
reasonable assistance.  Each Party shall bear its own expenses, with any
recovery allocated *****.

(The information below marked by ***** has been omitted by a request for 
confidential treatment. The omitted portion has been separately filed with the 
Commission.)

          (c)  Enforcement in the Royalty Bearing Territory.  ORTHO shall have
               --------------------------------------------                   
the right, but not the obligation, to institute, prosecute and control at its
own expense any action or proceeding with respect to infringement of any CTI
Patents, ORTHO Patents or Joint Patents covering the manufacture, use,
importation, sale or offer for sale of Collaboration Products being developed or
marketed in the Royalty Bearing Territory, by counsel of its own choice.  CTI
shall have the right, at its own expense, to be represented in any action by
counsel of its own choice.  If ORTHO fails to bring an action or proceeding or
otherwise take appropriate action to abate such infringement within a period of
***** of notice by CTI to ORTHO requesting action, CTI will have the right to
bring and control any such action or proceeding relating to CTI Patents by
counsel of its own choice and ORTHO will have the right to be represented in any
such action by counsel of its own choice and at its own expense. If one Party
brings any such action or proceeding, the other Party agrees to be joined as a
party plaintiff if necessary to prosecute the action or proceeding and to give
the first Party reasonable assistance and authority to file and prosecute the
suit. Any damages or other monetary awards recovered pursuant to this Section
11.05(c) shall be allocated *****.

(The information below marked by ***** has been omitted by a request for 
confidential treatment. The omitted portion has been separately filed with the 
Commission.)

          (d)  Enforcement with Respect to Independent Products.  The Party
               ------------------------------------------------            
developing or marketing an Independent Product shall have the right, but not the
obligation, to institute, prosecute and control at its own expense any action or
proceeding with respect to infringement of any CTI Patents, ORTHO Patents or
Joint Patents covering the manufacture, use, importation, sale or offer for sale
of an Independent Product being developed or marketed by such Party, by counsel
of its own choice.  The other Party shall have the right, at its own expense, to
be represented in any such action by counsel of its own choice.  If the Party
marketing such Independent Product fails to bring an action or proceeding within
a period of ***** of notice from the other Party requesting action, the other
Party will have the right to bring and control any such action or proceeding
relating to that Party's Patents (but not the Patents of the Party developing or
marketing such Independent Product) by counsel of its own choice and the Party
marketing the Independent Product will have the right to be represented in any
such action by counsel of its own choice and at its own expense. If one Party
brings any such action or proceeding, the other Party agrees to be joined as a
party plaintiff if necessary to prosecute the action or proceeding and to give
the first Party reasonable assistance and authority to file and prosecute the
suit. The

                                       58

<PAGE>
 
Party bringing such action shall be entitled to retain any damages or other
monetary awards recovered pursuant to this Section 11.05(d).

          (e)  Settlement with a Third Party.  The Party that controls the
               -----------------------------                              
prosecution of a given action shall also have the right to control settlement of
such action; provided, however, that if one Party controls, no settlement shall
             --------  -------                                                 
be entered into without the written consent of the other Party if such
settlement would materially and adversely affect the interests of such other
Party.  If the other Party shall refuse to grant such consent, then the dispute
will be resolved pursuant to Article XVI.

          (f) Exclusivity.  Notwithstanding the provisions of Sections 11.05(b),
              -----------                                                       
(c) and (d), neither Party shall file and prosecute an action for infringement
of a Patent in any country for which the other Party has the primary
responsibility to file and prosecute such action, and pursuant to which that
other Party having primary responsibility has commenced and is prosecuting at
least one such action for infringement of said Patent in the same country,
without the agreement of that other Party, which agreement shall not be
unreasonably withheld or delayed.

          SECTION 11.06.  Defense and Settlement of Third Party Claims.
                          -------------------------------------------- 

          (a)   Defense in the Co-Promotion Territory.  If a Third Party asserts
                -------------------------------------                           
that a patent, trademark or other intangible right owned by it is infringed by
any Collaboration Product in the Co-Promotion Territory, the Steering Committee
shall establish a plan for a common defense and select the Party responsible for
managing such plan.  The costs of any such action incurred by one or both of the
Parties at the direction of the Steering Committee (including the costs of any
judgment, award, decree or settlement) will be chargeable to the collaboration
as an Allowable Operating Expense.

          (b)  Defense in the Royalty Bearing Territory.  If a Third Party
               ----------------------------------------                   
asserts that a patent, trademark or other intangible right owned by it is
infringed by any Royalty Bearing Product in the Royalty Bearing Territory, ORTHO
will be solely responsible for defending against any such assertions at its cost
and expense, but no settlement may be entered into without the written consent
of CTI if such settlement would materially and adversely affect CTI's interests.
The costs of any such action incurred by ORTHO (including the costs of any
judgment, award, decree or settlement) will be charged against Royalty Bearing
Sales.

          (c) Defense with Respect to Independent Products.  If a Third Party
              --------------------------------------------                   
asserts that a patent, trademark or other intangible right owned by it is
infringed by any Independent Product, the Party marketing such Independent
Product will be solely responsible for defending against any such assertions at
its cost and expense, but no settlement may be entered into without the written
consent of the other Party if such settlement would materially and adversely
affect its interests.  The costs of any such action incurred by the Party

                                       59

<PAGE>
 
marketing such Independent Product (including the costs of any judgment, award,
decree or settlement) will be charged against Royalty Bearing Sales.

          (d) Settlement with a Third Party.  The entity that controls the
              -----------------------------                               
defense of a given claim with respect to a Collaboration Product shall also have
the right to control settlement of such claim; provided, however, that other
                                               --------  -------            
than as provided in Section 11.06(b), no settlement shall be entered into
without the written consent of the other Party, which consent shall not be
unreasonably withheld or delayed.  If there is no agreement between the Parties
as to any proposed settlement, then the dispute shall be decided by the Steering
Committee, and, if the Steering Committee is unable to decide the dispute, the
matter will be resolved pursuant to Article XIV.

          SECTION 11.07.  Patent and Trademark Expenses.
                          ----------------------------- 

          (a)   From the Effective Date of this Agreement, prior to the first
commercial sale of a Collaboration Product, all worldwide Patent and Trademark
Expenses will be treated as Development Expenses.

          (b) Following the first commercial sale of a Collaboration Product,
Patent and Trademark Expenses arising in the Co-Promotion Territory will be
treated as an Allowable Operating Expense.

          (c) On a country-by-country basis, following the first commercial sale
of a Collaboration Product, Patent and Trademark Expenses arising in the Royalty
Bearing Territory shall be borne by ORTHO, unless incurred without ORTHO's prior
approval or in respect of a country in the Royalty Bearing Territory where ORTHO
shall have abandoned commercialization pursuant to Section 7.06(b) hereof;
provided, however, that ORTHO shall be entitled to deduct from Royalty Bearing
- --------  -------                                                             
Sales an amount equal to the aggregate amount of the Patent and Trademark
Expenses arising in the Royalty Bearing Territory that it pays that relate to
the filing and maintenance of Patents and trademarks, including in such amount
the costs of conflict, re-examination, reissue, opposition, nullification and
revocation proceedings.  If any such Patent and Trademark Expenses are initially
paid by CTI, ORTHO shall promptly reimburse CTI for such Patent and Trademark
Expenses upon delivery of invoices.

          SECTION 11.08.  Assignment of Joint Patents.  Neither Party may assign
                          ---------------------------                           
its rights under any Joint Patent except with the prior written consent of the
other Party; provided, however, that either Party may assign such rights without
             --------  -------                                                  
consent to an Affiliate or other permitted assignee under this Agreement in
connection with a merger or similar reorganization or the sale of all or
substantially all of its assets, as provided for in Section 17.01(b).

                                       60

<PAGE>
 
          SECTION 11.09.  Trademarks.  ORTHO shall be responsible for the
                          ----------                                     
selection, registration and maintenance of all trademarks which it employs in
connection with Collaboration Products and shall own and control such
trademarks.  ORTHO shall keep the JDC and the JCC informed of proposed trademark
development and related expenses.  CTI recognizes the exclusive ownership by
ORTHO of any proprietary ORTHO name, logotype or trademark furnished by ORTHO
(including ORTHO's Affiliates) for use exclusively in connection with
Collaboration Products.  CTI shall not, either while this Agreement is in
effect, or at any time thereafter, register, use or attempt to obtain any right
in or to any such name, logotype or trademark or in and to any name, logotype or
trademark confusingly similar thereto.  In the event that this Agreement is
terminated by CTI pursuant to Section 14.02, then, at CTI's option, ORTHO shall
license to CTI on a royalty-free basis, any trademark specifically developed for
Collaboration Products.


                                  ARTICLE XII

                  REPRESENTATIONS AND WARRANTIES; EXCLUSIVITY
                  ------------------------------  -----------

          SECTION 12.01.  Representations and Warranties.
                          ------------------------------ 

          (a)   Each of the Parties hereby represents and warrants to the other
Party as follows:

          (i)   This Agreement is a legal and valid obligation binding upon such
Party and enforceable in accordance with its terms.  The execution, delivery and
performance of the Agreement by such Party does not conflict with any agreement,
instrument or understanding, oral or written, to which it is a Party or by which
it is bound, nor violate any law or regulation of any court, governmental body
or administrative or other agency having jurisdiction over it.

          (ii)  Such Party has not, and during the term of the Agreement will
not, grant any right to any Third Party relating to its respective Patents and
Know-how in the Field which would conflict with the rights granted to the other
Party hereunder.

          (iii) To the best of its knowledge neither Party is obligated under
any agreement as of the Effective Date to pay any Third Party royalties with
respect to the Collaboration Products.  As of the Effective Date there are no
such agreements in place.

          (b)   CTI hereby represents and warrants to ORTHO as follows:

          (i)   It has given ORTHO access to all clinical records which describe
all adverse event reports related to Collaboration Products that have been filed
with the FDA prior to the Effective Date.

                                       61

<PAGE>
 
          (ii)   As of the Effective Date, except as it may have previously
disclosed to ORTHO in writing, it has not received any notices of infringement
or any written communications relating in any way to a possible infringement
with respect to Lisofylline, and that it is not aware that the manufacture, use
or sale of Lisofylline infringes any Third Party patent rights.

          SECTION 12.02.  Performance by Affiliates.  The Parties recognize that
                          -------------------------                             
each Party may perform some or all of its obligations under this Agreement
through Affiliates, provided, however, that each Party shall remain responsible
                    --------  -------                                          
for and be a guarantor of the performance by its Affiliates and shall cause its
Affiliates to comply with the provisions of this Agreement in connection with
such performance.

          SECTION 12.03.  Exclusivity.  This Agreement shall be the exclusive
                          -----------                                        
mechanism by which the Parties will commercialize Collaboration Compounds within
the Field during the term of this Agreement.  CTI agrees that it will not,
without ORTHO's prior written consent, commercialize or sell or license to any
Third Party any compound discovered in the Sponsored Research Program if the
commercialization thereof would, or could reasonably be expected to, compete
with a Collaboration Product.


                                 ARTICLE XIII

                            INFORMATION AND REPORTS
                            -----------------------

          SECTION 13.01.  Information and Reports During Development and
                          ----------------------------------------------
Commercialization.  ORTHO and CTI will disclose and make available to each other
- -----------------                                                               
without charge (other than reasonable duplicating, postage and related out-of-
pocket costs) all preclinical, clinical, regulatory, commercial, marketing,
promotion, pricing, sales and other Information, including copies of all
preclinical and clinical reports, known by ORTHO or CTI directly concerning
Collaboration Compounds within the Field or Collaboration Products at any time
during the term of this Agreement.  Each Party will use commercially reasonable
and diligent efforts to disclose to the other Party all significant information
promptly after it is learned or its significance is appreciated.  Each Party
shall own and maintain its own database of clinical trial data accumulated from
all clinical trials of Collaboration Products for which it was responsible and
of adverse drug event information for all Collaboration Products.  At the option
of the requesting Party, such data shall be provided in a computer readable
format by the providing Party, to the extent available, which shall also assist
in the transfer and validation of such data to the receiving Party.  Without
limitation of the foregoing, each Party shall supply to the other the
Information required by the other Party and requested by it (either as a routine
practice or as a specific request) for purposes of compliance with regulatory
requirements.

                                       62

<PAGE>
 
          SECTION 13.02.  Complaints.  Each Party shall maintain a record of all
                          ----------                                            
complaints it receives with respect to any Collaboration Product.  Each Party
shall notify the other Party of any complaint with regulatory implications
received by it in sufficient detail and within five (5) business days after the
event, and in any event in sufficient time to allow the responsible Party to
comply with any and all regulatory requirements imposed upon it in any country;
provided, however, that notice of any complaint involving a field alert report
- --------  -------                                                             
shall be transmitted within one business day.

          SECTION 13.03.  Adverse Drug Experiences.  The Parties recognize that
                          ------------------------                             
the holder of a Drug Approval Application may be required to submit information
and file reports to various governmental agencies on Collaboration Products
under clinical investigation, Collaboration Products proposed for marketing, or
marketed Collaboration Products.  Information must be submitted at the time of
initial filing for investigational use in humans and at the time of a request
for market approval of a new Collaboration Product.  In addition, supplemental
information must be provided on Collaboration Products at periodic intervals and
adverse drug experiences must be reported at more frequent intervals depending
on the severity of the experience and whether or not the event is unexpected.
Consequently, each Party agrees to:

          (a) Provide to the other for initial and/or periodic submission to
government agencies significant information on the Collaboration Product from
preclinical laboratory, animal toxicology and pharmacology studies, as well as
adverse drug experience reports from clinical trials and commercial experiences
with the Collaboration Product;

          (b) In connection with investigational Collaboration Products, report
to the other within three (3) days of the initial receipt of a report of any
unexpected or serious experience with the drug, if required for either Party to
comply with regulatory requirements; and

          (c) In connection with marketed Collaboration Products, report to the
other within five (5) business days of the initial receipt of a report of any
adverse experience with the drug that is serious and unexpected or sooner if
required for either Party to comply with regulatory requirements.  Serious
adverse experience means any experience that suggests a significant hazard,
contraindication, side effect or precaution, or any experience that is fatal or
life threatening, is permanently disabling, requires or prolongs inpatient
hospitalization, or is a congenital anomaly, cancer, or overdose.  An unexpected
adverse experience is one not identified in nature, specificity, severity or
frequency in the current investigator brochure or the U.S. labeling for the
drug.

          Each Party also agrees that if it contracts with a Third Party for
research to be performed by such Third Party on the drug, that Party agrees to
require such Third Party to report to the contracting Party the information set
forth in subparagraphs (a), (b), and (c) above.  The Parties agree that at all
times after the approval of any Drug Approval

                                       63

<PAGE>
 
Application or equivalent thereof, ORTHO shall be responsible for collecting,
collating and reporting to the appropriate regulatory authority all adverse drug
experiences.

          SECTION 13.04.  Records of Revenues and Expenses.
                          -------------------------------- 

(The information below marked by ***** has been omitted by a request for 
confidential treatment. The omitted portion has been separately filed with the 
Commission.)

          (a)   Each Party will maintain complete and accurate records which are
relevant to revenues, costs, expenses and payments under this Agreement and such
records shall be open during reasonable business hours for a period of three (3)
years from creation of individual records for examination at the other Party's
expense and not more often than once each year by a certified public accountant
selected by the other Party for the sole purpose of verifying for the inspecting
Party the correctness of calculations and classifications of such revenues,
costs, expenses or payments made under this Agreement.  In the absence of
material discrepancies ***** of Operating Profits or Losses) in any request for
reimbursement resulting from such audit, the accounting expense shall be paid by
the Party requesting the audit.  If material discrepancies do result, the
audited Party shall bear the accounting expense.  In any case, the audited Party
shall pay the discrepancy.  Any records or accounting information received from
the other Party shall be Confidential Information for purposes of Article X.
Results of any such audit shall be provided to both Parties, subject to Article
X.

          (b)   If there is a dispute between the Parties following any audit
performed pursuant to Section 13.04(a), either Party may refer the issue (an
"Audit Disagreement") to an independent certified public accountant for
resolution.  In the event an Audit Disagreement is submitted for resolution by
either Party, the Parties shall comply with the following procedures:

          (i)   The Party submitting the Audit Disagreement for resolution shall
provide written notice to the other Party that it is invoking the procedures of
this Section 13.04(b).

          (ii)  Within thirty (30) business days of the giving of such notice,
the Parties shall jointly select a recognized international accounting firm to
act as an independent expert to resolve such Audit Disagreement.

          (iii) The Audit Disagreement submitted for resolution shall be
described by the Parties to the independent expert, which description may be in
written or oral form, within ten (10) business days of the selection of such
independent expert.

          (iv)  The independent expert shall render a decision on the matter as
soon as practicable.

          (v)   The decision of the independent expert shall be final and
binding and shall not be subject to Sections 16.02 and 16.03 hereof, unless such
Audit Disagreement

                                       64

<PAGE>
 
involves alleged fraud, breach of this Agreement or construction or
interpretation of any of the terms and conditions hereof.

          (vi)  All fees and expenses of the independent expert, including any
third party support staff or other costs incurred with respect to carrying out
the procedures specified at the direction of the independent expert in
connection with such Audit Disagreement, shall be borne by the losing Party.


                                  ARTICLE XIV

                             TERM AND TERMINATION
                             --------------------

          SECTION 14.01.  Term.  This Agreement shall commence as of the
                          ----                                          
Effective Date and, unless sooner terminated as provided herein and except as
provided in Section 14.05, (a) the remaining provisions of this Agreement
relating to activities in the Co-Promotion Territory shall continue in effect
until the date on which the Parties are no longer entitled to receive a share of
Operating Profits or Losses on any Product and (b) the remaining provisions of
this Agreement relating to Royalty Bearing Products and Independent Products
shall continue in effect until the date on which neither party is paying a
royalty to the other Party on Royalty Bearing Sales of Royalty Bearing Products
or Independent Products.  Those provisions shall govern the term of the rights
and obligations specifically covered thereby.

          SECTION 14.02.  Termination for Material Breach.
                          ------------------------------- 

(The information below marked by ***** has been omitted by a request for 
confidential treatment. The omitted portion has been separately filed with the 
Commission.)

          (a)   Subject to the provisions of this Section 14.02, if either Party
(the "Breaching Party") shall have committed a Material Breach and such Material
Breach shall remain uncured and shall be continuing for a period of *****
following receipt of notice thereof by the other Party (the "Non-Breaching
Party"), then, in addition to any and all other rights and remedies that may be
available, the Non-Breaching Party shall have the right to terminate this
Agreement effective upon the expiration of such ***** period. Any such notice of
alleged Material Breach by the Non-Breaching Party shall include a reasonably
detailed description of all relevant facts and circumstances demonstrating,
supporting and/or relating to each such alleged Material Breach by the Breaching
Party.

(The information below marked by ***** has been omitted by a request for 
confidential treatment. The omitted portion has been separately filed with the 
Commission.)

          (b)   If the Breaching Party, upon written notice delivered to the 
Non-Breaching Party prior to the expiration of such ***** period, shall assert
in good faith that any such alleged Material Breach described in the Non-
Breaching Party's notice, whether in payment of moneys or otherwise, was not a
Material Breach, or was excused by reason of material failure of performance by
the other Party or Third Parties or by reason of Force Majeure (as defined in
Section 17.05), or shall otherwise in good faith

                                       65

<PAGE>
 
dispute such alleged Material Breach, then the Parties shall continue to perform
under this Agreement, subject to all of its terms and conditions, and the matter
shall be resolved pursuant to the provisions of Sections 16.02 and 16.03.  In
such event, the Non-Breaching Party shall not be entitled to terminate this
Agreement pursuant to this Section 14.02 unless and until (i) it shall be
determined pursuant to Sections 16.02 and 16.03 that the Breaching Party has
committed a Material Breach and (ii) such Material Breach has not been cured
prior to such determination pursuant to Sections 16.02 and 16.03.  To  the
extent that it is determined pursuant to a final and non-appealable decision
under Sections 16.02 and 16.03 that the Breaching Party did commit a Material
Breach and failed to cure the same within the period provided for in clause (ii)
above, then the Non-Breaching Party may immediately terminate this Agreement
and, in addition to all damages determined pursuant to the provisions of
Sections 16.02 and 16.03 to be due and owing from the Breaching Party to the
Non-Breaching Party under this Agreement, the Breaching Party shall be liable
for the Non-Breaching Party's reasonable attorneys' fees incurred in connection
with resolving such matter pursuant to Sections 16.02 and 16.03.

          (c)   If the Non-Breaching Party terminates this Agreement pursuant to
the provisions of this Section 14.02(a) and (b), then the following provisions
shall apply:

          (i)   The Non-Breaching Party shall receive a paid-up, exclusive (even
as to the Breaching Party but subject to rights of Third Parties that are not
Affiliates of the Breaching Party that pre-existed or accrued prior to such
termination), worldwide right and license, with the right to grant sublicenses,
to all Patents of the Breaching Party and all of the Breaching Party's interest
in jointly owned trademarks pursuant to Section 11.09(a), to make, have made,
import, use, sell, offer for sale and have sold Collaboration Products, Royalty
Bearing Products and Independent Products and shall have the exclusive right
(but not the obligation) to enforce the Patents against competitive product
infringement (in the manner contemplated under the terms of Section 11.05
applicable to Patents of the Breaching Party in the event that the Breaching
Party does not or will not so enforce the Patents) and the exclusive right (but
not the obligation) to enforce the trademark rights against infringers.

          (ii)  all licenses and rights to the Non-Breaching Party's patents
granted to the Breaching Party hereunder shall terminate:

          (iii) all Confidential Information supplied by the Non-Breaching
Party to the Breaching Party shall be returned to the Non-Breaching Party except
the Breaching Party may retain one copy of such information solely for legal
archive purposes;

          (iv)  the Breaching Party shall cooperate in the transfer of all INDs,
Drug Approval Applications and Regulatory Approvals related to Collaboration
Compounds within the Field, Collaboration Products and Independent Products to
the Non-Breaching Party, and shall take such other actions and execute such
other instruments, assignments and documents

                                       66

<PAGE>
 
as may be necessary to effect the transfer of rights hereunder to the Non-
Breaching Party; and
 
          (v) the Breaching Party shall assign all of its rights in and to all
Joint Patents and all jointly owned trademarks (and all registrations and
applications for registration therefor) to the Non-Breaching Party.

(The information below marked by ***** has been omitted by a request for
confidential treatment. The omitted portion has been separately filed with the
Commission).

          (d) In the event of termination of this Agreement pursuant to this
Section 14.02 where the Breaching Party is the Manufacturing Party with respect
to one or more Collaboration Products hereunder, the Manufacturing Party shall
continue to provide for manufacture of such Collaboration Products to the extent
provided prior to notice of such termination, from the effective date of such
termination until such time as the Non-Manufacturing Party is able to secure an
equivalent alternative commercial manufacturing source, as requested by the Non-
Manufacturing Party, provided, however, that said period shall cease after
                     --------  -------                                    
***** from the effective date of the termination. To this end, as of the
effective date of such termination, all Third Party manufacturing contracts
shall be assigned to the Non-Manufacturing Party, and the cost charged to the
Non-Manufacturing Party by the Manufacturing Party for any of the internal
manufacturing activities to be continued by the Manufacturing Party pursuant to
this Section 14.02 for the production of Collaboration Products shall be the
same as the Manufacturing Party's cost was while this Agreement was in effect.
Further, upon the request of the Non-Manufacturing Party, the Manufacturing
Party shall provide such technical assistance and know-how licenses on a 
royalty-free basis as may reasonably be requested to transfer such technology as
is needed by the Non-Manufacturing Party to commence or continue commercial
manufacture of Collaboration Products. Such technical assistance shall be
provided at the Manufacturing Party's cost, which cost shall be reimbursed
within thirty (30) days upon receipt of an invoice from the Manufacturing Party
by the Non-Manufacturing Party or its designee. In the event that any technology
as is needed by the Non-Manufacturing Party to commence or continue commercial
manufacture of Collaboration Products is covered by one or more Patents owned or
Controlled by the Manufacturing Party, the Non-Manufacturing Party shall receive
a fully paid-up, royalty-free, non-exclusive worldwide license to practice any
and all such Patents for the purposes contemplated in this Section 14.02 with
the right to grant sublicenses.

          (e) Except where expressly provided for otherwise in this Agreement,
termination of this Agreement shall not relieve the Parties hereto of any
liability, including any obligation to make payments hereunder, which accrued
hereunder prior to the effective date of such termination, nor preclude any
Party from pursuing all rights and remedies it may have hereunder or at law or
in equity with respect to any breach of this Agreement nor prejudice any Party's
right to obtain performance of any obligation.

          (f) For purposes of this Agreement, "Material Breach" shall mean the
breach of or failure to perform, in a material respect, a Party's material
obligations under

                                       67

<PAGE>
 
this Agreement.  Without limiting the foregoing and by way of example only, the
term "Material Breach" shall be deemed to include the failure of any Party in a
material respect to meet such Party's payment obligations under Articles III,
IV, V, VII and VIII, the failure of any Party in any material respect to meet
its non-compete obligations under Section 12.03, and the unlicensed development
or commercialization of a Collaboration Compound for any indication.  In no
event shall an inadvertent failure to comply with the provisions of Section
10.06 or the failure to gain Regulatory Approval for a Collaboration Product or
to meet timelines or budgets specified in any Development Plan, Development
Budget, Commercialization Plan, Commercialization Budget, Launch Plan or Launch
Budget, in and of itself, be deemed to constitute a Material Breach, unless such
failure is a result of acts and events or conduct that is otherwise a Material
Breach.  The Parties acknowledge and agree that failure to exercise any right or
option with respect to any Product or to take any action expressly within the
discretion of a Party hereunder shall not be deemed to constitute a Material
Breach hereunder.

(The information below marked by ***** has been omitted by a request for 
confidential treatment. The omitted portion has been separately filed with the 
Commission.)

          (g) Notwithstanding anything in this Section 14.02 to the contrary,
any breach of or failure to perform, in a material respect, any of CTI's
material obligations under Article IV or Article VII hereof, including under any
Commercialization Plan or Launch Plan approved by the JCC (a "Shortfall Event"),
shall not constitute a Material Breach under this Agreement, and ORTHO's sole
remedy upon the occurrence of a Shortfall Event shall be as provided in this
Section 14.02(g).  If a Shortfall Event shall have occurred with respect to a
Collaboration Product and shall be uncured and shall be continuing for a period
of ***** following receipt of notice from ORTHO, then the JDC or JCC may, after
taking into account CTI's comments, terminate CTI's Co-Promotion rights
hereunder with respect to all Collaboration Products effective at the beginning
of the quarter following the quarter during which the JDC or JCC shall have
given CTI notice of such termination. Upon effectiveness of such termination,
the development commercialization of all Collaboration Products shall be
conducted independently by ORTHO, and ORTHO shall pay to CTI a royalty on all
Net Sales of such Collaboration Products as if such Collaboration Products were
Royalty Bearing Products hereunder as follows:

          Net Annual Sales                    Royalty Percentage
          ----------------                    ------------------
          *****

For purposes of calculating the royalties due on Net Sales of such Collaboration
Products, ORTHO shall be entitled to deduct from royalties due to CTI any
amounts owed by CTI to ORTHO under any Development Plan, Commercialization Plan
or Launch Plan as of the effective date of such termination, together with an
amount equal to any costs reasonably incurred by ORTHO in connection with
transitioning its sales and marketing forces.

          (h) The provisions of this Section 14.02 shall survive termination of
this Agreement.

                                       68

<PAGE>
 
          SECTION 14.03.  Termination by ORTHO.
                          -------------------- 

          (a)  ORTHO shall have the right to terminate this Agreement upon
thirty (30) days advance written notice to CTI (i) in the event that after the
Effective Date issues regarding the Safety of Lisofylline arise during the
Development of a Collaboration Product which are materially and adversely
different from the Safety profile of Lisofylline existing as of the Effective
Date or (ii) clinical data obtained after the Effective Date reveal a materially
and adversely different Tolerability profile for Lisofylline from such profile
as it existed as of the Effective Date.

          (b)  ORTHO shall have the right to terminate this Agreement for any
reason upon six (6) months' prior written notice of its election to terminate
this Agreement pursuant to this Section 14.03(b) given at any time after the
first anniversary of the Effective Date; provided, however, that such
                                         --------  -------           
termination shall not become effective until the expiration of such six (6)
month period.

          SECTION 14.04.  Effect of Termination by ORTHO Pursuant to Section
                          --------------------------------------------------
14.03.  If ORTHO terminates this Agreement pursuant to Section 14.03, it shall
- -----                                                                         
continue to be obligated during the termination notice period to perform all of
its obligations under this Agreement, including its obligation to pay
Development Expenses; provided, however, that ORTHO shall have no obligation to
                      --------  -------                                        
make any milestone payments pursuant to Section 3.02 with respect to any
milestone achieved during the termination notice period.  In addition, as a
result of such termination:

          (a)  CTI shall receive an exclusive (even as to ORTHO but subject to
rights of Third Parties that are not Affiliates of ORTHO that pre-existed or
accrued prior to such termination) worldwide right and license, with the right
to grant sublicenses, to all ORTHO Patents, to make, have made, import, use,
sell, offer for sale and have sold Collaboration Products and Independent
Products, subject to the applicable royalty obligations set forth in this
Agreement, and shall have the right (but not the obligation) to enforce the
ORTHO Patents against competitive product infringement (in the manner
contemplated under and pursuant to the terms of Section 11.05 applicable to
ORTHO Patents in the event that ORTHO does not or will not so enforce the
Patents) and the exclusive right (but not the obligation) to enforce the
trademark rights against infringers;

          (b)  all licenses and rights to CTI Patents and CTI Know-how granted
to ORTHO hereunder shall terminate;

          (c)  all Confidential Information supplied by CTI to ORTHO shall be
returned to CTI except ORTHO may retain one copy of such information solely for
legal archive purposes;

                                       69

<PAGE>
 
          (d) ORTHO shall be obligated to CTI under Section 9.07 to the extent
provided therein; provided, however, that said obligation shall follow the
                  --------  -------                                       
procedures set forth in Section 14.02;

          (e) ORTHO shall cooperate in the transfer of all INDs, Drug Approval
Applications and Regulatory Approvals related to Collaboration Compounds,
Collaboration Products and Independent Products to CTI, and shall take such
other actions and execute such other instruments, assignments and documents as
may be necessary to effect the transfer of rights hereunder to CTI; and

          (f) ORTHO shall assign all of its rights in and to all Joint Patents
to CTI.

          SECTION 14.05.  Surviving Rights.  The rights and obligations set
                          ----------------                                 
forth in this Agreement shall extend beyond the term or termination of the
Agreement only to the extent expressly provided for herein, or the extent that
the survival of such rights or obligations are necessary to permit their
complete fulfillment or discharge.  Without limiting the foregoing, the Parties
have identified various rights and obligations which are understood to survive,
as follows:

          (a) In the event of expiration of this Agreement pursuant to Section
14.01, the following provisions shall survive:  Article I (to the extent
applicable to the interpretation of other surviving clauses), Sections 6.05,
6.06, 10.01-10.06, 11.02 (for one year following expiration), 11.03 (to the
extent necessary to permit patent filings with respect to the inventions
disclosed under Section 11.02), 12.02, 13.04, 14.05 and 14.06 and Articles XV,
XVI and XVII.

          (b) In the event of termination of this Agreement pursuant to Section
14.02, the following provisions shall survive:  Article I (to the extent
applicable to the interpretation of other surviving clauses), Sections 6.05,
6.06, 6.08(a) and (b), 8.04(b), 8.05-8.09, 10.01-10.06, 11.02 (only as
applicable to the Breaching Party and for one year following the effective date
of termination), 11.03 (to the extent necessary to permit patent filings with
respect to the inventions disclosed under Section 11.02), 11.08, 12.02, 13.02-
13.04, 14.02, 14.05, 14.06, 15.01, 15.02 (solely with respect to acts or events
occurring prior to such termination for which indemnity may be sought
thereunder) and 15.03 and Articles XVI and XVII.

          (c) In the event of termination of this Agreement pursuant to Section
14.03, the following provisions shall survive:  Article I (to the extent
applicable to the interpretation of other surviving clauses), Sections 6.05,
6.06, 9.03, 10.01-10.06, 11.02 (for one year following the effective date of
termination), 11.03 (to the extent necessary to permit patent filings with
respect to the inventions disclosed under Sections 11.02), 11.08, 12.02, 13.02-
13.04, 14.04-14.06, 15.01, 15.02 (solely with respect to acts or events
occurring prior

                                       70

<PAGE>
 
to such termination for which indemnity may be sought thereunder) and 15.03 and
Articles XVI and XVII.

          SECTION 14.06.  Accrued Rights, Surviving Obligations.  Termination,
                          -------------------------------------               
relinquishment or expiration of the Agreement for any reason shall be without
prejudice to any rights which shall have accrued to the benefit of either Party
prior to such termination, relinquishment or expiration, including damages
arising from any breach hereunder.  Such termination, relinquishment or
expiration shall not relieve either Party from obligations which are expressly
indicated to survive termination or expiration of the Agreement.

(The information below marked by ***** has been omitted by a request for 
confidential treatment. The omitted portion has been separately filed with the 
Commission.)

          SECTION 14.07.  Change of Control.
                          ----------------- 

                                     *****

                                       71

<PAGE>
 
                                   ARTICLE XV

                                INDEMNIFICATION
                                ---------------

          SECTION 15.01.  Indemnification for Royalty Bearing Products.  With
                          --------------------------------------------       
respect to Royalty Bearing Products (determined on a country-by-country basis):

          (a) ORTHO hereby agrees to save, defend and hold CTI and its agents
and employees harmless from and against any and all suits, claims, actions,
demands, liabilities, expenses and/or losses, including reasonable legal
expenses and attorneys' fees (collectively, "Losses"), resulting directly from
                                             ------                           
the manufacture, use, handling, storage, sale or other disposition of Royalty
Bearing Products by ORTHO, its agents or sublicensees, except to the extent such
Losses result from the negligence or willful misconduct of CTI, in which case
CTI hereby agrees to save, defend and hold ORTHO and its agents and employees
harmless from any and all such Losses.

          (b) In the event that a Party is seeking indemnification under Section
15.01(a), it shall inform the other Party of a claim as soon as reasonably
practicable after it receives notice of the claim, shall permit the indemnifying
Party to assume direction

                                       72

<PAGE>
 
and control of the defense of the claim (including the right to settle the claim
solely for monetary consideration), and shall cooperate as requested (at the
expense of the indemnifying Party) in the defense of the claim.

          SECTION 15.02.  Indemnification For Collaboration Products.  With
                          ------------------------------------------       
respect to Collaboration Products:

          (a) Each Party hereby agrees to save, defend and hold the other Party
and its agents and employees harmless from and against any and all Losses
resulting directly or indirectly from the manufacture, use, handling, storage,
sale or other disposition of Collaboration Products sold or used in the Co-
Promotion Territory by the indemnifying Party, its agents or sublicensees, but
only to the extent such Losses result from the negligence or willful misconduct
of the indemnifying Party or its employees and agents and do not also result
from the negligence of willful misconduct of the Party seeking indemnification.
Any other Losses from claims resulting directly or indirectly from the
manufacture, use, handling, storage, sale or other disposition of Collaboration
Products in the Co-Promotion Territory shall be included as an Allowable
Operating Expense of either Party at the time such claim is finally determined,
whether by judgment, award, decree or settlement.

          (b) In the event that either Party receives notice of a claim with
respect to Collaboration Product in the Co-Promotion Territory, such Party shall
inform the other Party as soon as reasonably practicable.  The Parties shall
confer how to respond to the claim and how to handle the claim in an efficient
manner.

          SECTION 15.03.  Indemnification For Independent Products.  With
                          ----------------------------------------       
respect to Independent Products:

          (a) Each Party commercializing an Independent Product hereby agrees to
save, defend and hold the other Party and its agents and employees harmless from
and against any and all Losses resulting directly or indirectly from the
manufacture, use, handling, storage, sale or other disposition of Independent
Products by the indemnifying Party, its agents or sublicensees, but only to the
extent such Losses do not (i) result from the negligence or willful misconduct
of the Party seeking indemnification or (ii) result from a breach of
manufacturing representations or warranties by the Party seeking
indemnification.

          (b) In the event that either Party receives notice of a claim with
respect to an Independent Product, such Party shall inform the other Party as
soon as reasonably practicable.  The Parties shall confer how to respond to the
claim and how to handle the claim in an efficient manner.  In the event that a
Party is seeking indemnification under Section 15.03(a), it shall inform the
other Party of a claim as soon as reasonably practicable after it receives
notice of the claim, shall permit the indemnifying Party to assume direction and
control of the defense of the claim (including the right to settle the claim
solely for

                                       73

<PAGE>
 
monetary consideration), and shall cooperate as requested (at the expense of the
indemnifying Party) in the defense of the claim.


                                  ARTICLE XVI

                              DISPUTE RESOLUTION
                              ------------------

          SECTION 16.01.  Disputes.  The Parties recognize that disputes as to
                          --------                                            
certain matters may from time to time arise during the term of this Agreement
which relate to either Party's rights and/or obligations hereunder or
thereunder.  It is the objective of the Parties to establish procedures to
facilitate the resolution of disputes arising under this Agreement in an
expedient manner by mutual cooperation and without resort to litigation.  To
accomplish this objective, the Parties agree to follow the procedures set forth
in this Article XVI if and when a dispute arises under this Agreement.

          Unless otherwise specifically recited in this Agreement, disputes
among members of the JDC or JCC relating to the collaboration shall be first
referred to the Steering Committee by either Party at any time after such
dispute has arisen and such Party believes that there has been sufficient
discussion of the matter at the JDC or JCC level, as the case may be.  If the
Steering Committee is unable to resolve such a dispute within thirty (30) days
of being requested by a Party to resolve a JDC or JCC dispute, any Party may, by
written notice to the other, have such dispute referred to their respective
executive officers designated below or their successors, for attempted
resolution by good faith negotiations within fourteen (14) days after such
notice is received.  Said designated officers are as follows:

          For ORTHO:

               Disputes arising
               under the JDC:       Chairman, R.W. Johnson Pharmaceutical
                                    Research Institute

               Disputes arising
               under the JCC:       President, Ortho Biotech Inc.

          For CTI:                  Chief Executive Officer

In the event the designated executive officers are not able to resolve such
dispute, other than those disputes which may be expressly prohibited from being
resolved by this mechanism such as the Excepted Development Matters and the
Excepted Commercialization Matters referred to in Section 2.04 hereof, either
Party may at any time after the fourteen (14) day

                                       74

<PAGE>
 
period seek to resolve the dispute through other means as provided in Sections
16.02 and 16.03.

          SECTION 16.02   Alternative Dispute Resolution.  Any dispute
                          ------------------------------              
controversy or claim arising out of or relating to the validity, construction,
enforceability or performance of this Agreement, including disputes relating to
an alleged breach or to termination of this Agreement, but excluding (i) any
dispute, controversy or claim arising out of or relating to the validity,
enforceability, or infringement of any CTI Patent or any ORTHO Patent and (ii)
other than disputes which are expressly prohibited herein from being resolved by
this mechanism, shall be settled by binding Alternative Dispute Resolution
("ADR") in the manner described below:

          (a) If a Party intends to begin an ADR to resolve a dispute, such
Party shall provide written notice (the "ADR Request") to counsel for the other
                                         -----------                           
Party informing such other Party of such intention and the issues to be
resolved.  From the date of the ADR Request and until such time as any matter
has been finally settled by ADR, the running of the time periods contained in
Section 14.02 as to which a Party must cure a breach of this Agreement shall be
suspended as to the subject matter of the dispute.

          (b) Within fifteen (15) business days after receipt of the ADR
Request, the other Party may, by written notice to counsel for the Party
initiating ADR, add additional issues to be resolved.

          SECTION 16.03.  Arbitration Procedures.  An ADR initiated under this
                          ----------------------                              
Agreement will proceed in accordance with the Commercial Arbitration Rules of
the American Arbitration Association then in effect, insofar as such rules are
not inconsistent with the provisions expressly set forth in this Agreement,
unless the Parties mutually agree otherwise, and pursuant to the following
procedures:

          (a) Notice of the demand for arbitration will be filed in writing with
the other Party and with the American Arbitration Association.  The arbitration
panel shall consist of one (1) arbitrator mutually agreed to by the Parties and
the decision shall be final and binding on the Parties and their legal
successors.

          (b) The arbitrator may, at his discretion, provide for discovery by
the Parties, not to exceed four (4) months from the date of filing of the Notice
of Arbitration.

          (c) Any arbitration hearing under this Section 16.03 shall be
conducted in New York, New York.  The governing law will be as specified in
Section 17.12.  The arbitrator will have authority to award both legal and
equitable relief but not to award punitive damages.

                                       75

<PAGE>
 
          (d) All costs and fees of the arbitration, other than each Party's
legal fees and expenses, will be allocated by the arbitrators.  Subject to
subsection (c), each Party shall bear its own legal fees and expenses.

          (e) A final written decision by the arbitrator will be rendered not
later than thirty (30) days following the completion of the hearing.

          (f) The ADR proceeding shall be confidential and the arbitrator shall
issue appropriate protective orders to safeguard each Party's Confidential
Information.  Except as required by law, no Party shall make (or instruct the
arbitrator to make) any public announcement with respect to the proceedings or
decision of the arbitrator without prior written consent of each other Party.
The existence of any dispute submitted to ADR, and the award, shall be kept in
confidence by the Parties and the arbitrator, except as required in connection
with the enforcement of such award or as otherwise required by applicable law.

          SECTION 16.04.  Survivability.  Any duty to arbitrate under this
                          -------------                                   
Agreement shall remain in effect and enforceable after termination of this
Agreement for any reason.

          SECTION 16.05.  Jurisdiction.  For the purposes of this Article XVI,
                          ------------                                        
each Party agrees to abide by the award rendered in any arbitration, and the
Parties agree to accept the jurisdiction of any court having jurisdiction over
the Parties for the purposes of enforcing awards entered pursuant to this
Article and for enforcing the agreements reflected in this Article.


                                 ARTICLE XVII

                                 MISCELLANEOUS
                                 -------------

          SECTION 17.01.  Assignment.
                          ---------- 

          (a) Either Party may assign any of its rights or obligations under
this Agreement in any country to any Affiliates and may delegate its obligations
under this Agreement in any country to any of its Affiliates; provided, however,
                                                              --------  ------- 
that such assignment or delegation shall not relieve the assigning Party of its
responsibilities for performance of its obligations under this Agreement.

          (b) Except as provided in Section 11.08 hereof, neither Party may
assign its rights or obligations under this Agreement to a non-Affiliate without
the prior written consent of the other Party, except under the provisions of
Section 6.07 or subject to Section 14.07, in connection with a merger or similar
reorganization or the sale of all or substantially all of its assets.  This
Agreement shall survive any such merger or reorganization of either Party with
or into, or such sale of assets to, another party and no consent for such
merger,

                                       76

<PAGE>
 
reorganization or sale shall be needed, and no intellectual property rights of
the acquiring corporation shall be included in the technology licensed
hereunder; provided, that in the event of such merger, reorganization or sale,
no intellectual property rights of the acquiring corporation shall be included
in the technology licensed hereunder.

          (c) This Agreement shall be binding upon and inure to the benefit of
the successors and permitted assigns of the Parties.  Any assignment not in
accordance with this Agreement shall be void.

          SECTION 17.02.  Retained Rights.  Nothing in this Agreement shall
                          ---------------                                  
limit in any respect the right of either Party to conduct research and
development and to market products using such Party's technology other than as
herein expressly provided.

          SECTION 17.03.  Research and Development Entities.  Either Party may
                          ---------------------------------                   
assign its rights and obligations under this Agreement to an entity or entities
(e.g., partnership or corporation) that are specifically formed for financial
purposes and that finance research and development performed by such Party;
provided, however, that such assignment shall not relieve the assigning Party of
- --------  -------                                                               
responsibility for performance of its obligations under this Agreement.

          SECTION 17.04.  Consents Not Unreasonably Withheld or Delayed.
                          ---------------------------------------------  
Whenever provision is made in this Agreement for either Party to secure the
consent or approval of the other, that consent or approval shall not
unreasonably be withheld or delayed, even when not so expressly stated, and
whenever in this Agreement provision is made for one Party to object to or
disapprove a matter, such objection or disapproval shall not unreasonably be
exercised, even when not so expressly stated.

          SECTION 17.05.  Force Majeure.  Neither Party shall lose any rights
                          -------------                                      
hereunder or be liable to the other Party for damages or losses on account of
failure of performance by the defaulting Party if the failure is occasioned by
government action, war, fire, explosion, flood, strike, lockout, embargo, act of
God, or any other cause beyond the control of the defaulting Party, provided
                                                                    --------
that the Party claiming force majeure has extended all reasonable efforts to
avoid or remedy such force majeure and has given the other Party prompt notice
describing such event, the effect thereof and the actions being taken to avoid
or remedy such force majeure; provided, however, that in no event shall a Party
                              --------  -------                                
be required to settle any labor dispute or disturbance.

          SECTION 17.06.  Further Actions.  Each Party agrees to execute,
                          ---------------                                
acknowledge and deliver such further instruments, and to do all such other acts,
as may be necessary or appropriate in order to carry out the purposes and intent
of this Agreement.

          SECTION 17.07.  No Trademark Rights.  Except as otherwise provided
                          -------------------                               
herein, no right, express or implied, is granted by the Agreement to use in any
manner the

                                       77

<PAGE>
 
name "Cell Therapeutics, Inc.," "CTI," "ORTHO Biotech Inc.," "R. W. Johnson
Pharmaceutical Research Institute", "PRI," or any other trade name or trademark
of the other Party or its Affiliates in connection with the performance of the
Agreement.

          SECTION 17.08.  Notices.  All notices hereunder shall be in writing
                          -------                                            
and shall be deemed given if delivered personally or by facsimile transmission
(receipt verified), telexed, mailed by registered or certified mail (return
receipt requested), postage prepaid, or sent by express courier service, to the
Parties at the following addresses (or at such other address for a Party as
shall be specified by like notice; provided that notices of a change of address
                                   --------                                    
shall be effective only upon receipt thereof).

          (a)  If to CTI:

               Cell Therapeutics, Inc.
               201 Elliott Avenue West, Suite 400
               Seattle, Washington  98119
               Attention:  James A. Bianco, M.D.
                           President and Chief Executive Officer
               Telephone:  (206) 282-7100
               Telecopy:   (206) 284-6114
               
               With a copy to:
               Shearman & Sterling
               555 California Street, Suite 2000
               San Francisco, California  94104
               Attention:  Michael J. Kennedy, Esq.
               Telephone:  (415) 615-1100
               Telecopy:   (415) 616-1199
               
          (b)  If to ORTHO:
               
               Ortho Biotech Inc.
               Attention:  President
               700 U.S. Route 202 South
               Raritan, New Jersey 08869
               Telephone:  (908) 704-5232
               Telecopy:   (908) 526-4365
               
               With copies to:
               R. W. Johnson Pharmaceutical Research Institute
               Attention:  Chairman
               U.S. Route 202 South
               Raritan, NJ  08869

                                       78

<PAGE>
 
               Telephone:  (908) 704-4210
               Telecopy:   (908) 707-1895
               
               and
               
               Office of General Counsel
               Johnson & Johnson
               One Johnson & Johnson Plaza
               New Brunswick, NJ  08933
               Telephone:  (908) 524-2485
               Telecopy:   (908) 524-2788

          SECTION 17.09.  Waiver.  Except as specifically provided for herein,
                          ------                                              
the waiver from time to time by either of the Parties of any of their rights or
their failure to exercise any remedy shall not operate or be construed as a
continuing waiver of same or any other of such Party's rights or remedies
provided in this Agreement.

          SECTION 17.10.  Severability.  If any term, covenant or condition of
                          ------------                                        
this Agreement or the application thereof to any Party or circumstances shall,
to any extent or in any country, be held to be invalid or unenforceable, then
(i) the remainder of this Agreement, or the application of such term, covenant
or condition to Parties or circumstances other than those as to which it is held
invalid or unenforceable, shall not be affected thereby and each term, covenant
or condition of this Agreement shall be valid and be enforced to the fullest
extent permitted by law; and (ii) the Parties hereto covenant and agree to
renegotiate any such term, covenant or application thereof in good faith in
order to provide a reasonably acceptable alternative to the term, covenant or
condition of this Agreement or the application thereof that is invalid or
unenforceable, it being the intent of the Parties that the basic purposes of
this Agreement are to be effectuated.

          SECTION 17.11.  Ambiguities.  Ambiguities, if any, in this Agreement
                          -----------                                         
shall not be construed against any Party, irrespective of which Party may be
deemed to have authored the ambiguous provision.

          SECTION 17.12.  Governing Law.  This Agreement shall be governed by
                          -------------                                      
and interpreted under the laws of the State of New York as applied to contracts
entered into and performed entirely in New York by New York residents.

          SECTION 17.13.  Headings.  The sections and paragraph headings
                          --------                                      
contained herein are for the purposes of convenience only and are not intended
to define or limit the contents of said sections or paragraphs.

                                       79

<PAGE>
 
          SECTION 17.14.  Counterparts.  This Agreement may be executed in one
                          ------------                                        
or more counterparts, each of which shall be deemed an original, but all of
which together shall constitute one and the same instrument.

          SECTION 17.15.  Entire Agreement; Amendments.  This Agreement,
                          ----------------  ----------                  
including all Exhibits attached hereto and thereto, and all documents delivered
concurrently herewith and therewith, set forth all the covenants, promises,
agreements, warranties, representations, conditions and understandings between
the Parties hereto and supersede and terminate all prior agreements and
understandings between the Parties.  There are no covenants, promises,
agreements, warranties, representations, conditions or understandings, either
oral or written, between the Parties other than as set forth herein and therein.
No subsequent alteration, amendment, change or addition to this Agreement shall
be binding upon the Parties hereto unless reduced to writing and signed by the
respective authorized officers of the Parties.  This Agreement, including
without limitation the exhibits, schedules and attachments thereto, are intended
to define the full extent of the legally enforceable undertakings of the Parties
hereto, and no promise or representation, written or oral, which is not set
forth explicitly is intended by either party to be legally binding.  Both
Parties acknowledge that in deciding to enter into the Agreement and to
consummate the transaction contemplated thereby neither has relied upon any
statement or representations, written or oral, other than those explicitly set
forth therein.

          SECTION 17.16.  Independent Contractors.  The status of the Parties
                          -----------------------                            
under this Agreement shall be that of independent contractors.  Neither Party
shall have the right to enter into any agreements on behalf of the other Party,
nor shall it represent to any person that it has any such right or authority.
Nothing in this Agreement shall be construed as establishing a partnership or
joint venture relationship between the Parties.

          IN WITNESS WHEREOF, CTI and ORTHO have caused this Agreement to be
executed as of the date first written above by their respective officers
thereunto duly authorized.

                                    CELL THERAPEUTICS, INC.



                                    By:_______________________________________
                                       Name:   James A. Bianco, M.D.
                                       Title:  President and Chief Executive
                                               Officer

                                    ORTHO BIOTECH INC.

 

                                       80

<PAGE>
 
                                    By:_______________________________________
                                       Name:
                                       Title:



                                    R. W. JOHNSON PHARMACEUTICAL
                                    RESEARCH INSTITUTE, a division of
                                    ORTHO PHARMACEUTICAL
                                    CORPORATION

                                    By:  ORTHO PHARMACEUTICAL
                                         --------------------
                                         CORPORATION
                                         -----------



                                         By:__________________________________
                                            Name:
                                            Title:
 

                                       81

<PAGE>
 
                                   EXHIBIT A

                   DETERMINATION OF CERTAIN ACCOUNTING TERMS
                   -----------------------------------------


          As a supplement to the definitions provided in Article I of the
Collaboration Agreement (this "Agreement"), dated as of November 7, 1996,
between Cell Therapeutics, Inc. and Ortho Biotech Inc. and The R. W. Johnson
Pharmaceutical Research Institute (collectively "ORTHO"), the following
accounting terms shall be further specified as follows:

     1.   Cost of Goods Sold
          ------------------

          Cost of Goods Sold shall be equal to the sum of Material Costs, Direct
Labor costs and Indirect Costs.

(The information below marked by ***** has been omitted by a request for 
confidential treatment. The omitted portion has been separately filed with the 
Commission.)

     A.   "Material Costs" shall mean *****.

(The information below marked by ***** has been omitted by a request for 
confidential treatment. The omitted portion has been separately filed with the 
Commission.)

     B.   "Direct Labor Costs" shall mean *****.

(The information below marked by ***** has been omitted by a request for 
confidential treatment. The omitted portion has been separately filed with the 
Commission.)

     C.   "Indirect Costs" shall mean other costs associated with the operating
unit(s) manufacturing a Collaboration Product; provided, however,  that such
                                               --------  -------            
Indirect Costs shall exclude *****.

     2.   Marketing Expenses
          ------------------

(The information below marked by ***** has been omitted by a request for 
confidential treatment. The omitted portion has been separately filed with the 
Commission.)

          Marketing Expenses shall be equal to the sum of *****


<PAGE>
 
                                      A-2


     3.   Distribution Expenses
          ---------------------

          Distribution Expenses shall be equal to the sum of Stock and Shipping
Expenses and Transportation Expenses, each as specified below.

(The information below marked by ***** has been omitted by a request for 
confidential treatment. The omitted portion has been separately filed with the 
Commission.)

     A.   "Stock and Shipping" shall include *****.

(The information below marked by ***** has been omitted by a request for 
confidential treatment. The omitted portion has been separately filed with the 
Commission.)

     B.   "Transportation Expenses" shall include *****.

     4.   Post-Launch Product R&D Expenses
          --------------------------------

<PAGE>
 
                                      A-3

(The information below marked by ***** has been omitted by a request for 
confidential treatment. The omitted portion has been separately filed with the 
Commission.)

          Post-Launch Product R&D Expenses shall include *****.

     5.   Direct Administrative Expenses.
          ------------------------------ 

(The information below marked by ***** has been omitted by a request for 
confidential treatment. The omitted portion has been separately filed with the 
Commission.)

          Direct Administration Expenses shall be equal to *****


     6.   Uncollectible Accounts
          ----------------------

          Uncollectible Accounts shall be determined in accordance with
generally accepted accounting procedures consistently applied.

<PAGE>
 
                                   EXHIBIT B

                          FINANCIAL STATEMENT FORMAT
                          --------------------------


<TABLE>
<CAPTION>
                                       Product   Product   Total   % Net Sales
                                       -------   -------   -----   -----------
<S>                                    <C>       <C>       <C>     <C>
Gross Sales
Less:
  Discounts
  Credits & Allowances
  Taxes & Duties
  Rebates
Net Sales
 
Net Sublicense Revenues
 
Cost of Goods Sold
 
Pre-Marketing Expenses
 
(The information below marked by ***** has been omitted by a request for 
confidential treatment. The omitted portion has been separately filed with the 
Commission.)
 
Marketing Expenses:
       *****
Total Marketing Expenses
 
Distribution Expenses:
  Stock & Shipping
  Transportation
Total Distribution Expenses

(The information below marked by ***** has been omitted by a request for 
confidential treatment. The omitted portion has been separately filed with the 
Commission.)
 
Post-Launch Product R&D Expenses:
       *****
Total Post-Launch Product R&D Expenses

(The information below marked by ***** has been omitted by a request for 
confidential treatment. The omitted portion has been separately filed with the 
Commission.)
 
Direct Administrative Expenses
       *****
Total Direct Administrative Expenses
</TABLE>
 

<PAGE>
 
                                      B-2


<TABLE>
<S>                                    <C>       <C>       <C>     <C>
Patent and Trademark Expenses
 
(The information below marked by ***** has been omitted by a request for 
confidential treatment. The omitted portion has been separately filed with the 
Commission.)

Cost of Capital Allowance
 *****
Total Cost of Capital Allowance

Provision for Uncollectible Accounts
 
Operating Profits (Losses)
 
Equalization Receipt (Payment)
 
Balance After Equalization
</TABLE>


<PAGE>
 
(The information below marked by ***** has been omitted by a request for 
confidential treatment. The omitted portion has been separately filed with the 
Commission.)

                                   EXHIBIT C

                           LISOFYLLINE PRODUCT GENUS
                           -------------------------

                                     *****

<PAGE>
 
(The information below marked by ***** has been omitted by a request for 
confidential treatment. The omitted portion has been separately filed with the 
Commission.)

                                  EXHIBIT D-1

                                  CTI PATENTS
                                  -----------

                                     *****

<PAGE>
 
                                  EXHIBIT D-2

                                 ORTHO PATENTS
                                 -------------


                                     [NONE]

<PAGE>
 
                                   EXHIBIT E

                            FORM OF ROYALTY REPORT
                            ----------------------


(The information below marked by ***** has been omitted by a request for 
confidential treatment. The omitted portion has been separately filed with the 
Commission.)


<TABLE>
<S>                                            <C>       <C>       <C>
Product
 
Royalty Rate
 
Country
 
Currency
 
US$ Exchange Rate
 
<CAPTION> 
                                               Product   Product   Total
                                               -------   -------   -----
<S>                                            <C>       <C>       <C>
Gross Sales
***** 
Royalty Bearing Sales
  Local currency
  US$ equivalent
 
US$ Royalty Payable
</TABLE>




<PAGE>
 
 
                                                                   EXHIBIT 10.27

                                                                  EXECUTION COPY
                                                                  --------------

                                                        Portions of this Exhibit
                                                        have been omitted
                                                        pursuant to a request
                                                        for confidential
                                                        treatment. The omitted
                                                        portions are marked
                                                        ***** and have been
                                                        filed separately with
                                                        the Commission.

                           STOCK PURCHASE AGREEMENT

                         dated as of November 8, 1996

                                by and between

                            CELL THERAPEUTICS, INC.

                                      and

                   JOHNSON & JOHNSON DEVELOPMENT CORPORATION



(The information below marked by ***** has been
omitted by a request for confidential treatment.
The omitted portion has been separately filed
with the Commission.)




<PAGE>
 
                               TABLE OF CONTENTS


<TABLE>
<CAPTION>
                                                                          Page

<C>            <S>                                                         <C>
                                   ARTICLE I

                 SALE OF PREFERRED STOCK AT THE FIRST CLOSING
                 --------------------------------------------

SECTION 1.01.  Sale......................................................   1
SECTION 1.02.  First Closing.............................................   2

                                  ARTICLE II

                       SUBSEQUENT SALES OF COMMON STOCK
                       --------------------------------

SECTION 2.01.  Side-By-Side Put Option...................................   2
SECTION 2.02.  BMT Milestone Put Option..................................   3
SECTION 2.03.  AML Milestone Put Option..................................   4
SECTION 2.04.  Limitation of Obligation to Purchase Excess Put Shares....   5

                                  ARTICLE III

                                  STANDSTILL
                                  ----------

SECTION 3.01.  Standstill by JJDC........................................   7

                                  ARTICLE IV

                     REPRESENTATIONS AND WARRANTIES OF CTI
                     -------------------------------------

SECTION 4.01.  Organization and Corporate Power..........................   9
SECTION 4.02.  Subsidiaries..............................................   9
SECTION 4.03.  Authorization.............................................   9
SECTION 4.04.  Validity of the Shares....................................   9
SECTION 4.05.  Enforceability............................................  10
SECTION 4.06.  Capitalization............................................  10
SECTION 4.07.  Securities
 Act Compliance.................................  10
SECTION 4.08.  Obligations to Issue Securities...........................  10
SECTION 4.09.  SEC Reports...............................................  10
</TABLE>


<PAGE>
 

<TABLE>
<C>            <S>.......................................................  <C>
SECTION 4.10.  Absence of Certain Developments...........................  11
SECTION 4.11.  No Undisclosed Liabilities................................  12
SECTION 4.12.  Approvals.................................................  12
SECTION 4.13.  Title to Properties.......................................  12
SECTION 4.14.  Intellectual Property.....................................  12
SECTION 4.15.  Litigation................................................  13
SECTION 4.16.  Taxes.....................................................  13
SECTION 4.17.  Compliance With Laws......................................  13
SECTION 4.18.  Labor Matters.............................................  14
SECTION 4.19.  Insurance.................................................  14
SECTION 4.20.  Leases....................................................  15
SECTION 4.21.  Personal Property.........................................  15
SECTION 4.22.  Environmental.............................................  15
SECTION 4.23.  Improper Payments.........................................  16
SECTION 4.24.  Securities Laws...........................................  16
SECTION 4.25.  Brokerage.................................................  16
SECTION 4.26.  Disclosure................................................  16

                                   ARTICLE V

                    REPRESENTATIONS AND WARRANTIES OF JJDC
                    --------------------------------------

SECTION 5.01.  Legal Power...............................................  17
SECTION 5.02.  Due Execution.............................................  17
SECTION 5.03.  Investment Representations................................  17

                                  ARTICLE VI

                             CONDITIONS TO CLOSING
                             ---------------------

SECTION 6.01.  Condition to JJDC's Obligations at First Closing..........  19
SECTION 6.02.  Condition to JJDC's Obligations at Subsequent Closings....  19
SECTION 6.03.  Conditions to CTI's Obligations at Each Closing...........  20

                                  ARTICLE VII

                REGISTRATION OF COMMON STOCK; COVENANTS OF CTI
                ----------------------------------------------

SECTION 7.01.  Definitions...............................................  21
SECTION 7.02.  Registration Rights.......................................  22
SECTION 7.03.  Registration Expenses.....................................  23
</TABLE>


                                 ii

<PAGE>
 

<TABLE>
<C>            <S>.......................................................  <C>
SECTION 7.04.  Registration Procedures...................................  24
SECTION 7.05.  Indemnification...........................................  26
SECTION 7.06.  Reports Under Exchange Act................................  28
SECTION 7.07.  Transferability...........................................  28
SECTION 7.08.  Termination of Registration Rights........................  29
SECTION 7.09.  Limitations on Subsequent Registration Rights.............  29


                                 ARTICLE VIII
                           LOCKUP; REPURCHASE RIGHT
                           ------------------------

SECTION 8.01.  Lockup....................................................  29


                                  ARTICLE IX
                                 MISCELLANEOUS
                                 -------------

SECTION 9.01.  Publicity.................................................  30
SECTION 9.02.  Successors and Assigns....................................  30
SECTION 9.03.  Entire Agreement..........................................  30
SECTION 9.04.  Separability..............................................  30
SECTION 9.05.  Amendment and Waiver......................................  31
SECTION 9.06.  Notices...................................................  31
SECTION 9.07.  Fees and Expenses.........................................  32
SECTION 9.08.  Hart-Scott-Rodino Filings.................................  32
SECTION 9.09.  Titles and Subtitles......................................  32
SECTION 9.10.  Counterparts..............................................  32
SECTION 9.11.  Incorporation by Reference................................  32
SECTION 9.12.  Survival..................................................  32


                                   EXHIBITS

Exhibit A      Opinion of Counsel

Exhibit B      Articles of Amendment to Restated Articles of
               Incorporation
</TABLE>


                                      iii

<PAGE>
 
                                                                  EXECUTION COPY
                                                                  --------------



                            STOCK PURCHASE AGREEMENT
                            ------------------------


          THIS STOCK PURCHASE AGREEMENT (the "Agreement") is made as of November
                                              ---------                         
8, 1996, by and between CELL THERAPEUTICS, INC., a Washington corporation with
its principal office at 201 Elliott Avenue West, Suite 400, Seattle, Washington
98119 ("CTI"), and JOHNSON & JOHNSON DEVELOPMENT CORPORATION, a New Jersey
        ---                                                               
corporation having its principal place of business at One Johnson & Johnson
Plaza, New Brunswick, New Jersey 08933 ("JJDC").
                                         ----   

                              W I T N E S S E T H:
                              - - - - - - - - - - 

          WHEREAS, CTI and Ortho Biotech Inc. ("Ortho") and a wholly-owned
                                                -----                     
subsidiary of Johnson & Johnson, a New Jersey corporation ("J&J"), have entered
                                                            ---                
into that certain Collaboration Agreement (the "Collaboration Agreement") of
                                                -----------------------     
even date herewith (capitalized terms not otherwise defined herein being used
herein as therein defined); and

          WHEREAS, in connection with the Collaboration Agreement, CTI desires
to sell to JJDC, and JJDC desires to purchase from CTI, shares of CTI's Series B
Convertible Preferred Stock, without par value ("Series B Preferred"), and
                                                 ------------------       
shares of CTI's common stock, without par value ("Common Stock"), in each case
                                                  ------------                
on the terms and subject to the conditions set forth in this Agreement.  The
shares of Series B Preferred purchased by JJDC hereunder are referred to herein
as the "Series B Shares," and the shares of Common Stock purchased by JJDC
        ---------------                                                   
hereunder are referred to herein as the "Common Shares."  The Series B Shares
                                         -------------                       
and the Common Shares are referred to herein collectively as the "Shares."
                                                                  ------  

          NOW, THEREFORE, in consideration of the foregoing recitals and the
mutual covenants and agreements contained herein, the parties hereto, intending
to be legally bound, do hereby agree as follows:


                                   ARTICLE I

                  SALE OF PREFERRED STOCK AT THE FIRST CLOSING
                  --------------------------------------------

          SECTION 1.01.  Sale.  Subject to the terms of this Agreement, at the
                         ----                                                 
First Closing (as defined below), CTI agrees to sell to JJDC, and JJDC agrees to
purchase from CTI, 14,925.373 shares of Series B Preferred (the "First Closing
                                                                 -------------
Shares") at a price per share equal to $335.00, for an aggregate purchase price
- ------                                                                         
of $5,000,000.  The price paid by JJDC for the purchase of the First Closing
Shares at the First Closing is hereinafter referred

<PAGE>
 
to as "First Closing Purchase Price."
       ----------------------------  

          SECTION 1.02.  First Closing.  (a)  The closing of the sale and
                         -------------                                   
purchase of the First Closing Shares pursuant to Section 1.01 (the "First
                                                                    -----
Closing") shall be held at 10:00 a.m. (California time) at the offices of
- -------                                                                  
Shearman & Sterling, 555 California Street, Suite 2000, San Francisco,
California 94104, on the date hereof or at such other time within five (5)
business days of the Effective Date or at such other place as CTI and JJDC may
agree (the "First Closing Date").
            ------------------   

          (b) At the First Closing, subject to the terms and conditions of this
Agreement, CTI shall deliver to JJDC a certificate registered in JJDC's name
representing the First Closing Shares purchased at the First Closing, and JJDC
shall deliver the First Closing Purchase Price to CTI by certified check payable
to CTI or by wire transfer of immediately available funds to an account
specified by CTI.


                                   ARTICLE II

                        SUBSEQUENT SALES OF COMMON STOCK
                        --------------------------------

          SECTION 2.01.  Side-By-Side Put Option.  (a)  Subject to the terms of
                         -----------------------                               
this Agreement, upon the initial closing of a firm commitment underwritten
public offering of Common Stock (the "IPO Closing") for the account of CTI
                                      -----------                         
pursuant to an effective registration statement under the Securities Act of
1933, as amended (the "Securities Act"), CTI shall have the option (the "Side-
                       --------------                                    ----
By-Side Put Option") to sell to JJDC a number of shares of Common Stock equal to
- ------------------                                                              
not more than ten percent (10%) of the number of shares of Common Stock sold by
CTI in the IPO Closing (the "Side-By-Side Shares"), at a price per share equal
                             -------------------                              
to the price per share at which the Common Stock was sold to the public at the
IPO Closing.  The number of shares shall be rounded downward to the nearest
whole integer.  The aggregate price paid by JJDC for the purchase of the Side-
By-Side Shares concurrent with the IPO Closing is hereinafter referred to as the
"Side-By-Side Purchase Price."
 ---------------------------  

          (b) CTI shall provide at least three (3) business days advance written
notice to JJDC of CTI's election to exercise the Side-By-Side Put Option, which
notice shall specify the expected number of Side-By-Side Shares to be sold and
the expected date of such Side-By-Side Closing (as hereinafter defined), which
date shall be no later than five (5) business days after the occurrence of the
IPO Closing after which time the Side-by-Side Put Option shall expire if not
theretofore exercised.  If such notice is given prior to the IPO Closing, such
notice shall be contingent upon the occurrence of the IPO Closing.

          (c) The closing of the sale and purchase of the Side-By-Side Shares
pursuant to Section 2.01(a) (the "Side-By-Side Closing") shall be held at the
                                  --------------------                       
offices of Shearman & Sterling, 555 California Street, Suite 2000, San
Francisco, California 94104,

                                       2

<PAGE>
 
concurrently with the IPO Closing or at such other time and place as CTI and
JJDC may agree (the "Side-By-Side Closing Date").
                     -------------------------   

          (d) At the Side-By-Side Closing, subject to the terms and conditions
of this Agreement, CTI shall deliver to JJDC a certificate registered in JJDC's
name representing the Side-By-Side Shares purchased at the Side-By-Side Closing,
and JJDC shall deliver the Side-By-Side Purchase Price to CTI by certified check
payable to CTI or by wire transfer of immediately available funds to an account
specified by CTI.

          SECTION 2.02.  BMT Milestone Put Option.  (a)  Subject to the terms of
                         ------------------------                               
this Agreement, upon approval by the FDA or the relevant regulatory agency or
authority of the first Drug Approval Application for a Collaboration Product for
a BMT Indication in the United States or a Major Market County (the "BMT
                                                                     ---
Milestone"), CTI shall have the option (the "BMT Milestone Put Option") to sell
- ---------                                    ------------------------          
to JJDC the BMT Milestone Put Shares (as hereinafter defined) at a price per
share equal to the then applicable Current Market Price (as hereinafter
defined), for an aggregate purchase price of $2,000,000.

          (b) CTI shall provide at least five (5) business days advance written
notice (the "BMT Milestone Put Notice") to JJDC of CTI's election to exercise
             ------------------------                                        
the BMT Milestone Put Option, which notice shall specify the expected number of
BMT Milestone Put Shares to be sold and the date of such BMT Milestone Put Share
Closing (as hereinafter defined), which date shall be no later than ten (10)
business days after the occurrence of the BMT Milestone after which time the BMT
Milestone Put Option will expire if not theretofore exercised.

          (c) (i)  For purposes of this Section 2.02 the "BMT Milestone Put
                                                          -----------------
     Shares" shall mean the number of shares of Common Stock, rounded downward
     ------                                                                   
     to the nearest whole integer, equal to $2,000,000 divided by the Current
     Market Price per share of the Common Stock as of the fifth business day
     prior to the date of the BMT Milestone Put Share Closing.

          (ii) The "Current Market Price" per share of the Common Stock shall be
                    --------------------                                        
     defined as the arithmetic average of the closing prices of the Common Stock
     for the thirty (30) Trading Day (as defined below) period ending as of the
     Trading Day immediately prior to the date as of which such Current Market
     Price is being determined.  The closing price for each day shall be, if the
     Common Stock is listed and admitted to trading on a national securities
     exchange, as reported in the principal consolidated transaction reporting
     system with respect to securities listed on the principal national
     securities exchange on which the Common Stock is listed or admitted to
     trading or, if the Common Stock is not listed or admitted to trading on any
     national securities exchange, the last quoted price or, if not so quoted,
     the average of the high bid and low asked prices in the over-the-counter
     market, as reported by the Nasdaq National Market of the Nasdaq Stock
     Market, Inc., or such other system then in use, or, if on any such date the
     Common Stock is not quoted by

                                       3

<PAGE>
 
     any such organization, the average of the closing bid and asked prices as
     furnished by the professional market maker making a market in the Common
     Stock having the greatest number of actual trades during the relevant
     period.  If the Common Stock is not publicly held or not so listed or
     traded, the "Current Market Price" per share shall mean the fair value per
     share of Common Stock as agreed to by CTI and JJDC prior to the expiration
     of the periods specified in section 2.02(b) and Section 2.03(b), or, if no
     such agreement is reached, the last price at which CTI sold one or more
     shares of Common Stock (which shall include sales of preferred stock
     convertible into Common Stock at the as converted price on the day of sale)
     to a third party (not a corporate partner of CTI) in a bona fide arm's-
                                                            ---- ----      
     length transaction.  The term "Trading Day" shall mean, if the Common Stock
                                    -----------                                 
     is listed or admitted to trading on any national securities exchange, a day
     on which the principal national securities exchange on which the Common
     Stock is listed or admitted to trading is open for the transaction of
     business and a day on which at least one share of Common Stock is traded
     or, if the Common Stock is not so listed or admitted, a business day.

          (d) The closing of the sale and purchase of the BMT Milestone Put
Shares ("BMT Milestone Put Share Closing") shall be held at 10:00 a.m.
         -------------------------------                              
(California time) at the offices of Shearman & Sterling, 555 California Street,
Suite 2000, San Francisco, California 94104, on the date specified in the BMT
Milestone Put Notice, or at such other time and place as CTI and JJDC may agree.

          (e) At the BMT Milestone Put Share Closing, subject to the terms and
conditions hereof, CTI shall deliver to JJDC a certificate registered in JJDC's
name representing the BMT Milestone Put Shares purchased at the BMT Milestone
Put Share Closing, and JJDC shall deliver the purchase price therefor in the
amount of $2,000,000 to CTI by certified check payable to CTI or wire transfer
of immediately available funds to an account specified by CTI.

          SECTION 2.03.  AML Milestone Put Option.  (a)  Subject to the terms of
                         ------------------------                               
this Agreement, upon the approval by the FDA or the relevant regulatory agency
or authority of the First Drug Approval Application for a Collaboration Product
for an AML Indication in the United States or a Major Market Country (the "AML
                                                                           ---
Milestone"), CTI shall have the option (the "AML Milestone Put Option") to sell
- ---------                                    ------------------------          
to JJDC the AML Milestone Put Shares (as hereinafter defined) at a price per
share equal to the then applicable Current Market Price, for an aggregate
purchase price of $6,000,000.

          (b) CTI shall provide at least five (5) business days advance written
notice (the "AML Milestone Put Notice") to JJDC of CTI's election to exercise
             ------------------------                                        
the AML Milestone Put Option, which notice shall specify the expected number of
AML Milestone Put Shares to be sold and the date of such AML Milestone Put Share
Closing (as hereinafter defined), which date shall be no later than ten (10)
business days after the occurrence of the AML Milestone after which time the AML
Milestone Put Option shall expire if not theretofore exercised.

                                       4

<PAGE>
 
          (c) For purposes of this Section 2.03, the "AML Milestone Put Shares"
                                                      ------------------------ 
shall mean the number of shares of Common Stock, rounded downward to the nearest
whole integer, equal to $6,000,000 divided by the Current Market Price per share
of the Common Stock as of the fifth business day prior to the date of the AML
Milestone Put Share Closing.

          (d) The closing of the sale and purchase of the AML Milestone Put
Shares ("AML Milestone Put Share Closing") shall be held at 10:00 a.m.
         -------------------------------                              
(California time) at the offices of Shearman & Sterling, 555 California Street,
Suite 2000, San Francisco, California 94104, on the date specified in the AML
Milestone Put Notice, or at such other time and place as CTI and JJDC may agree.

          (e) At the AML Milestone Put Share Closing, subject to the terms and
conditions hereof, CTI shall deliver to JJDC a certificate registered in JJDC's
name representing the AML Milestone Put Shares purchased at the AML Milestone
Put Share Closing, and JJDC shall deliver the purchase price therefor in the
amount of $6,000,000 to CTI by certified check payable to CTI or wire transfer
of immediately available funds to an account specified by CTI.

(The information below marked by ***** has been omitted by a request for 
confidential treatment. The omitted portion has been separately filed with the 
Commission.)

          SECTION 2.04.  Limitation of Obligation to Purchase Excess Put Shares.
                         ------------------------------------------------------ 
(a)  Notwithstanding any other provision of this Agreement to the contrary, upon
written notice to CTI by JJDC delivered at any time prior to any closing
provided for in Sections 2.01, 2.02, 2.03 or this Section 2.04 (each, a
"Closing" and, collectively, the "Closings"), JJDC's obligation to purchase
 -------                          --------                                 
Excess Put Shares (as hereinafter defined) shall be suspended and JJDC shall not
be obligated to pay to CTI the Excess Put Share Amount (as hereinafter defined)
until such time as the payment by JJDC of the Excess Put Share Amount in
connection with the purchase by JJDC of the shares of Common Stock represented
by such amount, at a price per share calculated at the time of purchase pursuant
to the second sentence of Section 2.04(c) hereof (the "Additional Shares"), when
                                                       -----------------        
aggregated with all other shares of Common Stock (including shares of Common
Stock issuable upon conversion of any shares of Series B Preferred held by JJDC)
then owned of record by JJDC which were purchased pursuant to this Agreement,
would not constitute more than ***** of the voting power of the then outstanding
capital stock of CTI.  In calculating its ownership interest in CTI, JJDC shall
be entitled to rely upon the number of outstanding shares of CTI reported in
CTI's most recently filed report on Form 10-Q, 10-K or 8-K, as the case may be,
filed pursuant to the Securities Exchange Act of 1934 (the "Exchange Act"), most
                                                            ------------        
recently filed Registration Statement pursuant to the Securities Act, or the
most recently issued press release or other information delivered to JJDC by CTI
for the purpose of calculating such ownership.  The failure by JJDC to deliver
the written notice specified above in this paragraph with respect to any Excess
Put Shares shall not bar JJDC from subsequently delivering such notice with
respect to any subsequent Excess Put Shares and shall not effect the
applicability of this Section 2.04 with respect to such subsequent shares, even
if at the time of such subsequent delivery, JJDC owns of record more than *****
of the voting power of the then outstanding capital stock of CTI.

                                       5

<PAGE>
 
(The information below marked by ***** has been omitted by a request for 
confidential treatment. The omitted portion has been separately filed with the 
Commission.)

          (b) In the event of any change in the number of outstanding shares of
CTI voting securities such that any or all Additional Shares, when purchased
pursuant to this Agreement and aggregated with all other shares of Common Stock
(including shares of Common Stock issuable upon conversion of any shares of
Series B Preferred held by JJDC) then owned of record by JJDC which were
purchased pursuant to this Agreement, would not constitute more than ***** of
the voting power of the then outstanding capital stock of CTI, then CTI shall
have the right to sell such Additional Shares to JJDC upon fifteen (15) calendar
days' advance written notice to JJDC at any time in one or more separate
closings (but not more than two (2) separate closings in any twelve (12) month
period) until all of such Additional Shares have been sold hereunder.  Such
notice shall include a certificate executed on behalf of CTI by an executive
officer of CTI certifying that the conditions set forth above in this Section
2.04(b) have been met.  JJDC shall promptly (but in any event within ten (10)
calendar days) notify CTI of any disposition of shares purchased pursuant to
this Agreement or other event of which it becomes aware which would cause CTI's
right to sell Additional Shares to be reinstated hereunder.

          (c) The closing of each sale of Additional Shares pursuant to Section
2.04(b) shall be held at the time and place specified in CTI's notice delivered
pursuant to Section 2.04(b).  Any Additional Shares purchased by JJDC hereunder
shall be purchased by JJDC at a price equal to the Current Market Price in
effect on the date of CTI's notice regarding the sale of such Additional Shares.

          (d) The respective time periods during which CTI shall have the right
to exercise its BMT Milestone Put Right and AML Milestone Put Right, to the
extent that any such exercise resulted in Excess Put Shares, shall be tolled and
extended until all such Excess Put Shares are purchased pursuant to this Section
2.04.

          (e) For purposes of this Section 2.04, the following terms shall have
the following meanings:

(The information below marked by ***** has been omitted by a request for 
confidential treatment. The omitted portion has been separately filed with the 
Commission.)

          (i) "Excess Put Shares" shall mean any shares of Common Stock
               -----------------                                       
     otherwise issuable to JJDC pursuant to Sections 2.01, 2.02, 2.03 or this
     Section 2.04 which, if purchased by JJDC at the time otherwise provided for
     under this Agreement and when considered together with all other shares of
     Common Stock purchased by JJDC pursuant to this Agreement and then owed of
     record by JJDC or its Affiliates (including shares of Common Stock issuable
     upon conversion of any shares of Series B Preferred held by JJDC), would
     constitute more than ***** of the voting power of the then outstanding
     capital stock of CTI.  Securities of CTI acquired by JJDC other than
     pursuant to this Agreement shall be specifically excluded for purposes of
     this Section 2.04 in determining whether or not JJDC is the record holder
     of more than ***** of the voting power of the then outstanding capital
     stock of CTI.  For purposes of this Section 2.04, "JJDC" shall be deemed to
     include JJDC and its Affiliates (as defined in the Collaboration
     Agreement), including Ortho and J&J.

                                       6

<PAGE>
 
          (ii) "Excess Put Share Amount" shall mean the aggregate amount of the
                -----------------------                                        
     purchase price that would have been paid by JJDC pursuant to this Agreement
     for the purchase of any Excess Put Shares, but for the delivery by JJDC of
     the notice(s) specified in Section 2.04(a).


                                  ARTICLE III

                                  STANDSTILL
                                  ----------

(The information below marked by ***** has been omitted by a request for 
confidential treatment. The omitted portion has been separately filed with the 
Commission.)

          SECTION 3.01.  Standstill by JJDC.  Subject to the terms of this
                         ------------------                               
Section 3.01, JJDC agrees that, upon execution of this Agreement until the
earlier of (i) ***** from the date hereof, or (ii) ***** following the effective
date of termination of the Collaboration Agreement by Ortho, it will not, nor
will it permit any of its Affiliates (including Ortho and J&J) to, without the
prior written consent of CTI:

(The information below marked by ***** has been omitted by a request for 
confidential treatment. The omitted portion has been separately filed with the 
Commission.)

          (a) (i)  acquire, directly or indirectly, by purchase or otherwise, of
     record or beneficially, other than by the transactions set forth in
     Articles I and II of this Agreement, any securities of CTI or rights or
     options to acquire any securities from any holder of such securities if
     after such acquisition (and giving effect to the exercise of any such
     rights or options) JJDC and its Affiliates, including Ortho and J&J, would
     own capital stock of CTI having ***** or more of the voting power of the
     outstanding capital stock of CTI; provided, however, that neither (1) the
                                       --------  -------                      
     purchase of the Shares pursuant to Articles I and II of this Agreement nor
     (2) subsequent reductions in the number of shares of outstanding capital
     stock of CTI (or rights or options therefor) shall be deemed to have caused
     a violation of this Section 3.01(a)(i);

(The information below marked by ***** has been omitted by a request for 
confidential treatment. The omitted portion has been separately filed with the 
Commission.)

          (ii) to the extent JJDC and/or its Affiliates (including Ortho and
     J&J) own(s), beneficially or of record, securities of CTI constituting
     ***** or more of the voting power of the outstanding capital stock of CTI
     and such securities include securities of CTI other than those purchased
     pursuant to Articles I and II, JJDC and/or its Affiliates (including Ortho
     and J&J) shall be deemed to own "Prohibited Securities."  JJDC agrees that
                                      ---------------------                    
     neither it nor any of its Affiliates (including Ortho and J&J) shall (and
     neither it nor any of its Affiliates (including Ortho and J&J) shall be
     entitled to) vote any Prohibited Securities with respect to any matter
     subject to the vote or written consent of CTI's stockholders (provided,
                                                                   -------- 
     however, that the foregoing shall not be deemed to limit CTI's remedies in
     -------                                                                   
     the event that the Prohibited Securities were acquired in violation of this
     Section 3.01); and

          (iii)  JJDC hereby covenants and agrees that during the term provided
     for in Section 3.01(a)(i), it will provide written notice to CTI of any
     purchase, sale or other acquisition or disposition, on the open market or
     in private transactions, by JJDC or any of its Affiliates (including Ortho
     and J&J) of any securities of CTI (or if JJDC or such Affiliates shall
     direct any third party to take any such actions on behalf of JJDC

                                       7

<PAGE>
 
     or such Affiliates).  Such notice shall be transmitted to CTI by facsimile
     (with telephonic notice) within three (3) business days after any such
     transaction on the open market or within ten (10) business days after any
     such private transaction and shall specify the person or entity effecting
     the transaction, the date of such transaction, the number of securities and
     the price per security with respect to such transaction;

          (b) make, or in any way participate, directly or indirectly, in any
"solicitation" of "proxies" (as such terms are defined or used in Regulation 14A
of the Exchange Act to vote, or seek to advise or influence any person with
respect to the voting of, any securities of CTI, or become a "participant" in
any "election contest" (as such terms are used or defined in Regulation 14A of
the Exchange Act) relating to the election of directors of CTI;  deposit any
securities of CTI in a voting trust or subject them to a voting agreement or
other agreement of similar effect (other than a revocable proxy);

          (c) deposit any securities of CTI in a voting trust or subject them to
a voting agreement or other agreement of similar effect (other than a revocable
proxy);

          (d) initiate, propose or otherwise solicit any stockholder for the
approval of one or more stockholder proposals at any time, or induce or attempt
to induce any other person to initiate any stockholder proposal;

          (e) form, join or in any way participate in a "group" (within the
meaning of Section 13(d)(3) of the Exchange Act) or otherwise act in concert
with any person for the purpose of acquiring, holding, voting or disposing of
any securities of CTI;

          (f) request CTI (or its directors, officers, employees or agents),
directly or indirectly, to amend or waive any of the provisions contained in
this Section 3.01; or

          (g) take any action individually or jointly with any partnership,
limited partnership, syndicate, or other group or assist any other person,
corporation, entity or group in taking any action it could not take individually
under the terms of this Section 3.01.

(The information below marked by ***** has been omitted by a request for 
confidential treatment. The omitted portion has been separately filed with the 
Commission.)

Notwithstanding the foregoing, if a third party makes a tender offer or exchange
offer for ***** or more of CTI's outstanding voting securities, or CTI publicly
announces a transaction pursuant to which a third party not a shareholder of CTI
on the date hereof is or will acquire, whether through merger, tender offer or
exchange offer, ***** or more of CTI's voting securities or all or substantially
all of CTI's assets, then the restrictions set forth in this Section 3.01 shall
lapse until such time, if any, as such transaction or transactions are withdrawn
or abandoned, at which time such restrictions shall be reinstated.  Any
reinstatement of such restrictions shall not affect JJDC's ability to continue
to pursue ant transaction it announced prior to such reinstatement; provided,
                                                                    -------- 
that, such announcement did not violate this Section 3.01, and provided further
                                                               -------- -------
that such transaction is completed within six (6) months from the date of
announcement.

                                       8

<PAGE>
 
                                  ARTICLE IV

                     REPRESENTATIONS AND WARRANTIES OF CTI
                     -------------------------------------

          SECTION 4.01.  Organization and Corporate Power.  CTI is a corporation
                         --------------------------------                       
duly incorporated and validly existing under the laws of the State of Washington
and is duly licensed or qualified as a foreign corporation in each other
jurisdiction where the nature of business transacted by it makes such licensing
or qualification necessary.  CTI has, and will have at each Closing, the
corporate power and authority, and the legal right, to own and operate its
properties and to carry on its business as currently conducted, to execute,
deliver, and perform this Agreement, to issue, sell and deliver the Shares, to
issue and deliver the shares of Common Stock issuable upon conversion of the
Series B Shares (the "Conversion Shares") and in all other respects to
                      -----------------                               
consummate the transactions contemplated hereby and thereby.  True and complete
copies of the Articles of Incorporation and By-laws of CTI, as amended to date,
have been made available to JJDC by CTI.

          SECTION 4.02.  Subsidiaries.  CTI does not own any shares of any
                         ------------                                     
corporation or have any ownership or other investment interest, either of
record, beneficially or equitably, in any association, partnership, joint
venture or other legal entity other than wholly-owned subsidiaries which, as of
the date hereof, have conducted no business operations.

          SECTION 4.03.  Authorization.  The execution and delivery by CTI of
                         -------------                                       
this Agreement, the performance by CTI of its obligations hereunder, and the
issuance, sale and delivery by CTI of the Shares at each Closing pursuant hereto
and the issuance and delivery of the Conversion Shares upon conversion of the
Series B Shares, have been duly authorized by all requisite corporate action,
including without limitation all requisite action on the part of CTI's
shareholders, and will not violate any provision of law, any order of any court
or other agency of government, the Articles of Incorporation or By-laws of CTI,
any judgment award or decree or any provision of any indenture, agreement or
other instrument, to which CTI is a party, or by which it, or any of its
properties or assets, is bound or affected, or conflict with, result in a breach
of or constitute (with due notice or lapse of time or both) a default under, any
such indenture, agreement or other instrument, or result in the creation or
imposition of any lien, charge or encumbrance of any nature whatsoever upon any
of the properties or assets of CTI, or result in any suspension, revocation,
impairment, forfeiture or nonrenewal of any Governmental Permit (as hereinafter
defined).

          SECTION 4.04.  Validity of the Shares.  The Shares have been duly
                         ----------------------                            
authorized by CTI and, when paid for in accordance with this Agreement, will be
validly issued, fully paid and nonassessable shares of Common Stock or Series B
Preferred, as the case may be.  The Conversion Shares have been duly reserved
for issuance upon conversion of the Series B Shares and, when so issued, will be
duly authorized, validly issued, fully paid and nonassessable shares of Common
Stock.  Neither the issuance, sale and delivery of the Shares nor the issuance
and delivery of the Conversion Shares are subject to any

                                       9

<PAGE>
 
preemptive rights of shareholders of CTI or to any right of first refusal or
other similar right in favor of any person.

          SECTION 4.05.  Enforceability.  This Agreement has been duly executed
                         --------------                                        
and delivered by CTI and, subject to due execution by JJDC, constitutes the
legal, valid and binding obligation of CTI, enforceable against CTI in
accordance with its terms.

          SECTION 4.06.  Capitalization.  As of the date hereof, the authorized
                         --------------                                        
capital stock of CTI consists of 100,000,000 shares of Common Stock, of which
17,300,574 shares are issued and outstanding as of the date hereof, and
10,000,000 shares of preferred stock, no par value, ("Existing Preferred
                                                      ------------------
Stock"), of which 146,193.272 shares of have been designated as Series A
- -----
Convertible Preferred Stock ("Series A Preferred"), of which 146,193.272 shares
                              ------------------                               
are issued and outstanding as of the date hereof, and of which 14,925.373 shares
have been designated as Series B Preferred, none of which are issued and
outstanding as of the date hereof.   All shares of capital stock outstanding as
of the date hereof have been duly authorized and validly issued, and are fully
paid and nonassessable.  15,000,000 shares of Common Stock have been reserved
for issuance upon conversion of the Series A Preferred, and 1,492,538 shares of
Common Stock have been reserved for issuance upon conversion of the Series B
Preferred.  The designations, preferences, limitations and relative rights of
the Series A Preferred and Series B Preferred are set forth in the Articles of
Amendment to the Restated Articles of Incorporation of CTI, as set forth in
Exhibit B annexed hereto (the "Articles of Amendment").
                               ---------------------   

          SECTION 4.07.  Securities Act Compliance.  Assuming that JJDC's
                         -------------------------                       
representations and warranties contained in Article V of this Agreement are true
and correct, the Shares and Conversion Shares to be issued and delivered to JJDC
pursuant to this Agreement shall be offered, issued and sold in compliance with
the Securities Act and any other applicable United States federal or state
securities laws.

          SECTION 4.08.  Obligations to Issue Securities.  Except (a) for the
                         -------------------------------                     
obligations of CTI to JJDC under this Agreement, (b) as otherwise set forth in
the SEC Reports (as defined herein), and (c) for stock options granted to
employees, officers and consultants of CTI subsequent to the date of the SEC
Reports pursuant to CTI's 1994 Equity Incentive Plan, (i) no subscription,
warrant, option, convertible security or other right (contingent or other) to
purchase or acquire any shares of any class of capital stock of CTI is
authorized or outstanding, (ii) there is not any commitment of CTI to issue any
shares, warrants, options or other such rights or to distribute to holders of
any class of its capital stock any evidences of indebtedness or assets, and
(iii) CTI has no obligation (contingent or other) to purchase, redeem or
otherwise acquire any shares of the capital stock of CTI or any interest therein
or to pay any dividend or make any other distribution in respect thereof.

          SECTION 4.09.  SEC Reports.  (a)  CTI has filed all forms, reports and
                         -----------                                            
documents required to be filed with the Securities and Exchange Commission (the
"SEC") since April 29, 1996 and has made available to JJDC (i) its Registration
 ---                                                                           
Statement on Form

                                       10

<PAGE>
 
10, as amended by Amendment No. 2 thereto filed with the SEC on June 28, 1996;
(ii) its Quarterly Report on Form 10-Q for the period ended June 30, 1996; (iii)
all other reports or registration statements filed by CTI with the SEC since
June 28, 1996; and (iv) all amendments and supplements to all such reports and
registration statements filed by CTI with the SEC (the forms, reports and
documents made available by CTI to JJDC being collectively referred to herein as
the "SEC Reports").  The SEC Reports (i) were prepared in accordance with the
     -----------                                                             
requirements of the Securities Act or the Exchange Act, as the case may be, and
(ii) did not at the time they were filed (or if amended or superseded by a
filing prior to the date of this Agreement, then on the date of such amending or
superseding filing) contain any untrue statement of a material fact or omit to
state a material fact required to be stated therein or necessary in order to
make the statements therein, in the light of the circumstances under which they
were made, not misleading.

          (b) Each of the financial statements (including, in each case, any
related notes thereto) contained in the SEC Reports was prepared in accordance
with United States generally accepted accounting principles applied on a
consistent basis throughout the periods involved (except as may be indicated
therein or in the notes thereto) and each fairly presented the financial
position of CTI as at the respective dates thereof and the results of its
operations and cash flows for the periods indicated, except that the unaudited
interim financial statements were or are subject to normal and recurring year-
end adjustments which were not or are not expected to be material in amount.

          SECTION 4.10.  Absence of Certain Developments.  Except as set forth
                         -------------------------------                      
in the SEC Reports, since June 30, 1996, CTI has conducted its business in the
ordinary course and there has not occurred:  (i) any change or effect that is or
is reasonably likely to be materially adverse to the business, assets (including
intangible assets), financial condition or results of operations of CTI taken as
a whole; (ii) any amendments or changes in the Articles of Incorporation or By-
laws of CTI, other than an amendment to CTI's By-laws adopted on July 16, 1996;
(iii) any change by CTI in its accounting methods, principles or practices; (iv)
any revaluation by CTI of any of its assets; (v) any sale of a material amount
of property of CTI; (vi) any discharge or satisfaction by CTI of any material
lien, security interest, charge or other encumbrance or any payment by CTI of
any material obligation or liability (fixed or contingent), other than in the
ordinary course of business and consistent with past practice; (vii) any
investment by CTI of a capital nature, whether by purchase of stock or
securities, contributions to capital, property transfers or otherwise, in any
other partnership, corporation or other entity, or any purchase by CTI of any
material property or assets; (viii) any cancellation or compromise by CTI of any
debt or claim other than in the ordinary course of business consistent with past
practice; (ix) any waiver or release by CTI of any rights of material value,
including, without limitation, any Intangible Rights (as hereinafter defined);
(x) any material wage or salary increase by CTI applicable to any group or
classification of employees generally, or any material employment contract with,
loan to, or material transaction of any other nature with, any officer or
employee of CTI; or (xi) any establishment by CTI of any employee benefit plan
within the meaning of Section 3(3) of the Employee Retirement Income Security
Act of 1974.

                                       11

<PAGE>
 
          SECTION 4.11.  No Undisclosed Liabilities.  Except as and to the
                         --------------------------                       
extent (i) reflected in the financial statements contained in the SEC Reports or
(ii) incurred since June 30, 1996 in the ordinary course of business and
consistent with past practice, CTI has no lia bilities or obligations of any
kind or nature, whether secured or unsecured (whether absolute, accrued,
contingent or otherwise, and whether due or to become due), including without
limitation any tax liabilities due or to become due, or whether incurred in
respect of or measured by the assets, sales, income or receipts of CTI for any
period, which liabilities or obligations would be required to be reflected on a
balance sheet of CTI as of December 31, 1995, prepared in accordance with
generally accepted accounting principles.

          SECTION 4.12.  Approvals.  Based in part on the representations made
                         ---------                                            
by JJDC in Article V of this Agreement, no order, authorization, approval or
consent from, or filing with, any federal or state governmental or public body
or other authority having jurisdiction over CTI is required for the valid
execution (where called for), delivery and performance of this Agreement by CTI,
the issuance, sale and delivery of the Shares, or upon conversion of the Series
B Shares, the issuance and delivery of the Conversion Shares, or is required in
order that the business of CTI can be conducted immediately following the date
of the applicable Closing substantially in the same manner as heretofore
conducted, except for (i) those that have been made and obtained, (ii) those
filings under state "blue sky" laws which are now not required to be made or
obtained, and (iii) applicable obligations under the Hart-Scott-Rodino Antitrust
Improvement Act of 1976 and the rules and regulations thereunder (the "HSR
                                                                       ---
Act").
- --- 

          SECTION 4.13.  Title to Properties.  Except as set forth in the SEC
                         -------------------                                 
Reports, CTI has good and valid title to all its assets and properties, in each
case free and clear of all liens, charges, security interests or other
encumbrances of any nature whatsoever, other than (x) liens for taxes not yet
due, (y) mechanic's, materialman's and similar statutory liens arising in the
ordinary course of business and which, in the aggregate, would not have a
material adverse effect on the business, properties or condition (financial or
other) of CTI, or (z) security interests securing indebtedness not in default
for the purchase price of or lease rental payments on property purchased or
leased under capital lease arrangements in the ordinary course of business.

          SECTION 4.14.  Intellectual Property.  Except as is set forth in the
                         ---------------------                                
SEC Reports, CTI complies with its contractual obligations relating to the
protection of such of the patents, trademarks and trade names, trademark and
trade name registrations, logos, servicemark registrations, copyright
registrations, all applications pending on the date hereof for patent or for
trademark, trade name, servicemark or copyright registrations, and all other
material proprietary rights (collectively "Intangible Rights") used by it
                                           -----------------             
pursuant to licenses or other contracts, CTI has the right to use its Intangible
Rights for the purposes intended thereby, and to conduct its business as
heretofore conducted, and the consummation of the transactions contemplated
hereby will not alter or impair any such Intangible Rights, and, to the
knowledge of CTI, all such Intangible Rights that are capable of being enforced
are valid, enforceable and in good standing, and no claims have been asserted
with respect to the

                                       12

<PAGE>
 
ownership by CTI of any of the Intangible Rights or otherwise.  To the knowledge
of CTI, except as is set forth in the SEC Reports, (i) no person is infringing
an Intangible Right owned by CTI and (ii) CTI is not infringing any valid
patent, copyright or trademark owned by any third party.

          SECTION 4.15.  Litigation.  Except as set forth in the SEC Reports,
                         ----------                                          
there are no material claims, actions, suits, proceedings or investigations
pending or, to the knowledge of CTI, threatened by or against CTI or any of its
properties, assets, rights or businesses.  No such pending or threatened claims,
actions, suits, proceedings or investigations, if ad versely determined, would,
individually or in the aggregate, have a material adverse effect on the
business, properties or condition (financial or other) of CTI.  Except as set
forth in the SEC Reports, CTI knows of no basis for any other such claim,
action, suit, proceeding or investigation which, if adversely decided, would
have such a material adverse effect.  Except as set forth in the SEC Reports,
there are no actions, suits, proceedings or claims pending before or by any
court, arbitrator, regulatory authority or government agency against or
affecting CTI that might enjoin or prevent the consummation of the transactions
contem plated by this Agreement.

          SECTION 4.16.  Taxes.  CTI has duly and timely filed or caused to be
                         -----                                                
filed (or obtained valid, currently effective extensions for filing) all
federal, state, local and foreign income, franchise, excise, payroll, sales and
use, property, withholding and other tax returns, reports, estimates and
information and other statements or returns (collectively "Tax Returns")
                                                           -----------  
required to be filed by or on behalf of it pursuant to any applicable federal,
state, local or foreign tax laws for all years and periods for which such Tax
Returns have become due.  All such Tax Returns were correct as filed and
correctly reflect the federal, state, local and foreign income, franchise,
excise, payroll, sales and use, property, withholding and other taxes, duties,
imposts and governmental charges (and charges in lieu of any thereof), together
with interest, any additions to tax and penalties (collectively "Taxes")
                                                                 -----  
required to be paid or collected by (or allocable to) CTI.  CTI (i) has paid or
caused to be paid all Taxes as shown on Tax Returns filed by it or on any
assessment received by it and (ii) has properly and fully accrued on its audited
and interim unaudited financial statements all Taxes for any period from the
date of the last reporting period covered by such Tax Returns.  There is no
audit pending or threatened in writing, and, to the knowledge of CTI, there is
no dispute or claim being threatened by any relevant taxing authority concerning
any Tax Return or liabili ty for Taxes.  Without limiting the foregoing, CTI has
withheld or collected from each payment made to each of its employees (or has
otherwise paid or made provision for) the amount of all Taxes (including, but
not limited to, federal income taxes, federal Insurance Contribution Act taxes,
state and local income and wage taxes, payroll taxes, worker's compensation and
unemployment compensation taxes) required to be withheld or collected therefrom,
and CTI has paid (or caused to be paid) the same in respect of its employees
when due.

          SECTION 4.17.  Compliance With Laws.  (a)  CTI has all material govern
                         --------------------                                   
mental licenses, franchises and permits ("Governmental Permits") required under
                                          --------------------                 
applicable

                                       13

<PAGE>
 
law for the conduct of its business as currently conducted, including, without
limitation, all such licenses, franchises and permits as are required for
laboratory use, manufacturing, the experimental use of animals and the use and
disposal of hazardous or potentially hazardous substances.

          (b) The business of CTI is being conducted in material compliance with
all applicable laws, ordinances, rules and regulations of all governmental
authorities relating to CTI's properties or applicable to its business,
including, without limitation, the terms of all Governmental Permits, federal
securities laws, and laws relating to safe working conditions, laboratory and
manufacturing practices (including current Good Manufacturing Practices
prescribed by the U.S. Food and Drug Administration ("FDA")), the experimental
                                                      ---                     
use of animals and the use and disposal of hazardous or potentially hazardous
substances (including, without limitation, radioactive compounds and solvents).
CTI has not received any notice from any third party of any alleged violation of
any of the foregoing.

          (c) Neither CTI nor any of its properties, operations or businesses is
subject to any order, judgment, injunction or decree.  To the knowledge of CTI,
no action has been taken or recommended by any governmental or regulatory
official, body or authority, either to revoke, withdraw or suspend any
certificate of need or any license to operate CTI.

          SECTION 4.18.  Labor Matters.  (a)  No collective bargaining agreement
                         -------------                                          
is applicable to any employees of CTI.  There are no disputes between CTI and
any such employees that might reasonably be expected to materially adversely
affect the conduct of its business or any unresolved labor union grievances or
unfair labor practice or labor arbitra tion proceedings pending, or to the
knowledge of CTI, threatened, relating to the business of CTI.  To the knowledge
of CTI, there are no organizational efforts presently being made or threatened
involving any of such employees.  CTI has not received notice of any claim that
CTI has failed to comply with any laws relating to employment, including any
provisions thereof relating to wages, hours, collective bargaining, the payment
of social security and other payroll or similar taxes, equal employment
opportunity, employment discrimination and employment safety, or that CTI is
liable for any arrears of wages or any taxes or penalties for failure to comply
with any of the foregoing except for routine non-material grievances.

          (b) There are no proceedings pending or, to the knowledge of CTI,
threat ened before the National Labor Relations Board with respect to any
employees of CTI.  There are no discrimination charges (relating to sex, age,
religion, race, national origin, ethnicity, handicap or veteran status) pending
before any Federal or state agency or authority against CTI.

          SECTION 4.19.  Insurance.  CTI is a named insured under all policies
                         ---------                                            
of fire, liability, workers' compensation, malpractice and professional
liability and other forms of insurance providing insurance coverage to or for
CTI.  All premiums with respect to such policies covering all periods have been
paid.  No notice of cancellation or termination has

                                       14

<PAGE>
 
been received with respect to any such policy.  All such policies are in full
force and effect and will remain in full force and effect to and including the
later to occur of the BMT Milestone Put Share Closing or the AML Milestone Put
Share Closing, and coverage thereunder will continue to be in effect, without
limit as to time, for occurrences prior to such closings.

          SECTION 4.20.  Leases.  All real property leased by CTI is used and
                         ------                                              
operated by CTI in material compliance and conformity with all applicable
leases.  CTI has not received notice of any material violation of any applicable
zoning or building regulation, ordinance or other law, order, regulation or
requirement relating to the respective real estate assets of CTI and, to the
knowledge of CTI, there are no such material violations.

          SECTION 4.21.  Personal Property.  All tangible personal property,
                         -----------------                                  
fixtures and equipment comprising the assets of CTI are in a good state of
repair (ordinary wear and tear excepted) and operating condition, in all
material respects, and are sufficient and adequate to conduct its business on
the date hereof.

          SECTION 4.22.  Environmental.  For the purposes of this Section 4.22,
                         -------------                                         
the following terms shall have the following meanings:

          "Environmental Law" means any federal, state, provincial or local
           -----------------                                               
     statute, law, ordinance, rule or regulation of the United States and any
     other jurisdiction within the United States now effective and any order, to
     which CTI is a party or is otherwise directly bound, of the United States
     or other jurisdiction within the United States now effective relating to:
     (a) pollution or protection of the environment, including natural
     resources; or (b) exposure of persons, including employees, to Hazardous
     Substances.

          "Hazardous Substances" means any substance, whether liquid, solid or
           --------------------                                               
     gas (a) listed, identified or designated as hazardous or toxic under any
     Environmental Law, (b) which, applying criteria specified in any
     Environmental Law, is hazardous or toxic, or (c) the use or disposal of
     which is regulated under Environmental Law.

          (a) No Hazardous Substances have been, or have been threatened to be,
discharged, released or emitted into the air, water, surface water, ground
water, land surface or subsurface strata or transported to or from the property
of CTI except in accordance with Environmental Law and except for incidental
release of Hazardous Substances in amounts or concentrations which would not
reasonably be expected to give rise to any claims or liabili ties against CTI
under Environmental Law.

          (b) CTI has not received any notification from a governmental agency
that there is any material violation of any Environmental Law with respect to
the business and properties of CTI and CTI has not received any notification
from a governmental agency pursuant to Section 104, 106 or 107 of the
Comprehensive Environmental Response

                                       15

<PAGE>
 
Compensation and Liability Act, as amended.

          SECTION 4.23.  Improper Payments.  (a)  Neither CTI nor, to the
                         -----------------                               
knowledge of CTI, any officer, director, employee or agent of CTI, nor any other
person or entity acting on behalf of CTI, acting alone or together, has (i)
received, directly or indirectly, any rebates, payments, commissions,
promotional allowances or any other economic benefits, regardless of their
nature or type, from any customer, governmental employee or other person or
entity with whom CTI has conducted business activities directly or indirectly,
or (ii) directly or indirectly, given or agreed to give any gift or similar
benefit to any customer, governmental employee or other person or entity who is
or may be in a position to help or hinder the business of CTI (or assist CTI in
connection with any actual or proposed transac tion) which, under current law,
in the case of either clause (i) or clause (ii) above, would reasonably be
expected to subject CTI to any damage or penalty in any civil, criminal or
governmental litigation or proceeding.

          (b) To the knowledge of CTI, no employee, officer or director of CTI,
has been debarred under (S)306(a) or (S)306(b) of the Federal Food, Drug and
Cosmetic Act or has, within the last five years, been convicted of (x) a
criminal offense relating to the development or approval process of any drug
product, or (y) a felony involving bribery, payment of illegal gratuities,
fraud, perjury, false statements, racketeering, blackmail, extortion,
falsification or destruction of records, or interference with, obstruction of an
investigation into, or prosecution of, any criminal offense or a conspiracy to
commit, aid or abet such felony.

          SECTION 4.24.  Securities Laws.  No person authorized by CTI as agent,
                         ---------------                                        
broker, dealer or otherwise in connection with the offering or sale of the
Shares, or any similar securities, has taken or will take any action (including,
without limitation, any offer or sale of any securities under circumstances
which would require the integration of such securities with the Shares being
issued and sold hereunder under the Securities Act or the rules and regulations
of the SEC thereunder), which would subject such offer and sale to the
registration provisions of the Securities Act.

          SECTION 4.25.  Brokerage.    All negotiations relative to this
                         ---------                                      
Agreement, and the transactions contemplated hereby, have been carried out by
CTI directly with JJDC, without the intervention of any person on behalf of CTI
in such manner as to give rise to any claim by any person against JJDC for a
finder's fee, brokerage commission or similar pay ment.

          SECTION 4.26.  Disclosure.  This Agreement, and any other exhibits or
                         ----------                                            
schedules delivered in connection herewith or therewith do not contain any
untrue statement of a material fact by CTI or omit to state a material fact
necessary to the make the statements herein or therein by CTI in view of the
circumstances under which they were made not misleading.

                                       16

<PAGE>
 
                                   ARTICLE V

                    REPRESENTATIONS AND WARRANTIES OF JJDC
                    --------------------------------------

          JJDC hereby represents and warrants to CTI as follows:

          SECTION 5.01.  Legal Power.  JJDC has, and will have at each Closing,
                         -----------                                           
the requisite corporate power and authority to execute and deliver into this
Agreement, and to carry out and perform its obligations under the terms of this
Agreement.

          SECTION 5.02.  Due Execution.  This Agreement has been duly
                         -------------                               
authorized, executed and delivered by JJDC, and, upon due execution and delivery
by CTI, this Agreement will be a valid and binding agreement of JJDC, except as
enforceability may be limited by bankruptcy, insolvency, reorganization,
moratorium or similar laws affecting creditors' rights generally or by equitable
principles.

          SECTION 5.03.  Investment Representations.
                         -------------------------- 

          (a) JJDC is acquiring the Shares for its own account, not as nominee
or agent, for investment and not with a view to, or for resale in connection
with, any distribution or public offering thereof within the meaning of the
Securities Act.

          (b) JJDC understands that (i) the Shares have not been registered
under the Securities Act by reason of a specific exemption therefrom and, that
such securities may not be sold, unless a subsequent disposition thereof is
registered under the Securities Act or is exempt from such registration; (ii)
each certificate representing the Shares will be endorsed with the following
legends:

               A)  "THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED
     UNDER UNITED STATES FEDERAL OR STATE SECURITIES LAWS AND MAY NOT BE OFFERED
     FOR SALE, SOLD OR OTHERWISE TRANSFERRED OR ASSIGNED FOR VALUE, DIRECTLY OR
     INDIRECTLY, NOR MAY THE SECURITIES BE TRANSFERRED ON THE BOOKS OF THE
     CORPORATION, WITHOUT REGISTRATION OF SUCH SECURITIES UNDER ALL APPLICABLE
     UNITED STATES FEDERAL OR STATE SECURITIES LAWS OR COMPLIANCE WITH AN
     APPLICABLE EXEMPTION THEREFROM, SUCH COMPLIANCE AT THE OPTION OF THE
     CORPORATION, TO BE EVIDENCED BY AN OPINION OF SHAREHOLDER'S COUNSEL, IN
     FORM ACCEPTABLE TO THE CORPORATION, THAT NO VIOLATION OF SUCH REGISTRATION
     PROVISIONS WOULD RESULT FROM ANY PROPOSED TRANSFER OR ASSIGNMENT."

               B)  "THE SECURITIES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT
     TO THE TERMS AND CONDITIONS,

                                       17

<PAGE>
 
     INCLUDING RESTRICTIONS ON TRANSFERABILITY, OF THAT CERTAIN STOCK PURCHASE
     AGREEMENT, DATED AS OF NOVEMBER 7, 1996.  A COPY OF SUCH STOCK PURCHASE
     AGREEMENT WILL BE FURNISHED TO THE RECORD HOLDER OF THIS CERTIFICATE
     WITHOUT CHARGE UPON WRITTEN REQUEST TO CELL THERAPEUTICS, INC. AT ITS
     PRINCIPAL PLACE OF BUSINESS"; and

               C)  Any legend required to be placed thereon by CTI's By-laws or
     under applicable state securities laws;

and (iii) CTI will instruct any transfer agent not to register the transfer of
Shares (or any portion thereof) unless the conditions specified in the foregoing
legends are satisfied.

          (c) JJDC has been furnished with such materials and has been given
access to such information relating to CTI as it has requested, and JJDC has
been afforded the opportunity to ask such questions of, and to receive answers
from, CTI with respect to CTI and the Shares as it has found necessary to make
an informed investment decision, and has determined that the Shares are a
suitable investment.

          (d) JJDC is an investor in securities of companies in the development
stage and acknowledges that it can bear the economic risk of its investment and
has such knowledge and experience in financial or business matters that it is
capable of evaluating the merits and risks of the investment in the Shares.

          (e) JJDC recognizes that CTI has incurred substantial accumulated net
losses to date and expects to continue to incur operating losses.  JJDC also
recognizes that an investment in CTI involves substantial risk and could afford
a complete loss of such investment.

          (f) JJDC is not subscribing for the Shares as a result of or
subsequent to any advertisement, article, notice or other communication
published in any newspaper, magazine or similar media or broadcast over
television or radio or presented at any seminar or meeting.

          (g) JJDC is an "accredited investor" as such term is defined in Rule
501 of the General Rules and Regulations prescribed by the Commission pursuant
to the Securities Act and was not formed for the specific purpose of acquiring
the Shares.

          (h) JJDC acknowledges that CTI is entering into this Agreement in
reliance upon JJDC's representations and warranties in this Agreement,
including, without limitation, those set forth in this Section 5.03.

                                       18

<PAGE>
 
                                  ARTICLE VI

                             CONDITIONS TO CLOSING
                             ---------------------

          SECTION 6.01.  Condition to JJDC's Obligations at First Closing.  The
                         ------------------------------------------------      
obligation of JJDC to purchase the Shares at the First Closing is subject to the
fulfillment to JJDC's satisfaction on or before the First Closing of each of the
following conditions:

          (a) Representations and Warranties.  The representations and
              ------------------------------                          
warranties  made by CTI in Article IV hereof shall be true and correct in all
material respects (except for those qualified by materiality which shall be true
and correct in all respects) on and as of the First Closing Date with the same
force and effect as though such representations and warranties had been made on
and as of the First Closing Date.

          (b) Performance.  CTI shall have performed and complied in all
              -----------                                               
respects with all agreements, obligations and conditions contained in this
Agreement that are required to be performed or complied with by it on or before
the First Closing.

          (c) Qualifications.  All authorizations, approvals, or permits, if
              --------------                                                
any, of any governmental authority or regulatory body of the United States or of
any state that are required in connection with the lawful issuance and sale of
the Shares to JJDC pursuant to this Agreement shall have been duly obtained and
shall be effective on and as of the First Closing, and the sale and issuance of
such Shares at the First Closing shall be legally permitted by all laws and
regulations to which JJDC and CTI are subject.

          (d) Proceedings and Documents.  All corporate and other proceedings in
              -------------------------                                         
connection with the transactions contemplated at the First Closing and all
documents incident thereto shall be reasonably satisfactory in form and
substance to JJDC and JJDC's counsel, and they shall have received all such
counterpart original and certified or other copies of such documents as they may
reasonably request.

          (e) Collaboration Agreement.  The Collaboration Agreement shall have
              -----------------------                                         
been executed and delivered by CTI and shall be in full force and effect.

          (f) Opinion of Company Counsel.  JJDC shall have received from counsel
              --------------------------                                        
for CTI reasonably acceptable to JJDC an opinion or opinions addressed to JJDC
in substantially the form attached hereto as Exhibit A dated the date of the
First Closing.

          (g) Compliance Certificate.  The Chief Executive Officer of CTI shall
              ----------------------                                           
deliver to JJDC at the First Closing a certificate certifying on behalf of CTI
that the conditions specified in Sections 6.01(a), (b) and (c) hereof have been
fulfilled.

          SECTION 6.02.  Condition to JJDC's Obligations at Subsequent Closings.
                         ------------------------------------------------------ 
The obligation of JJDC to purchase the Shares at each Closing subsequent to the
First

                                       19

<PAGE>
 
Closing is subject to the fulfillment to JJDC's satisfaction on or before such
Closing of each of the following conditions.

          (a) Qualifications.  All authorizations, approvals, or permits, if
              --------------                                                
any, of any governmental authority or regulatory body of the United States or of
any state that are required in connection with the lawful issuance and sale of
the Shares to JJDC pursuant to this Agreement shall have been duly obtained and
shall be effective on and as of such Closing, and the sale and issuance of such
Shares at such Closing shall be legally permitted by all laws and regulations to
which JJDC and CTI are subject.

          (b) Collaboration Agreement.  The Collaboration Agreement shall be in
              -----------------------                                          
full force and effect; provided, however, that in no event shall JJDC be
                       --------  -------                                
obligated to purchase Shares hereunder with respect to which CTI's put rights
pursuant to Sections 2.01, 2.02, or 2.03 shall not have been effective on or
before the date of delivery by Ortho of notice of termination of the
Collaboration Agreement pursuant to Article XIV thereof.

          (c) HSR Act.  All waiting periods applicable to such Closing under the
              -------                                                           
HSR Act (including any extension thereof by reason of a request for additional
information) shall have expired or been terminated and no action shall have been
instituted, or shall be threatened or pending, by the United States Justice
Department or the Federal Trade Commission (the "FTC") challenging or seeking to
                                                 ---                            
enjoin the consummation of the transactions contemplated at such Closing, which
action shall not have been withdrawn or terminated.

          (d) Representations and Warranties.  The representations and
              ------------------------------                          
warranties made by CTI in Section 4.01, 4.09 and 4.24 of Article IV hereof shall
be true and correct in all material respects (except for those qualified by
materiality which shall be true and correct in all respects) on and as of the
date of such subsequent closing date with the same force and effect as though
such representations and warranties had been made on and as of such date.

          (e) Performance.  CTI shall have performed and complied with all
              -----------                                                 
agreements, obligations and conditions contained in this Agreement that are
required to be performed or complied with by it on or before the date of such
closing.

          (f) Compliance Certificate.  The Chief Executive Officer of CTI shall
              ----------------------                                           
deliver to JJDC at such closing a certificate certifying on behalf of CTI that
the conditions specified in Section 6.02(a) through (e) hereof have been
fulfilled.

          (g) Opinion of Company Counsel.  JJDC shall have received a bring-down
              --------------------------                                        
to the Closing date of opinion number 8 specified on Exhibit A, from counsel for
CTI reasonably acceptable to JJDC.

          SECTION 6.03.  Conditions to CTI's Obligations at Each Closing.  CTI's
                         -----------------------------------------------        
obligation to issue and sell the Shares at each Closing is subject to the
fulfillment to CTI's

                                       20

<PAGE>
 
satisfaction on or prior to the date of such Closing of each of the following
conditions, any of which may be waived by CTI:

          (a) Representations and Warranties True.  The representations and
              -----------------------------------                          
warranties made by JJDC in Article V hereof shall be true and correct in all
material respects on and as of the date of such Closing with the same force and
effect as though such representations and warranties had been made on and as of
the date of such Closing.

          (b) Qualifications, Legal Investment.  All authorizations, approvals,
              --------------------------------                                 
and permits, if any, of any governmental authority or regulatory body of the
United States or of any state that are required in connection with the lawful
sale and issuance of the Shares at such Closing pursuant to this Agreement shall
have been duly obtained and shall be effective on and as of the date of such
Closing, and the sale and issuance of the Shares at such Closing shall be
legally permitted by all laws and regulations to which JJDC and CTI are subject.

          (c) HSR Act.  All waiting periods applicable to such Closing under the
              -------                                                           
HSR Act (including any extension thereof by reason of a request for additional
information) shall have expired or been terminated and no action shall have been
instituted, or shall be threatened or pending, by the United States Justice
Department or the FTC challenging or seeking to enjoin the consummation of the
transactions contemplated at such Closing, which action shall not have been
withdrawn or terminated, provided that this condition shall not be applicable to
                         --------                                               
the First Closing.


                                  ARTICLE VII

                REGISTRATION OF COMMON STOCK; COVENANTS OF CTI
                ----------------------------------------------

          SECTION 7.01.  Definitions.  Unless the context otherwise requires,
                         -----------                                         
the terms defined in this Article VII shall have the meanings herein specified
for all purposes of this Agreement, applicable to both singular and plural forms
of any of the terms herein defined.

          "Holder" of any security means the record or beneficial owner of such
           ------                                     
security or any permitted assignee thereof.

          The terms "register," "registered" and "registration" refer to a
                     --------    ----------       ------------            
registration effected by preparing and filing a registration statement in
compliance with the Securities Act, and the declaration for ordering of the
effectiveness of such registration statement by the Commission.

          "Registrable Securities" means (i) the Shares (including, regardless
           ----------------------                                             
of whether issued, all of the Shares to be issued under Article II, unless both
CTI and JJDC otherwise agree), (ii) the Conversion Shares, and (iii) any Common
Stock issued or issuable with

                                       21

<PAGE>
 
respect to the Shares by way of a stock dividend or stock split or in connection
with a combination of shares, reclassification, recapitalization, merger or
consolidation or reorganization, provided, however, that such shares of Common
                                 --------  -------                            
Stock shall no longer be treated as "Registrable Securities" if (A) they have
been sold by a Holder in a transaction in which its registration rights under
this Agreement are not assigned, (B) a registration statement with respect to
the sale of such Registrable Securities shall have become effective under the
Securities Act and such Registrable Securities shall have been disposed of in
accordance with such registration statement, (C) such Registrable Securities
shall have been sold to the public pursuant to Rule 144 (or any successor
provision) under the Securities Act, (D) such Registrable Securities shall be
eligible for sale by the holder thereof in a single transaction exempt from the
registration and prospectus delivery requirements of the Securities Act pursuant
to Rule 144 thereunder, without compliance with any of the restrictions set
forth in paragraphs (c), (e), (f) and (h) of Rule 144 (or any successor
provision), (E) such Registrable Securities shall have been otherwise
transferred, new certificates for such Registrable Securities not bearing a
legend restricting further transfer shall have been delivered by CTI and
subsequent disposition of such Registrable Securities shall not be subject to
registration or qualification under the Securities Act or any state securities
or blue sky law then in force, or (F) such Registrable Securities shall have
ceased to be outstanding.

          SECTION 7.02.  Registration Rights.  (a)  Subject to the provisions of
                         -------------------                                    
this Agreement, not later than the first to occur of (i) twelve (12) months
after the final closing date of an initial public offering of the Common Stock
of CTI to the general public covered by a registration statement under the
Securities Act (the "IPO Closing Date"), (ii) September 30, 1998 and (iii)
                     ----------------                                     
concurrently with the registration of any Conversion Shares into which the
Series A Preferred is convertible, CTI shall use its best efforts to effect the
registration under the Securities Act of all Registrable Securities pursuant to
one or more registration statements which may be required from time to time
hereunder to effect the registration of all Registrable Securities; provided,
                                                                    -------- 
however, that a Holder may inform CTI in writing that it wishes to exclude all
- -------                                                                       
or a portion of its Registrable Securities from such registration.

          (b) Subject to the provisions of this Agreement (including but not
limited to Sections 7.02(c) and (d)), but without limitation of CTI's obligation
under 7.02(a) above, each time subsequent to the twelfth (12th) month after the
IPO Closing Date that CTI shall determine to file a registration statement under
the Securities Act (other than pursuant to Section 7.02(a) or (b) hereof and
other than on Form S-4, S-8, or a registration statement on Form S-1 covering
solely any employee benefit plan) in connection with the proposed offer and sale
for money of any of its securities either for its own account, or on behalf of
any other security holder, CTI agrees to give written notice of its
determination to all Holders of Registrable Securities.  Upon the written
request of a Holder of any shares of Registrable Securities given within twenty
(20) days after the receipt of such written notice from CTI, CTI agrees to cause
all such Registrable Securities, the Holders of which have so requested
registration hereof, to be included in such registration statement and to use
its best efforts to cause such registration statement to become effective under
the Securities Act, all to the

                                       22

<PAGE>
 
extent requisite to permit the sale or other disposition by the prospective
seller or sellers of the Registrable Securities to be so registered.

          (c) If the registration of which CTI gives written notice pursuant to
Section 7.02(b) is for a public offering involving an underwriting, CTI agrees
to so advise the Holders as a part of its written notice.  In such event the
right of any Holder to registration pursuant to Section 7.02(b) shall be
conditioned upon such Holder's participation in such underwriting and the
inclusion of such Holder's Registrable Securities in the underwriting to the
extent provided herein.  All Holders proposing to distribute their Registrable
Securities through such underwriting agree to enter into (together with CTI and
the other Holders distributing their securities through such underwriting) an
underwriting agreement with the underwriter or underwriters selected for such
underwriting by CTI.

          (d) Notwithstanding any other provision of this Section 7.02, if the
managing underwriter referred to in Section 7.02(c) advises CTI and the Holders
of the Registrable Securities requesting participation in such registration in
writing that in its good faith judgment the number of shares of Registrable
Securities and the other securities requested to be registered under Section
7.02(b) exceeds the number of shares of Registrable Securities and other
securities which can be sold in such offering, then (i) the number of shares of
Registrable Securities so requested to be included in the offering shall be
reduced to that number of shares which in the good faith judgment of the
managing underwriter can be sold in such offering (provided, that in no event
                                                   --------                  
shall the number of shares to be issued  or sold by CTI or any other security
holder of CTI participating in such offering pursuant to demand or "piggyback"
registration rights entered into prior to the date hereof be reduced, which
shares shall have priority over the Registrable Securities), and (ii) such
reduced number of shares shall be allocated among all participating Holders of
Registrable Securities sought to be included in such underwriting in proportion,
as nearly as practicable, to the respective number of shares of Registrable
Securities held by such Holders at the time of filing the registration
statement, provided that any such exclusion o