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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, 1998

                                       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                        (I.R.S. Employer
of 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 ($.01 par value)                    American Stock Exchange
  Preferred Stock Purchase Rights                  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 1, 1999, the aggregate market value of the voting stock held
by non-affiliates of the registrant was $226,515,960.*

      As of March 1, 1999, the number of outstanding shares of the registrant's
Common Stock was 27,101,696.

                       DOCUMENTS INCORPORATED BY REFERENCE

Part III -- Portions of the registrant's definitive Proxy Statement with
            respect to the registrant's 1999 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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            This report on Form 10-K contains forward-looking statements
concerning the business and financial conditions of the company, which are
subject to certain risks and uncertainties that could cause actual results to
differ materially from those anticipated in any forward-looking statements.
Factors that could cause such differences include, but are not limited to, those
discussed in this Form 10-K, including, without limitation in the Section of
Item 1 entitled "Risk Factors." As a result, the reader is cautioned not to rely
on these forward-looking statements.

            The following discussion also should be read in conjunction with
Part II of this Form 10-K and the Consolidated Financial Statements and notes to
the Consolidated Financial Statements on pages F-1 to F-20.

                                     PART I

Item 1. Business.

            General

            U.S. Bioscience, Inc., a Delaware corporation (the "company"), is a
pharmaceutical company specializing in the development and commercialization of
products for patients with cancer and acquired immune deficiency syndrome
("AIDS"). The company has, through licensing agreements, rights to several drugs
for the treatment of these diseases. Three of these drugs have received approval
for marketing in the United States by the United States Food and Drug
Administration ("FDA"), namely Hexalen(R) (altretamine), NeuTrexin(R)
(trimetrexate glucuronate for injection, and Ethyol(R) (amifostine). One of
these drugs, lodenosine (FddA), is in Phase II clinical trials. During 1998 the
company decided to focus its resources on the commercialization of these and
nearer term commercial products and discontinued its development of AZQ
(diaziquone), Mitomycin-C analogues, PALA and third generation platinum
anticancer agents.

            The company's drug development strategy 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 consists 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, the
company has endeavored to reduce the costs, risks and time involved in bringing
products to market.

            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, like some
of its competitors, is seeking to develop drugs that augment the efficacy or
reduce the toxicity of other chemotherapeutic agents and of radiation therapy.

            Anticancer drugs can be toxic to normal cells as well as cancer
cells, causing unwanted side effects. For many cancer drugs, therapeutic dosage
for cancerous tissue is close to the toxic dose. Thus, drugs that can
selectively protect normal cells should be of significant medical benefit.
Development of systemic therapeutic products for treating cancer or used in
connection with treatment of cancer requires laborious preclinical and


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clinical testing to satisfy government regulation and medical ethics. As a
consequence, the development of successful drugs for these purposes often takes
many years. See "Government Regulation."

            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 how the body's own regulatory systems
control this process. It is hoped that these advances 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. The company believes,
however, that systemic therapy will continue to make an important contribution
to the treatment of cancer.

            The Human Immunodeficiency 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, nelfinavir, ritonavir and
indinavir. The second segment of the HIV/AIDS treatment market includes those
agents which prevent or treat AIDS-related opportunistic infections, including
PCP, tuberculosis and candidiasis. The HIV/AIDS treatment market has been
rapidly changing due, in part, to significant advances in the treatment of AIDS
and AIDS-related infections.

Principal Products

            The company's products reflect its strategy of building a diverse
portfolio of drugs for the treatment of patients with cancer. This portfolio
includes cancer-attacking cytotoxics (Hexalen and NeuTrexin), cytoprotectors
(Ethyol and WR-151327) and modulators (NeuTrexin). 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, and it is also under investigation as an additional agent for the
treatment of patients with advanced colorectal cancer. The company has licensed
lodenosine, and its active metabolite FddI, which are reverse transcription
inhibitors now being evaluated in clinical trials for use in the treatment of
HIV and AIDS. See "Principal Products - Lodenosine (FddA)."

            Hexalen(R) (altretamine/hexamethylmelamine)

                  General Description. Hexalen is an orally administered
            cytotoxic drug that was cleared for marketing 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.

                  Marketing. The company has been co-promoting Hexalen in the
            U.S. market with ALZA Corporation under an agreement that will
            terminate in mid-1999. Since 1996, the company has been directing
            the U.S. marketing program for Hexalen, and the sales forces of both
            companies have been promoting Hexalen to health care providers who
            treat ovarian cancer. In mid-1999, the company will have sole
            responsibility for the distribution, marketing and promotion of
            Hexalen in the U.S. market and is planning to expand its field force
            in anticipation of this change. The marketing program consists of
            direct mail, symposia and promotion to prescribing physicians.
            Hexalen is distributed through pharmaceutical wholesalers. The
            company's revenues from Hexalen sales in 1998 were slightly lower
            than those in 1997.


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                  The company has obtained a registered U.S. trademark for
            Hexalen, the company's brand of altretamine. The company is also
            pursuing trademark registrations for Hexalen in a number of foreign
            countries.

                  As of March 1, 1999, Hexalen has been approved for the
            treatment of ovarian cancer in 20 countries outside the United
            States, including Canada, the United Kingdom, Australia, Israel,
            Sweden, Norway, China, South Korea, Egypt and Hong Kong. Commercial
            sales of Hexalen outside the United States are made through
            distribution or license arrangements. To date, commercial sales of
            Hexalen outside the United States have not been material.

                  For information regarding the company's major customers and
            geographic area data, see "Notes to the Consolidated Financial
            Statements - Note 10."

                  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") New Drug Application ("NDA"). In
            return, the company is required to pay royalties to Wyeth 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 or distributors in
            countries covered by the licensing or distribution agreements.

                  Orphan Drug Status. Under the orphan drug provisions of the
            Federal Food, Drug, and Cosmetic Act (the "FFDCA"), Hexalen had
            received orphan drug marketing exclusivity for its FDA approved
            indication, which expired in December 1997. See "Orphan Drug
            Status," "Government Regulation," and "Patents, Trademarks, and
            Trade Secrets."

                  Distribution and Marketing Agreements. Under the terms of the
            company's co-promotion agreement with ALZA, the company pays ALZA a
            commission, which is based upon a percentage of net sales of Hexalen
            and NeuTrexin in the United States above a base level of sales. At
            the end of the co-promotion term, in mid-1999, ALZA will be paid
            residual commissions for a term of three years based on a percentage
            of net sales during the residual period, subject to a maximum
            payment of a decreasing percentage of actual commission payments
            made to ALZA under the agreement during the final contract year of
            the co-promotion period.

                  The company has entered into distribution or licensing
            agreements for Hexalen with a number of pharmaceutical companies for
            several territories outside of the United States. The licensees are
            required to pay the company royalties based on their net sales of
            the product. Under the terms of the distribution agreements, the
            company sells Hexalen to its distribution partner at an agreed upon
            supply price.

                  Manufacturing. The company is dependent on third party
            suppliers for the manufacture of Hexalen. The company uses one
            approved source of altretamine drug substance and two approved
            sources for the finished dosage form of Hexalen. See "Government
            Regulation" and "Risk Factors - Reliance on Collaboration,
            Marketing, Manufacturing and Selling Arrangements."


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            NeuTrexin(R) (trimetrexate glucuronate for injection)

                  General Description. NeuTrexin 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 Canadian regulatory authority, the Health
            Protection Branch, granted commercial clearance for NeuTrexin with
            concurrent leucovorin administration (leucovorin protection) as an
            alternative therapy for the treatment of moderate-to-severe
            Pneumocystis carinii pneumonia ("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 September 1994,
            the European Union's ("EU") Committee for Proprietary Medicinal
            Products ("CPMP") recommended approval for NeuTrexin with concurrent
            leucovorin administration (leucovorin protection) as an alternative
            therapy for the treatment of moderate-to-severe PCP 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 10 years of regulatory
            exclusivity in the EU markets upon approval. Following the positive
            CPMP recommendation, the company received local regulatory approvals
            in 11 of the 12 original EU member countries. As of March 1, 1999,
            local health regulatory approvals for NeuTrexin have been received
            in 26 countries outside the United States, including Canada,
            Denmark, France, Germany, Ireland, Luxembourg, the United Kingdom,
            Spain, Greece, Sweden, Norway, Portugal, The Netherlands, Italy and
            Argentina.

                  Marketing. The company has been co-promoting NeuTrexin in the
            U.S. market with ALZA Corporation under an agreement that will
            terminate in mid-1999. Since 1996, the company has been directing
            the marketing program for NeuTrexin and the sales forces of both
            companies have been promoting NeuTrexin to health care providers who
            treat PCP. In mid-1999, the company will have sole responsibility
            for the distribution, marketing and promotion of NeuTrexin in the
            U.S. market and is planning to expand its field force in
            anticipation of this change. The marketing program consists of
            direct mail, symposia and promotion to prescribing physicians.
            NeuTrexin is distributed through pharmaceutical wholesalers. Sales
            of NeuTrexin increased in 1998 as compared to 1997. The company
            believes that this increase may be attributed to the use of
            NeuTrexin by oncologists for the treatment of patients with
            colorectal cancer, a use currently under investigation by the
            company. See "NeuTrexin Clinical Trials."

                  The company has obtained a registered U.S. 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.

                  For information regarding the company's major customers and
            geographic area data, see "Notes to the Consolidated Financial
            Statements - Note 10."

                  Clinical Trials. The company is continuing to investigate
            NeuTrexin as an anticancer agent. In response to data from Phase II
            studies of NeuTrexin in combination with 5-fluorouracil ("5-FU") and
            leucovorin in patients with metastatic colorectal cancer, the
            company sponsored two randomized Phase III clinical trials of 5-FU
            and leucovorin with and without NeuTrexin. Both of these studies are
            closed to accrual of new patients, and the company expects to begin
            data analysis during 1999. Research into topical and oral
            formulations of NeuTrexin also is underway. The development of these
            dosage forms


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            will facilitate clinical research not only in patients with diseases
            such as AIDS and cancer but, potentially, in patients with benign
            diseases (such as psoriasis and rheumatoid arthritis).

                  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 with Warner-Lambert
            Company ("Warner-Lambert"), the company has obtained an exclusive
            worldwide license to manufacture and market NeuTrexin for use in
            cancer or PCP 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.

                  Patents and Orphan Drug Status. As noted above, the company
            has licensed, on an exclusive basis, Warner-Lambert's NeuTrexin
            patents. One of those patents, a U.S. composition of matter patent
            on the form of NeuTrexin approved for commercial sale, was issued
            March 15, 1983 and, pursuant to recent 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. Pursuant to the Drug
            Price Competition and Patent Term Restoration Act of 1984, an
            application has been filed and a certificate granted which extends
            the term of the patent for 1,286 days, a period relating to the time
            NeuTrexin was under review by the FDA. Therefore, the extended
            expiration date for this patent is May 9, 2004. 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. As of
            March 1, 1999, supplementary protection has been granted in France,
            Germany, Luxembourg, the United Kingdom and Sweden, each for a five
            year term.

                  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 NeuTrexin to the Company."

                  Upon approval of the NDA for NeuTrexin in December 1993, the
            product received seven years of orphan drug marketing exclusivity
            under the orphan drug provisions of the FFDCA 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
            drug marketing exclusivity for such approved indications. See
            "Government Regulation," "Patents, Trademarks, and Trade Secrets,"
            and "Orphan Drug Status."

                  Distribution and Marketing Agreements. The company's
            co-promotion agreement with ALZA for NeuTrexin and Hexalen will
            terminate in mid-1999, when the company will have sole
            responsibility


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            for the distribution, marketing and promotion of both products in
            the U.S. See "Principal Products - Hexalen - Marketing" and
            "Principal Products - Hexalen - Distribution and Marketing
            Agreements."

                  The company has entered into distribution or licensing
            agreements for NeuTrexin with a number of pharmaceutical companies
            for several territories outside of the United States. The licensees
            are required to pay the company royalties based on their net sales
            of the product, and the company sells NeuTrexin to its distribution
            partners at an agreed upon supply price. For example, the company
            has licensed its rights for NeuTrexin in over 35 countries in Latin
            America and Asia (the "Latin America/Asia Territories") to an
            affiliate of Schering-Plough Corporation ("Schering"), Schering
            Overseas Ltd. ("Schering Overseas"). The company has also licensed
            its rights for NeuTrexin to another affiliate of Schering, Scherico,
            Ltd. ("Scherico"), under two agreements, one covering territories
            comprising Korea, Taiwan, Peru, Paraguay and six countries in the
            Middle East (the "Korea/Taiwan/Peru/Paraguay/Middle East
            Territories) and the other covering territories comprising
            Australia, Iran, Iraq, New Zealand and over 30 countries in Eastern
            Europe and Africa (the "Eastern Europe/Africa/ Australia/New Zealand
            Territories"). Under these agreements, which also grant rights to
            Ethyol, Scherico is required to pay the company royalties and
            consulting fees, on a country-by-country basis, for 15 years
            following the date of first commercial sale of NeuTrexin or Ethyol
            in that country, subject to a one-year extension in certain
            circumstances. The license for the East Europe/Africa/Australia/New
            Zealand Territories provides Scherico with the right to negotiate
            for additional products the company wishes to introduce into those
            territories. The license for the Korea/Taiwan/Peru/Paraguay/Middle
            East Territories provides Scherico with the right to expand the
            territory to include three additional countries in the Middle East
            if they become available. See "Ethyol Distribution and Marketing
            Agreements."

                  Manufacturing. The company relies, in part, 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
            received Dutch regulatory approval to manufacture the finished
            dosage form of NeuTrexin. The company supplies the EU markets with
            NeuTrexin manufactured at its Nijmegen manufacturing plant. The
            company has received FDA approval of its Nijmegen facility as a drug
            manufacturer for NeuTrexin for commercial sale in the United States.
            The company supplies the United States market with NeuTrexin
            manufactured primarily at its Nijmegen manufacturing plant and
            continues to purchase NeuTrexin for the United States market from
            its approved third party manufacturer.

            Ethyol(R) (Amifostine/WR-2721)

                  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.

                  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 indication 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. In the event the


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            clinical trial fails to verify the clinical benefit of Ethyol for
            this indication, the FDA may, under certain circumstances, withdraw
            approval of this indication. See "Government Regulation."

                  The CPMP originally recommended the company's drug Ethyol for
            approval at the CPMP meeting held on September 14, 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. On July 26, 1996, the CPMP approved an
            expanded indication to include protection of patients with advanced
            solid tumors of non-germ cell origin from cumulative nephrotoxicity
            of cisplatin and cisplatin-containing regimens, where unit doses of
            cisplatin range from 60-120 mg/m2, in conjunction with adequate
            hydration measures. As of March 1, 1999, Ethyol has received
            approvals from the following EU member countries: Austria, Belgium,
            Denmark, Finland, France, Germany, Greece, Italy, Luxembourg, The
            Netherlands, Portugal, Spain, the United Kingdom and Sweden. The
            company, either directly or through its overseas marketing partners,
            has been seeking additional regulatory approvals for Ethyol.

                  Ethyol was approved for commercial sale in Canada in April,
            1996 and launched by an affiliate of Eli Lilly and Company in
            August, 1996. In addition to approvals in the United States, Canada
            and the EU countries listed above, Ethyol has received approvals
            from 34 countries throughout the world. See "Ethyol - Distribution
            and Marketing Agreements."

                  In December 1996, after reviewing a chemistry and
            manufacturing supplement to the Ethyol NDA, the FDA cleared for
            marketing a room temperature crystalline form of Ethyol. This
            crystalline form of Ethyol is claimed in issued United States
            patents. See "Ethyol - Patents, Orphan Drug Status and NDA
            Exclusivity." The company made crystalline Ethyol commercially
            available in the United States in 1997 through ALZA, the company's
            exclusive distributor in the United States.

                  In September 1998, the company submitted a registration
            dossier with the regulatory agencies of the EU requesting marketing
            authorization to expand the use of Ethyol to include protection
            against acute and late toxicities associated with radiation therapy.
            In December 1998, the company submitted a supplemental NDA to the
            FDA covering the use of Ethyol to reduce the incidence and severity
            of radiation-induced xerostomia (dry mouth), an indication which has
            been granted orphan drug designation by the FDA.

                  Marketing. Through an agreement with ALZA, Ethyol was launched
            in the United States in April 1996. Under the terms of this
            agreement, ALZA has exclusive marketing rights to Ethyol in the
            United States. ALZA's marketing program consists of direct mail,
            journal advertising, symposia and promotion to prescribing
            physicians by ALZA's oncology sales force with co-promotion by the
            company's sales force. Ethyol is sold by the company to ALZA, and
            ALZA then sells Ethyol to the distributors and wholesalers that
            supply Ethyol for prescription sales. These rights expire on April
            1, 2001, or on April 1, 2002 if ALZA chooses to exercise a one-time
            option to extend the agreement. Thereafter, U.S. Bioscience will
            market Ethyol, subject to a declining reverse royalty. See "Ethyol
            Distribution and Marketing Agreements."

                  The company has obtained a registered U.S. trademark for
            Ethyol, the company's brand of amifostine. The company is also
            pursuing trademark registrations for Ethyol in a number of foreign
            countries.


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                  For information regarding the company's major customers and
            geographic area data, see "Notes to the Consolidated Financial
            Statements - Note 10."

                  Clinical Trials. The company has an ongoing clinical trial
            which the company anticipates may fulfill the FDA's requirement that
            products approved under the Accelerated Approval Regulations undergo
            further adequate and well-controlled studies to verify and describe
            clinical benefit. See "Principal Products - Ethyol - General
            Description" and "Government Regulation." The company is also
            continuing to investigate the use of Ethyol to protect normal
            tissues from the toxic effects of certain forms of chemotherapy,
            radiation therapy and radio-chemotherapy (or combined modality
            therapy) in a number of tumor types, without reducing the antitumor
            effects of these modalities. During 1998, the company has been
            managing four Phase III trials of Ethyol, two of which have been
            closed to accrual of new patients and two of which are expected to
            be closed to accrual in the first half of 1999. The company is also
            investigating Ethyol's potential role as a bone marrow stimulant in
            myelodysplastic bone marrow syndromes ("MDS"). MDS is a condition in
            which the bone marrow is typically ineffective in its production of
            the major blood elements: red blood cells, neutrophils and
            platelets.

                  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 (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 10
            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 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 novel proprietary dosage forms of
            crystalline amifostine and a novel method for manufacturing
            crystalline amifostine dosage forms. The company was granted a U.S.
            Patent covering methods of manufacturing crystalline amifostine
            dosage forms and the resulting dosage forms utilizing such method of
            manufacture. The company also was granted a U.S. patent on
            crystalline amifostine dosage forms which patent claims are
            independent of the method of manufacture. Both patents expire in
            July 2012. The company has foreign counterpart patent applications
            pending, some of which have recently been allowed.

                  Upon approval of the NDA for Ethyol in December 1995, the
            product received seven years of orphan drug marketing exclusivity
            under the orphan drug provisions of the FFDCA for the approved
            indication, as a chemoprotective agent for use with cisplatin in the
            treatment of advanced ovarian cancer. During this seven-year period,
            the FDA may not approve another company's NDA for the same drug with
            the same indication provided that the subsequent drug is not deemed
            clinically superior, there is not insufficient supply of the drug
            and the exclusive approval is not otherwise withdrawn. Ethyol has
            also been designated as an orphan drug for use as a chemoprotective
            agent for use with cyclophosphamide in the treatment of advanced
            ovarian carcinoma, as a chemoprotective agent for use with cisplatin
            in the treatment of metastatic melanoma, for the prevention or
            reduction of radiation-induced xerostomia, and for the prevention or
            reduction of cisplatin induced toxicities. If the company obtains
            the first NDA approval for the product for any of these indications,
            Ethyol would be eligible for seven years of orphan drug marketing
            exclusivity for such approved indication.


                                       8
<PAGE>   10

                  In addition, upon approval of the NDA for Ethyol, the product
            became entitled to a five year period of marketing exclusivity under
            the FFDCA, which runs concurrently with the seven year orphan
            exclusivity. 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 ANDA applicant certifies that the
            patent is invalid or certifies to noninfringement). 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. This five year marketing exclusivity does not,
            however, prohibit the submission or FDA approval of subsequent full
            NDAs filed by other sponsors based on such sponsors' separate
            clinical investigations or paper NDAs supported by published
            studies. See "Government Regulation," "Patents, Trademarks and Trade
            Secrets," and "Orphan Drug Status."

                  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 is responsible for sales and marketing; the company's
            sales force co-promotes the product with ALZA. Under the terms of
            this agreement, the company sells Ethyol to ALZA at a price based on
            a percentage of the net sales price of Ethyol in the United States.
            After the five-year period ending in 2001, which ALZA has an option
            to extend for one year upon payment of a significant milestone,
            marketing rights to Ethyol revert to the company, and ALZA will
            receive payments from the company for 10 years (9 years if ALZA
            exercises the option) based on sales of Ethyol in the United States.

                  Outside of the U.S. market, the company's primary marketing
            partners are affiliates of Schering. For example, the company has
            entered into an exclusive marketing and distribution agreement with
            Scherico, an affiliate of Schering, for Ethyol in the countries
            comprising the EU and European Free Trade Association (the "European
            Territories"). Under this agreement, Scherico purchases Ethyol from
            the company at a price based on a percentage of the net sales of
            Ethyol in Germany, United Kingdom, Spain, Italy and France, and
            Scherico's exclusive rights to market the product will continue for
            seven years from January 1, 1997. The company may co-promote Ethyol
            with Scherico for the two years following such seven year period.
            Thereafter, the company will reacquire sole marketing rights. Under
            certain circumstances Scherico is required to pay the company
            milestone payments as regulatory approvals, if any, are obtained.
            After reacquiring sole marketing rights, the company will pay
            Scherico a percentage of net sales, if any, from the European
            Territory for a period of three years. Under the terms of the
            agreement, the company supplies Ethyol to Scherico. 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. Sales of Ethyol to Scherico for the
            European Territory have been gradually increasing.

                  In two separate agreements, the company has licensed Ethyol to
            Scherico in Eastern Europe/Africa/Australia/New Zealand Territories
            and the Korea/Taiwan/Peru/Paraguay/Middle East Territories. Under
            these agreements, which also grant rights to NeuTrexin, Scherico is
            required to pay the company royalties and consulting fees, on a
            country-by-country basis, for 15 years following the date of first
            commercial sale of Ethyol or NeuTrexin in that country, subject to a
            one-year extension in certain circumstances. Scherico also paid
            milestone payments to the company upon approval of Ethyol in
            Australia and South Africa. The license for the East
            Europe/Africa/Australia/New Zealand Territories provides Scherico
            with the right to negotiate for additional products the company
            wishes to introduce into those territories. The license for the
            Korea/Taiwan/Peru/Paraguay/Middle East Territories provides


                                       9
<PAGE>   11

            Scherico with the right to expand the territory to include three
            additional countries in the Middle East if they become available.

                  The company has licensed Ethyol to Schering Overseas in the
            Latin America/Asia Territories. Schering Overseas purchases Ethyol
            from the company and is required to pay the company royalties and
            consulting fees for 10 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 is seeking a marketing partner for Ethyol for
            Japan.

                  Manufacturing. The company relies on an approved third party
            source for supply of drug substance for Ethyol. The company's
            facility located in Nijmegen, The Netherlands has been approved by
            the FDA to manufacture Ethyol for the United States market. The
            company's Nijmegen facility has also been approved by the Dutch
            regulatory authorities to manufacture Ethyol for commercial sale in
            Europe. In addition, the company has an agreement with an approved
            contract manufacturer to produce the finished dosage form of Ethyol
            for the United States and international markets.

            Lodenosine (FddA)

                  General Description. 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
            United States government's patent rights for use of the compounds
            known as FddA and its active metabolite, FddI, for the treatment of
            HIV infection, HIV-related infection or HIV-related disease in
            humans. The company has also entered into a Cooperative Research and
            Development Agreement ("CRADA") with the National Cancer Institute
            ("NCI") for clinical development of lodenosine.

                  Lodenosine is an acid stable, purine-based nucleoside reverse
            transcriptase inhibitor that was discovered, patented and developed
            preclinically by researchers at the NCI. In a SCID (immune-deprived)
            mouse model, lodenosine demonstrated potent antiviral activity
            against HIV and was superior to AZT. In other laboratory studies,
            lodenosine has shown synergistic activity with AZT, d4T and 3TC in
            addition to being active against HIV clinical isolates that were
            resistant to these drugs.

                  Clinical Trials. The company has been collaborating with the
            NCI on the clinical development of lodenosine under the CRADA. The
            collaborative Phase I/II clinical trials of lodenosine in adult and
            pediatric patients are being conducted at the NIH Clinical Center.
            The first clinical trial results from the Phase I dose escalation
            study conducted under the CRADA demonstrated that lodenosine had
            anti-HIV activity, defined as a reduction in HIV viral load, even in
            patients who had failed other AIDS antiretroviral therapies
            including AZT, 3TC and d4T. In the Fall of 1998, the company 's
            multi-center Phase II clinical trial of lodenosine cleared
            regulatory agencies in the United States, Great Britain and Brazil
            and patients are being accrued to this study. Lodenosine is still in
            the early stages of clinical development. For a description of the
            steps required before a drug may be marketed in the United States
            see "Government Regulation."

                  License of Lodenosine to the Company. The company obtained a
            worldwide exclusive license from the United States Government for
            lodenosine for the field of use for treatment of HIV infection,
            HIV-related infection or HIV-related disease in humans using FddA or
            FddI. The license extends until


                                       10
<PAGE>   12

            the expiration of the last to expire of the Licensed Patents under
            the agreement. Under the terms of the agreement, the company is
            required to pay the Government royalties on sales of FddA and FddI.

                  Patents. The United States 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 issued to the United States
            Government on February 27, 1996 covering, inter alia, FddA and FddI.
            A United States Patent issued to the United States Government on
            October 15, 1996 covering methods of using either FddA or FddI to
            treat a human infected with HIV and/or AIDS. A United States Patent
            issued to the United States Government on August 9, 1994 covering a
            synthesis of FddA. The company has an exclusive license to these
            patents. See "License of Lodenosine to the Company."

                  Manufacturing and Further Development. The company has had
            lodenosine manufactured in limited quantities to supply this
            investigational drug for laboratory studies and early clinical
            trials, and intends to rely on one or more third parties for
            supplies of lodenosine that may be required for further clinical
            studies. There can be no assurance that the company or any third
            party will be able to scale up a manufacturing process for
            lodenosine that will produce sufficient quantities of lodenosine at
            a commercially reasonable cost. The company is seeking a commercial
            partner for the further development of lodenosine. See "Risk Factors
            - Limited Manufacturing Experience."

Research and Development

            Research. The company does not currently have proprietary research
and preclinical development facilities, since its 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 and performs some analytical
services on a contract basis. The company's clinical studies, designed to
provide the rigorous clinical testing required before a new drug can be approved
by the FDA, are conducted by physicians, generally under clinical study
agreements with the company. The company is dependent upon its ability to
attract and recruit qualified investigating physicians and upon their ability to
accrue patients to the company's sponsored clinical studies.

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

            Research and development costs were $19,041,900 for 1998.

Marketing

            The market for chemotherapeutic drugs is highly concentrated and
comprised principally of oncologists practicing in cancer treatment centers,
large hospitals and private medical practices. The decision to use such drugs is
primarily an individual physician's decision, and marketing efforts are focused
on individual oncologists who prescribe such drugs. The market for intravenous
therapies for PCP is concentrated in about 120 hospitals which are found
primarily in major metropolitan areas, as well as private medical practices that
treat patients at risk for PCP. The use of such drugs may require acceptance
onto an individual hospital's formulary. The company's marketing efforts are
directed at prescribing physicians, pharmacists and members of the formulary
committees at these hospitals.


                                       11
<PAGE>   13

            In the United States, the company's marketing efforts are focused on
approximately 5,500 physicians. This audience is comprised of oncologists,
infectious disease specialists and other physicians who treat patients with
cancer or PCP. With respect to Hexalen, the company has directed most of its
marketing efforts to approximately 4,000 physicians who have prescribed Hexalen
at some point since its introduction or have reasonable potential to prescribe
Hexalen. With respect to NeuTrexin, the company has directed its marketing
efforts to approximately 1,500 specialists who treat PCP. Under the terms of its
agreement with ALZA for Ethyol, ALZA has exclusive marketing rights to Ethyol.
Thus, ALZA directs the marketing program in the United States for Ethyol. See
"Principal Products - Ethyol - Marketing."

            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.

            It is normal and customary in the pharmaceutical business in the
United States for wholesalers and distributors to be able to return
pharmaceutical products that remain unsold at their expiration date. It is
generally the company's policy to accept return of out-of-date pharmaceutical
products which the company has sold to the wholesalers and distributors for
direct end-market sales. These returns are accepted under terms and conditions
set by the company.

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

            For information regarding the company's major customers and
geographic area data, see "Notes to the Consolidated Financial Statements - Note
10."

Competition

            The sales potential of a pharmaceutical product is dependent upon
numerous variables, including efficacy, toxicity, trends in current treatment
regimens, established treatment algorithms, ease of incorporation into
combination regimens, reimbursement, pharmacoeconomic impact, clinical data,
price, acceptance by physicians, marketing, distribution and competitive
products. 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 labeling are also
critical. See "Government Regulation."

            The company is engaged in an industry that is highly competitive.
Many companies, including well known pharmaceutical companies, are marketing
anticancer drugs, drugs to ameliorate or treat the side effects of cancer
therapies, and drugs for the treatment of AIDS and allied diseases, and are
seeking to develop new products and technologies for these applications. 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, technical, manufacturing, marketing and other resources than
the company and may be better equipped than the company to develop, market and
manufacture these therapies. 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. No assurance can be given
that


                                       12
<PAGE>   14

drugs developed by the company will be able to compete successfully 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, the company's
drugs may become subject to generic competition at such times as generic
applications for drug approvals may be filed and approved by the FDA.

            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), Hoffmann-La Roche, Johnson & Johnson, Immunex
Inc. (a subsidiary of American Home Products), Amgen, Inc., Chiron Corporation,
Rhone-Poulenc Rorer S.A., Eli Lilly and Company and SmithKline Beecham p.l.c.

            In the United States, Glaxo Wellcome, Inc., Hoffmann-LaRoche, Inc.,
Pharmacia & Upjohn, Inc., Gensia, Inc. and Fujisawa Pharmaceutical Co., Ltd.
participate in the PCP market.

            Other groups active in anticancer and AIDS research include
universities and public and private research institutes. These institutions 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 institutions represent an
important source of novel compounds for in-licensing, since often their mission
does not include bringing compounds to market and they generally lack the
capabilities to do so.

Manufacturing

            The company has a small volume parenteral products manufacturing
facility in Nijmegen, The Netherlands, to manufacture the company's injectable
drug supplies. 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 also been inspected by
the FDA and approved as a manufacturing site for NeuTrexin and Ethyol for
commercial sale in the United States. The company relies on third parties to
manufacture drug substance for all of its products and to a decreasing, but
still important extent, on third parties to manufacture its finished drug
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 discussions of the patent rights
under "Principal Products." Under


                                       13
<PAGE>   15

these agreements, the company is obligated to pay royalties at 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 discussions of the various
license agreements under "Principal Products."

            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 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.

            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. These agreements provide that all
confidential information developed or made known to the individual during the
course of the individual's relationship with the company is to be kept
confidential and not disclosed to third parties except in specific
circumstances. In the case of employees, the agreements provide that all
inventions conceived by the employee shall be the exclusive property of the
company. 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 provisions of the FFDCA, 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. FDA may withdraw orphan exclusivity if it determines there are
insufficient quantities of the product available to the public. FDA may also
approve another drug for the same indication if it is characterized as not the
same drug because it is clinically superior. The company holds orphan drug
designations for Ethyol for use as a chemoprotective agent for use with
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. The company's
seven year regulatory exclusivity associated with the orphan drug designation
for Hexalen for advanced ovarian cancer expired in December 1997. See "Principal
Products."

            Orphan drug marketing exclusivity is only available to the sponsor
of the first approved NDA for a product that has been designated as an orphan
drug by the FDA. Following the first such approved orphan drug NDA, the FDA
would be prohibited from approving another company's NDA for the same drug for
the same indication for a period of seven years. However, prior to the approval
of the first such orphan drug NDA, it is


                                       14
<PAGE>   16

possible that more than one product may be designated by the FDA as an orphan
drug for the same indication. Therefore, because only the first sponsor to
obtain NDA approval of an orphan designated drug is entitled to the benefits of
market exclusivity, there is a risk that not all sponsors who receive an orphan
drug designation for a particular indication will gain the benefits of such
exclusivity or will not themselves be excluded from the market.

            The company has received several orphan drug designations for
additional uses of NeuTrexin and Ethyol. In addition, the company believes that
several of its other products and indications may also qualify for designations
as orphan drugs. There can be no assurance, however, that such orphan designated
products, or any products that may be designated as orphan drugs in the future,
will be the first such drug to receive FDA approval, or will not themselves be
excluded from the market if FDA first approves a competing orphan drug NDA or
will not have competition from a clinically superior version of a drug. There
also can be no assurance that the orphan drug provisions of the FFDCA will not
be amended, or that the benefits of the existing statute 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,
marketing, labeling, storage, record keeping, quality control, advertising and
promotion of the company's products. Failure to comply with applicable FDA
requirements can, among other things, result in Warning Letters, fines,
suspensions of regulatory approvals, product recalls or seizures, operating
restrictions, injunctions and criminal prosecution.

            A new drug may not be marketed in the United States until it has
undergone rigorous testing and has 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 Investigational New Drug application (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 establishment where the drug is to
be manufactured for sale in the United States must be registered with the FDA.
Domestic manufacturing establishments must comply with current good
manufacturing practices ("GMP") and are subject to periodic inspections by the
FDA. Foreign manufacturing establishments also must comply with GMPs and are
subject to periodic inspection by the FDA and/or by local authorities under
agreement with the FDA.

            Preclinical tests include laboratory evaluations 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
an IND applicant will be allowed to commence clinical trials following
submission of an IND.


                                       15
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            Clinical trials involve the administration of the investigational
drug to patients. Clinical trials typically are conducted in three phases which
generally are conducted sequentially. Drugs are first tested in Phase I 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 generally 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 company and/or the FDA may suspend clinical trials at any
time if it decides that patients are being exposed to a significant health risk
or there are other concern about the validity of the trial.

            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 from six months to one year 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. Under the Food and Drug
Modernization Act of 1997 ("FDAMA"), the FDA may determine that data from one
such clinical trial may be sufficient. The FDA may request additional
information, such as long term toxicity studies or other long-term studies
relating to product safety or efficacy. 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.

            Under FDAMA, the FDA is statutorily authorized to expedite (or "fast
track") the approval of certain drugs and biological products that are intended
to treat serious or life-threatening illnesses and may address unmet medical
needs. The "fast tract" provisions of FDAMA are intended to codify existing FDA
Accelerated Approval Regulations. Fast track approval is available when a
product has been shown to have an effect on a clinical or surrogate endpoint
that is reasonably likely to predict clinical benefit. Drugs that receive fast
tract approval may be subject to certain requirements, including that the
sponsor conduct the necessary and appropriate post-approval studies, and that
the sponsor submit copies of all promotional materials for FDA review during the
pre-approval review period and for a period of time following approval as
specified by the FDA. Under FDAMA, the FDA may withdraw the approval of a fast
track product if: (1) the sponsor fails to conduct any of the required
post-approval studies of the product with due diligence; (2) a post-approval
study of the fast track product fails to verify the product's clinical benefit;
(3) other evidence demonstrates that the fast track product is not safe or
effective under the conditions of use; or (4) the sponsor disseminates false or
misleading promotional materials regarding the product.

            Under existing Accelerated Approval Regulations promulgated prior to
enactment of FDAMA, which still are effective, the agency will accelerate
approval of certain drugs and biological products for serious or
life-threatening illnesses, with provisions for any necessary continued study of
the drugs' clinical benefit, after approval or with restrictions on use, if
necessary. Accelerated approval is considered when approval can be


                                       16
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reliably based on evidence from adequate and well-controlled studies of the
drug's effect on a surrogate endpoint that reasonably suggests clinical benefit
or on evidence of the drug's effect on a clinical endpoint other than survival
or irreversible morbidity, pending completion of studies to establish and define
the degree of clinical benefits to patients. Additionally, the FDA may determine
that a drug shown to be effective for the treatment of a serious or life
threatening disease can be used safely only if distribution or use is modified
or restricted. Drugs approved under the Accelerated Approval Regulations are
subject to the requirement that the drug be studied further, after approval,
where there is uncertainty regarding the clinical benefit or ultimate outcome.
The FDA has the authority to withdraw approval, following a hearing, if: (1) a
postmarketing clinical study fails to verify clinical benefit; (2) the applicant
fails to perform the required postmarketing study with due diligence; (3) use
after marketing demonstrates that postmarketing restrictions are inadequate to
assure safe use of the drug product; (4) the applicant fails to adhere to the
postmarketing conditions agreed upon; (5) promotional materials are false or
misleading; or (6) other evidence demonstrates that the drug product is not
shown to be safe or effective under its conditions of use.

            Under the regulations governing accelerated approvals, promotional
materials must be submitted to the FDA at least 30 days prior to the intended
time of initial dissemination of such materials. This is in contrast to the
FDA's requirement for drugs approved by the FDA not under the Accelerated
Approval Regulations, where promotional materials must be provided to FDA upon
first use.

            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. 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. In addition, for commercial
sales in the United States, the drug must be manufactured at manufacturing sites
approved by the FDA for the manufacture of the particular drug. Therefore, the
company is highly dependent on the ability of the approved facility or
facilities to manufacture the particular drug. A fire or other disaster
affecting an approved manufacturing site could have a materially adverse effect
on the ability of the company to supply a particular drug product. In addition,
foreign regulatory authorities may also require that manufacturing sites for
drugs be approved to manufacture the particular drug.

            Adverse experiences with the product must be reported to the FDA and
other regulatory authorities. 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.

            Under FDAMA, the FDA has been reauthorized to impose user fees on
manufacturers of prescription drugs. User fees were initially authorized under
the Prescription Drug User Fee Act of 1992, which was enacted to expedite FDA
review and approval of new drugs by providing the FDA with additional funding.
There are


                                       17
<PAGE>   19

three kinds of user fees that can be imposed: (1) a one-time fee for each single
source prescription NDA or supplemental NDA that incorporates new clinical data
submitted on or after September 1, 1992; (2) an annual fee for each
establishment named in an NDA that manufactures the product in the NDA; and (3)
an annual fee for each single source prescription drug product marketed. Under
FDAMA, no user fees are assessed on NDAs for products designated as orphan
drugs, unless such application also includes a non-orphan indication.

            The company also is subject to foreign regulatory requirements
governing clinical trials, manufacturing of products, marketing of products,
product approvals, marketing authorization, and pricing approvals. Whether or
not FDA approval has been obtained, approvals and/or authorizations 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 may require the licensee or
the distributor to be responsible for obtaining regulatory approvals and/or
authorizations in their respective territories.

Scientific Advisory Board and 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 will 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 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.

Employees

            As of December 31, 1998, the company employed 153 persons, including
five part-time employees.

            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.


                                       18
<PAGE>   20

Executive Officers of the Registrant

            The executive officers of the company are as follows:

<TABLE>
<CAPTION>
    Name                 Age      Position
    ----                 ---      --------
<S>                      <C>      <C>
C. Boyd Clarke           50       President, Chief Executive Officer and
                                  Director

Robert I. Kriebel        56       Executive Vice President, Chief Financial
                                  Officer, Treasurer and Director

Martha E. Manning        44       Executive Vice President, General Counsel
                                  and Secretary

Wolfgang Oster, M.D.     41       Executive Vice President, Worldwide Clinical
                                  Research
</TABLE>

            Mr. Clarke was elected to the Board of Directors in September 1996
when he joined the company as President and Chief Operating Officer. In March
1998, he was promoted to the position of President and Chief Executive Officer.
From 1977 until Mr. Clarke joined the company, Mr. Clarke held various positions
with Merck & Co. and its affiliates, including Vice President, Strategy,
Alliance Management and Development of Merck Vaccines from 1995 to 1996;
President of Pasteur-Merieux MSD, from 1993 to 1994; General Manager,
Pasteur-Merieux - Merck Affairs of Merck & Co., Inc., from 1992 to 1993; and
Executive Director, Corporate Planning of Merck & Co., Inc., from 1988 to 1992.

            Mr. Kriebel joined the company in April 1991 as Senior Vice
President - Finance and Administration and Treasurer and was elected Director in
May 1991. On September 26, 1996, Mr. Kriebel was promoted to the position of
Executive Vice President, Chief Financial Officer and Treasurer. 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. Manning joined U.S. Bioscience as Vice President, General
Counsel and Secretary in May 1993. In December 1996, Ms. Manning was promoted to
Senior Vice President, General Counsel and Secretary, and in December 1998, she
was promoted to Executive Vice President, General Counsel and Secretary. From
July 1988 until joining U.S. Bioscience, Ms. Manning 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
was an associate with the law firm Morgan, Lewis & Bockius.

            Dr. Oster joined the company on December 10, 1992 and early in 1993
became Vice President, Clinical Research, located in the company's Watford,
United Kingdom office. Effective December 11, 1996, Dr. Oster was promoted to
the position of Senior Vice President, Worldwide Clinical Research and relocated
to the company's United States offices in West Conshohocken, Pennsylvania. In
December 1998, he was promoted to


                                       19
<PAGE>   21

the position of Executive Vice President, Worldwide Clinical Research. Prior to
joining U.S. Bioscience, he served as director of clinical research and
development for oncology at Behringwerke/Hoechst in Marburg, Germany from 1989
to 1992. He continues as adjunct professor and member of the faculty of the
Albert-Ludwig University, Freiburg, Germany. He is a graduate of the University
of Mainz, Germany, where he earned the degree of Bachelor of Science and a
graduate of the University of Mainz Medical School as well. He did post-doctoral
training at the University of Mainz and the Memorial Sloan-Kettering Cancer
Center in New York.

Risk Factors

            The prospects of the company may be affected by a number of risk
factors, including the matters discussed below:

            Reliance on Collaborative Marketing, Manufacturing and Selling
Arrangements

            The company commercializes all three of its marketed products
through various contractual arrangements with other companies and, therefore,
the company is highly dependent on its contractual partners for marketing,
manufacture and sale of its drug products. If any of the company's major
commercial partners (such as ALZA for Ethyol in the U.S. market) fails to
successfully commercialize the company's product(s), the company's business
would suffer. In addition, the company could have disagreements or disputes with
its commercial partners which could result in decreased sales of the company's
products. There is also the risk that the company may not be able to negotiate
acceptable contractual arrangements with the commercial partners that the
company desires in the future.

            Future Capital Needs; Availability of Adequate Funds

            The company believes that its current cash and investments and
anticipated revenues from product sales and other sources will be sufficient to
cover the company's anticipated level of cash requirements for at least three
years. However, the company cannot be sure that it will achieve significant
revenues or profitable operations. The company's future capital requirements
will depend on many factors, including the costs of research and development,
marketing and administration, capital equipment and facilities; the time and
costs involved in obtaining regulatory approvals; the costs involved in filing,
prosecuting and enforcing patent claims; competing technological and market
developments; changes in commercial partners and the ability of the company to
establish and maintain good collaborative relationships; and the cost of
manufacturing scale-up and effective commercialization activities and
arrangements. If the company's existing resources are insufficient to fund its
activities, additional funds may be raised, including through public or private
financings. Additional funds may not be available when needed, or, if available,
they may not be available on acceptable terms. If addition, if funds are raised
by issuing Common Stock (or securities convertible into Common Stock), the
interests of existing stockholders may be diluted. If adequate funds are not
available, the company may have to significantly curtail one or more of its
research or development programs or obtain funds through arrangements with
collaborative partners or others that could require the company to give up
rights to certain of its technologies, product candidates or products.

            Uncertainty Associated with Clinical Trials

            The company is engaged in an extensive program of clinical trials
which hopefully will demonstrate the efficacy, safety and benefit to patients of
its marketed products and its products in clinical development. There are
significant risks involved in each stage of clinical drug development. The
company or a regulatory agency


                                       20
<PAGE>   22

(the FDA in the U.S.) may suspend clinical trials at any time if the patients
participating in such trials are being exposed to unacceptable health risks.
Further, there is always a risk that a clinical trial will not demonstrate that
a product or product candidate is safe or effective, or that regulatory agencies
will not approve a product for the indication(s) the company seeks.

            The completion of each clinical trial depends on the rate of patient
enrollment and the quality of the data, among other things. Patient enrollment
depends on several factors, including the size of the patient population, the
nature of the protocol, eligibility criteria for the study, whether the patient
population can complete the protocol, the proximity of patients to clinical
sites and the ability of investigators to continue follow up on patients with
life threatening diseases. Data quality also depends on many factors, including
the skill and diligence of participating investigators, research staff and
clinical monitors. The company could have increased expenses and delayed
revenues if it cannot achieve timely patient enrollment and retrieve quality
data from its clinical trials.

            No Assurance of Regulatory Approvals

            The development, production and marketing of the company's products
are subject to regulation by numerous federal, state and local governmental
authorities in the United States and other countries where the company intends
to test and market its products. Prior to marketing, each drug product developed
by the company must undergo an extensive regulatory approval process. In
addition, before beginning a clinical study, it must be approved by an
independent Institutional Review Board ("IRB") that considers ethical factors,
the safety of patients, the possible liability of the host institution and other
factors.

            The regulatory process, which includes preclinical and clinical
testing of each drug candidate to establish its safety and efficacy, normally
takes many years and requires the expenditure of substantial resources. At any
time during the regulatory review, it is possible that the company and the
regulatory agencies may have different interpretations of data obtained from
preclinical and clinical activities, and those differences could delay, limit or
prevent regulatory approvals. In addition, the company may encounter delays or
rejections resulting from regulatory policies for drug approval that may occur
during the period of product development and regulatory review. For a variety of
reasons, the company may not obtain regulatory approval of one or more of the
new drugs or indications it seeks. Even if the company does receive regulatory
approval of a drug, the approval may be limited in terms of the indicated uses
for which the drug is approved for marketing. After a product is approved and on
the market, if regulatory agencies identify previously unknown problems with the
product, manufacturer or facility, they may place restrictions on the product or
the manufacturer, and may require withdrawal of the product from the market. If
the company fails to comply with applicable regulatory requirements, the results
could include fines, suspensions of regulatory approvals, product recalls,
operating restrictions and criminal prosecution. Since the regulatory
environment is subject to change, the company may be subject to additional
regulation which could prevent or delay regulatory approval of the company's
products.

            Accelerated Approval Regulations

            The company's product Ethyol is approved for reduction of renal
toxicity associated with repeated administration of cisplatin in patients with
non-small cell lung cancer under the Accelerated Approval Regulations. In
December of 1992, the FDA issued regulations (Accelerated Approval Regulations)
under which the agency will accelerate approval of certain drugs and biological
products for serious or life-threatening illnesses, with provisions for any
necessary continued study of the drugs' clinical benefit, after approval or with
restrictions on use, if necessary. Accelerated approval is considered when
approval can be reliably based on


                                       21
<PAGE>   23

evidence from adequate and well-controlled studies of the drug's effect on a
surrogate endpoint that reasonably suggests clinical benefit or on evidence of
the drug's effect on a clinical endpoint other than survival or irreversible
morbidity, pending completion of studies to establish and define the degree of
clinical benefits to patients. The FDA may determine that a drug, effective for
the treatment of a disease, can be used safely only if distribution or use is
modified or restricted. Drugs approved under the Accelerated Approval
Regulations are subject to the requirement that the drug be studied further
after approval where there is uncertainty regarding the clinical benefit or
ultimate outcome. FDA has the authority to withdraw approval, following a
hearing, if: (1) a postmarketing clinical study fails to verify clinical
benefit; (2) the applicant fails to perform the required postmarketing study
with due diligence; (3) use after marketing demonstrates that postmarketing
restrictions are inadequate to assure safe use of the drug product; (4) the
applicant fails to adhere to the postmarketing conditions agreed upon; (5)
promotional materials are false or misleading; or (6) other evidence
demonstrates that the drug product is not shown to be safe or effective under
its conditions of use. Therefore, the company cannot be certain that FDA, having
granted accelerated approval of Ethyol for non-small cell lung cancer, will not
later withdraw that approval.

            Uncertainty Associated with Health Care Delivery and Third-Party
Reimbursement

            There continue to be significant changes in health care and the way
health care is delivered. For example, in the Balanced Budget Act of 1997,
Congress established reimbursement for prescription drugs under Medicare at 95%
of the drug's average wholesale price and additional reductions have been
recommended by the Health Care Financing Administration. The company is unable
to predict the effect of future changes to health care and its delivery on the
future operation of the company's business. Government and other third-party
payors are increasingly attempting to contain health care costs by limiting both
coverage and the level of reimbursement for therapeutic products. If adequate
coverage and reimbursement levels are not provided by government and third-party
payors for uses of the company's products, the market acceptance of these
products would be adversely affected. Other changes affecting drug pricing, drug
reimbursement, prescription benefits and levels of reimbursement for drugs could
have a significant negative effect on the company's business.

            Technological Change and Competition

            The company is engaged in a business that is highly competitive.
Many companies, including well known pharmaceutical companies, are marketing
anticancer drugs, drugs to reduce or treat the side effects of cancer therapies
and drugs for the treatment of AIDS and allied diseases, and many are also
seeking to develop new products and technologies for these applications. Many of
these drugs, products and technologies are, or in the future may be, competitive
with the company's drugs.

            The company's Phase III clinical studies for Ethyol and NeuTrexin,
and its Phase II study of lodenosine, are conducted in conjunction with the
administration of specific treatment regimens which the company selected because
when the studies were planned the selected regimens were standard treatment for
the patient population under study. It is possible that one or more of these
treatment regimens will not remain a standard treatment for the study patient
population throughout the study. If that happens, the company might not be able
to enroll or treat enough patients to complete one or more of its studies as
planned, and could decide to discontinue any of its studies altogether.

            Many competing companies 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. Many of these companies are better equipped to penetrate the
commercial market


                                       22
<PAGE>   24

with significantly more sales representatives than the company. In addition,
many of these companies have had more experience in undertaking preclinical
testing and human clinical trials and in obtaining regulatory approvals to
market products for health care. It is possible that the drugs developed by the
company will not be able to compete successfully against therapies already
established in the marketplace or against therapies which may result from
advances in the field that make the company's drugs less competitive or
obsolete. In addition, generic competition may threaten the success or
profitability of any of the company's drugs when generic applications for the
drug are approved by regulatory agencies.

            Dependence on Patents and Proprietary Rights

            The company's success depends, in part, on the ability of the
company and its licensors to obtain protection for its products and technologies
under United States and foreign patent laws, on their ability to preserve trade
secrets and on their ability to operate without infringing the proprietary
rights of third parties. It is possible that patent applications relating to the
company's products or technologies (whether now or in the future licensed by the
company from others) will not result in patents being issued, that any issued
patents may not afford adequate protection to the company and that the company
will not gain any competitive advantage by having rights under issued patents.
It is also possible that others may have independently developed, or may
independently develop, products or technologies that are similar to (or the same
as) those of the company or that others may design around patents that are
issued to the company.

            It is also a risk that others may challenge the validity of any of
the patents owned or licensed by the company. If that happened, a court could
decide that the challenged patents are not valid or that the company's
activities infringe patents owned by others. The company could incur substantial
costs in defending itself in suits brought against it or any of its licensors,
or in pursuing suits against others to protect patent rights. If a court
determines that the company's products or technologies infringe patents issued
to third parties, the court could forbid the manufacture, use and sale of the
company's infringing products and could require the company to pay substantial
damages. In addition, the company may need to obtain licenses to patents or
other proprietary rights of third parties, in order to develop and commercialize
its own products and technologies. It is possible that the company may not be
able to obtain the rights it needs under terms that are acceptable to the
company, if at all.


            The company also relies on trade secrets and proprietary know-how
which it tries to protect, in part, by entering into confidentiality agreements
with its employees, consultants, advisors and others. If any of these people
fail to maintain the confidentiality of the company's trade secrets or
proprietary information, the company could lose some competitive advantage or
suffer other damage. Even if these people maintain the confidentiality of the
company's trade secrets and proprietary information, there is a risk that the
company's trade secrets or proprietary know-how may become known or may be
independently developed by others in a way that will leave the company no
practical remedy.

            Limited Manufacturing Experience

            The company's ability to operate profitably depends in part on its
ability to manufacture its products at a competitive cost. The manufacture of
sufficient quantities of new drugs is typically a time-consuming and complex
process. It is possible that the company and its third-party suppliers may not
be able to manufacture one or more of the company's product candidates at a cost
or in amounts that are necessary to make the product commercially viable.


                                       23
<PAGE>   25

            The company and its drug product suppliers must comply with all
applicable regulatory requirements relating to their manufacturing facilities,
including Good Manufacturing Practices, and governmental agencies may inspect
their facilities to determine whether they are in compliance with those
requirements. If regulatory agencies identify previously unknown problems with a
product, manufacturer or facility, they may place restrictions on the product or
the manufacturer, and may require withdrawal of the product from the market. If
the company fails to comply with applicable regulatory requirements, the results
could include fines, suspensions of regulatory approvals, product recalls,
operating restrictions and criminal prosecution.

            Dependence on Key Personnel and Consultants

            The company is dependent on its key personnel and consultants. The
company's loss of their services could slow down the achievement of its
research, development, regulatory, manufacturing and/or marketing and sales
objectives. Recruiting and retaining qualified and experienced personnel to
perform research and development work in the future is critical to the company's
success. However, the company experiences substantial competition in attracting
and retaining qualified personnel, in many cases from businesses and
institutions with significantly greater resources.

            Potential Product Liability and Adequacy of Insurance

            The company conducts research using chemicals that may be
carcinogenic or toxic. The company also develops and sells human health care
products. These activities entail an inherent risk that employees, patients and
others may make product liability claims against the company. The company
currently carries product liability coverage on a claims made and reported basis
in the aggregate amount of $20,000,000 per policy year. The company believes
such coverage is commercially reasonable in light of its current operations, but
there is a risk that this coverage may not 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.

            In the past, the pharmaceutical industry has had difficulty
obtaining and maintaining product liability insurance coverage at reasonable
levels, and it is possible that future increases in the cost of this coverage
may make it economically impractical. Although the company will try to carry
reasonable levels of product liability insurance, it is not certain that such
coverage will be available on reasonable terms or that the amount of coverage
obtained will prove adequate for any period. The company could suffer serious
damage as a result of any product liability claims against it.

            Use of Hazardous Materials

            The company's research and development activities and manufacturing
activities involve the use of hazardous materials and chemicals. The company
cannot eliminate the risk of accidental contamination or injury from these
materials. In the event of such an accident, the company could be liable for any
resulting damages, which could exceed the resources of the company.

            Volatility of Stock Price

            The market price of the company's Common Stock, like that of the
securities of many other high technology companies, is highly volatile. Several
factors may have a significant effect on the price of the Common Stock, such as
fluctuations in the company's operating results, technological innovations, new
product announcements, merger and acquisition announcements or rumors,
regulatory approvals, regulatory changes,


                                       24
<PAGE>   26

changes in patents and other proprietary rights, public concerns as to drug
safety and general market conditions. In addition, market forces, such as
program trading and day trading may increase the risk of volatility.

            Anti-Takeover Effects of Certain Charter Provisions

            The Board of Directors of the company has the authority to issue up
to 5,000,000 shares of preferred stock and to determine the designations,
powers, preferences, rights, qualifications, limitations, restrictions and the
relative, participating, optional or other special rights of those shares,
without any further action by the stockholders. The rights of holders of the
company's Common Stock could be negatively affected by the rights of holders of
any shares of preferred stock that the company may issue in the future. The
company could issue preferred stock, or rights to purchase preferred stock, in a
way that could be used to discourage an unsolicited acquisition proposal or to
make it more difficult for a third party to acquire a majority of the
outstanding voting stock of the company.

Item 2. Properties.

            The company's principal offices comprise approximately 26,860 square
feet of space in West Conshohocken, Pennsylvania. The space is rented pursuant
to a lease which expires on October 31, 2003, but which may be terminated early
by either the company or the landlord, effective October 31, 2000, in accordance
with the notice and other conditions for early termination set forth in the
lease. The company also leases 10,000 square feet of laboratory space in Exton,
Pennsylvania which is used as an analytical laboratory to conduct small scale
product analysis, testing and development. This laboratory space is leased
pursuant to a lease that expires June 30, 2000.

            The company's United Kingdom operations are conducted through its
subsidiary, USB Pharma Limited, which was reorganized during 1997. These
operations are presently housed in a 1,362 square foot office in an office
building in Watford, Hertfordshire, England. This space is rented pursuant to a
three-year lease which began December 15, 1997. Before the reorganization, these
operations were housed in an 8,689 square foot office in an office building,
also in Watford, Hertfordshire, England, which space has been assigned to a new
tenant for the remainder of the ten-year lease term that began March 25, 1997.
The assigned lease can be terminated at the end of five years subject to an
early termination fee of (pound)50,000. The company has guaranteed the
obligations of the new tenant under the assigned lease.

            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
square foot facility designed to manufacture sterile products. The facility was
purchased in March 1993 for $2,250,000. The company has invested approximately
$4 million in renovations to the facility. The facility became subject to a
mortgage of approximately $680,000 in March 1994. The company leases warehouse
space in Nijmegen, The Netherlands of approximately 9,000 sq. feet. This space
is subject to a lease that may be terminated effective in 2003.

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

Item 3. Legal Proceedings.

            On February 28, 1996, Ichthyol Gesellschaft Cordes, Hermanni & Co.
("Ichthyol Gesellschaft") filed a complaint for refrain, information and damages
with the Regional Court of Hamburg against U.S. Bioscience, Inc. on the grounds
of trademark infringement in respect of the use of the trademark "Ethyol" in
Germany. On


                                       25
<PAGE>   27

April 29, 1996, U.S. Bioscience filed a reply to Ichthyol Gesellschaft's
complaint stating U.S. Bioscience's position that the trademark "Ethyol" does
not infringe plaintiff's trademark rights in the trademark "Ichthyol" nor
Ichthyol Gesellschaft's firm right in the slogan "Ichthyol." The suit was
dismissed on January 29, 1997, by the Regional Court of Hamburg at which time
Ichthyol Gesellschaft was given leave to appeal against the judgment rendered in
favor of U.S. Bioscience, Inc. Ichthyol Gesellschaft, filed an appeal, and a
judgment was rendered in favor of U.S. Bioscience in the appellate proceedings.
In January 1999, Ichthyol Gesellschaft filed an appeal on points of law with the
Federal Court of Justice, which has extended until May 17, 1999 the deadline for
Ichthyol Gesellschaft to file the grounds for the appeal on points of law. It is
not possible to predict the decision of the Federal Court of Justice with
respect to this appeal.

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

            Not applicable.


                                       26
<PAGE>   28

                                     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 reported by the AMEX for the periods
indicated.

<TABLE>
<CAPTION>
                                            High                       Low
                                            ----                       ---
<S>                                      <C>                           <C>     
Year ended December 31, 1998
         First Quarter                   12 1/4                        7 13/16
         Second Quarter                  11 3/16                       8 1/16
         Third Quarter                    8 5/8                        4 7/8
         Fourth Quarter                   9 1/4                        4 1/2

Year ended December 31, 1997
         First Quarter                   17 3/8                       11 3/8
         Second Quarter                  11 3/4                        8 11/16
         Third Quarter                   12 1/16                       9 1/4
         Fourth Quarter                  13 1/2                        8 3/8
</TABLE>

            On March 1, 1999, there were 4,367 holders 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.

            On January 27, 1999 the company entered into a Securities Purchase
Agreement with Domain Partners IV, L.P., DP IV Associates, L.P. and Proquest
Investments, L.P. (the "Purchasers") for the issuance and sale by the company to
the Purchasers of an aggregate of 2,686,728 shares of the company's Common Stock
at a price of $7.444 per share and warrants to purchase 537,346 shares of the
company's Common Stock, exercisable until February 2, 2002 at an exercise price
of $11.16. The purchase and sale of these securities were consummated in
accordance with the Securities Purchase Agreement on February 2, 1999. No
underwriters were involved in the sale and no underwriting discounts or
commissions were paid. The company claimed exemption from registration of these
securities pursuant to Section 4(6) of the Securities Act of 1933, as amended,
and Rule 506 thereunder, as set forth on its Form D filed with the Securities
and Exchange Commission on February 11, 1999. In determining that this exemption
was available, the company relied on the fact that there were only three
Purchasers, each of which had represented to the company that it was an
accredited investor. The foregoing description of this sale of unregistered
securities is qualified in its entirety by reference to the company's Current
Report on Form 8-K with respect thereto which was filed with the Securities and
Exchange Commission on February 3, 1999.


                                       27
<PAGE>   29

Item 6. Selected Financial Data.

         The selected financial data presented below for each of the five years
in the period ended December 31, 1998 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, including the
notes thereto and "Management's Discussion and Analysis of Financial Condition
and Results of Operations" included in this Annual Report on Form 10-K.

<TABLE>
<CAPTION>
                                                                                           YEAR ENDED DECEMBER, 31
                                                                      --------------------------------------------------------------
Statement of Operations Data:(1)                                         1998         1997         1996         1995        1994
                                                                      --------------------------------------------------------------
<S>                                                                   <C>          <C>          <C>          <C>          <C>      
Revenues:
  Net sales                                                           $  20,730    $  12,986    $  10,785    $   8,724    $   7,210
  Net investment income                                                   2,736        2,824        2,335        1,223        1,234
  Licensing, royalty and other income                                     6,005       11,913        7,344       21,398          102
                                                                      --------------------------------------------------------------
     Total revenues                                                      29,471       27,723       20,464       31,345        8,546
Expenses:
  Cost of sales                                                           5,788        4,158        2,956        2,559        1,694
  Selling, general and administrative costs                              13,546       14,387       12,275       16,583       13,233
  Research and development costs                                         19,042       16,904       14,383       12,186       17,608
  Interest expense                                                          149          183          537          255           52
                                                                      -------------------------------------------------------------
     Total expenses                                                      38,525       35,632       30,151       31,583       32,587
                                                                      -------------------------------------------------------------
Net loss                                                               ($ 9,054)   ($  7,909)   ($ 9,687)      ($ 238)    ($ 24,041)
                                                                      ==============================================================
Basic and diluted net loss per common share                             ($ 0.37)     ($ 0.33)    ($ 0.43)      ($ 0.01)    ($  1.19)
                                                                      ==============================================================
Weighted average number of common shares outstanding(2)                  24,307       23,872       22,396       20,436       20,127
</TABLE>

<TABLE>
<CAPTION>
                                                                                                DECEMBER 31,
                                                                      --------------------------------------------------------------
Balance Sheet Data:(1)                                                     1998         1997         1996         1995         1994
                                                                      --------------------------------------------------------------
<S>                                                                   <C>          <C>          <C>          <C>          <C>      
Cash, cash equivalents and investments                                $  41,949    $  50,651    $  36,677    $  45,596    $  24,428
Working capital                                                          18,680       32,835       34,126       42,577       21,536
Total assets                                                             52,722       62,381       49,111       61,880       34,464
Long-term debt                                                              523        1,135        1,845       19,088          997
Provision for litigation                                                     --           --           --           --        2,301
Other long-term liabilities                                               1,922        1,832        1,462        1,036          788
Accumulated deficit                                                    (131,580)    (122,526)    (114,617)    (104,930)    (104,692)
Stockholders' equity                                                     38,733       47,024       36,894       28,788       23,939
</TABLE>

(1)   In Thousands, except per share amounts

(2)   After giving effect to the 1 for 2 reverse stock split effected April 23,
      1996.


                                       28
<PAGE>   30

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

Overview

            This report on Form 10-K contains forward-looking statements
concerning the business and financial conditions of the company, which are
subject to certain risks and uncertainties that could cause actual results to
differ materially from those anticipated in any forward-looking statements.
Factors that could cause such differences include, but are not limited to those
discussed on this form 10-K including, without limitation in the Section of Item
1 entitled "Risk Factors."

            The following discussion also should be read in conjunction with the
Consolidated Financial Statements and the Notes to the Consolidated Financial
Statements on pages F-1 to F-20.

            From its inception in 1987 until March 1998, the company was a
development stage enterprise devoted 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 and commercializing its products in foreign markets
through distribution agreements with established pharmaceutical companies.
During the quarter ended March 31, 1998, the company completed a planned change
in senior management and the transition from a development stage enterprise to
one focusing on commercial operations and marketing.

            The company currently sells and markets three compounds in the
United States: Hexalen, introduced in January 1991, NeuTrexin, introduced in
January 1994, and Ethyol, which was made commercially available by the company's
U.S. distribution partner ALZA Corporation ("ALZA") in April 1996. The company's
marketing partner for European territories, Scherico Ltd. ("Scherico"), an
affiliate of Schering-Plough Corporation, has launched Ethyol in all major
European countries including, Germany, the United Kingdom, France, Spain and
Italy.

            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) further clinical trials aimed at label expansion and
regulatory approvals for Ethyol and NeuTrexin in the United States and Europe,
(ii) marketing of Hexalen, NeuTrexin and Ethyol in the United States, (iii)
clinical and preclinical testing of lodenosine, (iv) further product
development, and (v) enhancement of manufacturing and analytical capabilities.

            Commercial activities in 1998 focused on the promotion and sale, in
the United States, of the company's three commercially available products,
Ethyol, NeuTrexin and Hexalen. The company also managed six major Phase III
clinical trials during 1998. Four of these trials have the potential to expand
our understanding of how Ethyol may be used to reduce the toxicity of certain
radiation therapies and other chemotherapeutic agents. In September 1998, the
company submitted a supplemental filing for a radiation indication with the CPMP
in Europe. Similarly, in December 1998, the company submitted a supplemental new
drug application to the United States Food and Drug Administration ("FDA") for
the use of Ethyol to reduce the incidence of xerostomia (or severe dry mouth), a
common effect of radiation therapy for head and neck cancer. In early 1998, the
company received a $5 million payment from ALZA Corporation related to achieving
a milestone in the clinical development of Ethyol as a radiation protector in
the treatment of head and neck cancers.

            During 1998, the company continued to develop the use of NeuTrexin
in colorectal cancer in two on-going Phase III trials. The company, in
cooperation with the National Cancer Institute, also pursued preclinical


                                       29
<PAGE>   31

and product development activities for the development of lodenosine (FddA)
which has shown encouraging results in preclinical and early clinical studies as
a potential component of multi-drug regimens for the treatment of HIV infection.
In late 1998, the company began its own Phase II trial of lodenosine in
combination with indinavir and stavudine.

            In 1997, the company completed the sale of 1,178,882 shares of
Common Stock to ALZA Corporation and also received a $10 million clinical
milestone from ALZA in connection with the company's Phase III trial of the use
of Ethyol with Taxol and carboplatin in advanced non-small cell lung cancer. The
company signed agreements for the commercialization of NeuTrexin in over 40
additional countries. The company was awarded a three year contract by the
National Cancer Institute to provide analytical services with estimated revenues
of $2 million. The company also reorganized its European clinical organization.

            Commercial activities during 1996 centered around the launch of
Ethyol in the United States with the company's distribution partner ALZA, the
continued promotion and sale of Hexalen and NeuTrexin in the United States,
support of Ethyol marketing in Europe with Scherico and the conclusion of an
amendment in September 1996 to the marketing and distribution agreement for
Ethyol in Europe with Scherico. The company also pursued clinical programs to
expand the approved indications for Ethyol and NeuTrexin, principally in cancer
treatment regimens, achieved regulatory approvals for the use of Ethyol in
non-small cell lung cancer in the United States and several European countries,
and obtained the initial regulatory approvals for Ethyol in Canada, Australia
and other foreign markets. Additionally, third party contract manufacturing was
conducted at the company's manufacturing plant in The Netherlands and product
development activities were continued on drug products Ethyol, NeuTrexin and
lodenosine.

Results of Operations

1998 Compared with 1997

            Product sales increased to $20,729,700 for the year ended December
31, 1998 as compared to $12,985,800 in the prior year. The 60% increase in
product sales revenue is due to higher sales of Ethyol resulting from higher
shipments to and revenues received from the company's domestic and international
distribution partners and increased sales of NeuTrexin, the company's
anti-folate. The company continues to believe that Neutrexin sales have been
positively affected by the increased utilization of the product by oncologists
for the treatment of colorectal cancer, a use currently under investigation in
two company sponsored Phase III clinical trials. Sales of Hexalen declined
slightly compared to the prior year due to lower international sales and higher
U.S. product returns and rebates.

            Net investment income decreased to $2,736,300 in the year ended
December 31, 1998 as compared to $2,824,000 in the corresponding 1997 period due
to lower interest income provided from the smaller average portfolio balance
which resulted from the utilization of cash for operating activities during
1998.

            Licensing, royalty and other income decreased to $6,004,900 for the
year ended December 31, 1998 from $11,913,500 in the prior year due principally
to the receipt in 1997 of a $10 million payment from ALZA for achieving a
clinical development milestone. The amount recorded in the 1997 period also
includes a milestone payment received from an affiliate of Schering-Plough
Corporation for additional regulatory approvals of Ethyol in Europe and a
payment relating to the development of Ethyol. The 1998 amount includes a $5
million payment from ALZA received in February 1998 for achieving a clinical
development milestone in connection with the Phase III randomized trial of
Ethyol's radiation protective properties in patients with head and neck cancer.


                                       30
<PAGE>   32

            Cost of sales, which consists of product manufacturing, testing,
distribution and royalty expenses, increased due to the increase in sales. As a
percentage of sales, cost of sales for the year ended December 31, 1998,
declined to 28% of product sales from 32% in the prior year, with improved
margins on NeuTrexin and Ethyol reflecting increased trade prices and higher
production levels at the company's manufacturing plant in The Netherlands.

            Selling, general and administrative costs for the year 1998
decreased to $13,546,200 from $14,386,700 in 1997. The $840,500 decrease is
principally due to a $700,000 provision made in the second quarter of 1997 for
the reorganization of the company's European organization, reduced personnel
costs of $210,800 principally resulting from the reorganization of the company's
senior executive structure undertaken in the first quarter of 1998 and lower
personnel relocation costs, reduced insurance costs of $97,600 and a $74,300
reduction in marketing expenditures.

            Research and development costs for the year ended December 31, 1998
increased to $19,041,900 from $16,904,500 in 1997. The $2,137,400 increase is
principally due to the accrual of an approximately $1 million charge related to
a research consulting arrangement, increased U.S. clinical research costs of
$1,112,200 principally related to ongoing Phase III trials of Ethyol and
NeuTrexin and the start-up of a Phase II study of lodenosine, and $925,300 in
increased clinical and regulatory consulting costs. These increases are partly
offset by savings of approximately $1,200,000 in European clinical research
expenses due to the reorganization undertaken in 1997.

            The net loss for the year ended December 31, 1998 was $9,053,900 or
$0.37 basic and diluted net loss per common share as compared to a net loss of
$7,909,100 or $0.33 basic and diluted net loss per common share in 1997. The
major factor contributing to the reduced loss in 1997 was the $10 million
milestone payment received from ALZA as noted above.

1997 Compared with 1996

            Product sales increased to $12,985,800 for the year ended December
31,1997 from $10,785,200 in the prior year. The 20% increase was due to higher
Ethyol revenues from the company's major distribution partners, ALZA and
Scherico, which were partly offset by lower trade sales of NeuTrexin and Hexalen
in the United States. Ethyol revenue growth is attributable to the increasing
trade sales levels in the United States and Europe and the effects of an
amendment to the agreement with Scherico undertaken in September 1996. In the
United States, end-market sales, which were recorded by ALZA, increased to $20.6
million for the full year 1997 as compared to $9.4 million in 1996. The company
believes that sales of NeuTrexin were adversely affected by a decline in the
incidence and severity of Pneumocystis carinii pneumonia ("PCP") due to
improvements in treatment for human immunodeficiency virus (HIV) and the
prophylactic treatment of patients at risk for PCP. Despite the annual decline
in NeuTrexin sales, sales of the product increased markedly in the fourth
quarter of 1997 to levels not achieved since the second quarter of 1996. The
company attributes the reduction in Hexalen sales to increased competitive
pressures during 1997.

            Net investment income increased to $2,824,000 in the year ended
December 31, 1997 as compared to $2,335,300 in the full year 1996 due to higher
interest income resulting from the larger average portfolio balance resulting
from the funds raised in the sale of Common Stock to ALZA completed in the first
quarter of 1997.

            Licensing, royalty and other income increased to $11,913,500 for the
twelve month period ended December 31, 1997 from $7,343,500 in the prior year
due principally to the receipt of a $10 million milestone payment from ALZA for
meeting a clinical development milestone in connection with the company's Phase
III randomized trial of Taxol, carboplatin and Ethyol, the company's
cytoprotective agent, in patients with advanced


                                       31
<PAGE>   33

non-small cell lung cancer. The company also received, a payment from Scherico
relating to Ethyol product development.

            Cost of sales, which consists of product manufacturing, testing,
distribution and royalty expenses, increased as a percentage of sales in the
year ended December 31, 1997, due principally to product mix, notably increased
sales of Ethyol to the company's distribution partners.

            Selling, general and administrative costs for 1997 increased to
$14,386,700 from $12,274,800 in 1996. The $2,111,900 increase was principally
due to a $700,000 provision for the reorganization of the company's European
clinical research program and a $1,009,400 increase in promotional spending. The
remaining $402,500 increase was principally the net result of increased
personnel costs of $812,000 being partly offset by a decrease in corporate and
insurance expenses of $359,000 and lower travel related expenditures of $65,900.

            Research and development costs for the twelve month period ended
December 31, 1997 increased to $16,904,500 from $14,383,300 in 1996. The
$2,521,200 increase was principally due to increased payments for clinical
studies and related supplies of $1,575,900, higher personnel related costs of
$1,125,600 and travel expenses of $232,900, reflecting primarily the company's
Phase III clinical trials of Ethyol for use in radiation therapy and
chemotherapy, and for clinical trials of NeuTrexin for use in colorectal cancer.

            Interest expense decreased to $183,400 for the full year 1997 from
$537,600 in 1996 due principally to the conversion to equity, in early 1996, of
the company's entire $16.5 million convertible debenture issue.

            The basic and diluted net loss for the year ended December 31, 1997
was $7,909,100 or $0.33 loss per common share as compared to a basic and diluted
loss of $9,687,400 or $0.43 loss per common share in 1996.

Liquidity and Capital Resources

            Since its inception in 1987, the company has financed operations
principally through the sale of equity capital, the issuance of unsecured and
secured debt, investment income, sales of its drug products, Hexalen, NeuTrexin
and Ethyol, and revenues received through distribution and sublicense
agreements. As of December 31, 1998, the company's cash and investments totaled
$41,948,900. The company's investment portfolio consists of securities issued by
the U.S. Government or its agencies and investment grade corporate debt
instruments.

            During 1998, net cash used in operations amounted to $7,596,100
principally reflecting the net effect of the factors discussed above under
"Results of Operations" less non-cash charges of $912,300 and a net working
capital reduction of $455,800. Until such time as the company receives
significantly increased revenues, the company's cash position will continue to
be reduced due principally to expenditures in research, clinical development,
product development, marketing, selling and administrative activities. Failure
to achieve significant sales from the company's currently approved products and
to obtain additional regulatory approvals on products currently in development
would have a material adverse effect on the company. The level of future product
sales will depend on several factors, including product acceptance, market
penetration, competitive products, the incidence and severity of diseases and
side effects for which the company's products are indicated, the performance of
the company's licensees and distributors, and the health care and reimbursement
system existing in each market where the company's products are, or may become,
commercially available.

            In January 1999, the company entered into a $20,000,000 stock
purchase agreement with a group of private investors lead by Domain Partners IV
L.P., a leading health care venture capital fund, and Proquest Investments L.P.,
an oncology focused venture capital fund. Pursuant to the agreement, the company
issued to the investors 2,686,728 shares of Common Stock at a price of $7.44 per
share and warrants, exercisable for three


                                       32
<PAGE>   34

years, to purchase 537,346 additional shares of Common Stock at an exercise
price of $11.17 per share. The shares were purchased at the average closing
price of the company's Common Stock for the 30-day period ending January 26,
1999. The warrant exercise price is a 50% premium over that 30-day average
closing price. Except in certain change of control situations, the agreement
calls for the investors to hold the purchased securities for at least one year.
Following the closing of this transaction, the company had cash and marketable
securities of approximately $60 million.

            The company invests its cash in a variety of financial instruments,
principally securities issued by the U.S. Government and its agencies,
investment grade corporate debt, and money market instruments. These investments
are denominated in U.S. dollars. Investments in both fixed rate and floating
rate interest-earning instruments carry a degree of interest rate risk. Fixed
rate securities may have their fair market value adversely impacted due to rises
in interest rates, while floating rate securities may produce less income than
expected if interest rates fall. At December 31, 1998, a majority of the
company's investments were in floating rate instruments. The company does not
expect changes in interest rates to have a material impact on the results of
operations. See Note 3 to the consolidated financial statements for additional
information with respect to the investment portfolio.

            The company believes its current cash and investments coupled with
anticipated revenues generated from product sales and other sources, will be
sufficient to cover the company's anticipated level of cash requirements for a
period in excess of three years. However, the company's funding requirements may
change due to numerous factors, including but not limited to, sales of the
company's products, new clinical development initiatives, manufacturing costs,
reimbursement policies, regulatory and intellectual property requirements,
capital expenditures and other factors as discussed herein. 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 it 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 return on product sales will
be sufficient to cover operating expenses or that the company will have adequate
financial resources to commercialize its products.

            To meet its capital requirements, the company may from time to time
seek to access public or private financing markets by issuing debt, common or
preferred stock, warrants or other securities, either separately or in
combination. The company may also seek additional funding through corporate
collaborations or other financing vehicles, potentially including "off-balance
sheet" financing through partnerships or corporations. There can be no assurance
that such financings will be available at all or on terms acceptable to the
company. In addition, market reaction to any such financings may adversely
affect the price of the company's outstanding securities or debt.

            The company's net capital expenditures were $843,800 for the year
ended December 31, 1998. These expenditures principally relate to the company's
sterile products production facility in The Netherlands. This facility was
purchased in April 1993 and 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. The facility
was also approved by the FDA to manufacture NeuTrexin for the U.S. market in May
1995 and to manufacture Ethyol for the U.S. market in December 1996. The
manufacturing facilities of the company and its third party suppliers used to
produce its products are required to continually comply with all applicable FDA
requirements and those of regulatory authorities in other countries including
Good Manufacturing Practices, and are subject to inspection by governmental
agencies to determine compliance with those requirements. There can be no
assurance that the manufacturing facilities for the company's products will
comply with applicable requirements. A mortgage loan of approximately $456,000
relating to the company's facility in The Netherlands is currently outstanding.
The purchase price for this facility was $2,250,000 and


                                       33
<PAGE>   35

approximately $4,000,000 in capital improvements have been made since its
purchase to make the facility operational and expand its production capacity.
Further capital expenditures, estimated at $900,000 are planned during 1999.

            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 for clinical development of products to obtain regulatory
approvals, including expanded labeling for its products which are already
commercially available; obtaining the rights to additional commercially viable
compounds; competitive technological developments; additional government-imposed
regulation and control; and changes in healthcare systems which affect
reimbursement, pricing or availability of drugs and market acceptance of drugs.

            The above factors may also affect realization of certain assets
currently held by the company, principally investments in plant, equipment and
inventory.

            In 1995, Scherico, the company's European distributor for Ethyol,
launched Ethyol in several European markets where regulatory approvals had been
received. In September 1996, an amendment to the company's distribution
agreement with Scherico was executed pursuant to which, retroactive to January
1, 1996, Scherico began to purchase Ethyol from the company at a price based on
a percentage of in-market net sales.

            In April of 1996, ALZA and the company launched Ethyol in the United
States. ALZA has exclusive rights to market the product in the United States for
five years and is responsible for sales and marketing. After the initial
five-year period, in April 2001, ALZA will have the option to extend its
exclusive rights for one year. At the end of ALZA's exclusive period, all U.S.
marketing rights to Ethyol will revert to the company, and ALZA will receive
payments from the company for ten years (nine years if ALZA exercises the
option) based on in-market net sales of the product. ALZA paid the company an
up-front payment and initial distribution fee totaling $20 million and an
additional milestone payment of $10 million in the second quarter of 1997. The
final milestone payment of $5 million was paid in the first quarter of 1998.

            As the company sells Ethyol to its partners, Scherico and ALZA, in
quantities which may or may not correspond to the product's resale to the
pharmaceutical trade, the company's sales may fluctuate from period to period
dependent upon the timing of its partners' delivery requirements and sales to
the pharmaceutical trade as well as the levels of inventory they stock and
maintain. Sales of Ethyol are also affected by the same factors noted elsewhere
in this section on liquidity and capital resources. The company is hopeful that
the commercialization of Ethyol in the United States and Europe will be
successful. However, no assurances can be given that the company will achieve
meaningful revenues under its agreements with ALZA and Scherico or its other
distribution arrangements.

            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. As the company continues
its commercialization, research and development activities, losses are expected
to continue and may fluctuate from period to period. Although it is the
Company's objective to become profitable as soon as reasonably possible, there
can be no assurance that the company will achieve significant revenues or
profitable operations.


                                       34
<PAGE>   36

Risks Associated with the Year 2000

            The Year 2000 issue is the result of computer programs and embedded
technology (such as microcontrollers in telephones or laboratory equipment) that
use two digits rather than four to define the applicable year. These computer
programs and equipment with this type of embedded technology may recognize a
date using "00" as the year 1900 rather than the year 2000. This could result in
system failures or miscalculations causing disruptions of normal business
activities, including, among others, a temporary inability to process
transactions and information, send invoices or engage in similar business
activities.

            The company is implementing a readiness and remediation plan to
address the Year 2000 issue. The first part of this plan was an inventory of the
critical software systems and embedded technology at each of the company's
facilities, which the company started in the second quarter of 1998 and
completed during the first quarter of 1999. The second part of the plan was a
detailed assessment of the inventory results, which also was completed during
the first quarter of 1999. The third part of the plan involves correcting or
replacing the company's software systems and equipment that cannot accurately
identify the year 2000. The last part of the plan is an analysis to determine
the extent to which the systems of the company's major vendors, customers and
commercial partners will be affected by the Year 2000 issue. The company has
started work on these last two phases of the plan and expects that they will be
completed during the latter half of 1999.

            The Year 2000 readiness and remediation plan is being conducted by
the company using internal resources. As of December 31, 1998, the company had
spent less than $50,000 fixing Year 2000 issues, including modifying software
systems and replacing equipment, and these expenditures have been expensed or
capitalized by the affected departments within the company in the normal course
of business. The company estimates that the costs of completing its Year 2000
remediation plan will be less than $300,000 and expects to fund these costs from
currently available resources.

            The company does not anticipate that addressing the Year 2000 issue
for its internal software systems and equipment will delay the implementation of
the company's other planned information technology projects or have a material
impact on its operations or financial results. However, there can be no
assurance that these costs will not be greater than anticipated, or that
corrective actions undertaken will be completed before any Year 2000 problems
could occur. The company is currently unable to predict the extent to which it
would be vulnerable to a failure by one or more other companies, such as its
vendors, customers and commercial partners, to remediate Year 2000 issues on a
timely basis. Any such failures could have a material adverse effect on the
company. To date the company has not made any contingency plans to address Year
2000 risks. Contingency plans will be developed if it appears that the company
or its key vendors, customers or commercial partners will not be Year 2000
compliant and that such noncompliance can be expected to have a material adverse
impact on the company's operations. The Audit Committee of the Board of
Directors maintains an ongoing appraisal of the scope, estimated costs and
implementation of the company's Year 2000 remediation plan.

Item 7a. Quantative and Qualitative Disclosure about Market Risk

            Information required for this Item is contained on page 33 of Item 7
of this Form 10-K under the heading "Liquidity and Capital Resources."

Item 8. Financial Statements and Supplementary Data.

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


                                       35
<PAGE>   37

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

            None.


                                       36
<PAGE>   38

                                    PART III

Item 10. Directors and Executive Officers of the Registrant.

            The information required by Item 10 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 incorporated herein
by reference thereto.

Item 11. Executive Compensation.

            The information required by Item 11 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 incorporated herein
by reference thereto.

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

            The information required by Item 12 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 incorporated herein
by reference thereto.

Item 13. Certain Relationships and Related Transactions.

            The information required by Item 13 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 incorporated herein
by reference thereto.


                                       37
<PAGE>   39

                                     PART IV

Item 14.  Exhibits and Financial Statement Schedules.

            Financial Statements

                  The following is a list of the consolidated financial
                  statements of the company and its subsidiaries and
                  supplementary data included in the report under Item 8.

                  Report of independent auditors

                  Consolidated Balance Sheets at December 31, 1998 and 1997

                  Consolidated Statements of Operations for the years ended
                  December 31, 1998, 1997 and 1996

                  Consolidated Statements of Cash Flows for the years ended
                  December 31, 1998, 1997 and 1996

                  Consolidated Statement of Stockholders' Equity for the years
                  ended December 31, 1998, 1997 and 1996

                  Notes to Consolidated Financial Statements

            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.

            Reports on Form 8-K

                  The company filed no reports on Form 8-K during the last
                  quarter of the fiscal year ended December 31, 1998.


                                       38
<PAGE>   40

Exhibits

The following is a list of exhibits filed as part of this annual report on Form
10-K. Where so indicated by footnote, exhibits which were previously filed are
incorporated by reference. For exhibits incorporated by reference, the location
of the exhibit in the previous filing is indicated in parentheses.

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

4.2         Securities Purchase Agreement dated as of January 27, 1999 by and
            among the Registrant and Domain Partners IV, L.P, DP IV Associates,
            L.P., and Proquest Investments, L.P. (including form of Warrant)
            (incorporated by reference to the Registrant's Current Report on
            Form 8-K dated January 27, 1999)

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)


                                       39
<PAGE>   41

10.2.3      Amendment No. 2, dated June 30, 1995, to Office Lease Agreement
            between U.S. Bioscience, Inc. and Tower Bridge Associates
            (incorporated by reference to Exhibit 10.2.3 to the Registrant's
            Annual Report on Form 10-K filed with the Securities and Exchange
            Commission on March 20, 1996)

10.2.4      Amendment No. 3, dated May 12, 1998, to Office Lease Agreement
            between U.S. Bioscience and Tower Bridge Associates (incorporated by
            reference to Exhibit 10.2.3.1 to Registrant's Quarterly Report on
            Form 10-Q filed with the Securities and Exchange Commission on July
            31, 1998)

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)

10.3.3      Third Amendment to Lease Agreement between the Registrant and
            Pickering Associates dated October 12, 1995 (incorporated by
            reference to Exhibit 10.3.3 to the Registrant's Annual Report on
            Form 10-K filed with the Securities and Exchange Commission on March
            20, 1998)

10.3.4      Fourth Amendment to Lease Agreement between the Registrant and
            Pickering Acquisition Associates dated January 20, 1998
            (incorporated by reference to Exhibit 10.3.4 to the Registrant's
            Annual Report on Form 10-K filed with the Securities and Exchange
            Commission on March 20, 1998)

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)


                                       40
<PAGE>   42

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)

10.11.1     Amendment, dated April 12, 1995, to Agreement dated January 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 21, 1997)

10.11.2     Second Amendment, dated May 6, 1996 to Agreement dated January 1,
            1995 between the Registrant and Applied Analytical Industries, Inc.
            (incorporated by reference to Exhibit 10.11.2 to the Registrant's
            Annual Report on Form 10-K filed with the Securities and Exchange
            Commission on March 21, 1997)

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)

10.12.1     Amendment, dated April 11, 1995, to Agreement dated September 23,
            1993 between the Registrant and Ben Venue Laboratories, Inc.
            (incorporated by reference to Exhibit 10.12.1 to the Registrant's
            Annual Report on Form 10-K filed with the Securities and Exchange
            Commission on March 21, 1997)

10.12.2     Amendment, dated December 12, 1995, to Agreement dated September 23,
            1993 between the Registrant and Ben Venue Laboratories, Inc.
            (incorporated by reference to Exhibit 10.12.2 to the


                                       41
<PAGE>   43

            Registrant's Annual Report on Form 10-K filed with the Securities
            and Exchange Commission on March 21, 1997)

10.13       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)

10.13.1     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)

10.14       Amended and Restated License Agreement dated May 10, 1994 between
            the 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 20, 1998)

10.15*      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)

10.15.1*    Amendment to Distribution and Supply Agreement, dated as of August
            31, 1996 between the Registrant and Scherico, Ltd. (incorporated by
            reference to Exhibit 10.16.1 to the Registrant's Current Report on
            Form 8-K/A dated September 19, 1996 filed with the Securities and
            Exchange Commission on December 19, 1996)

10.16       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)

10.17       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)

10.18       Non-Executive Stock Option Plan (incorporated by reference to
            Exhibit 4.2 to the Registrant's Registration Statement on Form S-8
            filed with the Securities and Exchange Commission on May 9, 1997)

10.19*      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)

10.19.1     Amendment No. 2 to Distribution and Marketing Collaboration
            Agreement between the Registrant and ALZA Corporation dated as of
            February 3, 1997 (incorporated by reference to Exhibit 10.25.2 to
            the Registrant's Current Report on Form 8-K dated February 3, 1997)

10.20       Stock Purchase Agreement between the Registrant and ALZA Corporation
            dated as of February 3, 1997 (incorporated by reference to Exhibit
            10.25.1 to the Registrant's Current Report on Form 8-K dated
            February 3, 1997)


                                       42
<PAGE>   44

10.21       License Agreement between the Registrant and Scherico, Ltd. dated as
            of November 6, 1997 (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 20, 1998)

10.21.1     Amendment No. 1 to License Agreement dated as of November 6, 1997
            between the Registrant and Scherico, Ltd. (incorporated by reference
            to Exhibit 10.27.1 to the Registrant's Annual Report on Form 10-K
            filed with the Securities and Exchange Commission on March 20, 1998)

Executive Compensation Plans and Arrangements

10.22       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)

10.23       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)

10.24       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)

10.25       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)

10.26       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)

10.27       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)

10.28       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)

10.29       Amendment 1996-1 to Pension Restoration Plan (incorporated by
            reference to the Registrant's Annual Report on Form 10-K filed with
            the Securities and Exchange Commission on March 20, 1998)

10.30       Agreement between the Registrant and Philip S. Schein, M.D. dated as
            of March 10, 1998 (incorporated by reference to Exhibit 10.28.1 to
            the Registrant's Annual Report on Form 10-K filed with the
            Securities and Exchange Commission on March 20, 1998)

10.31       Form of Executive Severance Agreement executed with each Executive
            Vice President, each elected 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)


                                       43
<PAGE>   45

10.32       Executive Severance Agreement, dated September 3, 1996, between the
            Registrant and C. Boyd Clarke (incorporated by reference to the
            Registrant's Annual Report on Form 10-K filed with the Securities
            and Exchange Commission on March 20, 1998)

10.33       Executive severance arrangement, dated March 4, 1997, between the
            Registrant and C. Boyd Clarke (incorporated by reference to Exhibit
            10.42 to the Registrant's Annual Report on Form 10-K filed with the
            Securities and Exchange Commission on March 21, 1997)

10.34       Executive severance arrangement, dated March 4, 1997, between the
            Registrant and Wolfgang Oster, M.D. (incorporated by reference to
            Exhibit 10.43 to the Registrant's Annual Report on Form 10-K filed
            with the Securities and Exchange Commission on March 21, 1997)

10.35       Agreement, dated as of December 31, 1998, between the Registrant and
            Barbara J. Scheffler

10.36       U.S. Bioscience, Inc. 1999 Incentive Compensation Plan

10.37       Letter agreement dated May 5, 1997 between the Registrant and Robert
            L. Capizzi, M.D. (incorporated by reference to Exhibit 10.40.1 to
            the Registrant's Annual Report on Form 10-K filed with the
            Securities and Exchange Commission on March 20, 1998)

10.37.1     Letter agreement, dated April 30, 1998, between the Registrant and
            Robert L. Capizzi, M.D.

22          Subsidiaries of the Registrant

23          Consent of Ernst & Young LLP, Independent Auditors

27          Financial Data Schedule

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


                                       44
<PAGE>   46

                                   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 12, 1999                    By: /s/ C. Boyd Clarke
                                            ------------------------------------
                                            Title: President and Chief Executive
                                                   Officer

            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.

            Each person in so signing also makes, constitutes and appoints C.
Boyd Clarke and Robert I. Kriebel, and each of them acting alone, his true and
lawful attorney-in-fact, with full power of substitution, to execute and cause
to be filed with the Securities and Exchange Commission any and all amendments
to this report.

<TABLE>
<CAPTION>
        Signature                                         Title                                     Date
        ---------                                         -----                                     ----
<S>                                             <C>                                            <C> 
/s/ C. Boyd Clarke                              Principal Executive Officer and Director       March 12, 1999
-----------------------------
C. Boyd Clarke

/s/ Robert I. Kriebel                           Principal Financial Officer and                March 12, 1999
-----------------------------                   Director
Robert I. Kriebel                               

/s/ Mark R. Bausinger                           Principal Accounting Officer                   March 12, 1999
-----------------------------
Mark R. Bausinger

/s/ Paul Calabresi                              Director                                       March 12, 1999
-----------------------------
Paul Calabresi, M.D.

                                                Director                                       March 12, 1999
-----------------------------
Robert L. Capizzi, M.D.

/s/ Brian H. Dovey                              Director                                       March 12, 1999
-----------------------------
Brian H. Dovey

/s/ Douglas J. MacMaster                        Director                                       March 12, 1999
-----------------------------
Douglas J. MacMaster

/s/ Allen Misher                                Director                                       March 12, 1999
-----------------------------
Allen Misher, Ph.D.

 /s/ George H. Ohye                             Director                                       March 12, 1999
-----------------------------
George H. Ohye

/s/ Betsey Wright
-----------------------------
Betsey Wright                                   Director                                       March 12, 1999
</TABLE>

<PAGE>   47

                          INDEX TO FINANCIAL STATEMENTS
                                                                            Page
                                                                            ----

Report of Independent Auditors............................................   F-2

Consolidated Balance Sheets at December 31, 1998 and 1997.................   F-3

Consolidated Statements of Operations for the years ended December 31,
1998, 1997 and 1996.......................................................   F-4

Consolidated Statements of Cash Flows for the years ended December 31,  
1998, 1997 and 1996.......................................................   F-5

Consolidated Statement of Stockholders' Equity for the years ended 
December 31, 1998, 1997 and 1996. ........................................   F-6

Notes to Consolidated Financial Statements................................   F-7


                                      F-1
<PAGE>   48

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. as of December 31, 1998 and 1997, and the related consolidated statements
of operations, cash flows and stockholders' equity for each of the three years
in the period ended December 31, 1998. 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. at December 31, 1998 and 1997, and the consolidated results of
its operations and its cash flows for each of the three years in the period
ended December 31, 1998, in conformity with generally accepted accounting
principles.

                                        ERNST & YOUNG LLP

Philadelphia, Pennsylvania
February 15, 1999


                                      F-2
<PAGE>   49
                              U.S. BIOSCIENCE, INC.
                           CONSOLIDATED BALANCE SHEETS
 
<TABLE>
<CAPTION>
                                                                                              DECEMBER 31, 1998    DECEMBER 31, 1997
                                                                                              -----------------    -----------------
<S>                                                                                                <C>                 <C>         
                                                                 ASSETS
Current assets:
  Cash and cash equivalents                                                                        $  6,771,000        $ 26,569,400
  Investments                                                                                        18,114,200          12,075,100
  Accounts receivable, net of allowances of $727,000 and
      $427,000 in 1998 and 1997, respectively                                                         1,729,600           2,577,400
  Interest receivable                                                                                    29,400             269,700
  Inventories                                                                                         2,873,200           2,434,500
  Other                                                                                                 707,100           1,298,400
                                                                                                   ------------        ------------
            Total current assets                                                                     30,224,500          45,224,500

  Investments in long-term securities                                                                17,063,700          12,006,300
  Property, plant and equipment at cost, less accumulated depreciation                                5,433,700           5,149,800
                                                                                                   ------------        ------------
            Total assets                                                                           $ 52,721,900        $ 62,380,600
                                                                                                   ============        ============

                                                  LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
  Accrued compensation and related payroll taxes payab                                             $  1,183,000        $  1,926,200
  Accrued clinical grants payable                                                                     4,167,100           2,790,500
  Accrued product manufacturing costs payable                                                           795,400             798,700
  Accrued  marketing costs payable                                                                      390,300             437,400
  Accrued professional fees payable                                                                   1,478,500             977,200
  Line of credit                                                                                        849,300             745,300
  Current maturities of long-term debt                                                                  645,800             747,100
  Accounts payable and other accrued liabilities                                                      2,035,100           3,967,500
                                                                                                   ------------        ------------
            Total current liabilities                                                                11,544,500          12,389,900

Long-term liabilities:
  Long-term debt, net of current maturities                                                             522,600           1,135,000
  Other long-term liabilities                                                                         1,921,600           1,831,900
                                                                                                   ------------        ------------
            Total long-term liabilities                                                               2,444,200           2,966,900
                                                                                                   ------------        ------------
            Total liabilities                                                                        13,988,700          15,356,800

Stockholders' equity:
  Preferred stock, $.005 par value-5,000,000 shares authorized;
      none issued                                                                                            --                  --
  Common stock, $.01 par value-50,000,000 shares authorized; 24,363,200 shares
      issued and outstanding at  December 31, 1998, and 24,208,100 shares
      issued and outstanding at December 31, 1997                                                       243,600             242,100
Additional paid-in capital                                                                          170,645,100         169,905,800
Accumulated deficit                                                                                (131,580,200)       (122,526,300)
Accumulated other comprehensive loss                                                                   (430,700)           (597,800)
                                                                                                   ------------        ------------
                                                                                                     38,877,800          47,023,800
Less cost of treasury stock - 13,600 shares                                                            (144,600)                 --
                                                                                                   ------------        ------------
            Total stockholders' equity                                                               38,733,200          47,023,800
                                                                                                   ------------        ------------
            Total liabilities and stockholders' equity                                             $ 52,721,900        $ 62,380,600
                                                                                                   ============        ============
</TABLE>

                             See accompanying notes


                                      F-3
<PAGE>   50

                             U. S. BIOSCIENCE, INC
                     CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
                                                                                             YEAR ENDED DECEMBER 31,
                                                                           ---------------------------------------------------------
                                                                                1998                 1997                  1996
                                                                           ------------         ------------           -------------
<S>                                                                        <C>                   <C>                   <C>         
Revenues:
  Net sales                                                                $ 20,729,700          $ 12,985,800          $ 10,785,200
  Net investment income                                                       2,736,300             2,824,000             2,335,300
  Licensing, royalty and other income                                         6,004,900            11,913,500             7,343,500
                                                                           ------------            ----------            ---------- 
                                                                             29,470,900            27,723,300            20,464,000

Expenses:
  Cost of sales                                                               5,787,800             4,157,800             2,955,700
  Selling, general and administrative costs                                  13,546,200            14,386,700            12,274,800
  Research and development costs                                             19,041,900            16,904,500            14,383,300
  Interest expense                                                              148,900               183,400               537,600
                                                                           ------------            ----------            ---------- 
                                                                             38,524,800            35,632,400            30,151,400
                                                                           ------------            ----------            ---------- 

Net loss                                                                   $ (9,053,900)           (7,909,100)           (9,687,400)
                                                                           ============            ==========            ========== 


Basic and diluted loss per common share                                    $      (0.37)                (0.33)                (0.43)
                                                                           ============            ==========            ========== 


Weighted average number of common shares outstanding                         24,306,500            23,872,000            22,395,600
</TABLE>

                             See accompanying notes


                                      F-4
<PAGE>   51

                             U.S. BIOSCIENCE, INC.
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
 
 
<TABLE>
<CAPTION>
                                                                                                 YEAR  ENDED DECEMBER 31,
                                                                                          --------------------------------------
                                                                                          1998             1997             1996
                                                                                    -------------    -------------    -------------
<S>                                                                                 <C>              <C>              <C>           
Change in Cash and Cash Equivalents
Cash flows provided by (used in) operating activities:
    Net loss                                                                        $  (9,053,900)   $  (7,909,100)   $  (9,687,400)
    Adjustments to reconcile net loss to net cash
      provided by (used in) operating activities:
        Depreciation                                                                      890,300          819,100        1,054,800
        Loss on disposal of property, plant and equipment                                      --          270,900               --
        Compensation element of stock option grants                                        40,000           40,000               --
        (Gain) loss on investments                                                        (18,000)          26,900            8,700
        Amortization of debenture interest                                                     --               --          154,300
        Change in accounts receivable                                                     847,800         (651,200)      (1,123,700)
        Change in interest receivable                                                     240,300          (49,000)        (160,700)
        Change in inventories                                                            (326,300)          30,800         (482,900)
        Change in other current assets                                                    600,300          296,300        5,312,500
        Change in current liabilities                                                    (906,300)          48,100       (4,166,400)
        Change in other long-term liabilities                                              89,700          370,100          426,000
                                                                                    -------------    -------------    -------------
             Total adjustments                                                          1,457,800        1,202,000        1,022,600
                                                                                    -------------    -------------    -------------
             Net cash provided by (used in) operating activities                       (7,596,100)      (6,707,100)      (8,664,800)

Cash flows provided by (used in) investing activities:
        Proceeds from investments matured and sold                                     43,561,400      100,879,100       43,212,500
        Purchase of investments                                                       (54,657,900)    (101,338,600)     (62,875,300)
        Purchase of property, plant and equipment                                        (843,800)        (876,600)      (1,057,200)
                                                                                    -------------    -------------    -------------
             Net cash provided by (used in) investing activities                      (11,940,300)      (1,336,100)     (20,720,000)

Cash flows provided by (used in) financing activities:
        Proceeds from issuance of common stock and private placement 
          of securities                                                                     5,100       21,441,000          191,900
        Purchase of treasury stock                                                       (144,600)              --               --
        Proceeds from exercise of stock options                                           695,700          730,300        1,258,800
        Proceeds from line of credit                                                       45,600          181,600           92,100
        Repayment of long-term debt                                                      (751,200)        (606,500)        (689,200)
                                                                                    -------------    -------------    -------------
             Net cash provided by (used in) financing activities                         (149,400)      21,746,400          853,600

Effect of exchange rate changes on cash                                                  (112,600)        (188,600)         (32,800)
                                                                                    -------------    -------------    -------------
Net increase (decrease) in cash and cash equivalents                                  (19,798,400)      13,514,600      (28,564,000)
Cash and cash equivalents-beginning of year                                            26,569,400       13,054,800       41,618,800
                                                                                    -------------    -------------    -------------
Cash and cash equivalents-end of year                                               $   6,771,000    $  26,569,400    $  13,054,800
                                                                                    =============    =============    =============
Supplemental cash flow disclosure:
        Interest paid                                                               $     125,700    $     156,700    $     629,100
        Subordinate debentures and accrued interest converted to common stock                  --               --    $  16,841,700
</TABLE>

                             See accompanying notes


                                      F-5
<PAGE>   52

                              U.S. BIOSCIENCE, INC.
                 CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
 
<TABLE>
<CAPTION>
                                                             COMMON STOCK
                                                             ------------                      ADDITIONAL 
                                                    NUMBER OF                                   PAID-IN   
                                                     SHARES                 AMOUNT              CAPITAL   
                                                   ----------          -------------         -------------
 
<S>                                                 <C>                <C>                   <C>          
Balance at December 31, 1995                        21,046,800         $     210,500         $ 133,157,700

  Proceeds from exercise of stock options              255,500                 2,500             1,256,300
  Conversion of warrants                                   200                    --                 4,500
  Conversion of debentures                           1,577,400                15,800            16,825,900
  Comprehensive loss:
  Net loss for the year ended
       December 31, 1996                                    --                    --                    -- 
  Foreign currency translation adjustment                   --                    --                    -- 
  Unrealized gain (loss) on investments                     --                    --                    -- 

      Comprehensive loss
                                                    ----------         -------------         -------------
Balance at December 31, 1996                        22,879,900         $     228,800         $ 151,244,400

  Proceeds from exercise of stock options              149,300                 1,500               728,800
  Compensation related to stock options                     --                    --                40,000
  Issuance of shares ($18.256 per share,             1,178,900                11,800            17,892,000
  Conversion of warrants                                    --                    --                   600
  Comprehensive loss:
  Net loss for the year ended
      December 31, 1997                                     --                    --                    -- 
  Foreign currency translation adjustment                   --                    --                    -- 
  Unrealized gain (loss) on investments                     --                    --                    --

      Comprehensive loss
                                                    ----------         -------------         -------------
Balance at December 31, 1997                        24,208,100         $     242,100         $ 169,905,800

  Proceeds from exercise of stock options              154,800                 1,500               694,200
  Compensation related to stock options                     --                    --                40,000
  Treasury stock                                            --                    --                    -- 
  Conversion of warrants                                   300                    --                 5,100
  Comprehensive loss:
  Net loss for the year ended
      December 31, 1998                                     --                    --                    -- 
  Foreign currency translation adjustment                   --                    --                    -- 
  Unrealized gain (loss) on investments                     --                    --                    -- 

      Comprehensive loss
                                                    ----------         -------------         -------------
Balance at December 31, 1998                        24,363,200         $     243,600         $ 170,645,100
                                                    ==========         =============         =============

<CAPTION>
                                                                                             ACCUMULATED
                                                                                                 OTHER                  TOTAL
                                                  ACCUMULATED           TREASURY            COMPREHENSIVE            STOCKHOLDERS'
                                                    DEFICIT               STOCK             INCOME / (LOSS)             EQUITY
                                                 -------------        --------------        ---------------        ---------------
<S>                                              <C>                   <C>                   <C>                   <C>          
Balance at December 31, 1995                     $(104,929,800)        $          --         $     349,500         $  28,787,900

  Proceeds from exercise of stock options                   --                    --                    --             1,258,800
  Conversion of warrants                                    --                    --                    --                 4,500
  Conversion of debentures                                  --                    --                    --            16,841,700
  Comprehensive loss:
  Net loss for the year ended
       December 31, 1996                            (9,687,400)                   --                    --            (9,687,400)
  Foreign currency translation adjustment                   --                    --              (301,300)             (301,300)
  Unrealized gain (loss) on investments                     --                    --                (9,900)               (9,900)
                                                                                                                   --------------
      Comprehensive loss                                                                                              (9,998,600)
                                                 -------------         -------------         -------------         -------------
Balance at December 31, 1996                     $(114,617,200)        $          --         $      38,300         $  36,894,300

  Proceeds from exercise of stock options                   --                    --                    --               730,300
  Compensation related to stock options                     --                    --                    --                40,000
  Issuance of shares ($18.256 per share,                    --                    --                    --            17,903,800
  Conversion of warrants                                    --                    --                    --                   600
  Comprehensive loss:
  Net loss for the year ended
      December 31, 1997                             (7,909,100)                   --                    --            (7,909,100)
  Foreign currency translation adjustment                   --                    --              (663,100)             (663,100)
  Unrealized gain (loss) on investments                     --                    --                27,000                27,000
                                                                                                                   --------------
      Comprehensive loss                                                                                              (8,545,200)
                                                 -------------         -------------         -------------         -------------
Balance at December 31, 1997                     $(122,526,300)        $          --         $    (597,800)        $  47,023,800

  Proceeds from exercise of stock options                   --                    --                    --               695,700
  Compensation related to stock options                     --                    --                    --                40,000
  Treasury stock                                            --              (144,600)                   --              (144,600)
  Conversion of warrants                                    --                    --                    --                 5,100
  Comprehensive loss:
  Net loss for the year ended
      December 31, 1998                             (9,053,900)                   --                    --            (9,053,900)
  Foreign currency translation adjustment                   --                    --               185,100               185,100
  Unrealized gain (loss) on investments                     --                    --               (18,000)              (18,000)
                                                                                                                   -------------
      Comprehensive loss                                                                                              (8,886,800)
                                                 -------------         -------------         -------------         -------------
Balance at December 31, 1998                     $(131,580,200)        $    (144,600)        $    (430,700)        $  38,733,200
                                                 =============         =============         =============         =============
</TABLE>

                             See accompanying notes


                                      F-6
<PAGE>   53

                              U.S. BIOSCIENCE, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                December 31, 1998

1. Business and Organization

      U.S. Bioscience, Inc. ("the company"), was incorporated in the State of
Delaware on May 7, 1987. The company has 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 also has two wholly-owned inactive subsidiaries in the State of
Delaware, USB Resources, Inc. and USB Technologies, Inc.

      From the company's inception until March 31, 1998 the company was
considered for accounting purposes a development stage enterprise as defined in
Statement of Financial Accounting Standards No. 7 "Development Stage
Enterprises." During its development stage, the company devoted a substantial
portion of its efforts toward raising capital, developing its initial product
portfolio, establishing its manufacturing, laboratory and research capabilities
and structure and organizing its worldwide commercial presence principally
through the establishment of distribution agreements with established
pharmaceutical companies. During the quarter ended March 31, 1998, the company
completed a planned change in senior management and the transition from a
development stage enterprise to an enterprise focusing on commercial operations
and marketing.

      The company is a pharmaceutical company specializing in the development
and commercialization of products for patients with cancer and allied diseases.
Through December 31, 1998, the company's revenues have been derived principally
from the sale of drug products, Hexalen, NeuTrexin and Ethyol, from licensing of
rights to develop and market certain products, from contract development
activities and from investment income. Expenses incurred have been primarily for
the development of its drugs and related therapies, marketing and sales
activities and corporate organizational and administrative activities.

2. Accounting Policies

Principles of Consolidation

      The accompanying 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.


                                       F-7
<PAGE>   54

                              U.S. BIOSCIENCE, INC.
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

Investments

      The company 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, 1998 and 1997
were classified as "available for sale." Unrealized gains and losses have been
reported separately as a component of other comprehensive income (loss) .

Inventories

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

Property, Plant and Equipment

      Buildings, equipment and furniture and fixtures are depreciated by the
straight-line method over their useful lives for financial reporting purposes
and under accelerated methods 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.

Fair Values of Financial Instruments

      Fair values of cash equivalents, investments, accounts receivable,
payables, the line of credit and long term debt approximate their carrying
values.

Product Revenues

      Product revenues are recognized upon shipment to the customer. The
company's product revenues to date have principally been domestic sales of drug
products Hexalen and NeuTrexin primarily to drug wholesalers in the United
States and sales of Ethyol to the company's distribution partners. During 1998,
1997 and 1996 a significant portion of the company's sales and accounts
receivable related to ALZA, the company's US distribution partner for Ethyol.

Research and Development Costs

      All costs of research and development activities are expensed as incurred.

Reclassification

      Certain prior year amounts have been reclassified to conform with the
current year presentation.

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.


                                       F-8
<PAGE>   55

                              U.S. BIOSCIENCE, INC.
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

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 other comprehensive income (loss).

Net Loss Per Share

      Basic earnings per share is calculated by dividing the net loss by the
weighted average common shares outstanding for the period. Diluted earnings per
share is calculated by dividing net income by the weighted average common shares
outstanding for the period plus the dilutive effect of stock options, warrants
and convertible securities. The company incurred losses in 1998, 1997 and 1996
and therefore the effect of stock options, warrants and convertible securities
were anti-dilutive.

Accounting for Stock Options

      The company follows Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB 25") and related
interpretations in accounting for stock options. Under APB 25, if the exercise
price of the company's stock options equals the market price of the underlying
common stock on the date of grant, no compensation expense is recognized. Note
14 to these consolidated financial statements includes the required disclosure
and pro forma information provided for under FASB Statement No. 123, "Accounting
for Stock-Based Compensation" ("FASB 123").

Newly Adopted Accounting Standards

      In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive
Income" ("SFAS 130") and SFAS No. 131, "Disclosure about Segments of an
Enterprise and Related Information" ("SFAS 131"). SFAS 130 establishes standards
for reporting comprehensive income. SFAS 131 establishes standards for annual
and interim disclosures of operating segments, products and services, geographic
areas and major customers. Both SFAS 130 and SFAS 131 were adopted by the
company in 1998. Notes 9 and 10 to these consolidated financial statements
includes the required disclosure provided under SFAS 130 and SFAS 131,
respectively. The adoption of SFAS 130 and SFAS 131 had no impact on the
company's results of operations or financial condition.


                                       F-9
<PAGE>   56

                              U.S. BIOSCIENCE, INC.
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

3. Investments

      Investments are comprised of the following:

<TABLE>
<CAPTION>
                                                                       Fair Value at
            Name of Issuer             Principal          Amortized    Balance Sheet
          and Title of Each              Amount              Cost           Date
------------------------------------------------------------------------------------
<S>                                       <C>            <C>             <C>        
December 31, 1998
U.S. Government obligations
    Treasury Notes                         $5,599,900     $5,641,800      $5,640,600
    Federal Home Loan Mortgage              3,451,800      3,465,500       3,466,300
                                   -------------------------------------------------
        Sub-total                           9,051,700      9,107,300       9,106,900

Corporate Bonds                            24,423,700     24,444,900      24,600,100

Corporate Discount Notes                    1,464,500      1,470,000       1,470,900
                                   -------------------------------------------------
Total                                     $34,939,900    $35,022,200     $35,177,900
                                   =================================================
December 31, 1997

U.S. Government obligations
   Treasury Notes                          $1,995,600     $1,998,000      $2,000,000
                               
Corporate Bonds                            16,904,400     16,902,400      16,918,000
                               
Corporate Discount Notes                    5,031,600      5,163,900       5,163,400
                                   -------------------------------------------------
Total                                     $23,931,600    $24,064,300     $24,081,400
                                   =================================================
</TABLE>

      The amortized cost and fair market value of investments at December 31,
1998 and 1997, by contractual maturities are:

<TABLE>
<CAPTION>
                                    1998                        1997
                          -------------------------   -------------------------
                           Amortized        Fair      Amortized         Fair
                              Cost         Value         Cost          Value
                          -----------   -----------   -----------   -----------
<S>                       <C>           <C>           <C>           <C>        
Due in one year or less   $18,068,600   $18,114,200   $12,065,800   $12,075,100
Due after one year
  through two years         9,488,400     9,576,700     7,500,000     7,510,600
Due after two years
  through four years        7,465,200     7,487,000     4,498,500     4,495,700
                          -----------   -----------   -----------   -----------
Total                     $35,022,200   $35,177,900   $24,064,300   $24,081,400
                          ===========   ===========   ===========   ===========
</TABLE>

4. Accounts Receivable Allowance

      The company establishes an allowance in accounts receivable for
potentially uncollectible accounts, for estimated credits to be issued for
returned product and for estimated price adjustments related to the
non-commercial use of Ethyol by its U.S. distributor. The following is a
rollforward of this allowance:

<TABLE>
<CAPTION>
                                    1998        1997         1996
                                    ----        ----         ----
<S>                               <C>         <C>          <C>      
Balance at begining of the year   $ 427,000   $ 257,000    $ 142,600
Additions (charged to expense)      300,000     220,000      114,400
Deductions                               --     (50,000)          --
                                  ---------   ---------    ---------
Balance at end of year            $ 727,000   $ 427,000    $ 257,000
                                  =========   =========    =========
</TABLE>


                                      F-10
<PAGE>   57

                              U.S. BIOSCIENCE, INC.
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

5. Inventories

      Inventory balances at December 31, are as follows:

<TABLE>
<CAPTION>
                            1998               1997
                        ------------       ------------
<S>                     <C>                <C>         
Raw materials           $  1,086,900       $    752,000
Work in process            1,014,700          1,376,000
Finished goods               771,600            306,500
                        ------------       ------------
Total                   $  2,873,200       $  2,434,500
                        ============       ============
</TABLE>

6. Property, Plant and Equipment

      Property, plant and equipment balances at December 31, are as follows:

<TABLE>
<CAPTION>
                                                      1998            1997
                                                 -------------    -------------
<S>                                              <C>              <C>          
Land, buildings, and leasehold improvements      $   2,034,900    $   1,871,800
Equipment, furniture and fixtures                   10,131,200        8,965,700
Accumulated depreciation                            (6,732,400)      (5,687,700)
                                                 -------------    -------------
Property, plant and equipment, net               $   5,433,700    $   5,149,800
                                                 =============    =============
</TABLE>

7. Long-Term Debt

      Long-term debt at December 31, consisted of:

<TABLE>
<CAPTION>
                                   1998               1997
                              -------------       ------------
<S>                           <C>                 <C>         
MELF equipment loan           $     106,900       $    180,600
Mortgage loan                       456,000            462,100
Term loan                           500,000          1,100,000
Capital lease obligations           105,500            139,400
                              -------------       ------------
                              $   1,168,400       $  1,882,100
Less current portion                645,800            747,100
                              -------------       ------------
Long-term debt                $     522,600       $  1,135,000
                              =============       ============
</TABLE>

      Maturities of long-term debt for each of the five years succeeding
December 31, 1998 are as follows; 1999--$645,800; 2000--$106,700; 2001--$75,700;
2002--$56,700; 2003--$43,200 and thereafter $240,300.

      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.


                                      F-11
<PAGE>   58

                              U.S. BIOSCIENCE, INC.
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

      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 5.8%.

      In June 1995, the company received a term loan from its principal bank in
the amount of $2,400,000. This loan will fully amortize in the fourth quarter of
1999, bears an annual interest rate of 6.86% and is collateralized by a portion
of the company's investment portfolio.

8. 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 5.3125% and is utilized by
the company's subsidiary, USB Pharma B.V., for funding working capital
requirements. As of December 31, 1998, approximately $850,000 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. The
weighted average interest rates on the line of credit for the years ended
December 31, 1998 and 1997 were 5.3% and 4.6%, respectively.

9. Accumulated Other Comprehensive Loss

      The components of other comprehensive loss are as follows:

<TABLE>
<CAPTION>
                                                       Currency     Unrealized Gain         
                                                     Translation   on Available-for         
                                                      Adjustment    Sale Securities     Total
                                                      ----------    ---------------     -----
<S>                                                   <C>              <C>            <C>      
Balance at December 31, 1995                          $ 349,500        $      --      $ 349,500
                                                                  
Currency transaction adjustment                        (301,300)              --       (301,300)
                                                                  
Unrealized gain on available for sale securities             --           (9,900)        (9,900)
                                                      ---------        ---------      ---------
Balance at December 31, 1996                             48,200           (9,900)        38,300
                                                                  
Currency Translation adjustment                        (663,100)              --       (663,100)
                                                                  
Unrealized gain on available for sale securities             --           27,000         27,000
                                                      ---------        ---------      ---------
Balance at December 31, 1997                           (614,900)          17,100       (597,800)
                                                                  
Currency transaction adjustment                         185,100               --        185,100
                                                                  
Unrealized gain on available for sale securities             --          (18,000)       (18,000)
                                                      ---------        ---------      ---------
                                                                  
Balance at December 31, 1998                          $(429,800)       $    (900)     $(430,700)
                                                      =========        =========      =========
</TABLE>


                                      F-12
<PAGE>   59

                              U.S. BIOSCIENCE, INC.
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

10. Segment Disclosures

      The company operates in only one "dominant segment," as substantially all
of its combined revenues, losses and assets are derived and utilized in the
development and commercialization of pharmaceutical products used in the
treatment of cancer. The company had revenue from two major customers which
accounted for 47% and 14% in 1998, 53% and 13% in 1997, and 16% and 33% in 1996,
respectively of total revenue.

      A summary of revenues from customers, net income/(loss) and identifiable
assets by geographic area for the years ending December 31, is as follows:

<TABLE>
<CAPTION>
                                 1998               1997               1996
                                 ----               ----               ----
<S>                          <C>                <C>                <C>         
Revenues from customers:
   United States             $ 21,697,000       $ 20,331,300       $  9,853,200
   International                5,037,600          4,568,000          8,275,500
                             ------------       ------------       ------------
                             $ 26,734,600       $ 24,899,300       $ 18,128,700
                             ============       ============       ============
Net income / (loss)
   United States             ($ 6,698,800)      ($ 1,486,200)      ($ 3,057,000)
   International               (2,355,100)        (6,422,900)        (6,630,400)
                             ------------       ------------       ------------
                             ($ 9,053,900)      ($ 7,909,100)      ($ 9,687,400)
                             ============       ============       ============
Identifiable assets:         
   United States             $ 47,516,800       $ 57,193,800       $ 43,047,100
   International                5,205,100          5,186,800          6,064,000
                             ------------       ------------       ------------
                             $ 52,721,900       $ 62,380,600       $ 49,111,100
                             ============       ============       ============
</TABLE>

11. Commitments

      The company leases office, warehouse and laboratory space under four
operating leases, the last of which terminates in December 2003. Future minimum
annual lease payments are as follows: 1999 -- $1,036,300; 2000 -- $1,001,800;
2001 -- $846,300; 2002 -- $846,300 and 2003 -- $715,200. Rent expense for each
of the years ended December 31, was; 1998 -- $907,200; 1997 -- $1,036,200 and
1996 -- $911,400. The lease on the company's principal office expires in October
2003. However, both the company and the landlord have early termination rights
effective October 31, 2000 and October 31, 2001. The above minimum lease
payments assume that neither the company nor the landlord exercise such rights.

      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: 1998 -- $1,247,600; 1997 --
$728,300 and 1996 -- $488,700.

      As of December 31, 1998, 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 1999 and 2000. The
clinical investigators are compensated in accordance with their respective
agreements. As of December 31, 1998, the clinical investigator agreements, in
the aggregate, provide for minimum payments of approximately $8,348,500 over the
terms of the agreements, of which approximately $4,279,000 had been paid through
December 31, 1998.


                                      F-13
<PAGE>   60

                              U.S. BIOSCIENCE, INC.
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

12. Major Distribution and Marketing Agreements

      The company has an exclusive marketing and distribution agreement with
ALZA Corporation ("ALZA") for Ethyol in the United States. Under the terms of
this agreement, ALZA has exclusive rights to market Ethyol in the United States
through March 2001 and is responsible for sales and marketing; the company's
sales force co-promotes the product with ALZA. After the initial 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 (nine years if ALZA exercises the option) 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 rights noted above. In July
1997, ALZA made an additional clinical milestone payment to the company of $10
million and in February 1998, ALZA made the final clinical milestone payment of
$5 million. There can be no assurance that the marketing of Ethyol in the United
States will result in meaningful revenues to the company.

      In May 1996, the company entered into a co-promotion agreement with ALZA
to co-promote the company's products, Hexalen and NeuTrexin in the United
States. Under the terms of this agreement, the company pays ALZA a commission,
which is based upon a percentage of net sales of Hexalen and NeuTrexin in the
United States above a base level of sales. The commission payment is subject to
an annual minimum and the commission percentage rises as net sales increase. The
company elected to give ALZA notice of termination under this agreement in
December 1998 and the termination will become effective in June 1999. Under the
terms of the original agreement, ALZA's sales force will continue to co-promote
Hexalen and NeuTrexin through June 1999, at which time the company will assume
all promotional activities. At the end of the co-promotion term, the agreement
provides for ALZA to be paid a residual commission. The residual commission is
based on a percentage of net sales during the residual period subject to a
maximum payment of a decreasing percentage of actual commission payments made to
ALZA under the agreement during the co-promotion period. At December 31, 1998,
the company accrued $100,000 payable to ALZA related to this agreement. There
can be no assurance that the marketing of Hexalen and NeuTrexin in the United
States will result in meaningful revenues to the company.

      The company has entered into an exclusive marketing and distribution
agreement ("Agreement") with Scherico Ltd., ("Scherico") a subsidiary of
Schering Plough Corporation, for Ethyol in the countries comprising the EU and
EFTA (the "European Territories"). In September 1996, the company and Scherico
entered into an amendment to the original agreement ("Scherico Amendment")
pursuant to which, retroactive to January 1, 1996, Scherico began purchasing
Ethyol from the company at a price based on a percentage of in-market net sales
and the company stopped participating in operating profits/losses previously
shared by the parties. In conjunction with the Scherico Amendment, Scherico paid
the company a total of $6.2 million in the fourth quarter of 1996.

      Under the terms of the amended Agreement, Scherico's exclusive rights to
market the product will continue for seven years from January 1, 1997. During
such seven-year period the company will sell Ethyol to Scherico at a price based
upon a percentage of in-market net sales. The company may co-promote Ethyol with
Scherico for the two years following such seven-year period. Thereafter, the
company will reacquire sole marketing rights subject to the reverse royalty
payable to Scherico as described below. Under certain circumstances Scherico is
required to pay the company additional milestone payments when additional
regulatory approvals, if any, are obtained. There can be no assurance that all
milestone payments will be made to the company under the amended Agreement.

      After reacquiring sole marketing rights, the company will pay Scherico a
percentage of its Ethyol sales, 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. Scherico may terminate the Agreement at any time by providing
180 days


                                      F-14
<PAGE>   61

                              U.S. BIOSCIENCE, INC.
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

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.

13. Common Stock

      Voting rights of common stock are one vote per share. The company's
Certificate of Incorporation, as amended, 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. This 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 with
respect to possible acquisitions, financings, stock splits or dividends
requiring the availability of additional authorized common stock.

      The company has 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. Each stock certificate
representing outstanding shares of Common Stock of the company also represents
the same number of rights to purchase, under certain circumstances, shares of
Series A Junior Preferred Stock of the company (the "Rights"). 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 entitles the holder to buy
two one-hundredths of a share of the new Series A Junior Preferred Stock at a
price of $30. In addition, upon the occurrence of certain events, holders of the
Rights will be entitled to purchase either company stock or shares in an
"acquiring entity" at half the market value. The company generally will be
entitled to redeem the Rights at one-twentieth of one cent ($.0005) 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.
Until such time, the Rights automatically trade with the underlying common
stock.

      On April 22, 1996, the company's stockholders, at the company's annual
meeting, approved an amendment to the company's Certificate of Incorporation to
effect a 1 for 2 reverse stock split in which each two shares of the company's
Common Stock, par value $.005 per share, whether issued and outstanding or held
in treasury, were reclassified into one new share of Common Stock, par value
$.01 per share. The amendment to the company's Certificate of Incorporation
reduced the number of authorized shares of Common Stock from 100,000,000 to
50,000,000 shares and increased the par value of the Common Stock from $.005 per
share to $.01 per share.

14. Stock Option Plans

      The company has adopted various stock option plans, primarily as
incentives for recipients to remain affiliated with the company. At December 31,
1998, 5,611,172 shares of common stock were reserved for issuance pursuant to
company stock option plans. Option plan grants generally are exercisable at
rates from 20% to 33 1/3% per year, beginning one year from the date of grant.
With the exception of options granted to certain consultants and advisors to the
company, all options expire 10 years from the date of grant.


                                      F-15
<PAGE>   62

                              U.S. BIOSCIENCE, INC.
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

      The company currently grants stock options under three stock option plans:
the Non-Executive Stock Option Plan, which was established in 1994, and amended
in 1997, and is used to provide option incentives to employees who are not
officers or directors of the company for purposes of Section 16 of the
Securities Exchange Act of 1934, as amended and the regulations thereunder, and
consultants and advisors to the company; the 1992 Stock Option Plan, which is
used to provide option incentives to Section 16 officers and directors; and the
1996 Non-employee Directors Stock Option Plan, which is used to provide options
in lieu of fees to elected non-employee directors.

      Detail information concerning stock option plans is as follows:

<TABLE>
<CAPTION>
                                                                 1987           1991                                        1996
                                  1987           1987          SPECIAL        SPECIAL                        NON-           NON-
                                INCENTIVE        NON-            NON-           NON-          1992        EXECUTIVE       EMPLOYEE
                              STOCK OPTION     STATUTORY      STATUTORY      STATUTORY    STOCK OPTION   STOCK OPTION    DIRECTORS
                                  PLAN        STOCK OPTION   STOCK OPTION   STOCK OPTION      PLAN           PLAN       STOCK OPTION
                                                 PLAN            PLAN           PLAN                                        PLAN
                                                                                                                        
                              ------------------------------------------------------------------------------------------------------
<S>                               <C>           <C>               <C>          <C>           <C>            <C>               <C>   
OPTIONS AUTHORIZED                1,000,000     1,000,000         500,000      1,000,000     2,850,000      2,250,000         50,000
                              ======================================================================================================
OPTIONS OUTSTANDING                 200,400       584,300          48,600        318,400       956,600        368,200              0
        DECEMBER 31, 1995                                                                                             

      GRANTED                             0             0               0              0       687,800        505,700              0
      EXERCISED                     (24,500)      (30,500)        (11,700)       (36,700)     (121,800)       (30,300)             0
      CANCELED                       (3,800)            0               0        (57,000)      (26,500)      (143,800)             0
                              ------------------------------------------------------------------------------------------------------
OPTIONS OUTSTANDING                 172,100       553,800          36,900        224,700     1,496,100        699,800              0
        DECEMBER 31, 1996
                              ======================================================================================================

      GRANTED                             0             0               0              0       550,000        494,300          5,900
      EXERCISED                     (26,700)      (37,000)         (2,700)        (6,200)      (57,800)       (19,000)             0
      CANCELED                         (200)            0               0         (1,000)     (110,400)      (114,700)             0
                              ------------------------------------------------------------------------------------------------------
OPTIONS OUTSTANDING                 145,200       516,800          34,200        217,500     1,877,900      1,060,400          5,900
        DECEMBER 31, 1997
                              ======================================================================================================

      GRANTED                             0             0               0              0       854,000      1,107,100          6,000
      EXERCISED                     (51,500)      (48,500)              0         (2,300)      (42,600)       (10,100)             0
      CANCELED                            0             0               0         (2,500)     (129,100)      (152,300)             0
------------------------------------------------------------------------------------------------------------------------------------
OPTIONS OUTSTANDING                  93,700       468,300          34,200        212,700     2,560,200      2,005,100         11,900
        DECEMBER 31, 1998            
====================================================================================================================================
</TABLE>

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

<TABLE>
<CAPTION>
                                                     TOTAL        OPTION       OPTION       WEIGHTED        SHARES
                                                   ACTIVITY        PRICE        PRICE       AVERAGE       EXERCISABLE
                                                   ALL PLANS        PER          PER        EXERCISE          AT
                                                   (SHARES)        SHARE        SHARE        PRICE         YEAR-END
                                                                   (LOW)       (HIGH)
                                             ---------------------------------------------------------------------------
<S>                                                <C>             <C>         <C>           <C>           <C>      
OPTIONS OUTSTANDING DECEMBER 31, 1995              2,476,500       $4.62       $30.20        $6.51         1,180,850
                                                                                                          
   GRANTED                                         1,193,500      $10.00       $16.75        $13.07            --
   EXERCISED                                       (255,500)       $4.88       $10.25        $4.93             --
   CANCELED                                        (231,100)       $4.88       $30.20        $13.63            --
                                             ---------------------------------------------------------------------------
OPTIONS OUTSTANDING DECEMBER 31, 1996              3,183,400       $4.62       $30.20        $8.66         1,283,400
                                                                                                          
   GRANTED                                         1,050,200       $2.88       $15.00        $14.04            --
   EXERCISED                                       (149,400)       $4.88        $4.88        $4.91             --
   CANCELED                                        (226,300)       $4.88       $22.00        $12.52            --
                                             ---------------------------------------------------------------------------
OPTIONS OUTSTANDING DECEMBER 31, 1997              3,857,900       $2.88       $30.20        $10.05        1,765,100
                                                                                                          
   GRANTED                                         1,967,100       $5.88       $10.94        $8.74             --
   EXERCISED                                       (155,000)       $4.88        $8.00        $4.90             --
   CANCELED                                        (283,900)       $4.88       $14.75        $12.38            --
------------------------------------------------------------------------------------------------------------------------
OPTIONS OUTSTANDING DECEMBER 31, 1998              5,386,100       $2.88       $30.20        $9.59         2,239,400
========================================================================================================================
</TABLE>


                                      F-16
<PAGE>   63

                              U.S. BIOSCIENCE, INC.
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

      The price range of outstanding and exercisable stock options as at
December 31, 1998 is as follows:

<TABLE>
<CAPTION>
                        OPTIONS         WEIGHTED         WEIGHTED          OPTIONS        WEIGHTED
                     OUT-STANDING        AVERAGE          AVERAGE         EXERCIS-        AVERAGE
RANGE OF OPTION           AT            REMAINING        EXERCISE           ABLE          EXERCISE
EXERCISE PRICES        YEAR-END         CONTRACT           PRICE             AT            PRICE
                                          LIFE          OUTSTANDING       YEAR-END      EXERCISABLE
                                         (YEARS)          OPTIONS                         OPTIONS
----------------------------------------------------------------------------------------------------
<S>                    <C>                <C>             <C>             <C>              <C>  
  $2.88 - $4.63           16,900          8.08             $3.39             14,900         $3.22
 
  $4.88 - $5.25        1,461,600          3.95             $4.88          1,352,200         $4.88
 
  $5.63 - $8.00        1,073,400          9.77             $7.03             21,400         $7.00
 
 $8.75 - $11.19        1,215,800          8.80            $10.70            166,100        $10.59

$11.63 - $30.20        1,618,400          7.63            $14.76            684,800        $15.40
----------------------------------------------------------------------------------------------------
 $2.88 - $30.20        5,386,100          7.33             $9.59          2,239,400         $8.53
====================================================================================================
</TABLE>

      The exercise price of options currently granted under the plans is equal
to the fair market value of the underlying share of common stock at the time of
grant, except in respect to the 1996 Non-employee Directors Stock Option Plan
where options are granted in lieu of annual fees. 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.

      The company has elected to follow Accounting Principles Board Opinion No.
25,"Accounting for Stock Issued to Employees" ("APB 25") and related
interpretations in accounting for stock options because, as discussed below, the
alternative fair value accounting provided for under FASB Statement No. 123,
"Accounting for Stock-Based Compensation" ("FASB 123") requires the use of
option valuation models that were not developed for use in valuing employee
incentive stock options.

      Pro forma information regarding net income (loss) and earnings (loss) per
share is required by FASB 123, which also requires that the information be
determined as if the company has accounted for stock options granted subsequent
to December 31, 1994 under the fair value method of FASB 123. The fair value for
the company's stock options granted subsequent to December 31, 1994 is estimated
at the date of grant using a Black-Scholes option pricing model with the
following weighted-average assumptions for 1996, 1997 and 1998; risk-free
interest rate of 6.28%, 5.60% and 4.77% respectively; no expected dividend
payments; volatility factors of the expected market price of the company's
common stock, based on historical volatility, of 0.4252; 0.5341 and 0.6843
respectively; and a weighted-average expected life of the option of 8.00, 6.12
and 5.83 years, respectively.

      The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. As noted above, the company's stock options are
vested over an extended period. In addition, option models require the input of
highly subjective assumptions including future stock price volatility. Because
the company's stock options have characteristics significantly different from
those of traded options, and because changes in the subjective assumptions can
materially affect the fair value estimates, in managements opinion, the
Black-Scholes model does not necessarily provide a reliable measure of the fair
value of the company's stock options. The weighted average fair values of option
grants, as calculated using the Black-Scholes option valuation model, for the
years ending December 31 are as follows: 1998 -- $5.66; 1997 -- $8.06; and 1996
-- $7.63.


                                      F-17
<PAGE>   64

                              U.S. BIOSCIENCE, INC.
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

      For purposes of pro forma disclosure under FASB 123, the estimated fair
value of the company's options is amortized over the option's vesting period.
The company's pro forma information is as follows:

<TABLE>
<CAPTION>
                                          1998              1997             1996
                                      -------------     -------------    -------------
<S>                                   <C>               <C>              <C>         
Net loss as reported under APB 25      ($9,053,900)      ($7,909,100)     ($9,687,400)

Stock option expense per FASB 123       (5,400,600)       (4,062,600)      (1,304,400)
                                      -------------     -------------    -------------
Pro forma net loss                    ($14,454,500)     ($11,971,700)    ($10,991,800)

Pro forma net loss per common share         ($0.59)           ($0.50)          ($0.49)
</TABLE>

      Because FASB 123 is applicable only to options granted subsequent to
December 31,1994, its pro forma effect will not be fully reflected until the
year 2000 due to the five year vesting period of options granted in 1995, the
initial year pro forma disclosure of stock option accounting under FASB 123 was
required.

15. 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
401(k) costs during 1998 on a monthly basis. The company funded pension costs on
a quarterly basis in 1998. 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
the deferred compensation plans were for the years ended December 31,
1998--$1,260,000, 1997--$1,226,400 and 1996--$993,000.

16. Income Taxes

      As of December 31, 1998, the company had a net operating loss carry
forward of approximately $140,220,000 for federal income tax purposes. In
addition, the company had a research and development tax credit carry forward of
$6,159,000.

      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, 1998, or any prior period for
any net operating loss carryforwards or other deferred tax assets generated
during the year.


                                      F-18
<PAGE>   65
                              U.S. BIOSCIENCE, INC.
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

         Significant components of the company's estimated deferred tax assets
and liabilities as at December 31, 1998 and 1997 are as follows:

<TABLE>
<CAPTION>
                                                                  1998            1997
                                                                  ----            ----
<S>                                                           <C>             <C>
   Deferred tax assets
       Net operating loss carryforwards(1)                    $ 50,690,600    $ 48,091,200
       Book over income tax depreciation                           114,600         174,800
       Research and development tax credits                      6,159,800       5,338,000
       Other non-salary compensation and benefits                  877,000         869,500
       Other, principally reserves                                 729,200         308,600
                                                              ------------    ------------
       Total deferred tax assets                                58,571,200      54,782,100
   Deferred tax liabilities
       Prepaid expenses                                           (102,800)       (121,200)
                                                              ------------    ------------
       Total deferred tax liabilities                             (102,800)       (121,200)
                                                              ------------    ------------
                                                                58,468,400      54,660,900
   Valuation allowance for net deferred tax assets             (58,468,400)    (54,660,900)
                                                              ------------    ------------
   Net deferred tax assets                                    $          0    $          0
                                                              ============    ============
</TABLE>


(1)      Includes estimated state and foreign net operating loss carryforwards
         of $1,613,500.

         The reconciliation of the expected tax benefit for the years ended
December 31, 1998 and 1997 are as follows:

<TABLE>
<CAPTION>
                                                       1998             1997
                                                       ----             ----
<S>                                                <C>              <C>
Tax benefit at expected rate(35%)                  $ 3,168,900      $ 2,768,100
Permanent differences                                 (406,800)        (370,600)
Research and development tax credit                    781,900          707,400
State taxes, net                                      (102,400)        (217,900)
Foreign taxes, net                                     173,900          (94,000)
Other                                                  (15,000)         125,000
                                                   -----------      -----------
Income tax benefit                                   3,600,500        2,918,000
Stock option benefit recorded in equity                207,000          335,500
Increase in valuation allowance                     (3,807,500)      (3,253,500)
                                                   -----------      -----------
Tax benefit                                        $         0      $         0
                                                   ===========      ===========
</TABLE>


         Approximately $9,964,300 of tax benefits related to the exercise of
stock options is included in the deferred tax asset relating to 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.


                                      F-19
<PAGE>   66
                              U.S. BIOSCIENCE, INC.
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

         The federal income tax carryforwards expire as follows:


<TABLE>
<CAPTION>
                                                               Research and
                                     Net Operating              Development
                                        Losses                    Credits
                                     -------------             ------------
<S>                                  <C>                       <C>
2002                                  $      1,000             $          0
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                                     3,659,000                  473,000
2011                                    10,275,000                  593,000
2012                                     7,441,000                  717,000
2018                                     8,362,000                  782,000
                                      ------------             ------------
                                      $140,220,000             $  6,159,000
                                      ============             ============
</TABLE>

         The timing and manner in which the company will utilize net operating
loss and research and development tax credit carryforwards in any year, or in
total, may be limited by provisions of the Internal Revenue Service Tax Code
regarding changes in the ownership of the company. Such limitations may have an
impact on the ultimate realization of these federal income tax carryforwards.

17.      CONTINGENCY

         On February 28, 1996, Ichthyol Gesellschaft Cordes, Hermanni & Co.
("Ichthyol Gesellschaft") filed a complaint for refrain, information and damages
with the Regional Court of Hamburg against U.S. Bioscience, Inc. on the grounds
of trademark infringement in respect of the use of the trademark "Ethyol" in
Germany. On April 29, 1996, U.S. Bioscience filed a reply to Ichthyol
Gesellschaft's complaint stating U.S. Bioscience's position that the trademark
"Ethyol" does not infringe plaintiff's trademark rights in the trademark
"Ichthyol" nor Ichthyol Gesellschaft's firm right in the slogan "Ichthyol." The
suit was dismissed on January 29, 1997, by the Regional Court of Hamburg at
which time Ichthyol Gesellschaft. was given leave to appeal against the judgment
rendered in favor of U.S. Bioscience, Inc. Ichthyol Gesellschaft. filed an
appeal, and a judgment was rendered in favor of U.S. Bioscience in the appellate
proceedings. In January 1999, Ichthyol Gesellschaft filed an appeal on points of
law with the Federal Court of Justice, which has extended until May 17, 1999 the
deadline for Ichthyol Gesellschaft to file the grounds for the appeal on points
of law. It is not possible to predict the decision of the Federal Court of
Justice with respect to this appeal.

18.      SUBSEQUENT EVENT

         In January 1999, the company entered in a $20,000,000 stock purchase
agreement with a group of private investors lead by Domain Partners IV L.P., a
leading health care venture capital fund and Proquest Investments L.P., an
oncology focused venture capital fund. Pursuant to the agreement, the company
issued to the investors 2,686,728 shares of common stock at a price of $7.44 per
share and warrants exercisable for three years, to purchase 537,346 additional
shares of common stock at an exercise price of $11.17 per share. The shares were
purchased at the average closing price of the company's common stock for the
30-day period ending January 26, 1999. The warrant exercise price is a 50%
premium over that 30-day average closing price. Except in certain change of
control situations, the agreement calls for the investors to hold the purchased
securities for at least one year. Following the closing of this transaction, the
company had cash and marketable securities of approximately $60 million.


                                      F-20
<PAGE>   67
                                EXHIBIT INDEX

                                 Description
                                 -----------
Item No.
--------

The following is a list of exhibits filed as part of this annual report on Form
10-K. Where so indicated by footnote, exhibits which were previously filed are
incorporated by reference. For exhibits incorporated by reference, the location
of the exhibit in the previous filing is indicated in parentheses.

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

4.2         Securities Purchase Agreement dated as of January 27, 1999 by and
            among the Registrant and Domain Partners IV, L.P, DP IV Associates,
            L.P., and Proquest Investments, L.P. (including form of Warrant)
            (incorporated by reference to the Registrant's Current Report on
            Form 8-K dated January 27, 1999)

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)



<PAGE>   68

10.2.3      Amendment No. 2, dated June 30, 1995, to Office Lease Agreement
            between U.S. Bioscience, Inc. and Tower Bridge Associates
            (incorporated by reference to Exhibit 10.2.3 to the Registrant's
            Annual Report on Form 10-K filed with the Securities and Exchange
            Commission on March 20, 1996)

10.2.4      Amendment No. 3, dated May 12, 1998, to Office Lease Agreement
            between U.S. Bioscience and Tower Bridge Associates (incorporated by
            reference to Exhibit 10.2.3.1 to Registrant's Quarterly Report on
            Form 10-Q filed with the Securities and Exchange Commission on July
            31, 1998)

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)

10.3.3      Third Amendment to Lease Agreement between the Registrant and
            Pickering Associates dated October 12, 1995 (incorporated by
            reference to Exhibit 10.3.3 to the Registrant's Annual Report on
            Form 10-K filed with the Securities and Exchange Commission on March
            20, 1998)

10.3.4      Fourth Amendment to Lease Agreement between the Registrant and
            Pickering Acquisition Associates dated January 20, 1998
            (incorporated by reference to Exhibit 10.3.4 to the Registrant's
            Annual Report on Form 10-K filed with the Securities and Exchange
            Commission on March 20, 1998)

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)



<PAGE>   69

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)

10.11.1     Amendment, dated April 12, 1995, to Agreement dated January 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 21, 1997)

10.11.2     Second Amendment, dated May 6, 1996 to Agreement dated January 1,
            1995 between the Registrant and Applied Analytical Industries, Inc.
            (incorporated by reference to Exhibit 10.11.2 to the Registrant's
            Annual Report on Form 10-K filed with the Securities and Exchange
            Commission on March 21, 1997)

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)

10.12.1     Amendment, dated April 11, 1995, to Agreement dated September 23,
            1993 between the Registrant and Ben Venue Laboratories, Inc.
            (incorporated by reference to Exhibit 10.12.1 to the Registrant's
            Annual Report on Form 10-K filed with the Securities and Exchange
            Commission on March 21, 1997)

10.12.2     Amendment, dated December 12, 1995, to Agreement dated September 23,
            1993 between the Registrant and Ben Venue Laboratories, Inc.
            (incorporated by reference to Exhibit 10.12.2 to the



<PAGE>   70

            Registrant's Annual Report on Form 10-K filed with the Securities
            and Exchange Commission on March 21, 1997)

10.13       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)

10.13.1     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)

10.14       Amended and Restated License Agreement dated May 10, 1994 between
            the 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 20, 1998)

10.15*      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)

10.15.1*    Amendment to Distribution and Supply Agreement, dated as of August
            31, 1996 between the Registrant and Scherico, Ltd. (incorporated by
            reference to Exhibit 10.16.1 to the Registrant's Current Report on
            Form 8-K/A dated September 19, 1996 filed with the Securities and
            Exchange Commission on December 19, 1996)

10.16       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)

10.17       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)

10.18       Non-Executive Stock Option Plan (incorporated by reference to
            Exhibit 4.2 to the Registrant's Registration Statement on Form S-8
            filed with the Securities and Exchange Commission on May 9, 1997)

10.19*      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)

10.19.1     Amendment No. 2 to Distribution and Marketing Collaboration
            Agreement between the Registrant and ALZA Corporation dated as of
            February 3, 1997 (incorporated by reference to Exhibit 10.25.2 to
            the Registrant's Current Report on Form 8-K dated February 3, 1997)

10.20       Stock Purchase Agreement between the Registrant and ALZA Corporation
            dated as of February 3, 1997 (incorporated by reference to Exhibit
            10.25.1 to the Registrant's Current Report on Form 8-K dated
            February 3, 1997)



<PAGE>   71

10.21       License Agreement between the Registrant and Scherico, Ltd. dated as
            of November 6, 1997 (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 20, 1998)

10.21.1     Amendment No. 1 to License Agreement dated as of November 6, 1997
            between the Registrant and Scherico, Ltd. (incorporated by reference
            to Exhibit 10.27.1 to the Registrant's Annual Report on Form 10-K
            filed with the Securities and Exchange Commission on March 20, 1998)

Executive Compensation Plans and Arrangements

10.22       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)

10.23       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)

10.24       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)

10.25       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)

10.26       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)

10.27       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)

10.28       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)

10.29       Amendment 1996-1 to Pension Restoration Plan (incorporated by
            reference to the Registrant's Annual Report on Form 10-K filed with
            the Securities and Exchange Commission on March 20, 1998)

10.30       Agreement between the Registrant and Philip S. Schein, M.D. dated as
            of March 10, 1998 (incorporated by reference to Exhibit 10.28.1 to
            the Registrant's Annual Report on Form 10-K filed with the
            Securities and Exchange Commission on March 20, 1998)

10.31       Form of Executive Severance Agreement executed with each Executive
            Vice President, each elected 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)



<PAGE>   72

10.32       Executive Severance Agreement, dated September 3, 1996, between the
            Registrant and C. Boyd Clarke (incorporated by reference to the
            Registrant's Annual Report on Form 10-K filed with the Securities
            and Exchange Commission on March 20, 1998)

10.33       Executive severance arrangement, dated March 4, 1997, between the
            Registrant and C. Boyd Clarke (incorporated by reference to Exhibit
            10.42 to the Registrant's Annual Report on Form 10-K filed with the
            Securities and Exchange Commission on March 21, 1997)

10.34       Executive severance arrangement, dated March 4, 1997, between the
            Registrant and Wolfgang Oster, M.D. (incorporated by reference to
            Exhibit 10.43 to the Registrant's Annual Report on Form 10-K filed
            with the Securities and Exchange Commission on March 21, 1997)

10.35       Agreement, dated as of December 31, 1998, between the Registrant and
            Barbara J. Scheffler

10.36       U.S. Bioscience, Inc. 1999 Incentive Compensation Plan

10.37       Letter agreement dated May 5, 1997 between the Registrant and Robert
            L. Capizzi, M.D. (incorporated by reference to Exhibit 10.40.1 to
            the Registrant's Annual Report on Form 10-K filed with the
            Securities and Exchange Commission on March 20, 1998)

10.37.1     Letter agreement, dated April 30, 1998, between the Registrant and
            Robert L. Capizzi, M.D.

22          Subsidiaries of the Registrant

23          Consent of Ernst & Young LLP, Independent Auditors

27          Financial Data Schedule

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