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                      SECURITIES AND EXCHANGE COMMISSION
                            WASHINGTON, D.C. 20549
 
                                   FORM 10-K
 
    (MARK ONE)
    [X]         ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
                OF THE SECURITIES EXCHANGE ACT OF 1934
    FOR THE FISCAL YEAR ENDED DECEMBER 31, 1995
                                      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 1-10392

                             U.S. BIOSCIENCE, INC.
            (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
 
              DELAWARE                                  23-2460100
   (STATE OR OTHER JURISDICTION OF                   (I.R.S. EMPLOYER 
   INCORPORATION OR ORGANIZATION)                   IDENTIFICATION NO.)
 
            ONE TOWER BRIDGE                          
            100 FRONT STREET
          WEST CONSHOHOCKEN, PA                           19428
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)                (ZIP CODE)
              
 
      REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (610) 832-0570
 
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
 
                                                       NAME OF EACH EXCHANGE ON
          TITLE OF EACH CLASS                              WHICH REGISTERED
          -------------------                          ------------------------
      Common Stock ($.005 par value)                   American Stock Exchange
 
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
 
                                     None
                               (TITLE OF CLASS)
 
     Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes.  X    No.___
                                                    ---       

     Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
 
     As of March 4, 1996, the aggregate market value of the voting stock held by
non-affiliates of the registrant was $293,983,000.*
 
     As of March 4, 1996, the number of outstanding shares of the registrant's
Common Stock was 43,378,620.
 
                      DOCUMENTS INCORPORATED BY REFERENCE
 
Part III--Portions of the registrant's definitive Proxy Statement with respect
          to the registrant's 1996 Annual Meeting of Stockholders, to be filed
          not later than 120 days after the close of the Registrant's fiscal
          year.
__________
* Calculated by excluding all shares held by executive officers, directors and
  five percent shareholders of the registrant without conceding that all such
  persons are "affiliates" of the registrant for purposes of the federal
  securities laws.
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                                    PART I

Item 1.  BUSINESS.
 
     General

     U.S. Bioscience, Inc., a Delaware corporation (the "company"), is a
pharmaceutical firm established in 1987 which seeks to develop and market drugs,
principally drugs for treating patients with cancer, acquired immune deficiency
syndrome ("AIDS") and allied diseases and infections.  The company has, through
licensing agreements, rights to nine drugs for the treatment of these diseases.
Three drugs have been cleared by the United States Food and Drug Administration
("FDA"), Hexalen(R) (altretamine), NeuTrexin(R) (trimetrexate glucuronate for
injection) and Ethyol(R) (amifostine); three are in various stages of clinical
trials or targeted to begin clinical trials in 1996, AZQ, PALA and FddA; and
three are in preclinical testing,  WR-151327, Third Generation Platinums and
Mitomycin-C Analogues.  For a description of the steps required before a drug
may be marketed in the United States see "Government Regulation."

     In December 1990, the FDA approved the company's New Drug Application
("NDA") for Hexalen(R) (altretamine), a drug for the treatment of advanced
ovarian cancer.  Commercial sales of Hexalen commenced in the United States in
January 1991.  See "Principal Products - Hexalen."

     On February 1, 1993, the company filed an NDA for NeuTrexin(R)
(trimetrexate glucuronate for injection) for the treatment of Pneumocystis
carinii pneumonia ("PCP"), an infection primarily associated with AIDS.  This
application was the subject of a joint review by the FDA and the Canadian
regulatory authority, the Health Protection Branch ("HPB").  The application was
approved by the FDA and the HPB in December of 1993, and commercial sales of
NeuTrexin commenced in the United States in January 1994.  At its September 1994
meeting, the European Union's ("EU") Committee for Proprietary Medicinal
Products ("CPMP") recommended NeuTrexin for approval in the EU.  As of January
31, 1996 NeuTrexin has received local health regulatory approval in Denmark,
France, Germany, Ireland, Luxembourg, the United Kingdom, Spain, Greece, and The
Netherlands.  See "Principal Products - NeuTrexin."
 
     In September 1991, the company submitted to the FDA an NDA for a
chemotherapy protection indication for Ethyol.  The NDA was approved by the FDA
on December 8, 1995 for the indication of reducing the cumulative renal (kidney)
toxicity associated with repeated administration of cisplatin in patients with
advanced ovarian cancer.  On March 15, 1996, the company's supplemental NDA was
approved by the FDA under the Accelerated Approval Regulations to include use in
patients with non-small cell lung cancer for the reduction of cumulative renal
damage associated with repeated administration of cisplatin-based chemotherapy.
A dossier describing Ethyol's chemoprotection properties was submitted to the
CPMP in September 1992.  At its September, 1994 meeting, the CPMP recommended
Ethyol for approval by its member countries to reduce the neutropenia related
risk of infection (e.g. neutropenic fever) due to the combination regimen
cyclophosphamide and cisplatin in patients with advanced (FIGO Stage III or IV)
ovarian cancer.  As of January 31, 1996, Ethyol has received local health
regulatory approval in Belgium, Denmark, France, Germany, Greece, Luxembourg,
The Netherlands, Portugal, Spain and the United Kingdom.  See "Principal
Products - Ethyol."

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     The objective of the company is to become an important participant in the
worldwide pharmaceutical market for oncologic and AIDS drugs.  To achieve this
objective, the company's strategy to date has been to acquire exclusive licenses
in the United States and certain other markets for therapeutic agents that the
company believes have potentially significant commercial and clinical value in
the treatment of cancer, AIDS and allied diseases.  The company's primary
emphasis has been on "late-stage" drugs, which are drugs having an established
preclinical or clinical database and for which development by the company will
consist largely of further preclinical testing, clinical trials and the
preparation of applications for regulatory approval.  By acquiring rights to
drugs that have undergone some degree of development and for which preclinical
and clinical information exists, the company believes that it will be able to
reduce the costs, risks and time involved in bringing drugs to market.  The
company's long term strategy focuses on the licensing, development and
commercialization of anticancer and AIDS drugs currently in the early stages of
research.

     The three most common methods of treating patients with cancer are surgery,
radiation therapy and systemic therapy.  Systemic therapy consists principally
of chemotherapy and hormonal therapy.  Chemotherapy involves the administration
of cytotoxic drugs designed to kill cancer cells.  In addition to seeking to
develop these types of cancer-killing drugs, the company, as well as other
firms, is seeking to develop drugs that augment the efficacy or reduce the
toxicity of other chemotherapeutic agents.

     Hormonal therapy is based on the fact that in some patients the growth of
certain tumors, such as breast cancer, prostate cancer and endometrial cancer,
is dependent upon the availability of endogenous hormones, such as estrogen and
androgen.  The use of measures to either reduce the production of, or block the
action of, these hormones represents a form of systemic treatment for these
diseases.  Typically, when compared to chemotherapy, hormonal therapy produces a
lower incidence and severity of side effects.

     Anticancer drugs can be toxic to normal cells as well as cancer cells,
causing unwanted side effects.  For most cancer drugs, therapeutic dosage for
cancerous tissue is close to the toxic dose.  Thus, drugs that could selectively
protect normal cells could be of significant medical benefit.  Development of
systemic therapeutic products for the treatment of cancer requires laborious
preclinical and clinical testing to satisfy government regulation and medical
ethics.  As a consequence, the development of successful anticancer drugs often
requires five to ten years of preclinical and clinical testing.

     The Human Immune Deficiency Virus ("HIV")/AIDS treatment market can be
divided into two segments.  The antiretroviral segment includes those therapies
which specifically target the HIV virus, such as nucleoside analogues like
zidovudine (AZT), didanosine (ddI), zalcitabine (ddC) and lamivudine (3TC), and
protease inhibitors, such as saquinavir, which was approved by the FDA in
December 1995 and ritonavir and indinavir, which were approved by the FDA in
March 1996.  The second segment of the HIV/AIDS treatment market includes those
agents which prevent or treat AIDS-related opportunistic infections, including,
PCP, tuberculosis, candidiasis etc.  PCP remains the most common opportunistic
infection associated with AIDS.

     During the last two decades, significant advances in molecular biology,
immunology and other related fields of biotechnology have led to an improved
understanding of how malfunctioning genes lead to the development of certain
tumors, and to an appreciation of the body's own regulatory

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systems to control this process.  It is hoped that this area of biotechnology
will lead to better ways to diagnose cancer, to identify those predisposed to
develop the disease and to prevent tumors from forming or becoming malignant.
It is also hoped that this area of biotechnology will lead to better ways to
treat HIV/AIDS and the opportunistic infections associated with AIDS.  In view
of ongoing developments in the oncologic market and the general nature of
scientific research, no assurance can be given that the nature of the oncologic
market or the HIV/AIDS market or the method of treating cancer patients or AIDS
patients will not undergo significant change.  The company believes, however,
that systemic therapy will continue to make an important contribution to the
treatment of cancer.

     Marketing and Distribution

     The company currently markets Hexalen and NeuTrexin in the United States
through its own sales force.  The company has entered into an exclusive
distribution and marketing agreement with ALZA Corporation ("ALZA") for its drug
Ethyol for the U.S. market.  Under the terms of this agreement the company will
co-promote Ethyol with ALZA in the United States.  See "Principal Products--
Ethyol-- Distribution and License Agreements".  It is the company's intention to
determine the most appropriate commercial arrangements for marketing its other
drugs on a case by case basis.

     Opportunities exist for the registration and commercialization of the
company's products in some foreign countries prior to FDA approval.  Since the
company cannot, at this time, practically market drugs on its own in most
territories outside of the United States, the company has, with respect to
certain of its drugs, entered into licensing and distribution arrangements,
covering markets where the company does not currently plan to utilize its own
sales organization.  Some of these agreements provide signing fees and/or
milestone payments to the company, and some also provide royalties to the
company based upon future sales, if any, of licensed drugs.  The extent to which
the company derives meaningful revenues from these arrangements will be
dependent upon, among other things, the ability to obtain product approvals and
the licensees' and distributors' ability to market and sell the licensed drugs
in their respective markets.  To date foreign sales have not represented a
material portion of the company's revenues.



PRINCIPAL PRODUCTS

     The company's products reflect its strategy of building a portfolio of
drugs for the treatment of patients with cancer that represent a diverse group
of modalities, including cancer-attacking cytotoxics (Hexalen, NeuTrexin, AZQ,
third generation platinum anticancer agents, and Mitomycin-C analogues);
cytoprotectors (Ethyol and WR-151327); and modulators (NeuTrexin and PALA).  The
company's products also reflect its strategy of building a portfolio of drugs
for the treatment of AIDS and AIDS-related diseases or infections.  The
company's drug NeuTrexin is commercially available for treatment of PCP, an
infection primarily associated with AIDS.  The company has licensed FddA, and
its active metabolite FddI, which are reverse transcription inhibitors.
Clinical studies of FddA are targeted for initiation in 1996.  FddA is  being
evaluated for use in the treatment of HIV and the active state of HIV, AIDS.
See "Principal Products - FddA."

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     HEXALEN(R) (ALTRETAMINE/HEXAMETHYLMELAMINE)

     General Description.  Hexalen is an orally administered cytotoxic drug that
was cleared for commercial sale by the FDA in December 1990 for use as a single
agent in the palliative treatment of patients with persistent or recurrent
ovarian cancer following first-line therapy with cisplatin and/or alkylating
agent-based combination chemotherapy.  Until 1997, Hexalen has marketing
exclusivity in the United States for advanced ovarian cancer under the Orphan
Drug provisions of the Food, Drug and Cosmetic Act.

     Marketing.  The company launched its Hexalen marketing program in the
United States during early 1991.  The program consists of direct mail, journal
advertising, symposia and promotion to prescribing physicians by the company's
sales force.  Hexalen has been distributed through pharmaceutical wholesalers
and is prescribed by oncologists treating ovarian cancer.  New therapies with
potential clinical application in ovarian cancer may enter the U.S. marketplace
in 1996.  There can be no assurance that potentially competitive products will
not have a material adverse effect on the future sales of Hexalen.  In the
United States the company has obtained a registered trademark for Hexalen, the
company's brand of altretamine.  The company is also pursuing trademark
registrations for Hexalen in a number of foreign countries.

     Hexalen has been approved outside the United States for treatment of
advanced ovarian cancer in Sweden, Israel, Australia, Canada, the Philippines,
the United Kingdom, China, Norway, South Korea, Egypt and Hong Kong.  Commercial
sales of Hexalen in these countries will be through distribution and license
arrangements.  To date, commercial sales of Hexalen outside the United States
have not been material.

     License of Hexalen to the company.  The company's rights to Hexalen are
derived from an  assignment of rights regarding Wyeth Laboratories, Inc.'s
("Wyeth") NDA.  In return, the company is required to pay royalties on worldwide
sales by the company or its licensees of any product containing altretamine.
The company also has a licensing agreement with Rhone-Poulenc Rorer for rights
to applications, registrations and approvals relating to their brand of
altretamine (Hexastat(R)) in Canada, Germany, Italy, The Netherlands, Israel and
the Czech Republic.  The licenses expire in 2001 with respect to Canada and 2002
with respect to the other countries.  In commercializing Hexalen in these
markets, if and when regulatory approvals are obtained, the company will be
required to pay royalties to Rhone-Poulenc Rorer on sales of Hexalen by the
company or its licensees in countries covered by the licensing agreement.  There
can be no assurance that dossiers will be submitted in all those countries or
that regulatory approvals will be obtained.

     Orphan Drug Status.  Under the terms of the Orphan Drug Act, Hexalen has
U.S. marketing exclusivity for its FDA approved indication for a period of seven
years from approval of its NDA (i.e., the FDA may not approve another
altretamine product for that indication during the seven-year period).  Such
exclusivity expires in 1997.  See "Orphan Drug Status," "Government Regulation,"
and "Patents, Trademarks, and Trade Secrets."

     Distribution and Marketing Agreements.  The company has entered into
distribution or licensing agreements for Hexalen with a number of pharmaceutical
companies for territories outside of the United States.

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     The company has licensed its rights for Hexalen in Scandinavia to Swedish
Orphan AB ("Swedish Orphan").  Commercial sales of Hexalen commenced in Sweden
during the second quarter of 1993.  The company has licensed its Hexalen rights
in Australia and New Zealand to F.H. Faulding & Co. Limited (formerly David Bull
Laboratories Pty. Ltd.) ("Faulding").  It has licensed its rights in Israel to
Teva Pharmaceutical Industries, Ltd. ("Teva").  In addition, the company has
licensed its rights for Japan, South Korea and Taiwan to Kanebo, Ltd.
("Kanebo").  The licensees are required to pay the company royalties based on
their net sales for up to ten years after their first commercial sale of the
product.  The company and Schering Overseas Limited ("Schering Overseas"), a
subsidiary of Schering-Plough Corporation ("Schering") are negotiating to
terminate Schering Overseas's rights to Hexalen in over 35 countries in Latin
America and Asia ("Latin America/Asia Territories").

     The company has entered into an exclusive marketing and distribution
agreement for Hexalen with Societe de Conseils, de Recherches et d'Applications
Scientifiques ("SCRAS"), an affiliate of Beaufour IPSEN, for the United Kingdom
and Germany with rights of SCRAS to extend the territory to Belgium, France,
Ireland, Italy, Luxembourg, Portugal, Spain and The Netherlands for a term of up
to twelve (12) years.  Under the terms of the Agreement, the company supplies
the products to SCRAS at negotiated prices.

     The company has entered into an exclusive distribution and marketing
agreement with Eli Lilly  InterAmerica, Inc., an affiliate of Eli Lilly and
Company, for Hexalen in Canada.  Under the terms of the agreement another
affiliate of Eli Lilly and Company, Eli Lilly Canada Inc. ("Eli Lilly Canada")
will have rights to distribute and market Hexalen in Canada for five years and
under certain circumstances will have the right to extend the agreement for an
additional five years.  The company will supply Hexalen to Eli Lilly Canada at
an agreed upon supply price.

     The company has entered into exclusive distribution agreements for Hexalen
with six pharmaceutical companies in several Middle Eastern countries.  The
distributors are required to purchase Hexalen exclusively from the company
during the term of the agreements.  To date, regulatory approval for Hexalen has
been received in Egypt but has not been received for Hexalen from any other
Middle Eastern country.

     There can be no assurance that the company will derive meaningful revenues
from any of these arrangements.

     Manufacturing.  The company is dependent on third party suppliers for the
manufacture of Hexalen.  The company has one approved source of altretamine drug
substance and two approved sources for the finished dosage form of Hexalen.

     NEUTREXIN(R) (TRIMETREXATE GLUCURONATE FOR INJECTION)

     General Description.  NeuTrexin (trimetrexate glucuronate for injection) is
a lipid-soluble intravenously administrable analogue of methotrexate, a
commonly-used anticancer agent.  In December 1993, the FDA approved the
company's NDA, and the HPB granted commercial clearance, for NeuTrexin with
concurrent leucovorin administration (leucovorin protection) as an alternative
therapy for the treatment of moderate-to-severe PCP in immunocompromised
patients, including patients with AIDS, who are intolerant of, or are refractory
to, trimethoprim-sulfamethoxazole therapy or for whom trimethoprim-
sulfamethoxazole is contraindicated.  In

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September 1994, the CPMP recommended approval for NeuTrexin with concurrent
leucovorin administration (leucovorin protection) as an alternative therapy for
the treatment of moderate-to-severe Pneumocystis carinii pneumonia in patients
with AIDS who are intolerant of or refractory to standard therapy or for whom
standard therapy is contraindicated.  NeuTrexin was designated a "high tech"
drug under the CPMP's Concertation Procedure which provided for concurrent
review of the dossier by the then twelve members of the EU and provides up to
ten years of regulatory exclusivity in the major markets upon approval.
Following the positive CPMP recommendation, the company has applied for local
regulatory approvals in the EU member countries.  As of January 31, 1996, the
company has received local health regulatory approvals for NeuTrexin in Denmark,
France, Germany, Ireland, Luxembourg, the United Kingdom, Spain, Greece and The
Netherlands.

     Marketing.  The company launched its NeuTrexin marketing program in the
United States during early 1994.  The program consists of direct mail, journal
advertising, symposia and promotion to prescribing physicians by the company's
sales force.  NeuTrexin has been distributed through pharmaceutical wholesalers
and is prescribed by physicians treating PCP.  Commercial sales of NeuTrexin in
the United States commenced in January 1994.  In the United States the company
has obtained a registered trademark for NeuTrexin, the company's brand of
trimetrexate glucuronate.  The company is also pursuing trademark registrations
for NeuTrexin in a number of foreign countries.

     Clinical Trials.  The company has conducted a Phase II clinical trial
combining NeuTrexin with dapsone, a sulfa based antibiotic, to investigate this
combination for first-line PCP therapy.  There can be no assurance that this
combination will result in approval of NeuTrexin for a first-line indication for
PCP.  The company is also investigating NeuTrexin as an anticancer agent.  A
multicenter Phase II trial of NeuTrexin in combination with 5-FU and leucovorin
in 39 patients with metastatic colorectal cancer resulted in a 52% response rate
including 3 complete responses.  In follow up a randomized controlled Phase III
trial of 5-FU and Leucovorin with and without NeuTrexin has been initiated.
There can be no assurance that these trials will result in the approval of
NeuTrexin for cancer treatment.  Pharmacologic properties of NeuTrexin also
suggest possible applications in the management of non-neoplastic diseases such
as psoriasis and rheumatoid arthritis.  Research into topical and oral
formulations of NeuTrexin is underway.  The development of these dosage forms
will facilitate clinical research not only in patients with diseases such as
AIDS and cancer, but may also allow for an extended role for NeuTrexin in
patients with benign diseases (such as psoriasis and rheumatoid arthritis),
although no assurance can be given that such trials, if conducted, will yield
approved indications.

     Licenses of NeuTrexin to the Company.  The company has obtained an
exclusive license to the United States Government's U. S. patent claiming a
method of treating PCP with trimetrexate.  The term of exclusivity is seven
years from the first commercial use of the product.  After this period of
exclusivity, the company also has a non-exclusive license until the last of the
licensed patents expires.  Under the terms of its agreement with the United
States Government, the company is required to pay royalties based on net sales
of NeuTrexin.  Pursuant to an agreement as amended with Warner-Lambert Company
("Warner-Lambert"), the company has obtained an exclusive worldwide license to
manufacture and market NeuTrexin under the patent rights and know-how held by
Warner-Lambert, including a composition of matter patent on the form of
NeuTrexin approved for commercial sale.  Under the agreement, the company is
required to pay to Warner-Lambert royalties based on net sales of NeuTrexin.
The agreement may be terminated by Warner-Lambert in a country outside the
United States if commercial sales are not commenced in such country by the first
anniversary of the date on which NeuTrexin could legally be sold in such
country.

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     Patents and Orphan Drug Status.  As noted above, the company has reached an
agreement to license, on an exclusive basis, Warner-Lambert's NeuTrexin patents,
including those relating to composition of matter and manufacturing processes.
One of those patents, a composition of matter patent on the form of NeuTrexin
approved for commercial sale, was issued March 15, 1983 and, pursuant to new
legislation, will be entitled to a term of 20 years from the date of the first
U.S. filed application for that patent, October 31, 1980.  Therefore, the
current expiration date for this U.S. patent is October 31, 2000.  See "Patents
Trademarks and Trade Secrets."  Pursuant to the Drug Price Competition and
Patent Term Restoration Act of 1984, an application has been filed for an
extension of that patent in the United States for an additional 1,310 days, a
period relating to the time NeuTrexin was under review by the FDA.  On August 4,
1995 the U.S. Patent Office informed Warner Lambert, the patentee, that the
patent was eligible for patent term extension of 1,284 days.  Warner Lambert
filed a request for reconsideration of the length of the extension on September
1, 1995.  The request for reconsideration is pending.  There can be no assurance
that the extension will be granted or that, if granted, the extension will be
for the full term requested.  The company has rights to the foreign counterparts
of this U.S. Patent in many European markets.  These foreign counterpart patents
were filed in 1981 and are due to expire in 2001.  The company is applying for
supplementary patent protection in the EU countries where health regulatory
approvals for NeuTrexin have been received and where there is a foreign
counterpart patent.  Such supplementary protection may be granted for a period
of up to five additional years; however, there can be no assurance that
supplementary protection will be granted for any such patent or that, if
granted, the extension will be for the full term requested.  As of January 15,
1996, supplementary protection has been granted in France and Luxembourg for a
five year term.  The company has filed a U.S. patent application with respect to
crystalline trimetrexate salts and the process for making crystalline
trimetrexate salts.  There can be no assurance that patent(s) will issue from
this patent application.

     The company also has an exclusive license in the United States for a U.S.
Government patent claiming a method of treating PCP infection with trimetrexate.
See "Principal Products --NeuTrexin--Licenses of Trimetrexate to the Company."

     Upon approval of the NDA for NeuTrexin in December 1993, the product
received seven years' marketing exclusivity under the Orphan Drug Act for the
approved PCP indication.  NeuTrexin is also designated as an orphan drug for the
treatment of metastatic colorectal adenocarcinoma, metastatic carcinoma of the
head and neck, pancreatic adenocarcinoma and advanced non-small cell carcinoma
of the lung.  If the company obtains the first NDA approval for the product for
any of these indications, NeuTrexin would be eligible for seven years of orphan
marketing exclusivity for such approved indications.  See "Government
Regulation," "Patents, Trademarks, and Trade Secrets," and "Orphan Drug Status."

     Distribution and Marketing Agreements.   The company has entered into an
exclusive distribution agreement with Eli Lilly InterAmerica, Inc. for the sale
of NeuTrexin in Canada.  The company has entered into an exclusive distribution
agreement with SCRAS for NeuTrexin for Belgium, France, Germany, Greece,
Ireland, Italy, Luxembourg, The Netherlands, Portugal, Spain and the United
Kingdom.  Under the terms of that agreement, SCRAS has an option to participate
in the company's clinical development program for NeuTrexin for oncology.   The
company has licensed its rights for NeuTrexin in Scandinavia to Swedish Orphan.
For a period of two years following marketing approval in a given country,
Swedish Orphan is required to pay royalties to the company

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based on net sales of the product.  Thereafter, the company reacquires the
rights to NeuTrexin in such country.  In addition, the company has licensed its
rights in the Latin America/Asia Territories to Schering Overseas.  Under the
terms of the agreement, Schering Overseas is required to pay the company
royalties and consulting fees based on net sales of NeuTrexin for up to ten
years after first commercial sale of the product.  Under certain circumstances,
Schering Overseas may incur certain payment obligations for an additional five
years after such ten year period.  The agreement provides Schering Overseas with
the right to negotiate for additional products the company wishes to introduce
in the Latin America/Asia Territories.  The company has granted exclusive rights
to distribute NeuTrexin in Middle Eastern countries to distributors located in
such countries.  To date NeuTrexin has not been approved for commercial sale in
any Middle Eastern country.

     There can be no assurance that the company will derive meaningful revenues
from any of these arrangements.

     Manufacturing.  The company partially relies on third party manufacturers
to supply NeuTrexin.  The company has contracted with an approved source of drug
substance as well as an approved source of finished product for NeuTrexin.  In
addition, the company's manufacturing plant located in Nijmegen, The Netherlands
has undergone validation inspection by the Dutch regulatory authorities and has
received Dutch regulatory approval to manufacture the finished dosage form of
NeuTrexin.  The company intends to supply the EU markets with NeuTrexin
manufactured at its Nijmegen manufacturing plant.  The company has received FDA
approval of its Nijmegen facility as an alternate drug manufacturer for
NeuTrexin for commercial sale in the United States.  The company intends to
supply the United States market with NeuTrexin manufactured primarily at its
Nijmegen manufacturing plant and also to continue to purchase NeuTrexin for the
United States market from its approved third party manufacturer.

     ETHYOL(R) (AMIFOSTINE/WR-2721)

     General Description.  Ethyol is an injectable agent for which the company's
NDA was approved by the FDA in December 1995 as a selective cytoprotective agent
to reduce the cumulative renal (kidney) toxicity associated with repeated
administration of cisplatin in patients with advanced ovarian cancer.  The
mechanism of action of Ethyol is such that the activated drug is preferentially
taken up by normal tissues relative to tumor cells, thereby protecting normal
cells but not the tumor cells from the toxic effects of cisplatin.

      On March 15, 1996, the company's supplemental NDA was approved by the FDA
under the Accelerated Approval Regulations as a modification of the Ethyol
indications to include treatment of patients with non-small cell lung cancer for
the reduction of cumulative renal toxicity associated with repeated
administration of cisplatin.  Products approved under the Accelerated Approval
Regulations require further adequate and well-controlled studies to verify and
describe clinical benefit.  The company has a clinical trial ongoing which the
company anticipates may fulfill this requirement; however, there can be no
assurance that the company's ongoing clinical trial will verify the clinical
benefit of Ethyol for this indication.  In the event the clinical trial fails to
verify the  clinical benefit of Ethyol for this indication, the FDA may, under
certain circumstances, withdraw approval of this indication.

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<PAGE>
 
     The CPMP recommended the company's drug Ethyol for approval at the CPMP
meeting held on September 13, 1994.  Ethyol was recommended to reduce the
neutropenia related risk of infection (e.g. neutropenic fever) due to the
combination regimen cyclophosphamide and cisplatin in patients with advanced
(FIGO State III or IV) ovarian cancer.  Following the positive CPMP
recommendation, as of January 31, 1996, Ethyol has received approvals from the
local health regulatory authorities in Belgium, Denmark, France, Germany,
Greece, Luxembourg, The Netherlands, Portugal, Spain and the United Kingdom.
There were three EU countries that did not join in the positive recommendation
for Ethyol, The Netherlands, Denmark and Ireland.  Denmark and The Netherlands
have subsequently approved Ethyol and Ireland has requested additional
information from the company and the company has provided additional information
and data in response to the request; however, there can be no assurance that
Ireland will approve Ethyol for commercial sale.

     In December 1995 the company filed a Type II Variation to the CPMP to
expand the EU label for Ethyol to include protection against renal toxicity from
repeated administration of cisplatin in a range of solid tumors (excluding
tumors of germ cell origin).  There can be no assurance that the company will
receive a recommendation for approval from the CPMP for the Type II Variation.

     Marketing.  Through an agreement with ALZA, Ethyol is targeted for launch
in the United States during early 1996.  The program will consist of direct
mail, journal advertising, symposia and promotion to prescribing physicians by
ALZA's sales force with co-promotion by the company's sales force.  Ethyol will
be distributed through pharmaceutical wholesalers for prescription by physicians
treating cancer.  In the United States the company has obtained a registered
trademark for Ethyol, the company's brand of amifostine.  The company is also
pursuing trademark registrations for Ethyol in a number of foreign countries.

     Clinical Trials.  The company is continuing to investigate the use of
Ethyol  to protect normal tissues from the toxic effects of certain forms of
chemotherapy and radiation therapy in a number of tumor types without reducing
the antitumor effects of these modalities.

     A randomized trial of Ethyol has also been conducted to evaluate its
ability to protect normal tissues from the toxicities of radiation therapy.
Additional Phase II and Phase III trials investigating Ethyol as a radio-
protective agent are being initiated in the United States and Europe.  The
company anticipates filing a supplemental NDA for Ethyol's use as a radio-
protective agent, if satisfactory data results, when these studies are complete.
No assurance can be given that an application for regulatory approval for Ethyol
as a radiation protectant, if submitted, will be approved.

     Additional International New Drug Submissions.  The company submitted a New
Drug Submission for Ethyol with the Canadian regulatory authorities in September
1994.  In Europe, the company is in the process of seeking registration of an
Ethyol dossier in the countries comprising the European Free Trade Association
("EFTA") (Austria, Finland, Iceland, Liechtenstein, Norway, Sweden and
Switzerland).  As of January 31, 1996, within the EFTA region, the company has
achieved approval for Ethyol in Switzerland.  No assurance can be given that the
remaining EFTA applications, if submitted, will be approved.  Through its
marketing partner for the Far East/Latin American Territory, Schering Overseas,
dossiers have been submitted in numerous countries in that Territory.  Within
the Far East/Latin American Territory, as of January 31, 1996, Ethyol was

                                       9
<PAGE>
 
approved for commercial sale in Argentina and Uruguay.  While additional
regulatory approvals for Ethyol are being pursued throughout the Far East/Latin
American Territory, there can be no assurance that additional approvals will be
received.

     License of Ethyol to the company.  The company's exclusive rights to
develop and market Ethyol on a worldwide basis were derived from an agreement
with the Southern Research Institute ("Southern Research"), a not-for-profit
research institution.  Effective May 1, 1993, the agreement was amended and
restated to clarify the company's royalty obligations to Southern Research under
various sublicense and distribution arrangements (the "Restated and Amended
Ethyol Agreement").  Pursuant to the Restated and Amended Ethyol Agreement, the
company is required to pay Southern Research a royalty on net sales of Ethyol or
any pharmaceutical composition containing Ethyol for a period of ten years
following the first commercial sale in a given country.  Under certain
circumstances, the company is required to pay Southern Research a reduced
royalty rate on net sales of Ethyol for an additional five years.  The agreement
is for a term of fifteen (15) years from the date of first commercial sale on a
country-by-country basis.

     Patents, Orphan Drug Status and NDA Exclusivity.  The original United
States composition of matter patent on Ethyol expired in July 1992.   The
company has developed proprietary new dosage forms of crystalline amifostine and
a novel method for manufacturing crystalline amifostine.  The company has a
patent from the U.S. Patent and Trademark Office for a method of manufacturing
crystalline amifostine and the resulting dosage form utilizing such method of
manufacture of crystalline amifostine.  In a divisional patent application, the
company continues to pursue crystalline amifostine dosage form claims which are
independent of the method of manufacture; however, there can be no assurance
that a patent will issue for these dosage form claims.  The company has foreign
counterpart patent applications pending, however there can be no assurance that
such patent applications will result in issued patents in foreign jurisdictions.

     Upon approval of the NDA for Ethyol in December 1995, the product received
seven years' marketing exclusivity under the Orphan Drug Act for the approved
indication.  Ethyol has also been designated as an orphan drug for use as a
chemoprotective agent for cyclophosphamide in the treatment of advanced ovarian
carcinoma, and as a chemoprotective agent for cisplatin in the treatment of
metastatic melanoma.  If the company obtains the first NDA approval for the
product for either of these indications, Ethyol would be eligible for seven
years of orphan marketing exclusivity for such approved indication.

     In addition, upon approval of the NDA for Ethyol, the product became
entitled to a period of marketing exclusivity under the Food, Drug, and Cosmetic
Act.  Under the relevant provision of that Act, if an NDA is approved for a drug
that has not been the subject of any prior NDA approval, no Abbreviated New Drug
Application ("ANDA") referring to that drug may be submitted for five years from
the date of the NDA approval (or four years if the drug is covered by a patent,
unless the ANDA applicant challenges the patent).  Because Ethyol is the first
amifostine product to receive an NDA approval, it is entitled to protection
against FDA approval of an ANDA for a period of five years, plus the time
required for the FDA to review and approve an ANDA for the product.  This
exclusivity does not, however, prohibit the submission  or FDA approval of
subsequent full NDA's by other sponsors based on such sponsors' separate
clinical investigations.

                                       10
<PAGE>
 
     Distribution and Marketing Agreements.   The company has entered into an
exclusive marketing and distribution agreement with ALZA for Ethyol in the
United States.  Under the terms of the Agreement, ALZA has exclusive rights to
market Ethyol in the United States for five years and will be responsible for
sales and marketing; the company's sales force will co-promote the product with
ALZA.  After the five-year period, which ALZA has an option to extend for one
year, marketing rights to Ethyol revert to the company, and ALZA will receive
payments from the company for ten years based on sales of Ethyol in the United
States.

     The company has entered into an exclusive marketing and distribution
agreement with Scherico Ltd., ("Scherico") a subsidiary of Schering, for Ethyol
in the countries comprising the EU and EFTA (the "European Territories").  Under
the terms of its Agreement with Scherico, the company will share in operating
profits/losses (as defined in the Agreement) generated from marketing and sales
of Ethyol in Germany, United Kingdom, Spain, Italy and France (the "Major
Markets") for a period of up to two years from November 23, 1994, the date of
approval of Ethyol in the United Kingdom.  The company's exposure to operating
losses, if any, generated from the Major Markets is limited to an amount set
forth in the operating plans.  With respect to 1995, Scherico has invoiced the
company approximately $4.2 million for the company's share of operating losses.
With respect to 1996, the company's limit on operating losses under the terms of
its Agreement with Scherico, as determined by the 1996 operating plan is
approximately $1.7 million.  The company will share in operating profits, if
any, generated from sales of Ethyol in the other countries in the European
Territories outside the Major Markets in which Ethyol is launched by Scherico,
but is not exposed to operating losses, if any, generated in such countries.
Under the terms of the Agreement, the company is obligated to share in operating
losses, if any, generated from the Major Markets for a period up to the
"Commencement Date" which is defined as the first to occur of (i) the date of
the last Regulatory Approval with Minimum Chemoprotective Labelling in all of
the Major Markets; (ii) 270 days after Regulatory Approval with Minimum
Chemoprotective Labelling and, if required, pricing and/or reimbursement
approval in the first Major Market; (iii) if the first Regulatory approval is
less than the Minimum Chemoprotective Labelling, the second anniversary of such
Regulatory Approval, i.e. November 23, 1996.  Under the Agreement, Minimum
Chemoprotective Labelling is defined as protection against hematological
toxicities associated with the use of cyclophosphamide without protection
against the associated tumor and without any restriction limiting use of Ethyol
to ovarian cancer.

     Under the terms of the Agreement, Scherico's exclusive rights to market the
product will continue for five years from the Commencement Date.  During such
five year period the company will share in operating profits but will not share
in operating losses that might be generated.  The company will co-promote Ethyol
with Scherico for the two years following such five year period.  Thereafter,
the company will reacquire sole marketing rights.  Under certain circumstances
Scherico is required to pay the company milestone payments as regulatory and
pricing approvals, if any, are obtained.  There can be no assurance that
milestone payments will be made to the company under the Agreement.  After
reacquiring sole marketing rights, the company will pay Scherico a portion of
its Ethyol operating profits, if any, from the European Territory for a period
of three years.  The company will supply Ethyol to Scherico throughout the term
of the agreement at a negotiated price.  In addition, under the terms of the
Agreement, Scherico is to assist the company in establishing its own commercial
organization in Europe.  The contract provides that Scherico may terminate the
agreement at any time by providing 180 days written notice to the company of its
desire to terminate

                                       11
<PAGE>
 
the Agreement.  There can be no assurance that the Agreement will not be
terminated by Scherico.  There can be no assurance that the marketing of Ethyol
in the European Territories will result in meaningful revenues to the company.

     The company has licensed Ethyol to Schering Overseas in the Latin
America/Asia Territories.  Schering Overseas is required to pay the company
royalties and consulting fees for ten years following the first commercial sale
of the product.  Schering Overseas may incur certain payment obligations for an
additional five years under certain circumstances.

     The company has granted exclusive distribution rights for Ethyol in Canada
to Eli Lilly Interamerica, Inc. an affiliate of Eli Lilly and Company and Eli
Lilly Canada Inc.

     In a separate agreement, the company has licensed Ethyol to Scherico for
territories comprising Eastern Europe, Australia, New Zealand, Iran, Iraq, South
Africa, Botswana, Namibia and Zimbabwe (the "Eastern Europe/Africa/Australia/New
Zealand Territories").  Under the Agreement, Scherico is required to pay the
company royalties and consulting fees for fifteen years following the date of
first commercial sale of Ethyol in these territories.  In addition, under
certain circumstances, Scherico is required to pay milestone payments upon
approval of Ethyol in Australia and South Africa.  The Agreement provides
Scherico with the right to negotiate for additional products the company wishes
to introduce into those territories.

     The company is seeking a marketing partner for Ethyol for Japan, South
Korea and Taiwan.

     In Israel, the company has licensed Ethyol to Teva.  Teva is required to
pay the company a milestone payment upon approval of Ethyol in Israel.  In
addition, Teva is required to pay the company royalties on net sales of Ethyol
in Israel for a period of ten years following the first commercial sale of the
product.  The company has granted exclusive rights to distribute Ethyol in the
Middle East to distributors located in Middle Eastern countries.  To date Ethyol
has not been approved in any Middle Eastern country.

     There can be no assurance that the company will derive meaningful revenues
from any of these arrangements.

     Manufacturing.  The company relies on an approved third party source for
supply of Ethyol drug substance.  In the U.S., the company currently relies on
an approved contract manufacturer to produce the finished dosage form of Ethyol.
For other markets, the company intends to supply the finished dosage form of
Ethyol from its facility in Nijmegen, The Netherlands.  The company's Nijmegen
facility has been approved by the Dutch regulatory authorities to manufacture
Ethyol for commercial sale in Europe.

     AZQ (DIAZIQUONE)

     General Description.  AZQ is an intravenously administered anticancer agent
which crosses the "blood-brain barrier" and penetrates the central nervous
system.  AZQ has been under investigation in clinical studies as a treatment for
gliomas (brain tumors) and acute leukemia.

                                       12
<PAGE>
 
     Clinical Trials.  Clinical trials of AZQ have been conducted under the
auspices of the National Cancer Institute ("NCI") for the treatment of gliomas
and adult acute leukemia, and as an agent for treating patients prior to bone
marrow transplantation.  The company is evaluating the data from the NCI trials
to ascertain its usefulness in a possible regulatory submission.  It may also
elect to initiate additional clinical trials for AZQ for these indications, but
no decision has been reached as to whether such trials will be conducted.  There
can be no assurance that the results of these clinical trials or the NCI data
will lead to the filing or approval of an NDA.

     License of AZQ to the company.  The company obtained an exclusive license
from the United States Government to market AZQ in the United States.  The term
of exclusivity is until March 1998.  Thereafter, the company will have a non-
exclusive license until the last of the licensed patents expires.  The company
is required to pay royalties based on net sales of AZQ.

     Patents.  A composition of matter patent for AZQ and two patents for the
use of AZQ as an antitumor agent are held by the United States Government.  The
composition of matter patent will expire in 1997 and the use patents will expire
in 1996 and 2004.  See "Government Regulation," "Patents, Trademarks and Trade
Secrets."

     Manufacturing.  AZQ for investigational use has been produced by third
party contractors for the NCI.  The company has not yet identified a source for
development and manufacture of AZQ for commercial supply.  To date all AZQ used
in clinical trials has been supplied by the NCI.

     PALA DISODIUM SALT (SPARFOSATE SODIUM)

     General Description.  PALA disodium salt ("PALA") is an injectable drug
that is in clinical studies to evaluate its ability to enhance the activity of
certain chemotherapeutic agents, in particular, fluorinated pyrimidines.  The
most extensively used fluorinated pyrimidine is 5-fluorouracil ("5-FU"), which
is employed in the treatment of colorectal, breast and upper gastrointestinal
(stomach and pancreas) cancers.

     Clinical Trials and PreClinical Studies.  Both the company and the NCI
initiated Phase III clinical trials of PALA plus 5-FU in the United States in
1989.  The company has also conducted a Phase II clinical trial of PALA and 5-FU
in Canada, and a Phase III clinical trial of 5-FU/ methotrexate plus PALA in the
United Kingdom and other European countries for patients with advanced
colorectal cancer.   There can be no assurance that the company will file an
application for regulatory approval for PALA or that, if such an application is
filed, regulatory approval will be obtained for PALA.

     Animal studies have been conducted under the company's auspices to evaluate
the antiviral role of PALA in a number of viral conditions including
cytomegalovirus, vaccinia, respiratory syncytial virus and hepatitis B.    These
data have been submitted to the Anti-Viral Division of the FDA for review prior
to submission of an application to test PALA against molluscum contagiosum (MC),
a virus related to vaccinia.   MC is increasing in frequency in AIDS patients
and the company believes that to date there is no effective therapy.  There can
be no assurance that the company will file an IND with respect to clinical
testing of PALA against MC.

                                       13
<PAGE>
 
     License of PALA to the company.  Under an agreement with Warner-Lambert,
the company has been assigned all of Warner-Lambert's United States patent
rights (to the extent that such rights exist) and international patent rights to
the PALA Patents (as defined below).  The company has also obtained a non-
exclusive license to the United States Government rights.  The company is
required to pay certain royalties to the United States Government and Warner-
Lambert under these agreements.

     Patents and Orphan Drug Status.  The United States Government and Warner-
Lambert have asserted the United States rights to a United States composition of
matter patent for PALA which expires in 1997 and to three other patents, two of
which are composition of matter patents and one of which is a process patent,
which expire from 1996 to 1999 (collectively, the "PALA Patents").  In addition,
the company has filed patent applications in the United States and certain
foreign countries to cover the use of PALA for the treatment of the viral
conditions described above.  A patent issued in the United States on February
13, 1996 covering methods of using PALA in the treatment of certain primary and
secondary viral infections.  In addition, the company has filed a divisional
application in the United States directed to compositions of matter containing
PALA and other therapeutic agents, and to methods of treating or preventing
certain viral infections.  However, there can be no assurance that the company
will be granted patent protection for the subject matter in the PALA foreign
patent applications or the United States divisional patent application.

     Distribution and Marketing Agreements.  The company has granted Teva an
option to license PALA for Israel.  If the option is exercised, Teva will be
required to pay the company royalties on its net sales of PALA until the later
of (i) ten years after their first commercial sale of the product or (ii) the
expiration of any patent with respect to PALA held by the company on the date of
first commercial sale.  The company has licensed PALA to Schering Overseas in
the Latin America/Asia Territories.  Schering Overseas is required to pay the
company royalties and consulting fees for ten years following the first
commercial sale of the product.  Schering Overseas may incur certain payment
obligations for an additional five years under certain circumstances.

     There can be no assurance that the company will derive meaningful revenue
from any of these arrangements.

     Manufacturing.  The company has a development agreement with Ganes
Chemicals Inc. to manufacture the PALA drug substance and with Ben Venue
Laboratories for the manufacture and testing of the finished dosage form.


     ROGLETIMIDE (PYRIDOGLUTETHIMIDE)

     In July 1995 the company discontinued its development of the drug
rogletimide (pyridoglutethimide) and terminated its exclusive license to that
drug.

DRUGS IN PRECLINICAL DEVELOPMENT

     The following drugs are in varying stages of preclinical development by the
company.  While the company believes that these drugs may have efficacy in the
treatment of cancer, AIDS and allied diseases, significant research and
development, including clinical testing, will be required.  There can

                                       14
<PAGE>
 
be no assurance that these drugs will prove to be safe and effective in clinical
trials.  Moreover, other obstacles, including the ability to manufacture the
drugs, must also be surmounted.  In addition, in certain cases, licenses under
which the company has obtained the drugs require the achievement of development
milestones by the company.  There is no assurance that these milestones will be
met.

     FddA, FddI.  Under the terms of an agreement with the National Institutes
of Health of the United States Public Health Service, the company received a
worldwide exclusive license to the government's patent rights for use of the
compounds FddA and its active metabolite, FddI, for the treatment of HIV
infection, HIV-related infection or HIV-related disease in humans.  FddA is an
acid stable, purine-based reverse transcriptase inhibitor that in preclinical
studies compared favorably to AZT against HIV in comparative studies conducted
in SCID (immune-deprived) mice.  In in vitro laboratory studies of HIV, FddA has
not demonstrated cross-resistance to three commercially available treatments for
AIDS (AZT, ddI, ddC) and has shown synergistic activity with AZT.  Both the
company and the NIH intend to pursue the clinical development of FddA.  The NCI
has filed an Investigation New Drug Application and plans to initiate a phase I
clinical study of FddA in the near future.  There can be no assurance that the
clinical trials will lead to the filing of a regulatory application, and if
filed, will lead to marketing authorization.  The government has filed patent
applications covering, inter alia, FddA and FddI in the United States Patent and
Trademark Office and in certain foreign jurisdictions.  A United States patent
has issued to the government on February 27, 1996 covering compositions of
matter for, inter alia, FddA and FddI.  In addition the government has a United
States application pending which covers, inter alia, methods of treatment using
FddA and FddI.  However, there can be no assurance that these pending United
States or foreign applications will result in issued patents.

     WR-151327.  WR-151327 is a second generation chemotherapy and radiation
therapy protective agent.  Unlike Ethyol, a first generation protective agent
that has been administered intravenously, WR-151327 is administered orally.  The
United States, European, Canadian and Australian patent offices have allowed a
patent application claiming the use of WR-151327 to reduce toxicities of certain
forms of chemotherapy.  The company also plans studies to investigate WR-151327
as a protective agent to reduce the bone marrow toxicities associated with
zidovudine/ azidothymidine ("AZT"), a drug commercially available which is used
to treat AIDS, and as an intrinsic anti-HIV agent.  Patent applications have
been filed covering these uses of WR-151327.  No assurance can be made that
these patent applications will result in issued patents.

     Third Generation Platinum Anticancer Agents.  The company's third
generation platinum anti-cancer agents comprise a group of cytotoxic drugs
intended for use in treating ovarian, testicular, head and neck, lung and
certain other cancers.  Although the two approved platinum compounds currently
on the market have demonstrated efficacy as anticancer agents, widespread usage
of these compounds has been limited by their toxicity to normal cells.  The
company has licensed the rights to four U.S. patents owned by Georgetown
University with respect to its series of third generation platinum anticancer
agents.

     The company has granted an option to license certain of its foreign rights
to WR-151327 and third generation platinum anticancer agents to Teva in Israel
and granted certain of its foreign rights to WR-151327 to Schering Overseas in
the Latin America/Asia Territories.

                                       15
<PAGE>
 
     Mitomycin-C Analogues.  Under the terms of an agreement with the Vincent T.
Lombardi Cancer Center at Georgetown University, the company received a
worldwide exclusive field of use license to a series of analogues of mitomycin-
C. Mitomycin-C is an anticancer agent used for the treatment of gastrointestinal
cancer and breast cancer.  The company has licensed the rights to two Georgetown
University U.S. patents relating to Mitomycin-C analogues.  However, under the
terms of its agreement with Georgetown, if the company did not meet certain
development benchmarks, Georgetown retained the right to revoke such license
rights.  The company has not met those benchmarks and there can be no assurance
that the failure to meet the benchmarks will not result in a revocation of such
license rights by Georgetown.


OTHER LICENSE OPTIONS

     Pursuant to its license agreement with Schering Overseas, the company has
granted to Schering Overseas a right of first refusal until 1997 to license any
of its products not currently licensed to Schering Overseas on terms mutually
acceptable to the parties.  The right of first refusal applies to the Latin
America/Asia Territories covered by the license agreement.

     Pursuant to its license agreement with Scherico, the company has granted to
Scherico a right to negotiate in good faith to license company products for the
Eastern Europe/Africa/Australia/New Zealand Territories covered by the license
agreement.

     Pursuant to its distribution agreement with SCRAS, the company has granted
SCRAS an option to participate in the clinical development of NeuTrexin for
cancer and obtain the rights to commercialize NeuTrexin for cancer in the SCRAS
territories.  In addition, the company has granted SCRAS an option to
commercialize Hexalen in eight EU countries.


RESEARCH AND DEVELOPMENT

     Research.  The company does not currently have proprietary research and
preclinical development facilities since its initial strategy has emphasized the
acquisition of drugs and related therapies that have demonstrated some potential
value in preclinical testing or clinical trials.  The company does have
facilities where the company conducts analytical chemistry in support of its
regulatory applications and product development.

     Development.  The company has established relationships with numerous
preclinical programs in the United States and Europe for the purpose of
expanding its research and development programs.

     Research and development expenses were $12,186,000 for 1995, $17,607,900
for 1994, $19,403,800 for 1993, and $85,163,100 for the period May 7, 1987
(inception) to December 31, 1995.

MARKETING

     The market for chemotherapeutic and hormonal drugs is highly concentrated
and comprised principally of oncologists and hematologists practicing in cancer
treatment centers, large hospitals and private medical practices.  The decision
to use such drugs is an individual physician's decision, and

                                       16
<PAGE>
 
marketing efforts are focused upon individual oncologists and hematologists to
prescribe such drugs.  The market for intravenous therapies for PCP is mainly
derived from about 220 hospitals in major metropolitan areas.  The use of such
drugs may require acceptance onto an individual hospital's formulary.  Marketing
efforts are directed at prescribing physicians, pharmacists, and members of the
formulary committee.

     In the United States, the company's marketing efforts are focused on
approximately 5,500 physicians.  With respect to Hexalen, the company has
directed most of its marketing efforts to approximately 2,500 physicians who
have prescribed Hexalen at some point since its introduction.  With respect to
NeuTrexin, the company has directed its marketing efforts to approximately 2,000
AIDS and infectious disease specialists who treat PCP.  Because the number of
such physicians in both cases is relatively small, the company uses its own
sales force of approximately fifteen representatives to personally contact as
many of those physicians as possible.  With respect to NeuTrexin and Hexalen,
the company's marketing program consists of personal contacts, direct mail,
advertising, journal advertising, symposia and promotion by the company's sales
force.

     For the commercial launch of Ethyol in the United States, the company has
entered into an exclusive distribution and marketing agreement with ALZA.  See
Principal Products -- Ethyol --Distribution and Marketing Agreements.  Under the
terms of that agreement, ALZA will be responsible for marketing Ethyol in the
United States.  The company's sales force will co-promote Ethyol with ALZA's
approximately 45 sales representatives in the U.S. market.

     Hexalen and NeuTrexin are supplied through pharmaceutical wholesalers in
the United States. Representatives of the company have contacted wholesalers by
mail and have visited major wholesalers personally to establish account
relationships and distribution channels.

     To commercialize its products outside the United States, the company has
entered into  agreements with other companies.  See "Principal Products --
NeuTrexin -- Distribution and Marketing Agreements" "Principal Products --
Hexalen -- Distribution and Marketing Agreements"

and "Principal Products -- Ethyol -- Distribution and Marketing Agreements."

     The company has five employees engaged in marketing and business
development activities in addition to its specialty-oriented sales force.
Additional staff expansions may be required upon the expansion of indications
for previously approved drugs or the approval of other products currently in
development.

COMPETITION

     The sales potential of an oncology product or a PCP product is dependent
upon numerous variables, including efficacy in different tumor types in the case
of an oncology product, and efficacy in the treatment of PCP for a PCP product,
toxicity, ease of incorporation into combination regimens, reimbursement,
pharmacoeconomic impact, clinical data, price, acceptance by physicians,
marketing, and distribution.  The availability of patent protection or marketing
exclusivity afforded by orphan drug status or regulatory exclusivity afforded by
the Food, Drug and Cosmetic Act, and the ability to obtain expanded labelling
are also critical. See "Government Regulation."

                                       17
<PAGE>
 
     Many companies, including well known pharmaceutical companies, are
marketing anticancer drugs and drugs for the treatment of AIDS and allied
diseases and seeking to develop new products and technologies for the treatment
of cancer, AIDS and allied diseases. Many of these drugs, products and
technologies are, or may be, in the future, competitive with the company's
drugs.  Many of these companies have substantially greater financial and
technical resources and production and marketing capabilities than the company.
In addition, many such companies have had significantly greater experience both
in undertaking preclinical testing and human clinical trials of new or improved
pharmaceutical products and in obtaining the approval of the FDA or other
regulatory authorities to market products for health care.  Accordingly, the
company's competitors may succeed in obtaining regulatory approval of such
products before the company obtains approval of its own products.  The company
is also competing with respect to marketing capabilities and manufacturing
efficiency.

     The company is engaged in a business that is highly competitive.  Many of
the companies with competitive therapies have substantially greater financial,
technical, manufacturing, marketing and other resources than the company and may
be better equipped than the company to develop, market  and manufacture these
therapies.  No assurance can be given that drugs developed by the Company will
be able to compete against therapies already established in the marketplace or
against therapies which may result from advances in biotechnology or other forms
of therapy that may render the company's drugs less competitive or obsolete.  In
addition, many such companies have extensive experience in undertaking
preclinical testing and clinical trials and obtaining FDA and other regulatory
approvals.

     In the United States, the company believes that Bristol-Myers Squibb
Company holds the largest share of the chemotherapy market both in terms of
approved products and annual sales, and therefore dominates the market place.
Other companies maintaining an active oncology marketing and sales presence
include Schering-Plough Corporation, Pharmacia & Upjohn, Zeneca (a subsidiary of
Imperial Chemical Industries PLC), Hoffman-La Roche, Immunex Inc. (a subsidiary
of American Home Products), Amgen, Inc. and Chiron Corporation.

     In the United States, Burroughs Wellcome Co., Hoffman-La Roche and Fujisawa
Pharmaceutical Company participate in the PCP market.

Other groups active in anticancer and AIDS research include universities and
public and private research institutes.  These institutions also are becoming
increasingly competitive in recruiting personnel from the limited supply of
highly qualified clinical physicians, academic scientists and other
professionals.  However, the company believes that such institutes represent an
important source of novel compounds for in-licensing, since often their mission
does not include bringing compounds to market or they lack the capabilities to
do so.

MANUFACTURING

     The company has a small volume parenteral manufacturing facility in
Nijmegen, The Netherlands, to manufacture the company's injectable drug supplies
for the international market.  The plant has undergone an intense validation and
qualification program aimed at regulatory approval for commercial manufacturing
and testing.  The Nijmegen manufacturing facility received approval of the Dutch
regulatory authorities and is now able to manufacture Ethyol and NeuTrexin for
commercial sale in Europe.  The Nijmegen manufacturing facility has been
inspected by the FDA and approved

                                       18
<PAGE>
 
as a manufacturing site for NeuTrexin for commercial sale in the United States.
The company intends to apply to the FDA for approval of the Nijmegen
manufacturing facility to manufacture Ethyol for commercial sale in the United
States; however; there can be no assurance that the Nijmegen manufacturing
facility will receive FDA approval to produce Ethyol for commercial sale in the
United States.  The company relies to a substantial extent on third parties to
manufacture its products under contract.  There can be no assurance that third
party manufacturers will give the company's orders highest priority, or that the
company would be able to readily find a substitute manufacturer if one were
needed on short notice.  See "Principal Products" for information regarding
manufacturing of the company's products.

PATENTS, TRADEMARKS AND TRADE SECRETS

     Proprietary protection for the company's products is important for the
company's business. The patents obtained by the company's licensors and those
obtained by the company are expected to provide some degree of protection for
the company's products, although the scope and validity of patent protection is
uncertain.

     The company actively seeks patent protection both in the United States and
abroad for its proprietary technology.   In addition to seeking its own patents,
the company has entered into license agreements with various pharmaceutical
companies and research, educational and governmental institutions to obtain
certain patent rights from them for the purpose of developing, manufacturing and
selling potential products using the compounds and technologies protected by
these patents.  See discussion of the patent rights under "Principal Products."
Under these agreements, the company is obligated to pay royalties of varying
rates based upon, among other things, levels of revenues from the licensed
products.  Generally, the agreements continue for a specified number of years or
as long as any licensed patents remain in force, absent breach of the terms of
the agreements or termination of the agreements.  See the discussion of the
various license agreements under "Principal Products."

     A number of significant changes in the United States patent laws were
mandated by the North American Free Trade Agreement ("NAFTA") and the General
Agreement on Tariffs and Trade ("GATT").  Legislation enacting these treaties
has been passed into law.  The term of exclusive rights afforded by a United
States patent has historically been a period of 17 years measured from the date
of grant.  Under the new legislation, the new term of United States patents will
commence on the date of grant, and terminate 20 years from the date on which the
patent application was filed in the United States.  Existing patents and future
patents granted on an application filed before June 8, 1995, will have a term
that is the longer of twenty years from the filing date or seventeen years from
the date of grant.  If a patent issues from a continuation-in-part, divisional
or continuing application, the 20-year patent expiration date is measured from
the filing date of the earliest United States priority application relied on by
the applicant.  This change will affect the term of any patent granted on
applications filed subsequent to June 8, 1995, including patents which
ultimately mature from existing applications, if they are refiled as
continuations or continuations-in-part after June 8, 1995.

     Under the Drug Price Competition and Patent Term Restoration Act of 1984, a
United States product patent or use patent may be extended for up to five years
under certain circumstances to compensate the patent holder for the time
required for FDA regulatory review of the product.  The benefits of the Act are
available only to the first approved use of the active ingredient in the drug
product and may be applied only to one patent per drug product.  See "Principal
Products --NeuTrexin -- Patents and Orphan Drug Status."  This law also
establishes a period of time following

                                       19
<PAGE>
 
FDA approval of certain new drug applications during which other sponsors may
not submit an ANDA for the drug.  There can be no assurance that the company
will be able to take advantage of either the patent term extension or market
exclusivity provisions of this law.

     No assurance can be given that any patent issued to, or licensed by, the
company will provide protection that has commercial significance.  In this
regard, the patent position of pharmaceutical compounds is particularly
uncertain.  No assurance can be given that the company's patents will afford
protection against competitors with similar compounds or technologies, that
others will not obtain patents claiming aspects similar to those covered by the
company's patents or applications or that the patents of others will not have an
adverse effect on the ability of the company to do business. Moreover, the
company believes that obtaining foreign patents may be more difficult than
obtaining domestic patents because of differences in patent laws and recognizes
that its patent position, therefore may be stronger in the United States than
abroad.  In addition, the protection provided by foreign patents, once they are
obtained may be weaker than that provided by domestic patents.

     In addition to seeking the protection of patents and licenses, the company
also relies on trade secrets to maintain its competitive position.  It is the
practice of the company to enter into confidentiality agreements with employees,
consultants and licensees.  No assurance can be given, however, that these
measures will prevent the unauthorized disclosure or use of such information.

     Hexalen, Ethyol and NeuTrexin are registered United States trademarks of
the company.

ORPHAN DRUG STATUS

     Pursuant to the Orphan Drug Act, the FDA may designate a drug intended to
treat a "rare disease or condition" as an "orphan drug".  "Rare disease or
condition" is one which affects less than 200,000 people in the United States,
or which affects more than 200,000 people but for which the cost of development
and making available the drug will not be recovered from sales of the drug in
the United States.  Upon approval of an NDA for an orphan drug, such drug may be
eligible for exclusive marketing rights in the United States for designated and
approved indications for seven years.  Orphan drugs may also be eligible for
federal income tax credits for certain clinical trial expenses.  The company
holds orphan drug designations for Hexalen for advanced ovarian cancer; for
Ethyol for use as a chemoprotective agent against cisplatin and cyclophosphamide
in the treatment of ovarian cancer and for use as a chemoprotective agent for
cisplatin in the treatment of metastatic melanoma; and for NeuTrexin for PCP,
metastatic colorectal cancer, metastatic head and neck cancer, non-small cell
lung cancer and pancreatic cancer. See "Principal Products."

     The company may receive marketing exclusivity for an orphan drug only if it
is the sponsor of the first NDA approved for the drug for an indication for
which the drug was designated as an orphan drug prior to the approval of the
NDA.  Therefore, unlike patent protection, orphan drug status does not prevent
other manufacturers from attempting to develop the drug for the designated
indication or from obtaining NDA approval prior to approval of the company's
NDA.  If another sponsor's NDA for the same drug and the same indication is
approved first, that sponsor is entitled to exclusive marketing rights if that
sponsor has received orphan drug designation for the drug.  In that case, the
FDA would be prohibited from approving the company's application to market the

                                       20
<PAGE>
 
product for the relevant indication for a period of seven years.  If another
sponsor's NDA for the same drug and the same indication is approved first, but
that drug has not been designated as an orphan drug, the FDA would still be
permitted to approve the company's NDA.

     The company believes that several of its products in addition to Hexalen,
Ethyol, and NeuTrexin may qualify for designation as orphan drugs.  There can be
no assurance, however, that such other products will receive orphan drug status.
Moreover, possible amendment of the Orphan Drug Act by the United States
Congress and possible reinterpretation by the FDA are the subject of frequent
discussion.  Legislation to limit exclusivity in some respects was passed by
Congress, but vetoed by the President in 1990.  FDA regulations reflecting
certain other limitations and procedures went into effect in January 1993.
Therefore, there is no assurance as to the precise scope of protection that may
be afforded by orphan drug status in the future, or that the current level of
exclusivity and tax credits will remain in effect.

GOVERNMENT REGULATION

     The production and marketing of the company's products and its research and
development activities are subject to comprehensive regulation by various
federal, state and local authorities in the United States and governmental
authorities of other countries.  In particular, the FDA exercises regulatory
authority over the development, testing, formulation, manufacture, labeling,
storage, record keeping, quality control, advertising and promotion of the
company's products.

     A new drug may not be marketed in the United States until it has undergone
rigorous testing and been approved by the FDA.  The drug may then be marketed
only for the specific indications, uses, formulation, dosage forms, and
strengths approved by the FDA.  Similar requirements are imposed by foreign
regulators upon the marketing of a new drug in their respective countries.

     The steps required before a drug may be marketed in the United States
include (a) preclinical laboratory and animal tests, (b) submission to the FDA
of an application for an Investigational New Drug exemption (an "IND"), which
must become effective before human clinical trials may commence, (c) human
clinical trials to establish the safety and efficacy of the drug, (d) the
submission of a detailed NDA to the FDA, and (e) FDA approval of the NDA.  In
addition to obtaining FDA approval for each product, each domestic establishment
where the drug is to be manufactured must be registered with the FDA.  Domestic
manufacturing establishments must comply with good manufacturing practices
("GMP") and are subject to periodic inspections by the FDA.  Foreign
manufacturing establishments also must comply with GMP and are subject to
periodic inspection by the FDA or by local authorities under agreement with the
FDA.

     Preclinical tests include laboratory evaluation of product chemistry and
animal studies to assess the potential safety and efficacy of the product.
Products must be formulated according to GMP, and preclinical tests must be
conducted by laboratories that comply with FDA regulations regarding Good
Laboratory Practices.  The results of preclinical tests are submitted to the FDA
as part of an IND, which must become effective before the sponsor may conduct
clinical trials in human subjects.  Unless the FDA objects to an IND, the IND
becomes effective 30 days following its receipt by the FDA.  There is no
certainty that submission of an IND will result in FDA authorization to commence
clinical trials.

                                       21
<PAGE>
 
     Clinical trials involve the administration of the investigational drug to
patients.  Clinical trials typically are conducted in three phases which
generally are conducted sequentially, but  tested for safety, side effects,
dosage tolerance, metabolism and clinical pharmacology.  With respect to
anticancer agents, testing typically is done with a small group of patients with
advanced cancers that have proved unresponsive to other forms of therapy.  Phase
I testing typically takes one year to complete.  Phase II involves tests in a
larger but still limited patient population to determine the efficacy of the
drug for specific indications, to determine optimal dosage and to identify
possible side effects and safety risks.  Phase II testing for an indication
typically takes from one and one-half to two and one-half years to complete.
When a drug shows efficacy in Phase II evaluations, expanded Phase III trials
are undertaken to evaluate the overall risks and benefits of the drug in
relationship to the treated disease in light of other available therapies.
Phase III studies generally take from two and one-half to five years to
complete.  There can be no assurance that Phase I, Phase II or Phase III testing
will be completed successfully within any specified time period, if at all.
Furthermore, the FDA may suspend clinical trials at any time if it decides that
patients are being exposed to a significant health risk.

     The results of the preclinical studies and clinical trials are submitted to
the FDA as part of an NDA for approval of the marketing and commercial shipment
of the drug. The NDA also includes information pertaining to the chemistry,
formulation, activity and manufacture of the drug and each component of the
final product, as well as details relating to the sponsoring company. The NDA
review process takes more than two years on average to complete, although
reviews of treatments for cancer and other life-threatening diseases may be
accelerated. However, the process may take substantially longer if the FDA has
questions or concerns about a product. In general, the FDA requires at least two
adequate and well-controlled clinical studies demonstrating efficacy in order to
approve an NDA. The FDA may however, request additional information, such as
long term toxicity studies or other studies relating to product safety.
Notwithstanding the submission of such data, the FDA ultimately may decide that
the application does not satisfy its regulatory criteria for approval. Finally,
the FDA may require additional clinical tests following NDA approval (Phase IV
clinical tests).

     Among the requirements for product approval is the requirement that
prospective manufacturers conform to the FDA's current GMP standards, which also
must be observed at all times following approval.  Accordingly, manufacturers
must continue to expend time, money and effort in production, record keeping and
quality control to ensure compliance with GMP standards.  Failure to so comply
subjects the manufacturer to possible FDA action, such as the suspension of
manufacturing or seizure of the product.  The FDA may also request a voluntary
recall of a product.

     The product testing and approval process is likely to take a substantial
number of years, and involves the expenditure of substantial resources.  There
can be no assurance that any approval will be granted on a timely basis, or at
all.  The FDA also may require post-marketing testing and surveillance to
monitor the product and its continued compliance with regulatory requirements.
Upon approval, a drug may only be marketed for the approved indications in the
approved dosage forms and at the approved levels.  Adverse experiences with the
product must be reported to the FDA.  The FDA also may require the submission of
any lot of the product for inspection and may restrict the release of any lot
that does not comply with FDA standards, or may otherwise order the suspension
of manufacture, recall or seizure if non-compliant product is discovered.
Product approvals may be withdrawn if compliance with regulatory standards is
not maintained or if problems concerning safety or efficacy of the product are
discovered following approval.

                                       22
<PAGE>
 
     The Prescription Drug User Fee Act of 1992 was enacted to expedite FDA
review and approval of new drugs by providing the FDA additional funds through
the imposition of user fees.  The Act imposes three kinds of user fees on
manufacturers prescription drugs:  (1) a one time fee for each single source
prescription drug application submitted on or after September 1, 1992; (2) an
annual fee for each establishment that produces single source prescription
drugs; and (3) an annual fee for each single source prescription drug product
marketed.

     The company also will be subject to foreign regulatory requirements
governing clinical trials, manufacturing of products, marketing of products and
product approvals.  Whether or not FDA approval has been obtained, approval of a
product by the comparable regulatory authorities of foreign countries must be
obtained prior to the commencement of marketing of the product in those
countries.  The approval process varies from country to country and the time
required may be longer or shorter than that required for FDA approval.  Under
its agreement with licensees and distributors in foreign countries, the company
often requires the licensee or the distributor to be responsible for obtaining
regulatory approvals in their respective territories.

     Health care reform, if enacted, could bring radical change in the financing
and regulation of the health care business.  The company is unable to predict
whether such changes will be enacted or, if enacted, the effect of such changes
on the future operation of the company's business.  Changes affecting  drug
pricing, drug reimbursement, prescription benefits, and levels of reimbursement
for drugs, among others, could have a materially adverse effect on the company's
business.

EMPLOYEES

     As of January 31, 1996, the company employed 123 persons full-time, of whom
39 were engaged in research and development; the others were in manufacturing,
administrative, sales and marketing or executive positions.   A significant
percentage of the company's management and employees have had prior experience
with other pharmaceutical companies.

     None of the company's employees is covered by a collective bargaining
agreement.  Management considers the company's relations with its employees to
be good.

CONSULTANTS

     The company's Scientific Advisory Board consists of prominent physicians
and preclinical scientists who are experts in various areas of research and who
the company believes may make a contribution to the development of the company's
business.  The Scientific Advisory Board advises management of advances in
relevant science, assists in identifying specific product opportunities and aids
in recruiting personnel and procuring research contracts.

     In addition to the individuals serving on the Scientific Advisory Board,
the company has retained the services of physicians and preclinical scientists
(the "Scientific Consultants") representing a broad spectrum of scientific
disciplines in medicine, as well as consultants in such areas as preclinical
drug development and marketing.  These consultants are paid principally on a per
diem fee basis and in some cases have been granted options to purchase the
company's common stock under the company's stock option plans.  The company also
pays for preclinical studies and for human clinical trials in the academic
laboratories of several of the Scientific Consultants.  Certain of the

                                       23
<PAGE>
 
company's agreements with Scientific Consultants require them to disclose and
assign to the company all ideas, discoveries and inventions developed by them in
the course of providing consulting services to the company.

PRODUCT LIABILITY INSURANCE

     The testing, marketing and sale of human health care products by the
company entails an inherent risk that product liability claims may be asserted
against the company.  The company's therapies may be carcinogenic or toxic.  The
testing and sale of human health care products by the company entails inherent
risk that product liability claims may be asserted against the company.  The
company currently carries liability coverage in the aggregate amount of
$10,000,000 per policy year.  The company believes such coverage is commercially
reasonable in light of its current operations, although there can be no
assurance that such coverage will ultimately be adequate.  As the company
expands the scope of its clinical testing and marketing of its products, the
company will be exposed to far greater potential liabilities.

     The pharmaceutical industry has in the past experienced difficulty in
maintaining product liability insurance coverage at reasonable levels, and
substantial increases in insurance costs may  render coverage economically
impractical.  Although the company will seek to carry reasonable levels of
product liability insurance, it is not certain that such coverage can be
obtained on reasonable terms, or, if obtained, that such amounts ultimately will
prove adequate or will be renewable for any period.  If any product liability
claim against the company were sustained, its business and prospects could be
materially adversely affected.

ITEM 2.  PROPERTIES.

     The company's principal offices comprise approximately 26,400 square feet
of space in West Conshohocken, Pennsylvania.  The space is rented pursuant to a
lease which expires on October 31, 1998. The company also leases 10,000
square feet of laboratory space in Exton, Pennsylvania which is used as an
analytical laboratory conducting small scale product analysis, testing and
development.

     The company's European operations are conducted through its subsidiary, USB
Pharma Limited and are presently housed in a 5,000 square foot office in an
office building in Watford, Hertfordshire, England.  This space is rented
pursuant to a lease which expires in June 1999.  The lease may be terminated by
the company without penalty at any time between March 1995 and June 1996.

     The company's manufacturing facilities are held in its Dutch subsidiary,
USB Pharma B.V., and are located in The Netherlands in an 18,000 sq. ft.
facility designed to manufacture sterile products.  The facility was purchased
in March 1993 for $2,250,000.  The company has invested approximately $2,802,900
in renovations to the facility.  The facility became subject to a mortgage of
approximately $680,000 in March 1994.

     The company believes that its present facilities are satisfactory for its
current operations.

ITEM 3.  LEGAL PROCEEDINGS.

     Not applicable.

                                       24
<PAGE>
 
ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

     Not applicable.

EXECUTIVE OFFICERS OF THE REGISTRANT

     The executive officers of the company are as follows:

<TABLE>
<CAPTION>
             NAME              AGE                POSITION                
             ----              ---                --------                
<S>                            <C>                <C>                                    
Philip S. Schein, M.D.          56                Chairman, Chief Executive Officer,     
                                                  President and Director                 

Robert I. Kriebel               53                Senior Vice President - Finance and    
                                                  Administration, Treasurer and Director 

Barbara J. Scheffler            44                Senior Vice President -                
                                                  Project Management                     

Donald O. Brown                 53                Senior Vice President -                
                                                  Pharmaceutical Operations              
                                                                                         
Martha E. Manning               41                Vice President, General Counsel        
                                                  and Secretary                          
</TABLE>

     Dr. Schein has been Chief Executive Officer and a Director of the company
since its formation in May 1987 and Chairman since May 1990.  He is also
President of the company, a position he has held from its formation until April
1992 and again from May 1995 to the present.  From April 1987 to May 1987 he was
employed by U.S. Healthcare, Inc., a publicly-owned  operator of health
maintenance organizations ("HMO's") to commence the business undertaken by the
company.  From January 1987 to February 1987 Dr. Schein was a consultant in drug
development to Unimed, Inc., a pharmaceutical company, and Professor of Medicine
and Pharmacology at the University of Pennsylvania.  Dr. Schein served as Vice
President of Worldwide Clinical Research and development, Smith, Kline & French
Laboratories, the pharmaceutical division of SmithKline Beckman Corporation,
from October 1983 to December 1986.  Dr. Schein was the Scientific Director of
the Vincent T. Lombardi Cancer Research Center at Georgetown University School
of Medicine in Washington, D.C. from July 1982 to October 1983, Chief of the
Division of Medical Oncology from August 1974 to October 1983 and Professor in
the Departments of Medicine and Pharmacology from August 1974 to October 1983.
From July 1971 to August 1974 he was a senior investigator at the NCI and head
of the Clinical Pharmacology Section.  Dr. Schein is a former President of the
American Society of Clinical Oncology and a former Chairman of the FDA Oncologic
Drugs Advisory Committee, where he received the Commissioner's Special Citation
and the Wiley Medal for outstanding service.  In September 1994 Dr. Schein was
appointed by President Clinton to a six year term on the National Cancer
Advisory Board.  He has published more than 350 articles and texts relating to
basic and clinical research and drug development and is the recipient of
numerous scientific and medical awards and honors.  He is a Director of Oncor
Inc., a biotechnology-based diagnostics company and Medicis Pharmaceutical
Corporation, a research intensive pharmaceutical company focused on dermatology.

                                       25
<PAGE>
 
     Mr. Kriebel joined the company in April 1991 as Senior Vice President -
Finance and Administration and Treasurer and was elected Director in May 1991.
He held various positions with Rhone-Poulenc Rorer Inc. (formerly Rorer Group
Inc.) from 1974 until November 1990.  From 1987 to November 1990 he was Vice
President and Controller of Rorer Group Inc.'s Armour Pharmaceutical Company.
In 1986, Mr. Kriebel was Vice President - Investor Relations of Rorer Group Inc.
and from 1979 to 1985 he was Treasurer of Rorer Group Inc.

     Ms. Scheffler has been Senior Vice President Project Management since
February 1995.  From November 1991 to February 1995, she was  Senior Vice
President, Clinical Operations and Regulatory Affairs.  She was Vice President-
Clinical Operations from July 1987 to November 1991 and Secretary from May 1987
to August 1991 and from January 1993 to May 1993.  From September 1973 to April
1987, she held various positions in the Biostatistics and Clinical Information
Departments of Worldwide Clinical Research and Development at Smith, Kline &
French Laboratories, including Manager, Worldwide Clinical Sciences
Administration.

     Mr. Brown joined U.S. Bioscience as Senior Vice President of Pharmaceutical
Operations in April, 1992.  From 1982 through 1992, he served in numerous
capacities with Alcon Laboratories, Inc., including Group Director,
International Quality Assurance, and Director of Manufacturing, Alcon Munich
operations and at the World Headquarters facilities in Ft. Worth, Texas.  Mr.
Brown's oncology background was developed during his five year tenure with
Bristol-Myers Squibb where he served as Manager of Process Engineering and Plant
Manager, Sterile Operations.

     Ms. Manning joined U.S. Bioscience as Vice President, General Counsel and
Secretary in May  1993.  From July 1988 until joining U.S. Bioscience, she had
served as General Counsel for The Wistar Institute of Anatomy and Biology, the
nation's oldest independent basic biomedical research institute.  From 1983
until joining Wistar, Ms. Manning had been an associate with the law firm
Morgan, Lewis & Bockius.

                                       26
<PAGE>
 
                                    PART II

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

     The company's Common Stock is traded on the American Stock Exchange (the
"AMEX") under the symbol "UBS."  The following table sets forth the high and low
sale prices for the Common Stock as reported by the AMEX for the periods
indicated.

<TABLE>
<CAPTION>
                                        HIGH       LOW         
                                        ----       ---         
                                                               
<S>                                    <C>         <C>         
YEAR ENDED DECEMBER 31, 1995                                   
     First Quarter                     3 9/16      2           
     Second Quarter                    5 3/4       2 1/16      
     Third Quarter                     5 9/16      3 1/2       
     Fourth Quarter                    5 9/16      3 5/8       
                                                               
                                                               
                                                               
YEAR ENDED DECEMBER 31, 1994                                   
     First Quarter                     10 3/8      6 3/4       
     Second Quarter                     8 5/8      5 1/8       
     Third Quarter                      8 1/2      5 1/4       
     Fourth Quarter                     8 1/4      1            
</TABLE>

        On March 4, 1996, there were 7,753 stockholders of record of Common
Stock.

        The company has not paid any dividends on the Common Stock since its
inception and does not intend to pay any dividends in the foreseeable future.
It is the present policy of the Board of Directors to retain all earnings, if
any, to finance the development of the company's business.

                                       27
<PAGE>
 
ITEM 6.  SELECTED FINANCIAL DATA.

          The selected financial data presented below for each of the five year
periods prior to December 31, 1995, and the period May 7, 1987 (inception)
through December 31, 1995, is derived from the company's audited financial
statements.  The selected financial information presented below should be read
in conjunction with the consolidated financial statements, related notes and
other financial information included in this Annual Report on Form 10-K.

<TABLE>
<CAPTION>
                                                                                                             For the period
                                                                                                               May 7, 1987
                                                                                                              (inception)
                                                                                                                 through
                                                                    YEAR ENDED DECEMBER, 31                   December 31,
                                                  --------------------------------------------------------
STATEMENT OF OPERATIONS DATA:(1)                       1995        1994       1993       1992       1991          1995
                                                  ---------------------------------------------------------------------------
<S>                                                    <C>       <C>        <C>        <C>         <C>            <C> 
Revenues:
  Net sales                                            $8,724      $7,210     $2,361     $3,511     $3,348          $25,153
  Net investment income                                 1,223       1,234      3,776      7,294      7,605           25,050
  Licensing, royalty and research income               21,398         102      2,067        618        124           25,739
                                                  ---------------------------------------------------------------------------
     Total Revenues                                    31,345       8,546      8,204     11,423     11,077           75,942
Expenses:
  Cost of sales                                         2,559       1,694        626        886        762            6,526
  Selling, general and administrative                  16,583      13,233     18,639     14,028      6,876           77,650
  Research and development costs                       12,186      17,608     19,404     16,735      9,929           85,163
  Provision for litigation                                 --          --     10,165         --         --           10,165
  Interest expense                                        255          52         --         --         50            1,368
                                                  ---------------------------------------------------------------------------
     Total expense                                     31,583      32,587     48,834     31,649     17,617          180,872
                                                  ---------------------------------------------------------------------------
Net loss                                                $(238)   $(24,041)  $(40,630)  $(20,226)   $(6,540)       $(104,930)
                                                  ===========================================================================
Net loss per common share                              $(0.01)     $(0.60)    $(1.03)    $(0.51)    $(0.18)            ----
                                                  ===========================================================================
Weighted average numbers of common shares              40,872      40,254     39,604     39,407     37,095             ----
 outstanding(2)

<CAPTION> 
                                                                         DECEMBER 31,
                                                  ---------------------------------------------------------
BALANCE SHEET DATA:(1)                                   1995        1994       1993       1992       1991
                                                  ---------------------------------------------------------
<S>                                                  <C>         <C>         <C>        <C>        <C>        
Cash, cash equivalents and marketable securities      $45,596     $24,428    $48,364    $77,191    $95,507
Working capital                                        42,577      21,536     43,377     74,683     93,648
Total assets                                           61,880      34,464     57,787     83,272     99,147
Long-term debt                                         19,088         997        387         --         --
Provision for litigation                                   --       2,301     10,165         --         --
Other long-term liabilities                             1,036         788        588        438        387
Deficit accumulated during the development stage     (104,930)   (104,692)   (80,651)   (40,021)   (19,795)
Stockholders' equity                                   28,788      23,939     38,090     77,490     94,925
</TABLE>

(1)In Thousands, except per share amounts
(2)After giving effect to a 2-for-1 stock split paid in the form of a
   dividend to the common stockholders on January 16, 1992.

                                       28
<PAGE>
 
ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
         OF OPERATIONS.

OVERVIEW

     Since its inception in 1987, the company has devoted its efforts primarily
to raising capital, recruiting personnel, identifying and acquiring drugs for
further research and development, clinical development of such drugs and, since
1991, selling and marketing its drugs in the United States.  The company
currently sells and markets two compounds in the United States, Hexalen,
introduced in January 1991 and NeuTrexin, introduced in January 1994.  The
company received regulatory approval to market its third product, Ethyol in the
United States in December 1995.  Ethyol is a selective cytoprotective agent for
reducing cumulative renal toxicity associated with administration of cisplatin
in patients with advanced ovarian cancer.  The company expects Ethyol will be
launched by its U.S. co-promotion partner ALZA Corporation ("ALZA") in early
1996.  The company has also received regulatory approval for Ethyol in several
European countries and its marketing partner for European territories Scherico
Ltd., an affiliate of Schering-Plough Corporation ("Scherico"), began sales and
marketing efforts in 1995.

     The company believes that its expenditures for research and development,
marketing, capital equipment and facilities will continue to exceed revenues as
a result of (i) seeking further regulatory approvals for Ethyol in the United
States and Europe and further clinical trials and regulatory approvals for
NeuTrexin and Hexalen, (ii) the marketing of Hexalen and NeuTrexin and the
forthcoming launch of Ethyol in the United States and further Ethyol product
introductions in Europe where the company shares initial profits and losses with
its marketing partner, Scherico, (iii) expansion of clinical and preclinical
testing of drug compounds, including expanded indications for existing drugs and
(iv) development and enhancement of manufacturing and analytical capabilities.

     The company, in January 1995, following the December 1994 meeting of the
Oncologic Drug Advisory Committee of the FDA which withheld recommendation for
the U.S. approval of Ethyol, went through an internal restructuring and
downsizing in an effort to reduce expenditures so as to preserve financial
resources for its research, product development and commercial objectives.  This
restructuring resulted in a reduction in the company's staffing levels and
expenditures and a re-prioritization of research efforts focusing on near-term
projects, which management believes may be capable of providing additional
revenues.  A one-time restructuring charge of approximately $600,000 principally
to cover severance payments, was charged to earnings in the first quarter of
1995.  The company's principal research activity in 1995 centered on the
regulatory approval of Ethyol by the FDA.  As noted above, the company was
successful in achieving marketing approval of Ethyol by the FDA in December
1995.  Commercial activities during 1995 centered around the promotion and sale
of Hexalen and NeuTrexin in the United States, the launch of Ethyol in Europe by
marketing partner Scherico and the conclusion of a marketing and distribution
agreement for Ethyol in the United States with ALZA in December 1995.  The
company also pursued clinical programs to expand the label indications for
Ethyol, NeuTrexin and Hexalen and initial regulatory approvals for Ethyol in
several European countries and Canada.  Additionally, start-up and validation
efforts were completed at the company's manufacturing plant in The Netherlands.
The company also acquired FddA, a product for the treatment of AIDS developed by
the National Cancer Institute.  As part of a plan to enhance the company's
ability to pursue its long-term commercial and research objectives, in December
1995, the company raised approximately $19 million in a private placement
consisting of

                                       29
<PAGE>
 
1,120,112 shares of common stock and the issuance of $16.5 million in 4% three-
year unsecured convertible debentures.  One third of the convertible debentures
($5.5 million) were converted into 1,127,555 shares of the company's common
stock in February 1996.

     In 1994, the company's principal commercial activity was the launch of
NeuTrexin in the United States.  The launch of NeuTrexin and the refocused
marketing activity related to Hexalen, resulted in a 200% increase in sales over
the 1993 year sales.  Additionally, during 1994, as in 1993, the company's
operations also centered around regulatory submissions and follow-up activities
on Ethyol, NeuTrexin and Hexalen in the United States, Canada and Europe; start-
up and validation work at the company's newly acquired manufacturing plant in
The Netherlands; continued clinical development of late-stage compounds, Ethyol,
PALA and Rogletimide; expanded preclinical testing and product development;
licensing and business development activities; and legal activities related to
the 1993 settlement of stockholder litigation.

     During and prior to 1992, the company's operations focused on the research
and development of its product portfolio via continued clinical programs,
primarily related to Ethyol, NeuTrexin, Hexalen and PALA; sales and marketing of
Hexalen in the United States; monitoring and/or preparing regulatory filings for
Ethyol in the United States and Europe, NeuTrexin in the United States and
Hexalen in the United Kingdom, and enhancements to product manufacturing,
quality assurance and testing methods including the start-up of its own
analytical laboratory and clinical operation in Europe and business development
activities.


RESULTS OF OPERATIONS

1995 Compared with 1994

     Sales revenue increased by 21% to $8,724,000 for the year ended December
31, 1995 from $7,209,700 in the prior year.  The $1,514,300 increase was
primarily due to increased sales of Hexalen in the United States and sales of
initial launch quantities of Ethyol to Scherico for European distribution.

     Net investment income declined to $1,223,100 in the year ended December 31,
1995 from $1,234,700 in the same period of 1994.  The $11,600 decrease resulted
from a $510,600 decrease in interest income in the 1995 period due to a lower
portfolio balance which was largely off-set by a $88,800 gain on the portfolio
as compared to a $410,200 loss recorded in the 1994 period.

     Licensing, royalty and other income increased to $21,398,000 for the year
ended December 31, 1995 as compared to $102,000 for the 1994 period.  The
increase is principally due to the $20 million recognized from ALZA for U.S.
marketing and distribution rights for Ethyol.  The company also received in 1995
one-time payments for product distribution rights in Canada and Europe.

     Cost of sales, which consists of product manufacturing, testing, delivery
and royalty expenses, increased in line with sales.  As a percentage of sales,
cost of sales in the year ended December 31, 1995,  increased to 29% from 24% in
the prior year period due principally to the sale of Ethyol to Scherico at
approximately cost of manufacture.  Sales of Ethyol to Scherico will generate
positive returns to the company if and when the product achieves profitability
as defined in the company's agreement with Scherico.

                                       30
<PAGE>
 
     Selling, general and administrative costs for the year ended December 31,
1995 increased to $16,583,400, an increase of $3,350,700 over the 1994
expenditure of $13,232,700.  The increase is principally due to the accrual of
$4.2 million for the company's share of operating losses resulting from the
launch of Ethyol in Europe by Scherico and the accrual of a one-time $2.0
million charge related to Ethyol U.S. launch expenses as part of the company's
co-promotion arrangement with ALZA.  These expenses were partly off-set by
reductions in U.S. marketing costs for NeuTrexin of $1.7 million, lower facility
costs of $204,700 and reduced legal and consulting expenses of $383,500.

     Research and development costs for the year ended December 31, 1995 were
$12,186,000 as compared to $17,607,900 in 1994.  The $5.4 million reduction is
principally due to the capitalization of manufacturing expenses with the start
of commercial production at the company's manufacturing plant in The Netherlands
of $2,001,700, lower personnel costs of $1,914,500, reduced professional and
outside services expenses of $504,400 and reductions in travel costs of
$141,700.  In addition, lower clinical and product development expenditures of
$752,500 resulted from the completion and scale-down of several development
programs.  These expense reductions were achieved principally as a result of the
company's January 1995 internal restructuring.

     The net loss for 1995 was $237,800 or $0.01 per common share.  This
compares to a loss in 1994 of $24,041,000 or $0.60 per common share.


1994 Compared with 1993

     Sales revenue increased over 200% to $7,209,700 in the twelve-month period
ended December 31, 1994 as compared to the prior-year period.  The $4,849,200
increase was due to the U.S. launch in January 1994 of the company's second
commercial drug product, NeuTrexin, and a rebound in sales of the company's
ovarian cancer therapy product Hexalen.

     Net investment income declined to $1,234,700 in 1994 from $3,776,400 in
1993 due principally to a decline in market value of the company's portfolio of
marketable securities in contrast to substantial gains recorded in the year-ago
period.  Additionally, interest income was reduced arising from a smaller
portfolio balance partly offset by higher yields.  Licensing, royalty and
research income declined to $102,000 in 1994 and is reflective of payments made
principally for achievement of milestone events in the company's various product
license agreements.  1993 licensing, royalty and research income included a
substantial one-time payment from Scherico on signing a European distribution
agreement for the company's cytoprotective product, Ethyol.

     Cost of sales increased to $1,694,400 (24% of sales) in 1994 from $625,400
(26.5% of sales) in 1993 due to the January 1994 launch of the drug NeuTrexin.
As a percentage of sales, the decrease is primarily attributable to price
increases on the drug Hexalen.

     Selling, general and administrative costs decreased to $13,232,700 in 1994
from $18,639,200 in 1993.  The $5,406,500 decrease is due to a $2,319,000
decrease in marketing expenditures principally centered around the drug products
Ethyol and Hexalen, a reduction of $1,522,000 in legal expenses due principally
to the settlement of a class-action litigation and a $1,524,000 reduction in
personnel costs, relocation, recruiting and employee travel expenses reflective
of selective staff reductions and ongoing cost containment programs established
during 1994.

                                       31
<PAGE>
 
     Research and development expenditures also declined in 1994 to $17,607,900
for the twelve month period ended December 31, 1994 from $19,403,800 in 1993.
The $1,795,900 reduction is principally due to the completion of several
clinical and product development projects for drug products NeuTrexin and
Ethyol, and cost containment programs which reduced the activity in several
other projects.  The combination of these factors produced approximately
$2,075,700 in savings compared to 1993.  Additionally, 1993 results included two
large one-time charges of $460,000 for translation costs of regulatory documents
for submission of the NeuTrexin drug application to the European CPMP and a
$484,000 charge for engineering design costs related to a proposed U.S. pilot
production plant and analytical laboratory which were not built.  These savings
in 1994 were partly offset by increased start-up and validation costs of
$997,400 related to the company's manufacturing plant in The Netherlands.

     In 1993, the company accrued a charge of $10,165,000 for the net cost of a
settlement of a class-action litigation.  During 1994, $7,758,700 of this
accrual was transferred to stockholders' equity upon issuance of the common
stock component of the settlement and $105,500 was utilized to pay legal and
other related expenses.  Of the remaining $2,300,800, $2,241,200 was transferred
to stockholders' equity upon issuance of the warrant component of the settlement
in April 1995 and $59,600 was used to cover remaining litigation-related
expenses paid in 1995.

     The net loss for 1994 was $24,041,000 or $0.60 per common share.  This
compares to a net loss in 1993 of $40,629,600 or $1.03 per common share.
Excluding the litigation provision, the 1993 loss was $30,464,600 or $0.77 per
common share.


LIQUIDITY AND CAPITAL RESOURCES

     Since its inception in 1987, the company has financed operations
principally through the sale of equity capital, issuance of secured and
unsecured debt, investment income, sales of its two drug products, Hexalen and
NeuTrexin, and revenues received through distribution and sublicense agreements
for its drugs.  As of December 31, 1995, the company's cash and cash equivalents
and marketable securities totaled $45,596,200.  The company's investment
portfolio consists of securities issued by the U.S. Government or its agencies
and investment grade corporate debt instruments.

     During 1995, net cash used in operations amounted to $645,500 principally
due to the factors discussed above under "Results of Operations" and an increase
in inventory levels.  As noted above, the company, in December 1995 raised
approximately $19 million in a private placement of common stock and unsecured
convertible debentures.  The company also obtained secured debt financing
totaling approximately $3 million during 1995, (See Notes to Consolidated
Financial Statements 6 and 7.)  Until such time as one or more of the company's
currently approved products achieves significant sales or other revenue and
currently approved products receive regulatory approval to expanded indications
currently under development which result in increased revenues, the company's
cash position will continue to be reduced due principally to expenditures in
research, product development, marketing, and selling and administrative
activities.  Failure to obtain additional regulatory approvals on products
currently in development and to achieve significant sales, will have a material
adverse effect on the company.  Additionally, the level of future product sales
will also depend on several factors, including product acceptance, market
penetration, competitive products, the performance of the company's licensees
and distributors, and the healthcare system existing in each market where the
company's products are or may become commercially available.

                                       32
<PAGE>
 
     The company's net capital expenditures were $516,600 in 1995 and total
$9,834,200 since inception.  In April 1993, the company purchased a sterile
products production facility in The Netherlands.  Validation work and pilot
production on this new facility were completed in 1995.  The facility received
regulatory approval for product manufacture and distribution from the Dutch
regulatory authority in June 1994 to manufacture the company's products for
distribution in the European Community, and the facility was approved by the FDA
to manufacture NeuTrexin for the U.S. market in May 1995.  A mortgage loan of
approximately $680,000 relating to this facility was obtained in May 1994.  The
purchase price for this facility was $2,250,000 and $2,802,900 in capital
improvements have been made since its purchase to make the facility operational
and expand its production capacity.  Further capital expenditures, estimated at
$500,000, are planned in 1996.

     The funds raised in the private placement ($19 million, net) and the
distribution fees from ALZA ($20 million) have provided the company with
approximately $39 million in working capital, which the company believes will be
sufficient to cover operating expenses at current levels for the foreseeable
future.  The company is hopeful that its products will, in the near future,
generate sufficient sales to provide meaningful cash resources, although no
assurance can be given that they will do so.  The company is also hopeful that
the company will in the future receive further regulatory approvals and that
such approvals will increase sales.  However, no assurance can be given that
further regulatory approvals will be obtained in a timely manner, if ever, or
that the company will have adequate financial resources to commercialize its
products when approved or that product sales will be sufficient to cover
operating expenses.  Although the company will from time to time explore
additional sources of financing, there can be no assurance that the company will
be successful in obtaining such financing on terms acceptable to the company.

     The company's future liquidity and capital requirements are dependent upon
several factors, including, but not limited to, its success in generating
significant revenues from sales; the performance of its sublicensees and
distributors under sublicense and distribution arrangements for sales of its
products; the time and cost required to manufacture and market its products; the
time and cost required to obtain regulatory approvals, including expanded
labelling for its products which are already commercially available; obtaining
the rights to additional commercially viable compounds; competitive
technological developments; additional governmental-imposed regulation and
control; and changes in healthcare systems which affect reimbursement, pricing
or availability of drugs and market acceptance of drugs.  The above factors may
also affect realization of certain asset currently held by the company,
principally investments in plant, equipment and inventory.

     To extend its current financial resources, the company has instituted
programs to reduce expenditures.  As noted above, the company initiated an
internal restructuring in January 1995 in an effort to reduce expenditures and
has reduced its staff from 165 individuals at January 1, 1994 to 119 at December
31, 1995.  However, no assurance can be given that these measures will continue
to be successful in reducing expenditures to the degree necessary to allow the
company to reach its regulatory and commercial objectives and eventual
profitability.

     In 1995, Scherico, the company's European distributor for its
cytoprotective agent, Ethyol, launched Ethyol in several European markets where
regulatory approvals have been received.  Under the terms of its agreement with
Scherico, the company shares in operating profits/losses generated from
marketing and sales of Ethyol in Germany, United Kingdom, Spain, Italy and
France (the "Major Markets") for a period of up to two years from November 23,
1994, the date of approval of Ethyol in the United Kingdom.  The company's share
of operating losses, generated from the Major Markets was approximately $4.2
million in 1995.  The limit on operating losses, if any, attributable

                                       33
<PAGE>
 
to the Major Markets is limited to approximately $1.7 million for 1996 based on
an operating plan for 1996.  The company will share in operating profits, if
any, generated from sales of Ethyol in the other countries in the European
Territories outside the Major Markets in which Ethyol is launched by Scherico,
but is not exposed to operating losses, if any, generated in such countries.
Profits or losses under the agreement with Scherico are affected by the same
uncertainties noted in the preceding paragraphs.  The company is hopeful that
the commercialization of its drug product Ethyol will be financially successful
in Europe. However, no assurance can be given that the company will achieve
meaningful revenues under this agreement.

     The company has been unprofitable since its inception and expects to incur
additional operating losses until such time as substantial sales are realized
and further regulatory approvals are obtained, although the distribution fees
from ALZA Corporation did bring the company close to a break-even position for
1995.  The company's losses may increase as the company continues its
commercialization, research and development activities, and such losses may
fluctuate from quarter to quarter.  There can be no assurance that the company
will ever achieve significant revenues or profitable operations.  For the period
from May 7, 1987 (inception) through December 31, 1995, the company had an
accumulated deficit of $104,929,800.

Impact of Recently Issued Accounting Pronouncements

     In March 1995, the FASB issued Statement No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of",
which requires impairment losses to be recorded on long-lived assets used in
operations when indicators of impairment are present and the undiscounted cash
flows estimated to be generated by those assets are less than the assets
carrying amount.  Statement No. 121 also addresses the accounting for long-lived
assets that are expected to be disposed of.  The company will adopt Statement
No. 121 in the first quarter of 1996 and, based on current circumstances, does
not believe the effect of the adoption will be material.

     Statement of Financial Accounting Standard No. 123, "Accounting for Stock
Based Compensation", is effective for fiscal years beginning after December 15,
1995.  Statement No. 123 provides companies with a choice to follow the
provisions of Statement No. 123 in determination of stock-based compensation
expense or to continue with the provisions of APB 25, "Accounting for Stock
Issued to Employees."  The company will continue to follow APB 25 and will
provide proforma disclosures as required by Statement No. 123 in the December
31, 1996 notes to the consolidated financial statements.

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

     Financial statements are set forth in this report beginning at page F-1.


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

     None.

                                       34
<PAGE>
 
                                   PART III

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.

     This information is contained in the company's definitive Proxy Statement
with respect to the company's Annual Meeting of Stockholders, to be filed with
the Securities and Exchange Commission within 120 days following the end of the
company's fiscal year, and is hereby incorporated by reference thereto.

ITEM 11.  EXECUTIVE COMPENSATION.

     This information is contained in the company's definitive Proxy Statement
with respect to the company's Annual Meeting of Stockholders, to be filed with
the Securities and Exchange Commission within 120 days following the end of the
company's fiscal year, and is hereby incorporated by reference thereto.

ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

     This information is contained in the company's definitive Proxy Statement
with respect to the company's Annual Meeting of Stockholders, to be filed with
the Securities and Exchange Commission within 120 days following the end of the
company's fiscal year, and is hereby incorporated by reference thereto.

ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

          This information is contained in the company's definitive Proxy
Statement with respect to the company's Annual Meeting of Stockholders, to be
filed with the Securities and Exchange Commission within 120 days following the
end of the company's fiscal year, and is hereby incorporated by reference
thereto.

                                       35
<PAGE>
 
                                    PART IV

ITEM 14.  EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.

     (a) The following documents are being filed as part of this report of Form
         10-K:

         1.  Consolidated Financial Statements.

         The following consolidated statements are included in this filing:

           Report of independent auditors

           Consolidated Balance Sheets at December 31, 1995 and 1994

           Consolidated Statements of Operations for the years ended December
           31, 1995, 1994 and 1993 and the period May 7, 1987 (inception)
           through December 31, 1995

           Consolidated Statements of Cash Flows for the years ended December
           31, 1995, 1994 and 1993 and the period May 7, 1987 (inception)
           through December 31, 1995
 
           Consolidated Statement of Stockholders' Equity for the period May 7,
           1987 (inception) through December 31, 1995

           Notes to Consolidated Financial Statements

         2. Financial Statement Schedules:

         All financial schedules required to be filed in Part IV, Item 14(a)
         have been omitted because they are not applicable, not required or
         because the required information is included in the financial
         statements or notes thereto.

                                       36
<PAGE>
 
          3. Exhibits.

3.1       Restated Certificate of Incorporation (incorporated by reference to
          Exhibit 3(a) to the Registrant's Registration Statement on Form S-1
          (File No. 33-39576), filed with the Securities and Exchange Commission
          on March 22, 1991)

3.1.1     Certificate of Amendment to Certificate of Incorporation (incorporated
          by reference to Exhibit 3.1.1 to the Registrant's Registration
          Statement on Form S-3 (File No. 33-00077), filed with the Securities
          and Exchange Commission on January 5, 1996

3.1.2     Certificate of Designations of Series A Junior Preferred Stock
          (incorporated by reference to Exhibit 1 to the Registrant's Current
          Report on Form 8-K dated June 7, 1995)

3.2       Bylaws, as amended (incorporated by reference to Exhibit 3.2 to the
          Registrant's Annual Report on Form 10-K filed with the Securities and
          Exchange Commission on March 28, 1994)

4.1       Warrant Agreement dated as of June 6, 1994 by and between Registrant
          and Mellon Bank, N.A. (incorporated by reference to Exhibit 4.1 to the
          Registrant's Annual Report on Form 10-K filed with the Securities and
          Exchange Commission on March 28, 1995)

4.2       Rights Agreement dated as of May 19, 1995 by and between Registrant
          and Chemical Mellon Shareholder Services L.L.C. (incorporated by
          reference to Exhibit 1 to Registrant's Current Report on Form 8-K
          dated June 7, 1995)

10.1*     Agreement dated August 9, 1991, between the Registrant and Warner-
          Lambert Company, as amended by Amendment No. 1 dated December 12,
          1991, Amendment No. 2 dated March 10, 1994 and Amendment No. 3 dated
          March 11, 1994 (incorporated by reference to Exhibit 10.1 to the
          Registrant's Annual Report on Form 10-K filed with the Securities and
          Exchange Commission on March 28, 1994)

10.2      Office Lease Agreement, dated September 1990, between U.S. Bioscience,
          Inc. and Tower Bridge Associates (incorporated by reference to Exhibit
          10(k) to the Registrant's Registration Statement on Form S-1 (File No.
          33-39576), filed with the Securities and Exchange Commission on March
          22, 1991)

10.2.1    Amendment No. 1, dated August 31, 1991, to Office Lease Agreement
          between U.S. Bioscience, Inc. and Tower Bridge Associates
          (incorporated by reference to Exhibit 10(i)(ii) to the Registrant's
          Annual Report on Form 10-K, filed with the Securities and Exchange
          Commission on March 27, 1992)

10.2.2    Addendum, dated April 8, 1992, to Amendment No. 1 of Office Lease
          Agreement between U.S. Bioscience and Tower Bridge Associates
          (incorporated by reference to Exhibit 10.2.2 to the Registrant's
          Annual Report on Form 10-K, filed with the Securities and Exchange
          Commission on March 31, 1993)

                                       37
<PAGE>
 
10.2.3    Amendment No. 2, dated June 30, 1995, to Office Lease Agreement
          between U.S. Bioscience, Inc. and Tower Bridge Associates

10.3      Lease Agreement, dated June 15, 1992, between U.S. Bioscience, Inc.
          and Pickering Acquisition Associates (incorporated by reference to
          Exhibit 10.3 to the Registrant's Annual Report on Form 10-K, filed
          with the Securities and Exchange Commission on March 31, 1993)

10.3.1    Amendment No. 1, dated March 17, 1993, to Lease Agreement between the
          Registrant and Pickering Acquisition Associates (incorporated by
          reference to Exhibit 10.3.1 to the Registrant's Annual Report on Form
          10-K, filed with the Securities and Exchange Commission on March 31,
          1993)

10.3.2    Second Amendment to Lease Agreement between the Registrant and
          Pickering Acquisition Associates dated February 8, 1995 (incorporated
          by reference to Exhibit 10.3.2 to the Registrant's Annual Report on
          Form 10-K filed with the Securities and Exchange Commission on March
          28, 1995)

10.4      Research Agreement, dated May 14, 1987, between the Registrant and
          Georgetown University, as amended May 27, 1988 (incorporated by
          reference to Exhibit 10.13 to the Registrant's Registration Statement
          on Form 10, filed with the Securities and Exchange Commission on
          September 21, 1989)

10.4.1    Amendment No. 2, dated as of January 23, 1990, to Research Agreement,
          dated May 14, 1987, between the Registrant and Georgetown University
          (incorporated by reference to Exhibit 10.13.1 to the Registrant's
          Registration Statement on Form S-1, filed with the Securities and
          Exchange Commission on February 5, 1990)

10.5      Letter agreement, dated January 22, 1992, between the Registrant and
          Chemsyn Science Laboratories (incorporated by reference to Exhibit
          10(k) to the Registrant's Annual Report on Form 10-K, filed with the
          Securities and Exchange Commission on March 27, 1992)

10.6      License Agreement dated January 30, 1995 between Registrant and
          National Institutes of Health (incorporated by reference to Exhibit
          10.6 to the Registrant's Annual Report on Form 10-K filed with the
          Securities and Exchange Commission on March 28, 1995)

10.7      Agreement for Assignment of Rights, dated January 8, 1988, between the
          Registrant and Wyeth Laboratories, Inc. (incorporated by reference to
          Exhibit 10.18 to the Registrant's Registration Statement on Form 10,
          filed with the Securities and Exchange Commission on September 21,
          1989)

10.8*     Amended and Restated License Agreement, effective as of May 1, 1993,
          between the Registrant and Southern Research Institute (incorporated
          by reference to Exhibit 10.8 to the Registrant's Annual Report on Form
          10-K filed with the Securities and Exchange Commission on March 28,
          1994)

                                       38
<PAGE>
 
10.9      Agreement, dated as of November 25, 1988, between the Registrant and
          Warner-Lambert Company (incorporated by reference to Exhibit 10.23 to
          the Registrant's Registration Statement on Form 10, filed with the
          Securities and Exchange Commission on September 21, 1989)

10.9.1    Amendment No. 1, dated March 13, 1992 to Agreement dated as of
          November 25, 1988, between the Registrant and Warner-Lambert Company
          (incorporated by reference to Exhibit 10(o)(ii) to the Registrant's
          Annual Report on Form 10-K, filed with the Securities and Exchange
          Commission on March 27, 1992)

10.10     License Agreement, dated as of December 6, 1990, between the National
          Technical Information Service and the Registrant (incorporated by
          reference to Exhibit 10(t) to the Registrant's Registration Statement
          on Form S-1 (File No. 33-39576), filed with the Securities and
          Exchange Commission on March 25, 1991)

10.11     Agreement, dated as of January 1, 1995, between Registrant and Applied
          Analytical Industries, Inc. (incorporated by reference to Exhibit
          10.11 to the Registrant's Annual Report on Form 10-K filed with the
          Securities and Exchange Commission on March 28, 1995)

10.12     Agreement, dated as of September 23, 1993, between Registrant and Ben
          Venue Laboratories, Inc. (incorporated by reference to Exhibit 10.12
          to the Registrant's Annual Report on Form 10-K filed with the
          Securities and Exchange Commission on March 28, 1994)

10.13     U.S. Bioscience/Ganes PALA Research Agreement between the Registrant
          and Ganes Chemicals, Inc., signed by the Registrant on April 25, 1991
          and countersigned by Ganes Chemicals, Inc. on April 29, 1991
          (incorporated by reference to Exhibit 10(t) to the Registrant's Annual
          Report on Form 10-K, filed with the Securities and Exchange Commission
          on March 27, 1992)

10.14     License Agreement, dated February 14, 1992, between the Registrant and
          Schering Overseas Limited (incorporated by reference to Exhibit 10.14
          to the Registrant's Annual Report on Form 10-K, filed with the
          Securities and Exchange Commission on March 31, 1993)

10.14.1   Amendment dated October 15, 1993 to License Agreement between
          Registrant and Schering Overseas Limited (incorporated by reference to
          Exhibit 10.14.1 to the Registrant's Annual Report on Form 10-K filed
          with the Securities and Exchange Commission on March 28, 1994)

10.15     License Agreement dated May 10, 1994 between Registrant and Scherico,
          Ltd. (incorporated by reference to Exhibit 10.15 to the Registrant's
          Annual Report on Form 10-K filed with the Securities and Exchange
          Commission on March 28, 1995)

10.16*    Distribution and Supply Agreement, dated as of May 10, 1993 between
          Registrant and Scherico, Ltd. (incorporated by reference to Exhibit
          10.16 to the Registrant's Annual Report on Form 10-K filed with the
          Securities and Exchange Commission on March 28, 1995)

                                       39
<PAGE>
 
10.17     Agreement, dated as of March 10, 1994 between Registrant and Sipsy
          S.A. (incorporated by reference to Exhibit 10.17 to the Registrant's
          Annual Report on Form 10-K filed with the Securities and Exchange
          Commission on March 28, 1994)

10.18     License Agreement, effective November 28, 1990 between Registrant and
          National Technical Information Service (incorporated by reference to
          Exhibit 10.18 to the Registrant's Annual Report on Form 10-K filed
          with the Securities and Exchange Commission on March 28, 1994)

10.19     Stipulation of Settlement Civil Action No. 92-0678 (Dalzell, J.) dated
          January 19, 1994 (incorporated by reference to Exhibit 10.19 to the
          Registrant's Annual Report on Form 10-K filed with the Securities and
          Exchange Commission on March 28, 1995)

10.20     Non-Executive Stock Option Plan

10.21     Form of Subscription Agreement for sale of Common Stock by the
          Registrant to investors in December 1995 (incorporated by reference to
          Exhibit 1 to Registrant's Current Report on Form 8-K dated December
          22, 1995)

10.22     Form of Note Purchase Agreement for sale of convertible notes by the
          Registrant to investors in December 1995 (incorporated by reference to
          Exhibit 2 to Registrant's Current Report on Form 8-K dated December
          22, 1995)

10.23     Form of Convertible Note issued pursuant to Note Purchase Agreements
          for sale of convertible notes by the Registrant to investors in
          December 1995 (incorporated by reference to Exhibit 3 to Registrant's
          Current Report on Form 8-K dated December 22, 1995)

10.24     Form of Registration Rights Agreement with purchasers of Common Stock
          and convertible notes issued by the Registrant to investors in
          December 1995 (incorporated by reference to Exhibit 4 to Registrant's
          Current Report on Form 8-K dated December 22, 1995)

10.25*    Ethyol (Amifostine) Distribution and Marketing Collaboration Agreement
          between U.S. Bioscience, Inc. and ALZA Corporation dated December 12,
          1995 (incorporated by reference to Exhibit 5 to Registrant's Current
          Report on Form 8-K dated December 22, 1995)

          Executive Compensation Plans and Arrangements

10.26     Employment Agreement, dated as of March 1, 1993 between Registrant and
          Philip S. Schein, M.D. (incorporated by reference to Exhibit 10.21 to
          the Registrant's Annual Report on Form 10-K filed with the Securities
          and Exchange Commission on March 28, 1995)

                                       40
<PAGE>
 
10.27     U.S. Bioscience, Inc. 1987 Incentive Stock Option Plan (incorporated
          by reference to Exhibit 4.1 to the Registrant's Registration Statement
          on Form S-8 (File No. 33-43981), filed with the Securities and
          Exchange Commission on November 15, 1991)

10.28     U.S. Bioscience, Inc. 1987 Non-Statutory Stock Option Plan
          (incorporated by reference to Exhibit 4.2 to the Registrant's
          Registration Statement on Form S-8 (File No. 33-43981), filed with the
          Securities and Exchange Commission on November 15, 1991)

10.29     U.S. Bioscience, Inc. 1987 Special Non-Statutory Stock Option Plan
          (incorporated by reference to Exhibit 4.3 to the Registrant's
          Registration Statement on Form S-8 (File No. 33-43981), filed with the
          Securities and Exchange Commission on November 15, 1991)

10.30     U.S. Bioscience, Inc. 1991 Special Non-Statutory Stock Option Plan
          (incorporated by reference to Exhibit 4.5 to the Registrant's
          Registration Statement on Form S-8 (File No. 33-43981), filed with the
          Securities and Exchange Commission on November 15, 1991)

10.31     U.S. Bioscience, Inc. 1992 Stock Option Plan (incorporated by
          reference to Exhibit 10.27 to the Registrant's Annual Report on Form
          10-K filed with the Securities and Exchange Commission on March 28,
          1995)

10.32     Executive Benefits Plan and related Form of Split Dollar Agreement
          (incorporated by reference to Exhibit 10.28 to the Registrant's Annual
          Report on Form 10-K filed with the Securities and Exchange Commission
          on March 28, 1995)

10.33     Pension Restoration Plan (incorporated by reference to Exhibit 10.29
          to the Registrant's Annual Report on Form 10-K filed with the
          Securities and Exchange Commission on March 28, 1995)

10.33.1   Amendment 1996-1 to Pension Restoration Plan

10.34     Executive Severance Agreement, dated October 14, 1991, between the
          Registrant and Philip S. Schein, M.D. (incorporated by reference to
          Exhibit 10(v) to the Registrant's Annual Report on Form 10-K, filed
          with the Securities and Exchange Commission on March 27, 1992)

10.35     Amendment dated September 22, 1992 to Executive Severance Agreement
          between the Registrant and Philip S. Schein, M.D. (incorporated by
          reference to Exhibit 10.25.1 to the Registrant's Annual Report on Form
          10-K, filed with the Securities and Exchange Commission on March 31,
          1993)

10.36     Executive Severance Agreement, dated October 14, 1991, between the
          Registrant and Robert L. Capizzi, M.D. (incorporated by reference to
          Exhibit 10(w) to the Registrant's Annual Report on Form 10-K, filed
          with the Securities and Exchange Commission on March 27, 1992)

                                       41
<PAGE>
 
10.36.1   Amendment dated September 22, 1992 to Executive Severance Agreement
          between the Registrant and Robert L. Capizzi, M.D. (incorporated by
          reference to Exhibit 10.26.1 to the Registrant's Annual Report on Form
          10-K, filed with the Securities and Exchange Commission on March 31,
          1993)

10.37     Agreement, dated March 4, 1996, between the Registrant and Robert L.
          Capizzi, M.D.

10.38     Form of Executive Severance Agreement executed with each Senior Vice
          President, each Vice President, and the Controller of the Registrant
          (incorporated by reference to Exhibit 10.28 to the Registrant's Annual
          Report on Form 10-K, filed with the Securities and Exchange Commission
          on March 31, 1993)

22        Subsidiaries of the Registrant

23        Consent of Ernst & Young LLP, Independent Auditors

______________
*Confidential portions have been omitted and have been separately filed with the
Commission.

                                       42
<PAGE>
 
                                  SIGNATURES

    PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON
ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED.

                                          U.S. BIOSCIENCE, INC.

Date:   March 20, 1996                    By:  /s/ PHILIP S. SCHEIN
                                               --------------------
                                               Philip S. Schein, M.D.
                                               Chief Executive Officer,
                                               President and Chairman

    PURSUANT TO THE REQUIREMENT OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE
REGISTRANT AND IN THE CAPACITIES AND ON THE DATES INDICATED.

<TABLE>
<CAPTION>
 
        SIGNATURE                            TITLE                        DATE
        ---------                            -----                        ----
<S>                               <C>                                  <C>
     /s/ PHILIP S. SCHEIN         Principal Executive Officer and      March 20, 1996
--------------------------------
        Philip S. Schein          Director                           
                   
     /s/ ROBERT I. KRIEBEL        Principal Financial Officer and      March 20, 1996
--------------------------------  
         Robert I. Kriebel        Director

     /s/ MARK R. BAUSINGER        Principal Accounting Officer         March 20, 1996
--------------------------------
        Mark R. Bausinger

     /s/ PAUL CALABRESI           Director                             March 20, 1996
--------------------------------
         Paul Calabresi 

     /s/ ROBERT L. CAPIZZI        Director                             March 20, 1996
--------------------------------
         Robert L. Capizzi

     /s/DOUGLAS J. MACMASTER      Director                             March 20, 1996
--------------------------------
        Douglas J. MacMaster

     /s/ ALLEN MISHER             Director                             March 20, 1996
--------------------------------
        Allen Misher

     /s/ JONAH SHACKNAI           Director                             March 20, 1996
--------------------------------
        Jonah Shacknai

     /s/ BETSEY WRIGHT            Director                             March 20, 1996
--------------------------------
        Betsey Wright
</TABLE>

                                       43
<PAGE>
 
                         INDEX TO FINANCIAL STATEMENTS

<TABLE> 
<CAPTION> 
                                                                                       Page
                                                                                       ----
<S>                                                                                    <C> 
Report of Independent Auditors.....................................................    F-2
                                                                                          
Consolidated Balance Sheets at December 31, 1995 and 1994..........................    F-3
                                                                                          
Consolidated Statements of Operations for the years ended December 31,                    
 1995, 1994 and 1993 and the period May 7, 1987 (inception) through                       
 December 31, 1995.................................................................    F-4
                                                                                          
Consolidated Statements of Cash Flows for the years ended December 31,                    
 1995, 1994 and 1993 and the period May 7, 1987 (inception) through                       
 December 31, 1995.................................................................    F-5
                                                                                          
Consolidated Statement of Stockholders' Equity for the period May 7, 1987                 
 (inception) through December 31, 1995.............................................    F-6
                                                                                          
Notes to Consolidated Financial Statements.........................................    F-7 
</TABLE> 

                                      F-1
<PAGE>
 
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS


Board of Directors and Stockholders
U.S. Bioscience, Inc.

We have audited the accompanying consolidated balance sheets of U.S. Bioscience,
Inc. (a development stage enterprise) as of December 31, 1995 and 1994, and the
related consolidated statements of operations, cash flows and stockholders'
equity for each of the three years in the period ended December 31, 1995, and
for the period May 7, 1987 (inception) through December 31, 1995.  These
financial statements are the responsibility of the Company's management.  Our
responsibility is to express an opinion on these financial statements based on
our audits.

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

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of U.S.
Bioscience, Inc. (a development stage enterprise) at December 31, 1995 and 1994,
and the consolidated results of its operations and its cash flows for each of
the three years in the period ended December 31, 1995, and for the period May 7,
1987 (inception) through December 31, 1995, in conformity with generally
accepted accounting principles.



                                                               ERNST & YOUNG LLP



Philadelphia, Pennsylvania
February 16, 1996

                                      F-2
<PAGE>
                             U.S. BIOSCIENCE, INC.
                       (A Development Stage Enterprise)
                          CONSOLIDATED BALANCE SHEETS


<TABLE> 
<CAPTION> 
                                                                                DECEMBER 31, 1995     DECEMBER 31, 1994
                                                                                -----------------     -----------------
<S>                                                                             <C>                   <C>    
                                                           ASSETS                                    
Current assets:                                                                                      
   Cash and cash equivalents                                                    $     41,618,800       $    11,681,900
   Investments                                                                         3,977,400            12,746,400
   Accounts receivable, net                                                              802,500               791,600
   Interest receivable                                                                    60,000               124,100
   Inventories                                                                         2,165,100             1,857,200
   Other                                                                               6,922,200               774,300
                                                                                 ----------------       --------------- 
        TOTAL CURRENT ASSETS                                                          55,546,000            27,975,500
                                                                                                          
   Property, plant and equipment at cost, less accumulated depreciation                6,334,300             6,488,800
                                                                                 ----------------       --------------- 
        TOTAL ASSETS                                                            $     61,880,300       $    34,464,300
                                                                                 ================       ===============  
                                                                                                          
                                          LIABILITIES AND STOCKHOLDERS' EQUITY                       
Current liabilities:                                                                                      
   Accrued compensation and related payroll taxes payable                       $      1,937,600       $     1,406,600
   Accrued clinical grants payable                                                       716,300               827,400
   Accrued product manufacturing costs payable                                           384,300               732,300
   Accrued  marketing costs payable                                                      125,900               301,700
   Accrued professional fees payable                                                     393,200               636,100
   Line of credit                                                                        676,000                    --
   Current maturities of long-term debt                                                  721,300                69,600
   Accounts payable and other accrued liabilities                                      8,014,400             2,465,800
                                                                                 ----------------       --------------- 
        TOTAL CURRENT LIABILITIES                                                     12,969,000             6,439,500
                                                                                                          
Long-term liabilities:                                                                                    
   Long-term debt, net of current maturities                                           2,587,600               997,400
   Provision for litigation                                                                   --             2,300,800
   Convertible debentures                                                             16,500,000                    --
   Other long-term liabilities                                                         1,035,800               787,700
                                                                                 ----------------       --------------- 
        TOTAL LONG-TERM LIABILITIES                                                   20,123,400             4,085,900
                                                                                 ----------------       --------------- 
        TOTAL LIABILITIES                                                             33,092,400            10,525,400
                                                                                                          
Stockholders' equity:                                                                                     
   Preferred stock, $.005 par value - 5,000,000 shares authorized;                                       
     none issued                                                                              --                    --
   Common stock, $.005 par value - 100,000,000 shares authorized; 42,093,800                          
     shares issued and outstanding at December  31, 1995, and 40,770,800                            
     shares issued and outstanding at December 31, 1994                                  210,500               203,900
Additional paid-in capital                                                           133,157,700           128,323,100
Deficit accumulated during the development stage                                    (104,929,800)         (104,692,000)
Foreign currency translation adjustment                                                  349,500               103,900
                                                                                 ----------------       --------------- 
        TOTAL STOCKHOLDERS' EQUITY                                                    28,787,900            23,938,900
                                                                                                         
                                                                                 ----------------       --------------- 
        TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                              $     61,880,300       $    34,464,300
                                                                                 ================       ===============  
</TABLE> 

                                                         See accompanying notes.
                                      F-3
<PAGE>
                             U.S. BIOSCIENCE, INC.
                       ( A Development Stage Enterprise)
                     CONSOLIDATED STATEMENTS OF OPERATIONS



<TABLE> 
<CAPTION> 
                                                                 YEAR ENDED DECEMBER 31,                    PERIOD MAY 7, 1987
                                                      -------------------------------------------------  
                                                                                                              (INCEPTION)
                                                                                                                THROUGH
                                                           1995            1994               1993          DECEMBER 31, 1995
                                                           ----            ----               ----          -----------------
<S>                                                   <C>               <C>                <C>              <C> 
REVENUES:                                                                                                
    Net sales                                         $   8,724,000     $    7,209,700     $    2,360,500      $     25,153,200
    Net investment income                                 1,223,100          1,234,700          3,776,400            25,050,000
    Licensing, royalty and Other income                  21,398,000            102,000          2,066,900            25,739,300
                                                       -------------     --------------     --------------      ----------------
                                                         31,345,100          8,546,400          8,203,800            75,942,500
                                                                                                             
EXPENSES:                                                                                                    
    Cost of sales                                         2,558,500          1,694,400            625,400             6,526,400
    Selling, general and administrative costs            16,583,400         13,232,700         18,639,200            77,650,000
    Research and development costs                       12,186,000         17,607,900         19,403,800            85,163,100
    Provision for litigation                                   --                 --           10,165,000            10,165,000
    Interest expense                                        255,000             52,400               --               1,367,800
                                                        ------------      -------------      -------------      ---------------
                                                         31,582,900         32,587,400         48,833,400           180,872,300
                                                                                                             
                                                        ------------      -------------      -------------      ---------------
Net loss                                               $   (237,800)     $ (24,041,000)     $ (40,629,600)     $  (104,929,800)    
                                                        ============      =============      =============      ===============
                                                                                                        
Net loss per common share                              $      (0.01)     $       (0.60)     $       (1.03) 
                                                        ============      ==============      ============= 
                                                                                                        
Weighted average number of common shares outstanding     40,872,200         40,254,400         39,603,500  
                                                        ============      ==============      =============
</TABLE> 

                                                         See accompanying notes.
                                     F - 4
 
<PAGE>

                             U.S. BIOSCIENCE, INC.
                       ( A Development Stage Enterprise)
                     CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE> 
<CAPTION> 
                                                                                 YEAR ENDED DECEMBER 31,          PERIOD MAY 7, 1987
                                                                                 ----------------------
                                                                                                                      (INCEPTION)
                                                                                                                        THROUGH
                                                                     1995           1994              1993         DECEMBER 31, 1995
                                                               --------------  ---------------  -----------------  -----------------
<S>                                                            <C>             <C>              <C>                <C>  
Change in Cash and Cash Equivalents                                                                                     
Cash flows used in operating activities:                                                                                
  Net loss                                                     $    (237,800)  $  (24,041,000)  $    (40,629,600)  $  (104,929,800)
  Adjustments to reconcile net loss to net cash                                                                    
    used in operating activities:                                                                                  
      Depreciation                                                 1,031,300        1,015,000            802,800         3,998,200
      Compensation element of stock option grants                         --        1,330,300            906,900         5,303,400
      Unrealized (gain) / loss on investments                         (1,200)         140,600                 --           139,400
      Change in accounts receivable                                  (10,800)        (537,400)           149,200          (802,300)
      Change in interest receivable                                   64,100           55,400            717,800           (60,000)
      Change in inventories                                         (325,500)         266,900         (1,855,700)       (2,175,300)
      Change in other current assets                              (6,142,600)         278,200            254,000        (6,885,100)
      Change in current liabilities                                5,106,200       (2,199,400)         3,213,000        11,464,300
      Provision for litigation                                       (59,500)        (105,500)        10,165,000        10,000,000
      Change in other long-term liabilities                          (69,700)         130,500            536,600         1,035,700
                                                                -------------   --------------   ----------------   ---------------
         Total adjustments                                          (407,700)         374,600         14,889,600        22,018,300
                                                                -------------   --------------   ----------------   ---------------
         Net cash used in operating activities                      (645,500)     (23,666,400)       (25,740,000)      (82,911,500)
                                                                                                                   
Cash flows provided by (used in) investing activities:                                                             
      Proceeds from investments matured and sold                  25,197,200      516,460,100      1,572,826,100     3,114,404,100
      Purchase of investments                                    (16,427,100)    (481,137,300)    (1,543,985,700)   (3,118,516,000)
      Purchase of property, plant and equipment                     (516,600)      (1,281,400)        (3,641,700)       (9,834,200)
                                                                -------------   --------------   ----------------   ---------------
         Net cash provided by (used in) investing activities       8,253,500       34,041,400         25,198,700       (13,946,100)
                                                                                                                   
Cash flows provided by financing activities:                                                                       
      Proceeds from issuance of common stock and                                                                   
        private placement of securities                           18,739,100               --                 --       128,348,700
      Proceeds from exercise of stock options                        360,900          405,300            614,800         6,216,200
      Proceeds from loans                                          2,400,000          646,000                 --         3,219,100
      Proceeds from line of credit                                   676,000               --                 --           676,000
      Repayment of long-term debt                                   (214,700)              --                 --          (214,700)
                                                                -------------   --------------   ----------------   --------------- 
         Net cash provided by financing activities                21,961,300        1,051,300            614,800       138,245,300
                                                                                                                   
Foreign currency translation adjustment                              367,600           96,700            (60,100)          231,100
                                                                -------------   --------------   ----------------   ---------------
Net increase in cash and cash equivalents                         29,936,900       11,523,000             13,400        41,618,800
Cash and cash equivalents-beginning of period                     11,681,900          158,900            145,500                --
                                                                -------------   --------------   ----------------   ---------------
Cash and cash equivalents-end of period                        $  41,618,800   $   11,681,900   $        158,900   $    41,618,800
                                                                =============   ==============   ================   ===============
Supplemental cash flow disclosure:                                                                                  
      Interest paid to affiliate                               $          --   $           --   $             --   $     1,005,800
</TABLE>

                                                         See accompanying notes.
                                      F-5
<PAGE>
                             U.S. BIOSCIENCE, INC.
                       ( A Development Stage Enterprise)
                CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
       FOR THE PERIOD MAY 7, 1987 (INCEPTION) THROUGH DECEMBER 31, 1995
                         
<TABLE> 
<CAPTION> 
                                                            COMMON STOCK              CLASS B STOCK           ADDITIONAL   
                                                            ------------              -------------           
                                                       NUMBER OF                  NUMBER OF                    PAID-IN     
                                                         SHARES        AMOUNT       SHARES       AMOUNT        CAPITAL     
                                                      ------------   ----------  ------------  ----------   -------------- 
<S>                                                   <C>           <C>          <C>          <C>          <C> 
Issuance of shares for initial cash contribution                                                                           
 of capital ($.005 per share of common stock                                                                              
 and $.005 per share of Class B stock)                  9,000,000   $   45,000     1,000,000  $    5,000   $    1,000,000  
   Net loss for the period May 7, 1987 (inception)                                                                         
      through December 31, 1987                              --            --           --          --               --    
                                                      ------------   ----------  ------------  ----------   -------------- 
Balance at December 31, 1987                            9,000,000       45,000     1,000,000       5,000        1,000,000  
   Net loss for the year ended December 31, 1988             --            --           --          --               --    
                                                      ------------   ----------  ------------  ----------   -------------- 
Balance at December 31, 1988                            9,000,000       45,000     1,000,000       5,000        1,000,000  
   Proceeds from exercise of stock options                  2,500          --           --          --                400  
   Compensation related to stock options                     --            --           --          --            305,900  
   Issuance of shares ($6.00 per share, less costs      2,500,000       12,500          --          --         14,061,400  
   Conversion of class B stock to common stock          1,000,000        5,000    (1,000,000)     (5,000)            --    
   Net loss for the year ended December 31, 1989             --            --           --          --               --    
                                                      ------------   ----------  ------------  ----------   -------------- 
Balance at December 31, 1989                           12,502,500       62,500          --          --         15,367,700  
   Proceeds from exercise of stock options                285,800        1,400          --          --            143,500  
   Compensation related to stock options                     --            --           --          --            269,000  
   Issuance of shares ($9.00 per share, less costs      4,025,000       20,200          --          --         33,009,700  
   Net loss for the year ended December 31, 1990             --            --           --          --               --    
                                                      ------------   ----------  ------------  ----------   -------------- 
Balance at December 31, 1990                           16,813,300       84,100          --          --         48,789,900  
   Proceeds from exercise of stock options                500,700        2,500          --          --          3,349,600  
   Compensation related to stock options                     --            --           --          --          1,038,900  
   Issuance of shares ($28.50 per share, less cost      2,300,000       11,500          --          --         61,444,300  
   Issuance of shares for a 2 for 1 stock dividend     19,614,000       98,000          --          --            (98,000) 
   Net loss for the year ended December 31, 1991             --            --           --          --               --    
                                                      ------------   ----------  ------------  ----------   -------------- 
Balance at December 31, 1991                           39,228,000      196,100          --          --        114,524,700   
   Proceeds from exercise of stock options                264,400        1,400          --          --          1,336,400  
   Compensation related to stock options                     --            --           --          --          1,452,400  
   Net loss for the year ended December 31, 1992             --            --           --          --               --    
                                                      ------------   ----------  ------------  ----------   -------------- 
Balance at December 31, 1992                           39,228,000      197,500          --          --        117,313,500   
   Proceeds from exercise of stock options                106,500          500          --          --            614,300  
   Compensation related to stock options                     --            --           --          --            906,900  
   Net loss for the year ended December 31, 1993             --            --           --          --               --    
   Foreign currency translation adjustment                   --            --           --          --               --    
                                                      ------------   ----------  ------------  ----------   -------------- 
Balance at December 31, 1993                           39,492,400      198,000          --          --        118,834,700   
   Proceeds from exercise of stock options                 75,300          400          --          --            404,900  
   Class Action Settlement                              1,096,600        5,500          --          --          7,753,200  
   Compensation related to stock options                     --            --           --          --          1,330,300  
   Net loss for the year ended December 31, 1994             --            --           --          --               --    
   Foreign currency translation adjustment                   --            --           --          --               --    
                                                      ------------   ----------  ------------  ----------   -------------- 
Balance at December 31, 1994                           40,770,800      203,900          --          --        128,323,100  
   Proceeds from exercise of stock options                202,900        1,000          --          --            359,900  
   Class Action Settlement                                   --            --           --          --          2,241,200  
   Proceeds from private placement of securities        1,120,100        5,600          --          --          2,233,500  
   Net loss for the year ended  December 31, 1995            --            --           --          --               --    
   Foreign currency translation adjustment                   --            --           --          --               --    
                                                      ------------   ----------  ------------  ----------   -------------- 
Balance at December 31, 1995                           42,093,800   $  210,500          --    $     --     $  133,157,700  
                                                      ============   ==========  ============  ==========   ============== 
<CAPTION> 
                                                                                                
                                                                                         TOTAL             
                                                           ACCUM-                        STOCK-       
                                                          ULATED           OTHER        HOLDERS'       
                                                          DEFICIT          EQUITY        EQUITY        
                                                       --------------    -----------   --------------  
<S>                                                   <C>               <C>           <C>    
Issuance of shares for initial cash contribution     
 of capital ($.005 per share of common stock         
 and $.005 per share of Class B stock)                $         --      $      --     $    1,050,000
   Net loss for the period May 7, 1987 (inception)                                                    
      through December 31, 1987                           (1,030,500)          --         (1,030,500)  
                                                       --------------    -----------   --------------  
Balance at December 31, 1987                              (1,030,500)          --             19,500   
   Net loss for the year ended December 31, 1988          (1,556,800)          --         (1,556,800)  
                                                       --------------    -----------   --------------  
Balance at December 31, 1988                              (2,587,300)          --         (1,537,300)  
   Proceeds from exercise of stock options                      --             --                400   
   Compensation related to stock options                        --             --            305,900      
   Issuance of shares ($6.00 per share, less costs              --             --         14,073,900   
   Conversion of class B stock to common stock                  --             --               --     
   Net loss for the year ended December 31, 1989          (5,743,300)          --         (5,473,300)  
                                                       --------------    -----------   --------------  
Balance at December 31, 1989                              (8,330,600)          --          7,099,600   
   Proceeds from exercise of stock options                      --             --            144,900   
   Compensation related to stock options                        --             --            269,000   
   Issuance of shares ($9.00 per share, less costs              --             --         33,029,900   
   Net loss for the year ended December 31, 1990          (4,924,900)          --         (4,924,900)  
                                                       --------------    -----------   --------------  
Balance at December 31, 1990                             (13,255,500)          --         35,618,500   
   Proceeds from exercise of stock options                      --             --          3,352,100   
   Compensation related to stock options                        --             --          1,038,900   
   Issuance of shares ($28.50 per share, less cost              --             --         61,455,800   
   Issuance of shares for a 2 for 1 stock dividend              --             --               --     
   Net loss for the year ended December 31, 1991          (6,540,100)          --         (6,540,100)  
                                                       --------------    -----------   --------------  
Balance at December 31, 1991                             (19,795,600)          --         94,925,200   
   Proceeds from exercise of stock options                      --             --          1,337,800   
   Compensation related to stock options                        --             --          1,452,400   
   Net loss for the year ended December 31, 1992         (20,225,800)          --        (20,225,800)  
                                                       --------------    -----------   --------------  
Balance at December 31, 1992                             (40,021,400)          --         77,489,600
   Proceeds from exercise of stock options                      --             --            614,800    
   Compensation related to stock options                        --             --            906,900   
   Net loss for the year ended December 31, 1993         (40,629,600)          --        (40,629,600)  
   Foreign currency translation adjustment                      --         (291,800)        (291,800)   
                                                       --------------    -----------   --------------   
Balance at December 31, 1993                             (80,651,000)      (291,800)      38,089,900    
   Proceeds from exercise of stock options                      --             --            405,300   
   Class Action Settlement                                      --             --          7,758,700   
   Compensation related to stock options                        --             ---         1,330,300      
   Net loss for the year ended December 31, 1994         (24,041,000)          --        (24,041,000)      
   Foreign currency translation adjustment                      --          395,700          395,700       
                                                       --------------    -----------   --------------    
Balance at December 31, 1994                            (104,692,000)       103,900       23,938,900     
   Proceeds from exercise of stock options                      --             --            360,900     
   Class Action Settlement                                      --             --          2,241,200     
   Proceeds from private placement of securities                --             --          2,239,100     
   Net loss for the year ended  December 31, 1995           (237,800)          --           (237,800)    
   Foreign currency translation adjustment                      --          245,600          245,600     
                                                       --------------    -----------   --------------    
Balance at December 31, 1995                         $ (104,929,800)   $   349,500   $    28,787,900     
                                                       ==============    ===========   ==============    
</TABLE> 

                                                         See accompanying notes.
                                     F - 6
<PAGE>
 
                             U.S. BIOSCIENCE, INC.
                       (A DEVELOPMENT STAGE ENTERPRISE)

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                               DECEMBER 31, 1995


1.   ORGANIZATION

     U.S. Bioscience, Inc. (the "company"), was incorporated in the State of
Delaware on May 7, 1987.  Following the initial issuance of its shares in August
1987, the company was 80% owned by U.S. Healthcare, Inc. ("USHC").  In October
1987, USHC paid a special dividend to its stockholders in the form of the
company's common stock.  USHC distributed 46% of the company's common stock and
retained a 34% equity interest in the company.  In August 1992, USHC distributed
its remaining shares in the company to USHC shareholders as a dividend.

     The company entered into an agreement with Marion Laboratories, Inc.
("Marion"), in September 1989 pursuant to which Marion purchased 2,500,000
shares of newly issued U.S. Bioscience common stock (5,000,000 post-split)
pursuant to a Stock Purchase Agreement for a total investment of $15,000,000;
net proceeds to the company, after related costs, were $14,073,900.  By January
1996, Marion had sold its entire holding of U.S. Bioscience common stock.

     In February 1990, the company completed a public offering of 4,025,000
shares of common stock (8,050,000 post-split), realizing net proceeds of
$33,029,900.  In May 1991, the company completed a second public offering of
2,300,000 shares of common stock (4,600,000 post-split), realizing net proceeds
of $61,455,800.

     In December 1995, the company consummated a private placement of securities
pursuant to which it sold a total of 1,120,112 shares of common stock for an
aggregate price of $3.5 million and issued $16.5 million in three year, 4%
unsecured convertible debentures for an aggregate price of $16.5 million, for a
total financing of $20 million (excluding related fees and expenses).  Net
proceeds realized by the company in this private placement were $18,739,100.

     The company established in 1993 two wholly-owned operating subsidiaries;
USB Pharma B.V. incorporated in The Netherlands and USB Pharma Limited
incorporated in the United Kingdom. USB Pharma B.V. operates the company's
manufacturing plant located in Nijmegen, The Netherlands, and USB Pharma Limited
manages the company's European clinical research activities.

     The company is a pharmaceutical company specializing in the development and
commercialization of products for patients with cancer and allied diseases.  For
accounting purposes, the company is considered a "development stage enterprise."
Through December 31, 1995, the company's revenues have been derived principally
from investment income, from the sale of drug products, Hexalen(R) and
NeuTrexin(R), licensing of rights to develop and market certain products, and
from contract development activities.  Expenses incurred have been primarily for
the development of its drugs and related therapies, marketing and sales
activities and corporate organizational and administrative activities.

                                      F-7
<PAGE>
 
                             U.S. BIOSCIENCE, INC.
                       (A DEVELOPMENT STAGE ENTERPRISE)

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)



2.   SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation

     The consolidated financial statements include the accounts of U.S.
Bioscience, Inc. and its wholly owned subsidiaries. All significant intercompany
accounts and transactions are eliminated in consolidation.

Use of Estimates

     The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.

Cash and Cash Equivalents

     The company generally classifies as cash equivalents all highly liquid
instruments with a maturity of three months or less at the time of purchase.

Investments

     Effective January 1, 1994, the company adopted the Statement of Financial
Accounting Standard No. 115, "Accounting for Certain Investments in Debt and
Equity Securities". Under this standard management determines the appropriate
classifications of debt securities at the time of purchase and reevaluates such
designation as of each balance sheet date. The investments held by the company
at December 31, 1995 and 1994 were classified as available for sale, with the
unrealized gains and losses reported as a separate component of stockholders'
equity. At December 31, 1995, the fair value approximated cost and accordingly
there was no adjustment to stockholders' equity. At December 31, 1994, the
decline in fair value of these securities was, in the opinion of management,
believed to be other than temporary, and the unrealized loss of $140,600 was
included in investment income rather than being recorded as a separate component
of stockholders' equity.

Inventories

     Inventories are stated at the lower of cost (first-in, first-out) or fair
value.

Property, Plant and Equipment

     Buildings, furniture, equipment and leasehold improvements are stated at
cost less accumulated depreciation and amortization.  Buildings, furniture and
equipment are depreciated by the straight-line method over their useful lives
for financial reporting purposes and under an accelerated method for federal
income tax purposes.  Leasehold improvements are depreciated by the straight-
line method over the shorter of their useful lives or the life of the lease for
financial reporting purposes and under an accelerated method for federal income
tax purposes.

                                      F-8
<PAGE>
 
                             U.S. BIOSCIENCE, INC.
                       (A DEVELOPMENT STAGE ENTERPRISE)

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)



Product Revenues

     Product revenues are recognized upon shipment of inventory to the customer.
Most of the company's product revenues to date have been domestic sales of drug
products Hexalen and NeuTrexin primarily to drug wholesalers in the United
States.


Research and Development Costs

     For financial reporting purposes, all costs of research and development
activities are expensed as incurred.


Patents and Trademarks

     It is the company's practice to seek patent and trademark protection on
processes and products in various countries.  Patent and trademark application
costs are expensed as incurred.


Income Taxes

     Income taxes have been provided using the liability method in accordance
with FASB Statement No. 109, "Accounting for Income Taxes".


Foreign Currency Translation

     The financial statements of foreign subsidiaries have been translated into
U.S. dollars in accordance with FASB Statement No. 52, "Foreign Currency
Translation."  All balance sheet accounts have been translated using exchange
rates in effect at the balance sheet date.  Income statement amounts have been
translated using monthly average exchange rates for the year.  The gains and
losses resulting from the changes in exchange rates from year to year have been
reported separately as a component of stockholders' equity.


Net Loss per Share

     Net loss per share is calculated based on the weighted average number of
common shares outstanding.  Stock options outstanding and the effect of the
convertible debentures have not been included in the net loss per share
calculation since their effect would be antidilutive.

                                      F-9
<PAGE>
 
                             U.S. BIOSCIENCE, INC.
                       (A DEVELOPMENT STAGE ENTERPRISE)

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)



Impact of Recently Issued Accounting Pronouncements

     In March 1995, the FASB issued Statement No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of",
which requires impairment losses to be recorded on long-lived assets used in
operations when indicators of impairment are present and the undiscounted cash
flows estimated to be generated by those assets are less than the assets
carrying amount.  Statement No. 121 also addresses the accounting for long-lived
assets that are expected to be disposed of.  The company will adopt Statement
No. 121 in the first quarter of 1996 and, based on current circumstances, does
not believe the effect of the adoption will be material.

     Statement of Financial Accounting Standard No. 123, "Accounting for Stock
Based Compensation", is effective for fiscal years beginning after December 15,
1995.  Statement No. 123 provides companies with a choice to follow the
provisions of Statement No. 123 in determination of stock-based compensation
expense or to continue with the provisions of APB 25, "Accounting for Stock
Issued to Employees."  The company will continue to follow APB 25 and will
provide proforma disclosures as required by Statement No. 123 in the December
31, 1996 notes to the consolidated financial statements.

3.   INVESTMENTS

     Investments are comprised of the following:

<TABLE>
<CAPTION>
 
 
   
                                                                    Fair Value
               Name of Issuer              Principal    Amortized   at Balance
              and Title of Each             Amount        Cost      Sheet Date
     ---------------------------------------------------------------------------
      <S>                                 <C>          <C>          <C>
      DECEMBER 31, 1995

       U.S. Government obligations
        Treasury Bills............        $   974,400  $   974,400  $   974,400

        Corporate Bonds...........          3,002,600    3,001,200    3,003,000
                                            ---------    ---------    ---------
         Total....................        $ 3,977,000  $ 3,975,600  $ 3,977,400
                                          ===========  ===========  ===========
      DECEMBER 31, 1994
    
         Corporate Bonds..........      
                                          $12,886,000  $12,887,000  $12,746,400
                                          ===========  ===========  ===========
</TABLE>

The investments held at December 31, 1995 will mature during 1996.

                                     F-10
<PAGE>
 
                             U.S. BIOSCIENCE, INC.
                       (A DEVELOPMENT STAGE ENTERPRISE)

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

4.   INVENTORIES

     Inventory balances at December 31, are as follows:

<TABLE>
<CAPTION>
                                              1995            1994
                                              ----            ----
               <S>                        <C>              <C>
               Raw material               $  813,300       $   38,100
               Work in process               893,000        1,597,100
               Finished goods                458,800          222,000
                                             -------        ---------
               Total
                                          $2,165,100       $1,857,200
                                          ==========       ==========
</TABLE> 

 
5.   PROPERTY, PLANT AND EQUIPMENT
 
     Property, plant and equipment balances at December 31, are as follows:

<TABLE> 
<CAPTION> 
                                                           1995         1994
                                                           ----         ----
          <S>                                           <C>          <C>     
          Land, buildings, and leasehold improvements   $2,106,500   $2,026,900
          Equipment, furniture and fixtures              8,173,500    7,428,800
          Accumulated depreciation                      (3,945,700)  (2,966,900)
                                                        -----------  -----------
          Property, plant and equipment, net
                                                        $6,334,300   $6,488,800
                                                        ==========   ==========
</TABLE>


6.   LONG-TERM DEBT


     Long-term debt at December 31, consisted of:

<TABLE>
<CAPTION>
                                                  1995                1994
                                              -------------       -------------
       <S>                                    <C>                 <C>
       MELF Equipment Loan                      $323,600            $387,300
       Mortgage Loan                             685,300             679,700
       Term Loan                               2,300,000                 ---
       Convertible Debentures                 16,500,000                 ---
                                              ----------           ---------
                                             $19,808,900          $1,067,000
       Less Current Portion                      721,300              69,600
                                              ----------           ---------
       Long-Term Debt                        $19,087,600            $997,400
                                             ===========            ========
</TABLE>


     Maturities of long-term debt for each of the five years succeeding December
31, 1995 are; 1996--$721,300; 1997--$722,800; 1998--$17,224,300; 1999--$625,800;
and 2000--$82,400.

                                     F-11
<PAGE>
 
                             U.S. BIOSCIENCE, INC.
                       (A DEVELOPMENT STAGE ENTERPRISE)

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)


     In April 1993, the company received $500,000 from the Commonwealth of
Pennsylvania Machinery and Equipment Loan Fund Program (MELF), which provides
financing for companies expanding employment in the Commonwealth.  Proceeds of
this loan were used to purchase laboratory equipment for the company's
analytical laboratory located in Exton, Pennsylvania.  The loan will amortize
over a seven-year term and bears interest at a rate of 2% per annum.

     In May 1994, USB Pharma B.V., entered into a mortgage loan with
Cooperatieve Rabobank B.A. in the amount of Dutch Guilders 1,180,000
(approximately $680,000) secured by the land and buildings of its manufacturing
facility in Nijmegen, The Netherlands and guaranteed by U.S. Bioscience, Inc.
Proceeds of this loan were used to partly fund the purchase of additional
equipment for the company's manufacturing facility in The Netherlands.  The
mortgage loan has a 15 year term, requires quarterly Dutch Guilder installments
of principal repayment which began in March 1995 and bears a quarterly variable
interest rate.  Interest is payable quarterly in Dutch Guilders and the current
interest rate is 6.55%.

     In June 1995, the company received a term loan from its principal bank in
the amount of $2,400,000.  This loan will amortize monthly over four years,
bears an annual interest rate of 6.86% and is collateralized by a portion of the
company's investment portfolio.

     In December 1995, the company issued a $20 million private placement of
securities which consisted of 1,120,112 common shares issued for an aggregate
price of $3.5 million and $16.5 million in unsecured convertible debentures
("Debentures").  The Debentures mature on December 6, 1998 and bear interest at
the rate of 4% per annum.  One-third of the $16.5 million principal amount of
the Debentures became convertible into shares of the company's common stock on
February 6, 1996, another one-third of the principal amount became convertible
March 7, 1996 and the final one-third became convertible March 27, 1996.  On
February 12, 1996, the investors who purchased the Debentures, converted the
initial one-third of principal ($5.5 million) into 1,134,403 shares of the
company's Common Stock.  The shares issued in this conversion also included
6,848 shares in payment of accrued interest on the converted principal.  The
conversion price is 82.5% of the average market price for the Common Stock for
the five consecutive trading days ending one trading day prior to the date that
the conversion notice is received by the company.  The company has the right to
prepay the Debentures upon payment of a 21.21% premium.  The company also has
the right to require the conversion of the Debentures, which right the company
can exercise at any time or from time to time on or after March 27, 1996.  The
net proceeds of $18,739,100 were added to the company's working capital.

7.   LINE OF CREDIT

     In June 1995, the company established a $1,000,000 credit line with an
international financial institution.  This line of credit is denominated in
Dutch Guilders, currently bears an annual interest rate of 5.06% and is utilized
by the company's subsidiary, USB Pharma B.V., for funding working capital
requirements.  As of December 31, 1995 approximately $676,000 of this credit
line has been utilized.  The credit line is guaranteed by U.S. Bioscience, Inc.
and collateralized by a portion of the company's investment portfolio.

                                     F-12
<PAGE>
 
                             U.S. BIOSCIENCE, INC.
                        (A DEVELOPMENT STAGE ENTERPRISE)

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)


8.   COMMITMENTS

     The company leases office and laboratory space under three operating
leases, the last of which expires in June 1999.  Future minimum annual lease
payments total $2,016,700 and are as follows:  1996 -- $680,500; 1997 --
$731,400; 1998 -- $567,300 and $37,500 in 1999.  Rent expense for the year ended
December 31, 1995 was $989,800; 1994-- $1,187,700; 1993 -- $1,175,400; and May
7, 1987 (inception) through December 31, 1995 was $5,621,300.  As part of the
company's January 1995 internal restructuring, the company reduced its office
space in the company's principal office in West Conshohocken, Pennsylvania from
38,000 sq. ft. to approximately 26,400 sq. ft. The lease on the company's
principal office expires in October 1998.

     The company has entered into various license agreements with unrelated
parties which provide the company with rights to develop, produce and market
drugs and related therapies which the company believes demonstrate effectiveness
in the treatment of cancer and allied diseases.  The agreements allow the
company to use certain knowledge and patent rights of the licensors.  Terms of
the agreements require the company to pay percentage fees and royalties of
varying amounts based upon defined future net sales, if any, and in general,
variable percentages of any royalty income received from foreign licensees.
Some of the agreements also require minimum annual payments and the payment of
lump sums upon the achievement of certain milestones in the clinical development
of the chemical compound.  For the years ended December 31 listed below, the
company has incurred sales related royalty expense as follows:

<TABLE>
<CAPTION> 
                                            Royalty          
                                  Year      Expense 
                                  ----      -------
                         <S>               <C> 
                         Prior to 1993     $135,400
                                  1993       48,200
                                  1994      260,300
                                  1995      328,800
                                           --------
                                  Total    $772,700
                                           ======== 
</TABLE>


     As of December 31, 1995, the company had contracted and continues to
contract with third parties to serve as clinical investigators of certain
investigational drugs through terms, in general, expiring in 1996 and 1997.  The
clinical investigators are compensated on a completed-case basis, subject to
compliance with the agreements.  As of December 31, 1995, the clinical
investigator agreements, in the aggregate, provide for minimum payments of
approximately $1,877,000 over the terms of the agreements, of which
approximately $1,206,000 had been paid to date.

                                     F-13
<PAGE>
 
                             U.S. BIOSCIENCE, INC.
                       (A DEVELOPMENT STAGE ENTERPRISE)

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)



9.   MAJOR DISTRIBUTION AND MARKETING AGREEMENTS

     The company has entered into an exclusive marketing and distribution
agreement with ALZA Corporation ("ALZA") for Ethyol(R) in the United States.
Under the terms of the Agreement, ALZA has exclusive rights to market Ethyol in
the United States for five years and will be responsible for sales and
marketing; the company's sales force will co-promote the product with ALZA.
After the five-year period, which ALZA has an option to extend for one year,
marketing rights to Ethyol revert to the company, and ALZA will receive payments
from the company for ten years based on sales of Ethyol in the United States.
ALZA paid the company $14 million in December 1995 and $6 million in January
1996 as initial fees for the right noted above.  The company recorded as income
the entire initial $20 million fee in the fourth quarter of 1995.  The $6
million January payment was reflected in "Other Current Assets" in the December
31, 1995 consolidated balance sheet.  The company also accrued, in the fourth
quarter of 1995, a one-time $2.0 million charge related to Ethyol U.S. launch
expenses as part of the company's co-promotion arrangement with ALZA.  This
accrual was reflected in "Other Accrued Liabilities" in the December 31, 1995
consolidated balance sheet.

     The company has entered into an exclusive  marketing and distribution
agreement with Scherico Ltd., ("Scherico") a subsidiary of Schering Plough
Corporation, for Ethyol in the countries comprising the EU and EFTA (the
"European Territories").  Under the terms of its Agreement with Scherico, the
company will share in operating profits/losses (as defined in the Agreement)
generated from marketing and sales of Ethyol in Germany, United Kingdom, Spain,
Italy and France (the "Major Markets") for a period of up to two years from
November 23, 1994, the date of approval of Ethyol in the United Kingdom.  The
company's exposure to operating losses, if any, generated from the Major Markets
is limited to an amount set forth in the operating plans.  With respect to 1995,
Scherico has invoiced the company approximately $4.2 million for the company's
share of operating losses.  This amount was recorded as an expense in 1995 and
reflected as "Other Accrued Liabilities" in the December 31, 1995 consolidated
balance sheet.

     With respect to 1996, the company's limit on operating losses under the
terms of its Agreement with Scherico, as determined by the 1996 operating plan,
is approximately $1.7 million.  The company will share in operating profits, if
any, generated from sales of Ethyol in the other countries in the European
Territories outside the Major Markets in which Ethyol is launched by Scherico,
but is not exposed to operating losses, if any, generated in such countries.

     Under the terms of the Agreement, Scherico's exclusive rights to market the
product will continue for five years from November 23, 1996.  During such five
year period the company will share in operating profits but will not share in
operating losses that might be generated.   The company will co-promote Ethyol
with Scherico for the two years following such five year period.  Thereafter,
the company will reacquire sole marketing rights.  Under certain circumstances
Scherico is required to pay the company milestone payments as regulatory and
pricing approvals, if any, are obtained.  There can be no assurance that
milestone payments will be made to the company under the Agreement.

                                     F-14
<PAGE>
 
                             U.S. BIOSCIENCE, INC.
                       (A DEVELOPMENT STAGE ENTERPRISE)

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

After reacquiring sole marketing rights, the company will pay Scherico a portion
of its Ethyol operating profits, if any, from the European Territory for a
period of three years.  The company will supply Ethyol to Scherico throughout
the term of the agreement.  In addition, under the terms of the agreement,
Scherico is to assist the company in establishing its own commercial
organization in Europe.  The contract provides that Scherico may terminate the
agreement at any time by providing 180 days written notice to the company of its
desire to terminate the agreement.  There can be no assurance that the agreement
will not be terminated by Scherico.  There can be no assurance that the
marketing of Ethyol in the European Territories will result in meaningful
revenues to the company.


10.  COMMON STOCK

     Voting rights of common stock are one vote per share and voting rights of
the Class B stock were fifty votes per share, respectively.  In connection with
Marion's purchase of common stock, all outstanding Class B stock was converted
into common stock on a share-for-share basis in September 1989.  The
authorization of the Class B stock was eliminated in February 1990.

     In December 1991, the Board of Directors, by unanimous vote, authorized a
100% common stock dividend on the outstanding shares of common stock.  The
company issued 19,614,000 shares of common stock in paying this stock dividend.

     In May 1992, the company's Certificate of Incorporation was amended to
increase the number of authorized shares of common stock of the company from
50,000,000 shares to 100,000,000 shares.  Adoption of this amendment permits the
company's Board of Directors, without further approval of the company's
stockholders, except as may be required by Delaware law or the rules of the
American Stock Exchange, to issue additional shares of the company's common
stock, from time to time as the Board of Directors may determine, for such
consideration as the Board of Directors establishes.  The availability of
additional shares of common stock restores stock previously issued in the stock
dividend described above and provides flexibility in structuring possible
acquisitions of other businesses, enables the company to raise additional equity
capital if and when needed and allows the Board of Directors, in its discretion,
to declare stock splits or stock dividends in the future.  The company has no
present definitive plans, arrangements or understandings, other than shares to
be issued pursuant to: (1) the exercise of stock options pursuant to the
company's stock option plans, (2) the exercise of the 1,096,500 warrants
currently outstanding which were issued in 1995 under a class-action litigation
settlement and (3) the conversion of the three year 4% unsecured convertible
debentures issued pursuant to the December 1995 private placement and payment of
interest thereon, with respect to possible acquisitions, financings, stock
splits or dividends requiring the availability of additional authorized common
stock.

     In April 1995, the company, as part of a class action litigation
settlement, issued 1,096,634 warrants to purchase from the company one share of
U.S. Bioscience common stock for each warrant.  The warrants are exercisable for
three years from date of issuance, April 24, 1995, at an exercise price of
$9.20. Upon issuance of the warrants, the company transferred to stockholders'
equity $2,241,200 representing the remainder of a $10,165,000 litigation
provision established in 1993 to provide for the cost of these warrants. During
1994, $7,758,700 of the provision was transferred to stockholders' equity upon
issuance into escrow of a common stock component of the settlement.

                                     F-15
<PAGE>
 
                             U.S. BIOSCIENCE, INC.
                       (A DEVELOPMENT STAGE ENTERPRISE)

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)



     In May 1995, the company adopted a Preferred Stock Purchase Rights Plan
(the "Rights Plan") designed to protect company stockholders in the event of
takeover actions that would deny them the full value of their investment.  The
Rights Plan provided for a dividend distribution of one right for each share of
the company's Common Stock to holders of record at the close of business on May
29, 1995.  The rights will become exercisable only in the event, with certain
exceptions, a person or group of related persons accumulates 15 percent or more
of the company's voting stock.  The rights will expire on May 29, 2005.  Each
right will entitle the holder to buy one one-hundredth of a share of a new
series of preferred stock at a price of $15.  In addition, upon the occurrence
of certain events, holders of the rights will be entitled to purchase either
company stock or shares in an "acquiring entity" at half the market value.  The
company generally will be entitled to redeem the rights at one-tenth of one cent
($0.001) per right at any time until the tenth day following  the acquisition by
any person or group of related persons of 15 percent or more of the company's
outstanding voting stock.  The rights automatically trade with the underlying
common stock.

     At December 31, 1995, 6,670,500 shares of common stock were reserved for
issuance pursuant to company stock option plans, 1,096,500 shares of common
stock were reserved for issuance pursuant to the exercise of outstanding
warrants and 7,022,500 shares of common stock were reserved for issuance
pursuant to the conversion of, and payment of interest on the three year, 4%
unsecured convertible debentures.


11.  STOCK OPTION PLANS

     The company had adopted various stock option plans, primarily as incentives
for recipients to remain affiliated with the company, as continued affiliation
is a condition of exercise for all option plans.  Except for a limited number of
option grants where the ability to exercise is based upon the achievement of
benchmarks, options outstanding under the option plans are exercisable at rates
from 20% to 33 1/3% per year, generally beginning one year from date of grant.
With the exception of options granted to certain consultants and advisors to the
company, all options expire 10 years from date of grant.  The Non-Executive
Stock Option plan was established in 1994 to allow management to provide option
incentives to employees who are not Directors or Officers as defined in
Securities and Exchange Commission Regulation 16(b).  1,000,000 options were
authorized under this plan.  Additionally, the number of authorized options
under the 1992 Stock Option Plan was increased by 1,500,000.  No further options
may be granted under any option plan other than the 1992 Stock Option Plan and
the Non-Executive Stock Option Plan.

                                     F-16
<PAGE>
 
                             U.S. BIOSCIENCE, INC.
                       (A DEVELOPMENT STAGE ENTERPRISE)

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)


Detail information concerning all stock option plans is as follows:

<TABLE>
<CAPTION>
                                  1987          1987            1987           1990          1991           1992      NON-EXECUTIVE 
                               INCENTIVE    NON-STATUTORY      SPECIAL        SPECIAL       SPECIAL         STOCK     STOCK OPTION  
                              STOCK OPTION  STOCK OPTION    NON-STATUTORY    DIRECTORS   NON-STATUTORY     OPTION         PLAN      
                                  PLAN          PLAN        STOCK OPTION       STOCK     STOCK OPTION       PLAN                    
                                                                PLAN          OPTION         PLAN                                   
                                                                               PLAN                                                 
                            ------------------------------------------------------------------------------------------------------- 
<S>                           <C>           <C>             <C>              <C>         <C>              <C>         <C>  
OPTIONS AUTHORIZED.........    2,000,000      2,000,000       1,000,000       500,000      2,000,000      3,500,000     1,000,000   
                            ======================================================================================================= 

OPTIONS OUTSTANDING              
 DECEMBER 31, 1992.........      881,300      1,625,600         279,800        80,000      1,438,600        683,000             0

GRANTED....................            0              0               0             0              0      1,264,300            -- 
EXERCISED..................      (37,500)             0         (57,000)            0        (10,000)        (2,000)           -- 
CANCELED...................     (189,300)      (128,300)        (42,800)            0       (393,900)      (200,600)           -- 
                            ------------------------------------------------------------------------------------------------------- 

OPTIONS OUTSTANDING              
 DECEMBER 31, 1993.........      654,500      1,497,300         180,000        80,000      1,034,700      1,744,700             0

GRANTED....................            0              0               0             0              0        746,500       161,600 
EXERCISED..................      (28,700)             0          (5,900)      (20,000)             0        (20,700)            0 
CANCELED...................      (78,500)             0         (71,400)            0       (126,100)      (271,300)       (5,000)
                            ------------------------------------------------------------------------------------------------------- 

OPTIONS OUTSTANDING              
 DECEMBER 31, 1994.........      547,300      1,497,300         102,700        60,000        908,600      2,199,200       156,600

GRANTED....................            0              0               0             0              0        246,000       676,800 
EXERCISED..................      (23,300)       (40,000)              0             0        (29,600)       (91,200)     (18,700)
CANCELED...................     (123,200)      (288,800)         (5,600)      (60,000)      (242,300)      (440,800)     (78,300)
                            -------------------------------------------------------------------------------------------------------
OPTIONS OUTSTANDING              400,800      1,168,500          97,100             0        636,700      1,913,200      736,400 
 DECEMBER 31, 1995.........                                                                                                         
                            =======================================================================================================
</TABLE>

 A summary of stock option prices and exercisable shares is as follows:

<TABLE>
<CAPTION>
                                              TOTAL ACTIVITY       OPTION PRICE        SHARES        
                                                 ALL PLANS          PER SHARE        EXERCISABLE   
                                                 (Shares)          (LOW - HIGH)      AT YEAR-END   
                                             ----------------   ----------------   -------------   
     <S>                                     <C>                <C>                <C> 
     Options Outstanding December 31, 1992        4,988,300      $0.08 - $18.10       808,100      
                                                                                                   
     Granted................................      1,264,300        7.13 - 11.00            --      
     Exercised..............................       (106,500)       6.63 - 11.25            --      
     Canceled...............................       (954,900)       0.08 - 16.66            --      
                                                   ---------                                       
                                                                                                   
     Options Outstanding December 31, 1993         5,191,200       0.08 - 18.10     1,571,200      
                                                                                                   
     Granted................................                                                       
     Exercised..............................         908,100       0.08 -  8.25            --      
     Canceled...............................         (75,300)      0.08 -  7.88            --      
                                                    (552,300)      0.08 - 13.90            --                        
                                                    ---------                                      
                                                                                                   
     Options Outstanding December 31, 1994         5,471,700       0.08 - 18.10     2,290,600                                   
                                                                                                   
     Granted................................         922,800       2.31 -  5.13             -      
     Exercised..............................        (202,800)      0.08 -  2.44             -      
     Canceled...............................      (1,239,000)     2.44 -  15.10             -      
                                                  ----------                                       
                                                                                                   
     Options outstanding December 31, 1995         4,952,700     $2.31 - $15.10     2,361,700       
                                                  ==========    
</TABLE>

Option shares listed on the two preceding tables are recorded after giving
effect to a 2-for-1 stock split paid in the form of a 100% common stock dividend
to common stockholders paid in January 1992.

                                     F-17
<PAGE>
 
                             U.S. BIOSCIENCE, INC.
                       (A DEVELOPMENT STAGE ENTERPRISE)

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)



All outstanding options issued to the company's employees which had an exercise
price greater than $2.44 per share were amended on February 21, 1995 to change
the option price to $2.44 per share which is the closing price of the company's
Common Stock on the American Stock Exchange on February 21, 1995.

Generally, the exercise price of options granted is equal to the fair market
value of the underlying share of common stock at the time of grant.  Options for
which the exercise price is less than the fair market value at the time of grant
are considered compensatory and the difference in value is charged to operations
over the vesting period of the option.



12.  EMPLOYEE BENEFIT PLANS

     The company has a defined contribution pension plan covering substantially
all of its U. S. employees, subject to age and service requirements. In
addition, the company has an Employee Savings Plan (401(k)) available for all of
its U.S. employees subject to age and service requirements and matches employee
contributions in an amount equal to the lesser of one-third of the employee's
contribution or 2% of the employee's compensation subject to government tax
regulation limits. The company also provides a deferred compensation program for
certain executives of the company. The company funded employee Savings Plan
costs during 1995 on a monthly basis. The company plans to fund 1995 pension
costs in early 1996. Amounts accrued under the deferred compensation plan are
reflected as "Long-term Liabilities" in the company's consolidated balance
sheet. Costs of the Employee Pension Plan, the Employee Savings Plan (401(k))
and deferred compensation plan were as follows:

<TABLE>
<CAPTION>
                                     Year ended          
                                     December 31,     Amount 
                                     ------------     ------ 
                                     <S>              <C>     
                                         1993         $818,600
                                         1994          876,400
                                         1995          949,200 
</TABLE>


Employee benefit plan costs for the period May 7, 1987 (inception) through
December 31, 1995 total $4,255,600.

                                     F-18
<PAGE>
 
                             U.S. BIOSCIENCE, INC.
                       (A DEVELOPMENT STAGE ENTERPRISE)

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

13.  INCOME TAXES

     As of December 31, 1995, the company had a net operating loss carry forward
of approximately $114,298,000 for federal income tax purposes. In addition, the
company had a research and development tax credit carry forward of $4,043,000.

     The company records deferred tax assets and liabilities for the tax effects
of temporary differences between carrying amounts of assets and liabilities for
financial reporting purposes and amounts used for income tax purposes. A
valuation allowance equal to the net deferred tax asset has been recorded on the
basis of the uncertainty with respect to the ultimate realization of the net
deferred tax assets. Due to this uncertainty, no benefit has been recorded for
the year ended December 31, 1995 or any prior period for any net operating loss
carryforwards or other deferred tax assets generated during the year.
Significant components of the company's estimated deferred tax assets and
liabilities as at December 31, 1995 are as follows:

<TABLE>
  <S>                                                   <C>
  Deferred tax assets
  -------------------                             
     Net operating loss carryforwards/(1)/          $42,179,200
     Book over income tax depreciation                   94,800
     Research and development tax credits             4,043,000
     Other non-salary compensation and benefits         501,800
     Other, principally reserves                        237,500
                                                     ---------- 
     Total deferred tax assets                       47,056,300   
  Deferred tax liabilities                              
  ------------------------                           ---------- 
     Prepaid expenses                                   (97,000)
                                                     ----------  
     Total deferred tax liabilities                     (97,000) 
                                                     ----------    
                                                     46,959,300
  Valuation allowance for net deferred tax assets   (46,959,300)
                                                    -----------
  Net deferred tax assets                           $   -0-
                                                    ===========
</TABLE>

/(1)/  Includes estimated state and foreign net operating loss carryforwards of
       $2,174,800.

     Approximately $8,690,400 of tax benefits related to the exercise of stock
options is included in the net operating loss carryforwards listed above.
Although not a component of tax expense, the reserve for the future realization
of this asset is reflected in the valuation allowance and will be credited to
additional paid-in capital if and when realized.

     The reconciliation of the expected tax benefit for the year ended December
31, 1995 is as follows:

<TABLE>  
     <S>                                             <C> 
     Tax benefit at expected rate                    $  (80,850)
     Permanent differences                              206,450
     Research and development tax credit               (448,640)
     State taxes, net                                  (918,320)
     Other                                              (48,040)
                                                      ----------
                                                     (1,289,400)
     Increase in valuation allowance                  1,289,400
                                                      ----------
     Tax benefit                                      $  -0-
                                                      ==========
</TABLE> 

                                     F-19
<PAGE>
 
                             U.S. BIOSCIENCE, INC.
                       (A DEVELOPMENT STAGE ENTERPRISE)

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)



     The federal income tax carryforwards expire as follows:


<TABLE>
<CAPTION>
                       NET OPERATING           RESEARCH AND   
                           LOSSES           DEVELOPMENT CREDITS            
                           ------           -------------------
               <S>     <C>                  <C> 
               2002     $      1,000            $       --           
               2003        1,250,000                46,000           
               2004        5,206,000               140,000           
               2005        6,750,000               192,000           
               2006       23,486,000               545,000           
               2007       21,993,000               889,000           
               2008       27,367,000             1,072,000           
               2009       24,430,000               710,000           
               2010        3,815,000               449,000           
                        ------------            ----------           
                        $114,298,000            $4,043,000           
                        ============            ==========            
</TABLE>

                                     F-20
<PAGE>
 
                             U.S. BIOSCIENCE, INC.

                                   FORM 10-K

                                 EXHIBIT INDEX


<TABLE> 
<CAPTION> 
                                                                        Page
                                                                        ----
<S>       <C>                                                           <C> 
          3. Exhibits.

3.1       Restated Certificate of Incorporation (incorporated by
          reference to Exhibit 3(a) to the Registrant's Registration
          Statement on Form S-1 (File No. 33-39576), filed with the
          Securities and Exchange Commission on March 22, 1991)

3.1.1     Certificate of Amendment to Certificate of Incorporation
          (incorporated by reference to Exhibit 3.1.1 to the
          Registrant's Registration Statement on Form S-3 (File No. 33-
          00077), filed with the Securities and Exchange Commission on
          January 5, 1996

3.1.2     Certificate of Designations of Series A Junior Preferred
          Stock (incorporated by reference to Exhibit 1 to the
          Registrant's Current Report on Form 8-K dated June 7, 1995)

3.2       Bylaws, as amended (incorporated by reference to Exhibit 3.2
          to the Registrant's Annual Report on Form 10-K filed with
          the Securities and Exchange Commission on March 28, 1994)

4.1       Warrant Agreement dated as of June 6, 1994 by and between
          Registrant and Mellon Bank, N.A. (incorporated by reference
          to Exhibit 4.1 to the Registrant's Annual Report on Form 10-
          K filed with the Securities and Exchange Commission on March
          28, 1995)

4.2       Rights Agreement dated as of May 19, 1995 by and between
          Registrant and Chemical Mellon Shareholder Services L.L.C.
          (incorporated by reference to Exhibit 1 to Registrant's
          Current Report on Form 8-K dated June 7, 1995)

10.1*     Agreement dated August 9, 1991, between the Registrant and
          Warner-Lambert Company, as amended by Amendment No. 1 dated
          December 12, 1991, Amendment No. 2 dated March 10, 1994 and
          Amendment No. 3 dated March 11, 1994 (incorporated by
          reference to Exhibit 10.1 to the Registrant's Annual Report
          on Form 10-K filed with the Securities and Exchange
          Commission on March 28, 1994)

10.2      Office Lease Agreement, dated September 1990, between U.S.
          Bioscience, Inc. and Tower Bridge Associates (incorporated
          by reference to Exhibit 10(k) to the Registrant's
          Registration Statement on Form S-1 (File No. 33-39576),
          filed with the Securities and Exchange Commission on March
          22, 1991)
</TABLE> 
<PAGE>
 
                             U.S. BIOSCIENCE, INC.

                                   FORM 10-K

                                 EXHIBIT INDEX

<TABLE> 
<CAPTION> 

                                                                        Page
                                                                        ----
<S>       <C>                                                           <C> 
10.2.1    Amendment No. 1, dated August 31, 1991, to Office Lease
          Agreement between U.S. Bioscience, Inc. and Tower Bridge
          Associates (incorporated by reference to Exhibit 10(i)(ii)
          to the Registrant's Annual Report on Form 10-K, filed with
          the Securities and Exchange Commission on March 27, 1992)

10.2.2    Addendum, dated April 8, 1992, to Amendment No. 1 of Office
          Lease Agreement between U.S. Bioscience and Tower Bridge
          Associates (incorporated by reference to Exhibit 10.2.2 to
          the Registrant's Annual Report on Form 10-K, filed with the
          Securities and Exchange Commission on March 31, 1993)

10.2.3    Amendment No. 2, dated June 30, 1995, to Office Lease
          Agreement between U.S. Bioscience, Inc. and Tower Bridge
          Associates

10.3      Lease Agreement, dated June 15, 1992, between U.S.
          Bioscience, Inc. and Pickering Acquisition Associates
          (incorporated by reference to Exhibit 10.3 to the
          Registrant's Annual Report on Form 10-K, filed with the
          Securities and Exchange Commission on March 31, 1993)

10.3.1    Amendment No. 1, dated March 17, 1993, to Lease Agreement
          between the Registrant and Pickering Acquisition Associates
          (incorporated by reference to Exhibit 10.3.1 to the
          Registrant's Annual Report on Form 10-K, filed with the
          Securities and Exchange Commission on March 31, 1993)

10.3.2    Second Amendment to Lease Agreement between the Registrant
          and Pickering Acquisition Associates dated February 8, 1995
          (incorporated by reference to Exhibit 10.3.2 to the
          Registrant's Annual Report on Form 10-K filed with the
          Securities and Exchange Commission on March 28, 1995)

10.4      Research Agreement, dated May 14, 1987, between the
          Registrant and Georgetown University, as amended May 27,
          1988 (incorporated by reference to Exhibit 10.13 to the
          Registrant's Registration Statement on Form 10, filed with
          the Securities and Exchange Commission on September 21,
          1989)

10.4.1    Amendment No. 2, dated as of January 23, 1990, to Research
          Agreement, dated May 14, 1987, between the Registrant and
          Georgetown University (incorporated by reference to Exhibit
          10.13.1 to the Registrant's Registration Statement on Form S-
          1, filed with the Securities and Exchange Commission on
          February 5, 1990)
</TABLE> 
<PAGE>
 
                             U.S. BIOSCIENCE, INC.

                                   FORM 10-K

                                 EXHIBIT INDEX

<TABLE> 
<CAPTION> 
                                                                        Page
                                                                        ----
<S>       <C>                                                           <C> 
10.5      Letter agreement, dated January 22, 1992, between the
          Registrant and Chemsyn Science Laboratories (incorporated by
          reference to Exhibit 10(k) to the Registrant's Annual Report
          on Form 10-K, filed with the Securities and Exchange
          Commission on March 27, 1992)

10.6      License Agreement dated January 30, 1995 between Registrant
          and National Institutes of Health (incorporated by reference
          to Exhibit 10.6 to the Registrant's Annual Report on Form 10-
          K filed with the Securities and Exchange Commission on March
          28, 1995)

10.7      Agreement for Assignment of Rights, dated January 8, 1988,
          between the Registrant and Wyeth Laboratories, Inc.
          (incorporated by reference to Exhibit 10.18 to the
          Registrant's Registration Statement on Form 10, filed with
          the Securities and Exchange Commission on September 21,
          1989)

10.8*     Amended and Restated License Agreement, effective as of May
          1, 1993, between the Registrant and Southern Research
          Institute (incorporated by reference to Exhibit 10.8 to the
          Registrant's Annual Report on Form 10-K filed with the
          Securities and Exchange Commission on March 28, 1994)

10.9      Agreement, dated as of November 25, 1988, between the
          Registrant and Warner-Lambert Company (incorporated by
          reference to Exhibit 10.23 to the Registrant's Registration
          Statement on Form 10, filed with the Securities and Exchange
          Commission on September 21, 1989)

10.9.1    Amendment No. 1, dated March 13, 1992 to Agreement dated as
          of November 25, 1988, between the Registrant and Warner-
          Lambert Company (incorporated by reference to Exhibit
          10(o)(ii) to the Registrant's Annual Report on Form 10-K,
          filed with the Securities and Exchange Commission on March
          27, 1992)

10.10     License Agreement, dated as of December 6, 1990, between the
          National Technical Information Service and the Registrant
          (incorporated by reference to Exhibit 10(t) to the
          Registrant's Registration Statement on Form S-1 (File No. 33-
          39576), filed with the Securities and Exchange Commission on
          March 25, 1991)

10.11     Agreement, dated as of January 1, 1995, between Registrant
          and Applied Analytical Industries, Inc. (incorporated by
          reference to Exhibit 10.11 to the Registrant's Annual Report
          on Form 10-K filed with the Securities and Exchange
          Commission on March 28, 1995)
</TABLE> 
<PAGE>
 
                             U.S. BIOSCIENCE, INC.

                                   FORM 10-K

                                 EXHIBIT INDEX

<TABLE> 
<CAPTION> 

                                                                        Page
                                                                        ----
<S>       <C>                                                           <C> 
10.12     Agreement, dated as of September 23, 1993, between
          Registrant and Ben Venue Laboratories, Inc. (incorporated by
          reference to Exhibit 10.12 to the Registrant's Annual Report
          on Form 10-K filed with the Securities and Exchange
          Commission on March 28, 1994)

10.13     U.S. Bioscience/Ganes PALA Research Agreement between the
          Registrant and Ganes Chemicals, Inc., signed by the
          Registrant on April 25, 1991 and countersigned by Ganes
          Chemicals, Inc. on April 29, 1991 (incorporated by reference
          to Exhibit 10(t) to the Registrant's Annual Report on Form
          10-K, filed with the Securities and Exchange Commission on
          March 27, 1992)

10.14     License Agreement, dated February 14, 1992, between the
          Registrant and Schering Overseas Limited (incorporated by
          reference to Exhibit 10.14 to the Registrant's Annual Report
          on Form 10-K, filed with the Securities and Exchange
          Commission on March 31, 1993)

10.14.1   Amendment dated October 15, 1993 to License Agreement
          between Registrant and Schering Overseas Limited
          (incorporated by reference to Exhibit 10.14.1 to the
          Registrant's Annual Report on Form 10-K filed with the
          Securities and Exchange Commission on March 28, 1994)

10.15     License Agreement dated May 10, 1994 between Registrant and
          Scherico, Ltd. (incorporated by reference to Exhibit 10.15
          to the Registrant's Annual Report on Form 10-K filed with
          the Securities and Exchange Commission on March 28, 1995)

10.16*    Distribution and Supply Agreement, dated as of May 10, 1993
          between Registrant and Scherico, Ltd. (incorporated by
          reference to Exhibit 10.16 to the Registrant's Annual Report
          on Form 10-K filed with the Securities and Exchange
          Commission on March 28, 1995)

10.17     Agreement, dated as of March 10, 1994 between Registrant and
          Sipsy S.A. (incorporated by reference to Exhibit 10.17 to
          the Registrant's Annual Report on Form 10-K filed with the
          Securities and Exchange Commission on March 28, 1994)

10.18     License Agreement, effective November 28, 1990 between
          Registrant and National Technical Information Service
          (incorporated by reference to Exhibit 10.18 to the
          Registrant's Annual Report on Form 10-K filed with the
          Securities and Exchange Commission on March 28, 1994)
</TABLE> 
<PAGE>
 
                             U.S. BIOSCIENCE, INC.

                                   FORM 10-K

                                 EXHIBIT INDEX


<TABLE> 
<CAPTION> 

                                                                        Page
                                                                        ----
<S>       <C>                                                           <C> 
10.19     Stipulation of Settlement Civil Action No. 92-0678 (Dalzell,
          J.) dated January 19, 1994 (incorporated by reference to
          Exhibit 10.19 to the Registrant's Annual Report on Form 10-K
          filed with the Securities and Exchange Commission on March
          28, 1995)

10.20     Non-Executive Stock Option Plan

10.21     Form of Subscription Agreement for sale of Common Stock by
          the Registrant to investors in December 1995 (incorporated
          by reference to Exhibit 1 to Registrant's Current Report on
          Form 8-K dated December 22, 1995)

10.22     Form of Note Purchase Agreement for sale of convertible
          notes by the Registrant to investors in December 1995
          (incorporated by reference to Exhibit 2 to Registrant's
          Current Report on Form 8-K dated December 22, 1995)

10.23     Form of Convertible Note issued pursuant to Note Purchase
          Agreements for sale of convertible notes by the Registrant
          to investors in December 1995 (incorporated by reference to
          Exhibit 3 to Registrant's Current Report on Form 8-K dated
          December 22, 1995)

10.24     Form of Registration Rights Agreement with purchasers of
          Common Stock and convertible notes issued by the Registrant
          to investors in December 1995 (incorporated by reference to
          Exhibit 4 to Registrant's Current Report on Form 8-K dated
          December 22, 1995)

10.25*    Ethyol (Amifostine) Distribution and Marketing Collaboration
          Agreement between U.S. Bioscience, Inc. and ALZA Corporation
          dated December 12, 1995 (incorporated by reference to
          Exhibit 5 to Registrant's Current Report on Form 8-K dated
          December 22, 1995)

          Executive Compensation Plans and Arrangements

10.26     Employment Agreement, dated as of March 1, 1993 between
          Registrant and Philip S. Schein, M.D. (incorporated by
          reference to Exhibit 10.21 to the Registrant's Annual Report
          on Form 10-K filed with the Securities and Exchange
          Commission on March 28, 1995)

10.27     U.S. Bioscience, Inc. 1987 Incentive Stock Option Plan
          (incorporated by reference to Exhibit 4.1 to the
          Registrant's Registration Statement on Form S-8 (File No. 33-
          43981), filed with the Securities and Exchange Commission on
          November 15, 1991)
</TABLE> 
<PAGE>
 
                             U.S. BIOSCIENCE, INC.

                                   FORM 10-K

                                 EXHIBIT INDEX


<TABLE> 
<CAPTION> 
                                                                        Page
                                                                        ----
<S>       <C>                                                           <C> 
10.28     U.S. Bioscience, Inc. 1987 Non-Statutory Stock Option Plan
          (incorporated by reference to Exhibit 4.2 to the
          Registrant's Registration Statement on Form S-8 (File No. 33-
          43981), filed with the Securities and Exchange Commission on
          November 15, 1991)

10.29     U.S. Bioscience, Inc. 1987 Special Non-Statutory Stock
          Option Plan (incorporated by reference to Exhibit 4.3 to the
          Registrant's Registration Statement on Form S-8 (File No. 33-
          43981), filed with the Securities and Exchange Commission on
          November 15, 1991)

10.30     U.S. Bioscience, Inc. 1991 Special Non-Statutory Stock
          Option Plan (incorporated by reference to Exhibit 4.5 to the
          Registrant's Registration Statement on Form S-8 (File No. 33-
          43981), filed with the Securities and Exchange Commission on
          November 15, 1991)

10.31     U.S. Bioscience, Inc. 1992 Stock Option Plan (incorporated
          by reference to Exhibit 10.27 to the Registrant's Annual
          Report on Form 10-K filed with the Securities and Exchange
          Commission on March 28, 1995)

10.32     Executive Benefits Plan and related Form of Split Dollar
          Agreement (incorporated by reference to Exhibit 10.28 to the
          Registrant's Annual Report on Form 10-K filed with the
          Securities and Exchange Commission on March 28, 1995)

10.33     Pension Restoration Plan (incorporated by reference to
          Exhibit 10.29 to the Registrant's Annual Report on Form 10-K
          filed with the Securities and Exchange Commission on March
          28, 1995)

10.33.1   Amendment 1996-1 to Pension Restoration Plan

10.34     Executive Severance Agreement, dated October 14, 1991,
          between the Registrant and Philip S. Schein, M.D.
          (incorporated by reference to Exhibit 10(v) to the
          Registrant's Annual Report on Form 10-K, filed with the
          Securities and Exchange Commission on March 27, 1992)

10.35     Amendment dated September 22, 1992 to Executive Severance
          Agreement between the Registrant and Philip S. Schein, M.D.
          (incorporated by reference to Exhibit 10.25.1 to the
          Registrant's Annual Report on Form 10-K, filed with the
          Securities and Exchange Commission on March 31, 1993) 
</TABLE> 
<PAGE>
 
                             U.S. BIOSCIENCE, INC.

                                   FORM 10-K

                                 EXHIBIT INDEX

<TABLE> 
<CAPTION> 
                                                                        Page
                                                                        ----
<S>       <C>                                                           <C> 
10.36     Executive Severance Agreement, dated October 14, 1991,
          between the Registrant and Robert L. Capizzi, M.D.
          (incorporated by reference to Exhibit 10(w) to the
          Registrant's Annual Report on Form 10-K, filed with the
          Securities and Exchange Commission on March 27, 1992)

10.36.1   Amendment dated September 22, 1992 to Executive Severance
          Agreement between the Registrant and Robert L. Capizzi, M.D.
          (incorporated by reference to Exhibit 10.26.1 to the
          Registrant's Annual Report on Form 10-K, filed with the
          Securities and Exchange Commission on March 31, 1993)

10.37     Agreement, dated March 4, 1996, between the Registrant and
          Robert L. Capizzi, M.D.

10.38     Form of Executive Severance Agreement executed with each
          Senior Vice President, each Vice President, and the
          Controller of the Registrant (incorporated by reference to
          Exhibit 10.28 to the Registrant's Annual Report on Form 10-
          K, filed with the Securities and Exchange Commission on
          March 31, 1993)

22        Subsidiaries of the Registrant

23        Consent of Ernst & Young LLP, Independent Auditors
</TABLE> 

______________
*Confidential portions have been omitted and have been separately filed with the
Commission.