##### Table of Contents



SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549


FORM 20-F

(Mark One)

|    |  |                                                                                                 
|--- |  | ------------------------------------------------------------------------------------------------
|[ ] |  | REGISTRATION STATEMENT PURSUANT TO SECTION 12(b)
OR 12(g) OF THE SECURITIES EXCHANGE ACT OF 1934
|    |  | OR                                                                                              
|[X] |  | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934            
|    |  | For the fiscal year ended April 30, 2003                                                        
|    |  | 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 number: 0-20104



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VERNALIS plc

(Exact name of Registrant as specified in its charter)


England and Wales
(Jurisdiction of incorporation or organization)

Oakdene Court, 613 Reading Road,
Winnersh, Berkshire RG41 5UA
(Address of principal executive offices)



---



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

None

Securities registered or to be registered pursuant to Section 12(g) of the Act:

Ordinary Shares of 5 pence each (Ordinary Shares)
American Depositary Shares each representing the right to receive 40 Ordinary
Shares

Securities for which there is a reporting obligation pursuant to Section 15(d)
of the Act:

None

Indicate the number of outstanding shares of each of the issuers class of
capital or common stock as of the close of the period covered by the annual
report:

66,751,780 Ordinary Shares of 5 pence each

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 report(s)) and (2) has been subject to
such filing requirement for the past 90 days.

Yes X No

Indicate by check mark which financial statement item the registrant has
elected to follow.

Item 17    Item 18 X





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TABLE OF CONTENTS



|            |                                                                                      |                                                                      |  |  |  |  |  | 
|----------- | ------------------------------------------------------------------------------------ | -------------------------------------------------------------------- |  |  |  |  |  | 
|PART I     
|            | ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISORS                       
|            | ITEM 2.OFFER STATISTICS AND EXPECTED TIMETABLE                                      
|            | ITEM 3.KEY INFORMATION                                                              
|            |                                                                                      | A Selected Financial Data                                           
|            |                                                                                      | B Capitalization and Indebtedness                                   
|            |                                                                                      | C Reasons for the Offer and Use of Proceeds                         
|            |                                                                                      | D Risk Factors                                                      
|            | ITEM 4. INFORMATION ON THE COMPANY                                                  
|            |                                                                                      | A History and Development of the Company                            
|            |                                                                                      | B Business Overview                                                 
|            |                                                                                      | C. Research programs                                                
|            |                                                                                      | D Commercial Collaborations                                         
|            |                                                                                      | E Principal Markets in which Vernalis Competes                      
|            |                                                                                      | F Revenues                                                          
|            |                                                                                      | G Seasonality of the Companys Business                             
|            |                                                                                      | H Marketing Channels and Sales Methods                              
|            |                                                                                      | I Patents, Licenses and Proprietary Rights                          
|            |                                                                                      | J Competition                                                       
|            |                                                                                      | K Material Effects of Government Regulation                         
|            |                                                                                      | L Organizational Structure                                          
|            |                                                                                      | M Property, Plant and Equipment                                     
|            | ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS                                
|            |                                                                                      | A Results of Operations                                             
|            | B Liquidity and Capital Resources                                                   
|            |                                                                                      | C US GAAP Reconciliation                                            
|            |                                                                                      | D Research and development, patents and licences etc                
|            |                                                                                      | E Trend Information                                                 
|            |                                                                                      | F Off-balance sheet arrangements                                    
|            | G Information about Contractual Cash Payments                                       
|            | ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES                                  
|            | A Directors and Senior Management                                                   
|            |                                                                                      | B Compensation                                                      
|            |                                                                                      | C Service Contracts                                                 
|            |                                                                                      | D Board Practices                                                   
|            |                                                                                      | E Employees                                                         
|            |                                                                                      | F Share Options                                                     
|            | ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS                           
|            |                                                                                      | A Major Shareholders                                                
|            |                                                                                      | B Related Party Transactions                                        
|            |                                                                                      | C Interests of Experts and Counsel                                  
|            | ITEM 8. FINANCIAL INFORMATION                                                       
|            |                                                                                      | A Consolidated Statements and Other Financial Information           
|            |                                                                                      | B Dividends                                                         
|            |                                                                                      | C Legal matters                                                     
|            |                                                                                      | D Significant Changes                                               
|            | ITEM 9. THE OFFER AND LISTING                                                       
|            |                                                                                      | A Offer and Listing Details                                         
|            | ITEM 10. ADDITIONAL INFORMATION                                                     
|            |                                                                                      | A Memorandum and Articles of Association                            
|            |                                                                                      | B Share Capital                                                     
|            |                                                                                      | C Material Contracts                                                
|            |                                                                                      | D Exchange Controls and other Limitations Affecting Security Holders
|            |                                                                                      | E Taxation                                                          
|            |                                                                                      | F Documents on Display                                              
|            | ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                 
|            | ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES                     
|PART II    
|            | ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES                            
|            | ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHT OF SECURITY HOLDERS AND USE OF PROCEEDS
|            | ITEM 15. CONTROLS AND PROCEDURES                                                    
|            | ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT                                          
|            | ITEM 16B. CODE OF ETHICS                                                            
|            | ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES                                    
|PART III   
|            | ITEM 17. FINANCIAL STATEMENTS                                                       
|            | ITEM 18. FINANCIAL STATEMENTS                                                       
|            | ITEM 19. EXHIBITS                                                                   
|SIGNATURES 
|Exhibit 1  
|EXHIBIT 4.1
|EXHIBIT 4.2
|EXHIBIT 4.3
|EXHIBIT 4.4
|EXHIBIT 4.5
|Exhibit 12 



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##### Table of Contents



TABLE OF CONTENTS

|           |   |                                                                             |  |                                                                    |    |    |    |  | 
|---------- | - | --------------------------------------------------------------------------- |  | ------------------------------------------------------------------ | -- | -- | -- |  | 
|PART I     |   |                                                                             |  |                                                                    | 1  |   
|ITEM 1.    |   | IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISORS                       |  |                                                                    | 1  |   
|ITEM 2.    |   | OFFER STATISTICS AND EXPECTED TIMETABLE                                     |  |                                                                    | 1  |   
|ITEM 3.    |   | KEY INFORMATION                                                             |  |                                                                    | 1  |   
|           | A |                                                                             |  | Selected Financial Data                                            |    |    | 1  | 
|           | B |                                                                             |  | Capitalization and Indebtedness                                    |    |    | 4  | 
|           | C |                                                                             |  | Reasons for the Offer and Use of Proceeds                          |    |    | 4  | 
|           | D |                                                                             |  | Risk Factors                                                       |    |    | 4  | 
|ITEM 4.    |   | INFORMATION ON THE COMPANY                                                  |  |                                                                    | 13 |   
|           | A |                                                                             |  | History and Development of the Company                             |    |    | 13 | 
|           | B |                                                                             |  | Business Overview                                                  |    |    | 15 | 
|           | C |                                                                             |  | Research programs                                                  |    |    | 20 | 
|           | D |                                                                             |  | Commercial Collaborations                                          |    |    | 21 | 
|           | E |                                                                             |  | Principal Markets in which Vernalis Competes                       |    |    | 27 | 
|           | F |                                                                             |  | Revenues                                                           |    |    | 27 | 
|           | G |                                                                             |  | Seasonality of the Companys Business                              |    |    | 27 | 
|           | H |                                                                             |  | Marketing Channels and Sales Methods                               |    |    | 28 | 
|           | I |                                                                             |  | Patents, Licenses and Proprietary Rights                           |    |    | 28 | 
|           | J |                                                                             |  | Competition                                                        |    |    | 29 | 
|           | K |                                                                             |  | Material Effects of Government Regulation                          |    |    | 30 | 
|           | L |                                                                             |  | Organizational Structure                                           |    |    | 31 | 
|           | M |                                                                             |  | Property, Plant and Equipment                                      |    |    | 32 | 
|ITEM 5.    |   | OPERATING AND FINANCIAL REVIEW AND PROSPECTS                                |  |                                                                    | 33 |   
|           | A |                                                                             |  | Results of Operations                                              |    |    | 33 | 
|           | B |                                                                             |  | Liquidity and Capital Resources                                    |    |    | 35 | 
|           | C |                                                                             |  | US GAAP Reconciliation                                             |    |    | 38 | 
|           | D |                                                                             |  | Research and development, patents and licences etc                 |    |    | 38 | 
|           | E |                                                                             |  | Trend Information                                                  |    |    | 38 | 
|           | F |                                                                             |  | Off-balance sheet arrangements                                     |    |    | 39 | 
|           | G |                                                                             |  | Information
about Contractual Cash Payments                        |    |    | 39 | 
|ITEM 6.    |   | DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES                                  |  |                                                                    | 40 |   
|           | A |                                                                             |  | Directors and Senior Management                                    |    |    | 40 | 
|           | B |                                                                             |  | Compensation                                                       |    |    | 42 | 
|           | C |                                                                             |  | Service Contracts                                                  |    |    | 43 | 
|           | D |                                                                             |  | Board Practices                                                    |    |    | 43 | 
|           | E |                                                                             |  | Employees                                                          |    |    | 45 | 
|           | F |                                                                             |  | Share Options                                                      |    |    | 46 | 
|ITEM 7.    |   | MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS                           |  |                                                                    | 53 |   
|           | A |                                                                             |  | Major Shareholders                                                 |    |    | 53 | 
|           | B |                                                                             |  | Related Party Transactions                                         |    |    | 54 | 
|           | C |                                                                             |  | Interests of Experts and Counsel                                   |    |    | 54 | 
|ITEM 8.    |   | FINANCIAL INFORMATION                                                       |  |                                                                    | 54 |   
|           | A |                                                                             |  | Consolidated Statements and Other Financial Information            |    |    | 55 | 
|           | B |                                                                             |  | Dividends                                                          |    |    | 55 | 
|           | C |                                                                             |  | Legal matters                                                      |    |    | 55 | 
|           | D |                                                                             |  | Significant Changes                                                |    |    | 55 | 
|ITEM 9.    |   | THE OFFER AND LISTING                                                       |  |                                                                    | 55 |   
|           | A |                                                                             |  | Offer and Listing Details                                          |    |    | 55 | 
|ITEM 10.   |   | ADDITIONAL INFORMATION                                                      |  |                                                                    | 57 |   
|           | A |                                                                             |  | Memorandum and Articles of Association                             |    |    | 57 | 
|           | B |                                                                             |  | Share Capital                                                      |    |    | 62 | 
|           | C |                                                                             |  | Material Contracts                                                 |    |    | 62 | 
|           | D |                                                                             |  | Exchange Controls and other Limitations Affecting Security Holders |    |    | 65 | 
|           | E |                                                                             |  | Taxation                                                           |    |    | 65 | 
|           | F |                                                                             |  | Documents on Display                                               |    |    | 70 | 
|ITEM 11.   |   | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                  |  |                                                                    | 70 |   
|ITEM 12.   |   | DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES                      |  |                                                                    | 70 |   
|PART II    |   |                                                                             |  |                                                                    |    | 71
|ITEM 13.   |   | DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES                             |  |                                                                    | 71 |   
|ITEM 14.   |   | MATERIAL MODIFICATIONS TO THE RIGHT OF SECURITY HOLDERS AND USE OF PROCEEDS |  |                                                                    | 71 |   
|ITEM 15.   |   | CONTROLS AND PROCEDURES                                                     |  |                                                                    | 71 |   
|ITEM 16A.  |   | AUDIT COMMITTEE FINANCIAL EXPERT                                            |  |                                                                    | 71 |   
|ITEM 16B.  |   | CODE OF ETHICS                                                              |  |                                                                    | 71 |   
|ITEM 16C.  |   | PRINCIPAL ACCOUNTANT FEES AND SERVICES                                      |  |                                                                    | 71 |   
|PART III   |   |                                                                             |  |                                                                    | 72 |   
|ITEM 17.   |   | FINANCIAL STATEMENTS                                                        |  |                                                                    | 72 |   
|ITEM 18.   |   | FINANCIAL STATEMENTS                                                        |  |                                                                    | 72 |   
|ITEM 19.   |   | EXHIBITS                                                                    |  |                                                                    | 72 |   
|SIGNATURES |   |                                                                             |  |                                                                    | 74 |   

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PREAMBLE

THE ACQUISITION OF VERNALIS GROUP PLC
AND USE OF CERTAIN DEFINED TERMS

Vernalis plc is a public limited company incorporated under the laws of
England. On July 3, 2003, the Boards of British Biotech plc and Vernalis Group
plc announced that they had unanimously agreed the terms of a recommended
merger of the two companies by way of an offer by J P Morgan plc on behalf of
British Biotech plc to Vernalis Group plc to acquire the whole of the issued
and to be issued share capital of Vernalis Group plc in exchange for shares in
British Biotech plc. The offer was not made in the United States. The offer
was approved by British Biotech plcs shareholders at an extraordinary general
meeting held on August 13, 2003, and was declared unconditional in all respects
save as to admission of the new shares to the London Stock Exchange on August
29, 2003, by which date valid acceptances of the offer had been received in
respect of 76,328,753 Vernalis Group plc shares, representing approximately
87.29 per cent of the existing issued share capital of Vernalis Group plc.
Admission became effective at 8am on September 1, 2003. The offer closed on
September 23, 2003, by which date acceptances of the offer had been received in
respect of 80,178,155 Vernalis Group plc shares, representing approximately
91.58 per cent of the existing issued share capital of Vernalis Group plc.
British Biotech plc commenced the procedure to acquire compulsorily any
remaining Vernalis Group plc shares to which the offer relates pursuant to
sections 428 to 430f of the Companies Act 1985 on September 23, 2003. The
compulsory acquisition procedure is expected to be concluded on or shortly
after November 4, 2003.

On October 1, 2003, British Biotech announced that its shareholders had
approved the re-naming of British Biotech plc as Vernalis plc.

The operating results of the Company for the year ended April 30, 2003 do not
reflect the merger with Vernalis Group which occurred after the balance sheet
date and which will be reflected under UK merger accounting to the Companys
financial statements under UK GAAP for the year ending April 30, 2004.

As used herein the term Company refers to Vernalis plc and the terms
Vernalis and Group refer to the Company and its consolidated subsidiaries
as at the date of filing, except that the terms Vernalis and Group may have
different meanings as the context requires, and, in particular, as regards the
consolidated financial statements, Vernalis and Group will mean Vernalis
plc and its consolidated subsidiaries as at April 30, 2003. The term Vernalis
Group refers to the company Vernalis Group plc and Vernalis Group plcs
subsidiaries which have now become part of the Group as indicated above.

Consequently, the discussion of historical financial information in this Annual
Report refers to the financial statements of the Company, (then British Biotech
plc) as at and for the fiscal periods ended April 30, 2003. However,
additional disclosure has been provided in various parts of this Annual Report
to reflect the material effects of the merger with Vernalis Group to the
Companys business and financial condition.

For additional clarification on the issue of the defined terms mentioned above,
see foreword to each Item of this Annual Report on Form 20-F.

PRESENTATION OF FINANCIAL INFORMATION; AVAILABLE INFORMATION

The Companys fiscal year ends on April 30 of each year. References in this
document to a particular year are to the fiscal year unless otherwise
indicated.

The Company furnishes The Bank of New York, as Depositary, with annual reports
containing Consolidated Financial Statements and an opinion thereon by
independent public accountants. Such financial statements are prepared on the
basis of accounting principles generally accepted in the United Kingdom (UK
GAAP). The annual reports contain a reconciliation to accounting principles
generally accepted in the US (US GAAP) of net income and shareholders equity.
The Company also furnishes the Depositary with half-yearly reports prepared in
conformity with UK GAAP, which contain unaudited interim consolidated financial
information. Upon receipt thereof, the Depositary mails all such reports to
recorded holders of American Depositary Receipts (ADRs) evidencing American
Depositary Shares (ADSs). The Company also furnishes the Depositary with all
notices of shareholders meetings and other reports and communications that are
made generally available to shareholders meetings and other reports and
communications that are made generally available to shareholders of the
Company. The Depositary makes such notices, reports and communications
available for inspection by recorded holders of ADRs and mails to all recorded
holders of ADRs notices of shareholders meetings received by the Depositary.

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The Groups consolidated financial statements are reported in English pounds
sterling. In this Annual Report on Form 20-F, references to US dollars or
$ are to US currency and references to pounds sterling, £, pence or p
are to UK currency. Solely for the convenience of the reader, this Annual
Report contains translations of certain pound sterling amounts into US dollars
at specified rates. These translations should not be construed as
representations that the pound sterling amounts actually represent such US
dollar amounts or could be converted into US dollars at the rate indicated or
at any other rate. Unless otherwise stated, the translations of pounds
sterling into US dollars have been made at the noon buying rate in New York
City for cable transfers in pounds sterling as certified for customs purposes
by the Federal Reserve Bank of New York (the Noon Buying Rate) in effect on
April 30, 2003, which was $1.60 to £l.00.

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FORWARD-LOOKING STATEMENTS

Cautionary Statement for Purposes of the Safe Harbor Provisions of the US
Private Securities Litigation Reform Act of 1995.This Annual Report contains
certain forward-looking statements as defined in Section 21E of the US
Securities Exchange Act of 1934 with respect to the financial condition,
results of operations and business achievements/performance of Vernalis and
certain of the plans and objectives of management of the Group with respect
thereto. These statements may generally, but not always, be identified by the
use of words such as should, expects, estimates, believes or similar
expressions. Such statements include, but are not limited to, statements under
the following headings: (i) Item 4. Information on the Company; and (ii) Item
5. Operating and Financial Review and Prospects. By their nature,
forward-looking statements involve risk and uncertainty because they reflect
the Groups current expectations and assumptions as to future events and
circumstances that may not prove accurate: the factors discussed in Item 3. Key
Information  Risk Factors, among others, could cause the Companys actual
financial condition, results of operations and business
achievements/performance to differ materially from the estimates made or
implied in such forward-looking statements.

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##### Table of Contents






PART I




ITEM 1.    IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISORS

Not applicable.




ITEM 2.    OFFER STATISTICS AND EXPECTED TIMETABLE

Not applicable.




ITEM 3.    KEY INFORMATION

The selected financial data and other information presented below under Item 3A
represents financial data of British Biotech plc and its consolidated
subsidiaries and does not reflect the merger with Vernalis Group (under UK
merger accounting) which occurred after the end of the reporting fiscal period.
The risk factors discussed under Item 3D pertain to the risks faced by the
Group as of the date of filing.




A    Selected Financial Data

The selected financial data set forth below as of April 30, 2003, and the five
years ended April 30, 2003, and the period from February 4, 1986 (date of
foundation) to April 30, 2003, have been derived from the Consolidated
Financial Statements of the Group, which have been audited by its independent
auditors, PricewaterhouseCoopers LLP (PricewaterhouseCoopers for the years
ended April 30, 1999, 2000, 2001, and 2002). Such financial data should be
read in conjunction with, and are qualified in their entirety by reference to,
the Consolidated Financial Statements of the Group and Notes thereto included
elsewhere in this Annual Report.

The Group prepares its Consolidated Financial Statements in accordance with UK
GAAP, which differ in certain respects from US GAAP. A description of the
significant differences and reconciliations of net income and shareholders
equity are set forth in Note 3 of the Notes to the Consolidated Financial
Statements.

|                                                                               |  |                                                   |           |           |  |      |          |      |  |      |          |      |  |      |          |   |  |  |          |   |  |   |         |   |  |                    |          |  
|------------------------------------------------------------------------------ |  | ------------------------------------------------- | --------- | --------- |  | ---- | -------- | ---- |  | ---- | -------- | ---- |  | ---- | -------- | - |  |  | -------- | - |  | - | ------- | - |  | ------------------ | -------- | -
|Consolidated Statement of                                                      |  |                                                   |           |           |  |      |          |      |  |      |          |      |  |      |          |   |  |  |          |   |  |   |         |   |  | From foundation   
|Operations Data: Amounts                                                       |  |                                                   |           |           |  |      |          |      |  |      |          |      |  |      |          |   |  |  |          |   |  |   |         |   |  | (February 4, 1986)
|in Accordance with UK                                                          |  |                                                   |           |           |  |      |          |      |  |      |          |      |  |      |          |   |  |  |          |   |  |   |         |   |  | to                
|GAAP                                                                           |  | Years ended April 30,                             |           | April 30,
|                                                                               |  |                                                  
|                                                                               |  | 1999                                              |           | 2000      |  | 2001 |          | 2002 |  | 2003 |          | 2003 |  | 2003
|                                                                               |  |                                                   |           |           |  |      |          |      |  |      |          |      |  |     
|                                                                               |  | £                                                 |           | £         |  | £    |          | £    |  | £    |          | $    |  | £   
|                                                                               |  | (In thousands, except for Ordinary Share amounts)
|Revenues                                                                       |  |                                                   |           |           |  |      |          |      |  |      |          |      |  |      |          |   |  |  |          |   |  |   |         |   |  |                    |          |  
|Continuing operations                                                          |  |                                                   | 4,224     |           |  |      | 2,624    |      |  |      | 1,588    |      |  |      | 1,450    |   |  |  | 1,075    |   |  |   | 1,720   |   |  |                    | 47,349   |  
|Acquisitions(i)                                                                |  |                                                   |          |           |  |      |         |      |  |      |         |      |  |      |         |   |  |  | 3        |   |  |   | 5       |   |  |                    | 3        |  
|Discontinued operation(ii)                                                     |  |                                                   |          |           |  |      |         |      |  |      |         |      |  |      |         |   |  |  |         |   |  |   |        |   |  |                    | 16,156   |  
|                                                                               |  |                                                   |           |           |  |      |          |      |  |      |          |      |  |      |          |   |  |  |          |   |  |   |         |   |  |                    |          |  
|                                                                               |  |                                                   | 4,224     |           |  |      | 2,624    |      |  |      | 1,588    |      |  |      | 1,450    |   |  |  | 1,078    |   |  |   | 1,725   |   |  |                    | 63,508   |  
|                                                                               |  |                                                   |           |           |  |      |          |      |  |      |          |      |  |      |          |   |  |  |          |   |  |   |         |   |  |                    |          |  
|Research and development
expenditure                                           |  |                                                   | (35,389   | )         |  |      | (26,700  | )    |  |      | (23,724  | )    |  |      | (21,256  | ) |  |  | (14,544  | ) |  |   | (23,270 | ) |  |                    | (334,708 | )
|                                                                               |  |                                                   |           |           |  |      |          |      |  |      |          |      |  |      |          |   |  |  |          |   |  |   |         |   |  |                    |          |  
|Net interest income                                                            |  |                                                   | 8,434     |           |  |      | 4,346    |      |  |      | 3,449    |      |  |      | 2,542    |   |  |  | 1,435    |   |  |   | 2,296   |   |  |                    | 59,381   |  
|                                                                               |  |                                                   |           |           |  |      |          |      |  |      |          |      |  |      |          |   |  |  |          |   |  |   |         |   |  |                    |          |  
|Net loss                                                                       |  |                                                   | (39,843   | )         |  |      | (25,397  | )    |  |      | (23,353  | )    |  |      | (17,234  | ) |  |  | (17,488  | ) |  |   | (27,981 | ) |  |                    | (306,912 | )
|                                                                               |  |                                                   |           |           |  |      |          |      |  |      |          |      |  |      |          |   |  |  |          |   |  |   |         |   |  |                    |          |  
|Net loss per Ordinary
Share(iii)                                               |  |                                                   | (120.6) p |           |  |      | (76.3) p |      |  |      | (70.1) p |      |  |      | (51.7) p |   |  |  | (51.3) p |   |  | $ | (0.821  | ) |  |                    |          |  
|                                                                               |  |                                                   |           |           |  |      |          |      |  |      |          |      |  |      |          |   |  |  |          |   |  |   |         |   |  |                    |          |  
|Ordinary Shares used in
computing Net loss per
Ordinary Share
(000s)(iii)(iv) |  |                                                   | 33,031    |           |  |      | 33,273   |      |  |      | 33,318   |      |  |      | 33,362   |   |  |  | 34,107   |   |  |   | 34,107  |   |  |                    | 436,518  |  
|                                                                               |  |                                                   |           |           |  |      |          |      |  |      |          |      |  |      |          |   |  |  |          |   |  |   |         |   |  |                    |          |  



---

|(i)   |  | Relates to RiboTargets Holdings plc which was acquired on April 23,2003.                                                                                                                                                                                                                             
|----- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|     
|(ii)  |  | Relates to British Bio-technology Products Limited which was sold to
Techne Corporation on July 30, 1993.                                                                                                                                                                                            
|     
|(iii) |  | Restated due to the Capital reorganization (note 15 of Notes to the
Consolidated Financial Statements).                                                                                                                                                                                              
|     
|(iv)  |  | Subsequent to April 30, 2003, and as at September 23, 2003 80,178,155
ordinary shares were issued as consideration for the acquisition of
Vernalis Group. Additional shares to a maximum of 436,518 will be issued
in accordance with the compulsory acquisition procedure described in the
Preamble.

1



---



##### Table of Contents



|                               |  |                       |           |           |  |      |          |      |  |                                                   |          |          |  |      |          |   |  |  |          |   |  |   |         |   |  |                    |          |  
|------------------------------ |  | --------------------- | --------- | --------- |  | ---- | -------- | ---- |  | ------------------------------------------------- | -------- | -------- |  | ---- | -------- | - |  |  | -------- | - |  | - | ------- | - |  | ------------------ | -------- | -
|                               |  |                       |           |           |  |      |          |      |  |                                                   |          |          |  |      |          |   |  |  |          |   |  |   |         |   |  | From foundation   
|Consolidated Statement of      |  |                       |           |           |  |      |          |      |  |                                                   |          |          |  |      |          |   |  |  |          |   |  |   |         |   |  | (February 4, 1986)
|Operations Data: Amounts in    |  |                       |           |           |  |      |          |      |  |                                                   |          |          |  |      |          |   |  |  |          |   |  |   |         |   |  | to                
|Accordance with US GAAP        |  | Years ended April 30, |           | April 30,
|                               |  |                      
|                               |  | 1999                  |           | 2000      |  | 2001 |          | 2002 |  | 2003                                              |          | 2003 (i) |  | 2003
|                               |  |                       |           |           |  |      |          |      |  |                                                   |          |          |  |     
|                               |  | £                     |           | £         |  | £    |          | £    |  | £                                                 |          | $        |  | £   
|                               |  |                       |           |           |  |      |          |      |  | (In thousands, except for Ordinary Share amounts) |          |          |  |     
|Net loss                       |  |                       | (39,843   | )         |  |      | (25,397  | )    |  |                                                   | (24,844  | )        |  |      | (17,475  | ) |  |  | (22,495  | ) |  |   | (35,992 | ) |  |                    | (313,941 | )
|                               |  |                       |           |           |  |      |          |      |  |                                                   |          |          |  |      |          |   |  |  |          |   |  |   |         |   |  |                    |          |  
|Net
loss per OrdinaryShare (i) |  |                       | (120.6) p |           |  |      | (76.3) p |      |  |                                                   | (74.6) p |          |  |      | (52.4) p |   |  |  | (66.0) p |   |  | $ | (1.055  | ) |  |                    |          |  
|                               |  |                       |           |           |  |      |          |      |  |                                                   |          |          |  |      |          |   |  |  |          |   |  |   |         |   |  |                    |          |  



---

|(i) |  | Restated due to the capital reorganization (note 15 of Notes to the
Consolidated Financial Statements).
|--- |  | -------------------------------------------------------------------------------------------------------

|                                                       |  |              |         |      |  |      |         |      |  |                |        |      |  |  |        |  |  |  |        |  |  |  |         | 
|------------------------------------------------------ |  | ------------ | ------- | ---- |  | ---- | ------- | ---- |  | -------------- | ------ | ---- |  |  | ------ |  |  |  | ------ |  |  |  | ------- | 
|                                                       |  | At April 30,
|                                                       |  |             
|Consolidated Balance Sheets Amounts in Accordance with |  | 1999         |         | 2000 |  | 2001 |         | 2002 |  | 2003           |        | 2003
|UK GAAP:                                               |  |              |         |      |  |      |         |      |  |                |        |     
|                                                       |  | £            |         | £    |  | £    |         | £    |  | £              |        | $   
|                                                       |  |              |         |      |  |      |         |      |  | (in thousands) |        |      |  |  |        |  |  | 
|Cash and cash equivalents                              |  |              | 97,813  |      |  |      | 75,674  |      |  |                | 64,990 |      |  |  | 50,414 |  |  |  | 43,926 |  |  |  | 70,282  | 
|Property, plant and equipment                          |  |              | 30,498  |      |  |      | 27,146  |      |  |                | 13,053 |      |  |  | 7,996  |  |  |  | 10,151 |  |  |  | 16,242  | 
|Total assets                                           |  |              | 131,305 |      |  |      | 105,126 |      |  |                | 85,212 |      |  |  | 65,422 |  |  |  | 72,275 |  |  |  | 115,640 | 
|Long-term debt                                         |  |              | 2,430   |      |  |      | 2,531   |      |  |                | 2,442  |      |  |  | 1,683  |  |  |  | 4,147  |  |  |  | 6,635   | 
|Total liabilities                                      |  |              | 12,867  |      |  |      | 9,658   |      |  |                | 13,336 |      |  |  | 10,540 |  |  |  | 14,159 |  |  |  | 22,654  | 
|Total shareholders funds (i)                          |  |              | 117,691 |      |  |      | 95,183  |      |  |                | 71,876 |      |  |  | 54,882 |  |  |  | 58,116 |  |  |  | 92,986  | 
|Share Capital                                          |  |              | 33,049  |      |  |      | 33,307  |      |  |                | 33,326 |      |  |  | 33,375 |  |  |  | 35,045 |  |  |  | 56,072  | 



---

|(i) |  | Subsequent to April 30, 2003, ordinary shares had been issued as
consideration in respect of the merger with Vernalis Group plc.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------

|                                                |  |              |         |      |  |      |        |      |  |                |        |      |  |  |        |  |  |  |        |  |  |  |        | 
|----------------------------------------------- |  | ------------ | ------- | ---- |  | ---- | ------ | ---- |  | -------------- | ------ | ---- |  |  | ------ |  |  |  | ------ |  |  |  | ------ | 
|                                                |  | At April 30,
|                                                |  |             
|                                                |  |              |         |      |  |      |        |      |  |                |        |      |  |  |        |  |  |  |        |  |  |  |        | 
|Net Cash and Cash Equivalents and               |  | 1999         |         | 2000 |  | 2001 |        | 2002 |  | 2003           |        | 2003
|Short-Term Deposits in Accordance with US GAAP: |  |              |         |      |  |      |        |      |  |                |        |     
|                                                |  | £            |         | £    |  | £    |        | £    |  | £              |        | $   
|                                                |  |              |         |      |  |      |        |      |  | (in thousands) |        |      |  |  |        |  |  | 
|Cash and cash equivalents                       |  |              | 6,313   |      |  |      | 21,674 |      |  |                | 18,990 |      |  |  | 4,445  |  |  |  | 24,868 |  |  |  | 39,789 | 
|Short-term deposits                             |  |              | 91,500  |      |  |      | 54,000 |      |  |                | 46,000 |      |  |  | 45,969 |  |  |  | 19,058 |  |  |  | 30,493 | 
|Total shareholders funds                       |  |              | 117,691 |      |  |      | 95,183 |      |  |                | 70,385 |      |  |  | 53,150 |  |  |  | 55,382 |  |  |  | 88,611 | 

Dividends

No dividend has been paid by the Company in the five fiscal years up to and
including fiscal 2003.

Exchange Rates

The Consolidated Financial Statements of the Group which form part of this
Annual Report are presented in English pounds sterling (£ or pounds).

The following table sets forth, for the fiscal years and dates indicated,
certain information concerning the noon buying rate in New York City for pounds
expressed in US dollars ($ or dollars) per £1.00 as certified for customs
purposes by the Federal Reserve Bank of New York (the Noon Buying Rate).

2



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##### Table of Contents



|               |  |                               |      |                              |  |  |      | 
|-------------- |  | ----------------------------- | ---- | ---------------------------- |  |  | ---- | 
|Month          |  | Months Highest Exchange Rate |      | Months Lowest Exchange Rate
|               |  |                               |      |                             
|September 2003 |  |                               | 1.67 |                              |  |  | 1.57 | 
|August 2003    |  |                               | 1.66 |                              |  |  | 1.57 | 
|July 2003      |  |                               | 1.67 |                              |  |  | 1.59 | 
|June 2003      |  |                               | 1.68 |                              |  |  | 1.63 | 
|May 2003       |  |                               | 1.65 |                              |  |  | 1.59 | 
|April 2003     |  |                               | 1.60 |                              |  |  | 1.55 | 

|                                |  |            |      |         |  |      |      |     |  |  |      |  |  |  |      | 
|------------------------------- |  | ---------- | ---- | ------- |  | ---- | ---- | --- |  |  | ---- |  |  |  | ---- | 
|Years ended April 30,           |  | Period End |      | Average |  | High |      | Low
|                                |  |            |      |         |  |      |      |    
|1999                            |  |            | 1.61 |         |  |      | 1.64 |     |  |  | 1.72 |  |  |  | 1.59 | 
|2000                            |  |            | 1.55 |         |  |      | 1.58 |     |  |  | 1.65 |  |  |  | 1.55 | 
|2001                            |  |            | 1.43 |         |  |      | 1.46 |     |  |  | 1.56 |  |  |  | 1.40 | 
|2002                            |  |            | 1.46 |         |  |      | 1.43 |     |  |  | 1.48 |  |  |  | 1.37 | 
|2003 (through October 15, 2003) |  |            | 1.60 |         |  |      | 1.55 |     |  |  | 1.65 |  |  |  | 1.43 | 

On October 15, 2003, the noon buying rate for pounds was £1.00 = $1.67.

Principal Accounting Policies

The Consolidated Financial Statements of the Group which form part of this
Annual Report have been prepared in accordance with applicable Accounting
Standards in the United Kingdom. A summary of the principal Group accounting
policies, which have been applied consistently, is set forth in Note 2 of Notes
to the Consolidated Financial Statements. The Group is required to adopt
International Accounting Standards in 2005 and is currently reviewing the
implications.

3



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##### Table of Contents






B    Capitalization and Indebtedness

Not applicable.




C    Reasons for the Offer and Use of Proceeds

Not applicable.




D    Risk Factors

Prospective investors and shareholders should be aware that any investment in
the Group involves a high degree of risk and should be made only by those with
the necessary expertise to appraise the investment. In addition to the other
information in this document, the following risk factors should be considered
in evaluating whether to make or hold an investment in the Group.
Additionally, some risks may be unknown to Vernalis and other risks, currently
believed to be immaterial, could turn out to be material. Any or all of these
factors could have a material and adverse effect on the Groups operational
results, financial condition and prospects. Furthermore, the trading price of
Vernalis shares could decline, possibly rapidly, resulting in the loss of all
or part of any investment therein.

For the foreseeable future, the Group will be highly dependent on the success
of frovatriptan in the marketplace. The discovery of any adverse reactions to
frovatriptan or the failure of the Groups licensees, for any reason, to
achieve and sustain the level of sales anticipated by the Group could adversely
impact the occurrence, timing and /or amount of milestone payments and
royalties and have a material adverse effect on the cash position and income of
the Group.

Frovatriptan is the Groups only approved product. As such the Groups future
is highly dependent on the sales of the product. The discovery of adverse
reactions, including those which might result in individual or class warnings
or contraindications, or its temporary or permanent withdrawal from the market,
could considerably undermine the financial state of the Group.

The Group is working towards obtaining approval for the use of frovatriptan for
the prophylactic treatment of menstrually associated migraine anticipating that
this will increase the overall sales of the product. A failure to obtain the
change in the permitted use would reduce the ultimate sales potential of this
product.

The sales and marketing of frovatriptan is controlled by the Groups licensees,
Elan Pharma International Limited (and its co-promotion partner, UCB) in the
USA and Menarini International in Europe. If the licensees or co-promotion
partner do not exercise sufficient efforts in marketing and sales of
frovatriptan, or otherwise do not achieve the sales anticipated by the Group,
this could reduce milestone payments and royalties and have a material adverse
effect on the cash position and the income (and any resulting profitability) of
the Group. Frovatriptan is one of seven drugs in the triptan class which is
currently approved for the acute treatment of migraine in the USA, as such, is
subject to intense competition.

Various situations might arise with respect to Elan Pharma International
Limited, Menarini, or UCB or any of their respective affiliates which could
have an adverse effect on the sales and marketing of frovatriptan. These could
include the commencement of insolvency related proceedings in respect of any of
those entities, a direct or indirect sale or proposed sales of Elan Pharma
International Limited by Elan to a third party or an assignment or proposed
assignment by Elan Pharma International Limited of its licence in frovatriptan
to a third party.

The occurrence and timing of payment by Elan of the next milestone payment for
frovatriptan sales is uncertain and is of great importance to the Groups
financial wellbeing.

Under the terms of its licence arrangements with the Group, Elan is required to
pay the Company a $15 million milestone payment if net sales by Elan and UCB in
North America exceed $100 million in a 12 month period. The occurrence and
timing of receipt of this milestone payment and the consequent increase in the
Groups royalties from frovatriptan as a result of that sales level being
achieved are uncertain and are of great importance to the Groups financial
well-being. Furthermore, no assurance can be given as to the financial
condition of Elan, including the effect on its business and operating results
of its ongoing recovery plan, or that it will perform its obligations in full
under the licence. Elan is a reporting company under the US Securities
Exchange Act of 1934 and has provided information on its business and financial
conditions in filings and furnishings with the US Securities and Exchange
Commission (the SEC) including in its annual report on Form 20-F filed with
the SEC on September 4, 2003.

4



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##### Table of Contents



The Group has a history of operating losses and negative cashflow and may never
become profitable

Vernalis is an early stage biotechnology company that has a history of
operating losses. No assurance can be given that the operations of the Group
will become profitable. These losses have arisen mainly from the costs incurred
in research and development of its products and general administrative costs.
For the year ended 30 April 2003, Vernalis pre-tax losses were £17.5 million.
The Group expects to continue to incur operating losses over the next several
years and may never be profitable. To date, the Group has generated revenues
through licence fees, milestone payments, contract research, and research and
development funding from its partners. In addition, Vernalis is generating
income from royalty fees related to the licensing of frovatriptan in the US,
and from sales of the product in Europe. In order to support the research and
development of the Companys drug candidates, the Group plans to incur expenses
considerably in excess of revenue. Sales of frovatriptan may not generate
revenues at the levels anticipated. The Group may not develop any additional
products and any other products it may develop may not generate revenues.

Additional funding may be required to give the Group time to reach
profitability. Raising such additional funding could entail restrictions on
the rights of holders of Ordinary Shares. If the Group is unable to raise
additional funds it may have to curtail its operations.

Researching new compounds and conducting pre-clinical and clinical trials is
expensive. The Groups need for capital at any given time depends on a number
of factors, including:



| |  | the Groups degree of success in commercialising frovatriptan;                                                              
|- |  | ----------------------------------------------------------------------------------------------------------------------------
| 
| |  | the ability to enter collaborations to support its research and development programs;                                       
| 
| |  | the amount, and timing, of milestone payments the Group receives from its collaborators;                                    
| 
| |  | the rate of progress and cost of the Groups research activities;                                                           
| 
| |  | the costs of preparing, filing, prosecuting, maintaining and enforcing patent claims and other intellectual property rights;
| 
| |  | the emergence of competing products and other adverse market development; and                                               
| 
| |  | changes in, or termination of, the Groups existing collaboration and licensing arrangements.                               

The Group is of the opinion that the available cash resources of Vernalis,
according to the current business plan, will be sufficient to fund its
operating losses at least until end of calendar 2004. After this date the Group
might not have any cash resources, bank credit facility or other working
capital credit line under which it might borrow funds for working capital or
other general corporate purposes. If the Groups plans or assumptions change or
are inaccurate, it might need to seek capital sooner than anticipated. The
Group might seek to raise any funds it needs through public equity offerings.
If the Group obtains funds through a bank credit facility or through the
issuance of debt securities or preferred shares, this indebtedness or preferred
shares would have rights senior to the rights of holders of its Ordinary
Shares, and the terms of such indebtedness or preferred shares could impose
restrictions on its operations. If it is unable to raise additional funds when
it needs them, the Group may be required to delay, reduce or eliminate some or
all of its programmes. The Group may also be forced to license compounds or
technology to others that it would prefer to develop internally until a later
and potentially more lucrative stage. If the Group raises additional funds
through collaborations and other licensing arrangements, it may have to
relinquish its rights to some of its compounds or technologies or grant
licences on unfavourable terms.

Included within the merger with Vernalis Group, were significant liabilities of
£20 million and cash resources of £16 million.

The Group may be unable to retain and attract key employees which could weaken
the Groups scientific and management capabilities.

The loss of key employees could weaken the Groups scientific and management
capabilities, resulting in delays in the development of its drugs and impacting
negatively on the Groups business. Vernalis is significantly dependent on
certain scientific and management personnel. Although the Group has entered
into employment or consultancy arrangements with each of the Groups key
personnel with the aim of securing their services, the retention of such
services cannot be guaranteed. Biotechnology companies such as Vernalis are
highly dependent on employees who have an in-depth and long-term understanding
of their companies technologies, products, programmes, collaborative
relationships and strategic goals. The loss of these key employees and the
Groups inability to recruit new employees to replace them could have a
negative impact on the business and prospects of the Group.

5



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##### Table of Contents



The biotechnology industry has a highly competitive market for qualified
scientific and managerial employees. During the integration period following
the merger between the Company and Vernalis Group plc, competitors may try to
recruit the employees of the Group. Employees may also decide to leave due to
the uncertainty surrounding the merger. In addition, as the Group develops it
may also need to attract new personnel to manage new programmes and to provide
the management experience necessary for the Group to make the transition from a
development-focused company to a company with strong sales, marketing,
production and distribution capabilities.

The Group may experience difficulties managing its growth. The Groups failure
to meet its growth or development challenges could have a material adverse
effect on its operations.

The Group plans significant growth in all areas of its operations as it expands
its business. Growth in the Groups business has placed, and may continue to
place, a significant strain on its management and operations. The Groups
failure to meet any growth or development challenges could have a material
adverse effect on its operations. To compete effectively and manage its growth,
the Group will need to continue to:



| |  | improve its managerial controls and procedures;                                                                                                       
|- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------
| 
| |  | train, manage and motivate a growing employee base;                                                                                                   
| 
| |  | develop the necessary computer capacity and information systems to support its increasing operational needs and its
discovery and development efforts;
| 
| |  | secure suitable office and laboratory facilities to accommodate its growing needs;                                                                    
| 
| |  | accurately forecast demand for its research capability and products; and                                                                              
| 
| |  | expand existing operational, financial and management information systems.                                                                            

No assurance can be made that the Group will be able to bring any of the drug
candidates it is developing to market.

Development of drug candidates involves a lengthy and complex process. Any drug
candidate which the Group wishes to offer commercially to the public must be
put through extensive research, development and pre-clinical and clinical
testing which will be costly to the Group. This development process takes
several years. In addition, the Group or its partners will need to obtain
regulatory approvals to conduct clinical trials and manufacture drugs before
they can be marketed. Results of pre-clinical studies are not necessarily
indicative of results that may be obtained in clinical trials and results in
early clinical trials may be different from those obtained in long-term testing
or in general use. Adverse or inconclusive results from pre-clinical testing or
clinical trials may substantially delay, or halt entirely, the development of
products.

The Group may fail to successfully develop a drug candidate for many reasons,
including:



| |  | the failure to establish any collaborative third party agreements to support drug development;                                                                                  
|- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| 
| |  | the failure to produce a promising compound in sufficient quantities to conduct clinical trials or to manufacture the
compound at commercially acceptable quantities and prices;
| 
| |  | the failure of the drug in pre-clinical studies;                                                                                                                                
| 
| |  | the inability of clinical trials to demonstrate that the drug is safe and effective in humans; or                                                                               
| 
| |  | the failure to obtain required regulatory approvals.                                                                                                                            

The drugs that the Group brings to market may not be commercially successful.

The Groups success depends on acceptance of the Groups products by the
market, including by physicians and third-party payors, and consequently the
Groups progress may be adversely affected if it is unable to achieve market
acceptance of its products. Factors that may affect the rate and level of
market acceptance of any of the Groups products include:



| |  | the existence or entry onto the market of superior competing products or therapies;                                               
|- |  | ----------------------------------------------------------------------------------------------------------------------------------
| 
| |  | the price of the Groups products compared to competing products;                                                                 
| 
| |  | public perception regarding the safety, efficacy and benefits of the Groups products compared to competing products or
therapies;
| 
| |  | the effectiveness of the Groups sales and marketing efforts and those of the Groups marketing partners;                         
| 
| |  | regulatory developments related to manufacturing or use of the Groups products;                                                  
| 
| |  | the willingness of physicians to adopt a new treatment regimen; and                                                               
| 
| |  | publicity concerning the product type in general.                                                                                 

6



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##### Table of Contents



Even if the Groups products are approved, they may still face later regulatory
difficulties

Even if the Group receives regulatory approval to sell any of its products, the
FDA, MHRA or comparable foreign regulatory agencies could require the Group to
conduct post-marketing trials or could prevent the Group from using the
labelling claims which the Group would like to use to promote its products.
Regulators will undertake periodic reviews and inspections. If they discover
previously unknown problems with a product or its manufacturing facility or if
the Group fails to comply with regulatory requirements, regulators could:



| |  | impose fines against the Group;                                    
|- |  | -------------------------------------------------------------------
| 
| |  | impose restrictions on the product, its manufacturer, or the Group;
| 
| |  | require the Group to recall or remove a product from the market;   
| 
| |  | suspend or withdraw its regulatory approvals;                      
| 
| |  | require the Group to conduct additional clinical trials;           
| 
| |  | require the Group to change its product labelling; or              
| 
| |  | require the Group to submit additional marketing applications.     

If any of these events occur, the Groups ability to sell its products will be
impaired and the Group may incur substantial additional expense to comply with
the regulatory requirements. In addition, in certain countries, even after
regulatory approval, the Group is still required to obtain price reimbursement
approval. This may delay the marketing of the Groups products or, when
approval cannot be obtained, mean that the product cannot be sold at all.

The Groups business faces intense competition from major pharmaceutical
companies and specialised biotechnology companies engaged in the development of
drugs directed at the conditions and disorders that are the focus of the
Groups drug programmes.

The Groups competitors in the biotechnology and pharmaceutical industries may
have superior research and development capabilities, drugs, manufacturing
capability or marketing expertise. Many of the Groups competitors have
significantly greater financial and human resources and may have more
experience in research and development. As a result, the Groups competitors
may develop safer or more effective drugs, implement more effective sales and
marketing programmes or be able to establish superior proprietary positions. In
addition, the Group anticipates that it will face increased competition in the
future as new companies enter the Groups markets and alternative drugs and
technologies become available.

The Groups products under development are expected to address a broad range of
markets. The Groups competitive position will be determined in part by the
potential indications for which the Groups products are developed and
ultimately approved by regulatory authorities. In addition, the first
pharmaceutical product to reach the market in a therapeutic or preventive area
may be at a significant competitive advantage relative to late entrants to the
market. Accordingly, the relative speed with which the Group or its
collaborative partners can develop products, complete the clinical trials and
approval processes and supply commercial quantities of the products to the
market, are expected to be important competitive factors.

The Groups competitors are developing products that could compete with the
drug candidates the Group is developing. The Group and its collaborators will
need to persuade patients and physicians to adopt its products over its
competitors products.

Technological changes could overtake the Group.

The biotechnology and pharmaceutical industries are subject to rapid
technological change which could affect the success of the Groups drugs or
make them obsolete. The field of biotechnology is characterised by significant
and rapid technological change. Research and discoveries by others may result
in medical insights or breakthroughs which render the Groups drug candidates
less competitive or even obsolete before they generate revenue.

The Group may not be able to sell its drugs profitably if reimbursement from
third-party payers, including government and private health insurers, is
unavailable or limited.

The Group may be adversely affected by third-party reimbursement and healthcare
cost containment initiatives. A significant portion of the Groups future
revenue is likely to depend on payments by third-party payers, including
government health administration authorities and private health insurers. The
Group may not be able to sell its drugs
profitably if reimbursement from these sources is unavailable or limited.
Third-party payers are increasingly attempting to contain healthcare costs
through measures that are likely to impact the drugs the Group is developing,
including:

7



---



##### Table of Contents





| |  | challenging the prices charged for healthcare products, by limiting
both coverage and the amount of reimbursement for new therapeutic
products, and by denying or limiting coverage for drugs that are
approved by the regulatory agencies but are considered experimental by
third-party payers; and
|- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| 
| |  | refusing to provide coverage when an approved drug is used in a way
that has not received regulatory marketing approval.                                                                                                                                                                             

The Group may be unable to successfully establish and protect its intellectual
property which is significant to the Groups competitive position.

The Groups success depends in part on its ability to obtain and maintain
protection for its inventions and proprietary information, so that it can stop
others from making, using or selling its inventions or proprietary rights. The
Group owns a portfolio of patents and patent applications and is the authorised
licensee of other patents. There is a significant delay between the time of
filing of a patent application and the time its contents are made public, and
others may have filed patent applications for subject matter covered by the
Groups pending patent applications without the Group being aware of those
applications. The Groups patent applications may not have priority over patent
applications of others and its pending patent applications may not result in
issued patents. Even if the Group obtains patents, they may not be valid or
enforceable against others. Moreover, even if the Group receives patent
protection for some or all of its products, those patents may not give the
Group an advantage over competitors with similar products.

To develop and maintain its competitive position, the Group also relies on
unpatented trade secrets and improvements, unpatented know-how and continuing
technological innovation, which it protects with security measures it considers
to be reasonable, including confidentiality agreements with its collaborators,
consultants and employees. The Group may not have adequate remedies if these
agreements are breached and the Groups competitors may independently develop
any of this proprietary information.

If the Group fails to obtain adequate protection for its intellectual property,
the Groups competitors may be able to take advantage of the Groups research
and development efforts. The Groups success will depend, in large part, on its
ability to obtain and maintain patent or other proprietary protection for its
technologies in general and, in particular, drugs and processes. The Group may
not be able to obtain patent protection for the composition of matter of
discovered compounds, processes developed by its employees or medical uses of
compounds discovered through its technology. Legal standards relating to
patents covering pharmaceutical or biotechnological inventions and the scope of
claims made under these patents are still developing. There is no consistent
policy regarding the breadth of claims allowed in biotechnology patents. The
Groups patent position is therefore highly uncertain and involves complex
legal and factual issues.

The Group may incur substantial costs as a result of disputes relating to
intellectual property.

The Group may have to initiate litigation to enforce its patent and licence
rights. If the Groups competitors file patent applications that claim
technology also claimed by the Group, the Group may have to participate in
interference or opposition proceedings to determine the priority of invention.
An adverse outcome could subject the Group to significant liabilities and
require the Group either to cease using a technology or to pay licence fees.

The Group could incur substantial costs in any litigation or other proceeding
relating to patent rights, even if it is resolved in the Groups favour. Some
of the Groups competitors may be able to sustain the costs of complex
litigation more effectively or for a longer time than the Group can because of
their substantially greater resources. In addition, uncertainties relating to
any patent, pending patent or intellectual property litigation could have
material adverse effect on the Groups ability to bring a drug candidate to
market, enter into collaborations in respect of the disputed or other drug
candidates, or raise additional funds.

The Group cannot guarantee that its collaborators will devote sufficient
resources to collaborations with the Group or that the Groups drug candidates
can be developed and commercialised without these collaborators.

The Groups success is dependent on its collaborators and contractors. The
Groups collaborators have substantial responsibility for some of the
development and commercialisation of the Groups drug candidates. Certain of
the Groups collaborators also have significant discretion over the resources
they devote to these efforts. The Groups success, therefore, will depend on
the ability and efforts of these outside parties in performing their
responsibilities. Currently, Vernalis most important collaborators are Elan, Menarini, Roche,
Serono, and GeneSoft; For additional information see Item 4D, Information on
the Company  Commercial Collaborations.

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The Groups business will rely significantly on these strategic partners. If
the relationship with any one of these partners (or their co-partners) is
adversely affected, the Groups results of operations may be adversely
impacted. In addition, the Group will be unable to provide all of its research,
development, manufacturing, marketing or sales needs and so the Group will
depend on contractors providing such services and upon the effort and skill of
the companies providing those services.

The Group cannot guarantee that:



| |  | existing collaborative arrangements or licence agreements will be able to be maintained;
|- |  | ----------------------------------------------------------------------------------------
| 
| |  | any new collaborative arrangements or licence agreements will be on favourable terms; or
| 
| |  | any collaborative arrangements or licence agreements will prove successful.             

If the Group is unable to continue with any of the existing collaborations and,
following negotiations with the relevant partners, terminates a collaboration,
no assurance can be given that this will not have a negative impact on the
reputation of the Group or its ability to secure additional collaborations in
the future.

The Group is dependent on single sources of supply for some of its components.

The Group currently depends on single sources of supply for components it needs
to conduct its research activities and for some of the raw materials used to
manufacture frovatriptan. These suppliers may be unwilling or unable to meet
the Groups future needs. Replacing one of these suppliers or finding
additional suppliers could take a long time. For example, if circumstances
required the Group to locate an alternative supplier for the raw materials used
to manufacture frovatriptan or an alternative secondary manufacturer,
manufacture and delivery to the marketplace of frovatriptan could be
interrupted. Similarly, if the Group had to interrupt its research programmes
in order to locate an alternative supplier of essential components, the Group
could be forced to delay pre-clinical or clinical trails. Any of these events
would adversely affect the Groups programmes and projected revenues.

If the Group fails to maintain its computer hardware, software and related
infrastructure, market acceptance would be delayed and revenues lost.

The Groups research and development programmes involve the analysis of large
amounts of data. The Group depends on the continuous, effective, reliable and
secure operation of its computer hardware, software and related infrastructure.
If the Groups hardware or software malfunctions, or if their operations are
interrupted by forces beyond the Groups control, the Group will experience
reduced productivity.

The Group may be unable to successfully integrate the operations of the
Company, Vernalis Group and RiboTargets Holdings plc.

There can be no assurance that Vernalis will be able to successfully integrate
its operations following the acquisition of RiboTargets Holdings plc and the
merger with Vernalis Group and there can be no assurance that Vernalis will
realise the benefits expected from the integration. The integration will
require, amongst other things:



| |  | educating the employees of each company in the merger about the technologies and programmes of the other company;
|- |  | -----------------------------------------------------------------------------------------------------------------
| 
| |  | co-ordinating or combining research and development efforts;                                                     
| 
| |  | maintaining collaborative relationships as a merged Group; and                                                   
| 
| |  | aligning the strategic plans of two previously independent management teams.                                     

Integration will require the dedication of management resources that may
prevent management from spending its customary amount of time on the day-to-day
business of the Group. If Vernalis fails to integrate the merged companies
quickly and efficiently, the benefits expected to be created for shareholders
from the integration may not be realised and the Groups business and results
of operations could be adversely affected.

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There can be no assurance that the Group will be able to identify suitable
partners, enter into business combinations with them and successfully integrate
their operations with the Groups operations.

The biotechnology sector in the United States and in Europe has been
characterised by consolidation. The Groups competitors may also pursue
business combinations and bid for companies that the Group views as potential
partners in a business combination. As a result, the Group may be unable to
locate or enter into business combinations with partners that are the most
suitable to its product platform and business strategy, which would limit the
synergies created by a business combination. There can be no guarantee that the
Group will be able to successfully integrate any businesses or assets that it
may acquire in future transactions. Part of the Groups business strategy is to
acquire businesses and assets specialising in pharmaceutical research and
development and related services. At this time Vernalis is not a party to any
definitive agreement for the acquisition of any material business or assets
(other than agreements in the ordinary course of business and no guarantee can
be given that definitive agreements may be reached with any person, or that if
definitive agreements are executed, that such agreements will be consummated.

Investors should consider the Groups business and prospects in light of the
heightened risks and unexpected expenses and problems the Group may face as a
business in an early stage of development in a new and rapidly evolving
industry.

Vernalis limited operating history makes it difficult for an investor to
evaluate the Groups business and prospects. The Groups product pipeline may
not result in any meaningful benefits to the Group. Due to the limited
operating history referred to above, the Group may have difficulty accurately
forecasting its revenue. In addition, because the number of product candidates
to which the Group can devote development effort is limited by the availability
of financial and scientific resources, the Group is exposed to the risk that
the delay or failure of individual product development programs will adversely
affect the content and delivery over time of the Groups product development
pipeline.

Vernalis shares may fluctuate in value substantially.

The market price for Vernalis shares and the securities of other emerging
biotechnology companies have been volatile. During fiscal 2003, Vernalis
closing share price ranged from 44 pence to 250 pence (as restated following
the capital reorganization in April 2003) and, from May 1, to October 15, 2003
ranged from 57 pence to 84 pence. Factors that could significantly impact the
market price of Vernalis shares in the future other than those described
elsewhere in this annual report include:



| |  | sales of frovatriptan;                                                                                                                                       
|- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------
| 
| |  | announcements concerning research activities, technological innovations, clinical trials or financial results by the Group
or its competitors;               
| 
| |  | termination of collaborations by the Group or its partners;                                                                                                  
| 
| |  | governmental regulatory initiatives;                                                                                                                         
| 
| |  | the FDA, United Kingdom Medicines & Healthcare Products Regulatory Agency or European Medicines Evaluation Agency approving
or denying new drug applications;
| 
| |  | patent or proprietary rights developments;                                                                                                                   
| 
| |  | public concern as to the safety or ethical implications of biotechnology products;                                                                           
| 
| |  | the Groups ability to integrate the businesses of Vernalis and Vernalis Group plc and deliver expected integration
benefits; and                            
| 
| |  | sales of substantial amounts of the Groups shares by existing shareholders;                                                                                 
| 
| |  | price and volume fluctuations in the stock market at large that do not relate to the Groups operating performance;                                          
| 
| |  | changes in financial estimates by securities analysts, comments by securities analysts, or the Groups failure to meet
analysts expectation;                
| 
| |  | actual or anticipated variations in periodic operating results;                                                                                              
| 
| |  | new products or services introduced or announced by the Group or its competitors;                                                                            
| 
| |  | changes in the market valuations of other similar companies;                                                                                                 
| 
| |  | announcements by the Group of significant acquisitions, strategic partnerships, joint ventures or capital commitments; and                                   
| 
| |  | additions or departures of key personnel.                                                                                                                    

There can be no assurance that the Groups products will receive and maintain
regulatory approval. The complexity and multi-jurisdictional nature of the
applicable regulatory processes could result in delays in achieving such
regulatory approval.

The international pharmaceutical industry is highly regulated by numerous
governmental authorities in the US, the UK and Europe and by regulatory
agencies in other countries where the Group intends to test or market products
it may develop. National regulatory authorities administer a wide range of laws
and regulations governing the testing,
approval, manufacturing, labelling and marketing of drugs and also review the
quality, safety and effectiveness of pharmaceutical products. These regulatory
requirements are a major factor in determining whether a substance can be
developed into a marketable product and the amount of time and expense
associated with such development.

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Government regulation imposes significant costs and restrictions on the
development of pharmaceutical products for human use, including those the Group
is developing. The development, clinical evaluation, manufacture and marketing
of the Groups products and ongoing research and development activities are
subject to regulation by governments and regulatory agencies in all territories
within which the Group intends to manufacture and market its products (whether
themselves or through a partner). No assurance can be given that any of the
Groups products will successfully complete the clinical trial process or that
regulatory approvals to manufacture and market these products will ultimately
be obtained.

The time taken to obtain regulatory approval varies between territories and no
assurance can be given that any of the Groups products will be approved in any
territory within the timescale envisaged, or at all. This may result in a
delay, or make impossible, the commercialisation of its products.
Furthermore, each regulatory authority may impose its own requirements (for
instance, by restricting the products indicated uses) and may refuse to grant,
or may require additional data before granting, an approval, even though the
relevant product candidate may have been approved by another countrys
authority.

If regulatory approval is obtained, the product and its manufacture will be
subject to continual review and this approval may be withdrawn or restricted.
Changes in applicable legislation or regulatory policies, or discovery of
problems with the product, or its production process, site or manufacturer, may
result in the imposition of restrictions on the product, its sale, manufacture
or use, including withdrawal of the product from the market, or may otherwise
have an adverse effect on the Groups business.

The Group may be unable to secure adequate insurance at an acceptable cost.

The Groups business exposes it to potential product liability, and
professional indemnity and other risks which are inherent in the research and
development, pre-clinical studies, clinical trials, manufacturing, marketing
and use of pharmaceutical products. No assurance can be made that product
liability, clinical trials or any future necessary insurance cover will be
available to the Group at an acceptable cost, if at all, or that, if there is
any claim, the level of the insurance the Group carries now or in the future
will be adequate or that a product liability, professional indemnity or other
claim would not materially and adversely affect the Groups business. In
addition, it may be necessary for the Group to secure certain levels of
insurance as a condition to the conduct of clinical trials. In the event of any
claim, the Groups insurance coverage may not be adequate.

Competition regulation may have an impact on the way the Group conducts its
business and its dealings with private counter-parties and government
collaborators.

The Groups activities are subject to several competition law regimes such as
those of the European Union, the US and the UK. Article 81(1) of the EC Treaty
prohibits agreements between undertakings which have as their object, or
effect, the restriction, prevention or distortion of competition within the
European Union and which may affect trade between member states. The UK has a
similar system of competition law.

Agreements restricting competition within the meaning of Article 81(1) are void
in whole or in part. The European Commission may impose fines of up to 10 per
cent. of the respective worldwide turnover in the preceding business year on
parties entering into such agreements. Persons who have suffered loss by reason
of the anti-competitive restrictions may claim damages against those parties.
Agreements satisfying certain criteria are automatically exempt from the
application of Article 81(1) by virtue of the fact that they do not have an
appreciable effect on competition or fall within a block exemption. Parties to
an agreement not covered by a block exemption may presently apply to the
European Commission for an individual exemption. In practice, a similar (but
less legally secure) result to an individual exemption can presently be
achieved by obtaining a non-binding ''comfort letter from the European
Commission.

Certain agreements that Vernalis have, or a member of the Group have, entered
into or the Group may enter into, for example with collaborators and licensees,
contain provisions which might be said to be restrictive of competition under
Article 81(1). In particular, certain licence agreements that a member of the
Group have entered into, or the Group may enter into, involving the grant of
exclusive licences of patents, patent applications, other intellectual property
rights and know-how covering the EU territory and/or territorial restrictions
may be deemed restrictive. The relevant company will determine on an
agreement-by-agreement basis whether the effect of any agreement is not
appreciable or a block exemption from the application of Article 81(1) applies
to any agreement and, if not, whether to apply to the European Commission for
an individual exemption from the application of Article 81(1). If a block
exemption is not applicable

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and the relevant company does not apply for, or is unsuccessful in obtaining,
an individual exemption from the European Commission, provisions of any
agreement that restrict competition under Article 81(1), including those
relating to the exclusivity rights, may be unenforceable, which could have a
material adverse effect on that company. The relevant company could also
potentially be subject to fines and/or claims for damages in relation to any
anti-competitive arrangements which it enters.

The Groups activities are also subject to the EC rules on State aid. Article
87(1) of the EC Treaty prohibits any aid granted by a Member State or through
State resources which distorts or threatens to distort competition by favouring
certain undertakings or the production of certain goods and which affects trade
between Member States. Articles 87(2) and 87(3) provide a list of exhaustive
categories of aid compatible with the common market. The European Commission
must be informed of any plans to grant or alter aid and, if it finds that a
State aid has been granted or altered without prior notification, it is
entitled to require the Member State in question to suspend the aid pending the
outcome of its decision. If the European Commission finds that the aid is
incompatible with the common market, it will generally require repayment of the
aid with interest.

Certain arrangements that a member of the Group have entered into or the Group
may enter into, for example with Governmental collaborators, may involve
benefits which might be said to be State aid under Article 87(1). The relevant
company will determine on a case-by-case basis whether the effect of any
arrangement is to grant or alter aid which should be notified to the European
Commission. Any such arrangements which are not notified and subsequently found
to be incompatible with the common market could potentially have to be repaid.

The use of hazardous materials may subject the Group to additional compliance
costs and/or liability, in the event of a hazardous waste spill or other
accident.

The Groups research work involves the controlled use of biological waste,
chemicals, and hazardous, infectious and radioactive materials. The Group is
subject to UK and European environmental laws and regulations governing the
use, storage, handling, and disposal of these materials and other waste
products. Despite its precautions for handling and disposing of these
materials, the Group cannot eliminate the risk of accidental contamination or
injury. In the event of a hazardous waste spill or other accident, the Group
could be liable for damages, penalties or other forms of censure. If the Group
fails to comply with any laws or regulations, or if an accident occurs, the
Group may have to pay significant penalties and will be held liable for any
damages that result. This liability could exceed the Groups financial
resources and could harm its reputation. The Group may also have to incur
significant additional costs to comply with current or future environmental
laws and regulations.

The Groups failure to comply with any government regulation applicable to its
laboratory and the materials used in its laboratory may adversely affect its
ability to develop, produce or market any products it may develop.

The Group may face product liability claims. In addition, the Group may become
subject to shareholders action.

The Group in carrying out its activities will potentially face contractual and
statutory claims, or other types of claim. In addition, the Group is exposed to
potential product liability risks that are inherent in the research and
development, pre-clinical study, clinical trials, manufacturing, marketing and
use of drug products. Consumers, healthcare producers or persons selling
products based on the Groups technology may be able to bring claims against
the Group based on the use of such products in clinical trials and the sale of
products based on the Groups technology.

Claims have been alleged against Vernalis on behalf of shareholders and former
shareholders. If proceedings were to commence, such proceedings could be
protracted and may require substantial personnel and financial resources. In
the case of an adverse outcome for the Group, its liquidity could be adversely
affected. To date no proceedings have been served on the Company, however a
belief on the part of third parties that proceedings may have commenced or any
uncertainty as to the outcome of any potential proceedings could adversely
affect the Groups ability to conduct its business and, in particular, could
impair the Groups ability to negotiate business combinations with other
biotechnology companies. For additional information see Item 8C, Financial
Information  Legal Matters.

The Group may be subject to special interest groups and adverse public opinion.

Government bodies and regulatory agencies require that potential pharmaceutical
products are subject to pre-clinical studies, including animal testing, prior
to conducting human trials. Vernalis arranges for such work either directly or
through its collaborators. Such work can be subject to adverse public opinion
and has attracted the attention of special interest groups, including those of
animal rights activists. Such special interest groups have targeted Vernalis in
the past but this has not had a significant impact on Vernaliss operations to date.
There can, however, be no assurance that such groups will not, in the future,
focus on the Groups activities or those of its licensees or collaborators, or
that any such public opinion would not adversely affect the Groups operations.

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The pharmaceutical industry is frequently subject to adverse publicity on many
topics, including corporate governance or accounting issues, product recalls
and research and discovery methods, as well as to political controversy over
the impact of novel techniques and therapies on humans, animals and the
environment. Adverse publicity about the Group, its collaborators, its
products, or any other part of the industry may hurt the Groups public image,
which could harm its operations, cause its share price to decrease or impair
its ability to gain market acceptance for its products.

The Company may be classified as an investment company which could restrict its
ability to raise additional capital.

Vernalis may, in the future, be classified as an investment company under the
US Investment Company Act of 1940, as amended, because it may, in the future,
own investment securities that have a value exceeding 40 per cent. of its
unconsolidated assets not including US government securities and it may not
qualify for any exemption under the Investment Company Act. If Vernalis is
classified as an investment company, and chooses not to register with the SEC,
it may not, among other things, be allowed to conduct a public offering of
securities in the United States in the future which may impact its ability to
raise additional capital.

Foreign exchange rate fluctuations may adversely affect the Groups results of
operations and financial condition.

The Group records its transactions and prepares its financial statements in
pounds sterling, but a substantial proportion of the Groups income is received
in US dollars or Euros. In addition, the Group has a 20 million US dollar
denominated liability to GlaxoSmithKline and also incurs a proportion of its
expenditure in US dollars, relating primarily to the clinical trials that it
conducts in the United States. See item 4D, Information on the Company -
Commercial Collaborations, for a description of the arrangement with
GlaxoSmithKline. To the extent that the Groups foreign currency assets and
liabilities are not matched, fluctuations in exchange rates between pounds
sterling, the US dollar and the Euro may result in realised or unrealised
exchange gains and losses on translation of the underlying currency into pounds
sterling that may increase or decrease the Groups results of operations and
may adversely affect the Groups financial condition each as stated in pounds
sterling. The Group does not engage in hedging transactions to minimise
translation rate exposure.




ITEM 4.  INFORMATION ON THE COMPANY

Items 4A and 4E, reflect primarily the history and development and the revenues
of British Biotech plc before merger with Vernalis Group (under UK merger
accounting). The remaining Items present information for the Group as of the
date of the filing.




A History and Development of the Company

The Company was founded in 1986 as British Bio-technology Limited and
re-registered in 1989 as British Biotech plc, a public limited company under
the laws of England with registered number 2304992. On October 1, 2003,
following the merger with Vernalis Group plc, British Biotech plc re-registered
as Vernalis plc which is the Groups parent company. The Company is listed on
the London Stock Exchange (referenced BBG (to be changed to VER)) and on the
NASDAQ National Market System in the United States (referenced BBIO (to be
changed to VNLS) following an initial public offer of its shares in July 1992.
The Group does not have an agent in the United States.

The Group is principally engaged in pharmaceutical research and development,
this work being undertaken by Vernalis Research Ltd, Vernalis Development Ltd,
Vernalis (Oxford) Ltd (formerly British Biotech Pharmaceuticals Ltd), and
Vernalis (Cambridge) Ltd (formerly RiboTargets Ltd), all of which are
wholly-owned subsidiaries of the parent. The companies are currently conducting
research and development of new pharmaceutical products with a focus on cancer
and diseases and disorders of the central nervous system. For additional
information see Items 4 B and C. Business Overview and Research Programs.

Vernaliss principal executive offices are located at Oakdene Court, 613
Reading Road, Winnersh, Berkshire, RG41 5UA, United Kingdom (telephone number:
+44-118-977-3133) from where the management of clinical development activities
are undertaken. This follows a decision to wind up the Companys operations
located in Oxford. Certain research and development activities are conducted in
Cambridge, UK, and, in collaboration with other companies, at
other locations. At April 30, 2003, Vernalis employed 159 full-time employees.
Of these, 66 were PhDs or held other post-graduate qualifications. Following
the merger with Vernalis Group and as at October 15, 2003 the Group employed
205 individuals on a full-time basis.

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Vernalis has one product, frovatriptan, that is generating revenues. Vernalis
receives royalty and milestone payments in respect of this product; however,
frovatriptan has only been launched since June 2002 and revenues are therefore
at an early stage. The Group has incurred net losses since foundation and
expects to continue to incur losses as its research and development programs
continue. Other than frovatriptan, there can be no assurance that any of the
Groups products will be approved for sale in the US, UK, Europe or elsewhere
or that any of those other products, if approved, or frovatriptan, will perform
to the Groups expectations.

Important Events Since April 30, 2002.

In July 2002, the Company announced that it had stopped development of E21R and
terminated its collaboration with BresaGen Ltd. This followed review of new
pre-clinical data, sponsored by Vernalis, that failed to confirm certain
aspects of earlier published data on E21R-induced apoptosis in acute myeloid
leukaemia cells.

In August 2002, Vernalis entered into a broad-based collaboration with GeneSoft
Pharmaceuticals Inc (then GeneSoft Inc), a private US biopharmaceuticals
company, to discover and develop novel antibiotics based on Vernaliss
proprietary bacterial metalloenzyme inhibitors. In October 2003 following a
change in contractual arrangements, the Company announced that GeneSoft will
conduct all further research and development at no cost to Vernalis with
Vernalis receiving milestone and royalty payments if products progress through
development and to market.

In September 2002, following press speculation, Vernalis confirmed that it was
in preliminary merger discussions with MorphoSys AG, a German company listed on
the Neuer Markt. On October 23, 2002 the Company announced that it had
terminated such merger discussions with MorphoSys.

In October 2002, recruitment of patients commenced in a Phase II study of
BB-10153 in patients with acute myocardial infarction.

Also in October 2002, Vernalis commenced a Phase I study of BB-83698 in healthy
volunteers, to determine safety and pharmacokinetics of single doses of an
intravenous formulation of this antibiotic compound.

Additionally in October 2002, Vernalis entered into a deed of amendment with
Serono SA, whereby the collaborative research agreement between Vernalis and
Serono was extended for a period of one year to October 2003. That agreement
has now expired. The parties are in discussion about selection of candidates
for further development. For any candidates selected Serono will undertake the
further development with Vernalis receiving milestone and royalty payments if
products progress through development and to market.

On November 4, 2002, the Company announced that Dr. Elliot P. Goldstein would
step down as Chief Executive and from the Board of Directors with immediate
effect. Mr. Tim Edwards was appointed as acting Chief Executive.

Additionally in November 2002, the Company received a NASDAQ Staff
Determination indicating that Vernalis had failed to comply with the minimum
bid price requirement of $1.00 for continued listing set forth in NASDAQ
Marketplace Rule 4450(a)(5) with respect to its ADSs, and that its ADSs were
subject to delisting from The NASDAQ National Market. As a result, on 16
December 2002, the Company amended the ratio of its ADSs to its ordinary shares
from one-for-ten (1:10) to one-for-forty (1:40), bringing the minimum bid price
for its ADSs above $1.00 and satisfying the NASDAQ Listing Qualifications
Panels requirements for continued listing of Vernalis American Depositary
Shares (ADSs) on The NASDAQ National Market.

Also in November 2002, the Company announced completion of a Phase I study of
BB-10901. Data from the study were presented at the European Organisation for
Research and Treatment of Cancer/National Cancer Institute Molecular Targets
and Cancer Therapeutics symposium held in Frankfurt, Germany.

In December 2002, the Company appointed Dr. Peter J. Fellner to the Board of
Directors, and announced that Dr. Fellner would be appointed as non-executive
Chairman from 1 January, 2003. Mr. Christopher Hampson retired as Chairman of
the Board on 31 December, 2002. Dr Paul A Nicholson also retired as a
non-executive director of the Board on the same date.

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In March 2003, the Company announced that it had agreed terms for a proposed
acquisition of RiboTargets Holdings plc, a privately-held biotechnology
company. The acquisition was approved by the Companys shareholders at an
extraordinary general meeting held on April 22, 2003. A capital reorganization,
under which 20 Ordinary shares of the
Company were consolidated into one new Ordinary share was approved by the
Companys shareholders at this meeting. On completion of the merger, Dr P J
Fellner became Executive Chairman of the Group. Mr Simon Sturge, Chief
Executive Officer of RiboTargets, was appointed as the Groups Chief Executive.
Mr Ian F Kent, a non-executive director of RiboTargets, was appointed to the
Board of the Company and Mr Philip Rogerson retired as a non-executive director
of the Company.

Also in March 2003, the Company announced it had reached agreement with Evotec
OAI, a German company listed on the Deutsche Börse, on the transfer of 17
research scientists and certain equipment from the Company to Evotec.

In May 2003, the Company announced it had formed a scientific collaboration
with MerLion Pharmaceuticals Pte Ltd, a Singapore-based drug discovery company.

On July 3, 2003, the Boards of the Company (then British Biotech plc) and
Vernalis Group plc announced that they had unanimously agreed the terms of a
recommended merger of the two companies by way of an offer by J P Morgan plc on
behalf of the Company (then British Biotech plc) to acquire the whole of the
issued and to be issued share capital of Vernalis Group plc in exchange for
shares in the Company. The offer was not made in the United States. The offer
was approved by the Companys shareholders at an extraordinary general meeting
held on August 13, 2003, and was declared unconditional on August 29, 2003, by
which date valid acceptances of the offer had been received in respect of
76,328,753 Vernalis Group plc Shares, representing approximately 87.29 per cent
of the existing issued share capital of Vernalis Group plc. The offer closed on
September 23, 2003, by which date acceptances of the offer had been received in
respect of 80,178,155 Vernalis shares, representing approximately 91.58 per
cent of the existing issued share capital of Vernalis Group plc. The Company
commenced the procedure to acquire compulsorily any remaining Vernalis Group
shares to which the offer relates pursuant to sections 428 to 430f of the
Companies Act 1985 on September 23, 2003.

The compulsory acquisition procedure is expected to be concluded on or shortly
after November, 4, 2003.

On September 1, 2003 Mr Peter Worrall, formerly Finance Director of Vernalis
Group plc became Corporate Development Director; Dr John Hutchison, formerly
Senior Vice President, Development and Chief Medical Officer of Vernalis Group
plc, became Development Director; Mr George Kennedy, formerly Non-Executive
Chairman of Vernalis Group plc, became Deputy Chairman and Senior Independent
Director; and Dr Peter Read and Ms Carol Ferguson, formerly Non-Executive
Directors of Vernalis Group plc, became Non-Executive Directors of the Company.
On September 10, 2003 Mr Timothy Edwards stepped down from the Board.

On October 1, 2003, the Company announced that shareholders had approved the
re-naming of the Company as Vernalis plc.

Principal Capital Expenditures Since April 30, 2001.

The purchase of tangible fixed assets, comprising laboratory and computing
equipment, amounted to £997,000 in fiscal 2003, £1,801,000 in fiscal 2002 and
£752,000 in fiscal 2001. Expenditure on fixed asset investments, relating to
the purchase of shares in businesses with which Vernalis collaborates, was £nil
in fiscal 2003, £1,406,000 in fiscal 2002, and £1,623,000 in fiscal 2001 and on
intangible fixed assets, representing payments made to third parties to acquire
licenses to develop their intellectual property, was £nil in fiscal 2003,
£1,371,000 in fiscal 2002 and £1,236,000 in fiscal 2001.

In fiscal 2003, £222,000 was raised from the sale of plant and machinery to
Evotec OAI. In fiscal 2002, £7,264,000 was raised through the transfer of
pre-clinical facilities to OSI Pharmaceuticals, Inc. In fiscal 2001,
£11,169,000 was raised from the sale of freehold property and £29,000 was
raised from the sale of plant and machinery.

Principal Capital Expenditures in Progress.

Current principal expenditures comprise the fitout of offices and laboratories
at Granta Park, Abington, Cambridge, UK. This is expected to be completed
during fiscal 2004 at an estimated total cost of £315,000 of which £213,000 had
been accounted for at April 30, 2003. Such expenditure is to be funded from
existing cash reserves.

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B Business Overview

Business Strategy

Vernalis is an R&D-based biotechnology company, with a marketed product, a
pipeline of drug candidates in clinical development and research programmes Its
strategy is to build a profitable company both through organic growth and by
pursuing opportunities to merge with or acquire other biotechnology companies.
To execute its strategy, the Company aims to maximise revenue opportunities
from its marketed product, frovatriptan, and to progress its portfolio of
clinical development products and research programs itself and in collaboration
with other companies. Vernalis has an experienced internal discovery team and a
development group that has undertaken international drug development
successfully and achieved regulatory approvals in the United States and Europe.

Medical Focus

Vernalis is primarily focused on developing products to fight disorders of the
central nervous system and cancer. The Company has considerable scientific and
clinical experience in these fields and is currently engaged in the research
and development of new pharmaceutical products to meet medical needs in these
areas.

Marketed Product and Product Development Programs

This section summarises the Groups marketed product and product development
programs. Product development programs originate from each of the three
companies that have been consolidated through the acquisition in April 2003 and
the merger in September 2003, namely Vernalis (formerly British Biotech),
Vernalis Group and RiboTargets. By way of background the provenance of each
development program is:

|                           |  |                |  |            
|-------------------------- |  | -------------- |  | -----------
|Vernalis                   |  |                |  |            
|(formerly British Biotech) |  | Vernalis Group |  | RiboTargets
|                           |  |                |  |            
|BB-10153                   |  | Frovatriptan   |  | R140       
|BB-10901                   |  | VR2006         |  |            
|BB-83698                   |  | VML 670        |  |            
|MG-98                      |  |                |  |            

On October 1, 2003 Vernalis announced that, following a review of the combined
portfolio, it would focus future investment on four products in development:
frovatriptan (with respect to menstrually associated migraine), BB-10153, R140
and VR2006.

Frovatriptan

Frovatriptan is a selective
5-HT1B/1D receptor agonist developed as an acute
oral treatment for migraine headache and its associated symptoms. It is one of
a class of drugs called triptans, a number of which are already approved for
this indication. These drugs are currently available only by prescription.
Vernalis is currently conducting further studies to develop the compound as a
prophylactic oral treatment for menstrually associated migraine, a form of
migraine suffered by over 50% of female migraineurs. None of the triptan class
of drugs is currently approved for prophylactic use in migraine.

Frovatriptan was licensed from SmithKline Beecham, the discoverer of the
compound, in 1994, when SmithKline Beecham had completed most of the
pre-clinical development work required to initiate human clinical trials.
Vernalis completed the outstanding pre-clinical work and in January 1995 began
a series of Phase I clinical trials. In January 1996 Vernalis began a series of
Phase II clinical trials in over 1,600 migraineurs.

In March 1997, Vernalis began a series of Phase III clinical trials in over
3,000 migraineurs in a total of 17 countries. During the course of the clinical
development program Vernalis also conducted further pre-clinical studies and
carried out the necessary development work on the chemistry and manufacturing
process for the compound. A new drug application was filed in the United States
in January 1999 and a marketing authorization application in Europe in February
1999.

In November 2001, the FDA granted marketing approval for frovatriptan in the US
for the acute treatment of migraine. Elan and its co-promotion partner UCB
launched frovatriptan in the United States during June 2002, under the
trademark FrovaTM. Frova is being co-promoted by a combined sales force from
UCB and Elan. In the United States, migraineurs are treated primarily by
neurologists and primary care physicians (PCPs), so the marketing program for
Frova in the US is directed mainly towards these two groups of prescribers.
Both UCB and Elan have specialist neurology sales forces and Frova is being
detailed to PCPs by UCB.

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In the period from launch to the end of 2002, Elan reported Frova sales of
$11.2 million, including initial stock to trade ahead of the June launch. In
the first quarter of 2003, Elan reported Frova sales of a further $8.7 million
and in the second quarter of 2003 Elan reported Frova sales of $5.9 million.
Vernalis received its first royalty payment from Elan in August 2002 and
royalty payments are now being received on a quarterly basis. By October 2003,
16 months following launch, Frova had achieved a share of approximately 3% of
the US market for the triptan class of drugs, according to prescription data
generated by the market research organization IMS Health.

In December 2000, the French regulatory authorities, acting as the reference
member state for the pan-European Union regulatory review, formally granted
marketing approval for frovatriptan in France. Regulatory approval for
frovatriptan in 14 additional European Countries was subsequently granted in
January 2002, following completion of the European mutual recognition process,
under which the French authorities submitted a summary of the full frovatriptan
regulatory dossier, together with their recommendations, to the other European
countries. The products European licensee, Menarini, launched frovatriptan in
the first European market, Germany, during November 2002. According to IMS
Health data, frovatriptans share of units sold of triptans in Germany had
reached 7.2% by October 2003. Menarini also launched in Ireland in March 2003
and the United Kingdom in April 2003.

In conjunction with its licensees, Vernalis is conducting additional clinical
studies that, if successful, may enhance the commercial potential of the drug.

In the third quarter of 2002 Vernalis announced positive preliminary results
from another study exploring frovatriptans potential use in the prophylaxis
(prevention) of menstrually associated migraine. The study, a double blind,
placebo controlled cross-over design, was conducted at 36 clinics in the United
States and involved more than 500 menstrual migraine sufferers. Patients were
evaluated over three menstrual cycles over the course of which each patient
received all three dose regimens  placebo, 2.5mg frovatriptan once daily (qd)
and 2.5mg frovatriptan twice daily (bd). During each cycle they took the
treatment for a total of six days commencing two days before the expected onset
of their headache.

The headline results showed that both dose levels of frovatriptan were highly
effective in reducing the incidence, severity and duration of
menstrually-associated migraines compared to the placebo. By the intention to
treat analysis 50% of patients were completely headache-free during the six-day
period when they took 2.5mg frovatriptan twice daily (bd) and 39% were
headache-free at a daily dose of 2.5mg, compared to only 26% when they took the
placebo. The full results of the study were presented to the American Academy
of Neurology in the United States in April 2003, and will subsequently be
published in key scientific and clinical journals.

Vernalis intends carrying out additional studies required to enable its
partners to apply for US and European regulatory approval for the use of
frovatriptan in the prophylaxis of menstrually associated migraine. It is
expected that the requirements to submit applications to extend European
licenses will be broadly similar to those in the United States. See also
below, Item 4K, Material Effects of Government Regulation.

BB-10153

BB-10153 is a recombinant protein designed to prevent and dissolve blood clots,
with potential to improve the treatment of thrombolytic diseases such as Acute
Myocardial Infarction (AMI) stroke, or deep vein thrombosis (DVT). These
conditions may be under-treated because of the risk of bleeding, particularly
intracranial haemorrhage, associated with current thrombolytic agents.

A Phase I study of BB-10153 was completed in 1999, showing it to be well
tolerated in healthy volunteers. In 2001 DSM Biologics Company Inc. produced
sufficient compound to allow initiation of a Phase II proof-of-concept study in
2002.

In March 2002, the FDA gave clearance for this study to proceed in AMI
patients. It is being managed by The Thrombolysis In Myocardial Infarction
(TIMI) Study Group in the United States. The study is designed to test the
ability of BB-10153, administered at doses up to 10mg/kg, to dissolve clots and
restore blood flow in the coronary arteries of heart attack patients. The study
will also evaluate the safety of treatment with BB-10153, especially with
respect to bleeding. It is expected that an interim review of data from this
study will be made at the end of 2003.

R140

R140 (alphadolone acetate) is a
GABAA agonist targeted at the treatment of pain
in cancer patients, which was in-licensed from Monash University, Melbourne,
Australia. Data in various animal models demonstrate that R140 is an analgesic
at doses which do not cause sedation and can potentiate the analgesic efficacy
of opiates. R140 has been administered to man in a pilot study conducted in Australia under the Clinical
Trial Notification (CTN) Scheme. In this study, indications of analgesic
efficacy were seen in patients who received a single dose of R140 after
orthopaedic knee surgery. No sedative side effects were seen in this study.

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R140 presents an opportunity to be used concomitantly with current,
opiate-based pain therapies in cancer to improve the overall management of pain
in this condition. It is intended to compete with a number of opiate and
non-opiate agents currently used. However, from preliminary preclinical data,
there are indications that it is capable of providing an improved profile over
current therapies since it is expected to produce non-sedating analgesia.

Vernalis has completed the pre-clinical safety studies required to initiate
clinical development and a Phase I clinical programme to evaluate R140s safety
and pharmacokinetic properties in single and multiple dose studies was started
in September 2003.

VR 2006

Vernalis began a research programme in 1998 to assess the potential of
selective adenosine A2A receptor antagonists in the chronic treatment of
Parkinsons disease.

Parkinsons disease is a debilitating and progressive movement disorder that
affects approximately 1 per cent. of the population over the age of 65 years.
Common symptoms include stiffening of the muscles and difficulty in initiating
movement. Sufferers may develop a tremor or shaking. The primary cause of the
problems of co-ordination and movement in Parkinsonian patients is nerve
degeneration and cell death in the brain, leading to the loss of dopamine, a
chemical produced in the brain that is involved in the control of voluntary
movement. Most conventional therapies for Parkinsons disease are based on
dopamine replacement. Although generally effective in the short-term, these
treatments can have severe, or even disabling, side effects and their
effectiveness tends to decrease over time.

Another brain chemical called adenosine also plays an important role in motor
co-ordination and movement control. Vernalis believes that by using selective
adenosine A2A receptor antagonists to restore the imbalance of the other
neurotransmitters caused by the loss of dopamine, Vernalis may be able to
provide a novel approach to treat the symptoms of Parkinsons disease and to
slow or stop the progression of the disease. This hypothesis is supported by
pre-clinical research that Vernalis and other companies have carried out with
this type of compound, which has shown that motor function in models of
Parkinsons disease can be restored without inducing dopaminergic like side
effects. In particular it is hoped that A2A receptor antagonists can restore
function in Parkinsons disease without inducing unwanted side effects such as
nausea and dyskinesia (uncontrolled movements).

VR 2006 was selected as a development candidate in April 2002 and is currently
in pre-clinical development, which is required to establish the safety profile
of the drug before the regulatory authorities will allow Vernalis to commence
clinical trials.

VML 670

VML 670 is a potent and selective
5-HT1A receptor agonist licensed from Lilly
in 1998. Vernalis has conducted clinical trials to assess its potential as a
treatment for sexual dysfunction experienced by people taking medication to
treat depression.

Since licensing VML 670 from Lilly in October 1998, Vernalis has conducted
Phase I studies from which it has established the maximum tolerated single oral
dose at which the compound can be given to humans. The findings were consistent
with expectations for a 5-HT1A agonist in man.

Vernalis has also conducted a Phase I clinical study that included single and
multiple dose studies in healthy volunteers to establish that there are no
adverse consequences of co-administration of VML 670 and a commonly prescribed
SSRI antidepressant.

A Phase II double blind, placebo controlled clinical trial involving
approximately 240 male and female patients taking either of the two most
commonly prescribed SSRIs commenced in May 2002. This study was conducted under
a CTX, granted in March 2002, and under a US IND. The Study failed to met its
primary endpoint and in October 2003 the Company announced that it would not
undertake any further development of VML670. The study data have been provided
to Lilly, and Vernalis and Lilly intend to discuss future arrangements for the
drug shortly.

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BB-83698

BB-83698, the Companys lead peptide deformylase (PDF) inhibitor, is targeted
at patients hospitalised with community-acquired pneumonia. In completed
pre-clinical studies, BB-83698 has shown potency against a range of
gram-positive bacteria, including several drug resistant strains.

In August 2002, Vernalis entered into collaboration with GeneSoft
Pharmaceuticals Inc (then GeneSoft Inc). to discover and develop novel
anti-infectives based on Vernaliss proprietary anti-bacterial metalloenzyme
inhibitors. This collaboration allowed increased resources and capabilities to
be devoted to the PDF programme in support of BB-83698 and PDF inhibitors.

In October 2002, having completed the necessary pre-clinical studies to allow
human dosing, Vernalis commenced the initial Phase I study of an intravenous
formulation of BB-83698 in healthy volunteers. On October 1, 2003, the Company
announced that its peptide deformylase inhibitor development and research
program, including BB-83698, has been out-licensed in its entirety to GeneSoft
Inc. GeneSoft will conduct all further research and development with at no cost
to Vernalis with Vernalis receiving milestone and royalty payments if products
progress through development to market.

BB-10901

BB-10901 is a tumour-activated prodrug designed to treat small cell lung cancer
(SCLC) and other cancers that are CD56-positive, such as rarer neuroendocrine
tumours. BB-10901 consists of a highly potent cytotoxic agent (DM1) targeted
directly at SCLC cells via a humanised monoclonal antibody carrier (huN901).
When the monoclonal antibody reaches the tumour cell, the cytotoxic agent is
released inside the cell causing it to die.

SCLC accounts for approximately 20 per cent. of lung cancers and has a highly
aggressive clinical course: without treatment median survival is two to four
months from diagnosis. Treatment with chemotherapy and radiation usually
produces good initial response but most patients relapse and median survival
after recurrence is two to three months based on data provided by the National
Cancer Institute cancer database.

In May 2001, following the grant of an IND from the FDA, Vernalis commenced a
combined Phase I/II clinical study of BB-10901 in relapsed and refractory SCLC
patients and other CD56-positive tumours to evaluate the drugs safety,
tolerability and biological activity when administered once a week for four
weeks. This study has completed the Phase I element of the trial. A maximum
tolerated dose has been identified and this dose is now being tested in the
Phase II part of the study which will recruit relapsed SCLC patients only. In
addition, Vernalis was granted a Clinical Trials Exemption (CTX) in the UK for
a Phase I study of BB-10901 to investigate the drugs safety when administered
on a more frequent dosing regime. This study commenced in August 2002.

Under the terms of the Companys collaboration with ImmunoGen Inc., Vernalis
has commercialisation rights for BB-10901 in Europe and Japan. On October 1,
2003 the Company announced that, following completion of its portfolio review,
it intends to discuss the collaboration on BB-10901 with ImmunoGen.

MG98

In February 2002, Vernalis and MethylGene Inc. entered into a collaboration to
develop and commercialise, in Europe, MethylGenes second generation antisense
compound targeted at cancer.

In Phase I trials of MG98 being conducted by MethylGene Inc. and its
collaborative partner for North America and Canada, MGI Pharma, a twice weekly
dosing regime was documented as well tolerated in the all-comer solid tumour
population examined. MethylGene conducted a Phase II study of twice-weekly
administration of MG98 monotherapy in patients with head and neck cancer and
also sponsored a Phase II study in collaboration with the National Cancer
Institute of Canada Clinical Trials Group in renal cell carcinoma. Both these
studies have now closed recruitment and at the doses and twice-weekly schedule
tested, MG98 did not demonstrate objective clinical responses as defined by the
protocols.

A Phase I trial investigating multiple doses and schedules in patients with
advanced myelodysplasia and acute myeloid leukaemia was initiated by MGI in two
US sites in January 2002 and continues to recruit patients. Vernalis has
recently initiated a Phase I study to investigate safety and tolerability of a
continuous infusion regime in patients with solid tumours such as gastric
adenocarcinoma. This trial is being conducted at two centres in the UK.

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On October 1, 2003 the Company announced that following completion of its
portfolio review, it intends to discuss the collaboration on MG 98 with
MethylGene.




C. Research programs

This section summarises the Groups main research programs. The research
programs originate from each of the three companies that have been consolidated
through the mergers in April 2003 and September 2003, namely Vernalis (formerly
British Biotech), Vernalis Group and RiboTargets. By way of background the
provenance of each research program is:

|                           |  |                 |  |                 
|-------------------------- |  | --------------- |  | ----------------
|Vernalis                   |  |                 |  |                 
|(formerly British Biotech) |  | Vernalis Group  |  | RiboTargets     
|                           |  |                 |  |                 
|MEIs                       |  | 5HT2C agonists  |  | Hsp90 inhibitors
|Biodefence research        |  | A2A antagonists |  |                 
|                           |  | CB1 antagonists |  |                 

5HT2c receptor

Vernalis is investigating the
potential use of selective 5-HT2c receptor
agonists to treat obesity and related disorders. In 1999 Vernalis partnered
this programme with Roche, the worlds leading pharmaceutical company in sales
of prescription treatments for obesity, and granted Roche exclusive worldwide
rights to develop and commercialise compounds discovered in the programme.

In 1997, Vernalis scientists, working with the drug dexfenfluramine, a
clinically effective appetite suppressant previously marketed by American Home
Products that was withdrawn due to adverse cardiovascular side effects, were
the first to discover that 5-HT2c receptor subtype is the key receptor for
dexfenfluraminess effects in controlling satiety. The evidence for this
breakthrough came from the results of experiments Vernalis conducted in
transgenic models and in pre-clinical models using selective 5-HT receptor
antagonists. This was a significant finding since it is known that
5-HT2c
receptors are present in high density in the brain (in particular in areas that
control eating, such as the hypothalamus), but are not present in the
cardiovascular system. Accordingly, Vernalis believes that the adverse effects
seen with dexfenfluramine are due to its activity at another 5-HT receptor
subtype and that a selective 5-HT2creceptor agonist could be an effective and
safe treatment for obesity.

Following this finding, Vernalis research programme has been focused on
discovering selective 5-HT2creceptor agonists. Over the last four years
Vernalis has designed, synthesised and patented a large number of compounds
that it has shown to be highly selective for the 5-HT2c receptor.

The first compound nominated for development by Vernalis and Roche was
discontinued early in Phase I in July 2002 due to failing to achieve
pharmacokinetic criteria for further development. It is expected that a second
clinical candidate from a separate chemical series will be nominated before the
conclusion of the research collaboration in February 2004.

A2A receptor

Recent pre-clinical research by Vernalis and a number of other companies
suggests that adenosine, and specifically the adenosine A2A receptor subtype,
may be a novel target for the discovery of a new class of antidepressant drugs.
Transgenic animals with the A2A receptor gene deleted have shown a pattern of
activity in pre-clinical models of depression that appears to be predictive of
antidepressant activity in humans. Vernalis has also synthesised selective
adenosine A2A receptor antagonists that show activity in pre-clinical models of
depression. It is currently working to optimise the selectivity and
pharmacokinetic properties of the most promising compounds.

Hsp90 inhibitors

The scientific rationale for Hsp90 as a therapeutic cancer target is based on
the hypothesis that many of the signalling proteins that behave aberrantly in
cancer cells require Hsp90 as a chaperone molecule to ensure that they are
maintained in an active form. Inhibition of Hsp90 results in interference in
multiple signalling pathways that mediate cancer growth and cell survival.

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Vernalis has been optimising small molecule compounds which inhibit the ATPase
function of Hsp90 and has filed patent applications in this area. The project
is in the lead optimisation phase and is scheduled to identify a pre-clinical
development candidate in 2004. This programme is being conducted in
collaboration with the Institute of Cancer Research, under an exclusive
research and development agreement which provides access to relevant cancer
models.

CB1 antagonists

The objective of this research programme is to develop potent and selective
cannabinoid CB1 receptor antagonists for the treatment of obesity. Currently,
two cannabinoid receptors have been described: the CB1 receptor, which is
distributed widely in the central nervous system and is also present in the
periphery (e.g. in the gastrointestinal tract); and the CB2 receptor which is
generally localised in the periphery (e.g. immune cells). These cannabinoid
receptors are activated by the endocannabinoids, a family of endogenous lipids.
Extensive pre-clinical data support the hypothesis that CB1 receptor
antagonists have potential utility for the treatment of obesity.

A focused medicinal chemistry program has rapidly identified novel, selective,
CB1 receptor antagonists with oral efficacy in pre-clinical feeding models. The
program aims to identify a development candidate during 2004.

Metalloenzyme inhibition: Inflammation

In October 2000, Vernalis entered into a two year research collaboration with
Serono, to identify new compounds for clinical development for the treatment of
inflammatory diseases, particularly multiple sclerosis. In October 2002, the
term of the research collaboration was extended for a further year to October
2003, with the aim of identifying candidates for development. That research
collaboration has now expired. The parties are in discussion about selection
of candidates for further development. For any candidates selected Serono will
undertake the further development with Vernalis receiving milestone payments
and royalties upon successful commercialisation of products.

Metalloenzyme inhibition: Infection

In the field of anti-infectives, Vernalis has identified several metalloenzymes
not present in mammalian cells that are essential for the survival of
pathogenic bacteria.

In August 2002, Vernalis entered into a broad-based collaboration with GeneSoft
Pharmaceuticals Inc (then GeneSoft Inc), a private US biopharmaceuticals
company, to discover and develop novel antibiotics. The collaboration covered
clinical development of BB-83698 and other PDF inhibitors, and research into
other metalloenzyme targets. In September 2003 the parties terminated the
August 2002 agreements and replaced them with a new Research Agreement relating
to four anti-infective projects in respect of Vernaliss proprietary bacterial
metalloenzyme inhibitors, and a new agreement relating to BB-83698. Under the
revised September 2003 arrangements GeneSoft will conduct all further research
and development at no cost to Vernalis and Vernalis will receive milestone and
royalty payments if products progress through development and to market.

Biodefence research

As part of the UK Governments biodefence initiative, Vernalis has entered into
an agreement with the Defence, Science and Technology Laboratory (DSTL) in
Porton Down, UK, to investigate the efficacy of selected Vernalis metalloenzyme
inhibitors against anthrax lethal toxin and botulin toxin.




D Commercial Collaborations

The following section describes the Groups existing commercial collaborators
and the commercial agreements with respect to the Groups principal research
and development programs and marketed products. Collaborations were formed by
each of the three companies that have been consolidated through the mergers in
April 2003 and September 2003, namely Vernalis (formerly British Biotech),
Vernalis Group and RiboTargets. By way of background the provenance of each
collaboration is:

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|                                   |  |                     |  |                             
|---------------------------------- |  | ------------------- |  | ----------------------------
|Vernalis                           |  |                     |  |                             
|(formerly British Biotech)         |  | Vernalis Group      |  | RiboTargets                 
|                                   |  |                     |  |                             
|DSM Biologics                      |  | SmithKline Beecham  |  | Monash University           
|Serono                             |  | Elan                |  | Institute of Cancer Research
|GeneSoft Pharmaceuticals
ImmunoGen |  | Menarini            |  |                             
|MethylGene                         |  | Roche               |  |                             
|OSI Pharmaceuticals                |  | Eli Lilly & Company |  |                             
|DevCo                              |  |                     |  |                             
|Schering-Plough                    |  |                     |  |                             
|Tanabe Seiyaku                     |  |                     |  |                             
|R&D Systems Europe Ltd             |  |                     |  |                             

SmithKline Beecham; (Frovatriptan)

Frovatriptan is the Companys most advanced program and the Companys only
currently marketed product. Vernalis originally licensed frovatriptan from
SmithKline Beecham in 1994. In 1998, SmithKline Beecham waived its option to
commercialize the compound and worldwide marketing rights passed to Vernalis in
return for a residual royalty payable to SmithKline Beecham on future worldwide
sales of frovatriptan. During 2000, in connection with SmithKline Beechams
merger with Glaxo Wellcome plc, Vernalis made two important amendments to the
1994 agreement:



| |  | in July 2000, SmithKline Beecham assigned to Vernalis all of
SmithklineBeechams patents covering frovatriptan (with no substantive
changes in the royalty arrangements); and                                                                                                                                                                                                                                                                                                                                                                                                                    
|- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| 
| |  | in December 2000, SmithKline Beecham waived all of its rights to
royalties on sales of frovatriptan in return for a series of five $5
million cash payments by Vernalis. The first instalment of $5 million
was paid on September 16, 2002. The second instalment was due on
September 16, 2003 but has been postponed for 90 days pending further
discussions between Vernalis and SmithKline Beecham. Subsequent
instalments are due on each anniversary of the initial payment. The
final payment is subject to cumulative worldwide sales of frovatriptan
from launch exceeding $300 million.

Elan (frovatriptan)

Vernalis signed a license agreement with Elan in 1998 granting Elan exclusive
marketing rights for frovatriptan in the United States, Canada and Mexico. On
signing, Elan paid Vernalis a fee of $7.5 million and made a $10 million
investment in Vernalis Group ordinary shares at a negotiated price of £6.25 per
share. Elan subsequently paid Vernalis a further $7.5 million in 1999 when the
FDA formally accepted Vernaliss frovatriptan New Drug Application (NDA) for
review, and a further $15 million in the fourth quarter of 2001 following FDA
marketing approval. Under the terms of the 1998 license agreement, Vernalis
could have potentially received three additional milestone payments exceeding
$30 million in total on achievement by Elan of agreed sales targets for
frovatriptan. In addition, Elan would pay Vernalis a royalty based on its net
sales of frovatriptan. In December 2000, Vernalis entered into a new financing
agreement with Elan under which Elan made a $10 million loan to Vernalis and a
further equity investment of £4.96 million. Following that investment, Elan
held 2,943,396 Ordinary Shares, representing approximately 6.7% of Vernalis
Groups issued share capital, which was subsequently sold in July 2002. Elan no
longer has any shareholding in Vernalis Group (or Vernalis).

In the first quarter of 2002 Elan appointed UCB as its co-promotion partner for
frovatriptan in the US market. The co-promotion agreement is between Elan and
UCB and Vernalis has no contractual relationship directly with UCB. In
conjunction with the appointment of UCB, Vernalis agreed to revised commercial
arrangements with Elan. Under the new terms, Elan forgave the full amount of
its loan to Vernalis, including accrued interest, and accelerated a $5.4
million sales milestone payment due under the restated 1998 license agreement
to 30 days following the US launch. In return, Vernalis will receive royalties
at a reduced rate on US sales up to a pre-determined level during the launch
phase and early years of marketing of frovatriptan. At the end of an initial
three-year period following the US launch of frovatriptan, Elan will have an
option to extend the reduced royalty period by up to four years by making an
additional lump sum payment to Vernalis. This payment replaces the second sales
milestone payment due under the 1998 license agreement. Thereafter, or if Elan
elects not to the make the lump sum payment, the royalty rate due to Vernalis
will revert to the previous levels. The third sales milestone payment is not
affected by the new agreement. This is a payment of $15 million from Elan to
Vernalis which is triggered when the net sales of frovatriptan by Elan and UCB
in North America exceed $100 million in any 12-month period. Elan made its
first royalty payment to Vernalis in August 2002 and payments have subsequently
been received on a quarterly basis. For additional information on
frovatriptan, see above under Item 4B, Business Overview.

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In addition, Vernalis is committed to funding and conducting a number of
additional clinical studies with frovatriptan, known as Phase IIIb support
studies, up to a predetermined total cost. These include the ongoing studies in
the prophylaxis of menstrually associated migraine and a new study in the treatment
of adolescent migraine, which Vernalis commenced in April 2003. A total
commitment of approximately 14 million was outstanding as at September 30,
2003.

Menarini (Frovatriptan)

Vernalis have also signed a license agreement with Menarini granting Menarini
exclusive marketing rights for frovatriptan in the European Union, Eastern
Europe and specified countries in Central America. Under this agreement
Vernalis will supply Menarini with the finished packed product ready for sale.
Vernalis receives revenue on supply of product and also from royalties.

Vernalis is exploring opportunities to generate further revenues by selecting
marketing partners for frovatriptan in other geographic areas not covered by
Vernaliss existing marketing agreements with Elan and Menarini.

Vernalis also has an agreement in place with Diosynth Limited, with respect to
the manufacture and supply of the bulk active pharmaceutical ingredient in
frovatriptan. This bulk active is used by Galen Limited to produce finished
product that is supplied by Vernalis to Menarini.

Galen Limited (Frovatriptan)

Vernalis has an agreement with Galen Pharmaceuticals for tableting and
packaging of frovatriptan which is supplied as finished product to Menarini.

DSM Biologics Company Inc. (BB-10153)

Vernalis has had a series of agreements with DSM Biologics, the most recent
being January 1, 2003, all of which concern the supply of BB-10153 for clinical
trials.

Monash University (R140)

R140 (alphadolene acetate) In October 2002, Vernalis was granted an exclusive
licence to develop and commercialise the compound alphadolone (R140) for all
human and animal prophylactic and therapeutic analgesic indications from Monash
University and Professor Colin Goodchild (Victoria, Australia). In return for
an exclusive licence, Vernalis will pay Monash and Professor Goodchild success
milestones and royalties upon the sale of product. Currently, R140 is in Phase
I studies.

Roche (5HT2c receptor)

In December 1999 Vernalis signed an agreement with Roche to collaborate on
Vernaliss research program directed toward selective
5-HT2C agonists as
potential anti-obesity agents. Under the terms of this agreement, Vernalis
received funding for an initial two-year joint research program with Roche.
Vernalis also received a license fee on signature of the agreement and three
subsequent milestone payments from Roche: in November 2000 on the selection of
VR 1065 as the first lead development compound; in June 2001 when this compound
was confirmed as the first clinical development candidate; and in May 2002 when
it entered Phase I studies.

In February 2002, Vernalis and Roche entered into a further two-year research
collaboration to support the objective of bringing further product candidates
into Phase I clinical trials. Under the terms of this new agreement, Vernalis
receives additional research funding for the period of the new research
collaboration. In May 2002, Roche commenced Phase I clinical trials with VR
1065. Although there were no side effects, the pharmacokinetic data on VR 1065
did not meet the criteria for progression to Phase II. Together with Roche,
Vernalis is now focusing on follow-on compounds from different chemical series
that have already been identified in the substantial 5-HT2C library generated
by the collaboration so far.

Roche has exclusive worldwide rights to develop, manufacture and market all the
product candidates coming out of the program for the treatment of obesity and
related eating disorders, and will also fund and conduct all aspects of the
development program for each compound it elects to take into development for
this indication.

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Serono S.A. (MEIs: inflammation)

In October 2000, Vernalis and Serono S.A. (Serono) (SWX: SEO; NYSE: SRA) signed
a two-year agreement to jointly research, develop and commercialize
metalloenzyme inhibitors for the treatment of various inflammatory diseases.
Under the terms of the agreement, Vernalis received from Serono an up-front
payment of US$5 million.

The agreement with Serono covered BB-2827, BB-76163 and research activities.
The clinical development, manufacture and commercialization of BB-2827, a
collagenase inhibitor with potential application in rheumatoid arthritis, and
the pre-clinical research of BB-76163, an aminopeptidase inhibitor, with
potential application in multiple sclerosis, were terminated in 2001.

In October 2002, the term of the research agreement was extended for a further
year to October 2003. The research agreement has now expired. The parties are
in discussion about selection of candidates for future development. For any
candidates selected Serono will undertake the further development of these
compounds with Vernalis receiving milestone and royalty payments upon
successful commercialisation of products.

GeneSoft Pharmaceuticals Inc.
(MEIs: antibiotics)

In August 2002, Vernalis signed agreements with GeneSoft Pharmaceuticals Inc.
(then GeneSoft Inc.) for a broad-based collaboration to discover and develop
novel anti-infective drugs based on Vernaliss proprietary bacterial
metalloenzyme inhibitors. The collaboration combined Vernaliss novel targets,
chemistry and clinical development with GeneSofts experience in antibiotic
lead optimisation and clinical expertise.

GeneSoft made an initial payment to Vernalis in August 2002 of US$4 million.
Upon initiation of the initial Phase I study of BB-83698 in October 2002,
Vernalis received a further payment from GeneSoft of US$1 million and one
million shares of convertible-preferred stock (representing approximately 3.45
per cent of GeneSofts outstanding equity as of the date of the transaction, on
a fully-diluted basis).

In September 2003 the parties terminated the August 2002 agreements and
replaced them with a new Research Agreement relating to four anti-infective
projects in respect of Vernalis proprietary bacterial metalloenzyme
inhibitors, and a new agreement relating to the development and
commercialisation of BB-83698. Under the revised September 2003 arrangements
GeneSoft will conduct all further research and development at no cost to
Vernalis and Vernalis may receive milestone and royalty payments (dependent on
progression of development and sales respectively).

ImmunoGen Inc. (BB-10901)

In May 2000, Vernalis and ImmunoGen Inc., (NASDAQ: IMGN) (ImmunoGen), a US
biotechnology company, entered into a collaboration to develop and
commercialize ImmunoGens huN901-DM1, subsequently re-named as BB-10901,
targeted at the treatment of small cell lung cancer. ImmunoGen is a leader in
the development of anti-cancer agents with high potency and reduced toxicity,
through the use of its proprietary Tumor-Activated Prodrug (TAP) technology.

Under the agreement, Vernalis was granted exclusive rights to apply for
regulatory approval and commercialize BB-10901 in Europe and Japan. ImmunoGen
retains the rights to apply for regulatory approval and commercialize BB-10901
in the USA and the Rest of the World as well as the right to manufacture the
product worldwide. Upon signature of the agreement, Vernalis paid US$1.5
million for its rights to BB-10901.

Under the agreement, Vernalis and ImmunoGen share responsibility for the
development of BB-10901. ImmunoGen is responsible for completing pre-clinical
development and for the manufacture and supply of materials for clinical trials
and commercial sales. Vernalis is responsible for conducting the clinical
trials necessary to achieve regulatory approval in the US, Europe and Japan and
will reimburse ImmunoGen for the cost of clinical trial supplies. In the event
that ImmunoGen obtains regulatory approval for marketing the product in the US,
Vernalis will receive a one-off milestone payment. ImmunoGen will receive
royalties on sales made in Europe and Japan.

In May 2001, a combined Phase I/II study commenced in patients with relapsed
and refractory SCLC and other CD56-positive tumours to evaluate drug safety,
tolerability and biological activity. In August 2002, having been granted a
Clinical Trials Exemption (CTX) to investigate drug safety when administered on
a more frequent dosing regime, a second Phase I study of BB-10901 commenced in
two UK hospitals.

Vernalis plans to discuss this collaboration with ImmunoGen shortly.

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MethylGene Inc. (MG 98)

In February 2002, Vernalis signed an agreement with MethylGene Inc., a
privately-held Canadian biopharmaceuticals company, granting Vernalis the
European development and commercialization rights for MG98, MethylGenes
leading experimental anti-cancer drug. In addition, Vernalis was granted an
option to license pre-clinical compounds that emerge from MethylGenes
complementary DNA Methyltransferase (DNA MT) small molecule inhibitor program
for cancer. This option has now expired.

MG98 is currently in Phase I clinical development in North America, such trials
being conducted by MethylGene and its collaborative partner for North America
and Canada, MGI Pharma Inc.

Under the License, Development and Commercialization Agreement, Vernalis made
an initial research and development payment to MethylGene of US$1.7 million, to
be followed by milestone payments of up to US$12.8 million based on successful
regulatory approval and commercialization for MG98 in Europe. MethylGene will
also receive undisclosed royalties on sales. In addition, under a separate
Stock Purchase Agreement, Vernalis made an equity investment of US$2 million in
the private stock of MethylGene.

Vernalis plans to discuss this collaboration with MethylGene shortly.

Eli Lilly & Company (VML 670)

In 1998 Vernalis signed an agreement with Lilly for Vernalis to develop an
early development stage drug discovered by Lilly, VML 670, in one or more
indications, including as a treatment for sexual dysfunction experienced by
people taking a class of drug for depression called SSRIs.

An initial Phase IIa study with the product in treatment  emergent sexual
dysfunction met some secondary end-points but failed to meet its primary
end-point. The study data have been provided to Lilly and Vernalis and Lilly
intend to discuss future arrangements for the drug shortly. Vernalis will not
undertake any further development.

Roche (A2A receptor)

In May 2002, Vernalis entered a collaboration with Roche to discover and
develop new drugs for the treatment of depression. Under the terms of this
agreement, Roche had an option to license worldwide rights to develop,
manufacture and commercialize compounds arising from Vernaliss adenosine A2A
antagonist research program in depression. Roches option terminated in June
2003 and Vernalis now has complete control over its A2A antagonist programmes,
which are targeted at a range of indications including Parkinsons disease and
depression.

Hsp 90 Inhibitors

This program for cancer is being conducted in collaboration with the Institute
of Cancer Research, under an exclusive research and development agreement which
provides access to relevant cancer models.

OSI Pharmaceuticals, Inc.

In August 2001, Vernalis transferred part of its pre-clinical research
facilities to OSI Pharmaceuticals, Inc. (OSI) (NASDAQ: OSIP) for consideration
of £8.7 million in cash. In addition, Vernalis and OSI entered into an
agreement whereby OSI acquired rights to screen Vernaliss metalloenzyme
inhibitor (MEI) and other chemical libraries. The agreement with OSI is due
to expire in November 2003 although OSI may elect to take some compounds into
licence agreements. Vernalis will earn a royalty on the net sales of any drugs
developed and commercialized by OSI that are initially sourced from Vernalis
MEI library.

Schering-Plough Limited

In September 1999, Vernalis and Schering-Plough Limited (Schering-Plough)
signed an agreement to develop and commercialize Vernaliss MMPIs, including
marimastat and BB-3644, for the treatment of cancer. The agreement was in line
with Vernaliss declared strategy, established in 1998, to seek a partnership
with a major international pharmaceutical group to develop and market
marimastat and BB-3644 in North America and Europe.

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On execution of the agreement, Vernalis received payments totalling US$8
million. These consisted of a non-refundable milestone payment of US$4 million
and a US$4 million equity investment in Vernalis by Schering-Plough. This
equity investment was made on September 10, 1999 and was satisfied by the issue
of 4.5 million new shares, representing 0.7per cent of the Vernalis share
capital as enlarged by the issue.

Eight phase III clinical trials of marimastat have reported and, in each,
marimastat failed to meet the primary end-point. In addition clinical
development of BB-3644 has been stopped after it failed to show advantage over
marimastat in a Phase I study. The parties have now ceased all collaborative
efforts and the agreement between the parties was terminated in March 2003.

Tanabe Seiyaku

In November 1996, Vernalis signed a development and license agreement with
Tanabe Seiyaku (Tanabe) to develop and market marimastat in the territories of
Japan, China (including Hong Kong), Taiwan and Indonesia. Under the agreement,
Tanabe made an initial payment to Vernalis of US$7 million, to be followed by
further payments of up to US$67 million, subject to the successful development
and marketing of marimastat in its territories. In addition, Tanabe assumed the
cost and responsibility for the development of marimastat in its territories.
Tanabe commenced Phase I clinical trials of marimastat in healthy volunteers in
Japan in October 1997 and initiated the first of a planned series of Phase II
clinical trials during that year in gastric and lung cancer. The agreement
with Tanabe is still in place but Tanabe has taken the results of the
Schering-Plough clinical trials into account and Tanabe has now decided to
discontinue development in Japan.

DevCo Pharmaceuticals Limited

In March 2000, Vernalis and DevCo Pharmaceuticals Limited (DevCo) announced
that they had signed an agreement to develop the platelet activating factor
(PAF) antagonist, lexipafant, for the protection against prophylaxis of certain
serious neurological and renal complications experienced by patients undergoing
cardiac surgery.

The terms of the agreement grant DevCo exclusive rights to develop, manufacture
and sell lexipafant for the treatment of human disease other than in the fields
of oncology and ophthalmology. DevCo will undertake all development and, if
lexipafant is brought to market, pay Vernalis a royalty on sales.

R&D Systems Europe Limited

Following the sale in July 1993 of British Bio-technology Products Ltd (now
known as R&D Systems Europe Ltd) to Techne Corporation, a joint biological
research agreement was entered into between Vernalis, R&D Systems Europe Ltd
and Techne Corporation. Under the terms of this agreement, R&D Systems Europe
Ltd paid Vernalis research fees for the exclusive rights to develop,
manufacture and sell products to the basic research reagent or diagnostic
markets arising from biological molecules developed by Vernalis. Royalties are
payable to Vernalis on any products developed by R&D Systems Europe Ltd from
such biological molecules. The agreement was terminated on December 31, 1999,
however, royalties continue to be paid in respect of the sale by R&D Systems
Europe Ltd of research reagents and diagnostic kits that arose from the
biological molecules supplied by Vernalis.

External Consultation

Establishing a network of collaborations and external consultation is
fundamental to the operation of the Companys business. In addition to its
commercial collaborations under some of which joint committees of the Company
and the relevant collaborative partner are established to assess findings and
determine action, the Company has established an independent Scientific
Advisory Board, comprising international experts. In addition, the Company
consults widely with experts to challenge and verify important decisions for
each of its major projects. Additionally, an independent Safety Review Board
reviews all aspects of the Companys clinical development programs.

Scientific Advisory Board (SAB)

The SAB comprises a multi-disciplinary group of leading scientists. It is
responsible to the full Board. Its role is to assist with the assessment of the
Groups existing and potential research and development projects, including the
content, execution, interpretation and overall quality of those projects. The
Company is reviewing the Scientific Advisory Boards role and mode of
operation.

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Safety Review Board

The Safety Review Board comprises a Chairman and six other members all of whom
are independent of the Board and the Group. The Safety Review Board meets when
necessary to provide an independent technical review and monitoring of the
development programs of the Company and to ensure adequate risk benefit
assessment for clinical trials. Additional consultants/experts may be used on
an ad hoc basis if the Safety Review Board requires highly specialised advice.




E Principal Markets in which Vernalis Competes

The Groups continuing revenues have been derived primarily from: (i) licensing
and collaborative research and development agreements; and (ii) government
research grants. In addition, the Group has earned substantial interest income
from its cash balances held with banks over the period under review (see Note 5
of Notes to the Consolidated Financial Statements).

The licensing and collaborative research and development revenues include
royalties received in respect of sales of frovatriptan, research support fees,
milestone payments, and exercise of option fees and licensing fees. Currently,
Frovatriptan is licensed to Elan/UCB for sales in North America, and Menarini
for sales in Europe. Other licensing arrangements may be made in the future to
cover territories outside those covered by existing agreements. Frovatriptan is
also in clinical development as a prophylactic migraine treatment.

Vernaliss other development and research programmes are in therapeutic markets
with significant growth potential: cancer, thrombosis, depression and obesity.

The Groups losses fluctuate from year to year principally due to the
commencement or termination of collaborative research and development
agreements, the timing of revenue realised from milestone payments under those
agreements, the timing of product option and licensing fees, government grants,
the level of interest income and variations in the level of expenditures
relating to research and clinical development programs. Half-yearly results of
operations are expected to continue to fluctuate in the future, and the Group
expects to incur continued losses in coming years.

The production and potential marketing of Vernalis products and its ongoing
research and development activities are subject to regulation by numerous
governmental authorities in the US (including the FDA), the UK and Europe and
by regulatory agencies in other countries where Vernalis intends to test or
market products it may develop. The uncertainties involved in the regulatory
approval process could significantly affect the Groups operational results and
its ability to achieve profitability.




F Revenues

The geographical analysis of turnover, based on origin of payment, for fiscal
2003, 2002 and 2001 is as follows:

|               |  |      |       |      |  |      |       |  |  |  |       | 
|-------------- |  | ---- | ----- | ---- |  | ---- | ----- |  |  |  | ----- | 
|               |  | 2003 |       | 2002 |  | 2001
|               |  | £000 |       | £000 |  | £000
|               |  |      |       |      |  |     
|United Kingdom |  |      | 90    |      |  |      | 72    |  |  |  | 98    | 
|North America  |  |      | 420   |      |  |      |      |  |  |  | 190   | 
|Europe         |  |      | 568   |      |  |      | 1,378 |  |  |  | 1,300 | 
|               |  |      |       |      |  |      |       |  |  |  |       | 
|               |  |      | 1,078 |      |  |      | 1,450 |  |  |  | 1,588 | 
|               |  |      |       |      |  |      |       |  |  |  |       | 

The analysis of turnover by category is:

|                         |  |      |       |      |  |      |       |  |  |  |       | 
|------------------------ |  | ---- | ----- | ---- |  | ---- | ----- |  |  |  | ----- | 
|                         |  | 2003 |       | 2002 |  | 2001
|                         |  | £000 |       | £000 |  | £000
|                         |  |      |       |      |  |     
|Collaborative agreements |  |      | 988   |      |  |      | 1,378 |  |  |  | 1,300 | 
|Other                    |  |      | 90    |      |  |      | 72    |  |  |  | 288   | 
|                         |  |      |       |      |  |      |       |  |  |  |       | 
|                         |  |      | 1,078 |      |  |      | 1,450 |  |  |  | 1,588 | 
|                         |  |      |       |      |  |      |       |  |  |  |       | 




G Seasonality of the Companys Business

The Company does not consider its business to be materially affected by
seasonal variations.

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H Marketing Channels and Sales Methods

Sales and marketing of Vernalis approved product, frovatriptan, are carried
out by the products licensees, Elan (and its co-promotion partner UCB) in the
US, and Menarini in Europe and certain other territories.

Vernalis signed a license agreement with Elan in 1998 granting Elan exclusive
marketing rights for frovatriptan in the United States, Canada and Mexico. On
signing, Elan paid a fee of $7.5 million and made a $10 million investment in
Vernalis Group plcs ordinary shares at a negotiated price of £6.25 per share.
Elan subsequently paid a further $7.5 million in 1999 when the FDA formally
accepted the frovatriptan New Drug Application (NDA) for review, and a further
$15 million in the fourth quarter of 2001 following FDA marketing approval. In
December 2000, Vernalis entered into a new financing agreement with Elan under
which Elan made a $10 million loan to Vernalis and a further equity investment
of £4.96 million. Following that investment, Elan held 2,943,396 Ordinary
Shares, representing approximately 6.7% of Vernalis Group plcs issued share
capital at that time. This holding was subsequently sold in July 2002 and Elan
no longer has any shareholding in Vernalis Group plc (or Vernalis). In
November 2001, the FDA granted marketing approval for frovatriptan in the US
for the acute treatment of migraine. Elan and its co-promotion partner UCB
launched frovatriptan in the United States during June 2002, under the
trademark FrovaTM. Frova is being co-promoted by a combined sales force from
UCB and Elan. In the United States, migraineurs are treated primarily by
neurologists and primary care physicians (PCPs), so the marketing program for
Frova in the US will be directed mainly towards these two groups of
prescribers. Both UCB and Elan have specialist neurology sales forces and Frova
will also be detailed to high prescribing PCPs.

Vernalis has also signed a license agreement with Menarini granting Menarini
exclusive marketing rights for frovatriptan in the European Union, Eastern
Europe and specified countries in Central America. Under this agreement
Vernalis supplies Menarini with the finished packed product ready for sale.

Vernalis is exploring opportunities to generate further revenues by selecting
marketing partners for frovatriptan in other geographic areas not covered by
existing marketing agreements with Elan and Menarini. Agreements are also in
place with Diosynth Limited with respect to the manufacture and supply of the
bulk active pharmaceutical ingredient in frovatriptan, and Galen with respect
to the tableting and packaging of frovatriptan.




I Patents, Licenses and Proprietary Rights

Vernalis pursues a policy of seeking to obtain patent protection for its
inventions in the UK, the US, Europe, Japan and in selected other countries.
Vernalis also relies upon trade secrets, know-how, continuing technological
innovations and licensing opportunities to develop and maintain its competitive
position. To date, Vernalis has not threatened or instituted proceedings
against any third party on patent or other proprietary rights nor has any third
party threatened or instituted proceedings against Vernalis.

Certain products and processes currently being developed or considered for
development by Vernalis are in the area of biotechnology. The number of patent
filings by biotechnology firms in major jurisdictions is particularly high and
the outcome of such applications is generally uncertain and involves complex
legal and factual questions. To date, no consistent international policy has
emerged regarding the breadth of claims allowed in biotechnology patents.
Accordingly, there can be no assurance that the Group will develop products or
processes that are patentable, that patent applications made by the Group, or
made by parties who have agreed to license their inventions to the Group, will
result in patents being issued or that, if issued, the claims allowed will be
sufficiently broad to protect what Vernalis believes to be its proprietary
rights or that such patents will prevent others from developing similar or
functionally equivalent products or processes. In addition, there can be no
assurance that products or processes covered by such patents, or any other
products or processes developed by the Group or licensed to the Group, will not
infringe patents owned by third parties or be subject to claims of patent
infringement by these parties. In such a situation, Vernalis may have to obtain
a license, defend an infringement action in court or challenge the scope or
validity of any infringed or allegedly infringed patents. There can also be no
assurance that such required licenses will be available to the Group at all, or
if available, that such licenses will be on terms acceptable to the Group or
that Vernalis will prevail in any patent litigation. Failure to obtain a
license or prevail in any patent litigation relating to any technology that
Vernalis may require to commercialize its products or processes may have a
material adverse impact on the Group.

Litigation may also be necessary to enforce any patents granted to Vernalis or
to determine the scope and validity of third party patents. Patent litigation
is time consuming and expensive. There can be no assurance that Vernalis will
have, or will devote, the necessary resources to conduct patent litigation.
International policy with regard to the breadth of claims allowed in chemical
patents is better defined than that of biological entities and is therefore of
greater certainty, but there can be no assurance that patent applications made by or
licensed to the Group will result in patents being issued or that, if issued,
the patents will provide the right to exclude competitors with similar
technology.

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The Group maintains an active policy of filing patent applications. Vernalis
normally commences its patent filing process by filing in the UK, which filing
is generally followed by a filing under the Patent Co-operation Treaty (PCT).
The PCT allows for multi-jurisdictional filings to be made under the same
application. The countries normally covered by the various applications and
designated under the PCT system are the UK, the US, Canada, Japan and European
countries which are parties to the European Patent Convention (EPC) or the PCT.
Applications in respect of additional countries are filed in certain cases. A
PCT application fragments during its pendency into a number of national and
regional (for example, EPC) applications. An EPC application matures on grant
into a European patent, which, if appropriate action is taken, can be regarded
as a bundle of national rights equivalent to a collection of national patents
in the countries designated.

There can be no assurance that patents will be granted on pending applications
made by the Group or parties that have licensed their inventions to the Group
or that any issued patents will provide significant proprietary protection or
commercial advantage or will not be infringed or designed around by others.
Since publication of inventions or discoveries in scientific or patent
literature often lags behind actual invention or discovery, Vernalis cannot be
certain that it was the first to make the inventions covered by each of its
pending patent applications or that it was the first to file applications for
such inventions. There can be no assurance that Vernalis patents or patent
applications will not become involved in opposition proceedings instituted by
third parties. If such proceedings were initiated against Vernalis rights, the
defence of such rights could involve substantial costs and the outcome cannot
be anticipated. If patents are issued to other parties that contain valid
claims that are interpreted to cover any of Vernalis products, there can be no
assurance that the Group would be able to obtain licenses to such patents at a
reasonable cost, if at all, or be able to develop or obtain alternative
technology. Competitors or potential competitors may have filed applications
for, may have received patents covering, or may obtain additional patents and
proprietary rights that may relate to, compounds or processes competitive with
those of Vernalis.

Vernalis also relies upon unpatented proprietary technology, and no assurance
can be given that others will not independently develop substantially
equivalent proprietary technology and techniques, or otherwise gain access to
the Groups proprietary technology or disclose such technology, or that the
Group can meaningfully protect its rights to its unpatented proprietary
technology, secrets and know-how.

It is Vernalis policy generally to require its consultants, outside scientific
collaborators, sponsored researchers and other advisors to execute
confidentiality agreements prior to the commencement of consulting or other
relationships with the Group. Employees have a similar confidentiality
provision in their employment contracts. These agreements provide that all
confidential information developed or made known to the individual during the
course of the individuals relationship with the Group is to be kept
confidential and not disclosed to third parties except in specific, limited
circumstances. Vernalis also requires signed confidentiality or material
transfer agreements from any person who is to receive confidential data or
proprietary material from Vernalis. In the case of consultants, the agreements
generally provide that all inventions conceived by the individual while
rendering services to the Group shall be assigned to Vernalis as the exclusive
property of Vernalis. Similar provisions are contained in Vernalis employment
contracts, and provisions of many national laws provide that intellectual
property rights created during the course of employment belong to the employer.
There can be no assurance, however, that these agreements and provisions will
provide meaningful protection or adequate remedies for the Groups intellectual
property rights, trade secrets or other confidential information in the event
of unauthorized use or disclosure.




J Competition

The biotechnology and pharmaceutical industries are characterized by rapidly
evolving technology and intense competition. Vernalis competitors include
major pharmaceutical, chemical and specialized biotechnology companies, many of
which have financial, technical and marketing resources significantly greater
than those of the Group. In addition, many biotechnology companies have formed
collaborations with large, established companies to support research,
development and commercialization of products that may be competitive with
those of the Group. Academic institutions, governmental agencies and other
public and private research organizations are also conducting research
activities and seeking patent protection and may commercialize products on
their own or through collaborations. Vernalis is aware of certain products
manufactured or under development by competitors that are used for the
prevention or treatment of certain diseases and health conditions which the
Group has targeted for product development. The existence of these products, or
other products or treatments of which the Group is not aware, or products or
treatments that may be developed in the future, may adversely affect the
marketability of products developed by the Group.

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Vernalis products under development are expected to address a broad range of
markets. Vernalis competition will be determined in part by the potential
indications for which the Groups products are developed, and ultimately
approved, by regulatory authorities. In addition, the first pharmaceutical
product to reach the market in a therapeutic or preventive area is often at a
significant competitive advantage relative to later entrants to the market.
Accordingly, the relative speed with which Vernalis or its collaborative
partners can develop products, complete clinical trials and approval processes,
and supply commercial quantities of the products to the market are expected to
be important competitive factors. The Groups competitive position will also
depend on its ability to attract and retain qualified scientific and other
personnel (current retention rates remain at normal levels), develop effective
proprietary products, develop and implement production and marketing plans,
obtain and maintain patent protection and secure adequate capital resources.
Vernalis expects its products, if approved for sale, to compete primarily on
the basis of product efficacy, safety, patient convenience, reliability, value
and patent position.

The biotechnology sector, both in the United States and Europe, has recently
been characterized by rapid consolidation as biotechnology companies strive to
combine their forces to address the shortage of equity and debt financing due,
in part, to the difficult global trading environment. In light of these
industry developments and of the fact that Vernalis cash reserves will not
suffice to support its existing operations beyond calendar 2004, Vernalis
management is considering a number of options to maintain Vernalis business
beyond calendar 2005, including entering into business combinations with other
biotechnology companies that could provide liquidity, enhance Vernalis ability
to exploit its technologies and research and development capabilities, as well
as to reduce costs. If Vernalis is unable to conclude a business combination
or secure alternative ways of financing before the end of calendar 2005, it may
have to curtail all or some of its existing operations as it approaches the end
of its cash reserves. For additional information, see also item 5B, Operating
and Financial Review and Prospects  Liquidity and Capital Resources.




K Material Effects of Government Regulation

The international pharmaceutical industry is highly regulated by numerous
governmental authorities in the US, the UK, Europe and by regulatory agencies
in other countries where Vernalis intends to test or market products it may
develop. National regulatory authorities administer a wide range of laws and
regulations governing the testing, approval, manufacturing, labelling and
marketing of drugs and also review the quality, safety and effectiveness of
pharmaceutical products. These regulatory requirements are a major factor in
determining whether a substance can be developed into a marketable product and
the amount of time and expense associated with such development.

The national regulatory authorities have high standards of technical appraisal.
Consequently, the introduction of new pharmaceutical products generally entails
a lengthy development and approval process. Of particular importance is the
requirement that products be authorized or registered prior to marketing and
such authorization or registration be maintained. Of particular significance in
the US are the US Food and Drug Administration (FDA) requirements covering
research and development, testing, manufacturing, quality control, labelling
and marketing of drugs for human use. A pharmaceutical product cannot be
marketed in the US until it has been approved by the FDA, and then can only be
marketed for the indications and claims approved by the FDA. As a result of
these requirements, the length of time, the level of expenditure and the
laboratory and clinical information required for approval of a New Drug
Application (NDA) or a product license application are substantial and can
require a number of years, although recently revised regulations are designed
to reduce the time for approval of new products. In Europe, two systems for
the registration of pharmaceutical products are in operation, the centralized
procedure and the mutual recognition procedure. In the centralized system,
review of the proposed new product is co-ordinated by the European Medicines
Evaluation Agency (EMEA) located in London and, if the product is found to meet
the criteria for marketing authorisation, a European Marketing Authorisation is
granted which is valid throughout the EU. In the mutual recognition procedure,
the initial review is undertaken by the national health Authority of one of the
EU member states and, if this country considers the product acceptable for
marketing authorisation, the other EU member states are asked to recognise this
approval and issue their own authorisation. The mutual recognition procedure
thus results in a national authorisation in each member state. However,
irrespective of the procedure followed, the technical requirements for
marketing authorisation are the same. For European countries that are outside
the EU, national marketing authorisation procedures with similar technical
standards exist. Vernalis anticipates that the introduction of new products
will continue to require substantial effort, time and expense in order to
comply with regulatory requirements.

No new drug is permitted to be sold in developed countries without extensive
data on its quality, safety and efficacy first being obtained, organized and
submitted to governmental regulatory authorities. The development stage of
this process may be divided into two parts: (i) pre-clinical; and (ii) clinical
development. Included in pre-clinical development are the development of
processes for manufacturing the product candidate, toxicology studies and other
activities such as pharmacology and drug metabolism studies. Clinical trials
run until, and in some cases after, the product is marketed and cover several,
sometimes overlapping, phases.

In Phase I trials, a small number of healthy human volunteers are exposed to a
product candidate. Typically, the volunteers are administered single or
multiple doses, following which the effects of the candidate drug are closely
monitored. The way the body deals with the product candidate from
administration to elimination (pharmacokinetics) is also studied. Phase II
trials involve the first studies on patients and explore the doses required to
produce the desired benefits.Safety and pharmacokinetic information is also collected.
Phase III trials typically involve larger numbers of patients and geographically
dispersed test sites. The trials in this Phase may compare the new agent with
other available treatments. In Phase III trials, costs are significantly higher
than in earlier Phases due to the larger number of patients and longer duration
of trial. In respect of Vernalis portfolio, this would be particularly true in
the case of BB-10153.

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In addition to the forms of regulation referred to above, the prices of
pharmaceutical products in many countries are controlled by law. In some
countries, such as France and Japan, the prices of individual products are
regulated. By contrast, in the UK, prices are controlled by reference to
limits upon the overall profitability, measured by the rate of return on
capital employed, of sales of products supplied under the UK National Health
Service. The permitted rate of return on capital employed for each
pharmaceutical company is determined through negotiations with the UK
Department of Health under the 1999 Pharmaceutical Price Regulation Scheme. If
a companys actual rate of return exceeds the agreed rate, it is required to
negotiate either a repayment of past profits which the Department of Health
considers to be excessive or future price reductions. There is no assurance
that the current arrangements will continue in the future.

Governments may also influence the price of pharmaceutical products through
their control of national healthcare organizations which may bear a large part
of the cost of supply of such products to consumers. In the US and Germany,
indirect pressure can be exerted on prices by government funded or private
medical care plans.

Vernalis is unable to predict whether, or to what extent, its business may be
affected by legislative and regulatory developments relating to specific
pharmaceutical products or the pricing of such products, or to its overall
business. The uncertainties involved, or any adverse regulatory developments,
could significantly affect the Groups operational results and its ability to
achieve profitability.




L Organizational Structure

Within the Vernalis Group, Vernalis is the holding company listed on the London
Stock Exchange and quoted on NASDAQ.

The two principal operating subsidiaries during fiscal 2003 were Vernalis
(Oxford) Limited, formerly British Biotech Pharmaceuticals Limited, (research
and development) and from April 23, 2003, Vernalis (Cambridge) Limited,
formerly RiboTargets Limited (research and development). Following the merger
with Vernalis Group, Vernalis now also has two further operating subsidiaries,
Vernalis Research Limited (research, development and commercialisation) and
Vernalis Development Limited (research, development and commercialisation. At
April 30, 2003, the Company had the following wholly-owned subsidiary
undertakings:

|                                                                                                     |  |                    |  |              
|---------------------------------------------------------------------------------------------------- |  | ------------------ |  | -------------
|Subsidiary Undertaking                                                                               |  | Nature of business |  | Incorporation
|                                                                                                     |  |                    |  |              
|Vernalis (Oxford) Limited (previously British Biotech Pharmaceuticals                                |  | R&D                |  | E&W          
|- RiboTargets Limited (previously Neures Limited)                                                    |  | Dormant            |  | E&W          
|- British Biotech Pharmaceuticals Limited (previously                                                |  | Dormant            |  | E&W          
|Lanehawk Limited and Heptagen Limited)                                                               |  |                    |  |              
|Oxford Gene Systems Limited                                                                          |  | Dormant            |  | E&W          
|British Biotech Services Limited                                                                     |  | Support Services   |  | E&W          
|British Biotech International Limited                                                                |  | Pharmaceuticals    |  | E&W          
|British Biotech Investments Limited                                                                  |  | Holding company    |  | E&W          
|- British Biotech (UK) Limited                                                                       |  | Pharmaceuticals    |  | E&W          
|- British Biotech Americas Inc.                                                                      |  | Holding company    |  | USA          
|- British Biotech Inc.                                                                               |  | Non-trading        |  | USA          
|BB Pharmaceuticals limited                                                                           |  | Dormant            |  | E&W          
|British Bio-technology Products Limited                                                              |  | Dormant            |  | E&W          
|British Bio-technology limited                                                                       |  | Dormant            |  | E&W          
|British Biotech Limited (previously Genalife Limited)                                                |  | Dormant            |  | E&W          
|RiboTargets Holdings PLC                                                                             |  | Holding company    |  | E&W          
|Vernalis (Cambridge) Limited (previously RiboTargets Limited)                                        |  | R&D                |  | E&W          
|Since April 30, 2003 the following subsidiaries have been acquired                                   |  |                    |  |              
|Intrica Pharma Limited                                                                               |  | Dormant            |  | E&W          
|Intrica Pharmaceuticals Limited                                                                      |  | Dormant            |  | E&W          
|Vallesco Limited                                                                                     |  | Dormant            |  | E&W          
|Vallesca Limited                                                                                     |  | Dormant            |  | E&W          
|Vallesco Pharmaceuticals Limited                                                                     |  | Dormant            |  | E&W          
|Vallesca Pharmaceuticals Limited                                                                     |  | Dormant            |  | E&W          
|Following the merger with Vernalis Group plc the Group now also includes the following subsidiaries: |  |                    |  |              
|Vernalis Group Plc*                                                                                  |  | Holding company    |  | E&W          
|- Vernalis Development Limited (previously Vernalis Limited)                                         |  | R&D                |  | E&W          
|- Vernalis Research Limited                                                                          |  | R&D                |  | E&W          
|- Vernalis Group Share Scheme Trustees Limited                                                       |  | Trust              |  | Jersey       
|- Vernalis Corporation                                                                               |  | Dormant            |  | USA          
|- Vanguard Medica Limited                                                                            |  | Dormant            |  | E&W          
|- Cerebrus Limited                                                                                   |  | Dormant            |  | E&W          
|- CereXus Limited                                                                                    |  | Dormant            |  | E&W          
|- Cerberus Inc.                                                                                      |  | Dormant            |  | USA          

*Vernalis Group Plc Limited is not wholly owned by the Company but on September 23, 2003, Vernalis held approximately 91.58% of the issued shares in Vernalis
Group Plc and Vernalis is in the process of acquiring the remaining shares in Vernalis Group Plc in accordance with Sections 428 to 430 of the Companies Act 1985.
This compulsory acquisition process is expected to be concluded on or shortly after November 4, 2003.

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M Property, Plant and Equipment

Vernaliss headquarters are in Winnersh and Vernalis has research and
development facilities in both Winnersh and Cambridge. The complete schedule
of Vernalis offices, laboratory and storage facilities is:-

|                        |  |                                                                   |  |           |  |                   |  |                 
|----------------------- |  | ----------------------------------------------------------------- |  | --------- |  | ----------------- |  | ----------------
|Property                |  | Description                                                       |  | Title     |  | Location          |  | Approximate area
|                        |  |                                                                   |  |           |  |                   |  | (square metres) 
|Oakdene Court           |  | Office and laboratory facilities                                  |  | Leasehold |  | Winnersh, Reading |  | 4,400 sq m      
|Granta Park (Phase I)   |  | Office and laboratory facilities                                  |  | Leasehold |  | Cambridge         |  | 2,608           
|Granta Park (Phase II)  |  | Office and laboratory
facilities - unoccupied                     |  | Leasehold |  | Cambridge         |  | 2,418           
|4-10 The Quadrant       |  | Offices and laboratory
facilities, leased to Celltech
R&D Limited |  | Leasehold |  | Oxford            |  | 1,944           
|Thames Court            |  | Office and laboratory facilities                                  |  | Freehold  |  | Oxford            |  | 2,525           
|Brook House             |  | Office and laboratory
facilities, largely unoccupied              |  | Freehold  |  | Oxford            |  | 2,396           
|Cherwell House          |  | Stores, largely unoccupied                                        |  | Freehold  |  | Oxford            |  | 1,196           
|Cherwell House car park |  | Car park                                                          |  | Freehold  |  | Oxford            |  |                 
|Ex British Gas Site     |  | Car parking                                                       |  | Freehold  |  | Oxford            |  | 2,196           

These properties are believed to be in good condition. Vernalis has a
continuing program of repair and improvement considered appropriate to meet the
needs of Vernalis.

Vernaliss operations in Oxford are currently being wound down and the Company
is looking to sell or let its freehold properties (Thames Court, Brook House
and Cherwell House together with the car parks) in Oxford. In July 2003,
Vernalis disposed of its leasehold interest in a fourth neighbouring building
in Oxford, Harrow House.

The leases for the premises at Cambridge expire in 2019. Phase I is currently
operating at close to full capacity. Phase II is currently unoccupied and the
Company is reviewing options for this site.

From November 2003, Vernalis will operate from the sites at Winnersh and Granta
Park (Phase I), Cambridge. The lease of the premises at Winnersh expires in
2017, with the option to terminate early in 2012. The lease of Granta Park
(Phase I), Cambridge expires in 2019. These premises provide adequate
facilities for the operations of Vernalis in the short term. Manufacturing of
clinical trial supplies and commercial supplies of frovatriptan is
subcontracted to third party manufacturers who comply with nationally and
internationally accepted quality standards, including GMP, GLP and GCP. The
Company has no plans to establish its own manufacturing capability in the
foreseeable future.

The properties of Thames Court and Brook House are held under mortgage (see
Note 13 to the Notes to the Consolidated Financial Statements).

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Environmental

Vernalis carries out its research and development operations in the UK and is
therefore subject to the environmental regulation of the UK.

Vernaliss commitment to environmental issues is managed through the Health and
Safety Management Committee. Implementation of procedures, which aim to comply
with recognised national standards, has ensured that all activities with
potential environmental effects are identified and documented with controls
implemented to minimise the impact of the Vernaliss business activities upon
the environment.

Vernalis is subject to regulation regarding health and safety, disposal of
waste products and maintenance of systems to ensure that there is no ground or
groundwater contamination through accidental spillage of chemical or biological
material. The Group believes that it has satisfied the UK National Rivers
Authority with its operational methods to prevent any spillage from draining
into the natural water system in the soil or local watercourses. Vernalis
adheres to UK Health & Safety Executive approved Codes of Practice and regular
audits ensure that high standards are achieved both operationally and in the
development of facilities.

The use of hazardous materials is a necessary part of the Vernaliss activities
in pharmaceutical research and development. Assessment of risks to health and
environmental impacts is therefore integral to all operations, ensuring a safe
working environment as well as contributing to business risk management. During
fiscal 2003, all biological work continued to be reviewed to ensure compliance
with the UK Genetically Modified Organisms (Contained Use) Regulations 2000.

Vernaliss accident and incident reporting system incorporates causal analysis
and ensures appropriate remediation. As a result, Vernalis is able to report
that there were no releases to the environment, no reportable accidents and
only a few minor accidents/incidents during the past fiscal year.

The precise costs of complying with the various environmental laws and
regulations relating to the Groups operations are embedded in the costs of
conducting the Groups business. These are difficult to individually quantify
since they are linked with health, safety, and other regulatory and legal
compliance. The Group has no reason to believe however that the costs incurred
by the Group vary significantly from those incurred by other comparable
companies employed in similar business.

At April 30, 2003 there were no pending or threatened legal proceedings
relating to environmental regulations or legislation, nor have any internal
reviews revealed any situations of likely future environmental liability of any
major significance.




ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS

The operating and financial review under this Item relates primarily to British
Biotech plc for the fiscal periods prior to the merger with Vernalis Group
(under UK merger accounting). Certain post-balance sheet information has been
included to reflect material effects of the acquisition on the Groups
financial condition and other material information as of the date of the
filing.




A Results of Operations

The Groups principal activity since its foundation in 1986 has been
pharmaceutical research and product development, conducted both on its own
behalf and through various collaborative research and development agreements
with other companies. From 1987 until July 1993, Vernalis also supplied
research products to third parties through British Bio-technology Products
Limited (BBP). In July 1993, BBP was sold for $2.3 million to Techne
Corporation Inc.

The Group has made losses since its foundation. As at April 30, 2003, the
Groups accumulated losses were £305,215,000, as compared to £287,116,000 at
April 30, 2002 and £270,073,000 at April 30, 2001.

The Groups continuing revenues have been derived primarily from licensing and
collaborative research and development agreements with additional revenue from
government research grants. In addition, the Group has earned substantial
interest income from its cash balances held with banks over the period under
review (see Note 5 of Notes to the Consolidated Financial Statements). The
licensing and collaborative research and development revenues include research
support fees, milestone payments and product option and licensing fees.

The Groups losses fluctuate from year to year principally due to the
commencement or termination of collaborative research and development
agreements, the timing of milestone payments under those agreements, the timing
of product option and licensing fees, government grants, the level of interest
income and variations in the level of expenditures

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relating to research and clinical development programs. In addition, in fiscal
2004, the Group expects to receive operating revenues through royalties for
sales of frovatriptan in the United States and the European Union. In addition
to royalties, under the terms of its license arrangements with the Group, Elan
is required to pay the Company a $15 million milestone payment if net sales by
Elan and UCB in North America exceed $100 million in a 12 month period.
Accordingly, the timing and extent of royalty payments and of milestone
payments, if any, may vary considerably depending on the sale of frovatriptan.
Half-yearly results of operations are expected to fluctuate significantly in
the future, and the Group expects to incur continued losses in coming years.

The Group continues to incur the greater part of its costs on personnel and
external contract costs needed to support the research and development of
pharmaceutical products, including expenses related to the filing, defense and
enforcement of patent and other intellectual property rights. Other
significant costs have been incurred in 2003 in relation to the acquisition of
RiboTargets and terminated deal costs in connection with the aborted merger
discussions with MorphoSys AG.

On April 22, 2003 the Company acquired RiboTargets Holdings plc. The
acquisition of RiboTargets Holdings plc has been accounted for under purchase
accounting. The Companys intangible assets increased to £10 million (2002 :
£2 million) due to the addition of £8.2 million of goodwill arising on the
merger, which is being written off through the income statement in three years
(under UK GAAP). The amortization charge for fiscal 2003 amounted to £60,000.
Other reserves increased to £30 million (2002 : £10 million) as a result of the
issue of 33 million ordinary shares in connection with the merger. Debtors
increased to £7.1 million (2002 : £3.1 million) due principally to increases in
R&D tax credit and VAT receivable as a result of merger-related expenses. A
total of £14.8 million of cash and short term investments (net of expenses of
acquisition) were received on completion of the transaction. For the year
ended December 31, 2002, RiboTargets Holdings plc had reported a net loss of
£7.7 million on total revenues of £2.2 million. RiboTargets Holdings plc had
net assets at that date of £4.3 million, with net cash and cash equivalents and
short-term deposits of £4.3 million.

On September 23, 2003, the Company (then British Biotech plc) completed an
offer for the ordinary shares of Vernalis Group plc and on October 1, 2003 the
Company was renamed Vernalis plc. The operating results of the Company for the
year ended April 30, 2003 do not reflect the merger with Vernalis Group (under
UK merger accounting) which will be reflected under purchase accounting in the
Companys financial statements for the year ending April 30, 2004. For the
year ended December 31, 2002, Vernalis Group plc had reported a net loss of
16.1 million on total revenues of £5.9 million. Vernalis Group also had £18
million of research and development expenses and £7.1 million administrative
expenses during the same period. Vernalis had net liabilities at that date of
£0.3 million, with net cash and cash equivalents and short-term deposits of
£9.1 million. In May 2003, Vernalis Group plc had conducted a rights issue
raising approximately £14.1 million net of expenses.

Fiscal Years 2003, 2002 and 2001

Total revenues were £1,078,000 in fiscal 2003, £1,450,000 in fiscal 2002 and
£1,588,000 in fiscal 2001. Of this, revenues from collaborative agreements
were £988,000 in fiscal 2003, £1,378,000 in fiscal 2002 and £1,300,000 in
fiscal 2001and grant and other licensing revenues were £90,000 in fiscal 2003,
£72,000 in fiscal 2002 and £288,000 in fiscal 2001.

Profit and Loss Account

Collaborative revenues in 2003, 2002, and 2001 were derived from the
collaborations with Serono and in 2003 also derived from the collaboration with
GeneSoft Pharmaceuticals. Under the agreement with Serono to develop
metalloenzyme inhibitors for serious inflammatory disease, £0.6 million of the
£3.3 million received in November 2000 was recognised as income in fiscal 2003,
£1.4 million in fiscal 2002 and £1.3 million in fiscal 2001. Under the
agreement with GeneSoft to develop bacterial metalloenzyme inhibitors as novel
antibiotics, £0.4 million of the £3.2 million received from GeneSoft was
recognised as income in fiscal 2003.

Grant revenue in fiscal 2003, fiscal 2002 and fiscal 2001 relates to a number
of agreements with the UK Department of Trade and Industry (DTI), and in fiscal
2003 also relates two Fifth (EC) Framework programs with the EU.

Research and development expenditure was £14,544,000 in fiscal 2003,
£21,256,000 in fiscal 2002 and £23,724,000 in fiscal 2001. Research and
development expenditure in fiscal 2003 decreased by £6.7 million to £14.5
million due to reduced infrastructure costs of £4.5 million and reduced
expenditure on the product portfolio of £2.2 million. The decrease in fiscal
2002 was due to the transfer of pre-clinical facilities to OSI offset by an
increase in share option expense.

Profit on disposal of fixed assets of £2,505,000 in fiscal 2002 arose from the
transfer of certain pre-clinical facilities to OSI in September 2001. Amounts
written off investments were £799,000 in fiscal 2003 and £324,000 in fiscal
2002. In each year, this consists of an estimate of the permanent impairment in
the value of certain investments by reference to their market value.

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Net interest income was £1,435,000 in fiscal 2003, £2,542,000 in fiscal 2002
and £3,449,000 in fiscal 2001. The decrease in net interest during fiscal 2003
and, fiscal 2002 was due to reduced average cash balances and falling interest
rates. See Item 5B. Liquidity and Capital Resources. Interest expense
amounting to £219,000 in fiscal 2003, £278,000 in fiscal 2002 and £329,000 in
fiscal 2001 consists of payments on a fixed-rate mortgage by a fixed charge
secured on three of the Groups freehold properties and on various finance
leases.

Vernalis Group had £18,000,000 research and development expenditure and
£7,057,000 administrative expenses during fiscal 2002.




B    Liquidity and Capital Resources

Since Vernalis foundation, cash expenditures have exceeded revenues. The
Group has financed its research and development operations primarily by the
issuance of equity securities, acquisitions, revenues from joint development
and licensing agreements, interest earned on cash deposits and a mortgage of £4
million.

The Groups net cash and cash equivalents and short-term deposits were
£43,926,000 at April 30, 2003, £50,398,000 at April 30, 2002 and £64,990,000 at
April 30, 2001. Cash equivalents and short term deposits are predominantly
held in UK sterling. The £6,472,000 decrease in fiscal 2003 compared with
fiscal 2002 comprises £20,706,000 of cash utilised by operations and £665,000
of financing repayments offset by net cash and cash equivalents and short-term
deposits acquired with RiboTargets Holdings plc of £14,870,000 and exchange
gains of £29,000. The cash utilised by operations of £20,706,000 comprises
£23,278,000 on operating activities and £775,000 on capital expenditure offset
by net interest income of £1,666,000 and a tax refund of £1,681,000. The
£14,592,000 decrease in fiscal 2002 compared with fiscal 2001 comprises
£14,268,000 of cash utilised by operations and £342,000 of financing repayments
offset by exchange gains of £18,000. The cash utilised by operations of
£14,268,000 comprises £19,309,000 on operating activities and £4,578,000 on
capital expenditure offset by the net proceeds of sale of tangible fixed assets
to OSI Pharmaceuticals of £7,264,000, net interest income of £2,351,000 and a
tax refund of £4,000. The £10,684,000 decrease in fiscal 2001 compared with
fiscal 2000 comprises £10,365,000 of cash utilised by operations and £381,000
of financing repayments offset by exchange gains of £62,000. The cash utilised
by operations of £10,365,000 comprises £21,738,000 on and operating activities
and £3,611,000 on capital expenditure offset by proceeds of £11,198,00 on the
sale and leaseback of property, net interest income of £3,656,000 and a tax
refund of £130,000.

In fiscal 2003, capital expenditure was £997,000 on plant and machinery and
laboratory and office refurbishment, offset by proceeds from the sale of assets
of £222,000. Capital expenditure was £4,578,000 in fiscal 2002, comprising
£1,801,000 on plant and machinery and laboratory and office refurbishment,
£1,406,000 on the purchase of investments in collaborators and £1,371,000 on
payments to third parties to acquire licenses to develop their intellectual
property. Capital expenditure in fiscal 2002 was offset by proceeds from the
sale of assets of £7,264,000. Capital expenditure was £3,611,000 in fiscal
2001, comprising £752,000 on plant and machinery, £1,623,000 on the purchase of
investments in collaborators and £1,236,000 on payments to third parties to
acquire licenses to develop their intellectual property. Capital expenditure
in fiscal 2001 was offset by proceeds from the sale of assets of £11,198,000.

During fiscal 2002, the Group sold certain of its pre-clinical facilities to
OSI (see Item 4A, Information on the Company  History and Development of the
Company and Item 4B, Information on the Company  Business Overview above).
The proceeds from this transaction increased the Groups cash reserves while
the resulting reduction of infrastructure costs and headcount reduced the
Groups expenses.

The Group reports its results and states its balance sheets in English pounds
sterling. Where revenues are earned or expenditure incurred in other
currencies, the results are exposed to fluctuations in the exchange rates and
may give rise to gains and losses. Similarly where monetary assets and
liabilities are denominated in foreign currencies, the balance sheet is exposed
to foreign currency fluctuations.

The Group plans to generate its commercial returns through milestones and
royalties from frovatriptan and by actively seeking partners for its products
in all territories in the world while retaining commercialization rights for
certain products in niche markets (see Item 4B. Overview  Business Strategy).
Its cash resources will be used to expand and progress the portfolio of
development products and research programs principally focused on oncology and
diseases of the central nervous system. Substantial increases in
administrative support costs, marketing and commercialization expenditure will
only be incurred once product approvals are certain.

The Group maintains a policy of conservative cash management by placing surplus
funds on deposit with a range of major international banks and building
societies. Short-term deposits are for fixed terms at fixed rates of interest
and the investment objective is to achieve market returns while protecting the
capital value. Short term investments are investments in a money market
managed fund that is repayable within 48 hours. The Group does not have any
committed or uncommitted bank facilities. The Group does not enter into
derivative financial arrangements to manage foreign exchange risk. The Groups
operations do not have significant assets or liabilities denominated in
currencies other than sterling or US dollars respectively. Wherever possible,
expenditure in foreign currencies is matched with receipts in the same currency
(see Item 11. Quantitative and Qualitative Disclosures about Market Risk).

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The Groups future revenues, liquidity and capital requirements are dependent
upon several factors, including, but not limited to, its success in generating
significant revenues from partnerships and/or sales; the time and cost required
to manufacture and find partners for its products; the time and cost required
for clinically developed products to obtain regulatory approvals; competitive
technological developments; additional government-imposed regulation and
control; and changes in healthcare systems which affect reimbursement, pricing
or availability of drugs and market acceptance of drugs. In addition, the
Group may require additional financing to fund the acquisition costs of
acquiring additional products. If needed, there can be no assurance that such
facilities can or will be obtained on reasonable terms, if at all.

As at September 30, 2003, the Group had net cash and short term deposits of
£44.7 million subject to a long-term loan of £7 million that was acquired with
Vernalis Group and that has become immediately repayable as a result of the
transaction. The Groups primary source of operating cash are royalties
received with respect to sales of its only marketed product, frovatriptan, in
the United States and the European union. In addition to royalties, under the
terms of its license arrangements with the Group, Elan is required to pay the
Company a $15 million milestone payment if net sales by Elan and UCB in North
America exceed $100 million in a 12 month period. As the financial position of
the Group currently stands, Vernalis has insufficient cash reserves to continue
its existing operations beyond calendar 2004. The Groups management is
considering a number of options to maintain the Groups business beyond
calendar 2005, including entering into business combinations with other
biotechnology companies that could also enhance the Groups ability to exploit
its technologies and research and development capabilities, as well as to
reduce costs The Group may also seek to raise additional funds through public
equity offerings and/or offerings of debt securities or preferred shares, the
terms of which may impose restrictions on the Groups operations and financial
management. There can be no assurances that such offering would be available,
or, if available, that it would be on commercially reasonable terms. If the
Groups plans or assumptions are inaccurate, it might need to seek capital
sooner than currently anticipated. If the Group is unable to secure additional
funding the Group may be required to delay, reduce or eliminate some or all of
its programs or otherwise readjust its business plan to reduce costs.

Capital expenditure commitments contracted for but not provided for at April
30, 2003 were £102,000. Expenditure of £350,000 had been authorised but not
contracted for at April 30, 2003.

The Group has a secured loan outstanding that is secured over the Groups
freehold properties. The total amount outstanding at April 30, 2003 was
£1,620,000. This is repayable quarterly in equal instalments over the
remaining seven years of the loan. Following the merger with Vernalis Group
plc (under UK merger accounting) the Company acquired significant liabilities
of £19,640,000.. Of this amount Roche has the right to request immediate
repayment of £7 million. For information on the payments under the contract
between Vernalis Group and Glaxo Smithkline to which the company has succeeded,
see Item 4D, Information on the Company  Commercial Collaborations.

The Group has finance leases outstanding totalling £1,269,000 at April 30, 2003

Research and Development Programmes

Included within Research and Development Expenditure is the following external expenditure on research and development projects.

|                                           |  |      |        |      |  |      |        |  |  |  |        | 
|------------------------------------------ |  | ---- | ------ | ---- |  | ---- | ------ |  |  |  | ------ | 
|                                           |  | 2003 |        | 2002 |  | 2001
|                                           |  | £000 |        | £000 |  | £000
|Marimastat                                 |  |      | 399    |      |  |      | 1,623  |  |  |  | 3,137  | 
|BB-10901                                   |  |      | 662    |      |  |      | 1,078  |  |  |  | 974    | 
|BB-10153                                   |  |      | 1,781  |      |  |      | 2,742  |  |  |  | 953    | 
|Anti Infective programme                   |  |      | 2,227  |      |  |      | 1,218  |  |  |  | 802    | 
|Serono collaboration                       |  |      |        |      |  |      |        |  |  |  | 1,522  | 
|E21R                                       |  |      |        |      |  |      | 654    |  |  |  |        | 
|BB-94 Stent                                |  |      | 528    |      |  |      | 964    |  |  |  |        | 
|MG98                                       |  |      | 900    |      |  |      |        |  |  |  |        | 
|Other R and D projects and Infrastructure  |  |      | 8,047  |      |  |      | 12,977 |  |  |  | 16,336 | 
|Total Research and Development Expenditure |  |      | 14,544 |      |  |      | 21,256 |  |  |  | 23,724 | 
|                                           |  |      |        |      |  |      |        |  |  |  |        | 

See Item 4B , Information on the Company  Marketed Products and Product Development Programmes, for further information
of the current status of the development programmes.

36



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##### Table of Contents



See Item 4D , Information on the Company   Commercial Collaborations, for further information on the status of research and
development collaborations

See Item 3 D Risk Factors for the risks associated with bringing drug candidates to market.

The major risk to all research and development projects is that the company currently has insufficient funding to last beyond
calendar 2004. If the company cannot fund new research and development then it will not bring its current drug candidates
to market.

Application of Critical Accounting Policies

Revenue

The Group enters into collaborative research agreements whereby other
pharmaceutical and biotechnology companies assist in the research and
development of Vernalis intellectual property. Under these collaborations,
the Group receives revenue from the collaborator and participates with them in
the future research and development of the program. The Group receives revenue
from these agreements that are related either to the achievement of specified
objectives or to a commitment of resources by the Group over a period of time.
Revenues related to the achievement of specific objectives are recognised when
those objectives have been met. Revenues which are related to the commitment
of resources over a period of time are recognised in proportion to the work
completed. In August 2002, Vernalis entered into a collaborative agreement
with GeneSoft Inc. and received an initial payment of £3.2 million. This is
being recognised over the initial period of the research agreement and at April
30, 2003 an amount of £2,848,000 has yet to be recognised. In October 2000,
Vernalis entered into a collaborative agreement with Serono S.A. and received
an initial payment of $5 million (£3.3 million). This has been recognised as
revenue over the initial two-year period of the research agreement and at April
30, 2003 an amount of nil had yet to be recognised.

Goodwill and Intangible Assets

Vernalis has entered into in-licensing arrangements with other pharmaceutical
and biotechnology companies for which payments are made, first, to acquire
licenses to develop their intellectual property and, second, in relation to the
achievement of specific research and development milestones. Under UK GAAP,
the Group is required to capitalise these payments as intangible fixed assets
and amortise them over their expected useful life. The expected useful life is
based upon the shorter of the length of the agreement or the expected patent
life, and is subject to an impairment review which is based on the net present
value of expected returns from the arrangement. Under US GAAP, these payments
are subject to an additional review and may only be recognised as an asset if
an alternative primary use exists for the product or technology. Vernalis
believes that such an alternative primary use does not exist for the acquired
products and, under US GAAP, has made an additional charge of £1,089,000 for
the year ended April 30, 2001 and £898,000 for the year ended April 30, 2002
reducing the carrying value of intangible fixed assets to zero.

Under UK GAAP the shares issued to acquire RiboTargets Holdings plc were valued
at the market price at the date of acquisition on 23 April, 2003. Under US
GAAP the shares issued were valued at the average market price for three days
before and after the announcement of the acquisition on March 21, 2003. The
movement of the Companys share price between these dates and methods increases
the value of the purchase price by £4.0 million. In accordance with US GAAP
(EITF 95-3) an adjustment was made to the opening net assets position under UK
GAAP to reflect the redundancy costs arising following a reorganization of the
Group after acquisition. In accordance with UK GAAP, these costs were expensed
in 2003.

Under US GAAP, purchase price is allocated to all tangible and identifiable
intangible assets based upon estimated fair value at the date of acquisition.
For US GAAP purposes, fair values have been assigned to intangible assets which
included in-process research and development (£5.0 million) and technology
platform (£2.5 million). The specifically identifiable intangible assets have
not been recognised under UK GAAP as they do not meet the criteria for
recognition required by FRS 10, Goodwill and intangible assets.

Under US GAAP the amount of purchase consideration allocated to in-process
research and development is immediately written off to the profit and loss
account. The portion of the purchase price allocated to the technology
platform under US GAAP is amortised over the estimated useful economic life.
Under UK GAAP these amounts are included in goodwill.

37



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The net impact on shareholders funds at April 30, 2003 under US GAAP was:

|                                                 |  |      |        |  
|------------------------------------------------ |  | ---- | ------ | -
|                                                 |  | £000
|Difference in consideration issued under US GAAP |  |      | 4,005  |  
|Less profit and loss impact under US GAAP        |  |      | (4,933 | )
|                                                 |  |      | (928   | )

The movement in goodwill represents the fair value of intangible assets under
US GAAP less the difference in consideration issued and the restructuring
provision.

Fixed Asset Investments

Vernalis has investments in quoted and unquoted stocks acquired as a result of
collaborations with other companies. Under UK GAAP, these investments are
carried at cost less any permanent diminution in value. During the year, under
UK GAAP, provision for the permanent diminution in value of listed investments
was made by reference to the evolution of the market price of the shares and to
reflect the down-turn in share values across the biotechnology sector. As at
April 30, 2003 the carrying value of investments in quoted companies was
£179,000 representing an acquisition cost of £1,623,000 net of a provision of
£1,444,000 for a permanent diminution in value.

Under US GAAP marketable securities are valued at market value, with temporary
diminution in value being taken to other comprehensive income and permanent
diminutions taken to the Statement of Operations. The definition of permanent
is more prescriptive under US GAAP. The market value of securities at April
30, 2003 resulted in a reduction to the realisable value of the securities. At
April 30, 2002 there was no difference in the value of securities between UK
and US GAAP.

As at April 30, 2003, the carrying value of unlisted investments was £928,000
representing an acquisition cost of £1,406,000 net of a provision of £478,000
for a permanent diminution in value.

In September 2003 Vernalis disposed of its holding in CareScience Inc for
$268,787.




C    US GAAP Reconciliation

The Group prepares its Consolidated Financial Statements in accordance with UK
GAAP, which differ in certain respects from US GAAP. A description of the
significant differences and reconciliations of net income and shareholders
equity is in Note 3 of the Notes to the Consolidated Financial Statements.




D    Research and development, patents and licences etc

Under UK GAAP expenditure on research and development is written off in the
year in which it is incurred. Under UK GAAP, certain payments to acquire
licences to products are capitalised as Intangible Fixed Assets under FRS10.
Under US GAAP these payments are written off as in-process research and
development in so far as these products are to be used in research and
development activities and have no future alternative use.




E    Trend Information

The integration of the Company and RiboTargets Holdings plc has been completed,
while detailed plans for the integration of Vernalis Group plc are currently
being implemented. The combined headcount of the three companies which,
collectively, amounted to 271 prior to their consolidation, is expected to be
reduced to approximately 135 when the restructuring is completed. An initial
reduction of 67 was implemented, in connection with the integration of the
Company and RiboTargets Holdings plc, and headcount will be reduced by a
further 70 positions, approximately, during the integration of the Company and
Vernalis Group plc. Most of the reductions will take place in late 2003 and
the integration is expected to be completed early in 2004. As previously
announced, the Company also plans to close its Oxford facility in late 2003,
and then divest it. The merger will create significant cash savings through
focusing on the most commercially attractive research programs and the removal
of duplicate corporate overhead costs. These savings are expected to be
approximately £6.5 million in the first full financial year (to April 30, 2005)
following completion, with a net cash cost of £0.4 million (after recognizing
savings of £1.8 million) in the financial year to April 30, 2004.

Following an extensive portfolio review undertaken subsequent to the
acquisition of RiboTargets Holdings plc and the merger with Vernalis Group plc,
the Company has decided that research and development investment will be
primarily focused in the fields of central nervous system disorders (including
obesity-related targets) and in cancer. In addition, a novel product for the
treatment of thrombotic disorders will continue in development. As part of the
portfolio review, the Company has decided to discontinue certain research
projects and to discuss certain of its existing collaboration agreements with
its commercial collaborators. For additional information on the current status
of the Companys product development and research programs, see above Item 4B, Information on
the Company  Business Overview, Item 4C, Research Programs, and Item 4D,
Commercial Collaborations.

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Frovatriptan, the Companys only marketed product, is approved and marketed in
the United States and Europe for the acute treatment of migraine. By October
2003, 16 months following launch, Frova had achieved a share of approximately
3% of the US market for the triptan class of drugs, according to prescription
data generated by the market research organization IMS Health. In early
October 2003, approximately 11 months after launch in Germany, the first
European territory, ex-pharmacy unit sales of frovatriptan had amounted to
approximately 7.2% of the oral triptan market, according to prescription data
generated by the market research organization IMS Health.

As a result of the change of control of Vernalis Group plc, Roche became
entitled to repayment of a £7.0 million convertible loan made to Vernalis Group
plc in May 2002. Roche retains the right to require repayment of the loan with
accrued but unpaid interest but has not yet exercised its entitlement to
repayment. The Company expects to repay this in the near future. The Group is
of the opinion that the available cash resources of the Group, according to the
current business plan without taking into account any milestone payments from
Elan and assuming repayment of £7.0 million under the convertible loan with
Roche, will be sufficient to fund its operating losses for at least the next 12
months from the date of this annual report. See also above, under Item 5B,
Liquidity and Capital Resources. In addition, the Company is committed to
making three further annual payments of $5 million, by September 2005, in
respect of the loan from GSK.

As the financial position of the Group currently stands, Vernalis has
insufficient cash reserves to continue its existing operations beyond calendar
2004. The Groups management is considering a number of options to maintain
the Groups business beyond calendar 2005, including entering into business
combinations with other biotechnology companies that could also enhance the
Groups ability to exploit its technologies and research and development
capabilities, as well as to reduce costs The Group may also seek to raise
additional funds through public equity offerings and/or offerings of debt
securities or preferred shares, the terms of which may impose restrictions on
the Groups operations and financial management. There can be no assurances
that such offering would be available, or, if available, that it would be on
commercially reasonable terms. If the Groups plans or assumptions are
inaccurate, it might need to seek capital sooner than currently anticipated.
If the Group is unable to secure additional funding the Group may be required
to delay, reduce or eliminate some or all of its programs or otherwise readjust
its business plan to reduce costs.




F    Off-balance sheet arrangements

The Company has no off-balance sheet arrangements that have or are reasonably
likely to have current or future effect on the Companys financial condition,
changes in financial condition, revenues or expenses, results of operations,
liquidity, capital expenditures or capital resources that are material to
investors, other than those listed in section G below.




G    Information about Contractual Cash Payments

The table below shows the contractual obligations and commercial commitments as
at April 30, 2003.

Payments due

|                                         |  |       |        |        |  |           |       |           |              |              |       |  |  |  |       |  |  |  |        | 
|---------------------------------------- |  | ----- | ------ | ------ |  | --------- | ----- | --------- | ------------ | ------------ | ----- |  |  |  | ----- |  |  |  | ------ | 
|                                         |  |       |        |        |  |           |       |           |              | Payments due |       |  |  | 
|                                         |  |       |        |        |  | Less than |       |           |              |              |       | 
|                                         |  | Total |        | 1 year |  | 2-3 years |       | 4-5 years | Over 5 years
|                                         |  | £000  |        | £000   |  | £000      |       | £000      |              | £000        
|                                         |  |       |        |        |  |           |       |           |              |             
|Secured loan                             |  |       | 1,620  |        |  |           | 270   |           |              |              | 540   |  |  |  | 540   |  |  |  | 270    | 
|Obligations under finance leases         |  |       | 1,269  |        |  |           | 770   |           |              |              | 499   |  |  |  |      |  |  |  |       | 
|Operating lease commitments              |  |       | 25,866 |        |  |           | 1,680 |           |              |              | 3,236 |  |  |  | 3,224 |  |  |  | 17,726 | 
|Commitments under license
agreements (i) |  |       | 20,731 |        |  |           | 600   |           |              |              | 1,281 |  |  |  | 2,650 |  |  |  | 16,200 | 
|Capital commitments                      |  |       | 102    |        |  |           | 102   |           |              |              |      |  |  |  |      |  |  |  |       | 
|                                         |  |       |        |        |  |           |       |           |              |              |       |  |  |  |       |  |  |  |        | 
|Total                                    |  |       | 49,588 |        |  |           | 3,422 |           |              |              | 5,556 |  |  |  | 6,414 |  |  |  | 34,196 | 
|                                         |  |       |        |        |  |           |       |           |              |              |       |  |  |  |       |  |  |  |        | 



---

|(i) |  | Commitments under license agreements are contingent upon successful
product development, registration and approval, primarily relating to the
collaboration with MethylGene, and the licence agreement with Monash
University.
In addition the Company has commitments relating to ongoing clinical trials.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Following the merger with Vernalis Group, the Company acquired significant
liabilities £19,640,000 of which £7.0 million under a convertible loan
agreement with Roche has become immediately repayable as a result of this
transaction.

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##### Table of Contents






ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES

The information presented under this Item relates primarily to the Group as of
the date of the filing, other than with respect to compensation information
provided mainly for the reporting fiscal period.




A Directors and Senior Management

The Memorandum and Articles of Association of the Company provide that there
shall be no more than 20 directors and no less than two directors serving on
the Board of Directors at any time.

The Companys Articles of Association provide that at every annual general
meeting of shareholders of the Company (AGM), one-third, or the closest
approximation to one-third, of the Directors will retire by rotation and be
eligible for re-election by the shareholders. The Directors to retire will be
those who have been longest in office or, in the case of those who were
appointed or reappointed on the same day, will be (unless they otherwise agree)
determined by lot. Further, any Director who has been appointed since the date
of the last annual general meeting shall retire and be eligible for re-election
by the shareholders. Finally, any Director who is over the age of 70 at the
date of the annual general meeting shall retire and be eligible for re-election
by the shareholders.

This year the Companys annual general meeting was held on October 1, 2003 at
Barber-Surgeons Hall, Monkwell Square, London EC2Y 5BD. Dr Fellner, Mr Sturge,
Mr Kent, Mr Worrall, Dr Hutchison, Mr Kennedy, Ms Ferguson and Dr Read who were
appointed by the directors since the last annual general meeting, retired in
accordance with Article 86 of the Companys Articles of Association and were
reappointed. Mr Weir retired by rotation and was re-elected.

Certain information concerning the current Directors of the Company is set
forth below. Non-executive Directors are not full-time employees of the
Company.

|                 |  |     |    |                 |  |                                                   |  |                              
|---------------- |  | --- | -- | --------------- |  | ------------------------------------------------- |  | -----------------------------
|Name             |  | Age |    | Position/s Held |  | Period during which
Director
has served in
office
|                 |  |     |    |                 |  |                                                  
|Peter Fellner    |  |     | 59 |                 |  | Executive Chairman                                |  | April 2003  date of filing  
|Simon Sturge     |  |     | 44 |                 |  | Chief Executive Officer                           |  | April 2003  date of filing  
|Anthony Weir     |  |     | 43 |                 |  | Chief Financial Officer                           |  | April 1999  date of filing  
|Peter Worrall    |  |     | 49 |                 |  | Corporate Development Director                    |  | Sept 2003  date of filing   
|John Hutchison   |  |     | 48 |                 |  | Development Director                              |  | Sept 2003  date of filing   
|George Kennedy   |  |     | 63 |                 |  | Deputy Chairman, Senior Independent Director      |  | Sept 2003  date of filing   
|Carol Ferguson   |  |     | 56 |                 |  | Non-Executive Director                            |  | Sept 2003  date of filing   
|Ian Kent         |  |     | 59 |                 |  | Non-executive Director                            |  | April 2003  date of filing  
|Eugene Williams  |  |     | 44 |                 |  | Non-executive Director                            |  | January 2001  date of filing
|Peter Read       |  |     | 64 |                 |  | Non-executive Director                            |  | Sept 2003  date of filing   
|Keith Merrifield |  |     | 61 |                 |  | Non-executive Director                            |  | Dec 1995  date of filing    

No Director is related to any other. Biographical information with respect to
the Directors is as follows:

Peter Fellner

After his election to the Board as a Non-Executive Director in December 2002,
Dr Fellner became Non-Executive Chairman in January 2003, and Chairman with
executive responsibilities in April 2003. Dr Fellner is also Non-Executive
Chairman of Celltech Group plc, having previously been Chief Executive since
1990. Before joining Celltech Dr Fellner was Chief Executive of Roche UK from
1986 to 1990. Prior to this he was Director of the Roche UK Research Centre,
and previously Director of Research for Searle UK Research Laboratories. Dr
Fellner is also Chairman of two privately held biotechnology companies, Astex
Technology Ltd and Ionix Pharmaceuticals Ltd. He is a Director of Isis
Innovation Ltd and is a member of the Medical Research Council.

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##### Table of Contents



Simon Sturge

Mr Sturge was appointed to the Board as Chief Executive in April 2003. He has
more than 20 years experience in the pharmaceutical industry. After graduating
in biology from Sussex University in 1980 Mr Sturge became Product
Manager of Napp Laboratories, Head of Sales and Marketing at Smiths Industries
and Business Development Manager at Astra Pharmaceuticals. He joined Celltech
in 1988 and was appointed Chief Executive of Celltech Biologics plc (now Lonza
Biologics plc) in 1995 before joining RiboTargets Holdings plc as Chief
Executive. He founded RiboTargets in July 1997 when it was spun out from the
Medical Research Councils Laboratory of Molecular Biology with a £7 million
venture capital investment.

Anthony Weir

Mr Weir has a degree in mathematics from Oxford University and is a Fellow of
the Institute of Chartered Accountants. Following qualification he advised a
variety of businesses as a financial consultant, joining Vernalis in 1990 as
Chief Accountant and Company Secretary. In April 1999 he was promoted to the
Board as Finance Director with responsibility for Finance, Corporate
Communications, Legal and Company Secretariat, Facilities and IT. Following the
merger with Vernalis Group he continues as Chief Financial Officer.

Peter Worrall

Mr Worrall was appointed as Corporate Development Director on 1st September
2003 following the merger with Vernalis Group. Mr Worrall joined Vernalis in
1993 and was appointed to the board of Vernalis as Finance Director in February
1997. He then added the office of Company Secretary and from March 2003, he
also took on overall responsibility for the day to day duties and obligations
of the Chief Executive Officer of Vernalis. Prior to joining Vernalis, Mr
Worrall served as Finance Director of Danby Medical, which was acquired by
Baxter Healthcare Corporation in 1993. He has over 22 years experience in the
healthcare industry, including seven years with Imed Corporation becoming
general manager of its UK subsidiary before founding his own company, Isys
Medical, which he sold to Danby in 1991. He received a Masters degree in
economics from the University of St Andrews and qualified as a chartered
accountant with Arthur Andersen in 1980.

John Hutchison

Dr Hutchison was appointed as Development Director on 1st September 2003
following the merger with Vernalis Group. Prior to that he was Senior Vice
President Development and Chief Medical Officer of Vernalis. He was appointed
a director of Vernalis in February 2000 where he was responsible for drug
development. This involves taking potential new therapies from early
pre-clinical testing through to registration and commercialisation. He was
previously a main board director of Cerebrus where he was also responsible for
drug development since joining the company in 1997. Dr Hutchison began his
industrial career 15 years ago as a Clinical Pharmacologist with Fisons, before
moving to Experimental Medicine with Astra Pharmaceuticals Ltd. In addition to
being a UK registered physician, Dr Hutchison has a first class honours degree
in human physiology and a PhD in Neuroscience from the University of Liverpool.
Dr Hutchison is a Fellow of the Royal College of Physicians and a Fellow of
the Faculty of Pharmaceutical Medicine in London.

George Kennedy

Mr Kennedy was appointed as Deputy Chairman and Senior Independent Director on
September 1, 2003. He was Non-Executive Chairman of Vernalis Group from May
2000. He was previously with Smiths Industries PLC from 1973 to 2000, where he
was appointed to the board in 1983, becoming Executive Director and Chairman of
the Medical Division. His other current appointments include non-executive
chairman of Carclo PLC; Chairman of the Inprint Group, a privately held
specialist printing company; Chairman of Eschmann Holdings Limited, a
manufacturer of medical equipment and non-executive director of Isotron PLC. In
August 2000 he was appointed by the Department of Trade and Industry as
Chairman of the Trade Advisory Group for Africa and the Middle East. He was
awarded a CBE in 1997 for services to the healthcare industry and exports.

Carol Ferguson

Carol Ferguson was appointed as a Non-Executive Director on 1st September 2003.
She was appointed to the board of Vernalis Group as a Non-Executive Director
in May 2002. She is a qualified chartered accountant who began her investment
career with Ivory and Sime, an Edinburgh fund management group. Thereafter she
moved to Wood Mackenzie, a then stock broking company, becoming a partner in
1984. Her most recent position was as Finance Director for Timney Fowler, a
textiles company. Her current appointments include the Dental Practice Board,
where she is a non-executive director and chairs the Audit Committee, and the
Chartered Accountants Compensation Scheme where she is a non-executive director. She is also a non-executive director of
Gartmore Smaller Companies Investment Trust plc, Monks Investment Trust plc and
a non-executive director of the Association of Investment Trusts Companies. Ms
Ferguson has a Masters degree in Philosophy and Economics from St Andrews
University and was admitted as a member of the Institute of Chartered
Accountants of Scotland in 1973.

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##### Table of Contents



Ian Kent

Appointed to the Board in April 2003, Mr Kent is also a non-executive director
of Biofocus plc. He is chairman of Ardana Bioscience Limited, Intercytex
Limited, LGC (Holdings) Limited, Etiologics Limited and Adprotech Limited.

Eugene Williams

Appointed to the Board in January 2001, Mr Williams is also Senior Vice
President, Therapeutics and General Manager of immune medicated diseases at
Genzyme Corp. in the US. Mr Williams also sits on the Board of Directors of
Adheris, Inc.

Peter Read

Dr Read was appointed as a non-executive Director on September 1, 2003. He
joined the board of Vernalis Group as a Non-Executive Director in March 1998.
He is a former chairman of the Hoechst Group of Companies in the UK and a past
President of the Association of the British Pharmaceutical Industry. Current
appointments include Non-Executive Directorships of each of Celltech Group plc,
SSL International plc and Innogenetics Group. He is a Board Member of the
South East of England Development Agency and chairs their Business Board. Dr
Read qualified in medicine at the University of London. He is a Fellow of the
Royal College of Physicians and of the Faculty of Pharmaceutical Medicine. In
January 2000 he was awarded a CBE for services to the pharmaceutical industry.

Keith Merrifield

Appointed to the Board in 1995, Mr Merrifield was formerly a main Board
Director of Wellcome plc from 1990 until its acquisition in 1995 by Glaxo
Holdings plc, with responsibility for marketing and international operations.
Until May 2003, Mr Merrifield was also a non-executive director of Coats plc.

Board changes

Mr Christopher Hampson served as Chairman until his resignation from the Board
on 31 December, 2002. He was succeeded as Chairman by Dr Fellner. Dr Elliot
Goldstein served as Chief Executive until his resignation from the Board on 4
November, 2002. Mr Tim Edwards served as Acting Chief Executive until 23 April,
2003, when Mr Sturge became Chief Executive on completion of the acquisition of
RiboTargets Holdings plc. Two other Non-Executive Directors served on the Board
for part of the financial year: Dr Paul Nicholson, who resigned from the Board
on 31 December, 2002, and Mr Philip Rogerson, who resigned from the Board on 23
April, 2003.

Mr Timothy Edwards stepped down from the Board on September 10, 2003.




B    Compensation

The aggregate amount of compensation paid to all Directors of the Company as a
group by the Company and its subsidiaries for services in all capacities during
fiscal 2003 was £1,440,000. This amount includes directors fees, salaries and
bonus payments, but excludes amounts set aside or accrued to provide pension,
retirement or similar benefits. The aggregate amount set aside or accrued to
provide pension, retirement or similar benefits for Directors of the Company by
the Company and its subsidiaries during fiscal 2003 was £111,000.

The remuneration of each of the Directors who served during fiscal 2003 is set
out below. For details regarding share options held by directors, see Item 6F.
Share Ownership.

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##### Table of Contents



|                                   |  |         |     |          |  |           |    |                     |  |                  |     |          |  |         |     |         |  |      |       |  |  |  |       |  |  |  |     |  |  |  |     | 
|---------------------------------- |  | ------- | --- | -------- |  | --------- | -- | ------------------- |  | ---------------- | --- | -------- |  | ------- | --- | ------- |  | ---- | ----- |  |  |  | ----- |  |  |  | --- |  |  |  | --- | 
|                                   |  | Salary/ |     |          |  |           |    | Performance Related |  | Compensation for |     | 2003     |  | 2002    |     | 2003    |  | 2002
|                                   |  | Fees    |     | Benefits |  | Bonus (i) |    | loss of office      |  | Total            |     | total(v) |  | Pension |     | Pension
|                                   |  |         |     |          |  |           |    |                     |  |                  |     |          |  |         |     |        
|                                   |  | £000    |     | £000     |  | £000      |    | £000                |  | £000             |     | £000     |  | £000    |     | £000   
|                                   |  |         |     |          |  |           |    |                     |  |                  |     |          |  |         |     |        
|Executive                          |  |         |     |          |  |           |    |                     |  |                  |     |          |  |         |     |         |  |      |       |  |  |  |       |  |  |  |     |  |  |  |     | 
|Dr P J Fellner (Chairman (ii)      |  |         | 37  |          |  |           |   |                     |  |                  |    |          |  |         |    |         |  |      | 37    |  |  |  |      |  |  |  |    |  |  |  |    | 
|S J Sturge (Chief Executive) (iii) |  |         | 7   |          |  |           |   |                     |  |                  |    |          |  |         |    |         |  |      | 7     |  |  |  |      |  |  |  |    |  |  |  |    | 
|T P W Edwards                      |  |         | 208 |          |  |           | 13 |                     |  |                  | 55  |          |  |         |    |         |  |      | 276   |  |  |  | 273   |  |  |  | 40  |  |  |  | 35  | 
|A J Weir                           |  |         | 165 |          |  |           | 14 |                     |  |                  | 46  |          |  |         |    |         |  |      | 225   |  |  |  | 244   |  |  |  | 31  |  |  |  | 31  | 
|Dr E P Goldstein (iv)              |  |         | 211 |          |  |           | 12 |                     |  |                  |    |          |  |         | 526 |         |  |      | 749   |  |  |  | 551   |  |  |  | 40  |  |  |  | 72  | 
|Dr G V Campion(v)                  |  |         |    |          |  |           |   |                     |  |                  |    |          |  |         |    |         |  |      |      |  |  |  | 417   |  |  |  |    |  |  |  | 76  | 
|                                   |  |         |     |          |  |           |    |                     |  |                  |     |          |  |         |     |         |  |      |       |  |  |  |       |  |  |  |     |  |  |  |     | 
|                                   |  |         | 628 |          |  |           | 39 |                     |  |                  | 101 |          |  |         | 526 |         |  |      | 1,294 |  |  |  | 1,485 |  |  |  | 111 |  |  |  | 214 | 
|                                   |  |         |     |          |  |           |    |                     |  |                  |     |          |  |         |     |         |  |      |       |  |  |  |       |  |  |  |     |  |  |  |     | 
|Non-executive                      |  |         |     |          |  |           |    |                     |  |                  |     |          |  |         |     |         |  |      |       |  |  |  |       |  |  |  |     |  |  |  |     | 
|C Hampson(vi)                      |  |         | 60  |          |  |           |   |                     |  |                  |    |          |  |         |    |         |  |      | 60    |  |  |  | 90    |  |  |  |    |  |  |  |    | 
|I F Kent(iii)                      |  |         | 2   |          |  |           |   |                     |  |                  |    |          |  |         |    |         |  |      | 2     |  |  |  |      |  |  |  |    |  |  |  |    | 
|K J Merrifield                     |  |         | 23  |          |  |           |   |                     |  |                  |    |          |  |         |    |         |  |      | 23    |  |  |  | 23    |  |  |  |    |  |  |  |    | 
|Dr P A Nicholson(vi)               |  |         | 15  |          |  |           |   |                     |  |                  |    |          |  |         |    |         |  |      | 15    |  |  |  | 23    |  |  |  |    |  |  |  |    | 
|P G Rogerson(vi)                   |  |         | 23  |          |  |           |   |                     |  |                  |    |          |  |         |    |         |  |      | 23    |  |  |  | 23    |  |  |  |    |  |  |  |    | 
|E W Williams                       |  |         | 23  |          |  |           |   |                     |  |                  |    |          |  |         |    |         |  |      | 23    |  |  |  | 23    |  |  |  |    |  |  |  |    | 
|                                   |  |         |     |          |  |           |    |                     |  |                  |     |          |  |         |     |         |  |      |       |  |  |  |       |  |  |  |     |  |  |  |     | 
|                                   |  |         | 146 |          |  |           |   |                     |  |                  |    |          |  |         |    |         |  |      | 146   |  |  |  | 182   |  |  |  |    |  |  |  |    | 
|                                   |  |         |     |          |  |           |    |                     |  |                  |     |          |  |         |     |         |  |      |       |  |  |  |       |  |  |  |     |  |  |  |     | 
|Total                              |  |         | 774 |          |  |           | 39 |                     |  |                  | 101 |          |  |         | 526 |         |  |      | 1,440 |  |  |  | 1,667 |  |  |  | 111 |  |  |  | 214 | 
|                                   |  |         |     |          |  |           |    |                     |  |                  |     |          |  |         |     |         |  |      |       |  |  |  |       |  |  |  |     |  |  |  |     | 



---

|(i)   |  | The performance-related bonus was paid fully in cash.                                                                                                                                                           
|----- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|     
|(ii)  |  | Dr P J Fellner was appointed Executive Chairman on April 23, 2003.
remuneration is from the date of first appointment to the Board until April 30,
2003. Remuneration from April 23 to April 30, 2003 was £5,000
|     
|(iii) |  | Remuneration from date of appointment to April 30, 2003. Mr S J Sturge
is paid £300,000 per annum. Mr I F Kent receives fees for his services on the
Board and its committees of £37,500 per annum.             
|     
|(iv)  |  | Remuneration from May 1, 2002 to date of resignation. Compensation for
loss of office was paid in cash and was based on his 12 month notice period.                                                             
|     
|(v)   |  | Remuneration from May 1, 2001 to date of resignation. Compensation for
loss of office was paid in cash and was based on his 12-month notice period.                                                             
|     
|(vi)  |  | Remuneration from May 1, 2002 to date of resignation.                                                                                                                                                           




C    Service Contracts

All Executive Directors hold service contracts with Vernalis plc. All service
contracts are one-year rolling contracts and are approved by the Remuneration
Committee. Vernaliss purpose in entering into service contracts with
Executive Directors is to enable the recruitment of high quality executives and
to obtain protection from their sudden departure to competitor companies.
Additionally, service contracts optimise protection for the Groups
intellectual property rights and other commercially sensitive information.
Non-executive Directors do not hold service contracts but enter into letters of
engagement for a period of three years.

Each executive directors agreement is terminable by mutual agreement between
the parties at any time or by either party giving to the other not less than 12
calendar months notice in writing. As executive directors do not have fixed
term service agreements, if the executive directors employment terminates he
is entitled to be given notice as set out above and he will be entitled to
receive any salary or benefits for the duration of the notice period. Each
executive director other than Dr Fellner is entitled to terminate his
employment at any time within six months after a Change of Control of the
Company (as defined below for this purpose) by giving to the Company not less
than 30 days prior notice in writing. Upon such termination, or upon
termination without notice by the Company during such six month period, he
shall be entitled to receive a payment by way of liquidated damages equal to 12
times his then monthly salary. Change of Control shall take place on the date
on which one person or a group of persons acting in concert holds, directly or
indirectly any shares in the Company which carry 50 per cent or more of the
then voting rights of the Company but a Change of Control shall not be deemed
to have taken place upon completion of the merger with Vernalis Group. Dr
Fellners service agreement does not contain any provisions relating to change
of control of the Company. The agreement with each executive director provides
that if before the expiration of the agreement his employment is terminated as
part of any arrangement for the amalgamation of the Company, the executive
director shall be offered employment with the amalgamated company for a period
of not less than the unexpired term of his service agreement and on terms not
less favourable than the terms of his existing service agreement.




D    Board Practices

The Company is committed to practising good corporate governance of its affairs
as part of its management of relationships with its shareholders and other
stakeholders. The Company seeks to uphold, and to report on compliance with,
best practice in corporate governance.

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The Board

The Board of the Company is responsible for the Groups system of corporate
governance. The Board currently comprises eleven Directors: a Chairman with
executive responsibilities, four other Executive Directors and six
Non-Executive Directors. The role of Non-Executive Directors is to ensure that
independent judgement is brought to Board deliberations and decisions. The
Non-Executive Directors possess a wide range of skills and experience, relevant
to the development of the Company, which complement those of the Executive
Directors. All Non-Executive Directors are considered by the Board to be
independent. Mr G Kennedy is the Companys Deputy Chairman and Senior
Independent Director. Companies are recommended to have a Senior Independent
Director by the guidance given by the Financial Services Authority in the UK.
The Senior Independent Director is available to shareholders if they have
concerns which contact through the normal channels of Chairman, Chief Executive
Officer, or Chief Financial Officer fail to resolve or for which such contact
is inappropriate.

The Board has agreed procedures for Directors to follow if they believe they
require independent professional advice in the furtherance of their duties and
these procedures allow the Directors to take such advice at the companys
expense. In addition, all the Directors have direct access to the impartial
advice and services of the Company Secretary. The Company Secretary is
accountable to the Board through the Chairman on governance matters. It is the
responsibility of the Company Secretary to ensure that Board procedures are
followed and all rules and regulations are complied with. Under the direction
of the chairman the Company Secretarys responsibilities include facilitating
induction and professional development, and ensuring the smooth flow of
information within the board and its committees, and between Non-Executive
Directors and senior management. Removal of the Company Secretary is a matter
which is specifically reserved for the Boards consideration. Any new Director
receives a comprehensive, formal and tailored induction into the Companys
operations. Appropriate training is provided to new Directors and is also
available to other Directors as required.

The terms of reference of the Chairman and Chief Executive Officer have been
agreed with the Board and, in accordance with best practice, their roles remain
separate. These terms of reference are being reviewed in light of the Chairman
assuming executive responsibilities on 23 April, 2003, and will be revised
during 2003.

As part of its leadership and control of the Company, the Board has agreed a
list of items that are specifically reserved for its consideration. These
include business strategy, financing arrangements, material acquisitions and
divestments, approval of the annual budget, major capital expenditure projects,
risk management, treasury policies and establishing and monitoring internal
controls. At each meeting, the Board reviews strategy and progress of the Group
towards its objectives, particularly in respect of research and development
projects, and monitors financial progress against budget.

The Board meets on a regular basis approximately every two months, with
additional meetings when circumstances and urgent business dictate. In the
fiscal year 2003, 15 meetings of the full Board were held and three of a Board
committee established in connection with the acquisition of RiboTargets
Holdings plc. All Directors receive an agenda and board papers in advance of
meetings so that they can make an effective contribution at the meeting. In
addition, regular informal contact is maintained with Non-Executive Directors.
The Board makes full use of appropriate technology as a means of updating and
informing all its members.

While the Board retains overall responsibility for, and control of, the
Company, day-to-day management of the business is conducted by the Executive
Directors. Review of the Groups principal projects is the responsibility of
the Project Review Board (PRB), which meets every month and comprises the
Executive Directors and certain senior employees.

Board Committees

In accordance with best practice, the Company has established Audit,
Nominations & Corporate Governance and Remuneration Committees with written
terms of reference for each that deal with their authorities and duties. The
terms of reference of each Committee have been reviewed during the year and
updated to ensure compliance with current best practice.

Audit Committee

Audit Committee is made up entirely of Non-Executive Directors. It is chaired
by Mr Kent with Ms Ferguson, Mr Kennedy, Dr Read and Mr Williams as its other
members. The Audit Committee is responsible for reviewing the Groups annual
accounts and interim reports prior to their submission for approval to the full
Board. This committee also monitors the Groups accounting policies, internal
financial control systems and financial reporting procedures. The Audit
Committee provides a forum through which the Groups external Auditors report
to the Board and meets at least once a year with the auditors in the absence of
executive management. In addition, the Audit Committee monitors
the scope and the results of the audit, the independence and objectivity of the
Auditors and their performance, confirms their re-appointment and agrees the
level of audit fees and monitors the provision of non-audit services provided
by the Auditors. The Audit Committee held four meetings during fiscal year
2003.

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Nominations & Corporate Governance Committee

The Nominations & Corporate Governance Committee is chaired by Mr Kennedy with
Mr Merrifield, Mr Read, Mr Sturge and Dr Fellner as its other members. The
Committee is responsible to the full Board for determining the qualities and
experience required of the Companys Executive and Non-Executive Directors and
identifying suitable candidates. In appropriate cases, recruitment consultants
assist in the process. The Committee is also responsible for succession
planning and for reviewing, and making recommendations in relation to, the
Companys corporate governance procedures. The Nominations & Corporate
Governance Committee met once during fiscal year 2003.

Remuneration Committee

The Remuneration Committee is made up entirely of independent Non-Executive
Directors and is chaired by Mr Merrifield with Mr Kennedy, Mr Kent, Dr Read and
Mr Williams as its other members. The Remuneration Committee determines the
terms of service and remuneration of the Executive Directors and senior
employees. It also determines overall remuneration policy for all other
employees and targets for performance-related pay schemes operated by the
Company. The Remuneration Committee held four meetings during the year under
review.

The Public Company Accounting Reform and Investor Protection Act of 2002, also
known as Sarbanes-Oxley Act of 2002, was enacted on July 30, 2002 and contains
significant new rules on corporate governance for US and foreign companies
reporting in the United States, especially in the area of audit committee
composition and authority.

The Company is closely monitoring SEC rulemaking pursuant to the Sarbanes-Oxley
Act to ensure its compliance with any rules as they become applicable to the
Company as a foreign private issuer.




E Employees

As at April 30, 2003, Vernalis employed 159 individuals on a full-time basis
including 90 acquired with RiboTargets Holdings.

The Company employs a number of temporary employees in Research and
Development, Facilities and Biometrics and IT divisions. During the last fiscal
year, the average number of temporary employees was 7.

The following table summarises the number of full-time employees employed by
the Group, including Executive Directors, as at the year end of the last three
fiscal years:

|                               |  |                      |     |      |  |      |    |  |  |  |     | 
|------------------------------ |  | -------------------- | --- | ---- |  | ---- | -- |  |  |  | --- | 
|Division                       |  | Year ended April 30,
|                               |  |                     
|                               |  | 2003                 |     | 2002 |  | 2001
|                               |  |                      |     |      |  |     
|Research and Development       |  |                      | 81  |      |  |      | 29 |  |  |  | 79  | 
|Regulatory Affairs and Quality |  |                      | 7   |      |  |      | 6  |  |  |  | 10  | 
|Clinical Research              |  |                      | 9   |      |  |      | 9  |  |  |  | 5   | 
|Biometrics and IT              |  |                      | 19  |      |  |      | 15 |  |  |  | 20  | 
|Business Development           |  |                      | 5   |      |  |      | 3  |  |  |  | 3   | 
|Corporate Services             |  |                      | 23  |      |  |      | 12 |  |  |  | 9   | 
|Facilities and Engineering     |  |                      | 9   |      |  |      | 7  |  |  |  | 11  | 
|Directorate                    |  |                      | 6   |      |  |      | 6  |  |  |  | 8   | 
|                               |  |                      |     |      |  |      |    |  |  |  |     | 
|Total                          |  |                      | 159 |      |  |      | 87 |  |  |  | 145 | 
|                               |  |                      |     |      |  |      |    |  |  |  |     | 

From April 30, 2001 until April 23, 2003 all employees have been employed in
Oxford, UK and from April 23, 2003 also in Cambridge, UK. Following the merger
between the Company and Vernalis Group plc a number of employees are employed
in Winnersh, Reading while the Groups Oxford facilities are being wound up.

The combined headcount of 205 at October 15, 2003 is forecast to be 135 by
fiscal end year 2004 as a result of re-organisation. The retained employees
possess the skills and experience necessary for the business to focus on
development of the product portfolio and research programs.

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On March 18, 2003, as a part of contractual arrangements with Evotec OAI 17
permanent employees transferred to Evotec OAI reducing the permanent headcount
at that time to 73. On September 28, 2001, as a result of the transfer of part
of the Companys pre-clinical research facilities to OSI Pharmaceuticals, Inc.
(OSI), permanent full-time headcount had been reduced to 87 employees, with 58
employees having been transferred to OSI. A significant number of the Groups
management and professional employees have had prior experience with
pharmaceutical, biotechnology or medical product companies. Vernalis believes
that it has been successful in attracting skilled and experienced scientific
personnel. However, competition for such personnel is intense. None of the
Groups employees are covered by collective bargaining agreements and no
employee is represented by a trade union.

The Companys philosophy is to encourage open discussion of progress and to
communicate its corporate aims effectively. Employees are encouraged to
identify closely with the Company through participation in share option
schemes, regular departmental meetings and informal meetings with management.
As a result, management considers relations with its employees to be good.




F Share Options

The Company currently operates two share option schemes, the Discretionary
Share Option Plan and New SAYE Plan, under which grants of options may be made.
Option incentive arrangements under the British Biotech Group 1992 share
Option Scheme (the 1992 Scheme), the Discretionary Executive Share Option
Scheme (the Executive Scheme); the British Biotech SAYE Share Option Scheme
(the SAYE Scheme) and the British Biotech Deferred Share Bonus Scheme (the
Bonus Scheme) remain in place but will not be operated again. The total
number of shares that have been, or may be issued in pursuance of rights
granted after September 18, 1996, under the Share Option Plan, SAYE Plan,
Executive Scheme, the SAYE Scheme and the Bonus Scheme may not exceed 10 per
cent of the issued share capital of the Company at any time.

In addition, the Company has entered into an option deed in favour of the
Chairman (see section below).

Following the Rights Issue in May 1994, the exercise price of all outstanding
options was multiplied by a factor of 5496/5864 with a corresponding increase
in the number of shares under option. Following the Rights Issue in June 1996,
the exercise price of all outstanding options was multiplied by a factor of
21,050/21,375 with a corresponding increase in the number of shares under
option. Following the capitalization issue in July 1996, the exercise price of
all outstanding options was reduced by a factor of ten with a corresponding
increase in the number of shares under option. Following the Capitalisation in
April 2003, the exercise price of all outstanding options was multiplied by a
factor of twenty with a corresponding decrease in the number of shares under
option. These adjustments were in accordance with Inland Revenue regulations,
confirmed as reasonable by the Companys auditors and approved by the Inland
Revenue.

The 1992 Schemes

The price payable by a participant on the exercise of an option under the
Original Schemes may not be less than the higher of the nominal value of an
Ordinary Share and its market value on the date on which an invitation to apply
was issued.

Under the 1992 Scheme, two classes of options, Ordinary Options and Special
Options, could be granted to employees. Ordinary Options will normally be
exercisable in whole or in part not earlier than three years and not later than
10 years after grant. Prior to exercise, Ordinary Options are subject to the
satisfaction of a performance condition that the increase in the share price
has exceeded the corresponding increase in the retail price index over the same
period. Special Options were issued on the same terms as the Ordinary Options
save that they cannot be exercised until five years after their issue. In
addition, they are subject to the more stringent performance condition that the
increase in the Companys share price must outperform the return from the FT-SE
Actuaries Total Return Index for Pharmaceutical Companies over the same period.

Under the 1992 Schemes, the early exercise of options is permitted in certain
circumstances. These are: (i) if the participants employment ends as a result
of death, ill health, injury, disability, redundancy or in any other case where
the Committee so decides; (ii) if the company by which the participant is
employed, or the business in which he works, is sold outside the Group; or
(iii) if the participant ceases employment by reason of retirement on or after
the date at which he is bound to retire in accordance with the terms of his
contract of employment. Except in these circumstances, options will normally
lapse if the participant ceases to be employed by the Group. The exercise of
options will also be permitted in the event of a change in control, a
reorganization, an amalgamation or a voluntary winding up of the Company. In
the event of a change in control of the Company, participants may surrender
their options in consideration of the grant of substitute options for shares in
the acquiring company.

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As of April 30, 2003, options, including Special Options, over a total of
71,920 Ordinary Shares were outstanding under the Original Schemes. Such
options have exercise prices between £6.52 and £16.39 and exercise periods
which expire between July 2003 and October 2005.

Executive Scheme

Participation in the Executive Scheme is limited to employees and full-time
Directors (that is, those required to devote not less than 25 hours a week to
the performance of duties) of the Company and its subsidiaries. Options are non
transferable. Options may normally only be granted in the six weeks following
the announcement of the results of the Company for any period. No options may
be granted more than 10 years after the approval of the Executive Scheme by
shareholders on September 18, 1996. The exercise price may not be less than the
higher of: (i) the market value (determined in accordance with the Taxation of
Chargeable Gains Act 1992) of an Ordinary Share on the date of grant; and (ii)
the nominal amount of an Ordinary Share. Where the Ordinary Shares are listed
on the London Stock Exchange, the market value of an Ordinary Share will be
taken to be the middle market quotation of an Ordinary Share, as derived from
the London Stock Exchange Daily Official List, on the date of grant.

Participants may be granted both Ordinary Options and Special Options under the
Executive Scheme. Ordinary Options will normally be exercisable in whole or in
part not earlier than three years and not later than 10 years from the date of
grant. Ordinary Options are subject to satisfaction of a performance condition
prior to exercise. They will only become exercisable if the return to the
Companys shareholders over a three year period exceeds the total shareholder
return of the median FT-SE 100 company. The Special Options are issued on the
same terms as the Ordinary Options save that they are subject to a more
stringent performance target and, in addition, cannot be exercised until five
years after their issue. Special Options will only be exercisable if the return
to the Companys shareholders over a five-year period equals or exceeds the
upper quartile FTSE 100 performance.

The maximum number of Ordinary Shares over which an employee may be granted a
Special Option on any date, when added to those in respect of which he has been
granted Special Options in the previous five years under the Executive Scheme
and any other executive share option scheme adopted by the Company, shall be
limited so that the aggregate cost does not exceed four times remuneration. The
maximum number of Ordinary Shares over which an employee may be granted an
Ordinary Option on any date, when added to those in respect of which he has
been granted options (excluding Special Options) in the previous five years
under the Executive Scheme and any other executive share option scheme adopted
by the Company, shall be limited so that the aggregate cost does not exceed
four times remuneration. Remuneration, for this purpose, is the higher of the
total remuneration (excluding benefits in kind) expressed as an annual rate
payable by the Group and the total remuneration (excluding benefits in kind)
received by the participant in any period of 12 months ending within the
preceding two years in respect of his or her employment with the Group. Shortly
after joining the Group, a participant may be granted options which are
designated as Recruitment Options. Recruitment Options are disregarded when the
above individual limits are considered but are included in the limits on the
overall number of shares that may be placed under option.

Options will normally be exercisable in whole or in part no earlier than three
years (five years in the case of Special Options) and not later than 10 years
after grant. The exercise of options will, however, be permitted (subject to
the satisfaction of the performance condition): (i) if the participants
employment ends as a result of death, ill-health, injury, disability or
redundancy or in any other case where the Committee so decides; (ii) if the
company by which the participant is employed, or the business in which he
works, is sold outside the Group; or (iii) if the participants employment ends
by reason of retirement on or after reaching the age at which he is bound to
retire in accordance with the terms of his contract of employment. Except in
these circumstances, options will normally lapse if the participant ceases to
be employed by the Group. The exercise of options will also be permitted in the
event of a change in control, a reorganization, an amalgamation or a voluntary
winding up of the Company. In the event of a change in control of the Company,
participants may surrender their options in consideration of the grant of
substitute options for shares in the acquiring company.

As of April 30, 2003, options, including Special Options, over a total of
336,504 Ordinary Shares were outstanding under the Executive Scheme. Such
options have exercise prices between £6 and £42 and exercise periods which
expire between December 2006 and January 2010.

Bonus Scheme

Participation in the Bonus Scheme is limited to employees and full-time
directors (that is, those requested to devote not less than 25 hours a week to
the performance of their duties) of the Company and its subsidiaries. Awards
are non-transferable. Awards may normally only be granted in the six weeks
following the announcement of the results of the Company for any period. No
awards may be made more than 10 years after approval of the Bonus Scheme by
shareholders on September 18, 1996. Awards under the Bonus Scheme consist of an
option to purchase shares at not less than their nominal value.

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The principal purpose for the introduction of the Bonus Scheme was to replace
the previous cash bonus plan for senior managers. Under the arrangements, half
of each participants annual bonus consists of an award under the Bonus Scheme.
The other half will be paid in cash unless the participant elects to take that
half (or a proportion thereof) in deferred share rights in which case a further
award will be made to him which matches (on a one-for-one basis before
taxation) the number of shares subject to those rights.

Awards will normally be exercisable between two and seven years after they are
granted. The exercise of awards will, however, be permitted: (i) if the
participants employment ends as a result of death, ill health, injury,
disability or redundancy; (ii) if the company by which the participant is
employed, or the business in which he works, is sold outside the Group; or
(iii) if the participants employment ends by reason of retirement on or after
reaching the age at which he is bound to retire in accordance with the terms of
his contract of employment. The exercise of awards will also be permitted in
the event of a change of control, a reorganization, an amalgamation or a
voluntary winding up of the Company. In the event of a change in control of the
Company, participants may surrender their awards in consideration for the grant
of substitute awards for shares in the acquiring company. Other than in the
case of death, if the award is exercised prior to two years after the date of
grant then the award is exercisable as to the proportion of the time elapsed
from the date of grant to two years. Except in these circumstances, awards will
normally lapse if the participant ceases to be employed by the Group.

Grants of options under the Bonus Scheme in fiscal 2003, fiscal 2002 and fiscal
2001 were made conditional upon the meeting of certain performance criteria,
with the performance criteria being more demanding with increased seniority.
Such conditions and performance criteria for fiscal 2003, fiscal 2002 and
fiscal 2001 were agreed by the Committee and relate to the market value of an
Ordinary Share reaching specified levels in order that certain tranches of
options become exercisable.

As of April 30, 2003, awards over a total of 947,270 Ordinary Shares were
outstanding under the Bonus Scheme. All awards have an exercise price of £1 and
have exercise periods which expire between December 2003 and January 2010.

Save As You Earn (SAYE) Scheme

All UK resident employees (including full-time Directors) working 16 hours or
more per week who have one years (or such lesser period as the Directors may
decide) continuous service with the Company, or any subsidiary nominated to
join in the SAYE Scheme, are eligible to apply for options to acquire (whether
by purchase or subscription) Ordinary Shares under the SAYE Scheme. Other
employees may be invited to participate at the Directors discretion. Options
are not transferable. The first invitation to apply for options was issued
following approval of the SAYE Scheme by the UK Inland Revenue. Subsequent
invitations to apply for options may normally only be issued in the period
beginning three weeks before, and ending six weeks after, the announcement of
the interim or final results of the Group. No payment will be required for the
grant of an option. No options may be granted more than 10 years after the
first grant of options under the SAYE Scheme. The exercise price may not be
less than the higher of: (i) an amount equal to 80 per cent of the market value
(determined in accordance with the UK Taxation of Chargeable Gains Act 1992) of
an Ordinary Share; and (ii) in the case of options to subscribe for shares, the
nominal amount of an Ordinary Share. Where the Ordinary Shares are listed on
the London Stock Exchange, the market value of an ordinary Share will be taken
to be the arithmetic average of the middle market quotations of an Ordinary
Share, as derived from the London Stock Exchange Daily Official List, for three
consecutive dealing days selected by the Directors in the thirty-day period
immediately preceding the date of grant. The first invitation to apply for
options was made at a price of 345p per Ordinary Share and the second
invitation to apply for options was made at a price of 300p per Ordinary Share:
these prices were subsequently adjusted to 323p per share and 281p per share,
respectively, to reflect the bonus element of the 1994 Rights Issue. The third
invitation to apply for options was made at a price of 290p per Ordinary Share
and the fourth invitation at 370p per Ordinary Share. The prices of the first
four invitations were subsequently adjusted to 31.8p per share, 27.7p per
share, 28.6p per share and 36.4p per share, respectively, to reflect the bonus
element of the 1996 Rights Issue and the Capitalization Issue in 1996. The
fifth invitation to apply for options was made in July 1996 at a price of 186p
per Ordinary Share. The sixth invitation to apply for options was made in July
1997 at a price of 140p per Ordinary Share. The seventh invitation to apply for
options was made in July 1998 at a price of 28p per Ordinary Share. The eighth
invitation to apply for options was made in July 1999 at a price of 20p per
Ordinary Share. No invitations to apply for options have been made since July
1999.

The aggregate maximum monthly contribution payable by an employee under all
SAYE contracts linked to the SAYE Scheme may not exceed such sum as may from
time to time be permitted by the UK Income and Corporation Taxes Act 1988 and
approved by the Directors. The first invitation to apply for options was made
in August 1992 and was taken up in respect of 145,241 Ordinary Shares. The
second invitation was made in July 1993 and was taken up in respect of 70,178
Ordinary Shares. The third invitation was made in July 1994 and was taken up in
respect of 139,142 Ordinary Shares. The fourth invitation was made in July 1995
and was taken up in respect of 116,229 Ordinary Shares. Following the 1994
Rights Issue, the exercise price of all outstanding options was reduced by a
factor of 5496/5864 with a corresponding increase in the number of shares under
option.

48



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Following the 1996 Rights Issue, the exercise price of all outstanding options
was multiplied by a factor of 21,050/21,375 with a corresponding increase in
the number of Ordinary Shares under option. Following the
Capitalization Issue in July 1996, the exercise price of all outstanding
options was reduced by a factor of ten with a corresponding increase in the
number of Ordinary Shares under option. These adjustments were in accordance
with Inland Revenue regulations, confirmed as reasonable by the Companys
auditors and approved by the Inland Revenue. The fifth invitation was made in
July 1996 and was taken up in respect of 431,777 Ordinary Shares. The sixth
invitation was made in July 1997 and was taken up in respect of 755,984
Ordinary Shares. The seventh invitation was made in July 1998 and was taken up
in respect of 2,692,065 Ordinary Shares. The eighth invitation was made in July
1999 and was taken up in respect of 1,313,010 Ordinary Shares.

Following the Capitalisation in April 2003, the exercise price of all
outstanding options was multiplied by a factor of twenty with a corresponding
decrease in the number of shares under option.

In normal circumstances, an option may be exercised only during the period of
six months commencing on the date that the bonus under the related SAYE
contract is payable, that is, the third, fifth or seventh anniversary of the
commencement of the SAYE contract. Earlier exercise will be permitted: (i) if
the option-holders employment terminates by reason of death, injury,
disability, redundancy or retirement at normal retirement age; (ii) if the
option-holders employment terminates by reason of early or late retirement and
the option has been held for at least three years; or (iii) if the company by
which the option-holder is employed leaves the Group or if the business in
which he works is sold outside the Group. If an employee ceases to be employed
for any other reason, his option will normally lapse. The exercise of options
will also be permitted in the event of a change in control, a reorganization,
an amalgamation or a voluntary winding-up of the Company. In the event of a
change in control of the Company, option-holders may surrender their options in
consideration for the grant of substitute options over shares in the acquiring
company. In all cases, an option may be exercised only to the extent of the
amount then paid under the related SAYE contract and any interest or bonus
payable thereon.

As of April 30, 2003, options over a total of 7,126 Ordinary Shares were
outstanding under the SAYE Scheme at exercise prices of £5.60p to £37.20 per
Ordinary Share and with exercise periods that expire between October 2003 and
March 2004.

Discretionary Share Option Plan

The Option Plan is administered by the Remuneration Committee. There are two
parts to the Option Plan. There is an ''approved part for which the Inland
Revenue approval is being sought. There is also a part which is not designed
for Inland Revenue approval; this part is used primarily where the Company
wishes to grant to participants options over more than £30,000 worth of Shares.
Except to the extent required to comply with the legislation, the approved and
the unapproved parts of the Option Plan are essentially the same.

Eligibility

Selected employees and directors of the Merged Group (or any participating
subsidiary of the Company) who are required to devote substantially the whole
of their working time to the business of the Merged Group (or any subsidiary of
the Company) other than those within two years of their normal retirement date
can participate in the Option Plan at the discretion of the Remuneration
Committee.

Grant of Options

Options may be granted within the period of 42 days following the announcement
of the Companys results for any period, the day after any general meeting of
the Company, or at such other exceptional times as determined by the
Remuneration Committee. In the case of options under the part of the Option
Plan approved by the Inland Revenue, it may also grant within the period of 42
days following the day on which it is approved by the Inland Revenue.

Options may be granted over both newly issued Shares and over Shares purchased
in the market. However, it is anticipated that only new issue Shares will be
used.

No payment will be required for the grant of an option. Options are not
pensionable benefits, are not transferable and may only be exercised by a
person to whom they were granted or their personal representatives.

No options may be granted more than ten years after the adoption of the Option
Plan.

49



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Option Exercise Price

The price per New Ordinary Share payable upon the exercise of an option will
not be less than the higher of:



| |  |  | the middle market quotation for a New Ordinary Share as derived from
the Daily Official List for the dealing day immediately preceding the
date the option is to be granted or, if so determined by the
Remuneration Committee, the average of such quotations for the three or
five dealing days immediately preceding the day the option is to be
granted or at such other times as agreed with the Inland Revenue; and
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | where Shares are to be subscribed, their nominal value.                                                                                                                                                                                                                                                                                                                                                                  

Limits on the issue of Shares

The Option Plan is subject to the following overall limit on the number of
Shares which may be acquired by subscription: that in any ten year period not
more than ten per cent. of the issued ordinary share capital of the Company may
in aggregate be issued or issuable pursuant to rights acquired under the Option
Plan, the Executive Share Option Scheme, the Bonus Scheme (excluding qualifying
awards), the SAYE Scheme (excluding rights acquired before 18 September 1996)
or any other employees share scheme adopted by the Company since 1996.

For the purposes of this limit, options granted to Peter Fellner on 25 April
2003 will not be included and options and rights acquired which lapse or have
been released will cease to count.

Individual limit

It is intended that the aggregate maximum value of approved and unapproved
options which may be granted each year will after the first year not normally
exceed one times an employees earnings (subject, in the case of approved
options, to the statutory limit of £30,000) other than in exceptional
circumstances at the discretion of the Remuneration Committee. For these
purposes, an employees earnings will be his salary current at the date of
grant together with any bonus(es) paid in the previous year. In the first year
of operation of the Option Plan, the aggregate maximum value of options which
may be granted may be up to 2.75 times an employees base salary.

Exercise of options

On the exercise of an option, the Company intends to give the opportunity for
flexibility to reduce dilution by satisfying options in the form of a transfer
of a number of the Companys Shares equivalent to the gain on exercise of the
option. The Companys Board of Directors has approved the necessary amendment
to the rules to give the Company this flexibility. Such an amendment will not
apply to the Inland Revenue approved part of the British Biotech Option
Plan.

An option will normally be exercisable between three and ten years following
its grant provided that a performance target, specified by the Remuneration
Committee at the time of grant, has been satisfied. The Remuneration Committee
has decided that the share price performance of the Company when compared with
the share price performance of the constituent companies in the FTSE Small Cap
Index is the most appropriate performance target, rather than the total
shareholder return (TSR) performance of the Company compared with the TSR
performance of the constituent companies in the FTSE Small Cap Index (for half
the option) and, for the other half of the option, the TSR performance against
specified companies within the FTSE Pharmaceuticals Index.

The reason for this is that the share price performance measure retains the
focus on the delivery of shareholder value whilst simplifying communication and
measurement.

An option will only become exercisable to the extent that the Companys share
price increase against the FTSE Small Cap Index is in the upper quartile, in
which case 100% of the Shares under option will be exercisable, with 50%
becoming exercisable if it is at the median level. Between median and upper
quartile position, options become exercisable on a straight line, pro-rata
basis and below median, the option is not exercisable. The performance target
will first be tested on the third anniversary of grant of the option; if the
target is not satisfied in full after this period, it will be retested, but not
beyond, the fourth anniversary of grant of the option. To the extent that an
option does not become exercisable at all by the final test date, it will
lapse. Options are granted to Directors (other than the Chairman), to Proposed
Directors and senior executives on the basis set out above; further details of
option grants to Proposed Directors are set out at paragraph 9.7 of this Part
VI.

The Remuneration Committee will regularly review the exercise conditions for
option grants to ensure they are appropriate for the Company and the prevailing
recruitment market. The condition may be varied in certain circumstances
following the grant of an option so as to achieve its original purpose but not
so as to make its achievement any more difficult to satisfy. Option grants made
on 25 April 2003 were made on the basis of the two separate comparator groups
referred to above. Following suitable consultations, the Remuneration Committee
intends to harmonize the performance conditions on options granted to executives in the
year with those applying to future option grants.

50



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##### Table of Contents



If a participant leaves employment, exercise will only be permitted, regardless
of whether the relevant performance target has been satisfied, if the
participant dies or leaves because of injury, disability, retirement,
redundancy or on the undertaking or Merged Group company which employs him
leaving the Merged Group or in other circumstances at the discretion of the
Remuneration Committee. Early exercise will also be permitted in the event of a
take-over, reconstruction or winding-up of the Company, subject to the
achievement of the performance target measured to the date of the relevant
event.

Rights attaching to Shares

Shares allotted or transferred under the Option Plan will rank equally with all
other Shares of the Company for the time being in issue. The Company will apply
for any new Shares allotted under the Option Plan to be admitted to the
Official List and to trading on the London Stock Exchanges market for listed
securities.

Variation of Capital

In the event of any rights or capitalisation issue, subdivision, consolidation,
reduction or other variation of share capital, the Remuneration Committee may
make (in respect of the approved part subject to receiving prior approval of
the Inland Revenue) adjustments it considers appropriate to the number of
Shares subject to option and the price payable on the exercise of options.

Alterations to the Option Plan

The Option Plan may at any time be amended by the Company in any respect,
provided that the prior approval of the Company in general meeting is obtained
for alterations and additions to the advantage of participants to the rules
governing eligibility, limits on participation, terms of exercise and
adjustment of options. The requirement to obtain the prior approval of
shareholders does not, however, apply in relation to any alteration or addition
which is minor in nature and made to benefit the administration of the Option
Plan to comply with the provisions of any existing or proposed legislation or
to obtain or maintain favourable tax, exchange control or regulatory treatment
for participants or Merged Group companies. Any amendments or additions to the
Option Plan which affects the terms on which approved options may be granted or
exercised requires the prior approval of the Inland Revenue. Following the
merger with Vernalis Group plc all share options in Vernalis Group plc have
lapsed.

On October 3, 2003 the Company issued share options over 4,846,036 shares at an
exercise price of 832 pence under the Discretionary Share Option Plan.

New SAYE Plan

The SAYE Plan is a save-as-you-earn share option scheme designed to be approved
by the Inland Revenue. No Plan offer was made to employees or directors during
the year.

Option Deed in respect of the Chairman

A share option over 2,670,071 shares, representing four per cent of the issued
ordinary share capital of Vernalis was granted on April 23, 2003 by the Company
to the Chairman. The grant was made under an option deed made by Vernalis in
favour of the chairman. The exercise price is 100 pence per share. The option
will vest and become exercisable as follows:

|                                                 |  |                                              
|------------------------------------------------ |  | ---------------------------------------------
|Per cent. Of share subject to the option vesting |  | Vernalis share price equal to or greater than
|                                                 |  |                                              
|50                                               |  | 100pence                                     
|25                                               |  | 200pence                                     
|25                                               |  | 300pence                                     

For the option to vest in respect of any of the percentages of shares, the
Vernalis target share price must be met (using the mid-market closing price as
quoted in the daily official list of the London Stock Exchange) over 30
consecutive trading days. As at October 15, no options have vested.

51



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##### Table of Contents



The option will vest on a change of control of Vernalis to the extent that the
Vernalis share price has reached the target set out above.

As of April 30, 2003, awards over a total of 2,670,071 Ordinary Shares were
outstanding under the Option Deed. All awards have an exercise price of 100p
and exercise periods which expire between April 2003 and April 2013.

Total amounts set aside or accrued during fiscal 2003 to provide pension
contributions to directors amounted to £111,000.

Directors options

Share options held by Executive Directors are set forth in the following table
as at April 30, 2003.

At May 1,
    
    Granted in
    
    Lapsed in
    
    At April 30,
    
    
    
    
    
    Date from2002
    
    the year
    
    the year
    
    2003
    
    Exercise
    
    Which
    
    
    
    
    
    PerformanceNumber
    
    Number
    
    Number
    
    Number
    
    Price
    
    Exercisable
    
    Expiry Date
    
    ConditionsT P W Edwards
Executive
    
    
    2,500
    
    
    
    
    
    
    
    
    
    
    
    2,500
    
    
    
    47.00
    
    
    Apr 2000
    
    Apr  2007
    
    (iv)2,500
    
    
    
    
    
    
    
    
    
    
    
    2,500
    
    
    
    47.00
    
    
    Apr 2002
    
    Apr 2007
    
    
    (v
    )3,540
    
    
    
    
    
    
    
    
    
    
    
    3,540
    
    
    
    20.30
    
    
    Dec 2000
    
    Dec 2007
    
    (iv)3,540
    
    
    
    
    
    
    
    
    
    
    
    3,540
    
    
    
    20.30
    
    
    Dec 2002
    
    Dec 2007
    
    
    (v
    )6,250
    
    
    
    
    
    
    
    
    
    
    
    6,250
    
    
    
    8.00
    
    
    Sep 2001
    
    Sep 2008
    
    (iv)6,250
    
    
    
    
    
    
    
    
    
    
    
    6,250
    
    
    
    8.00
    
    
    Sep 2003
    
    Sep 2008
    
    
    (v
    )12,500
    
    
    
    
    
    
    
    
    
    
    
    12,500
    
    
    
    4.40
    
    
    Jul 2002
    
    Jul 2009
    
    (iv)12,500
    
    
    
    
    
    
    
    
    
    
    
    12,500
    
    
    
    4.40
    
    
    Jul 2004
    
    Jul 2009
    
    
    (v
    )Option Plan
    
    
    
    
    
    
    717,940
    
    
    
    
    
    
    
    717,940
    
    
    
    0.59
    
    
    Apr 2006
    
    Apr 2013
    
    (viii)SAYE scheme
    
    
    616
    
    
    
    
    
    
    
    (616
    )
    
    
    
    
    
    
    28.00
    
    
    Oct 2002
    
    Mar 2003
    
    
    (i
    )Bonus scheme
    
    
    1,500
    
    
    
    
    
    
    
    
    
    
    
    1,500
    
    
    
    1.00
    
    
    Apr 1999
    
    Apr 2004
    
    
    (i
    )1,850
    
    
    
    
    
    
    
    
    
    
    
    1,850
    
    
    
    1.00
    
    
    Jul 1998
    
    Jul 2005
    
    
    (i
    )3,700
    
    
    
    
    
    
    
    
    
    
    
    3,700
    
    
    
    1.00
    
    
    Jul 2000
    
    Jul 2005
    
    
    (i
    )62,500
    
    
    
    
    
    
    
    
    
    
    
    62,500
    
    
    
    1.00
    
    
    Jul 2002
    
    Jul 2007
    
    (vi)62,500
    
    
    
    
    
    
    
    
    
    
    
    62,500
    
    
    
    1.00
    
    
    Aug 2003
    
    Aug 2008
    
    (vii)182,246
    
    
    
    717,940
    
    
    
    (616
    )
    
    
    899,570Dr P J Fellner
Option Deed
    
    
    
    
    
    
    2,670,071
    
    
    
    
    
    
    
    2,670,071
    
    
    
    1.00
    
    
    Apr 2003
    
    Apr 2013
    
    (ix)
    
    
    
    2,670,071
    
    
    
    
    
    
    
    2,670,071Dr E P Goldstein
Executive Scheme
    
    
    100,000
    
    
    
    
    
    
    
    (100,000
    )
    
    
    
    
    
    
    8.00
    
    
    Sep 2001
    
    Sep 2008
    
    (iv)50,000
    
    
    
    
    
    
    
    (50,000
    )
    
    
    
    
    
    
    8.00
    
    
    Sep 2003
    
    Sep 2008
    
    
    (v
    )6,250
    
    
    
    
    
    
    
    (6,250
    )
    
    
    
    
    
    
    4.40
    
    
    Jul 2002
    
    Jul 2009
    
    (iv)6,250
    
    
    
    
    
    
    
    (6,250
    )
    
    
    
    
    
    
    4.40
    
    
    Jul 2004
    
    Jul 2009
    
    
    (v
    )Bonus scheme
    
    
    25,000
    
    
    
    
    
    
    
    
    
    
    
    25,000
    
    
    
    1.00
    
    
    Sep 2000
    
    Nov 2004
    
    
    (i
    )87,500
    
    
    
    
    
    
    
    
    
    
    
    87,500
    
    
    
    1.00
    
    
    Jul 2002
    
    Nov 2004
    
    (vi)87,500
    
    
    
    
    
    
    
    
    
    
    
    87,500
    
    
    
    1.00
    
    
    Aug 2003
    
    Nov 2004
    
    (vii)362,500
    
    
    
    
    
    
    
    (162,500
    )
    
    
    200,000S J Sturge
Option Plan
    
    
    
    
    
    
    1,367,520
    
    
    
    
    
    
    
    1,367,520
    
    
    
    0.59
    
    
    Apr 2006
    
    Apr 2013
    
    (viii)
    
    
    
    1,367,520
    
    
    
    
    
    
    
    1,367,520A J Weir
1992 Scheme
    
    
    5,417
    
    
    
    
    
    
    
    (5,417
    )
    
    
    
    
    
    
    8.00
    
    
    Dec 1995
    
    Dec 2002
    
    
    (i
    )2,708
    
    
    
    
    
    
    
    
    
    
    
    2,708
    
    
    
    6.52
    
    
    Jul 1996
    
    Jul 2003
    
    
    (i
    )5,077
    
    
    
    
    
    
    
    
    
    
    
    5,077
    
    
    
    7.19
    
    
    Jul 1997
    
    Jul 2004
    
    (ii)7,615
    
    
    
    
    
    
    
    
    
    
    
    7,615
    
    
    
    7.19
    
    
    Jul 1999
    
    Jul 2004
    
    (iii)Executive Scheme
    
    
    1,202
    
    
    
    
    
    
    
    
    
    
    
    1,202
    
    
    
    42.00
    
    
    Dec 2000
    
    Dec 2006
    
    (iv)1,202
    
    
    
    
    
    
    
    
    
    
    
    1,202
    
    
    
    42.00
    
    
    Dec 2001
    
    Dec 2006
    
    
    (v
    )3,078
    
    
    
    
    
    
    
    
    
    
    
    3,078
    
    
    
    20.30
    
    
    Dec 2000
    
    Dec 2007
    
    (iv)3,078
    
    
    
    
    
    
    
    
    
    
    
    3,078
    
    
    
    20.30
    
    
    Dec 2002
    
    Dec 2007
    
    
    (v
    )6,250
    
    
    
    
    
    
    
    
    
    
    
    6,250
    
    
    
    8.00
    
    
    Sep 2001
    
    Sep 2008
    
    (iv)6,250
    
    
    
    
    
    
    
    
    
    
    
    6,250
    
    
    
    8.00
    
    
    Sep 2003
    
    Sep 2008
    
    
    (v
    )12,500
    
    
    
    
    
    
    
    
    
    
    
    12,500
    
    
    
    4.40
    
    
    Jul 2002
    
    Jul 2009
    
    (iv)12,500
    
    
    
    
    
    
    
    
    
    
    
    12,500
    
    
    
    4.40
    
    
    Jul 2004
    
    Jul 2009
    
    
    (v
    )Option Plan
    
    
    
    
    
    
    615,380
    
    
    
    
    
    
    
    615,380
    
    
    
    0.59
    
    
    Apr 2006
    
    Apr 2013
    
    (viii)SAYE Scheme
    
    
    123
    
    
    
    
    
    
    
    (123
    )
    
    
    
    
    
    
    28.00
    
    
    Oct 2002
    
    Mar 2003
    
    
    (i
    )370
    
    
    
    
    
    
    
    
    
    
    
    370
    
    
    
    5.60
    
    
    Oct 2003
    
    Mar 2004
    
    
    (i
    )Bonus Scheme
    
    
    98
    
    
    
    
    
    
    
    
    
    
    
    98
    
    
    
    1.00
    
    
    Jul 1997
    
    Jul 2004
    
    
    (i
    )196
    
    
    
    
    
    
    
    
    
    
    
    196
    
    
    
    1.00
    
    
    Jul 1999
    
    Jul 2004
    
    
    (i
    )1,608
    
    
    
    
    
    
    
    
    
    
    
    1,608
    
    
    
    1.00
    
    
    Jul 1998
    
    Jul 2005
    
    
    (i
    )3,217
    
    
    
    
    
    
    
    
    
    
    
    3,217
    
    
    
    1.00
    
    
    Jul 2000
    
    Jul 2005
    
    
    (i
    )62,500
    
    
    
    
    
    
    
    
    
    
    
    62,500
    
    
    
    1.00
    
    
    Jul 2002
    
    Jul 2007
    
    (vi)62,500
    
    
    
    
    
    
    
    
    
    
    
    62,500
    
    
    
    1.00
    
    
    Aug 2003
    
    Aug 2008
    
    (vii)197,489
    
    
    
    615,380
    
    
    
    (5,540
    )
    
    
    807,329Total
    
    
    742,235
    
    
    
    5,370,911
    
    
    
    (168,656
    )
    
    
    5,944,490


52



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##### Table of Contents



None of the Non-Executive Directors who served during the financial year (Mr C
Hampson, Mr I F Kent, Mr K J Merrifield, Dr P A Nicholson, Mr P G Rogerson or
Mr E W Williams) held share options at the beginning, or end, or at any time
during, the year.

Performance conditions

Option awards are subject to share price growth performance conditions as
compared with the following various comparators:



| | (i) |  | None apply to the bonus scheme options
| | --- |  | --------------------------------------



| | (ii) |  | RPI
| | ---- |  | ---



| | (iii) |  | Pharmaceuticals index
| | ----- |  | ---------------------



| | (iv) |  | Median FT-SE 100
| | ---- |  | ----------------



| | (v) |  | Upper quartile FT-SE 100
| | --- |  | ------------------------



| | (vi) |  | Progressively as share price increases from £9.00 to £18.00 by July 2003
| | ---- |  | ------------------------------------------------------------------------



| | (vii) |  | Progressively as share increases from £5.00 to £8.00 by July 2004
| | ----- |  | -----------------------------------------------------------------



| | (viii) |  | See Share Option Plan description above
| | ------ |  | ---------------------------------------



| | (ix) |  | See Option Deed in respect of the Chairman above
| | ---- |  | ------------------------------------------------

No options were exercised by directors during the year.

The market price of the Companys shares at April 30, 2003, the last working
day of the financial year, was 59 pence (2002: 255 pence restated after capital
reorganization).

During the year, the market price of the Companys shares ranged from 44 pence
to 250 pence (restated after capital reorganization) (2002: 210 pence to 460
pence (restated)).

No options were exercised by Executive Directors during the year.

The market price of the Companys shares at April 30, 2003 was 59 pence, (April
30, 2002 was 255 pence). During fiscal 2003, the market price of the Companys
shares ranged from 44 pence to 28 pence and (210 pence to 460 pence in fiscal
2002).




ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS

The information presented under this Item 7A is provided as of the date of the
filing.




A Major Shareholders

As at October 15, 2003 the Company had received notification of the following
substantial interests in its ordinary shares, held directly:

As at October 15, 2003
    
    As at October 29, 2002
    
    As at September 30, 2001Number of shares
    
    % of issued
    
    Number of shares
    
    % of issued
    
    Number of shares
    
    % of issuedShareholder
    
    held
    
    shares
    
    held
    
    shares
    
    held
    
    sharesAmvescap plc
    
    
    38,097,713
    
    
    
    28.06
    
    
    
    137,468,526
    
    
    
    20.59
    
    
    
    99,575,742
    
    
    
    14.93Apax Partners
    
    
    13,134,148
    
    
    
    9.67Jupiter Asset management
    
    
    8,531,682
    
    
    
    6.28Fidelity
    
    
    7,365,230
    
    
    
    5.42HBOS plc and subsidiary
companies
    
    
    6,800,274
    
    
    
    5.01JP Morgan Partners
(BHCA) Limited
    
    
    4,919,674
    
    
    
    3.62Gartmore
    
    
    5,256,442
    
    
    
    3.87Advent
    
    
    4,873,605
    
    
    
    3.59BVF Partners LP and BVF
Inv
    
    
    
    
    
    
    
    
    
    
    49,467,536
    
    
    
    7.41
    
    
    
    20,200,000
    
    
    
    3.03Legal & General
Investment Management
Limited
    
    
    
    
    
    
    
    
    
    
    26,836,870
    
    
    
    4.02
    
    
    
    20,447,778
    
    
    
    3.07UBS Asset Management
(Phillips & Drew
Holding Limited)
    
    
    
    
    
    
    
    
    
    
    25,703,347
    
    
    
    3.85M&G Prudential plc
    
    
    
    
    
    
    
    
    
    
    22,608,885
    
    
    
    3.38
    
    
    
    22,608,885
    
    
    
    3.39Phillips & Drew Holding
Limited
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    33,500,298
    
    
    
    5.02National Provident
Institution
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    23,125,900
    
    
    
    3.47


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At such date of calculation of major shareholders, the issued share capital of
the Company was 135,784,793 ordinary shares. The major shareholders do not
have different voting rights.

At such date, the Directors of the Company owned 409,893 Ordinary Shares
representing approximately 0.3 per cent (i) of the Companys outstanding share
capital, as follows:

Director
    
    Number of shares heldDr P J Fellner (i)
    
    
    50,000S J Sturge
    
    
    56,435A J Weir
    
    
    51,728T P W Edwards
    
    
    60,403K J Merrifield
    
    
    1,500Carol Ferguson
    
    
    27,810John Hutchison
    
    
    35,811George Kennedy
    
    
    29,274Peter Read
    
    
    2,583Peter Worrall
    
    
    94,349Total
    
    
    409,893




---

|(i) |  | In addition P.J. Fellner holds share options
over 2,670,071 shares, which together with his
holding of 50,000 shares represents 2% of issued
share capital.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------

As far as is known to the Company and subject to the disclosure provided under
Item 8D. Financial information  Significant Changes, it is not directly or
indirectly owned or controlled by another corporation or by any government, and
there are no arrangements the operation of which may result in a change of its
control.




B Related Party Transactions

There have been no material transactions during the last three years to which
any Director or officer, any relative or spouse thereof or any five per cent
shareholder, was a party, or had a direct or indirect interest, and no such
transactions are presently proposed. No Director or officer of the Company, or
any associate thereof, was indebted to the Company or any of its subsidiaries
at any time during the last three years. Each of Dr P J Fellner, Mr S J
Sturge, Mr Weir, Mr Worrall and Dr Hutchison has a service agreement with
Vernalis plc, as did Dr Goldstein and Mr Edwards during their respective terms
of office. See also item 6F, Directors, Senior Management and Employees 
Share Options  Option Deed in respect of the Chairman.




C Interests of Experts and Counsel

Not applicable.




ITEM 8. FINANCIAL INFORMATION

The information provided under Item 8A relates to British Biotech plc and its
subsidiaries for the reported fiscal periods prior to the merger with Vernalis
Group (under UK merger accounting). Information provided under the remaining
Items relates to the Group as of the date of the filing.

54



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A Consolidated Statements and Other Financial Information

Reference is made to Item 18. Financial Statements for a list of all financial
statements, including the notes thereto, and exhibits.




B Dividends

The Company does not currently pay dividends. The payment of future dividends
will be dependent upon future earnings, the financial condition of the Group
and other factors. In addition, the Company expects to retain a substantial
portion of future earnings, if only to finance the growth and development of
the business. Accordingly, the Company does not expect to pay dividends in the
near future.




C Legal matters

Class Law, an English firm of solicitors, has made allegations, on behalf of a
number of its clients who are or were shareholders in Vernalis, that those
clients have suffered loss as a result of statements made by the Company and
its directors over a period of years. Class Law allege these statements were
false or misleading. They have indicated recently that one of their clients
intends issuing proceedings against the Company. The amount claimed by this
client would not be material. However to date no proceedings have been served
on the Company by any of their clients. The Company has taken legal advice and,
although it is not able to assess these claims with accuracy because of a lack
of information in relation to them (although this information has been
requested from Class Law on a number of occasions), it does not believe that
the claims alleged will have a significant effect upon the financial position
of Vernalis or the Group as a whole. Save as is set out above, there are no
legal or arbitration proceedings (including any such proceedings which are
pending or threatened of which Vernalis is aware) which may have or have had
during the 12 months preceding the date of this document, a significant effect
on the financial position of Vernalis and the Group as a whole.




D Significant Changes

See item 4A, Information on the Company  History and Development of the
Company  Important Events Since April 30, 2002.




ITEM 9. THE OFFER AND LISTING

The market data presented under this Item relate primarily to British Biotech
plc prior to the acquisition of Vernalis Group. Certain data, however, is
provided as of the date of the filing to reflect recent market data and
ordinary share and ADR record ownership after the merger with Vernalis Group
(under UK merger accounting).




A Offer and Listing Details

Trading Market for Ordinary Shares and ADSs

The principal trading market for the Ordinary Shares is the London Stock
Exchange (the Exchange), on which the Ordinary Shares have been listed, under
the symbol BBG, since July 1992. With effect from October 20, 1997, the
Exchange introduced a new trading system based on an electronic order book,
known as the Stock Exchange Electronic Trading Service (SETS). This replaced
the Stock Exchange Automated Quotation system (SEAQ), the old quote-driven
system of share trading under which market makers were required to quote
two-way prices in the Ordinary Shares and buying and selling was conducted
largely by telephone. SETS is based on the automated matching of orders placed
electronically by prospective buyers and sellers.

All trades resulting from orders executed on the order book generate automatic
trade reports and, regardless of size, the information is published immediately
and the buy and sell orders are matched in the SETS. Trading may still take
place outside the order book and there are certain circumstances in which the
reporting of large trades (deemed to be at least eight times the normal market
size (NMS)) may be delayed until the earlier of the risk being unwound or the
market close.

55



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The Company also has a sponsored ADR facility with The Bank of New York as
Depositary. The Companys ADSs, each representing 40 Ordinary Shares (prior to
December 16, 2002, each ADS represented ten Ordinary shares and prior to August
5, 1996 each ADS represented two Ordinary Shares) have been quoted on the
NASDAQ National Market System under the symbol BBIOY since July 1992.

At October 15, 2003, there were a total of 23,847 record holders of the
Companys Ordinary Shares, including those represented by ADSs, of which 47 had
registered addresses in the US and held a total of 6,568,136 Ordinary Shares
(4.8 per cent of the total outstanding shares of the Company). At October 3,
2003 (the latest date by which information was available), there were 489,028
ADSs equivalent to 19,561,120 Ordinary Shares held of record by 25 ADR holders.
Since certain of the Companys Ordinary Shares and ADSs are held by nominees,
the number of holders of record may not be representative of the number of
beneficial owners.

On August 29, 2002, Vernalis received from NASDAQ notice that, during the 30
consecutive days prior to the date of such notice, the Companys ADSs had
closed below the minimum $1.00 per share requirement for continued inclusion in
the NASDAQ National Market. The notice further stated that, if the price of the
ADSs did not exceed $1.00 for a minimum of 10 consecutive days in the period
from August 29, 2002 to November 27, 2002, NASDAQ would provide Vernalis with a
written notification that its ADSs would be delisted from the NASDAQ National
Market.

On November 28, 2002, the Company received a Nasdaq Staff Determination
indicating that Vernalis had failed to comply with the minimum bid price
requirement of $1.00 for continued listing set forth in NASDAQ Marketplace Rule
4450(a)(5) with respect to its ADSs, and that its ADSs were subject to
delisting from The NASDAQ National Market. As a result, on December 16, 2002,
Vernalis amended the ratio of its ADSs to its ordinary shares from one-for-ten
(1:10) to one-for-forty (1:40). The Company was subsequently notified by NASDAQ
that it had satisfied the NASDAQ Listing Qualifications Panels requirements
for continued listing of Vernalis American Depositary Shares (ADSs) on The
NASDAQ National Market.

The following table shows, for the years and months indicated, the reported
high and low sales prices (in pence) for the Ordinary Shares on the Exchange,
based on its Daily Official List, and the highest and lowest sales prices (in
dollars) for ADSs as reported by NASDAQ.

On October 15, 2003, the last sales price on the Exchange was 84p per Ordinary
Share and $0.40 per ADS on NASDAQ.

Pence per Ordinary Share
    
    US$ per ADSFinancial year end April 30:
    
    High
    
    Low
    
    High
    
    Low1998
    
    
    5410
    
    
    
    1000
    
    
    
    43.58
    
    
    
    9.061999
    
    
    1440
    
    
    
    315
    
    
    
    13.50
    
    
    
    2.632000
    
    
    945
    
    
    
    300
    
    
    
    8.31
    
    
    
    2.382001
    
    
    605
    
    
    
    365
    
    
    
    4.31
    
    
    
    2.502002
    
    
    460
    
    
    
    210
    
    
    
    4.31
    
    
    
    1.482003
    
    
    250
    
    
    
    44
    
    
    
    7.16
    
    
    
    1.50Last two years by quarterFinancial year ended April 30, 2003First quarter
    
    
    250
    
    
    
    210
    
    
    
    7.16
    
    
    
    3.00Second quarter
    
    
    138
    
    
    
    44
    
    
    
    4.15
    
    
    
    1.60Third quarter
    
    
    105
    
    
    
    50
    
    
    
    3.32
    
    
    
    1.50Fourth quarter
    
    
    87.5
    
    
    
    59
    
    
    
    2.79
    
    
    
    1.67Financial year ended April 30, 2002First quarter
    
    
    460
    
    
    
    360
    
    
    
    3.60
    
    
    
    2.50Second quarter
    
    
    425
    
    
    
    270
    
    
    
    3.00
    
    
    
    1.85Third quarter
    
    
    375
    
    
    
    315
    
    
    
    2.76
    
    
    
    2.25Fourth quarter
    
    
    605
    
    
    
    210
    
    
    
    4.31
    
    
    
    1.48Last six monthsApril 2003
    
    
    67.5
    
    
    
    58.5
    
    
    
    2.34
    
    
    
    2.34May 2003
    
    
    73
    
    
    
    57
    
    
    
    2.53
    
    
    
    2.48June 2003
    
    
    69
    
    
    
    63.5
    
    
    
    2.47
    
    
    
    2.35July 2003
    
    
    70.5
    
    
    
    59.5
    
    
    
    2.75
    
    
    
    2.45August 2003
    
    
    67.5
    
    
    
    63
    
    
    
    2.28
    
    
    
    2.15September 2003
    
    
    81
    
    
    
    67
    
    
    
    2.77
    
    
    
    2.55October 2003, through October 15, 2003
    
    
    84
    
    
    
    79
    
    
    
    2.76
    
    
    
    2.56


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ITEM 10. ADDITIONAL INFORMATION

Information provided under this Item reflects the Group as of the date of the
filing, other than information under Item B describing the development of share
capital of British Biotech plc prior to the merger with Vernalis Group (under
UK merger accounting) and certain historical tax analysis also relating to
British Biotech plc.




A Memorandum and Articles of Association

Memorandum of Association and Articles of Association

The following is a summary of the rights under the Companys Memorandum of
Association and Articles of Association relating to voting, dividends,
transfers and rights upon a liquidation which attach to the New Vernalis
Shares.

Memorandum

The Memorandum of Association of the Company provides that the Companys
principal objects are, inter alia, to act as or carry on the business of a
holding company and to carry on activities ancillary thereto. The objects of
the Company are set out in full in clause 4 of its Memorandum of Association
which is available for inspection at the address specified in paragraph 15
below.

Articles of Association

The Articles of Association contain, inter alia, provisions to the following
effect. These paragraphs should be read subject to the detailed provisions of
the Articles of Association which are available for inspection as provided in
paragraph 15 below.

Transfer

The issued and unissued ordinary shares of 5 pence each in the capital of the
Company were made eligible for settlement in CREST by means of a resolution of
the board dated 9 July 1996, as contemplated by the Uncertified Securities
Regulations 1995 and effective under the CREST Regulations. Vernalis Shares and
New Vernalis Shares can therefore be held in registered (certified or
uncertified) form.

Any shareholder may effect the transfer of some or all his certified shares by
an instrument of transfer in writing in the usual form or in any other form
approved by the directors or, in the case of uncertified shares, in accordance
with the CREST Regulations.

The share transfer form must be signed by or on behalf of the transferor and,
in the case of a partly paid shares, also on behalf of the transferee. The
transferor will continue to be treated as a shareholder until the name of the
transferee is entered in the register of members for the relevant share or
shares.

The directors may, without giving any reason, refuse to register any transfer
of shares which are:



|(a) |  | not fully paid provided that, if any of these shares have been admitted
to the Official List of the London Stock Exchange, this does not stop
dealings in the shares from taking place on an open and proper basis;
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(b) |  | in respect of more than one class of share;
|--- |  | -------------------------------------------



|(c) |  | for certified and uncertified shares, if to joint transferees, in favour
of more than four such transferees; and
|--- |  | ----------------------------------------------------------------------------------------------------------------



|(d) |  | for certified shares, not delivered to the office, or any other place
decided on by the directors and accompanied by the relevant share
certificate and such other evidence as to the transferors right to
transfer as the directors may reasonably require.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The Board may also refuse to register a transfer of uncertified shares in
accordance with the CREST
Regulations.

If the directors decide not to register a share transfer, they must no later
than two months after the transfer or the relevant operator-instruction was
received, in each case by the Company, send notice of the refusal to the
transferee.

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Voting rights

Subject to any special rights or restrictions as to voting which are given to
any shares (as to which there are none at present), on a show of hands every
shareholder who is present in person has one vote, and on a poll every
shareholder present in person or by proxy has one vote for every five pence in
nominal value of the shares he holds. In the case of joint holders, the vote of
the person whose name stands first in the register of members is accepted to
the exclusion of any vote tendered by any other joint holder. Unless the
directors decide otherwise, a shareholder may not vote at any general or class
meeting or exercise any other right in relation to meetings while any amount of
money relating to his shares remains outstanding.

Dividends

Subject to the Companies Act, the Company may, by ordinary resolution, declare
dividends in accordance with the respective rights of the shareholders, but no
dividend shall exceed the amount recommended by the board. Subject to the
Companies Act, the directors may pay such interim dividends as appear to them
to be justified by the financial position of the Company on shares of any
class, of any amount, on any date and for any period. The directors may also
pay fixed dividends on any class of share carrying a fixed dividend on the
dates prescribed for the payment of such dividends. Except as otherwise
provided by the rights attached to the shares, all dividends shall be divided
and paid proportionately to the amounts paid up on the shares on which the
dividend is paid during any period in respect of which the dividend is paid.

Except as otherwise provided by the Articles of Association or the rights
attached to any shares, a dividend or any other money payable in respect of a
share can be paid in whatever currency the directors decide.

Directors may deduct any amount relating to shares which remains outstanding
from any dividend or other money payable to the shareholder on or in respect of
any share held by him.

The Company may stop sending dividend payments through the post, or cease using
any other method of payment (including payment through CREST) if, for two
consecutive dividends, the dividend payments have been returned undelivered or
remain uncashed during the period for which they are valid or the payments by
any other method have failed and, in the case of any one dividend, reasonable
enquiries have failed to establish any new address or account of the registered
shareholder.

Any dividend which remains unclaimed for 12 years from the date when it was
declared or became due for payment, shall be forfeited and be returned to the
Company.

The board may, if authorised by an ordinary resolution of the Company, offer
ordinary shareholders the right to elect to receive ordinary shares instead of
some or all of their cash; a scrip dividend.

Upon the recommendation of the directors, the Company may by ordinary
resolution direct that a dividend be satisfied wholly or partly by the
distribution of specific assets (in particular, paid up shares or debentures of
any other company). Where any difficulty arises with regard to the
distribution, the directors may resolve it as they think fit and in particular
(but without limitation) may authorise any person to sell and transfer any
fraction (or ignore fractions) and fix the value for distribution of any
assets, and may determine that cash shall be paid to any shareholder upon the
basis of that value in order to adjust the rights of shareholders, and may vest
any assets in trustees.

Distribution of assets on a winding up

If the Company is wound up the liquidator may, with the sanction of a special
resolution, divide among the shareholders (the division among shareholders to
be decided upon by the liquidator) in kind the whole or any part of the assets
of the Company whether the assets consist of property of one or different kinds
and at such property value as the liquidator deems fair. With the like sanction
the liquidator may vest the whole or any part of the assets in trustees upon
such trusts for the benefit of the shareholders as he may determine, but no
shareholder shall be compelled to accept any assets upon which there is a
liability.

Alteration of share capital

The Company may, by ordinary resolution, increase its capital, consolidate (or
consolidate and then divide) all or any of its share capital into shares of a
larger nominal amount than its existing shares and cancel any shares which, at
the date
of the passing of the ordinary resolution have not been taken, or agreed to be
taken and reduce the amount of the Companys share capital by the amount of the
cancelled shares. Subject to the Companies Act, the Company may also divide
some or all of its existing shares into shares of a smaller nominal value by
ordinary resolution and provide that as between the holders of the divided
shares different rights and restrictions apply.

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The directors have the power to deal with any fractions of shares resulting
from a consolidation, including selling any shares representing fractions for
the best price reasonably obtainable and distributing the net proceeds of sale
among shareholders in proportion to their fractional entitlements.

The Company may by special resolution reduce its share capital, any capital
redemption reserve, any share premium account or any other undistributable
reserve in any way. The Company may, subject to the Companies Act, the rules of
the London Stock Exchange (if applicable) and to any special rights previously
given to holders of existing shares, purchase any of its own shares (including
redeemable shares).

If recommended by the directors, the Company can by ordinary resolution
capitalise any sum which is part of the Companys reserves or which the Company
is holding as net profit. Subject to the Companies Act and any resolution of
the company, the directors may decide how to deal with any unissued shares.
They may, for instance, offer the shares for sale, grant options to acquire
them, allot them or otherwise dispose of them.

Restrictions on shareholders

If any shareholder or any other person who the Company has reasonable cause to
believe has an interest in the Companys shares has been duly served with a
statutory notice and has not, within 14 days, provided details of those who
have an interest and the extent of their interest in that particular
shareholding, the Company may send out a further notice to the shareholder (a
Restriction Notice) to direct that in respect of the shares in relation to
which the default occurred (the Identified Shares) (which expression shall
include any further shares which are issued in respect of such shares) the
shareholder shall not be entitled to attend or vote either personally or by
proxy at a general meeting of the Company or a meeting of the holders of any
class of shares or to exercise any other right in relation to general meetings
of the Company or meeting of the holders of any class of shares.

Where the Identified Shares represent 0.25 per cent. or more (in nominal value
or number) of the issued shares of a class then the Restriction Notice may
additionally direct that any dividend (or part thereof) or other money which
would otherwise be payable in respect of the Identified Shares shall be
withheld without any liability to pay interest thereon when such money is
finally paid to the shareholder and/or that a transfer of any of the Identified
Shares in certified form and, as far as permitted by the CREST Regulations, any
of the identified shares in uncertified form shall be refused, unless the
directors are satisfied that they have been sold outright to an independent
third party. Any sale through the London Stock Exchange or other stock exchange
or acceptance of a takeover offer will be treated as an outright sale to an
independent third party.

Variation of rights

Subject to the Companies Act and to special rights previously given to holders
of existing shares, the Company may issue shares with any rights or
restrictions attached to them. Rights or restrictions can be decided upon by
either an ordinary resolution or, as long as there is no conflict with any
resolution, by the directors.

Subject to the Companies Act, the rights attached to any class of shares may be
changed or abrogated, with the written approval of shareholders holding at
least three quarters in nominal value of the issued shares of that class or
with the sanction of an extraordinary resolution passed at a separate meeting
of the holders of the relevant class of shares.

The provisions of the Articles of Association relating to general meetings will
apply to any such separate class meeting except that:



|(a) |  | the necessary quorum is two shareholders present in person or by proxy
who own at least one third in nominal value of the issued shares of the
class;
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------



|(b) |  | if at an adjourned meeting, a quorum as defined at (a) above is not
present, one person who holds shares of the class, or his proxy, will be a
quorum; and
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------



|(c) |  | any shareholder who is present in person or by proxy can demand a poll at
which every shareholder who is present in person or by proxy is entitled
to one vote for every share he has of the class (but this is subject to
any special rights or restrictions which are attached to any class of
shares).
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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Directors

NumberSubject to the passing of an ordinary resolution changing the
restrictions in the Articles of Association, there must be at least two
directors and not more than 20 (disregarding alternative directors).

AgeNo person will be appointed a director or be required to stop being a
director because he has reached a particular age. However, any person who is
age 70 or over must retire in accordance with the Articles of Association.
Notice of a meeting at which a resolution will be proposed to reappoint or
appoint a director who is age 70 or more must state the fact that the relevant
director is aged 70 or more.

AppointmentDirectors may be appointed by ordinary resolution or by the board
of the Company and a director need not be a shareholder of the Company. A
director appointed by the board of the Company holds office only until the next
following annual general meeting and is not taken into account in determining
the directors who are to retire by rotation at that meeting.

RemovalIn addition to any power to remove directors under the Companies Act,
the Company may pass a special resolution to remove a director from office even
though his time in office has not ended and may (subject to the Articles of
Association) elect a person to replace a director who has been removed in this
way by passing an ordinary resolution.

Retirement by rotationAt every annual general meeting, one third of the
directors will retire by rotation and be eligible for re-election. If one-third
is not a whole number, the number of directors to retire is the number nearest
to and less than one third. If there are less than three directors, they will
all retire. The directors to retire will be those who have been directors
longest since they were last elected. If there are directors who were last
elected on the same date, and they cannot agree who is to retire, they must
draw lots to decide. In addition, any director who would not otherwise be
required to retire by rotation must retire by rotation at the third annual
general meeting since his last appointment or re-appointment. Any director age
70 or more must retire by rotation.

EligibilityOnly the following may be elected as directors at a general
meeting:



|(a) |  | directors retiring at that meeting;
|--- |  | -----------------------------------



|(b) |  | anyone recommenced by the directors; and
|--- |  | ----------------------------------------



|(c) |  | anyone nominated by a shareholder (not being the person nominated)
entitled to vote at the meeting who has delivered to the office of the
Company between seven and 42 days before the meeting a letter stating that
he intends to nominate another person for election as director and written
confirmation from the nominee that he is willing to be elected.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

RemunerationThe total such fees paid to all of the directors must not exceed
£400,000 per annum or such other higher amount as may from time to time be
decided by ordinary resolution. Any director who performs any special or extra
services for the Company is entitled to receive special pay (whether by way of
salary, lump sum or a combination or in any other way, paid as well as or
instead of his ordinary pay as a director) as the board of the Company or a
committee thereof may decide. Each director may be paid reasonable expenses
incurred in attending and returning from board meetings, committee meetings,
general meetings or otherwise properly and reasonably incurred in connection
with the Companys business or in the performance of his duties as a director.

Pensions and gratuities for directorsThe board of the Company or any committee
thereof may provide pensions or other benefits to any director or former
director of the Company, or any relation or dependent of such person. However,
if the directors want to provide a benefit to a director or former director who
has not held an executive post or place of profit in the Company or in a
subsidiary undertaking of the Company or in any former owner of the business of
the Company or any subsidiary undertaking of the Company, the Company must also
pass an ordinary resolution to approve such payment.

Permitted interestssubject to the provisions of the Companies Act and provided
that a director discloses the nature and extent of his interest to the board, a
director can do any one or more of the following:



|(a) |  | have any kind of interest in any existing or proposed contract,
transaction or arrangement with or involving the Company or another
company in which the Company has some interest;
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(b) |  | alone or through some firm with which he is associated, do paid
professional work for the Company (other than as auditor);
|--- |  | --------------------------------------------------------------------------------------------------------------------------



|(c) |  | hold any other position (other than auditor) in the Company as well as
being a director; and
|--- |  | --------------------------------------------------------------------------------------------



|(d) |  | hold any position within, or be a shareholder of, any other company in
which the Company has an interest.
|--- |  | ---------------------------------------------------------------------------------------------------------

Any director who is so interested does not have to account to the Company for
any benefit he receives as a result of any of the above.

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Subject to the Articles of Association, a director cannot vote, and be counted
in a quorum, on any resolution relating to any contract, transaction,
arrangement or other proposal in which he (or a person connected with him)
knowingly has a material interest unless the only material interest falls
within one of the following:



|(a) |  | a resolution about giving him (the director concerned), or any other
person, any security or any indemnity for any money which he, or that
other person, has lent at the request, or for the benefit of, the Company,
any of its holding companies or any of its subsidiary undertakings;
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(b) |  | a resolution about giving him (the director concerned), or any other
person, any security or any indemnity for any liability which he, or that
other person, has incurred at the request, or for the benefit of, the
Company, any of its holding companies or any of its subsidiary
undertakings;
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(c) |  | a resolution about giving any security or any indemnity to any other
person for a debt or obligation which is owed by the Company, any of its
holding companies or any of its subsidiary undertakings, to that other
person, if the director has taken responsibility for some or all of that
debt or obligation. The director can take this responsibility by giving a
guarantee, indemnity or security;
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(d) |  | a resolution about any proposal relating to an offer of any shares or
debentures or other securities for subscription or purchase by the
Company, any of its holding companies or any of its subsidiary
undertakings, if the director takes part because he is a holder of shares,
debentures or other securities, or if he takes part in the underwriting or
subunderwriting of the offer;
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(e) |  | a resolution about any proposal involving any other company if the
director (together with any person connected with the director), has a
direct or indirect interest of any kind (including an interest by holding
any position in that company, or by being a shareholder of that company).
This does not apply if he knows that he and any persons connected with him
hold an interest in shares representing one per cent. or more of:
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (i) |  | any class of equity share capital of that company; or
| | --- |  | -----------------------------------------------------



| | (ii) |  | the voting rights in that company.
| | ---- |  | ----------------------------------



| |  | Any of these interests of one per cent. or more are treated as being a
material interest;
| |  | -----------------------------------------------------------------------------------------



|(f) |  | any arrangement for the benefit of employees of the Company, any of its
holding companies or any of its subsidiary undertakings which only gives
him benefits which are also generally given to the employees to whom the
arrangement relates; or
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(g) |  | a resolution about any proposal relating to any insurance which the
Company can buy and renew for the benefit of directors or of a group of
people which includes directors.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Benefit of employeesThe directors may exercise powers to make provision for
the benefit of employees or former employees of the Company or any of its
subsidiaries in connection with the cessation or transfer of the whole or part
of the business of the Company or that subsidiary.

Borrowings

The directors may exercise all the Companys powers to borrow money; to
mortgage or charge all or any of the Companys undertaking, property and assets
(present and future) and uncalled capital, to issue debentures and other
securities; and to give security for any debt, liability or obligation of the
Company or of any third party.

The directors will limit the total borrowings of the Company and, so far as
they are able, its subsidiary undertakings to ensure the total amount of the
Groups borrowing does not exceed the greater of £50,000,000 and 1.5 times the
Companys adjusted capital and reserves unless the Company by ordinary
resolution allows borrowings to exceed such limit. Any borrowings owed by one
member of the Group to another will not be taken into account for the purposes
of the calculation of the Groups total borrowings.

Shareholders meetings

Subject to the provisions of the Companies Act, the annual general meeting is
held at such time as the board of the Company may determine. The board of the
Company may call extraordinary general meetings at any time. At general
meetings of the Company two members present in person and who are entitled to
vote is a quorum, except in the case of adjourned meetings where a quorum is
one member present in person or by proxy. Notice periods and the majorities
required for the passing of resolutions are those provided for under the
Companies Act.

61



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Untraced shareholders

The Company may sell any certificated shares by instructing a member of the
London Stock Exchange to sell them at the best price reasonably obtainable at
the time of sale, if:



|(a) |  | during the 12 years before the earliest of the notices referred to in (b)
below, at least three dividends have become payable on the shares and no
dividend has been claimed during that period;
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(b) |  | after the 12 year period, the Company has published a notice, stating
that it intends to sell the shares in a national newspaper in the United
Kingdom and in a local newspaper appearing in the area in the United
Kingdom which includes the address held by the Company for serving notices
relating to those shares;
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(c) |  | during the 12 year period and for three months after the last of the
notices referred to in (b) above appear, the Company has not heard from
the shareholder or any person entitled to the shares by law; and
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(d) |  | the Company has notified the London Stock Exchange that it intends to
sell the shares.
|--- |  | --------------------------------------------------------------------------------------

To sell any shares in this way, the directors may appoint anyone to transfer
the shares. This transfer will be just as effective as if it had been signed by
the holder, or by a person who is entitled to the shares by law. The person to
whom the shares are transferred will not be bound to concern himself as to what
is done with the purchase moneys nor will his ownership be affected even if the
sale is irregular or invalid in any way.

The proceeds of sale will belong to the Company, but it must pay an amount
equal to the sale proceeds less the costs of the sale to the shareholder who
could not be traced, or to the person who is entitled to his shares by law, if
that shareholder, or person, asks for it.

After the sale, the Company must record the name of the shareholder, or (if
known) the person who would have been entitled to the shares by law, as a
creditor for the money in its accounts. The Company will not be a trustee of
the money and will not be liable to pay interest on it. The Company can use the
money, and any money earned by using the money, for its business or in any
other way that the directors decide, but the money cannot be invested in the
Companys shares or in the shares of any holding company of the Company.




B Share Capital

The Company raised funds through venture capital in 1986 and 1988, two private
placements of its equity securities, an initial public offering in July 1992, a
rights issue in May 1994 (the 1994 Rights Issue), the conversion of warrants
between December 1995 and January 1996 and a rights issue in July 1996 (the
1996 Rights Issue). Between December 11, 1995 and January 31, 1996, all
9,052,770 issued warrants were converted into Ordinary Shares on a one-for-one
basis for a total consideration of £47,527,000 before expenses. In July 1996,
7,246,524 Ordinary Shares were issued by way of rights to shareholders on a
one-for- eight basis for a total consideration before expenses of £148,554,000.
In August 1996, 587,036,718 Ordinary Shares were issued by way of the
nine-for-one capitalization issue, which had the effect of reducing the
Companys Ordinary Share price to approximately one tenth of its previous
level. In April 2003 the Company undertook a capital reorganization. 20 Old
Ordinary shares of 5 pence were consolidated into one Intermediate Ordinary
share of £1. The consolidation of Old ordinary Shares into intermediate
Ordinary shares was immediately followed by a share capital subdivision as
follows. Each Intermediate Ordinary share was subdivided into one New
Ordinary share of 5 pence and one Deferred share of 95 pence.

The Deferred shares are not listed, do not confer any rights to dividend and
have extremely limited other rights which render them of negligible monetary
value. The Company has appointed a director of the Company, Mr A J Weir, to
execute on behalf of each holder of a Deferred share a transfer of such
Deferred shares, for no payment, from Vernalis shareholders to Mr Weir pursuant
to restrictions attaching to the Deferred shares.

On 23 April, 2003 the company issued 33,375,889 New Ordinary shares of 5p
each in respect of the acquisition of RiboTargets Holdings plc.




C Material Contracts

The following contracts are the only contracts not entered into in the ordinary
course of business which have been entered into by the Group within two years
immediately preceding the date of this document and are or may be material to
the Group;



|(a) |  | Sale proposal relating to the acquisition by the Company of RiboTargets
Holdings plc
|--- |  | ------------------------------------------------------------------------------------

On March 21, 2003, the Company made an offer (the RiboTargets Offer) to
RiboTargets shareholders to acquire the entire issued share capital of
RiboTargets. The RiboTargets Offer comprised the following:



| |  | for every RiboTargets B ordinary share approximately 2.79 of the Companys shares;
|- |  | ----------------------------------------------------------------------------------



| |  | for every RiboTargets A ordinary share approximately 0.85 of the Companys shares; and
|- |  | --------------------------------------------------------------------------------------



| |  | 396,198 of the Companys shares allocated amongst RiboTargets
shareholders pro rata to their holdings of RiboTargets ordinary shares
immediately prior to April 23, 2003.
|- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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The Companys acquisition of RiboTargets was completed on April 23, 2003. Based
on the Companys share price of 3.875 pence on 19 March 2003, the last
practicable business day prior to announcement of the RiboTargets Offer, the
aggregate value of the RiboTargets Offer amounted to approximately £26 million.



|(b) |  | Deed of covenant
|--- |  | ----------------

In connection with the RiboTargets Offer, the Company entered into a deed of
covenant dated March 17, 2003 in favour of RiboTargets whereby the Company
agreed to carry on the business of the Group (then the British Biotech Group)
in the ordinary course pending completion of its acquisition of RiboTargets.



|(c) |  | Undertaking
|--- |  | -----------

|      |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |  |                                                                                                                                                                                                                               
|----- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(i)   |  | On March 21, 2003, in consideration for the Company agreeing to make the
RiboTargets Offer, certain RiboTargets shareholders holding in aggregate
100 per cent. of the issued. RiboTargets B ordinary shares, 99.9 per cent.
of the issued RiboTargets A ordinary shares, and 100 per cent. of the
issued RiboTargets ordinary shares, entered into an undertaking (the
Undertaking) to accept the RiboTargets Offer and granted warranties in
favour of the Company in respect of their ownership of the RiboTargets
shares. The Undertaking imposes restrictions on the ability of the (now,
former) RiboTargets shareholders who are party to it to sell the shares in
the Company which they received in connection with the RiboTargets Offer
(Lock-up Shares) without the Companys prior approval. Each (now, former)
RiboTargets shareholder that entered into the Undertaking:
|      |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |  |                                                                                                                                                                                                                               
|      |  | (a)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |  | may not dispose of any its Lock-up Shares at any time during
the period of six calendar months following April 23, 2003 (the
Initial Lock-up Period);                                                                         
|      |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |  |                                                                                                                                                                                                                               
|      |  | (b)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |  | subject as described in (ii) below, during the period of eight
calendar months after the Initial Lock-up Period has expired (the
Interim Lock-up Period) must:                                                                
|      |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |  |                                                                                                                                                                                                                               
|      |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |  | (x)    notify the Company or its nominated broker (currently Cazenove)
in writing prior to the disposal of any Lock-up Shares; and                                                                                            
|      |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |  |                                                                                                                                                                                                                               
|      |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |  | (y)    must not dispose of any Lock-up Shares other than through the
Companys nominated broker.                                                                                                                              
|      |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |  |                                                                                                                                                                                                                               
|      |  | However, if a (now, former) RiboTargets shareholder who has entered into
the Undertaking receives an unsolicited offer to acquire Lock-up Shares
then sub-paragraph (y) above will not apply and such RiboTargets
shareholder shall only be obliged to notify the Companys nominated broker
in writing prior to such disposal.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|      |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |  |                                                                                                                                                                                                                               
|(ii)  |  | During the Interim Lock-up Period the Qualifying Shareholders (as defined
below) are together entitled to dispose of Lock-up Shares up to a maximum
aggregate of Lock-up Shares equal to three per cent. of the issued
ordinary share capital of the Company immediately following April 23, 2003
without using the Companys nominated broker to effect such disposal.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|      |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |  |                                                                                                                                                                                                                               
|      |  | Qualifying Shareholder means a RiboTargets shareholder who has entered
into the Undertaking whose beneficial holding of Lock-up Shares
immediately following April 23, 2003 amounted to less than one per cent.
of the aggregate issued ordinary share capital of the Company immediately
following April 23, 2003.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|      |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |  |                                                                                                                                                                                                                               
|(iii) |  | A (now, former) RiboTargets shareholder wishing to dispose of any
Lock-up Shares in the six months after the Interim Lock-up Period has
expired must consult with the Companys nominated broker about such
disposal for a reasonable period of time prior to the proposed disposal,
including, without limitation, with respect to the method and timing of
the disposal.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|      |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |  |                                                                                                                                                                                                                               
|(iv)  |  | In addition, each (now, former) RiboTargets shareholder who has entered
into the Undertaking agreed, prior to the end of the Initial Lock-up
Period, not to acquire or offer to acquire, directly or indirectly, any of
the Companys shares if the effect would be to oblige any person to make a
mandatory offer for the Company under Rule 9 of the Code.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|      |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |  |                                                                                                                                                                                                                               
|(v)   |  | The Undertaking contains exemptions which allow the (now, former)
RiboTargets shareholders that entered into the undertaking to dispose of
Lock-up Shares, regardless of the restrictions listed above, in the
following situations:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|      |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |  |                                                                                                                                                                                                                               
|      |  | (a)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |  | a disposal pursuant to a court order;                                                                                                                                                                                         
|      |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |  |                                                                                                                                                                                                                               
|      |  | (b)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |  | a renunciation of a right to subscribe for shares where such
right is derived from the Lock-up Shares or a failure to take up any
such right;                                                                                 
|      |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |  |                                                                                                                                                                                                                               
|      |  | (c)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |  | if the Company makes an offer to its shareholders to purchase
its own shares or proposes a scheme of arrangement, a disposal or
agreement to dispose of any Lock-up Shares to the Company pursuant to
that offer or scheme; or
|      |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |  |                                                                                                                                                                                                                               
|      |  | (d)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |  | by acceptance of a general offer made for all the issued share
capital of the Company, provided such offer is recommended by the
board of directors of the Company.                                                           

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(d) Placing and Open Offer Agreement

The Placing and Open Offer Agreement dated May 1, 2003 between Vernalis Group
plc and Cazenove, pursuant to which Cazenove agreed: (1) as agent for Vernalis
and subject to the terms and conditions of the Placing and Open Offer
Agreement, to invite qualifying shareholders to subscribe for 30,098,086 new
ordinary shares in Vernalis; (2) subject to the terms and conditions of the
Placing and Open Offer Agreement, to procure subscribers for, or itself
subscribe for, all the new ordinary shares available under the open offer other
than the committed open offer shares (the Clawback Shares) on the basis
that such shares are subject to recall to satisfy valid applications by
qualifying shareholders under the open offer; (3) subject to the terms and
conditions of the Placing and Open Offer Agreement, to procure subscribers for,
or itself subscribe for, 14,346,359 new ordinary shares in Vernalis Group plc
pursuant to the firm placing; and (4) to act as sponsor to Vernalis Group plc
in connection with admission of its new ordinary shares. The Placing and Open
Offer Agreement contains certain warranties, undertakings and indemnities given
by Vernalis Group plc in favour of Cazenove.

Vernalis agreed to pay Cazenove (together with any applicable value added tax):
(1) whether or not admission of the new ordinary shares in Vernalis Group plc
became effective, a commitment commission of 0.5 per cent. of the value at the
offer price of the clawback shares and (2) subject to admission of the new
ordinary shares in Vernalis Group plc a commission of £750,000 plus a placing
commission of 0.75 per cent. of the value at the offer price of the clawback
shares. Out of the commissions, Cazenove paid placing commissions to such
persons (if any) as it procured to subscribe for Clawback Shares.

Vernalis Group plc paid the incidental costs and expenses of and relating to
the Placing and Open Offer.



|(e) |  | Roche Convertible Loan
|--- |  | ----------------------

On May 13, 2002 Vernalis Group plc entered into a convertible loan agreement
with Roche Finance Limited pursuant to which Roche Finance Limited made a loan
to Vernalis Group plc of £7 million, convertible at any time by Roche into
ordinary shares in Vernalis Group plc at a conversion price of 329 pence per
share. Vernalis Group plc also has rights to convert the Roche Convertible Loan
in specified circumstances. If not converted the Roche Convertible Loan is
repayable after five years. Interest is payable semi-annually in arrears on May
13 and November 13 in each year. The terms of the Roche Convertible Loan
include an anti-dilution provision that was triggered by the issue of new
ordinary shares in the Placing and Open Offer, the effect of which was to
reduce the conversion price. This would result in Roche Finance Limited
receiving an additional 1,576,044 new ordinary shares in Vernalis Group plc on
conversion of the full amount of the Roche Convertible Loan.

In accordance with the terms of the Roche Convertible Loan, the Company
notified Roche Finance Limited on Vernalis becoming aware that the right to
cast more than 50 per cent. of the votes at a general meeting of Vernalis Group
plc had become unconditionally vested in the Company. Roche Finance Limited
retains the right to require repayment of the loan with accrued but unpaid
interest to the date of repayment but has not yet exercised its entitlement to
repayment. Vernalis Group plc may, with the prior written consent of Roche
Finance Limited (such consent not to be unreasonably withheld or delayed),
assign or transfer all or any of its rights, benefits and obligations under the
Roche Convertible Loan, including the right of Roche Finance Limited to convert
the loan into ordinary shares, to an affiliate of Vernalis Group plc, including
the Company.



|(f) |  | Summary of offer document
|--- |  | -------------------------

On July 25, 2003 J.P. Morgan plc made an offer (the Offer) on behalf of
Vernalis plc (then British Biotech plc) for all the issued and to be issued
ordinary shares of 10 pence each in Vernalis Group plc (the Vernalis Group
Shares).

The terms of the Offer were:

for each Vernalis Group Share
    
    0.861 of a share in the Company


The Offer became wholly unconditional on 1 September 2003 and closed on
September 23 2003. Vernalis Group plc is now a subsidiary of the Company. The
procedure for the compulsory acquisition of the final outstanding minority
interests in Vernalis Group plc is expected to complete on 4 November 2003 at
which time Vernalis Group plc will be a wholly owned subsidiary of the Company.
Based upon the Companys mid-market closing price of 64.5 pence on 24
July 2003 (the last business day prior to the Offer being posted) the total
value of the Offer was approximately £48.6 million.

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|(g) |  | Lease between Allied Dunbar Assurance plc (successor to Marion Merrel
Limited) and Vernalis Research Limited (successor to Cerebrus Limited),
dated May 13, 1997.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------

The property is approximately 44,000 sq. ft. in size and Vernalis has a 20 year
leasehold interest in the property, which commenced on May 9, 1997 and expires
in 2017. Vernalis may terminate the Lease in 2012 if it wishes. Current annual
rent is £730,000. The rent is reviewed every 5 years, next due in 2007.



|(h) |  | Sub-Licence Agreement between Menarini International Operations
Luxembourg SA and Vernalis Development Limited (formerly known as Vanguard
Medica Limited), dated as of September 10, 1999; and Supply Agreement
between Vernalis Development Limited (formerly known as Vanguard Medica
Limited) and Menarini International Operations Luxembourg SA, dated as of
September 10, 1999.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Vernalis have also signed a license agreement with Menarini granting Menarini
exclusive marketing rights for frovatriptan in the European Union, Eastern
Europe and specified countries in Central America. Under this agreement
Vernalis will supply Menarini with the finished packed product ready for sale.
Vernalis receives revenue on supply of product and also from royalties. For
additional information, see above Item 4D Information on the
Company 
Commercial Collaborations under Menarini (Frovatriptan).



|(i) |  | Second Amending Agreement to the Frovatriptan Development and Sublicense
Agreement between SmithKline Beecham plc and the Vernalis Development
Limited (formerly known as Vanguard Medica Limited), dated November 27,
2000.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

In December 2000, SmithKline Beecham waived all of its rights to royalties on
sales of frovatriptan in return for a series of five $5 million cash payments
by Vernalis. For additional information, see above Item 4D Information on the
Company  Commercial Collaborations under Smithkline Beecham (Frovatriptan).



|(j) |  | Second Amended and Restated Licence Agreement between Elan Pharma
International Limited and Vernalis Limited, dated March 15, 2002, amending
and restating the Amended and Restated Sub-Licence Agreement between the
parties, dated as of December 12, 2000.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Vernalis signed a license agreement with Elan in 1998 granting Elan exclusive
marketing rights for frovatriptan in the United States, Canada and Mexico. On
signing, Elan paid Vernalis a fee of $7.5 million and made a $10 million
investment in Vernalis Group ordinary shares at a negotiated price of £6.25 per
share. Elan subsequently paid Vernalis a further $7.5 million in 1999 when the
FDA formally accepted Vernaliss frovatriptan New Drug Application (NDA) for
review, and a further $15 million in the fourth quarter of 2001 following FDA
marketing approval. Under the terms of the 1998 license agreement, Vernalis
could have potentially received three additional milestone payments exceeding
$30 million in total on achievement by Elan of agreed sales targets for
frovatriptan. In addition, Elan would pay Vernalis a royalty based on its net
sales of frovatriptan. In December 2000, Vernalis entered into a new financing
agreement with Elan under which Elan made a $10 million loan to Vernalis and a
further equity investment of £4.96 million. Following that investment, Elan
held 2,943,396 Ordinary Shares, representing approximately 6.7% of Vernalis
Groups issued share capital, which was subsequently sold in July 2002. Elan no
longer has any shareholding in Vernalis Group (or Vernalis). For additional
information, see above Item 4D Information on the Company  Commercial
Collaborations under Elan (Frovatriptan).




D Exchange Controls and other Limitations Affecting Security Holders

There are currently no UK foreign exchange control restrictions.

There are no restrictions under the Companys Memorandum and Articles of
Association or under English law that limit the right of non-resident or
foreign owners to hold or vote on the Groups Ordinary Shares.

65



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E Taxation

The following discussion summarizes certain US Federal income tax and UK tax
consequences generally applicable to ownership by a US holder (as defined
below) of ADSs or Ordinary Shares not in ADS form that is not resident in the
UK, for the purposes of the Old Treaty and the New Treaty (as defined below).
It applies to a US holder only if the US holder holds the ADSs or Ordinary
Shares as capital assets for tax purposes. This section does not apply to a US
holder is a member of a special class of holders subject to special rules,
including a dealer in securities, a trader in securities that elects to use a
mark-to-market method of accounting for his securities holdings, a tax-exempt
organization, a life insurance company, a person liable for alternative minimum
tax, a person that actually or constructively owns ten per cent or more of the
stock of the Company, a person that holds ADSs or Ordinary Shares as part of a
straddle or a hedging or conversion transaction, a person whose functional
currency is not the US dollar and holders who acquired the stock units or ADSs
as compensation.

This summary is based on the US Internal Revenue Code of 1986, as amended, its
legislative history, existing and proposed regulations, published rulings and
court decisions, and on the UK tax law and practice as of the date of this
document as well as on the Convention between the United States of America and
the United Kingdom for the avoidance of Double Taxation as entered into force
in 1980 (the Old Treaty) and the Convention between the United States of
America and the United Kingdom for the Avoidance of Double Taxation entered in
force March 31, 2003 (the New Treaty). These laws are subject to any changes
possibly on a retroactive basis.

The New Treaty generally will be effective in respect of taxes withheld at
source for amounts paid or credited on or after May 1, 2003. Other provisions
of the New Treaty, however, will take effect on January 1, 2004. The rules of
the Old Treaty remain applicable until these effective dates. A US holder,
however, may elect to have the Old Treaty apply in its entirety for a period of
twelve months after the applicable effective dates of the New Treaty.

This summary is also based in part on representations of the US Depositary and
assumes that each obligation provided for in, or otherwise contemplated by, the
Deposit Agreement between Vernalis, the Bank of New York as Depositary and all
owners from time to time of ADRs issued thereunder dated July 7, 1992 and
amended and restated as of August 5, 1996 and any related agreement, will be
performed in accordance with its terms.

A US holder is a beneficial owner of ADSs or Ordinary Shares that is for US Federal income tax purposes:



| |  |  | a citizen or resident of the United States,
| | - |  | -------------------------------------------



| |  |  | a domestic corporation,
| | - |  | -----------------------



| |  |  | an estate whose income is subject to United States Federal income tax regardless of its source, or
| | - |  | --------------------------------------------------------------------------------------------------



| |  |  | a trust if a United States court can exercise primary supervision
over the trusts administration and one or more United States persons
are authorized to control all substantial decisions of the trust.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

US holders should consult their own tax advisors regarding the United States
Federal, state and local and the United Kingdom and other tax consequences of
owning and disposing of the ADSs or Ordinary Shares in their particular
circumstances and in particular whether they are eligible for the benefits of
the Old Treaty and the New Treaty.

In general and taking into account earlier assumptions, for United States
Federal income tax and United Kingdom tax purposes, if a US holder holds ADRs
evidencing ADSs, the holder will be treated as the owner of the shares
represented by those ADSs. Furthermore, US holders of ADSs will be treated as
the owners of the underlying Ordinary Shares for the purposes of the
Conventions and the US Internal Revenue Code of 1986, as amended (the Code).
Accordingly, except as noted below, the tax consequences discussed below apply
equally to US holders of ADSs and to US holders of Ordinary Shares not in ADS
form, and exchanges of Ordinary Shares for ADSs, and ADSs for Ordinary Shares,
generally will not be subject to US Federal income tax or to UK tax.

Taxation of Dividends

United Kingdom Income Tax

For the purposes of this summary, the term Eligible US holder means a
beneficial owner of an ADS or Ordinary Share that derives and beneficially owns
the cash dividend paid thereon and that is a resident of the US for the
purposes of the Convention relating to income and capital gains taxes (the
Income Tax Convention).

An Eligible US holder will generally be entitled under the current Income Tax
Convention to receive, in addition to any dividend paid by the Company, an
amount equal to the tax credit available to UK resident shareholders in respect
of such dividend, currently equal to one-ninth of the dividend paid, but
subject to a notional withholding tax equal to 15 per cent of the sum of the
dividend paid and the tax credit. The withholding tax will exceed the tax
credit and therefore no additional payment will result.

The amount of withholding tax is restricted to the amount of the tax credit and
no additional withholding tax is due in situations where the withholding tax is
more than the credit.

For example, a dividend of £80.00 to an individual Eligible US holder would
generally entitle the individual Eligible US holder to receive a tax credit of
approximately £8.89 (i.e. one-ninth of 80) and the amount of withholding tax
will be limited to £8.89 (even though 15 per cent of the gross dividend would
be £13.33). The result is the refund to which the
individual Eligible US holder would otherwise be entitled is eliminated and no
withholding tax is due. Such an Eligible US holder would, therefore, only
receive the net amount of the dividend, i.e. £80.00.

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It is anticipated that almost all ADS holders will be subject to the above
arrangements.

U.S. shareholders who own less than 10 per cent of the voting stock as
portfolio investors, and who are entitled to a tax credit under the Income Tax
Convention may elect to be treated as receiving an amount equal to the credit
without affirmatively making a claim to the United Kingdom or obtaining a
receipt therefrom. This election is made on Line 5 of Form 8833, which is to
be filed with the portfolio investors income tax return. Such an investor
making this election will be treated as having received an additional dividend
equal to the gross tax credit payment and as having paid the UK withholding tax
on such tax credit payment.

United States Federal Income Tax

Subject to the passive foreign investment company, or PFIC, rules discussed
below, a US holder is subject to US Federal income taxation on the gross amount
of any dividend paid by Vernalis out of its current or accumulated earnings and
profits (as determined for US Federal income tax purposes). The PFIC rules,
however, materially alter this treatment. US holder that is eligible for the
benefits of the Old Treaty may include in the gross amount the UK tax withheld
from the dividend payment pursuant to the Old Treaty, as described above in
United Kingdom Taxation. Subject to certain limitations, the UK tax
withheld in accordance with the Old Treaty and effectively paid over to the UK
Inland Revenue will be creditable against the US holders United States federal
income tax liability, if the US holder is eligible for the benefits of the Old
Treaty and has appropriately filed Internal Revenue Form 8833. Under the New
Treaty, a US holder will not be entitled to a UK tax refund, but also not be
subject to UK withholding tax. In that case, the US holder therefore will
include in income for United States federal income tax purposes only the amount
of the dividend actually received from Vernalis, and the receipt of a dividend
will not entitle the US holder to a foreign tax credit. Dividends will be
income from sources outside the United States, and generally will be passive
income or financial services income, which is treated separately from other
types of income for purposes of computing the allowable foreign tax credit.

Dividends paid to a non-corporate US holder in taxable years beginning after
December 31, 2002 and before January 1, 2009 that constitute qualified dividend
income will be taxable to the holder at a maximum rate of 15% if certain
holding period requirements are met. Dividends paid by Vernalis, however,
likely will not be qualified dividend income as described below in
 Passive
Foreign Investment Company Considerations.

The amount of the dividend distribution that the US holder must include in his
income is the US dollar value of the pound payment made, determined at the spot
pound/US dollar rate on the date the dividend distribution is includible in the
US holders income, regardless of whether the payment is in fact converted into
US dollars. Generally, any gain or loss resulting from currency exchange
fluctuations during the period from the date the US holder includes the
dividend payment in income to the date the US holder converts the payment into
US dollars will be treated as ordinary income or loss. The gain or loss
generally will be income or loss from sources within the United States for
foreign tax credit limitation purposes.

Distributions in excess of current and accumulated earnings and profits, as
determined for United States Federal income tax purposes, will be treated as a
non-taxable return of capital to the extent of the US holders basis in the
Ordinary Shares or ADSs and thereafter as capital gain. No dividend received
deduction will be allowed to US corporations with respect to dividends paid by
the Company.

Special rules described below apply with respect to that holderto dividends
distributed to a US holder during periods in which Ordinary Shares or ADSs are
treated as stock of a PFIC.

Taxation of Capital Gains

United Kingdom Capital Gains Tax

A US holder who is not resident or ordinarily resident in the UK for UK tax
purposes will not normally be liable for UK tax on capital gains realized or
accrued on the sale or other disposal of Ordinary Shares or ADSs unless such
Ordinary Shares or ADSs are held in connection with a trade, profession or
vocation carried on by such US holder in the UK through a branch or agency and
the Ordinary Shares or the ADSs are, or have been used, held or acquired for
the purposes of such trade, profession or vocation or such branch or agency.

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United States Federal Income Tax

Subject to the PFIC rules discussed below, if a US holder sells or otherwise
disposes of his Ordinary Shares or ADSs, he will recognize capital gain or loss
for US Federal income tax purposes equal to the difference between the US
dollar value of the amount that the US holder realizes and his tax basis,
determined in US dollars, in his Ordinary Shares or ADSs. Capital gain of a
noncorporate US holder that is recognised after May 5, 2003 and before January
1, 2009 is generally taxed at a maximum rate of 15 per cent where the holder
has a holding period greater than one year. , The gain or loss will generally
be income or loss from sources within the United States for foreign tax credit
limitation purposes. The PFIC rules, however, materially alter the United
States federal income tax treatment described here.

A US holder who is liable for both UK and US tax on a gain on the disposal of
the Ordinary Shares or the ADSs will generally be entitled, subject to certain
limitations, to credit the amount of UK capital gains or corporation tax, as
the case may be, paid in respect of such gain, against its US Federal income
tax liability in respect of such gain. US holders who do not receive
significant foreign source income from other sources may not be able to derive
effective US foreign tax credit benefits in respect of any such UK capital
gains or corporation tax.

Passive Foreign Investment Company Considerations

The Company believes that for the taxable year ending April 30, 2003, Ordinary
Shares and ADSs will be treated as stock of a passive foreign investment
company (PFIC) for United States Federal income tax purposes. Although it is
possible that the Company will not be a PFIC in future years, US holders who
held the Companys Ordinary Shares or ADSs during the taxable year ending April
30, 2003 will be subject to the PFIC rules for all subsequent taxable years,
unless the US holder makes a QEF election as described below. The conclusion
that the Company is properly classified as a PFIC is a factual determination
made annually and thus, is subject to change. The Company will monitor its
status and will, promptly following the end of each taxable year, notify
shareholders if it believes that it is properly classified as a PFIC for that
taxable year.

The following is a general discussion of the PFIC rules applicable to US
holders who hold Ordinary Shares or ADSs during any taxable year of the Company
in which the Company is treated as a PFIC.

Under the PFIC rules, a US holder that does not make a QEF election or
mark-to-market election, each as described below, is subject to special rules
with respect to: (a) any gain realized on the sale or other disposition of
Ordinary Shares or ADSs; and (b) any excess distribution by the Company to
the US holder (generally, any distributions to the US holder in respect of the
Ordinary Shares or ADSs during a single taxable year that are greater than 125
per cent of the average annual distributions received by the US holder in
respect of the Ordinary Shares or ADSs during the three preceding taxable years
or, if shorter, the US holders holding period for the Ordinary Shares or
ADSs). Under these rules: (i) the gain or excess distribution would be
allocated ratably over the US holders holding period for the Ordinary Shares
or ADSs; (ii) the amount allocated to the taxable year in which the gain or
excess distribution was realized would be taxable as ordinary income; (iii) the
amount allocated to each prior year for which the Company is treated as a PFIC,
with certain exceptions, would be subject to tax at the highest tax rate in
effect for that year; and (iv) the interest charge generally applicable to
underpayments of tax would be imposed in respect of the tax attributable to
each such year.

The special PFIC tax rules described above will not apply to a US holder if the
US holder makes an election to have the Company treated as a qualified
electing fund (a QEF election) for the first taxable year in which the US
holder owns Ordinary Shares or ADSs and for which the Company is treated as a
PFIC, and the Company provides certain required information to holders. The
election generally must be made with the US holders Federal income tax return
for the taxable year of the US holder that includes the last day of the first
taxable year of the Company for which the Company is treated as a PFIC. Once a
US holder makes a QEF election, the election will apply to all subsequent
taxable years of the US holder with respect to the Company, unless the US
holder revokes the election with the consent of the Internal Revenue Service.
The Company intends to provide registered shareholders, on request, with such
information as may be required to make a QEF election effective.

A US holder that makes a QEF election will be currently taxable on its pro rata
share of the Companys ordinary earnings and net capital gain (at ordinary
income and capital gain rates, respectively) for each taxable year of the
Company, regardless of whether or not distributions were received. The US
holders basis in the Ordinary Shares or ADSs will be increased to reflect
taxed but undistributed income. Distributions of income that had previously
been taxed will result in a corresponding reduction of basis in the Ordinary
Shares or ADSs and will not be taxed again as a distribution to the US holder.
If the Company ceases to be a PFIC, a US holder that has made a valid QEF
election will no longer be currently taxable on its pro rata share of the
Companys ordinary earnings and net capital gain.

The special PFIC tax rules described above will also not apply to a US holder
of marketable stock if the U.S. holder makes an election to mark to market
such stock (a mark-to-market election). The ADSs will be considered
marketable stock for these purposes. However, there is no certainty that the
Ordinary Shares will be considered marketable stock for these purposes unless
and until the Internal Revenue Service designates the London Stock Exchange as
having rules adequate to carry out the purposes of the PFIC rules. There can
be no assurance that the Internal Revenue Service will make such a designation.

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A US holder that makes a mark-to-market election must include in each year for
which the election applies, as ordinary income, an amount equal to the excess
of the fair market value of the Ordinary Shares or ADSs at the close of the
taxable year over the US holders adjusted basis in the Ordinary Shares or
ADSs, and is allowed a deduction for any excess of the adjusted basis over the
fair market value of the Ordinary Shares or ADSs, but only to the extent of
previously included mark-to-market inclusions. A US holders adjusted basis in
the Ordinary Shares or ADSs will be adjusted to reflect the amounts included or
deducted with respect to the mark-to-market election, and any gain or loss on
the disposition of Ordinary Shares or ADSs would generally be ordinary income
or, to the extent of previously included mark-to-market inclusions, ordinary
loss. An election to mark-to-market will apply to the taxable year for which
made and for all subsequent taxable years unless the Ordinary Shares or ADSs
cease to be marketable stock or the Secretary of the Treasury consents to the
revocation of such election. It is not certain, if the Company ceases to be a
PFIC, whether a US holder that has made a valid mark-to-market election will be
required to continue to include in income amounts determined under the
mark-to-market regime.

A US holder that has not made a QEF election with respect to the Company will
continue to be subject to the PFIC rules unless it makes a deemed sale
election under Section 1298(b)(1) of the Code. A US holder that makes a
deemed sale election will be treated as if it had sold its Ordinary Shares or
ADSs on the last day of the last taxable year of the Company in which the
Company was a PFIC and will be required to recognize for Federal income tax
purposes any gain (but not loss) realized on the deemed sale. A US holder that
makes a deemed sale election will no longer be subject to the PFIC rules,
unless the Company again becomes a PFIC. US holders that have not already made
a QEF election with respect to the Company are advised to consult with their
tax advisor as to the desirability of making a deemed sale election.

A deemed sale election may be made by filing an amended tax return for the
taxable year that includes the last day of the last taxable year of the Company
in which the Company was a PFIC, together with Form 8621 or a statement,
prepared in accordance with Temporary US Treasury Regulation Section 1.1297-3T,
reporting any gain or loss recognized on the deemed sale. Gain recognized on
the deemed sale will be allocated pro rata to each day in the US holders
holding period for its Ordinary Shares or ADSs as of the last day of the last
taxable year of the Company in which the Company was a PFIC and will be taxed
as ordinary income. Any gain allocated to a prior taxable year will be taxed
at the highest marginal rate in effect for such year. In addition, the US
holder will be required to pay interest on the tax due, based on the rates
applicable to underpayments of tax in effect for the relevant taxable years.
Loss on the deemed sale must be reported on Form 8621, but will not be
recognized for Federal income tax purposes. A US holder that recognizes gain
pursuant to a deemed sale election will increase its basis in its Ordinary
Shares or ADSs by the amount of the gain recognized. A deemed sale election
must be made within 3 years of the due date, including extensions, of the US
holders tax return for the taxable year that included the last day of the last
taxable year of the Company in which the Company was a PFIC.

Special rules apply with respect to the calculation of the amount of the
foreign tax credit with respect to excess distributions by a PFIC or, in
certain cases, QEF inclusions. In general, these rules allocate creditable
foreign taxes over the US holders holding period for the Ordinary Shares or
ADSs and otherwise coordinate the foreign tax credit limitation rules with the
PFIC rules.

In addition, notwithstanding any election a US holder makes with regard to the
Ordinary Shares or ADS, dividends received from Vernalis by the US holder will
not constitute qualified dividend income to the holder if we are a PFIC either
in the taxable year of the distribution or the preceding taxable year.
Dividends received by the US holder that do not constitute qualified dividend
income are not eligible for the 15% maximum rate applicable to qualified
dividend income. Instead, the US holder must include the gross amount of any
such dividend paid by Vernalis out of its accumulated earnings and profits (as
determined for US Federal income tax purposes) in its gross income, and it will
be subject to tax at rates applicable to ordinary income.

A US holder that owns Ordinary Shares or ADSs during any year that the Company
is a PFIC must file Internal Revenue Service Form 8621.

Inheritance Tax

An ADS or Ordinary Share owned by an individual US holder who, for the purposes
of the convention relating to estate and gift taxes between the US and the UK
(the Estate and Gift Tax Convention), is domiciled in the US and is not a
national of the UK is not generally subject to UK inheritance tax in respect of
the ADSs or Ordinary Shares on the individuals death or on a gift made by the
individual during his lifetime except where the ADS or Ordinary Share is part
of the business property of a UK permanent establishment or pertains to a UK
fixed base used for the performance of independent personal services. The
Estate and Gift Tax Convention generally provides for inheritance tax paid in
the UK to be credited against US Federal gift or estate tax payable in the US
and for US Federal gift or estate tax paid in the US to be credited against any
inheritance tax payable in the UK, based on priority rules set forth in that
Convention, in a case where an ADS or Ordinary Share is subject both to UK
inheritance tax and to US Federal gift or estate tax. There are special rules
applying to ADSs or Ordinary Shares held in trust.

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Stamp Duty and Stamp Duty Reserve Tax (SDRT)

Stamp duty or SDRT at 1.5 per cent arises upon the deposit with the Depositary
of the Ordinary Shares. The rate is applied to the amount or value of the
consideration for the sale, or, if the transaction is not a transfer on sale,
the value of the Ordinary Shares at the date on which the instrument of
transfer transferring the Ordinary Shares is executed. The duty is then
rounded up to the nearest 1p in the case of SDRT or £5 in the case of stamp
duty. On the transfer of Ordinary Shares to the Depositary, stamp duty or SDRT
will be payable by the Depositary. Under the Deposit Agreement, holders of
ADRs must pay an amount in respect of such duty or tax to the Depositary.

Provided that any agreement to transfer or instrument of transfer is not
executed in the UK and remains at all subsequent times outside the UK, no UK
stamp duty will be payable on the acquisition or transfer of ADSs evidenced by
ADRs. An agreement to transfer ADSs evidenced by ADRs should not give rise to
a liability to SDRT.

A transfer of Ordinary Shares by the Depositary or its nominee to the relative
ADR holder when the ADR holder is not transferring beneficial ownership should
not give rise to any SDRT and should only give rise to UK stamp duty at the
rate of £5 per transfer.

Purchases of Ordinary Shares, as opposed to ADSs, will normally give rise to a
charge to UK stamp duty or SDRT at the rate of 0.5 per cent (rounded up to the
nearest 1p in the case of SDRT or £5 in the case of stamp duty) of the price
payable for the Ordinary Shares at the time of the transfer. SDRT is the
liability of the purchaser and stamp duty is also usually paid by the
purchaser. Where such Ordinary Shares are later transferred to the
Depositarys nominee, further stamp duty or SDRT at the 1.5 per cent rate will
normally be payable. Where Ordinary Shares being acquired are transferred
directly to the Depositarys nominee, the charge will generally be the higher
charge of 1.5 per cent, of the price payable for the Ordinary Shares so
acquired.




F Documents on Display

This Form 20-F and any related documents may be inspected by investors at the
Companys registered office at Oakdene Court, 613 Reading Road, Winnersh,
Berkshire, RG41 5UA or at the public reference room of the SEC located at Room
1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington DC 20549, at
prescribed rates. More information concerning the public reference room of the
SEC can be obtained by calling the SEC at 1-800-SEC-0330. The SEC filings of
the Company are also available to the public from commercial document retrieval
services and, for filings made on or after November 4, 2002, at the website
maintained by the SEC at www.sec.gov.




ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Information presented under this Item relates to British Biotech plc and its
consolidated subsidiaries for the fiscal period reported.

Details of Vernaliss exposure to market risk and its management of risk are
provided in Item 3. Risk Factors and Note 24 of the Consolidated Financial
Statements which are incorporated herein by reference.




ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES

Not applicable.

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PART II




ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES

None.




ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHT OF SECURITY HOLDERS AND USE
OF PROCEEDS

None.




ITEM 15. CONTROLS AND PROCEDURES

The management of Vernalis, including its Chief Executive Officer and Chief
Financial Officer has evaluated, the effectiveness of the design and operation
of the Companys disclosure controls and procedures (as defined under
Securities and Exchange Commission rules) as at April 30, 2003. Based upon
that evaluation, the Chief Executive Officer and Chief Financial Officer
concluded that the design and operation of these disclosure controls and
procedures were effective. No significant changes were made in the Companys
internal controls over financial reporting or in other factors that could
significantly affect these controls subsequent to the date of their evaluation.




ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT

Not applicable until the companys Annual Report onForm 20-Ffor the fiscal
year ending April 30, 2004.




ITEM 16B. CODE OF ETHICS

Not applicable until the companys Annual Report onForm 20-Ffor the fiscal
year ending April 30, 2004.




ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES

Not applicable until the companys Annual Report onForm 20-Ffor the fiscal
year ending April 30, 2004.

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PART III




ITEM 17. FINANCIAL STATEMENTS

Not applicable.




ITEM 18. FINANCIAL STATEMENTS

The financial statements presented under this Item are the financial statements
of British Biotech plc and its consolidated subsidiaries for the reported
periods other than post balance sheet events described in Note 25 to the Notes
to the Consolidated Financial Statements.

The following Consolidated Financial Statements and related Notes thereto,
together with the report of PricewaterhouseCoopers LLP thereon, are filed as
part of this Annual Report on Form 20-F.

PageReport of Independent Accountants
    
    
    F-1Consolidated Statements of Income
    
    
    F-2Statements of Total Recognized Gains and Losses
    
    
    F-3Consolidated Balance Sheets
    
    
    F-3Consolidated Statements of Cash Flow Statements
    
    
    F-4Consolidated Statements of Changes in Shareholders Equity
    
    F-5 to F-7Notes to Consolidated Financial Statements
    
    F-8 to F-30


Financial statements schedules have been omitted because the required
information is shown in the Consolidated Financial Statements or the related
Notes thereto.




ITEM 19. EXHIBITS

The following documents are filed as exhibits to this Annual Report on Form
20-F:



| | 1. |  | Memorandum and Articles of Association of the Company
| | -- |  | -----------------------------------------------------



| | 4. |  | Material Contracts:
| | -- |  | -------------------



| | 4.1 |  | Service Contracts of Directors
| | --- |  | ------------------------------



| | (a) |  | Service Agreement, dated March 21, 2003, between the Company and Peter Fellner
| | --- |  | ------------------------------------------------------------------------------



| | (b) |  | Service Agreement dated March 21, 2003, between the Company and Simon Sturge
including Letter of Amendment between the Company and Simon Sturge, dated July 17,
2003
| | --- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (c) |  | Service Agreement, dated June 24, 1999, between the Company and Tony Weir(2)
including Letter of Amendment dated March 21, 2003 between the Company and Tony Weir
and Letter of Amendment dated July 16, 2003 between the Company and Tony Weir
| | --- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (d) |  | Service Agreement, dated July 2, 2003, between the Company and Peter Worrall
| | --- |  | ----------------------------------------------------------------------------



| | (e) |  | Service Agreement, dated July 2, 2003, between the Company and John Hutchison
| | --- |  | -----------------------------------------------------------------------------



| | (f) |  | Engagement Letter between the Company and Peter Read, dated July 17, 2003
| | --- |  | -------------------------------------------------------------------------



| | (g) |  | Engagement Letter between the Company and George Kennedy, dated July 17, 2003
| | --- |  | -----------------------------------------------------------------------------



| | (h) |  | Engagement Letter between the Company and Carol Ferguson, dated July 17, 2003
| | --- |  | -----------------------------------------------------------------------------



| | (i) |  | Engagement Letter between the Company and Keith Merrifield, dated December 1,
1999(2), Engagement Letter between the Company and Keith Merrifield, dated March 21,
2003 including Letter of Amendment between the Company and Keith Merrifield, dated
July 17, 2003
| | --- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (j) |  | Engagement Letter between the Company and Ian Kent, dated March 21, 2003
including Letter of Amendment between the Company and Ian Kent, dated July 17, 2003
| | --- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (k) |  | Engagement Letter between the Company and Eugene Williams, dated December 12,
2000(2); Engagement Letter between the Company and Eugene Williams, dated March 21,
2003 including Letter of Amendment between the Company and Eugene Williams, dated
July 17, 2003
| | --- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (l) |  | Engagement Letter between the Company and Timothy Edwards, dated June 24,
1999(1)(2)   
| | --- |  | ---------------------------------------------------------------------------------------
|
| | (m) |  | Engagement Letter between the Company and Elliot Goldstein, dated October 6,
1998(1)(2)

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| | 4.2 |  | Acquisition of RiboTargets
| | --- |  | --------------------------



| | (a) |  | Offer for the acquisition by the Company of RiboTargets dated March 21, 2003
| | --- |  | ----------------------------------------------------------------------------



| | (b) |  | Deed of covenant dated March 17, 2003 entered into by the Company in favour of
RiboTargets
| | --- |  | ------------------------------------------------------------------------------------------



| | (c) |  | Undertaking dated March 21, 2003 entered into by certain (now former)
RiboTargets shareholders
| | --- |  | ----------------------------------------------------------------------------------------------



| | 4.3 |  | Merger with Vernalis Group plc
| | --- |  | ------------------------------



| | (a) |  | Offer for the acquisition by the Company of Vernalis Group plc dated July 25,
2003
| | --- |  | ----------------------------------------------------------------------------------



| | 4.4 |  | Agreements originally entered into by Vernalis Group plc
| | --- |  | --------------------------------------------------------



| | (a) |  | Lease between Allied Dunbar Assurance plc (successor to Marion Merrel Limited)
and Vernalis Research Limited (successor to Cerebrus Limited), dated May 13, 1997
| | --- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (b) |  | Sub-Licence Agreement between Menarini International Operations Luxembourg SA
and Vernalis Development Limited (formerly known as Vanguard Medica Limited), dated
as of September 10, 1999(3)
| | --- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (c) |  | Supply Agreement between Vernalis Development Limited (formerly known as
Vanguard Medica Limited) and Menarini International Operations Luxembourg SA, dated
as of September 10, 1999
| | --- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (d) |  | Second Amending Agreement to the Frovatriptan Development and Sublicense
Agreement between SmithKline Beecham plc and Vernalis Development Limited (formerly
known as Vanguard Medica Limited), dated November 27, 2000
| | --- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (e) |  | Second Amended and Restated Licence Agreement between Elan Pharma International
Limited and Vernalis Limited, dated March 15, 2002, amending and restating the
Amended and Restated Sub-Licence Agreement between the parties, dated as of December
12, 2000(3)
| | --- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (f) |  | £7,000,000 Convertible Loan Agreement between Vernalis Group plc and Roche
Finance Ltd, dated May 13, 2002(3)
| | --- |  | -------------------------------------------------------------------------------------------------------------



| | (g) |  | Placing and Open Offer Agreement, dated May 1, 2003, between Vernalis Group plc
and Cazenove
| | --- |  | --------------------------------------------------------------------------------------------



| | 4.5 |  | Other Contracts
| | --- |  | ---------------



| | (a) |  | The Company Discretionary Share Option Plan
| | --- |  | -------------------------------------------



| | (b) |  | Deed of Grant of Option, dated April 23, 2003, between the Company and Peter
Fellner
| | --- |  | ------------------------------------------------------------------------------------



| | 8. |  | List of subsidiaries of the Group(4)
| | -- |  | ------------------------------------



| | 12. |  | CEO and Finance Director Certifications pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934
| | --- |  | ---------------------------------------------------------------------------------------------------------



| | 13. |  | CEO and Finance Director Certifications pursuant to Rule 134a-14(b) of the Securities Exchange Act of 1934 (5)
| | --- |  | --------------------------------------------------------------------------------------------------------------



---

|(1) |  | Timothy Edwards and Elliot Goldstein have stepped down from the Board of the Company.                                                                                                                                                                                                                                                                                                          
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(2) |  | Incorporated by reference to the Annual Report of British Biotech plc on Form 20-F for the year ended April 30, 2001.                                                                                                                                                                                                                                                                          
|   
|(3) |  | Confidential treatment was requested with respect to certain portions of this exhibit. Omitted portions have been filed separately with the
Securities and Exchange Commission by Vernalis Group plc (File No: 0-31200) in connection with its registration statement on Form 20-F filed
with the SEC on September 17, 2001 and the Annual Report on Form 20-F filed with the SEC July 1, 2002.
|   
|(4) |  | Incorporated by reference to Item 4. L Organizational Structure of this Annual Report on Form 20-F.                                                                                                                                                                                                                                                                                            
|   
|(5) |  | Furnished but not filed.                                                                                                                                                                                                                                                                                                                                                                       

73



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##### Table of Contents






SIGNATURES

The registrant hereby certifies that it meets all of the requirements for
filing on Form 20-F and that it has duly caused and authorized the undersigned
to sign this annual report on its behalf.

Vernalis plc
(Registrant)By:
    
    /s/ A J WeirName:
    
    Anthony J WeirTitle:
    
    Chief Financial OfficerDate:  October 30, 2003


74



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##### Table of Contents



BRITISH BIOTECH PLC
REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and Shareholders of British Biotech plc.

We have audited the accompanying consolidated balance sheets of British Biotech
plc (a development stage company) and its subsidiaries (collectively referred
to as the Company) as of April 30, 2003 and 2002 and the related consolidated
profit and loss accounts, statements of total recognized gains and losses,
reconciliation of movements in shareholders funds and consolidated statements
of cash flows for each of the three years in the period ended April 30, 2003,
and the period from February 4, 1986 (foundation) to April 30, 2003, all
expressed in pounds sterling, which have been prepared on the basis of
accounting principles generally accepted in the United Kingdom. These
financial statements are the responsibility of the Companys management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.

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

In our opinion the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of British Biotech plc
and its subsidiaries as of April 30, 2003 and 2002 and the results of the
Companys operations and its cash flows for each of the three years in the
period ended April 30, 2003 and the period from February 4, 1986 (foundation)
to April 30, 2003, in conformity with accounting principles generally accepted
in the United Kingdom.

Accounting principles generally accepted in the United Kingdom vary in certain
significant respects from accounting principles generally accepted in the
United States of America. As set out in Note 3 to the consolidated financial
statements, the application of the latter would have affected the determination
of consolidated net loss expressed in pounds sterling for each of the three
years in the period ended April 30, 2003 and the period from February 4, 1986
(foundation) to April 30, 2003 and it would have affected the determination of
consolidated shareholders equity and consolidated financial position also
expressed in pounds sterling at April 30, 2003 and at April 30, 2002.

PricewaterhouseCoopers LLP
London
July 18, 2003 and in respect of note 25, October 1,2003

F-1



---



##### Table of Contents



British Biotech plc
(a development stage company)

CONSOLIDATED STATEMENTS OF INCOME

From foundation(February 4, 1986)Years ended April 30,
    
    to April 30,2001
    
    2002
    
    2003
    
    2003£000
    
    £000
    
    £000
    
    £000RevenuesContinuing operations
    
    
    1,588
    
    
    
    1,450
    
    
    
    1,075
    
    
    
    47,349Acquisition
    
    
    
    
    
    
    
    
    
    
    3
    
    
    
    3Discontinued operation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    16,156Total revenues
    
    
    1,588
    
    
    
    1,450
    
    
    
    1,078
    
    
    
    63,508Costs and expensesCost of goods sold
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (7,909
    )Research and development expenditure
    
    
    (23,724
    )
    
    
    (21,256
    )
    
    
    (14,544
    )
    
    
    (334,708
    )Selling, general & administration expenses
    
    
    (3,997
    )
    
    
    (3,759
    )
    
    
    (6,396
    )
    
    
    (90,785
    )Total operating costs and expenses (Note 4d)
    
    
    (27,721
    )
    
    
    (25,015
    )
    
    
    (20,940
    )
    
    
    (433,402
    )Operating loss (Note 4)Continuing operations
    
    
    (26,133
    )
    
    
    (23,565
    )
    
    
    (19,862
    )
    
    
    (370,172
    )Discontinued operation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    278(26,133
    )
    
    
    (23,565
    )
    
    
    (19,862
    )
    
    
    (369,894
    )Profit on disposal of fixed assets
    
    
    
    
    
    
    2,505
    
    
    
    
    
    
    
    2,505Profit on sale of investments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    660Loss on disposal of discontinued operation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (142
    )Amount written off investments
    
    
    (799
    )
    
    
    (324
    )
    
    
    (799
    )
    
    
    (1,922
    )Interest (Note 5)
    
    
    3,449
    
    
    
    2,542
    
    
    
    1,435
    
    
    
    59,381Loss before provision for income taxes
    
    
    (23,483
    )
    
    
    (18,842
    )
    
    
    (19,226
    )
    
    
    (309,412
    )Provision for income taxes
    
    
    130
    
    
    
    1,608
    
    
    
    1,738
    
    
    
    2,500Net loss
    
    
    (23,353
    )
    
    
    (17,234
    )
    
    
    (17,488
    )
    
    
    (306,912
    )Net loss per share (basic and diluted)  restated
    
    
    (70.1)p
    
    
    
    (51.7)p
    
    
    
    (51.3)pOrdinary Shares used in computing net loss per
share (000s)  restated
    
    
    33,318
    
    
    
    33,362
    
    
    
    34,107


All potential ordinary shares, including options and deferred shares, are
anti-dilutive.

The notes on pages F-8 to F-30 are an integral part of these Consolidated
Financial Statements.

F-2



---



##### Table of Contents



British Biotech plc(a development stage company)

STATEMENTS OF TOTAL RECOGNIZED GAINS AND LOSSES

From foundation(February 4, 1986)Years ended April 30,
    
    To April 30,2001
    
    2002
    
    2003
    
    2003£000
    
    £000
    
    £000
    
    £000Net loss for the financial year
    
    
    (23,353
    )
    
    
    (17,234
    )
    
    
    (17,488
    )
    
    
    (306,912
    )Goodwill written off
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (91
    )Translation of overseas subsidiaries
    
    
    25
    
    
    
    3
    
    
    
    
    
    
    
    (14
    )Total losses recognized during the year
    
    
    (23,328
    )
    
    
    (17,231
    )
    
    
    (17,488
    )
    
    
    (307,017
    )


CONSOLIDATED BALANCE SHEETS

April 30, 2002
    
    April 30, 2003£000
    
    £000Fixed assetsIntangible assets (Note 8)
    
    
    1,987
    
    
    
    9,986Tangible assets (Note 9)
    
    
    7,996
    
    
    
    10,151Investments (note 10)
    
    
    1,906
    
    
    
    1,10711,889
    
    
    
    21,244Current assetsDebtors (Note 11)
    
    
    3,119
    
    
    
    7,105Short term deposits and investments
    
    
    50,106
    
    
    
    43,632Cash
    
    
    308
    
    
    
    29453,533
    
    
    
    51,031Current liabilitiesCreditors: amounts falling due within one year (Note 12)
    
    
    (8,607
    )
    
    
    (7,495
    )Net current assets
    
    
    44,926
    
    
    
    43,536Total assets less current liabilities
    
    
    56,815
    
    
    
    64,780Creditors: amounts falling due after more than one year
(Note 13)
    
    
    (1,683
    )
    
    
    (4,147
    )Provisions for liabilities and charges (Note 14)
    
    
    (250
    )
    
    
    (2,517
    )Net assets
    
    
    54,882
    
    
    
    58,116Capital and reservesShare capital (note 15)
    
    
    33,375
    
    
    
    35,045Share premium account
    
    
    298,615
    
    
    
    298,252Other reserve
    
    
    10,008
    
    
    
    30,034Profit and loss account
    
    
    (287,116
    )
    
    
    (305,215
    )Total shareholders funds
    
    
    54,882
    
    
    
    58,116ANALYSIS OF SHAREHOLDERS FUNDSEquity
    
    
    54,882
    
    
    
    26,409Non-Equity
    
    
    
    
    
    
    31,70754,882
    
    
    
    58,116


The notes on pages F-8 to F-30 are an integral part of these Consolidated
Financial Statements.

F-3



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##### Table of Contents



British Biotech plc(a development stage company)

CONSOLIDATED CASH FLOW STATEMENTS

Years ended April 30
    
    From Foundation(February 4, 1986)To April 30,2001
    
    2002
    
    2003
    
    2003£000
    
    £000
    
    £000
    
    £000Net cash outflow from operating activities (Note 19)
    
    (21,738)
    
    
    (19,309
    )
    
    
    (23,278
    )
    
    
    (326,648
    )Returns on investments and servicing of finance (Note 20)
    
    
    3,656
    
    
    
    2,351
    
    
    
    1,666
    
    
    
    59,021Taxation
    
    
    130
    
    
    
    4
    
    
    
    1,681
    
    
    
    824Capital expenditure (Note 21)
    
    
    7,587
    
    
    
    2,686
    
    
    
    (775
    )
    
    
    (47,650
    )Cash utilised by operations
    
    
    (10,365
    )
    
    
    (14,268
    )
    
    
    (20,706
    )
    
    
    (314,453
    )Acquisitions and disposals
    
    
    
    
    
    
    
    
    
    
    1,967
    
    
    
    3,446Management of liquid resources
    
    
    11,254
    
    
    
    14,249
    
    
    
    19,377
    
    
    
    (30,592
    )Financing (Note 22)
    
    
    (381
    )
    
    
    (342
    )
    
    
    (665
    )
    
    
    341,837Increase/(decrease) in cash in the period
    
    508
    
    
    (361
    )
    
    
    (27
    )
    
    
    238Reconciliation of net cash flow to movement in net fundsIncrease/(decrease) in cash in the period
    
    508
    
    
    (361
    )
    
    
    (27
    )
    
    
    238Cash used to decrease (provided by) debt and lease financing
    
    
    402
    
    
    
    462
    
    
    
    450
    
    
    
    355New finance leases
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,978
    )Cash used to increase/ (decrease) liquid resources
    
    
    (11,254
    )
    
    
    (14,249
    )
    
    
    (19,377
    )
    
    
    30,592Exchange adjustment
    
    
    62
    
    
    
    18
    
    
    
    29
    
    
    
    196Finance leases acquired with subsidiary
    
    
    
    
    
    
    
    
    (1,269
    )
    
    
    (1,269
    )Liquid resources acquired with subsidiary
    
    
    
    
    
    
    
    
    12,903
    
    
    
    12,903Movement in net funds in the period
    
    (10,282)
    
    
    (14,130
    )
    
    
    (7,291
    )
    
    
    41,037Net funds at May 01
    
    
    72,740
    
    
    
    62,458
    
    
    
    48,328
    
    
    
    Net funds at April 30 (Note 23)
    
    
    62,458
    
    
    
    48,328
    
    
    
    41,037
    
    
    
    41,037


The notes on page F-8 to F-30 are an integral part of these Consolidated
Financial Statements.

F-4



---



##### Table of Contents



British Biotech plc(a development stage company)

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY

For the period from foundation on February 4, 1986 to April 30, 2003

TotalPreferred
    
    
    
    
    
    Share
    
    
    
    
    
    
    
    
    
    Profit and
    
    Share-Ordinary
    
    Ordinary
    
    premium
    
    
    
    
    
    
    
    
    
    loss
    

holdersshares
    
    shares
    
    account
    
    Other reserve
    
    Warrants
    
    account
    
    equity£000
    
    £000
    
    £000
    
    £000
    
    £000
    
    £000
    
    £000Issuance of 2,000,000
Ordinary Shares for cash
at par
    
    
    
    
    
    
    100
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    100Issuance of 68,000
Ordinary Shares
For cash at £0.25
    
    
    
    
    
    
    3
    
    
    
    14
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    17Issuance of 2,527,555
Preferred Ordinary Shares
at £0.99, net of
Issuance costs of £91,000
    
    
    127
    
    
    
    
    
    
    
    2,282
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,409On the acquisition of 30%
interest in Oxford Gene
Systems Limited, goodwill
of £45,000 was written
off to the accumulated
deficit
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (45
    )
    
    
    (45
    )Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (745
    )
    
    
    (745
    )Balances at April 30, 1987
    
    
    127
    
    
    
    103
    
    
    
    2,296
    
    
    
    
    
    
    
    
    
    
    
    (790
    )
    
    
    1,736Issuance of 183,822
Ordinary Shares in
consideration for the
acquisition of 70%
interest in Oxford Gene
Systems Limited. The
related goodwill of
£46,000 was written off
to the accumulated
deficit
    
    
    
    
    
    
    10
    
    
    
    36
    
    
    
    
    
    
    
    
    
    
    
    (46
    )
    
    
    Issuance of 4,001,693
Preferred Ordinary Shares
at £2.00, net of issuance
costs of £128,000
    
    
    199
    
    
    
    
    
    
    
    7,676
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7,875Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,492
    )
    
    
    (1,492
    )Balances at April 30, 1988
    
    
    326
    
    
    
    113
    
    
    
    10,008
    
    
    
    
    
    
    
    
    
    
    
    (2,328
    )
    
    
    8,119Issuance of 40 Ordinary
Shares for cash at par on
the formation of British
Biotech plc
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,927
    )
    
    
    (1,927
    )Balance at April 30, 1989
    
    
    326
    
    
    
    113
    
    
    
    10,008
    
    
    
    
    
    
    
    
    
    
    
    (4,255
    )
    
    
    6,192Issuance of 8,748,648
Preferred Ordinary Shares
at £2.60, net of issuance
costs of £1,179,000
    
    
    437
    
    
    
    
    
    
    
    21,130
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    21,567Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,702
    )
    
    
    (1,702
    )Balances at April 30, 1990
    
    
    763
    
    
    
    113
    
    
    
    31,138
    
    
    
    
    
    
    
    
    
    
    
    (5,957
    )
    
    
    26,057Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (6,126
    )
    
    
    (6,126
    )Balances at April 30, 1991
    
    
    763
    
    
    
    113
    
    
    
    31,138
    
    
    
    
    
    
    
    
    
    
    
    (12,083
    )
    
    
    19,931


The notes on pages F-8 to F-30are an integral part of these Consolidated
Financial Statements.

F-5



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##### Table of Contents



British Biotech plc(a development stage company)

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY (cont.)

For the period from foundation on February 4, 1986 to April 30, 2003

TotalPreferred
    
    
    
    
    
    Share
    
    
    
    
    
    
    
    
    
    Profit
    
    Share-Ordinary
    
    Ordinary
    
    premium
    
    
    
    
    
    
    
    
    
    and loss
    

Holdersshares
    
    shares
    
    account
    
    Other reserve
    
    Warrants
    
    account
    
    Equity£000
    
    £000
    
    £000
    
    £000
    
    £000
    
    £000
    
    £000Issuance of 11,111,110 Preferred
Ordinary shares at £3.60, net of
issuance costs of £1,968,000
    
    
    556
    
    
    
    
    
    
    
    37,476
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    38,032Issuance of 10,000 Ordinary Shares
on the exercise of options at
£0.50
    
    
    
    
    
    
    1
    
    
    
    4
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (11,612
    )
    
    
    (11,612
    )Balances at April 30, 1992
    
    
    1,319
    
    
    
    114
    
    
    
    68,618
    
    
    
    
    
    
    
    
    
    
    
    (23,695
    )
    
    
    46,356Reclassification of Preferred
Ordinary Shares as Ordinary Shares
    
    
    (1,319
    )
    
    
    1,319
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Issuance of 7,058,824 Ordinary
Shares at £4.25, net of issuance
costs of £2,617,000
    
    
    
    
    
    
    353
    
    
    
    27,030
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    27,383Issuance of 470,063 Ordinary
Shares on the exercise of options
at £0.25 to £3.60
    
    
    
    
    
    
    23
    
    
    
    215
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    238Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (13,096
    )
    
    
    (13,096
    )Balances at April 30, 1993
    
    
    
    
    
    
    1,809
    
    
    
    95,863
    
    
    
    
    
    
    
    
    
    
    
    (36,791
    )
    
    
    60,881Issuance of 37,500 Ordinary Shares
On the exercise of options at
£0.50 to £3.60
    
    
    
    
    
    
    2
    
    
    
    44
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    46Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (21,526
    )
    
    
    (21,526
    )Translation of foreign subsidiary
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2
    )
    
    
    (2
    )Balance at April 30, 1994
    
    
    
    
    
    
    1,811
    
    
    
    95,907
    
    
    
    
    
    
    
    
    
    
    
    (58,319
    )
    
    
    39,399Issuance of 64,302 Ordinary Shares
on the exercise of options at
£0.47 to £3.37
    
    
    
    
    
    
    3
    
    
    
    154
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    157Issuance of 3,017,590 Units each
comprising 4 Ordinary Shares and 3
Warrants at £16.00 per unit, net
of issuance costs of £2,406,000
    
    
    
    
    
    
    604
    
    
    
    41,934
    
    
    
    
    
    
    
    3,337
    
    
    
    
    
    
    
    45,875Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (26,338
    )
    
    
    (26,338
    )Translation of foreign subsidiary
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (6
    )
    
    
    (6
    )Balance at April 30, 1995
    
    
    
    
    
    
    2,418
    
    
    
    137,995
    
    
    
    
    
    
    
    3,337
    
    
    
    (84,663
    )
    
    
    59,087Issuance of 551,560 Ordinary shares
on the exercise of options
at £0.23 to £4.03
    
    
    
    
    
    
    27
    
    
    
    1,552
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,579Issuance of 9,052,770 Ordinary
Shares at £5.25 on the exercise of
the Warrants, net of issuance
Costs of £32,000
    
    
    
    
    
    
    453
    
    
    
    50,379
    
    
    
    
    
    
    
    (3,337
    )
    
    
    
    
    
    
    47,495Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (25,178
    )
    
    
    (25,178
    )Translation of foreign subsidiary
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    10
    
    
    
    10Balance at April 30, 1996
    
    
    
    
    
    
    2,898
    
    
    
    189,926
    
    
    
    
    
    
    
    
    
    
    
    (109,831
    )
    
    
    82,993


The notes on pages F-8 to F-30 are an integral part of these Consolidated
Financial Statements.

F-6



---



##### Table of Contents



British Biotech plc(a development stage company)

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY (cont.)

For the period from foundation on February 4, 1986 to April 30, 2003

TotalPreferred
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Share-Ordinary
    
    Ordinary
    
    Share premium
    
    
    
    
    
    
    
    
    
    Profit and loss
    

HoldersShares
    
    shares
    
    account
    
    Other reserve
    
    Warrants
    
    account
    
    Equity£000
    
    £000
    
    £000
    
    £000
    
    £000
    
    £000
    
    £000Issuance of 7,246,524 Ordinary
Shares at £20.50, net of issuance
costs of £5,184,000
    
    
    
    
    
    
    362
    
    
    
    143,008
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    143,370Issuance of 587,036,718 Ordinary
Shares on the 9 for 1 Capital
Issue
    
    
    
    
    
    
    29,352
    
    
    
    (29,352
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Issuance of 5,914,142 Ordinary
Shares on the exercise of options
At £0.05 to £0.82
    
    
    
    
    
    
    295
    
    
    
    1,893
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,188Transfer between reserves
    
    
    
    
    
    
    
    
    
    
    (10,008
    )
    
    
    10,008
    
    
    
    
    
    
    
    
    
    
    
    Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (28,943
    )
    
    
    (28,943
    )Translation of foreign subsidiary
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (20
    )
    
    
    (20
    )Charge for deferred shares
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,137
    
    
    
    1,137Balance at April 30, 1997
    
    
    
    
    
    
    32,907
    
    
    
    295,467
    
    
    
    10,008
    
    
    
    
    
    
    
    (137,657
    )
    
    
    200,725Issuance of 2,102,248 Ordinary
Shares on the exercise of
options at £0.05 to £0.58
    
    
    
    
    
    
    106
    
    
    
    629
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    735Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (44,912
    )
    
    
    (44,912
    )Translation of foreign subsidiary
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    15
    
    
    
    15Charge for deferred shares
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    606
    
    
    
    606Balance at April 30, 1998
    
    
    
    
    
    
    33,013
    
    
    
    296,096
    
    
    
    10,008
    
    
    
    
    
    
    
    (181,948
    )
    
    
    157,169Issuance of 733,481 Ordinary Shares
on exercise of options at £0.05 to
£0.32
    
    
    
    
    
    
    36
    
    
    
    144
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    180Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (39,843
    )
    
    
    (39,843
    )Translation of foreign subsidiary
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    10
    
    
    
    10Charge for deferred shares
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    175
    
    
    
    175Balance at April 30, 1999
    
    
    
    
    
    
    33,049
    
    
    
    296,240
    
    
    
    10,008
    
    
    
    
    
    
    
    (221,606
    )
    
    
    117,691Issuance of 613,780 Ordinary
shares on the exercise of options
at £0.05 to
£0.36
    
    
    
    
    
    
    32
    
    
    
    108
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    140Issuance of 4,529,719 Ordinary
Shares at £0.55
    
    
    
    
    
    
    226
    
    
    
    2,265
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,491Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (25,397
    )
    
    
    (25,397
    )Translation of foreign subsidiary
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (49
    )
    
    
    (49
    )Charge for deferred shares
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    307
    
    
    
    307Balance at April 30, 2000
    
    
    
    
    
    
    33,307
    
    
    
    298,613
    
    
    
    10,008
    
    
    
    
    
    
    
    (246,745
    )
    
    
    95,183Issuance of 378,471 Ordinary shares
on exercise of options at
£0.05
    
    
    
    
    
    
    19
    
    
    
    2
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    21Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (23,353
    )
    
    
    (23,353
    )Translation of foreign subsidiary
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    25
    
    
    
    25Balance at April 30, 2001
    
    
    
    
    
    
    33,326
    
    
    
    298,615
    
    
    
    10,008
    
    
    
    
    
    
    
    (270,073
    )
    
    
    71,876Issuance of 981,861 Ordinary
shares on exercise of options at
£0.05
    
    
    
    
    
    
    49
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    49Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (17,234
    )
    
    
    (17,234
    )Translation of foreign subsidiary
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3
    
    
    
    3Charge for deferred shares
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    188
    
    
    
    188Balance at April 30, 2002
    
    
    
    
    
    
    33,375
    
    
    
    298,615
    
    
    
    10,008
    
    
    
    
    
    
    
    (287,116
    )
    
    
    54,882Capital reorganisation of
667,517,806 Ordinary shares
    
    
    31,707
    
    
    
    (31,707
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Issuance of 24,665 Ordinary shares
on exercise of options at £0.05
    
    
    
    
    
    
    1
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1Issuance of 33,375,889Ordinary
shares, net of issuance costs of
£363,000
    
    
    
    
    
    
    1,669
    
    
    
    (363
    )
    
    
    20,026
    
    
    
    
    
    
    
    
    
    
    
    21,332Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (17,488
    )
    
    
    (17,488
    )Credit for deferred shares
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (611
    )
    
    
    (611
    )Balance of April 30, 2003
    
    
    31,707
    
    
    
    3,338
    
    
    
    298,252
    
    
    
    30,034
    
    
    
    
    
    
    
    (305,215
    )
    
    
    58,116


The notes on pages F-8 to F-30 are an integral part of these Consolidated
Financial Statements.

F-7



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##### Table of Contents



British Biotech plc(a development stage company)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1 History and operations

The Group (as defined below) was founded in 1986 and, since foundation, its
principal business has been pharmaceutical research and development with the
objective of developing a portfolio of patented pharmaceuticals. This research
has been conducted both on its own behalf and in connection with a number of
collaborative research agreements with other companies.

The Group has financed its research and development program initially through
venture capital raised in 1986 and 1988, then via two private placements which
raised £22,746,000 and £40,000,000, before issuance costs, in May 1989 and
July 1991 respectively, and a public offer of Ordinary Shares which raised
£30,000,000, before issuance costs, in July 1992. In May 1994, the Company
raised £48,281,000, before issuance costs, through a rights issue of Ordinary
Shares and warrants. In December 1995 and January 1996, the warrants were
exercised and, as a result, £47,527,000 was raised before issuance costs. In
July 1996, the Company completed a one-for-eight rights issue at a price of
2,050p per Ordinary Share which raised £148,554,000 before issuance costs (the
1996 Rights Issue). In April 2003, the Company acquired RiboTargets Holdings
plc in exchange for ordinary shares.

The Group is in the development stage, as it has yet to market or sell
pharmaceutical products. It aims to bring such products to the market through
collaboration partnerships but expects to incur substantial losses for the
next several years as potential products progress through clinical
development.

The directors have a reasonable expectation the Group has adequate cash
resources to continue in operation for at least 12 months from the date of
these financial statements. Accordingly, they continue to adopt the going
concern basis in preparing the financial statements.

From 1987 until July 1993, the Group also operated as a supplier of research
products to third parties. In July 1993, this business, British
Bio-technology Products Limited, was sold to Techne Corporation and is
described as a discontinued operation in these statements.

2 Summary of significant accounting policies

The consolidated financial statements have been prepared in accordance with
applicable Accounting Standards in the UK. The significant accounting policies
adopted in arriving at the consolidated financial statements are as follows:

(a) Accounting convention

The consolidated financial statements have been prepared under the historical
cost convention and in accordance with applicable UK accounting standards.

(b) Basis of preparation

The consolidated financial statements are based on the financial statements of
British Biotech plc and all its subsidiary undertakings (together, the Group).
Each of the principal subsidiaries are undertaking pharmaceutical research
and development and associated activities.

On March 17, 1989, the Groups legal structure was reorganized, with British
Biotech plc becoming the Groups holding company, following the issue to
British Biotech Pharmaceuticals Limited shareholders of one fully paid
Ordinary Share in British Biotech plc for each fully paid Ordinary Share held
in British Biotech Pharmaceuticals Limited and one fully paid Preferred
Ordinary Share in British Biotech plc for each fully paid Preferred Ordinary
Share held in British Biotech Pharmaceuticals Limited. As there has been no
change in ownership or control and the exchange of shares involved companies
under common control, a presentation similar to a pooling of interests has
been applied in preparing these consolidated financial statements. The period
from inception, as shown in the consolidated financial statements, commences
at the date of incorporation, February 4, 1986, of British Biotech
Pharmaceuticals Limited, which predates the incorporation of British Biotech
plc on October 13, 1988. British Biotech plc did not trade during the period
from October 13, 1988 to March 16, 1989.

F-8



---



##### Table of Contents



British Biotech plc(a development stage company)

(c) Accounting 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 date of the financial statements and
the reported amounts of revenues and expenses during the reported period.
Actual results could differ from those estimates.

(d) Revenues

Revenue represents income from collaborative agreements and revenue grants and
amounts invoiced, excluding value added tax, to customers in respect of
services rendered.

Revenues from collaborative research agreements which are related to time are
recognised in proportion to the work completed. Revenues from collaborative
research agreements which are related to the achievement of specified
objectives are recognised when those objectives have been met using the lesser
of non-refundable cash received or the result achieved using
percentage-of-completion accounting.

(e) Grants

Grants for revenue expenditure are credited to revenue so as to match the
related expenditure.

(f) Research and Development

Expenditure on research and development is written off in the period in which
it is incurred.

(g) Joint arrangements

Where the Group has certain contractual agreements with other participants.
These joint activities do not create an entity on a trade or business of its
own, and as such are accounted for as a joint arrangement that is not an
entity. That is, the Group accounting for its own assets, liabilities and
cash flows, measured according to the terms of the agreement governing the
arrangement.

(h) Goodwill and intangible assets

Purchased goodwill and intangible assets, which meet the recognition criteria
under FRS 10, are capitalized and amortized in equal instalments over their
estimated useful lives but no longer than 20 years. Goodwill in respect of
RiboTargets is being amortized over three years. Payments made to third
parties to acquire licenses to develop their intellectual property are written
off over a period not to exceed the remaining patent life after taking into
account the risk factors associated with pharmaceutical development. Goodwill
previously written off to reserves has not been reinstated on the balance
sheet as permitted by FRS 10.

(i) Property, plant and equipment

Freehold land and assets in the course of construction are not depreciated.
Depreciation is calculated to write off the cost less residual value of other
property, plant and equipment in equal annual instalments over their estimated
useful lives as follows:

Freehold buildings
    
    -
    
    50 yearsBuildings  internal works
    
    -
    
    Five to 50 yearsLeasehold buildings
    
    -
    
    Period of leasePlant and machinery
    
    -
    
    Two to five yearsFixtures and fittings
    
    -
    
    Five to ten years


The profit arising on the sale of owned assets that are subsequently leased
back under an operating lease is recognised at the time of disposal.

(j) Leased assets

The cost of operating leases is charged to the statement of operations as
incurred. Assets acquired under finance leases are included in the balance
sheet as fixed assets and depreciated over their estimated useful lives.
Interest is
charged to the statement of operations. Provision is made for the estimated
cost of the present obligations to reinstate lease buildings to their original
state.

F-9



---



##### Table of Contents



British Biotech plc(a development stage company)

(k) Fixed asset investments

Investments in subsidiary and other undertakings are carried at cost less any
impairment provision. Such investments are subject to periodic review, and
any impairment is charged to the profit and loss account. Impairments in
listed undertakings are determined having regard to the evolution of the
market price of shares. Impairment in unlisted investments is determined
using Directors estimates of changes in the underlying investment and market
movements.

(l) Deferred taxation

Provision is made for deferred tax liabilities and assets, using full
provision accounting, otherwise known as the incremental liability method,
when an event has taken place by the balance sheet date which gives rise to an
increased or reduced tax liability in the future in accordance with FRS 19.
Deferred tax is measured at the average tax rates that are expected to apply
in the periods in which the timing differences are expected to reverse, based
on tax rates and laws that have been enacted or substantially enacted by the
balance sheet date. Deferred tax is measured on a non-discounted basis.

(m) Pension costs

Pension costs relate to defined contribution schemes. Contributions are
charged to the statement of operations as incurred. The Group has no
obligation to the pension schemes beyond the payment of contributions. The
Group does not offer any other post-retirement benefits.

(n) Foreign currencies

Transactions in foreign currencies are translated into pounds sterling at the
rate of exchange ruling at the transaction date. Assets and liabilities in
foreign currencies are translated into sterling at the rate of exchange ruling
at the balance sheet date. The resulting exchange differences are dealt with
through the statement of operations.

The financial statements of overseas subsidiaries are translated using the net
investment method; the amounts in the balance sheet are translated at the
closing rate and the amounts in the profit and loss account are translated at
an average rate. Exchange differences in translation are taken directly to
reserves.

(o) Net loss per ordinary share

Net loss per Ordinary Share is computed using the weighted average number of
shares outstanding during each of the respective periods.

(p) Employee benefits

The charge for the shares awarded under the Deferred Share Bonus Scheme is
recognised in the consolidated profit and loss account as the difference
between the market value of the shares at the date of grant and any
consideration to be received on the exercise of the deferred shares. The
charge is recognised over the vesting period for options with performance
criteria, and based on estimates of staff turnover and share price growth and
is accrued in the profit and loss account reserve.

(q) Concentration of Credit Risk

Financial instruments that may subject the Company to significant
concentrations of credit risk consist primarily of short-term deposits.

Cash in excess of current operating needs is invested in accordance with the
Companys treasury policy. This policy emphasizes principal preservation, so
it requires strong issuer credit ratings and limits the amount of credit
exposure from any one financial institution. Accordingly, the credit risk
associated with these short-term deposits and investments is low.

F-10



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##### Table of Contents



British Biotech plc(a development stage company)

(r) Financial instruments

The Group does not enter into derivative financial instruments and has no
financial liabilities other than finance leases, loans and trade creditors.
Financial assets and liabilities are recognised and cease to be recognised on
the basis of when the related legal title or obligations pass to or from the
Group.

3 Summary of differences between UK and US Generally Accepted Accounting
Principles

The consolidated financial statements have been prepared in accordance with
generally accepted accounting principles in the UK (UK GAAP) which differs in
certain respects from generally accepted accounting principles in the US (US
GAAP). These differences relate principally, in the case of the Group at
present, to the areas as described below.

The application of the US GAAP would affect the determination of consolidated
net loss for each of the three years ending April 30, 2003, and the period
from February 4, 1986 (date of foundation) to April 30, 2003 (which occur
substantially in the years ended April 30, 2001, April 30, 2002 and April 30,
2003) and the determination of consolidated shareholders equity at April 30,
2001, 2002 and 2003 as set out below.

Reconciliation of loss for the financial year to US GAAP

Notes
    
    2001
    
    2002
    
    2003£000
    
    £000
    
    £000Loss under UK GAAP
    
    
    
    
    
    
    (23,353
    )
    
    
    (17,234
    )
    
    
    (17,488
    )US GAAP adjustments:Purchase accountingWrite off of in process research and development
    
    
    i
    
    
    
    
    
    
    
    
    
    
    
    (5,077
    )Restructuring provision
    
    
    i
    
    
    
    
    
    
    
    
    
    
    
    102Amortisation of goodwill
    
    
    i
    
    
    
    
    
    
    
    
    
    
    
    60Technology platform depreciation charge
    
    
    i
    
    
    
    
    
    
    
    
    
    
    
    (18
    )Payroll taxes payable on share option
    
    ii
    
    
    121
    
    
    
    (14
    )
    
    
    (107
    )Marketable securities
    
    iii
    
    
    (275
    )
    
    
    275
    
    
    
    17Profit on leaseback transaction
    
    iv
    
    
    (248
    )
    
    
    248
    
    
    
    In process research and development amortisation
    
    
    v
    
    
    
    (1,089
    )
    
    
    (898
    )
    
    
    210Share compensation charges
    
    vi
    
    
    
    
    
    
    148
    
    
    
    (257
    )Embedded option
    
    vii
    
    
    
    
    
    
    
    
    
    
    63Net loss under US GAAP
    
    
    
    
    
    
    (24,844
    )
    
    
    (17,475
    )
    
    
    (22,495
    )Loss per share under US GAAP
    
    
    
    
    
    
    (74.6)p
    
    
    
    (52.4)p
    
    
    
    (66.0)p


Reconciliation of shareholders funds to US GAAP

Notes
    
    2001
    
    2002
    
    2003£000
    
    £000
    
    £000Shareholders funds under UK GAAP
    
    
    
    
    
    
    71,876
    
    
    
    54,882
    
    
    
    58,116US GAAP adjustments:Purchase accountingMovement in goodwill
    
    
    i
    
    
    
    
    
    
    
    
    
    
    
    (3,394
    )Net capitalisation of technology platform
    
    
    i
    
    
    
    
    
    
    
    
    
    
    
    2,466Payroll taxes payable on share options
    
    ii
    
    
    121
    
    
    
    107
    
    
    
    Unrealised loss on investment
    
    iii
    
    
    (275
    )
    
    
    
    
    
    
    17Profit on leaseback transaction
    
    iv
    
    
    (248
    )
    
    
    
    
    
    
    In-process research and development
    
    
    v
    
    
    
    (1,089
    )
    
    
    (1,987
    )
    
    
    (1,777
    )Share compensation charges
    
    vi
    
    
    
    
    
    
    148
    
    
    
    (109
    )Embedded option
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    63Shareholders funds under US GAAP
    
    
    
    
    
    
    70,385
    
    
    
    53,150
    
    
    
    55,382


(i) Goodwill and other intangible assets

Under UK GAAP the shares issued to acquire RiboTargets Holdings plc were
valued at the market price at the date of acquisition on April 23, 2003.
Under US GAAP the shares issued were valued at the average market price for
three days before and after the announcement of the acquisition on March 21,
2003. The movement of the British Biotech share price between these dates and
methods increases the value of the purchase price by £4.0 million. In
accordance with US GAAP (EITF 95-3) an adjustment was made to the opening net
assets position under UK GAAP to reflect the redundancy costs arising
following a reorganization of the Group after acquisition. In accordance with
UK GAAP, these costs were expensed in 2003.

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British Biotech plc(a development stage company)

Under US GAAP, purchase price is allocated to all tangible and identifiable
intangible assets based upon estimated fair value at the date of acquisition.
For US GAAP purposes, fair values have been assigned to intangible assets
which included in-process research and development (£5.0 million) and
technology platform (£2.5 million). The specifically identifiable intangible
assets have not been recognised under UK GAAP as they do not meet the criteria
for recognition required by FRS 10, Goodwill and intangible assets.

Under US GAAP the amount of purchase consideration allocated to in-process
research and development is immediately written off to the profit and loss
account. The portion of the purchase price allocated to the technology
platform under US GAAP is amortised over the estimate useful economic life.
Under UK GAAP these amounts are included in goodwill.

The net impact on shareholders funds at April 30, 2003 under US GAAP was:

£000Difference in consideration issued under US GAAP
    
    
    4,005Less profit and loss impact under US GAAP
    
    
    (4,933
    )(928
    )


The movement in goodwill represents the fair value of intangible assets under
US GAAP less the difference in consideration issued and the restructuring
provision.

(ii) Payroll taxes payable on share option

In accordance with the Urgent Issues Task Force Abstract 25, National
Insurance Contributions on Share Options Gains, the Group has provided for
the employers National Insurance payable on unapproved options granted after
April 5, 1999. In accordance with US GAAP, taxation is only charged upon
exercise of the option.

(iii) Marketable securities

Under UK GAAP, an investment is written down where a permanent impairment has
occurred. Under US GAAP, marketable securities are valued at market value,
with temporary diminution in value being taken to other comprehensive income
and permanent diminutions taken to the Statement of Operations. The
definition of permanent is more prescriptive under US GAAP. The market value
of securities at April 30, 2003 resulted in an increase to the realisable
value of the securities. At April 30, 2002 there was no difference in the
value of securities between UK and US GAAP.

(iv) Profit on leaseback transaction

Under UK GAAP, a profit on a sale and leaseback of an operating lease is
recognised immediately. Under US GAAP, this profit is deferred over the
length of the lease. In fiscal 2002 the underlying lease was sold and hence
the remaining profit was recognised under US GAAP.

(v) In-process research and development

Under UK GAAP, certain payments to acquire licenses to products are
capitalised as Intangible Fixed Assets under FRS10. Under US GAAP these
payments are written off as in-process research and development in so far as
these products are to be used in research and development activities and have
no future alternative use.

(vi) Share compensation charges

Under UK GAAP, the cost of providing share options with performance criteria
is recognised over the period of the performance criteria using as measurement
date the date of issue. Under US GAAP, the measurement date remains open
until it is known how many options will be available.

(vii) Embedded option

Under US GAAP, FAS133, as amended, requires that all derivative financial
instruments, including embedded derivative financial instruments be fair
valued while any change in that fair value is taken to the profit and loss
account. The fair value of the Companys derivative financial instruments for
the year ended April 30, 2002 was not material.

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British Biotech plc(a development stage company)

(viii) Deferred tax

Under UK GAAP, deferred tax is recognised to the extent that it is probable
that a tax liability will become payable or an asset will be recoverable in
the foreseeable future. Under US GAAP, full provision is required for deferred
tax liabilities and deferred tax assets and losses carried forwards recognised
are subject to valuation allowances. Given the uncertainty of the
recoverability of the Groups tax losses carried forward, deferred tax assets
are recognised only to the extent of deferred tax liabilities under both UK or
US GAAP.

Cash Flows

Under UK GAAP, the cash flows are reported under a number of distinct
headings. Under US GAAP, however, there are only three categories of cash
flows: operating activities (including tax and interest), investing
activities (capital expenditure and including cash flows from sale or purchase
of short term deposits) and financing activities.

Under UK GAAP, cash is defined as cash in hand and deposits, with a maturity
period of no more than 24 hours, which are repayable on demand. However,
under US GAAP, the definition of cash and cash equivalents includes deposits
with a maturity period of less than three months when acquired.

Consolidated statement of cash flows under US GAAP

Years ended April 30,2001
    
    2002
    
    2003£000
    
    £000(i)
    
    £000Net cash deficit from operating activities
    
    
    (17,952
    )
    
    
    (18,325
    )
    
    
    (19,931
    )Net cash (used in)/provided by investing
activities
    
    
    15,587
    
    
    
    4,109
    
    
    
    40,990Net cash provided by/(used in) financing activities
    
    
    (381
    )
    
    
    (347
    )
    
    
    (665
    )Net (decrease)/increase in cash and
cash equivalents
    
    
    (2,746
    )
    
    
    (14,563
    )
    
    
    20,394Exchange rate adjustment on cash and
cash equivalents
    
    
    62
    
    
    
    18
    
    
    
    29Cash and cash equivalents at beginning
of the year
    
    
    21,674
    
    
    
    18,990
    
    
    
    4,445Cash and cash equivalents at end
of the year
    
    
    18,990
    
    
    
    4,445
    
    
    
    24,868




|(i) |  | Restated due to inclusion of money market accounts.
|--- |  | ---------------------------------------------------

Stock Compensation Plans
British Biotech adopted the disclosure requirements of SFAS 123 in fiscal 1997
but has elected to continue the recognition principles of APB No. 25 and
therefore, the effect of the adoption of SFAS 123 has had no effect on the
Groups results or financial position.

Under US GAAP, the Group is required to disclose the compensation expense for
the Executive Share Option plan and the SAYE plan. The compensation expense
represents the difference between the exercise price of the share options
granted in 1999 and 2000, and the fair market value of the underlying Ordinary
Shares at the date of grant.

The following assumptions were used under the Black-Scholes option pricing
model to estimate the fair values of the options granted:

April 30, 2001
    
    April 30, 2002
    
    April 30, 2003Dividend yield
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %Volatility
    
    
    77.6
    %
    
    
    77.7
    %
    
    
    63% - 68.5
    %Risk free investment rate
    
    
    5.6
    %
    
    
    5.11
    %
    
    
    3.7% - 4.25
    %Forfeiture rate
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %Expected life
    
    5 years
    
    5 years
    
    2 years - 6 years


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British Biotech plc(a development stage company)

The impact of the compensation expense would have been to increase the net
loss by £874,000 in 2001, £1,616,700 in 2002 and by £1,577,711 in 2003. The
impact on net loss per share would have been an increase of 2.6p, 4.8p and
4.6p respectively.

Accounting Developments

In June 2001, the FASB issued SFAS 143, Accounting for Asset Retirement
Obligations (SFAS 143). SFAS 143 addresses financial accounting and reporting
for obligations associated with the retirement of tangible long-lived assets
and the associated asset retirement costs. It applies to legal obligations
associated with the retirement of long-lived assets that result from the
acquisition, construction, development and (or) the normal operation of a
long-lived asset, except for certain obligations of lessees. SFAS 143
requires that the fair value of a liability for an asset retirement obligation
be recognized in the period in which it is incurred if a reasonable estimate
of fair value can be made. The associated asset retirement costs are
capitalized as part of the carrying amount of the long-lived asset. This
Statement is effective for financial statements issued for fiscal years
beginning after June 15, 2002. Earlier application is encouraged. Management
believes that the impact of the adoption of SFAS 143 on its Consolidated
Financial Statements will not be material.

In June 2002 the FASB issued FAS No 146, Accounting for Costs Associated with
Exit or Disposal activities, (FAS No. 146). FAS No. 146 addresses
financial accounting and reporting for costs associated with exit or disposal
activities (excluding an entity newly acquired in a business combination),
often referred to as restructuring costs, and nullifies prior accounting
guidance with respect to such costs. This Statement will spread out the
reporting of expenses related to restructurings initiated after 2002, because
a commitment to a plan to exit an activity or dispose of long-lived assets
will no longer be enough to record a liability for the anticipated costs. The
provisions of FAS No. 146 shall be effective for exit or disposal activities
initiated after December 31, 2002, with no retroactive restatement allowed.
FAS No. 146 has not had a significant impact on the Groups results of
operations or financial position.

At the November 21, 2002 meeting, the EITF reached a final consensus on issue
no. 00-21 Accounting for Revenue Arrangements with Multiple Deliveries.
This Issue addresses how to determine whether an arrangement involving
multiple deliverables contains more than one unit of accounting. EITF 00-21
is effective for revenue arrangements entered into in fiscal periods beginning
after June 15, 2003. Management is evaluating the potential impact of the
Issue on the Groups results.

In January 2003, the FASB issued FASB Interpretation No. (FIN) 46,
Consolidation of Variable Interest Entities. This interpretation of
accounting Research Bulletin No. 51, Consolidated financial Statements,
addresses consolidation by business enterprises of variable interest entities
which possess certain characteristics. The Interpretation requires that if a
business enterprise has a controlling financial interest in a variable
interest entity, the assets, liabilities, and results of the activities of the
variable interest entity must be included in the consolidated financial
statements with those for the business enterprise. The Interpretation applies
immediately to variable interest entities created after January 31, 2003 and
to variable interest entities in which an enterprise obtains an interest after
that date. The Company does not have any ownership in any variable interest
entities as of April 30, 2003. The Company will apply the consolidation
requirement of FIN 46 in future periods if we should own any interest in any
variable interest entity.

The Company is required to adopt International Accounting Standards in 2005
and is currently reviewing the implications.

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British Biotech plc(a development stage company)

4 Analysis of Revenues, Expenditure, Operating Results and Assets

Years ended April 30,2001
    
    2002
    
    2003£000
    
    £000
    
    £000(a) Revenues by activityContinuing operationsCollaborative agreements (Note (c))
    
    
    1,300
    
    
    
    1,378
    
    
    
    988Other grants
    
    
    288
    
    
    
    72
    
    
    
    901,588
    
    
    
    1,450
    
    
    
    1,078(b) Revenues by geographic areaUnited Kingdom
    
    
    98
    
    
    
    72
    
    
    
    90United States
    
    
    190
    
    
    
    
    
    
    
    420Rest of World
    
    
    1,300
    
    
    
    1,378
    
    
    
    5681,588
    
    
    
    1,450
    
    
    
    1,078


(c) Collaborative agreements

During the three years under review, the Group earned income under a
number of collaborative agreements as set out
in the following table. The amounts received are non-refundable.

Years ended April 30,2001
    
    2002
    
    2003£000
    
    £000
    
    £000GeneSoft Inc.
    
    
    
    
    
    
    
    
    
    
    420Serono Inc.
    
    
    1,300
    
    
    
    1,378
    
    
    
    5681,300
    
    
    
    1,378
    
    
    
    988


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British Biotech plc(a development stage company)

(d) Operating costs and expenses

Operating loss for continuing operations is stated after charging:

Years ended April 30,2001
    
    2002
    
    2003£000
    
    £000
    
    £000Wages and salaries
    
    
    (8,999
    )
    
    
    (6,566
    )
    
    
    (5,840
    )Social Security costs
    
    
    (801
    )
    
    
    (673
    )
    
    
    (611
    )Other pension costs
    
    
    (728
    )
    
    
    (565
    )
    
    
    (456
    )Staff costs
    
    
    (10,528
    )
    
    
    (7,804
    )
    
    
    (6,907
    )Average number of employees
    
    
    182
    
    
    
    117
    
    
    
    95Depreciation of property, plant
and equipment (including assets
under finance leases)
    
    
    (2,470
    )
    
    
    (1,269
    )
    
    
    (1,104
    )Loss/(profit) on disposal of
fixed assets (excluding
exceptional profit)
    
    
    (248
    )
    
    
    177
    
    
    
    (40
    )Amortisation of Intangible Assets
    
    
    (146
    )
    
    
    (173
    )
    
    
    (270
    )Impairment of Intangible Assets
    
    
    
    
    
    
    (301
    )
    
    
    Operating leases- property
    
    
    (753
    )
    
    
    (1,002
    )
    
    
    (403
    )- plant, machinery and vehicles
    
    
    (158
    )
    
    
    (79
    )
    
    
    (30
    )(911
    )
    
    
    (1,081
    )
    
    
    (433
    )Auditors remuneration- audit fees
    
    
    (26
    )
    
    
    (27
    )
    
    
    (44
    )- other services
    
    
    (138
    )
    
    
    (51
    )
    
    
    (654
    )(164
    )
    
    
    (78
    )
    
    
    (698
    )One-off charges- restructuring costs
    
    
    (974
    )
    
    
    
    
    
    
    (915
    )- asset write offs
    
    
    (127
    )
    
    
    (582
    )
    
    
    - terminated deal costs
    
    
    
    
    
    
    
    
    
    
    (1,454
    )(1,101
    )
    
    
    (582
    )
    
    
    (2,369
    )


One-off charges: Restructuring costs in fiscal 2001 were incurred in relation
to the reorganization announced in June 2000 and related principally to
redundancy costs. Restructuring costs in fiscal 2003 were incurred in
relation to the merger with RiboTargets announced in April 2003 and related
principally to redundancy costs.

Terminated deal costs in fiscal 2003 incurred in relation to the terminated
merger discussion with MorphoSys A.G. and relate principally to legal and
professional fees.

Auditors remuneration: Other services relates primarily to proposed and
completed acquisitions and other fees that have been paid for taxation advice
on collaborative agreements and services on SEC filings. There were no fees
paid in respect of management consultancy services.

Tangible Fixed Asset write offs relate primarily to the ongoing refurbishment
of the Groups properties.

(e) Profit on disposal of fixed assets

The profit on disposal of fixed assets of £2,505,000 arises from the agreement
signed with OSI Pharmaceuticals, Inc. in August 2001 whereby the Group sold
certain of its pre-clinical facilities and 59 British Biotech employees
transferred to OSI along with the leases of two properties and certain fixed
assets.

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##### Table of Contents



British Biotech plc(a development stage company)

(f) Operating result by activity

Years ended April 30,2001
    
    2002
    
    2003£000
    
    £000
    
    £000Continuing operationsPharmaceutical research and development
    
    
    (26,133
    )
    
    
    (23,565
    )
    
    
    (19,862
    )


(g) Total assets by activity

April 30,
    
    April 30,2002
    
    2003£000
    
    £000Continuing operationsPharmaceutical research and development
    
    
    65,422
    
    
    
    72,275


All significant losses on ordinary activities before taxation and net assets
arise in the UK and relate to pharmaceutical research and development.

(h) Analysis of capital expenditure by activity

Years ended April 30,2001
    
    2002
    
    2003£000
    
    £000
    
    £000Continuing operationsPharmaceutical research and development
    
    
    752
    
    
    
    1,801
    
    
    
    997


(i) Analysis of depreciation by activity

Years ended April 30,2001
    
    2002
    
    2003£000
    
    £000
    
    £000Continuing operationsPharmaceutical research and development
    
    
    2,470
    
    
    
    1,269
    
    
    
    1,104


(j) Acquisition of RiboTargets Holdings plc

On April 23, 2003 the Group completed its merger with RiboTargets Holdings
plc, which has been accounted for under the acquisition method. Under the
terms of the offer made to RiboTargets shareholders, 33,375,889 shares in
British Biotech plc have been issued in exchange for 100 per cent of the share
capital of RiboTargets, valuing RiboTargets at £21.7 million based on the
British Biotech share price of 65p at close of business on April 22, 2003 are
set out below:

Book values
    
    Adjustments
    
    Fair values£000
    
    £000
    
    £000Intangible assets
    
    
    
    
    
    
    
    
    
    
    Tangible assets
    
    
    1,520
    
    
    
    
    
    
    
    1,520Debtors
    
    
    2,521
    
    
    
    
    
    
    
    2,521Cash and short term investments
    
    
    12,903
    
    
    
    
    
    
    
    12,903Cash
    
    
    5,229
    
    
    
    
    
    
    
    5,229Creditors falling due within one year
    
    
    (4,552
    )
    
    
    (23
    )
    
    
    (4,575
    )Creditors falling due after more than one year
    
    
    (454
    )
    
    
    (45
    )
    
    
    (499
    )Provisions for liabilities and charges
    
    
    
    
    
    
    (412
    )
    
    
    (412
    )Net assets acquired
    
    
    17,167
    
    
    
    (480
    )
    
    
    16,687Satisfied by:Shares issued
    
    
    
    
    
    
    
    
    
    
    21,695Expenses of acquisition
    
    
    
    
    
    
    
    
    
    
    3,261Total consideration
    
    
    
    
    
    
    
    
    
    
    24,956Goodwill arising on acquisition
    
    
    
    
    
    
    
    
    
    
    8,269


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British Biotech plc(a development stage company)

Goodwill of £8.3 million has been capitalised and is being amortised over
three years, which is based on the Directors estimate of useful economic
life.

Net cash received on acquisition of £1,967,000 is total cash net of expenses
of acquisition.

RiboTargets Holdings plc and RiboTargets Limited accounting year end is
December 31. This will be aligned with the Group during financial year 2004.
The last financial statements of RiboTargets were prepared for the year ended
December 31, 2002. The summarised profit and loss account for the period
January 1, 2003 to April 22, 2003 the period prior to the effective date of
acquisition, is as follows:

Year ended
    
    Period toDecember 31, 2002
    
    April 22, 2003(audited)
    
    (unaudited)£000
    
    £000Turnover
    
    
    2,190
    
    
    
    39Operating loss
    
    
    (9,074
    )
    
    
    (6,202
    )Loss before tax
    
    
    (8,829
    )
    
    
    (6,112
    )Taxation
    
    
    1,107
    
    
    
    502Loss after tax
    
    
    (7,722
    )
    
    
    (5,610
    )


5 Interest

Years ended April 30,2001
    
    2002
    
    2003£000
    
    £000
    
    £000Interest incomeBank interest
    
    
    3,778
    
    
    
    2,820
    
    
    
    1,654Interest expenseSecured loans
    
    
    (282
    )
    
    
    (249
    )
    
    
    (217
    )Finance leases
    
    
    (46
    )
    
    
    (28
    )
    
    
    Bank overdraft
    
    
    (1
    )
    
    
    (1
    )
    
    
    (2
    )(329
    )
    
    
    (278
    )
    
    
    (219
    )3,449
    
    
    
    2,542
    
    
    
    1,435


6 Taxation

Years ended April 30,2001
    
    2002
    
    2003£000
    
    £000
    
    £000Overseas taxation
    
    
    (130
    )
    
    
    (4
    )
    
    
    Research and development tax credits  current year
    
    
    
    
    
    
    (1,604
    )
    
    
    (1,658
    )- adjustment in respect of prior period
    
    
    
    
    
    
    
    
    
    
    (80
    )(130
    )
    
    
    (1,608
    )
    
    
    (1,738
    )


2001
    
    2002
    
    2003£000
    
    £000
    
    £000Factors affecting the tax charge for the periodLoss before tax at 30%
    
    
    (7,045
    )
    
    
    (5,653
    )
    
    
    (5,768
    )Expenses not deductible for tax purposes
    
    
    1,245
    
    
    
    336
    
    
    
    803Deferred tax asset not recognised
    
    
    5,800
    
    
    
    3,311
    
    
    
    2,892Research and development tax credit received at 24%
of losses compared with 30% tax rate
    
    
    
    
    
    
    402
    
    
    
    415Overseas taxation refunded
    
    
    (130
    )
    
    
    (4
    )
    
    
    Under provision in respect of prior year tax credit
    
    
    
    
    
    
    
    
    
    
    (80
    )(130
    )
    
    
    (1,608
    )
    
    
    (1,738
    )


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##### Table of Contents



British Biotech plc(a development stage company)

No liability for UK corporation tax has arisen in any of the periods to April
30, 2003. The Group had losses, as computed for taxation purposes, of
approximately £300 million at April 30, 2003 (2002: £283 million) available to
be carried forward to future periods, of which £9 million (2002: £10 million)
has been set off against the liability to deferred taxation. Losses of £35
million have yet to be agreed with the Inland Revenue.

Tax losses can be carried forward with no expiry date against the profits of
the same trade. In the event that there is a change of ownership of the Group
(where one party or a group of connected parties gain control) then under
current UK tax law, if there is also a major change in the nature or conduct
of the trade within a period of three years either side of the change of
ownership, any tax losses at the time of change of ownership may not be
available for relief against future trading profits. Available tax losses
have been recognised as assets under US GAAP to the extent of any deferred tax
liabilities, and, a valuation allowance has been recognised against the
remaining deferred tax asset.

In accordance with the provisions of the Finance Act 2000 in respect of
Research and Development Allowances the Group has recognised a £1,738,000
(2002: £1,604,000) research and development tax credit relating to the year
ended April 30, 2003. The credit is expected to be received in the year
ending April 30, 2004.

There was no potential liability to deferred taxation at the end of any of the
periods ending April 30, 2003. The analysis, computed at the tax rate of 30
per cent, was as follows:

April 30,2002
    
    April 30,2003£000
    
    £000Excess of taxation allowances over depreciation
    
    
    3,009
    
    
    
    2,818Available tax losses applied
    
    
    (3,009
    )
    
    
    (2,818
    )
    
    
    
    


7 Dividends

No dividends have been paid since inception.

8 Intangible Assets

April 30, 2002
    
    April 30, 2003£000
    
    £000CostAt May 1
    
    
    1,236
    
    
    
    2,607Additions
    
    
    1,371
    
    
    
    8,269At April 30
    
    
    2,607
    
    
    
    10,876AmortisationAt May 1,
    
    
    146
    
    
    
    620Charge for the year
    
    
    173
    
    
    
    270Impairment
    
    
    301
    
    
    
    At April 30
    
    
    620
    
    
    
    890Net book value
    
    
    1,987
    
    
    
    9,986


Intangible Assets represent payments made to third parties to acquire licenses
to develop their intellectual property. The accounting policy for such assets
is set out in Note 2.

Additions in 2002 relate to licenses to develop and commercialize MG98.
Impairment relates to the termination of the collaboration with BresaGen.

Addition in 2003 relates to goodwill arising on acquisition of RiboTargets and
is being amortized over three years, which is based on the Directors estimate
of its useful economic life.

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British Biotech plc(a development stage company)

9 Property, plant and equipment

April 30, 2002
    
    April 30, 2003£000
    
    £000CostFreehold land and buildings
    
    
    9,249
    
    
    
    9,165Leasehold land and buildings
    
    
    
    
    
    
    1,232Plant and machinery
    
    
    8,311
    
    
    
    6,169Fixtures and fittings
    
    
    659
    
    
    
    90518,219
    
    
    
    17,471


April 30, 2002
    
    April 30, 2003£000
    
    £000Accumulated DepreciationFreehold land and buildings
    
    
    2,259
    
    
    
    2,612Leasehold land and buildings
    
    
    
    
    
    
    72Plant and machinery
    
    
    7,425
    
    
    
    3,977Fixtures and fittings
    
    
    539
    
    
    
    65910,223
    
    
    
    7,320Net book value
    
    
    7,996
    
    
    
    10,151


The net book value of plant and machinery includes an amount of £1,066,000
(2002: £125,000) in respect of assets held under finance leases. The
depreciation charge for the year in respect of these assets was £13,000 (2002:
£44,000).

Capital commitments at 30 April were as follows:

April 30, 2002
    
    April 30, 2003Contracted for but not provided
    
    
    £000
    
    
    
    £000411
    
    
    
    102


10 Investments

GroupMay 1, 2002
    
    Movement
    
    April 30, 2003£000
    
    £000
    
    £000Cost of investments in quoted companies
    
    
    1,623
    
    
    
    
    
    
    
    1,623Cost of shares in unquoted companies
    
    
    1,406
    
    
    
    
    
    
    
    1,406Provision
    
    
    (1,123
    )
    
    
    (799
    )
    
    
    (1,922
    )1,906
    
    
    
    (799
    )
    
    
    1,107


During the year provision has been made for a permanent diminution in value of
listed investments by reference to the evolution of the market price of
shares, and provision has been made for a permanent diminution in value of
unquoted investments by reference to directors estimates.

11 Accounts receivable

April 30, 2002
    
    April 30, 2003£000
    
    £000Interest receivable
    
    
    636
    
    
    
    405Research and Development tax credits
    
    
    1,604
    
    
    
    3,261Other receivables
    
    
    630
    
    
    
    2,183Prepayments and accrued income
    
    
    249
    
    
    
    1,2563,119
    
    
    
    7,105


No reserves for doubtful debts are considered necessary.

Included within research and development tax credits is £1,636,000 in respect
of RiboTargets Limited.

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British Biotech plc(a development stage company)

12 Creditors: amounts falling due within one year

April 30, 2002
    
    April 30, 2003£000
    
    £000Secured loan (see Note 13)
    
    
    270
    
    
    
    270Bank overdraft
    
    
    16
    
    
    
    Current portion of obligations
under finance leases
    
    
    117
    
    
    
    770Trade creditors
    
    
    4,527
    
    
    
    2,205Taxation and social security
    
    
    239
    
    
    
    443Accruals and deferred income
    
    
    3,383
    
    
    
    3,756Other creditors
    
    
    55
    
    
    
    518,607
    
    
    
    7,495


Included within the Groups accruals is deferred income of £550,000 (2002: £568,000)

13 Long term debt

April 30, 2002
    
    April 30, 2003£000
    
    £000Secured loan
    
    
    1,620
    
    
    
    1,350Obligations under finance leases
    
    
    63
    
    
    
    499Accruals and Deferred Income
    
    
    
    
    
    
    2,2981,683
    
    
    
    4,147These are repayable as follows:Over one and under two years
    
    
    333
    
    
    
    769Over two and under three years
    
    
    270
    
    
    
    270Over three and under four years
    
    
    270
    
    
    
    270Over four and under five years
    
    
    270
    
    
    
    270Repayable beyond five years, by instalments
    
    
    540
    
    
    
    2701,683
    
    
    
    1,849


The secured loan is for a term of 20 years from April 14, 1989 and is secured
by three of the Groups freehold properties. The terms of the loan provide for
a moratorium on capital repayments for five years from April 14, 1989;
thereafter, the loan is repayable quarterly in arrears by equal instalments.
Interest is fixed at 12.13 per cent per annum throughout the term.

14 Provisions for liabilities and charges

Restructuring
    
    Vacant lease
    
    Dilapidation
    
    TotalProvision
    
    provision
    
    provision£000
    
    £000
    
    £000At May 1, 2002
    
    
    
    
    
    
    
    
    
    
    250
    
    
    
    250Change for the year
    
    
    915
    
    
    
    412
    
    
    
    940
    
    
    
    2,267At April 30, 2003
    
    
    915
    
    
    
    412
    
    
    
    1,190
    
    
    
    2,517


The dilapidation provision relates principally to costs associated with the
Groups obligation to reinstate leased buildings to their original state. The
provision is expected to be utilised on vacating the properties by 2014.

The restructuring provision represents costs incurred in relation to the
acquisition of RiboTargets and related to redundancy costs.

Where leasehold properties become vacant the Group provides for all costs, net
of anticipated income, to the end of the lease or the anticipated date of the
disposal or sublease. This provision is expected to be utilised over the next
year.

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British Biotech plc(a development stage company)

15 Share capital

April 30, 2002
    
    April 30, 2003Group and Company
    
    Number
    
    £000
    
    Number
    
    £000Authorised
    
    
    
    
    
    
    
    
    
    
    285,858,083
    
    
    
    14,293Deferred shares of 95p each
    
    
    
    
    
    
    
    
    
    
    33,375,891
    
    
    
    31,707Old Ordinary shares of 5 pence each
    
    
    920,000,000
    
    
    
    46,000Allotted, called up and fully paidNew Ordinary shares of 5 pence each
    
    
    
    
    
    
    
    
    
    
    66,751,780
    
    
    
    3,338Deferred shares of 95p each
    
    
    
    
    
    
    
    
    
    
    33,375,891
    
    
    
    31,707Old Ordinary shares of 5 pence each
    
    
    667,493,141
    
    
    
    33,375
    
    
    
    
    
    
    
    33,375
    
    
    
    
    
    
    
    35,045


Capital reorganization

During the year the company undertook a capital reorganization. 20 Old
Ordinary shares of 5 pence were consolidated into one Intermediate Ordinary
share of £1. The consolidation of Old Ordinary Shares into Intermediate
Ordinary shares was immediately followed by a share capital subdivision as
follows. Each Intermediate Ordinary share was subdivided into one New
Ordinary share of 5 pence and one Deferred share of 95 pence.

The Deferred shares are not listed, do not confer any rights to dividend and
have extremely limited other rights which render them of negligible monetary
value. The Company has appointed a director of the Company, Mr A J Weir, to
execute on behalf of each holder of a Deferred share a transfer of such
Deferred shares, for no payment, from British Biotech shareholders to Mr Weir
pursuant to restrictions attaching to the Deferred shares.

On 23 April, 2003 the company issued 33,375,889 New Ordinary shares of 5p
each in respect of the acquisition of RiboTargets Holdings plc.

In the period prior to the Capital Reorganization the Company issued 24,665
Old Ordinary shares of 5p each in respect of share options, for which
consideration of £1,000 was received (2002 : £49,000).

16 Share option schemes

The Company has adopted various stock option plans, primarily as incentives to
retain and recruit high calibre staff. The Company currently grants stock
options under stock option plans: The British Biotech Executive Stock Option
Scheme; the British Biotech Group SAYE Share Option Scheme and the British
Biotech Deferred Share Bonus Scheme.

The options over the unissued Ordinary Shares of five pence that have been
granted to Directors and employees in the period from April 30, 2000 to April
30, 2003 are set out below. All of the quotations and prices have been
adjusted to reflect the effects of the capital reorganization in April 2003.
(Note 15).

Number of
    
    
    
    Weighted averageShare options
    
    Exercise price
    
    Exercise price(£)
    
    (£)Balance at April 30, 2000
    
    
    1,655,991
    
    
    
    1-47
    
    
    
    11.60Exercisable at April 30, 2000
    
    
    279,915
    
    
    
    1-47
    
    
    
    9.40Exercised
    
    
    17,543
    
    
    
    1
    
    
    
    1.00Surrendered
    
    
    279,784
    
    
    
    1-47
    
    
    
    12.00Granted
    
    
    765,585
    
    
    
    1
    
    
    
    1.00Balance at April 30, 2001
    
    
    2,124,249
    
    
    
    1-47
    
    
    
    7.60Exercisable at April 30, 2001
    
    
    374,787
    
    
    
    1-47
    
    
    
    13.40Exercised
    
    
    49,093
    
    
    
    1
    
    
    
    1.00Surrendered
    
    
    975,464
    
    
    
    1-42
    
    
    
    7.60Granted
    
    
    612,500
    
    
    
    1
    
    
    
    1.00Balance at April 30, 2002
    
    
    1,712,191
    
    
    
    1-47
    
    
    
    5.80Exercisable at April 30, 2002
    
    
    432,713
    
    
    
    1-47
    
    
    
    11.20Exercised
    
    
    1,233
    
    
    
    1
    
    
    
    1.00Surrendered
    
    
    400,138
    
    
    
    1-42
    
    
    
    10.17Granted
    
    
    5,422,911
    
    
    
    0.59-1
    
    
    
    0.80Balance at April 30, 2003
    
    
    6,733,731
    
    
    
    0.59-47
    
    
    
    1.31Exercisable at April 30, 2003
    
    
    405,354
    
    
    
    1-47
    
    
    
    10.67


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British Biotech plc(a development stage company)

The following table summarizes information about the range of exercise prices
for share options outstanding at April 30, 2003:

Weighted average
    
    Weighted
    
    
    
    
    
    Weighted averageExercise
    
    Number
    
    remaining
    
    average
    
    Exercisable
    
    Exercise price ofprices
    
    outstanding
    
    contractual life
    
    Exercise price
    
    Options
    
    Exercisable options(£)
    
    
    
    
    
    (years)
    
    (£)
    
    
    
    
    
    (£)£0.59
    
    
    2,700,840
    
    
    
    10.00
    
    
    
    0.59
    
    
    Nil
    
    Nil£1-4.40
    
    
    3,727,466
    
    
    
    8.55
    
    
    
    1.10
    
    
    
    165,805
    
    
    
    2.13£5.60-£7.20
    
    
    83,285
    
    
    
    1.90
    
    
    
    6.82
    
    
    
    71,263
    
    
    
    7.01£8
    
    
    76,250
    
    
    
    5.42
    
    
    
    8.00
    
    
    
    22,500
    
    
    
    8.00£16.40-£20.40
    
    
    111,998
    
    
    
    4.46
    
    
    
    20.10
    
    
    
    111,998
    
    
    
    20.10£22.00-£47.00
    
    
    33,892
    
    
    
    4.29
    
    
    
    30.90
    
    
    
    33,788
    
    
    
    30.87


The weighted-average grant-date fair values of options granted in the year
were:

Number of
    
    Weighted averageshare options
    
    grant-date fair values (pence)Exercise price less than
market value on day of
grant
    
    Nil
    
    NilExercise price equal to
market value on day of
grant
    
    
    2,700,840
    
    
    
    36.35Exercise price greater
than market value on day
of grant
    
    
    2,722,071
    
    
    
    21.90


17 Pension schemes

At April 30, 2003 the Groups pension schemes were defined contribution
schemes under which the Group had no obligations beyond the payment of the
premiums. The pension costs for the schemes have been as follows:

Years ended April 30,2001
    
    2002
    
    2003£000
    
    £000
    
    £000Pension costs
    
    
    728
    
    
    
    565
    
    
    
    456


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British Biotech plc(a development stage company)

18 Commitments and contingencies

(a) Operating lease commitments

At April 30, 2003, the Group had the following commitments under operating
leases, principally relating to leased properties:

Years ended April 30,
    
    £0002004
    
    
    1,6802005
    
    
    1,6222006
    
    
    1,6142007
    
    
    1,6122008
    
    
    1,612Later years
    
    
    17,726


The future aggregated minimum lease commitment is £25,866,000.

(b) Financial commitments and contingencies

The Group has commitments under license agreements of up to £12.45 million and
US$13.25 million which are contingent upon successful product development,
registration and approval, primarily relating to the collaboration with Monash
University and MethylGene respectively.

Commercial Collaborations

The following section describes the Groups existing commercial collaborators
and the commercial agreements with respect to the Groups principal research
and development programs and marketed products. Collaborations were formed by
companies that have been consolidated through the acquisition of RiboTargets in
April 2003 By way of background the provenance of each collaboration is:-

British Biotech
    
    RiboTargetsDSM Biologics
    
    Monash UniversitySerono
    
    Institute of Cancer ResearchGeneSoft PharmaceuticalsImmunoGenMethylGeneOSI PharmaceuticalsDevCoSchering-PloughTanabe SeiyakuR&D Systems Europe Ltd


(BB-10153)

British Biotech has had a series of agreements with DSM Biologics, the most
recent being January 1, 2003, all of which concern the supply of BB-10153 for
clinical trials.

Monash University

R140 (alphadolene acetate). In October 2002, British Biotech was granted an
exclusive licence to develop and commercialise the compound alphadolone (R140)
for all human and animal prophylactic and therapeutic analgesic indications
from Monash University and Professor Colin Goodchild (Victoria, Australia). In
return for an exclusive licence, British Biotech will pay Monash and Professor
Goodchild success milestones and royalties upon the sale of product.
Currently, R140 is in Phase I studies and is being developed for severe cancer
pain.

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British Biotech plc(a development stage company)

Serono S.A. (MEIs: inflammation)

In October 2000, British Biotech and Serono S.A. (Serono) (SWX: SEO; NYSE: SRA)
signed a two-year agreement to jointly research, develop and commercialize
metalloenzyme inhibitors for the treatment of various inflammatory diseases.
Under the terms of the agreement, British Biotech received from Serono an
up-front payment of US$5 million.

The agreement with Serono covered BB-2827, BB-76163 and research activities.
The clinical development, manufacture and commercialization of BB-2827, a
collagenase inhibitor with potential application in rheumatoid arthritis, and
the pre-clinical research of BB-76163, an aminopeptidase inhibitor, with
potential application in multiple sclerosis, were terminated in 2001.

In October 2002, the term of the research agreement was extended for a further
year to October 2003. The research agreement has now expired. The parties are
in discussion about selection of candidates for future development. For any
candidates selected Serono will undertake the further development of these
compounds with British Biotech receiving milestone and royalty payments upon
successful commercialisation of products.

GeneSoft Pharmaceuticals Inc. (MEIs: cancer)

In August 2002, the Company signed agreements with GeneSoft Pharmaceuticals
Inc. (then GeneSoft Inc.) for a broad-based collaboration to discover and
develop novel anti-infective drugs based on British Biotechs proprietary
bacterial metalloenzyme inhibitors. The collaboration combined British
Biotechs novel targets, chemistry and clinical development with GeneSofts
experience in antibiotic lead optimisation and clinical expertise.

GeneSoft made an initial payment to British Biotech in August 2002 of US$4
million. Upon initiation of the initial Phase I study of BB-83698 in October
2002, British Biotech received a further payment from GeneSoft of US$1 million
and one million shares of convertible-preferred stock (representing
approximately 3.45 per cent of GeneSofts outstanding equity as of the date of
the transaction, on a fully-diluted basis).

ImmunoGen Inc. (BB-10901)

In May 2000, British Biotech and ImmunoGen Inc., (NASDAQ: IMGN) (ImmunoGen), a
US biotechnology company, entered into a collaboration to develop and
commercialize ImmunoGens huN901-DM1, subsequently re-named as BB-10901,
targeted at the treatment of small cell lung cancer. ImmunoGen is a leader in
the development of anti-cancer agents with high potency and reduced toxicity,
through the use of its proprietary Tumor-Activated Prodrug (TAP) technology.

Under the agreement, British Biotech was granted exclusive rights to apply for
regulatory approval and commercialize BB-10901 in Europe and Japan. ImmunoGen
retains the rights to apply for regulatory approval and commercialize BB-10901
in the USA and the Rest of the World as well as the right to manufacture the
product worldwide. Upon signature of the agreement, British Biotech paid US$1.5
million for its rights to BB-10901.

Under the agreement, British Biotech and ImmunoGen share responsibility for the
development of BB-10901. ImmunoGen is responsible for completing pre-clinical
development and for the manufacture and supply of materials for clinical trials
and commercial sales. British Biotech is responsible for conducting the
clinical trials necessary to achieve regulatory approval in the US, Europe and
Japan and will reimburse ImmunoGen for the cost of clinical trial supplies. In
the event that ImmunoGen obtains regulatory approval for marketing the product
in the US, British Biotech will receive a one-off milestone payment. ImmunoGen
will receive royalties on sales made in Europe and Japan.

In May 2001, a combined Phase I/II study commenced in patients with relapsed
and refractory SCLC and other CD56-positive tumours to evaluate drug safety,
tolerability and biological activity. In August 2002, having been granted a
Clinical Trials Exemption (CTX) to investigate drug safety when administered on
a more frequent dosing regime, a second Phase I study of BB-10901 commenced in
two UK hospitals.

British Biotech plans to discuss this collaboration with ImmunoGen shortly.

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British Biotech plc(a development stage company)

MethylGene Inc. (MG 98)

In February 2002, British Biotech signed an agreement with MethylGene Inc., a
privately-held Canadian biopharmaceuticals company, granting British Biotech
the European development and commercialization rights for MG98, MethylGenes
leading experimental anti-cancer drug. In addition, British Biotech was granted
an option to license pre-clinical compounds that emerge from MethylGenes
complementary DNA Methyltransferase (DNA MT) small molecule inhibitor program
for cancer. This option has now expired.

MG98 is currently in Phase I clinical development in North America, such trials
being conducted by MethylGene and its collaborative partner for North America
and Canada, MGI Pharma Inc.

Under the License, Development and Commercialization Agreement, British Biotech
made an initial research and development payment to MethylGene of US$1.7
million, to be followed by milestone payments of up to US$12.8 million based on
successful regulatory approval and commercialization for MG98 in Europe.
MethylGene will also receive undisclosed royalties on sales. In addition, under
a separate Stock Purchase Agreement, British Biotech made an equity investment
of US$2 million in the private stock of MethylGene.

British Biotech plans to discuss this collaboration with MethylGene shortly.

Class Law

Class Law, an English firm of solicitors, has made allegations, on behalf of a
number of its clients who are or were shareholders in British Biotech, that
those clients have suffered loss as a result of statements made by the Company
and its directors over a period of years. Class Law allege these statements
were false or misleading. They have indicated recently that one of their
clients intends issuing proceedings against the Company. The amount claimed by
this client would not be material. However to date no proceedings have been
served on the Company by any of their clients. The Company has taken legal
advice and, although it is not able to assess these claims with accuracy
because of a lack of information in relation to them (although this information
has been requested from Class Law on a number of occasions), it does not
believe that the claims alleged will have a significant effect upon the
financial position of British Biotech or the Group as a whole. Save as is set
out above, there are no legal or arbitration proceedings (including any such
proceedings which are pending or threatened of which British Biotech is aware)
which may have or have had during the 12 months preceding the date of this
document, a significant effect on the financial position of British Biotech and
the Group as a whole.

19 Reconciliation of operating loss to operating cash flows

Years ended April 30,2001
    
    2002
    
    2003£000
    
    £000
    
    £000Operating loss
    
    
    (26,133
    )
    
    
    (23,565
    )
    
    
    (19,862
    )Depreciation
    
    
    2,470
    
    
    
    1,269
    
    
    
    1,104Amortisation of intangible fixed assets
    
    
    146
    
    
    
    173
    
    
    
    270Impairment of intangible fixed assets
    
    
    
    
    
    
    301
    
    
    
    Charge for deferred shares awarded
    
    
    
    
    
    
    188
    
    
    
    (611
    )Adjustment for exchange gain
    
    
    (37
    )
    
    
    (15
    )
    
    
    (29
    )Other loss/(profit) on disposal of fixed assets
    
    
    (248
    )
    
    
    177
    
    
    
    (40
    )Tangible fixed assets written off
    
    
    127
    
    
    
    582
    
    
    
    16Decrease in debtors
    
    
    (2,123
    )
    
    
    3,910
    
    
    
    (1,639
    )Increase/(decrease) in creditors
    
    
    4,010
    
    
    
    (2,229
    )
    
    
    (3,402
    )Increase/(decrease) in provisions
    
    
    50
    
    
    
    (100
    )
    
    
    915Net cash outflow from operating activities
    
    
    (21,738
    )
    
    
    (19,309
    )
    
    
    (23,278
    )


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British Biotech plc(a development stage company)

20 Returns on investments and servicing of finance

Years ended April 30,2001
    
    2002
    
    2003£000
    
    £000
    
    £000Interest received
    
    
    3,985
    
    
    
    2,629
    
    
    
    1,885Interest paid
    
    
    (283
    )
    
    
    (250
    )
    
    
    (219
    )Interest element of finance lease payments
    
    
    (46
    )
    
    
    (28
    )
    
    
    Net cash inflow from returns on
investments and servicing of finance
    
    
    3,656
    
    
    
    2,351
    
    
    
    1,666


21 Capital expenditure

Years ended April 30,2001
    
    2002
    
    2003£000
    
    £000
    
    £000Purchase of tangible fixed assets
    
    
    (752
    )
    
    
    (1,801
    )
    
    
    (997
    )Sale of tangible fixed assets
    
    
    11,198
    
    
    
    7,264
    
    
    
    222Purchase of fixed asset investments
    
    
    (1,623
    )
    
    
    (1,406
    )
    
    
    Purchase of intangible fixed assets
    
    
    (1,236
    )
    
    
    (1,371
    )
    
    
    Net cash inflow/(outflow) from capital expenditure
    
    
    7,587
    
    
    
    2,686
    
    
    
    (775
    )


The cash inflow on the disposal of fixed assets arising from the OSI
transaction in fiscal year 2002 was £7,176,000.

22 Financing

Years ended April 30,2001
    
    2002
    
    2003£000
    
    £000
    
    £000Issue of Ordinary share capital
    
    
    21
    
    
    
    49
    
    
    
    1Share issue costs
    
    
    
    
    
    
    
    
    
    
    (216
    )Debt due within one year:repayment of secured loan
    
    
    (270
    )
    
    
    (270
    )
    
    
    (270
    )Capital element of finance lease payments
    
    
    (132
    )
    
    
    (121
    )
    
    
    (180
    )Net cash inflow/(outflow) from financing
    
    
    (381
    )
    
    
    (342
    )
    
    
    (665
    )


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##### Table of Contents



British Biotech plc(a development stage company)

23 Analysis of changes in net funds

At April 30,
    
    Cash
    
    Exchange
    
    Other
    
    At April 30,2001
    
    Flow
    
    Movement
    
    Movements
    
    2002£000
    
    £000
    
    £000
    
    £000
    
    £000Cash
    
    
    656
    
    
    
    (366
    )
    
    
    18
    
    
    
    
    
    
    
    308Short term investments
    
    
    
    
    
    
    2,137
    
    
    
    
    
    
    
    
    
    
    
    2,137Bank overdraft
    
    
    (21
    )
    
    
    5
    
    
    
    
    
    
    
    
    
    
    
    (16
    )Short-term deposits
    
    
    64,355
    
    
    
    (16,386
    )
    
    
    
    
    
    
    
    
    
    
    47,96964,990
    
    
    
    (14,610
    )
    
    
    18
    
    
    
    
    
    
    
    50,398Secured loan due within one year
    
    
    (270
    )
    
    
    270
    
    
    
    
    
    
    
    (270
    )
    
    
    (270
    )Secured loan due after one year
    
    
    (1,890
    )
    
    
    
    
    
    
    
    
    
    
    270
    
    
    
    (620
    )Finance leases
    
    
    (372
    )
    
    
    121
    
    
    
    
    
    
    
    71
    
    
    
    (180
    )62,458
    
    
    
    (14,219
    )
    
    
    18
    
    
    
    71
    
    
    
    48,328


At May 01,
    
    Cash
    
    Acquisitions
    
    Exchange
    
    Other
    
    At April 30,2002
    
    Flow
    
    (excluding cash)
    
    Movement
    
    movements
    
    2003£000
    
    £000
    
    £000
    
    £000
    
    £000
    
    £000Cash
    
    
    308
    
    
    
    (43
    )
    
    
    
    
    
    
    29
    
    
    
    
    
    
    
    294Short term investments
    
    
    2,137
    
    
    
    1,451
    
    
    
    12,903
    
    
    
    
    
    
    
    
    
    
    
    16,491Short-term deposits
    
    
    47,969
    
    
    
    (20,828
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    27,141Bank overdraft
    
    
    (16
    )
    
    
    16
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    50,398
    
    
    
    (19,404
    )
    
    
    12,903
    
    
    
    29
    
    
    
    
    
    
    
    43,926Secured loan due
after one year
    
    
    (1,620
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    270
    
    
    
    (1,350
    )Secured loan due
within one year
    
    
    (270
    )
    
    
    270
    
    
    
    
    
    
    
    
    
    
    
    (270
    )
    
    
    (270
    )Finance leases
    
    
    (180
    )
    
    
    180
    
    
    
    (1,269
    )
    
    
    
    
    
    
    
    
    
    
    (1,269
    )48,328
    
    
    
    (18,954
    )
    
    
    11,634
    
    
    
    29
    
    
    
    
    
    
    
    41,037


Short-term deposits and short-term investments are aggregated on the balance
sheet. Cash flows from short-term deposits and short-term investments are
reported in the cash flow statement under the heading Management of Liquid
Resources. Short-term deposits have a maturity period of more than 24 hours
but less than 12 months. They are repayable on demand subject, in some
instances, to the payment of certain expenses. Short-term investments are
investments in a money market managed fund that is repayable within 48 hours.

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##### Table of Contents



British Biotech plc(a development stage company)

24 Financial instruments related disclosure

The Group does not trade in financial instruments.

All the Groups provisions, debtors and creditors falling due within one year
(other than the bank overdraft and secured loan) have been excluded from the
disclosures below either due to the exclusion of short-term items or because
they do not meet the definition of a financial liability.

Interest rate risk profile

The interest rate profile of the Groups financial assets and liabilities are:

Year ended April 302002
    
    2003Floating
    
    Fixed
    
    Total
    
    Floating
    
    Fixed
    
    TotalRate
    
    Rate
    
    
    
    Rate
    
    Rate£000
    
    £000
    
    £000
    
    £000
    
    £000
    
    £000Financial liabilitiesUS dollar bank overdraft
    
    
    16
    
    
    
    
    
    
    
    16
    
    
    
    
    
    
    
    
    
    
    
    Sterling secured loan (i)
    
    
    
    
    
    
    1,890
    
    
    
    1,890
    
    
    
    
    
    
    
    1,620
    
    
    
    1,620Finance leases (ii)
    
    
    
    
    
    
    180
    
    
    
    180
    
    
    
    
    
    
    
    1,269
    
    
    
    1,26916
    
    
    
    2,070
    
    
    
    2,086
    
    
    
    
    
    
    
    2,889
    
    
    
    2,889Financial assetsSterling cash at bank and in hand
    
    
    300
    
    
    
    
    
    
    
    300
    
    
    
    136
    
    
    
    
    
    
    
    136Euro cash at bank and in hand
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    11
    
    
    
    
    
    
    
    11US dollar cash at bank and in
hand
    
    
    8
    
    
    
    
    
    
    
    8
    
    
    
    147
    
    
    
    
    
    
    
    147Sterling short-term investment
(iii)
    
    
    2,137
    
    
    
    
    
    
    
    2,137
    
    
    
    16,491
    
    
    
    
    
    
    
    16,491Sterling short-term deposits (iv)
    
    
    
    
    
    
    47,969
    
    
    
    47,969
    
    
    
    
    
    
    
    27,141
    
    
    
    27,141US dollar investment
    
    
    98
    
    
    
    
    
    
    
    98
    
    
    
    70
    
    
    
    
    
    
    
    70Australian Dollar investment
    
    
    402
    
    
    
    
    
    
    
    402
    
    
    
    109
    
    
    
    
    
    
    
    109Canadian dollar investment
    
    
    1,406
    
    
    
    
    
    
    
    1,406
    
    
    
    928
    
    
    
    
    
    
    
    9284,351
    
    
    
    47,969
    
    
    
    52,320
    
    
    
    17,892
    
    
    
    27,141
    
    
    
    45,033




---

|(i)   |  | The secured loan is for a term of 20 years from 14 April, 1989 and is
secured by a fixed charge over three of the Groups freehold properties.
Interest is fixed at 12.13 per cent per annum throughout the term. The
loan is repayable quarterly in arrears by equal instalments. The
weighted average period until maturity is six years.
|----- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|     
|(ii)  |  | The finance leases were all in sterling at fixed rates of interest. The
weighted average interest rate and period remaining on liabilities at 30
April, 2003, was 8.8 per cent and 1.9 years.                                                                                                                                              
|     
|(iii) |  | The floating rate short term investments are invested in a money market
managed fund with a weighted average maturity of less than 120 days and
is repayable within 48 hours.                                                                                                                                                              
|     
|(iv)  |  | The fixed rate short-term deposits are placed with a range of banks and
building societies at fixed terms ranging between overnight and 12 months
and at fixed rates ranging between 3.55 per cent and 4.12 per cent.                                                                                                                      
|     
|(v)   |  | Fixed and Floating rate assets have been restated at April 30, 2001.
Short term deposits are now included within Fixed rate assets.                                                                                                                                                                                                        

Borrowing facilities

The Group has no significant undrawn committed borrowing facilities at April
30, 2003.

Foreign currency exposure

One of the Groups operations, British Biotech Pharmaceuticals Limited, has
net monetary assets of £0.1 million (2002: £0.1 million) denominated in US
dollars, £0.1 million (2002: £0.4 million) denominated in Australian dollars
and £0.9 million (2002: £1.4 million) denominated in Canadian dollars.

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##### Table of Contents



British Biotech plc(a development stage company)

Fair value of financial assets and liabilities

There is no significant difference between the fair value and the carrying
value of the Groups financial assets and liabilities at April 30, 2003 and
April 30, 2002, except for the secured loan and fixed asset investments. The
fair value of the loan at £1.9 million (2002: £2.7 million) was calculated
using a discounted cash flow method as market values were unavailable. The
book value of the loan at April 30, 2003, was £1.6 million (2002: £1.8
million). The market value of the Groups listed investments at April 30,
2003, was £179,000 (2002: £500,000).

25. Post Balance Sheet Events (unaudited)

On July 3, 2003, the Boards of British Biotech plc and Vernalis Group plc
announced that they had unanimously agreed the terms of a recommended merger
of the two companies by way of an offer by J P Morgan plc on behalf of the
Company to acquire the whole of the issued and to be issued share capital of
Vernalis Group plc in exchange for shares in the Company. The offer was not
made in the United States. The offer was approved by the companys
shareholders at an extraordinary general meeting held on August 13, 2003, and
was declared unconditional on August 29, 2003, by which date valid acceptances
of the offer had been received in respect of 76,328,753 Vernalis Group plc
Shares, representing approximately 87.29 per cent of the existing issued share
capital of Vernalis Group plc. The offer closed on September 23, 2003, by
which date acceptances of the offer had been received in respect of 80,178,155
Vernalis Group shares, representing approximately 91.58 per cent of the
existing issued share capital of Vernalis Group plc. The Company commenced
the procedure to acquire compulsorily any remaining Vernalis Group shares to
which the offer relates pursuant to sections 428 of the Companies Act 1985 on
September 23, 2003-10-20.

The compulsory acquisition procedure is expected to be concluded on or shortly
after November, 4, 2003.

On September 1, 2003 Mr Peter Worrall, formerly Finance Director of Vernalis
Group plc became Corporate Development Director; Dr John Hutchison, formerly
Senior Vice President, Development and Chief Medical Officer of Vernalis Group
plc, became Development Director, Mr George Kennedy, formerly Non-Executive
Chairman of Vernalis Group plc, became Deputy Chairman and Senior Independent
Director; and Dr Peter Read and Ms Carol Ferguson, formerly Non-Executive
Directors of Vernalis Group plc, became Non-Executive Directors of the
Company. On September 10, 2003 Mr Edwards stepped down from the Board.

On October 1, 2003, the Company announced that shareholders had approved the
re-naming of the Company as Vernalis plc.

F-30