<PAGE>   1
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549


                                    FORM 10-K
(Mark One)

  [X]    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
         EXCHANGE ACT OF 1934. For the fiscal year ended December 31, 1997, or

  [ ]    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
         EXCHANGE ACT OF 1934. For the transition period from               to
                      .                                       -------------
         -------------

                      COMMISSION FILE NO.:      0-25978
                                           --------------------

                           THERAPEUTIC ANTIBODIES INC.
         -------------------------------------------------------------
             (Exact Name of Registrant as Specified in Its Charter)


                  DELAWARE                                62-1212485
       -------------------------------                  ----------------
       (State or Other Jurisdiction of                  (I.R.S. Employer
        Incorporation or Organization)                 Identification No.)

      1207 17TH AVENUE SOUTH, SUITE 103
            NASHVILLE, TENNESSEE                              37212
       -------------------------------                  ----------------
  (Address of Principal Executive Offices)                 (Zip Code)

       Registrant's telephone number, including area code: (615) 327-1027
                                                           --------------

          Securities registered pursuant to Section 12(b) of the Act:

                                                   Name of Each Exchange
         Title of Each Class                      on Which Registered
         -------------------                      -------------------
                 None                                     None

           Securities registered pursuant to Section 12(g) of the Act:
                     COMMON STOCK; PAR VALUE $.001 PER SHARE
                     ---------------------------------------
                                (Title of Class)

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

                  YES  X     NO
                      ---       ---

                  Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of the registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K . [X]

                  The aggregate market value of the shares of Common Stock of
the registrant held by non-affiliates on March 13, 1998 ($3.46 per share), was
$59,657,483. As of March 13, 1998, the registrant had outstanding 23,252,825
shares of Common Stock.


<PAGE>   2


                       DOCUMENTS INCORPORATED BY REFERENCE

                  Portions of Part III are incorporated by reference from the
Registrant's Proxy Statement for the Annual Meeting of Shareholders to be held
on April 27, 1998. Certain exhibits listed in Part IV hereof are incorporated by
reference to the following documents previously filed by the Registrant with the
Commission: Registration Statement on Form 10, filed on May 1, 1995; Quarterly
Report on Form 10-Q for the period ended September 30, 1995; Quarterly Report on
Form 10-Q for the period ended March 31, 1996; Quarterly Report on Form 10-Q for
the period ended June 30, 1996; Quarterly Report on Form 10-Q for the period
ended September 30, 1996; Proxy Statement relating to the Special Meeting of
Shareholders held on July 5, 1996; Annual Report on Form 10-K for the fiscal
year ended December 31, 1996; and Quarterly Report on Form 10-Q for the period
ended March 31, 1997.


                                TABLE OF CONTENTS

                                     PART I
<TABLE>
<CAPTION>
ITEM                                                                                               PAGE
----                                                                                               ----

<S>    <C>                                                                                         <C>
 1.    Business.................................................................................... 1

 2.    Properties..................................................................................20

 3.    Legal Proceedings...........................................................................21

 4.    Submission of Matters to a Vote of Security Holders.........................................21


                                               PART II

 5.    Market for Registrant's Common Equity and Related Stockholder Matters.......................22

 6.    Selected Financial Data.....................................................................23

 7.    Management's Discussion and Analysis of Financial Condition and Results of Operations.......24

 8.    Financial Statements and Supplementary Data ................................................29

 9.    Changes in and Disagreements with Accountants on Accounting and
       Financial Disclosure........................................................................53

                                              PART III

10.    Directors and Executive Officers of the Registrant..........................................54

11.    Executive Compensation......................................................................54

12.    Security Ownership of Certain Beneficial Owners and Management..............................54

13.    Certain Relationships and Related Transactions..............................................54


                                               PART IV

14.    Exhibits, Financial Statement Schedules, and Reports on Form 8-K............................55

15.    Signatures..................................................................................60
</TABLE>


<PAGE>   3


                                     PART I
ITEM 1.           BUSINESS

GENERAL

                  Therapeutic Antibodies Inc. ("TAb" or the "Company"), is a
development stage biopharmaceutical company specializing in the preparation of
polyclonal antibodies for the treatment of disease. Headquartered in Nashville,
Tennessee, with operations in the United States, the United Kingdom, and
Australia, TAb is developing and producing a line of antibody products designed
primarily to treat life-threatening medical conditions for which there currently
are no satisfactory therapies.

                  The Company was incorporated in Delaware in 1984. The Company
was co-founded in 1984 by Professors John Landon and Tim Chard and Dr. Harry
Browne. Both Professors Landon and Chard have been active in the development of
antibodies for diagnostic purposes and the development of immunoassays. Each
formerly chaired a department at St. Bartholomew's and the Royal London School
of Medicine and Dentistry in London, and both have published numerous articles
relating to antibody/antigen interaction and detection. Since 1984, the Company
has affiliated itself with scientists at academic institutions in the United
States, Europe, Australia, New Zealand and Africa, to assist in the research,
testing and development of new antibody products. See "Item 1
-Business-Principal Licensing and Other Collaborative Arrangements."

                  TAb has developed systems for the production and purification
of a new generation of polyclonal antibodies that management believes can
produce suitable therapies for neutralizing a variety of toxins, including
certain venoms, cytokines and drugs. Some of TAb's innovations include the
preparation of unique immunogens, the purification of specific antibodies and
the digestion of antibodies into fragments. Management believes that these
capabilities enable TAb to produce a broad range of specific antibodies that are
safer and more effective than the antibody products currently available. The
Company's antibody products are in various stages of development, ranging from
preclinical testing to commercial distribution.

                  TAb currently has six therapeutic products and product
candidates ("products"), two on the market and four in clinical evaluation. One
of these products, CytoTAb(R), is being studied in four significant indications
including sepsis syndrome. Rigorous, ongoing scientific studies are
demonstrating the efficacy and safety of these products. For example, animal
studies have demonstrated that TAb's rattlesnake antivenom, CroTAb(R), is on
average five times more potent on a per weight basis than the current antivenom
on the market, and in clinical trials, CroTAb(R) is associated with a reduced
incidence and severity of side-effects. TAb's European adder antivenom,
ViperaTAb(R), is nearly ten times more effective on a per weight basis than
competing products and enjoys a majority market penetration in certain
countries.

                  The Company's anti-cytokine product, CytoTAb(R), has been
demonstrated to neutralize the cytokine tumor necrosis factor (TNF). In a study
published in the New England Journal of Medicine, physicians from Oxford
University demonstrated that CytoTAb(R) is the first effective therapy against
infection-related shock in humans (the Jarisch-Herxheimer Reaction). The New
England Journal of Medicine published an editorial on the study, calling it "the
first to establish that passive immunization against TNF can block the
development of a shock-like syndrome in humans."

                  Researchers are associating a growing number of life
threatening or disabling conditions with elevated serum and tissue
concentrations of TNF, including cerebral malaria, septic shock and rheumatoid
arthritis. TNF has therefore become a primary therapeutic target in the
biopharmaceutical industry's efforts to develop drugs to



                                       1
<PAGE>   4

prevent or treat these and other diseases. TAb is presently engaged in clinical
studies evaluating the efficacy of CytoTAb(R) in the treatment of cerebral
malaria, Sepsis Syndrome, the Jarisch-Herxheimer Reaction and acute Graft vs.
Host Disease (bone marrow transplant).

                  In January of 1998, the Company underwent a corporate
reorganization. Under this reorganization, TAb Australia Pty Ltd, was renamed
Therapeutic Antibodies Australasia Pty Ltd. ("TAb Australasia"). Polyclonal
Antibodies Ltd., TAb Wales Ltd., and TAb London were combined into Therapeutic
Antibodies UK Ltd ("TAb UK"). TAb's executive offices are located in Nashville,
Tennessee, in the vicinity of the Vanderbilt University Medical Center.
Research, production and testing operations are conducted through the Company's
subsidiaries. The Company operates its research and development laboratories
through TAb UK, at the facilities of St. Bartholomew's. The Company's antibody
production operations are situated in both Dyfed, Wales and Adelaide, Australia.
These operations are conducted through TAb UK and TAb Australasia See "Item 2
Properties."


THE INDUSTRY

                  The biotechnology/biopharmaceutical industry is considered a
segment of the pharmaceutical industry. Management believes that advances in
biotechnology research will contribute to the development of new pharmaceutical
products. In the past decade, medicine has benefited from advances in immunology
through the use of antibodies for diagnostic purposes, to detect the presence of
a variety of substances in the body. Antibodies are used for diagnostic purposes
to measure various hormones, cancer markers, drugs and other materials in
patient blood samples. An example of a commercial application of diagnostic
antibody technology is the home pregnancy test kit, which uses antibodies to
detect a pregnancy-associated hormone in samples of urine.

                  In addition to diagnostic applications, research has begun to
focus on the therapeutic applications of antibodies, which can be used for the
treatment of numerous toxic conditions including envenomation, drug overdose and
infectious disease. Although one of the Company's subsidiaries produces and
sells small amounts of animal antisera that is used for diagnostic purposes,
TAb's primary focus is on the production of antibodies for therapeutic purposes.


TECHNOLOGY AND PRODUCTION



                  Antibodies bind to toxic molecules, neutralizing them to a
greater or lesser degree. There are two types of antibodies. The first are
polyclonal antibodies which contain a variety of antibodies directed to
different sites, or epitopes, on the target disease molecule. The second type
are monoclonal antibodies consisting of a population of identical antibodies all
directed to a single epitope.

                  TAb has focused its development resources on polyclonal
antibodies. Company scientists believe that these are effective for certain
important therapeutic applications in humans, where target disease molecules
have multiple epitopes and are therefore more effectively treated with a
polyclonal approach, as well as applications involving small-molecule drugs
where the higher affinity of polyclonals is important.




                                       2
<PAGE>   5


                  Management believes that, in combination, the following four
factors create a unique position for TAb in the biopharmaceutical industry.
First, the Company uses polyclonal antibodies as the basis of its technology;
second, the Company uses sheep to produce these polyclonal antibodies; third,
the Company produces Fab fragments from these polyclonal antibodies; and
finally, TAb uses highly efficient production and purification systems. These
factors are described in more detail in the following sections.

                  POLYCLONAL ANTIBODIES. TAb faces only limited competition in
the commercial development of polyclonal antibody products, as most immunology
companies in recent years have focused on monoclonal antibodies. Management
believes the characteristics of monoclonals provide advantages as diagnostic
tools for in vivo imaging and for laboratory testing or immunoassays, because
they are very selective and offer specificity to a particular epitope.

                  Potential advantages of processed and purified polyclonal
antibodies over monoclonals, for certain therapeutic applications, are that
polyclonals bind multiple sites, resulting in greater neutralization of toxic
molecules; usually bind more strongly; are often more robust and can therefore
better withstand the fragmentation and purification process; and can generally
be developed at less expense.

                  PRODUCTION OF ANTIBODIES FROM SHEEP. TAb uses sheep for the
production of its polyclonal antibodies. The Company has selected sheep because
of the substantial amounts of high affinity, specific antibodies that they can
produce. Sheep antibody based products also have a proven safety record when
used therapeutically in humans because side effects resulting from immune or
allergic responses are relatively limited. Sheep are also easy to handle,
inexpensive to purchase and maintain, and are available in large numbers
worldwide. Flock sizes are approximately 1,000 at TAb's facility in Wales, and
4,300 at its Australian facility. TAb plans to increase the size of its flock in
Australia over time as required to meet full-scale commercial production.

                  All TAb products are prepared using a very similar series of
manufacturing steps. The common technology explains why TAb has been able to
develop new products in a relatively short time. Management believes that it
could also simplify the process of seeking regulatory approval.

                  ANTIBODY FRAGMENTS. An antibody can be divided into two
identical components known as the antibody binding Fab fragments and an
additional Fc fragment. Each Fab fragment has a binding site which attaches to a
specific epitope on the target molecule in order to neutralize its toxic
effects. The Fc is potentially harmful and can cause hypersensitivity and other
side effects.

                  TAb separates and discards the potentially harmful Fc fragment
and obtains the two beneficial Fab fragments, unimpaired in their ability to
bind and neutralize the target molecule. Most other immunotherapy companies
applying similar technology have used intact antibodies, or have used the enzyme
pepsin which yields the larger F(ab')2 fragment. The latter comprises two Fab
fragments joined together, but without the harmful Fc fragment. Fab fragment
products are less likely to cause hypersensitivity and other side effects than
intact antibodies or F(ab')2 fragment products. Furthermore, their small size
ensures that the Fab fragment products are rapidly and evenly distributed
throughout the body. This means that, following injection, they are expected to
quickly reach the various tissues where a target molecule may be causing toxic
effects. In addition, their small size allows excess unbound antibody and
antibodies bound to small toxic molecules to be excreted more efficiently by the
kidneys.




                                       3
<PAGE>   6

                  Any foreign protein, including an antibody of animal origin,
will induce an immune response if injected into a patient. Severe side-effects
such as anaphalatic death were common when passive immunization was first
introduced at the end of the last century for the treatment of diphtheria and
tetanus. This was due to the fact that unprocessed and unpurified equine serum
containing highly allergenic proteins were injected. Furthermore, large volumes
of such sera were administered, giving rise to a serious delayed complication
known as serum sickness. The incidence and severity of side-effects were reduced
significantly by separating antibodies from most of the contaminating proteins.
The incidence of harmful effects was further reduced by the use of enzymatic
cleavage to prepare the larger F(ab')2 based products. Removal of the Fc
fragment prevented the binding and activation of various blood cells. TAb uses
papain enzyme technology to produce Fab fragments which are less likely to cause
side-effects than either intact antibodies or F(ab')2. Being smaller, the Fab is
less immunogenic and only has a single binding site. Therefore, with a single
binding site, it cannot form potentially harmful large, cross linked, immune
complexes.

                  COMMON PRODUCTION PROCESS. Products for pre-clinical and
clinical trials have been developed primarily in TAb's development facility at
St. Bartholomew's in London. Once a new product has completed its development, a
product transfer group is responsible for moving the product to Wales and
preparing for clinical and commercial production. TAb completed construction of
a custom built 20,000 sq. ft. manufacturing plant at its facility in Wales in
1995. Internal validation by the Company is nearly complete and the plant awaits
inspection and approval by the FDA and MCA for commercial use. Management
believes that the production facilities will meet regulatory requirements. TAb's
Australian facility has serum processing capability with Therapeutic Goods
Administration approval and currently provides antisera to the manufacturing
plant in Wales.


PRODUCTS


                  TAb is concentrating on a portfolio of products in three
development programs with a view to balancing development risk and market
potential. The three programs are the Antivenom Program, the Anti-Drug Program
and the Anti-Cytokine Program.

                  ANTIVENOM PROGRAM. It is estimated that close to 1,000,000
people worldwide are bitten each year by poisonous snakes. This results in as
many as 100,000 deaths. In addition, there are large numbers of scorpion and
spider envenomations in North America and many other countries each year. It is
one of TAb's objectives to become the leading producer of antivenoms worldwide.
TAb has developed its first antivenoms to treat snakebites in North America,
Europe, Western Africa, Southeast Asia and Australia. Management believes that
there is an unsatisfied demand for safe and effective antivenom products.

                  VIPERATAB(R). TAb has developed ViperaTAb(R) for treating
poisonous bites by the European common adder, Vipera berus, and has entered into
an agreement with Swedish Orphan, a pharmaceutical marketing company, to market
this product in Scandinavia. In 1991, preclinical testing conducted on behalf of
TAb at the Liverpool School of Tropical Medicine indicated that ViperaTAb(R) was
nearly 10 times more effective on a weight for weight basis than an equine
derived antivenom available in Northern Europe. Clinical trials were completed
in 1994. ViperaTAb(R) was approved by the regulatory authorities in Sweden and
Norway in 1994, and Finland in 1995, for use in those countries on a named
patient basis. The Company commenced commercial distribution of ViperaTAb(R) in
Scandinavia in 1995.



                                       4
<PAGE>   7

                  TAb's patent attorneys are currently advising TAb with respect
to a competing European antivenom patent application that, if granted, may have
an impact on TAb's activities. Management believes that this European patent
application, if granted, will not affect the commercial viability of
ViperaTAb(R).

                  CROTAB(R). TAb's Crotalid ("rattlesnake") antivenom project
was carried out in collaboration with scientists at the University of Arizona,
USA. Preclinical tests performed on behalf of TAb at the University of Arizona
indicated that the antivenom was demonstrated, on average, to be 5 times more
potent on a weight per weight basis than the then existing equine-derived
antivenom. The Company filed an IND application with the FDA in 1992 and in 1993
was awarded an FDA grant to assist in the funding of clinical studies of
CroTAb(R), which began in 1993. CroTAb(R) has been designated an orphan drug
candidate by the FDA, which would provide certain development, registration and
marketing incentives. See " Item 1 - Business - Government Regulation." Phase
II/III clinical studies with this product were completed in 1996 and the Company
is preparing to submit applications for FDA approval of CroTAb(R).

                  ECHITAB(TM). TAb has developed EchiTAb(TM) as an antivenom
against the West African carpet viper, Echis ocellatus. TAb has entered into an
agreement with the Federal Ministry of Health on behalf of the Nigerian
Government under which the Nigerian Government has contributed to the costs of
development and clinical trials of EchiTAb(TM). Commercial production of this
product commenced in 1997.


                  OTHER ANTIVENOMS. TAb has the capability to develop antivenom
products to treat a variety of other snake, spider and scorpion venoms, and the
company currently has several other anti-venom products under development.

                  ANTI-DRUG PROGRAM. DigiTAb(R) TAb has developed DigiTAb(R) for
treating digoxin intoxication. Digoxin is a prescription drug which is used to
treat certain cardiac conditions on a long-term support basis. It is the most
commonly prescribed form of digitalis which has been in use worldwide for many
years. However, digoxin has a narrow therapeutic range and can cause
life-threatening toxicity when taken in excess. It is estimated that 12,000
cases of severe digoxin toxicity occur annually, with the majority of these in
the United States.

                  In 1986, a major multi-national pharmaceutical company
introduced in the U.S. a specific sheep derived polyclonal antibody product
(using papain cleavage) to treat life-threatening digoxin intoxication.
DigiTAb(R) will therefore be competing directly with an established product in
this market.

                  TAb has completed research and development and preclinical
testing of DigiTAb(R). The Federal Food and Drug Administration ("FDA") has
accepted TAb's application for IND status and TAb is currently in Phase III
clinical testing of DigiTAb(R) in the United States and Europe.





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<PAGE>   8



                  TriTAb(R) TAb is developing TriTAb(R) to treat tricyclic
antidepressant ("TCA") toxicity. TCAs are a family of structurally related
compounds used in the treatment of severe clinical depression and are one of the
main causes of poisoning by drug overdose in Europe and the United States.
Despite the recent introduction of safer non-TCA antidepressant drugs, TCAs as a
group, continue to hold a large share of the antidepressant market. Typically,
these drugs are generic and their patents have expired. Consequently, TCAs are
much less expensive than the newer non-TCA antidepressants. For this reason,
Management believes that TCA therapy is likely to remain in clinical use for
some time. In addition, they may exert a better clinical response in some severe
forms of depression.

                  Toxic side effects of TCA drugs are relatively common and the
incidence of toxicity has been estimated to run as high as 5 percent. The most
severe side effects of TCAs affect the heart, necessitating prolonged intensive
care treatment, and can ultimately be fatal. At present, no specific antidote
for TCA poisoning is available. TAb has developed an antibody treatment for TCA
toxicity, that the Company's preclinical tests demonstrated to be effective in
reversing TCA toxicity.

                  TAb is targeting the treatment of TCA toxicity victims
admitted to hospital emergency rooms with symptoms of serious toxicity. It is
estimated that such cases total 60,000 per year in Europe and the United States

                  The Company has completed all preclinical testing of TriTAb(R)
and the FDA has accepted an investigator IND application for this product. TAb
is actively pursuing pilot studies in the United States. The Company believes
these pilot studies may provide a rapid assessment of the efficacy of TriTAb(R),
with results available in 1998. Management is not aware of any other competitive
commercial efforts in this field.

                  ANTI-CYTOKINE PROGRAM. CytoTAb(R) - Sepsis. Sepsis Syndrome is
a name given to a spectrum of disorders caused by the body's exaggerated
response to infection or injury and is triggered by a wide variety of bacterial,
viral and fungal organisms. The three defining conditions for sepsis are a site
or source of inflammation, abnormal vital signs and a failure of one or more
major organ systems, typically the respiratory system (lungs), central nervous
system, cardiovascular system or the excretory system (kidneys). Immune
suppression, invasive procedures, trauma or surgery are the usual factors that
allow bacteria or their toxic products to enter the bloodstream.

                  An estimated 800,000 to 900,000 patients suffer with Sepsis
Syndrome each year in Europe and the United States alone and there is a fatality
rate ranging from 20 to 60 percent, depending on severity. The current clinical
management of Sepsis Syndrome is expensive, often involving intensive care
measures, mechanical ventilation, hemodialysis, nutritional support and a
variety of antibiotics. Furthermore, none of these interventions has
significantly decreased mortality rates, despite over 15 years of intensive
research.

                  A number of companies have been actively pursuing the
commercial development of antibody products to treat Sepsis Syndrome. TAb's
Management believes that most have adopted monoclonal technology, some with a
view to neutralizing endotoxins which often initiate the body's inflammatory
response to infection, while others have introduced antibodies to target
cytokines such as tumor necrosis factor ("TNF"), which act as mediators of
Sepsis Syndrome. Management is aware of monoclonal antibody products intended to
treat Sepsis Syndrome that have encountered problems in the testing stage and
some that have been withdrawn from clinical trials.

                  Through its sepsis program, TAb has developed a line of
polyclonal antibody products to target the inflammatory cytokines that act as
mediators to Sepsis Syndrome.




                                       6
<PAGE>   9

                  TAb has completed a number of preclinical tests with its first
product in this program, CytoTAb(R), which is directed against TNF. The results
of the Company's preclinical tests indicated statistically significant
neutralization of the TNF. The FDA has accepted the Company's IND application
for this product.

                  In 1993, an opportunity arose to test TAb's anti-TNF antibody
in a model of human sepsis using a study designed by scientists from the
University of Oxford. This model involved Louse-Borne Relapsing Fever ("LBRF"),
which is a serious medical problem in Ethiopia; mortality in untreated patients
has exceeded 50 percent in some epidemics. The current treatment for LBRF, while
effective, is associated with a predictable pattern of side-effects, some of
which are life-threatening and appear closely to resemble classic Sepsis
Syndrome. TAb's first study consisted of a randomized, double blind, placebo
controlled trial of TAb's anti-TNF antibody carried out in 49 patients with LBRF
in Ethiopia. Subsequent studies have taken place in Ethiopia on over 90
patients. The results provide evidence that TAb's antibody product suppresses
cytokine activity as seen in LBRF patients and were published in The New England
Journal of Medicine in August of 1996. To the best of Management's' knowledge,
this is the first time a human study of an anti-cytokine antibody has provided
such successful results.

                  In 1995, the Company entered into an agreement with scientists
at Vanderbilt University Medical Center ("Vanderbilt") to coordinate initial
United States clinical trials of the CytoTAb(R) product. These trials commenced
in April 1995. Vanderbilt has extensive experience in testing the impact of
interventions on endotoxemia, and has studied a variety of proposed antibody
products in both in vivo and in vitro models. In a Phase I study, a total of 25
patients meeting criteria for severe sepsis have been treated with one of
several doses of CytoTAb(R). The results indicated that the antibody binds to
its target (TNF) with high affinity. The various doses were well tolerated with
no significant hypersensitivity reactions or episodes of immune complex disease.
The antibody was rapidly distributed.

                  During 1997, the Company concluded a Phase IIa clinical study
and announced the results. Based on the data accumulated from this trial, the
Company is undertaking a Phase IIb study in severely ill sepsis Patients who
have developed failure in two organs. Knowledge gained from this trial will be
used to design a pivotal phase III study.

                  TAb has adhered to a systematic strategy in the conduct of its
pre-clinical testing and human studies for this CytoTAb(R) product. The Company
believes that an orderly approach to study of the action of the drug will lead
to its useful application in the treatment of sepsis and many other disorders.
Because of the many disease states in which elevated tissue or serum levels of
TNF are implicated, the Company believes there may be numerous clinical
applications of CytoTAb(R), some of which cannot be predicted or quantified at
this time.


                  CytoTAb(R) - Jarisch-Herxheimer Reaction ("JHR"). The
Jarisch-Herxheimer Reaction occurs in some patients who have received
antibiotics to treat an infection and can be fatal. The antibiotic kills the
infecting organism which breaks up. The fragments of the organism cause a
massive response involving a cascade of cytokine release which leads to a high
temperature and rapid pulse.

                  JHR is a model system for sepsis, but it is also an indication
in its own right. Variations of JHR occur throughout the world including Europe
and the United States. Four such examples are Louse-Borne Relapsing Fever in
Ethiopia, Tick-Borne Relapsing Fever, Secondary Syphilis, and Lyme Disease in
the United States.

                  TAb plans to carry out Phase III trials in JHR under full Good
Clinical Practice ("GCP") with a view to submitting a product license
application in the United States and possibly Europe for CytoTAb(R) for JHR.





                                       7
<PAGE>   10

Management believes that its CytoTAb(R) product has a notable advantage because
it has been the only product to have been tested and demonstrated efficacy in
treating JHR

                  CytoTAb(R)- Transplantation. Many kidney transplant patients
suffer acute rejection episodes which are often treated with an antilymphocyte
therapy, such as Orthoclone OKT(R)3. This treatment may itself be associated
with side effects stemming from release into the circulation of large quantities
of TNF. TAb is investigating the use of CytoTAb(R) to prevent and treat such
side effects. In 1997, the FDA cleared TAb's IND application for the development
of CytoTAb(R) in renal transplant patients

                  CytoTAb(R) - Cerebral Malaria. Severe cerebral malaria is
associated with elevated concentrations of TNF. The recurring exacerbations of
fever and other severe symptoms and signs of cerebral malaria represent a form
of sepsis. TAb is investigating the use of CytoTAb(R) in mitigating the
morbidity and mortality of severe cerebral malaria, and the possible
complications of cerebral malaria treatment. The Company completed a Phase I
pilot study for this indication in Thailand during the first quarter of 1997 and
has embarked on a subsequent Phase II study.

                  CytoTAb(R)- Acute Graft vs Host Disease. It is estimated that
some 10,000 patients worldwide suffer from the severe TNF-related complications
associated with stem cell transplantation. In bone marrow transplants, stem
cells are given to the patient, which may mount an immune response to the
patients' tissues leading to a release of cytokines, including TNF. The
deleterious effects of the TNF related complication can limit the quantity of
stem cells that can be given.

                  An agreement was reached in 1997 with investigators in the
U.S. to undertake a pilot study of CytoTAb(R) in the treatment of this syndrome.
The FDA has cleared an investigator IND application for this indication and a
study is currently being designed to determine if CytoTAb can neutralize this
syndrome, and more stem cells can be given. This would allow patients to recover
from the transplant more quickly, resulting in reduced hospital stay and
treatment. The reduced hospital stay could significantly reduce the total cost
of treatment, possibly making bone marrow transplant available to a broader
patient base.

                  TAb's position in relation to CytoTAb(R) may be affected by
two European patents. Opposition to these patents has been filed by TAb and
others on various general and specific grounds including lack of patentability.
If valid as granted, these European patents could be used to attempt to limit
TAb's freedom to use anti-TNF antibodies and, therefore, TAb's ability to market
CytoTAb(R) in certain European countries. TAb's Management does not believe that
the existence of these European patents will prevent TAb from achieving the
successful commercial exploitation of CytoTAb(R). TAb has itself applied for
specific patents covering the use of Fab fragments of anti-TNF antibodies, and
the techniques for its preparation. Patents have been issued in 1997 for these
claims in certain jurisdictions. See "Item 1 - Business-Intellectual Property"


PRINCIPAL LICENSING AND OTHER COLLABORATIVE ARRANGEMENTS

                  For certain product candidates, the Company has secured, or
will in the future pursue, some form of collaborative agreement as the preferred
arrangement for bringing its products to market. Abundant precedents exist
within the industry for such alliances. Typically, the biotechnology company
handles development while a collaborator provides funding and regulatory
assistance, and takes responsibility for marketing and distribution of the
product.



                                       8
<PAGE>   11




COLLABORATIVE ARRANGEMENTS

                  The following is a summary of TAb's current agreements:

                  Swedish Orphan. In January 1990 the Company entered into an
agreement with Swedish Orphan AB, a Swedish company, appointing them as
exclusive sales representative to market ViperaTAb(R) in certain territories.
The agreement was subsequently amended to include certain other antivenoms
identified by the Company, and DigiTAb(R) and TriTAb(R). The territories are
currently Sweden, Norway, Denmark and Finland. Swedish Orphan specializes in the
development, regulatory handling, marketing and distribution of niche
pharmaceuticals and has arranged for the Karolinska Institute to conduct
clinical trials of the products which are a pre-requisite to their registration
in Scandinavia. Swedish Orphan receives a commission on sales of the products in
the territories. The agreement will continue until December 31, 2002 and
thereafter unless terminated by 120 days' notice by either party.

                  Helena Laboratories and Immuno Gen. In April 1993 the Company,
TAb Wales and Polyclonal Antibodies Ltd ("PAL") entered into an agreement with
Helena Laboratories (UK) Limited ("Helena") and Immuno Gen International Limited
("Immuno Gen"), appointing Helena and Immuno Gen as worldwide distributor for
certain antisera products (other than those developed with a third party) for
use solely in diagnostic or research diagnostic purposes.

                  FH Faulding. In September 1995 the Company entered into an
exclusive distribution agreement with FH Faulding and Co. Ltd., an Australian
company, appointing FH Faulding and Co. Ltd. to obtain registration and
marketing approvals for certain products and to be exclusive distributor of such
products in Australia, New Zealand and such other countries as the Company may
agree. The products are DigiTAb(R) and TriTAb(R).

                  In October 1996 the Company signed a Clinical Trials and
Registration Agreement with FH Faulding, to provide financial support for
clinical trials and to seek registration and marketing approvals for CytoTAb(R)
for treatment of cerebral malaria for Thailand and other countries in South East
Asia where malaria is a problem.

                  CSL. In February 1997 the Company signed a Clinical Trials,
Registration, Manufacturing, and Distribution Agreement with CSL, an Australian
company. This agreement makes CSL the exclusive distributor for Brown TAb(TM) in
Australia and Papua New Guinea.

                  Federal Ministry of Health of Nigeria. In August 1995 the
Company entered into an agreement with the Federal Ministry of Health on behalf
of the Nigerian Government under which the Nigerian Government has contributed
to the costs of development and clinical trials of EchiTAb(TM), and undertakes
to purchase commercial quantities of this antivenom. A royalty is payable to the
Nigerian Government on sales of EchiTAb(TM) outside Nigeria.



                                       9
<PAGE>   12

                  Altana Inc. In October 1997, the Company signed a marketing
and distribution agreement with Altana Inc., covering the rights to three
emergency medicine products now under development by TAb. Altana Inc., is the
United States subsidiary of Altana AG, a leading German supplier of
pharmaceuticals through its Byk Gulden unit.

                  Under terms of the agreement, Altana will pay up to $23
million for the U.S. distribution rights to CroTAb(R), DigiTAb(R), and
TriTAb(R). The Company will receive $4.5 million in payments upon the
achievement of milestones expected in 1997 and 1998. Up to another $5.5 million
in payments will be provided to the Company based on achievement of additional
milestones culminating with the U.S. Food and Drug Administration approvals for
the product line. TAb will also receive bonus payments estimated at $13 million
tied to the first three years of each product's sales following FDA approval.
Revenues will be shared between the companies with TAb receiving 50 per cent of
net revenues through ongoing payments for the supply of product and royalties on
sales.

                  The agreement with Altana extends for five years following the
first FDA approval of each product. A renewal clause calls for an additional
five years if minimum sales targets are met. TAb will continue to be responsible
for the clinical development and regulatory submissions for each product. TAb
will also retain responsibility for manufacturing and packaging each product.



                  ACADEMIC AND CLINICAL AFFILIATIONS

                  A proportion of the Company's research and development and
product testing activities have been carried out through affiliations and
consulting arrangements with clinical research organizations and scientists at
academic institutions in the United Kingdom, Scandinavia and North America,
including St. Bartholomew's and the Royal London School of Medicine and
Dentistry, the Karolinska Institute, the University of Arizona and Vanderbilt
University Medical Center. These include arrangements in respect of preclinical
and clinical research, consultancy, patents, royalties and facility leases.


PROPRIETARY POSITION

                  COMPETITION

                  ANTIVENOMS. A number of organizations and companies
manufacture snake antivenom throughout the world. However, Management believes
most are using equine-derived products based on older technology. Based on
clinical results, Management believes that TAb's antivenom products are, in
general, safer and have greater efficacy.

                  There are two main European competitors to TAb's Vipera
product. The European Viper Antivenom is an equine-derived product made in
Croatia by the Zagreb Institute for Immunology. Institut Pasteur, part of
Pasteur Merieux Serums & Vaccins, also has an equine-derived Vipera antivenom
product. Management believes that TAb's product is superior, although both
competing products are considerably cheaper. Notwithstanding the price
differential, TAb has successfully competed with Institut Pasteur and the Zagreb
Institute for Immunology in Sweden where ViperaTAb(R) currently commands at
least 80% of the market.

                  Only one Crotalid antivenom product is currently approved in
the United States. There are frequent toxicity problems associated with that
product.



                                       10
<PAGE>   13

                  Equine-derived antivenom products with which EchiTAb(TM) and
certain other of the Company's potential antivenoms will compete are produced
by, among others, Institut Pasteur and Haffkine BioPharmaceuticals.

                  DIGOXIN ANTIDOTE. TAb has two competitors, one of which is
well-established in Europe and the other in the United States. Glaxo Wellcome
plc's Digibind(R) is available in the United Kingdom and the United States and
Boehringer Mannheim GmbH's Digitalis - Antidot BM(R) is available in Europe.
Both of these products are Fab based and derived from sheep polyclonal
antibodies. However, Management believes that DigiTAb(R) could achieve an
attractive niche position in this area.



                  TRICYCLIC ANTIDEPRESSANT ANTIDOTE. No specific tricyclic
antidepressant antidote exists and TAb's Management does not know of any
commercially, competitive activity in this area. TAb intends to apply for orphan
drug status in the United States which, if granted, will provide seven years of
marketing exclusivity. Furthermore, TAb has been granted a United States patent
for the key immunogens, the production process, the resultant product and the
use of the product to treat tricyclic antidepressant toxicity.

                  SEPSIS SYNDROME TREATMENT. Management expects to encounter
significant competition from rival products for Sepsis Syndrome treatment. Many
potential competitors are working on a variety of approaches. For example, Xoma
Corp. Centocor, Inc. and Celltech Group plc. have all had anti-endotoxin
monoclonal antibody preparations to treat septic shock in Phase III clinical
trials. However, the results indicated that these products were of limited value
as a treatment for life-threatening septic shock.

                  Celltech Group plc, Chiron Corp., Knoll AG and Centocor, Inc.,
have developed monoclonal anti-TNF antibodies; Immunex Corp. has developed a TNF
receptor; Roche Bioscience has generated a modified TNF receptor product which
is in clinical trials. Synergen Inc. has developed IL-1 receptor antagonists;
and Cortech, Inc. has tested a bradykinin antagonist.

                  One monoclonal antibody to TNF is known to be in advanced
clinical development (Phase III) but some clinicians have been disappointed with
published results regarding these products and are skeptical about their
ultimate success. Management knows of no competing polyclonal antibody in
development for the treatment of Sepsis Syndrome.

                  Management believes that CytoTAb(R) has a notable advantage
over other products in clinical development in having been the only product so
far to have been tested and demonstrated efficacy in a condition similar to
Sepsis Syndrome: the Jarisch-Herxheimer Reaction.

                  While potential competitors are abundant in this field of
therapy, Management believes that TAb's approach offers greater promise of
broad-range efficacy than any other product known to be under development.


                  INTELLECTUAL PROPERTY

                  TAb's policy is to protect and defend the intellectual
property associated with its technology and products. TAb seeks patents whenever
appropriate. Management also believes that sufficient steps have been taken



                                       11
<PAGE>   14

to ensure that trade secrets such as animal husbandry techniques and processes
unique to large-scale production of polyclonal antibodies are protected.

                  TAb has optimized the production and purification of
polyclonal antibodies and has developed extensive proprietary knowledge in this
area, combining scientific, veterinary and large-volume processing skills. TAb
has applied for patents (United States, Europe and elsewhere) which include
several key aspects of the relevant techniques; each application is now under
review by the relevant patent offices. However, some parts of the process are
non-patentable, and TAb has implemented policies and procedures designed to
protect proprietary information concerning manufacturing techniques.

                  TAb is pursuing a multinational patent strategy for the
protection of intellectual property associated with its technology and products.
TAb holds the following patents:

-                 A United States patent encompassing a broad set of claims in
                  respect of the antidote to poisoning with tricyclic
                  antidepressants.

-                 A patent on the use of Fab fragments of anti-TNF in the United
                  Kingdom, Australia, New Zealand, and through the European
                  Patent Office.

-                 A patent on the use of mixed monospecific antivenoms in the
                  United Kingdom and Australia.

-                 A United States patent on the isolation and purification of
                  antivenoms.

TAb is pursuing the following patent applications:

-                 Various steps in the production and purification of polyclonal
                  antibodies.

-                 The superiority of Fab fragments to TNF relative to other
                  antibody fragments or intact antibodies.

-                 The superiority of Fab fragments to antivenoms relative to
                  other antibody fragments or intact antibodies.

                  There can be no assurance that the Company will receive the
requested approval of these pending patent applications.


MARKETING AND RESEARCH AND DEVELOPMENT STRATEGIES

                  MARKETING STRATEGY. Collaboration agreements between large
pharmaceutical companies and biotechnology companies are common. The large
pharmaceutical companies seek to in-license products which are at an advanced
stage of development, providing the pharmaceutical companies with lower risk
investments in the development of new pharmaceuticals and access to products
outside their core area of research and development expertise. This provides a
biotechnology or biopharmaceutical company, such as TAb, with a source of
revenue prior to the launch of a product together with access to marketing
skills and to an experienced sales force. These agreements typically include an
upfront payment on signing the agreement, milestone payments on reaching
pre-defined stages in the development program, and royalties payable on sales by
the marketing collaborator together with a margin on the supply of product.



                                       12
<PAGE>   15

                  Management intends to enter into such arrangements for most
all of TAb's products. The stage at which TAb will out-license will depend on
balancing the market potential of the product with the costs and risks
associated with the continuing development program. Except in certain limited
circumstances, the Directors do not intend that TAb will establish its own sales
force but expect to market its products through alliances with collaborators.


                  Management groups TAb's products in two general categories:

                  Niche Products. These products include the antivenoms and
DigiTAb(R). Niche products serve an acute medical need in a low volume market.
Generally, the products have a lower commercial risk as they tend to have lower
development costs, shorter lead times and potentially accelerated regulatory
review. Management believes that TAb's niche products will be able to show
improved safety or efficacy compared with existing products or that they will be
able to present a market opportunity in an established market place.

                  Major Market Products. These products include the
anti-cytokine products and certain of the anti-drug products. Major market
products are being developed to meet medical needs for life threatening
conditions, which Management considers have significant market potential. For
products requiring sizable later stage trials, Management intends to out-license
these products at the end of Phase II clinical trials in order to optimize
return.

                  RESEARCH AND DEVELOPMENT STRATEGY. The nature of TAb's
technology affords flexibility in its development of a variety of products. By
varying the initial target molecule and using consistent production techniques,
TAb has already demonstrated that it can create products for different
therapeutic uses.

                  Management intends to take advantage of opportunities for
which United States orphan drug status might be granted given the development,
registration and marketing incentives which are available from such status being
granted.

                  TAb has already established and will continue to seek new
collaborative arrangements with academic institutions either sponsoring their
work directly or acquiring the intellectual property rights (or rights to use
the same) to complementary novel developments. This provides the Company with
another source of new technology to develop further its new products.


GOVERNMENT REGULATION

                  GENERAL

                  Regulation by government authorities in the United States,
Europe and other countries in which the Company operates is a significant
consideration in the development, production, marketing, labeling and
reimbursement of the Company's products and in its continuing research and
development activities.

                  In the United States, Europe and most other countries there is
a requirement to obtain and to maintain an approval for a product from the
appropriate regulatory authority ("marketing authorization"). The Company is
also subject to various laws, regulations, policies, guidelines and
recommendations relating to such matters as safe working conditions, laboratory
and manufacturing practices, the experimental use of animals and the




                                       13
<PAGE>   16

protection of the environment. The general trend has been towards greater
regulation of the pharmaceutical industry and its products.

                  The submission of an application to a regulatory authority
does not guarantee that an authorization will be granted. Regulatory authorities
require substantial data in connection with marketing authorization
applications, resulting in a lengthy approval process. The time taken to obtain
such approval varies, but can take from a few months to several years and can
involve substantial expenditure. This may be due to the lack of the necessary
results required by regulatory authorities or changing or additional regulation
during the product development process. Furthermore, regulatory authorities of
different countries may impose differing requirements and may refuse to grant,
or may require additional data before granting an approval, even though the
product may have been approved by the regulatory authority of another country.
Even if approval is obtained, failure to comply with present or future
regulatory requirements, or new information reflecting on the safety or
effectiveness of the approved drug, can lead the regulator to withdraw its
approval to market the product.

                  In the United States, the principal regulatory agency is the
U.S. Food and Drug Administration ("FDA"). Nearly all other countries have
national regulatory authorities. The Company may have to satisfy different
requirements from the FDA, European authorities and other national regulatory
authorities. There is an ongoing initiative, the International Conference on
Harmonization, between representatives from Japan, the United States and the
European Union, to limit differences where possible, but it may be many years
before its objective is achieved, if at all. In Europe, the Company must take
into consideration (a) the regulatory climate within the European Union,
including the stance of the International Conference on Harmonization, the
European Agency for the Evaluation of Medicinal Products ("EMEA") and the
European Committee for Proprietary Medicinal Products ("CPMP"), as well as (b)
the position of the national regulatory authorities of other European countries.
New licensing procedures were introduced in the European Union in 1995 aimed at
progressively limiting the differences in requirements between the regulatory
authorities of European member states in respect of the same products. However,
it is too early to assess fully the impact of these new procedures.

                  Wherever practical, the Company intends to design preclinical
and clinical protocols which should generate sufficient data to be acceptable to
support applications for the same product in each country where it is intended
to be marketed.


                  PRICE REGULATION

                   In some countries it is necessary to obtain approval for the
price to be charged. This is true in a number of European member states. In the
United Kingdom the launch price is set by the company (subject to the
constraints of the pharmaceutical price regulation system, which controls the
profitability of a company's business with the United Kingdom's National Health
Service).

                  Governments may also influence the price through the control
of national healthcare systems and also organizations which may bear the cost of
supply of such products. In the United States, government-funded or private
medical care plans can influence prices, and there are a variety of indirect
controls.

                  U.S. REGULATION

                  REGULATORY AUTHORITIES. The development and marketing of
medicinal products for human use in the United States is regulated at the
federal and state levels. The principal federal regulatory agency is the FDA
within the Department of Health and Human Services. Although most states
maintain one or more agencies with



                                       14
<PAGE>   17

power to regulate medicines, they commonly defer to the FDA in matters relating
to product development and approval.

                  Due to the requirements imposed by the FDA, the development
process for new pharmaceuticals in the United States is lengthy, expensive and
commercially risky. The great majority of compounds screened for possible
development are ultimately rejected at some stage in the pre-market testing
process; total development time for successful compounds often exceeds 10 years.
However, under the provisions of recent legislation the FDA has committed to
reduce the review time for applications. Although the agency has achieved some
reductions, especially for high-priority medicines, the review process remains
lengthy and complex. There has been little or no reduction in the testing
required before applications are submitted, which consumes most of the time
spent in developing new medicines for the U.S. market.


                  GOOD PRACTICE STANDARDS. Various standards are applied either
by law or custom to the activities of pharmaceutical companies. These include
principally Good Laboratory Practice ("GLP"), applied to studies performed
during preclinical developments to identify the compound's behavior and toxicity
in animals, Good Clinical Practice ("GCP"), intended to ensure the quality and
integrity of clinical data and to protect the rights and safety of human
subjects in clinical trials, and Good Manufacturing Practice ("GMP") which
ensures the quality of drugs by setting minimum standards for all drug
manufacturing facilities. Such standards have been developed by the FDA and by
the United States National Committee for Clinical Laboratory Standards.
Violation of these regulations can lead to invalidation of the relevant studies.
In Europe they are embodied in law (GMP and GLP) or guidelines (GCP).

                  The Company has used consulting firms in the United Kingdom
and in the United States for advice on compliance with existing regulations and
guidelines.

                  CLINICAl TRIALS. Clinical trials of new product candidates are
designed to establish their safety and efficacy in treating a specific disease
and are usually conducted in three phases, although there are not always
distinct divisions between the objectives and activities undertaken in each
phase. The clinical trial process may take from two to six years or more to
complete.

                  Phase I trials are normally conducted in a small number of
healthy human subjects or patients with the specific condition targeted. Their
purpose is to provide a preliminary evaluation of the product candidate's
safety, toxicity and behavior when administered to humans.

                  In Phase II trials, the product candidate is assessed for its
short-term safety and preliminary efficacy in a limited number of patients with
the targeted disease or disorder. The appropriate dose ranges and regimens for
Phase III are also determined during this Phase.

                  Phase III trials involve a comprehensive evaluation of safety,
efficacy and toxicity that might not have been seen in smaller studies. The
trials are carried out, typically on a multi-center basis, on a sufficient
number of patients to obtain statistically significant results. All adverse
reactions are investigated in detail and special features of the product
candidate are explored.

                  All clinical trials of investigational medicines in the United
States must be carried out under investigational new drug ("IND") submissions to
the FDA. FDA regulations impose requirements for documenting the safety of
proposed clinical trials, provide for submissions to FDA before clinical trials
can commence and authorize the FDA to suspend or withdraw permission to continue
clinical trials.



                                       15
<PAGE>   18

                  If the drug is considered by the FDA and by prospective users
to provide an important benefit in the treatment of a serious disease, the
applicant may be faced with demands from patient groups, sometimes endorsed by
the FDA, for release of the drug for treatment during the investigative stage.
The supply of such treatment is termed treatment use. Supplying drugs on this
basis can involve significant expense and resource demands for the sponsor of
the drug, which must administer the pre-approval release program. This may, in
some situations, interfere with the ability to complete controlled clinical
trials of the drug.

                  APPROVAL PROCEDURES AND CRITERIA. The FDA applies essentially
the same requirements for approval of all products: proof of safety and
efficacy, demonstration of adequate controls in the manufacturing process and
conformity with requirements for labeling. Efficacy must usually be demonstrated
by two well-controlled clinical trials carried out in accordance with FDA
regulations.

                  The FDA has discretion to determine whether the data submitted
are adequate for approval. The time taken for this approval process is related
to the quality of the submission, the potential contribution of the compound in
improving the treatment of the target disease and the workload at the FDA. There
can be no assurance that any new drug will successfully proceed through this
approval process or that it will be approved in any specific period of time.

                  During its review, the FDA may ask for additional test data.
If the FDA approves the product, it may require post-marketing testing,
including potentially expensive Phase IV studies. This phase assesses further
the product's therapeutic value and provides additional information about the
safety and efficacy of the product across a broader patient base. In addition,
the FDA can impose restrictions on the use of the drug that may be difficult and
expensive to administer.

                  ORPHAN DRUG STATUS. The Orphan Drug Act encourages
manufacturers to seek approval of products intended to treat diseases with a
prevalence of under 200,000 patients per annum in the United States. This Act
provides tax incentives, FDA assistance with protocol design, and a period of
seven years of marketing exclusivity for the product. The Company expects some
of its proposed products to be designated as orphan drugs by the FDA. TAb's
Crotalid antivenom CroTAb(R) has already been designated by the FDA as an orphan
drug.

                  ACCELERATED APPROVAL. The FDA may accelerate approval of
medicines that offer a significant improvement in the treatment of fatal or
life-threatening conditions, or conditions for which there is no alternative
therapy. In certain cases, the FDA may permit Phase II and Phase III studies to
be compressed into a single study. It is unusual for the FDA to base an approval
on such compressed studies and, although many of the Company's products would be
included in this category, there can be no assurance that such combined testing
would be considered acceptable for any of the Company's products.

                  ACCEPTANCE OF FOREIGN CLINICAL DATA. The FDA will accept
reports of foreign clinical trials if they meet requirements for GCP and are
relevant to U.S. medical practice. It is, however, uncommon for the agency to
approve a product without some evidence from clinical trials conducted in the
United States, and most sponsors carry out at least one pivotal trial there.
Studies conducted outside the United States are subject to special audits by FDA
inspectors and may be rejected if U.S. requirements for record-keeping,
protection of human subjects and other matters relating to GCP are not met.

                  NON-PATENT MARKET EXCLUSIVITY. In U.S. medicines law there are
two forms of non-patent market exclusivity. First, the law prohibits approval of
abbreviated new drug applications or literature-based applications for



                                       16
<PAGE>   19

copies of innovative products for a period of five years after the approval of a
new chemical entity, and three years after the approval of a new indication or
dosage form for which substantial clinical trials were required. These
provisions do not preclude approval of competitive applications based on
original data, and they apply only to new drugs, rather than antibiotics or
biological products.



                  Second, the law provides for a seven-year period of protection
for orphan drugs (see above). During this period, the FDA is precluded (subject
to complex exceptions) from approving any application for the same drug, even if
it is based on original data. These provisions apply to all drugs, including
antibiotics and biological products.

                  MANUFACTURING CONTROLS. The FDA inspects pharmaceutical
manufacturing establishments for compliance with current GMP and conformity with
specifications in marketing approvals. Biological manufacturing establishments
must be licensed by the FDA. The agency inspects foreign manufacturing
facilities that supply bulk or finished products for the United States market.
If companies cannot meet FDA requirements, their products may be excluded from
the United States.

                  ADVERTISING AND PROMOTION. The FDA regulates advertising and
promotion of prescription medicines. Promotion for unapproved uses is
prohibited, and sponsorship of medical symposia and publications is restricted.
Financial incentives to prescribers are regulated under federal and state
criminal laws as well as codes of practice for the medical professions.

                  ENFORCEMENT POWERS. The federal government has extensive
powers to compel compliance with medicines laws. Volatile products are subject
to seizure, and imported products may be detained. Companies and individuals
that violate the law are subject to injunctions and criminal penalties with no
requirement for proof of negligence or intent. Persons and companies convicted
of certain offenses can be barred from involvement in the medicines approval
process. The federal government can suspend or withdraw approval of products if
questions arise concerning safety or effectiveness.

                  PRODUCT LIABILITY. Companies that market medicines in the
United States are subject to suit in state and federal courts for personal
injuries caused by their products. The risk of product liability litigation is
significantly greater in the United States than in most European jurisdictions,
and damage awards can be substantial. FDA approval is not a defense to
liability, and failure to comply with FDA requirements may constitute evidence
of negligence.

                  EUROPEAN REGULATION

                  The Company's activities in Europe are regulated by national
and local laws and European Union law. There are European Directives governing
the development, manufacture and marketing (including wholesale) of medicinal
products which member states are required to implement into local law and which
must be interpreted in line with the European provisions. However, failure to
implement them properly by national governments may allow companies to rely upon
provisions of pre-existing local laws. Certain areas of regulation continue to
be regulated by national law, for example, the regulation of clinical research.


                  CLINICAl TRIALS. The three phase approach to clinical
development of new product candidates discussed in the section on U.S.
Regulation is also applicable to European regulation. See "Item 1. U.S.



                                       17
<PAGE>   20

Regulation". When adequate preclinical data are available, application will
usually be made to the regulatory authority in the country where the trial is to
be conducted. In most developed countries, clinical trials may only be commenced
after notification to and/or approval by the competent regulatory authority and
an independent ethics committee. In European Union member states, marketing
authorizations must be supported by clinical trial data as set out in European
Directives and guidelines, but the approval process and criteria for
commencement of clinical trials are not yet harmonized by European Union law.
The International Conference on Harmonization is developing proposals for new
legislation harmonizing national laws and practices.

                  MARKETING AUTHORIZATIONS. When clinical trial data supporting
safety and efficacy and the necessary manufacturing and formulation data are
available, an application for a marketing authorization may be submitted. If a
regulatory authority is satisfied that the criteria of safety, quality and
efficacy are met, a marketing authorization will be granted although European
Union law does allow member states, exceptionally, to prohibit product use on
grounds connected with public order or morality. Marketing authorizations are
granted subject to certain generally applicable conditions and may also be
subject to product-specific restrictions determined by the regulatory
authorities.

                  From January 1, 1995, two new procedures for the registration
of medicinal products in the European Union came into effect; the "centralized"
and "mutual recognition" systems. Until January 1, 1998, national applications
may also be made in several member states either in parallel, or in sequence if
the product is not subject to compulsory licensing under the centralized system.

                  The centralized system is compulsory for certain biotechnology
products, and optional for certain other products, including new active
substances not previously authorized in the European Union, products
administered by innovative and novel delivery systems and significant new
indications for existing products. The EMEA coordinates the registration
process, but the CPMP, a body of scientific experts drawn from each member
state, undertakes the scientific assessment of the product dossier and gives an
opinion as to whether the product meets the criteria for authorization. Time
periods are laid down for various stages in the approval process, including
allowances for questions and appeals. The decision to grant or refuse a
marketing authorization is taken by the Commission and, when granted, the single
authorization obtained is valid throughout all member states and the European
Free Trade Association.

                  The mutual recognition system is based upon a marketing
authorization granted by one national regulatory authority, the "Reference
Member State" or "RMS". Having obtained a marketing authorization from the RMS,
the authorization holder may apply to the regulatory authorities of other member
states to "recognize" that prior authorization and to issue national
authorizations on the same terms. Such applications can be made sequentially.
There are procedures and time limits according to which objections by member
states can be raised and appeals may be heard, although these may significantly
lengthen the time from initial application to approval. Arbitrations are handled
by the CPMP whose decision, when adopted by the Commission, is binding on all
member states. Consequently, arbitration may adversely affect prior
authorizations.

                  The passage of a product through the approval system can
therefore be long and drawn out. Although the procedures impose time limits upon
the authorities, these limits do not run if the applicant delays in providing
additional data or responses to queries raised. In addition, the regulatory
authorities can suspend, vary or revoke a marketing authorization at any time
after it has been granted if they are no longer satisfied as to the product's
safety, quality or efficacy. Increasing harmonization of decision-making in the
European Union through the CPMP means that, in the future, concerns raised by
any one member state are likely to be examined at CPMP level and the outcome of
its deliberations will affect the product in all member states.



                                       18
<PAGE>   21

                  Marketing authorizations are generally granted for a period of
five years and require renewal. During that period, should new developments
occur, the holder of the authorization is required to update the product
dossier. There is an obligation on the holder of the authorization to report
adverse events to the regulatory authorities and to keep product safety under
review.

                  MANUFACTURING AUTHORIZATIONS AND FACILITIES LICENSES. European
Union law requires that companies manufacturing medicinal products must hold a
manufacturer's authorization and must comply with the requirements of GMP. These
standards are enforced by inspection. Failure to comply may result in the
suspension or revocation of the manufacturer's authorization and may lead to
suspension of product marketing.

                  In the United Kingdom facilities licenses are issued after an
application to, and inspection by, the Medicines Control Agency ("MCA"), and
similarly in Australia by the Therapeutic Goods Administration ("TGA").




                  REGULATION IN OTHER COUNTRIES

                  In general, regulation is similar in countries outside the
United States and Europe, with the approval system regulated by specific
agencies in each geographic area. However, approval by one agency does not
ensure approval in other countries.

                  In Australia successful marketing of a therapeutic substance
may be dependent on receiving marketing approval from the TGA and also on
obtaining Commonwealth Government subsidy for use of the product via either the
Pharmaceutical Benefit Scheme or the Special Access Scheme. Applications for
listing on either of these Schemes requires additional information, in
particular economic analysis data, and approval for this second step may lag
behind obtaining marketing approval. The Australian Government is able to
exercise considerable power over price control through this process.

EMPLOYEES


                  As of December 31, 1997, the Company had 162 full-time
employees, including 49 scientists and 48 technicians engaged in research and
development, 6 regulatory personnel, and 25 management and 24 administrative
personnel. In addition, the Company employed 29 part-time employees at year end
1997. The Company believes that its future success will depend, in part, on its
ability to attract and retain highly skilled technical, marketing, support, and
management personnel.

                  None of the Company's employees in the United States is
subject to a collective bargaining agreement, and the Company has never
experienced a work stoppage. Management believes that its employee relations are
good.






                                       19
<PAGE>   22



ITEM 2.           PROPERTIES


                  The Company's physical properties are primarily owned or
leased through its subsidiaries. TAb UK operates the Company's research and
development laboratories at St. Bartholomew's in London. TAb UK leases 5,047
square feet of laboratory space from St. Bartholomew's. The current lease term
has an expiration date of September 30, 2003. TAb UK also leases 4,000 square
feet of office space at 14-15 Newbury Street in Central London, which lease
expires in 1999.

                  In addition, TAb UK owns and operates production offices,
quality control laboratories and a manufacturing facility in Ceredigion, Wales.
In 1992, TAb acquired these initial Welsh facilities, including approximately
230 acres of pasture land, animal stock, and production and ancillary
facilities. The Welsh facilities were established with financial support of the
Welsh government in the form of grants and investments. In 1995, TAb Wales
completed construction of a 20,000 square foot manufacturing plant within its
existing Welsh facilities.

                  In 1995, TAb Australasia (formerly TAb Australia Pty. Ltd)
leased offices and laboratories and acquired grazing rights over 250 hectares of
land at the Turretfield Research Center. The flocks of sheep were moved to this
location and a bleeding shed constructed. In the fourth quarter of 1996, TAb
Australasia completed construction of new facilities on the property. The new
facilities include offices, a cleanroom and a manufacturing plant, located
adjacent to the Company's existing facilities. The lease of the Turretfield
Research Center property will expire in 2015.

                  The Company's corporate headquarters is located in 9,392
square feet of leased office space in the vicinity of Vanderbilt University
Medical Center in Nashville, Tennessee. The lease expires on January 31, 2001.

                  All of the Company's laboratories, production facilities and
farms are suitably equipped for their intended purposes.














                                       20
<PAGE>   23


ITEM 3.  LEGAL PROCEEDINGS

                  There are no pending legal proceedings involving the Company
or any of its subsidiaries.




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

                  None



















                                       21
<PAGE>   24


                                     PART II

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


                  The Company's Common Stock is currently traded on the London
Stock Exchange (under the symbol TAB.L). There is no public trading market for
the Company's Common Stock within the United States.

                  The following table presents quarterly information on the
price range(1) of the Company's Common Stock, stated in British pounds and
United States dollars. This information indicates the high and low sale prices
reported by the London Stock Exchange.

<TABLE>
<CAPTION>
QUARTER ENDING                              HIGH                      LOW
--------------                              ----                      ---

<S>                                    <C>            <C>        <C>           <C>
         March 31, 1997               (pound)3.89    ($6.38)    (pound)3.035   ($5.07)

         June 30, 1997                (pound)3.74    ($6.18)    (pound)3.325   ($5.53)

         September 30, 1997           (pound)3.325   ($5.62)    (pound)1.80    ($2.85)

         December 31, 1997            (pound)2.585   ($4.40)    (pound)2.18    ($3.60)
</TABLE>

                  As of March 13, 1998, there were approximately 900 holders of
record of the Company's Common Stock. On March 13, 1998, the last sale prices
reported on the London Stock Exchange for the Company's Common Stock was
(pound)2.08 ($3.46).

                  The Company to date has paid no dividends on its Common Stock.
The declaration and payment of future dividends will be determined by the Board
of Directors in light of conditions existing in the future and are expected to
depend upon earnings, financial condition, capital requirements, and other
relevant factors not presently determinable. The Company does not expect to pay
dividends in the foreseeable future.









---------------------------
(1) Currency translations were calculated based upon the currency exchange rates
in effect on the date the price disclosed was reported on the London Stock
Exchange.




                                       22
<PAGE>   25





ITEM 6.   SELECTED FINANCIAL DATA

                  The following selected consolidated financial data at and for
each of the five years in the period ended December 31, 1997 have been derived
from the Company's consolidated financial statements. The data set forth below
should be read in conjunction with the consolidated financial statements and
notes thereto included elsewhere herein and also with "Management's Discussion
and Analysis of Financial Condition and Results of Operations".


<TABLE>
<CAPTION>
                                                                                                                         8/10/84
                                                                  Year Ended December 31,                             (Inception)
                                           ---------------------------------------------------------------------------   through
                                                                                                                        12/31/97
                                                                                                                       ----------
                                               1997            1996          1995           1994            1993
                                               ----            ----          ----           ----            ----
<S>                                        <C>            <C>            <C>             <C>            <C>           <C>
STATEMENT OF OPERATIONS DATA:

Total Revenues............(1)              $  2,677,931   $  3,268,368   $    750,490    $  1,130,323   $    290,315  $  9,386,745



Expenses:


Research and development ...............     11,462,352      9,185,126      6,321,674       5,107,894      3,597,555    42,042,457

General, administrative, marketing......      4,176,139      3,083,151      2,247,472       1,619,824      1,055,971    14,919,720

Depreciation and amortization ..........      1,643,922      1,387,916        856,756         864,288        533,244     5,511,670

Interest expense and debt conversions...      1,001,959      2,002,932        388,258         137,018        781,097     4,532,180

Foreign currency losses (1) ............        913,119              _              _               _              _       913,119

Other ..................................        328,158        355,360         36,368         119,052         25,873       879,982
                                           ------------   ------------   ------------    ------------   ------------  ------------


Total expenses .........................     19,525,649     16,014,485      9,850,528       7,848,076      5,993,740    68,799,128


Net loss ...............................   $(16,847,718)  $(12,746,117)  $ (9,100,038)   $ (6,717,753)  $ (5,703,425) $(59,412,383)
                                           ============   ============   ============    ============   ============  ============

Basic and diluted net loss per share....   $      (0.74)  $      (0.68)  $      (0.57)   $      (0.47)  $      (0.48) $      (5.98)
                                           ============   ============   ============    ============   ============  ============

BALANCE SHEET DATA:
Cash and cash equivalents...... (1)(3)     $  4,915,077   $ 20,502,536   $  3,397,082    $    593,154   $    103,842

Total assets.................. .(2)(3)       20,800,065     37,179,990     15,157,099      12,103,994      4,978,617

Long term debt, net of
 current portion (2)....................      6,059,072      8,592,755      9,595,420       2,917,251        282,555

Deficit accumulated during
 development stage .....................    (59,412,383)   (42,564,665)   (29,818,548)    (20,718,510)   (14,000,757)

Stockholders' equity.............(3)          9,758,345     25,215,530        894,479       4,862,404      1,917,332
</TABLE>

Notes:

(1)   At December 31, 1997, the Company held approximately U.S. $2,960,000
      denominated in British pounds and U.S. $347,000 in Australian dollars. The
      decline in the exchange rate at year end between the British pound and
      Australian dollar versus the U.S. dollar resulted in a foreign currency
      transaction loss of U.S. $913,119. At December 31, 1996, the Company held
      approximately U.S. $17,300,000 which was denominated in British pounds. As
      a result of improvement in the exchange rate between the British pound and
      the U.S. dollar, the Company experienced a foreign currency transaction
      gain of U.S. $1,730,000 for the year ended December 31, 1996.

(2)   In 1995 and 1994, the Company constructed a pilot production facility in
      London and a manufacturing facility in Wales. These facilities were funded
      through financing arrangements provided by Aberlyn Capital Management
      Company, Inc. and the Welsh Development Agency. See Note 5 to the
      consolidated financial statements for further information.

(3)   On July 23, 1996, the Company completed an initial public offering of
      4,190,477 shares of its common stock on the London Stock Exchange at
      (pound)5.25 ($8.14) per share. See Note 1 to the consolidated financial
      statements for further information.



                                       23
<PAGE>   26



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

         The following discussion and analysis of the financial condition and
results of operations of the Company should be read in conjunction with the
financial statements and notes thereto. Statements made in this Annual Report on
Form 10-K which are not historical fact are forward-looking statements. In
addition, the Company, through its senior management, from time to time makes
forward-looking public statements concerning its expected future operations and
performance and other developments. Such forward-looking statements are made
pursuant to the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995 and are necessarily estimates reflecting the Company's best
judgment based on current information and involve a number of risks and
uncertainties, and there can be no assurance that other factors will not affect
the accuracy of such forward-looking statements. While it is impossible to
identify all such factors, factors which could cause actual results to differ
materially from those estimated by the Company include but are not limited to,
changes in the regulation of the pharmaceutical industry, both in the United
States and internationally, changes in pharmaceutical product testing or
approval standards, both in the United States and internationally, competitive
pressures on the pharmaceutical industry and the Company's response thereto, the
Company's ability to appropriately address the Year 2000 computer system issue,
general conditions in the economy and capital markets, and other factors which
may be identified from time to time in the Company's Securities and Exchange
Commission filings and other public announcements.

GENERAL

         Since its inception, TAb has been in the development stage, devoting
its efforts and resources to drug discovery and development programs relating to
the development of highly purified, polyclonal antibodies for the treatment of
disease. Since inception, the Company's revenues have been from licensing
agreements with corporate partners, contract agreements, product sales, grant
income, interest income, and insurance and value added tax recoveries. Net
losses have been incurred each year since its inception and the Company expects
to continue to incur operating losses during at least the next year due to
continued spending on research, product development and increasing requirements
for process development, preclinical and clinical testing, regulatory affairs,
initial manufacturing activities and administration. To fund these activities,
the Company will continue to evaluate opportunities to raise further funding
which may be required in order to carry out the current business plan.

         The Company conducts its operations from its headquarters in the United
States and through subsidiaries located in the United Kingdom, Australia and New
Zealand. For a discussion of the Company's international operations for the past
three fiscal years, see Note 11 to the Company's financial statements.


RESULTS OF OPERATIONS


Year ended December 31, 1997 Compared to Year ended December 31, 1996

         TAb's revenues for 1997 decreased by 18% to $2,678,000 from $3,268,000
for 1996. During the year ended December 31, 1996 the Company recorded a foreign
currency transaction gain of $1,730,000 as a result of the U.S. dollar's
improvement during 1996 against the British pound. Due to a weaker British
currency in 1997, foreign currency transactions yielded a loss of $913,000 for
the year ended December 31, 1997. See Note 2b to the Company's financial
statements included as Item 8. As described under "Liquidity and Capital
Resources", licensing revenue increased 673% to $1,113,000 for the year ended
December 31, 1997 from $144,000 for the year ended December 31, 1996 due to
milestone payments received from licensing agreements with pharmaceutical
partners. Sales and contract revenue decreased




                                       24
<PAGE>   27

during the year ended December 31, 1997 primarily because 1996 included one time
contract revenue of $173,000 which was attributable to the Company's Nigerian
EchiTAb(TM) contract. Grant revenue increased $87,000 due to a grant received
from the Welsh Government for expansion of the Company's Welsh operations.
Interest income in the year ended December 31, 1997, increased 46% to $887,000
from $607,000 due to additional cash and short term investment holdings from the
proceeds of the Company's UK public offering of Common Stock in July 1996.

         Total expenses for the year ended December 31, 1997 increased by 22% to
$19,526,000 from $16,014,000 for the same period in 1996. Research and
development expenses during the same periods increased by 25% to $11,462,000
from $9,185,000 as a result of advanced clinical trial activities for DigiTAb(R)
and CytoTAb(R); the progression activities associated with preparing the
submissions through the regulatory review process for CroTAb(R); manufacturing
TAb's products for clinical trials; conducting and establishing the necessary
quality control and assurance systems. Additionally, the expansion of the
Australian facility was completed in early 1997 and the Company began devoting
resources there to meet the need for increased serum requirements for the
commercial production.

         General and administrative expenses for the year ended December 31,
1997 increased by 31% to $3,562,000 from $2,722,000 for the year ended December
31, 1996. This increase relates primarily to increased insurance requirements,
stockholder relations and other activities required following the Company's
initial public offering in the UK in 1996.

         Marketing and distribution expenses increased for the year ended
December 31, 1997 by 70% to $615,000 from $361,000 in the year ended December
31, 1996. This reflects increased staffing and associated expenses.

         Depreciation and amortization expense for the year ended December 31,
1997, increased by 18% to $1,644,000 from $1,388,000 for the year ended December
31, 1996. This increase is the result of the depreciation of the capital
expenditure for the Australian production facility, which was placed in service
in February 1997.

         Interest expense for the year ended December 31, 1997 decreased by 17%
to $1,002,000 from $1,201,000 in the year ended December 31, 1996, as a result
of the Company's repayment in 1996 of approximately $4,750,000 of its debt
obligations.

         The Company's net loss for the year ended December 31, 1997, was
$16,848,000 compared to a net loss of $12,746,000 for the year ended December
31, 1996. In addition to the factors described above, changes in foreign
currency exchange rates used to translate the foreign subsidiaries financial
statements into US dollars resulted in higher expense levels.





                                       25
<PAGE>   28










Year ended December 31, 1996 Compared to Year ended December 31, 1995

         TAb's revenues for 1996 increased by 335% to $3,268,000 from $750,000
for 1995. During the year ended December 31, 1996, the Company received
approximately $97,000 more in contract revenue over the amount received in the
year ended December 31, 1995, which was attributable primarily to the Company's
Nigerian EchiTAb(TM) contract. Grant revenue increased $79,000 due to a grant
received from the Economic Development Authority of the Government of South
Australia for expansion of the Company's Australian operations. Interest income
in the year ended December 31, 1996, increased 527% to $607,000 from $97,000 due
to additional cash and short term investment holdings from the proceeds of the
Company's UK public offering of Common Stock in July 1996. As a result of
improvement in the exchange rate between the British pound and the U.S. dollar,
the Company experienced a foreign currency transaction gain of $1,730,000 for
the year ended December 31, 1996. See Note 2b to the Company's financial
statements included as Item 8 hereof.

         The Company conducts research, development, manufacturing and/or
distributes its products in the United States, the United Kingdom, New Zealand
and Australia. In 1996 and 1995 the New Zealand and Australian operations did
not have a material impact on the results of operations. Trade revenues from
international operations increased 23% to $350,000 in 1996 from $283,000 in
1995.

         Expenses for the year ended December 31, 1996 increased by 63% to
$16,014,000 from $9,851,000 for the same period in 1995. Research and
development expenses during the same periods increased by 50% to $9,682,000 from
$6,449,000 as a result of increased clinical trial activities for DigiTAb(R) and
CytoTAb(R) for malaria as well as the progression through the more advanced
trial phases for CytoTAb(R) for Sepsis and CroTAb(R). These costs were related
to manufacturing TAb's products for clinical trials, conducting clinical trials
and ensuring that the necessary quality control and assurance procedures are in
place. The cost of regulatory compliance also increased as the Company's
products advanced through the development stages. Additionally, the Australian
facility increased the number of sheep in its flock during 1996 to meet the need
for increased serum requirements for the clinical trials.

         General and administrative expenses for the year ended December 31,
1996 increased by 39% to $2,225,000 from $1,601,000 for the year ended December
31, 1995. This increase relates primarily to expanded staffing and related
overhead expenses.

         Marketing and distribution expenses decreased for the year ended
December 31, 1996 by 30% to $361,000 from $518,000 in the year ended December
31, 1995 due to a temporary reduction in marketing personnel.

         Depreciation and amortization expense for the year ended December 31,
1996, increased by 62% to $1,388,000 from $857,000 compared to the year ended
December 31, 1995. This increase is the result of the depreciation of the
$4,000,000 capital expenditure for the Welsh production facility, which was
placed in service in December 1995.

         Interest expense for the year ended December 31, 1996 increased by 209%
to $1,201,000 from $388,000 in the year ended December 31, 1995 due to increased
borrowings by the Company.

         In the first quarter of 1996, the Company recorded a one-time debt
conversion expense of $802,000, relating to the conversion of an aggregate of
$2,565,000 of principal and interest on the Company's 6% Notes into shares of
Common Stock, which represented the difference between the stated conversion
price on the debt of $8.00 per share and the actual conversion price of $5.50.



                                       26
<PAGE>   29

         The Company's net loss for the year ended December 31, 1996, was
$12,746,000 compared to a net loss of $9,100,000 for the year ended December 31,
1995. This increase was due to the one-time debt conversion expense and the
other factors described above.

LIQUIDITY AND CAPITAL RESOURCES

         Since its inception, TAb has been in the development stage, devoting
its efforts and resources to drug discovery and development programs. Capital
resources have been used for the establishment and expansion of production
facilities, for product research and development activities, for clinical
testing and to meet TAb's overall increased working capital requirements.
Management does not expect revenues from product sales to be a significant
source of funding until additional products receive regulatory approval. Future
capital requirements will depend on numerous factors, including the progress of
its research programs and clinical trials, the development of regulatory
submissions, the commercial viability of the Company's products, the development
of sales, distribution and marketing capabilities, and the terms of any new
licensing arrangements. Funds for the Company's operating and capital
requirements historically have been provided by the sale of equity and debt and
from collaboration agreements and other financing arrangements. Measures are
currently being taken to conserve cash resources while at the same time
sustaining the progress of clinical trials for products that promise the most
success. Meanwhile, the Company continues to evaluate opportunities to raise
further funding which may be required in order to carry out the current business
plan.

         At December 31, 1997, the Company had cash and cash equivalents
totaling $4,915,000, of which approximately $2,960,000 was denominated in
British pounds and $347,000 in Australian dollars and short-term investments of
$1,997,000 denominated in U.S. dollars. The Company's net cash used in operating
activities during the year ended December 31, 1997, totaled $13,421,000, an
increase of 11% from the year ended December 31, 1996. Capital expenditures
decreased 62% to $1,257,000 in 1997 from $3,293,000 in 1996. The initial
expansion of the Company's production facilities in Australia was completed
during 1997. In 1998, the Company plans to begin scale up of the production
facilities in Wales and to furnish the new Australian facility with the
necessary laboratory equipment in anticipation of future commercial production.
Capital expenditures in 1998 are expected to be approximately $2,300,000. The
Company believes future cash requirements for capital expenditures can be funded
through financing arrangements and from the Company's current cash holdings.

         In October 1997, the Company finalized an agreement with Altana Inc.
whereby Altana will pay up to $23,000,000 for the U.S. distribution rights to
CroTAb(R), DigiTAb(R), and TriTAb(R). The Company received $1,000,000 in 1997
for the achievement of certain milestones. Upon attainment of other milestones,
TAb may receive additional payments of up to $3,500,000 in 1998. Additional
payments under the agreement will be based on FDA approvals and sales for the
first three years of market availability.

         TAb uses sheep for the production of its polyclonal antibodies and
supplies all the antisera required from its own flocks. Currently, TAb's
subsidiaries have approximately 5,600 sheep and TAb expects to substantially
increase the size of its flocks over several years to meet full scale production
requirements once additional products are approved for sale.

         TAb has recognized the potential Year 2000 problems that may affect its
computing systems, laboratory equipment and business processes. The Company has
plans in place to ensure that all of its entities worldwide will have the
ability to operate effectively in the 21st century. A Year 2000 Task Force has
been formally established which includes subgroups located at TAb, TAb UK Ltd
(at both Wales and London sites) and TAb Australasia Pty Ltd. The Company is
currently conducting a preliminary assessment



                                       27
<PAGE>   30

of its computer systems, laboratory equipment and business processes to identify
the systems that could be affected by the Year 2000 issue. The Company believes
that the Year 2000 issue will not pose significant operational problems for its
computer systems. The Company expects to complete its full assessment, including
the potential impacts of the Year 2000 from laboratory equipment and business
processes, by the end of April 1998. The Company will then be able to determine
the effect, if any, on future financial results.



NET OPERATING LOSS CARRYFORWARDS

         As of December 31, 1997, the Company had approximately $56.0 million of
net operating loss carryforwards for income tax purposes, of which $44.9 million
are available for U.S. Federal taxes and expire from 1999 through 2012. In
addition, the Company has approximately $232,000 of research and development tax
credits available to offset future federal income tax, subject to limitations
for alternative minimum tax. The Internal Revenue Code of 1986, as amended,
contains certain provisions that limit the net operating loss carryforward
available to be used in any given year if certain events occur, including
significant changes in ownership. At present the Company's net operating loss
carryforward is not subject to these limitations. No assets have been recognized
in the Company's financial statements for these net operating loss carryforwards
because management believes the generally accepted accounting principle criteria
for recognition have not been met.

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

         During June 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income" ("SFAS No. 130") and Statement of Financial Accounting Standards No. 131
"Disclosures about Segments of an Enterprise and Related Information" ("SFAS No.
131"). The Company will adopt SFAS No. 130 and SFAS No. 131 in 1998 as required.
Because these standards require only disclosure of certain additional
information, the effect of adoption will not have a significant impact on the
Company's financial position, results of operations or cash flows.












                                       28
<PAGE>   31


ITEM 8.        FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA



                  THERAPEUTIC ANTIBODIES INC. AND SUBSIDIARIES
                          (A Development Stage Company)

                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
                the years ended December 31, 1997, 1996 and 1995
                    and the cumulative development stage from
              August 10, 1984 (inception) through December 31, 1997



<TABLE>
<CAPTION>
                                                                       PAGE
                                                                       ----

<S>                                                                    <C>
Report of Independent Accountants.......................................30


Consolidated Financial Statements:

     Balance Sheets.....................................................31

     Statements of Operations...........................................32

     Statements of Stockholders' Equity.................................33

     Statements of Cash Flows...........................................34

     Notes to Financial Statements......................................35
</TABLE>






                                       29
<PAGE>   32




REPORT OF INDEPENDENT ACCOUNTANTS

Board of Directors
Therapeutic Antibodies Inc.

We have audited the accompanying consolidated balance sheets of Therapeutic
Antibodies Inc. and Subsidiaries (A Development Stage Company) as of December
31, 1997 and 1996, and the related consolidated statements of operations,
stockholders' equity, and cash flows for each of the three years in the period
ended December 31, 1997 and for the period from August 10, 1984 (inception)
through December 31, 1997. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.

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

As discussed in Note 1, the Company has been in the development stage with its
primary activities being research and development and has not yet commenced
planned principal operations.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Therapeutic
Antibodies Inc. and Subsidiaries as of December 31, 1997 and 1996, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1997 and for the period from August
10, 1984 (inception) through December 31, 1997 in conformity with generally
accepted accounting principles.




/S/ Coopers & Lybrand, LLP


Louisville, Kentucky
March 5, 1998





                                       30
<PAGE>   33

THERAPEUTIC ANTIBODIES INC. AND SUBSIDIARIES
(A Development Stage Company)
CONSOLIDATED BALANCE SHEETS
December 31, 1997 and 1996

<TABLE>
<CAPTION>
                                                                         1997              1996
                                                                         ----              ----
     ASSETS
<S>                                                                 <C>                <C>
Current assets:
   Cash and cash equivalents                                        $  4,915,077       $ 20,502,536
   Short-term investments                                              1,997,240          2,002,266
   Trade receivables                                                     594,267            101,281
   Value added tax receivable                                            179,629            251,186
   Inventories                                                           489,138            400,167
   Other current assets                                                  409,929            474,412
                                                                    ------------       ------------

                    Total current assets                               8,585,280         23,731,848

Property and equipment, net                                           11,456,690         12,682,680
Patent and trademark costs, net                                          598,924            529,228
Other assets, net                                                        159,171            236,234
                                                                    ------------       ------------

                    Total assets                                    $ 20,800,065       $ 37,179,990
                                                                    ============       ============


     LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
   Accounts payable and accrued expenses                            $  1,457,121       $    936,591
   Accrued interest                                                      146,326            161,367
   Current portion of notes payable                                    2,545,701          1,446,327
                                                                    ------------       ------------
                    Total current liabilities                          4,149,148          2,544,285

Notes payable, net of current portion                                  6,059,072          8,592,755
Deferred revenue                                                         559,467            656,170
Other liabilities                                                        274,033            171,250
                                                                    ------------       ------------

                    Total liabilities                                 11,041,720         11,964,460
                                                                    ------------       ------------

Commitments

Stockholders' equity:
   Common stock - par value $.001 per share;
     30,000,000 shares authorized; 23,252,825 -
     December 31, 1997 and 22,353,692 - December
     31, 1996 issued and outstanding                                      23,253             22,354
   Additional paid-in capital                                         68,927,203         67,082,048
   Deficit accumulated during the development
     stage (1984-1997)                                               (59,412,383)       (42,564,665)
   Cumulative translation adjustment                                     220,272            675,793
                                                                    ------------       ------------

                    Total stockholders' equity                         9,758,345         25,215,530
                                                                    ------------       ------------

                    Total liabilities and stockholders' equity      $ 20,800,065       $ 37,179,990
                                                                    ============       ============
</TABLE>


The accompanying notes are an integral part of the consolidated financial
statements.




                                       31
<PAGE>   34


THERAPEUTIC ANTIBODIES INC. AND SUBSIDIARIES
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF OPERATIONS



<TABLE>
<CAPTION>
                                                                                                      For the Cumulative
                                                              For the Years Ended                      Development Stage
                                                                  December 31,                       from August 10, 1984
                                                ------------------------------------------------     (inception) Through
                                                    1997              1996              1995           December 31, 1997
                                                ------------     --------------      -------------     -----------------
<S>                                             <C>              <C>                 <C>                <C>
Revenues:
  Sales and contract revenue                     $   392,888      $     600,607       $    488,347       $  2,791,117
  Licensing revenue                                1,112,955            143,500            100,000          1,356,455
  Interest income                                    886,511            607,479             96,917          1,922,686
  Grant income                                       205,569            118,535             39,509            732,519
  Value-added tax and insurance recoveries                --                 --                 --            577,170
  Foreign currency gains                                  --          1,733,357              3,054          1,785,984
  Other                                               80,008             64,890             22,663            220,814
                                                 -----------       ------------       ------------       ------------

                                                   2,677,931          3,268,368            750,490          9,386,745
                                                 -----------       ------------       ------------       ------------


Expenses:
  Cost of sales and contract revenue                 110,740            334,989             31,360            545,157
  Research and development                        11,462,352          9,185,126          6,321,674         42,042,457
  General and administrative                       3,561,541          2,721,889          1,729,262         12,943,167
  Marketing and distribution                         614,598            361,262            518,210          1,976,553
  Depreciation and amortization                    1,643,922          1,387,916            856,756          5,511,670
  Interest                                         1,001,959          1,201,335            388,258          3,730,583
  Debt conversion expense                                 --            801,597                 --            801,597
  Foreign currency losses                            913,119                 --                 --            913,119
  Other                                              217,418             20,371              5,008            334,825
                                                 -----------       ------------       ------------       ------------

                                                  19,525,649         16,014,485          9,850,528         68,799,128
                                                 -----------       ------------       ------------       ------------

                  Net loss                      $(16,847,718)      $(12,746,117)      $ (9,100,038)      $(59,412,383)
                                                ============       ============       ============       ============


Basic and diluted net loss per share            $      (0.74)      $      (0.68)             (0.57)      $      (5.98)
                                                ============       ============       ============       ============

Weighted average shares used in
  computing basic and diluted net
  loss per share                                  22,888,226         18,821,524         15,938,219          9,937,666
                                                ============       ============       ============       ============
</TABLE>


The accompanying notes are an integral part of the consolidated financial
statements.




                                       32
<PAGE>   35




THERAPEUTIC ANTIBODIES INC. AND SUBSIDIARIES
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
for the years ended December 31, 1997, 1996 and 1995 and for the Cumulative
Development Stage from August 10, 1984 (inception) through December 31, 1997


<TABLE>
<CAPTION>
                                       COMMON STOCK                         ADDITIONAL
                               -------------------------    COMMON STOCK     PAID-IN
                                  SHARES       PAR VALUE     SUBSCRIBED      CAPITAL
                               -------------   ----------   ------------   ------------
<S>                            <C>             <C>          <C>            <C>
Sale of common stock
     1985 - 1994                  9,033,619     $ 9,034         2,122      $ 22,621,470
One thousand-for-one stock
     split  1985                  2,797,200       2,797                          (2,797)
Exercise of stock warrants
     at $.75 per share 1989          66,667          67                          49,933
Issuance of shares 1990,
     1992 and 1994                1,949,373       1,949        (1,949)          (13,677)
Issuance of shares for
     acquisition of PAL 1992      1,415,875       1,416                       3,155,984
Issuance of warrants
     1992 and 1993                                                              212,000
Translation adjustment
     1992 - 1994
Net loss from August 10,
     1984 (inception)
     to December 31, 1994
                                 ----------     -------    ----------      ------------

Balance, December 31, 1994       15,262,734      15,263           173        26,022,913
Issuance of shares                  172,510         173          (173)
Exercise of stock warrants
     at $.50-$.75 per share          99,735         100                          60,201
Sale of common stock              1,021,624       1,021                       4,796,765
Net loss 1995
Translation adjustment
                                 ----------     -------     ---------      ------------

Balance, December 31, 1995       16,556,603      16,557             -        30,879,879
Issuance of shares
     upon debt conversion           466,383         466                       2,564,639
Debt conversion charge                                                          801,597
Sale of common stock, net           164,332         165                         933,384
Initial public offering, net      4,190,477       4,190                      30,370,518
Exercise of stock warrants
     at $.75-$4.50 per share        942,897         943                       1,332,989
Exercise of stock options            33,000          33                          89,667
Issuance of warrants                                                             46,944
Stock-based compensation expense                                                 62,431
Net loss 1996
Translation adjustment
                                 ----------     -------     ---------      ------------

Balance, December 31, 1996       22,353,692      22,354             -        67,082,048
Exercise of stock warrants
     at $.60-$3.50 per share        888,716         889                       1,357,197
Stock-based compensation expense                                                469,438
Exercise of stock options            10,417          10                          18,520
Net loss 1997
Translation adjustment
                                 ----------     -------     ---------      ------------

Balance, December 31, 1997       23,252,825     $23,253             -      $ 68,927,203
                                 ==========     =======     =========      ============


<CAPTION>
                                                             DEFICIT
                                          STOCK        ACCUMULATED DURING     CUMULATIVE
                                       SUBSCRIPTIONS      DEVELOPMENT        TRANSLATION
                                        RECEIVABLE           STAGE            ADJUSTMENT            TOTAL
                                       -------------      ------------       ------------      -------------
<S>                                    <C>             <C>                   <C>               <C>
Sale of common stock
     1985 - 1994                          (3,528,537)                -                  -      $  19,104,089
One thousand-for-one stock
     split  1985
Exercise of stock warrants
     at $.75 per share 1989                                                                           50,000
Issuance of shares 1990,
     1992 and 1994                         2,838,499                                               2,824,822
Issuance of shares for
     acquisition of PAL 1992                                                                       3,157,400
Issuance of warrants
     1992 and 1993                                                                                   212,000
Translation adjustment 1992 - 1994                                           $    232,603            232,603
Net loss from August 10,
     1984 (inception)
     to December 31, 1994                                 $(20,718,510)                          (20,718,510)
                                        -------------     -------------      ------------      -------------

Balance, December 31, 1994                  (690,038)      (20,718,510)           232,603          4,862,404
Issuance of shares                           690,038                                                 690,038
Exercise of stock warrants
     at $.50-$.75 per share                                                                           60,301
Sale of common stock                                                                               4,797,786
Net loss 1995                                               (9,100,038)                           (9,100,038)
Translation adjustment                                                           (416,012)          (416,012)
                                       -------------      ------------       ------------      -------------

Balance, December 31, 1995                         -       (29,818,548)          (183,409)           894,479
Issuance of shares
     upon debt conversion                                                                          2,565,105
Debt conversion charge                                                                               801,597
Sale of common stock, net                                                                            933,549
Initial public offering, net                                                                      30,374,708
Exercise of stock warrants
     at $.75-$4.50 per share                                                                       1,333,932
Exercise of stock options                                                                             89,700
Issuance of warrants                                                                                  46,944
Stock-based compensation expense                                                                      62,431
Net loss 1996                                              (12,746,117)                          (12,746,117)
Translation adjustment                                                            859,202            859,202
                                       -------------      ------------       ------------      -------------

Balance, December 31, 1996                         -       (42,564,665)           675,793         25,215,530
Exercise of stock warrants
     at $.60-$3.50 per share                                                                       1,358,086
Stock-based compensation expense                                                                     469,438
Exercise of stock options                                                                             18,530
Net loss 1997                                              (16,847,718)                          (16,847,718)
Translation adjustment                                                           (455,521)          (455,521)
                                       -------------      ------------       ------------      -------------

Balance, December 31, 1997                         -      $(59,412,383)      $    220,272      $   9,758,345
                                       =============      ============       ============      =============
</TABLE>



The accompanying notes are an integral part of the consolidated financial
statements.


                                       33
<PAGE>   36



THERAPEUTIC ANTIBODIES INC. AND SUBSIDIARIES
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>

                                                                                                                For the Cumulative
                                                                          For the Years Ended                   Development Stage
                                                                                December 31,                   From August 10, 1984
                                                             -----------------------------------------------   (Inception) Through
                                                                1997               1996               1995     December 31, 1997
                                                             -------------       -------------  ------------   -----------------
<S>                                                          <C>                 <C>            <C>            <C>
Cash flow from operating activities:
    Net loss                                                 $(16,847,718)       $(12,746,117)  $(9,100,038)   $(59,412,383)
    Adjustments to reconcile net loss to net
    cash used in operating activities:
       Depreciation and amortization                            1,643,922           1,387,916       856,756       5,511,670
       Disposal of property and equipment                         282,806             532,817       111,615         927,238
       Foreign currency loss (gain)                               913,119          (1,733,357)       (3,054)       (872,865)
       Warrant expense                                                  -              46,944             -         193,994
       Stock-based compensation expense                           487,968              62,431             -         550,399
       Debt conversion expense                                          -             801,597             -         801,597
       Changes in:
            Trade receivable                                     (434,140)            (52,373)    1,106,727        (509,232)
            Inventories                                           (88,971)             (7,073)     (332,559)       (374,964)
            Other current assets                                   60,616            (128,813)     (334,980)       (408,107)
            Accounts payable and accrued expenses                 646,550            (340,411)      (84,553)      1,553,382
            Accrued interest                                         (777)            (37,512)      154,858         776,225
            Deferred revenue                                      (84,063)            313,670             -         229,607
            Other                                                       -            (234,301)      236,139         (43,489)
                                                             ------------        ------------   -----------    ------------

          Net cash used in operating activities               (13,420,688)        (12,134,582)   (7,389,089)    (51,076,928)
                                                             ------------        ------------   -----------    ------------

Cash flows from investing activities:
    Decrease in restricted cash                                         -                   -     1,126,000               -
    Purchase of property and equipment                         (1,257,448)         (3,293,214)   (2,491,020)    (13,888,323)
    Patent and trademark costs, net                              (109,709)           (198,502)     (127,042)       (660,997)
    Purchase of short-term investments                        (11,931,028)         (2,002,266)            -     (13,933,294)
    Maturity of short-term investments                         11,838,785                   -             -      11,838,785
    Other                                                               -                   -             -          69,750
                                                             ------------        ------------   -----------    ------------

       Net cash used in investing activities                   (1,459,400)         (5,493,982)   (1,492,062)    (16,574,079)
                                                             ------------        ------------   -----------    ------------

Cash flows from financing activities:
    Proceeds from notes payable                                    17,605           2,518,239     4,989,452      15,809,005
    Payments on notes payable                                  (1,299,211)         (1,969,138)   (2,144,704)     (6,177,471)
    Proceeds from line of credit                                   61,897             123,371     1,311,053       3,371,278
    Payments on line of credit                                   (118,505)         (1,018,738)   (1,741,540)     (3,327,442)
    Proceeds from convertible debt, net                                 -           5,432,500     4,222,500       9,655,000
    Payments on convertible debt                                        -          (4,320,325)            -      (4,320,325)
    Proceeds from issuance of stock, net                        1,358,086          32,326,264     5,548,125      57,011,580
    Proceeds from issuance of warrants                                  -                   -             -          65,000
    Other                                                          39,184              (5,628)     (151,032)       (147,598)
                                                             ------------        ------------   -----------    ------------

       Net cash provided by financing activities                   59,056          33,086,545    12,033,854      71,939,027
                                                             ------------        ------------   -----------    ------------

Effect of exchange rate changes on cash and cash equivalents     (766,427)          1,647,473      (348,775)        627,057
                                                             ------------        ------------   -----------    ------------

Net (decrease) increase in cash and cash equivalents          (15,587,459)         17,105,454     2,803,928       4,915,077

Cash and cash equivalents, beginning of period                 20,502,536           3,397,082       593,154               -
                                                             ------------        ------------   -----------    ------------

Cash and cash equivalents, end of period                     $  4,915,077         $20,502,536   $ 3,397,082    $  4,915,077
                                                             ============         ===========   ===========    ============
Supplemental cash flow disclosures:
    Cash payments for interest (net of amount capitalized)   $  1,017,000         $ 1,142,738   $   250,616    $  1,738,516
                                                             ============         ===========   ===========    ============
</TABLE>

The accompanying notes are an integral part of the consolidated financial
statements.




                                       34
<PAGE>   37



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.       ORGANIZATION AND OPERATIONS OF THE COMPANY:

         Therapeutic Antibodies Inc. (the Company) was incorporated on August
         10, 1984 for the purpose of engaging in the research, development,
         production and marketing of therapeutic antibodies that provide
         protection against venoms, drugs, toxins and infectious diseases. The
         Company is a development stage company as defined in Statement of
         Financial Accounting Standards (SFAS) No. 7, Accounting and Reporting
         by Development Stage Enterprises, and is devoting substantially all of
         its present efforts to research and development, including
         pre-production activities. Certain of the Company's research and
         development and product testing activities are carried out through
         affiliations with scientists at academic institutions around the world.
         These affiliations include preclinical and clinical research
         agreements, consulting agreements, patent and royalty agreements and
         facility leases. Inherent in the development stage is a range of risks
         including the need for, and uncertainty of, future financing. The
         Company also faces risks stemming from the nature of the
         biopharmaceutical industry, such as the risk of competition, the risk
         of regulatory change, including potential changes in health care
         coverage, uncertainties associated with obtaining and enforcing patents
         and proprietary technology, uncertainty of the approval of products by
         governmental agencies and risks related to fluctuations in interest
         rates and foreign currencies.

         Net losses have been incurred each year since its inception and the
         Company expects to incur operating losses during at least the next year
         due to continued spending on research, product development and
         increasing requirements for process development, preclinical and
         clinical testing, regulatory affairs, initial manufacturing activities,
         and administration. The Company will require additional financing until
         product sales or licensing fees are sufficient to generate positive
         cash flows from operations.

         The Company is currently exploring raising additional financing in 1998
         in the form of either secured debt, equity or a convertible debt
         security. Furthermore, the Company may consider an additional equity
         offering in 1998 or 1999.

         On July 23, 1996, the Company completed an initial public offering of
         4,190,477 shares of its Common Stock on the London Stock Exchange at
         (pound)5.25 ($8.14) per share raising total gross and net proceeds of
         approximately $34,100,000 and $30,400,000, respectively. Approximately,
         $4,750,000 was used to repay the Company's 15% Notes and certain other
         indebtedness. The remainder of the net proceeds is being utilized to
         fund working capital, operations and capital expenditures.

2.       SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

         a.    PRINCIPLES OF CONSOLIDATION: The consolidated financial
               statements of the Company include the accounts of the Company and
               its wholly-owned subsidiaries. All intercompany accounts and
               transactions have been eliminated.




                                       35
<PAGE>   38

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

2.        SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:

          b.   FOREIGN CURRENCY TRANSLATION: Assets and liabilities of foreign
               subsidiaries denominated in foreign currencies are translated to
               U.S. dollars at period-end exchange rates. Revenues and expenses
               denominated in foreign currencies are translated at average
               exchange rates for the period. Translation adjustments are
               reported as a separate component of stockholders' equity. The
               effects of translation of intercompany loans to international
               subsidiaries which have been designated as long-term investments
               are also included in the separate component of stockholders'
               equity. The Company's initial public offering on the London Stock
               Exchange raised total proceeds of(pound)22,000,000 of
               which(pound)8,000,000 was converted to U.S. dollars in
               1996,(pound)1,565,000 to Australian dollars in early 1997 and the
               balance was left in sterling. At December 31, 1997, the Company
               had approximately(pound)1,794,000 in British sterling and
               $534,000 in Australian dollars which were translated to U.S.
               dollars at the year end currency rates of 1.65 and 0.65,
               respectively. Since the exchange rate for British sterling fell
               during the year, from 1.71 at December 31, 1996, the Company
               recognized significant foreign currency losses for 1997. Foreign
               currency transaction losses for the year ended December 31, 1997
               were $913,119 and foreign currency transaction gains for the
               years ending December 31, 1996 and 1995 were $1,733,357 and
               $3,054, respectively.

          c.   CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS: All highly-liquid
               investments with an original maturity of three months or less
               when purchased are classified as cash equivalents.

               Financial instruments which potentially subject the Company to
               concentrations of credit risk consists principally of cash and
               temporary cash investments. The Company places substantially all
               of its cash and temporary cash investments with one major
               financial institution. As of December 31, 1997, and at times
               throughout the period, cash balances were in excess of Federal
               Deposit Insurance Corporation (FDIC) insurance limits. The
               Company has not experienced any losses in such accounts and
               believes no significant exposure from this concentration exists
               with respect to cash and temporary cash investments. The Company
               also maintains balances at a U.S. institution denominated in
               British sterling pounds and Australian dollars.

               Short-term investments consists of governmental and corporate
               debt instruments. The carrying values of these short-term
               investments approximates fair value at December 31, 1997.

          d.   INVENTORIES: Inventories are stated at the lower of cost
               (first-in, first-out) or market.






                                       36
<PAGE>   39



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

2.       SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:

         e.   PROPERTY AND EQUIPMENT: Property and equipment is stated at cost
              and is depreciated using the straight-line method over the
              estimated useful life of the asset as follows:

              Buildings and improvements - 10 to 20 years Furniture, fixtures
              and equipment - 2 to 10 years Livestock - 5 years

              Leasehold improvements are amortized over the shorter of their
              estimated life or the period of the related leases, including
              anticipated renewals for which the Company has an option.

         f.    CARRYING VALUE OF LONG LIVED ASSETS: The carrying value of long
               lived assets is reviewed if the facts and circumstances suggest
               that they may be impaired. If this review indicates that the
               carrying value will not be recoverable, the carrying value is
               reduced to fair value.

         g.    PATENT AND TRADEMARK COSTS: Patent costs consist of legal fees
               associated with patent applications and filings and trademark
               costs consists of legal fees associated with trademark
               procurement. Once a patent is granted, costs are amortized using
               the straight-line method over 17 years from the patent grant
               date. Accumulated amortization was $27,282, $22,059 and $10,539
               as of December 31, 1997, 1996 and 1995, respectively. Trademark
               costs are amortized using the straight-line method over 10 years.
               Accumulated amortization was $34,790, $18,358 and $6,838 as of
               December 31, 1997, 1996 and 1995, respectively.

         h.    REVENUE RECOGNITION: Revenues from sales of products are
               recognized at the time of shipment. Revenues from licensing
               agreements are recognized when earned based upon signing the
               agreement, if applicable, and upon reaching predefined milestones
               in the development program.

               The Company has received grants from the United Kingdom and
               Australia as a result of reaching certain employment levels and
               constructing production facilities. Grants related to employment
               levels and conducting clinical trials are recognized as income at
               the point in time that the conditions of the grant are satisfied.
               Grants related to construction of production facilities are
               recognized over the life of the facility.

         i.    RESEARCH AND DEVELOPMENT COSTS: Research and development costs,
               costs for developing and improving manufacturing processes, pilot
               plant operations and inventories of products not yet approved for
               sale by governmental regulatory authorities are expensed when
               incurred.



                                       37
<PAGE>   40


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

2.       SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:


         j.    BASIC AND DILUTED EARNINGS PER COMMON SHARE: The basic and
               diluted earnings per common share calculation was based on
               Statement of Financial Accounting Standards No. 128, "Earnings
               per Share" (SFAS No. 128), which the Company adopted during the
               fourth quarter of 1997. Application of SFAS No. 128 to the years
               ended December 31, 1996 and 1995 did not change the previously
               disclosed per share amounts.

               The calculations are based upon the weighted average number of
               shares of common stock outstanding during each period. Common
               equivalent shares from stock options, warrants and other dilutive
               securities are excluded from the computations as their effect is
               antidilutive.

         k.    VALUE-ADDED TAX RECEIVABLE: The Company's operations in the
               United Kingdom (U.K.) are subject to value-added tax (VAT)
               whereby the Company pays tax at a rate of 17.5% on most goods and
               services purchased. These VAT taxes are subject to refund based
               on returns which are filed quarterly with U.K. taxing
               authorities.

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

         m.   RECLASSIFICATIONS: Certain reclassifications were made to the
              1996 and 1995 financial statements to conform with the 1997
              presentation. The reclassifications had no effect on total assets,
              liabilities, net loss or stockholders' equity.

      3.  RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS:

          During June 1997, the Financial Accounting Standards Board issued
          Statement of Financial Accounting Standards No. 130, "Reporting
          Comprehensive Income" ("SFAS No. 130") and Statement of Financial
          Accounting Standards No. 131 "Disclosures about Segments of an
          Enterprise and Related Information" ("SFAS No. 131"). The Company will
          adopt SFAS No. 130 and SFAS No. 131 in 1998 as required. Because these
          standards require only disclosure of certain additional information,
          the effect of adoption will not have a significant impact on the
          Company's financial position, results of operations or cash flows.




                                       38
<PAGE>   41





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

4.       PROPERTY AND EQUIPMENT:

         Property and equipment at December 31 consists of the following:


<TABLE>
<CAPTION>
                                                 1997            1996
                                              ------------    ------------

             <S>                              <C>             <C>
             Land                             $   614,429     $   639,266
             Buildings and improvements         7,976,570       6,420,062
             Construction in progress              64,571       1,420,018
             Furniture, fixtures and            7,141,732       7,078,837
             equipment
             Livestock                            870,323         861,286
                                              -----------     -----------

                                               16,667,625      16,419,469
             Accumulated depreciation           5,210,935       3,736,789
                                              -----------     -----------

                                              $11,456,690     $12,682,680
                                              ===========     ===========
</TABLE>

         Buildings and improvements includes $10,120 and $38,288 of capitalized
         interest associated with the construction of a building in Australia in
         1997 and 1996, respectively and $491,408 with the construction of
         buildings in the United Kingdom in 1995.






                                       39
<PAGE>   42


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

5.  NOTES PAYABLE:
    Notes payable at December 31 consist of:

<TABLE>
<CAPTION>
                                                                               1997          1996
                                                                           -----------   ----------
       <S>                                                                 <C>           <C>
       6% convertible notes payable, principal due
           October 1, 2000, interest due semi-annually
           on April 1 and October 1                                         $2,905,000   $ 2,905,000

       Capital lease payable to Aberlyn Capital
           Management Limited Partnership,
           interest at 14.5%-18%, collateralized by
           equipment in the United Kingdom with a net
           book value of $2.6 million with monthly payments
           of $113,000 required through January 2000                         1,697,708     2,714,413

       11.5% note payable to Equitas, LP, principal due
           July 2000, interest due quarterly
           in November, February, May, and August,
           collateralized by various assets of the
           Company's subsidiaries and common shares of the
           Company's subsidiary, Polyclonal
           Antibodies, Ltd.                                                    800,000       800,000

       12% and 15% unsecured notes payable to an officer
           of the Company, interest due monthly
           and/or quarterly, principal due December 1998                     1,000,000     1,000,000

       Notepayable to Bank of Wales PLC, collateralized by
           certain real property in the United Kingdom,
           interest at 2.5% over Bank of Wales lending
           rate (effective rate of 7.25% at December 31, 1997),
           principal and interest due monthly over 10
           years beginning February 1995                                       395,363       450,239

       11% note payable to South Australian Minister for
           Primary Industries, collateralized
           by building and equipment, principal repayable
           in annual installments over ten years
           beginning in 1997                                                 1,217,177     1,576,193

       Capital equipment leases, interest rates from 10.6% to
           19.5%, principal and interest payable
           monthly through 2001                                                327,172       266,682

       8% unsecured note payable to Avantec, Inc., interest
          due monthly, principal due October                                   100,000       100,000

       6% note payable to CATO, Inc., interest due
          semi-annually, principal due December 31, 2000                       100,000       100,000

       Other                                                                    62,353       126,555
                                                                            ----------   -----------
                                                                             8,604,773    10,039,082
       Less current portion                                                  2,545,701     1,446,327
                                                                            ----------   -----------
                                                                            $6,059,072   $ 8,592,755
                                                                            ==========   ===========
</TABLE>




                                       40
<PAGE>   43




NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

5.       NOTES PAYABLE, CONTINUED:

         In August 1995, the Company initiated a private placement of its 6%
         Convertible Notes due October 1, 2000 (the "6% Notes"). Interest on the
         6% Notes is payable semi-annually and the notes are convertible into
         shares of the Company's common stock at $8.00 per share at any time
         prior to maturity upon the election of the holder. The 6% Notes are not
         collateralized. In January 1996, the Company offered each holder of the
         6% Notes the opportunity to exchange all or a portion of their 6% Notes
         for shares of the Company's common stock at the rate of $5.50 per share
         until February 9, 1996. Pursuant to this offer, the holders of
         $2,565,105 aggregate amount of principal and accrued interest on the 6%
         Notes elected to tender their 6% Notes to the Company in exchange for
         466,383 shares of common stock. This exchange conversion resulted in a
         non-cash debt conversion expense of $801,597.

         The Company has entered into capital lease agreements with Aberlyn
         Capital Management Limited Partnership under which it has financed
         $1,000,000 at 18% and $3,203,573 at 14.5%. The borrowings are
         collateralized by certain of the Company's equipment located in the
         United Kingdom. Principal amounts mature from October 1998 through
         January 2000. Payments of $113,000 are due monthly. In connection with
         the agreement, the Company issued warrants in 1995 and 1994 to purchase
         a total of 102,514 shares of the Company's common stock at $5.00 per
         share. In addition, if the Company chooses to retire early any of the
         $1,000,000 financed under the agreements, the Company is required to
         issue warrants to Aberlyn to purchase up to 12,500 shares at $8.00 per
         share.

         In 1995, the Company obtained the proceeds of an $800,000 loan from
         Equitas, LP. The loan agreement provides for interest at an annual rate
         of 11.5% to be paid quarterly. Principal is due in full at maturity on
         July 24, 2000. The lender received warrants to purchase 22,198 shares
         of the Company's common stock at $8.00 per share. The loan is
         collateralized by accounts receivable, antisera inventory, and
         livestock from certain of the Company's subsidiaries as well as limited
         guarantees from those subsidiaries. This loan is additionally
         collateralized by the common shares of the Company's subsidiary,
         Polyclonal Antibodies, Limited (PAL).

         In April 1996, an officer of the Company made a short-term unsecured
         loan to the Company of $1,000,000. Interest was charged at 12%. In May,
         the officer converted $750,000 principal amount of the 12% Note into an
         equal amount of the Company's 15% Notes. The $250,000 principal balance
         on the 12% Note is payable in full together with accrued interest in
         December 1998.




                                       41
<PAGE>   44



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED


5.       NOTES PAYABLE, CONTINUED:

         In January 1995, financing of $465,900 was obtained from Bank of Wales
         PLC collateralized by certain property in the United Kingdom. The note
         is repayable over 10 years beginning in February 1995. Interest is paid
         at 2.5% over Bank of Wales base lending rate (effective rate of 7.25%
         at December 31, 1997).

         The Company's subsidiary, TAb Australia Pty. Ltd., has a loan agreement
         with the South Australian Minister for Primary Industries. The
         agreement allowed TAb Australia Pty. Ltd. to draw up to $2,000,000
         Australian dollars ($1,300,600 U.S. dollars at December 31, 1997) to
         assist with construction and equipment of buildings at its Turretfield
         location in South Australia. The loan is to be repaid over ten years in
         equal annual installments of principal beginning in 1997. Interest is
         due annually at 11% per annum. The loan is collateralized by a mortgage
         on the building and equipment purchased.

         In June 1996, the Company completed a private placement of $5,000,000
         principal amount of the Company's 15% Subordinated Promissory Notes due
         May 1, 1997, of which $4,250,000 were issued for cash and $750,000 were
         issued upon conversion of existing indebtedness. Each $250,000 unit of
         the 15% Notes was accompanied by a Stock Purchase Warrant to purchase
         18,000 shares of Common Stock at $8.00 per share. Warrants to purchase
         360,000 shares of Common Stock were issued in connection with the 15%
         Notes. On August 24, 1996, the Company redeemed, for cash, $4,250,000
         principal amount of the 15% Notes and accrued interest thereon.

         The Company has available lines of credit at December 31, 1997 totaling
         200,000 British pounds sterling with the Bank of Scotland and its
         subsidiary, Bank of Wales PLC, in the United Kingdom. These lines of
         credit are collateralized by the guarantee of the Company and are due
         on demand. Interest is paid at 2.5% over the relevant bank's base
         lending rate (effective rate of 7.25% at December 31, 1997). At
         December 31, 1997, the Company had outstanding borrowings on these
         lines of credit in the amount of $62,353 (37,770 British pounds
         sterling). The weighted average interest rate on these lines of credit
         outstanding at December 31, 1997 and 1996 was 9% and 11.6%,
         respectively.





                                       42
<PAGE>   45







NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

5.        NOTES PAYABLE, CONTINUED:

          Aggregate maturities of fixed payment on notes payable for the next
          five years follow:

<TABLE>
<CAPTION>
                       YEARS ENDING
                       DECEMBER 31:
                      --------------
                      <S>                              <C>
                           1998                        $2,545,701
                           1999                           846,772
                           2000                         4,020,614
                           2001                           144,856
                           2002                           141,427
                        Thereafter                        905,403
                                                       ----------
                                                       $8,604,773
                                                       ==========
</TABLE>

         At December 31, 1997 and 1996, $1,868,967 and $2,250,896, respectively,
         of the Company's debt obligations were denominated in British pounds
         sterling or Australian dollars and were translated to U.S. dollars at
         year-end exchange rates. The Company is subject to foreign currency
         risk to the extent that exchange rates between the U.S. dollar and the
         foreign currencies change. For accounting purposes, changes in exchange
         rates for the debt obligations result in translation adjustments which
         are reported as part of the separate component of stockholders' equity.
         At December 31, 1997 and 1996, the amount included in the cumulative
         translation adjustment related to the Company's debt obligations was
         $403,900 and $97,019 of loss, respectively. The Company does not hedge
         its exposure to foreign currency risks.






                                       43
<PAGE>   46





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

6.       INCOME TAXES:

         Under SFAS No. 109, Accounting for Income Taxes, deferred income taxes
         are recognized for future tax consequences of differences between the
         tax bases of assets and liabilities and their financial reporting
         amounts based on enacted laws and statutory rates applicable to the
         periods in which the differences are expected to affect taxable income.
         Valuation allowances are established when necessary to reduce deferred
         tax assets to the amount expected to be realized. The Company
         determined that at December 31, 1997 and 1996 its ability to realize
         future benefits of deferred tax assets did not meet the "more likely
         than not" criteria in SFAS No. 109. The components of the net deferred
         tax liability recognized in the accompanying consolidated balance
         sheets are as follows:

<TABLE>
<CAPTION>
                                                            DECEMBER 31,
                                                       1997               1996
                                                   ------------       -----------

               <S>                                 <C>                <C>
               Deferred tax liability              $   (643,339)      $  (409,636)
               Deferred tax asset                    19,214,452        13,587,078
               Valuation allowance                  (18,297,080)       13,177,442)
                                                   ------------       -----------

                                                   $   (274,033)      $        --
                                                   ============       ===========
</TABLE>

         The deferred tax liability arose due to tax differences in the bases of
         assets and liabilities relative to the acquisition of Polyclonal
         Antibodies, Ltd and the temporary difference in capital allowance in
         U.K. assets. The deferred tax asset arises primarily from the Company's
         net operating loss carryforwards of approximately $55,702,000. The
         Company has approximately $232,000 of research and development tax
         credits available to offset future federal income tax. United States
         net operating losses carryforwards (NOLs) and research and development
         tax credits (R&D credits) expire as follows:
<TABLE>
<CAPTION>
                                                                        R&D
                YEARS ENDING DECEMBER 31,               NOL           CREDITS
              ----------------------------         ------------      ---------
              <S>                                  <C>               <C>
                           1999                    $    74,000
                           2000                        148,000
                           2001                         52,000
                           2002                        225,000
                 thereafter through 2012            44,401,000        $232,000
                                                   -----------        --------
                                                   $44,900,000        $232,000
                                                   ===========        ========
</TABLE>




                                       44
<PAGE>   47







NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

6.       INCOME TAXES, CONTINUED:

         United Kingdom NOLs of $9,304,729 and Australian NOLs of $1,659,000,
         which are not included in the table above, may be carried forward
         indefinitely.

7.       STOCK WARRANTS AND STOCK OPTIONS:

         At December 31, 1997 there were warrants outstanding to purchase
         737,374 shares of the Company's common stock at prices ranging from
         $2.50 to $8.00 (average price of $6.09) per share. All outstanding
         warrants expire from 1998 to 2000.

         Activity in stock warrants is as follows:

<TABLE>
<CAPTION>
                                                   EXERCISE PRICE     NUMBER OF
                                                      PER SHARE        WARRANTS
                                                   -------------     -----------

           <S>                                     <C>               <C>
           Outstanding at December 31, 1994         $ .50-$5.00        2,161,583
              Granted                               $4.00-$8.00          241,287
              Forfeited                                  -                 -
              Exercised                             $ .50-$ .75          (99,735)
                                                                     -----------


           Outstanding at December 31, 1995         $ .60-$8.00        2,303,135
              Granted                                     $8.00          366,500
              Forfeited                                  -                 -
              Exercised                             $ .75-$4.50         (942,897)
                                                                     -----------

           Outstanding at December 31, 1996         $ .60-$8.00        1,726,738
              Granted                                     $1.25            5,000
              Forfeited                             $1.25-$3.50         (105,648)
              Exercised                             $ .60-$3.50         (888,716)


                                                                     -----------
           Outstanding at December 31, 1997         $2.50-$8.00          737,374
                                                                     ===========
</TABLE>

         On April 26, 1996, the Board of Directors of the Company amended the
         Therapeutic Antibodies Inc. 1990 Stock Incentive Plan (the 1990 Plan).
         Up to 1,650,000 shares of the Company's common stock may be subject to
         incentives under the 1990 Plan. The 1990 Plan provides for the grant to
         key employees, advisors, officers and directors of the Company of stock
         options complying with Section 422A of the Internal Revenue Code
         (qualified options) or options not qualifying under such provision
         (nonqualified options) as well as stock appreciation rights (SARs). The
         1990 Plan provides for adjustment of the number of shares under the
         Plan in the event of stock splits, stock dividends and certain other
         events. This Plan also provides that if the Company shall not be the
         surviving corporation in a business combination, the holder of an
         outstanding option will be entitled to purchase stock in the surviving
         corporation on the same terms and conditions as the options. Options
         are nontransferable, and options and SARs are subject to any
         restrictions contained in the grant and applicable securities laws.




                                       45
<PAGE>   48

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

7.       STOCK WARRANTS AND STOCK OPTIONS, CONTINUED:

         On April 27, 1997, shareholders of the Company voted in favor of
         adopting the Company's 1997 Stock Option Plan (the 1997 Plan). The 1997
         Plan states that 1,100,000 shares of the Company's common stock will be
         reserved for issuance, at the discretion of the Compensation Committee,
         to any director, employee, consultant or advisor of the Company or any
         of its subsidiaries. The 1997 Plan provides for adjustment of the
         number of shares available under the 1997 Plan in the event of stock
         splits, stock dividends and certain other events.

         Between the 1990 Plan and the 1997 Plan, options to purchase 2,032,388
         shares of the Company's common stock were outstanding at December 31,
         1997 at prices ranging from $1.25 to $8.18 (average price of $4.46).
         Options granted under the 1990 Plan have a contractual life of five
         years. All options granted under the 1997 Plan have a ten year
         contractual life. The average remaining contractual life of outstanding
         options under both plans at December 31, 1997 is approximately 4.6
         years. Generally, the Company grants options with a graded vesting
         requirement which typically vests ratably over one to five years. The
         options are issued at or above the fair value of the underlying stock
         at date of grant. At December 31, 1997, 1,259,013 options were
         exercisable at a weighted average price of $3.72. All options expire
         from 1998 to 2007.

         Activity in stock options is as follows:

<TABLE>
<CAPTION>
                                                  EXERCISE PRICE         NUMBER OF            WEIGHTED
                                                     PER SHARE             OPTIONS          AVERAGE PRICE
                                                  --------------        -----------         -------------
             <S>                                  <C>                   <C>                 <C>
             Outstanding at December 31, 1994      $1.25-$4.50              935,647
                          Granted                  $4.50-$6.00              245,550
                         Forfeited                 $2.40-$4.50              (72,571)
                         Exercised                        -                    -
                                                                         ----------

             Outstanding at December 31, 1995      $1.25-$6.00            1,108,626             $3.10
                          Granted                  $6.00-$8.18              538,050             $6.12
                         Forfeited                 $      6.00               (1,300)            $6.00
                         Exercised                 $2.40-$3.00              (33,000)            $2.49

                                                                         ----------
             Outstanding at December 31, 1996      $1.25-$8.18            1,612,376             $4.12
                          Granted                  $4.00-$6.00              504,450             $5.49
                         Forfeited                 $3.00-$6.00              (84,438)            $4.18
                         Exercised                        -                    -                   -


                                                                         ----------
             Outstanding at December 31, 1997      $1.25-$8.18            2,032,388             $4.46
                                                                         ==========
</TABLE>





                                       46
<PAGE>   49



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

7.        STOCK WARRANTS AND STOCK OPTIONS, CONTINUED:

          As permitted by Statement of Financial Accounting Standards (SFAS) No.
          123, "Accounting for Stock Based Compensation", the Company follows
          the provisions of Accounting Principles Board (APB) Opinion 25
          "Accounting For Stock Issued to Employees", and related
          interpretations in accounting for its stock option grants.
          Compensation expense for employees has not been recognized for options
          issued under the plan. Had compensation been determined based on the
          fair value of the awards at the grant date consistent with the
          provisions of SFAS No. 123, the Company's net loss and basic and
          diluted net loss per share would have been increased to the pro forma
          amounts which follow:


<TABLE>
<CAPTION>
                                                  1997                1996
                                              ------------       -------------
              <S>                            <C>                 <C>
              Net Loss
                     As reported             $(16,847,718)       $(12,746,117)
                     Pro forma               $(17,249,174)       $(12,922,164)

              Basic and diluted net
                     loss per share
                     As reported             $      (0.74)       $      (0.68)
                     Pro forma               $      (0.75)       $      (0.69)
</TABLE>



          During 1997 and 1996, the Company granted options to non-employees to
          purchase 290,650 and 107,550 shares, respectively, of the Company's
          common stock. The expense related to these grants recognized during
          1997 and 1996 was approximately $469,000 and $62,000, respectively.

          The weighted average fair value of options granted during 1997 and
          1996 was $2.88 and $0.97, respectively.

          Fair value estimates were determined using a variation of the Black
          Scholes model with the following weighted average assumptions for 1997
          and 1996:


<TABLE>
<CAPTION>
                                               1997             1996
                                              ------            ----
               <S>                            <C>              <C>
               Risk-free interest rate         6.0%             6.0%
               Volatility factor                30%              25%
               Expected term of                 10                5
               options (in years)
</TABLE>


The effects of applying SFAS No. 123 in this pro forma disclosure are not
indicative of the future amounts. SFAS No. 123 does not apply to awards made
prior to December 31, 1995, and the Company anticipates making awards in the
future under its stock-based compensation plan.




                                       47
<PAGE>   50


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

 8.   NET LOSS PER COMMON SHARE COMPUTATIONS:



<TABLE>
<CAPTION>
                                                     1997                1996              1995
                                                 ------------       ------------       -----------

<S>                                              <C>                <C>                <C>
Net loss amount used for basic and
diluted per share computations (numerator)       $(16,847,718)      $(12,746,117)      $ (9,100,038)

Shares used for basic and diluted per share
computations (denominator)                         22,888,226         18,821,524         15,938,219

Net loss per share amount                        $      (0.74)      $      (0.68)      $      (0.57)
</TABLE>



9.       COMMITMENTS:

         ROYALTY COMMITMENT: In 1992, the Company entered into a patent sale and
         royalty agreement with scientists who at the time worked at the
         University of Arizona. Under the agreement, the Company purchased the
         scientists' rights under their U.S. patent and certain U.S. patent
         applications. The Company agreed to pay royalties to the sellers with
         respect to products developed and sold under the patents. Currently, no
         royalty payments have yet been required under this agreement.

         LEASES: The Company leases laboratory and office space under operating
         leases. Aggregate rent expense incurred under these leases was
         approximately $475,209 in 1997, $190,248 in 1996 and $126,000 in 1995.
         Future minimum rental commitments under noncancelable operating leases
         as of December 31, 1997 are as follows:

<TABLE>
<CAPTION>
                    YEARS ENDING
                    DECEMBER 31,
                    ------------
                    <S>                                      <C>
                       1998                                  $   535,918
                       1999                                      525,608
                       2000                                      471,827
                       2001                                      383,019
                       2002                                      384,147
                       Thereafter                                815,694
                                                              ----------
                                                              $3,116,213
                                                              ==========
</TABLE>





                                       48
<PAGE>   51




NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

10.      RELATED PARTY TRANSACTIONS:

         The Company incurred interest expense and loan guarantee fees of
         $142,500, $115,241 and $17,380 in the years ended December 31, 1997,
         1996 and 1995, respectively, on notes payable to certain directors of
         the Company and loan guarantees made by certain directors on behalf of
         the Company in order to obtain short-term loan financing.



















                                       49
<PAGE>   52



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

11.  INTERNATIONAL OPERATIONS:

      The Company conducts its activities in the U.S., the United Kingdom, New
      Zealand and Australia. International operations are primarily located in
      the United Kingdom. Intercompany sales between regions are made at cost
      plus markup. Summarized financial data by region are as follows:

<TABLE>
<CAPTION>
1997                           U.S.           INTERNATIONAL      ELIMINATIONS           NET
----                       ------------       ------------       ----------         ------------

<S>                        <C>                <C>                <C>                <C>
Revenues:
  Trade                    $  2,255,334       $    422,597       $         --       $  2,677,931
  Intercompany (a)              779,507         10,912,302        (11,691,809)                --
                           ------------       ------------       ----------         ------------
                           $  3,034,841       $ 11,334,899       $(11,691,809)      $  2,677,931
                           ============       ============       ============       ============
R&D expense (a)            $ 13,458,565       $  8,871,785       $(10,867,998)      $ 11,462,352
                           ============       ============       ============       ============
Foreign Currency Loss      $    913,119       $    696,969       $   (696,969)      $    913,119
                           ============       ============       ============       ============
Net loss                   $(15,763,860)      $ (1,819,741)      $    735,883       $(16,847,718)
                           ============       ============       ============       ============
Capital expenditures       $     54,712       $  1,202,736       $         --       $  1,257,448
                           ============       ============       ============       ============
Identifiable assets        $  8,697,748       $ 12,114,317       $    (12,000)      $ 20,800,065
                           ============       ============       ============       ============
</TABLE>

<TABLE>
<CAPTION>
1996                           U.S.           INTERNATIONAL      ELIMINATIONS           NET
----                       ------------       -------------      ------------       ------------
<S>                        <C>                <C>                <C>                <C>

Revenues:
  Trade                      $  1,184,619       $    350,392       $         --       $  1,535,011
  Foreign Currency Gain         1,733,357                 --                 --          1,733,357
  Intercompany (a)              1,301,702          5,318,319         (6,620,021)                --
                             ------------       ------------       ------------       ------------
                             $  4,219,678       $  5,668,711       $ (6,620,021)      $  3,268,368
                             ============       ============       ============       ============
R&D expense (a)              $  5,279,302       $  6,860,712       $ (2,954,888)      $  9,185,126
                             ============       ============       ============       ============
Net loss                     $ (5,468,662)      $ (5,223,305)      $ (2,054,150)      $(12,746,117)
                             ============       ============       ============       ============
Capital expenditures         $     99,035       $  3,194,179       4         --       $  3,293,214
                             ============       ============       ============       ============
Identifiable assets          $ 24,048,275       $ 13,143,715       $    (12,000)      $ 37,179,990
                             ============       ============       ============       ============
</TABLE>





                                       50
<PAGE>   53

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

11.  INTERNATIONAL OPERATIONS, CONTINUED:


<TABLE>
<CAPTION>
1995                          U.S.          INTERNATIONAL       ELIMINATIONS          NET
----                      ------------      -------------       ------------       ------------
<S>                       <C>                <C>                <C>                <C>
Revenues:
   Trade                  $    466,945       $    283,545       $         --       $    750,490
   Intercompany (a)          1,017,517          3,415,826         (4,433,343)                --
                          ------------       ------------       ----------         ------------
                          $  1,484,462       $  3,699,371       $ (4,433,343)      $    750,490
                          ============       ============       ============       ============
R & D expense (a)         $  4,455,668       $  5,308,297       $ (3,442,291)      $  6,321,674
                          ============       ============       ============       ============
Net loss                  $ (5,039,977)      $ (4,108,795)      $     48,734       $ (9,100,038)
                          ============       ============       ============       ============
Capital expenditures      $    705,302       $  1,785,718       $         --       $  2,491,020
                          ============       ============       ============       ============
Identifiable assets       $  5,049,705       $ 10,385,116       $   (277,722)      $ 15,157,099
                          ============       ============       ============       ============
</TABLE>


      (a)    Intercompany revenues include interest income earned by the U.S.
             parent company on loans made to international subsidiaries and
             sales of product to, and the performance of contract research and
             development for, the U.S. parent company by international
             subsidiaries on a cost plus markup basis. The intercompany account
             associated with this activity is eliminated in consolidation.


12.    NONCASH INVESTING AND FINANCING ACTIVITIES:

       During 1997 the Company purchased equipment in the amount of $227,000
       which was financed under capital lease agreements.

       On February 9, 1996, the Company issued 466,383 shares of common stock in
       exchange for $2,500,000 of principal and $65,105 of accrued interest on
       the 6% Notes.

       In May, 1996 an officer of the Company converted $750,000 principal of
       the 12% Note into an equal principal amount of the Company's 15%
       Notes.

       On October 21, 1996 the Company issued 150,000 shares of common stock in
       exchange for (pound)250,000 of principal on the two notes payable to the
       Welsh Development Agency.






                                       51
<PAGE>   54


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED


 13. CARRYING AMOUNT AND FAIR VALUE OF FINANCIAL INSTRUMENTS:

       The carrying amount of cash and cash equivalents and short-term
       investments approximates fair value due to the short maturities of these
       instruments. The Company believes that it is not practicable to estimate
       the fair value of its long-term debt because these instruments were
       generally issued in a convertible form or in conjunction with warrants to
       purchase the Company's stock. The Company would be required to obtain an
       independent valuation of each specific instrument.



















                                       52
<PAGE>   55


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

          None






















                                       53
<PAGE>   56



                                    PART III

ITEM 10.          DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

                  Information with respect to the executive officers and
directors of the Company is incorporated by reference from the Company's Proxy
Statement relating to the Annual Meeting of Shareholders to be held on April 27,
1998.




ITEM 11.          EXECUTIVE COMPENSATION

                  Information with respect to the compensation of the Company's
executive officers is incorporated by reference from the Company's Proxy
Statement relating to the Annual Meeting of Shareholders to be held on April 27,
1998, except that the Comparative Performance Graph and the Compensation
Committee Report on Executive Compensation included in the Proxy Statement are
expressly not incorporated herein by reference.





ITEM 12.        SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

                  Information with respect to the security ownership of certain
beneficial owners of the Company's common stock and management is incorporated
by reference from the Company's Proxy Statement relating to the Annual Meeting
of Shareholders to be held on April 27, 1998.





ITEM 13.        CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

                  This information is incorporated by reference to the Company's
Proxy Statement relating to the Annual Meeting of Shareholders to be held on
April 27, 1998.










                                       54
<PAGE>   57


                                     PART IV

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

(a).      The following documents are being filed as part of this Report.

1.        Financial Statements.........................See Item 8 herein.

2.        Financial Statement Schedules

          Independent Auditors Report..................See Item 8 herein.

          All schedules are omitted, because they are not applicable or not
required, or because the required information is included in the consolidated
financial statements or notes thereto.

3.        Exhibits.

<TABLE>
<CAPTION>
EXHIBIT
 NUMBER                DESCRIPTION OF EXHIBITS
 ------                -----------------------

<S>       <C>     <C>
 3.1      -       Amended and Restated Certificate of Incorporation of
                  Therapeutic Antibodies Inc. (6)

 3.2      -       Amended and Restated Bylaws of Therapeutic Antibodies Inc.
                  (6)

10.1      -       Marketing Agreement, as amended, dated January 1, 1990,
                  between Swedish Orphan AB and the Company. (1)

10.2      -       Contract for the Production of Sheep Anti-Human IgG, dated
                  October 5, 1992, between Baxter Germany and the Company. (1)

10.3      -       Distribution Agreement, as amended, dated April 1, 1993,
                  among Helena Laboratories and the Company. (1)

10.4      -       Contract Services Agreement, dated December 16, 1991,
                  between Ministry of Agriculture and Fisheries and the
                  Company. (1)

10.5      -       Agreement, dated December 16, 1991, between Ministry of
                  Fisheries (now AgResearch) and the Company. (1)

10.6      -       Office Lease Agreement. as amended, dated August 28, 1990,
                  between Summit Place Limited and the Company. (1)

10.7      -       Lease, dated January 9, 1992, between The Medical College of
                  St. Bartholomew's Hospital in the City of London and the
                  Company. (1)
</TABLE>



                                       55
<PAGE>   58

<TABLE>
<S>       <C>     <C>
10.8      -       Lease Agreement, dated January 29, 1997, between Vanderbilt
                  University and the Company. (7)

10.9      -       Sublease, dated January 29, 1997, between Platinum
                  Entertainment, Inc. as Sublessor, and the Company, as
                  Sublessee.(7)

10.10     -       Assignment of 14/15 Newbury Street London EC1A 7HU, dated
                  February 1, 1996, between Immunogen International Limited,
                  as Assignor, and TAb London Limited, as Assignee. (7)

10.11     -       1990 Stock Incentive Plan as amended. (6)

10.12     -       1997 Stock Option Plan*

10.13     -       Basic Cooperation/Joint Program Agreement, dated August 30,
                  1995, between Nigerian Federal Ministry of Health and
                  Therapeutic Antibodies Inc. (2)

10.14     -       Memorandum of Lease, dated August 1, 1995, between Minister
                  for Primary Industries, as Lessor, and TAb Australia Pty.
                  Limited, as Lessee (Turretfield lease). (2)

10.15     -       Registration and Distribution Agreement, dated August 31,
                  1995, between Therapeutic Antibodies Inc. and F.H. Faulding
                  & Co. Limited. (2)

10.16     -       Loan Agreement, dated July 10, 1995, between Minister for
                  Primary Industries and TAb Australia Pty. Ltd. and Deed of
                  Charge, dated July 10, 1995, between Minister for Primary
                  Industries and TAb Australia Pty. Ltd. (2)

10.17     -       Lease Assignment, dated February 1, 1996, between Immunogen
                  International Limited and TAb London Limited (3)

10.18     -       Assignment, dated April 29, 1996, between Minister for
                  Industry, Manufacturing, Small Business and Regional
                  Development and TAb Australia, Pty. Ltd. (4)

10.19     -       Agistment Agreement, dated August 29, 1996, between
                  Martindale Holdings Pty Ltd. and TAb. Australia Pty Ltd. (5)

10.20     -       Clinical Trials and Registration Agreement, dated October 4,
                  1996, between Therapeutic Antibodies Inc. and F.H. Faulding
                  & Co. Limited. (7)

10.21     -       Clinical Trials, Registration, Manufacturing and
                  Distribution Agreement dated February 21, 1997, between the
                  Company and CSL Limited A.C.N. (8)

10.22     -       Distribution Agreement, dated October 2, 1997, between the
                  Company and Altana, Inc.*

10.23     -       Service Agreement, dated July 5, 1996 between Professor John
                  Landon and the Company. (7)
</TABLE>



                                       56
<PAGE>   59

<TABLE>
<S>       <C>     <C>
10.24     -       Service Agreement, dated July 5, 1996 between Professor
                  Timothy Chard and the Company. (7)

21.1      -       List of subsidiaries of the Registrant.*

27        -       Financial Data Schedule (for SEC use only)*
</TABLE>
















                                       57
<PAGE>   60




                 (1)  Incorporated by reference to exhibits filed with the
                      Company's Registration Statement on Form 10, filed on May
                      1, 1995, File No. 0-25978.

                 (2)  Incorporated by reference to exhibits filed with the
                      Company's Quarterly Report on From 10-Q for the quarter by
                      period ended September 30, 1995.

                 (3)  Incorporated by reference to exhibits filed with the
                      Company's Quarterly Report on From 10-Q for the quarter by
                      period ended March 31, 1996.

                 (4)  Incorporated by reference to exhibits filed with the
                      Company's Quarterly Report on From 10-Q for the quarter by
                      period ended June 30, 1996.

                 (5)  Incorporated by reference to exhibits filed with the
                      Company's Quarterly Report on From 10-Q for the quarter by
                      period ended September 30, 1996.

                 (6)  Incorporated by reference to appendices filed with the
                      Company's Proxy Statement relating to the Special Meeting
                      of Shareholders held on July 5, 1996.

                 (7)  Incorporated by reference to exhibits filed with the
                      Company's Annual Report on Form 10-K for the fiscal year
                      ended December 31, 1996.

                 (8)  Incorporated by reference to exhibits filed with the
                      Company's Quarterly Report on Form 10-Q for the quarterly
                      period ended March 31, 1997.


                 * Filed herewith.










                                       58
<PAGE>   61



(b).              Reports on Form 8-K.

                  None.

(c).              Compensatory Plans or Arrangements.

The following is a list of all executive compensation plans and arrangements
filed as exhibits to this Annual Report on Form 10-K.

<TABLE>
<CAPTION>
                  Exhibit Number                   Exhibit
                  --------------                   -------

                  <S>               <C>
                  10.11             1990 Stock Incentive Plan, as amended. (6)

                  10.12             1997 Stock Option Plan.*

                  10.23             Service Agreement, dated July 5, 1996,
                                    between Professor John Landon and the
                                    Company (7)

                  10.24             Service Agreement, dated July 5, 1996,
                                    between Professor Tim Chard and the Company.
                                    (7)

                  27                Financial Data Schedule (SEC Use only)
</TABLE>

                  (6)      Incorporated by reference to appendices filed with
                           the Company's Proxy Statement relating to the Special
                           Meeting of Shareholders to be held on July 5, 1996.


                  (7)      Incorporated by reference to exhibits to the
                           Company's Annual Report on Form 10-K for the fiscal
                           year ended December 31, 1996.

                  * Filed herewith.

(d).     Financial Statement Schedules Excluded from Annual Report to
         Shareholders.

         None.










                                       59
<PAGE>   62


                                   SIGNATURES

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

                                             THERAPEUTIC ANTIBODIES INC.


                                         By: /s/ Martin S. Brown
                                             ---------------------------------
                                             Martin S. Brown
                                             Chairman of the Board
Date:  MARCH 30, 1998

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

<TABLE>
<CAPTION>
NAME                                        TITLE                            DATE
----                                        -----                            ----

<S>                              <C>                                    <C>
/s/ Martin S. Brown              Chairman of the Board                  March 30, 1998
-------------------------
Martin S. Brown

/s/ Andrew J. Heath, M.D.        Vice Chairman of the Board,            March 30, 1998
-------------------------        Chief Executive Officer
Andrew J. Heath, M.D.            and Director

/s/ A. J. Kazimi                 President, Chief Operating             March 30, 1998
-------------------------        Officer, and Director
A.J. Kazimi                      (Principal Financial Officer and
                                 Principal Accounting Officer)

/s/ Harry G. Browne, M.D.        Vice Chairman of the Board,            March 30, 1998
-------------------------        Director, and Secretary
Harry G. Browne, M.D.

/s/ John Landon, M.D.            Executive Vice President-Research      March 30, 1998
-------------------------        and Development and Director
John Landon, M.D.

/s/ Tim Chard, M.D.              Senior Vice President-Research and     March 30, 1998
-------------------------        Development Administration
Tim Chard, M.D.                  and Director

/s/ Thomas G. Andrews            Director                               March 30, 1998
-------------------------
Thomas G. Andrews

/s/ Robert C. Hilton             Director                               March 30, 1998
-------------------------
Robert C. Hilton

/s/ Steven L. Stroup, M.D.       Director                               March 30, 1998
-------------------------
Steven L. Stroup, M.D.

/s/ Joseph D. Williams           Director                               March 30, 1998
-------------------------
Joseph D. Williams

</TABLE>







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