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

                                  United States
                       Securities and Exchange Commission
 
                               Washington DC 20549

            ---------------------------------------------------------
                                   Form 10-QSB
            ---------------------------------------------------------

    Quarterly Report under Section 13 of the Securities Exchange Act of 1934


For the Quarterly Period Ended                       Commission File No. 0-27282
     September 30, 1996


                         Atlantic Pharmaceuticals, Inc.

                             142 Cypress Point Road
                         Half Moon Bay, California 94019
                             Telephone (415)726-1327


Incorporated in Delaware                                     IRS ID # 36-3898269


     Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the last 90 days:

                         Yes   [x]                No   [ ]

     Transitional Small Business Disclosure Format      Yes   [ ]     No   [x]

     2,913,720 shares of common stock, $.001 par value, were outstanding on
September 30, 1996

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

<PAGE>

Atlantic Pharmaceuticals, Inc. and Subsidiaries


Part One - Financial Information                                            Page


Item 1 - Financial Statements (unaudited)

Consolidated Balance Sheets
as of September 30, 1996 and December 31, 1995.                                1

Consolidated Statements of Operations
for the three months ended September 30, 1996 and 1995
for the nine months ended September 30, 1996 and 1995
and the period from July 13, 1993(inception) to September 30, 1996.            2

Consolidated Statements of Cash Flows
for the nine months  ended September 30, 1996 and 1995
and the period from July 13, 1993(inception) to September 30, 1996.            3

Notes to Consolidated Financial Statements                                     4


Item 2 - Management's Discussion and Analysis
of Financial Condition and Results of Operations                               5

Part Two - Other Information


Item 4- Submission of matters to a vote of the security holders.              19


Item 5 - Other information                                                    19


Item 6 - Exhibits and Report on Form 8-K                                      20

<PAGE>

Part One

ATLANTIC PHARMACEUTICALS, INC. AND SUBSIDIARIES
(a development stage company)
Consolidated Balance Sheets
September 30, 1996 and  December 31, 1995



<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
Assets                                                                          September 30,1996   December 30,1996
====================================================================================================================
                                                                                  (unaudited)
<S>                                                                               <C>                   <C>      
Current assets:
      Cash and cash equivalents                                                   $  3,245,129          5,044,632
      Prepaid expenses                                                                  32,500             48,000

- --------------------------------------------------------------------------------------------------------------------
Total current assets                                                                 3,277,629          5,092,632
====================================================================================================================

Furniture and equipment, net of accumulated depreciation
      of $61,973 and $26,728 at September 30,1996 and December 31,
      1995, respectively                                                                87,196             55,791
- --------------------------------------------------------------------------------------------------------------------
                                                                                  $  3,364,825          5,148,423
====================================================================================================================
Liabilities and Stockholders' Equity
====================================================================================================================

Current liabilities:

      Accrued expenses                                                            $    290,292            800,383 
      Accrued interest                                                                    --              115,011
      Demand notes payable                                                                --              125,000
      Note payable                                                                        --               75,000

- --------------------------------------------------------------------------------------------------------------------
Total current liabilities                                                              290,292          1,115,394
====================================================================================================================

Stockholders' equity
      Preferred stock, $.001 par value. Authorized 50,000,000 shares;
        none issued and outstanding                                                       --                 --
      Common stock $.001 par value. Authorized 80,000,000 shares;
        2,913,720 and 2,663,720 shares issued and outstanding
         at September 30, 1996 and December 31, 1995, respectively                       2,914              2,664
      Common stock subscribed. 182 shares
        at September 30,1996 and December 31,1995                                         --                 --
      Additional paid -in capital                                                   10,634,938          9,043,875
      Deficit accumulated during development stage                                  (7,452,377)        (4,880,968)
      Deferred compensation                                                           (110,400)          (132,000)
====================================================================================================================
                                                                                     3,075,075          4,033,571

      Less common stock subscriptions receivable                                          (218)              (218)
      Less treasury stock, at cost                                                        (324)              (324)
- --------------------------------------------------------------------------------------------------------------------

Total stockholders' equity                                                           3,074,533          4,033,029
- --------------------------------------------------------------------------------------------------------------------
                                                                                  $  3,364,825          5,148,423
====================================================================================================================
</TABLE>


          See accompanying notes to consolidated financial statements.


                                     Page 1

<PAGE>

ATLANTIC PHARMACEUTICALS, INC. AND SUBSIDIARIES
(a development stage company)
Consolidated Statements of Operations (Unaudited)

Three months ended September 30, 1996 and 1995 , the nine months ended September
30, 1996 and 1995 and the period from July 13, 1993 (inception) to September 30,
1996.



<TABLE>
<CAPTION>
====================================================================================================================================
                                                           Three Months Ended               Nine Months Ended        
                                                      -----------------------------     ---------------------------  Cumulative from
                                                      September 30,    September 30,    September 30,  September 30,   July 13, 1993
                                                          1996             1995             1996           1995       (inception) to
                                                                                                                       September 30,
                                                                                                                           1996
- ------------------------------------------------------------------------------------------------------------------------------------
<S>                                                      <C>                               <C>                               <C>   
Income:
            Grant income                                 52,531             --             52,531             --             52,531

Total Income                                             52,531             --             52,531             --             52,531
- ------------------------------------------------------------------------------------------------------------------------------------
Costs and expenses:
           Research and development               $     251,811          111,983          739,124          328,590        1,365,666
           License fees                                  10,000           50,000           10,000           62,500          173,500
           General and administrative                   892,382          890,659        2,002,251        1,511,466        5,475,168
- ------------------------------------------------------------------------------------------------------------------------------------

Total operating expenses                              1,154,193        1,052,642        2,751,375        1,902,555        7,014,334
- ------------------------------------------------------------------------------------------------------------------------------------

Operating Loss                                        1,101,662        1,052,642        2,698,844        1,902,555        6,961,803
====================================================================================================================================

Other expense (income):
            Interest income                             (37,933)             (25)        (127,434)             (25)        (135,000)
            Interest expense                               --             67,449             --            159,322          625,575
- ------------------------------------------------------------------------------------------------------------------------------------

Total other expense (income)                            (37,933)          67,424         (127,434)         159,297          490,575
====================================================================================================================================
Net loss                                          $  (1,063,729)      (1,120,066)      (2,571,410)      (2,061,852)      (7,452,377)
====================================================================================================================================
Net loss per share                                $       (0.38)         (224.01)           (0.95)         (400.13)          (11.15)
====================================================================================================================================
Shares used in calculation
        of net loss per share                         2,788,720            5,000        2,705,691            5,153          668,510
====================================================================================================================================
</TABLE>


          See accompanying notes to consolidated financial statements.


                                     Page 2

<PAGE>

ATLANTIC PHARMACEUTICALS, INC. AND SUBSIDIARIES
(a development stage company)
Consolidated Statements of Cash Flows (Unaudited)
Nine months ended September 30, 1996 and 1995 and the period from July 13, 1993
(inception) to September 30, 1996


<TABLE>
<CAPTION>
                                                                                                                    Cumulative from
                                                                                                                    July 13, 1996,
                                                                                  Nine  Months Ended                (inception) to
                                                                            September 30,     September 30,          September 30,
                                                                                1996              1995                   1996
- ------------------------------------------------------------------------------------------------------------------------------------
<S>                                                                       <C>                 <C>                     <C>        
Cash flows from operating activities:
      Net loss                                                            $  (2,571,410)      (2,061,851)             (7,452,377)
      Adjustments to reconcile net loss to net                                                                  
            cash used in operating activities:                                                                  
                 Expense relating to issuance of warrants                       139,000             --                   139,000
                 Compensation expense relating to                                                               
                      stock options                                              21,600           69,582                  98,382
                 Discount on notes payable                                                                      
                       bridge financing                                            --               --                   300,000
                 Depreciation                                                    35,245            9,071                  61,973
                 Changes in assets and liabilities:                                                             
                                                                                                                
                      Increase (decrease) in prepaid expenses                    15,500           (2,613)                (32,500)
                      Increase (decrease)  in accrued expenses                 (510,091)         445,771                 168,592
                      Increase (decrease)  in accrued interest                 (115,011)            --                   294,004
- ------------------------------------------------------------------------------------------------------------------------------------
                                                                                                                
Net cash used in operating activities                                        (2,985,167)      (1,540,040)             (6,422,926)
- ------------------------------------------------------------------------------------------------------------------------------------
                                                                                                                
Net cash used in investing activities - acquisition                                                             
      of furniture and equipment                                                (66,649)         (27,265)               (149,168)
- ------------------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:                                                                           
      Proceeds from issuance of demand notes payable                               --          1,010,000               2,395,000
      Repayment of demand notes payable                                        (125,000)            --                  (125,000)
      Proceeds from the issuance of notes payable -                                                             
            bridge financing                                                       --          1,500,000               1,200,000
      Proceeds of issuance of warrants                                             --               --                   300,000
      Repayment of notes payable -- bridge financing                            (75,000)            --                (1,500,000)
      Repurchase of common stock                                                   --               (324)                   (324)
      Proceeds from the issuance of common stock                              1,452,313            3,683               7,547,548

- ------------------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in)  financing activities                          1,252,313        2,513,359               9,817,224
- ------------------------------------------------------------------------------------------------------------------------------------
                                                                                                                
Net increase (decrease)  in cash and cash equivalents                        (1,799,503)         946,054               3,245,129
                                                                                                                
Cash and cash equivalents at beginning of period                              5,044,632          110,884                    --
- ------------------------------------------------------------------------------------------------------------------------------------
                                                                                                                
Cash and cash equivalents at end of period                                $   3,245,129        1,056,938               3,245,129
====================================================================================================================================
                                                                                                            
Supplemental disclosure of noncash financing
      activities:
            Issuance of common stock in exchange for
                 common stock subscriptions                        $      -            -                       7,027
            Conversion of demand notes payable and the
                 related accrued interest to common stock                 -            -                     2,442,304

====================================================================================================================================
</TABLE>


          See accompanying notes to consolidated financial statements.


                                     Page 3

<PAGE>

Atlantic Pharmaceuticals, Inc. and Subsidiaries
(a development stage company)

Notes to Consolidated Financial Statements (Unaudited)

September 30, 1996 and 1995


(1)  Basis of Presentation

     The accompanying financial statements have been prepared in accordance with
Generally Accepted Accounting Principles for interim financial statements. In
the opinion of management, the accompanying financial statements reflect all
adjustments, consisting of only normal recurring adjustments, considered
necessary for fair presentation. Operating results are not necessarily
indicative of results that may be expected for the year ended December 31, 1996.
These financial statements should be read in conjunction with the Company's 10 -
KSB for the year ended December 31, 1995. Accordingly, they do not include all
information and footnotes required by Generally Accepted Accounting Principles
for complete financial statements.

(2)  Stock Options

     In July 1995 the Company established the 1995 Stock Option Plan (the
"Plan") which provided for the granting of up to 650,000 options to purchase
stock to officers, directors, employees, and consultants.

     As of December 31, 1995, 403,402 options were available for future issuance
under the Company's 1995 Stock Option Plan. On January 15, 1996 the Company
granted options to purchase an aggregate of 315,000 shares of common stock
exercisable for seven years at an exercise price of $5.81 per share. Such
options shall vest and be exercisable ratably during the four year period
commencing January 15, 1997. On August 14, 1996 the Company granted options to a
new board member to purchase an aggregate of 10,000 shares of common stock
exercisable for ten years at an exercise price of $7.25 per share. Such options
are immediately exercisable. At the Company's annual meeting of stockholders
held on July 24, 1996, the stockholders approved an amendment to the Plan to
increase the total number of shares of common stock authorized for issuance
thereunder by 300,000 shares to a total of 950,000 shares of common stock. (See

I
tem 4 in Part 2). No options have been exercised as of September 30, 1996.

(3)  Private Placement

     Pursuant to a private placement, the Company received an aggregate of
$1,528,750 in consideration of the issuance of 140,000 and 110,000 shares of its
common stock, par value $.001 per share, to Dreyfus Growth and Value Funds,
Inc., a Maryland corporation,- Dreyfus Aggressive Growth Fund and to Premier
Strategic Growth Fund, a Massachusetts business trust, respectively. In
connection with this private placement the Company paid Paramount Capital Inc. a
finder's fee of $76,438 and issued to Paramount a warrant to purchase 12,500
shares of the Company's common stock at $6.73 per share, which warrant expires
on August 16, 2001.

(4)  Grant Income


                                       4

<PAGE>

     Optex Ophthalmologics, Inc. (Optex), a majority-owned subsidiary, has been
awarded $100,000 under Phase I of a Small Business Innovation Research (SBIR)
Program grant from the National Eye Institute (NEI) division of the National
Institutes of Health (NIH). This grant is for the reimbursements of salary and
consulting expenses incurred by Optex and is being paid in monthly increments of
approximately $15,000.


(5)  Issuance of Warrants

     The Company entered into an agreement with Paramount Capital, Incorporated
("Paramount") effective April 15, 1996 pursuant to which Paramount will on a
non-exclusive basis render financial advisory services to the Company. Two
warrants exercisable for shares of the Company's common stock were issued to
Paramount in connection with this agreement. 1) a warrant to purchase 25,000
shares of the Company's common stock at $10 per share, which warrant expires on
April 16, 2001. 2) a warrant to purchase 25,000 shares of the Company's common
stock at $8.05 per share, which warrant expires on June 16, 2001. In connection
with the issuance of these warrants the Company recognized an expense in the
amount of $139,000. This expense is included in general and administrative
expenses in the accompanying consolidated statements of operations.


                                       5

<PAGE>


     Management's Discussion and Analysis
     of Financial Condition and Results of Operations

     The following discussion of the results of operations and financial
condition should be read in conjunction with the Company's Annual Report on Form
10 - KSB for the year ended December 31, 1995.

Results of Operations for the quarter ended September 30, 1996

     For the third quarter ended September 30, 1996 grant income was $52,531
compared to no grant income in the third quarter of 1995.

     For the third quarter ended September 30, 1996 research and development
expense increased by 125% over the similar period in 1995, primarily due to the
fact that the Company increased its research and development activity.

     For the third quarter of 1996 general and administrative expense increased
by .2% over the third quarter of 1995.

     For the third quarter of 1996 there was no interest expense compared with
$67,449 in the third quarter of 1995, as all interest bearing debt was fully
paid at the beginning of 1996 with proceeds from the Company's initial public
offering (the "IPO"). For the third quarter of 1996 interest income was $37,993
compared to no interest income in the third quarter of 1995, as cash was
available during the third quarter of 1996 due to proceeds received from the
Company's IPO and pursuant to a private placement. (See Item 5 d in Part 2)

Results of Operations for the nine month period ended September 30, 1996

     For the nine months period ended September 30, 1996 grant income was
$52,531 compared to no grant income in the similar period of 1995.

     For the nine month period ended September 30, 1996 research and development
expense increased by 125% over the similar period in 1995 due to increased
spending on research and development activity.

     For the nine month period ended September 30, 1996 general and
administrative expense increased by 32% over the similar period of 1995 as a
result of additional marketing, legal, consulting and other general and
administrative expenses.

     For the nine month period ended September 30, 1996 there was no interest
expense compared with $159,322 in the similar period of 1995, as all interest
bearing debt was fully paid at the beginning of 1996 with proceeds from the
Company's IPO. For the nine month period ended September 30, 1996 interest
income was $127,434 compared to $25 interest income in the similar period of
1995, as cash was available during the nine months ended September 30, 1996 due
to proceeds received from the Company's IPO and the private placement.

Liquidity and Capital Resources

     Pursuant to a private placement, the Company received an aggregate of
$1,528,750 in consideration of the issuance of 140,000 and 110,000 shares of its
common stock, par value $.001 per share, to Dreyfus Growth and Value Funds,
Inc., a Maryland corporation,- Dreyfus 


                                       6

<PAGE>

Aggressive Growth Fund and to Premier Strategic Growth Fund, a Massachusetts
business trust, respectively. In connection with this private placement the
Company paid Paramount Capital Inc. a finder's fee of $76,438 and issued to
Paramount a warrant to purchase 12,500 shares of the Company's common stock at
$6.73 per share, which warrant expires on August 16, 2001.

     The Company has incurred an accumulated deficit of approximately $7,452,377
since inception and expects to continue to incur additional losses for the
foreseeable future.

     The Company anticipates that its current resources will be sufficient to
finance the Company's currently anticipated needs for operating and capital
expenditures for at least eleven months. In addition, the Company will attempt
to generate additional capital through a combination of collaborative
agreements, strategic alliances and equity and debt financings. However, no
assurance can be given that additional capital can be obtained through these
sources on attractive terms or at all. If the Company is not able to obtain
additional financing, the Company may cease operation and in all likelihood all
of the Company's security holders will lose their entire investment.

     The Company's working capital requirements will depend upon numerous
factors, including progress of the Company's research and development programs;
preclinical and clinical testing; timing and cost of obtaining regulatory
approvals; levels of resources that the Company devotes to the development of
manufacturing and marketing capabilities; technological advances; status of
competitors; and ability of the Company to establish collaborative arrangements
with other organizations.

Research and Development Activities

     The Company is continuing with preclinical studies with all four of its
technologies. The feasibility of the Catarex device has been tested ex vivo in
bovine, porcine and human cataract lens preparations. In these studies
successful removal of the lens was demonstrated with several generations of the
prototype of the device. The Company expects preclinical work on this product to
be completed by early 1997 and, if successful, to begin human trials shortly
thereafter. The Gemini Technologies ("Gemini") antisense technology is being
evaluated in a number of in vitro systems including Chronic Myelogenous
Leukemia, Respiratory Syncytial Virus and Androgenic Alopecia with plans to move
into in vivo studies in early 1997. The United States Patent and Trademark
Office has granted a "Notice of Allowance" for a patent application, for which
Gemini is the exclusive licensee, which concerns a method of using antisense
oligonucleotides to target specific mRNAs for destruction by RNase L. The
Channel Therapeutics' CT-3 product candidate is being tested in several
preclinical models of pain and inflammation with results continuing to show
potent analgesic and antinflammatory effects. Channel Therapeutics' cyclodextrin
technology has been tested in in vivo models of vascular injury and successfully
demonstrated a decrease in intimal thickening following vascular injury.

Future Outlook

     In addition to historical information, this report contains predictions,
estimates and other forward-looking statements within the meaning of section 27A
of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of
1934. Actual results could differ materially from any future performance
suggested in this report as a result of the risk factors set forth below and in
the Company's Annual Report on Form 10-KSB filed with the Securities and
Exchange Commission on March 30, 1996.


                                       7

<PAGE>

RISK FACTORS

Development Stage Companies; History of Operating Losses; Accumulated Deficit;
Uncertainty of Future Profitability

     Atlantic holds a majority interest in each of three development-stage
companies: Gemini, Optex and Channel (collectively, the "Operating Companies").
The technologies and products under development by each of the Operating
Companies are in the research and development stage and no revenues have been
generated to date. The Company does not expect to generate any revenues in the
near future. As a result, the Company must be evaluated in light of the
problems, delays, uncertainties and complications encountered in connection with
newly established businesses. The Company has incurred operating losses since
its inception. As of September 30, 1996, the Company's working capital and
accumulated deficit were $2,987,339 and $7,452,377, respectively. Operating
losses have resulted principally from costs incurred in identifying and
acquiring the technologies under development, research and development
activities and from general and administrative costs. The Company expects to
incur significant operating losses over the next several years, primarily due to
continuation and expansion of its research and development programs, including
preclinical studies and clinical trials for its pharmaceutical products under
development. The Company's ability to achieve profitability depends upon its
ability to develop pharmaceutical and medical device products, obtain regulatory
approval for its proposed products, and enter into agreements for product
development, manufacturing and commercialization. There can be no assurance that
the Company will ever achieve significant revenues or profitable operations from
the sale of its proposed products.

Qualification of Auditor's Opinion

     The Company's independent accountants have included an explanatory
paragraph in their report on the Company's financial statements at December 31,
1995, included in the Company's Annual Report on Form 10-KSB, which states that
the Company has suffered recurring losses from operations and has limited
capital resources, both of which raise substantial doubt about the Company's
ability to continue as a going concern.

Need for Additional Financing; Issuance of Securities by the Operating
Companies; Future Dilution

     The Company and each of the Operating Companies will require substantial
additional financing to continue their research, complete their product
development and to manufacture and market any products that may be developed.
Based solely upon its currently existing consulting, license, sponsored research
and employment agreements, the Company currently anticipates that it will spend
all of its current cash reserves by late-1997. There can be no assurance,
however, that the Company's current cash reserves will not be expended prior to
that time. The Company anticipates that further funds may be raised through
additional debt or equity financings conducted either by the Company or one or
more of the Operating Companies, or through collaborative ventures entered into
between the Company or one or more of the Operating Companies and a corporate
partner. There can be no assurance that the Company will be able to obtain
additional financing or that such financing, if available, can be obtained on
terms acceptable to the Company. If additional financing is not otherwise
available, the Company will be required to modify its business development plans
or reduce or cease certain or all of its operations. In such event, stockholders
of the Company will, in all likelihood, lose their entire investment.

     Although the Company and each Operating Company will seek to enter into
collaborative ventures with corporate sponsors to fund some or all of such
activities, as well as to manufacture 


                                       8

<PAGE>

or market the products which may be successfully developed, neither the Company
nor any of the Operating Companies currently has any such arrangements with
corporate sponsors, and there can be no assurance that the Company or any of the
Operating Companies will be able to enter into such ventures on favorable terms,
if at all. In addition, no assurance can be given that the Company or any of the
Operating Companies will be able to complete a subsequent private placement or
public offering of their securities. Failure by the Company or the Operating
Companies to enter into such collaborative ventures or to receive additional
funding to complete its proposed product development programs either through a
public offering or a private placement would have a material adverse effect on
the Company.

     In the event that the Company obtains any additional funding, such
financings may have a dilutive effect on the holders of the Company's
securities. In addition, if one or more of the Operating Companies raises
additional funds through the issuance and sale of its equity securities, the
interest of the Company and its stockholders in such Operating Company or
Companies, as the case may be, could be diluted and there can be no assurance
that the Company will be able to maintain its majority interest in any or all of
the Operating Companies. In addition, the interest of the Company and its
stockholders in each Operating Company will be diluted or subject to dilution to
the extent any such Operating Company issues shares or options to purchase
shares of its capital stock to employees, directors, consultants and others. In
the event that the Company's voting interest in any of the Operating Companies
falls below 50%, the Company may not be able to exercise an adequate degree of
control over the affairs and policies of such Operating Company as is currently
being exercised. In addition, the Company has outstanding currently exercisable
warrants to purchase 3,765,250 shares of its Common Stock at exercise prices
ranging from $5.50 to $6.60 which is below the per share price of the Common
Stock as currently quoted on the Nasdaq Small Cap market. The exercise of such
warrants, if any, may dilute the value of the Common Stock.

No Developed or Approved Products

     To achieve profitable operations, each of the Operating Companies, alone or
with others, must successfully develop, obtain regulatory approval for,
introduce and market its products under development. The great majority of the
preclinical and clinical development work for the products under development of
each Operating Company remains to be completed. None of the Operating Companies
has generated, or are expected to generate in the near future, any operating
revenues. In addition, none of the Operating Companies has manufacturing or
marketing facilities nor any contracts with any commercial manufacturing or
marketing entities. No assurance can be given that any of their product
development efforts will be successfully completed, that required regulatory
approvals will be obtained, or that any such products, if developed and
introduced, will be successfully marketed or achieve market acceptance.

Technological Uncertainty and Early Stage of Product Development

     The technologies and products which the Operating Companies intend to
develop are in early stages of development, require significant further
research, development and testing and are subject to the risks of failure
inherent in the development of products based on innovative or novel
technologies. These risks include the possibility that any or all of the
Operating Companies' proposed technologies and products will be found to be
ineffective or unsafe, that such technologies and products once developed,
although effective, are uneconomical to market, that third parties hold
proprietary rights that preclude the Operating Companies from marketing such
technologies and products or that third parties market superior or equivalent
technologies and products.


                                       9

<PAGE>

     The Operating Companies' agreements with their licensors do not contain any
representations by the licensors as to the safety or efficacy of the inventions
or discoveries covered thereby. The Company is unable to predict whether the
research and development activities it is funding through the Operating
Companies will result in any commercially viable products or applications.
Further, due to the extended testing required before marketing clearance can be
obtained from the United States Food and Drug Administration (the "FDA") or
other similar agencies, the Company is not able to predict with any certainty,
when, if ever, the Operating Companies will be able to commercialize any of
their proposed technologies or products.

Government Regulation; No Assurance of Product Approval

     The Company's proposed products and technologies are in very early stages
of development. The research, preclinical development, clinical trials, product
manufacturing and marketing to be conducted by the Company is subject to
regulation by the FDA and similar health authorities in foreign countries. FDA
approval of the Company's products, as well as the manufacturing processes and
facilities, if any, used to produce such products will be required before such
products may be marketed in the U.S. The process of obtaining approvals from the
FDA is costly, time consuming and often subject to unanticipated delays. There
can be no assurance that approvals of the Company's proposed products, processes
or facilities will be granted on a timely basis, or at all. In addition, new
government regulations may be established that could delay or prevent regulatory
approval of the Company's products under development. Any future failure to
obtain or delay in obtaining any such approval will materially and adversely
affect the ability of the Company to market its proposed products and the
business, financial condition and results of operations of the Company.

     Even if regulatory approval of the Company's proposed products is granted,
such approval may include significant limitations on indicated uses for which
any such products could be marketed. Further, even if such regulatory approvals
are obtained, a marketed drug or device and its manufacturer are subject to
continued review, and later discovery of previously unknown problems may result
in restrictions on such product or manufacturer, including withdrawal of the
product from the market. Failure of the Company to obtain and maintain
regulatory approval of its proposed products, processes or facilities would have
a material adverse effect on the business, financial condition and results of
operations of the Company.

     The Company's proposed products and technologies may also be subject to
certain other federal, state and local government regulations, including, but
not limited to, the Federal Food, Drug and Cosmetic Act, the Environmental
Protection Act, the Occupational Safety and Health Act, and state, local and
foreign counterparts to certain of such acts. The Company intends to develop its
business to strategically address regulatory needs. However, the Company cannot
predict the extent of the adverse effect on its business or the financial and
other costs that might result from any government regulations arising out of
future legislative, administrative or judicial action.

Dependence on License and Sponsored Research Agreements

     Each Operating Company depends on its license agreements that form the
basis of its proprietary technology and certain of the Operating Companies rely
on their sponsored research agreements for their research and development
efforts. The license agreements that have been entered into by each Operating
Company typically require the use of due diligence in developing and bringing
products to market and the payment of certain milestone amounts that in some
instances may be substantial. Certain of the Operating Companies are also
obligated to make 


                                       10

<PAGE>

royalty payments on the sales, if any, of products resulting from such licensed
technology and, in some instances, are responsible for the costs of filing and
prosecuting patent applications and maintaining issued patents. As the Company
and certain of the Operating Companies do not currently have laboratory
facilities, certain research and development activities of each Operating
Company are intended to be conducted by universities or other institutions
pursuant to sponsored research agreements. The sponsored research agreements
entered into and contemplated to be entered into by the Operating Companies
generally require periodic payments on an annual or quarterly basis.

     If any Operating Company does not meet its financial, development or other
obligations under either its license agreements or its sponsored research
agreements in a timely manner, such Operating Company could lose the rights to
its proprietary technology or the right to have the applicable university or
institution conduct its research and development efforts. If the rights of any
Operating Company under its license or sponsored research agreements are
terminated, such termination could have a material adverse effect on the
business and research and development efforts of the Company and the applicable
Operating Company.

Uncertainty Regarding Patents and Proprietary Rights

     The success of Atlantic and of each of the Operating Companies will depend
in large part on their, or their licensors`, ability to obtain patents, defend
their patents, maintain trade secrets and operate without infringing upon the
proprietary rights of others, both in the United States and in foreign
countries. The patent position of firms relying upon biotechnology is highly
uncertain and involves complex legal and factual questions. To date there has
emerged no consistent policy regarding the breadth of claims allowed in
biotechnology patents or the degree of protection afforded under such patents.
The Company relies on certain United States patents and pending United States
and foreign patent applications relating to various aspects of its products and
processes. All of these patents and patent applications are owned by third
parties and are licensed or sublicensed to the Operating Companies. The patent
application and issuance process can be expected to take several years and
entail considerable expense to the Company, as it is responsible for such costs
under the terms of such license agreements. There can be no assurance that
patents will issue as a result of any such pending applications or that the
existing patents and any patents resulting from such applications will be
sufficiently broad to afford protection against competitors with similar
technology. In addition, there can be no assurance that such patents will not be
challenged, invalidated, or circumvented, or that the rights granted thereunder
will provide competitive advantages to the Company. The commercial success of
the Company will also depend upon avoiding infringement of patents issued to
competitors. A United States patent application is maintained under conditions
of confidentiality while the application is pending, so the Company cannot
determine the inventions being claimed in pending patent applications filed by
its competitors. Litigation may be necessary to defend or enforce the Company's
patent and license rights or to determine the scope and validity of others'
proprietary rights. Defense and enforcement of patent claims can be expensive
and time consuming, even in those instances in which the outcome is favorable to
the Company, and can result in the diversion of substantial resources from the
Company's other activities. An adverse outcome could subject the Company to
significant liabilities to third parties, require the Company to obtain licenses
from third parties, or require the Company to alter its products or processes,
or cease altogether any related research and development activities or product
sales, any of which may have a material adverse effect on Atlantic's and the
Operating Companies' respective businesses, results of operations and financial
condition.

     The Operating Companies have certain licenses from third parties and in the
future may 


                                       11

<PAGE>

require additional licenses from other parties to develop, manufacture and
market commercially viable products effectively. The Company's commercial
success will depend in part on obtaining and maintaining such licenses. There
can be no assurance that such licenses can be obtained or maintained on
commercially reasonable terms, if at all, that the patents underlying such
licenses will be valid and enforceable or that the proprietary nature of the
patented technology underlying such licenses will remain proprietary.

     The Company relies substantially on certain technologies that are not
patentable or proprietary and are therefore available to its competitors. The
Company also relies on certain proprietary trade secrets and know-how that are
not patentable. Although Atlantic and the Operating Companies have taken steps
to protect their unpatented trade secrets and know-how, in part through the use
of confidentiality agreements with their employees, consultants and contractors,
there can be no assurance that these agreements will not be breached, that
Atlantic and the Operating Companies would have adequate remedies for any
breach, or that Atlantic's or any Operating Company's trade secrets will not
otherwise become known or be independently developed or discovered by
competitors.

     The success of the Company is also dependent upon the skills, knowledge,
and experience of its scientific and technical personnel. The management and
scientific personnel of Atlantic and the Operating Companies have been recruited
primarily from other scientific companies, pharmaceutical companies, and
academic institutions. In some cases, these individuals may be continuing
research in the same areas with which they were involved prior to joining the
Company. Although the Company has not received any notice of any claims and
knows of no basis for any claims, it could be subject to allegations of
violation of trade secrets and similar claims which could, regardless of merit,
be time consuming, expensive to defend, and have a material adverse effect on
Atlantic's or the Operating Companies' respective businesses, results or
operations and financial condition.

Uncertainty of Product Pricing and Reimbursement; Health Care Reform and Related
Measures

     The levels of revenues and profitability of pharmaceutical and/or
biotechnology products and companies may be affected by the continuing efforts
of governmental and third party payors to contain or reduce the costs of health
care through various means and the initiatives of third party payors with
respect to the availability of reimbursement. For example, in certain foreign
markets, pricing or profitability of prescription pharmaceuticals is subject to
government control. In the United States there have been, and the Company
expects that there will continue to be, a number of federal and state proposals
to implement similar governmental control. Although the Company cannot predict
what legislative reforms may be proposed or adopted or what actions federal,
state or private payors for health care goods and services may take in response
to any health care reform proposals or legislation may have on its business, the
existence and pendency of such proposals could have a material adverse effect on
the Company in general. In addition, the Company's ability to commercialize
potential pharmaceutical and/or biotechnology products may be adversely affected
to the extent that such proposals have a material adverse effect on other
companies that are prospective collaborators with respect to any of the
Company's product candidates.

     In addition, in both the United States and elsewhere, sales of medical
products and services are dependent in part on the availability of reimbursement
to the consumer from third party payors, such as government and private
insurance plans. Third party payors are increasingly challenging the prices
charged for medical products and services. If the Operating Companies succeed in
bringing one or more products to the market, there can be no assurance that
these products will be considered cost effective and that reimbursement to the
consumer will be available or will be 


                                       12

<PAGE>

sufficient to allow the Operating Companies to sell their products on a
competitive basis.

Dependence Upon Key Personnel and Consultants

     The Company is highly dependent upon its officers and directors, as well as
its Scientific Advisory Board members, consultants and collaborating scientists.
The Company has only four full-time employees, each of whom is an officer of the
Company, and the loss of any of these individuals would have a material adverse
effect on the Company. Although the Company has entered into employment
agreements with each of its employees, such employment agreements do not contain
provisions which would prevent such employees from resigning their positions
with the Company at any time. The Company does not maintain key-man life
insurance policies on any of such key personnel. Each of the Company's
non-employee directors, advisors and consultants devotes only a portion of his
or her time to the Company's business. The loss of certain of these individuals,
including Lindsay A. Rosenwald, M.D., a Director of the Company, would have a
material adverse effect on the Company.

     The Company and each of the Operating Companies may seek to hire additional
personnel. Competition for qualified employees among pharmaceutical and
biotechnology companies is intense, and the loss of any of such persons, or the
inability to attract, retain and motivate any additional highly skilled
employees required for the expansion of the Company's and each of the Operating
Company's activities, could have a material adverse effect on the Company or
such Operating Company. There can be no assurance that the Company or the
Operating Companies will be able to retain their existing personnel or to
attract additional qualified employees.

     The Company's scientific advisors are employed on a full time basis by
unrelated employers and some have one or more consulting or other advisory
arrangements with other entities which may conflict or compete with their
obligations to the Company or such Operating Company. Inventions or processes
discovered by such persons, other than those to which the licenses may relate,
those to which the Company or any of the Operating Companies are able to acquire
licenses for or those which were invented while performing consulting services
on behalf of the Company or utilizing the Company's facilities, will not become
the property of the Company or such Operating Company, but will remain the
property of such persons or of such persons' full-time employers. Failure to
obtain needed patents, licenses or proprietary information held by others could
have a material adverse effect on the Company and such Operating Company.

Competition

     Each Operating Company's proposed business is characterized by intensive
research efforts and intense competition. Many companies, research institutes,
hospitals and universities are working to develop products and technologies in
the Company's fields of research. Most of these entities have substantially
greater financial, technical, manufacturing, marketing, distribution and other
resources than the Company and the Operating Companies. Certain of such
companies have experience in undertaking testing and clinical trials of new or
improved products similar in nature to that which the Operating Companies are
developing. In addition, certain competitors have already begun testing of
similar compounds or processes and may introduce such products or processes
before any of the Operating Companies. Accordingly, other companies may succeed
in developing products earlier than the Operating Companies or that are more
effective than those proposed to be developed by the Operating Companies.
Further, it is expected that competition in each Operating Company's field will
intensify. There can be no assurance that the Company or the Operating Companies
will be able to compete successfully in the future.


                                       13

<PAGE>

Dependence on Others for Clinical Development of, Regulatory Approvals for,
and Marketing of Pharmaceutical Products

     Neither the Company nor any of the Operating Companies currently has the
resources to directly manufacture, market or sell any of the Operating
Companies' proposed products and none of them currently intend to acquire such
resources. The Company anticipates that it will in the future enter into
collaborative agreements with pharmaceutical and/or biotechnology companies for
the development of, clinical testing of, seeking of regulatory approval for,
manufacturing of, marketing of, and commercialization of certain of its proposed
products. The Company and the Operating Companies may in the future grant to its
collaborative partners rights to license and commercialize any products
developed under these collaborative agreements, and such rights would limit the
Company's and the Operating Companies' flexibility in considering alternatives
for the commercialization of such products. Under such agreements, the Company
and the Operating Companies may rely on their respective collaborative partners
to conduct research efforts and clinical trials on, obtain regulatory approvals
for, and manufacture, market and commercialize certain of the Operating
Companies' products. The Company expects that the amount and timing of resources
devoted to these activities generally will be controlled by each such individual
partner. The inability of any of the Operating Companies to acquire such third
party manufacturing, distribution, marketing and selling arrangements for such
Operating Company's anticipated products will have a material adverse effect on
the Company's and such Operating Company's business. There can be no assurance
that the Company or any of the Operating Companies will be able to enter into
any arrangements for the manufacturing, marketing and selling of its products,
or that, if such arrangements are entered into, such future partners will be
successful in commercializing products or that the Company or the relevant
Operating Company will derive any revenues from such arrangements.

Risk of Product Liability; No Insurance

     Should any of the Operating Companies develop and market any products, the
marketing of such products, through third-party arrangements or otherwise, may
expose the Company and such Operating Company to product liability claims.
Neither the Company nor any of the Operating Companies presently carry product
liability insurance. Upon clinical testing or commercialization of the Operating
Companies' proposed products, certain of the licensors require that the
applicable Operating Company obtain product liability insurance. There can be no
assurance that the Operating Companies will be able to obtain such insurance or,
if obtained, that such insurance can be acquired in sufficient amounts to
protect the Company and such Operating Company against such liability or at a
reasonable cost. Certain of the Operating Companies are required to indemnify
such Operating Company's licensors against any product liability claims incurred
by them as a result of the products developed by such Operating Company. Each
Operating Company's licensors have not made, and are not expected to make, any
representations as to the safety or efficacy of the inventions covered by the
licenses or as to any products which may be made or used under rights granted
therein or thereunder.

Control by Existing Stockholders

     Two principal stockholders of the Company beneficially own approximately
32% of the outstanding shares of Common Stock. Accordingly, such holders, if
acting together, may have the ability to exert significant influence over the
election of the Company's Board of Directors and other matters submitted to the
Company's stockholders for approval. The voting power of these holders may
discourage or prevent any proposed takeover of the Company.


                                       14

<PAGE>

No Assurance of Identification of Additional Projects

     The Company is engaged in the development and commercialization of
biomedical and pharmaceutical products and technologies. From time to time, if
the Company's resources allow, the Company may explore the acquisition and
subsequent development and commercialization of additional biomedical and
pharmaceutical products and technologies. However, there can be no assurance
that the Company will be able to identify any additional products or
technologies and, even if suitable products or technologies are identified, the
Company does not expect to have sufficient resources to pursue any such products
or technologies in the foreseeable future.

Certain Interlocking Relationships; Potential Conflicts of Interest

     Three of the five members of the Board of Directors and one of the officers
of the Company are directors and/or full-time officers of Paramount Capital,
Incorporated, a New York-based venture capital firm specializing in
biotechnology companies ("Paramount"). In the regular course of its business,
Paramount identifies, evaluates and pursues investment opportunities in
biomedical and pharmaceutical products, technologies and companies. The Company
has entered into several agreements with Paramount pursuant to which Paramount
provides financial advisory services to the Company. Generally, Delaware
corporate law requires that any transactions between the Company and any of its
affiliates be on terms that, when taken as a whole, are substantially as
favorable to the Company as those then reasonably obtainable from a person who
is not an affiliate in an arms-length transaction. Nevertheless, Paramount is
not obligated pursuant to any agreement or understanding with the Company to
make any additional products or technologies available to the Company, nor can
there be any assurance, and the Company does not expect and purchasers of the
securities offered hereby should not expect, that any biomedical or
pharmaceutical product or technology identified by Paramount in the future will
be made available to the Company. In addition, certain of the officers and
directors of the Company may from time to time serve as officers or directors of
other biopharmaceutical or biotechnology companies. There can be no assurance
that such other companies will not in the future have interests in conflict with
those of the Company.

No Dividends

     The Company has not paid any cash dividends on its Common Stock since its
formation and does not anticipate paying any cash dividends in the foreseeable
future. Management anticipates that all earnings and other resources of the
Company, if any, will be retained by the Company for investment in its business.

Possible Delisting from Nasdaq and Market Illiquidity

     Although the Common Stock is quoted on Nasdaq, continued inclusion of such
securities on Nasdaq will require that (i) the Company maintain at least
$2,000,000 in total assets and $1,000,000 in capital and surplus, (ii) the
minimum bid price for the Common Stock be at least $1.00 per share, (iii) the
public float consists of at least 100,000 shares of Common Stock, valued in the
aggregate at more than $200,000, (iv) the Common Stock have at least two active
market makers and (v) the Common Stock be held by at least 300 holders. If the
Company is unable to satisfy such maintenance requirements, the Company's
securities may be delisted from the Nasdaq System. In such event, trading, if
any, in the Common Stock would thereafter be conducted in the over-the-counter
market in the "pink sheets" or the NASD's "Electronic Bulletin Board."
Consequently, the liquidity of the Company's securities could be materially
impaired, not only in the number of securities that can be bought and sold at a
given price, but also through delays in the 


                                       15

<PAGE>

timing of transactions and reduction in security analysts' and the media's
coverage of the Company, which could result in lower prices for the Company's
securities than might otherwise be attained and could also result in a larger
spread between the bid and asked prices for the Company's securities.

     In addition, if the Common Stock is delisted from trading on Nasdaq and the
trading price of the Common Stock is less than $5.00 per share, trading in the
Common Stock would also be subject to the requirements of Rule 15g-9 promulgated
under the Securities Exchange Act of 1934, as amended (the "Exchange Act").
Under such rule, broker/dealers who recommended such low-priced securities to
persons other than established customers and accredited investors must satisfy
special sales practice requirements, including a requirement that they make an
individualized written suitability determination for the purchaser and receive
the purchaser's written consent prior to the transaction. The Securities
Enforcement Remedies and Penny Stock Reform Act of 1990 also requires additional
disclosure in connection with any trades involving a stock defined as a penny
stock (generally, according to recent regulations adopted by the Securities and
Exchange Commission, any equity security not traded on an exchange or quoted on
Nasdaq that has a market price of less than $5.00 per share, subject to certain
exceptions), including the delivery, prior to any penny stock transaction, of a
disclosure schedule explaining the penny stock market and the risks associated
therewith. Such requirements could severely limit the market liquidity of the
Common Stock. There can be no assurance that the Common Stock will not be
delisted or treated as penny stock.

Liquidity of Investment

     The Common Stock is traded on the Nasdaq Small Cap market, and the Common
Stock lacks the liquidity of securities traded on the principal trading markets.
Accordingly, an investor may be unable to promptly liquidate an investment in
the Common Stock.

Possible Volatility of Stock Price.

     The market price of the Company's common stock, like the stock prices of
many publicly traded biotechnology and smaller pharmaceutical companies, has
been and may continue to be highly volatile.

Environmental Regulation.

     In connection with its research and development activities, 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 and wastes. Although the
Company believes that it has complied with these laws and regulations in all
material respects and has not been required to take any 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.

Possible Adverse Effect of Shares Eligible for Future Sale

     788,951 of the shares of Common Stock of the Company currently outstanding
are "restricted securities," and such shares are owned by "affiliates" (the
"Selling Stockholders") of the Company, as those terms are defined in Rule 144
promulgated under the Securities Act. The Company's officers, directors and
certain stockholders, including the Selling Securityholders, have agreed not to
sell or otherwise dispose of any of their shares of Common Stock now owned


                                       16

<PAGE>

or issuable upon the exercise of warrants for a period of 18 months from the
date of the Company's initial public offering on December 14, 1995 or such
longer period as may be required by applicable state securities laws, without
the prior written consent of Joseph Stevens & Company, L.P., the underwriter
that managed the Company's initial public offering (the "Underwriter"). Absent
registration under the Securities Act, the sale of such shares is subject to
Rule 144 as promulgated under the Securities Act. The Selling Securityholders
are subject to the 180-day lock-up described above, but may commence selling
their securities at any time, provided prior consent is given by the Company.
Finally, the Company has granted unlimited "piggy-back" and two S-3 registration
rights per year to certain stockholders with respect to such shares of Common
Stock and any shares of Common Stock purchased in the future by such investors,
which shares will be subject to the 180-day lock-up described above. Finally,
the Company has granted to holders of the Warrants issued to the Underwriter in
connection with the initial public offering the right on two occasions (one at
the expense of the Company) to file a registration statement under the
Securities Act covering the securities underlying such Warrants and the
additional right to include such securities in any registration filed by the
Company under the Securities Act.

     The Company has sold to the Underwriter, for nominal consideration, 165,000
Warrants, each to purchase one Unit (consisting of one share of Common Stock and
a warrant to purchase one share of Common Stock at an exercise price of $6.05)
at a purchase price per Unit equal to $6.60 per Unit, exercisable over a period
of four years commencing December 14, 1996. As long as the Warrants remain
unexercised, the terms under which the Company could obtain additional capital
may be adversely affected.

     No prediction can be made as to the effect, if any, that sales of Units,
Warrants and/or Common Stock or the availability of such securities for sale
will have on the market prices prevailing from time to time for the Units, the
Warrants and/or the Common Stock. Nevertheless, the possibility that substantial
amounts of such securities may be sold in the public market may adversely affect
prevailing market prices for the Company's equity securities, and could impair
the Company's ability to raise capital in the future through the sale of equity
securities.

Antitakeover Effects of Provisions of The Certificate of Incorporation and
Delaware Law

     Atlantic's Certificate of Incorporation authorizes the issuance of up to
50,000,000 shares of "blank check" Preferred Stock. The Board of Directors has
the authority to issue the Preferred Stock in one or more series and to fix the
relative rights, preferences and privileges and restrictions thereof, including
dividend rights, dividend rates, conversion rights, voting rights, terms of
redemption, redemption prices, liquidation preferences and the number of shares
constituting any series or the designation of such series. The issuance of
Preferred Stock may have the effect of delaying, deferring or preventing a
change in control of the Company without further action by the stockholders of
the Company. The issuance of Preferred Stock with voting and conversion rights
may adversely affect the voting power of the holders of the Common Stock,
including the loss of voting control to others.

     The Company is subject to Section 203 of the Delaware General Corporation
Law which, subject to certain exceptions, prohibits a Delaware corporation from
engaging in any business combination with any interested stockholder for a
period of three years following the date that such stockholder became an
interested stockholder. In general, Section 203 defines an interested
stockholder as any entity or person beneficially owning 15% or more of the
outstanding voting stock of the corporation and any entity or person affiliated
with or controlling or controlled by such entity or person. The foregoing
provisions could have the effect of discouraging others from


                                       17

<PAGE>

making tender offers for the Company's shares and, as a consequence, they also
may inhibit fluctuations in the market price of the Company's shares that could
result from actual or rumored takeover attempts. Such provisions also may have
the effect of preventing changes in the management of the Company.


                                       18

<PAGE>

P
art Two - Other Information

Item 4. Submission of matters to a vote of security holders

     The Company's annual meeting of stockholders was held on July 24, 1996 upon
notice. Total shares voted were 1,892,353 out of 2,663,720 entitled to vote.

     Matters voted on:

     1.   Election of directors:                   for              withheld
                                                   ---              --------
          Jon D. Lindjord                          1,892,353             0
          John K.A. Predergast, Ph.D.              1,892,348             5
          Steve H. Kanzer                          1,892,348             5
          Lindsay A. Rosenwald, M.D.               1,892,353             0

          Accordingly following the July 24, 1996 meeting the Board of Directors
          was re-elected in its entirety.

     2.   To approve an amendment to the Company's 1995 Stock Option Plan (a) to
          increase the total number of shares authorized for issuance thereunder
          by 300,000 shares to a total of 950,000 shares. (b) to increase the
          number of shares subject to option that a non-employee board member is
          automatically granted thereunder on the initial date of election or
          appointment to the Board from 5,000 shares to 10,000 shares and (c)
          commencing with this year's annual meeting to increase the number of
          shares subject to an option that a continuing non-employee Board
          member is automatically granted thereunder on the date of each annual
          meeting from 1,000 shares to 2,000 shares.

          For              Against              Abstain              Not voted
          ---              -------              -------              ---------
          1,007,140        41,805               12,600               830,808
          ---------        ------               ------               -------

     3.   To ratify the Board of Director's selection of KPMG Peat Marwick LLP
          to serve as the Company's independent auditors for the year ending
          December 31, 1996.

                    For                 Against               Abstain
                    ---                 -------               -------
                    1,892,112           240                   1
                    ---------           ---                   -


Item 5. Other information

     a.   Effective August 14, 1996 Yuichi Iwaki, M.D., Ph.D., was appointed to
a new seat on the Company Board of Directors.This appointment brings the total
membership on Atlantic's Board of Directors to five. In addition Dr. Iwaki was
retained as a consultant and will assume the position of the Chairman of the
Scientific Advisory Board of the Company. Dr. Iwaki will perform his services as
an independent contractor and not as an employee of the Company. (See exhibit
10.17)


                                       19

<PAGE>

          Dr. Iwaki, 46, is the Director, Transplantation Immunology and
Immunogenetics Laboratory in the Department of Urology at the University of
Southern California and is a Professor of Urology, Surgery and Pathology at the
University of Southern California School of Medicine. Prior to joining
Atlantic's Board of Directors, he held various academic appointments at the
University of Southern California School of Medicine, the University of
Pittsburgh, the University of California, Sapporo Medical School, Nihon
University School of Medicine, and Tokai School of Medicine. Dr. Iwaki has also
held various management positions at hospitals and laboratories, including the
University of Southern California, Sharp Memorial Hospital, and University
Presbyterian Hospital. He received his M.D. and Ph.D. from Sapporo Medical
School in Japan.

     b.   The Company entered into an agreement with Paramount Capital,
Incorporated ("Paramount") effective April 15, 1996 pursuant to which Paramount
will on a non-exclusive basis render financial advisory services to the Company.
Dr. Lindsay A. Rosenwald, M.D., a director of the Company, is the Chairman and
Chief Executive Officer of Paramount. ( See exhibit 10.15 ). Two warrants
exercisable for shares of the Company's common stock were issued to Paramount in
connection with this agreement. (See exhibits 10.19 and 10.20).

     c.   The Company entered into an agreement effective June 23, 1996 with UI
USA, the U.S. subsidiary of the merchant bank of Credit Agricole, the second
largest banking house in Europe, and Paramount to represent Atlantic's
technologies to leading European pharmaceutical and biomedical companies.

          Credit Agricole has over $350 billion in assets and recently acquired
control of Indosuez, another large French bank. UI USA, Inc. is the New York
based, US arm of Credit Agricole's merchant bank, Union d'Etudes et
d'Investissements (UI), based in Paris. UI invests in private companies in
Europe, and also advises European companies on mergers, acquisitions, private
placements and strategic alliances. UI USA, similarly, advises US companies
which hope to acquire or merge with a European company, or set up a joint or
strategic alliance in Europe. (See exhibit 10.16 ).

     d.   On August 15, 1996 two mutual funds managed by the Dreyfus Corporation
purchased an aggregate of 250,000 shares of Atlantic's common stock at a 15
percent discount to market. As a result of these purchases, these funds now own
approximately 8 percent of Atlantic's Common Stock. ( See item 6 b ). A warrant
exercisable for shares of the Company's common stock was issued to Paramount in
connection with the private placements. (See exhibit 10.21).


Item 6. Exhibits and reports on form 8-K

a.   Exhibits

10.  Material Contracts

     (a)  Financial advisory services between the Company and Paramount Capital,
          Incorporated. (Dated April 15,1996).

     (b)  Financial services agreement between the Company and UI USA, Inc. and
          Paramount Capital,Inc.


                                       20

<PAGE>

     (c)  Consulting agreement between the Company and Yuichi Iwaki, M.D., Ph.D.

     (d)  1995 Stock Option Plan as amended.

     (e)  Warrant to Paramount to purchase 25,000 common stock.

     (f)  Warrant to Paramount to purchase 25,000 common stock.

     (g)  Warrant to Paramount to purchase 12,500 common stock.

27.  Financial Data Schedule

b.   Form 8-K Reports

     On August 30, 1996 the Company filed a report on Form 8-K stating that the
Company had, pursuant to a private placement, issued 140,000 and 110,000 shares
of its common stock to Dreyfus Growth and Value Funds, Inc. and Premier
Strategic Growth Fund in consideration of $ 856,100 and $ 672,650, respectively.


                                       21

<PAGE>


Signatures

     Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf.


Atlantic Pharmaceuticals, Inc.

September 30, 1996



                                   Jon D. Lindjord
                              -------------------------------
                              Jon D. Lindjord
                              Chief Executive Officer and President


                                   Shimshon Mizrachi
                              -------------------------------
                              Shimshon Mizrachi
                              Controller
                              Principal Accounting and Financial Officer


                                       22

<PAGE>


                                  EXHIBIT INDEX

Exhibit No.              Description
- -----------              -----------

10.15     Financial agreement between the Company and Paramount dated September
          4,1996 (effective Date of April 15,1996)

10.16     Financial agreement between the Company, Paramount and UI USA dated
          june 23,1996

10.17     Consultancy agreement between the Company and Yuichi Iwaki dated July
          31,1996

10.18     1995 Stock Option Plan, as amended.

10.19     Warrant to purchase to Paramount for 25,000 shares

10.20     Warrant to purchase to Paramount for 25,000 shares

10.21     Warrant to purchase to Paramount for 12,500 shares

27.1      Financial Data Schedule






                                        September 4, 1996





Atlantic Pharmaceuticals, Inc.
142 Cypress Point Road
Half Moon Bay, CA 94019
Attn:    J.D. Lindjord, President and CEO

Dear Sirs:

     This letter (this "Agreement") will confirm the understanding and agreement
between Paramount Capital, Incorporated ("Paramount") and Atlantic
Pharmaceuticals, Inc. (the "Company") as follows:

     1.   The Company hereby engages Paramount, and Paramount hereby accepts
such engagement effective as of April 15, 1996 (the "Effective Date"), on a
non-exclusive basis to render financial advisory services to the Company. The
term of Paramount's engagement hereunder shall extend from the Effective Date
hereof through June 15, 1996 (the "Initial Term") and shall be renewed at the
sole option of the Company on a monthly basis thereafter (the Initial Term and
any renewals thereof being referred to as the "Term").

     2.   The Company shall make available to Paramount all publicly available
information concerning the business, assets, operations, financial condition and
prospects of the Company which it reasonably requests in connection with the
performance of its obligations hereunder.

     3.   As compensation for the services rendered by Paramount hereunder
during the Term, the Company shall pay Paramount
 as follows:

          (a)  The amount of Five Thousand Dollars ($5,000) per month, payable
in advance.

          (b)  A retainer payable in warrants to Paramount or its designees to
purchase 25,000 shares of the Company's common stock at an exercise price of
$10.00. In the event that this Agreement is renewed beyond the Initial Term by
the Company, the Company further agrees to issue to Paramount warrants to
purchase an additional 25,000 shares of the Company's common stock at an
exercise price equal to the price per share of the Company's common stock on the
effective date of such renewal of this Agreement. The

<PAGE>

parties agree that no additional warrants will be issued in the event of
additional renewals, unless agreed to in advance by the parties.

          (c) `If permitted by applicable regulations, upon the exercise of any
warrants between the effective date of this Agreement and December 13, 1996, the
Company shall pay Paramount 1% of any proceeds received.

     4.   In addition, upon the closing of any Investment (as defined below)
during the Term or during the twelve-month period following the expiration or
earlier termination of the Term, the Company shall pay to Paramount a fee in an
amount equal to 7% of the aggregate value of such Investment (payable in the
same form as received by the Company (e.g., cash or stock) within 30 days of the
receipt of such Investment by the Company) and shall issue to Paramount warrants
to purchase an amount of securities equal to 10% of the securities sold by the
Company in connection with such Investment at an exercise price of 110% of the
price of such securities, exercisable until five years from the date of issuance
of such warrants; provided, however, with respect to Investments made by parties
listed on Schedule I, the Company shall pay to Paramount a fee in an amount
equal to 5% of the aggregate value of such Investment and shall issue to
Paramount warrants to purchase an amount of securities equal to 5% of the
securities sold as part of such Investment at an exercise price of 110% of the
price of such securities, exercisable until five years from the date of issuance
of such warrants. For the purposes of this Agreement, an Investment shall be any
sale of securities by the Company or its affiliates during the Term or during
the twelve-month period following the expiration of the Term to an investor
first introduced to the Company by or through Paramount during or prior to the
Term. In the event that it could be reasonably interpreted that Paramount is
entitled to compensation under this Agreement as well as any other agreement
between Paramount and the Company, then this Agreement shall control unless such
other agreement specifically states that it controls.

     5.   The Company shall reimburse Paramount for its reasonable out-of-pocket
expenses (including without limitation, reasonable professional fees and
disbursements) incurred in connection with its engagement hereunder with respect
to the services to be rendered by it; provided, however, that if any individual
expense item shall exceed $500.00, Paramount agrees to obtain prior
authorization for such item from the Company.

     6.   Except as contemplated by the terms hereof or as required by
applicable law or pursuant to an order entered or subpoena issued by a court of
competent jurisdiction, Paramount shall keep confidential all material
non-public information provided to it by the Company, if any, and shall not
disclose such information to any third party, other than such of its employees
and advisors as Paramount determines to have a need to know for a period of 2
years following the date of such disclosure. This provision shall not apply to
any information which: (a) was in Paramount's possession or control prior to the
date of disclosure; (b) was in the public domain or enters into the public
domain through no


                                       2.

<PAGE>

improper act on Paramount's part or on the part of any of Paramount's employees;
(c) is required to be disclosed by legal, administrative or judicial process; or
(d) is rightfully given to Paramount from sources independent of the Company.

     7.   Except as required by applicable law, any advice to be provided by
Paramount under this Agreement shall not be disclosed publicly or made available
to third parties without the prior approval of Paramount, and accordingly such
advice shall not be relied upon by any person or entity other than the Company.

     8.   The Company agrees that Paramount has the right following the closing
of a transaction initiated or negotiated by Paramount to place advertisements in
financial and other newspapers and journals at its own expense describing its
services to the Company hereunder subject to applicable regulatory restrictions
and, provided that Paramount will submit a copy of any such advertisements to
the Company for its prior approval.

     9.   The Company shall indemnify each of Paramount, its successors and
assigns, and the directors, officers, employees and agents thereof (the
"Paramount Indemnities"), and hold each Paramount Indemnity harmless from and
against, any and all liabilities, damages, losses, settlements, claims, actions,
suits, penalties, fines, costs or expenses (including, without limitation,
reasonable attorneys' fees) (any of the foregoing, a "Claim") incurred by or
asserted against any Paramount Indemnity, arising from, in connection with or
occurring as a result of this Agreement or any introduction made pursuant
hereto; provided, however, that this indemnity shall not apply to the extent
that it is finally judicially determined that such claims resulted from the
gross negligence or willful misconduct of Paramount.

     10.  The invalidity or unenforceability of any provision of this Agreement
shall not affect the validity or enforceability of any other provisions of this
Agreement, which shall remain in full force and effect.

     11.  Subject to the provisions of paragraphs 3, 4, 5, 6, 7, 9 and 12 which
shall survive any termination or expiration of this Agreement (including by
operation of the preceding sentence), either party may terminate this Agreement
at any time by giving the other party at least 10 days' prior written notice.

     12.  This Agreement may not be amended or modified except in writing signed
by each of the parties and shall be governed by and construed and enforced in
accordance with the laws of the State of New York. Neither the making of this
Agreement nor the performance of any of the provisions hereof shall be construed
to constitute Paramount an agent, employee or legal representative of the
Company for any purpose nor shall Paramount hold itself out to third parties as
the Company's agent, employee or legal representative or otherwise bind the
Company. The Company and Paramount hereby irrevocably and unconditionally
consent to submit to the exclusive jurisdiction of the courts of the State of
New York and of the United States District Courts located in the City of


                                       3.

<PAGE>

New York for any lawsuits, actions or other proceeding arising out of or
relating to this Agreement and agree not to commence any such lawsuit, action or
other proceeding except in such courts. The Company and Paramount hereby
irrevocably and unconditionally waive any objection to the laying of venue of
any lawsuit, action or other proceeding arising out of or relating to this
Agreement in the courts of the State of New York or the United States District
Courts located in the City of New York, and hereby further irrevocably and
unconditionally waive and agree not to plead or claim in any such court that any
such lawsuit, action or other proceeding brought in any such court has been
brought in an inconvenient forum. Any right to trial by jury with respect to any
lawsuit, claim or other proceeding arising out of or relating to this Agreement
or the services to be rendered by Paramount hereunder is expressly and
irrevocably waived.

     If the foregoing correctly sets forth the understanding and agreement
between Paramount and the Company, please do indicate in the space provided for
that purpose below, whereupon this letter shall constitute a binding agreement
as of the date hereof.

                                        PARAMOUNT CAPITAL, INCORPORATED


                                        By:  __________________________

                                        Title: ________________________

AGREED:

ATLANTIC PHARMACEUTICALS, INC.


By:  _______________________________________
Name:    J.D. Lindjord
Title: President and Chief Executive Officer


                                       4.

<PAGE>

                                   SCHEDULE I


Fiduciary Trust


The Dreyfus Fund



                          FINANCIAL SERVICES AGREEMENT


     This Agreement shall confirm the understanding and agreement of the parties
hereto that UI USA, Inc. (the "UI Group") and Paramount Capital, Inc.
("Paramount") (the UI Group and Paramount are sometimes collectively referred to
herein as the "Financial Adviser") have been engaged to furnish financial
advisory and investment banking services to Atlantic Pharmaceuticals, Inc. (the
"Company") with respect to forming a research and development, collaboration,
license agreement, joint venture or other business relationship in the areas of
(a) Gemini Gene Therapies, Inc.'s 2-5A enhancing technology and/or lead
products, (b) the analgesic/anti-inflammatory compound CT-3 and its analogs, (c)
the anti-restenosis compounds CT-1 and CT-2 or (d) the cataract removal device
marketed under the trademark Catarex(TM) with an entity approved by the Company
(a "Partner") (the foregoing is collectively referred to as a "Transaction"). A
Transaction does not include a business relationship consisting solely of an
equity investment in the Company. Accordingly, the UI Group, Paramount and the
Company agree as follows:

     1.   The Company hereby engages, on a non-exclusive basis, the UI Group and
Paramount, acting together as
 the Company's financial advisor in connection with
the establishment of a Transaction for the period commencing with the date of
the execution and delivery of this Agreement by the Company and ending eighteen
(18) months thereafter, unless this Agreement is extended by mutual consent of
the Company and the Financial Advisor in writing. This Agreement may be
terminated by any party hereto upon 30 days' prior written notice; provided,
however, that all fees earned and costs incurred prior to termination shall be
payable to the Financial Adviser and provided, further, however, that paragraph
8 hereof shall survive the termination of this Agreement. In the event that the
Company chooses to use any additional advisor with regard to a Transaction, the
Company will so notify the Financial Advisor, and the Company and the Financial
Advisor will work together to ensure that the work of the Financial Advisor and
the work of any additional advisor(s) is not in conflict.

     2.   Financial Adviser's services to the Company may include (a) contacting
potential Partners; (b) coordinating meetings and follow-up due diligence visits
with management, as well as responses to additional information requests; (c)
assessing various business structures; (d) managing negotiations with
prospective Partners; and (e) coordinating and managing the closing process. In
addition, the Financial Adviser will be prepared to assist the Company in any
presentations to the Company's Board of Directors concerning a Transaction.

     3.   The Company agrees to pay the Financial Advisor a retainer fee
totaling $30,000 payable in advance in payments of $15,000 for each of the first
two six

<PAGE>

month periods or portions thereof that this Agreement is in effect. The first
$15,000 will be payable within five days of the signing of this Agreement and
the next payment of $15,000 will be due in six months from the date of this
Agreement. The retainer will be payable by the Company regardless of whether any
Transaction is consummated. If this Agreement is extended beyond eighteen
months, or any extension thereafter, a $15,000 payment for each successive six
month period will be due and payable in advance at the beginning of such period.

     4.   In the event that the Company enters into any Transaction with a
Partner that was introduced to the Company by the Financial Adviser pursuant to
this Agreement either (i) during the term of this Agreement (including any
extensions thereof) or (ii) within two years after the termination of this
Agreement, and pursuant to any such Transaction the Company receives one or more
payments (including, in part, an equity investment) from such Partner in the
form of cash or securities (each a "Payment(s)"), the Company shall pay the
Financial Advisor a transaction fee equal to the sum of, (i) 5% of the first $12
million of Payment(s) received by the Company under such agreement, (ii) 4% of
the next $8 million of Payment(s) received by the Company under any such
agreement, and (iii) 3% of the next $5 million of Payment(s) received by the
Company and (iv) 2% of any additional Payment(s) received by the Company under
such agreement. The fee shall be payable in installments within 15 days of each
such time or times as the Company receives a Payment from the Partner, each such
installment to be (a) in an amount equal to the applicable percentage (as
determined in the immediately preceding sentence) of the cumulative Payment(s)
received by the Company and (b) in the same form (i.e. cash or securities) on a
proportionate basis as such Payment is received by the Company. The transaction
fee shall be applied separately for each Partner with which a Transaction is
consummated, and for each product or technology area, and shall not be
cumulative for different Partners, or on different projects. The term "Partner"
as used in this paragraph shall include only the entities named on Appendix A
hereto, as it may be amended from time to time with the written consent of all
the parties hereto.

     5.   All success fees payable to the Financial Advisor pursuant to this
Agreement shall be paid by the Company 50% to the UI Group and 50% to Paramount.
The UI Group and Paramount shall coordinate with each other the billing for such
fees. All retainer fees payable to the Financial Adviser pursuant to this
Agreement shall be paid by the Company 66.66% to the UI Group and 33.33% to
Paramount.

     6.   The Company also agrees to reimburse the Financial Advisor for its
reasonable out-of-pocket costs and expenses incurred in connection with its
activities hereunder, including the fees and disbursements of the Financial
Advisor's legal counsel, upon submission of invoices from time to time, except
that any individual expense (except legal fees) over $500 must be approved by
the Company in writing in advance and except that the aggregate reimbursement of
the Financial Advisor's expenses (including legal fees) shall not exceed $5,000
in any calendar quarter without the


                                       2.

<PAGE>

Company's prior written approval. The UI Group and Paramount shall invoice the
Company for such costs and expenses no less frequently than on a calendar
quarterly basis. If requested by the Company, the UI Group and Paramount shall
provide reasonable back-up (in the form of receipts, etc.) for such costs and
expenses. The UI Group and Paramount shall coordinate with each other regarding
the incurrence of, and billing for, such costs and expenses. An administrative
charge of 10% of other expenses will be charged to cover telephone, faxes and
other miscellaneous direct expenses which are not billed separately.

     7.   The Company agrees to furnish to the Financial Advisor all financial
and other information and data which the Financial Advisor deems appropriate and
necessary for the purposes of the engagement of the Financial Advisor hereunder
and will provide the Financial Advisor with access to its officers, employees
and agents (including, within reason, its accountants and attorneys) as the
Financial Advisor shall deem appropriate. In connection with acquiring and
maintaining the confidentiality of all such information and data, the Financial
Advisor shall execute a customary and appropriate confidentiality agreement, if
requested to do so, and all such information and data will be kept confidential
by the Financial Advisor except such information and data as the Company agrees
may be disclosed publicly or such information and data which become publicly
available other than through a breach of such confidentiality agreement or which
the Financial Advisor is required by law, regulation, subpoena or other similar
legal or regulatory process to disclose.

     8.   The Company agrees to indemnify and hold harmless the Financial
Advisor and any of its affiliates, and any person, officer, director, employee
or agent of the Financial Advisor or its affiliates, and any person controlling
the Financial Adviser or any of its affiliates (collectively, the "Indemnified
Party") from and against any losses, claims, damages or liabilities (or actions
in respect thereof) related to or arising out of the Indemnified Party's role in
connection with this Agreement, and will reimburse the Indemnified Party for all
costs and expenses (including, without limitation, reasonable attorneys' fees
and expenses) as they are incurred by the Indemnified Party in connection with a
pending or threatened action, suit or proceeding (including the cost of
investigation) in which the Indemnified Party is a party or otherwise subject.
The Company will not, however, be responsible for any claims, liabilities,
losses, damages or expenses to the extent that it is determined by a court or an
agreement between the Company and the Indemnified Party that they result from
the Indemnified Party's willful misconduct or gross negligence. Promptly after
receipt by the Indemnified Party of notice of any such pending or threatened
litigation, the Indemnified Party will promptly notify the Company in writing of
such matter; provided, however, that the failure to provide such prompt notice
to the Company shall not relieve the Company of any obligations it has pursuant
to this Section 8 which it may have to the Indemnified Party unless such failure
has materially prejudiced the defense of such litigation and then only to the
extent of such prejudice. In the event that any such action is brought against
the Indemnified Party and the Indemnified Party notifies the Company, the
Company shall


                                       3.

<PAGE>

be entitled to participate therein and to assume the defense thereof, with
counsel reasonably satisfactory to the Indemnified Party, unless, however, the
Indemnified Party reasonably determines that defenses may be available to the
Indemnified Party which are not available to the Company and/or may not be
consistent with the best interest of the Company. In such event, the Indemnified
Party shall have the right to assume its own defense, with counsel reasonably
satisfactory to the Company, and shall so signify by promptly notifying the
Company in writing of this decision, though such right shall not limit the
Company's right to continue its own defense. Such decision shall not relieve the
Company of any liability which it may have to the Indemnified Party including
the reimbursement of any reasonable legal or other expenses incurred in
connection with the Indemnified Party's defense. Notwithstanding the foregoing,
the Indemnified Party shall not be entitled to settle any claims hereunder
without the Company's prior written consent, which consent shall not be
unreasonably withheld or delayed. In addition, the Company shall not be entitled
to settle, for non-monetary relief, any claims made against an Indemnified Party
without the Indemnified Party's prior written consent, which consent shall not
unreasonably be withheld or delayed.

     9.   This Agreement may not be amended or modified except by an instrument
in writing signed by the Company, the UI Group and Paramount. This Agreement
shall be governed by and construed in accordance with the law of the State of
New York applicable to agreements made and to be performed in New York and shall
be construed without regard to any presumption or other rule requiring
construction against the party causing the Agreement to be drafted.

     10.  In the event it could reasonably be interpreted that Paramount is
entitled to compensation pursuant to both this Agreement and the letter
agreement, dated July 19, 1996, between the Company and Paramount, Paramount
shall be entitled to compensation only pursuant to this Agreement.


                                       4.

<PAGE>

     11.  This Agreement sets forth the entire understanding and agreement
between parties with respect to the subject matter hereof and supersedes all
prior to other understandings and agreements among them with respect to such
subject matter, all of which are merged herein. There are no representations or
warranties regarding such subject matter, other than those expressly set forth
herein.

     12.  This Agreement may be signed in counterpart and all such counterparts
together shall constitute one agreement.

     This Agreement is entered into as of the ___ day of June, 1996.

UI USA, INC.



By:_____________________________

Name:  Allison Gushee Molkenthin
Title:   President & COO


ATLANTIC PHARMACEUTICALS, INC.



By:_____________________________

Name:  Mr. J.D. Lindjord
Title:   President & CEO


PARAMOUNT CAPITAL, INC.



By:_____________________________

Name:  Lindsay A. Rosenwald, M.D.
Title:   Chairman


                                       5.

<PAGE>



                                   APPENDIX A

                                   "Partners"


                                       6.



                              CONSULTANCY AGREEMENT


     CONSULTANCY AGREEMENT (the "Agreement") dated as of July 31, 1996 (the
"Effective Date") by and between Atlantic Pharmaceuticals, Inc., a Delaware
corporation (the "Company"), and Dr. Yuichi Iwaki, M.D., Ph.D. ("Consultant").

     WHEREAS the Company desires that it be able to call upon the experience and
knowledge of Consultant for consultation services and advice;

     WHEREAS Consultant is willing to render such services to the Company on the
terms and conditions hereinafter set forth in this Agreement;

     NOW, THEREFORE, in consideration of the promises and mutual covenants
contained herein and for other good and valuable consideration, the parties
agree as follows:

     1.   Term of Agreement. Commencing on the Effective Date (as defined
above), Consultant shall be retained by the Company for a period of three years,
which shall be renewable upon agreement of the parties for additional one year
periods. The initial period and any extensions or renewals thereof shall
constitute the "Consulting Term."

     2.   Position and Responsibilities. Consultant hereby agrees to serve as a
consultant to the Company and to render such advice and services to the Company
as may be reasonably required by the Company including, without
 limitation,
advising the Company with respect to the direction of the Company's research and
product development and business development activities. During the Consulting
Term, Consultant shall report directly to the President and/or Chief Executive
Officer of the Company.

     3.   Compensation. The Company shall pay Consultant at a rate of $2,500 per
month payable on the last day of each calendar month.

     4.   Expenses. Consultant shall be reimbursed in accordance with the
policies of the Company for necessary and reasonable business expenses incurred
by Consultant in connection with performance of his duties hereunder.

     5.   Termination. This Agreement and Consultant's retention hereunder may
be terminated prior to the end of the Consulting Term for any reason upon thirty
days' written notice by either party.

     6.   Confidentiality. Consultant recognizes and acknowledges that in the
course of his duties Consultant may receive confidential or proprietary
information owned by the Company, or other third parties with whom the Company
has an obligation of confidentiality. Therefore, during and after the Consulting
Term, Consultant agrees to


                                        1

<PAGE>

keep confidential and not disclose or use (except in connection with the
fulfillment of his consulting duties to the Company under this Agreement) all
confidential or proprietary information owned by, or received by or on behalf of
the Company. "Confidential Information" shall include, but shall not be limited
to, confidential or proprietary scientific or technical information or data,
business plans, trade secrets, or other confidential information relating to
customers, development programs, costs, marketing, trading, investment, sales
activities, promotion, credit and financial data, manufacturing processes,
financing methods, plans or the business and affairs of the Company generally,
or of any subsidiary or affiliate of the Company. "Confidential Information"
shall not include, however, information in the public domain, information
disclosed to Consultant by a third party entitled to disclose it without any
obligation of confidentiality, or information already known to Consultant prior
to its receipt.

     7.   Non-Solicitation. During the term of this Agreement and for a period
of one year thereafter, Consultant shall not directly or indirectly employ,
solicit for employment, or advise or recommend to any other person that they
employ or solicit for employment, any person whom he knows to be an employee of
the Company or any parent, subsidiary or affiliate of the Company.

     8.   Ownership of Inventions. In consideration for the compensation paid to
the Consultant by the Company in paragraph 3 of this Agreement, Consultant
hereby assigns to the Company all his right, title and interest in all
inventions and intellectual property that arise from his consulting activities
for the Company hereunder, and agrees to cooperate fully in the prosecution of
any patent application resulting from any such invention, at the expense of the
Company, which cooperation shall include executing any necessary documents in
connection therewith.

     9.   Specific Performance. Consultant acknowledges and agrees that the
Company's remedies at law for a breach or threatened breach of any of the
provisions of paragraphs 6 through 8 would be inadequate and, in recognition of
this fact, Consultant agrees that, in the event of such a breach or threatened
breach, in addition to any remedies at law, the Company, without posting any
bond, shall be entitled to obtain equitable relief in the form of specific
performance, temporary restraining order, temporary or permanent injunction or
any other equitable remedy which may then be available.

     10.  Representation of Consultant; Use of Name. Consultant hereby
represents that his current principal place of employment has received
disclosure as to Consultant's acting as a Chairman of the Scientific Advisory
Board of the Company and of the duties required of Consultant under this
Agreement, and that such employer consents fully to Consultant's execution of
this Agreement and the position that he will hold. Consultant further represents
that there are no binding agreements to which he is a party or by which he is
bound forbidding or restricting his activities herein. In addition, Consultant
and his current employer consent to the use of their names in various reports,
brochures or other documents produced by or on behalf of the Company, including
any and all documents filed with the Securities and Exchange Commission.


                                        2

<PAGE>

     11.  Consultant Not an Employee. The Company and Consultant hereby
acknowledge and agree that Consultant shall perform the services hereunder as an
independent contractor and not as an employee of the Company. Consultant agrees
that he will file his own tax returns on the basis of his status as an
independent contractor for the reporting of all income, social security,
employment and other taxes due and owing on the consideration received by him
under this Agreement and that he is responsible for the payment of such taxes.
Similarly, Consultant shall not be entitled to benefits specifically associated
with employment status, such as medical, dental and life insurance, stock or
stock options of the Company and shall not be entitled to participate in any
other employer benefit programs. As an independent contractor, Consultant
acknowledges, understands and agrees that he is not, and shall not represent
himself to third parties as being, the agent or representative of the Company
nor does he have, and shall not represent himself to third parties as having,
power or authority to do or take any action for or on behalf of the Company, as
its agent, representative or otherwise, except as specifically herein set forth.
Consultant agrees to defend, indemnify and hold Company harmless from any and
all claims made by any entity on account of an alleged failure by Consultant to
satisfy any tax or withholding obligations.

     12.  Miscellaneous.

          (a)  Governing Law. This Agreement shall be governed by and construed
in accordance with the laws of the State of California, without regard to
principles of conflicts of laws.

          (b)  Entire Agreement; Amendment. This Agreement contains the entire
understanding of the parties with respect to the retention of Consultant by the
Company. There are no restrictions, agreements, promises, warranties, covenants
or undertakings between the parties with respect to the subject matter herein
other than those expressly set forth herein. This Agreement may not be altered,
modified, or amended except by written instrument signed by the parties hereto.

          (c)  No Waiver. The failure of a party to insist upon strict adherence
to any term of this Agreement on any occasion shall not be considered a waiver
of such party's rights or deprive such party of the right thereafter to insist
upon strict adherence to that term or any other term of this Agreement.

          (d)  Severability. In the event that any one or more of the provisions
of this Agreement shall be or become invalid, illegal or unenforceable in any
respect, the validity, legality and enforceability of the remaining provisions
of this Agreement shall not be affected thereby.

          (e)  Successors; Binding Agreement. This Agreement shall inure to the
benefit of and be binding upon the parties hereto and their respective heirs,
representatives, successors and assigns.

          (f)  Counterparts; Effectiveness. This Agreement may be signed


                                        3

<PAGE>

in counterparts, each of which shall be an original, with the same effect as if
the signatures thereto and hereto were upon the same instrument. This Agreement
shall become effective when each party hereto shall have received a counterpart
hereof signed by the other party hereto.

     13.  Entire Agreement. This Agreement constitutes the entire understanding
between the parties.

     IN WITNESS THEREOF, the undersigned have duly executed this Agreement as of
the date first written below:



                                        ATLANTIC PHARMACEUTICALS, INC.



July __, 1996                           _______________________________
                                        J.D. Lindjord
                                        President and Chief Executive Officer


                                        "CONSULTANT"



July __, 1996
                                        ________________________________
                                        Yuichi Iwaki, M.D., Ph.D.


                                        4



                         ATLANTIC PHARMACEUTICALS, INC.
                             1995 STOCK OPTION PLAN
                      as amended and restated June 9, 1996


                                   ARTICLE ONE

                               GENERAL PROVISIONS


     I.   PURPOSE OF THE PLAN

          This 1995 Stock Option Plan is intended to promote the interests of
Atlantic Pharmaceuticals, Inc., a Delaware corporation, by providing eligible
persons with the opportunity to acquire a proprietary interest, or otherwise
increase their proprietary interest, in the Corporation as an incentive for them
to remain in the service of the Corporation.

          Capitalized terms shall have the meanings assigned to such terms in
the attached Appendix.

     II.  STRUCTURE OF THE PLAN

          A.   The Plan shall be divided into two separate equity programs:

               (i)  the Discretionary Option Grant Program under which eligible
          persons may, at the discretion of the Plan Administrator, be granted
          options to purchase shares of Common Stock, and

               (ii)      the Automatic Option Grant Program under which Eligible
          Directors shall automatically receive option grants at periodic
          intervals to purchase shares of Common Stock.

          B.   The provisions of Articles One and Four shall apply to all equity
programs under the Plan and shall accordingly govern the interests of all
persons under the Plan.

     III. ADMINISTRATION
 OF THE PLAN

          A.   The Primary Committee shall have sole and exclusive authority to
administer the Discretionary Option Grant Program with respect to Section 16
Insiders. No non-employee Board member shall be eligible to serve on the Primary
Committee if such individual has, during the twelve (12)-month period
immediately preceding the date of his or her appointment to the Committee or (if
shorter) the period commencing with the

<PAGE>

Section 12(g) Registration Date and ending with the date of his or her
appointment to the Primary Committee, received an option grant or direct stock
issuance under the Plan or any other stock option, stock appreciation, stock
bonus or other stock plan of the Corporation (or any Parent or Subsidiary),
other than pursuant to the Automatic Option Grant Program.

          B.   Administration of the Discretionary Option Grant Program with
respect to all other persons eligible to participate in that program may, at the
Board's discretion, be vested in the Primary Committee or a Secondary Committee,
or the Board may retain the power to administer those programs with respect to
all such persons. The members of the Secondary Committee may be Board members
who are Employees eligible to receive discretionary option grants or direct
stock issuances under the Plan or any other stock option, stock appreciation,
stock bonus or other stock plan of the Corporation (or any Parent or
Subsidiary).

          C.   Members of the Primary Committee or any Secondary Committee shall
serve for such period of time as the Board may determine and may be removed by
the Board at any time. The Board may also at any time terminate the functions of
any Secondary Committee and reassume all powers and authority previously
delegated to such committee.

          D.   Each Plan Administrator shall, within the scope of its
administrative functions under the Plan, have full power and authority to
establish such rules and regulations as it may deem appropriate for proper
administration of the Discretionary Option Grant Program and to make such
determinations under, and issue such interpretations of, the provisions of such
program and any outstanding options thereunder as it may deem necessary or
advisable. Decisions of the Plan Administrator within the scope of its
administrative functions under the Plan shall be final and binding on all
parties who have an interest in the Discretionary Option Grant Program under its
jurisdiction or any option thereunder.

          E.   Service on the Primary Committee or the Secondary Committee shall
constitute service as a Board member, and members of each such committee shall
accordingly be entitled to full indemnification and reimbursement as Board
members for their service on such committee. No member of the Primary Committee
or the Secondary Committee shall be liable for any act or omission made in good
faith with respect to the Plan or any option grants under the Plan.

          F.   Administration of the Automatic Option Grant Program shall be
self- executing in accordance with the terms of that program, and no Plan
Administrator shall exercise any discretionary functions with respect to option
grants made thereunder.


                                       2.

<PAGE>

     IV.  ELIGIBILITY

          A.   The persons eligible to participate in the Discretionary Option
Grant Program are as follows:

               (i)  Employees,

               (ii) non-employee members of the Board (other than those serving
          as members of the Primary Committee) or the board of directors of any
          Parent or Subsidiary, and

               (iii) consultants and other independent advisors who provide
          services to the Corporation (or any Parent or Subsidiary).

          B.   Each Plan Administrator shall, within the scope of its
administrative jurisdiction under the Plan, have full authority (subject to the
provisions of the Plan) to determine, with respect to the option grants under
the Discretionary Option Grant Program, which eligible persons are to receive
option grants, the time or times when such option grants are to be made, the
number of shares to be covered by each such grant, the status of the granted
option as either an Incentive Option or a Non-Statutory Option, the time or
times at which each option is to become exercisable and the vesting schedule (if
any) applicable to the option shares and the maximum term for which the option
is to remain outstanding.

          C.   The individuals eligible to participate in the Automatic Option
Grant Program shall be (i) those individuals who first become non-employee Board
members after the Automatic Option Grant Program Effective Date, whether through
appointment by the Board or election by the Corporation's stockholders, and (ii)
those individuals who continue to serve as non-employee Board members after one
or more Annual Stockholders Meetings held after the Automatic Option Grant
Program Effective Date, including those individuals serving as non-employee
Board members on the Automatic Option Grant Program Effective Date. A
non-employee Board member who has previously been in the employ of the
Corporation (or any Parent or Subsidiary) shall not be eligible to receive an
initial option grant under the Automatic Option Grant Program at the time he or
she first becomes a non-employee Board member, but such individual shall be
eligible to receive periodic option grants under the Automatic Option Grant
Program upon his or her continued service as a non-employee Board member
following one or more Annual Stockholders Meetings. However, in no event shall a
non-employee Board member be eligible to receive option grants under the
Automatic Option Grant Program if such individual is a 5% Stockholder or is a
representative of, or affiliated with, a 5% Stockholder.


                                       3.

<PAGE>

     V.   STOCK SUBJECT TO THE PLAN

          A.   The stock issuable under the Plan shall be shares of authorized
but unissued or reacquired Common Stock, including shares repurchased by the
Corporation on the open market. The maximum number of shares of Common Stock
which may be issued over the term of the Plan shall initially not exceed 950,000
shares.

          B.   The number of shares of Common Stock available for issuance under
the Plan shall automatically increase on the first trading day of each calendar
year during the term of the Plan, beginning with the 1997 calendar year, by an
amount equal to one percent (1%) of the shares of Common Stock outstanding on
December 31 of the immediately preceding calendar year. No Incentive Options may
be granted on the basis of the additional shares of Common Stock resulting from
such annual increases.

          C.   No one person participating in the Plan may receive options and
separately exercisable stock appreciation rights for more than 100,000 shares of
Common Stock in the aggregate per calendar year, beginning with the 1995
calendar year; provided, however, that for the calendar year in which such
person first commences Service, the limit shall be increased to 200,000 shares.

          D.   Shares of Common Stock subject to outstanding options shall be
available for subsequent issuance under the Plan to the extent (i) the options
expire or terminate for any reason prior to exercise in full or (ii) the options
are cancelled in accordance with the cancellation-regrant provisions of Article
Two. All shares issued under the Plan, whether or not those shares are
subsequently repurchased by the Corporation pursuant to its repurchase rights
under the Plan, shall reduce on a share-for-share basis the number of shares of
Common Stock available for subsequent issuance under the Plan. In addition,
should the exercise price of an option under the Plan be paid with shares of
Common Stock or should shares of Common Stock otherwise issuable under the Plan
be withheld by the Corporation in satisfaction of the withholding taxes incurred
in connection with the exercise of an option under the Plan, then the number of
shares of Common Stock available for issuance under the Plan shall be reduced by
the gross number of shares for which the option is exercised, and not by the net
number of shares of Common Stock issued to the holder of such option.

          E.   Should any change be made to the Common Stock by reason of any
stock split, stock dividend, recapitalization, combination of shares, exchange
of shares or other change affecting the outstanding Common Stock as a class
without the Corporation's receipt of consideration, appropriate adjustments
shall be made to (i) the maximum number and/or class of securities issuable
under the Plan, (ii) the maximum number and/or class of securities for which the
share reserve is to increase automatically each year, (iii) the number and/or
class of securities for which any one person may be granted options and
separately exercisable stock appreciation rights per calendar year, (iv) the
number and/or class of securities for which automatic option grants are to be
made subsequently per


                                       4.

<PAGE>

Eligible Director under the Automatic Option Grant Program and (v) the number
and/or class of securities and the exercise price per share in effect under each
outstanding option in order to prevent the dilution or enlargement of benefits
thereunder. The adjustments determined by the Plan Administrator shall be final,
binding and conclusive, absent manifest error.


                                       5.

<PAGE>

                                   ARTICLE TWO

                       DISCRETIONARY OPTION GRANT PROGRAM


     I.   OPTION TERMS

          Each option shall be evidenced by one or more documents in the form
approved by the Plan Administrator; provided, however, that each such document
shall comply with the terms specified below. Each document evidencing an
Incentive Option shall, in addition, be subject to the provisions of the Plan
applicable to such options.

          A.   Exercise Price.

               1.   The exercise price per share shall be fixed by the Plan
Administrator and may be less than, equal to or greater than the Fair Market
Value per share of Common Stock on the option grant date.

               2.   The exercise price shall become immediately due upon
exercise of the option and shall, subject to the provisions of Section I of
Article Four and the documents evidencing the option, be payable in cash or
check made payable to the Corporation. After the Section 12(g) Registration
Date, the exercise price may also be paid as follows:

                    (i)  in shares of Common Stock held for the requisite period
          necessary to avoid a charge to the Corporation's earnings for
          financial reporting purposes and valued at Fair Market Value on the
          Exercise Date, or

                    (ii) to the extent the option is exercised for vested
          shares, through a special sale and remittance procedure pursuant to
          which the Optionee shall concurrently provide irrevocable written
          instructions to (a) a Corporation-designated brokerage firm to effect
          the immediate sale of the purchased shares and remit to the
          Corporation, out of the sale proceeds available on the settlement
          date, sufficient funds to cover the aggregate exercise price payable
          for the purchased shares plus all applicable Federal, state and local
          income and employment taxes required to be withheld by the Corporation
          by reason of such exercise and (b) the Corporation to deliver the
          certificates for the purchased shares directly to such brokerage firm
          in order to complete the sale.

               Except to the extent such sale and remittance procedure is
utilized, payment of the exercise price for the purchased shares must be made on
the Exercise Date.


                                       6.

<PAGE>

          B.   Exercise and Term of Options. Each option shall be exercisable at
such time or times, during such period and for such number of shares as shall be
determined by the Plan Administrator and set forth in the documents evidencing
the option. However, no option shall have a term in excess of ten (10) years
measured from the option grant date.

          C.   Effect of Termination of Service.

               1.   The following provisions shall govern the exercise of any
options held by the Optionee at the time of cessation of Service or death:

                    (i)  Any option outstanding at the time of the Optionee's
          cessation of Service for any reason shall remain exercisable for such
          period of time thereafter as shall be determined by the Plan
          Administrator and set forth in the documents evidencing the option,
          but no such option shall be exercisable after the expiration of the
          option term.

                    (ii) Any option exercisable in whole or in part by the
          Optionee at the time of death may be exercised subsequently by the
          personal representative of the Optionee's estate or by the person or
          persons to whom the option is transferred pursuant to the Optionee's
          will or in accordance with the laws of descent and distribution.

                    (iii) During the applicable post-Service exercise period,
          the option may not be exercised in the aggregate for more than the
          number of vested shares for which the option is exercisable on the
          date of the Optionee's cessation of Service. Upon the expiration of
          the applicable exercise period or (if earlier) upon the expiration of
          the option term, the option shall terminate and cease to be
          outstanding for any vested shares for which the option has not been
          exercised. However, the option shall, immediately upon the Optionee's
          cessation of Service, terminate and cease to be outstanding to the
          extent the option is not otherwise at that time exercisable for vested
          shares.

                    (iv) Should the Optionee's Service be terminated for
          Misconduct, then all outstanding options held by the Optionee shall
          terminate immediately and cease to be outstanding.

                    (v)  In the event of an Involuntary Termination following a
          Corporate Transaction,the provisions of Section III of this Article
          Two shall govern the period for which the outstanding options are to
          remain exercisable following the Optionee's cessation of Service and
          shall supersede any provisions to the contrary in this section.


                                       7.

<PAGE>

               2.   The Plan Administrator shall have the discretion,
exercisable either at the time an option is granted or at any time while the
option remains outstanding, to:

                    (i)  extend the period of time for which the option is to
          remain exercisable following the Optionee's cessation of Service from
          the period otherwise in effect for that option to such greater period
          of time as the Plan Administrator shall deem appropriate, but in no
          event beyond the expiration of the option term, and/or

                    (ii) permit the option to be exercised, during the
          applicable post-Service exercise period, not only with respect to the
          number of vested shares of Common Stock for which such option is
          exercisable at the time of the Optionee's cessation of Service but
          also with respect to one or more additional installments in which the
          Optionee would have vested under the option had the Optionee continued
          in Service.

          D.   Stockholder Rights. The holder of an option shall have no
stockholder rights with respect to the shares subject to the option until such
person shall have exercised the option, paid the exercise price and become a
holder of record of the purchased shares.

          E.   Repurchase Rights. The Plan Administrator shall have the
discretion to grant options which are exercisable for unvested shares of Common
Stock. Should the Optionee cease Service while holding such unvested shares, the
Corporation shall have the right to repurchase, at the exercise price paid per
share, any or all of those unvested shares. The terms upon which such repurchase
right shall be exercisable (including the period and procedure for exercise and
the appropriate vesting schedule for the purchased shares) shall be established
by the Plan Administrator and set forth in the document evidencing such
repurchase right.

          F.   First Refusal Rights. Until the Section 12(g) Registration Date,
the Corporation shall have the right of first refusal with respect to any
proposed sale or other disposition by the Optionee (or any successor in interest
by reason of purchase, gift or other transfer) of any shares of Common Stock
issued under the Plan. Such right of first refusal shall be exercisable in
accordance with the terms and conditions established by the Plan Administrator
and set forth in the agreement evidencing such right.

          G.   Limited Transferability of Options. During the lifetime of the
Optionee, the option shall be exercisable only by the Optionee and shall not be
assignable or transferable other than by will or by the laws of descent and
distribution following the Optionee's death. However, a Non-Statutory Option may
be assigned in whole or in part during the Optionee's lifetime in accordance
with the terms of a Qualified Domestic Relations Order. The assigned portion may
only be exercised by the person or persons who acquire a proprietary interest in
the option pursuant to such Qualified Domestic Relations


                                       8.

<PAGE>

Order. The terms applicable to the assigned portion shall be the same as those
in effect for the option immediately prior to such assignment and shall be set
forth in such documents issued to the assignee as the Plan Administrator may
deem appropriate.

     II.  INCENTIVE OPTIONS

          The terms specified below shall be applicable to all Incentive
Options. Except as modified by the provisions of this Section II, all the
provisions of Articles One, Two and Five shall be applicable to Incentive
Options. Options which are specifically designated as Non-Statutory Options when
issued under the Plan shall not be subject to the terms of this Section II.

          A.   Eligibility. Incentive Options may only be granted to Employees.

          B.   Exercise Price. The exercise price per share shall not be less
than one hundred percent (100%) of the Fair Market Value per share of Common
Stock on the option grant date.

          C.   Dollar Limitation. The aggregate Fair Market Value of the shares
of Common Stock (determined as of the respective date or dates of grant) for
which one or more options granted to any Employee under the Plan (or any other
option plan of the Corporation or any Parent or Subsidiary) may for the first
time become exercisable as Incentive Options during any one (1) calendar year
shall not exceed the sum of One Hundred Thousand Dollars ($100,000). To the
extent the Employee holds two (2) or more such options which become exercisable
for the first time in the same calendar year, the foregoing limitation on the
exercisability of such options as Incentive Options shall be applied on the
basis of the order in which such options are granted.

          D.   10% Stockholder. If any Employee to whom an Incentive Option is
granted is a 10% Stockholder, then the exercise price per share shall not be
less than one hundred ten percent (110%) of the Fair Market Value per share of
Common Stock on the option grant date, and the option term shall not exceed five
(5) years measured from the option grant date.

     III. CORPORATE TRANSACTION/CHANGE IN CONTROL

          A.   In the event of any Corporate Transaction, each outstanding
option shall automatically accelerate so that each such option shall,
immediately prior to the effective date of the Corporate Transaction, become
fully exercisable for all of the shares of Common Stock at the time subject to
such option and may be exercised for any or all of those shares as fully-vested
shares of Common Stock. However, an outstanding option shall not so accelerate
if and to the extent: (i) such option is, in connection with the Corporate
Transaction, either to be assumed by the successor corporation (or parent
thereof) or to be replaced with a comparable option to purchase shares of the
capital stock of the successor


                                       9.

<PAGE>

corporation (or parent thereof), (ii) such option is to be replaced with a cash
incentive program of the successor corporation which preserves the spread
existing on the unvested option shares at the time of the Corporate Transaction
and provides for subsequent payout in accordance with the same vesting schedule
applicable to such option or (iii) the acceleration of such option is subject to
other limitations imposed by the Plan Administrator at the time of the option
grant. The determination of option comparability under clause (i) above shall be
made by the Plan Administrator, and its determination shall be final, binding
and conclusive, absent manifest error.

          B.   All outstanding repurchase rights shall also terminate
automatically, and the shares of Common Stock subject to those terminated rights
shall immediately vest in full, in the event of any Corporate Transaction,
except to the extent: (i) those repurchase rights are to be assigned to the
successor corporation (or parent thereof) in connection with such Corporate
Transaction or (ii) such accelerated vesting is precluded by other limitations
imposed by the Plan Administrator at the time the repurchase right is issued.

          C.   Immediately following the consummation of the Corporate
Transaction, all outstanding options shall terminate and cease to be
outstanding, except to the extent assumed by the successor corporation (or
parent thereof).

          D.   Each option which is assumed in connection with a Corporate
Transaction shall be appropriately adjusted, immediately after such Corporate
Transaction, to apply to the number and class of securities which would have
been issuable to the Optionee in consummation of such Corporate Transaction had
the option been exercised immediately prior to such Corporate Transaction.
Appropriate adjustments shall also be made to (i) the number and class of
securities available for issuance under the Plan following the consummation of
such Corporate Transaction, (ii) the exercise price payable per share under each
outstanding option, provided the aggregate exercise price payable for such
securities shall remain the same and (iii) the maximum number of securities
and/or class of securities for which any one person may be granted options and
separately exercisable stock appreciation rights under the Plan per calendar
year.

          E.   Any options which are assumed or replaced in the Corporate
Transaction and do not otherwise accelerate at that time, shall automatically
accelerate (and any of the Corporation's outstanding repurchase rights which do
not otherwise terminate at the time of the Corporate Transaction shall
automatically terminate and the shares of Common Stock subject to those
terminated rights shall immediately vest in full) in the event the Optionee's
Service should subsequently terminate by reason of an Involuntary Termination
within eighteen (18) months following the effective date of such Corporate
Transaction. Any options so accelerated shall remain exercisable for
fully-vested shares until the earlier of (i) the expiration of the option term
or (ii) the expiration of the one (1)- year period measured from the effective
date of the Involuntary Termination.


                                       10.

<PAGE>

          F.   The Plan Administrator shall have the discretion to grant options
with terms different from those described in this Section III in connection with
a Corporate Transaction.

          G.   The Plan Administrator shall have the discretion, exercisable
either at the time the option is granted or at any time while the option remains
outstanding, to (i) provide for the automatic acceleration of one or more
outstanding options (and the automatic termination of one or more outstanding
repurchase rights with the immediate vesting of the shares of Common Stock
subject to those rights) upon the occurrence of a Change in Control or (ii)
condition any such option acceleration (and the termination of any outstanding
repurchase rights) upon the subsequent Involuntary Termination of the Optionee's
Service within a specified period following the effective date of such Change in
Control. Any options accelerated in connection with a Change in Control shall
remain fully exercisable until the expiration or sooner termination of the
option term.

          H.   The portion of any Incentive Option accelerated in connection 
with a Corporate Transaction or Change in Control shall remain exercisable as an
Incentive Option only to the extent the applicable One Hundred Thousand Dollar
($100,000) limitation is not exceeded. To the extent such dollar limitation is
exceeded, the accelerated portion of such option shall be exercisable as a
Non-Statutory Option under the Federal tax laws.

          I.   The grant of options under the Discretionary Option Grant Program
shall in no way affect the right of the Corporation to adjust, reclassify,
reorganize or otherwise change its capital or business structure or to merge,
consolidate, dissolve, liquidate or sell or transfer all or any part of its
business or assets.

     IV.  CANCELLATION AND REGRANT OF OPTIONS

          The Plan Administrator shall have the authority to effect, at any time
and from time to time, with the consent of the affected option holders, the
cancellation of any or all outstanding options under the Discretionary Option
Grant Program and to grant in substitution new options covering the same or
different number of shares of Common Stock but with an exercise price per share
based on the Fair Market Value per share of Common Stock on the new option grant
date.

     V.   STOCK APPRECIATION RIGHTS

          A.   The Plan Administrator shall have full power and authority to
grant to selected Optionees tandem stock appreciation rights and/or limited
stock appreciation rights.

          B.   The following terms shall govern the grant and exercise of tandem
stock appreciation rights:


                                       11.

<PAGE>



               (i)  One or more Optionees may be granted the right, exercisable
          upon such terms as the Plan Administrator may establish, to elect
          between the exercise of the underlying option for shares of Common
          Stock and the surrender of that option in exchange for a distribution
          from the Corporation in an amount equal to the excess of (a) the Fair
          Market Value (on the option surrender date) of the number of shares in
          which the Optionee is at the time vested under the surrendered option
          (or surrendered portion thereof) over (b) the aggregate exercise price
          payable for such shares.

               (ii) No such option surrender shall be effective unless it is
          approved by the Plan Administrator. If the surrender is so approved,
          then the distribution to which the Optionee shall be entitled may be
          made in shares of Common Stock valued at Fair Market Value on the
          option surrender date, in cash, or partly in shares and partly in
          cash, as the Plan Administrator shall in its sole discretion deem
          appropriate.

               (iii) If the surrender of an option is rejected by the Plan
          Administrator, then the Optionee shall retain whatever rights the
          Optionee had under the surrendered option (or surrendered portion
          thereof) on the option surrender date and may exercise such rights at
          any time prior to the later of (a) five (5) business days after the
          receipt of the rejection notice or (b) the last day on which the
          option is otherwise exercisable in accordance with the terms of the
          documents evidencing such option, but in no event may such rights be
          exercised more than ten (10) years after the option grant date.

          C.   The following terms shall govern the grant and exercise of 
limited stock appreciation rights:

               (i)  One or more Section 16 Insiders may be granted limited stock
          appreciation rights with respect to their outstanding options.

               (ii) Upon the occurrence of a Hostile Take-Over, each such
          individual holding one or more options with such a limited stock
          appreciation right in effect for at least six (6) months shall have
          the unconditional right (exercisable for a thirty (30)-day period
          following such Hostile Take-Over) to surrender each such option to the
          Corporation, to the extent the option is at the time exercisable for
          vested shares of Common Stock. In return for the surrendered option,
          the Optionee shall receive a cash distribution from the Corporation in
          an amount equal to the excess of (a) the Take-Over Price of the shares
          of Common Stock which are at the time vested under each surrendered
          option (or surrendered portion thereof) over (b) the aggregate
          exercise price payable for such shares. Such cash distribution shall
          be paid within five (5) days following the option surrender date.


                                       12.

<PAGE>

               (iii) Neither the approval of the Plan Administrator nor the
          consent of the Board shall be required in connection with such option
          surrender and cash distribution.

               (iv) The balance of the option (if any) shall continue in full
          force and effect in accordance with the documents evidencing such
          option.


                                       13.

<PAGE>

                                  ARTICLE THREE

                         AUTOMATIC OPTION GRANT PROGRAM


     I.   OPTION TERMS

          A.   Grant Dates. Option grants shall be made on the dates specified
below:

               1.   Each Eligible Director who is first elected or appointed as
a non-employee Board member after the Automatic Option Grant Program Effective
Date shall automatically be granted, on the date of such initial election or
appointment (as the case may be), a Non-Statutory Option to purchase 10,000
shares of Common Stock.

               2.   On the date of each Annual Stockholders Meeting held after
the Automatic Option Grant Program Effective Date, each individual who is to
continue to serve as an Eligible Director after such meeting, shall
automatically be granted, whether or not such individual is standing for
re-election as a Board member at that Annual Meeting, a Non-Statutory Option to
purchase an additional 2,000 shares of Common Stock, provided such individual
has served as a non-employee Board member for at least six (6) months. There
shall be no limit on the number of such 2,000-share option grants any one
Eligible Director may receive over his or her period of Board service.

          B.   Exercise Price.

               1.   The exercise price per share shall be equal to one hundred
percent (100%) of the Fair Market Value per share of Common Stock on the option
grant date.

               2.   The exercise price shall be payable in one or more of the
alternative forms authorized under the Discretionary Option Grant Program.
Except to the extent the sale and remittance procedure specified thereunder is
utilized, payment of the exercise price for the purchased shares must be made on
the Exercise Date.

          C.   Option Term. Each option shall have a term of ten (10) years
measured from the option grant date.

          D.   Exercise and Vesting of Options. Each option shall be immediately
exercisable for any or all of the option shares. However, any shares purchased
under the option shall be subject to repurchase by the Corporation, at the
exercise price paid per share, upon the Optionee's cessation of Board service
prior to vesting in those shares. Each initial grant shall vest, and the
Corporation's repurchase right shall lapse, in a series of three


                                       14.

<PAGE>

(3) successive and equal annual installments over the Optionee's period of
continued service as a Board member, with the first such installment to vest
upon the Optionee's completion of one (1) year of Board service measured from
the option grant date. Each annual grant shall vest, and the Corporation's
repurchase right shall lapse, upon the Optionee's completion of one (1) year of
Board service measured from the option grant date.

          E.   Effect of Termination of Board Service. The following provisions
shall govern the exercise of any options held by the Optionee at the time the
Optionee ceases to serve as a Board member:

               (i)  The Optionee (or, in the event of Optionee's death, the
          personal representative of the Optionee's estate or the person or
          persons to whom the option is transferred pursuant to the Optionee's
          will or in accordance with the laws of descent and distribution) shall
          have a twelve (12)- month period following the date of such cessation
          of Board service in which to exercise each such option.

               (ii) During the twelve (12)-month exercise period, the option may
          not be exercised in the aggregate for more than the number of vested
          shares of Common Stock for which the option is exercisable at the time
          of the Optionee's cessation of Board service.

               (iii) Should the Optionee cease to serve as a Board member by
          reason of death or Permanent Disability, then all shares at the time
          subject to the option shall immediately vest so that such option may,
          during the twelve (12)-month exercise period following such cessation
          of Board service, be exercised for all or any portion of those shares
          as fully-vested shares of Common Stock.

               (iv) In no event shall the option remain exercisable after the
          expiration of the option term. Upon the expiration of the twelve
          (12)-month exercise period or (if earlier) upon the expiration of the
          option term, the option shall terminate and cease to be outstanding
          for any vested shares for which the option has not been exercised.
          However, the option shall, immediately upon the Optionee's cessation
          of Board service for any reason other than death or Permanent
          Disability, terminate and cease to be outstanding to the extent the
          option is not otherwise at that time exercisable for vested shares.


                                       15.

<PAGE>

     II.  CORPORATE TRANSACTION/CHANGE IN CONTROL/HOSTILE TAKE- OVER

          A.   In the event of any Corporate Transaction, the shares of Common
Stock at the time subject to each outstanding option but not otherwise vested
shall automatically vest in full so that each such option shall, immediately
prior to the effective date of the Corporate Transaction, become fully
exercisable for all of the shares of Common Stock at the time subject to such
option and may be exercised for all or any portion of those shares as
fully-vested shares of Common Stock. Immediately following the consummation of
the Corporate Transaction, each automatic option grant shall terminate and cease
to be outstanding, except to the extent assumed by the successor corporation (or
parent thereof).

          B.   In connection with any Change in Control, the shares of Common
Stock at the time subject to each outstanding option but not otherwise vested
shall automatically vest in full so that each such option shall, immediately
prior to the effective date of the Change in Control, become fully exercisable
for all of the shares of Common Stock at the time subject to such option and may
be exercised for all or any portion of such shares as fully-vested shares of
Common Stock. Each such option shall remain exercisable for such fully-vested
option shares until the expiration or sooner termination of the option term or
the surrender of the option in connection with a Hostile Take-Over.

          C.   Upon the occurrence of a Hostile Take-Over, the Optionee shall
have a thirty (30)-day period in which to surrender to the Corporation each
automatic option held by him or her for a period of at least six (6) months. The
Optionee shall in return be entitled to a cash distribution from the Corporation
in an amount equal to the excess of (i) the Take-Over Price of the shares of
Common Stock at the time subject to the surrendered option (whether or not the
Optionee is otherwise at the time vested in those shares) over (ii) the
aggregate exercise price payable for such shares. Such cash distribution shall
be paid within five (5) days following the surrender of the option to the
Corporation. No approval or consent of the Board or any Plan Administrator shall
be required in connection with such option surrender and cash distribution.

          D.   Each option which is assumed in connection with a Corporate
Transaction shall be appropriately adjusted, immediately after such Corporate
Transaction, to apply to the number and class of securities which would have
been issuable to the Optionee in consummation of such Corporate Transaction had
the option been exercised immediately prior to such Corporate Transaction.
Appropriate adjustments shall also be made to the exercise price payable per
share under each outstanding option, provided the aggregate exercise price
payable for such securities shall remain the same.

          E.   The grant of options under the Automatic Option Grant Program 
shall in no way affect the right of the Corporation to adjust, reclassify,
reorganize or otherwise change its capital or business structure or to merge,
consolidate, dissolve, liquidate or sell or transfer all or any part of its
business or assets.


                                       16.

<PAGE>

     III. AMENDMENT OF THE AUTOMATIC OPTION GRANT PROGRAM

          The provisions of this Automatic Option Grant Program, together with
the option grants outstanding thereunder, may not be amended at intervals more
frequently than once every six (6) months, other than to the extent necessary to
comply with applicable Federal income tax laws and regulations.

     IV.  REMAINING TERMS

          The remaining terms of each option granted under the Automatic Option
Grant Program shall be the same as the terms in effect for option grants made
under the Discretionary Option Grant Program.


                                       17.

<PAGE>

                                  ARTICLE FOUR

                                  MISCELLANEOUS


     I.   FINANCING

          A.   The Plan Administrator may permit any Optionee to pay the option
exercise price under the Discretionary Option Grant Program by delivering a
promissory note payable in one or more installments. The terms of any such
promissory note (including the interest rate and the terms of repayment) shall
be established by the Plan Administrator in its sole discretion. Promissory
notes may be authorized with or without security or collateral. In all events,
the maximum credit available to the Optionee may not exceed the sum of (i) the
aggregate option exercise price payable for the purchased shares plus (ii) any
Federal, state and local income and employment tax liability incurred by the
Optionee in connection with the option exercise.

          B.   The Plan Administrator may, in its discretion, determine that one
or more such promissory notes shall be subject to forgiveness by the Corporation
in whole or in part upon such terms as the Plan Administrator may deem
appropriate.

     II.  TAX WITHHOLDING

          A.   The Corporation's obligation to deliver shares of Common Stock
upon the exercise of options or stock appreciation rights under the Plan shall
be subject to the satisfaction of all applicable Federal, state and local income
and employment tax withholding requirements.

          B.   The Plan Administrator may, in its discretion, provide any or all
holders of Non-Statutory Options under the Plan (other than the options granted
under the Automatic Option Grant Program) with the right to use shares of Common
Stock in satisfaction of all or part of the Taxes incurred by such holders in
connection with the exercise of their options. Such right may be provided to any
such holder in either or both of the following formats:

               (i)  Stock Withholding: The election to have the Corporation
          withhold, from the shares of Common Stock otherwise issuable upon the
          exercise of such Non-Statutory Option, a portion of those shares with
          an aggregate Fair Market Value equal to the percentage of the Taxes
          (not to exceed one hundred percent (100%)) designated by the holder.

               (ii) Stock Delivery: The election to deliver to the Corporation,
          at the time the Non-Statutory Option is exercised, one or more


                                       18.

<PAGE>

          shares of Common Stock previously acquired by such holder (other than
          in connection with the option exercise triggering the Taxes) with an
          aggregate Fair Market Value equal to the percentage of the Taxes (not
          to exceed one hundred percent (100%)) designated by the holder.

     III. EFFECTIVE DATE AND TERM OF THE PLAN

          A.   The Discretionary Option Grant Program shall became effective on
the Plan Effective Date and options may be granted under the Discretionary
Option Grant Program at any time after the Plan Effective Date. The Automatic
Option Grant Program became effective on the Automatic Option Grant Program
Effective Date and option grants under the Automatic Option Grant Program may be
made to the Eligible Directors after such date. However, no options granted
under the Plan may be exercised until the Plan is approved by the Corporation's
stockholders. If such stockholder approval is not obtained within twelve (12)
months after the Plan Effective Date, then all options previously granted under
this Plan shall terminate and cease to be outstanding, and no further options
shall be granted and no shares shall be issued under the Plan.

          B.   The Plan was amended on June 9, 1995 to (i) increase the total
number of shares of Common Stock available for issuance from 650,000 shares to
950,000 shares and (ii) to increase the number of shares of Common Stock subject
to the options granted under the Automatic Option Grant Program upon the initial
election or appointment of an Eligible Director from 5,000 shares to 10,000 and
to increase the number of shares of Common Stock subject to the annual option
grants thereunder to be made on the date of each Annual Stockholders Meeting to
continuing non-employee Board members from 1,000 to 2,000 shares.

          C.   The Plan shall terminate upon the earliest of (i) June 30, 2005,
(ii) the date on which all shares available for issuance under the Plan shall
have been issued pursuant to the exercise of the options under the Plan or (iii)
the termination of all outstanding options in connection with a Corporate
Transaction. Upon such Plan termination, all outstanding options shall continue
to have force and effect in accordance with the provisions of the documents
evidencing such options.

     IV.  AMENDMENT OF THE PLAN

          A.   The Board shall have complete and exclusive power and authority
to amend or modify the Plan in any or all respects. However, (i) no such
amendment or modification shall adversely affect any rights and obligations with
respect to options or stock appreciation rights at the time outstanding under
the Plan unless the Optionee consents to such amendment or modification, and
(ii) any amendment made to the Automatic Option Grant Program (or any options
outstanding thereunder) shall be in compliance with the limitations of that
program. In addition, the Board shall not, without the approval of the
Corporation's stockholders, (i) materially increase the maximum number of shares
issuable


                                       19.

<PAGE>

under the Plan, the number of shares for which options may be granted under the
Automatic Option Grant Program or the maximum number of shares for which any one
person may be granted options or separately exercisable stock appreciation
rights in the aggregate per calendar year, except for permissible adjustments in
the event of certain changes in the Corporation's capitalization, (ii)
materially modify the eligibility requirements for Plan participation or (iii)
materially increase the benefits accruing to Plan participants.

          B.   Options to purchase shares of Common Stock may be granted under
the Discretionary Option Grant Program that are in excess of the number of
shares then available for issuance under the Plan, provided any excess shares
actually issued under those programs are held in escrow until there is obtained
stockholder approval of an amendment sufficiently increasing the number of
shares of Common Stock available for issuance under the Plan. If such
stockholder approval is not obtained within twelve (12) months after the date
the first such excess grants are made, then (i) any unexercised options granted
on the basis of such excess shares shall terminate and cease to be outstanding
and (ii) the Corporation shall promptly refund to the Optionees the exercise
price paid for any excess shares issued under the Plan and held in escrow,
together with interest (at the applicable Short Term Federal Rate) for the
period the shares were held in escrow, and such shares shall thereupon be
automatically cancelled and cease to be outstanding.

     V.   USE OF PROCEEDS

          Any cash proceeds received by the Corporation from the sale of shares
of Common Stock under the Plan shall be used for general corporate purposes.

     VI.  REGULATORY APPROVALS

          A.   The implementation of the Plan, the granting of any option or
stock appreciation right under the Plan and the issuance of any shares of Common
Stock upon the exercise of any option or stock appreciation right shall be
subject to the Corporation's procurement of all approvals and permits required
by regulatory authorities having jurisdiction over the Plan, the options and
stock appreciation rights granted under it and the shares of Common Stock issued
pursuant to it.

          B.   No shares of Common Stock or other assets shall be issued or
delivered under the Plan unless and until there shall have been compliance with
all applicable requirements of Federal and state securities laws and all
applicable listing requirements of any stock exchange (or the Nasdaq National
Market, if applicable) on which Common Stock is then listed for trading.

     VII. NO EMPLOYMENT/SERVICE RIGHTS

          Nothing in the Plan shall confer upon the Optionee any right to
continue in Service for any period of specific duration or interfere with or
otherwise restrict in any way


                                       20.

<PAGE>

the rights of the Corporation (or any Parent or Subsidiary employing or
retaining such person) or of the Optionee, which rights are hereby expressly
reserved by each, to terminate such person's Service at any time for any reason,
with or without cause.


                                       21.

<PAGE>

                                    APPENDIX


          The following definitions shall be in effect under the Plan:

     A.   Automatic Option Grant Program shall mean the automatic option grant
program in effect under the Plan.

     B.   Automatic Option Grant Program Effective Date shall mean the date on
which the Underwriting Agreement is executed and the initial public offering
price of the Common Stock is established.

     C.   Board shall mean the Corporation's Board of Directors.

     D.   Change in Control shall mean a change in ownership or control of the
Corporation effected through either of the following transactions:

          (i)  the acquisition, directly or indirectly, by any person or related
     group of persons (other than the Corporation or a person that directly or
     indirectly controls, is controlled by, or is under common control with, the
     Corporation), of beneficial ownership (within the meaning of Rule 13d-3 of
     the 1934 Act) of securities possessing more than fifty percent (50%) of the
     total combined voting power of the Corporation's outstanding securities
     pursuant to a tender or exchange offer made directly to the Corporation's
     stockholders which the Board does not recommend such stockholders to
     accept, or

          (ii) a change in the composition of the Board over a period of
     thirty-six (36) consecutive months or less such that a majority of the
     Board members ceases, by reason of one or more contested elections for
     Board membership, to be comprised of individuals who either (A) have been
     Board members continuously since the beginning of such period or (B) have
     been elected or nominated for election as Board members during such period
     by at least a majority of the Board members described in clause (A) who
     were still in office at the time the Board approved such election or
     nomination.

     E.   Code shall mean the Internal Revenue Code of 1986, as amended.

     F.   Common Stock shall mean the Corporation's common stock.

     G.   Corporate Transaction shall mean either of the following stockholder-
approved transactions to which the Corporation is a party:


                                      A-1.

<PAGE>

          (i)  a merger or consolidation in which securities possessing more
     than fifty percent (50%) of the total combined voting power of the
     Corporation's outstanding securities are transferred to a person or persons
     different from the persons holding those securities immediately prior to
     such transaction; or

          (ii)      the sale, transfer or other disposition of all or
     substantially all of the Corporation's assets in complete liquidation or
     dissolution of the Corporation.

     H.   Corporation shall mean Atlantic Pharmaceuticals, Inc., a Delaware
corporation, and any corporate successor to all or substantially all of the
assets or voting stock of Atlantic Pharmaceuticals, Inc. which shall by
appropriate action adopt the Plan.

     I.   Discretionary Option Grant Program shall mean the discretionary option
grant program in effect under the Plan.

     J.   Domestic Relations Order shall mean any judgment, decree or order
(including approval of a property settlement agreement) which provides or
otherwise conveys, pursuant to applicable State domestic relations laws
(including community property laws), marital property rights to any spouse or
former spouse of the Optionee.

     K.   Eligible Director shall mean a non-employee Board member eligible to
participate in the Automatic Option Grant Program in accordance with the
eligibility provisions of Article One.

     L.   Employee shall mean an individual who is in the employ of the
Corporation (or any Parent or Subsidiary), subject to the control and direction
of the employer entity as to both the work to be performed and the manner and
method of performance.

     M.   Exercise Date shall mean the date on which the Corporation shall have
received written notice of the option exercise.

     N.   Fair Market Value per share of Common Stock on any relevant date shall
be determined in accordance with the following provisions:

          (i)  If the Common Stock is at the time traded on the Nasdaq National
     Market, then the Fair Market Value shall be the closing selling price per
     share of Common Stock on the date in question, as such price is reported by
     the National Association of Securities Dealers on the Nasdaq National
     Market or any successor system. If there is no closing selling price for
     the Common Stock on the date in question, then the Fair Market Value shall
     be the closing selling price on the last preceding date for which such
     quotation exists.


                                      A-2.

<PAGE>

          (ii) If the Common Stock is at the time traded on the Nasdaq SmallCap
     Market or the over-the-counter market, then the Fair Market Value shall be
     the average of the highest bid and lowest asked prices per share of Common
     Stock on the date in question on the Nasdaq SmallCap Market or the
     over-the-counter market, as such prices are reported by the National
     Association of Securities Dealers through its Nasdaq system or any
     successor system. If there are no reported bid and asked prices for the
     Common Stock on the date in question, then the Fair Market Value shall be
     the average of the highest bid and lowest asked prices on the last
     preceding date for which such quotations exist.

          (iii) If the Common Stock is at the time listed on any Stock Exchange,
     then the Fair Market Value shall be the closing selling price per share of
     Common Stock on the date in question on the Stock Exchange determined by
     the Plan Administrator to be the primary market for the Common Stock, as
     such price is officially quoted in the composite tape of transactions on
     such exchange. If there is no closing selling price for the Common Stock on
     the date in question, then the Fair Market Value shall be the closing
     selling price on the last preceding date for which such quotation exists.

          (iv) For purposes of any option grants made on the date the
     Underwriting Agreement is executed and the initial public offering price of
     the Common Stock is established, the Fair Market Value shall be deemed to
     be equal to the established initial offering price per share. For purposes
     of option grants made prior to such date, the Fair Market Value shall be
     determined by the Plan Administrator after taking into account such factors
     as the Plan Administrator shall deem appropriate.

     O.   5% Stockholder shall mean the owner of stock (as determined under Code
Section 424(d)) possessing more than five percent (5%) of the total combined
voting power of all classes of stock of the Corporation (or any Parent or
Subsidiary).

     P.   Hostile Take-Over shall mean a change in ownership of the Corporation
effected through the following transaction:

          (i)  the acquisition, directly or indirectly, by any person or related
     group of persons (other than the Corporation or a person that directly or
     indirectly controls, is controlled by, or is under common control with, the
     Corporation) of beneficial ownership (within the meaning of Rule 13d-3 of
     the 1934 Act) of securities possessing more than fifty percent (50%) of the
     total combined voting power of the Corporation's outstanding securities
     pursuant to a tender or exchange offer made directly to the Corporation's


                                      A-3.

<PAGE>

     stockholders which the Board does not recommend such stockholders to
     accept, and

          (ii) more than fifty percent (50%) of the securities so acquired are
     accepted from persons other than Section 16 Insiders.

     Q.   Incentive Option shall mean an option which satisfies the requirements
of Code Section 422.

     R.   Involuntary Termination shall mean the termination of the Service of
any individual which occurs by reason of:

          (i)  such individual's involuntary dismissal or discharge by the
     Corporation for reasons other than Misconduct, or

          (ii) such individual's voluntary resignation following (A) a change in
     his or her position with the Corporation which materially reduces his or
     her level of responsibility, (B) a reduction in his or her level of
     compensation (including base salary, fringe benefits and participation in
     corporate-performance based bonus or incentive programs) by more than
     fifteen percent (15%) or (C) a relocation of such individual's place of
     employment by more than fifty (50) miles, provided and only if such change,
     reduction or relocation is effected by the Corporation without the
     individual's consent.

     S.   Misconduct shall mean the commission of any act of fraud, embezzlement
or dishonesty by the Optionee, any unauthorized use or disclosure by such person
of confidential information or trade secrets of the Corporation (or any Parent
or Subsidiary), or any other intentional misconduct by such person adversely
affecting the business or affairs of the Corporation (or any Parent or
Subsidiary) in a material manner. The foregoing definition shall not be deemed
to be inclusive of all the acts or omissions which the Corporation (or any
Parent or Subsidiary) may consider as grounds for the dismissal or discharge of
any Optionee or other person in the Service of the Corporation (or any Parent or
Subsidiary).

     T.   1934 Act shall mean the Securities Exchange Act of 1934, as amended.

     U.   Non-Statutory Option shall mean an option not intended to satisfy the
requirements of Code Section 422.

     V.   Optionee shall mean any person to whom an option is granted under the
Discretionary Option Grant or Automatic Option Grant Program.


                                      A-4.

<PAGE>

     W.   Parent shall mean any corporation (other than the Corporation) in an
unbroken chain of corporations ending with the Corporation, provided each
corporation in the unbroken chain (other than the Corporation) owns, at the time
of the determination, stock possessing fifty percent (50%) or more of the total
combined voting power of all classes of stock in one of the other corporations
in such chain. For purposes of the grant of Non-Statutory Options and stock
appreciation rights under the Discretionary Option Grant Program, the term
Parent shall also include any corporation, partnership, joint venture or other
business entity which, directly or indirectly, controls the management and
policies of the Corporation, whether through the ownership of voting securities,
by contract or otherwise.

     X.   Permanent Disability or Permanently Disabled shall mean the inability
of the Optionee to engage in any substantial gainful activity by reason of any
medically determinable physical or mental impairment expected to result in death
or to be of continuous duration of twelve (12) months or more. However, solely
for the purposes of the Automatic Option Grant Program, Permanent Disability or
Permanently Disabled shall mean the inability of the non-employee Board member
to perform his or her usual duties as a Board member by reason of any medically
determinable physical or mental impairment expected to result in death or to be
of continuous duration of twelve (12) months or more.

     Y.   Plan shall mean the Corporation's 1995 Stock Option Plan, as set forth
in this document.

     Z.   Plan Administrator shall mean the particular entity, whether the
Board, the Primary Committee or the Secondary Committee, which is authorized to
administer the Discretionary Option Grant Program with respect to one or more
classes of eligible persons, to the extent such entity is carrying out its
administrative functions under those programs with respect to the persons under
its jurisdiction.

     AA.  Plan Effective Date shall mean the date on which the Plan is adopted
by the Board.

     AB.  Primary Committee shall mean the committee of two (2) or more non-
employee Board members appointed by the Board to administer the Discretionary
Option Grant Program with respect to Section 16 Insiders.

     AC.  Qualified Domestic Relations Order shall mean a Domestic Relations
Order which substantially complies with the requirements of Code Section 414(p).
The Plan Administrator shall have the sole discretion to determine whether a
Domestic Relations Order is a Qualified Domestic Relations Order.

     AD.  Secondary Committee shall mean a committee of two (2) or more Board
members appointed by the Board to administer the Discretionary Option Grant
Program with respect to eligible persons other than Section 16 Insiders.


                                      A-5.

<PAGE>

     AE.  Section 16 Insider shall mean an officer or director of the
Corporation subject to the short-swing profit liabilities of Section 16 of the
1934 Act.

     AF.  Section 12(g) Registration Date shall mean the first date on which the
Common Stock is registered under Section 12(g) of the 1934 Act.

     AG.  Service shall mean the provision of services to the Corporation (or
any Parent or Subsidiary) by a person in the capacity of an Employee, a
non-employee member of the board of directors or a consultant or independent
advisor, except to the extent otherwise specifically provided in the documents
evidencing the option grant.

     AH.  Stock Exchange shall mean either the American Stock Exchange or the
New York Stock Exchange.

     AI.  Subsidiary shall mean any corporation (other than the Corporation) in
an unbroken chain of corporations beginning with the Corporation, provided each
corporation (other than the last corporation) in the unbroken chain owns, at the
time of the determination, stock possessing fifty percent (50%) or more of the
total combined voting power of all classes of stock in one of the other
corporations in such chain. For purposes of the grant of Non-Statutory Options
and stock appreciation rights under the Discretionary Option Grant Program, the
term Subsidiary shall also include any corporation, partnership, joint venture
or other business entity in which the Corporation, directly or indirectly,
controls the management and policies, whether through the ownership of voting
securities, by contract or otherwise.

     AJ.  Take-Over Price shall mean the greater of (i) the Fair Market Value
per share of Common Stock on the date the option is surrendered to the
Corporation in connection with a Hostile Take-Over or (ii) the highest reported
price per share of Common Stock paid by the tender offeror in effecting such
Hostile Take-Over. However, if the surrendered option is an Incentive Option,
the Take-Over Price shall not exceed the clause (i) price per share.

     AK.  Taxes shall mean the Federal, state and local income and employment
tax liabilities incurred by the holder of Non-Statutory Options or unvested
shares of Common Stock in connection with the exercise of those options or the
vesting of those shares.

     AL.  10% Stockholder shall mean the owner of stock (as determined under
Code Section 424(d)) possessing more than ten percent (10%) of the total
combined voting power of all classes of stock of the Corporation (or any Parent
or Subsidiary).

     AM.  Underwriting Agreement shall mean the agreement between the
Corporation and the underwriter or underwriters managing the initial public
offering of the Common Stock.


                                      A-6.



                               WARRANT TO PURCHASE
                             SHARES OF COMMON STOCK


THIS WARRANT HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED, OR ANY STATE SECURITIES LAWS AND MAY NOT BE SOLD, OFFERED FOR SALE,
TRANSFERRED, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF A REGISTRATION STATEMENT
IN EFFECT WITH RESPECT TO THE SECURITIES UNDER SUCH ACT AND ANY APPLICABLE STATE
SECURITIES LAW OR AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY THAT SUCH
REGISTRATION IS NOT REQUIRED.

                         ATLANTIC PHARMACEUTICALS, INC.

              INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE

                            Void after April 15, 2001


     THIS CERTIFIES THAT, for value received, Paramount Capital, Incorporated
("Holder") is entitled to purchase, on the terms hereof, Twenty Five Thousand
(25,000) shares of Common Stock (as adjusted pursuant to Section 4 hereof, the
"Shares") of Atlantic Pharmaceuticals, Inc., a Delaware corporation (the
"Company"), subject to the provisions and upon the terms and conditions
hereinafter set forth. As used herein, the term "Common Stock" shall mean the
Company's presently authorized Common Stock, par value $.001 per share, and any
stock into or for which such Common Stock may hereafter be converted or
exchanged. The term "Warrant" as used herein shall include this
 Warrant, and any
warrants delivered in substitution or exchange therefor as provided herein.

     The following terms shall apply to this Warrant:

     1.   Term of Warrant. Subject to the terms and conditions set forth herein,
the term of this Warrant shall commence and this Warrant shall be exercisable
for the Shares, commencing on the date hereof and expiring at 5:00 p.m. Pacific
Standard Time on April 15, 2001.

     2.   Exercise Price; Number of Shares. The exercise price ("Exercise
Price") at which this Warrant may be exercised shall be Ten Dollars ($10.00), as
adjusted from time to time pursuant to Section 4 hereof. The number of shares of
Common Stock for which this Warrant is initially exercisable is Twenty Five
Thousand (25,000) shares of Common Stock, which number is subject to adjustment
pursuant to Section 4 of this Warrant.

     3.   Exercise of Warrant. Subject to the terms of Section 1 hereof, the
purchase rights represented by this Warrant are exercisable by Holder during the
term hereof, in whole or in part and from time to time, by the surrender of this
Warrant (with the notice of exercise form attached hereto as Exhibit A duly
executed) at the principal office of the Company and by payment to the Company,
by check or wire transfer of an amount equal to the then applicable Exercise
Price multiplied by the number of Shares then being purchased. In the event of
any exercise of the rights represented by this Warrant, certificates for the
Shares so purchased shall be delivered to Holder hereof as soon as possible and,
unless this Warrant has been fully exercised or expired, a new Warrant
representing the portion of the Shares, if any, with respect to which this
Warrant shall not then have been exercised shall also be issued to Holder hereof
as soon as possible.

<PAGE>

     4.   Certain Adjustments.

     4.1. Adjustments for Splits, Subdivisions, Recapitalizations and other
Combinations. In case the Company shall (i) pay a dividend in Common Stock or
make a distribution in the form of Common Stock, (ii) subdivide the outstanding
shares of Common Stock, (iii) combine its outstanding shares of Common Stock
into a smaller number of shares of Common Stock, (iv) issue by reclassification
of its Common Stock other securities of the Company, or (v) take any other
action, the effect of which is to reclassify or reorganize the outstanding
shares of Common Stock into a different number of shares or class of securities,
the number of shares purchasable upon exercise of this Warrant immediately prior
thereto shall be adjusted so that the Holder shall be entitled to receive the
kind and number of shares or other securities of the Company which it would have
owned or would have been entitled to receive immediately after the happening of
any of the events described above, had the Warrant been exercised immediately
prior to the happening of such event or any record date with respect thereto.
Any adjustment made with respect to this Section 4.1 shall become effective
immediately after the effective date of such event retroactive to the record
date, if any, for such event. Whenever the number of Shares purchasable upon the
exercise of this Warrant is adjusted, as herein provided, the Exercise Price
payable upon the exercise of this Warrant shall be adjusted by multiplying such
Exercise Price immediately prior to such adjustment by a fraction, of which the
numerator shall be the number of Shares purchasable upon the exercise of the
Warrant immediately prior to such adjustment, and of which the denominator shall
be the number of Warrant shares so purchasable immediately thereafter. Except as
provided above, no adjustment in respect of any dividends or distributions out
of earnings shall be made during the term of this Warrant or upon the exercise
of this Warrant.

     4.2. Mergers, Consolidations or Sale of Assets. If at any time there shall
be a capital reorganization (other than a combination or subdivision of Shares
otherwise provided for herein), or a merger or consolidation of the Company with
or into another corporation, or the sale of the Company's properties and assets
as, or substantially as, an entirety to any other person, then, as a part of
such reorganization, merger, consolidation or sale, lawful provision shall be
made so that the Holder shall thereafter be entitled to receive upon exercise of
this Warrant, during the period specified in this Warrant and upon payment of
the purchase price, the number of shares of stock or other securities or
property of the Company or the successor corporation resulting from such
reorganization, merger, consolidation or sale, to which a holder of Common Stock
deliverable upon exercise of this Warrant would have been entitled under the
provisions of the agreement in such reorganization, merger, consolidation or
sale if this Warrant had been exercised immediately before that reorganization,
merger, consolidation or sale. In any such case, appropriate adjustment (as
determined in good faith by the Company's Board of Directors) shall be made in
the application of the provisions of this Warrant with respect to the rights and
interests of the Holder after the reorganization, merger, consolidation or sale
to the end that the provisions of this Warrant (including adjustment of the
purchase price then in effect and the number of the Shares) shall be applicable
after that event, as near as reasonably may be, in relation to any shares or
other property deliverable after that event upon exercise of this Warrant;
provided, however, that the aggregate purchase price shall not be adjusted.

     4.3. Certificate as to Adjustments. In the case of each adjustment or
readjustment of the purchase price pursuant to this Section 4, the Company will
promptly compute such adjustment or readjustment in accordance with the terms
hereof and cause a certificate setting forth such adjustment or readjustment and
showing in detail the facts upon which such adjustment or readjustment is based
to be delivered to the Holder of this Warrant. The Company will, upon the
written request at any time of the Holder of this Warrant, furnish or cause to
be furnished to such Holder a certificate setting forth:

     (a)  Such adjustments and readjustments;

     (b)  The purchase price at the time in effect; and


                                       2.

<PAGE>

     (c)  The number of Shares and the amount, if any, of other property at the
time receivable upon the exercise of the Warrant.

     5.   Fractional Stock. No fractional shares shall be issued in connection
with any exercise of this Warrant. In lieu of the issuance of such fractional
share, the Company shall make a cash payment equal to the then fair market value
of such fractional share as determined in good faith by the Company's Board of
Directors.

     6.   Reservation of Common Stock. The Company shall at all times reserve
and keep available out of its authorized but unissued shares of Common Stock,
solely for the purpose of effecting the exercise of this Warrant, such number of
its shares of Common Stock as shall from time to time be sufficient to effect
the exercise of this Warrant.

     7.   Restrictions on Transfer.

     Unless the issuance of the Shares has been registered under the Securities
Act of 1933, as amended (the "1933 Act"):

     (a)  this Warrant and any Shares may not be sold, transferred, pledged,
hypothecated or otherwise disposed of except: (i) to a person who, in the
opinion of counsel to the Company, is a person to whom this Warrant or the
Shares may legally be transferred without registration and without the delivery
of a current prospectus under the 1933 Act with respect thereto and then only
against receipt of an agreement of such person to comply with the provisions of
this Section 6 with respect to any resale or other disposition of such
securities; or (ii) to any person upon the delivery of a prospectus then meeting
the requirements of the 1933 Act relating to such securities and the offering
thereof for such sale or disposition, and thereafter to all successive
assignees;

     (b)  upon exercise of any of the Warrants and the issuance of any of the
Shares, all certificates representing such shares shall bear on the face thereof
substantially the following legend, insofar as is consistent with California
law, as well as any other legends necessary to comply with applicable state and
federal laws for the issuance of such shares:

     THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
     UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "1933 ACT"), OR UNDER THE
     PROVISIONS OF ANY APPLICABLE STATE SECURITIES LAWS, BUT HAVE BEEN ACQUIRED
     BY THE REGISTERED HOLDER HEREOF FOR PURPOSES OF INVESTMENT AND IN RELIANCE
     ON STATUTORY EXEMPTIONS UNDER THE 1933 ACT, AND UNDER ANY APPLICABLE STATE
     SECURITIES LAWS. THESE SECURITIES MAY NOT BE SOLD, PLEDGED, TRANSFERRED OR
     ASSIGNED, EXCEPT IN A TRANSACTION WHICH IS EXEMPT UNDER PROVISIONS OF THE
     1933 ACT AND ANY APPLICABLE STATE SECURITIES LAWS OR PURSUANT TO AN
     EFFECTIVE REGISTRATION STATEMENT; AND IN THE CASE OF AN EXEMPTION; ONLY IF
     THE COMPANY HAS RECEIVED AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY
     THAT SUCH TRANSACTION DOES NOT REQUIRE REGISTRATION OF ANY SUCH SECURITIES.

     8.   Rights as Stockholders; Information. Holder shall not be entitled to
vote or receive dividends or be deemed the holder of Common Stock or any other
securities of the Company which may at any time be issuable on the exercise
hereof for any purpose, nor shall anything contained herein be construed


                                       3.

<PAGE>

to confer upon Holder any of the rights of a stockholder of the Company or any
right to vote for the election of directors or upon any matter submitted to
shareholders or at any meeting thereof, or to receive notice of meetings, or to
receive dividends or subscription rights or otherwise until this Warrant shall
have been exercised and the Shares purchasable upon the exercise hereof shall
have become deliverable, as provided herein.

     9.   Net Issuance.

     (a)  Right to Convert. In addition to and without limiting the rights of
the Holder under the terms of this Warrant, the Holder shall have the right to
convert this Warrant or any portion thereof (the "Conversion Right") into shares
of Common Stock as provided in this Section 9(a) at any time or from time to
time during the term of this Warrant. Upon exercise of the Conversion Right with
respect to a particular number of shares subject to this Warrant (the "Converted
Warrant Shares"), the Company shall deliver to the Holder (without payment by
the Holder of any exercise price or any cash or other consideration) that number
of shares of fully paid and nonassessable Common Stock equal to the quotient
obtained by dividing (x) the value of this Warrant (or the specified portion
hereof) on the Conversion Date (as defined in subsection (b) hereof), which
value shall be determined by subtracting (1) the aggregate Exercise Price of the
Converted Warrant Shares immediately prior to the exercise of the Conversion
Right from (2) the aggregate fair market value of the Converted Warrant Shares
issuable upon exercise of this Warrant (or the specified portion hereof) on the
Conversion Date (as herein defined) by (y) the fair market value of one share of
Common Stock on the Conversion Date (as herein defined). No fractional shares
shall be issuable upon exercise of the Conversion Right, and, if the number of
shares to be issued determined in accordance with the foregoing formula is other
than a whole number, the Company shall pay to the Holder an amount in cash equal
to the fair market value of the resulting fractional share on the Conversion
Date (as hereinafter defined). For purposes of Section 9 of this Warrant, shares
issued pursuant to the Conversion Right shall be treated as if they were issued
upon the exercise of this Warrant.

     (b)  Method of Exercise. The Conversion Right may be exercised by the
Holder by the surrender of this Warrant at the principal office of the Company
together with a written statement specifying that the Holder thereby intends to
exercise the Conversion Right and indicating the number of shares subject to
this Warrant which are being surrendered (referred to in subsection (a) hereof
as the Converted Warrant Shares) in exercise of the Conversion Right. Such
conversion shall be effective upon receipt by the Company of this Warrant
together with the aforesaid written statement, or on such later date as is
specified therein (the "Conversion Date"). Certificates for the shares issuable
upon exercise of the Conversion Right and, if applicable, a new warrant
evidencing the balance of the shares remaining subject to this Warrant, shall be
issued as of the Conversion Date and shall be delivered to the Holder within
thirty (30) days following the Conversion Date.

     (c)  Determination of Fair Market Value. For purposes of this Section 9(c),
"fair market value" of a share of Common Stock or a Converted Warrant Share, as
the case may be, as of a particular date (the "Determination Date") shall mean:

          (i)  If traded on a securities exchange or on Nasdaq, the fair market
value of the Common Stock shall be deemed to be the closing price of the Common
Stock on such exchange on the business day prior to the Determination Date;

          (ii) If traded over-the-counter, the fair market value of the Common
Stock shall be deemed to be the closing price of the Common Stock on the
business day prior to the Determination Date; and


                                       4.

<PAGE>

          (iii) If there is no public market for the Common Stock, then fair
market value shall be determined by the Board of Directors of the Company;
provided, however, that if the Holder shall not agree with the fair market value
determined by the Board, the Company shall engage an investment banker of
national reputation (or such other party as shall be mutually acceptable to the
parties) to determine the fair market value. If the valuation of the investment
banker is less than the value determined the Board of Directors or does not
exceed such valuation by 10%, the expenses of the valuation shall be borne by
the Holder. If the valuation of the investment banker is greater than the value
determined by the Board of Directors by more than 10%, the expenses of such
valuation shall be borne by the Company.

     10.  Transfers and Exchanges. Subject to the terms and conditions of the
applicable Federal and state securities laws, this Warrant is transferable in
whole or in part by the Holder. All new warrants issued in connection with
transfers or exchanges shall be identical in form and provision to this Warrant
except as to the number of shares.

     11.  Successors and Assigns. The terms and provisions of this Warrant shall
be binding upon the Company and the Holder and their respective successors and
assigns.

     12.  Amendments. This Warrant and any provision hereof may be changed,
waived, discharged or terminated only by an instrument in writing signed by the
party against which enforcement of the same is sought.

     13.  Letter Agreement. This Warrant is issued pursuant to the letter
agreement, dated as of April 15, 1996, between the Company and Holder.

     14.  Loss, Theft, Destruction or Mutilation of Warrant. Upon receipt by the
Company of evidence reasonably satisfactory to it of the loss, theft,
destruction or mutilation of this Warrant, and in case of loss, theft or
destruction, of indemnity or security reasonably satisfactory to the Company,
and upon reimbursement to the Company of all reasonable expenses incidental
thereto, and upon surrender and cancellation of this Warrant, if mutilated, the
Company will make and deliver a new warrant of like tenor and dated as of such
cancellation, in lieu of this Warrant.

     15.  Saturdays, Sundays, Holidays, etc. If the last or appointed day for
the taking of any action or the expiration of any right required or granted
herein shall be a Saturday or Sunday or shall be a legal holiday, then such
action may be taken or such right may be exercised on the next succeeding day
not a legal holiday.


                                       5.

<PAGE>

     16.  Governing Law. The terms and conditions of this Warrant shall be
governed by and construed in accordance with California law as such laws are
applied to agreements which are entered into solely between California residents
and are to be performed entirely within that state.


Dated: ___________________              ATLANTIC PHARMACEUTICALS, INC.



                                        By:_____________________________________
                                           Jon D. Lindjord
                                           President and Chief Executive Officer


Dated: ___________________              PARAMOUNT CAPITAL, INCORPORATED


                                        By:_____________________________________
                                           Lindsay Rosenwald, M.D.
                                           Chairman


                                       6.

<PAGE>

                                    EXHIBIT A

                               NOTICE OF EXERCISE



To:  Atlantic Pharmaceuticals, Inc.


     1.   The undersigned hereby elects to purchase __________ shares of Common
Stock of Atlantic Pharmaceuticals, Inc. pursuant to the terms of the attached
Warrant, and tenders herewith payment of the purchase price of such shares in
full.

     2.   Please issue a certificate or certificates representing said shares in
the name of the undersigned or in such other name or names as are specified
below:


                        --------------------------------
                                     (Name)

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

                        --------------------------------
                                    (Address)

     3.   The undersigned represents that the aforesaid shares are being
acquired for the account of the undersigned for investment and not with a view
to, or for resale in connection with, the distribution thereof and that the
undersigned has no present intention of distributing or reselling such shares.


                                        HOLDER


                                        By: ____________________________________

                                        Its:____________________________________



Dated: __________________________



                               WARRANT TO PURCHASE
                             SHARES OF COMMON STOCK


THIS WARRANT HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED, OR ANY STATE SECURITIES LAWS AND MAY NOT BE SOLD, OFFERED FOR SALE,
TRANSFERRED, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF A REGISTRATION STATEMENT
IN EFFECT WITH RESPECT TO THE SECURITIES UNDER SUCH ACT AND ANY APPLICABLE STATE
SECURITIES LAW OR AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY THAT SUCH
REGISTRATION IS NOT REQUIRED.

                         ATLANTIC PHARMACEUTICALS, INC.

              INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE

                            Void after June 16, 2001


     THIS CERTIFIES THAT, for value received, Paramount Capital, Incorporated
("Holder") is entitled to purchase, on the terms hereof, Twenty Five Thousand
(25,000) shares of Common Stock (as adjusted pursuant to Section 4 hereof, the
"Shares") of Atlantic Pharmaceuticals, Inc., a Delaware corporation (the
"Company"), subject to the provisions and upon the terms and conditions
hereinafter set forth. As used herein, the term "Common Stock" shall mean the
Company's presently authorized Common Stock, par value $.001 per share, and any
stock into or for which such Common Stock may hereafter be converted or
exchanged. The term "Warrant" as used herein shall include this
 Warrant, and any
warrants delivered in substitution or exchange therefor as provided herein.

     The following terms shall apply to this Warrant:

     1.   Term of Warrant. Subject to the terms and conditions set forth herein,
the term of this Warrant shall commence and this Warrant shall be exercisable
for the Shares, commencing on the date hereof and expiring at 5:00 p.m. Pacific
Standard Time on June 16, 2001.

     2.   Exercise Price; Number of Shares. The exercise price ("Exercise
Price") at which this Warrant may be exercised shall be Eight Dollars and Five
Cents ($8.05), as adjusted from time to time pursuant to Section 4 hereof. The
number of shares of Common Stock for which this Warrant is initially exercisable
is Twenty Five Thousand (25,000) shares of Common Stock, which number is subject
to adjustment pursuant to Section 4 of this Warrant.

     3.   Exercise of Warrant. Subject to the terms of Section 1 hereof, the
purchase rights represented by this Warrant are exercisable by Holder during the
term hereof, in whole or in part and from time to time, by the surrender of this
Warrant (with the notice of exercise form attached hereto as Exhibit A duly
executed) at the principal office of the Company and by payment to the Company,
by check or wire transfer of an amount equal to the then applicable Exercise
Price multiplied by the number of Shares then being purchased. In the event of
any exercise of the rights represented by this Warrant, certificates for the
Shares so purchased shall be delivered to Holder hereof as soon as possible and,
unless this Warrant has been fully exercised or expired, a new Warrant
representing the portion of the Shares, if any, with respect to which this
Warrant shall not then have been exercised shall also be issued to Holder hereof
as soon as possible.

<PAGE>

     4.   Certain Adjustments.

     4.1. Adjustments for Splits, Subdivisions, Recapitalizations and other
Combinations. In case the Company shall (i) pay a dividend in Common Stock or
make a distribution in the form of Common Stock, (ii) subdivide the outstanding
shares of Common Stock, (iii) combine its outstanding shares of Common Stock
into a smaller number of shares of Common Stock, (iv) issue by reclassification
of its Common Stock other securities of the Company, or (v) take any other
action, the effect of which is to reclassify or reorganize the outstanding
shares of Common Stock into a different number of shares or class of securities,
the number of shares purchasable upon exercise of this Warrant immediately prior
thereto shall be adjusted so that the Holder shall be entitled to receive the
kind and number of shares or other securities of the Company which it would have
owned or would have been entitled to receive immediately after the happening of
any of the events described above, had the Warrant been exercised immediately
prior to the happening of such event or any record date with respect thereto.
Any adjustment made with respect to this Section 4.1 shall become effective
immediately after the effective date of such event retroactive to the record
date, if any, for such event. Whenever the number of Shares purchasable upon the
exercise of this Warrant is adjusted, as herein provided, the Exercise Price
payable upon the exercise of this Warrant shall be adjusted by multiplying such
Exercise Price immediately prior to such adjustment by a fraction, of which the
numerator shall be the number of Shares purchasable upon the exercise of the
Warrant immediately prior to such adjustment, and of which the denominator shall
be the number of Warrant shares so purchasable immediately thereafter. Except as
provided above, no adjustment in respect of any dividends or distributions out
of earnings shall be made during the term of this Warrant or upon the exercise
of this Warrant.

     4.2. Mergers, Consolidations or Sale of Assets. If at any time there shall
be a capital reorganization (other than a combination or subdivision of Shares
otherwise provided for herein), or a merger or consolidation of the Company with
or into another corporation, or the sale of the Company's properties and assets
as, or substantially as, an entirety to any other person, then, as a part of
such reorganization, merger, consolidation or sale, lawful provision shall be
made so that the Holder shall thereafter be entitled to receive upon exercise of
this Warrant, during the period specified in this Warrant and upon payment of
the purchase price, the number of shares of stock or other securities or
property of the Company or the successor corporation resulting from such
reorganization, merger, consolidation or sale, to which a holder of Common Stock
deliverable upon exercise of this Warrant would have been entitled under the
provisions of the agreement in such reorganization, merger, consolidation or
sale if this Warrant had been exercised immediately before that reorganization,
merger, consolidation or sale. In any such case, appropriate adjustment (as
determined in good faith by the Company's Board of Directors) shall be made in
the application of the provisions of this Warrant with respect to the rights and
interests of the Holder after the reorganization, merger, consolidation or sale
to the end that the provisions of this Warrant (including adjustment of the
purchase price then in effect and the number of the Shares) shall be applicable
after that event, as near as reasonably may be, in relation to any shares or
other property deliverable after that event upon exercise of this Warrant;
provided, however, that the aggregate purchase price shall not be adjusted.

     4.3. Certificate as to Adjustments. In the case of each adjustment or
readjustment of the purchase price pursuant to this Section 4, the Company will
promptly compute such adjustment or readjustment in accordance with the terms
hereof and cause a certificate setting forth such adjustment or readjustment and
showing in detail the facts upon which such adjustment or readjustment is based
to be delivered to the Holder of this Warrant. The Company will, upon the
written request at any time of the Holder of this Warrant, furnish or cause to
be furnished to such Holder a certificate setting forth:

     (a)  Such adjustments and readjustments;

     (b)  The purchase price at the time in effect; and


                                       2.

<PAGE>

     (c)  The number of Shares and the amount, if any, of other property at the
time receivable upon the exercise of the Warrant.

     5.   Fractional Stock. No fractional shares shall be issued in connection
with any exercise of this Warrant. In lieu of the issuance of such fractional
share, the Company shall make a cash payment equal to the then fair market value
of such fractional share as determined in good faith by the Company's Board of
Directors.

     6.   Reservation of Common Stock. The Company shall at all times reserve
and keep available out of its authorized but unissued shares of Common Stock,
solely for the purpose of effecting the exercise of this Warrant, such number of
its shares of Common Stock as shall from time to time be sufficient to effect
the exercise of this Warrant.

     7.   Restrictions on Transfer.

     Unless the issuance of the Shares has been registered under the Securities
Act of 1933, as amended (the "1933 Act"):

     (a)  this Warrant and any Shares may not be sold, transferred, pledged,
hypothecated or otherwise disposed of except: (i) to a person who, in the
opinion of counsel to the Company, is a person to whom this Warrant or the
Shares may legally be transferred without registration and without the delivery
of a current prospectus under the 1933 Act with respect thereto and then only
against receipt of an agreement of such person to comply with the provisions of
this Section 6 with respect to any resale or other disposition of such
securities; or (ii) to any person upon the delivery of a prospectus then meeting
the requirements of the 1933 Act relating to such securities and the offering
thereof for such sale or disposition, and thereafter to all successive
assignees;

     (b)  upon exercise of any of the Warrants and the issuance of any of the
Shares, all certificates representing such shares shall bear on the face thereof
substantially the following legend, insofar as is consistent with California
law, as well as any other legends necessary to comply with applicable state and
federal laws for the issuance of such shares:

     THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
     UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "1933 ACT"), OR UNDER THE
     PROVISIONS OF ANY APPLICABLE STATE SECURITIES LAWS, BUT HAVE BEEN ACQUIRED
     BY THE REGISTERED HOLDER HEREOF FOR PURPOSES OF INVESTMENT AND IN RELIANCE
     ON STATUTORY EXEMPTIONS UNDER THE 1933 ACT, AND UNDER ANY APPLICABLE STATE
     SECURITIES LAWS. THESE SECURITIES MAY NOT BE SOLD, PLEDGED, TRANSFERRED OR
     ASSIGNED, EXCEPT IN A TRANSACTION WHICH IS EXEMPT UNDER PROVISIONS OF THE
     1933 ACT AND ANY APPLICABLE STATE SECURITIES LAWS OR PURSUANT TO AN
     EFFECTIVE REGISTRATION STATEMENT; AND IN THE CASE OF AN EXEMPTION; ONLY IF
     THE COMPANY HAS RECEIVED AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY
     THAT SUCH TRANSACTION DOES NOT REQUIRE REGISTRATION OF ANY SUCH SECURITIES.

     8.   Rights as Stockholders; Information. Holder shall not be entitled to
vote or receive dividends or be deemed the holder of Common Stock or any other
securities of the Company which may at any time be issuable on the exercise
hereof for any purpose, nor shall anything contained herein be construed


                                       3.

<PAGE>

to confer upon Holder any of the rights of a stockholder of the Company or any
right to vote for the election of directors or upon any matter submitted to
shareholders or at any meeting thereof, or to receive notice of meetings, or to
receive dividends or subscription rights or otherwise until this Warrant shall
have been exercised and the Shares purchasable upon the exercise hereof shall
have become deliverable, as provided herein.

     9.   Net Issuance.

     (a)  Right to Convert. In addition to and without limiting the rights of
the Holder under the terms of this Warrant, the Holder shall have the right to
convert this Warrant or any portion thereof (the "Conversion Right") into shares
of Common Stock as provided in this Section 9(a) at any time or from time to
time during the term of this Warrant. Upon exercise of the Conversion Right with
respect to a particular number of shares subject to this Warrant (the "Converted
Warrant Shares"), the Company shall deliver to the Holder (without payment by
the Holder of any exercise price or any cash or other consideration) that number
of shares of fully paid and nonassessable Common Stock equal to the quotient
obtained by dividing (x) the value of this Warrant (or the specified portion
hereof) on the Conversion Date (as defined in subsection (b) hereof), which
value shall be determined by subtracting (1) the aggregate Exercise Price of the
Converted Warrant Shares immediately prior to the exercise of the Conversion
Right from (2) the aggregate fair market value of the Converted Warrant Shares
issuable upon exercise of this Warrant (or the specified portion hereof) on the
Conversion Date (as herein defined) by (y) the fair market value of one share of
Common Stock on the Conversion Date (as herein defined). No fractional shares
shall be issuable upon exercise of the Conversion Right, and, if the number of
shares to be issued determined in accordance with the foregoing formula is other
than a whole number, the Company shall pay to the Holder an amount in cash equal
to the fair market value of the resulting fractional share on the Conversion
Date (as hereinafter defined). For purposes of Section 9 of this Warrant, shares
issued pursuant to the Conversion Right shall be treated as if they were issued
upon the exercise of this Warrant.

     (b)  Method of Exercise. The Conversion Right may be exercised by the
Holder by the surrender of this Warrant at the principal office of the Company
together with a written statement specifying that the Holder thereby intends to
exercise the Conversion Right and indicating the number of shares subject to
this Warrant which are being surrendered (referred to in subsection (a) hereof
as the Converted Warrant Shares) in exercise of the Conversion Right. Such
conversion shall be effective upon receipt by the Company of this Warrant
together with the aforesaid written statement, or on such later date as is
specified therein (the "Conversion Date"). Certificates for the shares issuable
upon exercise of the Conversion Right and, if applicable, a new warrant
evidencing the balance of the shares remaining subject to this Warrant, shall be
issued as of the Conversion Date and shall be delivered to the Holder within
thirty (30) days following the Conversion Date.

     (c)  Determination of Fair Market Value. For purposes of this Section 9(c),
"fair market value" of a share of Common Stock or a Converted Warrant Share, as
the case may be, as of a particular date (the "Determination Date") shall mean:

          (i)  If traded on a securities exchange or on Nasdaq, the fair market
value of the Common Stock shall be deemed to be the closing price of the Common
Stock on such exchange on the business day prior to the Determination Date;

          (ii) If traded over-the-counter, the fair market value of the Common
Stock shall be deemed to be the closing price of the Common Stock on the
business day prior to the Determination Date; and


                                       4.

<PAGE>

          (iii) If there is no public market for the Common Stock, then fair
market value shall be determined by the Board of Directors of the Company;
provided, however, that if the Holder shall not agree with the fair market value
determined by the Board, the Company shall engage an investment banker of
national reputation (or such other party as shall be mutually acceptable to the
parties) to determine the fair market value. If the valuation of the investment
banker is less than the value determined the Board of Directors or does not
exceed such valuation by 10%, the expenses of the valuation shall be borne by
the Holder. If the valuation of the investment banker is greater than the value
determined by the Board of Directors by more than 10%, the expenses of such
valuation shall be borne by the Company.

     10.  Transfers and Exchanges. Subject to the terms and conditions of the
applicable Federal and state securities laws, this Warrant is transferable in
whole or in part by the Holder. All new warrants issued in connection with
transfers or exchanges shall be identical in form and provision to this Warrant
except as to the number of shares.

     11.  Successors and Assigns. The terms and provisions of this Warrant shall
be binding upon the Company and the Holder and their respective successors and
assigns.

     12.  Amendments. This Warrant and any provision hereof may be changed,
waived, discharged or terminated only by an instrument in writing signed by the
party against which enforcement of the same is sought.

     13.  Letter Agreement. This Warrant is issued pursuant to the letter
agreement, dated as of April 15, 1996, between the Company and Holder.

     14.  Loss, Theft, Destruction or Mutilation of Warrant. Upon receipt by the
Company of evidence reasonably satisfactory to it of the loss, theft,
destruction or mutilation of this Warrant, and in case of loss, theft or
destruction, of indemnity or security reasonably satisfactory to the Company,
and upon reimbursement to the Company of all reasonable expenses incidental
thereto, and upon surrender and cancellation of this Warrant, if mutilated, the
Company will make and deliver a new warrant of like tenor and dated as of such
cancellation, in lieu of this Warrant.

     15.  Saturdays, Sundays, Holidays, etc. If the last or appointed day for
the taking of any action or the expiration of any right required or granted
herein shall be a Saturday or Sunday or shall be a legal holiday, then such
action may be taken or such right may be exercised on the next succeeding day
not a legal holiday.


                                       5.

<PAGE>

     16.  Governing Law. The terms and conditions of this Warrant shall be
governed by and construed in accordance with California law as such laws are
applied to agreements which are entered into solely between California residents
and are to be performed entirely within that state.


Dated: ___________________              ATLANTIC PHARMACEUTICALS, INC.



                                        By:_____________________________________
                                           Jon D. Lindjord
                                           President and Chief Executive Officer


Dated: ___________________              PARAMOUNT CAPITAL, INCORPORATED


                                        By:_____________________________________
                                           Lindsay Rosenwald, M.D.
                                           Chairman


                                       6.

<PAGE>

                                    EXHIBIT A

                               NOTICE OF EXERCISE



To:  Atlantic Pharmaceuticals, Inc.


     1.   The undersigned hereby elects to purchase __________ shares of Common
Stock of Atlantic Pharmaceuticals, Inc. pursuant to the terms of the attached
Warrant, and tenders herewith payment of the purchase price of such shares in
full.

     2.   Please issue a certificate or certificates representing said shares in
the name of the undersigned or in such other name or names as are specified
below:


                        --------------------------------
                                     (Name)

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

                        --------------------------------
                                    (Address)

     3.   The undersigned represents that the aforesaid shares are being
acquired for the account of the undersigned for investment and not with a view
to, or for resale in connection with, the distribution thereof and that the
undersigned has no present intention of distributing or reselling such shares.


                                        HOLDER


                                        By: ____________________________________

                                        Its:____________________________________



Dated: __________________________



                               WARRANT TO PURCHASE
                             SHARES OF COMMON STOCK


THIS WARRANT HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED, OR ANY STATE SECURITIES LAWS AND MAY NOT BE SOLD, OFFERED FOR SALE,
TRANSFERRED, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF A REGISTRATION STATEMENT
IN EFFECT WITH RESPECT TO THE SECURITIES UNDER SUCH ACT AND ANY APPLICABLE STATE
SECURITIES LAW OR AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY THAT SUCH
REGISTRATION IS NOT REQUIRED.

                         ATLANTIC PHARMACEUTICALS, INC.

              INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE

                           Void after August 16, 2001


     THIS CERTIFIES THAT, for value received, Paramount Capital, Incorporated
("Holder") is entitled to purchase, on the terms hereof, Twelve Thousand Five
Hundred (12,500) shares of Common Stock (as adjusted pursuant to Section 4
hereof, the "Shares") of Atlantic Pharmaceuticals, Inc., a Delaware corporation
(the "Company"), subject to the provisions and upon the terms and conditions
hereinafter set forth. As used herein, the term "Common Stock" shall mean the
Company's presently authorized Common Stock, par value $.001 per share, and any
stock into or for which such Common Stock may hereafter be converted or
exchanged. The term "Warrant" as used herein shall include
 this Warrant, and any
warrants delivered in substitution or exchange therefor as provided herein.

     The following terms shall apply to this Warrant:

     1.   Term of Warrant. Subject to the terms and conditions set forth herein,
the term of this Warrant shall commence and this Warrant shall be exercisable
for the Shares, commencing on the date hereof and expiring at 5:00 p.m. Pacific
Standard Time on August 16, 2001.

     2.   Exercise Price; Number of Shares. The exercise price ("Exercise
Price") at which this Warrant may be exercised shall be Six Dollars and Seventy
Three Cents ($6.73), as adjusted from time to time pursuant to Section 4 hereof.
The number of shares of Common Stock for which this Warrant is initially
exercisable is Twelve Thousand Five Hundred (12,500) shares of Common Stock,
which number is subject to adjustment pursuant to Section 4 of this Warrant.

     3.   Exercise of Warrant. Subject to the terms of Section 1 hereof, the
purchase rights represented by this Warrant are exercisable by Holder during the
term hereof, in whole or in part and from time to time, by the surrender of this
Warrant (with the notice of exercise form attached hereto as Exhibit A duly
executed) at the principal office of the Company and by payment to the Company,
by check or wire transfer of an amount equal to the then applicable Exercise
Price multiplied by the number of Shares then being purchased. In the event of
any exercise of the rights represented by this Warrant, certificates for the
Shares so purchased shall be delivered to Holder hereof as soon as possible and,
unless this Warrant has been fully exercised or expired, a new Warrant
representing the portion of the Shares, if any, with respect to which this
Warrant shall not then have been exercised shall also be issued to Holder hereof
as soon as possible.

<PAGE>

     4.   Certain Adjustments.

     4.1. Adjustments for Splits, Subdivisions, Recapitalizations and other
Combinations. In case the Company shall (i) pay a dividend in Common Stock or
make a distribution in the form of Common Stock, (ii) subdivide the outstanding
shares of Common Stock, (iii) combine its outstanding shares of Common Stock
into a smaller number of shares of Common Stock, (iv) issue by reclassification
of its Common Stock other securities of the Company, or (v) take any other
action, the effect of which is to reclassify or reorganize the outstanding
shares of Common Stock into a different number of shares or class of securities,
the number of shares purchasable upon exercise of this Warrant immediately prior
thereto shall be adjusted so that the Holder shall be entitled to receive the
kind and number of shares or other securities of the Company which it would have
owned or would have been entitled to receive immediately after the happening of
any of the events described above, had the Warrant been exercised immediately
prior to the happening of such event or any record date with respect thereto.
Any adjustment made with respect to this Section 4.1 shall become effective
immediately after the effective date of such event retroactive to the record
date, if any, for such event. Whenever the number of Shares purchasable upon the
exercise of this Warrant is adjusted, as herein provided, the Exercise Price
payable upon the exercise of this Warrant shall be adjusted by multiplying such
Exercise Price immediately prior to such adjustment by a fraction, of which the
numerator shall be the number of Shares purchasable upon the exercise of the
Warrant immediately prior to such adjustment, and of which the denominator shall
be the number of Warrant shares so purchasable immediately thereafter. Except as
provided above, no adjustment in respect of any dividends or distributions out
of earnings shall be made during the term of this Warrant or upon the exercise
of this Warrant.

     4.2. Mergers, Consolidations or Sale of Assets. If at any time there shall
be a capital reorganization (other than a combination or subdivision of Shares
otherwise provided for herein), or a merger or consolidation of the Company with
or into another corporation, or the sale of the Company's properties and assets
as, or substantially as, an entirety to any other person, then, as a part of
such reorganization, merger, consolidation or sale, lawful provision shall be
made so that the Holder shall thereafter be entitled to receive upon exercise of
this Warrant, during the period specified in this Warrant and upon payment of
the purchase price, the number of shares of stock or other securities or
property of the Company or the successor corporation resulting from such
reorganization, merger, consolidation or sale, to which a holder of Common Stock
deliverable upon exercise of this Warrant would have been entitled under the
provisions of the agreement in such reorganization, merger, consolidation or
sale if this Warrant had been exercised immediately before that reorganization,
merger, consolidation or sale. In any such case, appropriate adjustment (as
determined in good faith by the Company's Board of Directors) shall be made in
the application of the provisions of this Warrant with respect to the rights and
interests of the Holder after the reorganization, merger, consolidation or sale
to the end that the provisions of this Warrant (including adjustment of the
purchase price then in effect and the number of the Shares) shall be applicable
after that event, as near as reasonably may be, in relation to any shares or
other property deliverable after that event upon exercise of this Warrant;
provided, however, that the aggregate purchase price shall not be adjusted.

     4.3. Certificate as to Adjustments. In the case of each adjustment or
readjustment of the purchase price pursuant to this Section 4, the Company will
promptly compute such adjustment or readjustment in accordance with the terms
hereof and cause a certificate setting forth such adjustment or readjustment and
showing in detail the facts upon which such adjustment or readjustment is based
to be delivered to the Holder of this Warrant. The Company will, upon the
written request at any time of the Holder of this Warrant, furnish or cause to
be furnished to such Holder a certificate setting forth:

     (a)  Such adjustments and readjustments;

     (b)  The purchase price at the time in effect; and


                                       2.

<PAGE>

     (c)  The number of Shares and the amount, if any, of other property at the
time receivable upon the exercise of the Warrant.

     5.   Fractional Stock. No fractional shares shall be issued in connection
with any exercise of this Warrant. In lieu of the issuance of such fractional
share, the Company shall make a cash payment equal to the then fair market value
of such fractional share as determined in good faith by the Company's Board of
Directors.

     6.   Reservation of Common Stock. The Company shall at all times reserve
and keep available out of its authorized but unissued shares of Common Stock,
solely for the purpose of effecting the exercise of this Warrant, such number of
its shares of Common Stock as shall from time to time be sufficient to effect
the exercise of this Warrant.

     7.   Restrictions on Transfer.

     Unless the issuance of the Shares has been registered under the Securities
Act of 1933, as amended (the "1933 Act"):

     (a)  this Warrant and any Shares may not be sold, transferred, pledged,
hypothecated or otherwise disposed of except: (i) to a person who, in the
opinion of counsel to the Company, is a person to whom this Warrant or the
Shares may legally be transferred without registration and without the delivery
of a current prospectus under the 1933 Act with respect thereto and then only
against receipt of an agreement of such person to comply with the provisions of
this Section 6 with respect to any resale or other disposition of such
securities; or (ii) to any person upon the delivery of a prospectus then meeting
the requirements of the 1933 Act relating to such securities and the offering
thereof for such sale or disposition, and thereafter to all successive
assignees;

     (b)  upon exercise of any of the Warrants and the issuance of any of the
Shares, all certificates representing such shares shall bear on the face thereof
substantially the following legend, insofar as is consistent with California
law, as well as any other legends necessary to comply with applicable state and
federal laws for the issuance of such shares:

     THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
     UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "1933 ACT"), OR UNDER THE
     PROVISIONS OF ANY APPLICABLE STATE SECURITIES LAWS, BUT HAVE BEEN ACQUIRED
     BY THE REGISTERED HOLDER HEREOF FOR PURPOSES OF INVESTMENT AND IN RELIANCE
     ON STATUTORY EXEMPTIONS UNDER THE 1933 ACT, AND UNDER ANY APPLICABLE STATE
     SECURITIES LAWS. THESE SECURITIES MAY NOT BE SOLD, PLEDGED, TRANSFERRED OR
     ASSIGNED, EXCEPT IN A TRANSACTION WHICH IS EXEMPT UNDER PROVISIONS OF THE
     1933 ACT AND ANY APPLICABLE STATE SECURITIES LAWS OR PURSUANT TO AN
     EFFECTIVE REGISTRATION STATEMENT; AND IN THE CASE OF AN EXEMPTION; ONLY IF
     THE COMPANY HAS RECEIVED AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY
     THAT SUCH TRANSACTION DOES NOT REQUIRE REGISTRATION OF ANY SUCH SECURITIES.

     8.   Rights as Stockholders; Information. Holder shall not be entitled to
vote or receive dividends or be deemed the holder of Common Stock or any other
securities of the Company which may at any time be issuable on the exercise
hereof for any purpose, nor shall anything contained herein be construed


                                       3.

<PAGE>

to confer upon Holder any of the rights of a stockholder of the Company or any
right to vote for the election of directors or upon any matter submitted to
shareholders or at any meeting thereof, or to receive notice of meetings, or to
receive dividends or subscription rights or otherwise until this Warrant shall
have been exercised and the Shares purchasable upon the exercise hereof shall
have become deliverable, as provided herein.

     9.   Net Issuance.

     (a)  Right to Convert. In addition to and without limiting the rights of
the Holder under the terms of this Warrant, the Holder shall have the right to
convert this Warrant or any portion thereof (the "Conversion Right") into shares
of Common Stock as provided in this Section 9(a) at any time or from time to
time during the term of this Warrant. Upon exercise of the Conversion Right with
respect to a particular number of shares subject to this Warrant (the "Converted
Warrant Shares"), the Company shall deliver to the Holder (without payment by
the Holder of any exercise price or any cash or other consideration) that number
of shares of fully paid and nonassessable Common Stock equal to the quotient
obtained by dividing (x) the value of this Warrant (or the specified portion
hereof) on the Conversion Date (as defined in subsection (b) hereof), which
value shall be determined by subtracting (1) the aggregate Exercise Price of the
Converted Warrant Shares immediately prior to the exercise of the Conversion
Right from (2) the aggregate fair market value of the Converted Warrant Shares
issuable upon exercise of this Warrant (or the specified portion hereof) on the
Conversion Date (as herein defined) by (y) the fair market value of one share of
Common Stock on the Conversion Date (as herein defined). No fractional shares
shall be issuable upon exercise of the Conversion Right, and, if the number of
shares to be issued determined in accordance with the foregoing formula is other
than a whole number, the Company shall pay to the Holder an amount in cash equal
to the fair market value of the resulting fractional share on the Conversion
Date (as hereinafter defined). For purposes of Section 9 of this Warrant, shares
issued pursuant to the Conversion Right shall be treated as if they were issued
upon the exercise of this Warrant.

     (b)  Method of Exercise. The Conversion Right may be exercised by the
Holder by the surrender of this Warrant at the principal office of the Company
together with a written statement specifying that the Holder thereby intends to
exercise the Conversion Right and indicating the number of shares subject to
this Warrant which are being surrendered (referred to in subsection (a) hereof
as the Converted Warrant Shares) in exercise of the Conversion Right. Such
conversion shall be effective upon receipt by the Company of this Warrant
together with the aforesaid written statement, or on such later date as is
specified therein (the "Conversion Date"). Certificates for the shares issuable
upon exercise of the Conversion Right and, if applicable, a new warrant
evidencing the balance of the shares remaining subject to this Warrant, shall be
issued as of the Conversion Date and shall be delivered to the Holder within
thirty (30) days following the Conversion Date.

     (c)  Determination of Fair Market Value. For purposes of this Section 9(c),
"fair market value" of a share of Common Stock or a Converted Warrant Share, as
the case may be, as of a particular date (the "Determination Date") shall mean:

          (i)  If traded on a securities exchange or on Nasdaq, the fair market
value of the Common Stock shall be deemed to be the closing price of the Common
Stock on such exchange on the business day prior to the Determination Date;

          (ii) If traded over-the-counter, the fair market value of the Common
Stock shall be deemed to be the closing price of the Common Stock on the
business day prior to the Determination Date; and


                                       4.

<PAGE>

          (iii) If there is no public market for the Common Stock, then fair
market value shall be determined by the Board of Directors of the Company;
provided, however, that if the Holder shall not agree with the fair market value
determined by the Board, the Company shall engage an investment banker of
national reputation (or such other party as shall be mutually acceptable to the
parties) to determine the fair market value. If the valuation of the investment
banker is less than the value determined the Board of Directors or does not
exceed such valuation by 10%, the expenses of the valuation shall be borne by
the Holder. If the valuation of the investment banker is greater than the value
determined by the Board of Directors by more than 10%, the expenses of such
valuation shall be borne by the Company.

     10.  Transfers and Exchanges. Subject to the terms and conditions of the
applicable Federal and state securities laws, this Warrant is transferable in
whole or in part by the Holder. All new warrants issued in connection with
transfers or exchanges shall be identical in form and provision to this Warrant
except as to the number of shares.

     11.  Successors and Assigns. The terms and provisions of this Warrant shall
be binding upon the Company and the Holder and their respective successors and
assigns.

     12.  Amendments. This Warrant and any provision hereof may be changed,
waived, discharged or terminated only by an instrument in writing signed by the
party against which enforcement of the same is sought.

     13.  Letter Agreement. This Warrant is issued pursuant to the letter
agreement, dated as of April 15, 1996, between the Company and Holder.

     14.  Loss, Theft, Destruction or Mutilation of Warrant. Upon receipt by the
Company of evidence reasonably satisfactory to it of the loss, theft,
destruction or mutilation of this Warrant, and in case of loss, theft or
destruction, of indemnity or security reasonably satisfactory to the Company,
and upon reimbursement to the Company of all reasonable expenses incidental
thereto, and upon surrender and cancellation of this Warrant, if mutilated, the
Company will make and deliver a new warrant of like tenor and dated as of such
cancellation, in lieu of this Warrant.

     15.  Saturdays, Sundays, Holidays, etc. If the last or appointed day for
the taking of any action or the expiration of any right required or granted
herein shall be a Saturday or Sunday or shall be a legal holiday, then such
action may be taken or such right may be exercised on the next succeeding day
not a legal holiday.


                                       5.

<PAGE>

     16.  Governing Law. The terms and conditions of this Warrant shall be
governed by and construed in accordance with California law as such laws are
applied to agreements which are entered into solely between California residents
and are to be performed entirely within that state.


Dated: ___________________              ATLANTIC PHARMACEUTICALS, INC.



                                        By:_____________________________________
                                           Jon D. Lindjord
                                           President and Chief Executive Officer


Dated: ___________________              PARAMOUNT CAPITAL, INCORPORATED


                                        By:_____________________________________
                                           Lindsay Rosenwald, M.D.
                                           Chairman


                                       6.

<PAGE>

                                    EXHIBIT A

                               NOTICE OF EXERCISE



To:  Atlantic Pharmaceuticals, Inc.


     1.   The undersigned hereby elects to purchase __________ shares of Common
Stock of Atlantic Pharmaceuticals, Inc. pursuant to the terms of the attached
Warrant, and tenders herewith payment of the purchase price of such shares in
full.

     2.   Please issue a certificate or certificates representing said shares in
the name of the undersigned or in such other name or names as are specified
below:


                        --------------------------------
                                     (Name)

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

                        --------------------------------
                                    (Address)

     3.   The undersigned represents that the aforesaid shares are being
acquired for the account of the undersigned for investment and not with a view
to, or for resale in connection with, the distribution thereof and that the
undersigned has no present intention of distributing or reselling such shares.


                                        HOLDER


                                        By: ____________________________________

                                        Its:____________________________________



Dated: __________________________



<TABLE> <S> <C>


<ARTICLE>                     5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FINANCIAL
STATEMENTS FOR THE PERIOD ENDED SEPTEMBER 30, 1996 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS

Amounts inapplicable or not disclosed as a separate line on the Statement of
Financial or Results of Operations are reported as 0 herein.
</LEGEND>
       
<S>                             <C>
<PERIOD-TYPE>                   9-MOS
<FISCAL-YEAR-END>                             DEC-31-1996
<PERIOD-END>                                  SEP-30-1996
<CASH>                                          3,245,129      
<SECURITIES>                                            0      
<RECEIVABLES>                                           0      
<ALLOWANCES>                                            0      
<INVENTORY>                                             0      
<CURRENT-ASSETS>                                3,277,629      
<PP&E>                                            149,169      
<DEPRECIATION>                                     61,973      
<TOTAL-ASSETS>                                  3,364,825      
<CURRENT-LIABILITIES>                             290,292      
<BONDS>                                                 0      
<PREFERRED-MANDATORY>                                   0      
<PREFERRED>                                             0      
<COMMON>                                            2,914      
<OTHER-SE>                                      3,074,533      
<TOTAL-LIABILITY-AND-EQUITY>                    3,364,825      
<SALES>                                                 0      
<TOTAL-REVENUES>                                   52,531      
<CGS>                                                   0      
<TOTAL-COSTS>                                           0      
<OTHER-EXPENSES>                                2,751,375      
<LOSS-PROVISION>                                        0      
<INTEREST-EXPENSE>                               (127,434)     
<INCOME-PRETAX>                                (2,571,410)     
<INCOME-TAX>                                            0      
<INCOME-CONTINUING>                            (2,571,410)     
<DISCONTINUED>                                          0      
<EXTRAORDINARY>                                         0      
<CHANGES>                                               0      
<NET-INCOME>                                   (2,571,410)     
<EPS-PRIMARY>                                       (0.95)  
<EPS-DILUTED>                                       (0.95)  
                                             


</TABLE>