As filed
  with the Securities and Exchange Commission on June 24, 2002

---

UNITED
  STATES
  SECURITIES AND EXCHANGE COMMISSION

Washington,
  D.C. 20549
  FORM 20-F

|(Mark One) |  |                                                                                                                                             
|---------- |  | --------------------------------------------------------------------------------------------------------------------------------------------
|           |  | REGISTRATION
  STATEMENT PURSUANT TO SECTION 12(b)
  OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934
  OR                                     
|           |  | ANNUAL
  REPORT PURSUANT TO SECTION 13 OR 15(d)
  OF THE SECURITIES EXCHANGE ACT OF 1934
  For the fiscal year ended: December 31, 2001
  OR
|           |  | TRANSITION
  REPORT PURSUANT TO SECTION 13
  OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF
  1934                                          

For the transition period from N/A to N/A

Commission
  file number : 0-29860

SKYEPHARMA
  PLC
  (Exact name of Registrant as specified in its charter)

England
  and Wales
  (Jurisdiction of incorporation or organization)

105
  Piccadilly, London W1J 7NJ, England
  (Address of principal executive offices)

Securities
  registered or to be registered pursuant to Section 12(b) of the Act: None

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

ordinary
  shares of nominal value 10p each

Securities
  for which there is a reporting obligation pursuant to Section 15(d) of the Act:
  None.

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

ordinary
  shares, nominal value 10p each 569,213,863

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 which financial statement item the registrant has elected to follow:

Item
  17                  Item
  18 X

---

TABLE
  OF CONTENTS



|                                  | Page | 
|--------------------------------- | ---- | 
|Presentation
      of Information | 3    | 
|Certain
      Definitions         | 3    | 
|Statistical
      Data            | 3    | 
|Forward-looking
      Statements  | 4    | 
|Exchange
      Rate Information   | 4    | 
|                                  |      | 

Part
  I

|Item
      1: Identity of Directors, Senior Management and Advisers       | 5   | 
|------------------------------------------------------------------------- | --- | 
|Item
      2: Offer Statistics and Expected Timetable                     | 5   | 
|Item
      3: Key Information                                             | 5   | 
|Item
      4: Information on the Company                                  | 20  | 
|Item
      5: Operating and Financial Review and Prospects                | 67  | 
|Item
      6: Directors, Senior Management and Employees                  | 78  | 
|Item
      7: Major Shareholders and Related Party Transactions           | 91  | 
|Item
      8: Financial Information                                       | 96  | 
|Item
      9: The Offer and Listing                                       | 98  | 
|Item
      10: Additional Information                                     | 99  | 
|Item
      11: Quantitative and Qualitative Disclosures About Market Risk | 110 | 
|Item
      12: Description of Securities Other than Equity Securities     | 116 | 
|                                                                          |     | 

Part
  II

|Item
      13: Defaults, Dividend Arrearages and Delinquencies                                    | 117 | 
|------------------------------------------------------------------------------------------------- | --- | 
|Item
      14: Material Modifications to the Rights of Security Holders and Use of
      Proceeds | 117 | 
|                                                                                                  |     | 

Part
  III

|Item
      17: Financial Statements | 118 | 
|----------------------------------- | --- | 
|Item
      18: Financial Statements | 118 | 
|Item
      19: Exhibits             | 118 | 

2

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PRESENTATION
  OF INFORMATION

In
  this Annual Report on Form 20-F (Form 20-F), the term ordinary
  shares refers to SkyePharmas ordinary shares, nominal value 10 pence
  each, and the term ADSs refers to American Depositary Shares each
  representing the right to receive 10 ordinary shares and evidenced by American
  Depositary Receipts (ADRs).

SkyePharma
  PLC (the Company) publishes its consolidated financial statements
  expressed in pounds sterling. In this Form 20-F, references to pounds
  sterling, £, pence or p are
  to the lawful currency of the United Kingdom; references to U.S. dollars
  or $ are to the lawful currency of the United States; references
  to Euros or € are to the lawful currency of the
  members of the European Union that have adopted the single European currency;
  references to $ Canadian are to the lawful currency of Canada and
  references to Swiss francs, Chf or Sfr are
  to the lawful currency of Switzerland. Solely for the convenience of the reader,
  this Form 20-F contains translations of certain pound sterling amounts into
  U.S. dollar amounts at specified rates. Unless otherwise stated, the translations
  of pounds sterling into U.S. dollars have been made at the noon buying rate
  in New York City for cable transfers in pounds sterling, as certified for customs
  purposes by the Federal Reserve Bank of New York (the Noon Buying Rate).
  No representation is made that pounds sterling have been, could have been or
  could be converted into U.S. dollars at the rates indicated or at any other
  rate.

SkyePharma
  prepares its consolidated financial statements in accordance with generally
  accepted accounting principles in the United Kingdom (U.K. GAAP),
  which differ in certain significant respects from generally accepted accounting
  principles in the United States (U.S. GAAP). The principal differences
  between U.K. GAAP and U.S. GAAP as they relate to SkyePharma are summarized
  in Note 31 of SkyePharmas Consolidated Financial Statements included in
  Item 18 of this Form 20-F.

CERTAIN
  DEFINITIONS

In
  this document:

DepoCyt®
  refers to the product combining SkyePharmas DepoFoam with cytarabine,
  a drug used to treat certain cancers. DepoCyt is approved for marketing in the
  U.S. and Canada under the trademark DepoCyt® and in Europe as DepoCyte.

Solaraze
  refers to the topical gel formulation of hyaluronan and the non-steroidal, anti-inflammatory
  drug diclofenac and is being developed primarily as a product for the treatment
  of actinic keratosis, a lesion of the skin which may precede skin cancer, although
  in some countries the trademark used may vary.

STATISTICAL
  DATA

Except
  where otherwise indicated, figures included in this Form 20-F relating to pharmaceutical
  market sales are based on syndicated industry sources, including I.M.S. Health,
  Inc. (IMS) or from the Companys collaborative partners. IMS
  is a market research firm internationally recognized by the pharmaceutical industry.

3

---

FORWARD-LOOKING
  STATEMENTS

This
  Form 20-F contains certain forward-looking statements as defined in Section
  21E of the Securities Exchange Act of 1934 with respect to the financial condition,
  results of operations and business of the Company and certain of the plans and
  objectives of the board of directors of the Company with respect thereto. Such
  statements may generally, but not always, be identified by the use of words
  such as anticipates, should, expects, estimates,
  believes or similar expressions. Such statements in this Form 20-F
  include, but are not limited to, statements under the following headings: (1)
  Item 4: Information on the Company; (2) Item 5: Operating
  and Financial Review and Prospects; (3) Item 8: Financial Information;
  and (4) Item 11: Quantitative and Qualitative Disclosures About Market
  Risk. Specific risks faced by the Company are described under Risk
  Factors on pages 8 to 19. By their nature, forward-looking statements
  involve risk and uncertainty, and the factors described in the context of such
  forward-looking statements in this Form 20-F could cause actual results and
  developments to differ materially from those expressed in or implied by such
  forward-looking statements.

EXCHANGE
  RATE INFORMATION

The
  table below sets forth, for the periods and dates indicated, certain information
  concerning the Noon Buying Rates for pounds sterling expressed in U.S. dollars
  per pound. The period average data set forth below is the average of the Noon
  Buying Rates on the last day of each full month during the period.

Fluctuations
  in the exchange rate between the pound sterling and the U.S. dollar will affect,
  among other things, the U.S. dollar equivalent of the pound sterling price of
  the ordinary shares on the London Stock Exchange (LSE), which is
  likely to affect the market prices of the ADSs in the United States.

|                                   | High   |  | Low    |  | Period
      
      Average |  | Period
      End | 
|---------------------------------- | ------ |  | ------ |  | --------------------------- |  | ---------------- | 
|                                   |        |  |        |  |                             |  |                  | 
|1997                               | 1.7035 |  | 1.5775 |  | 1.6397                      |  | 1.6427           | 
|1998                               | 1.7222 |  | 1.6114 |  | 1.6602                      |  | 1.6628           | 
|1999                               | 1.6765 |  | 1.5515 |  | 1.6146                      |  | 1.6150           | 
|2000                               | 1.6538 |  | 1.3997 |  | 1.5156                      |  | 1.4955           | 
|2001                               | 1.5045 |  | 1.3730 |  | 1.4382                      |  | 1.4543           | 
|2002
      (through June 19, 2002) | 1.4676 |  | 1.4074 |  | 1.4379                      |  | 1.4873           | 
|                                   |        |  |        |  |                             |  |                  | 

|                                        | High   |  | Low    | 
|--------------------------------------- | ------ |  | ------ | 
|                                        |        |  |        | 
|December
      2001                     | 1.4588 |  | 1.4164 | 
|January
      2002                      | 1.4482 |  | 1.4074 | 
|February
      2002                     | 1.4322 |  | 1.4117 | 
|March
      2002                        | 1.4287 |  | 1.4146 | 
|April
      2002                        | 1.4592 |  | 1.4310 | 
|May 2002                                | 1.4676 |  | 1.4474 | 
|June
      2002 (through June 19, 2002) | 1.4873 |  | 1.4574 | 
|                                        |        |  |        | 

For
  a discussion of the impact of exchange rate fluctuations on the Companys
  operating results, see Item 5: Operating and Financial Review and Prospects
   Operating Results.

4

---

PART
  I

Item
  1: Identity of Directors, Senior Management and Advisers

Not
  applicable

Item
  2: Offer Statistics and Expected Timetable

Not
  applicable

Item
  3: Key Information

Selected
  Financial Data

The
  selected financial data set forth below for the Company as of December 31, 2001
  and 2000, and for the years ended December 31, 2001, 2000 and 1999 have been
  derived from, and should be read in conjunction with the Consolidated Financial
  Statements of the Company included in Item 18 of this Form 20-F. The selected
  financial data set forth below for the Company as of December 31, 1999, 1998
  and 1997 and for the years ended December 31, 1998 and 1997 have been derived
  from audited Consolidated Financial Statements of the Company. The Consolidated
  Financial Statements of the Company for the years ended December 31, 2001, 2000,
  1999 and 1998 have been audited by PricewaterhouseCoopers, independent chartered
  accountants. The Consolidated Financial Statements of the Company for the year
  ended December 31, 1997 were audited by Price Waterhouse, independent chartered
  accountants.

The
  selected financial data has been prepared using U.K. GAAP, which differs in
  certain significant respects from U.S. GAAP. A reconciliation to U.S. GAAP of
  the Companys net loss and shareholders funds at December 31, 2001
  and 2000 and for the years ended December 31, 2001, 2000 and 1999 is set out
  in Note 31 of the Notes to SkyePharmas Consolidated Financial Statements
  included in Item 18 of this Form 20-F. Total assets for U.S. GAAP comprise total
  assets under U.K. GAAP adjusted for the U.S. GAAP adjustments set out in Note
  31 of the Notes to SkyePharmas Consolidated Financial Statements included
  in Item 18 of this Form 20-F.

The
  Company has not paid dividends in the past ten years on its ordinary shares
  and does not intend to pay dividends in the foreseeable future. The Company
  currently intends to retain all of its earnings to finance its operations and
  future growth. Moreover, under current U.K. law, the Companys accumulated
  realized profits must exceed its accumulated realized losses (on a non-consolidated
  basis) before dividends can be paid.

For
  exchange rate information, see Exchange Rate Information on page
  4 of this Form 20-F. Solely for the convenience of the reader, the pound sterling
  amounts as of and for the year ended December 31, 2001 have been translated
  into U.S. dollars at the noon buying rate on December 31, 2001 of $1.4543 per
  £1.00.

For
  a discussion of the impact of exchange rate fluctuations on the Companys
  operating results, see Item 5: Operating and Financial Review and Prospects
   Operating Results.

5

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SkyePharma PLC

|                                                                                     | Year
      ended December 31,              
|------------------------------------------------------------------------------------ | -------------------------------------------
|Consolidated
      Income Statement Data                                             | 1997                                       
|                                                                                     |                                            
|                                                                                     | (in
      thousands, except per share data)
|U.K.
      GAAP                                                                      |                                            
|Turnover(1)
      (6)                                                                | £
      13,839                             
|Cost
      of sales(2)                                                               | (10,193                                    
|                                                                                     |                                            
|Gross
      profit                                                                   | 3,646                                      
|Selling,
      marketing & distribution expenses(3)                                  | (3,063                                     
|Administration
      expenses(4)                                                     | (6,422                                     
|Research
      and development expenses(5)                                           | (6,109                                     
|Other
      operating income                                                         |                                           
|                                                                                     |                                            
|Group
      operating loss                                                           | (11,948                                    
|Share
      of operating (loss)/profit in Joint 
         Venture                    | (346                                       
|Associated
      undertaking                                                         |                                           
|                                                                                     |                                            
|Total
      operating loss                                                           | (12,294                                    
|Reversal
      of provision for loss on disposal of 
         fixed asset investment |                                           
|                                                                                     |                                            
|Loss
      on ordinary activities before interest and 
         taxation             | (12,294                                    
|Interest
      receivable                                                            | 808                                        
|Interest
      payable                                                               | (6,229                                     
|Taxation                                                                             | (66                                        
|                                                                                     |                                            
|Net
      loss(6)                                                                    | £
      (17,781                            
|                                                                                     |                                            
|Weighted
      average number of shares (000)                                       | 350,963                                    
|Basic
      and diluted loss per ordinary share                                      | (5.1                                       
|U.S.
      GAAP                                                                      |                                            
|Turnover                                                                             | £
      13,839                             
|Group
      operating loss                                                           | (£13,171                                   
|Net loss
      under U.S. GAAP                                                       | £
      (18,658                            
|Basic
      and diluted Net loss per share                                           | (5.3                                       
|Principal
      Reconciling Differences to U.S. 
         GAAP                       |                                            
|Purchase
      accounting and goodwill                                               | (877                                       
|Sale
      of royalty interest                                                       |                                           
|Other
      reconciling items                                                        |                                           
|                                                                                     |                                            

All
  results, under U.K. GAAP and U.S. GAAP, represent continuing operations.

The
  notes on page 7 describe significant movements within the above categories in
  respect of acquisitions made during specific financial periods.

For
  further details of the reconciliation to U.S. GAAP, see Note 31 of the Notes
  to SkyePharmas Consolidated Financial Statements included in Item 18 of
  this Form 20-F.

6

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|(1) | Turnover in 1997 includes
      £5,357,000 from acquisitions in respect of the manufacturing facility
      of SkyePharma Production SAS (Lyon) in Lyon.
Turnover in 1999 includes £3,520,000 from acquisitions in respect of the
operations of SkyePharma Inc. SkyePharma Inc. refers to DepoTech Corporation,
a California corporation, which was renamed SkyePharma Inc. as of April 27, 1999.                              
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(2) | Cost of sales in 1997 includes
£5,153,000 from acquisitions in respect of the manufacturing facility in
Lyon. Cost of sales in 1999 includes £2,669,000 from acquisitions in respect
of the operations of SkyePharma Inc.                                                                                                                                                                                                        
|(3) | Selling, marketing and
distribution expenses in 1999 include £1,870,000 from acquisitions in respect
of the operations of SkyePharma Inc.                                                                                                                                                                                                                                                                                        
|(4) | Administration expenses
      in 1997 include £988,000 from acquisitions in respect of the manufacturing
      facility in Lyon.
Administration expenses in 1999 include £4,559,000 from acquisitions in
respect of the operations of SkyePharma Inc.                                                                                                                                                                            
|(5) | Research and development
expenses in 1999 includes £3,273,000 from acquisitions in respect of the
operations of SkyePharma Inc.                                                                                                                                                                                                                                                                                                  
|(6) | RTP Pharma Inc. (RTP)
was acquired on December 27, 2001. During the period December 27, 2001 to December
31, 2001 RTP contributed £nil to turnover and a loss of £39,000 to
net loss. RTP was renamed SkyePharma Canada Inc. on April 24, 2002. In the period
from July  19, 2001 to December  27, 2001, SkyePharma owned 40.2% of
RTP and the results of its operations were included in Results from associated
undertakings.

The
  Company has calculated loss per share data using the weighted average number
  of shares in issue for each period as set out in the table above. Basic and
  diluted loss per ordinary share are set out in the table above, there is no
  difference between basic and diluted loss per share since all potential ordinary
  shares including convertible bonds, warrants and options are anti-dilutive.

|                                        | SkyePharma
      PLC
As of December 31,      
|--------------------------------------- | ---------------------------------------------
|Consolidated
      Balance Sheet Data   | 1997                                         
|                                        |                                              
|                                        | (in
      thousands, except Number of shares)
|U.K.
      GAAP                         |                                              
|Fixed
      assets                      | £24,034                                      
|Cash
      and short term bank deposits | 8,671                                        
|Total
      assets                      | 42,430                                       
|Net
      Assets                        | (46,110                                      
|Share
      Capital                     | 36,395                                       
|Number
      of shares                  | 363,950,609                                  
|U.S.
      GAAP                         |                                              
|Total
      assets                      | 148,559                                      
|Net Assets                              | 129,847                                      
|                                        |                                              

7

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RISK FACTORS

The
  Company is exposed to certain risks that arise from the activity of developing
  and manufacturing drug products.

Extensive government
  regulation may cause increased costs and delays in developing and marketing
  products

The
  Company is subject to extensive government regulation. The U.S. Food and Drug
  Administration (FDA), European and other national regulatory authorities
  require rigorous pre-clinical testing, clinical trials and other approval procedures
  for human drugs. Numerous regulations also govern the manufacturing, safety,
  labeling, storage, record keeping, reporting and marketing of human drugs. These
  requirements vary widely from country to country and the time required to complete
  pre-clinical testing and clinical trials and to obtain regulatory approvals
  to sell drugs is uncertain. The process of obtaining these approvals and complying
  with applicable government regulations is time consuming and expensive. If the
  FDA or other national regulatory authorities require additional clinical trials,
  the Company could face increased costs and significant development delays before
  the Company will be able to sell its products commercially. In addition, changes
  in regulatory policy or additional regulations adopted during product development
  could also result in delays or rejections.

Geomatrix
  is a range of technologies by which drugs taken orally in tablet form are formulated
  so as to control the amount, timing and location of the release of drug in the
  body. All of the improved outcome and new Geomatrix products that the Company
  develops will require a new drug application filing with the FDA before they
  can be marketed in the U.S. Based on current practice, the Company expects that
  it will take less than two years from the date of filing for the FDA to approve
  a new drug application for a Geomatrix product formulation, although the Company
  cannot predict the exact time required with any certainty.

DepoFoam
  is a technology by which drugs taken by injection are formulated to release
  over an extended period of time. With the exception of one product, DepoCyt,
  used to treat neoplastic meningitis from lymphomas and solid tumors and which
  has received FDA approval, Canadian marketing approval and European marketing
  authorization, products using the Companys DepoFoam technology are at
  various stages of development, ranging from pre-clinical to Phase III clinical
  trials. The Company cannot be certain that it will obtain further regulatory
  approvals of any of such products. To date, only three potential DepoFoam products
  have been subjected to human testing. Potential DepoFoam products will require
  expensive and lengthy testing and regulatory clearances before they can be sold
  commercially. DepoFoam products may not prove safe and effective in clinical
  trials, meet applicable regulatory standards, or be capable of being made at
  acceptable cost or successfully commercialized. In addition, pre-clinical or
  clinical testing may not accurately predict safety or effectiveness in broader
  human use. Unexpected delays in the regulatory approval process may also occur.
  Even if the FDA and other regulatory authorities approve potential DepoFoam
  products for marketing, the products still may not achieve broad market acceptance.

Competition and technological
  change may render the Companys products or technologies uncompetitive
  or obsolete

The
  drug development industry is highly competitive and rapidly evolving, with significant
  developments expected to continue at a rapid pace. The Companys success
  will depend on maintaining a competitive position and developing efficient and
  cost-effective products and technologies. The Companys products will compete
  with other drugs and methods for delivering drugs. The Company cannot be certain
  that any of its products will have advantages that will be significant enough
  to cause medical professionals to use them. New drugs or further development
  in alternative drug delivery methods may provide greater benefits or may offer
  comparable performance at lower cost than the Companys methods. The Company
  cannot be certain that

8

---

developments
  by other companies will not render its products or technologies uncompetitive
  or obsolete.

Many
  of the Companys competitors have longer operating histories and greater
  financial, marketing and other resources. Such competitors may prove to be more
  successful in developing competing technologies, obtaining regulatory approvals
  and marketing their products than the Company because of greater financial resources,
  stronger sales and marketing teams or other factors.

The
  Company will face a variety of competitors with respect to the products it is
  developing under its collaborative arrangements with leading pharmaceutical
  companies. Specifically,

| |  | products
developed and produced by such collaborative arrangements may compete with products
produced internally by one or more of the Companys other collaborative partners;
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | proprietary
and generic products developed and produced by such collaborative arrangements
may face competition from generic substitutes produced by other companies; and
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | generic
products developed and produced by the Company may compete against branded products
produced by one or more of the Companys collaborative partners.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------

Due
  to the Companys reliance on the important financial and technological
  contributions made by the Companys pharmaceutical company partners, any
  of these outcomes could adversely affect the Companys business.

The Companys
  business may give rise to product liability claims not covered by insurance
  or indemnification

The
  design, development and manufacture of the Companys products involve an
  inherent risk of product liability claims.

The
  Company has obtained product liability insurance in respect of the improved
  outcome or new pharmaceutical products the Company is developing in conjunction
  with the Companys collaborative partners although the Company generally
  relies on indemnity provisions in its agreements with such partners to protect
  the Company against the possibility of product liability claims. This product
  liability insurance also covers liabilities associated with the commercial sale
  of products marketed by third parties using the Companys technology.

The
  Company has obtained clinical trial product liability insurance for current
  human clinical trials and bio-equivalence studies involving its products under
  development and the Company intends to obtain insurance for future clinical
  trials and bio-equivalence studies of additional products under development.
  The Company cannot be certain, however, that it will be able to obtain or maintain
  insurance for any of its future human clinical trials or bio-equivalence studies.

The
  Company believes that its product liability insurance, together with the indemnity
  provisions in its collaborative agreements, is adequate for current operations.
  However, the coverage limits of the Companys insurance or the indemnity
  provisions in the Companys collaborative agreements may not be adequate
  to cover all potential claims. Product liability insurance, especially in respect
  of the Companys U.S. operations, is expensive and may be difficult to
  maintain. In addition, product liability insurance may not be available to the
  Company in the future on commercially reasonable terms, if at all. A successful
  claim against the Company in excess of the Companys insurance coverage
  or outside the scope of the indemnity given by its collaborative partners could
  adversely affect the results of operations.

9

---

The Companys
  revenues may be reduced and costs increased as a result of third-party payor
  cost containment measures

The
  Companys ability to achieve profitability in its businesses depends in
  part on the extent to which appropriate levels of reimbursement for products
  and related treatments are obtained from government authorities, private health
  insurers and other organizations, such as health maintenance organizations.
  These third-party payors are increasingly challenging the pricing of pharmaceutical
  products. The trend toward managed healthcare in the U.S. and the growth of
  organizations such as health maintenance organizations in the U.S. could significantly
  influence the purchase of pharmaceutical products, resulting in lower prices
  and reduced demand for the Companys products under development. Such cost
  containment measures could affect the Companys ability to sell products
  under development and may adversely affect the Company.

Healthcare reform
  proposals may adversely affect the Companys business

The
  efforts of governments to contain or reduce the cost of health care will continue
  to affect the business and financial condition of drug companies. A series of
  health care reform proposals announced in recent years have created uncertainty
  that could adversely affect the Companys ability to raise funds and to
  identify and reach agreements with potential partners. If such proposals are
  eventually adopted, business could be adversely affected. Furthermore, the Companys
  ability to commercialize potential products may be adversely affected to the
  extent that such proposals have an adverse effect on the business, financial
  condition and profitability of other companies that are current or prospective
  collaborators for some of such products.

The Companys
  results of operations tend to fluctuate

The
  Companys operating revenues principally derive from contract development.
  Contract development revenues, except for revenue derived from contract manufacturing,
  are tied to a number of unpredictable factors, such as scientific developments,
  the timing of regulatory approvals, the market introduction of new products
  and other factors. As a result, the Companys results of operations tend
  to fluctuate materially on a monthly, semi-annually and yearly basis and, therefore,
  make period-to-period and period-on-period comparisons inappropriate at this
  stage in the Companys development. The Company believes that its revenues
  will continue to fluctuate in the near to medium term as a result of the factors
  described above.

The Company may not
  achieve future profitability

The
  Company has not generated any earnings to date from its pharmaceutical operations
  and has incurred substantial net losses in its recent fiscal years. As of December
  31, 2001, the Company had accumulated consolidated equity shareholders
  funds of £72.5 million. In the second half of 2001, SkyePharma reported
  a profit for the first time of £2.2 million. While the Companys
  internal forecasts indicate that the Company may achieve full year profitability
  in 2002, this is dependent upon the level of milestone payments and license
  fees received, the timing of contract development revenues and the amount of
  discretionary investment the Company chooses to make in furthering its own product
  portfolio and other factors, including those described below, and therefore
  the Company cannot assure you that it will be able to achieve profitability,
  or sustain profitability if it is attained. See Item 5: Operating and
  Financial Review and Prospects.

The
  Companys future profitability will additionally depend, among other things,
  on whether it will, alone or together with its partners, be able to:

| |  | develop
products utilizing its technologies, either independently or in collaboration
with other pharmaceutical companies;
| | - | --------------------------------------------------------------------------------------------------------------------------

| |  | receive
necessary regulatory and marketing approvals;
| | - | -----------------------------------------------------

| |  | establish
and enhance its manufacturing;
| | - | ----------------------------------------

| |  | achieve
market acceptance for such products;
| | - | --------------------------------------------

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| |  | receive
royalties on products that have been approved, marketed or submitted for marketing
approval with regulatory authorities in line with the Companys current forecasts;
and
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | maintain
sufficient funds to finance its activities.
| | - | ----------------------------------------------------

The Company is dependent
  on Geomatrix, DepoFoam and Inhalation technologies as to which further successful
  development is uncertain

The
  Companys ability to increase revenues and achieve profitability is largely
  dependent on its Geomatrix, Depofoam and inhalation technologies. Approximately
  26% of the Companys revenues for the year ended December 31, 2001 was
  derived from royalties, contract development and milestone payments relating
  to its Geomatrix technologies, approximately 35% relating to its DepoFoam technologies
  and approximately 7% relating to its inhalation technologies. In order to increase
  revenues from Geomatrix, DepoFoam and inhalation technologies, the Company must
  continue to obtain new development contracts for third parties. The Company
  cannot assure you that it will be able to obtain such contracts.

The
  Company has successfully developed drug products incorporating three Geomatrix
  technologies which are currently on the market. However, the Company cannot
  assure you that it will be able to develop successfully future products incorporating
  these delivery systems. The development and formulation of oral controlled-release
  products is difficult and time consuming. Each drug compound is different, and
  there can be no assurance that a drug delivery system that works with one product
  will work with another.

The
  Company is currently formulating products utilizing other Geomatrix technologies.
  However, the Company cannot assure you that these efforts will be successful.
  One of these technologies, the Multiple Pulse System, has only been subject
  to limited in vivo (human) clinical testing. Consequently, the Company
  cannot assure that drugs utilizing the Multiple Pulse System will be successfully
  formulated and approved.

The
  Company has successfully developed one drug product incorporating DepoFoam technologies
  which was approved by the FDA in April 1999. However, the Company cannot assure
  you that it will be able to develop successfully future products utilizing the
  DepoFoam technologies. The development and formulation of injectable controlled-release
  products is difficult and time-consuming. Each drug compound is different and
  there can be no assurance that a drug delivery system that works with one product
  will work with another.

The
  Company is developing two advanced inhalation technologies to deliver medicines
  via a patients lungs without relying on CFC-based propellants. The Company
  has successfully developed one drug product incorporating its inhalation technologies
  which is currently in Phase III clinical trials. However the Company cannot
  assure you that it will be able to develop successfully future products utilizing
  the inhalation technologies. The development and formulation of inhalation products
  is difficult and time-consuming. Each drug compound is different, and there
  can be no assurance that a drug delivery system that works with one product
  will work with another.

Even
  after a product incorporating the Geomatrix, DepoFoam or inhalation technologies
  has been successfully formulated and approved, its commercial success is not
  assured. In order to gain medical and commercial acceptance, a product generally
  must demonstrate some performance improvements and other benefits over products
  incorporating the same or similar drug compounds. In some cases, these benefits
  may be difficult to establish.

The failure by the
  Companys collaborative partners to provide funding, obtain regulatory
  approvals and conduct marketing activities could adversely affect the Companys
  business

Funding.The Company has entered into a number of collaborative arrangements with
  leading pharmaceutical companies for the development and commercialization of
  products using its technologies. An inability to continue to obtain funding
  for its development activities through its

11

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collaborative
  arrangements or for collaborative partners to make payments due under the development
  and commercialization agreements, would adversely affect the Companys
  business.

Regulatory
  Approvals.In addition, the Company generally depends upon its collaborative
  partners to secure the necessary regulatory approvals for improved outcome and
  new pharmaceuticals utilizing its technologies. In these cases, the Company
  has no control over the timing and location of the regulatory filings. Its partners
  may follow a regulatory strategy that does not maximize the royalty income that
  the Company will receive from its technologies. In addition, the Companys
  partners may choose not to file for regulatory approval of a product successfully
  formulated with the technologies. Even if the Companys partners do file
  for regulatory approval, they may fail to devote the necessary resources and
  expertise to secure the approval.

Marketing.At present the Company is not involved in the consumer marketing of improved
  outcome or new products formulated with its technologies. The Company depends
  on its collaborative partners for such marketing. The Companys partners
  are not obligated to market products incorporating its technologies, even if
  such products are successfully developed and approved. Although the Company
  has no reason to believe that its partners will not market a successfully developed
  and approved product, the Company cannot assure you that this will be the case.
  The Companys future revenues largely depend on the success of such marketing
  efforts, which are beyond its control. For example, Paxil CR® was approved
  in April 1999 but was not launched by GlaxoSmithKline until April 2002.

If the Company is
  unable to obtain additional funding on favorable terms, it will adversely affect
  the Companys research and development and ability to commercialize its
  products

The
  Company believes that its currently available funds will be sufficient for the
  needs of its operations through at least the next twelve months.

If
  the Companys currently available funds and internally generated cash flow
  are not sufficient to satisfy its financing needs, the Company would be required
  to seek additional funding through other arrangements with corporate collaborators,
  through bank borrowings or through public or private sale of its securities,
  including equity securities. Any such collaboration could result in limitations
  on the Companys ability to control the research, development and commercialization
  of resulting products, if any, as well as its profits therefrom. In addition,
  the terms of any future bank borrowings could place restrictions on the Companys
  ability to take certain actions, and any equity financing could result in dilution
  to the Companys shareholders. The Company does not currently have any
  committed sources of additional capital. There can be no assurance that additional
  funds will be available on a timely basis, on favorable terms or at all, or
  that such funds, if raised, would be sufficient to permit the Company to continue
  to conduct its operations. If adequate funds are not available, the Company
  may be required to curtail significantly, or discontinue, one or more of its
  research and development programs.

The
  Companys ability to meet its future capital requirements will depend on
  many factors. These include:

| |  | the
Companys ability to maintain existing collaborative arrangements and to
establish and maintain new collaborative arrangements with others;
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------

| |  | the
costs involved in preparing, filing, prosecuting, maintaining and enforcing patent
claims;
| | - | ----------------------------------------------------------------------------------------------

| |  | complying
with regulatory requirements; competing technological and market developments;
| | - | ----------------------------------------------------------------------------------------

| |  | changes
in the Companys existing research relationships; and
| | - | -------------------------------------------------------------

| |  | the
effectiveness of product commercialization activities and arrangements.
| | - | ---------------------------------------------------------------------------

12

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For
  more information on the Companys liquidity and capital resources, see
  Item 4: Information about the Company  Business Operations 
  Collaborative Arrangements and Item 5: Operating and Financial Review
  and Prospects.

A failure to obtain
  and maintain patents and proprietary rights may adversely affect the Companys
  business

The
  Companys success, competitive position and amount of royalty income will
  depend in part on its ability to obtain and maintain patent and trade secret
  protection, particularly of its drug delivery technologies.

The
  Company believes that patent and other intellectual property protection of its
  drug delivery and formulation technologies is important to its business and
  that its future will depend in part on its ability to obtain patents, maintain
  confidential and trade secret information and to operate without infringing
  the intellectual property rights of others.

There
  can be no assurance that the Company will be issued with any additional patent
  or that if any patents are issued, they will provide the Company with significant
  protection or will not be challenged by third parties asserting claims against
  the Company concerning its existing products or with respect to future products
  under development by the Company. The Company, from time to time, may receive
  notification of alleged infringements. The Company may not, in all cases, be
  able to resolve any such allegations through licensing arrangements, settlement
  or otherwise. Furthermore the Company anticipates that any attempt to enforce
  its patent would be time consuming and costly. Moreover, the law of some foreign
  countries does not protect the Companys proprietary rights in the products
  to the same extent, as does the law of the U.S. The U.S. Patent and Trademark
  Office has instituted changes to the U.S. patent law including changing the
  term to 20 years from the date of filing for applications filed after June 8,
  1995. The Company cannot predict the effect that such changes on the patent
  laws may have on its business or on the Companys ability to protect its
  proprietary information and sustain the commercial viability of its products.

The
  Company also relies on trade secrets and other unpatented proprietary information
  in its product development activities. To the extent that the company relies
  on trade secrets and unpatented know-how to maintain its competitive technological
  position, there can be no assurance that others may not independently develop
  the same or similar technologies. The Company seeks to protect trade secrets
  and proprietary knowledge, in some cases through clauses in confidentiality
  agreements with its employees, consultants, advisors and collaborators. Nevertheless,
  these agreements may not effectively prevent disclosure of the Companys
  confidential information and may not provide the Company with an adequate remedy
  in the event of unauthorized disclosure of such information. If the Companys
  employees, scientific consultants or collaborators develop inventions or processes
  independently that may be applicable to the Companys products under development,
  disputes may arise about ownership of proprietary rights to those inventions
  and processes. Such inventions and processes will not necessarily become the
  Companys property, but may remain the property of those persons or their
  employers. Protracted and costly litigation could be necessary to enforce and
  determine the scope of the Companys proprietary rights. Failure to obtain
  or maintain patent and trade secret protection, for any reason, would adversely
  affect the Companys business.

The
  Company has entered into a number of collaborative arrangements with leading
  pharmaceutical companies for the development and commercialization of improved
  outcome and new products. In connection therewith, the Company shares certain
  of its proprietary knowledge with such collaborative partners. Although the
  Companys patents and other proprietary rights are designed to protect
  the Company from infringement by such collaborative partners, there can be no
  assurance that the Companys patents or other proprietary rights will prevent
  its collaborative partners from developing similar or functionally equivalent
  products.

13

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The
  Company engages in collaborations, sponsored research agreements and other arrangements
  with academic researchers and institutions some of which have received and may
  receive funding from government agencies. Although the Company seeks to retain
  ownership of all intellectual property rights pertaining to inventions which
  may result from such collaborations, there can be no assurance that the governments,
  the institutions or researchers or other third parties will not have rights
  to such inventions to the extent permitted under applicable law.

For
  more information on the Companys patents and proprietary rights, see Patents
  and Proprietary Rights.

The Company may not
  be able to maintain its exclusive technology rights to DepoFoam from the Research
  Development Foundation

The
  Companys DepoFoam business depends on its ability to continue to use exclusive
  technology rights that the Research Development Foundation (RDF)
  assigned to a subsidiary of the Company. Under the RDF agreement, the foundation
  has the right to terminate the agreement or to convert the exclusive nature
  of the rights granted under the agreement into a nonexclusive right if the subsidiary
  does not satisfy its contractual obligations, including making certain minimum
  annual payments. RDF may also terminate the agreement if the subsidiary becomes
  bankrupt, breaches the agreement or contests the patents included in this technology.
  The termination of the subsidiarys agreement with RDF or its conversion
  to a nonexclusive agreement would adversely affect the Companys DepoFoam
  business.

Possible patent litigation
  arising from abbreviated new drug applications may adversely affect the Companys
  business

There
  has been substantial litigation in the pharmaceutical, biomedical and biotechnology
  industries with respect to the manufacture, use and sale of new products that
  are the subject of patent rights. Most of the brand-name products of which the
  Company is developing generic versions are covered by one or more patents. Under
  the Drug Price Competition and Patent Restoration Act of 1984, known as the
  Hatch-Waxman amendments, when a drug developer files an abbreviated
  new drug application for a generic drug, and the developer believes that an
  unexpired patent which has been listed with the FDA as covering that brand-name
  product will not be infringed by the developers product or is invalid
  or unenforceable, the developer must so certify to the FDA. That certification
  must also be provided to the patent holder, who may challenge the developers
  certification of non-infringement, invalidity or unenforceability by filing
  a suit for patent infringement. If a suit is filed within 45 days of the patent
  holders receipt of such certification, the FDA can review and approve
  the abbreviated new drug application, but is precluded from granting final marketing
  approval of the product until the earlier of the date a final judgment is rendered
  and the date that is 30 months from the date the certification was received.
  Should a patent holder commence a lawsuit with respect to alleged patent infringement
  by the Company, the uncertainties inherent in patent litigation make the outcome
  of such litigation difficult to predict. The delay in obtaining FDA approval
  to market the Companys product candidates as a result of litigation, as
  well as the expense of, and diversion of management resources associated with,
  such litigation, whether or not the Company is successful, could adversely affect
  the Companys business.

A failure to comply,
  or the costs of complying, with environmental, health and safety regulations
  could adversely affect the Companys business

The
  Companys business is also subject to regulation relating to the protection
  of the environment and health and safety, including those governing the use,
  generation, manufacture, storage, air emission, effluent discharge, handling
  and disposal of certain materials. The Company believes that it is in compliance
  in all material respects with all such laws, rules, regulations and policies
  applicable to the Company. However, there can be no assurance that the Company
  will not be required to incur significant costs to comply with such environmental
  and health and safety laws and regulations in the future. The Companys
  research and development involves the controlled use of hazardous materials.
  Although the Company believes that its safety procedures for handling and

14

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disposing
  of such materials comply with the standards prescribed by applicable regulations,
  the risk of contamination or injury from these materials cannot be completely
  eliminated. In the event of such contamination or injury, the Company could
  be held liable for any damages that result and any such liability could have
  a material adverse effect on the Companys business, financial condition
  or results of operations.

A failure to manage
  expansion effectively could adversely affect the Companys businessManagement
  of the Companys growth, as well as the commencement of commercial manufacturing
  and marketing of the Companys product candidates, will require continued
  expansion and improvement of the Companys systems and internal controls
  and an increase in the Companys manufacturing, marketing and sales operations.
  In addition, the Company intends to continue to add new personnel. Any failure
  to manage growth effectively and integrate new personnel on a timely basis could
  adversely affect the Companys business.

If the Companys
  Lyon manufacturing facility fails to meet required standards, it could result
  in delays in manufacturing and additional costsManufacturing
  operations take place at the Companys facilities in Lyon, France and in
  Muttenz, Switzerland. Limited manufacturing activities are conducted in Muttenz.
  The Company acquired the Lyon facility in 1997, and it plans to use it for scale-up
  manufacturing as well as for manufacturing commercial quantities of its product
  candidates. The Company has completed its Geomatrix manufacturing suite in the
  Lyon facility and is in the process of expanding its operations at the Lyon
  facility to include production activities for dry powder inhaler products. The
  Company believes that it has substantially brought the facility into compliance
  with current good manufacturing practices (cGMP) and FDA standards. The FDA
  has inspected the Lyon facility in respect of three products, and in July 2001
  the FDA approved the Lyon facility for the commercial manufacturing of one of
  these products, Dilacor XR®. There can be no assurance, however, that the
  Lyon facility will ultimately be found to be in compliance with cGMP or other
  regulatory requirements for the purposes for which the Company plans to use
  the facility. Failure to comply could result in significant delays in the Companys
  planned manufacturing efforts. The Company also could incur significant additional
  expense in bringing the facility into compliance with cGMP or other regulatory
  requirements. The Company cannot assure you that it will be able to complete
  its plans successfully for additional scale-up manufacturing or for manufacturing
  commercial quantities of its product candidates. On May 14, 2002, the Company
  announced that it had signed a non-binding Letter of Intent with Kowa Company
  Ltd., (Kowa) to evaluate Kowas acquisition of a 50% interest
  in the Lyon facility.

A failure to maintain
  its existing or further scale-up the Companys DepoFoam manufacturing operations
  successfully could adversely affect the Companys business.If
  the Company fails to maintain its existing or further scale-up its DepoFoam
  manufacturing operations successfully or to comply with applicable regulations,
  its business will be adversely affected. In particular, the Company could lose
  its manufacturing rights for DepoCyt under its key collaboration agreement with
  Chiron Corporation. Chiron Corporation is the Companys U.S. development
  and marketing partner for DepoCyt, the first approved injectable drug product
  using its DepoFoam technology. The Companys DepoFoam manufacturing operations
  in San Diego, California will need to meet ongoing commercial requirements for
  all markets in which its products have been approved. In addition, the Companys
  manufacturing operations for DepoCyt will need to pass pre-approval inspections
  by regulatory agencies for countries in which there are regulatory filings to
  market DepoCyt. In October 1999, SkyePharma Inc. discovered that two lots of
  DepoCyt did not meet specifications and recalled these lots. Investigations
  identified that changes in a suppliers manufacturing process for a raw
  material resulted in product that did not meet all specifications throughout
  the shelf life. SkyePharma Inc. and Chiron Corporation voluntarily withdrew
  DepoCyt from the market. There were no adverse events attributed to the recalled
  batches and the product was made available to patients on a compassionate basis.
  In March 2001, the FDA gave clearance to return Depocyt to the market. In April
  2001, the Company received

15

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notification
  that the European Committee on Proprietary Medicinal Products (CPMP)
  had recommended the granting of marketing authorization for DepoCyt. The CPMPs
  recommendation will be forwarded to the European Commission and when ratified
  the Company will receive a single licence for marketing throughout the European
  Union. The CPMP has suggested certain modifications to the DepoCyt manufacturing
  facility to improve personnel and materials flows. These modifications are currently
  being implemented and will be completed prior to production of DepoCyt for the
  European market. The CPMP have not suggested any alterations to the DepoCyt
  manufacturing equipment or production process. For all other DepoFoam products,
  the Company will need to scale-up its current manufacturing operations significantly.
  The Company will also need to comply with regulations in the U.S. and foreign
  countries relating to achieving the prescribed quality and required levels of
  production of its DepoFoam products and obtaining marketing approval.

The Company may not
  be able to obtain the materials necessary to manufacture its DepoFoam productsThe
  Company currently relies on a limited number of suppliers for materials used
  to manufacture its DepoFoam products. Some of these materials are purchased
  only from one supplier. If the Company cannot obtain the materials it needs
  from its existing suppliers, the Company may not be able to access alternative
  sources of supply within a reasonable period of time or at commercially reasonable
  rates. In addition, regulatory requirements applicable to drugs tend to make
  the substitution of suppliers costly and time-consuming. The unavailability
  of adequate commercial quantities, the inability to develop alternative sources,
  a reduction or interruption in supply or a significant increase in the price
  of materials could adversely affect the Companys ability to manufacture
  and market its DepoFoam products.

One
  of the DepoFoam injectable products in development, DepoMorphine, has
  morphine sulphate as its active ingredient. Morphine sulphate is classified
  as a scheduled drug by the U.S.  Drug Enforcement Agency (DEA).
  While SkyePharma Inc. has a DEA license to use morphine sulphate in its research
  and manufacturing of DepoMorphine for clinical studies, SkyePharma Inc. might
  not be able to obtain the required DEA licenses to manufacture commercial quantities
  of DepoMorphine.

The Companys
  manufacturing process may not be suitable for all of the DepoFoam products the
  Company desires to commercializeTo
  date, SkyePharma Inc. has relied on a particular proprietary method of manufacturing
  its potential DepoFoam products. The Company cannot be certain that this method
  will be applicable to all potential products it desires to commercialize. The
  problems that may arise include:

| |  | the
Company may not be able to meet manufacturing challenges that arise concerning
particular drugs to be incorporated in DepoFoam;
| | - | -----------------------------------------------------------------------------------------------------------------------------------

| |  | the
Companys manufacturing process may not result in viable yields of DepoFoam
products; and
| | - | ---------------------------------------------------------------------------------------------

| |  | the
physical and chemical stability of DepoFoam products may vary.
| | - | ------------------------------------------------------------------

If
  the Company decides to pursue alternative manufacturing methods for some or
  all of its drugs, it cannot be certain that these methods will prove to be commercially
  practical or that it will have the right to use any alternative methods.

The Company may expend
  significant time and resources relating to existing and potential legal proceedings
  and the eventual outcome of such proceedings may differ materially from managements
  current estimates and beliefsThe
  Company is currently involved in various legal proceedings, including actions
  claiming alleged violations of antitrust laws and infringement of intellectual
  property rights. Although the

16

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Company cannot
  predict the outcome of these proceedings with certainty, the Company believes,
  based on information received, that these actions are without merit and is vigorously
  contesting these claims. Contesting these claims, however, may involve the expenditure
  of significant management time and resources of the Company. In addition, we
  cannot exclude the possibility that, contrary to managements current estimates
  and beliefs, the eventual outcome of such matters could have a material adverse
  effect on our financial position, results of operations or liquidity. You should
  read Item 8: Financial Information  Legal Proceedings for
  further information on our pending litigation.

The Company may not
  be able to obtain the rights to the drugs it desires to deliver through DepoFoamThe
  Companys ability to develop and commercialize its DepoFoam technology
  will depend on whether it and its partners can access the drugs that are to
  be delivered through DepoFoam. At times, the Company intends to rely on its
  partners ability to provide this access. The Company cannot be certain,
  however, that its partners will have appropriate drug candidates for its DepoFoam
  technology. In addition, the Company or its partners may be alleged or determined
  to be infringing on third parties rights and may be prohibited from using
  the drug or be found liable for damages. Any restriction on access or liability
  for damages would adversely affect the Companys business.

The Company may incur
  substantial costs related to its use of hazardous materialsThe
  Companys research and development on DepoFoam products involves the use
  of hazardous materials, chemicals and various radioactive compounds. The Company
  cannot completely eliminate the risk of accidental contamination or injury from
  these materials. If such an accident occurs, the Company could be held liable
  for any damages that result and any such liability could exceed its resources.
  The Company may incur substantial cost to comply with environmental regulations.

If the Company is
  unable to retain key personnel or attract new personnel, it could have an adverse
  effect on the Companys businessThe
  Company relies upon a number of key executives and employees, including Ian
  Gowrie-Smith, its Executive Chairman and Michael Ashton, its Chief Executive
  Officer. In addition, the Companys future operating results depend in
  part upon its ability to attract and retain other qualified management, scientific,
  technical, marketing and support personnel. Competition for such personnel is
  intense, and there can be no assurance that the Company will be able to continue
  to attract and retain such personnel. The loss of the services of any of the
  Companys key executives or employees could materially adversely affect
  the Company.

Potential conflicts
  of interests may arise from related party transactionsThe
  Company and certain of its principal shareholders or their affiliates and other
  related parties have engaged in several significant transactions among themselves
  in the past and may continue to do so from time to time in the future. Certain
  of these transactions provide for significant payments to certain principal
  shareholders, directors and executive officers upon achievement of specified
  milestones or profit hurdles. As a result of these arrangements, conflicts of
  interest may arise between and among the Company, certain principal shareholders,
  directors and executive officers because of their independent pecuniary interests.

The
  Company acquired Jago Holding AG and its subsidiaries (Jago) in
  May 1996 from Dr. Jacques Gonella, who was, up until June 6, 2001, a Director
  of the Company, for a combination of cash and shares. In addition to the initial
  purchase price, the Company agreed to an earn-out arrangement with Dr. Gonella
  whereby Dr. Gonella was entitled to receive payments dependent on certain revenues
  related to Geomatrix technologies. On March 31, 2000, certain amendments were
  made to the 1996 Acquisition Agreement for Jago and a Settlement Agreement was
  signed establishing the full and final settlement of the deferred consideration
  payable to Dr. Gonella. For a

17

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description
  of the earn-out arrangement with Dr. Gonella, see Item 7: Major Shareholders
  and Related Party Transactions  Certain Arrangements in Respect of the
  Jago Acquisition.

The
  Company acquired Krypton Limited (Krypton) in a share-for-share
  exchange in January 1996 from a series of trusts in which Ian Gowrie-Smith,
  who is the Executive Chairman of the Company, certain former directors and a
  former employee of the Company had interests. Pursuant to an earn-out arrangement,
  the Company agreed to pay additional consideration consisting of ordinary shares
  and warrants dependent upon certain milestones relating to achieving regulatory
  approvals for the sale of certain Krypton products and the sales and profitability
  of such products. See Item 7: Major Shareholders and Related Party Transactions
   Certain Arrangements in Respect of the Krypton Acquisition.

At
  June 19, 2002, the Company owned 14.2% of Astralis LTD (Astralis).
  In December 2001, the Company announced the completion of several agreements
  concerning the development of Astralis novel injectable vaccine therapy,
  for the treatment of all forms of psoriasis, a chronic skin disorder. See Item
  7: Major Shareholders and Related Party Transactions  Other Arrangements.

Although
  the Company anticipates that all future related party transactions and agreements
  will be on terms no less favorable to the Company than it could obtain in comparable
  contracts with unaffiliated third parties, there can be no assurance that conflicts
  of interest will not arise between the Company and the principal shareholders
  or their affiliates in certain circumstances.

Principal shareholders
  may influence the outcome of shareholder approvals and hinder a change in control
  that might be in your interestAs
  of June 19, 2002, certain principal shareholders and the directors and officers
  of the Company as a group owned approximately 14.71% of the outstanding ordinary
  shares. As a result, certain directors, officers and such shareholders may be
  in a position to exert influence in the election of the Companys directors
  and officers and other corporate actions that require shareholder approval.
  The Board of Directors of the Company consists of nine people.

Exchange rate fluctuations
  may adversely affect the Companys results of operations and financial
  positionApproximately
  54% of the Companys sales for the year ended December 31, 2001 were derived
  from customers located outside the United Kingdom. Since the revenue and expenses
  of the Companys foreign operations are generally denominated in U.S. dollars,
  Euros and Swiss francs, exchange rate fluctuations between such currencies and
  the pound sterling will subject the Company to foreign exchange risk with respect
  to the reported results of its foreign operations. The Company does not currently
  hedge against the effect of currency translation on its reported results, but
  does, where appropriate, seek to hedge its exchange rate risk on particular
  transactions. Fluctuations between local currencies and pounds sterling may
  materially adversely affect the Companys financial condition and results
  of operations. See Item 5: Operating and Financial Review and Prospects.

The
  Companys ordinary shares trade on the London Stock Exchange in pounds
  sterling and the ADSs trade on The Nasdaq National Market in U.S. dollars. The
  value of the ADSs in U.S. dollars may fluctuate as a result of fluctuations
  in the U.S. dollar/pound sterling exchange rate.

The market prices
  of the Company ordinary shares and ADSs may be adversely affected by market
  volatilityCompanies
  like SkyePharma have, in recent years, experienced dramatic stock price volatility.
  The following factors may cause the market price of the Companys ordinary
  shares or ADSs to fluctuate significantly:

| |  | announcements
of technological innovations or new products by competitors and others;
| | - | -------------------------------------------------------------------------------------

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| |  | the
status of submissions to the FDA or its international equivalent;
| | - | ---------------------------------------------------------------------

| |  | variations
in results of operations, market condition, analysts estimates and the stock
market generally; and
| | - | --------------------------------------------------------------------------------------------------------------

| |  | stock
market perceptions of the pharmaceutical, biotechnology and/or drug delivery industries
specifically.
| | - | -----------------------------------------------------------------------------------------------------------

Sales of substantial
  amounts of the Company ordinary shares or ADSs could adversely affect their
  market priceSales
  of substantial amounts of ordinary shares or ADSs could adversely affect the
  market price of the ordinary shares and ADS. As of June 19, 2002, certain principal
  shareholders and the directors and officers of the Company, as a group, held
  14.71% of the Companys outstanding ordinary shares. Shares may be eligible
  for future sale subject to the conditions imposed by Rule 144 and Regulation
  S under the Securities Act.

The Companys
  shareholders may not receive a return on their shares other than through the
  sale of their sharesThe
  Company intends to retain earnings, if any, for use in its business and does
  not anticipate paying any cash dividends in the foreseeable future. Accordingly,
  other than through the sale of their shares, the Companys shareholders
  may not receive a return.

19

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Item
  4: Information on the CompanyHistory and DevelopmentOverviewSkyePharma
  PLC is a public limited company organized under the laws of England and Wales
  with its registered office at 105 Piccadilly, London W1J 7NJ, telephone number
  +44 (0)20 7491 1777. SkyePharma PLC was formerly named Black & Edgington
  plc and incorporated on March 10, 1910. It was engaged in the provision of temporary
  structures for major events. In January 1996 the Board of Directors changed
  the name of the Company to SkyePharma PLC and the nature of its activities to
  pharmaceuticals.

The
  Company, as currently operated, was formed substantially from the 1996 acquisition
  of Jago, the 1999 acquisition of DepoTech Corporation and the 2001 acquisition
  of RTP Pharma Inc. In addition, the Company has acquired certain technologies
  as set out below.

Corporate AcquisitionsJago,
  a Swiss drug delivery company which commenced operations in 1983, was acquired
  by the Company in May 1996. The total consideration paid by the Company to acquire
  Jago was approximately £100.8 million in cash (plus a prepayment of $6.0
  million (£3.9 million)) and approximately 30.7 million ordinary shares
  (valued at 75 pence per share). In the fundraising associated with the transaction,
  Dr. Gonella, the vendor, purchased 84,789,463 ordinary shares of the Company
  at a purchase price of 75 pence per share. The Company agreed to pay additional
  consideration in respect of the Jago acquisition pursuant to an earn-out arrangement.
  See Item 7: Major Shareholders and Related Party Transactions  Certain
  Arrangements in Respect of the Jago Acquisition. On March 31, 2000 a settlement
  agreement was signed establishing the full and final settlement of the deferred
  consideration payable to the vendor of Jago, Dr. Gonella. The settlement was
  approved by shareholders at the Companys Annual General Meeting held on
  July 11, 2000 to be made entirely in shares and 6 million ordinary shares and
  24 million Deferred Shares were issued. To finance the Jago acquisition and
  to provide additional working capital for the Company, the Company issued and
  sold approximately 187.8 million ordinary shares in a public offering in the
  United Kingdom in May 1996 at a price of 75 pence per share. Through the acquisition
  of Jago, SkyePharma acquired the Geomatrix range of oral controlled release
  systems and a new generation of inhalation technologies.

In
  October 1998, the Company acquired 16% of the common stock of DepoTech Corporation
  of San Diego for a consideration of £2.9 million. On March 10, 1999, the
  Company completed the acquisition by issuing to the former DepoTech shareholders
  28,311,070 SkyePharma ordinary shares in the form of ADSs, valued at £20.0
  million, plus the right to receive additional shares if one or both of two conditions
  occur. On April 1, 1999, the first condition, the approval by the FDA of DepoCyt
  for sale to the public, occurred and the Company issued to the former DepoTech
  shareholders an additional 16,177,849 SkyePharma ordinary shares valued at £9.8
  million, in the form of ADSs. On April 4, 2000 the Company announced that the
  final contingent payment on the acquisition of DepoTech had been triggered following
  the signing of a contract to utilize DepoFoam technology for a macromolecule
  which fulfilled the second condition. As a result 12,132,600 shares were issued,
  in the form of ADSs, on April 25, 2000 at a value of £13.3 million. In
  connection with the acquisition, the Company agreed that outstanding warrants
  to purchase DepoTech common stock on the effective date of the merger would
  become warrants to purchase the Companys ordinary shares. Following the
  issue of shares on April 25, 2000, the former DepoTech shareholders became entitled
  to a further 458,144 warrants with a value of £0.2 million. Taking into
  account these final payments, the total consideration paid on the acquisition
  of DepoTech was £49.4 million. DepoTech had been developing the DepoFoam
  technology. The DepoFoam system is a proprietary, injectable technology that
  provides controlled drug delivery for an extended period of time, improving
  bioavailability profiles and clinical outcomes. On April 27, 1999 DepoTech was
  renamed SkyePharma Inc. SkyePharma Inc. is SkyePharmas center for the
  development and manufacture of injectable, sustained release therapeutic products.

20

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On
  July 19, 2001 the Company acquired an initial 40.2% interest in RTP Pharma Inc.
  of Montreal, Canada for $20 million (£14.2 million) in SkyePharma ordinary
  shares and acquired $5.0 million (£3.5 million) of preferred shares in
  RTP for cash. RTP specialized in improving the solubility of drugs using its
  Insoluble Drug Delivery (IDD) technology platform. During the 90 days following
  July 19, 2001, the Company acquired $10 million (£6.9 million) of preferred
  shares in RTP in return for the issue of additional SkyePharma ordinary shares.
  The remaining shareholders were given the right to require the Company to purchase
  the remaining 59.8% of the outstanding common shares prior to January 1, 2004,
  in the event that certain key milestones were achieved, which, amongst other
  factors, included profitability, partnerships and licensing agreements. The
  Company also had the right, under certain circumstances, principally the achievement
  of profitability, to purchase the remaining common shares prior to January 1,
  2004, in return for the issue of SkyePharma ordinary shares. On December 27,
  2001 agreement was reached to acquire the majority of the outstanding voting
  shares in RTP. In the interim period, RTP had achieved certain of the key milestones,
  given which, the Directors of the Company were of the view that it was in the
  Companys best interests to negotiate with RTPs remaining shareholders
  to acquire their holdings. On March 13, 2002 the Company announced the completion
  of the acquisition of the outstanding voting shares in RTP in return for the
  issue of SkyePharma ordinary shares to the value of $20.6 million (£14.2
  million). The total consideration of $56.5 million (£39.4 million) for
  100% of RTP and preferred shares including acquisition costs comprised 49,959,367
  ordinary shares and $5.0 million (£3.5 million) cash. The issued shares
  are subject to selling restrictions, which, other than in limited circumstances,
  range from a minimum of 12 months to 24 months. In consideration for the loss
  of the former RTP shareholders certain option rights, which were agreed
  on July 19, 2001 when the Group acquired an initial 40.2% interest in RTP, deferred
  consideration has been agreed. If the SkyePharma share price is below 82 pence
  on June 30, 2003, then the Company is required to issue 200,000 additional shares,
  or pay an amount in cash, for each penny difference between the actual share
  price and 82 pence. In the opinion of the Directors, the deferred consideration
  cannot be estimated with any degree of certainty; therefore, this deferred consideration
  has not been recognized as at December 31, 2001. On April 24, 2002, RTP was
  renamed SkyePharma Canada Inc. (SkyePharma Canada).

Krypton,
  a Gibraltar-based company which holds development rights to certain generic
  drugs, was acquired by the Company in January 1996. The total consideration
  paid by the Company to acquire Krypton was £12.0 million satisfied by
  the issue of 30 million ordinary shares and warrants to subscribe for an additional
  3 million ordinary shares at an effective exercise price of 40 pence per share.
  The Company has agreed to pay additional consideration in respect of the Krypton
  acquisition if certain milestones and profit hurdles are met. See Item
  7: Major Shareholders and Related Party Transactions  Certain Arrangements
  in Respect of the Krypton Acquisition. To date, no payments have been
  made under the Krypton earn-out arrangements.

In
  January 1997, the Company acquired a pharmaceutical manufacturing and production
  facility near Lyon, France. See Item 4: Information about the Company
   Business Operations  Manufacturing.

Technology AcquisitionsOn
  July 30, 1999, the Company acquired intellectual property, license agreements,
  know-how and trademarks related to nano-particulate drug delivery technology
  for the delivery of poorly soluble drugs from Medac GmbH (Medac)
  a private German pharmaceutical company. As consideration for the acquisition,
  the Company made an initial cash payment of $2.5 million and issued 3,067,286
  ordinary shares with a market value of $2.5 million to Medac on the date of
  signing the agreement. The agreement provided for additional consideration in
  the form of cash and SkyePharma PLC ordinary shares for a total value of $5.0
  million. On July 21, 2000 the Company issued 1,461,455 shares with a market
  value of $2.0 million to Medac as deferred consideration due upon the satisfactory
  transfer of the nano-particulate technology and know-how to SkyePharma. On April
  17, 2000, a further $3.0 million in cash was paid to Medac due to compliance
  by the vendor

21

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with certain
  terms specified in the agreement. In addition, future royalties will be paid
  to Medac on net sales of marketed products using nano-particulate technology.

In
  October 1999, the Company acquired the tangible assets and intellectual property
  of Hyal Pharmaceutical Corporation in Canada (Hyal) from the court
  appointed receiver and administrator of Hyal, for a total consideration of Cdn$14.0
  million (£5.7 million) plus acquisition expenses of £0.2 million.
  The consideration was satisfied by the set-off of Cdn$11.6 million of SkyePharma
  secured and unsecured debt owed by Hyal including the interest due and Cdn$2.4
  million in cash. In addition, and because Hyal was in receivership at this time,
  SkyePharma indemnified the receiver to the extent that Cdn$11.6 million exceeded
  the amount that SkyePharma may ultimately be entitled to receive as a creditor
  of Hyal. This indemnity was secured by an irrevocable letter of credit open
  for up to one year in the amount of Cdn$1.0 million. During 2000, the letter
  of credit was called to recover the shortfall in the receivership process. As
  a result, in April 2001, SkyePharma received 8.0 million shares representing
  seven Hyal shares for every dollar shortfall in the process. In addition the
  Company acquired the 0.7 million shares issued to Meditech Research Limited,
  another creditor of Hyal, for Cdn$0.1 million in May 2001. As a result the total
  Company shareholding in Hyal (now renamed Cade Struktur) is 0.9 million shares
  following a 10 for 1 share consolidation. As at June 2002, this represents approximately
  10.1% of Cade Struktur. The shares have been recorded at zero cost. Hyal was
  a drug delivery company that developed products using its topical drug delivery
  technologies, based on hyaluronan (HA), a natural polymer, which
  are primarily designed to maintain efficacy and localize delivery of drugs to
  the skin for the treatment of a variety of skin disorders. Following the sale
  of all related intellectual property and the reorganization of the company,
  Cade Struktur is now involved solely in the pursuit of financing and development
  of infrastructure related projects in the former East Germany.

In
  January 2001, SkyePharma announced that it had licensed rights to three further
  topical drug delivery technologies, Crystalip, DermaStick and the ES-Gel system,
  from Bioglan AB, a subsidiary of Bioglan Pharma PLC (Bioglan). Under
  the terms of the agreement SkyePharma paid $9 million in cash and obtained certain
  exclusive development and commercial rights in relation to new products from
  the Crystalip and DermaStick technologies and also the right to develop with
  Bioglan two new products using the ES-Gel system. SkyePharma will be entitled
  to retain the first $9 million of all new income generated by SkyePharma from
  the three technologies. After receipt of the first $9 million, all other revenues
  received will be split equally between SkyePharma and Bioglan. Bioglan will
  retain rights to use the patents and know-how related to the technologies for
  existing marketed products utilizing the technologies, products in development
  and projects for companies with whom Bioglan already has such agreements.

In
  May 2002, SkyePharma acquired the entire drug delivery business of Bioglan AB
  for £2.8 million in cash and the assumption of approximately £1.1
  million of net liabilities. The acquired rights included Bioglans Biosphere
  injectable technology and those rights to DermaStick, Crystalip and ES-Gel topical
  technologies that had remained with Bioglan after the January 2001 development
  and commercialization licensing agreement with Bioglan.

Discontinued OperationsPrior
  to 1998, the Companys strategy for the sale and distribution of its generic
  pharmaceutical product candidates had been to develop its own marketing capability
  through its subsidiary Brightstone Pharma Inc. (subsequently renamed SkyePharma
  U.S. Inc.). However, in late 1998, the Company concluded that it was unlikely
  to maximize the value of its generic pharmaceutical product candidates using
  its own marketing resources and decided to seek one or more strategic collaborative
  partners who already have significant and complementary U.S. generic drug marketing
  capability to sell and distribute the Companys generic product candidates
  in the U.S. The Company therefore decided to discontinue its own generic drug
  sales and marketing operations in the U.S. The Company incurred a one-time charge
  in connection with this restructuring of approximately £1.3 million in
  1998.

22

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Business OperationsOverviewThe
  Company develops novel therapeutic drugs based on five technology platforms
  for delivering drugs to parts of the human body in the following areas: oral,
  injectable, inhalation, topical and enhanced solubilization. The Companys
  operations relate wholly to one class of business, pharmaceuticals, and a segmental
  analysis of revenues is provided under Item 5: Operating and Financial
  Review and Prospects  Operating Results.

OralA
  significant part of the Companys business is developing applications of
  its Geomatrix technologies. Geomatrix is a range of technologies by which drugs
  taken orally in tablet form are formulated so as to control the amount, timing
  and location of the release of the drug in the body. The Company focuses its
  research and development efforts on the reformulation of existing drugs using
  its technologies rather than the discovery of new chemical compounds.

Geomatrix
  technologies can improve the efficacy of orally administered drugs and enhance
  compliance by patients with prescribed medical treatments by permitting the
  drug to be taken less frequently, by reducing side effects and by causing the
  drug to be released at more specific locations within the body. The Geomatrix
  technologies use hydrophillicmethylcellulose, or HPMC, matrices which govern
  the release profile of a drug depending on the viscosity of HPMC used and the
  rate of surface area exposure. The release profile refers to the
  rates at which a drug tablet releases the active drug component over the period
  of time after the drug is taken. There are currently eight Geomatrix technologies
  which are designed to meet a wide range of therapeutic objectives. See Drug
  Delivery Platforms  Oral  The Geomatrix Oral Technologies
  below. The Company believes that the Geomatrix systems enjoy a competitive advantage
  in the drug delivery industry because of the ease with which Geomatrix tablets
  can be manufactured. The Geomatrix technologies are flexible and can be modified
  to apply to a variety of pharmaceutical products.

The
  Company collaborates with large pharmaceutical companies to develop Geomatrix
  formulations of their proprietary products. The products may be novel pharmaceuticals
  (which may include new chemical entities) or already existing and approved pharmaceuticals.
  In reformulating an existing drug, the Company seeks to enhance the therapeutic
  and commercial value of the product by creating an improved outcome formulation
  that may mitigate certain side effects, reduce dosing or help protect against
  competition from generic drug products. The Company conducts research and development
  of its Geomatrix projects with its collaborative pharmaceutical company partners.
  The pharmaceutical companies reimburse the Company for all or most of the research
  and development costs associated with the collaborative arrangements and have
  generally taken responsibility for clinical trials and regulatory filings. The
  pharmaceutical companies obtain the marketing rights to the Geomatrix formulations
  and, in return, pay the Company certain milestone payments and a royalty based
  on net sales of any commercialized products.

There
  are five drugs currently being marketed that use the Companys Geomatrix
  technologies: one in Europe (Xatral 10mg OD®), one in the United States
  (Paxil®CR), two in Germany (Cordicant-Uno® and Diclofenac-ratiopharm-uno®)
  and one in Switzerland (Madopar DR®). The Company is also collaborating
  with several other pharmaceutical companies to commercialize its Geomatrix technologies,
  including Abbott Laboratories, Merck KGaA and GlaxoSmithKline. There are currently
  four drugs using Geomatrix technologies in human studies. See Drug Delivery
  Platforms  Oral  Geomatrix Products in Development below.

InjectableSkyePharma
  Inc. is SkyePharmas center for the development and manufacture of potential
  injectable, sustained therapeutic products. The potential products include drugs
  which have already been shown to be useful or potentially useful in humans as
  well as new drugs in development at

23

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other pharmaceutical
  companies which may potentially benefit from the Companys DepoFoam technology.
  SkyePharma Inc. does not conduct research and development to discover new drugs.

DepoFoam
  consists of microscopic, spherical particles composed of hundreds to thousands
  of chambers, each separated from adjacent chambers by lipid membranes. SkyePharma
  Inc. has developed DepoFoam formulations which release drugs over an extended
  period of time, such as several weeks, or over a shorter period, such as a few
  days. SkyePharma Inc. has combined many drugs with DepoFoam and performed studies
  on these combinations showing that they often achieve controlled release of
  the drugs. These features allow the Company to develop new formulations of drug
  products aimed at treating different diseases and symptoms or allow for more
  convenient administration by reducing the number or frequency of injections.
  The new formulations can also provide for greater efficacy through sustained
  controlled release of the potential drug. The Company is currently developing
  products in cancer, pain management and other medical fields, both alone and
  funded by corporate partners.

SkyePharma
  Inc.s first approved drug product using its DepoFoam technology is DepoCyt.
  DepoCyt combines SkyePharma Inc.s DepoFoam with cytarabine, a drug used
  for the treatment of cancers which have spread to the fluid surrounding the
  brain and spinal cord. DepoCyt is currently marketed in collaboration with Chiron
  in the U.S., with Paladin Inc. in Canada, and is licensed for distribution to
  Elan Pharma International Limited, an affiliate of Elan Corporation PLC (Elan)
  in Europe and Nippon-Shinyaku Co Ltd. (Nippon-Shinyaku) in Japan.

SkyePharma
  Inc.s second potential drug product in this area is DepoMorphine, a sustained-release
  encapsulated morphine sulphate, for acute pain management following surgery.

In
  addition to DepoCyt and DepoMorphine, SkyePharma Inc. is currently working on
  DepoBupivacaine, a DepoFoam formulation of the local anaesthetic bupivacaine,
  for the treatment of regional pain. SkyePharma Inc. is also evaluating, in conjunction
  with Chugai Pharamaceutical Co Ltd (Chugai) and other undisclosed
  corporate partners, DepoFoam formulations of several additional compounds, including
  macromolecules. See Drug Delivery Platforms  Injectable  DepoFoam
  Injectable Products in Development below.

InhalationThe
  Company is developing advanced technologies to deliver medicines via a patients
  lungs without relying on CFC-based propellants, which are considered environmentally
  harmful. The Company is working with two types of such inhalation systems. The
  first is a metered dose inhaler (MDI) that relies on non-CFC propellants
  to deliver the required therapy. The other is a dry powder inhaler (SkyeHaler)
  that requires no propellant but instead is breath-activated to deliver drugs
  in a fine powder suspension. In its MDI development work, the Company focuses
  on the formulation of drugs for use in MDIs manufactured by others. In its dry
  powder inhaler development work, the Company focuses both on the development
  of the device and dry powder formulation.

The
  Company currently has the aerosol formulations of formoterol, budesonide and
  salbutamol in various stages of development for use with non-CFC MDIs. The Company
  has developed a DPI device which is currently in Phase III clinical trials with
  the compound formoterol. The Company has entered into four collaborative arrangements
  to commercialize its inhalation drug delivery technology and is developing a
  fifth product internally. See Drug Delivery Platforms  Inhalation
   Inhalation Products in Development below.

TopicalSkyePharma
  entered the topical field through its 1999 acquisition of the intellectual property
  of Cade Struktur. The Companys topical drug delivery technologies, based
  on HA, a natural polymer, which are primarily designed to maintain efficacy
  and localize delivery of drugs to the skin for the treatment of a variety of
  skin disorders.

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The
  principal product acquired from Cade Struktur, Solaraze, is a topical gel used
  to treat actinic keratosis, a pre-cancerous skin condition caused by constant
  over-exposure to the sun. In July 1997, Solaraze received regulatory approval
  for marketing in the U.K. Subsequently, in May 1998, Solaraze was approved for
  marketing in Germany, Sweden, Italy, France and Canada. The Company received
  FDA approval for this product in October 2000. For a description of the commercialization
  of Solaraze, see Drug Delivery Platforms  Topical  Approved
  Topical Products below.

In
  addition to Solaraze, Cade Struktur had been developing Hyclinda, a topical
  gel to treat acne, in conjunction with Shire and for which Phase III trials
  had been completed. During 2001, the Company recovered the rights to Hyclinda
  from Shire and intends to complete the data package and prepare to file for
  marketing approval in the U.S. and Europe during 2003. A new marketing partner
  is currently being sought. See Drug Delivery Platforms  Topical
   Topical Products in Development below.

In
  January 2001, SkyePharma expanded its topical technology portfolio through the
  license of rights to three further topical drug delivery technologies, Crystalip,
  Dermastick and the ES-Gel system, from Bioglan. Bioglan retained the rights
  to use the patents and know-how related to the technologies for existing marketed
  products utilizing the technologies, products in development and projects for
  companies with whom Bioglan already had such agreements. However, through the
  May 2002 acquisition of the entire drug delivery business of Bioglan AB, SkyePharma
  acquired those rights to DermaStick, Crystalip and ES-Gel topical technologies
  that had remained with Bioglan after the January 2001 development and commercialization
  licensing agreement.

Solubilization

Solubility
  of drugs is an essential factor for all drug delivery systems, independent of
  the route of administration. Poor solubility leads to a range of problems including
  poor bioavailability, increased toxicity, variability of absorption when taken
  with food and poor efficacy. The Company believes that a large number of existing
  marketed drugs and newly synthesized compounds have solubility problems.

SkyePharma
  entered the solubilization field in 1999 through its acquisition of the intellectual
  property, license agreements, know-how and trademarks related to the nano-particulate
  drug delivery technology from Medac. Nano-particulate technology aims to improve
  a drugs solubility by reducing the size of the particules. It has been
  demonstrated in laboratory testing that the saturation solubility of many drugs
  can be improved by reducing particle size below one micron in diameter.

In
  March 2002, SkyePharma announced that it had completed the acquisition of SkyePharma
  Canada, thereby expanding its solubilization technology platform. SkyePharma
  Canada specializes in improving the solubility of drugs using its IDD technology
  platform enhancing the uptake and safety of water-insoluble drugs across a broad
  range of therapeutic classes including anesthetics, anti-cancer agents and immune
  suppressants.

SkyePharma
  Canada currently has a number of proprietary IDD based products in various stages
  of clinical development including fenofibrate, propofol, cyclosporine, and busulfan.
  SkyePharma Canada, together with an undisclosed pharmaceutical company, is directing
  fenofibrates late-stage clinical development. Currently marketed forms
  of fenofibrate had sales in 2001 of over $500 million. Propofol has been reformulated
  using the IDD technology and will enter Phase IIb trials during 2002. SkyePharma
  Canada has disclosed alliances with Baxter, Schering Plough Corporation, and
  other non-disclosed partners on drugs formulated using IDD technology.

The
  IDD technology is complementary to the Companys existing nano-particulate
  technology acquired from Medac, and, therefore, the Company expects to be able
  to provide customers with a wider range of patented solubilization technologies.

25

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In
  addition, it is intended that the solubilization technologies will be used to
  complement and enhance the Companys other drug delivery systems. See Drug
  Delivery Platforms  Solubilization  Solubilization Products in Development
  below for details of such products.

Strategy

The
  Company has a dual strategy, one objective of which is to become one of the
  leading providers of integrated drug delivery services to the pharmaceutical
  industry, the second objective of which is to develop a number of projects based
  on the Companys drug delivery technologies to a later stage of development.
  The Companys strategy for achieving these objectives consists of the following
  elements:

| |  | Selectively
Fund a Number of Key Projects to a Later Stage of Development.The Companys
strategy has historically been to focus on customer-funded development projects
with typical licensing arrangements under which the Company received license fees
and royalty payments for product sales. Such agreements typically provided for
royalty rates under 5%. However, in recent years the Companys focus on retaining
manufacturing rights and on undertaking additional value added services, such
as assuming responsibility for development and regulatory activities, has enabled
it to increase its share of the potential revenue stream. Additionally, the Company
believes that significantly higher value can be realized by taking certain products
to a late stage of development, prior to licensing the products to marketing partners.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Commercialization
of the Companys Core Technologies.The Company currently has a portfolio
of eight Geomatrix systems, of which four have been commercialized. The Company
is focusing on developing and commercializing the remaining four systems, either
in conjunction with its collaborative partners or through its own internal development
activities. Similarly, the Company seeks to exploit its existing inhalation, DepoFoam
injectable and other drug delivery technologies by entering into development contracts
with established pharmaceutical companies. The Company believes that the expansion
and integration of its existing capabilities will enable it to apply the technologies
to a broader range of pharmaceutical products. In entering into collaborative
arrangements, the Companys goal is to cover all or a large part of its research
and development costs and receive milestone payments upon the achievement of specified
objectives.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Realize
Research and Development Synergies between the Companys Technologies.
The Company believes that additional shareholder value can be created by the realization
of research and development synergies between the Companys technologies.
For example, the DepoFoam and Biosphere technologies ability to encapsulate
a wide spectrum of water-soluble drugs, involving small molecules, proteins and
peptides, could expand the scope of the Companys oral and inhalation technologies,
particularly in the field of proteins and peptides. Additionally, the Companys
solubilization technologies will be used to complement and enhance the Companys
other drug delivery systems.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Broadening
the Companys Drug Delivery Technology Base.The Companys pharmaceutical
customers are increasingly requesting a broader range of delivery solutions. The
Company is currently well placed with its oral, injectable and inhalation technologies
and the acquisition of additional topical and enhanced solubilization technologies
has further extended the Companys opportunities. The Company intends to
seek to acquire additional add-on technologies which are complementary to its
existing technologies. Management intends to focus on technologies it believes
are capable of commercial realization in the near term and will also seek to acquire
or license new drug delivery platforms and enabling technologies.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Broadening
the scope of the technology base will enable the Company to:
| |  | -----------------------------------------------------------------------

| |  |  | market a broader range
of drug delivery solutions to its existing oral, inhalation and injectable customer
base and to new customers;
| |  | - | -------------------------------------------------------------------------------------------------------------------------------------

26

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| |  |  | decrease the risk normally
associated with a single technology or product base; and
| |  | - | -----------------------------------------------------------------------------------

| |  |  | be a more competitive
Company in the drug delivery industry and be better able to negotiate corporate
partnerships on attractive terms.
| |  | - | ---------------------------------------------------------------------------------------------------------------------------------------

| |  | Develop
Existing and New Collaborative Agreements.In order to increase market exposure
of its products and to capitalize on its collaborative partners market position
and distribution capabilities, the Company intends to continue to develop its
projects with its existing collaborative partners and to seek new partners, who
will fund further development projects incorporating the Companys technology.
The Companys existing collaborative arrangements typically provide for a
customer-funded development project and contemplate a licensing arrangement (which
may be entered into at the same time as the development project or at a later
date) under which, if a project is commercialized by the collaborative partner,
the Company would receive license fees and royalty payments from product sales.
The Company believes that such arrangements may also serve to validate the Companys
technologies in the pharmaceutical markets and thereby assist the Company in attracting
additional licensing arrangements on favorable terms.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Seek
to Retain Manufacturing Rights on Future Collaborations.The Company believes
that retaining manufacturing rights to its products should enable it to capture
greater revenue and generate production economies of scale that may not be available
to pharmaceutical companies seeking to apply the Companys technologies to
only one or a few products. The Company employs personnel who specialize in manufacturing,
to commercial quantities, products utilizing the Companys technologies.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Drug Delivery Platforms

Oral

The Geomatrix
  Oral Technologies

The
  original Geomatrix technology was developed by a team of researchers at the
  University of Pavia in Italy in the early 1980s. Subsequently, the Company acquired
  the technology and pursued the development of the Geomatrix platform of oral
  controlled-release systems. The effort has produced a platform of proprietary
  Geomatrix controlled-release systems that can be applied to a broad range of
  drugs on a commercial scale.

The
  Geomatrix systems control the amount, timing and location of the release of
  drug compounds in the human body. This is achieved through the construction
  of a tablet with two basic components: a core containing the active drug or
  drugs in an HPMC matrix formulation and one or two additional barrier layers
  that control the surface area diffusion of the drug or drugs out of the core.
  In addition, the tablet may be coated if, for example, this would ease any gastric
  irritation that otherwise would be caused by the drug compound, or for other
  functional purposes.

The
  combination of different chemical components in the core and barrier layers,
  each with different rates of swelling, gelling and erosion, allows the production
  of tablets with a wide range of predictable and reproducible drug release profiles.
  The rate of drug release is a function of the viscosity of the HPMC and the
  exposed surface area from which the drug diffuses. When the tablet is first
  swallowed, the drug concentration is high but the surface area is small; as
  time goes by and the core swells, the surface area expands to compensate for
  the decrease in drug concentration.

The
  Company believes that the Geomatrix systems enjoy a competitive advantage in
  the drug delivery industry because of the ease with which Geomatrix tablets
  can be manufactured. Unlike certain competing drug delivery systems that require
  off-site, customized production equipment and methods, Geomatrix tablets can
  be manufactured by readily available equipment that can be incorporated into
  widely used pharmaceutical production processes. In this way, Geomatrix may
  afford the pharmaceutical partner direct control over its production strategy
  while other drug

27

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delivery systems
  may entail incremental risks or costs related to their off-site, customized
  production requirements.

In
  addition to ease of manufacturing, the Company believes that the key features
  of the Geomatrix technologies are as follows:

| |  | Custom
Design.Drugs can be formulated to deliver the release profile required by
the client pharmaceutical company and drugs can be combined with other active
substances to improve their effectiveness.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Versatility.Geomatrix can be applied to a wide range of small molecule drugs, including
some with poor water solubility, and can target the site of release.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Controlled
Rate of Diffusion.Geomatrix controls the rate of drug diffusion throughout
the release process, ensuring 100% release of the active drug.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Reproducibility.Use of conventional high speed tableting processes allows a high degree of
product consistency and uniformity.
| | - | ------------------------------------------------------------------------------------------------------------------------------

| |  | Complete
Disintegration.Geomatrix tablets disintegrate completely in the patients
digestive system and leave no solid residue.
| | - | -------------------------------------------------------------------------------------------------------------------------------

Release Profiles

The
  flexibility of the Geomatrix technologies has enabled the Company to create
  a number of release profiles suitable for a broad variety of pharmaceuticals.

The
  following sets forth a brief description of the Geomatrix systems.

|Zero
      Order Release | The Zero Order Release
      system provides a constant rate of drug release over a defined period of
      time. It is used primarily for drugs with short half-lives so that constant
      blood levels of the active drug compounds can be maintained with fewer doses.
      The Company has two approved Zero Order Release formulations currently on
      the market: Cordicant-Uno in Germany and Xatral OD in several European countries.
      Paxil CR, currently marketed in the U.S., has been developed using a combination
      of the Zero Order and Positioned Release technologies.
|------------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Binary
      Release | The Binary
      Release system is used to provide the controlled-release of two different
      drugs in a single formulation. The drugs may be released at different rates
      and times, if desired. This system is designed for drugs that work best
      in combination. The Company has one Binary Release formulation that was
      approved and launched in the third quarter of 1997: Madopar DR in Switzerland.
|--------------------- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Quick
      Slow Release | The Quick Slow Release
      system provides a quick burst of drug release followed by a constant rate
      of release over a defined period of time. It is used primarily in drugs,
      such as arthritis medications, in which it is desirable to have an initial
      burst of release to achieve maximum relief in a short amount of time followed
      by a constant rate of release for sustained therapy. The Company has one
      approved Quick Slow Release formulation currently on the market: Diclofenac-ratiopharm-uno
      in Germany.
|------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Slow
      Quick Release | The Slow Quick Release
      system provides an initial constant rate of release followed by a quick
      burst of drug release at a predetermined time. This release profile is designed
      for medications to treat diseases, such as angina, that would benefit from
      increased therapy when the patient is sleeping because of the high incidence
      of nocturnal attacks.
|------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

28

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|Positioned Release | The Positioned Release
      system is designed to deliver the tablet to a predetermined position in
      the digestive system before it begins to release the active drug compounds.
      This system is best suited to drugs for which it is desirable to begin release
      at a certain point in the gastrointestinal tract, for example in the case
      of drug compounds that are best absorbed by the human body at particular
      points in the upper gastrointestinal tract. Paxil CR, currently marketed
      in the U.S., has been developed using a combination of the Zero Order and
      Positioned Release technologies.
|------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Accelerated Release | The Accelerated Release
      system provides a constantly accelerating rate of drug release. This system
      is well suited for drugs such as H2-receptor antagonists that are preferentially
      absorbed in the upper part of the gastrointestinal tract.
|-------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Delayed
      Release | The Delayed Release system
      provides a predetermined time lag before it begins releasing drug molecules.
      This system is designed for drugs such as certain cardiovascular medications
      for which the desired dosing time may be several hours after the patient
      takes the drug.
|---------------------- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Multiple
      Pulse | The Multiple Pulse system
      provides an initial quick burst of drug release followed by a predetermined
      period of no release followed by a second burst of drug release. This system
      is designed for drugs that may have certain side effects, such as appetite
      suppression, that are desired to be minimized at predetermined times in
      the day, such as mealtimes. To date, the Multiple Pulse system has only
      been subject to limited in vivo (human) clinical testing.
|--------------------- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Products
  formulated with the Zero Order, Binary Release, Quick Slow and Positioned Release
  systems are either currently on the market or about to be launched. There can
  be no assurance, however, that the Company will be able to develop successfully
  future products incorporating such delivery systems. At present, there are no
  products on the market that have been formulated with the Companys Slow
  Quick, Accelerated Release, Delayed Release or Multiple Pulse systems. The Company
  is actively developing formulations utilizing some of these and other drug delivery
  systems, but there can be no assurance that these efforts will be successful.

Approved Geomatrix Products

To
  date, six Geomatrix formulations of pharmaceutical products have received regulatory
  approval. Of these products, one is being marketed in Europe (Xatral 10mg OD),
  one in the U.S. (Paxil CR), two in Germany (Cordicant-Uno and Diclofenac-ratiopharm-uno)
  and one in Switzerland (Madopar DR).

29

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The
  following table sets forth certain information regarding the approved Geomatrix
  products.

|Product                   |  | Indication                               |  | Regulatory
  Approvals and
  Year of First
        Approval |  | Geomatrix
        System        |  | Collaborative
        Partner | 
|------------------------- |  | ---------------------------------------- |  | ----------------------------------------------------------- |  | ------------------------------- |  | ----------------------------- | 
|                          |  |                                          |  |                                                             |  |                                 |  |                               | 
|Xatral
      10mg OD      |  | GenitoUrinary                           |  | Europe
  (2000)                                             |  | Zero Order                      |  | Sanofi-Synthelabo             | 
|Paxil
      CR            |  | Depression                               |  | U.S. (1999)                                                 |  | Positioned
  Release/Zero Order |  | GlaxoSmithKline               | 
|Dilacor
      XR          |  | Hypertension
  and Chronic Stable Angina |  | U.S. (1992)                                                 |  | Zero Order                      |  | Watson                        | 
|Cordicant-Uno             |  | Hypertension                             |  | Germany
  (1994)                                            |  | Zero Order                      |  | Mundipharma                   | 
|Diclofenac-ratiopharm-uno |  | Arthritis                                |  | Germany
  (1995)                                            |  | Quick Slow                      |  | Ratiopharm                    | 
|Madopar
      DR          |  | Parkinsons
  Disease                    |  | Switzerland
  (1996)                                        |  | Binary                          |  | Hoffmann-La
        Roche     | 
|                          |  |                                          |  |                                                             |  |                                 |  |                               | 

Xatral
  10mg OD is a once per day Zero Order Geomatrix formulation of alfuzosin
  used for the treatment of the functional symptoms of benign prostatic hyperplasia
  (BPH), a common disorder in men over the age of 50, that was developed in conjunction
  with Sanofi-Synthelabo. Xatral is available in more than 80 countries world-wide
  as a two or three times a day formulation. In January 2000, Sanofi-Synthelabo
  announced that it had received the first batch of European marketing approvals
  for Xatral 10mg OD (Xatral OD). The product is now launched in France,
  the U.K., the Netherlands, Denmark, Sweden, Switzerland, Finland, Italy, Poland
  and Germany with other launches pending in the rest of Europe. In December 2000,
  Sanofi-Synthelabo submitted an NDA with the FDA for Xatral OD. In October 2001,
  Sanofi-Synthelabo announced that an Approvable Letter had been
  received from the FDA for Xatral, registered in the U.S. as UroXatral®.
  SkyePharma received royalty revenues of approximately £0.6 million in
  2001 that represented 1% of 2001 revenues for the Company.

Paxil
  CR is a modified release version of Paxil/Seroxat (paroxetine) using a combination
  of the Positioned Release and Zero Order Geomatrix systems. Paxil is an FDA-approved
  drug that is currently marketed primarily in the United States and Europe. The
  currently marketed product is an immediate release formulation and is prescribed
  for central nervous system disorders. Paxil is the seventh largest selling drug
  in the world based on 2001 sales data, with worldwide sales of £1.9 billion.
  Paxil CR was filed with the FDA by SmithKline Beecham (now part of GlaxoSmithKline)
  in December 1997 and approved by the FDA in February 1999 for the 12.5 and 25
  mg dosage forms. In early 2001 GlaxoSmithKline, the Companys collaborative
  partner in the development of Paxil CR, announced that it had received an approvable
  letter from the FDA for a second CR indication, panic disorder and gave notification
  that it was working on third CR indication, pre-menstrual dysphoric disorder,
  a severe form of pre-menstrual syndrome. In March 2002, GlaxoSmithKline announced
  that it would be launching Paxil CR by the end of April 2002, and on April 19,
  2002, the product was launched in the U.S.

Dilacor
  XR is a once per day Zero Order Geomatrix formulation of diltiazem hydrochloride,
  a calcium channel-blocking agent indicated for hypertension and for the management
  of chronic stable angina. Dilacor XR was developed in conjunction with Rhône
  Poulenc Rorer (now part of Aventis Pharma). In June 1997, Rhône Poulenc
  Rorer granted Watson Pharmaceuticals an exclusive worldwide license to market
  Dilacor XR. In addition to being approved in the United States, Dilacor XR is
  also approved for sale in Australia, New Zealand, Korea, the Philippines and
  Germany. Marketing exclusivity for this product in the United States expired
  in June 1995. Accordingly,

30

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increased
  competition from generic manufacturers of controlled-release formulations of
  Dilacor XR has been experienced.

Cordicant-Unois a once per day Zero Order Geomatrix formulation of nifedipine, a calcium
  channel-blocking agent indicated for hypertension, which is approved for sale
  in Germany. Cordicant-Uno was developed in conjunction with and is marketed
  by Mundipharma, a private German pharmaceutical company. The Geomatrix controlled
  release technology in Cordicant-Uno enhances patient compliance and convenience
  by reducing the dosing requirement to once per day.

Diclofenac-ratiopharm-unois a once per day Quick Slow Geomatrix formulation of diclofenac, a nonsteroidal
  anti-inflammatory drug indicated for the acute and chronic treatment of rheumatoid
  arthritis. Diclofenac-ratiopharm-uno, which is approved for sale in Germany,
  was developed in conjunction with and is marketed by Ratiopharm, a private German
  pharmaceutical company. The Geomatrix controlled-release technology in Diclofenac-ratiopharm-uno
  optimizes patient therapy by providing an initial burst of the drug for quick
  relief followed by a controlled-release for sustained therapy. It also optimizes
  patient compliance and convenience by reducing the dosing requirement to once
  per day.

Madopar
  DRis a once per day Binary Geomatrix formulation of levodopa and benzerazide,
  a combination therapy indicated for the treatment of Parkinsons Disease
  which is approved for sale in Switzerland. Madopar DR was developed in conjunction
  with Hoffmann-La Roche. The Binary Geomatrix formulation of levodopa and benzerazide
  optimizes patient therapy and convenience by providing for the release of an
  enzyme inhibitor along with the drug compound without the co-administration
  of two pills. The Company is manufacturing this product for the Swiss market
  on behalf of Hoffmann-La Roche at its facility in Muttenz, Switzerland.

No
  royalty revenue has been earned in respect of Cordicant-Uno, and £0.1
  million royalty revenues were earned in respect of Diclofenac-ratiopharm-uno
  and Madopar DR in the year-ended December 31, 2001.

Geomatrix Products in
  Development

There
  are currently three products in the development process that utilize the Geomatrix
  technologies. One such undisclosed product has been filed for approval in one
  European market. In addition, the Company has a number of projects in earlier
  stages of development. The following table sets forth certain information regarding
  some of the products in the Companys development pipeline. For a description
  of the development process, including definitions for development status stages,
  see Research and Development  Development Process for Brand-Name
  Pharmaceuticals.

|Product              |  | Modified
Release |  | Therapeutic
Category     |  | Development
Status |  | Geomatrix
System |  | Collaborative
Partner | 
|-------------------- |  | ---------------- |  | ------------------------ |  | ------------------ |  | ---------------- |  | --------------------- | 
|                     |  |                  |  |                          |  |                    |  |                  |  |                       | 
|Undisclosed
      #1 |  | Yes              |  | Undisclosed              |  | Filed              |  | Zero Order       |  | Undisclosed           | 
|Ropinirole           |  | Yes              |  | Central Nervous
  System |  | Phase II           |  | Undisclosed      |  | GlaxoSmithKline       | 
|Undisclosed
      #2 |  | Yes              |  | Undisclosed              |  | Phase I            |  | Delayed Release  |  | Merck KGaA            | 
|                     |  |                  |  |                          |  |                    |  |                  |  |                       | 

Undisclosed
  #1 is a new formulation of a drug that is currently marketed in Europe.
  The Company is developing a once per day Zero Order Geomatrix formulation that
  is expected to enhance patient compliance and convenience by reducing the dosing
  requirement to once per day. The Geomatrix formulation has been filed for approval
  in one European market. The Company believes that the current market for this
  category of drugs is extremely competitive. Accordingly, the extent to which
  the Companys collaborative partner will elect to commercialize a successfully
  developed Geomatrix formulation is uncertain.

Ropinirole
  is an FDA-approved drug that is currently marketed as Requip®, primarily
  in the U.S. and Europe by GlaxoSmithKline. As it is currently marketed, Requip
  is an immediate release

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formulation
  administered three times daily and is prescribed for Parkinsons disease,
  a chronic progressive disease in which the degeneration of nerve cells in the
  brain eventually impairs the ability to control body movements. The Company
  is currently developing a once-daily version using its Geomatrix technology.
  The Geomatrix formulation is expected to provide a simplified regime for patients
  on Requip therapy that will improve patient convenience. The once-daily version
  is in Phase II clinical trials.

Undisclosed
  #2is a new formulation of a drug being developed for Merck KGaA utilizing
  the Geomatrix delayed release technology to deliver the dose at a precise time
  interval after administration. The new formulation being developed by the Company
  is in the scale-up/bio-batch stage of development.

Other Oral Products
  in Development

NK-104
  is a new lipidlowering agent that has been developed by Kowa and submitted
  for marketing authorization in Japan. Phase II trials have been completed in
  Europe and have commenced in the U.S. NK-104 has been developed from a class
  of compounds called statins that have been shown to significantly reduce mortality
  in patients with high cholesterol and heart disease. The Company is responsible
  for providing materials for the scale-up and Phase III European and U.S. clinical
  trials which the Company anticipates will lead to the commercial manufacture
  of the compound.

Injectable

DepoFoam
  Injectable Technologies

DepoFoam
  consists of microscopic, spherical particles composed of hundreds to thousands
  of chambers containing the encapsulated drug, with each chamber separated from
  adjacent chambers by a lipid membrane. DepoFoam formulations can be delivered
  into the body by a number of routes, including under the skin, within muscle
  tissue, into brain and spinal fluid, within joints and within the abdominal
  cavity. Because the components of DepoFoam are similar to lipids normally present
  in the body, the material is biodegradable and biocompatible. Typically, a DepoFoam
  particle consists of less than 10% lipid, with the remaining 90% consisting
  of drug in solution. The resulting DepoFoam formulation is stored under refrigeration
  in ready-to-use form.

SkyePharma
  Inc. has tested DepoFoam formulations that release drugs over a period of days
  to weeks with the period of release defined by characteristics of DepoFoam and
  the drug. SkyePharma Inc. believes drugs may be released from DepoFoam particles
  as the drugs diffuse through the walls, by gradual erosion of the particles,
  and by processes involving the rearrangement of membranes. The nature of drug
  release may also be determined by the characteristics of each drug molecule.
  SkyePharma Inc. has demonstrated that DepoFoam can be used to encapsulate a
  wide spectrum of drugs, including small molecules, proteins, peptides, antisense
  oligonucleotides and DNA, aimed at treating different diseases and symptoms.

Advantages of DepoFoam

The
  Company believes DepoFoam addresses many of the limitations associated with
  traditional methods of delivering drugs. Most drugs are administered orally,
  by injection in intermittent and frequent doses or by continuous infusion. These
  methods of administration are not ideal for several reasons, including difficulty
  in achieving appropriate drug levels over time, problems with side effects,
  high costs due to frequent or continuous administration and poor patient compliance.
  Furthermore, innovations in biotechnology have led to an increase in the number
  of large-molecule protein and peptide drugs under development. These drugs,
  because of their large molecular size and susceptibility to degradation in the
  gastrointestinal tract or in the blood, must usually be administered by multiple
  injections often in a hospital or other clinical setting.

The
  Company believes that DepoFoams key advantage over traditional methods
  of drug delivery, including injections and oral administration, is that the
  sustained-release characteristics of

32

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DepoFoam allow
  drugs to be administered less frequently and more conveniently. To attain the
  desired effect, conventional drug delivery often results in a dosage that delivers
  an initially high level of the drug followed by a sharp decline over a relatively
  short period of time, whereas DepoFoam formulations can provide a more consistent
  drug level over an extended period. As a result, DepoFoam products can potentially
  improve safety and effectiveness. For example, DepoCyt clinical trials have
  shown that DepoCyt has a therapeutic life of up to two weeks after a single
  intrathecal injection compared to one day with unencapsulated cytarabine.

The
  Company believes that key features of DepoFoam, including lower initial drug
  levels and delivery of appropriate drug levels over an extended period of time,
  make it superior not only to traditional methods of delivering drugs, but also
  to other sustained-release delivery formulations. The Company believes DepoFoam
  may:

| |  | Enhance
safety and efficacy.DepoFoam drug delivery may improve the ratio of therapeutic
effect to side effects by decreasing the initial concentrations of drug associated
with side effects, while maintaining levels of drug at therapeutic, sub-toxic
concentrations for an extended period of time.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Improve
convenience and lower overall treatment costs.DepoFoam formulations of drugs
may offer cost savings by reducing the need for continuous infusion, the frequency
of administration and the number of visits a patient must make to the doctor.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Expand
types of drugs which can be delivered over an extended period of time.DepoFoam
may be able to deliver proteins, peptides and nucleic acids more effectively.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Expand
indications of currently marketed drugs. The appropriate release of drugs from
a DepoFoam formulation may allow such drugs to be marketed for indications where
they are currently not thought to be useful because of the limitations of current
delivery methods.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Improve
products through reformulation.DepoFoam may offer the potential to produce
new formulations of generic products that may be differentiated from the nonsustained-release
versions by virtue of reduced dosing requirements, improved effectiveness, additional
applications or decreased side effects.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Approved DepoFoam Injectable
  ProductsDepoCytDepoCyt
  is the first product, utilizing the SkyePharma Inc.s DepoFoam Injectable
  technology, to receive regulatory approval and be marketed. DepoCyt combines
  the Companys DepoFoam with cytarabine, a drug used to treat neoplastic
  meningitis from lymphomas and solid tumors. DepoCyt was developed in collaboration
  with Chiron in the U.S., and until June 2000 with Pharmacia Corporation outside
  the U.S. It is currently marketed in collaboration with Chiron in the U.S.,
  with Paladin Inc. in Canada, and is licensed for distribution to Elan in Europe
  and Nippon- Shinyaku in Japan.

BackgroundCancer
  from solid tumors, leukemia (a form of cancer involving white blood cells) or
  lymphomas (a form of cancer involving tissues of the lymphatic system) can spread
  to the soft tissue membrane of the brain and spinal cord. This type of cancer
  is called neoplastic meningitis. Because of the blood-brain barrier, drugs in
  the bloodstream do not penetrate well into the fluid which surrounds the brain
  and spinal cord. Thus, when cancer cells spread to this membrane, the most effective
  therapy is to inject anti-cancer drugs directly into the fluid which surrounds
  the brain and spinal cord. Cytarabine is one of several drugs most commonly
  used for this therapy. Cytarabine acts by inhibiting a vital enzyme in DNA synthesis,
  resulting in death of a dividing cell.

33

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Therefore,
  the best results are obtained when the drug is localized in the vicinity of
  dividing cancer cells for an extended period.

Because
  cytarabine does not last long in the fluid which surrounds the brain and spinal
  cord, frequent and repeated injections are necessary for effective treatment.
  The result is that neoplastic meningitis cannot be treated effectively without
  the use of repeated injections into the space between the brain and/or spinal
  cord and the membrane which surrounds them. These injections are inconvenient
  and uncomfortable for patients, require physician supervision and increase the
  risk of infection. Because of these and other factors, the disease is often
  under-diagnosed and frequently left untreated. Without effective treatment,
  life expectancy for patients diagnosed with this disease is between two and
  four months. Clinical trials to date have shown that DepoCyt maintained concentrations
  of cytarabine in the fluid which surrounds the brain and spinal cord for up
  to two weeks after a single injection as compared to approximately one day with
  traditional injections of cytarabine. As a consequence, the use of DepoCyt results
  in less frequent injections and may extend effective levels of the drug in the
  space between the brain and/or spinal cord and the membrane which surrounds
  them.

Clinical DevelopmentDepoCyt
  was developed in collaboration with Chiron Corporation in the U.S. and until
  June 2000 with Pharmacia & Upjohn S.p.A., an affiliate of Pharmacia Corporation.
  Since April 1994, SkyePharma Inc. has been conducting clinical trials of DepoCyt
  for the treatment of these cancers.

In
  the Phase III clinical trial as originally designed and initiated in April 1994,
  patients with one of the three subtypes of neoplastic meningitis selected from
  multiple centers received either DepoCyt or standard therapy. Standard therapy
  for neoplastic meningitis from solid tumors is methotrexate and the standard
  therapy for neoplastic meningitis from leukemia and lymphoma is unencapsulated
  cytarabine. Within each subtype, at least 20 patients were to receive DepoCyt
  and at least 20 patients were to receive standard therapy. A total of 40 patients
  were to be treated for each subtype of the disease and a minimum total of only
  120 patients were required to complete all three arms of the study. Enrollment
  of patients into the Phase III trial for neoplastic meningitis from solid tumors
  was completed in May 1996, and the data from the trial was analyzed subsequently
  based on a data cutoff date of October 1, 1996.

In
  April 1997, SkyePharma Inc. completed the filing of a new drug application (NDA)
  for the treatment of cancers which have spread to the fluid surrounding the
  brain and spinal cord from solid tumors with the FDA. In December 1997, an advisory
  committee to the FDA declined to recommend approval of DepoCyt for the treatment
  of these cancers. In April 1998, SkyePharma Inc. filed an amendment to its new
  drug application which provided information on twice the number of patients
  included in the original filing. In May 1998, the FDA informed SkyePharma Inc.
  that the amended new drug application did not contain adequate information to
  support approval for DepoCyt for the treatment of these cancers. In August 1998,
  the FDA sent a letter to SkyePharma Inc. inviting it to submit a new drug application
  for DepoCyt for the treatment of cancers which have spread to the fluid surrounding
  the brain and spinal cord from the lymphatic system. This new drug application
  was filed in October 1998. In April 1999, the FDA approved DepoCyt for the treatment
  of neoplastic meningitis from lymphomas and the product was launched in the
  U.S. in May 1999.

In
  October 1999, SkyePharma Inc. discovered that two lots of DepoCyt did not meet
  specifications and recalled these lots. Investigations identified that changes
  in a suppliers manufacturing process for a raw material resulted in product
  which did not meet all specifications throughout the shelf-life. SkyePharma
  Inc. and Chiron Corporation voluntarily withdrew DepoCyt from the market. There
  were no adverse events attributed to the recalled batches, and the product was
  made available to patients on a compassionate basis. In March 2001, the FDA
  gave clearance to return DepoCyt to the market.

34

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In
  November 1999, SkyePharma Inc. received marketing approval for DepoCyt from
  the Canadian regulatory authorities for the treatment of neoplastic meningitis
  from lymphomas and solid tumours. The Canadian marketing and distribution rights
  were licensed to Paladin Inc. in June 2000.

Pharmacia
  Corporation filed for marketing approval of DepoCyt to be used in the treatment
  of cancers which have spread to the brain and spinal cord from both the lymphatic
  system and solid tumors in Europe but subsequently withdrew the application
  until additional data could be provided. In October 1999, Pharmacia Corporation
  refiled for marketing approval in Europe and its filing was accepted by the
  regulatory authority. In June 2000, Pharmacia Corporation notified the Company
  that it was terminating the marketing and distribution agreement with the Company
  for DepoCyt. Pharmacia Corporation assigned the European marketing application
  to the Company, and the Company continued to pursue European marketing approval.

In
  April 2001, the Company received notification that the CPMP had recommended
  the granting of marketing authorization for DepoCyt, marketed in Europe as DepoCyte,
  for the treatment of neoplastic meningitis from lymphomas. The CPMPs recommendation
  was forwarded to the European Commission for ratification. In June 2001, the
  Company licensed the marketing rights for DepoCyte in Europe and the Philippines
  to Elan. Under the terms of the agreement, SkyePharma received a $10 million
  signing fee and will receive significant milestone payments on commercialization
  of DepoCyte and additional milestone payments if DepoCyte reaches certain sales
  targets. These additional milestone payments could total $13  million.
  In addition, SkyePharma will manufacture and supply DepoCyte to Elan and will
  receive a supply price equal to a fixed percentage of net sales. In August 2001,
  the European Commission ratified the positive recommendation received from the
  CPMP by granting marketing authorization for DepoCyte throughout the European
  Union.

In
  June 2001, the Company licensed the marketing and distribution rights for DepoCyt
  in Japan and Taiwan to Nippon-Shinyaku.

Additional Territories
  and IndicationsThe
  Company is currently conducting a clinical trial to support a claim for solid
  tumor treatment in the U.S. and Europe.

DepoFoam Injectable
  Products in DevelopmentThe
  table below summarizes DepoFoam products currently under development. The stages
  of the development process: pre-clinical, Phase I, Phase II and Phase III are
  explained under Research and Development  Development Process for
  Brand-Name Pharmaceuticals.

|Product                       |  | Intended
  Use             |  | Development
  Status |  | Collaborative
  Partner | 
|----------------------------- |  | -------------------------- |  | -------------------- |  | ----------------------- | 
|                              |  |                            |  |                      |  |                         | 
|DepoMorphine
      (morphine) |  | Acute postsurgical
  pain |  | Phase III            |  | SkyePharma              | 
|DepoBupivacaine
(bupivacaine) |  | Regional
  pain            |  | Phase I completed    |  | SkyePharma              | 
|                              |  |                            |  |                      |  |                         | 

DepoMorphineThe
  Company is developing DepoMorphine for use in moderating acute pain following
  surgery. This product is intended for administration into a space near the spinal
  cord (the epidural space) and may provide up to two days of pain relief following
  surgery. DepoMorphine may replace repeated administration of pain medicines
  and use of patient controlled analgesia devices.

The
  Company has completed formulation development and initial manufacturing scale-up.
  Pre-clinical studies in animals showed that DepoMorphine provided a minimum
  of two to three days of pain control following a single epidural injection.
  One characteristic of certain DepoFoam formulations of drugs is that an enhanced
  local effect may occur with limited side effects throughout the body. A number
  of studies in animals have confirmed that there are high levels of morphine
  at the injection site and in the fluid in the spinal cord with very low levels
  in the blood. These data also show a sustained effect of the morphine.

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In
  December 1996, SkyePharma Inc. filed an investigational new drug application
  with the FDA to begin human studies of DepoMorphine for the management of acute
  pain following surgery. In December 1997, SkyePharma Inc. completed a Phase
  I dose-escalation study that assessed the safety and level of drug exposure
  in the blood of single doses of DepoMorphine administered to healthy volunteers.
  The study was conducted at a single site under the leadership of members of
  the Department of Anesthesiology at Stanford University Medical Center. This
  study identified the maximum tolerated dose of DepoMorphine and indicated that
  the drug has similar adverse effects to that seen with free morphine administered
  in the same fashion.

In
  February 2000, the Company announced that in Phase II clinical trials, DepoMorphine,
  when given to patients as a single pre-operative epidural injection using hip
  replacement surgery as the pain model, showed a statistically significant dose-related
  reduction in post-operative fentanyl usage and pain intensity scores relative
  to placebo for up to 48 hours. For patients requesting post-operative fentanyl,
  pain intensity at time of first request was rated severe in 57%
  of placebo patients but rated severe in only 21%, 9% and 4% in the
  patients dosed with 10mg, 20mg and 30mg of DepoMorphine respectively.

In
  January 2001, the Company announced that it had started its Phase III clinical
  trials for DepoMorphine. The Phase III clinical trials will involve approximately
  750 DepoMorphine treated patients in the U.S. in a variety of surgical procedures.
  In January 2001, the Company also announced that it had entered into an Agreement
  with the Paul Capital Royalty Acquisition Fund, L.P. (Paul Capital)
  to develop DepoMorphine. Details of the agreement with the Paul Capital are
  explained below in - Collaborative Arrangements.

DepoBupivacaineThe
  Company is developing DepoBupivacaine, a DepoFoam formulation of the widely
  used local pain medicine bupivacaine for controlling post-surgical or post-injury
  pain. Pain associated with surgery or injury is often treated with local anesthetics.
  However, the usefulness of local anesthetics is frequently limited by their
  short period of effectiveness following administration which results in recurrence
  of pain and the need for repeated drug administration by a medical professional.
  One dose of DepoBupivacaine is expected to provide 24 hours of regional pain
  relief, compared to two to six hours following conventional bupivacaine administration.

SkyePharma
  Inc. has successfully encapsulated bupivacaine into DepoFoam. Initial studies
  have shown that DepoBupivacaine is released slowly from the site of injection,
  resulting in prolonged duration (more than 24 hours) of pain relief following
  a single-dose administration. The Company completed Phase I clinical trials
  for DepoBupivacaine during 2001.

The
  Company believes that a DepoFoam formulation of a local anesthetic may complement
  its current DepoMorphine program and that the DepoMorphine and local anesthetic
  formulations may give physicians improved drugs to manage post-operative pain.

DepoAmikacin

Another
  product in the Companys development pipeline is DepoAmikacin, a DepoFoam
  formulation of an antibiotic, amikacin. SkyePharma Inc. has successfully encapsulated
  amikacin in DepoFoam and has tested various formulations in animals. SkyePharma
  Inc. completed a Phase I clinical trial for DepoAmikacin in April 1996 in which
  the drug was found to be well-tolerated for all dosage levels studied. In order
  to focus SkyePharma Inc.s resources on DepoCyt, DepoMorphine, DepoBupivacaine
  and partner-funded feasibility programs, SkyePharma Inc. has put on hold further
  development of DepoAmikacin and this product is under ongoing consideration
  by the Company.

Other Injectable Collaboration
  and Development Projects

On
  December 12, 2001, the Company announced the completion of several agreements
  concerning the development of Astralis novel injectable vaccine therapy,
  for the treatment of all forms of psoriasis, a chronic skin disorder. A first
  generation of Psoraxine, developed by Astralis,

36

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has completed
  clinical studies in Venezuela with encouraging results. Under the terms of a
  technology access agreement, the Company will receive from Astralis a $5 million
  license fee, which will be recognized as revenue over the lifetime of the contract,
  for access to DepoFoam and other relevant drug delivery technologies. In addition,
  through a service agreement, the company will provide all development, manufacturing,
  pre-clinical and clinical development services to Astralis for second generation
  Psoraxine, up to the completion of Phase II clinical studies. On completion
  of Phase II studies, Astralis will offer SkyePharma the option to acquire the
  worldwide licensing and distribution rights to Psoraxine. If SkyePharma does
  not take the option, Astralis will seek a marketing partner to fund Phase III
  clinical studies and to provide a sales and marketing infrastructure. The Company
  anticipates that an Investigational New Drug (IND) application to start Phase
  I-B clinical studies will be filed with the FDA in 2002.

In
  a separate transaction, the Company will make a total equity investment in Astralis
  of up to $20 million in convertible preferred shares, on payment for which the
  Company will own 15.3% of Astralis. The Company made an initial investment of
  $10 million on signing the agreement. Two additional investments of $2.5 million
  were made on January 31, 2002 and April 30, 2002. The remaining $5 million investment
  will be paid in instalments, at times and in quantities, and subject to certain
  conditions, up to January 31, 2003.

New Product Feasibility
  Programs

The
  Company is also evaluating, in conjunction with Chugai and other undisclosed
  corporate partners, DepoFoam formulations of several additional compounds including
  macromolecules. These projects are all at the pre-clinical stage of development.
  The objectives of these programs are to:

| |  | determine
whether DepoFoam can be combined with the candidate drugs;
| | - | --------------------------------------------------------------------

| |  | evaluate
drug release characteristics in the lab and in animal tissue; and
| | - | --------------------------------------------------------------------------

| |  | conduct
initial effectiveness and/or safety studies in animal models to demonstrate potential
clinical utility and advantages of the DepoFoam formulations.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------

Biosphere Technologies

The
  Biosphere drug delivery system, acquired in May 2002, provides sustained release
  of injectable proteins and peptides. The first human administration of coated
  and uncoated starch Biosphere microspheres containing no active drug took place
  in 2001. The study, involving 16 subjects, is complete, and no significant adverse
  reactions were reported. The Company believes that the Biosphere injectable
  technology will complement our DepoFoam sustained release injectable expertise
  in providing additional delivery options for proteins and peptides.

Inhalation

Inhalation
  Technologies

The
  Company is developing advanced inhalation drug delivery technologies that are
  designed to deliver medicines via a patients lungs without relying on
  CFC-based propellants. CFC-based propellants have recently come under pressure
  from the global environmental lobby. The 1997 Montreal protocol signed by more
  than 140 countries aims to eliminate the manufacture, use and sale of CFC propellants
  by 2005. This pressure for the phasing out of CFCs has led to an increased focus
  on the development of both non-CFC metered dose inhalers (MDIs)
  and dry powder inhalers (DPIs). The Company is currently working
  with two types of inhalation drug delivery systems: non-CFC MDIs and DPIs. In
  its MDI development work, the Company focuses on the formulation of drugs for
  use in MDIs manufactured by third parties. In its DPI development work, the
  Company focuses both on the development of the device and on formulating of
  drugs for use with the device.

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In
  both its MDI and DPI development work, the Companys objective is to maximize
  the efficiency of the delivery system while addressing commercial requirements
  for reproducibility, formulation, stability, safety and convenience. The Company
  has assembled a team of researchers with substantial experience in both powder
  and aerosol science and is applying this expertise to develop proprietary techniques
  and methods that it believes will produce stable and reproducible dry powder
  and aerosol formulations. To achieve this goal, the Company is combining an
  understanding of lung biology, aerosol science, chemical engineering and mechanical
  engineering.

MDI Technologies

Metered
  dose inhalers, the most widely used systems for inhalation drug delivery, have
  been in existence for more than 40 years and are primarily used to deliver asthma
  medications and other small molecule drugs to the lung, although significant
  advances have been made in recent years in the delivery of large molecule drugs,
  such as peptides and proteins, via the lung. The drugs are typically packaged
  in a portable canister as a suspension or solution in a volatile propellant.
  The primary technical challenge in developing a non-CFC MDI results from the
  fact that the two most widely used non-CFC propellants, HFA 134a and HFA 227,
  behave differently from CFC gases because of their physio-chemical characteristics.
  This has resulted in a need for a complete reformulation of the MDI device rather
  than a simple substitution. Among other things, this means that the mechanical
  components of the MDI device, especially the valves and gaskets, must be completely
  reformulated to work properly with non-CFC gases. The Companys work in
  this area has resulted in a high level of expertise in the evaluation of valves
  and gaskets utilized in the MDI device. The Company is currently developing
  aerosol formulations of a range of generic or off-patent drugs for the treatment
  of asthma. In its formulation work, the Company is working with both the HFA
  134a and HFA 227 propellants.

Dry Powder Technologies

Dry
  powder inhalation technology has emerged as an effective means of delivering
  asthma medications to the pulmonary system without the use of CFC propellants.
  DPIs rely on the patients own lung power to deliver a fine dry powder
  suspension to the lung. DPI drug compounds are formulated in solid form and
  packaged in portable containers. Most DPIs currently on the market provide medicine
  in a pre-metered single dose form, such as a gelatine capsule or blister pack.
  Under the brand name SkyeHaler the Company is developing a DPI with
  a drug reservoir with the capacity to deliver up to 300 doses.

The
  primary technical challenge in developing a DPI device is to design a product
  that offers accurate and uniform dosing at variable flow rates of inhalation.
  Although additional testing remains to be performed, the Company believes that
  it has solved this problem by designing and incorporating valves in its DPI
  that make it flow-rate independent at inhalation rates of between 25 and 60
  litres per minute. The Companys DPI is fully breath-actuated and offers
  an easy-to-use mechanism that is capable of delivering uniform doses. In addition,
  the device benefits from a counter that keeps track of how many doses remain
  in the device.

Each
  drug designed for use with a DPI poses different formulation challenges due
  to varying physical and chemical characteristics and dosing requirements. These
  challenges require significant optimization work for each drug. The Company
  has assembled a team with substantial experience in formulation, dry powder
  science and aerosol science and is applying this expertise to develop proprietary
  techniques and methods that it believes will produce stable, fillable and dispersible
  dry powder drug formulations. Through its development work, the Company is developing
  an extensive body of knowledge of dry powder formulations, including knowledge
  relating to powder flow characteristics and solubility within the lung, as well
  as physical and chemical properties of various excipients.

The
  Companys SkyeHaler is currently in Phase III clinical trials with a new
  formulation of Novartis Foradil asthma drug. Although the device is subject
  to additional testing and validation, the Company believes that its DPI benefits
  from the following features:

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| |  | Flow
Rate Independent.The Companys DPI offers accurate and uniform dosing
at variable flow rates of inhalation of between 25 and 60 litres per minute.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Breath
Activated.The Companys DPI relies on the patients own lung power
to deliver a fine powder suspension to the lung.
| | - | --------------------------------------------------------------------------------------------------------------------------

| |  | Uniform
Delivery.The Companys DPI offers an easy-to-use mechanism to deliver
consistent and uniform doses to the lung.
| | - | -----------------------------------------------------------------------------------------------------------------------

| |  | Dose
Counter.The Companys DPI incorporates an easy-to-read dose counter
that keeps track of how many doses remain in the device.
| | - | ---------------------------------------------------------------------------------------------------------------------------------

The
  Company is continuing to seek additional collaborative partners to further develop
  and commercialize its inhalation drug delivery technologies. The Companys
  strategy is to enter into development contracts with established pharmaceutical
  companies. In entering into collaborative arrangements, the Companys goal
  is to cover all or a large part of its research and development costs and receive
  milestone payments upon the achievement of specified objectives. The Company
  would expect to receive royalties from its partners based on sales of products
  incorporating the Companys pulmonary drug delivery technologies.

Inhalation Products
  in Development

The
  table below summarizes inhalation products currently under development. The
  stages of the development process: Feasibility, Phase I, Phase II and Phase
  III are explained under Research and Development  Development Process
  for Brand-Name Pharmaceuticals.

|Product                     |  | Therapeutic
Category |  | Development
Status |  | Inhalation
System |  | Collaborative
Partner | 
|--------------------------- |  | -------------------- |  | ------------------ |  | ----------------- |  | --------------------- | 
|                            |  |                      |  |                    |  |                   |  |                       | 
|Foradil®
      (formoterol) |  | Asthma               |  | Phase III          |  | DPI               |  | Novartis              | 
|HFA 
      formoterol      |  | Asthma               |  | Phase I            |  | HFA 
  MDI       |  | SkyePharma            | 
|Undisclosed                 |  | Asthma               |  | Feasibility        |  | HFA
         MDI |  | Sepracor              | 
|Pulmicort®MDI
(budesonide)  |  | Asthma               |  | Feasibility        |  | HFA 
  MDI       |  | AstraZeneca           | 
|AD
      313                |  | COPD                 |  | Feasibility        |  |                  |  | Arakis                | 
|                            |  |                      |  |                    |  |                   |  |                       | 

Foradil

In
  November 1998, the Company and Novartis agreed to jointly develop a new formulation
  of Novartis Foradil asthma drug using the Companys SkyeHaler. The
  Company will be responsible for development of the drug in its finished form,
  to include supplying both the powder and the device as a product to Novartis.
  The Company plans to produce the product at its Lyon facility. Under the arrangement,
  Novartis has paid the Company a technology access fee of £0.4 million
  and has made an equity investment in the Company amounting to £6.1 million.
  Novartis has also agreed to pay the Company royalty income on future worldwide
  sales of the drug. In return, the Company has granted Novartis an exclusive
  worldwide license to market Foradil in the new delivery form. Foradil (formoterol
  fumarate) is a long-acting bronchodilator used in the treatment of chronic asthma.
  It is currently marketed in over 60 countries and achieved worldwide sales in
  2001 of CHF 390 million. In October 1999, the Company and Novartis announced
  that this new formulation of Foradil had entered clinical trials. Phase III
  clinical trials commenced in the second half of 2000 and continued throughout
  2001. The Company is producing DPI devices for the clinical trials, filled with
  the new formulation of Foradil, at its Lyon production facility. A joint U.S.
  and European filing is anticipated within the next twelve months.

HFA-formoterol

In
  March 2002, the Company announced that it had entered into a second agreement
  with Paul Capital. Under the terms of the agreement, Paul Capital will pay SkyePharma
  $30 million over the next two years, principally to fund the clinical development
  of propofol and the Companys hydro-fluoro alkane (HFA) formulation
  of formoterol (HFA-formoterol). In return Paul Capital will

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receive a
  portion of the future royalty and revenue streams from these, and seven other,
  products from the Companys pipeline. The seven products
  referred to are the lipid-lowering drug fenofibrate, an anti-cancer agent busulfan,
  an intravenoious formulation of the anti-biotic oxytetracycline, oral budesonide
  to treat inflammatory bowel disease, HFA-budesonide and Foradil both treating
  asthma and the anti-depressant Paxil CR. The Companys HFA-formoterol,
  the long-acting beta-2 agonist will be used in metered dose inhalers to treat
  asthma. HFA-formoterol will enter human clinical studies during 2002, targeting
  an anticipated product launch in 2004.

Undisclosed

In
  October 1998, the Company and Sepracor Inc. agreed to jointly develop a range
  of metered dose inhaler formulations containing Sepracors chiral forms
  of asthma drugs. Under the arrangement, the Company will be responsible for
  formulation development, scale-up to pre-production quantities and will supply
  clinical trial materials. Sepracor has retained commercial manufacturing rights,
  and has received an exclusive license from the Company to distribute and sell
  the resulting products worldwide. Sepracor has agreed to fund the Companys
  development costs, to make certain milestone payments to the Company on achievement
  of specified development objectives and to pay the Company future royalties
  on Sepracors net sales of the products.

Pulmicort MDI

On
  January 7, 2002, the Company announced exclusive agreements with AstraZeneca
  PLC to develop the next generation of AstraZenecas Pulmicort (budesonide)
  metered dose inhaler. The Company will apply one of its inhalation delivery
  technologies using hydro-fluoro alkane (HFA) as propellant to replace
  CFCs in the currently marketed MDIs. Under the terms of the agreement,
  the Company will be responsible for all pre-clinical and clinical development,
  as well as compiling regulatory filings for marketing approval. The Company
  received a signing fee of $2 million and payments under the agreement total
  up to $10 million, payable on the achievement of certain development and regulatory
  milstones up to the granting of marketing approval. AstraZeneca has also agreed
  to pay the Company royalty income on future net sales of the HFA-based product.
  The Company has already developed an internal formulation of budesonide, the
  active ingredient in Pulmicort that is pharmaceutically stable and suitable
  for use in an HFA-MDI. Phase I clinical studies on the AstraZeneca formulation
  are expected to commence in the second half of 2002.

AD 313

On
  July 16, 2001, the Company and Arakis Ltd announced that they had entered into
  an agreement to jointly develop AD 313, a novel tissue-remodelling agent for
  treating Chronic Obstructive Pulmonary Disease (COPD), using the
  Companys proprietary inhalation formulation and device technology. The
  Company and Arakis will contribute proprietary intellectual property and know-how
  to the venture. The Company will contribute its proprietary inhalation formulation
  and device technology and expertise. Arakis will provide the initial AD 313
  intellectual property along with clinical development expertise. The two companies
  will jointly fund AD 313, manage product development, and upon commercialization
  share rewards equally. AD 313 is currently being developed in nebulized form
  with the potential to use either SkyePharma inhalation system. The potential
  of AD 313 and its novel mechanism have been confirmed in a clinical proof of
  concept study conducted by Arakis in COPD patients.

Other Inhalation Collaborations

In
  March 2000, the Company announced that it had entered into a collaboration agreement
  with PA Recruitment Services Holding S.A. (part of the PA Consulting Group)
  for the development of a range of non-CFC propelled metered dose asthma products
  in conjunction with a breath-actuated inhaler. Under the terms of the collaboration,
  the Company will provide its expertise in non-CFC metered dose formulation,
  and PA Consulting will provide its breath-actuated inhaler device currently
  under development. The first phase of the development, which included the finalization
  of the device design and the formulation of two initial compounds to be delivered
  using the device Xcelovent, was completed in early 2001 and pre-clinical
  lung deposition studies have started. The collaboration is an exclusive arrangement
  in the field of asthma and COPD. The original

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collaboration
  agreement terminated on December 31, 2001. A contract extension has been negotiated
  and was signed on June 13, 2002.

Topical

Topical
  Technologies

HA-Based
  Technologies

The
  Companys HA-based technologies are topical drug delivery technologies
  are based on HA, a natural polymer, which is designed to maintain efficacy and
  localize the delivery of drugs to the skin for the treatment of a variety of
  skin disorders. HA is a long-chained polysaccharide that is a major constituent
  surrounding cells in most animal tissues. In solution HAs coiled structure
  acts as a net which can entrap a wide variety of drug compounds. HA is attracted
  to and adheres to specific receptors on cell membranes which can be found in
  increasing numbers at sites of damage and disease in the body. This means that
  drugs can potentially be targeted to and held at the site where the drug is
  needed.

Advantages of HA-Based
  Technologies

HAs
  safety profile, its ability to carry drugs and its potential targeting characteristics
  make it an excellent vehicle for drug delivery. The Company anticipates that
  by enhancing the delivery of a specific drug, treatment with HA formulations
  might require less drug compared to treatment with the drug administered by
  itself. As a result the Company believes formulations employing HA-based technologies
  may result in decreased systemic side effects or enhanced therapeutic effect.

Crystalip, DermaStick
  and ES-Gel

In
  January 2001, SkyePharma announced that it had licensed certain rights to three
  topical drug delivery technologies, Crystalip, DermaStick and the ES-Gel system,
  from Bioglan. Crystalip enhances stability of drugs by embedding them in lipid
  crystals. Suitable for hydrophilic or hydrophobic drugs, the drug is released
  as the lipid melts at skin temperature. DermaStick presents the active ingredient
  in a wax stick, which facilitates controlled application to affected skin. ES-Gel
  is a semi-solid formulation producing enhanced solubility of drugs and providing
  substantially increased bioavailability by the transdermal route. In May 2002,
  SkyePharma acquired the rights to DermaStick, Crystalip and ES-Gel that had
  remained with Bioglan after the January 2001 development and commercialization
  licensing agreement with Bioglan.

Advantages of Crystalip
  DermaStick and ES-Gel

| |  | Crystalip.The major advantage of Crystalip comes from its versatility, as it can be
formulated as a spray, lotion, cream or paste. Additionally, it can stabilize
lipophilic and hydrophilic actives, provide photostabilization, and due to its
anti-microbial effect can be free from preservatives leading to a low risk of
toxic or allergic reactions. There are no direct competitors to Crystalip in providing
both stabilization of lipophilic and hydrophilic drugs combined with an anti-microbial
effect.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | DermaStick.A major advantage of DermaStick over existing stick technologies is that it
avoids the problem of poor homogeneity of stick formulations. This poor homogeneity
is experienced because the active is suspended in the vehicle, and during the
solidification process the suspended active is allowed to sediment. The DermaStick
avoids this issue by holding the active in solution and thereby allowing manufacture
of homogeneous sticks.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | ES-Gel.The system will primarily compete with transdermal patch technologies. Other
than the avoidance of the need for a patch, the major advantage is ES-Gels
ability to deliver low water soluble compounds through the skin and to do this
without the use of penetration enhancers. The resultant products may also be significantly
lower cost compared to patches and most other transdermal delivery systems.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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Approved Topical Products

Solaraze

The
  first approved drug product using HA-based technology is Solaraze. Solaraze
  is a topical gel used to treat actinic keratosis, a pre-cancerous skin condition
  caused by constant over-exposure to the sun. It is a formulation of HA and the
  non-steroidal anti-inflammatory drug diclofenac. Solaraze has been shown to
  be an effective topical product for actinic keratosis. Compared to other actinic
  keratosis treatments, Solaraze is non-invasive, non-scarring and is well tolerated
  by patients.

During
  1996, two positive Phase III clinical trials in the treatment of actinic keratosis
  were completed and in 1997, a third Phase III clinical trial was completed confirming
  the results of the previous two trials. In July 1997, Solaraze received regulatory
  approval for marketing in the U.K. Subsequently, in May 1998, Solaraze was approved
  for marketing in Germany, Sweden, Italy, France and Canada.

In
  October 1998, the Company submitted an NDA for the marketing of Solaraze in
  the U.S., which was filed by the FDA in December 1998. The Company received
  FDA approval for this product in October 2000.

On
  March 13, 2000, the Company entered into an agreement with Bioglan for the manufacture,
  marketing and distribution of Solaraze in Europe. Under the terms of the agreement
  Bioglan paid the Company an up-front licensing fee and agreed to pay the Company
  royalties on sales of Solaraze by Bioglan or by sub-licensees of Bioglan. In
  December 2000, the Company entered into a further agreement with Bioglan for
  the license of marketing rights to the U.S., Canada and Mexico for Solaraze.
  As a result of the agreement with Bioglan for the U.S., Canada, and Mexico,
  Bioglan paid a $14 million fee and agreed to pay further significant milestone
  payments upon commercialization of Solaraze. Additional milestones were also
  agreed to be paid if Solaraze met certain sales targets in each of the first
  5 years together with a royalty on net sales. The licenses granted under the
  two agreements with Bioglan ran until 2013, the latest date on which any of
  the related patents expire. Solaraze received marketing approval in both Europe
  and the U.S. Bioglan launched Solaraze in the UK in May 2001, Germany in August
  2001 and Sweden in October 2001.

On
  November 20, 2001, the Company announced that it had served notice to terminate
  all agreements with Bioglan concerning the licence of Solaraze for marketing
  in Europe, USA, Canada and Mexico. Bioglan was asked to provide redress for
  certain material breaches raised in the notice. In December 2001, SkyePharma
  announced the withdrawal of this termination notice following announcements
  from Bioglan concerning certain arrangements with its banks and Quintiles Transnational
  Corp. (Quintiles). Bioglan received £15 million from Quintiles
  in return for the U.S., Canadian and Mexican rights to market and sell Solaraze.
  To enable Bioglan to complete these arrangements, SkyePharma agreed, amongst
  other matters, to withdraw its notice to terminate all agreements concerning
  Solaraze. In addition, SkyePharma agreed the transfer of rights to market Solaraze
  in the U.S., Canada and Mexico from Bioglan to Quintiles, in consideration of
  which Quintiles paid SkyePharma $5 million. Bioglan agreed to pay SkyePharma
  $12.5 million in settlement of monies owing under the license agreements between
  the two companies for the sales and marketing of Solaraze in U.S., Canada and
  Mexico. Quintiles subsequently launched Solaraze in the U.S. in January 2002.

On
  February 21, 2002, the affairs of Bioglan were placed into administration. On
  May 13, 2002, following negotiations with the Administrators of Bioglan, SkyePharma
  announced an agreement to transfer all rights to market Solaraze in Europe to
  Shire for a total consideration up to £15 million, plus royalties on European
  sales. Of this total consideration, £2.1 million is contingent on conditions,
  including Solarazes launch in certain European countries.

In
  January 2001, SkyePharma PLC entered into an agreement with Meditech Research
  Limited (Meditech) which included a license to commercialize Solaraze
  in Australia, New Zealand, Malaysia and Singapore. SkyePharma would receive
  a 15% share of all amounts Meditech received

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from either
  commercializing or licensing Solaraze and associated products in the above territories.
  After Australian regulatory approval was obtained, Solaraze was to be marketed
  by Meditech, or its sub-licensee, Faulding Limited. SkyePharma agreed to work
  with Meditech to expedite approval. Independently Meditech obtained a non-exclusive
  license over the HA-Based Technology to exclusively exploit its anti-cancer
  HyACT project worldwide. Meditech agreed to pay SkyePharma 10% of all
  net revenue it receives from the HyACT project. However, the first A$5 million
  Meditech receives by way of reimbursement of development expenses would not
  be subject to the 10% royalty. In May 2002, Jagotec AG entered into an agreement
  with Meditech Research Ltd under which firstly the previous agreement of January
  2001 was declared null and void. Secondly, the parties agreed on new licensing
  terms for one Jagotec patent. That patent was exclusively licensed to Meditech
  for worldwide use for intratumoral and injection. Additionally, under the terms
  of the May 2002 agreement, Jagotec AG assigned to Meditech certain other patents
  acquired from Cade Struktur which would be of benefit to Meditech. In consideration
  for the exclusive licence and assignment of patents, Meditech have agreed to
  pay Jagotec AG a lump sum together with a royalty of 8% of net sales or 12%
  of net sub-licensing proceeds received from the sales of its HyACT products.

Topical Products in
  Development

Hyclinda
  is a topical gel to treat acne, which was developed by Cade Struktur and latterly
  under license by Shire and for which pivotal Phase III trials have been completed.
  In 2002, the Company recovered the rights to Hyclinda from Shire and intends
  to complete the data package and prepare to file for marketing approval in the
  U.S. and Europe during 2003. A new marketing partner is currently being sought.

Solubilization

Solubilization
  Technology

Solubility
  of drugs is an essential factor for all drug delivery systems, independent of
  the route of administration. Poor solubility leads to a range of problems including
  poor bioavailability, increased toxicity, variability of absorption when taken
  with food and poor efficacy. The Company believes that a large number of existing
  marketed drugs and newly synthesized compounds have solubility problems. The
  acquisition of nano-particulate technology from Medac and the IDD technology
  from SkyePharma Canada provides the Company with access to important enabling
  technologies for the enhanced delivery of poorly water-soluble drugs.

Nano-particulate
  technology aims to improve a drugs solubility by reducing the size of
  the particles. It has been demonstrated in laboratory testing that the saturation
  solubility of many drugs can be improved by reducing particle size below one
  micron in diameter. The nano-particles are produced via a process of homogenization
  whereby a therapeutic compound dispersed in a solvent or a compound carrier
  system is subjected to size reduction forces in a homogenizer. A homogenizer
  is a device where material is pushed through a narrow chamber at very high pressure.
  The process breaks down the particles of the compound and generates particles
  in the nanometer size range.

The
  nano-particulate technology acquired from Medac was originally developed by
  a team of researchers at the Free University of Berlin in the early 1990s and
  was subsequently licensed to Medac which pursued the development of the technology.
  The nano-particulate technology acquired from Medac consists of three separate
  techniques:

| |  | nano-suspensions,
a dispersion of pure drug without any matrix;
| | - | ---------------------------------------------------------------

| |  | solid
lipid nano-particles, solid solutions of drugs in a lipid matrix; and
| | - | ---------------------------------------------------------------------------

| |  | solid
polymer nano-particles, solid solutions of drugs in a solid polymer matrix.
| | - | ---------------------------------------------------------------------------------

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The
  IDD technology platform acquired with the acquisition of SkyePharma Canada has
  been developed since the early 1990s with over $50 million having been invested
  in the technology and development of a proprietary product pipeline. To date,
  no products using the IDD technology have been approved. The IDD technology
  incorporates the following methods:

| |  | MicroParticle (IDD-P),
      phospholipid stabilized sub-micron to micron sized water-insoluble drug
      particles. This approach can be used for a wide range of insoluble drugs
      to be administered via the oral, topical, injectable, implantable or inhaled
      routes; and
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | MicroDroplet (IDD-D),
      phospholipid stabilized emulsions of water-insoluble drug particles. This
      approach is available also to a restricted range of drugs, limited by solubility
      in biocompatible oils, administered by the injectable route.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The
  IDD technology acquired with SkyePharma Canada is complementary to the Companys
  existing nano-particulate technology acquired from Medac, and, therefore, the
  Company expects to be able to provide customers with a wider range of patented
  solubilzation technologies. It is intended that the SkyePharma solubilization
  technologies will also be used to complement and enhance the Companys
  other drug delivery systems.

Advantages of solubilization
  technologies

The
  Company believes that its solubilization technologies acquired from Medac and
  SkyePharma Canada offer a number of potential advantages over other solubilization
  technologies being developed by pharmaceutical and biotechnology companies.
  These include the following:

| |  | A
variety of solutions.The SkyePharma technology encompasses five different
approaches: nano-suspensions, solid lipid nano-particles and solid polymer nano-particles,
MicroParticle and MicroDroplet which offer a number of different methods to address
solubility problems.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Simplicity
of manufacturing process.All particles are produced on the same relatively
simple equipment, which may reduce the investment cost and complexity of the manufacturing
operation.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Rapid
manufacturing process.The homogenization part of the manufacturing process
typically takes 1 to 2 hours which is significantly shorter than other processes
used by competitors.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Narrow
particle size range.The particles produced are within a narrow size range.
| | - | ---------------------------------------------------------------------------------

Solubilization Products
  in Development

The
  table below summarizes products currently under development based on the solubilization
  technologies. The stages of the development process: Phase I, Phase II, Phase
  III and Filed are explained under Research and Development  Development
  Process for Brand-Name Pharmaceuticals.

|Product     |  | Therapeutic
  Category   |  | Development
  Status |  | Solubilization
  System |  | Collaborative
  Partner | 
|----------- |  | ------------------------ |  | -------------------- |  | ----------------------- |  | ----------------------- | 
|            |  |                          |  |                      |  |                         |  |                         | 
|Undisclosed |  | Bacterial
      diseases |  | Filed                |  | IDD
       P           |  | IDEXX
      Labs        | 
|Propofol    |  | Anesthesia               |  | Phase II             |  | IDD 
P                 |  | SkyePharma              | 
|Busulfan    |  | Oncology                 |  | Phase
      II       |  | IDD
       P           |  | SuperGen                | 
|Fenofibrate |  | Cardiovascular           |  | Phase I              |  | IDD 
P                 |  | Undisclosed             | 
|            |  |                          |  |                      |  |                         |  |                         | 

Undisclosed

The
  Company has licensed its IDD technology to Blue Ridge Pharmaceuticals, Inc.,
  a subsidiary of IDEXX Laboratories, Inc. (IDEXX), to be applied
  to a range of water insoluble veterinary drugs. IDEXX is developing a number
  of products utilizing the IDD technology, with one

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product currently
  undergoing regulatory review at the U.S. Food and Drug Administration Center
  for Veterinary Medicine. The Company will provide formulation and scale up support
  to IDEXX and will receive royalties upon commercialization of the products.

Propofol

Propofol
  is the active ingredient in AstraZenecas Diprivan, a leading injectable
  anesthetic, which achieved sales in 2001 of $465 million. The Company is developing
  an improved formulation of propofol using its IDD technology. Patents began
  to expire on Diprivan in 2000. Diprivan has problems with micro-organism growth
  if the product is not properly handled and also may cause the build up of fats
  in the body. The IDD formulation is inherently anti-microbial and offers significant
  improvement in both these areas. The Company has completed Phase I trials on
  IDD Propofol and Phase IIb trials will commence during 2002 with a target launch
  date, on successful completion of clinical trials, in 2005.

Busulfan

The
  Company is developing an injectable formulation of Busulfan, in partnership
  with SuperGen, using its IDD-P technology. Busulfan is currently marketed by
  SuperGen in oral form. The new formulation is being developed for bone marrow
  transplants in pediatrics. The new formulation does not contain dimethyl acetamide
  (DMA), does not require refrigeration and is currently in Phase
  II.

Fenofibrate

The
  Company is developing an improved formulation of fenofibrate, in partnership
  with an undisclosed pharmaceutical company. Fenofibrate is a lipid-lowering
  drug launched by Abbott in the U.S. in 1998. Currently marketed forms of fenofibrate
  had sales in 2001 of over $500 million. The IDD formulation is a lower dose
  product providing blood levels similar to the 200mg currently marketed form.
  The new formulation is currently in Phase I trials.

New Product Feasibility
  Programs

SkyePharma
  Canada has signed an exclusive agreement with Baxter Healthcare Corporation
  (Baxter) to collaborate on the use of the IDD technology for the
  formulation of injectable New Chemical Entity (NCE) medications.
  Baxter will work with its pharmaceutical company clients to develop injectable
  formulations for insoluble medications utilizing the IDD technology and its
  expertise in formulating and manufacturing injectable drugs. One of the most
  challenging issues in the development of many pharmaceutical products is formulating
  a water-insoluble NCE  a drug molecule that cannot be dissolved in water
   so that it can be administered to patients in an injectable form. Under
  the terms of the agreement, SkyePharma Canada will receive milestone payments
  from Baxter based on certain events leading to the commercialization of the
  first product under the collaboration. In addition, SkyePharma Canada will receive
  a proportion of license fees, milestone payments and royalties on net sales
  of the IDD formulated injectable medications developed by Baxter for Baxters
  global pharmaceutical company partners. Baxter has exclusive manufacturing rights
  to these products. Where SkyePharma Canada develops products for Baxters
  partners, SkyePharma will pay to Baxter a proportion of the milestones and royalties
  earned.

In
  addition to the above described products, SkyePharma Canada has a number of
  deals for feasibility studies on third party compounds which are at an early
  stage of development. SkyePharma Canada has disclosed alliances with Schering
  Plough Corporation and other non-disclosed partners on drugs formulated using
  IDD technology. SkyePharma Canada owns or has exclusively licensed twenty two
  patents and has submitted twenty three patent applications on its IDD technology
  in the U.S. SkyePharma Canada has also filed related patent applications on
  its IDD technology in other countries and regions.

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Generics

The
  Company historically applied the Geomatrix technologies to off-patent (generic)
  drugs. In many of these cases, the Company developed controlled-release versions
  of brand-name pharmaceuticals whose patent protection or marketing exclusivity
  had expired or was about to expire. Prior to 1998 the Company filed Abbreviated
  New Drug Applications (ANDAs) for six generic products, one for
  a Geomatrix formulation of Isosorbide Mononitrate or ISMN (Imdur®), three
  for a group of injectable drugs developed for the Company by Synthon, one for
  a Geomatrix formulation of Naprelan® (Naproxen) and one for a generic version
  of Cylest (Pemoline) developed together with Oread. The Company has signed one
  licensing agreement in respect of its generic pharmaceutical product candidates,
  and in November 1999, the Company announced that the FDA had approved the Companys
  application to manufacture and market its generic once-daily sustained release
  formulation of ISMN. The Company has been in discussions with a number of potential
  marketing partners for this product but has experienced difficulty in finalizing
  a marketing agreement with a partner due to the number of generic formulations
  of Imdur already available on the market. In addition, the Company does not
  believe that the remaining four generic pharmaceutical product candidates will
  have commercial value due to the number of generic formulations already available
  on the market and has consequently withdrawn these four ANDAs.

Prior
  to 1998, the Companys strategy for the sale and distribution of its generic
  pharmaceutical product candidates had been to develop its own marketing capability
  through its subsidiary in the U.S., SkyePharma U.S. Inc. However, in late 1998,
  the Company concluded that it was unlikely to maximize the value of its generic
  pharmaceutical product candidates using its own marketing resources and therefore
  decided to discontinue its own generic drug sales and marketing operations in
  the U.S. The Company incurred a one-time charge in connection with this restructuring
  of approximately £1.3 million in 1998.

ISMN
  is an organic nitrate indicated for the prevention of angina pectoris due to
  coronary artery disease. The brand-name product, Imdur, is a controlled-release
  version of ISMN which is marketed by Key Pharmaceuticals, a subsidiary of Schering-Plough.
  The Company is applying the Zero Order Release System to replicate the release
  profile of Imdur. The U.S. patent for this product expired in April 1997. In
  November 1999, the Company announced that the FDA had approved the Companys
  application to manufacture and market its generic once-daily sustained release
  formulation of ISMN. The Company has been in discussions with a number of potential
  marketing partners for this product but has experienced difficulty finalizing
  a marketing agreement with a partner due to the number of generic formulations
  of Imdur already available on the market.

Naproxen
  is a nonsteroidal anti-inflammatory drug indicated for the treatment of rheumatoid
  arthritis, osteoarthritis, ankylosing spondylitis, tendinitis, bursitis and
  acute gout. It is also indicated in the relief of mild to moderate pain and
  the treatment of primary dysmenorrhea. The brand-name product, Naprelan, is
  a controlled-release version of Naproxen which is marketed by Elan Pharmaceuticals.
  Marketing exclusivity for this product expired in the U.S. in April 1999. Naproxen
  is one of the products in the joint venture portfolio, and in January 2000,
  an agreement was reached with Genta for the sharing of any revenues received
  for this product. Naproxen is not approved.

There
  can be no assurance that any of the products in the Companys generic drug
  portfolio will be successfully outlicensed or partnered, or if outlicensed or
  partnered that the product can be successfully developed, approved or commercialized.
  If any of the products in the generic drug portfolio fail to be outlicensed
  or partnered, the Company is unlikely to continue their development.

ISMN
  and certain products in the early stage of development are subject to an earn-out
  arrangement pursuant to which certain current directors and officers of the
  Company will receive additional consideration if certain regulatory and profit
  milestones are met. See Item 7: Major Shareholders and Related Party Transactions
   Certain Arrangements in Respect of the Krypton Acquisition.

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Collaborative Arrangements

The
  Company has collaborative arrangements with each of its pharmaceutical partners,
  the terms of which vary considerably. Pursuant to these arrangements, the Companys
  partners typically fund all or a large part of the research and development
  expenses incurred in the development of new formulations of their products.
  Most of the Companys development contracts either provide for a flat fee
  for the Companys research and development efforts or provide for an agreed
  research and development budget. Some agreements have involved equity investments
  in the Company by the Companys partners. In negotiating contracts with
  its partners, the Companys strategy generally has been to cover its costs
  in the research and development process. Substantially all potential profits
  are expected to be generated by royalty payments or manufacturing fees for successfully
  developed and marketed products. In some cases, the partners have agreed to
  make specified payments to the Company upon the achievement of certain milestones,
  which may be deducted from future royalty payments for successfully developed
  and marketed products.

In
  return, the Company gives each of its partners an exclusive license to market
  the products incorporating the Companys technologies. In some cases the
  licenses are worldwide. In others they are limited to specific territories.
  In all cases, however, partners are free to sublicense the technologies, although
  the Companys consent may be required and royalties on all sales must be
  paid to the Company. In addition, the majority of the collaborative agreements
  do not prohibit the Company from developing formulations of competitive products.
  In some cases, however, the Company will agree not to develop formulations of
  specified compounds for an agreed period of time. Most of the agreements do
  not prohibit partners from developing, either internally or in collaboration
  with the Companys competitors, controlled-release versions of the contract
  products.

The
  Companys collaborative partners generally take responsibility for conducting
  clinical trials and for preparing and pursuing all necessary regulatory approvals
  although more recently the Company has taken responsibility for managing clinical
  trials in some collaborations. The Company may assist its partners in the conduct
  of such trials and the preparation of regulatory filings, but its partners ultimately
  control the process, including the selection of the jurisdictions in which regulatory
  approval will be sought, if at all.

The
  collaborative agreements do not obligate the partners to market any successfully
  developed and approved products. The Company does not have any control over
  whether and to what extent a partner will elect to commercialize a product.
  A client may choose not to market a product for reasons wholly independent of
  the Companys technologies. In most cases if a client does not proceed
  to market the product once it has been successfully formulated and approved,
  the Company will not receive any additional income in respect of the product.

During
  the formulation and development stages, the Companys partners are generally
  free to terminate the collaborative relationship at any time and for any reason.
  The Companys policy is to recognize income only when the earnings process
  has culminated, that is when the Company has performed all of its obligations
  under the collaborative arrangement, when the Companys ongoing obligations
  under the arrangement are merely perfunctory and when the income is not refundable.
  During 2001 £11.7 million of income and other income was deferred using
  this policy.

Oral

The
  Company is currently receiving significant royalty revenues under two collaborative
  arrangements for its Geomatrix technology: Xatral OD and Paxil CR. Under the
  terms of these agreements, each of the development partners bore all of the
  costs of research and development according an agreed budget and are obligated
  to pay the Company continuing royalties of between 1.5% and 5% of net sales.
  In return, the Company granted the development partners exclusive licenses to
  use the Geomatrix technology in these products throughout the world. The license
  agreement for Xatral OD was signed in May 1999 with Sanofi-Synthelabo. The license
  agreement for Paxil CR was signed in March 1996 with SmithKline Beecham plc
  (now part of GlaxoSmithKline).

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The
  only collaborative arrangement involving Geomatrix technology in which the Company
  is responsible for conducting clinical trials is the development and licensing
  agreement for a once-daily version of Requip (ropinirole) with GlaxoSmithKline,
  which was entered into in September 1999 with SmithKline Beecham (now part of
  GlaxoSmithKline). Under the terms of the agreement with GlaxoSmithKline the
  Company is responsible for all development activities for Requip oral controlled
  release tablets up to regulatory filing, in collaboration with GlaxoSmithKline.
  As part of the agreement, GlaxoSmithKline made an equity investment of £4.9
  million in the Company and will pay milestone payments at intervals up to product
  approval, including an up-front payment. In December 2001, the Company and GlaxoSmithKline
  amended the 1999 license for Requip to take account of additional activities
  that had been undertaken by SkyePharma. Under the terms of the amendment, the
  timeline of certain milestone payments was renegotiated together with additional
  development revenues to reimburse SkyePharma for the additional activities.
  On commercialization of once-daily Requip, the Company will receive royalties
  on future product sales. GlaxoSmithKline will take responsibility for preparing
  and pursuing all necessary regulatory approvals. The once-daily version is in
  Phase II clinical trials.

The
  Company has a development and license agreement for Dilacor XR, signed in 1998
  with Rorer, a member of the Rhône Poulenc Rorer Group (now part of Aventis
  Pharma). In 1997, Rorer granted to Watson Laboratories, Inc. (with the consent
  of the Company) exclusive rights to market, advertise, promote, sell and distribute
  Dilacor XR. The grant of rights to Watson Laboratories does not affect any entitlements
  of the Company or any of the material terms of the collaborative arrangement.

Injectable

In
  March 1994, DepoTech (renamed SkyePharma Inc.) entered into a collaboration
  agreement with Chiron. The objective of the collaboration is to develop and
  commercialize DepoCyt for use in the treatment of neoplastic meningitis from
  lymphomas and solid tumors, and to explore the use of DepoTechs DepoFoam
  for certain other Chiron compounds. The Chiron agreement, as amended, grants
  Chiron rights to market and sell DepoCyt in the U.S. Chiron has funded, and
  is obligated to fund, 50% of the clinical development expenses in the U.S. Canadian
  registration expenses and the cost of clinical trials required in Europe were
  funded by Chiron until June 1997, when the Chiron agreement was amended in connection
  with the agreement with Pharmacia & Upjohn (now known as Pharmacia Corporation)
  described below. SkyePharma Inc. will manufacture DepoCyt, Chiron will market,
  sell, and distribute DepoCyt in the U.S., and the parties will share all profits
  equally. The Company will also fund 50% of the sales and marketing expenses
  incurred for DepoCyt. Chiron also has a right of first refusal to obtain a license
  to alternate DepoFoam formulations of cytarabine under terms and conditions
  to be negotiated in the future. Following an evaluation of the markets and certain
  other factors, DepoTech and Chiron mutually agreed not to further develop certain
  additional generic cancer compounds named in the Chiron agreement.

In
  June 1997, DepoTech and Chiron amended their agreement, and SkyePharma Inc.
  repurchased rights to DepoCyt in Canada and Europe from Chiron for aggregate
  cash payments of up to $13.7 million, of which $2.0 million was expensed and
  paid to Chiron in December 1997. The remaining $11.7 million originally was
  payable upon the earlier of six months following U.S. or European regulatory
  notification that the application to market or sell DepoCyt is approvable or
  approved. In March 1999, SkyePharma Inc. and Chiron further amended the agreement
  with Chiron, such that SkyePharma Inc. issued a note payable for $9.7 million
  on receipt of FDA approval of DepoCyt on April 1, 1999. During 2000 SkyePharma
  and Chiron amended the March 1999 agreement whereby SkyePharma Inc. would have
  issued a note payable for $3.5 million to Chiron upon the filing of an application
  for DepoCyt for pediatric indications in the U.S. Under the amendment dated
  October 4, 2000, this note became payable on the earlier of the filing of an
  application for DepoCyt for pediatric indications in the U.S. or the date on
  which Phase IV clinical trials, required by the FDA as a condition of product
  approval, commenced. The $3.5 million note was issued in December 2000. The
  notes are secured on the rights to DepoCyt and bear a floating rate of interest
  based on LIBOR. At December 31, 2001 $5.5 million (£3.8 million) was outstanding

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on the Chiron
  loan notes. The principal amounts are payable on June 30, 2002 for the first
  tranche and in equal instalments on June 30, 2002 and 2003 for the second.

Both
  the Company and Chiron have the ability to terminate a portion or all of the
  collaboration at certain intervals and with advance notice.

In
  July 1997, DepoTech entered into a marketing and distribution agreement with
  Pharmacia & Upjohn (now known as Pharmacia Corporation). Under the agreement,
  Pharmacia Corporation acquired rights to market and sell DepoCyt in countries
  outside the United States. Pharmacia Corporation would generally be responsible
  for submitting regulatory filings, and for labeling, packaging, distributing,
  marketing and selling DepoCyt in this territory. SkyePharma Inc. would manufacture
  DepoCyt and receive a share of the net sales of this product from Pharmacia
  Corporation, if any. DepoTech received a cash payment of $2.0 million when the
  agreement was signed. The agreement also provides for reimbursement by Pharmacia
  Corporation of certain clinical trial expenses and regulatory fees incurred
  by SkyePharma Inc. In February 2000, the Company and Pharmacia Corporation renegotiated
  certain aspects of this agreement relating to milestone payments and reimbursement
  of clinical trials expenses. In addition, the Company recovered the rights to
  DepoCyt for Japan and Canada. In June 2000, Pharmacia Corporation notified the
  Company that it was terminating the 1997 Marketing and Distribution Agreement.
  Subsequently, Pharmacia Corporation assigned the European marketing application
  to the Company and the Company continued to pursue the European marketing approval.
  In April 2001, the Company received notification that the CPMP had recommended
  the granting of marketing authorization for DepoCyte, for the treatment of neoplastic
  meningitis from lymphomas. The CPMPs recommendation was forwarded to the
  European Commission for ratification. In June 2001, the Company licensed the
  marketing and distribution rights for DepoCyte in Europe and the Philippines
  to Elan. Under the terms of the agreement, SkyePharma received a $10 million
  signing fee and will receive significant milestone payments on commercialization
  of DepoCyte and additional milestone payments if DepoCyte reaches certain sales
  targets. These additional milestone payments could total $13 million. In addition,
  SkyePharma will manufacture and supply DepoCyte to Elan and will receive a supply
  price equal to a fixed percentage of net sales. In August 2001, the European
  Commission ratified the positive recommendation received from the CPMP by granting
  marketing authorization for DepoCyte through the European Union.

In
  June 2000, the Company licensed the marketing and distribution rights for DepoCyt
  in Canada to Paladin Inc. and in June 2001, the Company licensed the marketing
  and distribution rights for DepoCyt in Japan and Taiwan to Nippon-Shinyaku.

Inhalation

In
  November 1998, the Company and Novartis agreed to jointly develop a new formulation
  of Novartis Foradil asthma drug using the Companys multi-dose dry
  powder inhaler. The Company is responsible for development of the drug in its
  finished form, to include supplying both the powder and the device as a product
  to Novartis. Under the arrangement, Novartis has paid the Company a technology
  access fee of £0.4 million and has made an equity investment in the Company
  amounting to £6.1 million. Novartis has also agreed to pay the Company
  royalty income on future worldwide sales of the drug. In return, the Company
  has granted Novartis an exclusive worldwide license to market Foradil in the
  new delivery form.

In
  March 2000, the Company announced that it had entered into a collaboration agreement
  with PA Recruitment Services Holding S.A. (part of the PA Consulting Group)
  for the development of a range of non-CFC propelled metered dose asthma products
  in conjunction with a breath-actuated inhaler. Under the terms of the collaboration,
  the Company will provide its expertise in non-CFC metered dose formulation and
  PA Consulting will provide its breath-actuated inhaler device currently under
  development. The original collaboration agreement terminated on December 31,
  2001. A contract extension has been negotiated and was signed on June 13, 2002.

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On
  July 16, 2001, the Company and Arakis Ltd announced that they had entered into
  an agreement to jointly develop AD 313, a novel tissue-remodelling agent for
  treating COPD, using the Companys proprietary inhalation formulation and
  device technology. The Company and Arakis will contribute proprietary intellectual
  property and know-how to the venture. The Company will contribute its proprietary
  inhalation formulation and device technology and expertise. Arakis will provide
  the initial AD 313 intellectual property along with clinical development expertise.
  The two companies will jointly fund AD 313, manage product development, and
  upon commercialization share rewards equally.

On
  January 7, 2002, the Company announced exclusive agreements with AstraZeneca
  PLC to develop the next generation of AstraZenecas Pulmicort metered dose
  inhaler. The Company will apply one of its inhalation delivery technologies
  using hydro-fluoro alkane (HFA) as propellant to replace CFCs
  in the currently marketed MDIs. Under the terms of the agreement, the Company
  will be responsible for all pre-clinical and clinical development, as well as
  compiling regulatory filings for marketing approval. The Company received a
  signing fee of £2 million and progress related payments could total up
  to $10 million once marketing approval is granted. AstraZeneca has also agreed
  to pay the Company royalty income on future net sales of the HFA-based product.
  The Company has already developed an internal formulation of budesonide, the
  active ingredient in Pulmicort that is pharmaceutically stable and suitable
  for use in an HFA-MDI. Phase I clinical studies on the AstraZeneca formulation
  are expected to commence in the second half of 2002.

Topical

As
  set out above under Drug Delivery Platforms  Topical  Approved
  Topical Products  Solaraze, the Company entered into two agreements
  with Bioglan; for the manufacture, marketing and distribution of Solaraze in
  Europe and; for the license of marketing rights to the U.S., Canada and Mexico.
  As set out above, during 2001, SkyePharma agreed the transfer of rights to market
  Solaraze in the U.S., Canada and Mexico from Bioglan to Quintiles. On May 13,
  2002, following negotiations with the Administrators of Bioglan, SkyePharma
  announced an agreement to transfer all rights to market Solaraze in Europe to
  Shire for a total consideration up to £15 million, plus royalties on European
  sales. Of this total consideration, £2.1 million is contingent on conditions
  including Solarazes launch in certain European countries.

In
  June 2000, SkyePharma entered into a research and development collaboration
  with Kings College London for the investigation of the use of HA as a carrier
  or vector for active substances in drug delivery applications, principally for
  administration by the topical route. The projects being pursued under this agreement
  are all at the pre-clinical stage of development.

Solubilization

SkyePharma
  Canada has signed an exclusive agreement with Baxter Healthcare Corporation
  to collaborate on the use of the IDD technology for the formulation of injectable
  medications. Details of this collaboration are set out above under Drug
  Delivery Platforms  Solubilization  Solubilization Products in Development
   New Product Feasibility Programs.

Other Collaborative
  Arrangements

In
  January 2001, SkyePharma announced that it entered into an agreement with Paul
  Capital to develop DepoMorphine. Under the agreement, Paul Capital will provide
  a total of $30 million between 2000 and 2002, to fund the clinical development
  and regulatory submission of DepoMorphine, in return for the sale of a portion
  of potential future royalty and revenue streams from DepoMorphine, Xatral OD,
  Solaraze and DepoCyt. Between January 2003 and December 2014, Paul Capital will
  receive 15% of the annual royalties and revenues from the stated products up
  to an agreed ceiling. Once the predetermined ceiling is reached, the percentage
  participation will fall to 3% for the remainder of the period until December
  31, 2014.

In
  March 2002, SkyePharma announced that it had entered into a second agreement
  with Paul Capital. Under the terms of the agreement, Paul Capital will pay SkyePharma
  $30 million over the

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next two years,
  principally to fund the clinical development of propofol and HFA-formoterol.
  In return, Paul Capital will receive a portion of the future royalty and revenue
  streams from these, and seven other products from the Companys pipeline.
  The seven products referred to are the lipid-lowering drug fenofibrate, an anti-cancer
  agent busulfan, an intravenious formulation of the anti-biotic oxytetracycline,
  oral budesonide to treat inflammatory bowel disease, HFA-budesonide and Foradil
  both treating asthma, and the anti-depressant Paxil CR. Between January 2002
  and December 2015, Paul Capital could receive between 4% and 20% of the annual
  royalties and revenues from the total of nine products. Based on managements
  current projections, the 20% rate will apply from 2004 to 2008. The percentage
  then falls, when an agreed return is achieved, to 12.5% until a second ceiling
  is reached, before falling to 4% for the remainder of the period until December
  31, 2015. During 2002 and 2003, the 20% rate will be reduced based on the percentage
  of the total $30 million already funded. In addition, should the share of royalties
  received by Paul Capital not meet minimum returns, SkyePharma may issue SkyePharma
  ordinary shares up to a value of $7.5 million. The number of ordinary shares
  to be issued is capped based upon a minimum price of 55 pence per share. Also
  under the terms of these agreements, Paul Capital has been issued warrants carrying
  rights to subscribe for 5 million SkyePharma Ordinary Shares at an exercise
  price of 73.75 pence, representing a 25% premium to the average trading price
  for the five trading days immediately prior to the closing date.

On
  May 14, 2002 SkyePharma announced its intention to enter a wide ranging strategic
  collaboration with Kowa Company Ltd., a leading Japanese company with substantial
  pharmaceutical interests, which proposes, under a Subscription Agreement signed
  on May 13, 2002, to make a strategic investment in SkyePharma. Kowa and SkyePharma
  have signed a separate non-binding Letter of Intent to evaluate Kowas
  acquisition of a 50% interest in SkyePharmas manufacturing facility in
  Lyon.

Kowa
  and SkyePharma have an active relationship involving the formulation and scaled-up
  manufacture for a new lipid-lowering agent NK-104 to support late-stage clinical
  development of the drug. The two parties now intend to strengthen their commercial
  relationship through NK-104 manufacturing.

Following
  shareholder approval at an Extraordinary General Meeting held on June 7, 2002,
  Kowa will acquire 30 million ordinary shares of 10p each in SkyePharma for a
  total consideration of approximately £25.3 million. This represents a
  holding of around 5% after the investment. As part of its investment, Kowa will
  have the right to appoint a non-executive director to the board of SkyePharma.

Kowa
  and SkyePharma have also identified areas of synergy to exploit further their
  respective product and development pipelines. Kowas sales and marketing
  experience should create opportunities to expand the market for SkyePharmas
  products into both Europe and Japan. In addition, SkyePharmas broad portfolio
  of drug delivery technology has the potential to create improved drugs from
  Kowas marketed products and development pipeline. SkyePharma and Kowa
  are already cooperating on an undisclosed project using SkyePharmas enhanced
  solubilization technology.

Research and Development

The
  Companys research and development activities are conducted primarily at
  SkyePharma AG in Muttenz, Switzerland and at SkyePharma Inc. in San Diego, California,
  U.S. The Company has 263 employees at these two facilities, the majority of
  whom were engaged in research and development, including 170 scientists, 52
  of whom hold Ph.D.s, masters or medical degrees.

In
  all periods the amounts reimbursed by collaborative partners, including milestone
  payments, were greater than the direct costs incurred in the provision of such
  services, representing the contribution to general and administrative costs.
  The Company generally attempts to break even on its development work for third
  party customers, and, therefore, product development activities do not contribute
  significantly to current operating profit and loss. The Companys research
  and

51

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development
  costs reimbursed by collaborative partners are characterized as cost of sales
  in the financial statements of the Company and the Companys own research
  and development is separately characterized as research and development. The
  aggregate amount that the Company spent on research and development and the
  aggregate amount that was reimbursed by collaborative partners is shown in the
  table below.

|                                                   | Consolidated
Year ended December 31, | 
|-------------------------------------------------- | ------------------------------------ | 
|                                                   | 1999                                 | 
|                                                   |                                      | 
|                                                   | (in
      thousands)                 | 
|Research
      and Development                     |                                      | 
|Client
      sponsored product development         | £5,780                               | 
|Internal
      sponsored product development       | 6,728                                | 
|                                                   |                                      | 
|                                                   | 12,508                               | 
|                                                   |                                      | 
|Contract
      Development Income                  |                                      | 
|Client
      sponsored developments reimbursed by: |                                      | 
|Research
      and Development costs recharged     | 6,078                                | 
|Milestone
      payments                           | 2,967                                | 
|                                                   |                                      | 
|                                                   | £9,045                               | 
|                                                   |                                      | 
|Other
      Operating Income                       |                                     | 
|                                                   |                                      | 
|                                                   |                                      | 

Contract
  development income represents amounts invoiced to customers for services rendered
  under development contracts or for milestone payments in accordance with the
  contract terms. Such amounts are only treated as revenue when the services have
  been rendered or the specified milestone has been met. Certain refundable income
  is treated as deferred income until the Company has no further obligations to
  make refunds. The Companys self-sponsored research and development costs
  are expensed as incurred.

Under
  the agreement announced in January 2001 with Paul Capital, Paul Capital are
  to provide $30 million between 2000 and 2002, to fund the clinical development
  and regulatory submission of DepoMorphine by the Company. These funds are recorded
  as Other Operating Income.

Development Process
  for Brand-Name Pharmaceuticals

The
  development of improved outcome or new pharmaceuticals using one of the Companys
  drug delivery technologies takes place in several steps. The first step, called
  the preliminary assessment, is to assess the suitability of the
  drug candidate for a particular drug delivery system through various techniques
  including the use of sophisticated computer modeling. During the preliminary
  assessment, the Company will analyze product specifications provided by the
  client. If the preliminary assessment indicates that the drug candidate is suitable
  for formulation with the drug delivery technology, the project will proceed
  to development as follows:

|Feasibility | At this stage, the Company
      conducts an in vitro (laboratory) feasibility study to determine
      whether, under laboratory conditions, the formulation of the product candidate
      can be achieved. The Company may develop up to 20 prototype formulations
      for in vitro feasibility studies and selects the most promising two
      or three for further study and analysis.
|------------ | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Pilot
Trials | Once a successful feasibility
study has been conducted, small batches of the selected prototypes are manufactured
by the Company or its collaborative partners for in vivo (human) testing
in pilot trials. Pilot trials involve approximately 12 patients. The purpose is
to determine whether
|------------- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

52

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the in
  vitro results can be replicated in humans. Pilot trials are generally managed
  by the company and conducted by a clinical research organization (CRO). If the
  pilot trials demonstrate sub-optimal results, the product candidate may be reformulated
  and new pilot trials conducted.

|Scale-up/Bio-Batch | After a successful pilot
      trial, the Company or its collaborative partners will manufacture a commercial
      scale batch or a bio-batch (at least one-tenth of the projected
      commercial batch size). The purpose of this stage is to develop and validate
      the process by which the product will be manufactured. If formulation changes
      are made during scale-up/bio-batch, additional in vivo testing may
      be performed in pre-pivotal trials involving a small patient population.
|------------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The pre-clinical
      phase of development referred to in parts of this document means additional
      testing following initial feasibility studies and other studies, including
      additional animal studies, necessary to prepare and file an Investigational
      New Drug (IND) application. For a more comprehensive description
      of the requirements of an IND, see  Government Regulation 
      United States  NDA Process.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Phase
I Trials | The first stage in the
      clinical development plan is to conduct Phase I clinical trials. These studies
      are usually performed to generate preliminary information on the chemical
      action of the compound, the activity or fate of the product in the human
      body over a period of time including adsorption, distribution, metabolism
      and elimination, and safety of the drug using normal healthy volunteers
      and patients. Phase I trials involve approximately 10-30 patients. These
      trials are generally managed by the Company and conducted by a clinical
      research organisation (CRO) that has a Phase I clinical study
      unit.
|--------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Phase
II Trials | The second stage in the
      clinical development plan is to conduct Phase II clinical trials. These
      trials are generally carried out on patients with the disease or condition
      of interest. The main purpose is to provide preliminary information on:
      the positive effects of the treatment and whether the effects are correlated
      with the administered doses in one or more demographic groups, assess various
      measures of patient benefit as potential candidates for use in Phase III
      trials, and to supplement safety information obtained from Phase I trials.
      The Company, in collaboration with its partner, or the partner, manages
      the trial activities (from protocol development through to the writing of
      the study final reports). The Company may use a CRO to complete the trials.
      Phase II studies may not be required for improved outcome formulations of
      an existing drug if the improved formulation is targeted at the same indication
      as the existing drug.
|---------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Pivotal
      (Phase III) 
         Trials | The last step of the development
      process is a pivotal (Phase III) trial of the product formulation in an
      expanded patient population to support the approval of marketing applications.
      Typically, the studies will be performed in the U.S., Canada and Europe
      to facilitate a multi-national product registration process. The Company,
      in collaboration with its partner, or the partner manages the trial activities
      (from protocol development until the writing of the final study reports).
      The Company may use a CRO to complete the studies on schedule.
|------------------------------------------- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Regulatory
Filing | The Company, in collaboration
      with its partner, or the partner manages all regulatory activities during
      the product development phases until product
|------------------ | ----------------------------------------------------------------------------------------------------------------------------------------------------------------

53

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| | approval. These activities
      included submissions, communication and meetings with health authorities
      and preparation of marketing approval applications.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------

The
  Companys research and development efforts in respect of its drug delivery
  technologies are by their nature subject to risks and uncertainties. There can
  be no assurance the products under development can be successfully formulated
  using the drug delivery technologies. In addition, even if such products can
  be successfully formulated, there can be no assurance that they will secure
  regulatory approval for the appropriate indication or that approved compounds
  would be capable of being produced in commercial quantities at reasonable costs
  and successfully marketed.

Generic Drug Development
  Process

In
  developing generic pharmaceuticals, it must be proven that the generic product
  candidate will exhibit in vivo release characteristics equivalent to
  those of the brand-name pharmaceutical. The generic drug development process
  is similar to the development process for brand-name pharmaceuticals except
  that a series of smaller bio-equivalence studies are performed in lieu of more
  extensive Phase I, Phase II and Phase III studies. The process by which generic
  controlled-release products are developed for manufacture and sale in the U.S.
  may be categorized into four basic stages:

|Formulation | During formulation, the
      Company attempts to develop its own version of the brand-name drug. Once
      a suitable generic version has been formulated, it is then evaluated in
      in vitro dissolution studies to determine whether in vivo bio-equivalence
      studies should be conducted.
|------------ | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Pilot
Studies | Once a suitable formulation
      has been developed and tested in in vitro studies, in vivo bio-equivalence
      studies are conducted which compare the generic formulation to the brand-name
      drug. Because bio-equivalence studies can be relatively expensive to perform,
      the Company may conduct a preliminary bio-equivalence study (pilot study)
      in which a small batch of the product is manufactured for testing in a limited
      number of humans.
|-------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Bio-equivalence
      
          Studies | If the formulation yields
      a blood level profile comparable to the brand-name drug, full-scale bio-equivalence
      studies may be performed, which require the manufacture of at least 100,000
      dosage units and usually involve 24 or more human subjects. These studies
      are conducted to determine the plasma concentrations of the drug in human
      subjects under fasted and fed conditions as well as under multiple dose
      administration. If successful, the studies will demonstrate that the rate
      and extent of absorption of the generic version is equivalent to that of
      the brand-name drug. If the studies demonstrate that the blood level profiles
      of the generic product are not comparable to the brand-name drug, the formulation
      will either be modified or the drug delivery technology, if there is one,
      will be altered. In some cases, the project may be abandoned.
|----------------------------------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|ANDA
Filing | After a generic formulation
      has been shown to be bio-equivalent to the brand-name drug, an ANDA is prepared
      for submission to the FDA. This ANDA includes the results of the bio-equivalence
      studies and other data such as in vitro specifications for the generic formulation,
      stability data, analytical data, methods validation and manufacturing procedures
      and controls. See  Government Regulation  United States
       ANDA Process.
|------------ | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

54

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Patents and Proprietary
  Rights

The
  Company believes that patent and other intellectual property protection of its
  drug delivery and formulation technologies is important to its business and
  that its future will depend in part on its ability to obtain patents, maintain
  confidential and trade secret information and to operate without infringing
  the intellectual property rights of others.

Geomatrix Technology

The
  company has two granted patents in respect of its core Geomatrix technologies.
  The first patent issued in Australia, New Zealand, Italy, Europe, Japan, the
  U.S. and Canada will expire in 2002 in Australia and New Zealand, 2005 in Italy,
  2006 in the rest of Europe, Japan and the U.S., and 2009 in Canada. The Company
  has no products utilizing this patent which has been overtaken by technological
  advances. A second patent relating also to controlled rate release has been
  granted in Italy, the U.S. and Europe, Canada and Japan. These patents expire
  between 2009 and 2012.

In
  addition, the Company has several other granted patents, as well as applications
  filed in the major markets (Europe, the U.S., Japan, Canada, Australia and New
  Zealand), which continue to protect the technology to 2015. Further applications
  have been filed as recently as summer 1999.

The
  patents and applications represent the variety of different swellable and gellable
  polymers for the core of a tablet containing an active drug and various surfaces
  covering the core. Later applications cover recent innovations and/or improvements
  to the original inventions.

In
  2001 the Company defended a European opposition relating to one of its Geomatrix
  patents, which was upheld by the European Patent Office (EPO). The
  Company has appealed this decision; that appeal is still pending.

During
  2001 the Company obtained three new U.S. patents and five patents in other countries.
  The U.S. patents are related to controlled release pharmaceutical tablets that
  contain an active principle of low water solubility, pharmaceutical tablets
  capable of liberating one or more drugs at different release rates and pharmaceutical
  tablets suitable for delivering an active substance in subsequent and predeterminable
  times. In all the Company has 122 patents protecting the Geomatrix technology,
  which represents the 19 patent families.

DepoFoam Technology

Through
  its acquisition of SkyePharma Inc. in 1999, the Company acquired a large portfolio
  of patents relating to the DepoFoam technology. There are in excess of 20 patent
  families relating to this technology, with patents granted in respect of these
  various families in the U.S., Japan, Australia, New Zealand, Europe, Canada
  and many other countries. The majority of these patents will continue in force
  until 2014. Additional filings of patent applications have been made for improvements
  of the initial technology and for innovative technology relating to this subject
  matter. These applications have been filed in the U.S., Australia, New Zealand,
  Canada, Japan and Europe and in many other countries throughout the world, and
  during the last twelve months, nine patents have been issued (one in Europe,
  three in New Zealand and five in the U.S.).

In
  addition, through a prior agreement entered into by SkyePharma Inc. with the
  Research Development Foundation (RDF), RDF granted certain rights,
  on an exclusive basis, relating to the DepoFoam technology to SkyePharma Inc.
  Under the agreement SkyePharma Inc. is obligated to prosecute certain patent
  applications and maintain issued patents relating to the licensed intellectual
  property. RDF retains the right to terminate the agreement or to convert the
  exclusive nature of the rights granted under the agreement, into a non-exclusive
  license in the event that SkyePharma Inc. does not satisfy its contractual obligations
  including making certain minimum annual payments. Additional termination events
  include bankruptcy and a material breach of the agreement which is not remedied
  within a specified period. The termination of this agreement or the conversion
  to a non-exclusive agreement would have a material adverse effect on the Company.

55

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Inhalation Technology

The
  Company has three patent families in respect of this technology. The granted
  patent covers the device itself as well as several of the structural elements
  and features incorporated therein, and has been granted in Switzerland, Europe,
  the U.S., Australia, Canada, Japan and New Zealand and the first to expire of
  these patents, expires in 2015. The two other patent families relate to the
  dry powder, for use with the Dry Powder Inhaler. Applications for these two
  patents were filed in Switzerland and it is expected that further country filings
  will be made in due course.

The
  Company has, together with other companies working in the same area, been involved
  in several European patent oppositions related to the use of environmentally
  friendly hydrofluoroalkanes (HFA) as propellants. Of these oppositions three
  have been settled and the remaining five are in various stages within the European
  Patent Office. There is also a further opposition relating to the use of micronized
  powder for inhalation. In all oppositions SkyePharma has had to defend its rights
  together with several other major inhalation companies, in Europe. There are
  currently six oppositions in which SkyePharma is participating in relation to
  various aspects of inhalation technologies.

Topical Technology

The
  portfolio of intellectual property rights acquired from Cade Struktur is large
  and wide-ranging. Patents and applications covering many and varied uses of
  hyaluronic acid have been filed throughout the world. Following these filings,
  patents have been granted in, amongst others the U.S., Europe, Australia, New
  Zealand and South Africa, expiring between 2010 and 2013. While the Company
  recognises the benefit of many of these patents and the corresponding applications,
  it will refocus the portfolio by the abandonment of various patents and/or applications
  in non-key markets (e.g. Estonia, Liechtenstein, Monrovia). During the last
  twelve months the Company obtained two new U.S. patents regarding formulations
  containing hyaluronic acid. A further 18 patents were granted in non-U.S. territories.
  Following the acquisition of the Cade Struktur portfolio in 1999, the Company
  is continuing to pursue 81 pending patent applications. In order to rationalize
  the portfolio, the Company has assigned 4 patent families to Meditech, in
  return for a lump sum payment as well as royalties deferred from products sold
  which incorporate such assigned rights.

The
  Company obtained the licences required to enable it to develop and fully exploit
  this technology.

Solubilization

The
  Company previously acquired two patent families; these related to solid lipid
  nano-particles and to nano-suspensions which are useful for drug delivery. The
  granted patents for this technology are in Australia, Canada, Japan and Europe
  and will expire in 2012. There are also applications pending for this technology
  in the U.S. In respect of the nano-suspension technology, there is a granted
  patent in the U.S. expiring in 2015 and corresponding applications filed in
  Europe, Australia, Canada and Japan as well as other countries. The Company
  also has an exclusive license under two further patent families: one relating
  to solid polymer nano-particulate technology and the other to further developments
  in the areas of solid lipid nano-particles and nano-suspensions.

As
  part of its recent acquisition of SkyePharma Canada, the Company acquired a
  large portfolio of patents and patent applications. The portfolio consists of
  three broad patent families relating to:

| | i) | lipid stabilized microparticle
technology (where the drug is a solid particle);
| | -- | -------------------------------------------------------------------------------

| | ii) | lipid stabilized microdroplet
technology (where the drug is a liquid); and
| | --- | --------------------------------------------------------------------------

| | iii) | omega-3 oil stabilized
drug technology, which is useful for drug delivery.
| | ---- | --------------------------------------------------------------------------

56

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The
  technology is protected by 15 U.S. patents and by 70 in countries outside of
  the U.S. In addition, the portfolio contains many pending applications, including
  23 U.S., 35 outside U.S. and 23 regional (European and PCT) patent applications.

The
  granted patents will expire at various times. Those relating to U.S rights for
  microparticle technology will expire in April 2010, and related non-U.S. patents 
  will expire in April 2011. U.S. Patents related to microdroplet technology will
  expire in November 2003 and February 2005 respectively, related patents in Canada
  and Japan will expire in June 2004.

Patent Protection

There
  can be no assurance that the Company will be issued with any additional patents
  or that if any patents are issued, they will provide the Company with significant
  protection or will not be challenged by third parties asserting claims against
  the Company concerning its existing products or with respect to future products
  under development by the Company. The Company, from time to time, may receive
  notification of alleged infringements. The Company may not, in all cases, be
  able to resolve any such allegations through licensing arrangements, settlement
  or otherwise. Furthermore, the Company anticipates that any attempt to enforce
  its patents would be time consuming and costly. Moreover, the law of some foreign
  countries does not protect the Companys proprietary rights in the products
  to the same extent, as does the U.S. The U.S. patent and trademark Office has
  instituted changes to the U.S. patent law including changing the term to 20
  years from the date of filing for applications filed after June 8, 1995. The
  Company cannot predict the effect that such changes on the patent laws may have
  on its business or on the Companys ability to protect its proprietary
  information and sustain the commercial viability of its products.

There
  can be no assurance that the Companys patents or any future patents will
  prevent other companies from developing similar or functionally equivalent products.
  Furthermore, there can be no assurance that (1) any of the Companys future
  processes or products will be patentable, (2) any pending or additional patents
  will be issued in any or all appropriate jurisdictions, (3) the Companys
  processes or products will not infringe upon the proprietary rights of third
  parties, or (4) the Company will have the resources necessary to protect its
  patent rights against third parties. The inability of the Company to protect
  its patent and proprietary rights or the infringement by the Company of the
  patent or proprietary rights of others could have a material adverse effect
  on the Companys business, financial condition or results of operations.

The
  Company also relies on trade secrets and proprietary know-how which it seeks
  to protect, in some cases through confidentiality clauses in agreements with
  its employees and consultants. There can be no assurance that these agreements
  will not be breached, that the Company would have adequate remedies from any
  breach or that the Companys trade secrets will not otherwise become known
  or be independently developed by competitors.

There
  has been substantial litigation in the pharmaceutical, biomedical and biotechnology
  industries with respect to the manufacture, use and sale of new products that
  are the subject of conflicting patent rights. Most of the brand name controlled-release
  products of which the Company is developing generic versions are covered by
  one or more patents. Under the Hatch-Waxman amendments, when a drug developer
  files an ANDA for a generic drug, and the developer believes that an unexpired
  patent, which has been listed with the FDA as covering that brand name product,
  will not be infringed by the developers product or is invalid or unenforceable,
  the developer must so certify to the FDA. That certification must also be provided
  to the patent holder, who may challenge the developers certification of
  non-infringement, invalidity or unenforceability by filing a suit for patent
  infringement. If a suit is filed within 45 days of the patent holders
  receipt of such certification, the FDA can review and approve the ANDA, but
  is precluded from granting final marketing approval of the product until a final
  judgment in the action has been rendered or 30 months from the date the certification
  was received, whichever is sooner. Should a patent holder commence a lawsuit
  with respect to alleged patent infringement by the Company, the uncertainties

57

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inherent in
  patent litigation make the outcome of such litigation difficult to predict.
  The Company evaluates the probability of patent infringement litigation with
  respect to its ANDA submissions on a case by case basis. The delay in obtaining
  FDA approval to market the Companys product candidates as a result of
  litigation, as well as the expense of such litigation, whether or not the Company
  is successful, could have a material adverse effect on the Companys business,
  financial condition or results of operations.

Manufacturing

Geomatrix
  and Inhalation Manufacturing

The
  Company presently manufactures three Geomatrix products, Cordicant-Uno, Madopar
  DR and Diclofenac-ratiopharm-uno, and produces bio-batches for its collaborative
  partners.

Manufacturing
  operations take place at the Companys Lyon facility in France and Muttenz
  facility in Switzerland. In Muttenz the Company has a 9,647 square meter (103,826
  square feet) facility. In Lyon the Company has an approximately 17,000 square
  meter (183,000 square feet) pharmaceutical manufacturing and production facility
  and an approximately 2,400 square meter (25,850 square feet) adjoining office
  complex. The Company acquired the Lyon facility in 1997 by acquiring 100% of
  the issued and outstanding share capital of Laboratories Novalis Production
  SAS (Novalis), a French company, from Wyeth-Lederlé, a wholly-owned
  subsidiary of American Home Products Inc. (AHP), for a total consideration,
  excluding acquisition expenses, of two French francs and the assumption of liabilities
  in the amount of £891,000 arising out of a loan from Wyeth-Ayerst International,
  which is also a wholly-owned subsidiary of AHP. After the acquisition, Novalis
  changed its name to Jago Production SAS.

The
  terms of the acquisition allowed the Company to transfer its manufacturing activities
  gradually into the new facility over a three-year period from 1997 to 1999 without
  assuming all of the operating costs of the facility up front. The Company packaged
  certain pharmaceutical products and other products (Contract Products)
  on behalf of certain subsidiaries of AHP. The current manufacturing space was
  sufficient to allow the Company to continue to package the Contract Products
  on behalf of AHP and to install the Companys own manufacturing suite.
  The facility is in compliance with cGMP with respect to the packaging operations
  and it had European regulatory approval to package the Contract Products. Under
  the original contract with AHP, AHPs subsidiaries compensated the Company
  on a sliding scale of 100%, 85% and 50% during the first, second and third year
  of the agreement, respectively, for the costs of operating the Lyon facility.
  AHPs subsidiaries were responsible for the registration of the Contract
  Products with all proper health, customs and other authorities under applicable
  law, but the Company furnished assistance to AHPs subsidiaries from time
  to time in connection with their filing of documentation as is necessary for
  such registrations. In consequence of the expiration of the agreement on December
  31, 1999, the Company and AHP negotiated a new two-year agreement for the Company
  to continue to supply a number of human pharmaceuticals, over-the-counter and
  food products to AHP. Pricing for the products under the new two-year agreement
  have been negotiated for each product.

The
  Company has completed its Geomatrix manufacturing suite in the Lyon facility
  at a capital cost of approximately £7.1 million. This facility will be
  used to manufacture products for collaborative partners and for the Company.
  The facility will enable the Company to manufacture its own products in addition
  to contracting with third parties. The Muttenz facility will, however, remain
  the Companys principal research and development and laboratory facility
  for Geomatrix and inhalation products.

Currently,
  manufacturing operations for Cordicant-Uno and Madopar DR take place at the
  Companys Muttenz site. Manufacturing for Diclofenac-ratio-pharm-uno was
  transferred to the Lyon facility during 2000.

58

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The
  Company is in the process of expanding its operations at the Lyon facility to
  include production activities for dry powder inhaler products pursuant to the
  Novartis development contract, see Drug Delivery Platforms  Inhalation
   Inhalation Products in Development at a capital cost to date of
  approximately £8.1 million. Commercial production is expected to begin
  in late 2003.

The
  Lyon facility was designed and built for drug production in 1993 by American
  Cyanamid but was used instead for packaging activities. The Company believes
  that it has substantially brought the facility into compliance with cGMP and
  FDA standards at a cost of approximately £0.8 million. The FDA has inspected
  the Lyon facility in respect of three products and in July 2001 the FDA approved
  the Lyon facility for the commercial manufacturing of one of these products,
  Dilacor XR. There can be no assurance, however, that the Lyon facility will
  ultimately be found to be in compliance with cGMP or other regulatory requirements
  for the purposes for which the Company plans to use the facility. Failure to
  comply could result in significant delays in the Companys planned manufacturing
  efforts. The Company also could incur significant additional expense in bringing
  the facility into compliance with cGMP or other regulatory requirements.

The
  Company currently has only a limited number of personnel experienced in the
  commercial manufacture of pharmaceuticals. Accordingly, before the Company commences
  manufacturing its product candidates in commercial quantities, significant expenditures
  and additional personnel will be required. There can be no assurance that the
  Company will be able to establish a successful manufacturing operation.

On
  May 14, 2002 SkyePharma announced its intention to enter a wide-ranging strategic
  collaboration with Kowa Company Ltd., a leading Japanese company with substantial
  pharmaceutical interests, which proposes, under a Subscription Agreement signed
  on May 13, 2002, to make a strategic investment in SkyePharma. Kowa and SkyePharma
  have signed a separate non-binding Letter of Intent to evaluate Kowas
  acquisition of a 50% interest in SkyePharmas manufacturing facility in
  Lyon. Kowa and SkyePharma have an active relationship involving the formulation
  and scaled-up manufacture for a new lipid-lowering agent NK-104 to support late-stage
  clinical development of the drug. The two parties now intend to strengthen their
  commercial relationship through NK-104 manufacturing. For additional information,
  see Item 7: Major Shareholders and Related Party Transactions  Major
  Shareholders.

DepoFoam Manufacturing

In
  connection with its collaborative arrangements, the Company may elect to maintain
  exclusive formulation and manufacturing rights to any DepoFoam encapsulated
  drugs, or enter into a technology transfer agreement with corporate partners,
  which would allow the corporate partner to manufacture a DepoFoam formulation
  of the partners drug under license from SkyePharma. Under these arrangements,
  the Company would receive compensation based on the manufacturing costs of the
  product or royalties, or both. The Company commenced manufacturing DepoCyt for
  commercial distribution and sale following approval of this drug in April 1999.
  Manufacturing is in an approximately 2,020 square meter (21,746 square feet)
  facility built for this purpose. This facility complies with cGMP regulations
  and has been approved for the manufacture of DepoCyt by the FDA and EMEA and
  licensed for drug manufacturing by the State of California. Clinical trial materials
  are also manufactured in this facility. The Company must undergo and pass a
  pre-approval inspection for many countries outside the U.S. in which applications
  to obtain marketing approval may be filed. Prior to marketing DepoCyt (and any
  other drugs) outside the U.S., Canada and Europe, the Company will need to meet
  applicable regulatory standards, achieve prescribed product quality and reach
  necessary levels of production of such products and obtain marketing approvals.

In
  October 1999, SkyePharma Inc. discovered that two lots of DepoCyt did not meet
  specifications and recalled these lots. Investigations identified that changes
  in a suppliers manufacturing process for raw material resulted in product
  that did not meet all specifications throughout the shelf-life. SkyePharma Inc.
  and Chiron Corporation voluntarily withdrew DepoCyt

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from the market.
  There were no adverse events attributed to the recalled batches and the product
  was made available to patients on a compassionate basis. In March 2001, the
  FDA gave clearance to return DepoCyt to the market.

In
  addition, SkyePharma Inc. leases an approximately 7,600 square meter (82,000
  square feet) facility housing its administrative, research and development and
  future manufacturing activities. Effective June 2000, the Company subleased
  to a third party approximately 15,600 square feet of this facility. This lease
  expires on July 31, 2002. Prior to commencing commercial manufacturing operations
  from this facility, the Company will need to comply with additional and necessary
  validation, regulatory and inspection requirements.

To
  date, SkyePharma Inc. has relied on a particular method of manufacture for products
  based on its DepoFoam technology which involves processes known only to SkyePharma
  Inc. There can be no assurance that this method will be applicable to all pharmaceuticals
  the Company desires to commercialize. Further, the yield of DepoFoam product
  may be highly variable for different drugs. Finally, the Company will need to
  successfully meet any manufacturing challenges associated with the characteristics
  of the drug to be encapsulated. The physical and chemical stability of the DepoFoam
  formulation may vary with each drug over time and under various storage conditions.
  There can be no assurance that the manufacturing process will result in economically
  viable yields of product or that it will produce formulations of therapeutic
  products sufficiently stable under suitable storage conditions to be commercially
  useful.

In
  the event that the Company decides to pursue alternative manufacturing methods
  for some or all of its injectable drugs utilizing DepoFoam, there can be no
  assurance that these methods will prove to be commercially practical or that
  the Company will have or be able to acquire rights to use such alternative methods.

Product and Raw Material
  Supply

The
  Companys collaborative pharmaceutical company partners rely on certain
  suppliers of key raw materials. Certain of those materials are purchased from
  single sources and others may be purchased from single sources in the future.
  Although the Company has no reason to believe that its collaborative pharmaceutical
  company partners will be unable to procure adequate supplies of such raw materials
  on a timely basis, disruptions in supplies, including delays due to the inability
  of the Companys pharmaceutical company partners, the Company or its manufacturers
  to procure raw materials, would have a material adverse effect on the Companys
  business.

The
  Company currently relies on a limited number of suppliers to provide the materials
  used to manufacture its DepoFoam products. Some of these materials are purchased
  only from one supplier. In the event the Company could not obtain adequate quantities
  of necessary materials from its existing suppliers, the Company might not be
  able to access alternative sources of supply within a reasonable period of time
  or at commercially reasonable rates. Regulatory requirements for pharmaceutical
  products tend to make the substitution of suppliers costly and time-consuming.
  The unavailability of adequate commercial quantities, the inability to develop
  alternative sources, a reduction or interruption in supply or a significant
  increase in the price of materials could have a material adverse effect on the
  Companys ability to manufacture and market its products.

One
  of the DepoFoam Injectable products in development, DepoMorphine, has morphine
  sulphate as its active ingredient. Morphine sulphate is classified as a Scheduled
  Drug by the DEA. The DEA has determined that these drugs have a high potential
  for abuse and could lead to severe psychological or physical dependence. The
  DEA controls the national production and distribution of certain Scheduled Drugs
  in the U.S. by allocating production quotas based, in part, upon the DEAs
  view of national demand. While SkyePharma Inc. has a DEA license to use morphine
  sulphate in its research and manufacturing of DepoMorphine for clinical studies,
  SkyePharma Inc. might not be able to obtain the required DEA licenses to manufacture
  commercial quantities of DepoMorphine.

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The
  principal components used in the Companys generic product candidates are
  active and inactive pharmaceutical ingredients and certain packaging materials.
  Source suppliers of some materials for the Companys products must be approved
  by the FDA, and in some instances only one source supplier may be available
  or approved for certain materials. Development and approval of the Companys
  products are dependent upon the Companys ability to procure active and
  inactive ingredients and certain packaging materials from FDA-approved sources.
  FDA approval of a new supplier would be required if such active and inactive
  ingredients or packaging materials were no longer available from an initially
  approved supplier. The qualification of a new supplier would delay the manufacture
  of the drug involved. The Companys policy is to seek, where possible,
  a second qualifying source of raw materials for all of its product candidates.

Two
  of the Companys generic product candidates, which are in early stages
  of development, require substances which are classified as Scheduled Drugs by
  the DEA. The Companys generic product candidates, which are in early stages
  of development, may not be successfully formulated, and if successfully formulated,
  the Company might not be able to obtain commercial quantities of the raw materials
  or obtain the required licenses from the DEA to manufacture commercial quantities
  of the products.

Joint Venture with
  Genta

The
  Companys joint venture is Genta-Jago Technologies B.V. (Joint Venture),
  a Netherlands Corporation in which the Company is a 50/50 partner with Genta
  Incorporated, a Delaware Corporation (Genta). The Company set up
  the Joint Venture to develop Geomatrix controlled-release formulations of a
  range of drugs that have lost, or are about to lose, marketing exclusivity or
  patent protection.

The
  Joint Venture, established in 1992, gained rights from the Company to develop,
  commercialize and manufacture Geomatrix versions of approximately 50 additional
  products. In October 1996, as a result of the then financial difficulties being
  experienced by Genta, the Company acquired from the Joint Venture the licenses
  to the Geomatrix technologies in respect of what it considered to be the six
  most commercially viable compounds in the product portfolio referred to. The
  products include AB-rated diclofenac (Voltaren-XR), AB-rated naproxen (Naprelan)
  and AB-rated verapamil HCI (Covera HS). The Company paid $1 million to the Joint
  Venture in consideration of this and agreed to make additional payments if specified
  development milestones are achieved on a product by product basis. In addition,
  the Company agreed to assume the research and development costs of formulating
  the new products.

On
  March 4, 1999, an agreement was signed between the Company and Genta concerning
  the future operation of the Joint Venture. Under the terms of this agreement
  existing balances between the Joint Venture company and the parent companies
  were waived. These are principally unpaid development cost invoices due to the
  Company and the loan notes due to Genta. In addition, Genta is released from
  future funding obligations. The Company also became responsible for all obligations
  under existing development and license agreements between the Joint Venture
  and third parties and the Company is solely responsible for the future development,
  marketing, distribution, manufacturing and funding of future Joint Venture products.

The
  Company is no longer developing products associated with the Joint Venture as
  the Company believes that these products do not have commercial value. However,
  should a product be developed, the Joint Ventures share of any future
  revenues will be shared between the parent companies according to agreed formulae
  and a distribution schedule which allows for payment of sums which give recognition
  to the working capital advances made by Genta before reverting to a 50/50 share.
  The intent is to ensure that the rights of the parties, pre-existing the agreement,
  are fully compensated.

The
  Company is currently investigating the possibility of winding-up the joint venture
  as it is no longer required.

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Competition

The
  pharmaceutical industry is highly competitive and is affected by new technologies,
  governmental regulations, health care legislation, availability of financing
  and other factors. Many of the Companys competitors have longer operating
  histories and greater financial, marketing and other resources than the Company.

The
  Company expects that it will be subject to competition from numerous other entities
  that currently operate, or intend to operate, in the pharmaceutical industry.
  These include companies that are engaged in the development of controlled-release
  technologies and products, as well as other pharmaceutical manufacturers that
  may decide to undertake in-house development of these products.

As
  the pharmaceutical industry continues to consolidate and as pressures increase
  for cost-effective research and development, some pharmaceutical companies have
  reduced and may continue to reduce their funding of research and development.
  Competition for limited client financing may therefore increase, and this competition
  could include the clients internal research and development programs,
  other drug delivery programs and other technologies and products of third parties.

Government Regulation

All
  drugs and medical devices, including the Companys products under development,
  are subject to extensive regulation in the U.S. and Europe, the Companys
  two principal markets. In the U.S., the primary regulatory body is the FDA,
  although to a lesser extent state and local authorities are also involved in
  the regulatory process. In Europe, there are two regulatory systems. There is
  a European Union system that is the responsibility of the European Medicines
  Evaluation Agent (EMEA). In addition, each country has its own regulatory
  agency. In both the U.S. and Europe, the applicable regulations govern or influence
  the development, testing, manufacture, safety, labeling, storage, record keeping,
  approval, advertising, promotion, sale and distribution of prescription pharmaceutical
  products. Pharmaceutical manufacturers are also subject to certain record keeping
  and reporting requirements, establishment registration and product listing and
  agency inspections.

United States

The
  federal Food, Drug and Cosmetics Act (FDCA), the Public Health Services
  Act, the Controlled Substances Act and other federal statutes and regulations
  govern or influence all aspects of the Companys business. Noncompliance
  with applicable requirements can result in fines and other judicially imposed
  sanctions, including product seizures, injunctive actions and criminal prosecutions.
  In addition, administrative or judicial actions can result in the recall of
  products, and the total or partial suspension of the manufacturing of products,
  as well as the refusal of the government to approve pending applications or
  supplements to approved applications. The FDA also has the authority to withdraw
  approvals of drugs in accordance with statutory due process procedures.

FDA
  approval is required before any dosage form of any new unapproved drug, including
  a generic equivalent of a previously approved drug, can be marketed. All applications
  for FDA approval must contain information relating to evidence of safety and
  efficacy or bio-equivalence to a listed reference drug, product formulation,
  stability, manufacturing processes, packaging, labeling and quality control.
  In addition, acts of foreign governments may affect the price or availability
  of raw materials needed for the development or manufacture of generic drugs.

ANDA Process

The
  Drug Price Competition and Patent Restoration Act of 1984, known as the Hatch-Waxman
  Act, established abbreviated application procedures for obtaining FDA approval
  for those drugs which are off-patent and whose non-patent exclusivity under
  the Hatch-Waxman Act has expired and which are shown to be bioequivalent to
  brand-name drugs. Approval to manufacture these

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drugs is obtained
  by filing an ANDA. An ANDA is a comprehensive submission which generally must
  contain data and information pertaining to the bioequivalence of the drug covered
  by the ANDA to a referenced listed drug, formulation specifications, stability
  data, analytical data, methods and manufacturing validation data and quality
  control procedures. As a substitute for clinical studies, the FDA requires data
  indicating that the ANDA drug formulation is bioequivalent to a previously approved
  NDA drug. In order to obtain an ANDA approval of a strength or dosage form which
  differs from the referenced brand-name drug, an applicant must file and have
  granted an ANDA Suitability Petition. A product is not eligible for ANDA approval
  if it is not bioequivalent to the referenced brand-drug or if it is intended
  for a different use. However, such a product might be approved under a Section
  505(b)(1) or (b)(2) NDA with supportive data from clinical trials.

The
  advantage of the ANDA approval process is that an ANDA applicant generally can
  rely upon bioequivalent data in lieu of conducting pre-clinical testing and
  clinical trials to demonstrate that a product is safe and effective for its
  intended use(s). While the FDCA provides for a 180-day review period, the Company
  believes the average length of time between initial submission of an ANDA and
  receiving FDA approval is at least two years.

While
  the Hatch-Waxman Act established the ANDA, it has also fostered pharmaceutical
  innovation through such incentives as market exclusivity and patent restoration.
  The Hatch-Waxman Act provides two distinct market exclusivity provisions which
  either preclude the submission or delay the approval of a competitive drug application.
  A five-year marketing exclusivity period is provided for new chemical compounds
  and a three-year marketing exclusivity period is provided for applications containing
  new clinical investigations essential to the approval of the application. The
  non-patent marketing exclusivity provisions apply equally to patented and non-patented
  drug products. Any entitlement to patent marketing exclusivity under the Hatch-Waxman
  Act is based upon the term of the original patent plus any patent extension
  granted under the Hatch-Waxman Act as compensation for reduction of the effective
  life of a patent as a result of time spent by the FDA in reviewing the innovators
  NDA. The patent and non-patent marketing exclusivity provisions do not prevent
  the filing or the approval of a full Section 505(b)(1) NDA. Additionally, the
  Hatch-Waxman Act provides 180-day marketing exclusivity against effective approval
  of another ANDA for the first ANDA applicant who submits a certification challenging
  a listed patent as being invalid or not infringed and successfully defends in
  court any patent infringement action based on such certification.

NDA Process

An
  NDA is a filing submitted to the FDA to obtain approval of a new drug or a new
  formulation of an existing drug and must contain complete pre-clinical and clinical
  safety and efficacy data or a right of reference to such data. Before dosing
  a new drug in healthy human subjects or patients may begin, stringent government
  requirements for pre-clinical data must be satisfied. The pre-clinical data,
  typically obtained from studies in animal species, as well as from laboratory
  studies, are submitted in an Investigational New Drug application, or its equivalent
  in countries outside the U.S., where clinical trials are to be conducted. The
  pre-clinical data must provide an adequate basis for evaluating both the safety
  and the scientific rationale for the initiation of clinical trials.

Clinical
  trials are typically conducted in three sequential phases, Phase I, II and III,
  although the phases may overlap. A description of each of these phases of development
  is included in Research and Development -Development Process for Brand-Name
  Pharmaceuticals. Data from pre-clinical testing and clinical trials are
  submitted to the FDA as an NDA for marketing approval. The process of completing
  clinical trials for a new drug is likely to take several years and require the
  expenditure of substantial resources. Preparing an NDA or marketing authorization
  application involves considerable data collection, verification, analysis and
  expense, and there can be no assurance that approval from the FDA will be granted
  on a timely basis, if at all. The approval process is affected by a number of
  factors, primarily the risks and benefits demonstrated in clinical trials as
  well as the severity of the disease and the availability of alternative treatments.
  The FDA

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may deny an
  NDA or marketing authorization application if the regulatory criteria are not
  satisfied, or such authorities may require additional testing or information.

Even
  after initial FDA approval has been obtained, further studies, including Phase
  IV post-marketing studies, may be required to provide additional data on safety
  and will be required to provide approval for the use of a product as a treatment
  for clinical indications other than those for which the product was initially
  tested. Also, the FDA or other regulatory authorities require post-marketing
  reporting to monitor the adverse effects of the drug. Results of post-marketing
  programs may limit or expand the further marketing of the products. Further,
  if there are any modifications to the drug, including changes in indication,
  manufacturing process or labeling or a change in manufacturing facility, an
  application seeking approval of such changes must be submitted to the FDA or
  other regulatory authority. Additionally, the FDA regulates post-approval promotional
  labeling and advertising activities to assure that such activities are being
  conducted in conformity with statutory and regulatory requirements. Failure
  to adhere to such requirements can result in regulatory actions which could
  have a material adverse effect on the Companys business, results of operations
  and financial condition.

The
  FDCA provides for NDA submissions that may rely in whole or in part on publicly
  available clinical data on safety and efficacy under section 505(b)(2) of the
  FDCA. The Company and its collaborative partners may be able to rely on existing
  publicly available safety and efficacy data in filing NDAs for extended-release
  products when such data exist for an approved immediate-release version of the
  same chemical entity. However, there is no guarantee that the FDA will accept
  such applications under section 505(b)(2), or that such existing data will be
  publicly available or useful. Further, utilizing the section 505(b)(2) application
  process is uncertain, because neither the Company nor the FDA have had significant
  experience with it. Additionally, under the Prescription Drug User Fee Act of
  1992 (the PDUFA), all NDAs require the payment of a substantial
  fee upon filing, and other fees must be paid annually after approval. Under
  the PDUFA, there are circumstances when waivers may be granted to the payment
  of user fees. No assurances exist that, if approval of an NDA is required, such
  approval can be obtained in a timely manner, if at all.

Other Regulation

The
  Prescription Drug Marketing Act (PDMA), which amends various sections
  of the FDCA, imposes requirements and limitations upon drug sampling and prohibits
  states from licensing wholesale distributors of prescription drugs unless the
  state licensing program meets certain federal guidelines that include, among
  other things, state licensing of wholesale distributors of prescription drugs
  under federal guidelines that include minimum standards for storage, handling
  and record keeping. In addition, the PDMA sets forth civil and criminal penalties
  for violations of these and other provisions. Various sections of the PDMA are
  still being implemented by the FDA and the states. Nevertheless, failure by
  the Companys distributors to comply with the requirements of the PDMA
  could have a material adverse effect on the Companys business, results
  of operations and financial condition.

Manufacturers
  of marketed drugs must comply with cGMP regulations and other applicable laws
  and regulations required by the FDA, the Environmental Protection Agency, the
  DEA, the HPB in Canada, the EMEA in the European Union and other regulatory
  agencies. Failure to do so could lead to sanctions, which may include an injunction
  suspending manufacturing, the seizure of drug products and the refusal to approve
  additional marketing applications. The Company seeks to ensure that any third
  party with whom it contracts for product manufacturing will comply with cGMP.
  The FDA conducts periodic inspections to ensure compliance with these rules.
  However, there can be no assurance that any such third parties will be found
  to be in compliance with cGMP standards. Any such non-compliance could result
  in a temporary or permanent interruption in the development and testing of the
  Companys planned products or in the marketing of approved products, as
  well as increased costs. Such non-compliance could have a material adverse effect
  on the Companys business, results of operations and financial condition.
  In addition, SkyePharma

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Inc.s
  manufacturing facility located in San Diego, California is regulated by the
  State of California, Department of Health Services, Food and Drug Branch, and
  the U.S. DEA.

European Union Regulation

The
  European drug registration system is based on co-operation between the European
  Medicines Evaluation Agency (EMEA), established in London, and competent national
  authorities of the member states of the European Union.

Since
  1995, two new registration procedures have been available throughout the European
  Union.

The
  first of these is a centralized procedure which is compulsory for medicinal
  products derived from biotechnology, and available at the request of companies
  for other innovative new products. Applications are submitted directly to the
  EMEA in London. At the conclusion of the EMEAs internal scientific evaluation,
  the opinion of the EMEAs scientific committee is transmitted to the European
  Commission, the approval of which will form the basis of a single market authorization
  applying to the whole European Union.

The
  second procedure is mutual recognition which is mandatory for most
  conventional medicinal products. It is based upon the principle of mutual recognition
  of national authorizations and it provides for the extension of a marketing
  authorization granted by one member state of the European Union to one or more
  other member states identified by the applicant. Should the original national
  authorization not be recognized in another member state the points in dispute
  are submitted to EMEAs scientific committee for arbitration.

In
  both cases, the final decision is adopted by the European Commission, with the
  assistance of the EMEA or, in the event of serious disagreement between the
  member states, by the European Council. In addition, certain European countries
  outside the European Union follow the decisions of the European Commission.

In
  addition to the above forms of regulation, price constraints on pharmaceutical
  products exist in most countries either through governmental regulation or pressure
  from healthcare organizations. In some countries, governments or governmental
  agencies are substantial purchasers of human healthcare products and this also
  imposes an indirect form of regulation on the industry.

Organizational Structure

SkyePharma
  PLC is an international pharmaceutical company and has a number of wholly-owned
  principal subsidiary undertakings as detailed below:

|Company                               | Country
      of incorporation |  | %
      Held | 
|------------------------------------- | ------------------------------ |  | ------------ | 
|                                      |                                |  |              | 
|SkyePharma
      Canada Holding Inc.* | Canada                         |  | 100%         | 
|SkyePharma
      Canada Inc.          | Canada                         |  | 100%         | 
|SkyePharma
      Production SAS*      | France                         |  | 100%         | 
|Krypton
      Limited                 | Gibraltar                      |  | 100%         | 
|SkyePharma
      Holding AG*          | Switzerland                    |  | 100%         | 
|Jago
      Holding AG                 | Switzerland                    |  | 100%         | 
|SkyePharma
      AG                   | Switzerland                    |  | 100%         | 
|Jago
      Research AG                | Switzerland                    |  | 100%         | 
|Jagotec
      AG                      | Switzerland                    |  | 100%         | 
|SkyePharma
      Holding Inc.*        | U.S.                           |  | 100%         | 
|SkyePharma
      US Inc.              | U.S.                           |  | 100%         | 
|SkyePharma
      Inc.                 | U.S.                           |  | 100%         | 
|SkyePharma
      AB*                  | Sweden                         |  | 100%         | 
|                                      |                                |  |              | 

|* | Directly
  held by SkyePharma PLC.
|- | ----------------------------------

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Property, Plants and
  Equipment

In
  January 1997, the Company acquired an approximately 17,000 square meter (183,000
  square feet) pharmaceutical manufacturing and production facility and an approximately
  2,400 square meter (25,850 square feet) adjoining office space near Lyon, France
  by acquiring 100% of the issued and outstanding share capital of Laboratories
  Novalis Production SAS, a French company, from Wyeth-Lederlé for a total
  consideration of two French francs and the assumption of certain liabilities.
  See Business Operations  Manufacturing  Geomatrix and Inhalation
  Manufacturing above.

In
  addition, the Company owns a 3,435 square meter (36,961 square feet) facility
  in Muttenz, Switzerland in which its principal research and development, production,
  small-scale manufacturing, laboratory and workshop operations are housed. In
  February 1999, the Company purchased a warehousing and administration facility
  in Muttenz, Switzerland, of approximately 6,138 square meters (66,045 square
  feet), including approximately 2,040 square meters (22,000 square feet) previously
  occupied by the Company under a leasing agreement. The purchase price of £3.1
  million was financed by bank mortgage at 3% per annum with no repayments during
  the first five years. Interest and repayment terms will be renegotiated at the
  end of the five-year period. The building has since been extended and refitted
  to house additional administrative, research and laboratory operations, and
  the building was officially re-opened on April 7, 2001.

The
  Companys principal executive offices are located in an approximately 850
  square meter (9,150 square feet) facility in London, England. The premises are
  occupied pursuant to a lease expiring in December 2005 at a total annual rent
  of approximately £522,000 per year. The Company also leases a small office
  space in New York City, New York, for a total annual rent of approximately $360,000
  pursuant to a leasing agreement renewed in February 2001 for two years based
  on an independent valuation.

On
  March 10, 1999, the Company acquired SkyePharma Inc., which maintains its principal
  operations in a leased 7,600 square meter (82,000 square feet) building in San
  Diego, California. The facility houses production, research and development
  and administrative functions. The future minimum annual rental commitment ranges
  from $2.8 million to $4.3 million per year over the balance of the remaining
  lease term of approximately 14 years based upon pre-established annual rent
  increases. Effective June 2000, the Company subleased to a third party approximately
  15,600 square feet of this facility. Sublease income will total approximately
  $998,000 over the term of the lease, which expires July 31, 2002. On expiry,
  the Company does not expect to extend the sublease and intends to utilize the
  additional space. With the acquisition of SkyePharma Inc., the Company also
  acquired the leasehold of a 2,020 square meter (21,746 square feet) purpose
  built facility, approved by the FDA for the commercial manufacture of DepoCyt.
  The lease expires in January 2006 and annual rentals range from $622,000 to
  $720,000 in this period. Additionally, the Company maintains a leased facility
  containing primarily office space, with lease terms expiring in January 2006.
  The facility was subleased effective January 1, 2001 with annual rental income
  ranging from $317,000 to $352,000 for the terms of the sublease, which expires
  on January 31, 2006.

On
  January 1, 2000, the Company entered into a lease for an office facility in
  Exton, Pennsylvania for a number of newly recruited U.S. business development
  employees. The office consisted of 296 square meters (3,190 square feet) of
  floor space and had an extended lease term of two years, expiring in December
  2001. The annual rental for this office was approximately $74,000. On May 7,
  2001 the office facility in Exton was completely destroyed by fire. Under the
  terms of the lease, SkyePharmas obligations expired as of the date of
  the fire. The six employees located in this facility were unhurt, and the Company
  entered into a short-term lease in a new location in Exton. The new office consists
  of approximately 106 square meters (1,150 square feet) and has a renewable lease
  term of 3 months. The Company expects to occupy the office space through August
  2002. The monthly rental of this office is approximately $8,300. Upon expiration
  of

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the Exton
  lease in August 2002, the Company plans to move its U.S. business development
  operations to its existing leased office space in New York.

The
  Company believes that its current facilities are adequate to meet its anticipated
  needs for the foreseeable future.

Item
  5: Operating and Financial Review and Prospects

The
  following discussion contains forward-looking statements that involve risks
  and uncertainties. The Companys actual results may differ materially from
  the results discussed in such forward-looking statements as a result of various
  factors, including those set forth under the caption Risk Factors
  and elsewhere in this Form 20-F.

The
  following discussion and analysis of the financial condition and results of
  operations of the Company should be read in conjunction with the Consolidated
  Financial Statements of the Company and related Notes to those Consolidated
  Financial Statements included in Item 18 of this Form 20-F. This discussion
  contains summarized financial information which has been derived from such financial
  statements. You should not rely solely upon such summarized information but
  should read this entire document.

Skyepharmas
  discussion and analysis of its financial condition and results of operations
  are based upon the Companys Consolidated Financial Statements, which have
  been prepared in accordance with accounting principles generally accepted in
  the United Kingdom which vary in certain important respects from accounting
  principles generally accepted in the United States. The principal differences
  between U.K. GAAP and U.S. GAAP as they relate to SkyePharma are summarized
  in Note 31 of SkyePharmas Consolidated Financial Statements included in
  Item 18 of this Form 20-F.

Critical Accounting
  Policies and Estimates

The
  preparation of the Consolidated Financial Statements requires the Company to
  make estimates and judgments that affect the reported amounts of assets, liabilities,
  revenues and expenses, and related disclosure of contingent assets and liabilities.
  On an on-going basis, the Company evaluates its estimates, including those related
  to revenue recognition, intangible assets, deferred consideration and other
  contingent liabilities. The Company bases its estimates on historical experience
  and on various other assumptions that are believed to be reasonable. Actual
  results may differ from these estimates under different assumptions or conditions.

The
  Company believes the following represent its critical accounting policies:

Revenue Recognition

The
  Companys revenue comprises contract development, manufacturing and distribution,
  and royalty income. Contract development income represents amounts invoiced
  to customers for services rendered under development contracts including milestone
  payments and technology access fees. Under U.K. GAAP contract revenue is recognized
  when earned and non-refundable, and when there are no future obligations pursuant
  to the revenue, in accordance with the contract terms. Refundable contract revenue
  is treated as deferred until such time as it is no longer refundable. Manufacturing
  and distribution revenues principally comprise contract manufacturing fees invoiced
  to third parties, non-contract manufacturing revenues under a collaboration
  agreement with Chiron Corporation, plus other contract manufacturing revenue
  and income from product sales. Royalty income represents income earned as a
  percentage of product sales. Advance royalties received are treated as deferred
  income until earned, when they are recognized as income. See discussion of revenues
  under Operating Results  Year ended December 31, 2001 compared with
  the year ended December 31, 2000 below.

The
  Company recognizes revenue for U.S. GAAP in accordance with SEC Staff Accounting
  Bulletin No. 101. Revenue Recognition in Financial Statements (SAB 101), as
  amended by SAB

67

---

101A and 101B.
  SAB 101 requires that four basic criteria must be met before revenue can be
  recognized: (1) persuasive evidence that an arrangement exists; (2) delivery
  has occurred or services rendered; (3) the fee is fixed and determinable; and
  (4) collectability is reasonably assured. Determination of criteria (3) and
  (4) are based on the judgments of the Directors. Should changes in conditions
  cause the Directors to determine these criteria are not met for certain future
  transactions, revenue recognized for future reporting periods could be adversely
  affected.

Intangible Fixed Assets

The
  Companys intangible fixed assets comprise goodwill, intellectual property
  and capitalized development costs. The Directors estimate the useful economic
  life of such assets and the assets are amortized over this period. Future events
  could cause the Directors to amend their view of the estimated economic life
  of these assets.

Impairment of Fixed
  Assets

The
  Company reviews the carrying value of fixed assets when there is an indication
  that the assets may be impaired. First year impairment reviews are conducted
  for acquired goodwill and intangible assets. Impairment is determined by reference
  to the higher of net realisable value and value in use, which requires estimates
  on future cash flows. Judgments regarding the existence of impairment indicators
  are based on legal factors, market conditions and operational performance of
  our acquired businesses. Future events could cause the Company to conclude that
  impairment indicators exist and assets may have been impaired. Any resulting
  impairment loss could have a material adverse impact on the Companys financial
  condition and results of operations.

Deferred Consideration

The
  provision for deferred consideration comprises the fair value of contingent
  consideration arising from acquisitions. The eventual outcome is subject to
  the Groups future performance and certain contractual terms. The provision
  is reviewed annually by the Directors who make significant judgments as to,
  and changes to, the estimated fair value of the contingent consideration. Based
  on these judgments, changes to the estimated fair value are recorded as an adjustment
  to goodwill or the underlying asset value. Where the effect of the time value
  of money is material the provision is reflected at its present value and the
  interest element arising on discounting the liability is recorded as interest
  payable in the profit and loss account as it unwinds. At December 31, 2001,
  the main judgments on balances recorded for deferred consideration related to
  the 1996 acquisition of Krypton and the 2001 acquisition of SkyePharma Canada.

The
  deferred consideration of Krypton was revised on April 26, 1996, such that a
  maximum of 37.5 million Ordinary Shares and 37.5 million B Warrants
  would be issued contingent on a change in control of the Company at a share
  price of not less than 80 pence compounded at an annual rate of 10%, or satisfaction
  of a potential four hurdles. At December 31, 2001, the Directors believe that
  until products are marketed and agreement is reached with the Krypton vendors,
  certain elements of deferred consideration cannot be estimated with any degree
  of certainty. Therefore, the deferred consideration recognized in the accounts
  at December 31, 2001, related only to the extent that the first hurdle is reasonably
  expected to be met. Consequently, an estimate of £4.8 million (2000: £5.0
  million) has been recognized as deferred consideration based on market prices
  on December 31, 2001, for 7.5 million Ordinary shares and 7.5 million B
  Warrants.

In
  consideration for the loss of the former SkyePharma Canada shareholders
  certain option rights, which were agreed on July 19, 2001 when the Group acquired
  an initial 40.2% interest in SkyePharma Canada, deferred consideration was agreed.
  If the SkyePharma share price is below 82 pence on June 30, 2003, then the Company
  is required to issue 200,000 additional shares, or pay an amount in cash, for
  each penny difference between the actual share price and 82 pence. In the Directors
  opinion, the deferred consideration cannot be estimated with any degree of certainty.
  Therefore, this deferred consideration has not been recognized as at December
  31, 2001. Initial

68

---

estimates
  of the deferred consideration will be revised as further and more certain information
  becomes available with potential corresponding adjustments to goodwill.

Contingent Liabilities

Provisions
  for contingent liabilities are dependent upon estimates and assessments of whether
  the criteria for recognition have been met, including estimates by the Directors
  as to the probable outcome and the amount of the potential cost of resolution.
  We follow the strict rules for identification and recognition of such provisions
  in accordance with U.K. GAAP. The Company is currently involved in certain legal
  proceedings as discussed in Item 8: Financial Information  Legal
  Proceedings. As at December 31, 2001, no costs have been accrued in relation
  to these proceedings because the Company does not believe that the proceedings
  will have a material adverse effect on the Companys consolidated financial
  position. Any estimate for such an accrual would be developed in consultation
  with external legal advisors handling the Companys defense in these matters
  and would be based upon an analysis of potential outcomes. It is possible that
  future results of operations could be materially affected by changes in our
  assumption.

Operating Results

The
  Companys revenues to date from continuing business have been principally
  generated by contract development revenue, including milestone payments from
  third parties, contract manufacturing and distribution, and royalty revenue
  from sales by third parties of products developed by the Company. See Item
  3: Key Information  Risk Factors  The Companys results of
  operations tend to fluctuate.

The
  Groups operations relate wholly to one class of business, pharmaceuticals.

|                                                         | Year
      ended December 31, | 
|-------------------------------------------------------- | ----------------------------- | 
|                                                         | 1999                          | 
|                                                         |                               | 
|                                                         | (in
      thousands)          | 
|By
      class of business:                              |                               | 
|Pharmaceuticals                                          |                               | 
|Contract
      development, including milestone payments | £
      9,045                 | 
|Manufacturing
      and distribution                     | 4,597                         | 
|Royalties
      receivable                               | 4,097                         | 
|                                                         |                               | 
|                                                         | £
      17,739                | 
|                                                         |                               | 
|By location
      of customer:                           |                               | 
|U.K.                                                     | £
      2,237                 | 
|Continental
      Europe                                 | 10,812                        | 
|U.S.                                                     | 4,590                         | 
|Rest
      of the world                                  | 100                           | 
|                                                         |                               | 
|                                                         | £
      17,739                | 
|                                                         |                               | 
|                                                         |                               | 

Historically,
  the contributions to total revenues generated by each revenue source have varied
  from period to period. Each of these sources results in significantly different
  gross margins. In respect of contract development revenue, the Company generally
  endeavors to recover its direct costs, its objective being to generate long-term
  profits from royalties on successful product commercializations. Royalty revenues
  generally result in higher gross margins than contract development revenue,
  which is affected by the timing of milestone payments. Accordingly, the comparability
  of gross margins from period to period will be affected by the mix or sources
  of revenue earned.

69

---

In
  1998, the Company also received contract development revenue, including milestone
  payments from the joint venture with Genta. On March 4, 1999 the Company reached
  an agreement with Genta relating to the outstanding liabilities and the future
  operation of the Joint Venture with Genta. The existing balances between the
  joint venture company and the parent companies have been waived and in addition
  Genta was released from future funding obligations. The Company did not suffer
  any material adverse financial consequences from its implementation of the agreement
  and fully recognized its 50% share of the net loss on operations in the joint
  venture in 1999. See Item 4: Information on the Company  Business
  Operations  Joint Venture with Genta for further details of the
  terms of this agreement.

The
  results for the year ended December 31, 1999 included revenues from SkyePharma
  Inc., which has been consolidated from the date of its acquisition in March
  1999. At this point the Company began to incur costs relating to non-contract
  manufacturing at its San Diego facility.

After
  cost of sales, the Companys principal expenditures have related to administrative
  expenses, the Companys internal research and development costs, sales
  and marketing expenses, the costs of the corporate offices and interest expense.
  As the majority of the Companys principal expenses are incurred in Switzerland,
  France and the United States and the Companys revenues are substantially
  in U.S. dollars, the Companys results of operations, as reported in pounds
  sterling, can be materially influenced by changes in exchange rates.

Inflation
  did not have a significant impact on the Companys operations during any
  of the periods presented.

Year Ended December
  31, 2001 compared with the Year Ended December 31, 2000

|                                                               | Year
      ended December 31, |  
|-------------------------------------------------------------- | ----------------------------- | -
|                                                               | 2001                          |  
|                                                               |                               |  
|                                                               | (in
      thousands)          |  
|Turnover                                                       | £46,126                       |  
|Cost
      of sales                                            | (18,820                       | )
|                                                               |                               |  
|Gross
      profit                                             | 27,306                        |  
|Selling,
      marketing and distribution expenses             | (4,804                        | )
|Administration
      expenses                                  | (16,025                       | )
|Research
      & development expenses                          | (17,918                       | )
|Other
      operating income                                   | 6,342                         |  
|                                                               |                               |  
|Operating
      loss                                           | (5,099                        | )
|Associated
      undertaking                                   | (578                          | )
|                                                               |                               |  
|Loss
      on ordinary activities before interest and taxation | (5,677                        | )
|Interest
      receivable                                      | 1,251                         |  
|Interest
      payable                                         | (4,951                        | )
|                                                               |                               |  
|Loss
      on ordinary activities before taxation              | (9,377                        | )
|Taxation                                                       | (75                           | )
|                                                               |                               |  
|Retained
      loss                                            | (9,452                        | )
|                                                               |                               |  
|                                                               |                               |  

Turnover
  in the year ended December 31, 2001 increased by 90% to £46.1 million,
  compared to £24.3 million in 2000.

Contract
  research and development revenue, including milestone payments, increased by
  128% to £38.2 million. Milestone payments in 2001 included £12.4
  million in respect of Solaraze and £9.0 million following receipt of the
  DepoCyt European approval. Contract development income

70

---

excluding
  milestones also more than doubled during the year to £9.9 million. Manufacturing
  and distribution revenues increased by 85% to £6.4 million mainly due
  to the return of DepoCyt to the market in March 2001. Royalty income of £1.5
  million is comprised of approximately £1.1 million from Xatral OD and
  Solaraze, with £0.4 million from generics. This contrasts with 2000 where
  £3.7 million came from generics and £0.3 million from non-generics.
  The Company also recognized income of £6.3 million during the year under
  its agreement to finance the development of DepoMorphine shown as Other
  operating income. See Note 31 of the Notes to SkyePharmas Consolidated
  Financial Statements included in Item 18 of this Form 20-F for the accounting
  treatment of this transaction under U.S. GAAP.

SkyePharma
  recognizes revenue only when it is earned and non-refundable, and when there
  are no future obligations pursuant to the revenue, in accordance with the contract
  terms. During 2001 some £11.7 million (2000: £ Nil) of turnover and other income was
  deferred under U.K. GAAP using this policy:

|Contract
development revenue | £7.0
million  | 
|---------------------------- | ------------- | 
|Other operating
income       | £4.7
million  | 
|                             |               | 
|                             | £11.7
million | 
|                             |               | 
|                             |               | 

Cost
  of sales consists of research and development expenditures, including: the costs
  of certain clinical trials incurred on behalf of our collaborative partners;
  the direct costs of contract manufacturing; and the direct costs of licensing
  arrangements and royalties payable. Cost of sales were £18.8 million in
  2001 compared to £15.6 million in 2000. However, gross profit trebled
  to £27.3 million compared to £8.7 million in 2000, primarily as
  a result of the increased milestone payments received.

Selling,
  marketing and distribution expenses were £4.8 million compared to £3.8
  million in 2000, reflecting primarily SkyePharmas share of expenses for
  DepoCyt under its collaboration agreement with Chiron Corporation. Research
  and development expenses increased by £4.8 million to £17.9 million,
  due to increased expenditure on DepoMorphine, DepoCyt and on expanding and maintaining
  the Groups patent portfolio. Amortization of intangible assets increased
  by £0.5 million to £3.8 million in 2001 and other administration
  expenses were £12.2 million in 2001 compared to £9.3 million in
  2000. The increase in administration costs reflects the growth of the business
  and increased professional fees for significant transactions entered into during
  the year.

Under
  an agreement with Paul Capital, signed in December 2000, the Group will receive
  a total of $30 million between 2000 and 2002 to fund the clinical development
  and regulatory submission of DepoMorphine, in return for a proportion of potential
  future royalty and revenue streams from DepoMorphine and certain SkyePharma
  products. During 2001 £11.0 million (2000: £2.9 million) was received
  of which £6.3 million (2000: £2.9 million) has been recognized as
  other operating income which essentially offsets the R&D expenses associated
  with DepoMorphine during the period. The remaining £4.7 million (2000:
  nil) was deferred.

Operating
  losses for the 12 months to December 31, 2001 fell by 72% to £5.1 million
  from £18.0 million in 2000. The Groups loss on ordinary activities
  before tax was £9.4 million in 2001, after a net interest payable increase
  of £2.0 million, compared to £19.7 million in 2000.

71

---

The
  Group made its first operating profit and net profit in the second half of 2001.
  The two half years compare as follows:

|                        | Six
months
ended
June 30,
2001 |   | Six
months ended 
December 31, 2001 | 
|----------------------- | ------------------------------ | - | ----------------------------------- | 
|                        | £000                          |   | £000                               | 
|                        |                                |   |                                     | 
|Turnover                | 14,799                         |   | 31,327                              | 
|Gross profit            | 5,549                          |   | 21,757                              | 
|Operating
(Loss)/Profit | (9,919                         | ) | 4,820                               | 
|Net (Loss)/Profit       | (11,603                        | ) | 2,151                               | 
|                        |                                |   |                                     | 
|                        |                                |   |                                     | 

The
  acquisition of SkyePharma Canada negatively impacted the second half results
  by £0.6 million. The loss per share for the year fell by 54% to 1.8 pence
  compared to 3.9 pence in 2000.

Foreign
  currency exchange movements did not have a material impact on the results of
  operations in 2001 compared with 2000.

Year Ended December
  31, 2000 compared with the Year Ended December 31, 1999

|                                                                     | Year
      ended
December 31,
2000 |   | Year
      ended
December 31,
1999 |  
|-------------------------------------------------------------------- | ---------------------------------- | - | ---------------------------------- | -
|                                                                     |                                    |   |                                    |  
|                                                                     | (in
      thousands)              
|Turnover                                                             | £24,292                            |   | £17,739                            |  
|Cost of sales                                                        | (15,598                            | ) | (14,854                            | )
|                                                                     |                                    |   |                                    |  
|Gross profit                                                         | 8,694                              |   | 2,885                              |  
|Selling,
marketing and distribution expenses                         | (3,844                             | ) | (3,161                             | )
|Administration
expenses                                              | (12,630                            | ) | (12,584                            | )
|Research
& development expenses                                      | (13,104                            | ) | (6,728                             | )
|Other operating
income                                               | 2,900                              |   |                                   |  
|                                                                     |                                    |   |                                    |  
|Operating
loss                                                       | (17,984                            | ) | (19,588                            | )
|Share of
operating loss in joint venture                             |                                   |   | (48                                | )
|                                                                     |                                    |   |                                    |  
|Loss on ordinary
activities before interest and taxation             | (17,984                            | ) | (19,636                            | )
|Reversal
of provision for loss on disposal of fixed asset investment |                                   |   | 381                                |  
|Interest
receivable                                                  | 1,806                              |   | 1,364                              |  
|Interest
payable                                                     | (3,508                             | ) | (1,391                             | )
|                                                                     |                                    |   |                                    |  
|Loss on ordinary
activities before taxation                          | (19,686                            | ) | (19,282                            | )
|Taxation                                                             | (4                                 | ) | (132                               | )
|                                                                     |                                    |   |                                    |  
|Retained
loss                                                        | (19,690                            | ) | (19,414                            | )
|                                                                     |                                    |   |                                    |  
|                                                                     |                                    |   |                                    |  

Turnover
  in the year ended December 31, 2000 increased by 37% to £24.3  million
  compared to £17.7  million in 1999. This represents a cumulative
  annual growth rate of 28% since 1996.

Contract
  research and development including milestone payments increased by 86% to £16.8 
  million in 2000. Milestone payments in 2000 included £8.9  million
  ($14  million) received from Bioglan on the licensing of Solaraze in the
  U.S., Canada and Mexico. Manufacturing and distribution revenues decreased to
  £3.5  million in 2000 compared to £4.6  million in 1999,
  mainly as a result of the absence of revenues from the manufacture and sale
  of DepoCyt. Royalty income was earned primarily from the licensing of part of
  the Groups portfolio of generic products and amounted to

72

---

£4.0 
  million in 2000 compared to £4.1  million in 1999. The first royalty
  income from Xatral OD was also received in the year. The Company also received
  £2.9  million during 2000 under its agreement to finance the development
  of DepoMorphine shown above as Other Operating Income. See Note
  31 of the Notes to SkyePharmas Consolidated Financial Statements included
  in Item 18 of this Form 20-F for the accounting treatment of this transaction
  under U.S. GAAP.

Cost
  of sales consists of research and development expenditure, including the costs
  of certain clinical trials incurred on behalf of our collaborative partners,
  the direct costs of contract manufacturing, direct costs of licensing arrangements
  and royalties payable. Cost of sales were £15.6  million in 2000
  compared to £14.9  million in 1999. Gross profit trebled to £8.7 
  million in 2000 compared to £2.9  million in 1999 as a result of
  the increase in milestone payments received.

Selling,
  marketing and distribution expenses were £3.8  million in 2000 compared
  to £3.2  million in 1999, primarily due to a full years expenses
  for SkyePharmas business development presence in North America. Research
  and development expenses increased by 95% to £13.1  million compared
  to £6.7  million in 1999, due primarily to increased expenditure
  on DepoCyt and DepoMorphine. Administrative expenses were £12.6 
  million in 2000, the same as in 1999, including amortization of £3.3 
  million in 2000, compared to £1.5  million in 1999.

In
  December 2000 the Group received other operating income of £2.9 
  million ($4.4  million) under an agreement with Paul Capital by which it
  will receive a total of $30  million over the next two years to fund the
  clinical development and regulatory submission of DepoMorphine in return for
  the sale of a proportion of potential future royalty and revenue streams from
  DepoMorphine and certain SkyePharma products. Research and development costs
  for DepoMorphine were £4.3  million in 2000. This is explained more
  fully in Note 3 of the Notes to SkyePharmas Consolidated Financial Statements
  included in Item 18 of this Form 20-F.

Operating
  loss fell by 8% from £19.6  million in 1999 to £18.0 
  million in the year and was achieved at a time when research and development
  expenses were almost doubled. The absence of DepoCyt from the market place in
  2000 also adversely impacted SkyePharmas operating result by some £5.8 
  million. DepoCyt was re-introduced to the market in March 2001. The costs of
  amortizing goodwill and recent intellectual property acquisitions more than
  doubled to £3.3  million during the year.

The
  Groups loss on ordinary activities before tax was £19.7  million
  in 2000, after a net interest payable increase of £1.7  million,
  compared to £19.3  million in 1999. The loss per share for the year
  fell by 7% to 3.9 pence compared to 4.2 pence in 1999.

Foreign
  currency exchange movements did not have a material impact on the results of
  operations in 2000 compared with 1999.

Liquidity and Capital
  Resources

Sources
  of Liquidity

The
  Company finances its operations primarily by the sale of equity and debt securities,
  funding provided by collaborative partners and, in 2001, cash generated from
  operations.

During
  2001 £11.0  million ($16.0  million) (2000: £2.9 
  million ($4.4  million)) in cash was received under an agreement with Paul
  Capital by which SkyePharma will receive a total of $30  million between
  2000 and 2002 to fund the clinical development and regulatory submission of
  DepoMorphine in return for the sale of a proportion of potential future royalty
  and revenue streams from DepoMorphine and certain SkyePharma products.

In
  March 2002, SkyePharma announced that it had entered into a second agreement
  with Paul Capital. Under the terms of the agreement, Paul Capital will pay SkyePharma
  $30  million during 2002 and 2003, principally to fund the clinical development
  of SkyePharmas propofol and HFA-formoterol products. In return, Paul Capital
  will receive a portion of the potential future royalty

73

---

and revenue
  streams from these, and seven other products from the Companys pipeline.
  Between January 2002 and December 2015, Paul Capital could receive between 4%
  and 20% of the annual royalties and revenues from the total of nine products.
  Based on managements current projections, the 20% rate will apply from
  2004 to 2008. The percentage then falls, when an agreed return is achieved,
  to 12.5% until a second ceiling is reached, before falling to 4% for the remainder
  of the period until December 31, 2015. During 2002 and 2003, the 20% rate will
  be reduced based on the percentage of the total $30  million already funded.
  In addition, should the share of royalties received by Paul Capital not meet
  minimum returns, SkyePharma may issue SkyePharma Ordinary Shares up to a value
  of $7.5  million. The number of Ordinary Shares to be issued is capped
  based upon a minimum price of 55 pence per share. Also under the terms of these
  agreements, Paul Capital has been issued warrants carrying rights to subscribe
  for 5  million SkyePharma Ordinary Shares at an exercise price of 73.75
  pence, representing a 25% premium to the average trading price for the five
  trading days immediately prior to the closing date on March 7, 2002.

On
  May 14, 2002 SkyePharma announced its intention to enter a wide ranging strategic
  collaboration with Kowa Company Ltd., a leading Japanese company with substantial
  pharmaceutical interests, which proposes, under a Subscription Agreement signed
  on May 13, 2002, to make a strategic investment in SkyePharma. Kowa and SkyePharma
  have signed a separate non-binding Letter of Intent to evaluate Kowas
  acquisition of a 50% interest in SkyePharmas manufacturing facility in
  Lyon. At an Extraordinary General Meeting on June 7, 2002, shareholder approval
  was obtained for Kowa to acquire 30  million ordinary shares of 10p each
  in SkyePharma for a total consideration of approximately £25.3  million.
  This represents a holding of around 5% after the investment. As part of its
  investment, Kowa will have the right to appoint a non-executive director to
  the board of SkyePharma.

Total
  cash outflow before use of liquid resources and financing in 2001 was £10.9 
  million, including purchases of fixed asset investments of £8.3 
  million and tangible fixed assets of £7.7  million. The Companys
  cash position including short-term bank deposits at December 31, 2001 amounted
  to £25.3  million, net of bank overdrafts of £1.6  million.

Based
  upon the Companys business plan and given the recent funding described
  above, the Directors anticipate that the Company will have sufficient resources
  to fund its current operations through at least the next twelve months. The
  additional funding will enable the Company to selectively develop a number of
  key projects to a later stage of development prior to licensing out, thereby
  potentially increasing its share of the profits. The Company is an emerging
  pharmaceutical company and expects to absorb cash until products are fully commercialized.
  Much of the Companys cash requirement is of an investment nature and is
  to a great extent discretionary. Funds will be used for the Companys own
  product development efforts and capital expenditure.

Future
  acquisitions or investments, a material decrease in our cash flow from operations
  or the failure of our collaborative partners to provide funding are circumstances
  could affect our liquidity and working capital. The Company is reliant on collaborative
  partners and upon its ability to continue to obtain new development contracts
  from third parties to further develop and commercialize its drug delivery technologies.
  See Item 3: Key Information  Risk Factors. The Company is
  dependent on Geomatrix and DepoFoam technologies as to which further successful
  development is uncertain; however, the failure by the Companys collaborative
  partners to provide funding, obtain regulatory approvals and conduct marketing
  activities could adversely affect the Companys business.

Borrowings

At
  December 31, 2001 the Company had short-term borrowings, including obligations
  under finance leases, amounting to £7.3  million and long-term borrowings,
  including obligations under finance leases and Convertible Bonds (the Bonds),
  amounting to £66.8  million.

74

---

At
  December 31, 2001 the Group had an overdraft facility of £1.2  million
  (CHF 3  million) with the Basellandschaftliche Kantonalbank, secured on
  the assets of Jago and guaranteed by SkyePharma PLC.

At
  December 31, 2001 the Group also had an overdraft facility with Société
  Générale of £0.7  million (FF8  million), secured
  by the trade debtors of SkyePharma Production SAS and guaranteed by SkyePharma
  PLC.

Included
  within bank loans, the Basellandschaftliche Kantonalbank has extended a loan
  of £0.8  million (CHF2  million) and a fixed credit facility
  of £0.6  million (CHF1.5  million). These loans are renewable
  annually and bear interest at 6.5% and 6.0%, respectively. The bank loans are
  all secured on the assets of Jago and the credit facility is guaranteed by SkyePharma
  PLC.

At
  December 31, 2001 the Group had £0.1  million outstanding on a loan
  payable to the Silicon Valley Bank. The loan is secured upon specific fixed
  assets of SkyePharma Inc. and is guaranteed by SkyePharma PLC. The loan bears
  a floating rate of interest set at the U.S. prime rate plus 0.5% and the principal
  is repayable in monthly instalments until February 2002. Under the agreement,
  the Company covenanted to hold cash balances at SkyePharma Inc. equivalent to
  1.5 times outstanding loan balances. As of February 2002 the loan was paid off
  and the guarantee cancelled.

At
  December 31, 2001 the Group had a property mortgage facility with the Basellandschaftliche
  Kantonalbank of £7.4  million (CHF18.0  million). The mortgage
  is in two tranches, both secured by the assets of Jago, and guaranteed by SkyePharma
  PLC. The first tranche bears interest at 4.75% and is repayable by instalments
  over 21 years semi-annually. The second tranche bears interest at 3.0% and is
  repayable in 2004.

At
  December 31, 2001 the Group had £3.8  million outstanding on the
  Chiron loan notes. The original note was issued in 1999 on the acquisition of
  SkyePharma Inc. (formerly DepoTech Corporation). Under a collaboration agreement
  with Chiron Corporation, DepoTech had an obligation to pay Chiron $11.7 
  million within six months of U.S. or European marketing approval of DepoCyt.
  Consequent upon the acquisition, SkyePharma, DepoTech and Chiron amended the
  agreement with Chiron in March 1999 such that the Group issued a note payable
  to Chiron of $9.7  million on the receipt of FDA approval of DepoCyt on
  April 1, 1999.

During
  2000, SkyePharma and Chiron amended the March 1999 agreement whereby SkyePharma
  would have issued a note payable for $3.5  million to Chiron upon the filing
  of an application for DepoCyt for pediatric indications in the U.S. Under the
  amendment dated October 4, 2000 the note became payable on the earlier of the
  filing of an application for DepoCyt for pediatric indications in the U.S. or
  the date on which Phase IV clinical trials, required by the FDA as a condition
  of product approval, commenced. The $3.5  million note was issued in December
  2000. The notes are secured on the rights to DepoCyt and bear a floating rate
  of interest based on LIBOR. The principal amounts are payable on June 30, 2002
  for the first tranche and in equal instalments on June 30, 2002 and 2003 for
  the second.

On
  June 16, 2000, the Company issued £59.4  million 6% Bonds due 2005.
  The Bonds are convertible at the option of the holder into fully paid 10 pence
  Ordinary Shares in the Company at an initial conversion price of 132 pence at
  any time up to June 19, 2005. The initial conversion price was recalculated
  to the minimum 83 pence on June 19, 2001. Unless previously redeemed or converted,
  the Bonds will be redeemed by the Company at their principal amount on June
  19, 2005.

75

---

Contractual Cash Obligations

The
  following is a summary of the Groups contractual cash obligations as of
  December 31, 2001:

|                                         | Payments
      Due by Period | 
|---------------------------------------- | ---------------------------- | 
|                                         | Total                        | 
|                                         | £000                        | 
|                                         |                              | 
|Bank
      overdrafts                    | 1,618                        | 
|Bank
      loans                         | 1,521                        | 
|Secured
      mortgage                   | 7,407                        | 
|Chiron
      loan notes                  | 3,825                        | 
|Finance
      leases                     | 1,721                        | 
|Operating
      leases                   | 39,748                       | 
|Convertible
      bonds                  | 57,962                       | 
|                                         |                              | 
|Total
      Contractual Cash Obligations | 113,802                      | 
|                                         |                              | 
|                                         |                              | 

Capital
  commitments, contracted for but not provided in the accounts, were £0.3 
  million at December 31, 2000 and December 31, 2001.

In
  December 1999 SkyePharma Production SAS entered into a leasing arrangement with
  Lombard North Central PLC by which certain pharmaceutical manufacturing and
  laboratory equipment was the subject of a four-year sale and leaseback arrangement.
  The Company has guaranteed the obligations of the lessee under this lease to
  an amount of FF30  million (£2.8  million).

Financial Instruments

The
  Group holds financial instruments to finance its operations and to manage the
  currency risk that arise from these operations. Further information on these
  financial instruments is set out in Note 26 of the Notes to SkyePharmas
  Consolidated Financial Statements included in Item 18 of this Form 20-F.

Principal Differences
  between U.K. and U.S. GAAP

As
  at December 31, 2001, the principal differences between U.K. and U.S. GAAP relate
  to the treatment of goodwill, acquired in-process research and development expenditure,
  revenue recognition and the sale of royalty interests. Each of these differences
  are explained in more detail in Note 31 of the Notes to SkyePharmas Consolidated
  Financial Statements included in Item 18 of this Form 20-F.

New Accounting Standards
  not yet Adopted

U.K. Accounting
  Standards

The
  Company has implemented the transitional disclosure requirements of Financial
  Reporting Standard 17 Retirement Benefits. The FRS adopts a market
  value approach to the measurement of retirement benefits and requires expanded
  disclosures. The Standard does not require implementation of the change in measurement
  approach until 2003.

Financial
  Reporting Standard 19 Deferred Tax falls to be implemented by the
  Company in 2002. The FRS requires deferred tax to be accounted for on a full
  provision basis, rather than a partial provision basis, as at present.

U.S. Accounting Standards

In
  July 2001 the FASB issued Statement No. 141, Business Combinations,
  and Statement No.  142 Goodwill and Other Intangible Assets
  which are required to be implemented with effect

76

---

from July
  1, 2001 and January 1, 2002, respectively. FASB Statement No. 141 requires that
  all business combinations be accounted for under the purchase method. FASB Statement
  No. 142 requires that goodwill will no longer be amortized over its estimated
  useful life. The Group must instead identify and value its reporting units for
  the purpose of assessing, at least annually, potential impairment of goodwill
  allocated to each reporting unit. Additionally, the Group will need to reassess
  the useful lives of existing recognized intangible assets. Intangible assets
  deemed to have indefinite lives will no longer be amortized, instead tested
  annually for potential impairment. Separate intangible assets with finite lives
  will continue to be amortized over their useful lives. The Group will adopt
  SFAS 142 prospectively as of January 1, 2002. Since an extensive effort is needed
  to adopt SFAS 142, it is not yet practical to fully estimate the impact of adopting
  SFAS 142 on the Groups financial statements. At December 31, 2001, the
  Group had unamortized goodwill of approximately £142.9  million under
  U.S. GAAP. Total goodwill amortization was approximately £8.6  million
  for the year ended December 31, 2001 which will not be incurred in 2002 under
  U.S. GAAP.

In
  August 2001, the FASB issued FASB Statement No. 143, Accounting for Obligations
  Associated with the Retirement of Long-Lived Assets. This standard will
  be effective for the Groups fiscal year beginning January 1, 2003. The
  standard requires that such obligations be capitalized as part of the assets
  cost at the time of initial recognition, with the related liability discounted
  to its fair value at the date of recognition. The income statement impact of
  adopting this standard will be presented as a cumulative effect of a change
  in accounting principle. The Group is assessing the impact that this new standard
  will have on its financial position and results of operations.

In
  October 2001, the FASB issued Statement of Financial Accounting Standards No.
  144, Accounting for the Impairment of Disposal of Long-Lived Assets
  (SFAS 144). SFAS 144 supersedes SFAS 121, Accounting for the Impairment
  of Long-Lived Assets and for Long-Lived Assets to be Disposed of. SFAS
  144 develops an accounting model, based on the framework previously established
  in SFAS 121, for long-lived assets to be disposed of by sale. The accounting
  model applies to all long-lived assets, including discontinued operations, and
  it supersedes the provisions of APB Opinion No. 30, Reporting Results
  of Operations  Reporting the Effects of Disposal of a Segment of a Business
  and Extraordinary, Unusual and Infrequently Occurring Events and Transactions,
  for disposal of segments of a business. SFAS 144 requires that long-lived assets
  be measured at the lower of carrying amount or fair value less cost to sell,
  whether reported in continuing operations or discontinued operations. SFAS 144
  also broadens the definition of discontinued operations. The Company will adopt
  SFAS 144 from January 1, 2002, and is currently assessing the impact that this
  new standard will have on its financial position and results of operations.

In
  April 2002, the FASB issued SFAS No. 145, Rescission of FASB Statements No.
  4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections
  (FAS 145). This standard will require gains and losses from extinguishment of
  debt to be classified as extraordinary items only if they meet the criteria
  of unusual and infrequent in Opinion 30, Reporting the Results of OperationsReporting
  the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual
  and Infrequently Occurring Events and Transactions. Any gain or loss on
  extinguishment will be recorded in the most appropriate line item to which it
  relates within net income before extraordinary items. FAS 145 is effective for
  fiscal years beginning after May 15, 2002; however, certain sections are effective
  for transactions occurring after May 15, 2002. The Company does not expect the
  adoption of this standard to have a material effect on its financial statements.

Research and Development,
  Patents and Licenses

For
  a discussion of the Companys research and development activities, see
  Item 4: Information on the Company  Business Operations  Research
  and Development and patents and licenses, see Item 4: Information
  on the Company  Business Operations  Patents and Proprietary Rights.

77

---

Trend information

The
  Companys results of operations have fluctuated materially on a monthly,
  semi-annually and yearly basis, partly as a result of acquisitions and partly
  due to the timing of contract revenues. Therefore, period-to-period and period-on-period
  comparisons are not meaningful at this stage in the Companys development.
  The Company believes that it will continue to experience fluctuations in its
  results of operations in the near to medium term.

Item
  6: Directors, Senior Management and Employees

Directors
  and Senior Management

|Name                                             |  | Age |  | Position                                        | 
|------------------------------------------------ |  | --- |  | ----------------------------------------------- | 
|                                                 |  |     |  |                                                 | 
|Ian Gowrie-Smith(1)(5)                           |  | 54  |  | Executive
      Chairman                        | 
|Michael Ashton(1)                                |  | 56  |  | Chief Executive
Officer                         | 
|Donald
      Nicholson(1)                        |  | 44  |  | Finance
      Director and Executive Director   | 
|Suzanne V.
McLean(1)(2)                          |  | 48  |  | Company
Secretary and General Counsel           | 
|Air Chief
      Marshal Sir Michael Beavis(3)(4) |  | 72  |  | Senior
      Independent Non-Executive Director | 
|Dr. David
Ebsworth(3)(4)                         |  | 47  |  | Non-Executive
      Director                    | 
|R. Stephen
      Harris(4)(5)                    |  | 59  |  | Non-Executive
      Director                    | 
|Dr. Keith
Mansford(4)                            |  | 70  |  | Non-Executive
      Director                    | 
|Dr. Argeris
      (Jerry) Karabelas(3)(5)        |  | 49  |  | Non-Executive
      Director                    | 
|Walter Zeller(3)                                 |  | 71  |  | Non-Executive
      Director                    | 
|                                                 |  |     |  |                                                 | 

---

|(1) | Member of Executive Committee.   
|--- | ---------------------------------
|(2) | Not a Director of the Company.   
|(3) | Member of Audit Committee.       
|(4) | Member of Remuneration
Committee.
|(5) | Member of Nomination Committee.  

Ian
  Gowrie-Smith has been Executive Chairman of the Board of the Company since
  January 1995. From January 1995 to November 1998 he was also Chief Executive
  Officer of the Company. He has more than 15 years of management experience in
  the pharmaceutical industry, most recently as Chief Executive Officer of Medeva
  plc. He graduated with a Bachelor of Commerce degree from the University of
  Melbourne in 1970.

Michael
  Ashton was named Chief Executive Officer of the Company in November 1998.
  He joined the Company in January 1997 as Chief Executive Officer of Jago, was
  appointed to the Board in March 1997 and was named Chief Operating Officer of
  the Company in May 1998. He has 30 years of experience in the pharmaceutical
  industry. Prior to joining the Company, he was Chairman, President and Chief
  Executive Officer of Faulding Inc. He obtained a B.Pharm degree from Sydney
  University in 1968 and an MBA from Rutgers University in 1974.

Donald
  Nicholson was named Finance Director in March 1997. He joined the Company
  in February 1996 as Chief Financial Officer and was appointed to the Board in
  March 1997. He has more than 12 years of experience in the healthcare industry.
  Prior to joining the Company, he was the Corporate Strategy and Finance Director
  at Corange Group. Mr. Nicholson is a member of the Institute of Chartered Accountants
  of Scotland and obtained a B.Com (Hons) degree from the University of Edinburgh
  in 1980.

Suzanne
  V. McLean joined the Company in September 1999 as International Legal Counsel
  and Company Secretary. She has 20 years of international legal experience in
  commerce and industry. Prior to joining the Company, she was Legal Director
  and Company Secretary at Biocompatibles International plc. She has a Business
  Law degree from Guildhall University and was called to the Bar in 1979.

Sir
  Michael Beavis was appointed to the Board in 1989 and was appointed Senior
  Independent Non-Executive Director in May 2001. He retired from the Royal Air
  Force in 1987 as an Air Chief

78

---

Marshal. His
  last appointment was Deputy Commander-in-Chief Allied Forces Central Europe.
  He became a defense consultant with Burdeshaw Associates in 1987 and is a Non-executive
  director of the Alliance Aircraft, USA. He graduated from the Royal Air Force
  Staff college in 1963 and from the Royal College of Defense Studies in 1974.

R.
  Stephen Harris was appointed to the Board in November 1995. He has 35 years
  of commercial experience in the pharmaceutical industry, having worked for ICI
  Pharmaceuticals, Merck, Eli Lilly, Boots, Reckitt & Colman and Gensia and
  was Director of Development and Licensing with Medeva plc. He is Non-executive
  Chairman of Proteome Sciences plc and a Non-executive Director of Advanced Medical
  Solutions Group Plc, Pharmaceutical Profiles Limited, Microscience Limited and
  Trigen Ltd. He is a member of the Pharmaceutical Society of Great Britain and
  graduated with a B.Sc in Pharmacy from the University of London in 1964.

Dr.
  David Ebsworth was appointed to the Board on April 11, 2002. Dr. Ebsworth
  has over 20 years of experience in the pharmaceutical industry. Prior to his
  last position as President and General Manager of the Pharmaceutical Business
  Group for Bayer AG he held a series of global positions with the same group
  in Canada, Europe and the U.S. Dr Ebsworth is CEO Designate of Oxford GlycoSciences
  PLC and is also a Non-executive Director of CuraGen Corporation.

Dr.
  Argeris Karabelas was appointed to the Board in November 2000. Dr Karabelas
  has more than 20 years experience in the pharmaceutical industry having
  spent the majority of his career with SmithKline Beecham plc. Dr Karabelas was
  appointed Chairman of the Novartis Venture Fund in July 2000, having previously
  held the position of CEO of Novartis Pharma AG. He is also an external director
  of Layton Biosciences, California, Fox Chase Cancer Center, The University of
  the Sciences in Philadelphia, and a member of the Scientific Advisory Committee
  of the Massachusetts General Hospital, Boston. He received a Ph.D. in Pharmacokinetics
  from the Massachusetts College of Pharmacy in 1979.

Dr.
  Keith Mansford was appointed to the Board in March 1996. He has over 40
  years experience in the pharmaceutical and biotechnology sectors principally
  with Beecham Group and SmithKline Beecham plc. From 1982 to 1992 he was Chairman
  of Research and Development at SmithKline Beecham plc. He is an external director
  of Sepracor Inc. and of Mindset Pharmaceuticals. He is Chairman of Mansford
  Associates, an international healthcare consultancy. He obtained a B.Sc in Chemistry
  and a M.Sc in Biochemistry from the University of Durham and a Ph.D. in Biochemistry
  from the University of London.

Walter
  Zeller was appointed to the Board in February 1996. He had an extensive
  career with Ciba Geigy and was most recently Chief Financial Officer of Corange
  Ltd., the holding company of Boehringer Mannheim and DePuy. He is a Non-executive
  Director of Henkel and CieAG. He obtained a B.Sc in Business Administration
  from State Commercial College, Zurich.

There
  are no arrangements or understandings with major shareholders, customers or
  suppliers or others pursuant to which any person was selected to serve as a
  director or senior manager.

There
  are no provisions within the directors service contracts that provide for any
  benefit to accrue to any director upon termination of employment save that salary
  may be paid in lieu of notice.

79

---

Compensation

The
  following table sets forth certain information regarding the compensation paid
  to directors and officers of the Company in the year ended December 31, 2001.

|                                           |  | Salary |  | Bonus |  | Pension
Benefits |  | All
      Other 
Monetary
Compensation(1) | 
|------------------------------------------ |  | ------ |  | ----- |  | ---------------- |  | ----------------------------------------- | 
|Name                                       |  | £000  |  | £000 |  | £000            |  | £000                                     | 
|                                           |  |        |  |       |  |                  |  |                                           | 
|Ian
      Gowrie-Smith                     |  | 406    |  | 134   |  | 51               |  | 20                                        | 
|Michael
      Ashton(2)                    |  | 350    |  | 115   |  | 44               |  | 58                                        | 
|Donald
      Nicholson                     |  | 180    |  | 70    |  | 23               |  | 10                                        | 
|Suzanne
      V. McLean(3)                 |  | 130    |  | 31    |  | 16               |  | 9                                         | 
|Dr.
      Jacques Gonella(4)               |  | 11     |  |      |  |                 |  |                                          | 
|Air
      Chief Marshal Sir Michael Beavis |  | 30     |  |      |  |                 |  |                                          | 
|Stephen
      Harris                       |  | 28     |  |      |  |                 |  |                                          | 
|Dr.
      Keith Mansford                   |  | 28     |  |      |  |                 |  |                                          | 
|Walter
      Zeller                        |  | 37     |  |      |  |                 |  |                                          | 
|Tamar
      Howson(5)                      |  | 71     |  |      |  |                 |  |                                          | 
|Dr.
      Argeris Karabelas                |  | 28     |  |      |  |                 |  |                                          | 
|                                           |  |        |  |       |  |                  |  |                                           | 

---

|(1) | All other monetary
      compensation includes company car allowance and medical insurance for directors,
      officers and their families.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------
|(2) | All other monetary
      compensation additionally includes living allowance and school fees.                                               
|(3) | Miss McLean is an officer
      who is not a director.                                                                                      
|(4) | Dr. Gonella resigned effective
June 6, 2001.                                                                                                
|(5) | Ms. Howson resigned effective
November 26, 2001.                                                                                            

In
  the year ended December 31, 2001, the Company paid £1,880,000 in aggregate
  compensation to its directors and officers as a group (11 persons).

For
  further information on share options granted, see Outstanding Options
  below.

The
  Remuneration Committee of the Board of Directors administers a bonus plan for
  the Companys executive directors and officers. Bonuses are paid at the
  discretion of the Remuneration Committee, in recognition of the individuals
  contribution to the success of the Company and the achievement of specified
  objectives. In 2001 the primary performance targets were a combination of objective
  corporate, divisional and specific individual targets. A fundamental part of
  the annual bonus plan is the requirement that a stated proportion of any cash
  bonus awarded under the bonus plan each year be deferred through the Companys
  Deferred Share Bonus Plan which was introduced for 2001. The Plan is designed
  to align the interests of participants with those of the shareholders by encouraging
  executive directors and officers to build up and maintain shareholdings which
  are meaningful in the context of their remuneration. The mandatory deferred
  proportion of the bonus is currently set at 50%. The Company currently provides
  one matching share for each executive share acquired (calculated on the gross
  bonus deferral). These matching shares will be released after three years provided
  that the executive director or officer remains in employment and the corresponding
  executives shares have not been sold. The release of matching shares is not
  subject to additional performance criteria because the maximum potential level
  of annual bonus including matching shares for 2001 was 90% of salary and the
  performance conditions for earning this bonus were challenging.

Pension and Savings
  Plans

The
  Company operates various defined contribution plans for its employees in the
  U.K., Switzerland and the U.S.. The Companys contributions to these plans
  are charged to the income statement in the year to which they relate, and the
  assets are held in separate trustee administered funds. In 2001, the Company
  contributed £822,000 (2000 £532,000) to pension and savings plans
  and a provision of £51,000 is included within provisions for liabilities
  and charges. See Note 18 of

80

---

the Notes
  to SkyePharmas Consolidated Financial Statements included in Item 18 of
  this Form 20-F.

The
  Company operates an unfunded defined benefit scheme in respect of its employees
  in France, based on the national collective agreement of the pharmaceutical
  industry.

At
  December 31, 2001, a valuation was performed by professionally qualified actuaries
  on the present value of the accrued liabilities calculated under the projected
  unit credit actuarial cost method.

Board Practices

The
  Companys Articles of Association provide that, except as otherwise provided
  in the Articles or unless otherwise determined by ordinary resolution of the
  Company, the Board of Directors shall consist of not less than three directors.
  Directors of U.K. companies do not generally have fixed terms of office. The
  Articles provide that at each Annual General Meeting, a number of directors
  equal to as close as possible (but not exceeding) one-third of the directors
  must retire from office by rotation, based principally on length of term of
  office, and are eligible for re-election. Directors may be appointed by the
  Company by ordinary resolution of the shareholders. In addition, the Board of
  Directors may appoint directors to fill vacancies or as additional directors.
  Any director so appointed by the Board of Directors must retire from office
  at the next Annual General Meeting but is then eligible for re-appointment by
  the shareholders at that meeting.

The
  Board has an Executive Committee, an Audit Committee, a Remuneration Committee
  and a Nomination Committee. The Executive Committee is responsible for the executive
  management of the Company. It is chaired by the Chief Executive Officer and
  is comprised of the executive directors and senior management identified above.
  The Executive Committee generally meets monthly between Board meetings.

The
  Audit Committee is responsible for reviewing and appraising the Companys
  financial reporting practices and procedures, the adequacy of its system of
  internal accounting control, and any matters raised by its independent auditors.
  It also is responsible for reviewing the half-year and full-year results of
  the Company and its Interim and Annual Reports and Accounts prior to their submission
  to the full Board. The Audit Committee is comprised of the Non-executive directors
  identified above and is chaired by Walter Zeller. It meets formally twice each
  year.

The
  Remuneration Committee is responsible for approving the remuneration and other
  benefits, including pension contributions, bonus payments, share options and
  severance payments, of the executive directors and other members of senior management.
  The Remuneration Committee is comprised of the Non-executive directors identified
  above and is chaired by Sir Michael Beavis.

The
  Nomination Committee is responsible for making recommendations to the Board
  on any appointment to the Board. The Nomination Committee is comprised of the
  Chairman and Chief Executive Officer and the Non-executive directors identified
  above.

81

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Employees

The
  following table shows the distribution of the year end number of employees for
  the last three fiscal years by activity and geographic location:

|                                                               | Year
      ended December 31, | 
|-------------------------------------------------------------- | ----------------------------- | 
|                                                               | 1999                          | 
|                                                               |                               | 
|By category
      of activity:                                 |                               | 
|Corporate
      Management and Administration                  | 50                            | 
|Marketing
      operations                                     | 7                             | 
|Research
      and Development                                 | 161                           | 
|Manufacturing
      Operations                                 | 146                           | 
|                                                               |                               | 
|                                                               | 364                           | 
|                                                               |                               | 
|By geographic
      location:                                  |                               | 
|U.K.                                                           | 15                            | 
|Switzerland                                                    | 126                           | 
|France                                                         | 124                           | 
|U.S.
      and Canada                                          | 99                            | 
|                                                               |                               | 
|                                                               | 364                           | 
|                                                               |                               | 
|Number
      of employees with scientific qualifications:      |                               | 
|PhDs,
      masters or medical degrees                        | 68                            | 
|Scientists
      (including PhDs, masters or medical degrees) | 155                           | 
|                                                               |                               | 
|                                                               | 223                           | 
|                                                               |                               | 
|                                                               |                               | 

The
  Company believes that it has good relations with its employees and labor unions.

Share Ownership

The
  following table sets out the interests of Directors in the ordinary shares of
  the Company (including the interests of their immediate families and persons
  connected with the Directors) as at June 19, 2002.

|Name                                       |  | Number
      of
ordinary shares |  | Percentage
      of issued share capital | 
|------------------------------------------ |  | ------------------------------- |  | ---------------------------------------- | 
|                                           |  |                                 |  |                                          | 
|Ian Gowrie-Smith                           |  | 25,286,129                      |  | 4.442%                                   | 
|Michael
      Ashton                       |  | 266,004                         |  | 0.047%                                   | 
|Donald
      Nicholson                     |  | 223,590                         |  | 0.039%                                   | 
|Air Chief
      Marshal Sir Michael Beavis |  | 210,297                         |  | 0.037%                                   | 
|Dr.
      David Ebsworth                   |  | 8,000                           |  | 0.001%                                   | 
|Stephen
      Harris                       |  | 131,083                         |  | 0.023%                                   | 
|Dr.
      Jerry Karabelas                  |  | 6,667                           |  | 0.001%                                   | 
|Dr. Keith
      Mansford                   |  | 52,990                          |  | 0.009%                                   | 
|Walter
      Zeller                        |  | 91,162                          |  | 0.016%                                   | 
|                                           |  |                                 |  |                                          | 

In
  addition to the interests shown above Dr. A Karabelas had a beneficial interest
  in 2,000 American Depositary Receipts and Mr I R Gowrie-Smith had a beneficial
  interest in 20,000 convertible bonds, all issued by the Company.

The
  aggregate number of ordinary shares held by the Directors listed in the table
  above at June 19, 2002 was 26,275,922, representing 4.62% of the total ordinary
  shares outstanding.

The
  aggregate number of ordinary shares underlying the Companys outstanding
  options and warrants as of June 19, 2002 was 45,923,533.

82

---

Share Option Plans

The
  Company has five share option schemes; grants between 1996 and 1998 being made
  under the 1988 Executive Share Option Scheme and the European and North American
  Scheme and grants from April 1999 being made under the SkyePharma PLC 1999 Share
  Option Scheme, the European and North American 1999 Scheme and the SkyePharma
  Holding Inc 1999 Stock Option Plan for SkyePharma Inc. Employees.

Option Schemes

Executive
  Directors and senior executives participate in the SkyePharma PLC 1999 Share
  Option Scheme, the European and North American Scheme and the SkyePharma Holdings
  Inc. 1999 Share Option Plan as appropriate. Following publication in March 2001
  of revised Association of British Insurers guidelines for Share Incentive Schemes,
  the Board gained shareholder approval to make certain changes to the SkyePharma
  PLC 1999 Share Option Scheme and the SkyePharma Holdings Inc. 1999 Share Option
  Plan at the Annual General Meeting of the Company in June 2001. In particular,
  the individual participation limits of 200% of remuneration and the performance
  conditions were amended so that exercise is dependent upon total shareholder
  return performance against a comparator group of companies. All options granted
  to Executive Directors and senior executives during 2001 were made on this basis
  and vest after three years on a scale between 0% and 100% depending on the Companys
  performance relative to the performance against the comparator group of companies
  (in France, options granted during 2001 will still vest according to this three
  year performance period but they will not be exercisable until four years from
  date of grant). A further change approved by shareholders at the Annual General
  Meeting in June 2001was that future options will not be subject to re-testing.
  Accordingly, options granted in 2001 will not be re-tested. If the stringent
  performance requirements are not met at the end of the performance period, all
  options will lapse.

Prior
  to 2001 individual participation limits under the schemes were set at four times
  individual remuneration, with the exception of Super Options set at eight times
  remuneration. Options granted under the schemes (other than Super Options),
  granted at the market price ruling at the date of grant, are exercisable after
  three years and up to a maximum of 10 years from date of grant. Options granted
  under each of the schemes may be exercised only if, over a period of three consecutive
  years, the shareholder return of the Company exceeds the growth in FT-SE All
  Share Index over the same period. Super Options, also granted at the market
  price ruling at the date of grant, are exercisable after five years and are
  subject to more challenging performance conditions based upon top quartile performance
  in the FT-SE 250 Index.

The
  Company has decided within the current rules of the SkyePharma PLC 1999 Share
  Option Scheme to normally transfer the employers national insurance contributions
  on the gain on the exercise of unapproved options to the option-holder.

SkyePharma PLC 1999
  Share Option Scheme

The
  SkyePharma PLC 1999 Share Option Scheme (the Scheme) is divided
  into two parts, the first of which is approved by the Inland Revenue and the
  second of which is unapproved. The unapproved part is designed for the grant
  of options to employees the value of which may exceed the approved limit of
  £30,000. Except to the extent required to obtain Inland Revenue approval,
  the two parts of the Scheme are similar in all material respects.

The
  Scheme is governed by the Rules of the Scheme and is administered by the Board
  of Directors of the Company. Eligibility for participation in the Scheme is
  limited to those employees of SkyePharma, including Directors, who work for
  SkyePharma at least 25 hours per week, as may from time to time be invited to
  participate by the Board. No Director or employee will be entitled as of right
  to participate in the Scheme.

Options
  may be granted under the Scheme within six weeks of the day on which the Company
  first announces its annual or interim results in any year in which the Scheme
  is in operation or any

83

---

date on which
  the Directors determine that exceptional circumstances exist which justify the
  grant of options at that date. Initially, offers to participate also had to
  be made within six weeks of May 19, 1999, the date of approval of the Scheme
  by shareholders. No consideration is payable on the grant of an option. An option
  may not be granted to an individual selected to participate if the total subscription
  price thereunder would exceed 200% of the participants remuneration in
  that year. Remuneration includes salary, commission and bonuses, but excludes
  benefits in kind. In the case of the approved part of the Scheme, participants
  may only be granted options up to a value of £30,000. The Directors will
  only grant options to replace those already exercised if they are satisfied
  that there has been sustained improvement in the performance of the Company
  over not less than a two to three year period prior to such grant. Benefits
  under the Scheme are not pensionable.

The
  price per ordinary share at which a participant may acquire ordinary shares
  (the Option Price) on the exercise of an option will be at the discretion
  of the Board, but shall not be less than the market value (as defined in the
  Rules) of an ordinary share at the date of grant and shall not in any event
  be less than the nominal value of an ordinary share.

Options
  granted pursuant to the Scheme may not be exercized prior to the third anniversary
  of their grant and must be exercized before the expiry of ten years from the
  date of grant. Super options may not be exercized prior to the fifth anniversary
  of their grant and must be exercized before the expiry of ten years from the
  date of grant. Options may be exercised in whole or in part in respect of any
  number of ordinary shares subject to a minimum of 1,000 ordinary shares. An
  option granted under the Scheme may not be exercized unless the relevant condition,
  as specified by the Directors or a committee thereof and notified to the participant
  no later than the date of grant, is satisfied. In the case of a super option,
  the performance condition specified by the Directors will be more challenging
  and in accordance with criteria recommended by the Association of British Insurers.

If
  a participant leaves the service of the Company by reason of injury, disability,
  redundancy or normal retirement, or because the company by which such participant
  is employed ceases to be a member of the Company, such participant will be entitled
  to exercise any options in accordance with the rules of the Scheme. If a participant
  leaves the service of the Company by reason of death, such participants
  personal representative will be entitled to exercise any options within 12 months
  following the date of such participants death. If a participant leaves
  the service of the Company for any reason other than the foregoing, prior to
  2001, such participant will be entitled to exercise any options within six months
  of leaving the service of the Company. For options granted during 2001 and subsequently,
  the options would normally lapse.

If
  an offeror obtains control of the Company on the occurrence of (i) a general
  offer to acquire the whole of the ordinary share capital of the Company, (ii)
  pursuant to an offer, an offeror becoming entitled to acquire the shares under
  Sections 428-430 of the Companies Act 1985 (the Act) or (iii) a
  compromise or arrangement being sanctioned by the Court under Section 425 of
  the Act, then an option holder and the offeror may agree that the options held
  can be exchanged for equivalent options in the offeror. Alternatively, if an
  offeror gains control pursuant to either a general offer or a compromise or
  arrangement pursuant to Section 425 of the Act, then the option holder may in
  the case of a general offer, exercise his options within six months following
  the later of the date of the acquisition or the date upon which the offer becomes
  unconditional, or in the case of a court order sanctioning a compromise or arrangement,
  within six months of that date.

The European and North
  American Scheme

The
  European and North American Scheme is in all material aspects identical to the
  SkyePharma PLC 1999 Share Option Scheme, except that eligibility is restricted
  to employees in Europe and North America. No further grants will be made under
  this Scheme.

84

---

SkyePharma Holdings
  Inc 1999 Stock Option Plan for SkyePharma Inc. Employees

The
  SkyePharma Holdings Inc 1999 Stock Option Plan (the Plan) is governed
  by the rules of the Plan and is administered by the Board of Directors of the
  Company acting through the Remuneration Committee. The Plan will be available
  to all officers and key employees of SkyePharma Holdings Inc. and its subsidiaries
  who render services which contribute to its management growth or financial success,
  at the discretion of the Remuneration Committee. No Director or employee will
  be entitled as of right to participate in the Plan.

Options
  may be granted under the Plan within six weeks of the day on which the Company
  first announces its annual or interim results in the year which the Plan is
  in operation or any date on which the Remuneration Committee determines that
  exceptional circumstances exist which justify the grant of options at that date.
  Initially, options may be granted within six weeks of May 19, 1999, the date
  of approval of the Plan by shareholders. An option could not be granted to an
  individual selected to participate if the total subscription price thereunder
  exceeds 200% of his remuneration in that year. Remuneration includes salary,
  commission and bonuses, but excludes benefits in kind.

If
  an option is to qualify for tax benefits under certain provisions of the U.S.
  Internal Revenue Code of 1986 as amended, (Incentive Options) then
  the aggregate exercise price of options first becoming exercisable in any one
  calendar year may not exceed U.S.$100,000.

The
  price per ordinary share at which a participant may acquire ordinary shares
  (the Option Price) on the exercise of an option will be at the discretion
  of the Remuneration Committee, but shall not (in the case of Incentive Options)
  be less than the market value (as defined in the rules of the Plan), or (in
  the case of options which are not Incentive Options) 85% of the market value
  (as so defined) of an ordinary share at the date of grant and shall not in any
  event be less than the nominal value of an ordinary share.

Options
  must be exercised before the expiry of ten years from the date of grant. The
  earliest date at which an option may be exercised is at the discretion, in each
  case, of the Remuneration Committee. The Remuneration Committee may, but is
  not obliged, to impose conditions on the exercise of an option. In exercising
  its discretion in these respects, the Remuneration Committee will seek to act
  in the best interests of the Company, having regard to the conflicting requirements
  of, on the one hand, the custom and practice in the U.S. with regard to the
  grant of share options, and the expectations of U.S.-based employees, and on
  the other hand, the need to operate the Plan in such a way as complies with
  best U.K. practice.

The
  lapsing provisions and those relating to change of control under the Plan are
  in all material respects similar to the provisions of the SkyePharma PLC 1999
  Share Option Scheme, as described on page 84.

Outstanding Options

The
  table below sets forth certain information concerning the options issued to
  certain directors and officers of the Company pursuant to the Companys
  share option plans as of June  19, 2002. The remaining directors and officers
  of the Company have no outstanding ordinary or super options.

85

---

Ordinary Options

|Name                       |  | Number
      of ordinary
shares Underlying
Options Granted |  | Exercise
Price |  | First
      Exercise Date |  | Last
      Exercise Date | 
|-------------------------- |  | ---------------------------------------------------------- |  | -------------- |  | ------------------------- |  | ------------------------ | 
|                           |  |                                                            |  |                |  |                           |  |                          | 
|Ian Gowrie-Smith(1)(2)     |  | 1,234,568                                                  |  | 81.0p          |  | December
      6, 1999    |  | December
      6, 2006   | 
|                           |  | 575,539                                                    |  | 69.5p          |  | April
      19, 2002      |  | April
      19, 2009     | 
|                           |  | 1,008,313                                                  |  | 80.6p          |  | June
      12, 2004       |  | June
      12, 2011      | 
|                           |  | 1,178,022                                                  |  | 72.3p          |  | April,
      12 2005      |  | April
      12, 2012     | 
|Donald
      Nicholson(1)  |  | 533,333                                                    |  | 75.0p          |  | April
      29, 1999      |  | April
      29, 2006     | 
|                           |  | 86,022                                                     |  | 93.0p          |  | March
      31, 2001      |  | March
      31, 2008     | 
|                           |  | 172,662                                                    |  | 69.5p          |  | April
      19, 2002      |  | April
      19, 2009     | 
|                           |  | 446,650                                                    |  | 80.6p          |  | June
      12, 2004       |  | June
      12, 2011      | 
|                           |  | 521,826                                                    |  | 72.3p          |  | April,
      12, 2005     |  | April
      12, 2012     | 
|Michael
      Ashton(3)    |  | 639,077                                                    |  | 93.0p          |  | March
      31, 2001      |  | March
      31, 2008     | 
|                           |  | 871,451                                                    |  | 69.5p          |  | April
      19, 2002      |  | April
      19, 2009     | 
|                           |  | 868,486                                                    |  | 80.6p          |  | June
      12, 2004       |  | June
      12, 2011      | 
|                           |  | 1,014,661                                                  |  | 72.3p          |  | April
      12, 2005      |  | April
      12, 2012     | 
|Suzanne
      V. McLean(4) |  | 263,014                                                    |  | 91.25p         |  | June
      6, 2003        |  | June
      6, 2010       | 
|                           |  | 293,878                                                    |  | 81.67p         |  | November
      3, 2003    |  | November
      3, 2010   | 
|                           |  | 241,936                                                    |  | 80.6p          |  | June
      12, 2004       |  | June
      12, 2011      | 
|                           |  | 280,498                                                    |  | 72.3p          |  | April
      12, 2005      |  | April
      12, 2012     | 
|                           |  |                                                            |  |                |  |                           |  |                          | 

---

|(1) | 1,234,568 options in respect
of Ian Gowrie-Smith and 533,333 in respect of Donald Nicholson were issued pursuant
to the Executive Share Option Scheme. This scheme has subsequently expired in
respect of further grants and the remainder of these options were granted under
the SkyePharma PLC 1999 Share Option Scheme.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(2) | Also holds B
Warrants. See  Warrants.                                                                                                                                                                                                                                                                                 
|(3) | 639,077 issued pursuant
to the European and North American Scheme. The remainder of Michael Ashtons
options are granted under the SkyePharma PLC 1999 Share Option Scheme.                                                                                                                                                
|(4) | All options granted under
the SkyePharma PLC 1999 Share Option Scheme.                                                                                                                                                                                                                                                     

During
  the financial year ended December 31, 2001, 1,008,313 options were granted to
  Ian Gowrie-Smith, 446,650 options were granted to Donald Nicholson and 868,486
  options were granted to Michael Ashton. During 2002, 1,178,022 options were
  granted to Ian Gowrie-Smith, 521,826 options were granted to Donald Nicholson
  and 1,014,661 options were granted to Michael Ashton.

Super Options

|Name                   |  | Number
      of ordinary shares Underlying Options Granted |  | Exercise
Price |  | First
      Exercise Date |  | Last
      Exercise Date | 
|---------------------- |  | ---------------------------------------------------------- |  | -------------- |  | ------------------------- |  | ------------------------ | 
|                       |  |                                                            |  |                |  |                           |  |                          | 
|Ian Gowrie-Smith       |  | 2,385,009                                                  |  | 56.67p         |  | May
      25, 2004        |  | May
      25, 2009       | 
|Donald
      Nicholson |  | 1,022,147                                                  |  | 56.67p         |  | May
      25, 2004        |  | May
      25, 2009       | 
|Michael
      Ashton   |  | 2,044,293                                                  |  | 56.67p         |  | May
      25, 2004        |  | May
      25, 2009       | 
|                       |  |                                                            |  |                |  |                           |  |                          | 

The
  aggregate number of ordinary shares underlying outstanding options as of June
  19, 2002 was 44,555,865. Such options have exercise prices ranging between 44.8
  pence and 93 pence and expire between April 29, 2006 and May 24, 2012.

Deferred Share Bonus
  Plan

The
  Deferred Share Bonus Plan was introduced in 2001 and operated for the whole
  year. Approximately 25 senior executives (including all Executive Directors)
  participate in the Deferred Share Bonus Plan. It is designed to align the interests
  of participants with those of the shareholders by encouraging executives to
  build up and maintain shareholdings which are meaningful in the context of their
  remuneration. The Deferred Share Bonus Plan requires that there is a mandatory
  deferral of part of each annual bonus, in the form of Company shares (Executive
  Shares), for a

86

---

period of
  normally three years. The mandatory deferred proportion of the bonus is currently
  set at 50%. The Company currently provides one Matching Share for each Executive
  Share acquired (calculated on the gross bonus deferral). Currently, as set by
  a Committee of Directors, these matching shares will be released after three
  years provided that the executive remains in employment and the corresponding
  executive shares have not been sold.

The
  Deferred Share Bonus Plan is operated by the Directors of the Company (the Committee).
  The Remuneration Committee, the members of which are Non-executive Directors,
  supervise the operation of the Deferred Share Bonus Plan in respect of the executive
  directors of the Company. Eligible participants are any employees of the Company
  selected by the Committee, or a trustee acting on behalf of such an employees
  (Eligible Employee).

Awards
  may be granted in the form of Matching Shares or Deferred Shares (Award).
  Awards will be made as a deferred and conditional grant of shares. Shares will
  normally be purchased by executives with the amount of the bonus (net of tax)
  mandatorily deferred (Executive Shares). Matching Shares will always
  be granted in consideration for the purchase of Executive Shares. Deferred Shares
  may be granted subject to such terms and conditions as the Committee determines.
  It is the current intention of the Committee that only Awards of Matching Shares
  will be granted.

For
  the year ended December 31, 2002, the Committee has determined that 50% of bonus
  earned will be subject to a mandatory deferral and that the ratio of Matching
  Shares granted to Executive Shares purchased shall be 1:1. Unless the Committee
  so determines, there will normally be no further performance requirements relating
  to the release of awards unless the ratio of Matching Shares to Executive Shares
  proposed exceeds 1:1 when the Committee may attach additional performance conditions
  to the release of the Matching Shares (the maximum matching ratio is three Matching
  Shares for each Executive Share).

The
  maximum value of shares subject to an Award for financial year 2002 is 37.5%
  of the relevant Eligible Employees salary. It is the current intention
  of the Committee that the maximum value of an Award will not exceed 50% of the
  relevant Eligible Employees salary and/or bonus after the deduction of
  tax.

The
  Company may issue 10% of its shares within a ten year period to satisfy Awards
  to employees under the Deferred Share Bonus Plan and any other share scheme
  operated by the Company under which shares are issued. Where Awards are granted
  to executives which will be satisfied by the issue of shares no more than 5%
  of the Companys shares will be issued under the Deferred Share Bonus Plan
  or any other share scheme operated by the Company where shares are issued provided
  that this limit may be exceeded if the executives are required to satisfy more
  stretching performance requirements. The Remuneration Committee will be monitoring
  the issue of shares during the ten year period.

If
  the Company decides to grant Deferred Shares, the maximum value that may be
  granted to an individual in any year is 100% of the participants salary
  and/or bonus. This type of Award will normally be subject to the attachment
  of performance conditions. Participants shall have no rights to vote or receive
  dividends in respect of the shares subject to the Award during the holding period.

Shares
  subscribed will not rank for dividends payable by reference to a record date
  falling before the date on which the shares are acquired but will otherwise
  rank pari passu with existing shares. Application will be made to the relevant
  exchange on which the shares are listed for admission to trading on the relevant
  exchange for new shares that are to be issued following the release of an Award.

If
  a participant disposes of his Executive Shares during the holding period or
  ceases employment, his award will lapse unless the Committee in its absolute
  discretion determines otherwise. Awards are not transferable and will lapse
  if the participant attempts to do so. If a participant leaves employment prior
  to the expiration of the holding period, then the Award will

87

---

lapse unless
  the Committee in its absolute discretion determines otherwise. In the event
  of a takeover, reconstruction, amalgamation or winding up of the Company then
  all Awards will be released unless in certain circumstances they are exchanged
  for Awards over shares in the acquiring company. In the event of a merger or
  demerger of the Company, the Committee may determine that all Awards will be
  released or the number of shares comprised in an Award may be adjusted.

On
  a variation of the capital of the Company, the number of shares subject to an
  Award may be adjusted in such manner as the Committee determines and a professional
  advisor of the Company confirms to be fair and reasonable.

The
  Committee may not grant Awards under the Deferred Share Bonus Plan more than
  five years after its adoption unless the Deferred Share Bonus Plan is extended
  pursuant to shareholder authority for a further period of up to five years.

Amendments
  to the rules may be made at the discretion of the Committee. However, the provisions
  governing eligibility requirements, equity dilution, share utilization and individual
  participation limits and the adjustments that may be made following a rights
  issue or any other variation of capital and the limitations on the number of
  shares that may be issued cannot be altered to the advantage of participants
  without prior shareholder approval, except for minor amendments to benefit the
  administration of the Deferred Share Bonus Plan, to take account of a change
  in legislation or to obtain or maintain favorable tax, exchange control or regulatory
  treatment for participants or for the Company and any subsidiary.

Shares
  acquired, awards and any other rights granted pursuant to the Deferred Share
  Bonus Plan are non-pensionable.

The
  Company has the ability to use new issue shares under the Deferred Share Bonus
  Plan. Any shares issued under this Deferred Share Bonus Plan would be subject
  to the limits set out above for the Option Schemes (i.e., the shares issued
  under this Deferred Share Bonus Plan would be aggregated with the shares issued
  under the Option Schemes when calculating the number of shares issued against
  the limits). In addition, the provision of matching shares may be subject to
  the satisfaction of performance conditions. The attachment of performance conditions
  to matching shares means that the Deferred Share Bonus Plan would be classified
  as a long-term incentive plan requiring shareholder approval. It is the Companys
  current intention to provide additional performance conditions to matching shares
  where the ratio of matching shares to executive shares is greater than 1:1.

Share Purchase Plan

The
  Companys intention is to encourage share ownership at all levels of the
  business, thereby aligning all employees interests with those of the shareholders.
  Accordingly, the Company recently introduced the SkyePharma International Share
  Purchase Plan (the Plan) and the Employee Stock Purchase Plan which
  was launched in February 2002.

All
  employees (including all the Executive Directors) are eligible to participate
  in the Plan under the arrangements introduced in their respective countries.

The
  Plan complements the Option Schemes as it is more focused on employee retention
  and enables the same remuneration policy applied to executives under the Deferred
  Share Bonus Plan to be applied to all employee levels, i.e., awarding matching
  shares on the basis of the number of employee purchased shares.

Under
  the Plan, employees are given the opportunity of purchasing Company shares up
  to a maximum of £1,500 per year (or local currency equivalent). The Company
  will then match each share purchased with an award of Matching Shares.
  The maximum ratio of Matching Shares to employee purchased shares is two to
  one although the current ratio adopted by the Company is

88

---

one Matching
  Share for each share purchased. The Matching Shares are subject to a three year
  holding period. Normally, the Matching Shares will only be released at the end
  of this holding period of the corresponding employee purchased shares have not
  been sold and the employee is still in employment at that time. Awards under
  this Plan lapse if the holder is adjudicated bankrupt or when the holder sells
  his or her shares or ceases to be in the Companys employment during the
  restricted period determined by the Directors. Matching Shares cannot be released
  later than ten years after the date of the purchase of the shares.

The
  shares required for the Plan are currently being purchased in the market rather
  than being issued by the Company. The Company does, however, want to have the
  flexibility to issue new share for the purposes of the Plan if this becomes
  necessary or desirable in the future and hence shareholder approval was obtained
  for this amendment to the Plan at the Companys Annual General Meeting
  held on May 30, 2002.

Warrants

B
  Warrants

In
  January 1996, in connection with the Krypton acquisition, the Company issued
  59,443,235 B Warrants to subscribe for ordinary shares.

7,500,000
  of these warrants were issued for no consideration on the basis of one B
  Warrant for every 10 ordinary shares on the placing of 75,000,000 ordinary shares.
  17,354,522 of these warrants were issued for no consideration on the basis of
  one B Warrant for every 10 ordinary shares taken up by then existing
  shareholders under a rights issue of 173,545,215 ordinary shares.

4,589,180
  B Warrants were issued on the capitalization of certain Loan Notes.

A
  further 30,000,000 B Warrants to subscribe for ordinary shares to
  certain directors and officers of the Company and an unrelated third party.
  In addition, the Company agreed to issue up to 37,500,000 additional B
  Warrants pursuant to an earn-out arrangement. See Item 7: Major Shareholders
  and Related Party Transactions  Certain Arrangements in Respect of the
  Jago Acquisition.

All
  the B Warrants issued in January 1996 entitle the holders of such
  warrants to subscribe for ordinary shares. Effective upon the Companys
  May 1996 ten-to-one reverse stock split, each B Warrant entitles
  the holder thereof to subscribe for one-tenth of one ordinary share at an exercise
  price of 4p. Accordingly, the 30,000,000 outstanding B Warrants
  entitle the holders thereof to subscribe for 3,000,000 ordinary shares at an
  effective exercise price of 40 pence per share, and the 37,500,000 B
  Warrants that may be issued in connection with the Krypton earn-out would entitle
  the holders thereof to subscribe for 3,750,000 ordinary shares at an effective
  exercise price of 40 pence per share.

B
  Warrants may be exercised in whole or in part on any number of occasions prior
  to December 31, 2002, which is the final B exercise date. The ordinary
  shares issued pursuant to the exercise of the B Warrants will rank
  pari passu in all respects from the date of their issue with the existing
  ordinary shares then in issue.

In
  the event of the voluntary winding-up of the Company or any other return of
  capital prior to the final B exercise date, the B Warrantholders
  will be entitled to be treated as if they had immediately before the date of
  the winding-up resolution fully exercised their rights to acquire ordinary shares
  pursuant to the exercise of the B Warrants and in that event shall
  be entitled to receive out of the available assets pari passu with the holders
  of the ordinary shares such a sum as they would have received had they been
  the holders of such ordinary shares.

If
  while any B Warrants remain outstanding any offer or invitation
  by or on behalf of the Company by way of rights is made to the holders of the
  ordinary shares, the Company shall ensure that a like offer or invitation is
  made at the same time to each B Warrantholder as if B
  Warrants

89

---

had been validly
  exercised in full on the date immediately preceding the record date for such
  offer or invitation.

While
  B Warrants remain which have not been exercised the Company shall
  not make any issue of ordinary shares or of any other rights or securities by
  way of capitalization of profits or reserves (including any share premium account
  and capital redemption reserve) to the holders of ordinary shares nor shall
  the Company make any distribution out of its capital or capital reserves, except
  that these restrictions shall not prevent the issue of any ordinary shares by
  way of capitalization of profits or reserves at the option of a holder of ordinary
  shares in lieu of a cash dividend.

If
  while any B Warrants remain outstanding the ordinary shares shall
  be consolidated or sub-divided, then the number of ordinary shares (as so consolidated
  or sub-divided) to be issued on the exercise of the Warrants shall be adjusted
  pro rata accordingly.

The
  ordinary shares and B Warrants were listed on the London Stock Exchanges
  Alternative Investment Market on January 9, 1996 and on May 3, 1996 they were
  admitted to the London Stock Exchanges Official List; however, the B
  Warrants were not marketed or made available to the public. The B
  Warrantholders shall not be deemed to be shareholders of the Company. The B
  Warrants are transferable by instrument in writing in any usual or common form
  (or in such other form as the directors of the Company may approve).

The
  following table sets forth certain information concerning the B
  Warrants exercisable over the Companys ordinary shares:

|Name                                            |                   | Number
      of
B Warrants |  | Ordinary
      Shares Issuable Upon Exercise
B Warrants |  | Effective
      Exercise | 
|----------------------------------------------- | ----------------- | ---------------------------- |  | --------------------------------------------------------- |  | ------------------------ | 
|                                                |                   |                              |  |                                                           |  |                         
|                                                | At
June  19, 2002 |                             
|Ian Gowrie-Smith                                |                   | 19,797,143                   |  | 1,979,714                                                 |  | 40p                      | 
|Air Chief
Marshal Sir Michael Beavis            |                   | 84,000                       |  | 8,400                                                     |  | 40p                      | 
|Directors
and officers as a group (10  persons) |                   | 19,881,143                   |  | 1,988,114                                                 |  | 40p                      | 
|                                                |                   |                              |  |                                                           |  |                          | 

1,317,143
  B Warrants in which Ian Gowrie-Smith is shown above as having an
  interest are owned by and registered in the name of Estuary Investments Limited.
  The entire issued share capital of Estuary Investments Limited is held on behalf
  of The I.R. Gowrie-Smith Family Trust, the beneficiaries of which are certain
  members of Mr. Gowrie-Smiths family. In addition, 480,000 B
  Warrants are registered in the name of Pellinore Holdings Limited. All of the
  B Warrants registered in the name of Pellinore Holdings Limited
  are owned by Cangary Limited as trustee of The I.R. Gowrie-Smith Family Trust.

90

---

Assumption of SkyePharma
  Inc. Warrants

In
  connection with the acquisition of DepoTech, the Company agreed that outstanding
  warrants to purchase DepoTech common stock on the effective date of the merger
  would become warrants to purchase the Companys ordinary shares. The following
  table sets forth certain information concerning these warrants outstanding at
  December 31, 2001:

|Ordinary
      Shares issuable upon exercise of warrants |  | Exercise
      price per Ordinary Share |  | Expiration
      date | 
|-------------------------------------------------------- |  | --------------------------------------- |  | --------------------- | 
|                                                         |  |                                         |  |                       | 
|1,322,728                                                |  | $ 2.399                                 |  | 2001                  | 
|291,778                                                  |  | $ 1.453                                 |  | 2005                  | 
|                                                         |  |                                         |  |                       | 

The
  above table includes the additional warrants that the former DepoTech shareholders
  became entitled to when FDA approval was granted for DepoCyt in the U.S. in
  April 1999. On March 31, 2000 an additional 12.1 million shares became issuable
  on the signing of a development agreement for a macromolecule using DepoFoam.
  See Item 4: Information on the Company  History and Development
   Corporate Acquisitions. Following the issue of these shares on
  April 25, 2000 the number of outstanding warrants has been adjusted as shown
  below. No additional exercise price was payable.

|Ordinary
      Shares issuable upon exercise of warrants |  | Exercise
      price per Ordinary Share |  | Expiration
      date | 
|-------------------------------------------------------- |  | --------------------------------------- |  | --------------------- | 
|                                                         |  |                                         |  |                       | 
|1,683,472                                                |  | $ 1.885                                 |  | 2001                  | 
|371,353                                                  |  | $ 1.178                                 |  | 2005                  | 
|                                                         |  |                                         |  |                       | 

The
  Company has issued warrants to Paul Capital giving rights to subscribe for 5
  million SkyePharma ordinary shares at an exercise price of 73.75 pence, representing
  a 25% premium to the average trading price for the five trading days immediately
  prior to the closing date. At June 19, 2002, should the warrants be converted,
  they represented 0.9% of the Companys ordinary share capital. The warrants
  are divided into 2,500,000 Series D and 2,500,000 Series E warrants. The terms
  are identical save for the exercise dates. The Series D Warrants can be exercised
  at any time from the date of creation of the warrants until December 31, 2008
  and the Series E Warrants can be exercised at any time from June 30, 2002 until
  December 31, 2008. There are standard provisions in the deed polls creating
  the warrants relating to provision for adjustment of the warrant rights in certain
  circumstances such as a capital reorganisation and relating to certain restrictions
  on the Company such as capital distributions and there are a number of provisions
  in the deed polls designed to comply with U.S. Securities Act.

Item
  7: Major Shareholders and Related Party Transactions

Major Shareholders

As
  far as the Company is aware, it is neither directly nor indirectly owned or
  controlled by another corporation or any government, and there are no arrangements
  in place the operation of which may result in the change in its control.

91

---

As
  of June 19, 2002, the Company had notice that the following persons owned more
  than 5% of the outstanding ordinary shares:

|                          | Number
      of Ordinary Shares |  | %
      Holding | 
|------------------------- | ------------------------------- |  | --------------- | 
|                          |                                 |  |                 | 
|Dr. Jacques
      Gonella | 57,428,004                      |  | 10.1            | 
|                          |                                 |  |                 | 

The
  Companys major shareholders do not have different voting rights.

Dr.
  Jacques Gonella also has an interest in 12 million A Deferred Shares
  and 12 million B Deferred Shares, both of which do not confer upon
  the holder the right to receive notice of or attend or vote at any general meeting
  of the Company. The Deferred Shares automatically convert into ordinary shares
  on the occurrence of certain events. The contingencies determining the conversion
  of the Deferred Shares into ordinary shares are set out in Note 22 of the Notes
  to SkyePharmas Consolidated Financial Statements included in Item 18 of
  this Form 20-F. Since June 6, 2001, Dr. Gonella has reduced his holding of ordinary
  shares by 39,044,886 shares. Following the April 2002 U.S. launch of Paxil CR
  by GlaxoSmithKline and the first commercial sale of Paxil, Dr. Gonellas
  12 million A Deferred Shares will be converted into 12 million
  ordinary shares. The Company expects these shares to be converted within the
  next two months.

On
  May 14, 2002 SkyePharma announced its intention to enter a wide ranging strategic
  collaboration with Kowa Company Ltd., a leading Japanese company with substantial
  pharmaceutical interests, which proposes, under a Subscription Agreement signed
  on May 13, 2002, to make a strategic investment in SkyePharma. Kowa and SkyePharma
  have signed a separate non-binding Letter of Intent to evaluate Kowas
  acquisition of a 50% interest in SkyePharmas manufacturing facility in
  Lyon. At an Extraordinary General Meeting on June 7, 2002, shareholder approval
  was obtained for Kowa to acquire 30 million ordinary shares of 10p each in SkyePharma
  for a total consideration of approximately £25.3 million. This represents
  a holding of around 5% after the investment. As part of its investment, Kowa
  will have the right to appoint a non-executive director to the board of SkyePharma.

As
  of June 19, 2002, there were 20,075 holders of record of ordinary shares and
  51 of such holders were beneficial U.S. holders representing 16% of the ordinary
  shares. In addition, at June  19, 2002 there were 139 holders of record
  of American Depositary Shares (ADSs) representing 5.5% of the ordinary
  shares.

Certain Arrangements
  in Respect of the Jago Acquisition

The
  Company acquired Jago from Dr. Jacques Gonella, the sole shareholder of Jago,
  on May  3, 1996 at an initial purchase price of approximately £101
  million in cash (plus a prepayment of $6 million) and 30,711,856 ordinary shares
  (valued at 75 pence per share or approximately £23 million). In the fund
  raising associated with the transaction, Dr. Gonella purchased 84,789,463 ordinary
  shares of the Company, at a purchase price of 75 pence per share. In addition,
  the Company agreed to pay Dr. Gonella up to $5 million of any license income,
  royalties, milestones and contract fees received by the Company from the Joint
  Venture. The Company also agreed to pay Dr. Gonella up to $5 million in connection
  with any licensing, contract fees or other compensation payable by a third party
  to the Company (under the terms of a joint venture agreement or otherwise) in
  respect of the pulmonary drug delivery technologies acquired in the Jago acquisition.

The
  Company agreed to pay additional consideration in respect of the Jago acquisition
  pursuant to an earn-out arrangement. The agreement provides that the Company
  would pay Dr. Gonella an earn-out of the lesser of

| | (1) | $250 million; or
| | --- | ----------------

92

---

| | (2) | the aggregate of (A) 20%
of the Companys consolidated gross Geomatrix license income (which is generally
defined to include all income received by the Company relating to its Geomatrix
technologies, but excludes intracompany payments, reimbursements from third parties
relating to the Companys contract research and development expenses, and
any royalty payments from sales of Dilacor XR) and (B) 2% of its consolidated
gross Geomatrix sales revenues (which is generally defined to include any income
received by the Company relating to the sale of any products that directly or
indirectly use the Geomatrix technologies, but excludes intra-company sales),
over a period of 10 years commencing May 1996.
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The
  Company was obligated to make any payments due under the earn-out arrangement
  on a semi-annual basis over a period of 10 years, subject to the sum of the
  Companys consolidated gross Geomatrix license income and 10% of the Companys
  consolidated gross Geomatrix sales revenues reaching a threshold of $30 million
  in any given year. Each installment was to be equal to 20% of the Companys
  consolidated gross Geomatrix license income and 2% of the Companys consolidated
  gross Geomatrix revenues during the six months preceding the date of the semi-annual
  payment. The Company had the option to prepay the earn-out arrangements in cash
  for the present value of $250 million, discounted from 2006 at an annual rate
  of 8.5%, less any amount paid under the amount prior to the exercise of this
  option. Additionally, the Company had the option to pay $123 million to Dr.
  Gonella when the first $30 million threshold was reached, in full satisfaction
  of its earn-out obligation.

Under
  U.K. Generally Accepted Accounting Standards, the Directors are obliged to provide
  a reasonable estimate of the fair value of the earn-out likely to be payable
  in preparing the accounts. Having regard to these matters at December 31, 1998
  a provision of approximately £40 million was recognized based upon the
  Directors then estimate of the maximum amount likely to be due under a
  proposed Settlement Agreement with Dr Gonella.

The
  Directors believed that it was in the best interests of the Company to settle
  the deferred consideration to remove a significant uncertainty that complicated
  the evaluation of the Group. As a result, at March 31, 2000, the following amendments
  were made to the 1996 Acquisition Agreement for Jago as set out below:

1.   An
  amendment was signed by which the Company obtained the right to satisfy the
  deferred consideration in shares rather than cash.

2.   A
  Settlement Agreement was signed establishing the full and final settlement,
  in shares, of the deferred consideration payable to the vendor of Jago, Dr.
  Gonella. The Settlement Agreement received shareholder approval on July 11,
  2000 and the following shares were issued on July 20, 2000:

| | (i) | 6 million ordinary shares;
| | --- | --------------------------

| | (ii) | 12 million A
Deferred Shares. These Deferred Shares automatically convert into 12  million
ordinary shares on the first commercial sale of Paroxetine/Paxil in combination
with Geomatrix technology under the current Licence Agreement; and
| | ---- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (iii) | 12 million B
Deferred Shares. These Deferred Shares automatically convert into 12  million
ordinary shares on the Companys receipt of a royalty statement under the
current License Agreement stating that reported sales of Paroxetine/Paxil in combination
with the Geomatrix technology have exceeded $1,000 million during any calendar
year prior to January 1, 2006, or exceeded $337 million between January 1, 2006
and May 3, 2006.
| | ----- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

In
  the event that any of the conditions set out above are not satisfied prior to
  May 3, 2006 the Deferred A and B Shares will not be
  converted and will be cancelled. The vendor shall not be entitled to any other
  compensation nor additional compensation.

93

---

As
  a result of the above agreement, the deferred consideration payable was re-classified
  and recorded as Shares and warrants to be issued, at December 31,
  1999. In the Directors opinion, 30  million ordinary shares were
  likely to be issued under the terms of the Settlement Agreement. This represented
  a settlement valued at £33 million based upon a closing share price of
  110 pence on March 31, 2000, the date of the agreement.

The
  6 million Ordinary Shares and 12 million Deferred A and B
  shares were issued on July 20, 2000. On issue, the Ordinary Shares were recorded
  as share capital and share premium at a price of 94.25 pence. The Deferred Shares
  were recorded within non-equity share capital and non-equity share premium at
  a price of 94.25 pence, the fair value of those shares, on July 20, 2000.

Following
  the April 2002 U.S. launch of Paxil CR by GlaxoSmithKline and the first commercial
  sale of Paxil, Dr.  Gonellas 12 million A Deferred Shares
  will be converted into 12 million ordinary shares. The Company expects these
  shares to be converted within the next two months.

In
  the years ended December 31, 1998, 1999 and 2001, and during the period to June
  19, 2002, the Company has made no payments to Dr. Gonella in respect to the
  foregoing earn-out arrangement. In the year ended December 31, 2000 no payments
  were made to Dr. Gonella except the issue of shares described above.

Certain Arrangements
  in Respect of the Krypton Acquisition

The
  Company acquired Krypton on January 8, 1996 from a series of trusts in which
  Ian Gowrie-Smith, Richard Stewart and Joseph Bozman (each of whom was then a
  director or officer of the Company), Amy Ikerd (an employee of the Company)
  and an unrelated third party had interests. At the time of the acquisition,
  Gowrie-Smith held a 64% interest, Stewart held a 3.8% interest and Bozman held
  a 11.7% interest in Krypton through their respective trusts. The total consideration
  paid by the Company (as adjusted to reflect the Companys 1996 reverse
  stock split) was 30 million ordinary shares and 30 million B Warrants
  that entitle the holders to subscribe for an additional 3 million ordinary shares
  at an effective exercise price of 40 pence per share. The Company agreed to
  pay additional consideration pursuant to an earn-out arrangement of up to 37.5
  million additional ordinary shares and 37.5 million additional B
  Warrants that would entitle the holders to subscribe for 3.75 million ordinary
  shares at an effective exercise price of 40 pence per share.

The
  agreement provides that these be issued contingent on a change in control of
  the company at a share price of not less than 80 pence compounded at an annual
  rate of 10 per cent, or on satisfaction of the following conditions and hurdles:

| | (a) | for each of the first
three Krypton Products (as defined below) that obtains ANDA approval before December
31, 2003, an additional 2.5 million ordinary shares and 2.5  million additional
B Warrants shall be issued;
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (b) | in the event that the
aggregate annual sales of the Krypton Products exceed $50 million and the Company
is profitable in respect of such products before December 31, 2003, 10  million
additional ordinary shares and 10 million additional B Warrants shall
be issued;
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (c) | in the event that the
aggregate annual sales of the Krypton Products and the annual revenues of the
Company exceed $200 million and the Company is profitable in respect of such products
before December 31, 2003, an additional 10 million ordinary shares and 10 million
additional B Warrants shall be issued; and
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (d) | in the event that the
aggregate annual sales of the Krypton Products and the annual revenues of the
Company exceed $275 million and the Company is profitable in respect of such Products
before December 31, 2003, an additional 10 million ordinary shares and 10 million
additional B Warrants shall be issued.
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

94

---

In
  the event that any two of hurdles (a), (b) and ? are satisfied in relation to
  any single years sales, only the first such hurdle shall be considered
  as satisfied. For purposes of this paragraph, the term Krypton Products
  refers to glipizide, glyburide, ISMN, midazolam HCL and vecuronium bromide.

Immediately
  prior to the acquisition of Krypton, Gowrie-Smith held 13.9%, Stewart held 0.5%
  and Bozman held 1.6% of the ordinary shares of the Company. At that time, if
  all of the outstanding Convertible Preference Shares and then existing A
  Warrants had been exercised, Gowrie-Smith would have held an interest of 19.58%,
  Stewart an interest of 0.4% and Bozman an interest of 1.35% in the Company.
  Immediately after the acquisition, Gowrie-Smith held 24.7%, Stewart held 1.2%
  and Bozman held 3.9% of the ordinary shares of the Company. At that time, if
  all of the outstanding Convertible Preference Shares, A Warrants
  and B Warrants had been exercised, Gowrie-Smith would have held
  an interest of 26.38%, Stewart an interest of 1.17% and Bozman an interest of
  3.63% in the Company.

During
  1998, the Company revised its strategy for the sale and distribution of its
  generic products in the U.S. and is currently in discussions with potential
  collaborative partners to sell and distribute its generic products, including
  the products acquired as part of the acquisition of Krypton. Certain of the
  hurdles relating to the Krypton acquisition were not formulated to take account
  of the detailed arrangements currently envisaged by the Company. Should any
  of the Krypton products be approved and marketed, the Company will need to renegotiate
  elements of the Krypton acquisition agreement primarily hurdles (b), ? and (d)
  above should hurdle (a) be met.

At
  December 31, 2001, the Directors have the opinion that until products are marketed
  and agreement is reached with the Krypton vendors, certain elements of deferred
  consideration cannot be estimated with any degree of certainty. Therefore, the
  deferred consideration recognized in the accounts at December 31, 2001, related
  only to the extent that the first hurdle is reasonably expected to be met. Consequently,
  an estimate of £4.8 million (2000: £5.0 million) has been recognized
  as deferred consideration based on market prices on December 31, 2001, for 7.5
  million Ordinary shares and 7.5 million B Warrants.

In
  January 1996, the Company repaid an amount of approximately £1 million
  that had been loaned interest-free to Krypton by the Ian Gowrie-Smith Family
  Trust to fund certain drug development and milestone payments.

Certain Arrangements
  in Respect of VECAP

Dr.
  Thomas Rinderknecht, a Non-executive Director of the Company until November
  2000, is the sole director and manager of VECAP Venture Capital Partners AG,
  a Swiss company that specializes in raising finance and investing in commercial
  opportunities. In 1993, Jago purchased for Sfr 700,000 certain exclusive marketing
  rights to a dry powder inhaler that was being developed pursuant to a collaborative
  arrangement between VECAP and NEOTEK Pharmaceutical Technologies AG. The development
  of the inhaler was abandoned, and in June 1996 VECAP agreed to reimburse Jago
  Sfr 532,500 of the purchase price.

In
  1994, VECAP provided Jago with $1.5 million of working capital in exchange for
  an option over the worldwide rights for the development of products by Jago.
  Subsequently, however, as part of the Joint Venture arrangement, Jago, VECAP
  and Genta agreed that VECAP would waive its right to exercise the option and
  that the Joint Venture would repay VECAP the $1.5 million it had loaned Jago
  out of revenues it may receive from third parties. Such repayment is to be made
  in return for the Joint Ventures obtaining the same rights over the same
  products in respect of which VECAP had waived its option. The Joint Venture
  also agreed to pay Jago a $1.5 million manufacturing license fee also payable
  out of future revenues. In 1996, the Joint Venture received revenues that triggered
  the obligation to pay VECAP and Jago each $500,000. Jago agreed to defer this
  payment, but VECAP refused to do so. In February 1997 Jago loaned $0.5 million
  to the Joint Venture to enable it to satisfy, in part, its obligation to VECAP.
  Thus, as of December 31, 1998, the Joint Venture was still obligated to pay
  $1 million to VECAP and $1.5 million to Jago out of future qualifying income
  and to repay a $0.5 million loan to Jago.

95

---

In
  March 1999, an agreement was signed between the Company and Genta Inc. concerning
  the future operations of the joint venture. The agreement reflects the above
  obligations in an agreed distribution schedule. Under the agreement, an amount
  of $1,000,000 became payable to VECAP as its share of the Joint Ventures
  license fees. This charge was recognized during the year ended December 31,
  1999 and the payment made in 2000. During 1999, Dr Gonella, who was up until
  June 6, 2001, a Director of the Company became a shareholder of VECAP.

Other Arrangements

At
  the end of December 1998, Ian Gowrie-Smith, (through a family owned trust),
  acquired a 50% interest in 10 East 63rd Street Inc., the company which owns
  10 East 63rd Street, a property in New York. SkyePharma PLC has been in occupation
  of that property since January 1997, subject to a tenancy agreement which expired
  in January 1999, under which it paid a rent of $300,000 per annum. In January
  1999 the lease was renewed on the same terms. In February 2001 the lease was
  renewed for two years based upon an independent valuation. The annual rent was
  increased to $360,000 per annum with effect from February 1, 2001. Approximately
  one-third of the premises are subleased to Fifth Avenue Capital Inc., an unrelated
  company.

At
  June 20, 2002, the Company owned 14.2% of Astralis. The Company has the right
  to elect one member of the Board of Directors of Astralis, and Michael Ashton,
  our Chief Executive Officer, has been appointed to the Astralis Board. On December
  12, 2001, the Company announced the completion of several agreements concerning
  the development of Astralis novel injectable vaccine therapy, for the
  treatment of all forms of psoriasis, a chronic skin disorder. A first generation
  of Psoraxine, developed by Astralis, has completed clinical studies in Venezuela
  with encouraging results. Under the terms of a technology access agreement,
  the Company will receive from Astralis a $5 million license fee for access to
  DepoFoam and other relevant drug delivery technologies. In addition, through
  a service agreement, the Company will provide all development, manufacturing,
  pre-clinical and clinical development services to Astralis for second generation
  Psoraxine, up to the completion of Phase II clinical studies. On completion
  of Phase II studies, Astralis will offer SkyePharma the option to acquire the
  worldwide licensing and distribution rights to Psoraxine. If SkyePharma does
  not take the option, Astralis will seek a marketing partner to fund Phase III
  clinical studies and to provide a sales and marketing infrastructure. The Company
  anticipates that an Investigational New Drug (IND) application to start Phase
  I-B clinical studies will be filed with the FDA in 2002.

Item
  8: Financial Information

Legal Proceedings

In
  April 1998, a class action lawsuit was filed in California against DepoTech
  (renamed SkyePharma Inc.) and two of its former officers. The lawsuit alleges
  violations of federal securities laws and seeks unspecified money damages on
  behalf of a class of shareholders who purchased DepoTech common stock during
  the period April 1, 1996 through December 18, 1997. On May 11, 1999, the judge
  granted SkyePharma Inc.s motion to dismiss and dismissed the plaintiffs
  complaint with leave to amend by June 8, 1999. The plaintiffs timely filed an
  amended complaint and the defendants responded with a motion to dismiss. After
  completion of several rounds of briefing and supplemental briefing on the motion,
  the Court denied the motion without prejudice to the defendants and without
  addressing its merits, instructed the parties to repeat the process from the
  beginning. Pursuant to a court-ordered schedule, the plaintiffs filed their
  Second Amended Complaint by April 14, 2000. The District Court dismissed the
  action on January 26, 2001. However, following the dismissal, on February 9,
  2001, the plaintiffs filed an appeal to the U.S. Court of Appeals for the Ninth
  circuit, claiming that the District Court had erred in dismissing the plaintiffs
  complaint and also that the District Court had erred in permitting certain motions
  to strike. The U.S. Court of Appeals on February 6, 2002 denied the plaintiffs
  appeal and so affirmed the District Court decision.

On
  June 13, 2000, a summons was filed in respect of a claim by RTP Pharma Corporation
  against SkyePharma PLC and others in the U.S. District Court for the District
  of Columbia. The

96

---

lawsuit seeks
  the correction of inventorship of a U.S. patent, U.S. Patent Number 5,858,410,
  together with unspecified monetary damages on behalf of RTP. This action was
  dismissed with prejudice by agreement of the parties on August 10, 2001.

On
  May 8, 2001, a summons in a civil case was filed in respect of a claim by Andrx
  Corporation, a generic drug manufacturer against SkyePharma Inc. in the U.S.
  District Court, Southern District of Florida. The lawsuit alleges violations
  of anti-trust law and common law of the United States and the State of Florida.
  The complainant seeks injunctive relief and unspecified monetary damages from
  Elan Corporation PLC (who was the original defendant in this case) and SkyePharma
  arising from an alleged agreement entered into by Elan and SkyePharma to prevent
  competition for a controlled release version of the product Naprelan made with
  the active drug Naproxen. This action was settled with prejudice on June 
  7, 2002 without the payment of any damages.

On
  April 12, 2002 a Class Action Complaint was filed by the Action Alliance of
  Senior Citizens of Greater Philadelphia, a non-profit Pennsylvania corporation,
  individually and on behalf of all others similarly situated, against Elan Corporaton
  PLC and SkyePharma Inc. The action was filed in the U.S. District Court for
  the Eastern District of Pennsylvania. The lawsuit is brought under the Sherman
  Anti-trust Act (the Act) and alleges a contract in restraint of
  trade in violation of the Act as well as an attempt to monopolise the market
  for Naprelan in violation of the Act. The Plaintiff seeks injunctive relief
  only against Elan (the first defendant) as well as SkyePharma Inc. Although
  the Company cannot predict the outcome, the Company believes that the claim
  is without merit and will vigorously defend the action.

On
  May 15, 2002 a Class Action complaint was filed by Jeanine Michelle Weber, individually
  and on behalf of 22 U.S. States against SkyePharma Inc. The action was filed
  in the U.S. District Court for the Eastern District of Pennsylvania. The action
  is brought under the Sherman Anti-trust Act (the Act) and certain
  state consumer fraud and anti-trust acts. The action alleges that Elan Corporation
  PLC (the first defendant) and SkyePharma Inc entered into a contract in restraint
  of trade in violation of the Act. Further, it alleges monopolization, or an
  attempt to monopolize, the market for Naprelan in violation of the Act. The
  Plaintiffs seek damages and treble damages as well as an accounting for gains
  resulting from such violations. Although the Company cannot predict the outcome,
  the Company believes that the claim is without merit and will vigorously defend
  the action.

Contingent
  liabilities and guarantees are summarized in Note 20 of the Notes to SkyePharmas
  Consolidated Financial Statements included in Item 18 of this Form 20-F.

Dividend Policy

The
  Company has not paid dividends in the last 10 years on its ordinary shares and
  does not intend to pay dividends in the foreseeable future. The Company currently
  intends to retain all of its earnings to finance its operations and future growth.
  Moreover, under current U.K. law, the Companys accumulated realized profits
  must exceed its accumulated realized losses (on a non-consolidated basis)
  before dividends can be paid.

97

---

Item
  9: The Offer and Listing

Stock Price
  History

The
  principal trading market for the ordinary shares is the London Stock Exchange
  (the LSE).

The
  table below sets forth, for the periods indicated, the highest and lowest middle-market
  quotations for the Companys ordinary shares as derived from the Daily
  Official List of the LSE and the highest and lowest sales prices of the Company
  ADSs on The Nasdaq National Market. The mid-closing price for the ordinary shares
  on the LSE and the last sale price for the ADSs on The Nasdaq National Market
  on June 19, 2002 was 69.5 pence per ordinary share and $10.60 per ADS. See Exchange
  Rate Information with respect to the exchange rates applicable to the
  periods set forth below.

|                                             | SkyePharma
Ordinary Shares                   |  | SkyePharma
ADSs               | 
|-------------------------------------------- | -------------------------------------------- |  | ----------------------------- | 
|                                             | High                                         |  | Low                           | 
|                                             |                                              |  |                               | 
|                                             | (Pence
      per the Company
Ordinary Share) |  | ($
      per the Company ADS) | 
|Year
      ended December 31, 1997           | 93.0                                         |  | 48.0                          | 
|Year
      ended December 31, 1998           | 103.5                                        |  | 44.5                          | 
|Year
      ended December 31, 1999           | 88.0                                         |  | 45.3                          | 
|Year
      ended December 31, 2000           | 190.0                                        |  | 49.8                          | 
|Year
      ended December 31, 2001           | 108.0                                        |  | 49.0                          | 
|                                             |                                              |  |                               | 
|Year
      ended December 31, 2000           |                                              |  |                               | 
|First
      Quarter                          | 190.0                                        |  | 49.8                          | 
|Second
      Quarter                         | 133.0                                        |  | 85.5                          | 
|Third
      Quarter                          | 95.3                                         |  | 80.0                          | 
|Fourth
      Quarter                         | 88.5                                         |  | 63.0                          | 
|                                             |                                              |  |                               | 
|Year
      ended December 31, 2001           |                                              |  |                               | 
|First
      Quarter                          | 108.0                                        |  | 63.5                          | 
|Second
      Quarter                         | 97.5                                         |  | 78.0                          | 
|Third
      Quarter                          | 90.0                                         |  | 50.0                          | 
|Fourth
      Quarter                         | 69.0                                         |  | 49.0                          | 
|                                             |                                              |  |                               | 
|Year
      ended December 31, 2002           |                                              |  |                               | 
|First
      Quarter                          | 74.0                                         |  | 52.5                          | 
|Second
      Quarter (through June 19, 2002) | 80.3                                         |  | 64.0                          | 
|                                             |                                              |  |                               | 
|Monthly
      Data                           |                                              |  |                               | 
|December
      2001                          | 61.25                                        |  | 52.00                         | 
|January
      2002                           | 74.00                                        |  | 60.75                         | 
|February
      2002                          | 67.25                                        |  | 56.25                         | 
|March
      2002                             | 67.00                                        |  | 52.50                         | 
|April
      2002                             | 80.25                                        |  | 64.00                         | 
|May 2002                                     | 79.75                                        |  | 68.50                         | 
|June
      2002 (through June 19, 2002)      | 78.00                                        |  | 68.00                         | 
|                                             |                                              |  |                               | 

Stock Exchanges on which
  the Companys Shares are Listed

The
  ordinary shares were admitted to the Official List of the LSE on May 3, 1996
  and are quoted under the symbol SKP. Prior to that time, the ordinary
  shares traded on the LSEs Alternative Investment Market, from January
  9, 1996 to May 2, 1996, and on the LSEs Unlisted Securities Market, from
  October 26, 1987 to January 8, 1996.

The
  LSE classifies equity securities based on 12 levels of normal market size, ranging
  from 200,000 to 500 shares. These levels of normal market size reflect the turnover
  by value in each of

98

---

the Companys
  shares over the past 12 months. The ordinary shares have a normal market size
  of 10,000 shares. The normal market size classification for each equity security
  is subject to quarterly review in the light of trading volumes in the previous
  quarter and to adjustment, as appropriate. U.K. market makers are normally required
  to make a two-way market in sizes of not less than the normal market size and
  to report all transactions to the LSE within three minutes. In respect of securities
  with a normal market size greater than 2,000, transactions of not more than
  three times normal market size are published immediately as to size and price,
  but transactions in excess of three times normal market size are not published
  until after 60 minutes.

The
  Companys ADSs are quoted on The Nasdaq National Market under the symbol
  SKYE. ADSs are issued by the Bank of New York as depositary under
  the Deposit Agreement dated as of July 8, 1998. Each ADS represents ten ordinary
  shares.

Item
  10: Additional Information

Memorandum
  and Articles of Association

The
  following summarizes certain provisions of SkyePharma PLCs memorandum
  and articles of association and applicable English law. The summary is qualified
  in its entirety by reference to the UK Companies Act and SkyePharmas memorandum
  and articles of association. Investors can obtain copies of the memorandum and
  articles of association by contacting the Company Secretary at the registered
  office of the Company. At the Annual General Meeting of the Company held on
  May 30, 2002 the Company adopted new Articles of Association. The amendments
  were proposed simply in order to bring the Companys Articles of Association
  in line with developments since the last date of adoption on January 8, 1996
  and do not effect any major change.

The
  amendments were as follows:

| |  | The existing Articles
      of Association contain rights and obligations relating to a class of share
      capital in the Company (Convertible Preference Shares), which
      are no longer in issue following their conversion in full on March 25, 1996,
      on the basis of 20 Ordinary Shares for each existing Convertible Preference
      Share. The new Articles of Association, therefore, reflect the conversion
      of the Convertible Preference Shares and omit any reference to such class
      of shares.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | The new Articles of Association
      also contain appropriate provisions, in accordance with the Electronic Communications
      Act 2000, to enable the Company, at the discretion of the Directors, to
      distribute circulars, publish certain information and issue notices to Shareholders,
      in accordance with and subject to the limitations imposed by the Companies
      Act 1985 (the Act) and other relevant statutes, by electronic
      means.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | The new Articles of Association
      also contain details of the present share capital of the Company, which
      reflects the increase, reorganisation and consolidation of the share capital
      of the Company which took place from time to time up to an including April
      29, 1996 and the increases of the authorized share capital which took place
      on May 19, 1999 and July 11, 2000. As of the date of this Circular, which
      is reflected in the new Articles of Association, the authorized share capital
      of the Company is £111,400,000 divided into 1,090,000,000 Ordinary
      Shares of 10p each and 12,000,000 A Deferred Shares of 10p each
      and 12,000,000 B Deferred Shares of 10p each.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | The new Articles of Association
      now include references to the Financial Services and Markets Act 2000 (FSMA),
      which came into force on December 1, 2001, replacing the Financial Services
      Act 1986 (FSA). The references merely replace the previous sections
      of the FSA with the corresponding new corresponding sections of the FSMA.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | The new Articles of Association
      remove provision 92 (L) that previously allowed the Company to relax, by
      ordinary resolution, the provisions under Article 92 governing the types
      of transactions a director may be interested in, when such involvement also
      involves the Company itself.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

99

---

Objects and Purposes

The
  Company was incorporated in England and Wales on March 10, 1910 under the Companies
  Act 1908 as a Company limited by shares and was re-registered in 1982 as a public
  limited company under the Companies Act 1948 to 1980. The Company is registered
  under company number 107582. The Company was re-registered as SkyePharma PLC
  on January 8, 1996.

The
  objects of the Company are set out in full in clause 4 of its memorandum of
  association which provides, among other things, that the Companys objects
  are to carry on in any part of the world any business which, in the opinion
  of the directors, may seem conveniently carried on in connection with or ancillary
  to any of several diverse businesses, including applying for, purchasing or
  otherwise acquiring and holding, using, developing, selling, licensing or otherwise
  disposing of or dealing with patents, copyrights, designs, trade marks, secret
  processes, know-how and inventions and any interest therein.

Directors

The
  business and affairs of the Company shall be managed by the directors.

A
  director may not vote or count towards the quorum on any resolution concerning
  any proposal in which he (or any connected person) to his knowledge has a material
  interest (other than by virtue of his interest in securities of the Company),
  which includes the voting of compensation awards to themselves. This prohibition
  does not apply to any of the following matters:

| | (i) | a contract or arrangement
      for giving to the director security or as guarantee or indemnity in respect
      of
| | --- | --------------------------------------------------------------------------------------------------------------------

| |  | a) | money lent by him or obligations
      undertaken by him or by any other person at the request of or for the benefit
      of the Company or any of its subsidiaries; or
| |  | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | b) | a debt or obligation of
      the Company or any of its subsidiaries for which he himself has assumed
      responsibility in whole or part under a guarantee or indemnity or by the
      giving of security.
| |  | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (ii) | where the Company or any
      of its subsidiary undertakings is offering securities in which offer the
      director is, or may be, entitled to participate as a holder of securities
      or in the underwriting or sub underwriting of which the director is to participate;
| | ---- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (iii) | relating to another company
      in which he and any persons connected to him do not to his knowledge hold
      an interest in shares representing 1 per cent or more of any class of the
      equity share capital or of the voting rights in that company;
| | ----- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (iv) | relating to a pension,
      superannuation or similar scheme or retirement, death or disability benefits
      scheme or employees share scheme which has been approved by the inland
      revenue or is conditional upon that approval or does not award him any privilege
      or benefit not awarded to the employees to whom the scheme relates; or
| | ---- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (v) | concerning insurance which
      the Company proposes to maintain or purchase for the benefit of persons
      including directors.
| | --- | -----------------------------------------------------------------------------------------------------------------------------------

A
  director may not vote or be counted in the quorum on any resolution which concerns
  his or her own appointment with the Company or any other company in which the
  Company is interested.

The
  UK Companies Act requires a director of a company who is in any way interested
  in a contract or proposed contract with the Company to declare the nature of
  his interest at a meeting of the directors of the Company.

The
  directors may exercise all the powers of the Company to borrow money. The borrowing
  powers contained in the articles of association may only be varied by amending
  the articles of association.

100

---

A
  director must retire at the conclusion of the first annual general meeting after
  he reaches the age of 70 and thereafter annually, and being eligible, may stand
  for re-election.

A
  director is not required to hold an interest in the shares of the Company.

At
  each annual general meeting of the Company one-third of the directors for the
  time being (rounded down if necessary) are required to resign from office.

Classes of Shares

The
  authorized share capital of the Company is £111,400,000 divided into 1,090,000,000
  ordinary shares of 10p each, 12,000,000 A Deferred Shares of 10p
  each and 12,000,000 B Deferred Shares of 10p each.

Provisions
  set out applying to the Ordinary Shares of 10p each:

(a) Dividends

Under
  English law, dividends are payable on the Companys ordinary shares only
  out of profits available for distribution, as determined in accordance with
  accounting principles generally accepted in the UK and by the Companies Act
  1985. The Company in general meeting may declare dividends by ordinary resolution,
  but such dividend may not exceed the amount recommended by the directors. The
  directors may pay interim dividends if it appears they are justified by the
  Companys financial position.

Dividends
  unclaimed for 12 years after they become due for payment shall, unless the directors
  resolve otherwise, be forfeited and revert to the Company.

(b) Voting Rights

Every
  member who is present in person or represented at any general meeting of the
  Company and who is entitled to vote has one vote on a show of hands. On a poll
  every member who is present or represented has one vote for every share held.

Holders
  of ordinary shares may appoint a proxy, including a beneficial owner of those
  shares, to attend, speak and vote on their behalf at any shareholders
  meeting.

If
  any sum remains unpaid in relation to a members shareholding, that member
  is not entitled to vote that share unless the board otherwise determines.

(c) Rights to share in
  the Companys profits

The
  profits of the Company available for dividend and resolved to be distributed
  shall be applied in the payment of dividends (if any are declared) to members
  in accordance with their respective rights and priorities.

(d) Rights to share in
  any surplus in the event of liquidation

On
  a winding up of the Company, the balance of the assets available for distribution,
  after deduction of any provision made under the Companies Act 1985 and subject
  to any special rights attaching to any class of share, shall be applied in repaying
  to the members of the Company the amounts paid up on the shares held by them.
  Any surplus assets will belong to the holders of any ordinary shares then in
  issue according to the numbers of shares held by them.

(e) Redemption and sinking
  provisions

The
  Company may by special resolution create and sanction the issue of shares which
  are, or at the option of the Company or the holder are to be liable, to be redeemed,
  subject to and in accordance with the provisions of the Companies Act 1985.
  The special resolution sanctioning the issue shall also make such alterations
  to the articles of the Company as are necessary to specify the terms on which
  and the manner in which the shares are to be redeemed. The Company has no

101

---

redeemable
  shares in issue and there are no provisions relating to sinking funds in the
  articles of the Company. The Company has not established a sinking fund.

(f) Liability to further
  capital calls by the Company.

The
  directors may make calls upon the members in respect of any monies unpaid on
  their shares. Each member shall pay to the Company at the time and place specified
  the amount called on his shares. A call may be revoked or postponed as the directors
  determine.

Provisions set out applying
  to the A Deferred Shares:

The
  A Deferred Shares do not confer any right to participate in any
  profits of the Company or to receive notice of or attend any general meeting
  of the Company. Each A Deferred Share will be redesignated as an
  ordinary share within thirty days of the sale of a Geomatrix version of Paroxetine/
  Paxil in accordance with the Companys existing license agreement with
  SmithKline Beecham, PLC. At present, the Company is in the process of converting
  the A Deferred Shares.

The
  right of redesignation attaching to the A Deferred Shares will lapse
  if this event has not taken place by May 3, 2006.

Provisions set out applying
  to the B Deferred Shares:

The
  B Deferred Shares do not confer any right to participate in any
  profits of the Company or to receive notice of or attend any general meeting
  of the Company. Each B Deferred Share will be redesignated as an
  ordinary share on the first occasion that total reported sales of Geomatrix
  versions of Paroxetine/ Paxil exceed $1 billion in any calendar year ending
  prior to January 1, 2006 or, if that does not happen, then if such sales exceed
  $337 million in the period January 1, 2006 to May 3, 2006.

The
  right of redesignation attaching to the B Deferred Shares will lapse
  if this event has not taken place by May 3, 2006.

(g) Substantial shareholders

There
  are no provisions contained in the articles of the Company which discriminate
  against any existing or prospective holder of securities as a result of such
  shareholder owning a substantial number of shares.

Variation of rights

Whenever
  the capital of the Company is divided into different classes of shares the special
  rights attached to any class of shares may be modified either with the consent
  in writing of the holders of three quarters of the issued shares of the class
  or with the sanction of an extraordinary resolution passed at a separate general
  meeting of the holders.

Shareholders Meetings
  and Notices

The
  Company is required to hold a general meeting each year as its annual general
  meeting in addition to other meetings (called extraordinary general meetings)
  as the directors think fit. The type of meeting will be specified in the notice
  calling it. Not more than 15 months may elapse between the date of one annual
  general meeting and the next.

In
  the case of an annual general meeting or the meeting for the passing of a special
  resolution (requiring the consent of a 75% majority) 21 clear days notice
  is required. In other cases 14 clear days notice is required. The notice
  must specify the place, the date, and the hour of the meeting, and the general
  nature of the business to be transacted.

102

---

Limitations on foreign
  shareholdersThere
  are no limitations imposed by English law or the Companys memorandum or
  articles of association on the right of non-residents or foreign persons to
  hold or vote the Companys ordinary shares other than the limitations that
  would generally apply to all of the Companys shareholders.

Change of ControlThere
  are no provisions in the articles of association that would have an effect of
  delaying, deferring or preventing a change in control of the Company and that
  would operate only with respect to a merger, acquisition or corporate restructuring
  involving the Company or any of its subsidiaries.

Disclosure of Interests
  in SharesThe
  UK Companies Act gives the Company the power to require persons whom it believes
  to have, or to have acquired in the previous three years, an interest in its
  voting shares to disclose certain information with respect to those interests.
  Failure to supply the information required may lead to disenfranchisement of
  the relevant shares and a prohibition on their transfer and receipt of dividends
  and other payments in respect of those shares. In this context the term interest
  is widely defined and will generally include an interest of any kind whatsoever
  in voting shares, including an interest of a holder of SkyePharma ADSs.

Material ContractsAt
  March 31, 2000, a Settlement Agreement was signed establishing the full and
  final settlement of the deferred consideration payable to the vendor of Jago,
  Dr Gonella. The settlement was approved by shareholders at the Companys
  Annual General Meeting held on July 11, 2000 to be made entirely in shares.
  On July 20, 2000, 6 million ordinary shares were issued to Dr Gonella at a price
  of 94.25 pence. Also on July 20, 2000, 12 million A and 12 million
  B non-equity Deferred Shares were issued. The contingencies determining
  the conversion of the Deferred Shares into ordinary shares are set out in Note
  22 of the Notes to SkyePharmas Consolidated Financial Statements included
  in Item 18 of this Form 20-F. Following the April 2002 U.S. launch of Paxil
  CR by GlaxoSmithKline and the first commercial sale of Paxil, Dr. Gonellas
  12 million A Deferred Shares will be converted into 12 million
  ordinary shares. In the event that the remaining conditions are not satisfied
  prior to May 3, 2006, the B Deferred Shares will not be converted
  and will be cancelled. The vendor will not be entitled to any other compensation
  nor additional compensation. On issue, the ordinary and Deferred Shares were
  recorded in share capital and share premium. At December 31, 1999 prior to the
  issue of shares, in the Directors opinion, 30 million ordinary shares
  were likely to be issued under the terms of the Settlement Agreement and a figure
  of £33 million was recorded within shares and warrants to be issued, based
  upon a closing share price of 110 pence on March 31, 2000, the date of the Settlement
  Agreement.

For
  a description of transactions with related parties, see Item 7: Major
  Shareholders and Related Party Transactions.

Exchange ControlsThere
  are currently no limitations, either under the laws of the United Kingdom or
  in the Articles of Association of the Company, on the rights of non-residents
  to hold, or to vote on Ordinary Shares. Additionally, there are currently no
  United Kingdom foreign exchange control restrictions on the conduct of the Companys
  operations or affecting the remittance of dividends on unrestricted shareholders
  equity.

TaxationThe
  following is a summary of the material U.S. federal income and the United Kingdom
  tax consequences of the ownership and disposition of ordinary shares or ADSs
  by a U.S. Holder and a Non-U.S. Holder that holds the ordinary shares or ADSs
  as capital assets.

103

---

This
  summary is not exhaustive of all possible tax considerations and does not take
  into account the specific circumstances of any particular investors (such as
  tax-exempt organizations, financial institutions, certain insurance companies,
  dealers in securities and currencies, traders in securities that elect to use
  a mark-to-market method of accounting, investors liable for alternative minimum
  tax, investors that actually or constructively own 10% or more of the voting
  stock of the Company, investors that hold ordinary shares or ADSs as part of
  a straddle or a hedging or conversion transaction, holders who acquired the
  stock units or ADS as compensation, or investors whose functional currency is
  not the U.S. dollar), some of which may be subject to special rules.

This
  summary is based on the tax laws of the United States (including the Internal
  Revenue Code of 1986, as amended, its legislative history, existing and proposed
  regulations, published rulings and court decisions) and on the tax laws of the
  United Kingdom all as in effect on the date hereof, as well as on the Convention
  Between the Government of the United States of America and the Government of
  the United Kingdom of Great Britain and Northern Ireland for the Avoidance of
  Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on
  Income and Capital Gains as in effect on the date hereof (the Treaty)
  and on the Convention between the Government of the United States and the Government
  of the United Kingdom of Great Britain and Northern Ireland for the Avoidance
  of Double Taxation and Prevention of Fiscal Evasion with respect to Taxes on
  Estates of Deceased Persons and on Gifts as in effect on the date hereof (the
  Estate Tax Treaty), all of which are subject to change (or changes
  in interpretation), possibly with retroactive effect. The governments of the
  United States and the United Kingdom have signed a new convention between the
  two countries for the avoidance of double taxation with respect to taxes on
  income and capital gains (the Income Tax Convention). The proposed
  convention is subject to ratification in accordance with the procedures of each
  country and would replace the existing convention, which has been in effect
  since 1980. If the new Income Tax Convention is ratified, it may alter the U.S.
  and U.K. tax consequences of the ownership and disposition of ordinary shares
  or ADSs by a U.S. Holder or Non-U.S. Holder. Except where specifically noted,
  this summary is based on the Treaty currently in force between the United States
  and the United Kingdom, and does not discuss the impact of the new Income Tax
  Convention on any U.S. Holders or Non-U.S. Holders of any ordinary shares or
  ADSs.

In
  addition, this summary is based in part upon the representations of the Depositary
  and the assumption that each obligation in the Deposit Agreement and any related
  agreement will be performed in accordance with their respective terms.

For
  purposes of this discussion, a U.S. Holder is any beneficial owner
  of ordinary shares or ADSs that is

| | (1) | a citizen or resident
      of the United States;
| | --- | -------------------------------------------------

| | (2) | a corporation organized
      under the laws of the United States or any State thereof;
| | --- | ---------------------------------------------------------------------------------------

| | (3) | an estate the income
      of which is subject to United States federal income tax without regard to
      its source; or
| | --- | -------------------------------------------------------------------------------------------------------------------------

| | (4) | a trust if a court
      within the United States is able to exercise primary supervision over the
      administration of the trust and one or more United States persons have the
      authority to control all substantial decisions of the trust.
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

A
  Non-U.S. Holder is any beneficial owner of ordinary shares or ADSs
  that is not a United States person for United States federal income tax purposes.

The
  discussion does not address any aspects of United States taxation other than
  federal income taxation. In addition, the following summary of certain U.K.
  tax considerations does not address the tax consequences of a U.S. Holder

|104
|-----

---

| | (1) | that is resident (or,
      in the case of an individual, ordinarily resident) in the United Kingdom
      for U.K. tax purposes,
| | --- | ---------------------------------------------------------------------------------------------------------------------------------

| | (2) | whose holding of ordinary
      shares or ADSs is effectively connected with a permanent establishment in
      the United Kingdom through which such U.S. Holder carries on business activities
      or, in the case of an individual who performs independent personal services,
      with a fixed base situated therein,
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (3) | that is a corporation
      which alone or together with one or more associated corporations, controls
      directly or indirectly, 10% or more of the Company,
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (4) | who is not otherwise
      eligible for benefits under the Treaty with respect to income and gain from
      the ordinary shares or ADSs.
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------

Prospective
  investors are urged to consult their own tax advisors regarding the United States
  federal, state and local and the United Kingdom and other tax consequences of
  acquiring, owning and disposing of ordinary shares and ADSs. In particular,
  a U.S. Holder should confirm its shares as an eligible U.S. Holder, as defined
  below with its advisor and should discuss any possible consequences of failing
  to qualify as an elibible U.S. Holder.

In
  general, and taking into account the earlier assumptions, for United States
  federal income and United Kingdom income tax purposes, holders of ADRs evidencing
  ADSs will be treated as the beneficial owners of the ordinary shares represented
  by those ADSs. Exchange of shares for ADSs and ADSs for shares, generally will
  not be subject to United States federal income tax or to United Kingdom income
  tax.

Taxation of Capital
  GainsUnited Kingdom TaxationU.S.
  Holders who are not resident or (in the case of individuals only) ordinarily
  resident for tax purposes in the United Kingdom will not be liable for U.K.
  tax on capital gains realized on the disposal of their ADSs or ordinary shares
  unless such ADSs or ordinary shares are used, held or acquired for the purposes
  of a trade, profession or vocation carried on in the United Kingdom through
  a branch or agency.

United States TaxationU.S. HoldersUnder
  the United States federal income tax laws, and subject to foreign investment
  company (PFIC) rules discussed below, upon a sale or other disposition
  of ordinary shares or ADSs, a U.S. Holder will recognize gain or loss for United
  States federal income tax purposes in an amount equal to the difference between
  the U.S. dollar value of the amount realized and the U.S. Holders tax
  basis (determined in U.S. dollars) in such ordinary shares or ADSs. Generally,
  such gain or loss, will be long-term capital gain or loss if the U.S. Holders
  holding period for such ordinary shares or ADSs exceeds one year and any such
  gain or loss will be from sources within the United States for foreign tax credit
  limitation purposes. Long-term capital gain of a non-corporate U.S. Holder is
  generally subject to a maximum tax rate of 20%.

Non-U.S. HoldersA
  Non-U.S. Holder will not be subject to United States federal income tax in respect
  of gain recognized on a sale or other disposition of ordinary shares or ADSs
  unless:

| | (1) | the gain is effectively
      connected with a trade or business of the Non-U.S. Holder in the United
      States (and is attributable to a permanent establishment maintained in the
      United States by such Non-U.S. Holder, if an applicable income tax treaty
      so requires as a condition for such Non-U.S. Holder to be subject to United
      States taxation on a net
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

105

---



| |     | income basis in respect
      of gain from the sale or other disposition of the ordinary shares or ADSs);
      or                                                                                           
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (2) | in the case of a Non-U.S.
      Holder who is an individual, such holder is present in the United States
      for 183 or more days in the taxable year of the sale and certain other conditions
      exist.

Effectively
  connected gains realized by a corporate Non-U.S. Holder may also, under certain
  circumstances, be subject to an additional branch profits tax at
  a 30% rate or such lower rate as may be specified by an applicable income tax
  treaty.

Taxation of DividendsUnited Kingdom TaxationThe
  taxation of dividends paid in respect of the ordinary shares depends upon the
  law and practice in force at the time dividends are paid. The following summary
  is based upon current law and practice, which may change by the time that any
  dividends become payable.

For
  dividends paid on or after April 6, 1999, under the Treaty an Eligible U.S.
  Holder is entitled to receive from the U.K. a tax credit (Tax Credit Amount)
  in respect of any dividend received equal to one-ninth of the amount of the
  cash dividend. The payment is reduced by an amount equal to 15% of the sum of
  the dividend payment and the tax credit amount (the 15% U.K. withholding
  tax). The 15% U.K. withholding tax will not, however, exceed such amount
  and reduces the Tax Credit Amount to $0.

For
  the purposes of this document, the term Eligible U.S. Holder means
  a U.S. Holder that is a beneficial owner of an ordinary share or an ADS and
  the cash dividend paid with respect thereto and that

| | (1) | is an individual or
      a corporation resident in the United States for purposes of the Treaty (and,
      in the case of a corporation, is not also resident in the United Kingdom
      for U.K. tax purposes);
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (2) | is not a corporation
      which, alone or together with one or more associated corporations, controls,
      directly or indirectly, 10% or more of the voting stock of the Company;
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (3) | holds the ordinary
      share or ADS in a manner which is not effectively connected with a permanent
      establishment in the United Kingdom through which such U.S. Holder carries
      on business or with a fixed base in the United Kingdom from which such holder
      performs independent personal services;
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (4) | under certain circumstances,
      is not an investment or holding company, 25% or more of the capital of which
      is owned, directly or indirectly by persons that are not individuals resident
      in, and are not nationals of, the United States;
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (5) | under certain circumstances,
      is not exempt from federal income tax on dividend income in the United States;
      and
| | --- | ---------------------------------------------------------------------------------------------------------------------------

| | (6) | is eligible for benefits
      under the Treaty with respect to income and gain from the ordinary shares
      or ADSs.
| | --- | ------------------------------------------------------------------------------------------------------------------------

An
  Eligible U.S. Holder may claim the Treaty Payment to which he is entitled from
  the Inland Revenue. However, under Rev. Proc. 2000-13 an Eligible U.S. Holder
  may elect to be treated as receiving the Tax Credit Amount due under the Treaty
  without affirmatively making a claim to the Inland Revenue. Please see a complete
  discussion of these rules below in the discussion of U.S. taxation.

106

---

While
  a claim for payment is no longer necessary, if a claim for payment is made,
  it must be made within 6 years of the U.K. year of assessment (generally, the
  12 month period ending April 5 in each year) in which the related dividend was
  paid. The first such claim by an Eligible U.S. Holder for payment under these
  procedures is made by sending the appropriate U.K. forms in duplicate to the
  Philadelphia Service Center, Foreign Certification Unit, P.O. Box 16347, DP535B,
  Philadelphia, PA 19114. If the Eligible U.S. Holder qualifies as a U.S. resident,
  the Internal Revenue Service will certify the form to that effect and forward
  it to the U.K. Inland Revenue. Forms may be obtained by writing to the U.S.
  Internal Revenue Service, Assistant Commissioner International, 950 LEnfant
  Plaza South, S.W., Washington, D.C. 20024, Attention: Taxpayers Service Division.
  Because a refund claim is not considered made until the U.K. tax authorities
  receive the appropriate form from the Internal Revenue Service, forms should
  be sent to the Internal Revenue Service well before the end of the applicable
  limitation period. Any claim under these procedures after the first claim should
  be filed directly with the U.K. Financial Intermediaries and Claims Office,
  Fitzroy House, P.O. Box 46, Nottingham NG2 1BD, England.

U.S.
  Holders who are not resident or ordinarily resident for tax purposes in the
  United Kingdom and have no other source of U.K. income are not required to file
  a U.K. income tax return.

United States TaxationU.S. HoldersUnder
  the United States federal income tax laws, and subject to the passive foreign
  investment company PFIC rules discussed below, U.S. Holders will
  include in gross income the gross amount of any dividend paid (including the
  Tax Credit Amount) by the Company out of its current or accumulated earnings
  and profits (as determined for United States federal income tax purposes) as
  ordinary income when the dividend is actually or constructively received by
  the U.S. Holder, in the case of ordinary shares, or by the Depositary, in the
  case of ADSs. The dividend will not be eligible for the dividends-received deduction
  generally allowed to United States corporations in respect of dividends received
  from other United States corporations. The amount of the dividend distribution
  includible in income of a U.S. Holder will be the U.S. dollar value of the British
  pounds sterling payments made, determined at the spot British pound sterling/U.S.
  dollar rate on the date such dividend distribution is includible in the income
  of the U.S. Holder, regardless of whether the payment is in fact converted into
  U.S. dollars. Generally, any gain or loss resulting from currency exchange fluctuations
  during the period from the date the dividend payment is includible in income
  to the date such payment is converted into U.S. dollars will be treated as ordinary
  income or loss. Such gain or loss will generally be from sources within the
  United States for foreign tax credit limitation purposes. Distributions in excess
  of current and accumulated earnings and profits, as determined for United States
  federal income tax purposes, will be treated as a return of capital to the extent
  of the U.S. Holders basis in the ordinary shares or ADSs and thereafter
  as capital gain.

Subject
  to certain limitations, the United Kingdom tax withheld in accordance with the
  Treaty (i.e., an amount equal to the Tax Credit Amount) will be creditable against
  the U.S. Holders United States federal income tax liability. To qualify
  for such credit, U.S. Holders must make an election of Form 8833, (Treaty-Based
  Return Position Disclosure). Form 8833 is filed with the Eligible U.S. Holders
  U.S. income tax return for the relevant year, in addition to any other filings
  that may be required.

For
  foreign tax credit limitation purposes, the dividend will be income from sources
  without the United States, but generally will be treated separately, together
  with other items of passive income (or, in the case of certain holders,
  financial services income).

In
  general, the Income Tax Convention, if ratified, would replace the Treaty. The
  Income Tax Convention would make a number of important changes. In particular,
  under the Income Tax Convention, U.S. holders would not be entitled to a Tax
  Credit Amount and accordingly there would be no imposition of U.K. withholding
  tax and no associated United States foreign tax credit. The Income Tax Convention
  would generally be effective, in respect of taxes withheld at source, for

107

---

amounts paid
  or credited on or after the first day of the second month after the Income Tax
  Convention is ratified. Other provisions of the Income Tax Convention would
  take effect on the first January next following the date of ratification. If
  the Income Tax Convention is ratified, the rules of the Treaty would remain
  in effect until the effective dates described above. However, a U.S. holder
  would be entitled to elect to have the Treaty apply in its entirety for a period
  of twelve months after the effective dates of the Income Tax convention.

Non-U.S. HoldersDividends
  paid to a Non-U.S. Holder in respect of ordinary shares or ADSs will not be
  subject to United States federal income tax unless such dividends are effectively
  connected with the conduct of a trade or business within the United States by
  such Non-U.S. Holder (and are attributable to a permanent establishment maintained
  in the United States by such Non-U.S. Holder, if an applicable income tax treaty
  so requires as a condition for such Non-U.S. Holder to be subject to United
  States taxation on a net income basis in respect of income from ordinary shares
  or ADSs), in which case the Non-U.S. Holder generally will be subject to tax
  in respect of such dividends in the same manner as a U.S. Holder. Any such effectively
  connected dividends received by a non-United States corporation may also, under
  certain circumstances, be subject to an additional branch profits tax
  at a 30% rate or such lower rate as may be specified by an applicable income
  tax treaty.

Additional United
  States Federal Income Tax ConsiderationsPFIC RulesIn
  general, the Company will be a PFIC with respect to a U.S. Holder if, for any
  taxable year in which the U.S. Holder holds the Companys ordinary shares
  or ADSs, either:

| | (1) | 75% or more of the
      gross income of the Company for the taxable year is passive income; or
| | --- | -----------------------------------------------------------------------------------------------

| | (2) | 50% or
      more of the value (determined on the basis of ;quarterly averages) of the
      Companys assets is attributable to assets that produce or are held
      for the production of passive income.
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

For
  this purpose, passive income generally includes dividends, interest, royalties,
  rents (other than certain rents and royalties derived in the active conduct
  of a trade or business) annuities and gains from assets that produce passive
  income of this nature. If a foreign corporation owns at least 25% by value of
  the stock of another corporation, the foreign corporation is treated for purposes
  of the PFIC tests as owning its proportionate share of the assets of the other
  corporation, and as receiving directly its proportionate share of the other
  corporations income. Although the matter is not entirely free from doubt,
  the Company believes that its ordinary shares and ADSs should not be treated
  as the stock of a PFIC for United States federal income tax purposes. However
  this conclusion is a factual determination made annually and thus may be subject
  to change.

If
  the Company is treated as a PFIC, a U.S. Holder that did not make a qualified
  electing fund (QEF) or mark-to-market election, each as described
  below, would be subject to special rules with respect to (a) any gain realized
  on the sale or other disposition of ordinary shares or ADSs and (b) any excess
  distribution by the Company to the U.S. Holder (generally, any distributions
  to the U.S. Holder in respect of the ordinary shares or ADSs during a single
  taxable year that are greater than 125% of the average annual distributions
  received by the U.S. Holder in respect of the ordinary shares or ADSs during
  the three preceding taxable years or, if shorter, the U.S. Holders holding period
  for the ordinary shares or ADSs). Under these rules:

| | (1) | the gain or excess
      distribution would be allocated ratably over the U.S. Holders holding period
      for the ordinary shares or ADSs;
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------

|108
|-----

---

| | (2) | the amount allocated
      to the taxable year in which the gain or excess distribution was realized
      would be taxable as ordinary income;
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------

| | (3) | the amount allocated
      to each prior year, with certain exceptions, would be subject to tax at
      the highest tax rate in effect for that year; and
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------

| | (4) | the interest charge
      generally applicable to underpayments of tax would be imposed in respect
      of the tax attributable to each such year.
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------

A
  U.S. Holder that makes a QEF election will be currently taxable on its pro rata
  share of the Companys ordinary earnings and net capital gain (at ordinary
  income and capital gain rates, respectively) for each taxable year of the Company,
  regardless of whether or not distributions were actually received. The U.S.
  Holders basis in the ordinary shares or ADSs will be increased to reflect
  taxed but undistributed income. Distributions of income that had previously
  been taxed will result in a corresponding reduction of basis in the ordinary
  shares or ADSs and will not be taxed again as a distribution to the U.S. Holder.

Special
  rules apply with respect to the calculation of the amount of the foreign tax
  credit with respect to excess distributions by a PFIC or, in certain cases,
  QEF inclusions.

A
  U.S. Holder will not be subject to the PFIC tax rules described above if the
  U.S. Holder makes a mark-to-market election with respect to its ordinary shares
  or ADS. Instead, in general, an electing shareholder will include in each year,
  as ordinary income, the excess, if any, of the fair market value of the ordinary
  shares or ADSs at the end of the taxable year over its adjusted basis and will
  be permitted an ordinary loss in respect of the excess, if any, of the adjusted
  basis of the ordinary shares of ADSs over their fair market value at the end
  of the taxable year (but only to the extent of the net amount of previously
  included income as a result of the mark-to-market election). The electing U.S.
  Holders basis in the ordinary shares or ADSs will be adjusted to reflect
  any such income or loss amounts.

A
  U.S. Holder who owns ordinary shares or ADSs during any year that the Company
  is a PFIC must file Internal Revenue Service Form 8621.

Additional United
  Kingdom ConsiderationsGift and Inheritance
  TaxesAn
  individual who is domiciled in the U.S. and who is not a national of the United
  Kingdom for the purposes of the Estate Tax Treaty will normally not be subject
  to U.K. inheritance tax in respect of the ordinary shares or ADSs on the individuals
  death or on a gift of the ordinary shares or ADSs during the individuals
  lifetime, provided that any applicable U.S. federal gift or estate tax liability
  is paid, unless the ordinary shares or ADSs are part of the business property
  of a permanent establishment of an enterprise of the individual in the United
  Kingdom or pertain to a fixed base in the United Kingdom of the individual used
  for the performance of independent personal services.

Where
  the ADSs or ordinary shares have been placed in trust by a settlor who, at time
  of settlement, was a U.S. Holder, the ADSs or ordinary shares will normally
  not be subject to U.K. inheritance tax unless the settlor, at the time of settlement,
  was not domiciled in the United States and was a U.K. national. In the exceptional
  case where the ADSs or ordinary shares are subject both to U.K. inheritance
  tax and to U.S. federal gift or estate tax, the Estate Tax Treaty generally
  provides for the tax paid in the United Kingdom to be credited against tax paid
  in the United States or for tax paid in the United States to be credited against
  tax payable in the United Kingdom based on priority rules set out in that Treaty.

Stamp Duty and Stamp
  Duty Reserve TaxA
  transfer for value of the ordinary shares will generally be subject to U.K.
  ad valorem stamp duty, normally at the rate of 0.5% of the amount or value of
  the consideration given for the transfer, rounded up to the nearest £5.
  Stamp duty is normally a payable by the Purchaser.

109

---

An
  agreement to transfer ordinary shares for money or moneys worth will normally
  give rise to a charge to stamp duty reserve tax (SDRT) at the rate
  of 0.5% of the amount or value of the consideration unless an instrument of
  transfer of the ordinary shares has been executed in pursuance of the agreement
  and duly stamped. SDRT is a liability of the purchaser.

Stamp
  duty is charged at the higher rate of 1.5%, rounded up to the nearest £5,
  or SDRT at the rate of 1.5%, of the amount or value of the consideration, or
  in some circumstances the value of the ordinary shares, on a transfer or issue
  of the ordinary shares (a) to, or to a nominee for, a person whose business
  is or includes the provision of clearance services or (b) to, or to a nominee
  for, a person whose business is or includes issuing depositary receipts. An
  election is available whereby clearance services may, under certain conditions,
  elect for the 0.5% rate of SDRT to apply to a transfer of shares into, and to
  transactions within, the service.

In
  accordance with the terms of the Deposit Agreement, any tax or duty payable
  by the Depositary or the Custodian of the Depositary on the deposit of ordinary
  shares will be charged by the Depositary to the holder of the ADS.

No
  U.K. stamp duty will be payable on the acquisition or transfer of an ADS evidenced
  by an ADR or beneficial ownership of an ADR, provided that any instrument of
  transfer or written agreement to transfer remains at all times outside the United
  Kingdom. An agreement for the transfer of an ADR or beneficial ownership of
  an ADR will not give rise to a liability to SDRT.

Any
  transfer for value of the underlying ordinary shares represented by ADSs evidenced
  by ADRs, may give rise to a liability to U.K. stamp duty or SDRT at the rate
  of 0.5% as indicated above. However, on a transfer from the Custodian of the
  Depositary to a holder of an ADS upon cancellation of the ADS a fixed U.K. stamp
  duty of £5 per instrument of transfer only will be payable.

Documents on DisplayIt
  is possible to read and copy documents referred to in this annual report on
  Form 20-F that have been filed with the SEC at the SECs public reference
  room located at 450 Fifth Street, NW, Washington D.C. 20549. Please call the
  SEC at 1(800) SEC 0330 for further information on the public reference rooms
  and their copy charges.

Item 11: Quantitative
  and Qualitative Disclosures about Market RiskThe
  Company holds financial instruments to finance its operations and to manage
  the currency, interest rate and liquidity risks that arise from those operations.
  A discussion of the Companys treasury policies employed to manage these
  risks is set out below. In the numerical disclosures that follow, short-term
  debtors and creditors that arise directly as a result of the Companys
  operations are excluded from all disclosures with the exception of the table
  below on currency exposures.

110

---

Liquidity riskThe
  Companys policy is to maintain continuity of funding through a mixture
  of long-term debt and bank loans, raised to cover specific projects, and through
  the issue of shares to collaborative partners, where necessary, to obtain development
  contracts. Short-term flexibility is provided through the use of overdrafts.
  The maturity profile of the Companys debt at December 31, 2001 is set
  out below.

Maturity of financial
  liabilities

|                                   | December
      31, 2000
      Total |  | December
      31, 2001
      Total |  | December
      31, 2001
      Fixed rate financial liabilities |  | December
      31, 2001
      Floating rate financial liabilities | 
|---------------------------------- | ----------------------------------- |  | ----------------------------------- |  | -------------------------------------------------------------- |  | ----------------------------------------------------------------- | 
|                                   |                                     |  |                                     |  |                                                                |  |                                                                   | 
|                                   | (in
      thousands)               
|Within
      one year              | 9,940                               |  | 7,257                               |  | 930                                                            |  | 6,327                                                             | 
|Between
      one and two years    | 4,023                               |  | 1,893                               |  | 927                                                            |  | 966                                                               | 
|Between
      two and three years  | 1,790                               |  | 4,206                               |  | 4,040                                                          |  | 166                                                               | 
|Between
      three and four years | 3,141                               |  | 59,570                              |  | 59,404                                                         |  | 166                                                               | 
|Between
      four and five years  | 59,565                              |  | 166                                 |  |                                                               |  | 166                                                               | 
|Beyond
      five years            | 2,563                               |  | 2,400                               |  |                                                               |  | 2,400                                                             | 
|                                   |                                     |  |                                     |  |                                                                |  |                                                                   | 
|                                   | 81,022                              |  | 75,492                              |  | 65,301                                                         |  | 10,191                                                            | 
|                                   |                                     |  |                                     |  |                                                                |  |                                                                   | 
|                                   |                                     |  |                                     |  |                                                                |  |                                                                   | 

Foreign currency riskAll
  of the Companys operations are based overseas in Continental Europe, the
  U.S. and Canada giving rise to exposures to changes in foreign exchange rates,
  notably the Swiss Franc, Euro, U.S. Dollar and Canadian Dollar. Beginning in
  June 1996, and where natural hedges have not been sufficient or possible, the
  Company has selectively entered into forward currency contracts to fix certain
  of the non-sterling funding requirements of its principal subsidiaries. The
  contracts generally have maturities not exceeding twelve months. Gains or losses
  on these contracts are not recorded until the maturity of the contracts at which
  time they are recorded as an adjustment to administrative expenses, consistent
  with the underlying non-sterling expenses that are required to be funded. No
  forward contracts were entered into during 1999. During 2000, £59.4 million
  of funding was raised in sterling, and as a result, since then, the Group has
  actively used forward currency contracts and currency options. No gain or loss
  was recognized on such contracts during 2000 or 2001.

At
  December 31, 1999 the Company had no outstanding contracts to buy foreign currency.
  At December 31, 2000, the Company had written options to purchase £7.2
  million euros and £5.3 million U.S. dollars. There were no other forward
  foreign currency contracts open at December 31, 2000. The unrecognized gains
  from such contracts at December 31, 2000 were £117,000. At December 31,
  2001, the Company had currency options to sell £2.8 million U.S. dollars.
  At December 31, 2001 the Company had accrual forward options to purchase £0.2
  million Swiss francs each week for 31 weeks ending June 19, 2002 and £0.2
  million Euro each week for 26 weeks ending May 22, 2002. At December 31, 2001
  the Company had forward currency contracts to purchase £2.7 million Swiss
  francs. There ware no other forward foreign currency contracts open at December
  31, 2001. The unrecognized losses from such contracts at December 31, 2001 were
  £31,000.

The
  analysis below shows the net monetary assets and liabilities of Group companies
  that are not denominated in their functional currency and therefore give rise
  to exchange gains and losses in the income statements in both 2001 and 2000.

111

---

Currency exposures

|December
      31, 2001                |                                                          |   |        |  |                     |  |                    |  |       |   |        |  
|-------------------------------------- | -------------------------------------------------------- | - | ------ |  | ------------------- |  | ------------------ |  | ----- | - | ------ | -
|                                       |                                                          |   |        |  |                     |  |                    |  |       |   |        |  
|Functional
      currency of Operating |                                                          |   |        |  |                     |  |                    |  |       |   |        |  
|                                       | Net
      foreign currency monetary assets/(liabilities)
|                                       |                                                         
|                                       | Sterling                                                 |   | $US    |  | French
      francs |  | Swiss
      francs |  | Other |   | Total  |  
|                                       |                                                          |   |        |  |                     |  |                    |  |       |   |        |  
|                                       | (in
      thousands)                                    
|Sterling                               |                                                         |   | 11,527 |  |                    |  |                   |  | (49   | ) | 11,478 |  
|$US                                    | (5,231                                                   | ) |       |  |                    |  |                   |  |      |   | (5,231 | )
|French
      francs                    | (2,260                                                   | ) | 102    |  |                    |  | 25                 |  |      |   | (2,133 | )
|Swiss
      francs                     | 3,568                                                    |   | 4,087  |  | 406                 |  |                   |  | 10    |   | 8,071  |  
|$Canadian                              |                                                         |   | 477    |  |                    |  |                   |  |      |   | 477    |  
|                                       |                                                          |   |        |  |                     |  |                    |  |       |   |        |  
|                                       | (3,923                                                   | ) | 16,193 |  | 406                 |  | 25                 |  | (39   | ) | 12,662 |  
|                                       |                                                          |   |        |  |                     |  |                    |  |       |   |        |  
|                                       |                                                          |   |        |  |                     |  |                    |  |       |   |        |  

|December
      31, 2000                |                                                          |   |       |   |                     |  |                    |  |       |  |        |  
|-------------------------------------- | -------------------------------------------------------- | - | ----- | - | ------------------- |  | ------------------ |  | ----- |  | ------ | -
|                                       |                                                          |   |       |   |                     |  |                    |  |       |  |        |  
|Functional
      currency of Operating |                                                          |   |       |   |                     |  |                    |  |       |  |        |  
|                                       | Net
      foreign currency monetary assets/(liabilities)
|                                       |                                                         
|                                       | Sterling                                                 |   | $US   |   | French
      francs |  | Swiss
      francs |  | Other |  | Total  |  
|                                       |                                                          |   |       |   |                     |  |                    |  |       |  |        |  
|                                       | (in
      thousands)                                    
|Sterling                               |                                                         |   | 4,179 |   | 7                   |  |                   |  |      |  | 4,186  |  
|$US                                    | (2,254                                                   | ) |      |   |                    |  |                   |  |      |  | (2,254 | )
|French
      francs                    | (1,528                                                   | ) | 80    |   |                    |  |                   |  |      |  | (1,448 | )
|Swiss
      francs                     | (1,445                                                   | ) | (870  | ) |                    |  |                   |  | 1,197 |  | (1,118 | )
|                                       |                                                          |   |       |   |                     |  |                    |  |       |  |        |  
|                                       | (5,227                                                   | ) | 3,389 |   | 7                   |  |                   |  | 1,197 |  | (634   | )
|                                       |                                                          |   |       |   |                     |  |                    |  |       |  |        |  
|
|                                       |                                                          |   |       |   |                     |  |                    |  |       |  |        |  

Interest rate risk

The
  Company borrows at fixed and floating rates of interest as deemed appropriate
  for its circumstances. Where necessary the Company uses interest rate swaps
  to achieve the desired interest rate profile. During 2001, £30 million
  of the £59.4 million convertible bond liability was the subject of a cancellable
  interest rate swap agreement by which the Company swapped a fixed obligation
  to floating and paid 5.6% until December 19, 2001. The interest rate swap agreement
  was cancelled on December 19, 2001. The Companys management have assessed
  remaining interest rate exposures and deemed them not to be material. The interest
  rate and currency profile of the Companys financial assets and liabilities
  is set out below.

112

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Interest rate and
  currency profile of financial assets

|December
      31, 2001 |                                      |  |                                   |  |                                                   |  |                        | 
|----------------------- | ------------------------------------ |  | --------------------------------- |  | ------------------------------------------------- |  | ---------------------- | 
|                        |                                      |  |                                   |  |                                                   |  |                        | 
|Currency                |                                      |  |                                   |  |                                                   |  |                        | 
|                        | Floating
      rate financial assets |  | Fixed
      rate financial assets |  | Non-interest
      bearing financial
      assets |  | Total financial assets | 
|                        |                                      |  |                                   |  |                                                   |  |                        | 
|                        | (in
      thousands)                 | 
|Sterling                | 5,690                                |  |                                  |  | 62                                                |  | 5,752                  | 
|$US                     | 14,977                               |  |                                  |  | 35                                                |  | 15,012                 | 
|Euro                    | 48                                   |  |                                  |  |                                                  |  | 48                     | 
|Swiss
      francs      | 549                                  |  |                                  |  | 93                                                |  | 642                    | 
|$Canadian               | 48                                   |  | 5,389                             |  | 1                                                 |  | 5,438                  | 
|                        |                                      |  |                                   |  |                                                   |  |                        | 
|                        | 21,312                               |  | 5,389                             |  | 191                                               |  | 26,892                 | 
|                        |                                      |  |                                   |  |                                                   |  |                        | 
|                        |                                      |  |                                   |  |                                                   |  |                        | 

|December
      31, 2000 |                                      |  |                                                   |  |                              | 
|----------------------- | ------------------------------------ |  | ------------------------------------------------- |  | ---------------------------- | 
|                        |                                      |  |                                                   |  |                              | 
|Currency                |                                      |  |                                                   |  |                              | 
|                        | Floating
      rate financial assets |  | Non-interest
      bearing financial
      assets |  | Total
      financial assets | 
|                        |                                      |  |                                                   |  |                              | 
|                        | (in
      thousands)                 | 
|Sterling                | 32,170                               |  | 252                                               |  | 32,422                       | 
|$US                     | 8,993                                |  | 215                                               |  | 9,208                        | 
|French
      francs     | 7                                    |  |                                                  |  | 7                            | 
|Swiss
      francs      | 23                                   |  |                                                  |  | 23                           | 
|Other                   | 1,218                                |  |                                                  |  | 1,218                        | 
|                        |                                      |  |                                                   |  |                              | 
|                        | 42,411                               |  | 467                                               |  | 42,878                       | 
|                        |                                      |  |                                                   |  |                              | 
|                        |                                      |  |                                                   |  |                              | 

Financial
  assets primarily comprise cash and short-term bank deposits.

Included
  within the sterling denominated financial assets shown above for 2001 is £4
  million, placed on deposit for 18 months in December 2000, at a capped rate.
  The Company will receive 6.5% for each successive week that the two-year sterling
  swap rate stays below 7.0%. If the two-year sterling swap rate sets above 7.0%,
  no coupon will accrue for that week.

The
  $Canadian denominated fixed rate financial assets shown above for 2001 of £5.4
  million have a 2.06% weighted average interest rate and 3.65 months weighted
  average time for which the rate is fixed.

All
  other of the Companys financial assets, in both 2001 and 2000, either
  bear interest at floating rates based upon the floating bank rate in the country
  in which the funds are held or are non-interest bearing. Non-interest bearing
  financial assets consist of balances held in short-term current accounts.

113

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Interest rate and
  currency profile of financial liabilities

|December
      31, 2001 |                                        |   |                                     |          |                             |  |                                                                                 |  |                                                           | 
|----------------------- | -------------------------------------- | - | ----------------------------------- | -------- | --------------------------- |  | ------------------------------------------------------------------------------- |  | --------------------------------------------------------- | 
|                        |                                        |   |                                     |          |                             |  |                                                                                 |  |                                                           | 
|Currency                |                                        |   |                                     |          |                             |  |                                                                                 |  |                                                           | 
|                        | Fixed
      rate financial liabilities |   | Floating rate financial liabilities |          | Total financial liabilities |  | Weighted
      average
      interest rate
      on fixed financial liabilities |  | Weighted average time
      for which rate
      is fixed | 
|                        |                                        |   |                                     |          |                             |  |                                                                                 |  |                                                           | 
|                        | (in
      thousands)                   | % |                                     | (months) |                            
|Sterling                | 59,400                                 |   |                                    |          | 59,400                      |  | 6.00                                                                            |  | 41.5                                                      | 
|$US                     |                                       |   | 3,898                               |          | 3,898                       |  |                                                                                |  |                                                          | 
|French
      francs     | 1,599                                  |   | 745                                 |          | 2,344                       |  | 6.25                                                                            |  | 23.0                                                      | 
|Swiss
      francs      | 4,302                                  |   | 5,548                               |          | 9,850                       |  | 3.63                                                                            |  | 23.6                                                      | 
|                        |                                        |   |                                     |          |                             |  |                                                                                 |  |                                                           | 
|                        | 65,301                                 |   | 10,191                              |          | 75,492                      |  | 5.85                                                                            |  | 39.9                                                      | 
|                        |                                        |   |                                     |          |                             |  |                                                                                 |  |                                                           | 
|                        |                                        |   |                                     |          |                             |  |                                                                                 |  |                                                           | 

|December
      31, 2000 |                                        |   |                                     |          |                             |  |                                                                                 |  |                                                           | 
|----------------------- | -------------------------------------- | - | ----------------------------------- | -------- | --------------------------- |  | ------------------------------------------------------------------------------- |  | --------------------------------------------------------- | 
|                        |                                        |   |                                     |          |                             |  |                                                                                 |  |                                                           | 
|Currency                |                                        |   |                                     |          |                             |  |                                                                                 |  |                                                           | 
|                        | Fixed
      rate financial liabilities |   | Floating rate financial liabilities |          | Total financial liabilities |  | Weighted
      average
      interest rate
      on fixed financial liabilities |  | Weighted average time
      for which rate
      is fixed | 
|                        |                                        |   |                                     |          |                             |  |                                                                                 |  |                                                           | 
|                        | (in
      thousands)                   | % |                                     | (months) |                            
|Sterling                | 29,400                                 |   | 30,000                              |          | 59,400                      |  | 6.00                                                                            |  | 53.5                                                      | 
|$US                     |                                       |   | 7,989                               |          | 7,989                       |  |                                                                                |  |                                                          | 
|French
      francs     | 2,391                                  |   | 767                                 |          | 3,158                       |  | 6.25                                                                            |  | 27.9                                                      | 
|Swiss
      francs      | 4,386                                  |   | 6,089                               |          | 10,475                      |  | 3.04                                                                            |  | 35.0                                                      | 
|                        |                                        |   |                                     |          |                             |  |                                                                                 |  |                                                           | 
|                        | 36,177                                 |   | 44,845                              |          | 81,022                      |  | 5.66                                                                            |  | 49.2                                                      | 
|                        |                                        |   |                                     |          |                             |  |                                                                                 |  |                                                           | 
|                        |                                        |   |                                     |          |                             |  |                                                                                 |  |                                                           | 

Financial
  liabilities primarily comprise bank and other loans and convertible bonds.

Total
  financial liabilities does not agree to the total of the balance sheet captions
  due to the presence of £1,438,000 (2000: £1,854,000) of unamortized
  issue costs within the value shown on the balance sheet for convertible bonds.
  Certain financial instruments, such as currency options, are excluded from the
  analysis above where they do not alter the interest basis or currency of financial
  liabilities.

All
  other floating rate financial liabilities, in both 2001 and 2000, are interest
  bearing financial liabilities that bear interest at interest rates based on
  LIBOR, prime and other bank based lending rates in the country in which the
  liability arises, which are fixed for periods of up to 12 months.

Credit risk

The
  Company is exposed to credit-related losses in the event of non-performance
  by third parties to financial instruments. The Company does not expect any third
  parties to fail to meet their obligations given the policy of selecting only
  parties with high credit ratings and minimizing its exposure to any one institution.

114

---

Fair values

The
  comparison of fair and book values of all the Companys financial instruments
  as at December 31, 2001 is set out below. Market values have been used to determine
  the fair values of all swaps and foreign currency contracts. The fair value
  of the non-equity Deferred A and B Shares has been
  calculated by reference to the ordinary share price at December 31, 2001, based
  upon the Directors opinion that 24 million ordinary shares will be issued
  in settlement of the deferred consideration payable on the acquisition of Jago.
  See Item 7: Major Shareholders and Related Party Transactions  Certain
  arrangements in Respect of the Jago Acquisition for details of the contingencies
  governing the issuance of these shares. The fair values of all other items have
  been calculated by discounting future cash flows at interest rates prevailing
  at December 31, 2001.

|December
      31, 2001                                                                                       |                      |   |                   |  
|------------------------------------------------------------------------------------------------------------- | -------------------- | - | ----------------- | -
|                                                                                                              | Book
      Values    |   | Fair
      values |  
|                                                                                                              |                      |   |                   |  
|                                                                                                              | (in
      thousands)
|Financial
      instruments held or issued to finance the Companys operations:                               |                      |   |                   |  
|Cash
      at bank and in hand                                                                                | 4,534                |   | 4,534             |  
|Short-term
      bank deposits                                                                                | 22,358               |   | 22,358            |  
|Short-term
      borrowings and current portion of long-term borrowings                                       | (7,257               | ) | (7,257            | )
|Long-term
      convertible debt                                                                              | (59,400              | ) | (50,194           | )
|Other
      long-term debt                                                                                    | (8,835               | ) | (8,602            | )
|Non-equity
      Deferred A and B Shares                                                                  | (22,620              | ) | (14,700           | )
|                                                                                                              |                      |   |                   |  
|                                                                                                              | (71,220              | ) | (53,861           | )
|                                                                                                              |                      |   |                   |  
|Derivative
      financial instruments held to manage the Companys currency profile:                         |                      |   |                   |  
|Euro
      currency options                                                                                   |                     |   | 38                |  
|US$
      currency options                                                                                    | (20                  | ) | (23               | )
|Forward
      currency contracts                                                                              |                     |   | (46               | )
|                                                                                                              |                      |   |                   |  
|                                                                                                              | (20                  | ) | (31               | )
|                                                                                                              |                      |   |                   |  
|December
      31, 2000                                                                                       |                      |   |                   |  
|                                                                                                              |                      |   |                   |  
|Financial
      instruments held or issued to finance the Companys operations:                               |                      |   |                   |  
|Cash
      at bank and in hand                                                                                | 10,769               |   | 10,769            |  
|Short-term
      bank deposits                                                                                | 32,109               |   | 32,109            |  
|Short-term
      borrowings and current portion of long-term borrowings                                       | (9,940               | ) | (9,940            | )
|Long-term
      convertible debt                                                                              | (59,400              | ) | (46,022           | )
|Other
      long-term debt                                                                                    | (11,682              | ) | (10,942           | )
|Non-equity
      Deferred A and B Shares                                                                  | (22,620              | ) | (15,360           | )
|                                                                                                              |                      |   |                   |  
|                                                                                                              | (60,764              | ) | (39,386           | )
|                                                                                                              |                      |   |                   |  
|Derivative
      financial instruments held to manage the Companys interest rate and
      currency profile: |                      |   |                   |  
|Interest
      rate swap                                                                                      |                     |   | 822               |  
|Euro
      currency options                                                                                   |                     |   | 221               |  
|US$
      currency options                                                                                    |                     |   | (104              | )
|                                                                                                              |                      |   |                   |  
|                                                                                                              |                     |   | 939               |  
|                                                                                                              |                      |   |                   |  
|                                                                                                              |                      |   |                   |  

115

---

The
  excess of fair values over book values for currency options and forward currency
  contracts shown in the table above represents the unrecognized hedging gain
  on these instruments as at December 31, 2001. The actual gains or losses arising
  on these options will be dependent on future exchange rates and will be recognized
  in the profit and loss account, in 2002, as the operational transactions to
  which they are linked occur. The table below shows the extent to which the Company
  has off-balance sheet (unrecognized) and on-balance sheet (deferred) gains and
  loses in respect of hedges at the beginning and end of the year ended December
  31, 2001.

At
  December 31, 2001, the Company had currency options to sell £2.8 million
  US dollars. These outstanding contracts has maturities of less than 12 months.

At
  December 31, 2001, the Company had accrual forward options to purchase £0.2
  million Swiss francs each week for 31 weeks ending June 19, 2002 and £0.2
  million Euro each week for 26 weeks ending May 22, 2002.

At
  December 31, 2001, the Company had forward currency contracts to purchase £2.7
  million Swiss francs. These open contracts at December 31, 2001 have maturities
  of less than 12 months.

|                                                                           | Unrecognized         |   | Deferred |  
|-------------------------------------------------------------------------- | -------------------- | - | -------- | -
|                                                                           |                      |   |          |  
|                                                                           | Gains                |   | Losses   |  
|                                                                           |                      |   |          |  
|                                                                           | (in
      thousands) |  
|Gains/(losses)
      on hedges at January 1, 2001                          | 1,043                |   | (104     | )
|Changes
      in value from January 1, 2001 to settlement                  | (923                 | ) | 104      |  
|                                                                           |                      |   |          |  
|Gains/(losses)
      arising in 2000 recognized in 2001                    | 120                  |   |         |  
|                                                                           |                      |   |          |  
|Gains/(losses)
      not recognized in 2001 arising before January 1, 2001 |                     |   |         |  
|Arising
      in 2001                                                      |                     |   | (31      | )
|                                                                           |                      |   |          |  
|Gains/(losses)
      on hedges at December 31, 2001                        |                     |   | (31      | )
|                                                                           |                      |   |          |  
|                                                                           |                      |   |          |  

Unrecognized
  gains at January 1, 2001 include £0.8 million in relation to the cancelable
  interest rate swap agreement. This was based upon the agreement continuing for
  the life of the convertible bonds and as such the gain would have been spread
  in the profit and loss account until 2005. The Royal Bank of Scotland cancelled
  the agreement on December 19, 2001. As a result, only £0.1million of the
  gain was recognized in 2001 and £0.7 million of the gain is shown above
  as a change in value before settlement.

Item 12: Description
  of Securities other than Equity Securities

Not
  applicable

116

---

PART
  II

Item 13: Defaults, Dividend
  Arrearages and Delinquencies

None

Item 14: Material Modifications
  to the Rights of Security Holders and Use of Proceeds

None

Item 15: Reserved



Item 16: Reserved



117

---

PART
  III

Item 17: Financial Statements

(Not
  supplied as Item 18 is complied with)

Item 18: Financial Statements

The
  following financial statements, together with the report thereon, by PricewaterhouseCoopers,
  are filed as part of this Form 20F:

|Report
      of Independent Accountants                                                      | F-1  | 
|-------------------------------------------------------------------------------------------- | ---- | 
|SkyePharma
      PLC Consolidated Financial Statements                                       |      | 
|Consolidated
      Income Statements for the years ended December 31, 1999, 2000 and 2001    | F-2  | 
|Consolidated
      Balance Sheets at December 31, 2000 and 2001                              | F-3  | 
|Consolidated
      Cash Flow Statements for the years ended December 31, 1999, 2000 and 2001 | F-4  | 
|Notes
      to the Consolidated Cash Flow Statements                                         | F-5  | 
|Statement
      of Total Recognized Gains and Losses                                         | F-8  | 
|Reconciliation
      of Movement in Shareholders Funds                                      | F-9  | 
|Notes
      to the Consolidated Financial Statements                                         | F-10 | 
|                                                                                             |      | 

Item 19: Exhibits

The following
  exhibits are filed as part of this Form 20-F:

|1.1 | Memorandum and Articles
      of Association of SkyePharma PLC
|--- | --------------------------------------------------------------

| | 1.1. | Memorandum of Association
      of SkyePharma PLC*
| | ---- | --------------------------------------------------

| | 1.1.2 | Articles of Association
      of SkyePharma PLC, as amended on May 30, 2002
| | ----- | ---------------------------------------------------------------------------

|4.1 | Directors
      and Officers Service Contracts
|--- | ----------------------------------------------

| | 4.1.1 | Contract of employment
      between the Company and Donald Nicholson dated February 28, 1996*
| | ----- | ----------------------------------------------------------------------------------------------

| | 4.1.2 | Contract of employment
      between the Company and Suzanne V. McLean dated May 24, 1999*
| | ----- | ------------------------------------------------------------------------------------------

| | 4.1.3 | Proforma letter of
      appointment in respect of the appointment of Non-executive Directors*
| | ----- | ----------------------------------------------------------------------------------------------

|4.2 | Share Purchase Plans
|--- | --------------------

| | 4.2.1 | The SkyePharma PLC
      Deferred Share Bonus Plan
| | ----- | --------------------------------------------------

|4.3 | Amendments to the
      1996 Acquisition Agreement, dated April 7, 2000 and May 11, 2000, between
      Dr Jacques Gonella and SkyePharma PLC**
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------

|8.1 | List of SkyePharma
      PLCs subsidiaries
|--- | -------------------------------------------

|10.1 | Consent of independent
      accountants
|---- | ----------------------------------------

---

* Incorporated
  by reference to the Companys Annual Report on Form 20-F for the financial
  year ended December 31, 2000 (Commission File No. 0-29860)

** Filed with
  the Companys Annual Report on Form 20-F for the year ended December 31,
  1999 (Commission File No.  0-29860)

118

---

SIGNATURES

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

Date: June
  24, 2002

SKYEPHARMA
  PLC
  (Registrant)

| | By: | /s/ Donald Nicholson
| | --- | --------------------

| |  | _________________________________
| |  | ---------------------------------

| |  | Name: Donald Nicholson
Title: Finance Director
| |  | ----------------------------------------------

119

---

SKYEPHARMA PLC
REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors
  and Shareholders of SkyePharma PLC

In
  our opinion, the accompanying consolidated balance sheets and the related consolidated
  statements of income, of cash flows, of total recognized gains and losses and
  of movements in shareholders funds present fairly, in all material respects,
  the financial position of SkyePharma PLC and its subsidiaries at December 31,
  2001 and 2000 and the results of their operations and their cash flows for the
  years ended December 31, 2001, 2000 and 1999 in conformity with generally accepted
  accounting principles in the United Kingdom. These financial statements are
  the responsibility of the Companys Directors; our responsibility is to
  express an opinion on these financial statements based on our audits. We conducted
  our audits of these statements in accordance with generally accepted auditing
  standards in the United States which 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, assessing
  the accounting principles used and significant estimates made by management,
  and evaluating the overall financial statement presentation. We believe that
  our audits provide a reasonable basis for the opinion expressed above.

Accounting
  principles generally accepted in the United Kingdom vary in certain important
  respects from accounting principles generally accepted in the United States.
  The application of the latter would have affected the determination of consolidated
  net loss expressed in pounds sterling for the years ended December 31, 2001,
  2000 and 1999 and the determination of consolidated shareholders funds and financial
  position also expressed in pounds sterling at December 31, 2001 and 2000 to
  the extent summarized in Note 31 to the Consolidated Financial Statements.

PricewaterhouseCoopers
  London,
  United Kingdom

April 9,
  2002

(Except for
  information in Note 29 for which the date is June 24, 2002)

F-1

---

SKYEPHARMA PLC

Consolidated Income
  Statements

|                                                                                     |       |  | Year
      to
      December 31,
      1999 |    | Year
      to
      December 31,
      2000 |    | Year
      to
      December 31,
      2001 |   
|------------------------------------------------------------------------------------ | ----- |  | ------------------------------------------- | -- | ------------------------------------------- | -- | ------------------------------------------- | --
|                                                                                     |       |  |                                             |    |                                             |    |                                             |   
|                                                                                     | Notes |  | £000                                       |    | £000                                       |    | £000                                       |   
|                                                                                     |       |  |                                             |    |                                             |    |                                             |   
|Turnover                                                                             | 2     |  | 17,739                                      |    | 24,292                                      |    | 46,126                                      |   
|Cost
      of sales                                                                  | 2     |  | (14,854                                     | )  | (15,598                                     | )  | (18,820                                     | ) 
|                                                                                     |       |  |                                             |    |                                             |    |                                             |   
|Gross
      profit                                                                   |       |  | 2,885                                       |    | 8,694                                       |    | 27,306                                      |   
|Selling,
      marketing and distribution expenses                                   |       |  | (3,161                                      | )  | (3,844                                      | )  | (4,804                                      | ) 
|Administration
      expenses                                                        |       |  | (12,584                                     | )  | (12,630                                     | )  | (16,025                                     | ) 
|Research
      and development expenses                                              |       |  | (6,728                                      | )  | (13,104                                     | )  | (17,918                                     | ) 
|Other
      operating income                                                         | 3     |  |                                            |    | 2,900                                       |    | 6,342                                       |   
|                                                                                     |       |  |                                             |    |                                             |    |                                             |   
|Operating
      loss                                                                 | 2, 4  |  | (19,588                                     | )  | (17,984                                     | )  | (5,099                                      | ) 
|Share
      of operating loss in Joint Venture                                       | 12    |  | (48                                         | )  |                                            |    |                                            |   
|Associated
      undertaking                                                         |       |  |                                            |    |                                            |    | (578                                        | ) 
|                                                                                     |       |  |                                             |    |                                             |    |                                             |   
|Loss
      on ordinary activities before interest 
          and taxation            |       |  | (19,636                                     | )  | (17,984                                     | )  | (5,677                                      | ) 
|Reversal
      of provision for loss on disposal of
          fixed asset investment | 12    |  | 381                                         |    |                                            |    |                                            |   
|Interest
      receivable                                                            | 6     |  | 1,364                                       |    | 1,806                                       |    | 1,251                                       |   
|Interest
      payable                                                               | 7     |  | (1,391                                      | )  | (3,508                                      | )  | (4,951                                      | ) 
|                                                                                     |       |  |                                             |    |                                             |    |                                             |   
|Loss
      on ordinary activities before 
          taxation                         |       |  | (19,282                                     | )  | (19,686                                     | )  | (9,377                                      | ) 
|Taxation                                                                             | 8     |  | (132                                        | )  | (4                                          | )  | (75                                         | ) 
|                                                                                     |       |  |                                             |    |                                             |    |                                             |   
|Retained
      loss                                                                  |       |  | (19,414                                     | )  | (19,690                                     | )  | (9,452                                      | ) 
|                                                                                     |       |  |                                             |    |                                             |    |                                             |   
|Basic
      and diluted loss per Ordinary Share                                      | 9     |  | (4.2                                        | )p | (3.9                                        | )p | (1.8                                        | )p
|                                                                                     |       |  |                                             |    |                                             |    |                                             |   
|                                                                                     |       |  |                                             |    |                                             |    |                                             |   

---

There was
  no material difference between the loss on ordinary activities before taxation
  and historic cost loss before taxation for these periods. All results represent
  continuing activities.

See Notes
  to the Consolidated Financial Statements.

F-2

---

SKYEPHARMA PLC

Consolidated Balance
  Sheets

|                                                              |       |  | December
      31,
      2000 |   | December
      31,
      2001 |  
|------------------------------------------------------------- | ----- |  | ----------------------------- | - | ----------------------------- | -
|                                                              | Notes |  | £000                         |   | £000                         |  
|                                                              |       |  |                               |   |                               |  
|Fixed
      assets                                            |       |  |                               |   |                               |  
|Intangible
      assets                                       | 10    |  | 72,086                        |   | 98,228                        |  
|Tangible
      assets                                         | 11    |  | 40,288                        |   | 44,952                        |  
|Investments                                                   | 12    |  |                              |   | 14,211                        |  
|                                                              |       |  |                               |   |                               |  
|                                                              |       |  | 112,374                       |   | 157,391                       |  
|                                                              |       |  |                               |   |                               |  
|Current
      assets                                          |       |  |                               |   |                               |  
|Stock                                                         | 13    |  | 1,636                         |   | 2,278                         |  
|Debtors                                                       | 14    |  | 6,937                         |   | 14,022                        |  
|Cash
      and short-term bank deposits                       |       |  | 42,878                        |   | 26,892                        |  
|                                                              |       |  |                               |   |                               |  
|                                                              |       |  | 51,451                        |   | 43,192                        |  
|                                                              |       |  |                               |   |                               |  
|Creditors:
      amounts falling due within one year          | 15    |  | (20,541                       | ) | (35,188                       | )
|                                                              |       |  |                               |   |                               |  
|Net
      current assets                                      |       |  | 30,910                        |   | 8,004                         |  
|                                                              |       |  |                               |   |                               |  
|Total
      assets less current liabilities                   |       |  | 143,284                       |   | 165,395                       |  
|Creditors:
      amounts falling due after more than one year |       |  |                               |   |                               |  
|Other
      creditors                                         | 16    |  | (14,667                       | ) | (12,220                       | )
|Convertible
      bonds due June 2005                         | 17    |  | (57,546                       | ) | (57,962                       | )
|                                                              |       |  |                               |   |                               |  
|                                                              |       |  | (72,213                       | ) | (70,182                       | )
|                                                              |       |  |                               |   |                               |  
|                                                              |       |  | 71,071                        |   | 95,213                        |  
|                                                              |       |  |                               |   |                               |  
|Provisions
      for liabilities and charges                  |       |  |                               |   |                               |  
|Deferred
      consideration                                  | 18    |  | 2,008                         |   |                              |  
|Other                                                         | 18    |  | 111                           |   | 68                            |  
|                                                              |       |  |                               |   |                               |  
|                                                              |       |  | 2,119                         |   | 68                            |  
|                                                              |       |  |                               |   |                               |  
|Capital
      and reserves                                    |       |  |                               |   |                               |  
|Share
      capital                                           | 22    |  | 54,132                        |   | 58,402                        |  
|Share
      premium                                           | 24    |  | 261,569                       |   | 287,357                       |  
|Currency
      translation reserve                            | 24    |  | (1,427                        | ) | (1,399                        | )
|Shares
      and warrants to be issued                        | 23    |  | 4,985                         |   | 10,617                        |  
|Other
      reserves                                          | 24    |  | 11,212                        |   | 10,720                        |  
|Profit
      and loss account                                 | 24    |  | (261,519                      | ) | (270,552                      | )
|                                                              |       |  |                               |   |                               |  
|Shareholders
      funds                                     |       |  |                               |   |                               |  
|Attributable
      to equity interests                        |       |  | 46,332                        |   | 72,525                        |  
|Attributable
      to non-equity interests                    |       |  | 22,620                        |   | 22,620                        |  
|                                                              |       |  |                               |   |                               |  
|                                                              |       |  | 68,952                        |   | 95,145                        |  
|                                                              |       |  |                               |   |                               |  
|                                                              |       |  | 71,071                        |   | 95,213                        |  
|                                                              |       |  |                               |   |                               |  

---

For details
  of contingent liabilities and commitments, see Notes 20 and 21 to Consolidated
  Financial Statements.

See Notes
  to the Consolidated Financial Statements.

F-3

---

SKYEPHARMA PLC

Consolidated Cash Flow
  Statements

|                                                                                   |       |  | Year
      to December 31, 1999 |   | Year
      to December 31, 2000 |   | Year
      to December 31, 2001 |  
|---------------------------------------------------------------------------------- | ----- |  | ------------------------------- | - | ------------------------------- | - | ------------------------------- | -
|                                                                                   | Notes |  | £000                           |   | £000                           |   | £000                           |  
|                                                                                   |       |  |                                 |   |                                 |   |                                 |  
|Net
      cash (outflow)/inflow from operating 
         activities                | (b)   |  | (15,139                         | ) | (9,312                          | ) | 5,909                           |  
|Returns
      on investments and servicing of 
         finance                    |       |  |                                 |   |                                 |   |                                 |  
|Interest
      received                                                            |       |  | 1,449                           |   | 1,297                           |   | 2,741                           |  
|Interest
      paid                                                                |       |  | (1,337                          | ) | (2,941                          | ) | (4,370                          | )
|Interest
      element of finance lease payments                                   |       |  | (92                             | ) | (232                            | ) | (170                            | )
|                                                                                   |       |  |                                 |   |                                 |   |                                 |  
|                                                                                   |       |  | 20                              |   | (1,876                          | ) | (1,799                          | )
|                                                                                   |       |  |                                 |   |                                 |   |                                 |  
|Taxation                                                                           |       |  | (194                            | ) | (8                              | ) | (75                             | )
|                                                                                   |       |  |                                 |   |                                 |   |                                 |  
|Capital
      expenditure and financial 
         investment                       |       |  |                                 |   |                                 |   |                                 |  
|Purchase
      of intangible fixed assets                                          |       |  | (4,029                          | ) | (7,180                          | ) | (310                            | )
|Purchase
      of tangible fixed assets                                            |       |  | (7,820                          | ) | (8,470                          | ) | (7,673                          | )
|Purchase
      of fixed asset investments                                          |       |  |                                |   |                                |   | (8,273                          | )
|Proceeds
      from sale of fixed asset investment                                 |       |  | 381                             |   |                                |   |                                |  
|                                                                                   |       |  |                                 |   |                                 |   |                                 |  
|                                                                                   |       |  | (11,468                         | ) | (15,650                         | ) | (16,256                         | )
|                                                                                   |       |  |                                 |   |                                 |   |                                 |  
|Acquisitions                                                                       | (d)   |  |                                 |   |                                 |   |                                 |  
|Purchase
      of subsidiary undertakings                                          |       |  | (2,998                          | ) |                                |   | (4,118                          | )
|Net cash
      acquired with subsidiary                                            |       |  | 48                              |   |                                |   | 5,436                           |  
|                                                                                   |       |  |                                 |   |                                 |   |                                 |  
|                                                                                   |       |  | (2,950                          | ) |                                |   | 1,318                           |  
|                                                                                   |       |  |                                 |   |                                 |   |                                 |  
|Cash
      outflow before use of liquid 
         resources and financing          |       |  | (29,731                         | ) | (26,846                         | ) | (10,903                         | )
|                                                                                   |       |  |                                 |   |                                 |   |                                 |  
|Management
      of liquid resources                                               |       |  |                                 |   |                                 |   |                                 |  
|Net decrease/(increase)
      in amounts held on 
         short-term bank deposit | (a)   |  | 19,989                          |   | (21,641                         | ) | 14,668                          |  
|                                                                                   |       |  |                                 |   |                                 |   |                                 |  
|Financing                                                                          |       |  |                                 |   |                                 |   |                                 |  
|Issue
      of Ordinary Share capital                                              |       |  | 5,038                           |   | 2,088                           |   | 468                             |  
|Issue
      of convertible bonds                                                   |       |  |                                |   | 59,400                          |   |                                |  
|Expenses
      of convertible bond issue                                           |       |  |                                |   | (2,022                          | ) |                                |  
|Debt
      due within one year:                                                    |       |  |                                 |   |                                 |   |                                 |  
|Increase
      in borrowings                                                       |       |  |                                |   | 1,187                           |   |                                |  
|Repayment
      of loans                                                           |       |  | (460                            | ) | (2,846                          | ) | (4,502                          | )
|Debt
      due beyond one year:                                                    |       |  |                                 |   |                                 |   |                                 |  
|Increase
      in borrowings                                                       |       |  | 2,998                           |   |                                |   |                                |  
|Repayment
      of loans                                                           |       |  | (1,357                          | ) | (1,226                          | ) | (85                             | )
|Lease
      payment received under sale and 
          leaseback transaction       |       |  | 2,999                           |   |                                |   |                                |  
|Repayment
      of capital element of finance 
          lease payments            |       |  | (944                            | ) | (891                            | ) | (772                            | )
|                                                                                   |       |  |                                 |   |                                 |   |                                 |  
|                                                                                   |       |  | 8,274                           |   | 55,690                          |   | (4,891                          | )
|                                                                                   |       |  |                                 |   |                                 |   |                                 |  
|(Decrease)/increase
      in cash                                                  | (a)   |  | (1,468                          | ) | 7,203                           |   | (1,126                          | )
|                                                                                   |       |  |                                 |   |                                 |   |                                 |  
|                                                                                   |       |  |                                 |   |                                 |   |                                 |  

F-4

---

SKYEPHARMA PLC
Notes to the Consolidated Cash Flow Statement

(a) Reconciliation
  of movements in net debt (Note (c))

|                                                                    | Year
      to December 31, 1999
      £000 |   | Year
      to
      December 31, 2000
      £000 |   | Year
      to
      December 31, 2001
      £000 |  
|------------------------------------------------------------------- | ------------------------------------------- | - | ------------------------------------------------- | - | ------------------------------------------------- | -
|                                                                    |                                             |   |                                                   |   |                                                   |  
|(Decrease)/increase
      in cash in the year                       | (1,468                                      | ) | 7,203                                             |   | (1,126                                            | )
|Cash
      (inflow)/outflow from change in debt and lease financing | (3,236                                      | ) | 3,776                                             |   | 5,359                                             |  
|Cash
      (inflow)/outflow from change in liquid resources         | (19,989                                     | ) | 21,641                                            |   | (14,668                                           | )
|Issue
      of convertible debt                                     |                                            |   | (57,378                                           | ) |                                                  |  
|                                                                    |                                             |   |                                                   |   |                                                   |  
|Change
      in net debt resulting from cash flows                  | (24,693                                     | ) | (24,758                                           | ) | (10,435                                           | )
|Loans
      and finance leases acquired with subsidiary             | (5,187                                      | ) |                                                  |   |                                                  |  
|Short-term
      bank deposits acquired with subsidiary             | 3,223                                       |   |                                                  |   |                                                  |  
|Issue
      of loan note                                            | (6,008                                      | ) | (2,307                                            | ) |                                                  |  
|New finance
      leases                                            | (34                                         | ) |                                                  |   |                                                  |  
|Conversion
      of debentures                                      | 2,337                                       |   | 103                                               |   |                                                  |  
|Debenture
      interest                                            | (116                                        | ) |                                                  |   |                                                  |  
|Expenses
      of convertible bonds                                 |                                            |   | (167                                              | ) | (416                                              | )
|Translation
      differences                                       | 921                                         |   | (907                                              | ) | (21                                               | )
|                                                                    |                                             |   |                                                   |   |                                                   |  
|Movement
      in net debt in the year                              | (29,557                                     | ) | (28,036                                           | ) | (10,872                                           | )
|Net funds/(debt)
      at beginning of the year                     | 21,303                                      |   | (8,254                                            | ) | (36,290                                           | )
|                                                                    |                                             |   |                                                   |   |                                                   |  
|Net debt
      at end of the year                                   | (8,254                                      | ) | (36,290                                           | ) | (47,162                                           | )
|                                                                    |                                             |   |                                                   |   |                                                   |  
|                                                                    |                                             |   |                                                   |   |                                                   |  

---

Net funds/(debt)
  is defined as cash and liquid resources less borrowings.

(b) Reconciliation of
  group operating loss to net cash outflow from operating activities

|                                                          | Year
      to
      December 31, 1999
      £000 |   | Year
      to December 31,
      2000
      £000 |   | Year
      to December 31, 2001
      £000 |  
|--------------------------------------------------------- | ------------------------------------------------- | - | ------------------------------------------------- | - | ------------------------------------------- | -
|                                                          |                                                   |   |                                                   |   |                                             |  
|Group
      operating loss                                | (19,588                                           | ) | (17,984                                           | ) | (5,099                                      | )
|Depreciation                                              | 3,842                                             |   | 3,945                                             |   | 4,778                                       |  
|Amortization                                              | 1,540                                             |   | 3,339                                             |   | 3,824                                       |  
|Decrease/(increase)
      in stock and work in progress   | 325                                               |   | (426                                              | ) | (642                                        | )
|(Increase)/decrease
      in debtors                      | (1,627                                            | ) | 3,247                                             |   | (7,478                                      | )
|Increase
      in deferred income                         |                                                  |   |                                                  |   | 11,690                                      |  
|Increase/(decrease)
      in other creditors              | 1,124                                             |   | (1,283                                            | ) | 1,688                                       |  
|Decrease
      in provisions                              | (755                                              | ) | (150                                              | ) | (2,051                                      | )
|Other                                                     |                                                  |   |                                                  |   | (801                                        | )
|                                                          |                                                   |   |                                                   |   |                                             |  
|Net cash
      (outflow)/inflow from operating activities | (15,139                                           | ) | (9,312                                            | ) | 5,909                                       |  
|                                                          |                                                   |   |                                                   |   |                                             |  
|                                                          |                                                   |   |                                                   |   |                                             |  

F-5

---

SKYEPHARMA PLC
  Notes to the Consolidated Cash Flow Statement (continued)

(c) Analysis of net funds/(debt)

|                               | At
      January 1, 1999
      £000 |   | Cash
      flow
      £000 |   | Acquisitions
      (excl cash & overdrafts)
      £000 |   | Non-cash
      changes
      £000 |   | Exchange
      movement
      £000 |   | At
      December 31, 1999
      £000 |  
|------------------------------ | ------------------------------------ | - | --------------------------- | - | ------------------------------------------------------- | - | ---------------------------------- | - | ----------------------------------- | - | -------------------------------------- | -
|                               |                                      |   |                             |   |                                                         |   |                                    |   |                                     |   |                                        |  
|Cash
      at bank and in hand | 3,983                                |   | (296                        | ) |                                                        |   |                                   |   | (222                                | ) | 3,465                                  |  
|Overdrafts                     | (1,917                               | ) | (1,172                      | ) |                                                        |   |                                   |   | 280                                 |   | (2,809                                 | )
|Short-term
      bank deposits | 26,942                               |   | (19,989                     | ) | 3,223                                                   |   |                                   |   | 33                                  |   | 10,209                                 |  
|                               |                                      |   |                             |   |                                                         |   |                                    |   |                                     |   |                                        |  
|                               | 29,008                               |   | (21,457                     | ) | 3,223                                                   |   |                                   |   | 91                                  |   | 10,865                                 |  
|Debt
      due within one year | (1,234                               | ) | 460                         |   | (1,751                                                  | ) | (2,002                             | ) | 103                                 |   | (4,424                                 | )
|Debt
      due after one year  | (6,020                               | ) | (1,641                      | ) | (2,404                                                  | ) | (1,785                             | ) | 545                                 |   | (11,305                                | )
|Finance
      leases           | (451                                 | ) | (2,055                      | ) | (1,032                                                  | ) | (34                                | ) | 182                                 |   | (3,390                                 | )
|                               |                                      |   |                             |   |                                                         |   |                                    |   |                                     |   |                                        |  
|                               | (7,705                               | ) | (3,236                      | ) | (5,187                                                  | ) | (3,821                             | ) | 830                                 |   | (19,119                                | )
|                               |                                      |   |                             |   |                                                         |   |                                    |   |                                     |   |                                        |  
|                               | 21,303                               |   | (24,693                     | ) | (1,964                                                  | ) | (3,821                             | ) | 921                                 |   | (8,254                                 | )
|                               |                                      |   |                             |   |                                                         |   |                                    |   |                                     |   |                                        |  
|                               |                                      |   |                             |   |                                                         |   |                                    |   |                                     |   |                                        |  

|                               | At
      January 1,
      2000
      £000 |   | Cash
      flow
      £000 |   | Acquisitions
      (excl cash & overdrafts)
      £000 |  | Non-cash
      changes
      £000 |   | Exchange
      movement
      £000 |   | At
      December 31, 2000
      £000 |  
|------------------------------ | ------------------------------------------ | - | --------------------------- | - | ------------------------------------------------------- |  | ---------------------------------- | - | ----------------------------------- | - | -------------------------------------- | -
|                               |                                            |   |                             |   |                                                         |  |                                    |   |                                     |   |                                        |  
|Cash
      at bank and in hand | 3,465                                      |   | 7,014                       |   |                                                        |  |                                   |   | 290                                 |   | 10,769                                 |  
|Overdrafts                     | (2,809                                     | ) | 189                         |   |                                                        |  |                                   |   | (228                                | ) | (2,848                                 | )
|Short-term
      bank deposits | 10,209                                     |   | 21,641                      |   |                                                        |  |                                   |   | 259                                 |   | 32,109                                 |  
|                               |                                            |   |                             |   |                                                         |  |                                    |   |                                     |   |                                        |  
|                               | 10,865                                     |   | 28,844                      |   |                                                        |  |                                   |   | 321                                 |   | 40,030                                 |  
|Debt
      due within one year | (4,424                                     | ) | 1,659                       |   |                                                        |  | (3,055                             | ) | (411                                | ) | (6,231                                 | )
|Debt
      due after one year  | (11,305                                    | ) | (56,152                     | ) |                                                        |  | 684                                |   | (768                                | ) | (67,541                                | )
|Finance
      leases           | (3,390                                     | ) | 891                         |   |                                                        |  |                                   |   | (49                                 | ) | (2,548                                 | )
|                               |                                            |   |                             |   |                                                         |  |                                    |   |                                     |   |                                        |  
|                               | (19,119                                    | ) | (53,602                     | ) |                                                        |  | (2,371                             | ) | (1,228                              | ) | (76,320                                | )
|                               |                                            |   |                             |   |                                                         |  |                                    |   |                                     |   |                                        |  
|                               | (8,254                                     | ) | (24,758                     | ) |                                                        |  | (2,371                             | ) | (907                                | ) | (36,290                                | )
|                               |                                            |   |                             |   |                                                         |  |                                    |   |                                     |   |                                        |  
|                               |                                            |   |                             |   |                                                         |  |                                    |   |                                     |   |                                        |  

|                               | At
      January 1,
      2001
      £000 |   | Cash
      flow
      £000 |   | Acquisitions
      (excl cash & overdrafts)
      £000 |  | Non-cash
      changes
      £000 |   | Exchange
      movement
      £000 |   | At
      December 31, 2001
      £000 |  
|------------------------------ | ------------------------------------------ | - | --------------------------- | - | ------------------------------------------------------- |  | ---------------------------------- | - | ----------------------------------- | - | -------------------------------------- | -
|                               |                                            |   |                             |   |                                                         |  |                                    |   |                                     |   |                                        |  
|Cash
      at bank and in hand | 10,769                                     |   | (1,502                      | ) |                                                        |  |                                   |   | 184                                 |   | 9,451                                  |  
|Overdrafts                     | (2,848                                     | ) | 376                         |   |                                                        |  | 828                                |   | 26                                  |   | (1,618                                 | )
|Short-term
      bank deposits | 32,109                                     |   | (14,668                     | ) |                                                        |  |                                   |   |                                    |   | 17,441                                 |  
|                               |                                            |   |                             |   |                                                         |  |                                    |   |                                     |   |                                        |  
|                               | 40,030                                     |   | (15,794                     | ) |                                                        |  | 828                                |   | 210                                 |   | 25,274                                 |  
|                               |                                            |   |                             |   |                                                         |  |                                    |   |                                     |   |                                        |  
|Debt
      due within one year | (6,231                                     | ) | 4,502                       |   |                                                        |  | (2,936                             | ) | (127                                | ) | (4,792                                 | )
|Debt
      due after one year  | (67,541                                    | ) | 85                          |   |                                                        |  | 1,692                              |   | (159                                | ) | (65,923                                | )
|Finance
      leases           | (2,548                                     | ) | 772                         |   |                                                        |  |                                   |   | 55                                  |   | (1,721                                 | )
|                               |                                            |   |                             |   |                                                         |  |                                    |   |                                     |   |                                        |  
|                               | (76,320                                    | ) | 5,359                       |   |                                                        |  | (1,244                             | ) | (231                                | ) | (72,436                                | )
|                               |                                            |   |                             |   |                                                         |  |                                    |   |                                     |   |                                        |  
|                               | (36,290                                    | ) | (10,435                     | ) |                                                        |  | (416                               | ) | (21                                 | ) | (47,162                                | )
|                               |                                            |   |                             |   |                                                         |  |                                    |   |                                     |   |                                        |  
|                               |                                            |   |                             |   |                                                         |  |                                    |   |                                     |   |                                        |  

---

Cash at bank
  and in hand and short-term deposits are aggregated on the balance sheet. Debt
  includes a secured mortgage and convertible bonds. Other non-cash changes in
  2001 relate to the amortization of the issue costs on the convertible bonds
  and transfers between categories.

F-6

---

SKYEPHARMA PLC
  Notes to the Consolidated Cash Flow Statement (continued)

(d)    Purchase of subsidiary
  undertakings

|                                                 | Year
      to
      December 31,
      1999
      £000 |   | Year
      to
      December 31,
      2000
      £000 |  | Year
      to
      December 31,
      2001
      £000 |  
|------------------------------------------------ | ------------------------------------------------------- | - | ------------------------------------------------------- |  | ------------------------------------------------------- | -
|                                                 |                                                         |   |                                                         |  |                                                         |  
|Net assets
      acquired                        | 3,378                                                   |   |                                                        |  | 5,935                                                   |  
|Goodwill                                         | 32,306                                                  |   |                                                        |  | 29,901                                                  |  
|                                                 |                                                         |   |                                                         |  |                                                         |  
|Net consideration                                | 35,684                                                  |   |                                                        |  | 35,836                                                  |  
|                                                 |                                                         |   |                                                         |  |                                                         |  
|Satisfied
      by:                              |                                                         |   |                                                         |  |                                                         |  
|Shares
      issued/allocated                    | 32,686                                                  |   |                                                        |  | 29,536                                                  |  
|Shares
      to be issued/allocated              |                                                        |   |                                                        |  | 5,780                                                   |  
|Cash                                             |                                                        |   |                                                        |  | 3,528                                                   |  
|Expenses
      relating to the transaction       | 2,998                                                   |   |                                                        |  | 590                                                     |  
|Deferred
      consideration                     |                                                        |   |                                                        |  |                                                        |  
|Demand
      notes                               |                                                        |   |                                                        |  | (3,598                                                  | )
|                                                 |                                                         |   |                                                         |  |                                                         |  
|                                                 | 35,684                                                  |   |                                                        |  | 35,836                                                  |  
|                                                 |                                                         |   |                                                         |  |                                                         |  
|Cash
      consideration                         |                                                        |   |                                                        |  | (3,528                                                  | )
|Expenses
      relating to transaction           | (2,998                                                  | ) |                                                        |  | (590                                                    | )
|Net cash
      acquired with subsidiary          | 48                                                      |   |                                                        |  | 5,436                                                   |  
|                                                 |                                                         |   |                                                         |  |                                                         |  
|Net cash
      outflow on purchase of subsidiary | (2,950                                                  | ) |                                                        |  | 1,318                                                   |  
|                                                 |                                                         |   |                                                         |  |                                                         |  
|                                                 |                                                         |   |                                                         |  |                                                         |  

During
  year ended December 31, 1999 SkyePharma Inc. contributed £7.8 million
  to the Groups net cash outflow from operating activities and utilised
  £0.6 million for capital expenditure.

Part
  of the consideration for the purchase of RTP Pharma Inc. comprised shares (see
  Note 25 Acquisitions).

F-7

---

SKYEPHARMA PLC

Statement of Total Recognized
  Gains and Losses

|                                                     | Year
      to
      December 31,
      1999
      £000 |   | Year
      to
      December 31,
      2000
      £000 |   | Year
      to
      December 31,
      2001
      £000 |  
|---------------------------------------------------- | ------------------------------------------------------- | - | ------------------------------------------------------- | - | ------------------------------------------------------- | -
|                                                     |                                                         |   |                                                         |   |                                                         |  
|Loss
      attributable to shareholders              | (19,414                                                 | ) | (19,690                                                 | ) | (9,452                                                  | )
|Net currency
      translation effect                |                                                         |   |                                                         |   |                                                         |  
|Group                                                | (2,220                                                  | ) | 758                                                     |   | 28                                                      |  
|Share
      of Joint Venture                         | (627                                                    | ) |                                                        |   |                                                        |  
|                                                     |                                                         |   |                                                         |   |                                                         |  
|                                                     | (2,847                                                  | ) | 758                                                     |   | 28                                                      |  
|Lapse
      of warrants                              |                                                        |   |                                                        |   | 271                                                     |  
|                                                     |                                                         |   |                                                         |   |                                                         |  
|Total
      recognized gains and losses for the year | (22,261                                                 | ) | (18,932                                                 | ) | (9,153                                                  | )
|                                                     |                                                         |   |                                                         |   |                                                         |  
|                                                     |                                                         |   |                                                         |   |                                                         |  

As
  described in Note 22b Class C Warrants relating to the debenture
  issue lapsed during the year. The fair value of the Warrants at issue of £271,000
  has been transferred from non-distributable reserves to retained profits. The
  lapse of warrants represents a transfer of value from the Warrant holders to
  existing shareholders. In accordance with FRS4, this is shown as a recognized
  gain, although total shareholders funds remain unchanged.

F-8

---

SKYEPHARMA PLC

Reconciliation of Movement
  in Shareholders Funds

|                                                                                                         | Year
      to
      December 31,
      1999
      £000 |   | Year
      to
      December 31,
      2000
      £000 |   | Year
      to
      December 31,
      2001
      £000 |  
|-------------------------------------------------------------------------------------------------------- | ------------------------------------------------------- | - | ------------------------------------------------------- | - | ------------------------------------------------------- | -
|                                                                                                         |                                                         |   |                                                         |   |                                                         |  
|Shareholders
      funds at the beginning of the year                                                   | 6,235                                                   |   | 72,057                                                  |   | 68,952                                                  |  
|                                                                                                         |                                                         |   |                                                         |   |                                                         |  
|Total
      recognized gains and losses for the year                                                     | (22,261                                                 | ) | (18,932                                                 | ) | (9,153                                                  | )
|Reinstatement
      on dissolution of joint venture of goodwill previously writtenoff
      to reserves | 5,760                                                   |   |                                                        |   |                                                        |  
|Goodwill
      adjustments on deferred consideration                                                     | 8,900                                                   |   | 3,618                                                   |   | 148                                                     |  
|Equity
      shares issued/allocated, net of expenses                                                    | 41,573                                                  |   | 22,581                                                  |   | 30,058                                                  |  
|Non-equity
      shares issued, net of expenses                                                          |                                                        |   | 22,620                                                  |   |                                                        |  
|Increase/(decrease)
      in shares and warrants to be issued                                            | 40,750                                                  |   | (29,528                                                 | ) | 5,780                                                   |  
|Revaluation
      of shares and warrants to be issued                                                    | (8,900                                                  | ) | (3,618                                                  | ) | (148                                                    | )
|Issue
      of warrants                                                                                  |                                                        |   | 154                                                     |   |                                                        |  
|Exercise
      of warrants                                                                               |                                                        |   |                                                        |   | (56                                                     | )
|Lapse
      of warrants                                                                                  |                                                        |   |                                                        |   | (436                                                    | )
|                                                                                                         |                                                         |   |                                                         |   |                                                         |  
|Net movement
      in the year                                                                           | 65,822                                                  |   | (3,105                                                  | ) | 26,193                                                  |  
|                                                                                                         |                                                         |   |                                                         |   |                                                         |  
|Shareholders
      funds at the end of the year                                                         | 72,057                                                  |   | 68,952                                                  |   | 95,145                                                  |  
|                                                                                                         |                                                         |   |                                                         |   |                                                         |  
|                                                                                                         |                                                         |   |                                                         |   |                                                         |  

F-9

---

SKYEPHARMA PLC
  Notes to the Consolidated Financial Statements

1    Accounting Policies
Accounting convention
  and presentationThe
  financial statements have been prepared under the historical cost convention
  and in accordance with applicable UK accounting standards. The principal accounting
  policies, which have been applied consistently, are set out below. The results
  for the year all relate to continuing operations. The financial statements have
  been prepared on a going concern basis.

New accounting policies
  and requirementsThe
  Group has implemented the transitional disclosure requirements of Financial
  Reporting Standard 17 Retirement Benefits. The FRS adopts a market
  value approach to the measurement of retirement benefits and requires expanded
  disclosures. The Standard does not require implementation of the change in measurement
  approach until 2003.

The
  Group has implemented FRS18 Accounting Policies. The FRS updates
  an existing standard and provides new guidance. It has not had any effect on
  the results for the period or required any restatement of prior year comparatives.

Consolidation
The
  consolidated financial information includes the financial statements for the
  Company, its subsidiary undertakings and the Groups share of the net assets
  and results of associated undertakings. Intra-group sales and profits are eliminated
  fully on consolidation. The results of subsidiaries sold or acquired are included
  in the consolidated profit and loss account up to the date of their sale or
  from their date of acquisition respectively. The share of results of associated
  undertakings sold or acquired are included in the consolidated profit and loss
  account up to the date of their sale or from their date of acquisition respectively.

Investments
  which are held for the long-term and where the Group exercises joint control
  are accounted for using the gross equity method. Where the Group has certain
  contractual agreements with other participants to engage in joint activities
  that do not create an entity carrying on a trade or business of its own, they
  are accounted for as a joint arrangement. The Group includes its share of the
  assets, liabilities and cash flows in such joint arrangements measured in accordance
  with the terms of each arrangement which is usually pro-rata to the Groups
  interest in the joint arrangement.

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

Revenue recognition
Turnover
  comprises contract development, manufacturing and distribution, and royalty
  income. Contract development income represents amounts invoiced to customers
  for services rendered under development contracts including milestone payments
  and technology access fees. Contract revenue is recognized when earned and non-refundable,
  and when there are no future obligations pursuant to the revenue, in accordance
  with the contract terms. Refundable contract revenue is treated as deferred
  until such time as it is no longer refundable. Manufacturing and distribution
  revenues principally comprise contract manufacturing fees invoiced to third
  parties, non-contract manufacturing revenues under a collaboration agreement
  with Chiron Corporation, plus other contract manufacturing revenue and income
  from product sales. Royalty income represents income earned as a percentage
  of product sales. Advance royalties received are treated as deferred income
  until earned, when they are recognized as income.

F-10

---

SKYEPHARMA PLC
  Notes to the Consolidated Financial Statements (continued)

1    Accounting Policies
  (continued)Research and development
  costsResearch
  costs are charged as an expense in the period in which they are incurred. Development
  costs are also recognized as an expense in the period in which they are incurred,
  unless all of the criteria are met for asset recognition. The major asset recognition
  criteria include: the ability to clearly define the product or process, demonstration
  of its technical feasibility and that a market for it exists. Development costs
  recognized as an asset do not exceed the probable net amount to be recovered
  in marketing the product or process and they are amortized over the estimated
  economic life.

Financial Instruments
The
  Group uses derivative financial instruments to hedge its exposure to fluctuations
  in interest and foreign exchange rates. Specifically, the Group uses interest
  rate swaps, forward currency contracts and currency options. Receipts and payments
  on interest rate swaps are recognized on an accruals basis, over the life of
  the swap, as an adjustment to interest payable. Gains and losses on forward
  currency contracts and currency options are not recognized until the period
  that the foreign currency exposure is recognized. Option premia are deferred
  in the balance sheet and recognized upon the maturity of the option agreement.

Foreign currencies
Foreign
  currency transactions by Group companies are recorded in local currency at the
  exchange rate ruling on the date of transaction. Assets and liabilities expressed
  in foreign currencies are translated into sterling at the exchange rates ruling
  at the balance sheet date. Exchange differences which relate to the translation
  of net assets of overseas companies are taken directly to reserves. All other
  foreign exchange differences are taken to the profit and loss account in the
  year in which they arise. The Group uses the average of exchange rates prevailing
  during the year to translate the results of overseas subsidiaries into sterling
  and year-end rates to translate the net assets of those undertakings.

Tangible fixed assets
Tangible
  fixed assets are included in the balance sheet at cost less accumulated depreciation.
  Depreciation is provided on tangible fixed assets at rates calculated to write
  off the cost, less estimated residual value, of each asset over its expected
  useful life. The rates and bases are as follows:

|Freehold land | not
      depreciated
|------------- | ---------------------

|Freehold
      buildings | 2%-5% straight
      line
|------------------------ | -------------------------

|Short
      leasehold property | period
      of lease
|------------------------------ | ---------------------

|Plant,
      equipment and fixtures | 10%-33%
      straight line
|----------------------------------- | ---------------------------

|Motor
      vehicles | 20% straight
      line
|-------------------- | -----------------------

|Finance
      leases | period
      of lease
|-------------------- | ---------------------

F-11

---

SKYEPHARMA PLC
  Notes to the Consolidated Financial Statements (continued)

1    Accounting Policies
  (continued)Intangible fixed
  assetsIntangible
  fixed assets comprise goodwill, intellectual property and capitalized development
  costs. Goodwill, both positive and negative, being the difference between the
  purchase consideration in subsidiary undertakings and the Groups share
  of the fair value of the net assets acquired, is capitalized and amortized over
  a period of 20 years or less in line with the Directors view of its useful
  economic life. Prior to the introduction of FRS 10, the policy adopted was to
  write off goodwill to reserves. As permitted by FRS 10 goodwill written off
  to reserves in previous years has not been reinstated on the balance sheet and
  adjustments to such goodwill have been taken directly to reserves. Goodwill
  previously written off to reserves is charged to the profit and loss account
  in the event of disposal of the related business.

Intellectual
  property comprises acquired patents, trademarks, know-how and other similarly
  identified rights. These are recorded at their fair value at acquisition date
  and are amortized in equal instalments over their estimated economic lives,
  from the date when the transfer of technology is complete. The period over which
  the Group expects to derive economic benefits does not exceed 20 years. Costs
  associated with internally developed intellectual property are generally treated
  as research and development costs. Development costs are recognized under the
  criteria stated above.

Fixed asset investments
Group
  fixed asset investments are recorded at Directors valuation, less provision
  for impairment. In addition, the Company has fixed asset investments relating
  to equity and loan investments in subsidiaries.

Impairment of fixed
  assetsThe
  carrying values of fixed assets are reviewed for impairment when there is an
  indication that the assets may be impaired. First year impairment reviews are
  conducted for acquired goodwill and intangible assets. Impairment is determined
  by reference to the higher of net realizable value and value in use, which is
  measured by reference to discounted future cash flows. Any provision for impairment
  is charged to the profit and loss account in the year concerned.

Employee share plans
Incentives
  in the form of shares are provided to employees under share option and share
  award schemes. In respect of award schemes the Group provides finance to an
  employee share ownership trust to purchase company shares on the open market
  to meet the Groups obligation to provide shares when employees exercise
  their award. The difference between the purchase price of the shares and the
  exercise price of the award is charged, or credited, to the profit and loss
  account over the periods of service in respect of which the award was granted.

The
  costs of running the employee share ownership trust are charged to the profit
  and loss account as they accrue.

Shares
  held by the employee share ownership trust are accounted for as fixed asset
  investments at cost less accrual for costs charged.

Stock and work-in-progress
Stock
  and work-in-progress are valued at the lower of cost and net realizable value
  and calculated using the first-in, first-out basis.

Liquid resources
Liquid
  resources comprise short-term bank and commercial deposits with a maturity of
  less than one year.

F-12

---

SKYEPHARMA PLC
  Notes to the Consolidated Financial Statements (continued)

1    Accounting Policies
  (continued)Deferred consideration
The
  provision for deferred consideration comprises the fair value of contingent
  consideration arising from acquisitions. The eventual outcome is subject to
  the Groups future performance and certain contractual terms. The provision
  is reviewed annually by the Directors and changes to the estimated fair value
  of the contingent consideration are recorded as an adjustment to goodwill or
  the underlying asset value. Where the effect of the time value of money is material
  the provision is reflected at its present value and the interest element arising
  on discounting the liability is recorded as interest payable in the profit and
  loss account as it unwinds.

Deferred taxation
Deferred
  taxation is provided on timing differences using the liability method where
  it is probable that tax liabilities or assets will crystallize within the foreseeable
  future.

Leased and hired
  assetsLeasing
  agreements which transfer to the Group substantially all of the risks and rewards
  of ownership of an asset are treated as finance leases, as if the asset had
  been purchased outright. The assets are included in tangible fixed assets and
  the capital element of amounts owed to the finance company at the balance sheet
  date is included in creditors as amounts falling due either within or after
  more than one year. Repayments are treated as consisting of both capital and
  interest with the interest element being charged to the profit and loss account
  in proportion to the outstanding obligations. Payments under operating leases
  and short-term hire contracts are charged to profit and loss account as they
  fall due.

Pension costs
The
  costs of the Groups defined contribution pension arrangements are charged
  to the income statement in the year to which they relate. The costs of the Groups
  defined benefits scheme are charged to the income statement on a systematic
  basis allowing for the expected pension cost over the service lives of employees,
  based on actuarial advice.

Convertible debt
On
  issue, convertible debt is stated at the amount of net proceeds after deducting
  issue costs. On conversion the amount recognized in shareholders funds
  in respect of the shares issued is equal to the carrying value at the date of
  conversion. Interest payable on convertible debt is calculated to unwind the
  issue costs and any discount on issue at a constant rate over the term of the
  debt.

2    Segmental Analysis
SkyePharmas
  strategy is to be a provider of integrated drug delivery services to the pharmaceutical
  industry, providing a full complement of drug delivery products and services
  ranging from formulation and development through to commercial manufacturing.
  As such SkyePharmas operations represent a single business segment, pharmaceuticals,
  served by a range of drug delivery technologies and services.

The
  tables below present an analysis of turnover, loss before interest, total assets,
  total long-lived assets and net assets by geographical area together with an
  analysis of cost of sales, capital expenditure and depreciation. A breakdown
  of turnover and cost of sales is also presented based upon the various drug
  delivery products and services provided.

As
  there is only one business segment the totals shown in the following tables
  represent the total for the segment and the consolidated financial statements.

F-13

---

SKYEPHARMA PLC
  Notes to the Consolidated Financial Statements (continued)

2     Segmental Analysis
  (continued)(a)  Turnover

|                                                         | Year
      to December  31, |  | Year
      to December  31, |  | Year
      to December  31, | 
|-------------------------------------------------------- | --------------------------- |  | --------------------------- |  | --------------------------- | 
|                                                         | 1999
      £000            |  | 2000
      £000            |  | 2001
      £000            | 
|                                                         |                             |  |                             |  |                             | 
|By
      class of business:                              |                             |  |                             |  |                             | 
|Pharmaceuticals                                          |                             |  |                             |  |                             | 
|Contract
      development, including milestone payments | 9,045                       |  | 16,805                      |  | 38,236                      | 
|Manufacturing
      & distribution                       | 4,597                       |  | 3,476                       |  | 6,422                       | 
|Royalties
      receivable                               | 4,097                       |  | 4,011                       |  | 1,468                       | 
|                                                         |                             |  |                             |  |                             | 
|Total
      and consolidated                             | 17,739                      |  | 24,292                      |  | 46,126                      | 
|                                                         |                             |  |                             |  |                             | 
|Contract
      development split:                        |                             |  |                             |  |                             | 
|R&D
      costs recharged                                | 6,078                       |  | 4,808                       |  | 9,857                       | 
|Milestone
      payments                                 | 2,967                       |  | 11,997                      |  | 28,379                      | 
|                                                         |                             |  |                             |  |                             | 
|                                                         | 9,045                       |  | 16,805                      |  | 38,236                      | 
|                                                         |                             |  |                             |  |                             | 
|By
      location of customer:                           |                             |  |                             |  |                             | 
|U.K.                                                     | 2,237                       |  | 13,178                      |  | 21,411                      | 
|Continental
      Europe                                 | 10,812                      |  | 6,095                       |  | 16,511                      | 
|U.S.A.                                                   | 4,590                       |  | 4,284                       |  | 5,482                       | 
|Rest
      of the world                                  | 100                         |  | 735                         |  | 2,722                       | 
|                                                         |                             |  |                             |  |                             | 
|Total
      and consolidated                             | 17,739                      |  | 24,292                      |  | 46,126                      | 
|                                                         |                             |  |                             |  |                             | 
|By
      location of operation:                          |                             |  |                             |  |                             | 
|Continental
      Europe                                 | 14,219                      |  | 22,646                      |  | 30,268                      | 
|U.S.A.                                                   | 3,520                       |  | 1,646                       |  | 15,858                      | 
|                                                         |                             |  |                             |  |                             | 
|Total
      and consolidated                             | 17,739                      |  | 24,292                      |  | 46,126                      | 
|                                                         |                             |  |                             |  |                             | 
|                                                         |                             |  |                             |  |                             | 

F-14

---

SKYEPHARMA PLC
  Notes to the Consolidated Financial Statements (continued)

2 Segmental Analysis
  (continued)

(b) Cost of sales

|                                     | Year
      to
      December 31,
      1999 |   | Year
      to
      December 31,
      2000 |   | Year
      to
      December 31,
      2001 |  
|------------------------------------ | ------------------------------------------- | - | ------------------------------------------- | - | ------------------------------------------- | -
|                                     | £000                                       |   | £000                                       |   | £000                                       |  
|                                     |                                             |   |                                             |   |                                             |  
|By class
      of business:          |                                             |   |                                             |   |                                             |  
|Pharmaceuticals                      |                                             |   |                                             |   |                                             |  
|Contract
      development           | (5,780                                      | ) | (6,986                                      | ) | (7,917                                      | )
|Manufacturing
      and distribution | (8,241                                      | ) | (7,073                                      | ) | (10,331                                     | )
|Royalties
      payable              | (833                                        | ) | (1,539                                      | ) | (572                                        | )
|                                     |                                             |   |                                             |   |                                             |  
|Total
      and consolidated         | (14,854                                     | ) | (15,598                                     | ) | (18,820                                     | )
|                                     |                                             |   |                                             |   |                                             |  
|                                     |                                             |   |                                             |   |                                             |  

(c) Operating Loss

|                                | Year
      to
      December 31,
      1999 |   | Year
      to
      December 31,
      2000 |   | Year
      to
      December 31,
      2001 |  
|------------------------------- | ------------------------------------------- | - | ------------------------------------------- | - | ------------------------------------------- | -
|                                | £000                                       |   | £000                                       |   | £000                                       |  
|                                |                                             |   |                                             |   |                                             |  
|By class
      of business:     |                                             |   |                                             |   |                                             |  
|Pharmaceuticals                 | (19,588                                     | ) | (17,984                                     | ) | (5,099                                      | )
|                                |                                             |   |                                             |   |                                             |  
|Total
      and consolidated    | (19,588                                     | ) | (17,984                                     | ) | (5,099                                      | )
|                                |                                             |   |                                             |   |                                             |  
|By location
      of operation: |                                             |   |                                             |   |                                             |  
|U.K.                            | (4,733                                      | ) | (5,291                                      | ) | (6,840                                      | )
|Continental
      Europe        | (4,776                                      | ) | 973                                         |   | 6,985                                       |  
|U.S.A.                          | (10,079                                     | ) | (13,666                                     | ) | (5,205                                      | )
|Canada                          |                                            |   |                                            |   | (39                                         | )
|                                |                                             |   |                                             |   |                                             |  
|Total
      and consolidated    | (19,588                                     | ) | (17,984                                     | ) | (5,099                                      | )
|                                |                                             |   |                                             |   |                                             |  
|                                |                                             |   |                                             |   |                                             |  

(d) Total assets and
  net assets

|                                | Total
      assets            |  | Net
      assets              | 
|------------------------------- | ----------------------------- |  | ----------------------------- | 
|                                |                               |  |                               | 
|                                | December
      31,
      2000 |  | December
      31,
      2001 | 
|                                | £000                         |  | £000                         | 
|                                |                               |  |                               | 
|By class
      of business:     |                               |  |                               | 
|Pharmaceuticals                 | 163,825                       |  | 200,583                       | 
|                                |                               |  |                               | 
|By location
      of operation: |                               |  |                               | 
|U.K.                            | 30,340                        |  | 65,639                        | 
|Continental
      Europe        | 60,097                        |  | 62,032                        | 
|U.S.A.                          | 73,388                        |  | 62,395                        | 
|Canada                          |                              |  | 10,517                        | 
|                                |                               |  |                               | 
|Total
      and consolidated    | 163,825                       |  | 200,583                       | 
|                                |                               |  |                               | 
|                                |                               |  |                               | 

F-15

---

SKYEPHARMA PLC
  Notes to the Consolidated Financial Statements (continued)

2 Segmental Analysis
  (continued)

(e) Capital expenditure

|                            | Year
      to
      December 31,
      1999 |  | Year
      to
      December 31,
      2000 |  | Year
      to
      December 31,
      2001 | 
|--------------------------- | ------------------------------------------- |  | ------------------------------------------- |  | ------------------------------------------- | 
|                            | £000                                       |  | £000                                       |  | £000                                       | 
|                            |                                             |  |                                             |  |                                             | 
|By class
      of business: |                                             |  |                                             |  |                                             | 
|Pharmaceuticals             | 7,656                                       |  | 8,736                                       |  | 7,646                                       | 
|                            |                                             |  |                                             |  |                                             | 
|                            |                                             |  |                                             |  |                                             | 

(f) Depreciation &
  amortization

|                            | Year
      to
      December 31,
      1999 |  | Year
      to
      December 31,
      2000 |  | Year
      to
      December 31,
      2001 | 
|--------------------------- | ------------------------------------------- |  | ------------------------------------------- |  | ------------------------------------------- | 
|                            | £000                                       |  | £000                                       |  | £000                                       | 
|                            |                                             |  |                                             |  |                                             | 
|By class
      of business: |                                             |  |                                             |  |                                             | 
|Pharmaceuticals             | 5,382                                       |  | 7,281                                       |  | 8,602                                       | 
|                            |                                             |  |                                             |  |                                             | 
|                            |                                             |  |                                             |  |                                             | 

(g) Long lived assets

|                                | Year
      to
      December 31,
      2000 |  | Year
      to
      December 31,
      2001 | 
|------------------------------- | ------------------------------------------- |  | ------------------------------------------- | 
|                                | £000                                       |  | £000                                       | 
|                                |                                             |  |                                             | 
|By location
      of operation: |                                             |  |                                             | 
|U.K.                            | 214                                         |  | 38,645                                      | 
|Continental
      Europe        | 52,477                                      |  | 49,820                                      | 
|U.S.A.                          | 59,683                                      |  | 64,967                                      | 
|Canada                          |                                            |  | 3,959                                       | 
|                                |                                             |  |                                             | 
|                                | 112,374                                     |  | 157,391                                     | 
|                                |                                             |  |                                             | 
|                                |                                             |  |                                             | 

3 Other operating income

During
  the year £11.0 million ($16.0 million) (2000: £2.9 million ($4.4
  million)) was received from Paul Capital Royalty Acquisition Fund, LP (PCRAF)
  to develop DepoMorphine. Of this £6.3 million ($9.1 million) (2000: £2.9
  million ($4.4 million)) has been recognized as other operating income and the
  remaining £4.7 million ($6.9 million) (2000: £nil) deferred. Under
  the agreement, PCRAF will provide a total of $30 million between 2000 and 2002,
  to fund the clinical development and regulatory submission of DepoMorphine,
  in return for the sale of a portion of future royalty and revenue streams from
  DepoMorphine, Xatral OD, Solaraze and DepoCyt. Between January 2003 and December
  2014, PCRAF will receive 15% of the annual royalties and revenues from the stated
  products, up to an agreed ceiling. Once the predetermined ceiling is reached,
  the percentage participation will fall to 3% for the remainder of the period
  until 31 December 2014.

F-16

---

SKYEPHARMA PLC
  Notes to the Consolidated Financial Statements (continued)

4 Operating Loss

Operating
  loss is stated after charging:

|                                                  | Year
      to 
      December 31, 1999 |  | Year
      to 
      December 31, 2000 |  | Year
      to 
      December 31, 2001 | 
|------------------------------------------------- | -------------------------------------- |  | -------------------------------------- |  | -------------------------------------- | 
|                                                  | £000                                  |  | £000                                  |  | £000                                  | 
|                                                  |                                        |  |                                        |  |                                        | 
|Auditors
      remuneration                       |                                        |  |                                        |  |                                        | 
| audit
      of SkyePharma PLC                   | 39                                     |  | 64                                     |  | 93                                     | 
| audit
      of subsidiary undertakings-overseas | 101                                    |  | 117                                    |  | 101                                    | 
|Fees
      to auditors for other work             |                                        |  |                                        |  |                                        | 
| auditors
      U.K. firm                       | 307                                    |  | 222                                    |  | 499                                    | 
| auditors
      overseas firms                  | 141                                    |  | 312                                    |  | 240                                    | 
|Depreciation
      of tangible fixed assets       |                                        |  |                                        |  |                                        | 
| owned
      assets                              | 3,508                                  |  | 3,501                                  |  | 4,343                                  | 
| assets
      held under finance leases          | 334                                    |  | 441                                    |  | 435                                    | 
|Amortization
      of intangible fixed assets     |                                        |  |                                        |  |                                        | 
| amortization
      of goodwill                  | 1,211                                  |  | 2,099                                  |  | 2,341                                  | 
| amortization
      of intellectual property     | 329                                    |  | 1,082                                  |  | 1,282                                  | 
|Research
      and development expenses           |                                        |  |                                        |  |                                        | 
| current
      year expenditure                  | 6,728                                  |  | 13,104                                 |  | 17,918                                 | 
| amortized
      from deferred expenditure       |                                       |  | 158                                    |  | 201                                    | 
|Operating
      lease rentals                     |                                        |  |                                        |  |                                        | 
| hire
      of plant and machinery               | 1,844                                  |  | 2,593                                  |  | 3,486                                  | 
| other                                           | 486                                    |  | 373                                    |  | 439                                    | 
|                                                  |                                        |  |                                        |  |                                        | 
|                                                  |                                        |  |                                        |  |                                        | 

It
  is the Groups policy to employ PricewaterhouseCoopers on assignments additional
  to their statutory audit duties where their expertise and experience with the
  Group are important, principally tax advice and due diligence reporting on acquisitions,
  or where they are awarded assignments on a competitive basis. During the year
  PricewaterhouseCoopers earned the following fees from the Group:

|                                                 | Year
      to 
      December 31, 1999 |  | Year
      to December 31, 2000 |  | Year
      to December 31, 2001 | 
|------------------------------------------------ | -------------------------------------- |  | ------------------------------- |  | ------------------------------- | 
|                                                 | £000                                  |  | £000                           |  | £000                           | 
|                                                 |                                        |  |                                 |  |                                 | 
|Due diligence
      and other audit-related work | 152                                    |  | 159                             |  | 215                             | 
|Tax advice                                       | 230                                    |  | 231                             |  | 297                             | 
|Accounting
      advice and regulatory returns   | 66                                     |  | 144                             |  | 227                             | 
|                                                 |                                        |  |                                 |  |                                 | 
|Total
      non-audit fees                       | 448                                    |  | 534                             |  | 739                             | 
|                                                 |                                        |  |                                 |  |                                 | 
|                                                 |                                        |  |                                 |  |                                 | 

F-17

---

SKYEPHARMA PLC
  Notes to the Consolidated Financial Statements (continued)

5 Employees

|                            | Year
      to 
      December 31, 1999 |  | Year
      to 
      December 31, 2000 |  | Year
      to 
      December 31, 2001 | 
|--------------------------- | -------------------------------------- |  | -------------------------------------- |  | -------------------------------------- | 
|                            | £000                                  |  | £000                                  |  | £000                                  | 
|                            |                                        |  |                                        |  |                                        | 
|Employment
      costs      |                                        |  |                                        |  |                                        | 
|Wages
      and salaries    | 11,559                                 |  | 13,506                                 |  | 15,502                                 | 
|Social
      security costs | 1,815                                  |  | 2,011                                  |  | 2,451                                  | 
|Pension
      costs         | 469                                    |  | 532                                    |  | 822                                    | 
|                            |                                        |  |                                        |  |                                        | 
|                            | 13,843                                 |  | 16,049                                 |  | 18,775                                 | 
|                            |                                        |  |                                        |  |                                        | 
|                            |                                        |  |                                        |  |                                        | 

The
  average number of persons employed by the Group during the year was as follows:

|                | Year
      to December 31, 1999 |  | Year
      to December 31, 2000 |  | Year
      to December 31, 2001 | 
|--------------- | ------------------------------- |  | ------------------------------- |  | ------------------------------- | 
|                | Number                          |  | Number                          |  | Number                          | 
|                |                                 |  |                                 |  |                                 | 
|Pharmaceuticals | 354                             |  | 373                             |  | 411                             | 
|                |                                 |  |                                 |  |                                 | 
|                |                                 |  |                                 |  |                                 | 

Directors Remuneration

The
  tables below set out details of the Directors aggregate emoluments and
  pension contributions for the years ended December 31, 1999, 2000 and 2001.

|                                            | Base
      Salary
      & Fees |  | Benefits |  | Bonuses |  | Total | 
|------------------------------------------- | ------------------------------ |  | -------- |  | ------- |  | ----- | 
|Year
      to December 31, 1999             | £000                          |  | £000    |  | £000   |  | £000 | 
|                                            |                                |  |          |  |         |  |       | 
|Executive
      Directors                   |                                |  |          |  |         |  |       | 
|I R Gowrie-Smith
      (Executive Chairman) | 350                            |  | 22       |  | 60      |  | 432   | 
|M Ashton                                    | 300                            |  | 60       |  | 51      |  | 411   | 
|D Nicholson                                 | 150                            |  | 10       |  | 37      |  | 197   | 
|                                            |                                |  |          |  |         |  |       | 
|                                            | 800                            |  | 92       |  | 148     |  | 1,040 | 
|                                            |                                |  |          |  |         |  |       | 
|Non-Executive
      Directors               |                                |  |          |  |         |  |       | 
|Sir M
      G Beavis                        | 25                             |  |         |  |        |  | 25    | 
|Dr J
      Gonella                          | 25                             |  |         |  |        |  | 25    | 
|R S Harris                                  | 25                             |  |         |  |        |  | 25    | 
|D J Lees
      (to 19 May 1999)             | 10                             |  |         |  |        |  | 10    | 
|Dr K
      Mansford                         | 25                             |  |         |  |        |  | 25    | 
|Dr T
      Rinderknecht                     | 37                             |  |         |  |        |  | 37    | 
|N W Wray                                    | 25                             |  |         |  |        |  | 25    | 
|W Zeller                                    | 37                             |  |         |  |        |  | 37    | 
|                                            |                                |  |          |  |         |  |       | 
|                                            | 209                            |  |         |  |        |  | 209   | 
|                                            |                                |  |          |  |         |  |       | 
|                                            | 1,009                          |  | 92       |  | 148     |  | 1,249 | 
|                                            |                                |  |          |  |         |  |       | 
|                                            |                                |  |          |  |         |  |       | 

F-18

---



---

SKYEPHARMA PLC
  Notes to the Consolidated Financial Statements (continued)

|                                             | Fees
      and
      Salary |  | Benefits |  | Bonuses |  | Total | 
|-------------------------------------------- | --------------------------- |  | -------- |  | ------- |  | ----- | 
|Year
      to December 31, 2000              | £000                       |  | £000    |  | £000   |  | £000 | 
|                                             |                             |  |          |  |         |  |       | 
|Executive
      Directors                    |                             |  |          |  |         |  |       | 
|I R Gowrie-Smith
      (Executive Chairman)  | 376                         |  | 20       |  | 60      |  | 456   | 
|M Ashton                                     | 323                         |  | 59       |  | 52      |  | 434   | 
|D Nicholson                                  | 161                         |  | 10       |  | 26      |  | 197   | 
|                                             |                             |  |          |  |         |  |       | 
|                                             | 860                         |  | 89       |  | 138     |  | 1,087 | 
|                                             |                             |  |          |  |         |  |       | 
|Non-Executive
      Directors                |                             |  |          |  |         |  |       | 
|Sir M
      G Beavis                         | 25                          |  |         |  |        |  | 25    | 
|Dr J
      Gonella                           | 25                          |  |         |  |        |  | 25    | 
|R S Harris                                   | 25                          |  |         |  |        |  | 25    | 
|D J Lees
      (to 19 May 1999)              |                            |  |         |  |        |  |      | 
|T Howson
      (from 28 September 2000)      | 6                           |  |         |  |        |  | 6     | 
|A N Karabelas
      (from 30 November 2000)  | 2                           |  |         |  |        |  | 2     | 
|Dr K
      Mansford                          | 25                          |  |         |  |        |  | 25    | 
|Dr T
      Rinderknecht (to 3 November 2000) | 33                          |  |         |  |        |  | 33    | 
|N W Wray
      (to 30 November 2000)         | 21                          |  |         |  |        |  | 21    | 
|W Zeller                                     | 37                          |  |         |  |        |  | 37    | 
|                                             |                             |  |          |  |         |  |       | 
|                                             | 199                         |  |         |  |        |  | 199   | 
|                                             |                             |  |          |  |         |  |       | 
|                                             | 1,059                       |  | 89       |  | 138     |  | 1,286 | 
|                                             |                             |  |          |  |         |  |       | 
|                                             |                             |  |          |  |         |  |       | 



|                                                              | Fees
      and 
      Salary |  | Benefits |  | Bonuses |  | Total | 
|------------------------------------------------------------- | ---------------------------- |  | -------- |  | ------- |  | ----- | 
|Year
      to December 31, 2001                               | £000                        |  | £000    |  | £000   |  | £000 | 
|                                                              |                              |  |          |  |         |  |       | 
|Executive
      Directors                                     |                              |  |          |  |         |  |       | 
|I R Gowrie-Smith
      (Executive Chairman)                   | 406                          |  | 20       |  | 134     |  | 560   | 
|M Ashton                                                      | 350                          |  | 58       |  | 115     |  | 523   | 
|D Nicholson                                                   | 180                          |  | 10       |  | 70      |  | 260   | 
|                                                              |                              |  |          |  |         |  |       | 
|                                                              | 936                          |  | 88       |  | 319     |  | 1,343 | 
|                                                              |                              |  |          |  |         |  |       | 
|Non-Executive
      Directors                                 |                              |  |          |  |         |  |       | 
|Sir M
      G Beavis                                          | 30                           |  |         |  |        |  | 30    | 
|Dr J
      Gonella (to June 6, 2001)                          | 11                           |  |         |  |        |  | 11    | 
|R S Harris                                                    | 28                           |  |         |  |        |  | 28    | 
|T Howson
      (from September 28, 2000 to November 26, 2001) | 71                           |  |         |  |        |  | 71    | 
|A N Karabelas
      (from November 30, 2000)                  | 28                           |  |         |  |        |  | 28    | 
|Dr K
      Mansford                                           | 28                           |  |         |  |        |  | 28    | 
|Dr T
      Rinderknecht (to November 3, 2000)                 |                             |  |         |  |        |  |      | 
|N W Wray
      (to November 30, 2000)                         |                             |  |         |  |        |  |      | 
|W Zeller                                                      | 37                           |  |         |  |        |  | 37    | 
|                                                              |                              |  |          |  |         |  |       | 
|                                                              | 233                          |  |         |  |        |  | 233   | 
|                                                              |                              |  |          |  |         |  |       | 
|                                                              | 1,169                        |  | 88       |  | 319     |  | 1,576 | 
|                                                              |                              |  |          |  |         |  |       | 
|                                                              |                              |  |          |  |         |  |       | 

The
  emoluments of Dr T Rinderknecht and W Zeller include remuneration in respect
  of their capacity as Non-executive Directors of subsidiary companies. The emoluments
  of T Howson include remuneration in respect of consulting on business development
  during the year. Benefits for M  Ashton include a living allowance and
  school fees.

F-19

---

SKYEPHARMA PLC
  Notes to the Consolidated Financial Statements (continued)

5 Employees (continued)
  Pensions Contributions
  made to defined contribution pension schemes on behalf of the Directors are
  set out below:

|                 | Year
      to
      December 31, |  | Year
      to
      December 31, |  | Year
      to
      December 31, | 
|---------------- | -------------------------------- |  | -------------------------------- |  | -------------------------------- | 
|                 | 1999                             |  | 2000                             |  | 2001                             | 
|                 | £000                            |  | £000                            |  | £000                            | 
|                 |                                  |  |                                  |  |                                  | 
|I R Gowrie-Smith | 44                               |  | 47                               |  | 51                               | 
|M Ashton         | 37                               |  | 40                               |  | 44                               | 
|D Nicholson      | 19                               |  | 20                               |  | 23                               | 
|                 |                                  |  |                                  |  |                                  | 
|                 | 100                              |  | 107                              |  | 118                              | 
|                 |                                  |  |                                  |  |                                  | 
|                 |                                  |  |                                  |  |                                  | 

Directors Interests
  The
  following tables set out the interests of Directors (including the interests
  of their immediate families and persons connected with the Directors) as at
  December 31, 1999, December 31, 2000 and December 31, 2001. All interests are
  beneficial unless otherwise stated in the notes to the table.

|Number
      of ordinary shares               | December
      31,
      1999 |  | December
      31,
      2000 |  | December
      31,
      2001 | 
|--------------------------------------------- | ----------------------------- |  | ----------------------------- |  | ----------------------------- | 
|                                              |                               |  |                               |  |                               | 
|I R Gowrie-Smith                              | 37,122,972                    |  | 25,122,972                    |  | 25,122,972                    | 
|Dr J
      Gonella (to June 6, 2001)          | 90,472,890                    |  | 96,472,890                    |  |                              | 
|M Ashton                                      | 110,000                       |  | 110,000                       |  | 110,000                       | 
|D Nicholson                                   | 137,000                       |  | 137,000                       |  | 137,000                       | 
|Sir M
      G Beavis                          | 172,000                       |  | 172,000                       |  | 172,000                       | 
|R S Harris                                    | 46,500                        |  | 46,500                        |  | 101,500                       | 
|Dr K
      Mansford                           | 16,000                        |  | 16,000                        |  | 16,000                        | 
|Dr T
      Rinderknecht (to November 3, 2000) | 5,785,065                     |  |                              |  |                              | 
|N W Wray
      (to November 30, 2000)         | 8,367,560                     |  |                              |  |                              | 
|W Zeller                                      | 55,000                        |  | 55,000                        |  | 55,000                        | 
|                                              |                               |  |                               |  |                               | 
|                                              | 142,284,987                   |  | 122,132,362                   |  | 25,714,472                    | 
|                                              |                               |  |                               |  |                               | 
|                                              |                               |  |                               |  |                               | 

In
  addition to the interests shown above at December 31, 2001, Mr I R Gowrie-Smith
  had a beneficial interest in 20,000 convertible bonds and Dr A N Karabelas had
  a beneficial interest in 2,000 American Depository Receipts, all issued by the
  Company.

Interests
  in the Ordinary Shares, Deferred A Shares and Deferred B
  Shares held by Dr  J  Gonella and T Howson at December 31, 2001 are
  not shown as they ceased to be a Director during the year.

|Number
      of B warrants          | December
      31,
      1999 |  | December
      31,
      2000 |  | December
      31,
      2001 | 
|------------------------------------- | ----------------------------- |  | ----------------------------- |  | ----------------------------- | 
|                                      |                               |  |                               |  |                               | 
|I R Gowrie-Smith                      | 19,797,143                    |  | 19,797,143                    |  | 19,797,143                    | 
|Sir M
      G Beavis                  | 84,000                        |  | 84,000                        |  | 84,000                        | 
|N W Wray
      (to November 30, 2000) | 1,589,510                     |  |                              |  |                              | 
|                                      |                               |  |                               |  |                               | 
|                                      | 21,470,653                    |  | 19,881,143                    |  | 19,881,143                    | 
|                                      |                               |  |                               |  |                               | 
|                                      |                               |  |                               |  |                               | 

F-20

---

SKYEPHARMA PLC
  Notes to the Consolidated Financial Statements (continued)

5 Employees (continued)

|Ordinary
      Options over shares
      of 10 pence each | January
      1,
      2001 |  | Granted   |  | December
      31,
      2001 |  | Exercise
      price |  | Date
      from
      which
      options
      can be exercised |  | Expiry
      date | 
|--------------------------------------------------------- | --------------------------- |  | --------- |  | ----------------------------- |  | -------------------- |  | ---------------------------------------------------------------- |  | ----------------- | 
|                                                          |                             |  |           |  |                               |  |                      |  |                                                                  |  |                   | 
|I R Gowrie-Smith                                          | 1,234,568                   |  |          |  | 1,234,568                     |  | 81.0p                |  | 12-06-99                                                         |  | 12-06-06          | 
|                                                          | 575,539                     |  |          |  | 575,539                       |  | 69.5p                |  | 04-19-02                                                         |  | 04-19-09          | 
|                                                          |                            |  | 1,008,313 |  | 1,008,313                     |  | 80.6p                |  | 06-12-04                                                         |  | 06-12-11          | 
|M Ashton                                                  | 639,077                     |  |          |  | 639,077                       |  | 93.0p                |  | 03-31-01                                                         |  | 03-31-08          | 
|                                                          | 871,451                     |  |          |  | 871,451                       |  | 69.5p                |  | 04-19-02                                                         |  | 04-19-09          | 
|                                                          |                            |  | 868,486   |  | 868,486                       |  | 80.6p                |  | 06-12-04                                                         |  | 06-12-11          | 
|D Nicholson                                               | 533,333                     |  |          |  | 533,333                       |  | 75.0p                |  | 04-29-99                                                         |  | 04-29-06          | 
|                                                          | 86,022                      |  |          |  | 86,022                        |  | 93.0p                |  | 03-31-01                                                         |  | 03-31-08          | 
|                                                          | 172,662                     |  |          |  | 172,662                       |  | 69.5p                |  | 04-19-02                                                         |  | 04-19-09          | 
|                                                          |                            |  | 446,650   |  | 446,650                       |  | 80.6p                |  | 06-12-04                                                         |  | 06-12-11          | 
|                                                          |                             |  |           |  |                               |  |                      |  |                                                                  |  |                   | 

|Super
      Options over shares
      of 10 pence each | January
      1,
      2001 |  | Granted |  | December
      31,
      2001 |  | Exercise
      price |  | Date
      from which options can be exercised |  | Expiry
      date | 
|------------------------------------------------------ | --------------------------- |  | ------- |  | ----------------------------- |  | -------------------- |  | ---------------------------------------------- |  | ----------------- | 
|                                                       |                             |  |         |  |                               |  |                      |  |                                                |  |                   | 
|I R Gowrie-Smith                                       | 2,385,009                   |  |        |  | 2,385,009                     |  | 56.67p               |  | 05-25-04                                       |  | 05-25-09          | 
|M Ashton                                               | 2,044,293                   |  |        |  | 2,044,293                     |  | 56.67p               |  | 05-25-04                                       |  | 05-25-09          | 
|D Nicholson                                            | 1,022,147                   |  |        |  | 1,022,147                     |  | 56.67p               |  | 05-25-04                                       |  | 05-25-09          | 
|                                                       |                             |  |         |  |                               |  |                      |  |                                                |  |                   | 

The
  above options are granted to Directors under the terms of the SkyePharma Executive
  Share Option Scheme, the European and North American Scheme and the SkyePharma
  PLC 1999 Share Option Scheme described in Note 22.

As
  at December 31, 2001, none of the Directors had any interests in shares of any
  other Group company. The market value of ordinary shares at December 31, 2001
  was 61.25 pence. The market value of ordinary shares during 2001 ranged from
  the lowest closing mid price of 49.0 pence to the highest closing mid price
  of 108.0 pence.

The
  holdings of the Directors have not changed since December 31, 2001 except for
  the following:

SkyePharma PLC Share
  Purchase Plan As
  a result of purchases on February 28, 2002 and March 28, 2002 by the SkyePharma
  PLC Share Purchase Plan (an Inland Revenue approved all employee share purchase
  plan), Michael Ashton and Donald Nicholson, Directors of the Company, as trustees
  of the Plan became the non-beneficial owners of 6,038 Ordinary Shares of the
  Company.

Of
  these shares the Directors of the Company have the following beneficial interests
  as a result of their personal participation in the Plan:

Michael
  Ashton  385 partnership shares (Ordinary Shares in the Company)

Donald
  Nicholson  385 partnership shares (Ordinary Shares in the Company).

In
  accordance with the rules of the Plan these Directors have been awarded Matching
  Shares on the basis of one Matching Share for each Partnership Share. The beneficial
  ownership of these Matching Shares will pass to the Directors in three years
  time subject to continued employment and the retention of the underlying Partnership
  Shares:

F-21

---

SKYEPHARMA PLC
  Notes to the Consolidated Financial Statements (continued)

5 Employees (continued)

Michael
  Ashton  385 Matching Shares (Ordinary Shares in the Company)

Donald
  Nicholson  385 Matching Shares (Ordinary Shares in the Company).

Partnership
  Shares were purchased at a price of 61 and 69 pence per share. Matching Shares
  were awarded at a price of 61 pence and 69 pence per share.

SkyePharma PLC Deferred
  Share Bonus Plan

On
  January 30, 2002, under the new SkyePharma PLC Deferred Share Bonus Plan (the
  Plan), approved by shareholders at the Companys Annual General
  Meeting held on June 6, 2001, the Executive Directors and other senior executives
  (Plan Members) have invested 50% of their gross bonus relating to
  the year 2001 into Ordinary Shares in the Company (the Executive Shares).
  The total net number of Executive Shares allocated on January 30, 2002 to all
  Plan Members was 300,904 at a price per share of 65.75 pence (the three day
  average prior to January 30, 2002).

The
  Executive Shares for this operation of the Plan have been provided by the Trustees
  of the SkyePharma PLC General Employee Benefit Trust. Under the rules of the
  Plan, the Trustees are required to account for any income tax due on the allocation
  of shares on behalf of the Company. Therefore the actual number of Executive
  Shares retained by Plan Members is the net number shown below.

In
  addition, the Plan provides for the Company to allocate one Matching Share,
  subject to certain conditions, for every Executive Share (calculated on the
  gross bonus invested in shares). The conditions are that each Plan Member retains
  his or her Executive Shares, acquired with their bonus monies, for three years
  (in the case of the awards detailed here, until January 30, 2005) and that he
  or she has continuously remained an employee of the Company for those three
  years. In respect of the following Executive Directors the number of Executive
  Shares and conditional Matching Shares awarded are as follows:

|                 |                        |  |                                   | 
|---------------- | ---------------------- |  | --------------------------------- | 
|                 | Executive
      Shares |  | Conditional
      Matching Shares | 
|                 |                        |  |                                   | 
|I R Gowrie-Smith | 61,184                 |  | 101,973                           | 
|M Ashton         | 66,752                 |  | 87,832                            | 
|D Nicholson      | 31,939                 |  | 53,231                            | 
|                 |                        |  |                                   | 

6 Interest Receivable

|                                                | Year
      to December  31, 1999 |  | Year
      to December  31, 2000 |  | Year
      to December  31, 2001 | 
|----------------------------------------------- | -------------------------------- |  | -------------------------------- |  | -------------------------------- | 
|                                                | £000                            |  | £000                            |  | £000                            | 
|                                                |                                  |  |                                  |  |                                  | 
|Interest                                        | 1,364                            |  | 1,806                            |  | 1,215                            | 
|Share
      of interest receivable of associate |                                 |  |                                 |  | 36                               | 
|                                                |                                  |  |                                  |  |                                  | 
|                                                | 1,364                            |  | 1,806                            |  | 1,251                            | 
|                                                |                                  |  |                                  |  |                                  | 
|                                                |                                  |  |                                  |  |                                  | 

F-22

---

SKYEPHARMA PLC
  Notes to the Consolidated Financial Statements (continued)

7 Interest Payable

|                                                                  | Year
      to December  31, 1999 |  | Year
      to December  31, 2000 |  | Year
      to December  31, 2001 | 
|----------------------------------------------------------------- | -------------------------------- |  | -------------------------------- |  | -------------------------------- | 
|                                                                  | £000                            |  | £000                            |  | £000                            | 
|                                                                  |                                  |  |                                  |  |                                  | 
|Interest
      payable on bank loans, overdrafts and other loans: |                                  |  |                                  |  |                                  | 
|Repayable
      within five years, not by installments            | 242                              |  | 268                              |  | 91                               | 
|Repayable
      within five years, by instalments                 | 630                              |  | 715                              |  | 470                              | 
|Repayable
      wholly or partly in more than five years          | 311                              |  | 241                              |  | 360                              | 
|Finance
      leases                                              | 92                               |  | 232                              |  | 170                              | 
|Interest
      on convertible debentures                          | 116                              |  |                                 |  |                                 | 
|Interest
      on convertible bonds                               |                                 |  | 2,052                            |  | 3,860                            | 
|                                                                  |                                  |  |                                  |  |                                  | 
|                                                                  | 1,391                            |  | 3,508                            |  | 4,951                            | 
|                                                                  |                                  |  |                                  |  |                                  | 
|                                                                  |                                  |  |                                  |  |                                  | 

8 Taxation

Loss
  from ordinary activities before taxes, as shown in the consolidated income statements,
  is analyzed over its component parts as follows:

|         | Year
      to December  31, 1999 |   | Year
      to December  31, 2000 |   | Year
      to December  31, 2001 |  
|-------- | -------------------------------- | - | -------------------------------- | - | -------------------------------- | -
|         | £000                            |   | £000                            |   | £000                            |  
|         |                                  |   |                                  |   |                                  |  
|U.K.     | 234                              |   | 4,069                            |   | 1,269                            |  
|Overseas | (19,516                          | ) | (23,755                          | ) | (10,646                          | )
|         |                                  |   |                                  |   |                                  |  
|         | (19,282                          | ) | (19,686                          | ) | (9,377                           | )
|         |                                  |   |                                  |   |                                  |  
|         |                                  |   |                                  |   |                                  |  

Taxation
  charge based on results for the year:

|                                                         | Year
      to December  31, 1999 |   | Year
      to December  31, 2000 |   | Year
      to December  31, 2001 |  
|-------------------------------------------------------- | -------------------------------- | - | -------------------------------- | - | -------------------------------- | -
|                                                         | £000                            |   | £000                            |   | £000                            |  
|                                                         |                                  |   |                                  |   |                                  |  
|Overseas
      taxation                                  | (57                              | ) | (19                              | ) | (75                              | )
|(Under
      provision)/over provision in previous years | (75                              | ) | 15                               |   |                                 |  
|                                                         |                                  |   |                                  |   |                                  |  
|                                                         | (132                             | ) | (4                               | ) | (75                              | )
|                                                         |                                  |   |                                  |   |                                  |  
|                                                         |                                  |   |                                  |   |                                  |  

There
  was no deferred tax component in the tax charge for the years presented.

F-23

---

SKYEPHARMA PLC
  Notes to the Consolidated Financial Statements (continued)

8 Taxation (continued)

The
  Group has estimated total tax losses available to be set off against future
  taxable profits of £163.9 million (December 31, 2000: £165.5 million,
  December 31, 1999: £105.0 million). These losses arise primarily in the
  U.K., Switzerland and the U.S.A. Of the £163.9 million of losses carried
  forward, £2.0 million expire in 2002, £30.6 million expire between
  2003 and 2005, £122.8 million expire from 2006 onwards and £8.5
  million of losses may be carried forward indefinitely.

The
  above charges reconcile with the applicable U.K. statutory corporation tax rate
  as follows:

|                                                        | Year
      to December 31,
      1999
      % |   | Year
      to December 31, 2000
      % |   | Year
      to December 31, 2001
      % |  
|------------------------------------------------------- | --------------------------------------------- | - | --------------------------------------- | - | --------------------------------------- | -
|                                                        |                                               |   |                                         |   |                                         |  
|Statutory
      U.K. Corporation tax rate               | 30.3                                          |   | 30.0                                    |   | 30.0                                    |  
|Tax rate
      differences                              | 9.0                                           |   | 12.0                                    |   | 19.0                                    |  
|Tax losses
      not recognized as deferred tax assets  | (26.1                                         | ) | (21.9                                   | ) | (35.0                                   | )
|Prior
      year items                                  | (0.4                                          | ) | 0.1                                     |   |                                        |  
|Other
      items not recognized as deferred tax assets | 0.2                                           |   | (35.2                                   | ) | (14.8                                   | )
|Other                                                   | (13.7                                         | ) | 15.0                                    |   |                                        |  
|                                                        |                                               |   |                                         |   |                                         |  
|Effective
      tax rate                                | (0.7                                          | ) | (0.0                                    | ) | (0.8                                    | )
|                                                        |                                               |   |                                         |   |                                         |  
|                                                        |                                               |   |                                         |   |                                         |  

9 Loss per Ordinary
  Share

|                                                        | Year
      to December 31, 1999 |    | Year
      to December 31, 2000 |    | Year
      to December 31, 2001 |   
|------------------------------------------------------- | ------------------------------- | -- | ------------------------------- | -- | ------------------------------- | --
|                                                        |                                 |    |                                 |    |                                 |   
|Attributable
      loss (£000)                         | (19,414                         | )  | (19,690                         | )  | (9,452                          | ) 
|Weighted
      average number of shares in issue (000) | 467,214                         |    | 508,228                         |    | 526,250                         |   
|                                                        |                                 |    |                                 |    |                                 |   
|Loss
      per share (pence)                            | (4.2                            | )p | (3.9                            | )p | (1.8                            | )p
|                                                        |                                 |    |                                 |    |                                 |   
|                                                        |                                 |    |                                 |    |                                 |   

There
  is no difference between basic and diluted loss per share since all potential
  Ordinary Shares including convertible bonds, warrants and options are anti-dilutive.

F-24

---

SKYEPHARMA PLC
  Notes to the Consolidated Financial Statements (continued)

10 Intangible
  Fixed Assets

|                                                     |          |   |                             |  |                         |  |         |  
|---------------------------------------------------- | -------- | - | --------------------------- |  | ----------------------- |  | ------- | -
|                                                     | Goodwill |   | Intellectual
      property |  | Development
      costs |  | Total   |  
|                                                     | £000    |   | £000                       |  | £000                   |  | £000   |  
|                                                     |          |   |                             |  |                         |  |         |  
|Cost                                                 |          |   |                             |  |                         |  |         |  
|At January
      1, 2000                             | 32,306   |   | 17,836                      |  | 1,531                   |  | 51,673  |  
|Exchange
      adjustments                           |         |   | 1,918                       |  | 161                     |  | 2,079   |  
|Additions                                            | 13,720   |   | 10,017                      |  |                        |  | 23,737  |  
|                                                     |          |   |                             |  |                         |  |         |  
|At December
      31, 2000                           | 46,026   |   | 29,771                      |  | 1,692                   |  | 77,489  |  
|Exchange
      adjustments                           |         |   | 292                         |  | 24                      |  | 316     |  
|Additions                                            | 29,901   |   | 433                         |  |                        |  | 30,334  |  
|Lapse
      of warrants                              | (165     | ) |                            |  |                        |  | (165    | )
|                                                     |          |   |                             |  |                         |  |         |  
|At December
      31, 2001                           | 75,762   |   | 30,496                      |  | 1,716                   |  | 107,974 |  
|                                                     |          |   |                             |  |                         |  |         |  
|Amortization                                         |          |   |                             |  |                         |  |         |  
|At January
      1, 2000                             | 1,211    |   | 484                         |  | 225                     |  | 1,920   |  
|Exchange
      adjustments                           |         |   | 113                         |  | 31                      |  | 144     |  
|Charge
      for the year                            | 2,099    |   | 1,082                       |  | 158                     |  | 3,339   |  
|                                                     |          |   |                             |  |                         |  |         |  
|At December
      31, 2000                           | 3,310    |   | 1,679                       |  | 414                     |  | 5,403   |  
|Exchange
      adjustments                           |         |   | 13                          |  | 3                       |  | 16      |  
|Charge
      for the year                            | 2,341    |   | 1,282                       |  | 201                     |  | 3,824   |  
|Transfer
      on acquisition of subsidiary interest | 503      |   |                            |  |                        |  | 503     |  
|                                                     |          |   |                             |  |                         |  |         |  
|At December
      31, 2001                           | 6,154    |   | 2,974                       |  | 618                     |  | 9,746   |  
|                                                     |          |   |                             |  |                         |  |         |  
|Net book
      value at December 31, 2000            | 42,716   |   | 28,092                      |  | 1,278                   |  | 72,086  |  
|                                                     |          |   |                             |  |                         |  |         |  
|Net book
      value at December 31, 2001            | 69,608   |   | 27,522                      |  | 1,098                   |  | 98,228  |  
|                                                     |          |   |                             |  |                         |  |         |  
|                                                     |          |   |                             |  |                         |  |         |  

On
  April 4, 2000 the Company announced that the final contingent payment on the
  acquisition of DepoTech had been triggered following the signing of a contract
  to utilize DepoFoam technology for a macromolecule. As a result 12.1 million
  shares were issued on April 20, 2000 at a value of £13.3 million.

In
  connection with the acquisition of DepoTech, the Company agreed that outstanding
  warrants to purchase DepoTech common stock on the effective date of the merger
  would become warrants to purchase the Companys Ordinary Shares. Following
  the issue of shares on April 25, 2000, the former DepoTech shareholders became
  entitled to a further 458,144 warrants with a value of £0.2 million.

Taking
  into account the final payments above, the total consideration paid on the acquisition
  of DepoTech was £49.4 million.

Significant
  additions to intellectual property during 2000 comprised £5.9 million
  ($9 million) paid to Bioglan for certain exclusive development and commercial
  rights in relation to new products from the Crystalip and DermaStick technologies
  and also the right to develop with Bioglan two new products in the ES-Gel system,
  £2.3 million ($3.5 million) capitalized on the Chiron loan note (see Note
  16 Creditors: Amount falling due after more than one year) and an additional
  Cdn$1.3 million paid to the receiver of Hyal (see Note 12: Investments and Joint
  Venture).

The
  acquisition of RTP gave rise to goodwill of £29.9 million in 2001 (see
  Note 25  Acquisitions).

F-25

---

SKYEPHARMA PLC
  Notes to the Consolidated Financial Statements (continued)

11 Tangible Fixed Assets

|                                          | Land
      and buildings
      £000 |   | Laboratory
      equipment and machines
      £000 |   | Assets
      in the course of construction
      £000 |   | Office
      and other equipment
      £000 |   | Motor
      vehicles
      £000 |   | Total
      £000 |  
|----------------------------------------- | ------------------------------------ | - | --------------------------------------------------- | - | ------------------------------------------------------ | - | -------------------------------------------- | - | -------------------------------- | - | ----------------- | -
|                                          |                                      |   |                                                     |   |                                                        |   |                                              |   |                                  |   |                   |  
|Cost                                      |                                      |   |                                                     |   |                                                        |   |                                              |   |                                  |   |                   |  
|At
      January 1, 2000                  | 23,439                               |   | 14,659                                              |   | 1,105                                                  |   | 2,613                                        |   | 277                              |   | 42,093            |  
|Exchange
      adjustments                | 851                                  |   | 1,092                                               |   | 171                                                    |   | 176                                          |   | 15                               |   | 2,305             |  
|Additions                                 | 330                                  |   | 5,113                                               |   | 2,334                                                  |   | 930                                          |   | 29                               |   | 8,736             |  
|Disposals                                 |                                     |   | (277                                                | ) | (1                                                     | ) | (76                                          | ) |                                 |   | (354              | )
|                                          |                                      |   |                                                     |   |                                                        |   |                                              |   |                                  |   |                   |  
|At
      December 31, 2000                | 24,620                               |   | 20,587                                              |   | 3,609                                                  |   | 3,643                                        |   | 321                              |   | 52,780            |  
|Exchange
      adjustments                | (258                                 | ) | 13                                                  |   | (31                                                    | ) | 17                                           |   | 1                                |   | (258              | )
|Additions                                 | 2,518                                |   | 4,130                                               |   | 277                                                    |   | 643                                          |   | 78                               |   | 7,646             |  
|Acquisitions                              | 384                                  |   | 1,516                                               |   |                                                       |   | 118                                          |   |                                 |   | 2,018             |  
|Transfer                                  | 1,047                                |   | 2,162                                               |   | (2,393                                                 | ) | (816                                         | ) |                                 |   |                  |  
|Disposals                                 |                                     |   | (8                                                  | ) |                                                       |   | (69                                          | ) | (43                              | ) | (120              | )
|                                          |                                      |   |                                                     |   |                                                        |   |                                              |   |                                  |   |                   |  
|At
      December 31, 2001                | 28,311                               |   | 28,400                                              |   | 1,462                                                  |   | 3,536                                        |   | 357                              |   | 62,066            |  
|                                          |                                      |   |                                                     |   |                                                        |   |                                              |   |                                  |   |                   |  
|Depreciation                              |                                      |   |                                                     |   |                                                        |   |                                              |   |                                  |   |                   |  
|At
      January 1, 2000                  | 3,259                                |   | 3,477                                               |   |                                                       |   | 1,370                                        |   | 149                              |   | 8,255             |  
|Exchange
      adjustments                | 155                                  |   | 319                                                 |   |                                                       |   | 72                                           |   | 10                               |   | 556               |  
|Disposals                                 |                                     |   | (197                                                | ) |                                                       |   | (64                                          | ) |                                 |   | (261              | )
|Charge
      for year                     | 1,407                                |   | 1,929                                               |   |                                                       |   | 546                                          |   | 60                               |   | 3,942             |  
|                                          |                                      |   |                                                     |   |                                                        |   |                                              |   |                                  |   |                   |  
|At
      December 31, 2000                | 4,821                                |   | 5,528                                               |   |                                                       |   | 1,924                                        |   | 219                              |   | 12,492            |  
|Exchange
      adjustments                | (83                                  | ) | (4                                                  | ) |                                                       |   | 8                                            |   |                                 |   | (79               | )
|Charge
      for the year                 | 1,358                                |   | 2,320                                               |   |                                                       |   | 1,044                                        |   | 56                               |   | 4,778             |  
|Transfer                                  | (886                                 | ) | 1,260                                               |   |                                                       |   | (374                                         | ) |                                 |   |                  |  
|Disposals                                 |                                     |   | (8                                                  | ) |                                                       |   | (40                                          | ) | (29                              | ) | (77               | )
|                                          |                                      |   |                                                     |   |                                                        |   |                                              |   |                                  |   |                   |  
|At
      December 31, 2001                | 5,210                                |   | 9,096                                               |   |                                                       |   | 2,562                                        |   | 246                              |   | 17,114            |  
|                                          |                                      |   |                                                     |   |                                                        |   |                                              |   |                                  |   |                   |  
|Net
      book value at December 31, 2000 | 19,799                               |   | 15,059                                              |   | 3,609                                                  |   | 1,719                                        |   | 102                              |   | 40,288            |  
|                                          |                                      |   |                                                     |   |                                                        |   |                                              |   |                                  |   |                   |  
|Net
      book value at December 31, 2001 | 23,101                               |   | 19,304                                              |   | 1,462                                                  |   | 974                                          |   | 111                              |   | 44,952            |  
|                                          |                                      |   |                                                     |   |                                                        |   |                                              |   |                                  |   |                   |  
|                                          |                                      |   |                                                     |   |                                                        |   |                                              |   |                                  |   |                   |  

F-26

---

SKYEPHARMA PLC
  Notes to the Consolidated Financial Statements (continued)

11 Tangible Fixed Assets
  (continued)

Land
  and buildings, at net book value, is as follows:

|                        | Year
      to December 31, 2000 |  | Year
      to December 31, 2001 | 
|----------------------- | ------------------------------- |  | ------------------------------- | 
|                        | £000                           |  | £000                           | 
|                        |                                 |  |                                 | 
|Freehold
      property | 17,365                          |  | 19,084                          | 
|Long
      leaseholds   |                                |  | 384                             | 
|Short
      leaseholds  | 2,434                           |  | 3,633                           | 
|                        |                                 |  |                                 | 
|                        | 19,799                          |  | 23,101                          | 
|                        |                                 |  |                                 | 
|                        |                                 |  |                                 | 

Included
  in freehold property is an amount of £4,537,000 (December 31, 2000: £4,561,000)
  in respect of land which is not depreciated.

Laboratory
  equipment and machinery include cost of £3,569,000 (December 31, 2000:
  £3,982,000) and accumulated depreciation of £1,255,000 (December
  31, 2000: £1,119,000) in respect of assets held under finance leases and
  hire purchase contracts.

12 Investments and Joint
  Venture

|                                                     | Interest
      in associate |   |  | Unlisted
      investments |  | Own
      shares |   | Total   |  
|---------------------------------------------------- | --------------------------- | - |  | -------------------------- |  | ---------------- | - | ------- | -
|                                                     | £000                       |   |  | £000                      |  | £000            |   | £000   |  
|                                                     |                             |   |  |                            |  |                  |   |         |  
|Cost                                                 |                             |   |  |                            |  |                  |   |         |  
|At
      January 1, 2001                             |                            |   |  |                           |  |                 |   |        |  
|Additions                                            |                            |   |  | 11,431                     |  | 790              |   | 12,221  |  
|Acquisition
      of RTP Pharma Inc.                 | 25,232                      |   |  | 2,228                      |  |                 |   | 27,460  |  
|Net
      assets                                     | 1,914                       |   |  |                            |  |                  |   |         |  
|Goodwill                                             | 23,318                      |   |  |                            |  |                  |   |         |  
|                                                     |                             |   |  |                            |  |                  |   |         |  
|Share
      of losses retained                       | (39                         | ) |  |                           |  |                 |   | (39     | )
|Transfer
      on acquisition of subsidiary interest | (25,193                     | ) |  |                           |  |                 |   | (25,193 | )
|Charge
      for the year                            |                            |   |  |                           |  | (238             | ) | (238    | )
|                                                     |                             |   |  |                            |  |                  |   |         |  
|At
      December 31, 2001                           |                            |   |  | 13,659                     |  | 552              |   | 14,211  |  
|                                                     |                             |   |  |                            |  |                  |   |         |  
|Amortization                                         |                             |   |  |                            |  |                  |   |         |  
|At
      January 1, 2001                             |                            |   |  |                           |  |                 |   |        |  
|Charge
      for the year                            | 503                         |   |  |                           |  |                 |   | 503     |  
|Transfer
      on acquisition of subsidiary interest | (503                        | ) |  |                           |  |                 |   | (503    | )
|                                                     |                             |   |  |                            |  |                  |   |         |  
|At
      December 31, 2001                           |                            |   |  |                           |  |                 |   |        |  
|                                                     |                             |   |  |                            |  |                  |   |         |  
|Net
      book value at December 31, 2000            |                            |   |  |                           |  |                 |   |        |  
|                                                     |                             |   |  |                            |  |                  |   |         |  
|Net
      book value at December 31, 2001            |                            |   |  | 13,659                     |  | 552              |   | 14,211  |  
|                                                     |                             |   |  |                            |  |                  |   |         |  
|                                                     |                             |   |  |                            |  |                  |   |         |  

F-27

---

SKYEPHARMA PLC
  Notes to the Consolidated Financial Statements (continued)

12 Investments and Joint
  Venture (continued)

Cade Struktur

On
  October 28, 1999 SkyePharma completed its acquisition of the tangible assets
  and intellectual property of Cade Struktur (formerly Hyal Pharmaceutical Corporation)
  of Mississauga, Ontario for a purchase price of Canadian$14.0 million. Consideration
  was satisfied by the set-off of Canadian$11.6 million of SkyePharmas secured
  and unsecured debt owed by Cade Struktur including the interest due and $2.4
  million in cash. In addition, and because Cade Struktur was in receivership
  at this time, SkyePharma indemnified the receiver to the extent that Canadian$11.6
  million exceeded the amount that SkyePharma may ultimately be entitled to receive
  as a creditor of Cade Struktur. This indemnity was secured by an irrevocable
  letter of credit open for up to one year in the amount of Canadian$1.0 million.

During
  2000 the letter of credit was called to recover the shortfall in the receivership
  process. In return, SkyePharma, as one of the creditors of Cade Struktur, was
  awarded 8,005,038 shares in Cade Struktur representing seven Cade Struktur shares
  for every dollar shortfall in the process. In addition, SkyePharma acquired
  the 685,834 shares issued to Meditech Research Limited, another creditor of
  Cade Struktur, for Canadian$118,000 (£56,000) in 2001. As a result, the
  total SkyePharma holding at December 31, 2001 is 869,086, following a 10 for
  1 share consolidation representing approximately 16.8% of Cade Struktur. Since
  the shares are not currently traded on a public market there is currently no
  value attributable to these shares and thus they have been recorded at zero
  cost.

Astralis

During
  the year the Company acquired 200,000 ordinary shares and 1,000,000 series A
  convertible preferred shares of Astralis Limited, a US company, representing
  approximately 10.1% of the ordinary share capital assuming conversion, for £7.5
  million.

Waratah

As
  part of the acquisition of RTP Pharma Inc. (see note 25  Acquisitions),
  the Group acquired an investment in Waratah Pharmaceuticals Inc. (Waratah)
  of Canada, representing approximately 23.2% of the ordinary share capital, with
  a fair value of £2.2 million at acquisition. In the opinion of the Directors,
  the Group is not in a position to exercise significant influence over the operating
  and financial policy of Waratah. As at December 31, 2000 Waratah had net assets
  of £4.7 million and retained loss of £0.6 million. On January 14,
  2002 Waratah merged with Transition Therapeutics Inc. (Transition) and Waratah
  shareholders were awarded 0.83333 Transition shares for every one share of Waratah
  held. The total SkyePharma holding is 4,930,814 ordinary shares representing
  approximately 11.9% of Transition.

Other investments

The
  Group has other investments of £3.9 million in a collaborative partner
  based in the US, representing approximately 14.2% of the ordinary share capital
  assuming conversion, recorded at Directors valuation based on a number
  of considerations including comparable transactions and discounted future cash
  flows.

Own shares

During
  2001 the Company established an employee share ownership trust, the SkyePharma
  PLC General Employee Benefit Trust. The purpose of the trust is to hold shares
  in the Company, which may subsequently be awarded to Executive Directors and
  senior executives under the SkyePharma PLC Deferred Share Bonus Plan. Details
  of this plan are described in Note 5. During 2001, the trust purchased one million
  shares and 300,904 shares were allocated on January 30, 2002 at a price per
  share of 65.75 pence (the three day average prior to January 30, 2002). As at
  December 31, 2001 the trust held one million shares with a nominal value of
  £100,000 and a market value of £612,500.

F-28

---

SKYEPHARMA PLC
  Notes to the Consolidated Financial Statements (continued)

12 Investments and Joint
  Venture (continued)

Joint Venture

The
  Group, through Jago, has a 50% interest in a Joint Venture with Genta Incorporated,
  a U.S. public biotechnology company, which is based in California.

The
  Joint Venture, Genta Jago Technologies BV, was formed in 1992 on a 50/50 basis
  with Genta. The purpose of the Joint Venture was to develop Geomatrix controlled
  release formulations of a range of drugs that have lost, or are about to lose,
  marketing exclusivity or patent protection. Pursuant to a Working Capital Agreement,
  Genta was obligated to fund the Joint Ventures operations. For its part,
  Jago contributed to the Joint Venture licenses to the Geomatrix technologies.
  All of the development work in respect of the products in the Joint Venture
  was performed by Jago at its research facility in Switzerland.

The
  Joint Venture was structured such that funding from Genta was required to be
  made in the form of interest bearing Working Capital Loans which were repayable
  in full in October 1998. If any products in the Joint Venture were successfully
  developed and commercialized, the Joint Venture was required to repay the outstanding
  Working Capital Loans to Genta and pay Jago a pre-determined royalty on net
  sales of such products. Following such payments, all earnings on the Joint Venture
  were to be shared equally by Jago and Genta.

In
  1996, the Group acquired from the Joint Venture rights to develop what were
  considered to be the six most commercially viable compounds in the product portfolio
  of the Joint Venture.

Over
  recent years Genta has been unwilling or unable to continue to meet its funding
  obligations to the Joint Venture. In addition the Joint Venture was not able
  to repay the Working Capital Loans due in 1998. Consequently, the Group was
  in negotiations with Genta for some time to resolve outstanding issues and the
  future operation of the Joint Venture.

On
  March 4, 1999 an agreement was signed between SkyePharma PLC and Genta Inc,
  concerning the future operations of the Joint Venture. Under the terms of this
  agreement existing balances between the Joint Venture company and the parent
  companies have been waived. These are principally unpaid development cost invoices
  due to SkyePharma and the loan notes due to Genta. In addition Genta was released
  from future funding obligations.

SkyePharma
  became responsible for all obligations under existing development and license
  agreements between the Joint Venture and third parties and SkyePharma is solely
  responsible for the future development, marketing, distribution, manufacturing
  and funding of future Joint Venture products.

The
  Joint Ventures share of any future revenues arising from products originating
  from the Joint Venture will be shared between the parent companies according
  to a distribution schedule which allows for payment of sums which give recognition
  to the working capital advances made by Genta before reverting to a 50/50 share.
  The intent is to ensure that the rights of the parties, pre-existing the agreement,
  are fully compensated. As such the agreement between the two parent companies
  will be viewed as a joint arrangement. In future periods the Group will account
  for its share of any assets, liabilities and cash flows in the joint arrangement
  according to the agreement set out above.

For
  the years ended December 31, 2001 and 2000 there was no profit or loss on operations
  in the Joint Venture recognized in the financial statements. The net loss arising
  in the Joint Venture included in the income statement for the year to December
  31, 1999 was £48,000.

F-29

---

SKYEPHARMA PLC
  Notes to the Consolidated Financial Statements (continued)

12 Investments and Joint
  Venture (continued)

At
  January 1, 1999 the Group held 232,056 unregistered shares in Genta. A provision
  for loss on disposal amounting to £1,823,000, representing the historical
  cost of the shares, was made in the year to December 1996, as the shares remained
  unregistered pending resolution of the future of the Joint Venture. This reduced
  the carrying value to zero. Subsequent to the March 4, 1999 agreement the necessary
  steps were taken to enable the Group to dispose of the shares. A profit of £381,000
  was realized which is shown as a reversal of the provision of loss on disposal
  of fixed asset investment.

13 Stock

|                                    | December
      31,
      2000 |  | December
      31,
      2001 | 
|----------------------------------- | ----------------------------- |  | ----------------------------- | 
|                                    | £000                         |  | £000                         | 
|                                    |                               |  |                               | 
|Raw materials
      and consumables | 1,428                         |  | 896                           | 
|Work
      in progress              | 206                           |  | 1,313                         | 
|Finished
      goods                | 2                             |  | 69                            | 
|                                    |                               |  |                               | 
|                                    | 1,636                         |  | 2,278                         | 
|                                    |                               |  |                               | 
|                                    |                               |  |                               | 

The
  replacement cost of stock is not materially different from original cost.

14 Debtors

|                                     | December
      31,
      2000 |  | December
      31,
      2001 | 
|------------------------------------ | ----------------------------- |  | ----------------------------- | 
|                                     | £000                         |  | £000                         | 
|                                     |                               |  |                               | 
|Trade
      debtors                  | 1,118                         |  | 8,662                         | 
|Other
      debtors                  | 1,261                         |  | 1,829                         | 
|Royalties
      receivable           | 102                           |  | 168                           | 
|Prepayments
      and accrued income | 2,914                         |  | 3,347                         | 
|Interest
      receivable            | 1,542                         |  | 16                            | 
|                                     |                               |  |                               | 
|                                     | 6,937                         |  | 14,022                        | 
|                                     |                               |  |                               | 
|                                     |                               |  |                               | 

Trade
  debtors includes allowance for doubtful accounts amounting to £Nil (December
  31, 2000: £Nil).

F-30

---

SKYEPHARMA PLC
  Notes to the Consolidated Financial Statements (continued)

15 Creditors: Amounts
  Falling Due within One Year

|                                                         | December
      31,
      2000 |  | December
      31,
      2001 | 
|-------------------------------------------------------- | ----------------------------- |  | ----------------------------- | 
|                                                         | £000                         |  | £000                         | 
|                                                         |                               |  |                               | 
|Bank
      overdrafts                                    | 2,848                         |  | 1,618                         | 
|Bank
      loans                                         | 3,120                         |  | 1,521                         | 
|Current
      portion of secured mortgage (note 16)      | 165                           |  | 248                           | 
|Current
      portion of Chiron loan note (note 16)      | 2,946                         |  | 3,023                         | 
|Trade
      creditors                                    | 2,836                         |  | 3,716                         | 
|Corporation
      tax                                    | 3                             |  | 3                             | 
|Other
      taxation and social security costs           | 233                           |  | 1,031                         | 
|Royalties
      payable                                  | 1,119                         |  | 1,455                         | 
|Accrued
      legal and professional fees                | 605                           |  | 1,334                         | 
|Accrued
      convertible bond interest                  | 991                           |  | 1,891                         | 
|Obligations
      under hire purchase and finance leases | 861                           |  | 847                           | 
|Deferred
      income                                    |                              |  | 11,690                        | 
|Accruals                                                 | 4,814                         |  | 6,811                         | 
|                                                         |                               |  |                               | 
|                                                         | 20,541                        |  | 35,188                        | 
|                                                         |                               |  |                               | 
|                                                         |                               |  |                               | 

At
  December 31, 2001 the Group had a secured overdraft facility of £1.2 million
  (CHF3 million) with the Basellandschaftliche Kantonalbank. In addition, and
  included within bank loans, the Kantonalbank has extended a loan of £0.8
  million (CHF2 million) and a fixed credit facility of £0.6  million
  (CHF1.5 million). These loans are renewable annually and bear interest at 6.5%
  and 6.0% respectively. The overdraft and bank loans are all secured on the assets
  of Jago with the overdraft and credit facility also guaranteed by SkyePharma
  PLC.

At
  December 31, 2001 the Group also had an overdraft facility with Société
  Générale of £0.7  million (FF8 million), secured by
  the trade debtors of SkyePharma Production SAS and guaranteed by SkyePharma
  PLC, which has now been cancelled.

At
  December 31, 2001 the Group had £0.1 million outstanding on a loan payable
  to the Silicon Valley Bank. The loan is secured upon specific fixed assets of
  SkyePharma Inc. and is guaranteed by SkyePharma PLC. The loan bears a floating
  rate of interest set at the U.S. prime rate plus 0.5% and the principal is repayable
  in monthly instalments until February 2002. As of February 2002 the loan was
  paid off and the guarantee cancelled.

F-31

---

SKYEPHARMA PLC
  Notes to the Consolidated Financial Statements (continued)

16 Creditors: Amounts
  Falling Due After More Than One Year

|                                                                 | December
      31,
      2000
      £000 |  | December
      31,
      2001
      £000 | 
|---------------------------------------------------------------- | ----------------------------------------- |  | ----------------------------------------- | 
|                                                                 |                                           |  |                                           | 
|                                                                 |                                           |  |                                           | 
|Bank
      loans                                                 | 71                                        |  |                                          | 
|Secured
      mortgage                                           | 6,197                                     |  | 7,159                                     | 
|Chiron
      loan note                                           | 3,727                                     |  | 802                                       | 
|Accrued
      rent                                               | 2,985                                     |  | 3,385                                     | 
|Convertible
      bonds due June 2005                            | 57,546                                    |  | 57,962                                    | 
|Obligations
      under finance leases                           | 1,687                                     |  | 874                                       | 
|                                                                 |                                           |  |                                           | 
|                                                                 | 72,213                                    |  | 70,182                                    | 
|                                                                 |                                           |  |                                           | 
|Bank
      and other loans are repayable as follows:             |                                           |  |                                           | 
|Between
      one and two years                                  | 3,181                                     |  | 1,050                                     | 
|Between
      two and three years                                | 946                                       |  | 4,179                                     | 
|Between
      three and four years                               | 3,139                                     |  | 166                                       | 
|Between
      four and five years                                | 166                                       |  | 166                                       | 
|After
      five years                                           | 2,563                                     |  | 2,400                                     | 
|                                                                 |                                           |  |                                           | 
|                                                                 | 9,995                                     |  | 7,961                                     | 
|                                                                 |                                           |  |                                           | 
|Obligations
      under finance leases are repayable as follows: |                                           |  |                                           | 
|Between
      one and two years                                  | 842                                       |  | 843                                       | 
|Between
      two and three years                                | 844                                       |  | 27                                        | 
|Between
      three and four years                               | 1                                         |  | 4                                         | 
|                                                                 |                                           |  |                                           | 
|                                                                 | 1,687                                     |  | 874                                       | 
|                                                                 |                                           |  |                                           | 
|                                                                 |                                           |  |                                           | 

At
  December 31, 2001 the Group had a property mortgage facility with the Basellandschaftliche
  Kantonalbank of £7.4 million (CHF18.0 million) of which £0.2 million
  (CHF0.6 million) is shown within current liabilities. The mortgage is in two
  tranches, both secured by the assets of Jago, and guaranteed by SkyePharma PLC.
  The first tranche bears interest at 4.75% and is repayable by instalments over
  21 years semi-annually. The second tranche bears interest at 3.0% and is repayable
  in 2004.

At
  December 31, 2001 the Group had £3.8 million outstanding on the Chiron
  loan note of which £3.0 million is shown within current liabilities. The
  original note was issued in 1999 on the acquisition of SkyePharma Inc. (formerly
  DepoTech Corporation). Under a collaboration agreement with Chiron Corporation,
  DepoTech had an obligation to pay Chiron $11.7 million within six months of
  U.S. or European marketing approval of DepoCyt. Consequent upon the acquisition,
  SkyePharma, DepoTech and Chiron further amended the agreement with Chiron in
  March 1999 such that the Group issued a note payable to Chiron of $9.7 million
  on the receipt of FDA approval of DepoCyt on April 1, 1999.

During
  2000, SkyePharma and Chiron amended the March 1999 agreement whereby SkyePharma
  would have issued a note payable for $3.5 million to Chiron upon the filing
  of an application for DepoCyt for paediatric indications in the U.S. Under the
  amendment dated October 4, 2000 the note became payable on the earlier of the
  filing of an application for DepoCyt for paediatric indications in the U.S.
  or the date on which Phase IV clinical trials, required by the U.S. FDA as a
  condition of product approval, commenced. The $3.5 million note was issued in
  December 2000. The notes are secured on the rights to DepoCyt and bear a floating
  rate of interest based on LIBOR. The principals are payable in June 30, 2002
  for the first tranche and in equal instalments on June 30, 2002 and 2003 for
  the second.

F-32

---

SKYEPHARMA PLC
  Notes to the Consolidated Financial Statements (continued)

17 Convertible
  Bonds

On
  June 16, 2000, the Company issued £59.4 million 6% Convertible Bonds (the
  Bonds) due 2005. The Bonds are convertible at the option of the
  holder into fully paid 10 pence Ordinary Shares in the Company at an initial
  conversion price of 132 pence at any time up to June 19, 2005. The initial conversion
  price was recalculated to the minimum 83 pence on June 19, 2001. Unless previously
  redeemed or converted, the Bonds will be redeemed by the Company at their principal
  amount on June 19, 2005.

During
  2001, £30 million of the Bond proceeds was subject to a cancellable interest
  rate swap agreement by which the Company swapped a fixed obligation to floating
  and paid 5.6% until December 19, 2001. The interest rate swap agreement was
  cancelled on December 19, 2001.

18 Provisions
  for Liabilities and Charges

|                           |                                          |   | Other               |  
|-------------------------- | ---------------------------------------- | - | ------------------- | -
|                           |                                          |   |                     |  
|                           | Deferred
      consideration
      £000 |   | Pension
      £000 |  
|                           |                                          |   |                     |  
|At January
      1, 2000   | 1,861                                    |   | 130                 |  
|Charged
      in the year  |                                         |   |                    |  
|Utilized                   |                                         |   | (49                 | )
|Exchange
      adjustments | 147                                      |   | 4                   |  
|                           |                                          |   |                     |  
|At December
      31, 2000 | 2,008                                    |   | 85                  |  
|Exchange
      adjustments |                                         |   | (10                 | )
|Charged
      in the year  |                                         |   |                    |  
|Utilized                   | (2,008                                   | ) | (24                 | )
|                           |                                          |   |                     |  
|At
      December 31, 2001 |                                         |   | 51                  |  
|                           |                                          |   |                     |  
|                           |                                          |   |                     |  

Medac Deferred consideration

On
  April 17, 2001, US$3.0 million (£2.0 million) was paid to Medac GmbH as
  the final portion of the deferred consideration due under the terms of the acquisition
  agreement for the nano-particulate intellectual property acquired in 1999.

Pension provision

The
  pension provision relates to the retirement commitments under a defined benefit
  scheme for SkyePharma Production SAS employees (Note 27: Pension Arrangements).

Restructuring provision

The
  restructuring provision, established in 1998, for the reorganisation and associated
  write down of fixed assets and inventory following a decision to withdraw from
  the sales and marketing activities of Brightstone Pharma Inc., was fully utilised
  during 2000.

National Insurance provision

Following
  the Social Security Act of 1998 and the introduction of a national insurance
  charge on U.K. employers on the gains made by employees upon the exercise of
  options issued under certain unapproved share schemes, a balance sheet provision
  of £17,000 has been recognized at December 31, 2001 (December 31, 2000:
  £26,000) in accordance with UITF 25.

F-33

---

SKYEPHARMA PLC
  Notes to the Consolidated Financial Statements (continued)

19 Deferred Taxation

|                                                        | Full
      Potential                         |  | Provided                                     | 
|------------------------------------------------------- | -------------------------------------------- |  | -------------------------------------------- | 
|                                                        |                                              |  |                                              | 
|                                                        | At
      December 31,
      2000
      £000 |  | At
      December 31,
      2001
      £000 | 
|                                                        |                                              |  |                                              | 
|Accelerated
      capital allowances                    | 4,030                                        |  | 3,091                                        | 
|Other
      timing differences                          | 10,891                                       |  | 21,085                                       | 
|U.K.
      tax benefits from losses carried forward     | 1,893                                        |  | 1,305                                        | 
|Overseas
      tax benefits from losses carried forward | 31,480                                       |  | 34,881                                       | 
|                                                        |                                              |  |                                              | 
|Potential
      deferred tax asset                      | 48,294                                       |  | 60,362                                       | 
|                                                        |                                              |  |                                              | 
|                                                        |                                              |  |                                              | 

No
  deferred tax asset is recognized, given the uncertainty of the recoverability
  of the Groups tax losses carried forward.

20 Contingent
  Liabilities and Guarantees

At
  December 31, 2001 the Company had provided guarantees on various bank borrowings
  of its subsidiaries as set out in Note 15: Creditors  amounts falling
  due within one year and Note 16: Creditors  amounts falling due after
  more than one year.

In
  December 1999 SkyePharma Production SAS entered into a leasing arrangement with
  Lombard North Central PLC by which certain pharmaceutical manufacturing and
  laboratory equipment was the subject of a four-year sale and leaseback arrangement.
  The Company has guaranteed the obligations of the lessee under this lease to
  an amount of FF30 million (£2.8 million).

On
  June 13, 2000, a summons was filed in respect of a claim by RTP Pharma Corporation
  against SkyePharma PLC and others in the U.S. District Court for the District
  of Columbia. The lawsuit seeks the correction of inventorship of a U.S. Patent
  Number 5,858,410, together with unspecified monetary damages on behalf of RTP
  Pharma Corporation. In March 2001 SkyePharma PLC together with the other defendants
  filed a motion to dismiss the claim. Following the purchase of the initial 40.2%
  of RTP Pharma Inc. shares, the litigation was settled, with RTP agreeing to
  have the suit dismissed.

In
  common with most business enterprises, group companies are subject to a number
  of claims and potential claims from third parties, the outcome of which cannot
  at present be determined. These claims and potential claims are not considered
  to be material in the context of these Financial Statements. Provision has been
  made in these accounts for any liabilities which are expected to materialize
  from such potential claims.

F-34

---

SKYEPHARMA PLC
  Notes to the Consolidated Financial Statements (continued)

21 Commitments

|                                                      | December
      31, 2000
      £000 |  | December
      31, 2001
      £000 | 
|----------------------------------------------------- | ----------------------------------- |  | ----------------------------------- | 
|                                                      |                                     |  |                                     | 
|Capital
      commitments                             |                                     |  |                                     | 
|Contracted
      for but not provided in the accounts | 344                                 |  | 340                                 | 
|                                                      |                                     |  |                                     | 
|                                                      |                                     |  |                                     | 

|                                                                          | December
      31, 2000
      £000 |  | December
      31, 2001
      £000 | 
|------------------------------------------------------------------------- | ----------------------------------- |  | ----------------------------------- | 
|                                                                          |                                     |  |                                     | 
|Commitments
      under operating leases to pay rentals for the next year |                                     |  |                                     | 
|Operating
      leases on land and buildings which expire:                |                                     |  |                                     | 
|In
      one year or less                                                 | 238                                 |  | 187                                 | 
|In two
      to five years                                                | 642                                 |  | 1,304                               | 
|In
      five years or more                                               | 2,378                               |  | 2,532                               | 
|                                                                          |                                     |  |                                     | 
|                                                                          | 3,258                               |  | 4,023                               | 
|                                                                          |                                     |  |                                     | 
|                                                                          |                                     |  |                                     | 

|                                           | December
      31, 2000
      £000 |  | December
      31, 2001
      £000 | 
|------------------------------------------ | ----------------------------------- |  | ----------------------------------- | 
|                                           |                                     |  |                                     | 
|Other
      operating leases which expire: |                                     |  |                                     | 
|In
      one year or less                  | 152                                 |  | 42                                  | 
|In
      two to five years                 | 69                                  |  | 47                                  | 
|In
      five years or more                |                                    |  | 2                                   | 
|                                           |                                     |  |                                     | 
|                                           | 221                                 |  | 91                                  | 
|                                           |                                     |  |                                     | 
|                                           |                                     |  |                                     | 

F-35

---

SKYEPHARMA PLC
  Notes to the Consolidated Financial Statements (continued)

22 Share Capital

Equity share capital

|                           | Ordinary
      Shares of 10p each | 
|-------------------------- | --------------------------------- | 
|                           |                                   | 
|Authorized                 | No.
      of shares               | 
|                           |                                   | 
|At December
      31, 2000 | 1,114,000,000                     | 
|                           |                                   | 
|At
      December 31, 2001 | 1,114,000,000                     | 
|                           |                                   | 
|                           |                                   | 

|                                                     | Ordinary
      Shares of 10p each
      Number |  | Nominal
      Value
      £000 | 
|---------------------------------------------------- | ---------------------------------------------- |  | ------------------------------- | 
|                                                     |                                                |  |                                 | 
|                                                     |                                                |  |                                 | 
|Issued,
      allotted and fully paid                |                                                |  |                                 | 
|At
      January 1, 1999                             | 427,098,454                                    |  | 42,710                          | 
|Exercise
      of B Warrants                       | 6,206                                          |  | 1                               | 
|Exercise
      of share options                      | 214,073                                        |  | 21                              | 
|Conversion
      of debentures                       | 5,099,348                                      |  | 510                             | 
|Shares
      issued to acquire DepoTech              | 44,488,919                                     |  | 4,449                           | 
|Shares
      issued to SmithKline Beecham            | 8,671,240                                      |  | 867                             | 
|Shares
      issued to Medac                         | 3,067,286                                      |  | 307                             | 
|Shares
      issued to acquire Hyal debentures       | 5,441,454                                      |  | 544                             | 
|                                                     |                                                |  |                                 | 
|At
      January 1, 2000                             | 494,086,980                                    |  | 49,409                          | 
|Exercise
      of B Warrants                       | 196,356                                        |  | 20                              | 
|Exercise
      of share options                      | 3,226,173                                      |  | 322                             | 
|Conversion
      of debentures                       | 219,204                                        |  | 22                              | 
|Shares
      issued to acquire DepoTech              | 12,132,600                                     |  | 1,213                           | 
|Shares
      issued to Dr Gonella                    | 6,000,000                                      |  | 600                             | 
|Shares
      issued to Medac                         | 1,461,455                                      |  | 146                             | 
|                                                     |                                                |  |                                 | 
|At
      December 31, 2000                           | 517,322,768                                    |  | 51,732                          | 
|Exercise
      of B Warrants                       | 22,008                                         |  | 2                               | 
|Exercise
      of share options                      | 736,644                                        |  | 74                              | 
|Exercise
      of DepoTech warrants                  | 41,820                                         |  | 4                               | 
|Shares
      allocated in respect of RTP Pharma Inc. | 41,900,099                                     |  | 4,190                           | 
|                                                     |                                                |  |                                 | 
|At
      December 31, 2001                           | 560,023,339                                    |  | 56,002                          | 
|                                                     |                                                |  |                                 | 
|                                                     |                                                |  |                                 | 

The
  cash consideration received on the issue of Ordinary Shares during the year
  amounted to £468,000 (2000: £2,088,000, 1999: £5,038,000).
  The cash consideration received on the exercise of share options during the
  year amounted to £459,000 (2000: £2,010,000, 1999: £97,000).

F-36

---

SKYEPHARMA PLC
  Notes to the Consolidated Financial Statements (continued)

22 Share Capital (continued)



Non-equity share capital

|                                      | December
      31, 2000
      Number of shares |  | December
      31, 2001
      Number of shares |  | December
      31, 2000
      £000 |  | December
      31, 2001
      £000 | 
|------------------------------------- | ---------------------------------------------- |  | ---------------------------------------------- |  | ----------------------------------- |  | ----------------------------------- | 
|                                      |                                                |  |                                                |  |                                     |  |                                     | 
|Authorized
      and issued           |                                                |  |                                                |  |                                     |  |                                     | 
|Deferred
      A Shares of 10p each | 12,000,000                                     |  | 12,000,000                                     |  | 1,200                               |  | 1,200                               | 
|Deferred
      B Shares of 10p each | 12,000,000                                     |  | 12,000,000                                     |  | 1,200                               |  | 1,200                               | 
|                                      |                                                |  |                                                |  |                                     |  |                                     | 
|                                      | 24,000,000                                     |  | 24,000,000                                     |  | 2,400                               |  | 2,400                               | 
|                                      |                                                |  |                                                |  |                                     |  |                                     | 
|                                      |                                                |  |                                                |  |                                     |  |                                     | 

The
  Deferred A and B Shares were issued to Dr Gonella, the
  vendor of Jago, on July 20, 2000 under the Settlement Agreement that established
  the full and final settlement of the deferred consideration payable on the acquisition
  of Jago. The holders of Deferred A and B Shares have
  no rights to participate in the profits of the Company, no voting rights and
  on a winding up or other return of capital only receive the nominal value of
  their shares if the holders of Ordinary Shares in the capital of the Company
  have received the sum of £1,000,000 per Ordinary Share and, as such, are
  classified as non-equity shares.

The
  Deferred Shares automatically convert into Ordinary Shares on the happening
  of the following contingent events:

| | (i) | 12 million A
      Deferred Shares. These Deferred Shares automatically convert into 12 million
      Ordinary Shares on the first commercial sale of Paroxetine/Paxil in combination
      with Geomatrix technology under the current Licence Agreement;
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (ii) | 12 million B
      Deferred Shares. These Deferred Shares automatically convert into 12 million
      Ordinary Shares on the Companys receipt of a royalty statement under
      the current Licence Agreement stating that reported sales of Paroxetine/Paxil
      in combination with the Geomatrix technology have exceeded $1,000 million
      during any calendar period prior to 1 January 2006 or exceeded $337 million
      between 1 January 2006 and 3 May 2006.
| | ---- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

In
  the event that the conditions set out in (i) and (ii) above are not satisfied
  prior to May 3, 2006, the Deferred A and B Shares will
  not be converted and will be cancelled. The vendor will not be entitled to any
  other compensation nor additional compensation.

The
  Deferred Shares were issued on July 20, 2000 when the price of an Ordinary Share
  was 94.25 pence. The difference between the nominal value of the Deferred Shares
  and the fair value of those shares, taken to be 94.25 pence, at issue has been
  recorded as non-equity share premium. See Note 24: Reserves.

F-37

---

SKYEPHARMA PLC
  Notes to the Consolidated Financial Statements (continued)



Warrants

The
  Company has the following warrants outstanding:

(a) B Warrants

|                           | Number     |  
|-------------------------- | ---------- | -
|                           |            |  
|At January
      1, 2000   | 58,709,055 |  
|Warrants
      exercised   | (1,963,560 | )
|                           |            |  
|At December
      31, 2000 | 56,745,495 |  
|Warrants
      exercised   | (220,080   | )
|                           |            |  
|At
      December 31, 2001 | 56,525,415 |  
|                           |            |  
|                           |            |  

The
  B Warrants, which were issued in January 1996 on the basis of one
  warrant for every ten existing Ordinary Shares subscribed pursuant to the placing,
  rights issue and capitalization of loan notes and in consideration for the outstanding
  warrants of Krypton, entitle the holders to subscribe for 5,652,542 Ordinary
  Shares at any time during the period beginning six months after the date of
  issue and ending on December 31, 2002 at an effective price of 40 pence per
  Ordinary Share. The fair value of the B Warrants issued in January
  1996 was determined by applying the ratio of the relative trading prices of
  the B warrants and Ordinary Shares in the week following the issuance,
  to the total proceeds of the issuance, and amounted to 3.04 pence per B
  Warrant. The total fair value allocated to the B warrants, amounting
  to £1,809,000 was recorded as a separate component of shareholders
  funds, see Note 24: Reserves, with the respective elements recorded as cash
  proceeds, reduction of loan notes and as purchase consideration. Consequent
  upon the consolidation of existing Ordinary Shares in May 1996 the terms under
  which the B Warrants may be exercised were amended so that a holder
  is required to exercise ten B Warrants to acquire one Ordinary Share.

The
  market value of B Warrants as at December 31, 2001 was 3.25 pence
  (December 31, 2000: 2.5 pence). The market value of B Warrants during
  the period from January 1, 2001 to December 31, 2001 ranged from the lowest
  mid-price of 2.75 pence to the highest mid-price of 8.5 pence per B
  Warrant.

(b) C Warrants

The
  C Warrants were issued in March 1998 in consideration of services
  provided in connection with the 1998 debenture issue. The fair value of the
  Warrants at issue was £271,000. All outstanding Warrants lapsed unexercised
  on March 11, 2001.

(c) Warrants issued
  on the acquisition of DepoTech

In
  connection with the acquisition of DepoTech Corporation, the Company agreed
  that outstanding warrants to purchase DepoTech common stock on the effective
  date of the merger would become warrants to purchase the Companys Ordinary
  Shares. Subsequent to the acquisition, additional warrants were issued to the
  former DepoTech shareholders, as contingent consideration became payable. The
  fair value of the warrants at issue was £212,000. All outstanding warrants
  were either exercised or lapsed during 2001.

Share options

The
  Company encourages employee participation in its shares through ownership and
  continues to operate various Share Option Schemes and the Unapproved Share Option
  Scheme. Under the terms of these Schemes the Board may offer options to purchase
  Ordinary Shares in the Company to employees, including Directors, at a price
  not less than the higher of the nominal value and the market value of the shares.

F-38

---

SKYEPHARMA PLC
  Notes to the Consolidated Financial Statements (continued)

22 Share Capital (continued)

Options
  granted to U.K. and European employees are only exercisable between the third
  and tenth anniversary of the date of grant, and are subject to the Companys
  Code of Conduct for dealing in Shares, and the Model Code. Options granted to
  U.S. employees prior to 2001 vest at 25% per annum from the date of grant and
  there were no performance criteria. U.K. and European options may only be exercised
  if the growth in the Companys share price over a consecutive three-year
  period exceeds the growth over the same period in the FT-SE All Share Index
  for options granted prior to 2001. This condition was satisfied for the first
  time in March 2000. Employees with options that are within their exercise period
  are now able to exercise those options within any one-year period from the date
  the performance condition is satisfied. Super Options are exercisable after
  five years and are subject to higher performance conditions in accordance with
  those recommended by the Association of British Insurers.

Following
  changes to the option plans approved at the Annual General Meeting June 2001,
  options granted since that date to Directors and senior employees are subject
  to performance conditions linked to the total shareholder return of a comparator
  group of companies, and are not subject to retesting. Options granted to other
  US employees continue to vest at 25% per annum with no performance criteria,
  and other European employees who are not Directors or senior employees can exercise
  their options after three years and are not subject to performance conditions.

The
  following table summarizes the activity in share options for the year to December
  31, 2000 and the year to December 31, 2001:

|                           | Share
      Options |   | Option
      Price  | 
|-------------------------- | ------------------- | - | ------------------- | 
|                           |                     |   |                     | 
|At January
      1, 2000   | 27,787,313          |   | 44.8p
       93.0p | 
|Granted                    | 4,059,406           |   | 81.7p
       91.3p | 
|Exercised                  | (3,226,174          | ) | 44.8p
       81.5p | 
|Cancelled
      or expired | (2,303,717          | ) | 44.8p
       93.0p | 
|                           |                     |   |                     | 
|At December
      31, 2000 | 26,316,828          |   | 44.8p
       93.0p | 
|Granted                    | 9,962,366           |   | 55.1p
       80.6p | 
|Exercised                  | (736,644            | ) | 44.8p
       75.0p | 
|Cancelled
      or expired | (818,435            | ) | 44.8p
       91.3p | 
|                           |                     |   |                     | 
|At December
      31, 2001 | 34,724,115          |   | 44.8p
       93.0p | 
|                           |                     |   |                     | 
|                           |                     |   |                     | 

On
  July 19, 2001 the Group acquired its initial 40.2% interest in RTP Pharma Inc.,
  and achieved control on December 27, 2001 when agreement was reached to acquire
  the majority of the outstanding voting shares in RTP. Under the terms of the
  acquisition, all RTP share options were cancelled. SkyePharma has made a commitment
  to the employees formerly with RTP share options to issue SkyePharma share options
  at the earliest opportunity.

F-39

---

SKYEPHARMA PLC
  Notes to the Consolidated Financial Statements (continued)

22 Share Capital (continued)

The
  market value of Ordinary Shares as at December 31, 2001 was 61.25 pence (December
  31, 2000: 64.0 pence). The market value of Ordinary Shares during 2001 ranged
  from the lowest closing mid-price of 49.0 pence to the highest closing mid-price
  of 108.0 pence per share.

At
  December 31, 2001 the following Ordinary Shares were under option to employees
  or former employees of the Group:

| | Option
      Price for 
      each Ordinary
      Share of
      10 pence |  | Number
      of Options 
      over Ordinary 
      Shares of
      10 pence |  | Expiration
      
      Date | 
| | ------------------------------------------------------------------------- |  | ---------------------------------------------------------------------------- |  | ---------------------------- | 
| |                                                                           |  |                                                                              |  |                              | 
| | 75.0p                                                                     |  | 1,427,676                                                                    |  | 04-29-06                     | 
| | 92.0p                                                                     |  | 417,255                                                                      |  | 05-28-06                     | 
| | 81.0p                                                                     |  | 1,234,568                                                                    |  | 12-06-06                     | 
| | 66.5p                                                                     |  | 836,580                                                                      |  | 04-07-07                     | 
| | 51.0p                                                                     |  | 124,073                                                                      |  | 01-28-08                     | 
| | 93.0p                                                                     |  | 872,974                                                                      |  | 03-31-08                     | 
| | 44.8p                                                                     |  | 2,170,041                                                                    |  | 10-05-08                     | 
| | 69.5p                                                                     |  | 3,444,211                                                                    |  | 04-19-09                     | 
| | 56.7p                                                                     |  | 9,480,399                                                                    |  | 05-25-09                     | 
| | 56.9p                                                                     |  | 1,194,066                                                                    |  | 09-07-09                     | 
| | 91.3p                                                                     |  | 1,283,609                                                                    |  | 06-06-10                     | 
| | 81.7p                                                                     |  | 2,276,297                                                                    |  | 11-03-10                     | 
| | 80.6p                                                                     |  | 7,801,493                                                                    |  | 06-12-11                     | 
| | 55.6p                                                                     |  | 1,608,359                                                                    |  | 10-31-11                     | 
| | 55.1p                                                                     |  | 552,514                                                                      |  | 12-24-11                     | 
| |                                                                           |  |                                                                              |  |                              | 
| |                                                                           |  | 34,724,115                                                                   |  |                              | 
| |                                                                           |  |                                                                              |  |                              | 
| |                                                                           |  |                                                                              |  |                              | 

23 Shares and Warrants
  to be issued

|                                 | £000   |  
|-------------------------------- | ------- | -
|                                 |         |  
|At January
      1, 1999         | 6,281   |  
|Reclassification                 | 39,500  |  
|Increase                         | 1,250   |  
|Revaluation                      | (8,900  | )
|                                 |         |  
|At January
      1, 2000         | 38,131  |  
|Revaluation                      | (3,618  | )
|Issue
      of equity shares     | (6,908  | )
|Issue
      of non-equity shares | (22,620 | )
|                                 |         |  
|At December
      31, 2000       | 4,985   |  
|Revaluation                      | (148    | )
|Additions
      (Note 25)        | 5,780   |  
|                                 |         |  
|At December
      31, 2001       | 10,617  |  
|                                 |         |  
|                                 |         |  

F-40

---

SKYEPHARMA PLC
  Notes to the Consolidated Financial Statements (continued)

23 Shares and Warrants
  to be issued (continued)

Jago Deferred Consideration

At
  March 31, 2000, a Settlement Agreement was signed establishing the full and
  final settlement of the deferred consideration payable to the vendor of Jago,
  Dr Gonella. The settlement was approved by shareholders at the Companys
  Annual General Meeting held on July 11, 2000 to be made entirely in shares.
  On July 20, 2000, 6 million ordinary shares were issued to Dr Gonella at a price
  of 94.25 pence. Also on July 20, 2000, 24 million Deferred non-equity Shares
  were issued. The contingencies determining the conversion of the Deferred Shares
  into ordinary shares are set out in Note 22: Share Capital. In the event that
  these conditions are not satisfied prior to May 3, 2006, the Deferred Shares
  will not be converted and will be cancelled. The vendor will not be entitled
  to any other compensation nor additional compensation. On issue, the ordinary
  and Deferred Shares were recorded in share capital and share premium. At December
  31, 1999 prior to the issue of shares, in the Directors opinion, 30 million
  ordinary shares were likely to be issued under the terms of the Settlement Agreement
  and a figure of £33 million was recorded within shares and warrants to
  be issued, based upon a closing share price of 110 pence on March 31, 2000,
  the date of the Settlement Agreement.

Krypton Deferred Consideration

The
  deferred consideration on the acquisition of Krypton was revised on April 26,
  1996, such that a maximum of 37.5 million Ordinary Shares and 37.5 million B
  Warrants would be issued contingent on a change in control of the Company at
  a share price of not less than 80 pence compounded at an annual rate of 10 percent,
  or satisfaction of the following conditions and hurdles:

| | (i) | 2.5 million Ordinary
      Shares and 2.5 million B Warrants on each Krypton product obtaining
      ANDA approval subject to a maximum of 7.5 million Ordinary Shares and 7.5 
      million B Warrants;
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (ii) | an additional 10 million
      Ordinary Shares and 10 million B Warrants in the event that
      the aggregate annual sales of the Krypton products exceeds $50 million and
      the Company is profitable in respect of these products before December 31,
      2003;
| | ---- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (iii) | an additional 10 million
      Ordinary Shares and 10 million B Warrants in the event that
      the aggregate annual sales of the Krypton products and annual revenues of
      the Company exceeds $200 million and the Company is profitable in respect
      of these products before December 31, 2003;
| | ----- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (iv) | an additional 10 million
      Ordinary Shares and 10 million B Warrants in the event that
      the aggregate annual sales of the Krypton products and annual revenues of
      the Company exceeds $275 million and the Company is profitable in respect
      of these products before December 31, 2003.
| | ---- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

In
  the event that two of hurdles (i), (ii) and (iii) are satisfied in relation
  to any single years sales, only the first such hurdle will be considered
  as having been satisfied.

Certain
  of the hurdles relating to the Krypton acquisition were not formulated to take
  account of the detailed arrangements currently envisaged by the Company. Should
  any of the Krypton products be approved and marketed, SkyePharma will need to
  renegotiate elements of the Krypton acquisition agreement.

The
  Directors have formed the opinion that until products are marketed and agreement
  is reached with the Krypton vendors, certain elements of deferred consideration
  cannot be estimated with any degree of certainty. Therefore the deferred consideration
  recognized in the accounts at December 31, 2001 relates only to the extent that
  hurdle (i) is reasonably expected to be met.

F-41

---

SKYEPHARMA PLC
  Notes to the Consolidated Financial Statements (continued)

23 Shares and Warrants
  to be issued (continued)

Consequently,
  an estimate of £4.8 million (December 31, 2000: £5.0 million) has
  been recognized as deferred consideration based on market prices on December
  31, 2001 for 7.5 million Ordinary Shares and 7.5 million B Warrants.

Medac Deferred Consideration

At
  December 31, 1999, £1.2 million was recorded within shares and warrants
  to be issued for the $2.0 million of ordinary shares to be issued to Medac GmbH
  under the purchase agreement for their intellectual property. On July 21, 2000,
  1,461,455 ordinary shares, with a market value of $2.0 million were issued to
  Medac. A final payment of $3.0 million was made on April 17, 2001 (see Note
  18: Provisions for liabilities and charges).

24 Reserves

|                                                                    | Equity
      share premium |  | Non-equity
      
      share 
      premium |  | Other
      
      reserves |   | Currency
      translation reserve |   | Profit
      and 
      loss account |  
|------------------------------------------------------------------- | -------------------------- |  | -------------------------------------------- |  | --------------------------- | - | ---------------------------------- | - | ------------------------------------ | -
|                                                                    | £000                      |  | £000                                        |  | £000                       |   | £000                              |   | £000                                |  
|                                                                    |                            |  |                                              |  |                             |   |                                    |   |                                      |  
|At January
      1, 1999                                            | 186,215                    |  |                                             |  | 11,060                      |   | 662                                |   | (240,693                             | )
|On issue
      of shares and 
         warrants                     | 33,046                     |  |                                             |  |                            |   |                                   |   |                                     |  
|On conversion
      of debentures                                   | 1,828                      |  |                                             |  |                            |   |                                   |   |                                     |  
|On exercise
      of warrants                                       | 2                          |  |                                             |  | (2                          | ) |                                   |   |                                     |  
|Goodwill
      adjustment on 
         deferred consideration       |                           |  |                                             |  |                            |   |                                   |   | 8,900                                |  
|Write-off
      of goodwill 
         attributable to Joint Venture |                           |  |                                             |  |                            |   |                                   |   | 5,760                                |  
|Exchange
      adjustments                                          |                           |  |                                             |  |                            |   | (2,847                             | ) |                                     |  
|Loss
      for the year                                             |                           |  |                                             |  |                            |   |                                   |   | (19,414                              | )
|                                                                    |                            |  |                                              |  |                             |   |                                    |   |                                      |  
|At December
      31, 1999                                          | 221,091                    |  |                                             |  | 11,058                      |   | (2,185                             | ) | (245,447                             | )
|On issue
      of shares and 
         warrants                     | 20,121                     |  | 20,220                                       |  | 212                         |   |                                   |   |                                     |  
|On exercise
      of warrants                                       | 58                         |  |                                             |  | (58                         | ) |                                   |   |                                     |  
|On conversion
      of debentures                                   | 79                         |  |                                             |  |                            |   |                                   |   |                                     |  
|Goodwill
      adjustments on 
         deferred consideration      |                           |  |                                             |  |                            |   |                                   |   | 3,618                                |  
|Exchange
      adjustments                                          |                           |  |                                             |  |                            |   | 758                                |   |                                     |  
|Loss
      for the year                                             |                           |  |                                             |  |                            |   |                                   |   | (19,690                              | )
|                                                                    |                            |  |                                              |  |                             |   |                                    |   |                                      |  
|At December
      31, 2000                                          | 241,349                    |  | 20,220                                       |  | 11,212                      |   | (1,427                             | ) | (261,519                             | )
|Exchange
      adjustments                                          |                           |  |                                             |  |                            |   | 28                                 |   |                                     |  
|On issue
      of shares and 
         warrants                     | 25,736                     |  |                                             |  |                            |   |                                   |   |                                     |  
|On exercise
      of warrants                                       | 52                         |  |                                             |  | (56                         | ) |                                   |   |                                     |  
|On lapse
      of warrants                                          |                           |  |                                             |  | (436                        | ) |                                   |   | 271                                  |  
|Goodwill
      adjustments on 
         deferred consideration      |                           |  |                                             |  |                            |   |                                   |   | 148                                  |  
|Loss
      for the year                                             |                           |  |                                             |  |                            |   |                                   |   | (9,452                               | )
|                                                                    |                            |  |                                              |  |                             |   |                                    |   |                                      |  
|At December
      31, 2001                                          | 267,137                    |  | 20,220                                       |  | 10,720                      |   | (1,399                             | ) | (270,552                             | )
|                                                                    |                            |  |                                              |  |                             |   |                                    |   |                                      |  
|                                                                    |                            |  |                                              |  |                             |   |                                    |   |                                      |  

As
  at December 31, 2001, the cumulative amount of goodwill eliminated against reserves
  was £152,469,000 (2000: £152,617,000; 1999: £156,235,000).

F-42

---

SKYEPHARMA PLC
  Notes to the Consolidated Financial Statements (continued)

25 Acquisitions

RTP Pharma Inc.

On
  July 19, 2001 the Group acquired an initial 40.2% interest in RTP Pharma Inc.
  of Canada (RTP) for US$20 million (£14.2 million) in SkyePharma
  Ordinary Shares and acquired US$5.0 million (£3.5 million) of preferred
  shares in RTP for cash.

The
  Group acquired US$10 million (£6.9 million) of preferred shares in RTP
  in return for the issue of SkyePharma Ordinary Shares during the 90 days following
  July 19, 2001.

SkyePharma
  achieved control of RTP on December 27, 2001 when agreement was reached to acquire
  the majority of the outstanding voting shares in RTP. On March 13, 2002 SkyePharma
  announced the acquisition of the outstanding voting shares in RTP in return
  for the issue of SkyePharma Ordinary Shares to the value of $20.6 million (£14.2
  million). Given the Directors intent to acquire 100% of RTP and SkyePharmas
  control, the Group has consolidated RTP from December 27, 2001, the date it
  achieved control. The total consideration of US$56.5 million (£39.4 
  million) including acquisition costs comprised 49,959,367 Ordinary Shares and
  US$5.0 million (£3.5  million) cash.

The
  equity method of accounting was adopted between July 19, 2001 and December 27,
  2001 and the acquisition method during the period thereafter. Goodwill of £29.9
  million has been capitalized according to the Companys accounting policy.
  By consideration of the likely commercial life of the technology acquired with
  RTP, the Directors have determined that a suitable period over which to amortize
  the goodwill is 20 years.

|                                              | Book
      values at December 27,
      2001 |   | Adjustments |   | Provisional
      fair values at December 27, 2001 |  
|--------------------------------------------- | -------------------------------------------- | - | ----------- | - | -------------------------------------------------- | -
|                                              | £000                                        |   | £000       |   | £000                                              |  
|                                              |                                              |   |             |   |                                                    |  
|Fixed
      assets                            |                                              |   |             |   |                                                    |  
|Intangible
      assets                       | 1,451                                        |   | (1,451      | ) |                                                   |  
|Tangible
      assets                         | 2,018                                        |   |            |   | 2,018                                              |  
|Investments                                   | 705                                          |   | 1,523       |   | 2,228                                              |  
|                                              |                                              |   |             |   |                                                    |  
|                                              | 4,174                                        |   | 72          |   | 4,246                                              |  
|                                              |                                              |   |             |   |                                                    |  
|Current
      assets                          |                                              |   |             |   |                                                    |  
|Debtors                                       | 1,162                                        |   |            |   | 1,162                                              |  
|Cash                                          | 5,436                                        |   |            |   | 5,436                                              |  
|                                              |                                              |   |             |   |                                                    |  
|                                              | 6,598                                        |   |            |   | 6,598                                              |  
|Current
      liabilities                     | (1,311                                       | ) |            |   | (1,311                                             | )
|Demand
      notes                            | (3,598                                       | ) |            |   | (3,598                                             | )
|                                              |                                              |   |             |   |                                                    |  
|Net
      assets                              | 5,863                                        |   | 72          |   | 5,935                                              |  
|Satisfied
      by:                           |                                              |   |             |   |                                                    |  
|Shares
      issued/allocated                 |                                              |   |             |   | 29,536                                             |  
|Shares
      to be issued/allocated (note 23) |                                              |   |             |   | 5,780                                              |  
|Cash                                          |                                              |   |             |   | 3,528                                              |  
|Expenses
      relating to the transaction    |                                              |   |             |   | 590                                                |  
|Deferred
      consideration                  |                                              |   |             |   |                                                   |  
|                                              |                                              |   |             |   |                                                    |  
|Consideration                                 |                                              |   |             |   | 39,434                                             |  
|Demand
      notes                            |                                              |   |             |   | (3,598                                             | )
|                                              |                                              |   |             |   |                                                    |  
|Net consideration                             |                                              |   |             |   | 35,836                                             |  
|                                              |                                              |   |             |   |                                                    |  
|Goodwill                                      |                                              |   |             |   | 29,901                                             |  
|                                              |                                              |   |             |   |                                                    |  
|                                              |                                              |   |             |   |                                                    |  

F-43

---

SKYEPHARMA PLC
  Notes to the Consolidated Financial Statements (continued)

25 Acquisitions
  (continued) The
  provisional material fair value adjustments made to the net assets of RTP were
  as follows:

| |  | (a) | An adjustment of £1,451,000
      to eliminate RTPs intangible assets as at December 27, 2001.
| |  | --- | -----------------------------------------------------------------------------------------------
| |  |     |                                                                                                

| |  | (b) | A revaluation of £1,523,000
to reflect RTPs investment in Waratah Pharmaceuticals Inc. at its fair value
at December 27, 2001.
| |  | --- | -------------------------------------------------------------------------------------------------------------------------------

Deferred
  Consideration In
  consideration for the loss of the former RTP shareholders certain option
  rights, which were agreed on July 19, 2001 when the Group acquired an initial
  40.2% interest in RTP, deferred consideration has been agreed. If the SkyePharma
  share price is below 82 pence on June 30, 2003, then the Company is required
  to issue 200,000 additional shares, or pay an amount in cash, for each penny
  difference between the actual share price and 82 pence. In the opinion of the
  Directors, the deferred consideration cannot be estimated with any degree of
  certainty. Therefore this deferred consideration has not been recognized as
  at December 31, 2001.

Initial
  estimates of the deferred consideration will be revised as further and more
  certain information becomes available with potential corresponding adjustments
  to goodwill.

Results
  of RTP The
  results of RTP for the period January 1, 2001 to December 27, 2001 and for the
  preceding year ended December 31, 2000 are set out below:

|                                   | Period
      ended December 27, 2001 |  | Year
      ended December 31, 2000 | 
|---------------------------------- | ------------------------------------ |  | ---------------------------------- | 
|                                   | £000                                |  | £000                              | 
|                                   |                                      |  |                                    | 
|Retained
      loss for the period | 4,837                                |  | 11,147                             | 
|                                   |                                      |  |                                    | 
|                                   |                                      |  |                                    | 

During
  the period December 27, 2001 to December 31, 2001 RTP contributed £nil
  to turnover and a loss of £39,000 to the group operating loss.

26 Financial
  Instruments The
  Group holds financial instruments to finance its operations and to manage the
  currency risk that arises from these operations. The Group finances its operations
  through a combination of shareholders funds, convertible bonds, bank loans
  and long-term borrowings. The main risks arising from the Groups financial
  instruments are liquidity risk, foreign currency risk, interest rate risk and
  credit risk.

Liquidity
  risk The
  Groups policy is to maintain continuity of funding through a mixture of
  long-term debt and bank loans, raised to cover specific projects, and through
  the issue of shares to collaborative partners, where necessary, to obtain development
  contracts. Short-term flexibility is provided through the use of overdrafts.
  The maturity profile of the Groups debt is set out below at Note (c).

F-44

---

SKYEPHARMA PLC
  Notes to the Consolidated Financial Statements (continued)

26 Financial
  Instruments (continued) Foreign
  currency risk All
  of the Groups operations are based overseas in Continental Europe, the
  U.S. and Canada giving rise to exposures to changes in foreign exchange rates
  notably the Swiss Franc, Euro, U.S. Dollar and Canadian Dollar. To minimize
  the impact of any fluctuations, the Groups policy has historically been
  to maintain natural hedges by relating the structure of borrowings to the trading
  cash flows that generate them. Where subsidiaries are funded centrally, this
  is achieved by the use of long-term loans the exchange differences on which
  are taken to reserves. Where it was not possible to use natural hedges, forward
  currency contracts were used. The Group has used forward currency contracts
  and currency options during the year to minimize the currency exposure on operational
  transactions. Foreign currency exchange movements did not have a material impact
  on the results of operations in 2001 compared with 2000.

Interest
  rate risk The
  Group borrows at fixed and floating rates of interest as deemed appropriate
  for its circumstances. Where necessary the Group uses interest rate swaps to
  achieve the desired interest rate profile. During the year the Group had a cancellable,
  floating rate, interest rate swap on £30 million of the 6% convertible
  bond liability. The interest rate swap agreement was cancelled on December 19,
  2001. The interest rate profile of the Groups financial assets and liabilities
  is set out in Notes (a) and (b) respectively.

Credit
  risk The
  Group is exposed to credit related losses in the event of non-performance by
  third parties to financial instruments. The Group does not expect any third
  parties to fail to meet their obligations given the policy of selecting only
  parties with high credit ratings and minimizing its exposure to any one institution.

In
  the numerical disclosures that follow, short-term debtors and creditors that
  arise directly as a result of the Groups operations are excluded from
  all disclosures with the exception of Note (f) on currency exposures.

(a) Interest rate and
  currency profile of financial assets

December 31, 2001

|                   | Floating
      rate financial 
      assets |  | Fixed
      rate financial 
      assets |  | Non-interest
      bearing financial
      assets |  | Total
      financial assets | 
|------------------ | ------------------------------------------- |  | ---------------------------------------- |  | ------------------------------------------------- |  | ---------------------------- | 
|Currency           | £000                                       |  | £000                                    |  | £000                                             |  | £000                        | 
|                   |                                             |  |                                          |  |                                                   |  |                              | 
|Sterling           | 5,690                                       |  |                                         |  | 62                                                |  | 5,752                        | 
|$US                | 14,977                                      |  |                                         |  | 35                                                |  | 15,012                       | 
|Euro               | 48                                          |  |                                         |  |                                                  |  | 48                           | 
|Swiss
      francs | 549                                         |  |                                         |  | 93                                                |  | 642                          | 
|$Canadian          | 48                                          |  | 5,389                                    |  | 1                                                 |  | 5,438                        | 
|                   |                                             |  |                                          |  |                                                   |  |                              | 
|                   | 21,312                                      |  | 5,389                                    |  | 191                                               |  | 26,892                       | 
|                   |                                             |  |                                          |  |                                                   |  |                              | 
|                   |                                             |  |                                          |  |                                                   |  |                              | 

Financial
  assets primarily comprise cash and short-term bank deposits.

Included
  within the sterling denominated financial assets shown above for 2001, is £4
  million, placed on deposit for 18 months in December 2000, at a capped rate.
  The Group will receive 6.5% for each successive week that the two-year sterling
  swap rate stays below 7.0%. If the two-year sterling swap rate sets above 7.0%,
  no coupon will accrue for that week.

F-45

---

SKYEPHARMA PLC
  Notes to the Consolidated Financial Statements (continued)

26 Financial
  Instruments (continued)

The
  $Canadian denominated fixed rate financial assets shown above for 2001 of £5.4
  million have a 2.06% weighted average interest rate and 3.65 months weighted
  average time for which the rate is fixed.

All
  other of the Groups financial assets, in both 2001 and 2000, either bear
  interest at floating rates based upon the floating bank rate in the country
  in which the funds are held or are non-interest bearing. Non-interest bearing
  financial assets consist of balances held in short-term current accounts.

December 31, 2000

|Currency            | Floating
      rate financial
      assets |  | Non-interest
      bearing
      financial
      assets |  | Total
      financial assets | 
|------------------- | ------------------------------------------ |  | ------------------------------------------------------- |  | ---------------------------- | 
|                    | £000                                      |  | £000                                                   |  | £000                        | 
|                    |                                            |  |                                                         |  |                              | 
|Sterling            | 32,170                                     |  | 252                                                     |  | 32,422                       | 
|$US                 | 8,993                                      |  | 215                                                     |  | 9,208                        | 
|French
      francs | 7                                          |  |                                                        |  | 7                            | 
|Swiss
      francs  | 23                                         |  |                                                        |  | 23                           | 
|Other               | 1,218                                      |  |                                                        |  | 1,218                        | 
|                    |                                            |  |                                                         |  |                              | 
|                    | 42,411                                     |  | 467                                                     |  | 42,878                       | 
|                    |                                            |  |                                                         |  |                              | 
|                    |                                            |  |                                                         |  |                              | 

(b) Interest rate and
  currency profile of financial liabilities

December 31, 2001

|Currency            | Fixed
      rate financial 
      liabilities |  | Floating
      rate financial 
      liabilities |  | Total
      financial liabilities |  | Weighted
      
      average
      interest rate
      on fixed
      financial
      liabilities |  | Weighted
      
      average time
      for which rate
      is fixed | 
|------------------- | --------------------------------------------- |  | ------------------------------------------------ |  | --------------------------------- |  | -------------------------------------------------------------------------------------------------- |  | ---------------------------------------------------------------------- | 
|                    | £000                                         |  | £000                                            |  | £000                             |  | %                                                                                                  |  | (months)                                                               | 
|                    |                                               |  |                                                  |  |                                   |  |                                                                                                    |  |                                                                        | 
|Sterling            | 59,400                                        |  |                                                 |  | 59,400                            |  | 6.00                                                                                               |  | 41.5                                                                   | 
|$US                 |                                              |  | 3,898                                            |  | 3,898                             |  |                                                                                                   |  |                                                                       | 
|French
      francs | 1,599                                         |  | 745                                              |  | 2,344                             |  | 6.25                                                                                               |  | 23.0                                                                   | 
|Swiss
      francs  | 4,302                                         |  | 5,548                                            |  | 9,850                             |  | 3.63                                                                                               |  | 23.6                                                                   | 
|                    |                                               |  |                                                  |  |                                   |  |                                                                                                    |  |                                                                        | 
|                    | 65,301                                        |  | 10,191                                           |  | 75,492                            |  | 5.85                                                                                               |  | 39.9                                                                   | 
|                    |                                               |  |                                                  |  |                                   |  |                                                                                                    |  |                                                                        | 
|                    |                                               |  |                                                  |  |                                   |  |                                                                                                    |  |                                                                        | 

Financial
  liabilities primarily comprise bank and other loans and convertible bonds.

Total
  financial liabilities does not agree to the total of the balance sheet captions
  due to the presence of £1,438,000 (2000: £1,854,000) of unamortized
  issue costs within the value shown on the balance sheet for convertible bonds.
  Certain financial instruments, such as currency options, are excluded from the
  analysis above where they do not alter the interest basis or currency of financial
  liabilities. The terms and conditions that relate to those instruments are set
  out in Note 26(g).

All
  other floating rate financial liabilities, in both 2001 and 2000, are interest
  bearing financial liabilities that bear interest at interest rates based on
  LIBOR, prime and other bank based lending rates in the country in which the
  liability arises, which are fixed for periods of up to 12 months.

The
  non-equity Deferred A and B Shares hold no rights to
  dividends. See Note 22: Share Capital.

F-46

---

SKYEPHARMA PLC
  Notes to the Consolidated Financial Statements (continued)

26 Financial
  Instruments (continued) December 31, 2000

|Currency            | Fixed
      rate financial
      liabilities |  | Floating
      rate financial
      liabilities |  | Total
      financial liabilities |  | Weighted
      
      average
      interest rate
      on fixed
      financial
      liabilities |  | Weighted
      
      average time
      for which rate
      is fixed | 
|------------------- | -------------------------------------------- |  | ----------------------------------------------- |  | --------------------------------- |  | -------------------------------------------------------------------------------------------------- |  | ---------------------------------------------------------------------- | 
|                    | £000                                        |  | £000                                           |  | £000                             |  | %                                                                                                  |  | (months)                                                               | 
|                    |                                              |  |                                                 |  |                                   |  |                                                                                                    |  |                                                                        | 
|Sterling            | 29,400                                       |  | 30,000                                          |  | 59,400                            |  | 6.00                                                                                               |  | 53.5                                                                   | 
|$US                 |                                             |  | 7,989                                           |  | 7,989                             |  |                                                                                                   |  |                                                                       | 
|French
      francs | 2,391                                        |  | 767                                             |  | 3,158                             |  | 6.25                                                                                               |  | 27.9                                                                   | 
|Swiss
      francs  | 4,386                                        |  | 6,089                                           |  | 10,475                            |  | 3.04                                                                                               |  | 35.0                                                                   | 
|                    |                                              |  |                                                 |  |                                   |  |                                                                                                    |  |                                                                        | 
|                    | 36,177                                       |  | 44,845                                          |  | 81,022                            |  | 5.66                                                                                               |  | 49.2                                                                   | 
|                    |                                              |  |                                                 |  |                                   |  |                                                                                                    |  |                                                                        | 
|                    |                                              |  |                                                 |  |                                   |  |                                                                                                    |  |                                                                        | 

(c) Maturity of financial
  liabilities

|                                   | December 
      31, 2000
      Total |  | December 
      31, 2001
      Total |  | December 
      31, 2001
      Fixed rate
      financial
      liabilities |  | December 
      31, 2001
      Floating rate
      financial
      liabilities | 
|---------------------------------- | ------------------------------------ |  | ------------------------------------ |  | --------------------------------------------------------------------------- |  | ------------------------------------------------------------------------------ | 
|                                   | £000                                |  | £000                                |  | £000                                                                       |  | £000                                                                          | 
|                                   |                                      |  |                                      |  |                                                                             |  |                                                                                | 
|Within
      one year              | 9,940                                |  | 7,257                                |  | 930                                                                         |  | 6,327                                                                          | 
|Between
      one and two years    | 4,023                                |  | 1,893                                |  | 927                                                                         |  | 966                                                                            | 
|Between
      two and three years  | 1,790                                |  | 4,206                                |  | 4,040                                                                       |  | 166                                                                            | 
|Between
      three and four years | 3,141                                |  | 59,570                               |  | 59,404                                                                      |  | 166                                                                            | 
|Between
      four and five years  | 59,565                               |  | 166                                  |  |                                                                            |  | 166                                                                            | 
|Beyond
      five years            | 2,563                                |  | 2,400                                |  |                                                                            |  | 2,400                                                                          | 
|                                   |                                      |  |                                      |  |                                                                             |  |                                                                                | 
|                                   | 81,022                               |  | 75,492                               |  | 65,301                                                                      |  | 10,191                                                                         | 
|                                   |                                      |  |                                      |  |                                                                             |  |                                                                                | 
|                                   |                                      |  |                                      |  |                                                                             |  |                                                                                | 

The
  non-equity Deferred A and B Shares will convert to Ordinary
  Shares on the occurrence of certain future contingent events. See Note 22: Share
  Capital.

(d) Borrowing facilities
  As
  at December 31, 2001 the Group had the following undrawn committed borrowing
  facilities available.

|                               | December
      31,
      2000 |  | December
      31,
      2001 | 
|------------------------------ | ----------------------------- |  | ----------------------------- | 
|                               | £000                         |  | £000                         | 
|                               |                               |  |                               | 
|Expiring
      within one year |                              |  | 369                           | 
|                               |                               |  |                               | 
|                               |                               |  |                               | 

F-47

---

SKYEPHARMA PLC
  Notes to the Consolidated Financial Statements (continued)

26 Financial
  Instruments (continued) (e) Fair values

The
  comparison of fair and book values of all the Groups financial instruments
  as at December 31, 2001 is set out below. Market values have been used to determine
  the fair values of all swaps and foreign currency contracts. The fair value
  of the non-equity Deferred A and B Shares has been calculated
  by reference to the Ordinary Share price at December 31, 2001, based upon the
  Directors opinion that 24 million Ordinary Shares will be issued in settlement
  of the deferred consideration payable on the acquisition of Jago. See Note 22:
  Share Capital for details of the contingencies that shall determine the issuance
  of the Ordinary Shares. The fair values of all other items have been calculated
  by discounting future cash flows at interest rates prevailing at December 31,
  2001.

|                                                                                                            | Book
      Values |   | Fair
      values |  
|----------------------------------------------------------------------------------------------------------- | ----------------- | - | ----------------- | -
|                                                                                                            | £000             |   | £000             |  
|                                                                                                            |                   |   |                   |  
|December
      31, 2001                                                                                     |                   |   |                   |  
|Financial
      instruments held or issued to finance the Groups operations:                               |                   |   |                   |  
|Cash
      at bank and in hand                                                                              | 4,534             |   | 4,534             |  
|Short-term
      bank deposits                                                                              | 22,358            |   | 22,358            |  
|Short-term
      borrowings and current portion of long-term borrowings                                     | (7,257            | ) | (7,257            | )
|Long-term
      convertible debt                                                                            | (59,400           | ) | (50,194           | )
|Other
      long-term debt                                                                                  | (8,835            | ) | (8,602            | )
|Non-equity
      Deferred A and B Shares                                                                | (22,620           | ) | (14,700           | )
|                                                                                                            |                   |   |                   |  
|                                                                                                            | (71,220           | ) | (53,861           | )
|                                                                                                            |                   |   |                   |  
|Derivative
      financial instruments held to manage the Groups currency profile:                         |                   |   |                   |  
|Euro
      currency options                                                                                 |                  |   | 38                |  
|US$ currency
      options                                                                                  | (20               | ) | (23               | )
|Forward
      currency contracts                                                                            |                  |   | (46               | )
|                                                                                                            |                   |   |                   |  
|                                                                                                            | (20               | ) | (31               | )
|                                                                                                            |                   |   |                   |  
|December
      31, 2000                                                                                     |                   |   |                   |  
|Financial
      instruments held or issued to finance the Groups operations:                               |                   |   |                   |  
|Cash
      at bank and in hand                                                                              | 10,769            |   | 10,769            |  
|Short-term
      bank deposits                                                                              | 32,109            |   | 32,109            |  
|Short-term
      borrowings and current portion of long-term borrowings                                     | (9,940            | ) | (9,940            | )
|Long-term
      convertible debt                                                                            | (59,400           | ) | (46,022           | )
|Other
      long-term debt                                                                                  | (11,682           | ) | (10,942           | )
|Non-equity
      Deferred A and B Shares                                                                | (22,620           | ) | (15,360           | )
|                                                                                                            |                   |   |                   |  
|                                                                                                            | (60,764           | ) | (39,386           | )
|                                                                                                            |                   |   |                   |  
|Derivative
      financial instruments held to manage the Groups interest rate and
      currency profile: |                   |   |                   |  
|Interest
      rate swap                                                                                    |                  |   | 822               |  
|Euro
      currency options                                                                                 |                  |   | 221               |  
|US$ currency
      options                                                                                  |                  |   | (104              | )
|                                                                                                            |                   |   |                   |  
|                                                                                                            |                  |   | 939               |  
|                                                                                                            |                   |   |                   |  
|                                                                                                            |                   |   |                   |  

F-48

---

SKYEPHARMA PLC
  Notes to the Consolidated Financial Statements (continued)

26 Financial
  Instruments (continued)

(f) Currency exposures

The
  following analysis shows the net monetary assets and liabilities of Group companies
  that are not denominated in their functional currency and therefore give rise
  to exchange gains and losses in the income statements in both 2001 and 2000.

December 31, 2001

|                                               | Net
      foreign currency monetary assets/(liabilities) |  
|---------------------------------------------- | -------------------------------------------------------- | -
|Functional
      currency of Operating Company | Sterling                                                 |  
|                                               | £000                                                    |  
|                                               |                                                          |  
|Sterling                                       |                                                         |  
|$US                                            | (5,231                                                   | )
|French
      francs                            | (2,260                                                   | )
|Swiss
      francs                             | 3,568                                                    |  
|$Canadian                                      |                                                         |  
|                                               |                                                          |  
|                                               | (3,923                                                   | )
|                                               |                                                          |  
|                                               |                                                          |  

December 31, 2000

|                                               | Net
      foreign currency monetary assets/(liabilities)
|---------------------------------------------- | --------------------------------------------------------
|Functional
      currency of Operating Company | Sterling                                                
|                                               | £000                                                   
|                                               |                                                         
|Sterling                                       |                                                        
|$US                                            | (2,254                                                  
|French
      francs                            | (1,528                                                  
|Swiss
      francs                             | (1,445                                                  
|                                               |                                                         
|                                               | (5,227                                                  
|                                               |                                                         
|                                               |                                                         

F-49

---

SKYEPHARMA PLC
  Notes to the Consolidated Financial Statements (continued)

26 Financial
  Instruments (continued)



(g) Hedging

As
  explained above, the Groups policy is to hedge interest rate exposures
  through the use of interest rate swaps and currency exposures through the use
  of currency options, accrual forward options and forward currency contracts.
  The table below shows the extent to which the Group has off-balance sheet (unrecognized)
  and on-balance sheet (deferred) gains and loses in respect of hedges at the
  beginning and end of the year.

|                                                                           | Unrecognized |   | Deferred |  
|-------------------------------------------------------------------------- | ------------ | - | -------- | -
|                                                                           |              |   |          |  
|                                                                           | Gains        |   | Losses   |  
|                                                                           | £000        |   | £000    |  
|                                                                           |              |   |          |  
|Gains/(losses)
      on hedges at January  1, 2001                         | 1,043        |   | (104     | )
|Changes
      in value from January 1, 2001 to
         settlement         | (923         | ) | 104      |  
|                                                                           |              |   |          |  
|Gains/(losses)
      arising in 2000 recognized
         in 2001           | 120          |   |         |  
|                                                                           |              |   |          |  
|Gains/(losses)
      not recognized in 2001 arising before January 1, 2001 |             |   |         |  
|Arising
      in 2001                                                      |             |   | (31      | )
|                                                                           |              |   |          |  
|Gains/(losses)
      on hedges at December 31, 
         2001              |             |   | (31      | )
|                                                                           |              |   |          |  
|                                                                           |              |   |          |  

At
  December 31, 2001, the Company had currency options to sell £2.8 million
  US dollars. These outstanding contracts have maturities of less than 12 months.

At
  December 31, 2001, the company had accrual forward options to purchase £0.2
  million Swiss francs each week for 31 weeks ending June 19, 2002 and £0.2
  million Euro each week for 26 weeks ending May 22, 2002.

At
  December 31, 2001, the Company had forward currency contracts to purchase £2.7
  million Swiss francs. These open contracts at December 31, 2001 have maturities
  of less than 12 months.

The
  excess of fair values over book values for currency options and forward currency
  contracts shown in Note 26(e) represents the unrecognized hedging gain on these
  instruments as at December 31, 2001. The actual gains or losses arising on these
  options will be dependent on future exchange rates and will be recognized in
  the profit and loss account, in 2002, as the operational transactions to which
  they are linked occur.

Unrecognized
  gains at January 1, 2001 include £0.8 million in relation to the cancellable
  interest rate swap agreement. This was based upon the agreement continuing for
  the life of the convertible bonds and as such the gain would have been spread
  in the profit and loss account until 2005. The Royal Bank of Scotland cancelled
  the agreement on December 19, 2001. As a result, only £0.1million of the
  gain was recognized in 2001 and £0.7 million of the gain is shown above
  as a change in value before settlement.

F-50

---

SKYEPHARMA PLC
  Notes to the Consolidated Financial Statements (continued)

27 Pension Arrangements

The
  Group operates various defined contribution plans for its employees in the U.K.,
  Switzerland and the U.S. The Groups contributions to these plans are charged
  to the income statement in the period to which they relate, and the assets are
  held in separate trustee administered funds. The charge for the year amounted
  to £822,000 (2000: £532,000; 1999: £513,000).

The
  Group operates an unfunded defined benefit scheme in respect of its employees
  in France based on the national collective agreement of the pharmaceutical industry.
  A provision of £51,000 is included in Provisions for Liabilities and Charges
  (Note 18).

Under
  the transitional provisions of FRS 17 Retirement Benefits certain
  disclosures are required as follows:

At
  December 31, 2001 a valuation was performed by professionally qualified actuaries
  on the present value of the accrued liabilities calculated under the projected
  unit credit actuarial cost method.

The
  principal assumptions made by the actuaries were:

|                                   | %
      per
      annum | 
|---------------------------------- | ----------------------- | 
|                                   |                         | 
|Inflation
      rate               | 2.0                     | 
|Rate
      of increase in salaries | 3.0                     | 
|Discount
      rate                | 5.5                     | 
|                                   |                         | 

|Analysis
      of amounts charged to operating profit in respect of the defined benefit
      scheme | 2001  |  
|---------------------------------------------------------------------------------------------------- | ----- | -
|                                                                                                     | £000 |  
|                                                                                                     |       |  
|Current
      service cost                                                                           | 18    |  
|Interest
      on pension scheme liabilities                                                         | 19    |  
|                                                                                                     |       |  
|Total
      operating charge                                                                         | 37    |  
|                                                                                                     |       |  
|Movement
      in deficit during the year                                                            |       |  
|At
      January 1, 2001                                                                             | 364   |  
|Exchange
      adjustment                                                                            | (10   | )
|Current
      service cost                                                                           | 18    |  
|Interest
      on pension scheme liabilities                                                         | 19    |  
|Payments                                                                                             | (9    | )
|                                                                                                     |       |  
|At
      December 31, 2001                                                                           | 382   |  
|                                                                                                     |       |  
|                                                                                                     |       |  

28 Related Party
  Transactions

At
  the end of December 1998, Ian Gowrie-Smith, (through a family owned trust),
  acquired a 50% interest in 10 East 63rd Street Inc., the company which owns
  10 East 63rd Street, a property in New York. SkyePharma PLC has been in occupation
  of that property since January 1997, subject to a tenancy agreement which expired
  in January 1999, under which it paid a rent of US$300,000 per annum. In January
  1999 the lease was renewed on the same terms. In February 2001 the lease was
  renewed for two years based upon an independent valuation. The annual rent was
  increased to $360,000 per annum with effect from February 1, 2001. Approximately
  one-third of the premises are subleased to Fifth Avenue Capital Inc., an unrelated
  company.

F-51

---

SKYEPHARMA PLC
  Notes to the Consolidated Financial Statements (continued)

29 Subsequent events

On
  March 13, 2002 the Group announced a transaction under which Paul Capital Royalty
  Acquisiton Fund (Paul Capital) will pay SkyePharma $30 million during
  2002 and 2003, principally to fund the clinical development of SkyePharmas
  propofol and HFA-formoterol products. In return, SkyePharma has agreed to sell
  a portion of the potential future royalty and revenue streams from these, and
  seven other products from the drug pipeline to Paul Capital. Between January
  2002 and December 2015, Paul Capital could receive between 4% and 20% of the
  annual royalties and revenues from the total of nine products. Based on managements
  current projections, the 20% rate will apply from 2004 to 2008. The percentage
  then falls, when an agreed return is achieved, to 12.5% until a second ceiling
  is reached, before falling to 4% for the remainder of the period until December
  31, 2015. During 2002 and 2003, the 20% rate will be reduced based on the percentage
  of the total $30 million already funded. In addition, should the share of royalties
  received by Paul Capital not meet minimum returns, SkyePharma may issue SkyePharma
  Ordinary Shares up to a value of US$7.5 million. The number of Ordinary Shares
  to be issued is capped based upon a minimum price of 55 pence per share. Also
  under the terms of the agreements, Paul Capital has been issued warrants carrying
  rights to subscribe for 5 million SkyePharma Ordinary Shares at an exercise
  price of 73.75 pence, representing a 25% premium to the average trading price
  for the five trading days immediately prior to the closing date on March 7,
  2002.

On
  May 14, 2002 SkyePharma announced its intention to enter a wide ranging strategic
  collaboration with Kowa Company Ltd., (Kowa) a leading Japanese
  company with substantial pharmaceutical interests, which proposes, under a Subscription
  Agreement signed on May 13, 2002, to make a strategic investment in SkyePharma.
  Kowa and SkyePharma have signed a separate non-binding Letter of Intent to evaluate
  Kowas acquisition of a 50% interest in SkyePharmas manufacturing
  facility in Lyon. At an Extraordinary General Meeting on June 7, 2002, shareholder
  approval was obtained for Kowa to acquire 30 million ordinary shares of 10p
  each in SkyePharma for a total consideration of approximately £25.3 million.
  This represents a holding of around 5% after the investment. As part of its
  investment, Kowa will have the right to appoint a non-executive director to
  the board of SkyePharma.

Following
  the April 2002 U.S. launch of Paxil by GlaxoSmithKline and the first commercial
  sale of Paxil, Dr. Gonellas 12 million A Deferred Shares will
  be converted into 12 million ordinary shares. The Company expects these shares
  to be converted within the next two months.

In
  April and May 2002, the Company was served with two class action lawsuits in
  the United States related to the sales of Naprelan. Although the Company cannot
  predict the outcome of these suits, it believes both claims to be without merit
  and will vigorously defend the actions.

30 Principal
  Subsidiary Undertakings

|Company                                | Country
        of incorporation |  | Percentage
        held |  | Principal
        activities                        
|-------------------------------------- | -------------------------------- |  | ----------------------- |  | ----------------------------------------------------
|                                       |                                  |  |                         |  |                                                     
|SkyePharma
      Canada Holding Inc(1) | Canada                           |  | 100%                    |  | Holding
        company                             
|RTP
      Pharma Inc(2)                | Canada                           |  | 100%                    |  | Research
        and development                    
|SkyePharma
      Production SAS(1)     | France                           |  | 100%                    |  | Manufacturing
        of pharmaceuticals            
|Krypton
      Limited                  | Gibraltar                        |  | 100%                    |  | Exploitation
        of intellectual property       
|SkyePharma
      Holding AG(1)         | Switzerland                      |  | 100%                    |  | Holding
        company                             
|Jago
      Holding AG                  | Switzerland                      |  | 100%                    |  | Holding
        company                             
|SkyePharma
      AG                    | Switzerland                      |  | 100%                    |  | Research
        and development                    
|Jago
      Research AG                 | Switzerland                      |  | 100%                    |  | Exploitation
        of intellectual property       
|Jagotec
      AG                       | Switzerland                      |  | 100%                    |  | Exploitation
        of intellectual property       
|SkyePharma
      Holding Inc.(1)       | U.S.                             |  | 100%                    |  | Holding
        company                             
|Brightstone
      Pharma Inc.          | U.S.                             |  | 100%                    |  | Development
        of pharmaceuticals and licensing
|SkyePharma
      Inc.                  | U.S.                             |  | 100%                    |  | Development
        of pharmaceuticals              
|                                       |                                  |  |                         |  |                                                     

---

(1) Denotes
  investment directly held by the Company

(2) SkyePharma
  achieved control of RTP Pharma Inc. on December 27, 2001 when agreement was
  reached to acquire the majority of the outstanding voting shares in RTP. Agreement
  was reached with the remaining shareholders and the remaining shares issued
  by March 2002 or are held in escrow pending satisfaction of certain Canadian
  tax requirements.

F-52

---

SKYEPHARMA PLC
  Notes to the Consolidated Financial Statements (continued)

31 Summary of
  Material Differences between U.K. and U.S. GAAP

The
  Groups consolidated financial statements are prepared in accordance with
  accounting principles generally accepted in the United Kingdom (U.K. GAAP),
  which differ in certain material respects from accounting principles generally
  accepted in the United States (U.S. GAAP). Such differences include
  methods for measuring and presenting the amounts shown in the consolidated financial
  statements, as well as additional disclosures required by U.S. GAAP.

I.Reconciliation
  of net loss and shareholders funds

The
  following tables summarize the significant adjustments to the net loss for the
  period and shareholders funds which would be required if U.S. GAAP had
  been applied instead of U.K. GAAP.

|                                                                                                                                 |                  |   | Year
      to
      December 31,
      1999 |    | Year
      to
      December 31,
      2000 |    | Year
      to
      December 31,
      2001 |   
|-------------------------------------------------------------------------------------------------------------------------------- | ---------------- | - | ------------------------------------------- | -- | ------------------------------------------- | -- | ------------------------------------------- | --
|                                                                                                                                 | Note
      31. I |   | £000                                       |    | £000                                       |    | £000                                       |   
|                                                                                                                                 |                  |   |                                             |    |                                             |    |                                             |   
|Loss
      under U.K. GAAP                                                                                                       |                  |   | (19,414                                     | )  | (19,690                                     | )  | (9,452                                      | ) 
|U.S.
      GAAP adjustments:                                                                                                     |                  |   |                                             |    |                                             |    |                                             |   
|Purchase
      accounting and goodwill                                                                                           |                  |   |                                             |    |                                             |    |                                             |   
|Amortization
      of goodwill                                                                                                   | (1a,c,e)         |   | (6,134                                      | )  | (5,873                                      | )  | (5,708                                      | ) 
|Depreciation
      of tangible fixed assets                                                                                      | (1b)             |   | 782                                         |    | 727                                         |    | 488                                         |   
|Write-off
      of acquired in-process research and development costs                                                            | (1e)             |   | (4,268                                      | )  |                                            |    | (18,893                                     | ) 
|Goodwill
      written off previously amortized under U.S. GAAP                                                                  | (1a)             |   | 816                                         |    |                                            |    |                                            |   
|Results
      of equity investments (RTP)                                                                                        | (1d              | ) |                                            |    |                                            |    | (559                                        | ) 
|Stock
      based compensation                                                                                                   | (3               | ) |                                            |    | (734                                        | )  | (215                                        | ) 
|Revenue
      Recognition                                                                                                        | (4               | ) |                                            |    | (189                                        | )  | (1,934                                      | ) 
|Sale
      of royalty interest                                                                                                   |                  |   |                                             |    |                                             |    |                                             |   
|Revenue
      recognition                                                                                                        | (5               | ) |                                            |    | (2,900                                      | )  | (6,342                                      | ) 
|Interest
      expense                                                                                                           | (5               | ) |                                            |    |                                            |    | (1,222                                      | ) 
|Financial
      instruments                                                                                                      | (7               | ) |                                            |    |                                            |    | (31                                         | ) 
|                                                                                                                                 |                  |   |                                             |    |                                             |    |                                             |   
|Loss
      before cumulative effect of change in accounting principles under U.S. GAAP                                           |                  |   | (28,218                                     | )  | (28,659                                     | )  | (43,868                                     | ) 
|Cumulative
      effect of change in accounting principles (SAB 101)                                                             | (4               | ) |                                            |    | (542                                        | )  |                                            |   
|                                                                                                                                 |                  |   |                                             |    |                                             |    |                                             |   
|Net
      loss under U.S. GAAP                                                                                                   |                  |   | (28,218                                     | )  | (29,201                                     | )  | (43,868                                     | ) 
|                                                                                                                                 |                  |   |                                             |    |                                             |    |                                             |   
|Loss
      per ordinary share under U.S. GAAP before cumulative effect of change in
      
         accounting principle (pence) |                  |   | (6.0                                        | )p | (5.6                                        | )p | (8.3                                        | )p
|Cumulative
      effect of change in accounting principle per ordinary share (pence)                                             |                  |   |                                            |    | (0.1                                        | )p |                                            |   
|                                                                                                                                 |                  |   |                                             |    |                                             |    |                                             |   
|Net loss
      per ordinary share under U.S. GAAP (pence)                                                                        | (12              | ) | (6.0                                        | )p | (5.7                                        | )p | (8.3                                        | )p
|                                                                                                                                 |                  |   |                                             |    |                                             |    |                                             |   

F-53

---

SKYEPHARMA PLC
  Notes to the Consolidated Financial Statements (continued)

31 Summary of Material
  Differences between U.K. and U.S. GAAP (continued)

|                                                                                                       |                  |   | December
      31, 2000 |   | December
      31, 2001 |  
|------------------------------------------------------------------------------------------------------ | ---------------- | - | ----------------------- | - | ----------------------- | -
|Shareholders
      funds                                                                              | Note
      31. I |   | £000                   |   | £000                   |  
|                                                                                                       |                  |   |                         |   |                         |  
|Shareholders
      funds under U.K. GAAP                                                              |                  |   | 68,952                  |   | 95,145                  |  
|U.S.
      GAAP adjustments:                                                                           |                  |   |                         |   |                         |  
|Purchase
      accounting and goodwill                                                                 |                  |   |                         |   |                         |  
|Goodwill
      (net of accumulated amortization of 28,188 and 33,896 Respectively)                     | (1a,c,e          | ) | 89,267                  |   | 73,259                  |  
|Other
      intangible fixed assets (RTP) (net of accumulated amortization of nil and 54 respectively) | (1c              | ) |                        |   | 5,174                   |  
|Tangible
      fixed assets (net of accumulated depreciation of 3,003 and 3,530 respectively)          | (1b              | ) | (7,925                  | ) | (7,192                  | )
|Investments
      in associates (RTP)                                                                  | (1c              | ) |                        |   | 796                     |  
|Deferred
      taxes (RTP)                                                                             | (1c              | ) |                        |   | (2,738                  | )
|Contingent
      consideration charged to goodwill reserve                                             | (1f              | ) | 33,260                  |   | 27,457                  |  
|Measurement
      of purchase consideration                                                            | (1g              | ) |                        |   |                        |  
|Shares
      and warrants to be issued and deferred shares                                             | (2               | ) | (33,260                 | ) | (34,070                 | )
|Stock
      based compensation                                                                         | (3               | ) | (734                    | ) | (193                    | )
|Employee
      benefit trust                                                                           | (6               | ) |                        |   | (552                    | )
|Deferred
      revenue                                                                                 | (4               | ) | (731                    | ) | 771                     |  
|Funding
      liabilities                                                                              | (5               | ) | (2,900                  | ) | (15,256                 | )
|Financial
      instruments                                                                            | (7               | ) |                        |   | (31                     | )
|                                                                                                       |                  |   |                         |   |                         |  
|Shareholders
      funds under U.S. GAAP                                                              |                  |   | 145,929                 |   | 142,570                 |  
|                                                                                                       |                  |   |                         |   |                         |  
|                                                                                                       |                  |   |                         |   |                         |  

Certain
  adjustments as of and for the year ended December 31, 2000 have been reclassified
  for comparative purposes.

(1) Business combinations

Under
  both U.K. and U.S. GAAP the acquisitions of Jago Holdings AG, SkyePharma Production
  SAS (formerly Laboratories Novalis Production SAS), SkyePharma Inc. (formerly
  DepoTech Corporation) and RTP Pharma Inc. are accounted for as acquisitions/purchases.
  Both U.K. and U.S. GAAP require the purchase consideration to be allocated to
  the net assets acquired at their fair value at the date of acquisition, with
  the difference between the consideration and the fair value of the net assets
  acquired treated as goodwill. In the allocation of consideration, and the treatment
  of deferred consideration, certain differences between U.K. and U.S. GAAP arise
  as set out below.

(a) Goodwill and
  other intangible fixed assets

Under
  U.K. GAAP, prior to the introduction of FRS 10, no intangible assets have been
  recognized as a result of purchase accounting. The intangible assets were considered
  to be an integral part of the business acquired and were, therefore, included
  within goodwill and eliminated against shareholders funds. Following the
  introduction of FRS10 there is a requirement to capitalize such goodwill as
  an intangible asset and amortize it over a suitable period not normally exceeding
  20 years. The Company has adopted transitional provisions under FRS10 not to
  reinstate goodwill, previously eliminated against reserves, as an intangible
  asset.

U.S.
  GAAP requires an allocation of consideration to identifiable intangible assets,
  including any resulting from research and development. For business combinations
  prior to the adoption of FAS 141 Business Combinations on July 1,
  2001 (FAS 141) goodwill recognized under U.S. GAAP purchase accounting
  requirements is amortized over 20 years. Negative goodwill, if any, is eliminated
  proportionately reducing the value of the non-current assets acquired. For business
  combinations subsequent to the adoption of FAS 141 (e.g., RTP Pharma Inc.),
  goodwill is no longer amortized under U.S. GAAP but instead is subject to annual
  impairment tests. This results in a reversal of goodwill amortization charged
  under U.K. GAAP.

F-54

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SKYEPHARMA PLC
  Notes to the Consolidated Financial Statements (continued)

31 Summary of Material
  Differences between U.K. and U.S. GAAP (continued)

In
  addition in 1999 the Company effected its dissolution of the Joint Venture with
  Genta (acquired through the Jago acquisition  see Note 12). Under U.K.
  GAAP, goodwill arising before the introduction of FRS 10, which had been written-off
  directly to reserves, has been charged to the profit and loss account on the
  dissolution of the Joint Venture. Under U.S. GAAP, goodwill arising from the
  acquisition less amounts previously amortized must be charged to the profit
  and loss account on the dissolution of the Joint Venture.

(b) Tangible fixed
  assets

Prior
  to the introduction of FRS10 under U.K. GAAP for business acquisitions, where
  the aggregate of the fair values of the net assets acquired exceeds the cost
  of the acquired net assets resulting in negative goodwill, such excess was credited
  directly to reserves. Negative goodwill arising on the acquisition of Jago Production
  SAS has been accounted for according to this policy. Under U.S. GAAP such excess
  is eliminated by proportionately reducing the value of the non-current assets
  acquired.

(c) Acquisition of
  RTP

In
  2001, the Group purchased the majority interest of RTP through a two-step acquisition
  effected in July and December 2001. Under U.K. GAAP, the aggregate purchase
  price was £39.4 million, including £35.3 million of ordinary shares,
  £3.5 million of cash, and £0.6 million in acquisition costs. The
  acquisition was recorded using the purchase method of accounting under both
  U.K. and U.S. GAAP. Goodwill has been determined as the difference between the
  purchase price and the fair value of the net assets acquired. Under both U.K.
  and U.S. GAAP the investment in RTP was equity accounted for until control was
  gained on December 27, 2001 and consolidated from that date on.

The
  adjustments between U.K. and U.S. GAAP related to the RTP acquisition relate
  mainly to differences in (i) the valuation of contingent purchase price consideration,
  (ii) the methods of purchase price allocation and (iii) amortization of goodwill.

Contingent
  consideration. Under U.K. GAAP, contingent consideration has not been recognized
  as part of the acquisition cost. Under U.S. GAAP, the Company has applied EITF
  97-15, Accounting for Contingency Arrangements Based on Security Prices
  in a Purchase Business Combination to estimate the contingent consideration
  as of the acquisition date. Under EITF 97-15 a contingency arrangement that
  does not result in a guarantee of the minimum value of the total consideration
  should be recorded at an amount equal to the maximum number of shares that could
  be issued multiplied by the fair value per share at the date of the acquisition.
  However, the recorded amount may not exceed the target value of the consideration
  issued at the date of acquisition (i.e., the lowest total value at which additional
  consideration would not be required to be issued). The subsequent payment or
  issuance of additional consideration resulting from either of these security
  price contingencies would not change the recorded cost of the acquisition. The
  application of the provisions of EITF 97-15 has resulted in a £5.3 million
  increase in the purchase consideration.

F-55

---

SKYEPHARMA PLC
  Notes to the Consolidated Financial Statements (continued)

31 Summary of Material
  Differences between U.K. and U.S. GAAP (continued)

Purchase
  price allocation. Under U.S. GAAP an intangible asset shall be recognized
  as an asset apart from goodwill if it arises from contractual or other legal
  rights or if it is separable, that is, it is capable of being separated or divided
  from the acquired entity and sold, transferred, licensed, rented, or exchanged.
  In addition, U.S. GAAP requires amounts allocated to acquired in-process research
  and development that do not have an alternative use to be expensed through earnings
  in the period of acquisition. Under U.S. GAAP, the investment in Waratah Pharmaceuticals
  Inc has been fair valued based on prices quoted by the Canadian Venture Stock
  Exchange as of each acquisition date. The difference between the fair value
  and the equity value of the investment has been allocated to goodwill, which
  is not amortized but tested for impairment. Under U.K. GAAP, the investment
  has been fair valued when the Company gained control in December 2001. The deferred
  taxation impact of all these differences has been recognized in the purchase
  price allocation for U.S. GAAP purposes.

Goodwill.
  Under U.K. GAAP goodwill is being amortized over 20 years on a straight-line
  basis. Under U.S. GAAP, for business combinations subsequent to the adoption
  of FAS 141, goodwill is not amortized but is subject to regular impairment tests.
  In addition, under U.S. GAAP, the excess of the fair value of the net assets
  acquired in December 2001 over the purchase consideration (negative goodwill)
  resulting from difference in the purchase price allocation has been allocated
  as a pro rata reduction of the non-current assets acquired including in-process
  research and development.

(d) Results of equity
  investments (RTP)

In
  accordance with the equity method of accounting under U.K. and U.S. GAAP, the
  Group records its relative share of profits and losses reported by associated
  companies. Accordingly, this adjustment includes the Groups proportionate
  share of U.K. to U.S. GAAP adjustments related to net income of RTP between
  July 19 and December 27, 2001.

(e) Acquired in-process
  research and development

Under
  U.K. GAAP acquired in-process research and development is considered part of
  goodwill. Under U.S. GAAP acquired in-process research and development which
  does not have an alternative future use is separately identified and written
  off directly to net income in the period that the acquisition was made. The
  reversal of the U.K. GAAP amortization of the portion of goodwill allocated
  to acquired in-process research and development under U.S. GAAP has been included
  within the Amortization of Goodwill caption in the reconciliation
  of net loss. Acquired in-process research and development of £18,893,000
  in 2001 represents the fair value of the RTPs efforts to internally develop
  its Insoluble Drug Delivery technology platform. In 1999 the £4,268,000
  acquired in-process research and development relates to the DepoFoam technology
  in connection with the acquisition of DepoTech. The Group has determined the
  fair values of the acquired in-process research and development based on independent
  appraisals, which rely on information available at the acquisition date and
  assumptions as to future operations as of that date.

(f) Contingent consideration
  charged to goodwill

The
  Group effected the acquisition of Krypton and Jago through the exchange of shares
  and warrants. The issuance of certain of these shares and warrants is contingent
  upon the occurrence of certain future events. Under U.K. GAAP, the Group estimated
  the fair value of the contingent consideration to determine the acquisition
  cost. The resulting goodwill was eliminated against shareholders funds.
  Under U.S. GAAP the acquisition cost has been adjusted to remove the contingent
  consideration, which is only recognized when it is determinable beyond reasonable
  doubt.

F-56

---

SKYEPHARMA PLC
  Notes to the Consolidated Financial Statements (continued)

31 Summary of Material
  Differences between U.K. and U.S. GAAP (continued)

(g) Measurement of
  purchase consideration

The
  Company effected its acquisition of Krypton in 1996 through the exchange of
  shares and warrants and recorded the consideration at the estimated fair value
  of the shares and warrants.

Under
  U.K. GAAP, the fair value of the shares and warrants issued for the acquisition
  was estimated by reference to the price that the Companys shares were
  issued for on the same day under a rights issue and public placing. U.S. GAAP
  requires that the fair value of shares and warrants issued to effect a business
  combination be based on the market price for a reasonable period before and
  after the date the terms of the acquisition were agreed to and announced. The
  effect of this difference was to increase the value measurement of purchase
  consideration by £11,942,000 which was fully allocated to acquired in-process
  research and development and wrote off to income in 1996 with an offsetting
  adjustment to share premium on acquisition. As a result, the impact of this
  adjustment in net equity was nil and at December 31, 2000 and 2001 it represents
  an increase of £11,942,000 in retained losses and an increase in share
  premium by the same amount.

(2) Shares and warrants
  to be issued and deferred shares

Under
  U.S. GAAP, consideration payable in future in connection with the acquisition
  of Krypton and Jago is included within shareholders funds as shares
  and warrants to be issued and deferred shares, respectively.
  Under U.S. GAAP, contingent consideration is recognized only when determined
  beyond reasonable doubt.

In
  addition, under U.K. GAAP in connection with the acquisition of RTP, £5.8
  million of the total consideration is payable in shares which will be issued
  subsequent to December 31, 2001. These shares have been included within shareholders
  funds as shares and warrants to be issued. Under U.S. GAAP, such amounts would
  be recorded as a liability until the ordinary shares are actually issued.

(3) Stock-based compensation

Under
  U.S. GAAP, the Company does not recognize compensation expense associated with
  its stock option plans granted to employees.

Under
  U.S. GAAP the Company has adopted Financial Accounting Standard No. 123, Accounting
  for Stock-Based Compensation (FAS 123). In accordance with the provisions
  of FAS 123, the Company has elected to continue to apply the recognition principles
  of APB Opinion No. 25, Accounting for Stock Issued to Employees,
  and related interpretations (APB 25) in accounting for its plans.
  For awards under the Companys option plans where the exercise price of
  the option equals the market price of the shares on the date of grant and the
  number of options granted is known (fixed plan), no compensation expense is
  recognized. For awards under the Companys option plans which are variable
  plans an estimate of compensation expense is made when it is probable that the
  relevant performance targets will be achieved. Compensation cost under these
  plans is measured based on the market value of the shares at the date the number
  of options to ultimately be awarded is known less the exercise price of the
  option. Periodic charges to expense are made for the difference between the
  market price and the exercise price when it is probable that the performance
  criteria will be met. A compensation expense of £215,000 (2000: £734,000)
  has been recognized under APB 25 in relation to those options where it is considered
  probable that the performance criteria will be met. Based on the Companys
  share price performance since the respective grant dates in relation to the
  underlying performance conditions, in 1999 it was considered not yet probable
  that the performance conditions would be met. As a result, no compensation expense
  was recognized under APB 25 in 1999.

F-57

---

SKYEPHARMA PLC
  Notes to the Consolidated Financial Statements (continued)

31 Summary of Material
  Differences between U.K. and U.S. GAAP (continued)

Had
  the Company elected to recognize compensation expense based upon the fair value
  at the grant date for awards under stock option plans consistent with the methodology
  prescribed by FAS 123, the Companys U.S. GAAP net loss would have been
  increased by £2,883,000, £1,725,000 and £1,488,000 in the
  years ended December 31, 2001, 2000 and 1999, respectively. Earnings per share
  would have been reduced by 0.5p, 0.3p and 0.3p per share in the years ended
  December 31, 2001, 2000 and 1999, respectively. These pro forma amounts may
  not be representative of future disclosures since the estimated fair value of
  stock options is amortized to expense over the vesting period, and additional
  options may be granted in future years. The fair value for these options was
  estimated at the date of grant using the Black-Scholes option-pricing model
  with the following weighted average assumptions for the year ended December
  31, 2001: dividend yield 0.0% (2000 and 1999: 0.0%); expected volatility 58.0%
  (2000: 55.0 %, 1999: 76.8%); risk-free interest rate 5.2% (2000: 5.5%, 1999:
  5.0% to 5.28%); and expected option term 7 years (2000 and 1999: 7 years). The
  weighted average fair value of options granted during the year ended December
  31, 2001 for which the exercise price equals the market price on the grant date
  was 41.0p (2000: 49.0p, 1999: 44.6p). No options were granted for which the
  exercise price was below or exceeded the market price.

At
  December 31, 2001 there were 34,724,115 outstanding options with a weighted
  average option price of 68.6 pence (2000: 26,316,828 and 66.0 pence). During
  the year ended December 31, 2001 9,962,366 options were granted at a weighted
  average option price of 75.1 pence and 818,435 options were cancelled or expired
  at a weighed average option price of 72.5 pence. During the year ended December
  31, 2000 4,059,406 options were granted at a weighted average option price of
  85.0 pence and 2,303,717 options were cancelled or expired at a weighted average
  option price of 73.0 pence.

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. In addition, option valuation models require the input of highly
  subjective assumptions including the expected stock price volatility. Because
  the Companys employee stock options have characteristics significantly
  different from those of traded options, and because changes in the subjective
  input assumptions can materially affect the fair value estimate, in managements
  opinion, the existing models do not necessarily provide a reliable single measure
  of the fair value of its employee stock options.

(4) Revenue Recognition

Under
  U.K. GAAP, contract revenue is recognized when it is earned and non-refundable
  and when there are no future obligations in under the contract terms. Under
  U.S. GAAP, the Company applies Staff Accounting Bulletin 101 Revenue Recognition
  in Financial Statements issued by the Securities and Exchange Commission
  in December 1999 (SAB 101). According to SAB 101, more prescriptive
  criteria have been applied to assess whether the culmination of the earnings
  process has been completed and the Companys continuing obligation throughout
  the contract term. As a result, under U.S. GAAP certain non-refundable fees
  have been deferred over the contract terms. The Company adopted SAB 101 as of
  January 1, 2000 and on this date the Company recorded a net cumulative-effect-type
  adjustment to net income of £542,000. This adjustment represents the difference
  between the shareholders funds as of December 31, 1999 and the shareholders
  funds that would have been reported at that date if SAB 101 had been applied
  retroactively for all periods that would have been affected.

The
  Deferred Revenue adjustment to the shareholders funds at December 31,
  2001 includes the amount of revenue not currently eligible for recognition under
  SAB 101 but also the reversal of £4.8 million deferred revenue related
  to the sale of royalty interests, which is treated as debt under U.S. GAAP.

F-58

---



SKYEPHARMA PLC
  Notes to the Consolidated Financial Statements (continued)

31 Summary of Material
  Differences between U.K. and U.S. GAAP (continued)



(5) Sale of Royalty
  Interests

Under
  U.K. GAAP, payments received from a third party to fund the internal research
  and development of products in return for the sale of a portion of potential
  future royalty streams from a selection of products are reflected within other
  operating income when the risk of reimbursement has effectively been transferred
  to the third party. Under U.S. GAAP, Emerging Issues Task Force (EITF) 88-18,
  Sales of Future Revenues requires such payments to be recorded as
  debt where there is continuing involvement in the generation of the cash flows
  due to the third party. The U.S. GAAP adjustment includes the reversal of revenue
  from third parties recorded under U.K. GAAP as well as the accrued interest
  on the outstanding funding liability balance.

(6) Employee Benefit
  Trust

Under
  U.K. GAAP shares of the Companys stock held by the SkyePharma PLC General
  Employee Benefit Trust are recorded at cost and accounted for as investments.
  The value of the investment is reduced based on the cost of the shares that
  are allocated to certain executive directors and other senior executives under
  the Deferred Share Bonus Plan. Under U.S. GAAP, shares of the Companys
  stock purchased by the Employee Benefit Trust are accounted for at cost as treasury
  shares which reduce shareholders funds. Gains or losses arising on subsequent
  issuance of the shares to employees are recorded as adjustments to shareholders
  funds.

(7) Financial Instruments

Under
  U.K. GAAP, periodic gains and losses on interest and foreign currency derivatives
  are not recognized in the income statement until the operational transactions
  to which they are linked occur. For U.S. GAAP reporting purposes, on January
  1, 2001 the Group adopted Financial Accounting Standard No. 133 Accounting
  for Derivative Instruments and Hedging Activities (FAS 133)
  as amended by FAS 137 and FAS 138. FAS 133 establishes accounting and reporting
  standards for derivative instruments, including certain derivative instruments
  embedded in other contracts (collectively, referred to as derivatives) and for
  hedging activities. FAS 133 requires that an entity recognize all derivatives
  as either assets or liabilities in the balance sheet and measure those instruments
  at fair value. Changes in fair values are recorded in earnings or other comprehensive
  income, depending on whether the derivative instrument is part of a hedge transaction
  and, if it is, the type of hedge transaction. FAS 133 prescribes requirements
  for designation and documentation of hedging relationships and ongoing assessments
  of effectiveness in order to qualify for hedge accounting.

The
  Group has also reviewed its contractual arrangements for the existence of embedded
  derivatives that should be separately accounted for under FAS 133. If embedded
  derivatives are identified as a result of this review, they are recorded separately
  from their host contracts at fair value, with changes in fair value recognized
  in current earnings. The Group did not identify any such embedded derivatives
  as of January 1 or December 31, 2001.

Accordingly,
  under U.S. GAAP all derivative instruments have been recorded on the balance
  sheet at fair value upon adoption of FAS 133. The Company did not designate
  any of its derivatives as qualifying hedge instruments under FAS 133. In accordance
  with the transition provisions of FAS 133 on January 1 2001, the Company recorded
  a cumulative-effect-type adjustment of £643,000 within Other Comprehensive
  Income in connection with certain foreign currency derivative instruments. During
  2001 the Group reclassified within earnings all the transition adjustment that
  was recorded in Other Comprehensive Income. In addition, the difference between
  the previous carrying amount of certain interest rate derivatives and their
  fair values has been reported as a cumulative-effect-type adjustment of net
  income of £820,000. The Group has also recognized an offsetting amount
  on the related hedged liabilities by adjusting their carrying amounts at that
  date. As a result, the net cumulative-effect-type adjustment of net income is
  nil. The adjustment of the carrying amount of the hedged liability has been
  amortized to earnings over the period of the derivative.

F-59

---

SKYEPHARMA PLC
  Notes to the Consolidated Financial Statements (continued)

31 Summary of Material
  Differences between U.K. and U.S. GAAP (continued)

(8) Deferred Taxes

Under
  U.K. GAAP, deferred tax is recognized to the extent that it is probable that
  a tax liability will become payable or an asset will be recoverable in the foreseeable
  future. Under U.S. GAAP, full provision is required for deferred tax liabilities
  and deferred tax assets including losses carried forward recognized subject
  to valuation allowances. Given the uncertainty of the recoverability of the
  Groups tax losses carried forward, no deferred tax asset is recognized
  under U.K. GAAP and a valuation allowance has been provided in full for the
  deferred tax assets recognized under U.S. GAAP (December 31, 2001: £60,362,000;
  December 31, 2000: £48,294,000; December 31, 1999: £37,314,000).
  The breakdown of the potential deferred tax assets and additional tax disclosures
  are included in Notes 8 and 19 to the financial statements.

(9) Fixed Asset Investments

Under
  U.K. GAAP, fixed asset investments are stated at cost or Directors valuation,
  less provision for impairment. Under U.S. GAAP, certain investments are classified
  as available for sale and stated at market value with unrealized gains or losses
  accounted for in shareholders funds. In the years to December 31, 2001,
  2000 and 1999 there were no unrealized gains or losses accounted for in shareholders
  funds.

(10) Joint arrangements

Under
  U.K. GAAP, where the Group has certain contractual agreements with other participants
  to engage in joint activities that do not create an entity carrying on a trade
  or business of its own, they are accounted for as a joint arrangement. The Group
  includes its share of the assets, liabilities and cash flows in such joint arrangements
  measured in accordance with the terms of each arrangement which is usually pro-rata
  to the Groups interest in the joint arrangement. Under U.S. GAAP, such
  arrangements are viewed as synthetic Joint Ventures and accounted for under
  the gross equity method. This difference does not have an impact on the overall
  net loss of the Group but under U.S. GAAP, selling and marketing costs and research
  and development costs would be reduced by £2,896,000 (2000: £2,250,000;
  1999: £Nil) and £Nil (2000: £2,665,000; 1999: £1,849,000)
  respectively and be shown net as the Groups share of the operating loss
  in the Joint Venture. The difference has no impact on the Groups overall
  consolidated cash flow although under U.S. GAAP operating cash outflows would
  be £6,857,000 (2000: £4,915,000; 1999: £1,849,000) higher
  and cash outflows from investing activities would be £6,857,000 (2000:
  £4,915,000; 1999: £1,849,000) lower.

(11) Consolidated Cash
  Flow Statements

The
  consolidated cash flow statements prepared in accordance with FRS 1 (Revised)
  presents substantially the same information as that required under U.S. GAAP,
  however, there are certain differences from U.K. GAAP with regard to the classification
  of items within the cash flow statement and with regard to the definition of
  cash and cash equivalents.

Under
  U.K. GAAP, cash flows are presented separately for trading activities, returns
  on investments and servicing of finance, taxation, capital expenditure, acquisitions
  and disposals, management of liquid resources and financing activities. Under
  U.S. GAAP, however, only three categories of cash flow activities are reported,
  being operating activities, investing activities and financing activities. Cash
  flows from taxation and returns on investments and servicing of finance would,
  with the exception of dividends paid, be included as operating activities under
  U.S. GAAP. Cash flows from capital expenditure, acquisitions and disposals would
  be combined as investing activities under U.S. GAAP.

Under
  U.S. GAAP, cash and cash equivalents do not include overdrafts, but do include
  investments with remaining maturities of less than 3 months when acquired.

F-60

---

SKYEPHARMA PLC
  Notes to the Consolidated Financial Statements (continued)

31 Summary of Material
  Differences between U.K. and U.S. GAAP (continued)

Set
  out below, for illustrative purposes, is a summary consolidated statement of
  cash flows under U.S. GAAP.

|                                                           | Year
      to December 31, 1999 |   | Year
      to December 31, 2000 |   | Year
      to December 31, 2001 |  
|---------------------------------------------------------- | ------------------------------- | - | ------------------------------- | - | ------------------------------- | -
|                                                           | £000                           |   | £000                           |   | £000                           |  
|                                                           |                                 |   |                                 |   |                                 |  
|Net cash
      used in operating activities                | (15,313                         | ) | (11,196                         | ) | 4,035                           |  
|Net cash
      used in investing activities                | (11,195                         | ) | (15,650                         | ) | (14,938                         | )
|Net cash
      provided by financing activities            | 9,446                           |   | 55,501                          |   | (5,267                          | )
|                                                           |                                 |   |                                 |   |                                 |  
|Net (decrease)/increase
      in cash and cash equivalents | (17,062                         | ) | 28,655                          |   | (16,170                         | )
|Cash
      and cash equivalents at beginning of year       | 30,925                          |   | 13,674                          |   | 42,878                          |  
|Exchange
      adjustments                                 | (189                            | ) | 549                             |   | 184                             |  
|                                                           |                                 |   |                                 |   |                                 |  
|Cash
      and cash equivalents at end of year             | 13,674                          |   | 42,878                          |   | 26,892                          |  
|                                                           |                                 |   |                                 |   |                                 |  
|                                                           |                                 |   |                                 |   |                                 |  

(12) Earnings per share

Diluted
  earnings per share (EPS) is not presented since the group reported
  a net loss under U.S. GAAP and the common equivalent shares from warrants, stock
  options and contingent issuance of shares would have an antidilutive effect
  on earnings per share. There is no difference between the net loss for computing
  basic and diluted loss per share. The effect of securities that could potentially
  dilute basic EPS in future are set out below:

|                                                                                                                      | Year
      to December 31, 1999 |  | Year
      to December 31, 2000 |  | Year
      to December 31, 2001 | 
|--------------------------------------------------------------------------------------------------------------------- | ------------------------------- |  | ------------------------------- |  | ------------------------------- | 
|                                                                                                                      | Number                          |  | Number                          |  | Number                          | 
|                                                                                                                      |                                 |  |                                 |  |                                 | 
|Stock
      outstanding in terms of basic earnings per share                                                          | 467,214,000                     |  | 508,228,000                     |  | 526,250,000                     | 
|B
      Warrants outstanding                                                                                        | 5,870,906                       |  | 5,674,550                       |  | 5,652,542                       | 
|C
      Warrants outstanding                                                                                        | 1,800,000                       |  | 1,800,000                       |  |                                | 
|Warrants
      assumed from SkyePharma Inc.                                                                           | 1,679,864                       |  | 2,054,825                       |  |                                | 
|Employee
      stock options outstanding                                                                              | 27,787,313                      |  | 26,316,828                      |  | 34,724,115                      | 
|Convertible
      debentures                                                                                          | 227,587                         |  |                                |  |                                | 
|Convertible
      bonds                                                                                               |                                |  | 45,000,000                      |  | 71,566,265                      | 
|                                                                                                                      |                                 |  |                                 |  |                                 | 
|Stock
      outstanding in terms of diluted EPS                                                                       | 504,579,670                     |  | 589,074,203                     |  | 638,192,922                     | 
|Contingent
      shares relating to Krypton consideration (see note 
         23; Shares and Warrants to be issued)   | 7,500,000                       |  | 7,500,000                       |  | 7,500,000                       | 
|Contingent
      warrants relating to Krypton consideration (see 
         note 23; Shares and Warrants to be issued) | 750,000                         |  | 750,000                         |  | 750,000                         | 
|Contingent
      shares relating to Jago consideration (see note 
         23; Shares and Warrants to be issued)      | 30,000,000                      |  |                                |  |                                | 
|Deferred
      A and B Shares relating to Jago consideration 
         (see note 22; Share Capital)               |                                |  | 24,000,000                      |  | 24,000,000                      | 
|                                                                                                                      |                                 |  |                                 |  |                                 | 
|                                                                                                                      | 542,829,670                     |  | 621,324,203                     |  | 670,442,922                     | 
|                                                                                                                      |                                 |  |                                 |  |                                 | 
|                                                                                                                      |                                 |  |                                 |  |                                 | 

Contingent
  shares and warrants to be issued relating to Krypton and Jago have been set
  out above. While these are potentially dilutive, they would not be used for
  calculating diluted EPS under U.S. GAAP as the amount is not determinable beyond
  reasonable doubt.

F-61

---

SKYEPHARMA PLC
  Notes to the Consolidated Financial Statements (continued)

31 Summary of Material
  Differences between U.K. and U.S. GAAP (continued)

In
  March 1998, the Company issued convertible unsecured debentures (the Debentures)
  and C Warrants. The aggregate number of shares which would have
  been issued under the terms of the Warrants and Debentures would not have exceeded
  30,000,000. The Debentures issued had an aggregate principal amount of U.S.$18,576,359
  and were due February 2001 with the option to convert at any time prior to that.
  During the first six months, conversion could only have taken place at a price
  of 90 pence per share. Thereafter, the subscription price depended on the share
  price during the 20 day period prior to subscription subject to a maximum of
  90 pence per share. The Warrants could have been converted to shares at an exercise
  price of 120 pence per ordinary share at any time up to three years from issue.
  All Debentures were converted in the six months ended June 30, 2000. On March
  11, 2001 the C Warrants lapsed, unexercised.

In
  March 1999, 28 million ordinary shares were issued on the acquisition of DepoTech
  Corporation. In April 1999 a further 16 million ordinary shares were issued
  to the former shareholders of DepoTech as deferred consideration following the
  approval for sale of DepoCyt in the U.S. on April 1, 1999. In April 2000 an
  additional 12 million ordinary shares were issued following the announcement
  that a contract had been signed with Amgen to use DepoFoam technology for macromolecule.
  This was the final contingent payment on the acquisition of DepoTech.

The
  contingent events determining the conversion of the Deferred A and
  B Shares into ordinary shares are described in Note 22: Share Capital.

II.  Additional disclosures

The
  following disclosures are included to comply with the United States Securities
  and Exchange Commissions regulations for foreign registrants. As indicated,
  certain disclosures are presented on a U.K GAAP measurement basis.

F-62

---

SKYEPHARMA PLC
  Notes to the Consolidated Financial Statements (continued)

31  Summary of Material
  Differences between U.K. and U.S. GAAP (continued)

(1)  Acquisition of RTP

For
  U.S. GAAP purposes, the Group has determined the fair values of the net assets
  acquired as of each acquisition date based on information currently available
  and on current assumptions as to future operations. The Group acquired RTP through
  two purchases in July and December 2001 and therefore, the Group has identified
  the cost of each investment, the fair value of the underlying assets acquired,
  and the goodwill for each step acquisition. The Group has obtained preliminary
  independent appraisals of the fair values of the acquired intangible assets
  and their remaining useful economic lives. The Group is also completing the
  review and determination of the fair values of the other assets acquired and
  liabilities assumed. Accordingly, the allocation of the purchase price is subject
  to revision, which is not expected to be material, based on the final determination
  of appraised and other fair values. The following table summarizes the estimated
  fair values of the assets acquired and liabilities assumed in each step acquisition:

|                                                         | July
      19,
      2001
      £000 |  | December
      27, 2001
      £000 |  
|-------------------------------------------------------- | ------------------------------------- |  | ----------------------------------- | -
|                                                         |                                       |  |                                     |  
|Current
      assets                                     | 9,992                                 |  | 6,602                               |  
|Intangible
      assets                                  | 2,658                                 |  | 7,523                               |  
|Tangible
      assets                                    | 2,451                                 |  | 2,017                               |  
|Investments                                              | 4,672                                 |  | 2,220                               |  
|Acquired
      inprocess research and development costs | 20,998                                |  | 19,719                              |  
|Goodwill                                                 | 32,927                                |  | (2,204                              | )
|                                                         |                                       |  |                                     |  
|Total
      assets acquired                              | 73,698                                |  | 35,877                              |  
|                                                         |                                       |  |                                     |  
|Current
      liabilities                                | 4,776                                 |  | 2,701                               |  
|Demand
      notes                                       | 3,657                                 |  | 3,598                               |  
|Deferred
      taxes                                     | 2,500                                 |  | 2,999                               |  
|                                                         |                                       |  |                                     |  
|Total
      liabilities assumed                          | 10,933                                |  | 9,298                               |  
|                                                         |                                       |  |                                     |  
|Net assets                                               | 62,765                                |  | 26,579                              |  
|                                                         |                                       |  |                                     |  
|Equity
      interest acquired                           | 40.2%                                 |  | 59.8%                               |  
|Net assets
      acquired                                | 25,232                                |  | 15,894                              |  
|                                                         |                                       |  |                                     |  
|Net
      consideration                                  |                                       |  |                                     |  
|Cash                                                     | 3,529                                 |  |                                    |  
|Acquisition
      expenses                               | 590                                   |  |                                    |  
|Shares
      of SkyePharma(1)                            | 21,113                                |  | 19,492                              |  
|Demand
      notes acquired                              |                                      |  | (3,598                              | )
|                                                         |                                       |  |                                     |  
|Total                                                    | 25,232                                |  | 15,894                              |  
|                                                         |                                       |  |                                     |  
|                                                         |                                       |  |                                     |  



|(1) | It represents 26,189,061
      and 23,770,306 shares of SkyePharma for the first and second purchase, respectively.
      Of the total number of shares, 8,059,268 (4,313,982 and 3,745,286 for the
      first and the second purchase, respectively) were issued subsequent to December
      31, 2001 and therefore, under U.S. GAAP the value of those shares has been
      recorded as a liability. For the first purchase, the shares have been valued
      based on the average market price of the Companys common shares over
      a short period before and after the terms of the acquisition were agreed
      to. For the second purchase, the shares have been valued given consideration
      to the provisions of EITF 97-15, Accounting for Contingency Arrangements
      Based on Security Prices in a Purchase Business Combination. As a
      result, the total consideration has been recorded at an amount equal to
      the target value of the consideration issued at the date of acquisition
      (i.e., the lowest total value at which additional consideration would not
      be required to be issued) as this amount is lower than the maximum number
      of shares that could be issued multiplied by the fair value per share at
      the date of the acquisition.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F-63

---

SKYEPHARMA PLC
  Notes to the Consolidated Financial Statements (continued)

31 Summary of Material
  Differences between U.K. and U.S. GAAP (continued)

The
  intangible assets acquired were allocated as follows:

|                               | July
      19,
      2001
      £000 |  | December
      27, 2001
      £000 | 
|------------------------------ | ------------------------------------- |  | ----------------------------------- | 
|                               |                                       |  |                                     | 
|Patents                        | 2,658                                 |  | 7,523                               | 
|Equity
      interest acquired | 40.2%                                 |  | 59.8%                               | 
|Net assets
      acquired      | 1,069                                 |  | 4,499                               | 
|                               |                                       |  |                                     | 
|                               |                                       |  |                                     | 

The
  useful economic life of the acquired intangible assets is approximately 20 years.
  The £13.3  million of goodwill on the first purchase was assigned
  to the pharmaceutical reportable segment. The £1.3 million negative goodwill
  on the second purchase was allocated as a pro rata reduction of the amounts
  assigned to the non current assets acquired and the acquired in-process research
  and development costs. Goodwill is non-deductible for tax purposes.

In
  connection with the acquired in-process research and development (IPR&D)
  £18.9 million was expensed in the period ended December 31, 2001 as the
  IPR&D projects had not reached technological feasibility nor had any alternative
  future use. This amount represents the valuation of the IPR&D at each acquisition
  date less the allocation of a portion of the negative goodwill on the second
  purchase. RTP was in the process of applying its Insoluble Drug Delivery (IDD)
  technology to several products, including propofol, fenofibrate and busulfan.
  Each of these in-process IDD formulated drugs were analysed and valued separately
  using the income approach. The income approach includes an analysis of the markets,
  projected cash flows, and technical and commercial risks associated with achieving
  such cash flows. The estimated cash flows were projected over periods ranging
  from 15 to 20 years after the acquisition dates, and were discounted at rates
  ranging from 20% to 25% in order to determine the present value. The discount
  rates were selected on a project-by-project basis and were based on the Groups
  weighted average cost of capital adjusted for the risks associated with the
  fact that RTP had yet to obtain FDA approval for its drug delivery technology,
  estimated growth, profitability, technical and commercial risks of the acquired
  IPR&D projects. Should the development of the products incorporating the
  acquired technology be completed successfully, the Company anticipates that
  the products could begin to generate cash flows over the 3 year period following
  the acquisitions. However, development of these technologies remains a significant
  risk due to the remaining effort to achieve technological feasibility. The valuation
  of the acquired IPR&D also gave consideration to the stage of completion
  of the projects at the time of the acquisition and the degree to which the projects
  relied on prior, existing technology. With respect to the stage of completion,
  propofol and busulfan were in Phase II and fenofibrate was in Phase I. All other
  products were at a similar, or earlier, stage of completion.

Reasons for the acquisition

RTP
  was acquired for its IDD technology, its late stage proprietary product pipeline
  available for outlicensing, its third party clients and client products that
  are different but complimentary to the Groups and the match between SkyePharma
  and RTPs solubilization intellectual property.

F-64

---

SKYEPHARMA PLC
  Notes to the Consolidated Financial Statements (continued)

31 Summary of Material
  Differences between U.K. and U.S. GAAP (continued)

Pro forma financial
  data

The
  following unaudited pro forma financial information for the years ended December
  31, 2001 and 2000 has been prepared in accordance with U.K. GAAP, and assumes
  the RTP acquisition occurred as at the beginning of the respective periods,
  after making certain adjustments, including the amortization of intangible assets.
  The pro forma results have been prepared for comparative purposes only and are
  not necessarily indicative of the results of operations that may occur in the
  future or that would have occurred had the acquisition of RTP been affected
  on the dates indicated. The unaudited pro forma amounts do not consider synergies
  resulting from acquisitions and do not purport to be indicative of the results
  of operations which actually would have resulted had the acquisitions occurred
  on the date indicated, or which may result in the future.

|                                                | Year
      to December 31, 2000 |   | Year
      to December 31, 2001 |  
|----------------------------------------------- | ------------------------------- | - | ------------------------------- | -
|                                                | £000                           |   | £000                           |  
|                                                | (unaudited)                     |   | (unaudited)                     |  
|                                                |                                 |   |                                 |  
|Turnover                                        | 24,950                          |   | 48,499                          |  
|Net loss                                        | (32,508                         | ) | (15,810                         | )
|Basic
      and diluted loss per Ordinary Share | (5.9p)                          |   | (2.8p)                          |  
|                                                |                                 |   |                                 |  

(2) Concentration of
  credit risk, major customers and suppliers

Financial
  instruments that potentially subject the Group to concentration of credit risk
  consist primarily of cash and cash equivalents and short-term bank deposits.

The
  Group places its cash and cash equivalents and short-term bank deposits through
  high credit quality financial institutions diversifying its holdings of short-term
  financial instruments across a range of money market instruments of a variety
  of counter parties and, by policy, limits the amount of credit exposure with
  any one counter party.

The
  Company normally enters into several agreements to conduct its business including
  research and development, manufacturing and distribution and royalty contracts.
  The Companys customers are primarily pharmaceutical and biotechnology
  companies. In 2001, 2000 and 1999, 1%, 9% and 14% of total revenues respectively
  are manufacturing fees invoiced to Wyeth-Ayerst International Inc. and affiliated
  companies. In 2001 the Company had revenue from research and development contracts
  with three third parties (2000: one; 1999: nil) representing 59% of total revenues
  (2000: 38%; 1999: 0%), where revenue derived from each party individually represented
  over 10% of total revenues in each year. In February 2002, the affairs of a
  major customer were placed into administration. The marketing rights of this
  customer were transferred to two third parties. Royalties receivable in 2001,
  2000 and 1999 relate predominantly to one customer.

The
  Company currently relies on a limited number of suppliers for materials used
  to manufacture its DepoFoam products. Some of these materials are purchased
  only from one supplier. If the Company cannot obtain the materials it needs
  from its existing suppliers, the Company may not be able to access alternative
  sources of supply within a reasonable period of time or at commercially reasonable
  rates. However, whilst regulatory requirements applicable to drugs tend to make
  the substitution of suppliers costly and time-consuming the Company is likely
  to be able to gain access to alternative supplies.

F-65

---

SKYEPHARMA PLC
  Notes to the Consolidated Financial Statements (continued)

31 Summary of Material
  Differences between U.K. and U.S. GAAP (continued)

(3) Recent U.S. GAAP Pronouncements

In
  July 2001 the FASB issued Statement No. 141, Business Combinations,
  and Statement No. 142 Goodwill and Other Intangible Assets which
  are required to be implemented with effect from July 1, 2001 and January 1,
  2002, respectively. FASB Statement No. 141 requires that all business combinations
  be accounted for under the purchase method. FASB Statement No. 142 requires
  that goodwill will no longer be amortized over its estimated useful life. The
  Group must instead identify and value its reporting units for the purpose of
  assessing, at least annually, potential impairment of goodwill allocated to
  each reporting unit. Additionally, the Group will need to reassess the useful
  lives of existing recognized intangible assets. Intangible assets deemed to
  have indefinite lives will no longer be amortized, instead tested annually for
  potential impairment. Separate intangible assets with finite lives will continue
  to be amortized over their useful lives. The Group will adopt SFAS 142 prospectively
  as of January 1, 2002. Since an extensive effort is needed to adopt SFAS 142,
  it is not yet practical to fully estimate the impact of adopting SFAS 142 on
  the Groups financial statements. At December 31, 2001, the Group had unamortized
  goodwill of approximately £142.9 million under U.S. GAAP. Total goodwill
  amortization was approximately £8.6 million for the year ended December
  31, 2001 which will not be incurred in 2002 under U.S. GAAP.

In
  August 2001, the FASB issued FASB Statement No. 143, Accounting for Obligations
  Associated with the Retirement of Long-Lived Assets. This standard will
  be effective for the Groups fiscal year beginning January 1, 2003. The
  standard requires that such obligations be capitalized as part of the assets
  cost at the time of initial recognition, with the related liability discounted
  to its fair value at the date of recognition. The income statement impact of
  adopting this standard will be presented as a cumulative effect of a change
  in accounting principle. The Group is assessing the impact that this new standard
  will have on its financial position and results of operations.

In
  October 2001, the FASB issued Statement of Financial Accounting Standards No.
  144, Accounting for the Impairment of Disposal of Long-Lived Assets
  (SFAS 144). SFAS 144 supersedes SFAS 121, Accounting for the Impairment
  of Long-Lived Assets and for Long-Lived Assets to be Disposed of. SFAS
  144 develops an accounting model, based on the framework previously established
  in SFAS 121, for long-lived assets to be disposed of by sale. The accounting
  model applies to all long-lived assets, including discontinued operations, and
  it supersedes the provisions of APB Opinion No. 30, Reporting Results
  of Operations  Reporting the Effects of Disposal of a Segment of a Business
  and Extraordinary, Unusual and Infrequently Occurring Events and Transactions,
  for disposal of segments of a business. SFAS 144 requires that long-lived assets
  be measured at the lower of carrying amount or fair value less cost to sell,
  whether reported in continuing operations or discontinued operations. SFAS 144
  also broadens the definition of discontinued operations. The Company will adopt
  SFAS 144 from January 1, 2002, and is currently assessing the impact that this
  new standard will have on its financial position and results of operations.

In
  April 2002, the FASB issued SFAS No. 145, Rescission of FASB Statements No.
  4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections
  (FAS 145). This standard will require gains and losses from extinguishment of
  debt to be classified as extraordinary items only if they meet the criteria
  of unusual and infrequent in Opinion 30, Reporting the Results of Operations
   Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary,
  Unusual and Infrequently Occurring Events and Transactions. Any gain or
  loss on extinguishment will be recorded in the most appropriate line item to
  which it relates within net income before extraordinary items. FAS 145 is effective
  for fiscal years beginning after May 15, 2002; however, certain sections are
  effective for transactions occurring after May 15, 2002. The Company does not
  expect the adoption of this standard to have a material effect on its financial
  statements.

F-66

---

SKYEPHARMA PLC
  Notes to the Consolidated Financial Statements (continued)

31 Summary of
  Material Differences between U.K. and U.S. GAAP (continued)

(4) Leases

The
  Group leases certain tangible assets under long-term arrangements. As of December
  31, 2001 the approximate future minimum lease payments under non-cancellable
  leases that have initial or remaining non-cancellable lease terms in excess
  of one year are as follows:

|Year
      ending December 31,                   | Finance
      £000 |   | Operating
      £000 | 
|------------------------------------------------ | ------------------- | - | --------------------- | 
|                                                 |                     |   |                       | 
|                                                 | 944                 |   | 4,114                 | 
|2003                                             | 877                 |   | 3,395                 | 
|2004                                             | 27                  |   | 3,454                 | 
|2005                                             | 4                   |   | 3,549                 | 
|2006                                             |                    |   | 2,285                 | 
|Thereafter                                       |                    |   | 22,951                | 
|                                                 |                     |   |                       | 
|Total
      minimum lease payments               | 1,852               |   | 39,748                | 
|Less
      interest payable under finance leases | (132                | ) |                      | 
|                                                 |                     |   |                       | 
|                                                 | 1,720               |   | 39,748                | 
|                                                 |                     |   |                       | 

At
  December 31, 2001 total future minimum rentals under non-cancelable sub leases
  were £1,143,000.

(5) Commitments

The
  Group conducts R&D activities under a number of collaboration arrangements
  with pharmaceutical companies to develop products utilizing its technologies.
  These activities are conducted under varying fixed price or cost plus arrangements
  which are designed to permit the Group to recover its development costs. The
  Group does not have any actual or contingent obligations to deliver successful
  results under any of these arrangements, and amounts earned under these contracts
  are not refundable, even if the research effort is unsuccessful. Except as described
  below, the Group does not consider any individual contract to be significant.

Oral

The
  Company is currently receiving significant royalty revenues under two collaborative
  arrangements for its Geomatrix technology: Xatral OD and Paxil CR. Under the
  terms of these agreements, each of the development partners bore all of the
  costs of research and development according an agreed budget and are obligated
  to pay the Company continuing royalties of between 1.5% and 5% of net sales.
  In return, the Company granted the development partners exclusive licenses to
  use the Geomatrix technology in these products throughout the world. The license
  agreement for Xatral OD was signed in May 1999 with Sanofi-Synthelabo. The license
  agreement for Paxil CR was signed in March 1996 with SmithKline Beecham plc
  (now part of GlaxoSmithKline).

F-67

---

SKYEPHARMA PLC
  Notes to the Consolidated Financial Statements (continued)

31 Summary of Material
  Differences between U.K. and U.S. GAAP (continued)

The
  only collaborative arrangement involving Geomatrix technology in which the Company
  is responsible for conducting clinical trials is the development and licensing
  agreement for a once-daily version of Requip (ropinirole) with GlaxoSmithKline,
  which was entered into in September 1999 with SmithKline Beecham (now part of
  GlaxoSmithKline). Under the terms of the agreement with GlaxoSmithKline the
  Company is responsible for all development activities for Requip oral controlled
  release tablets up to regulatory filing, in collaboration with GlaxoSmithKline.
  As part of the agreement, GlaxoSmithKline made an equity investment of £4.9
  million in the Company and will pay milestone payments at intervals up to product
  approval, including an up-front payment. In December 2001, the Company agreed
  with GlaxoSmithKline to amend the 1999 license for Requip to take account of
  additional activities that had been undertaken by SkyePharma. Under the terms
  of the amendment, the timeline of certain milestone payments was renegotiated
  together with additional development revenues to reimburse SkyePharma for the
  additional activities. On commercialization of once-daily Requip, the Company
  will receive royalties on future product sales. GlaxoSmithKline will take responsibility
  for preparing and pursuing all necessary regulatory approvals. The once-daily
  version is in Phase II clinical trials.

The
  Company has a development and license agreement for Dilacor XR, signed in 1998
  with Rorer, a member of the Rhône Poulenc Rorer Group (now part of Aventis
  Pharma). In 1997, Rorer granted to Watson Laboratories, Inc. (with the consent
  of the Company) exclusive rights to market, advertise, promote, sell and distribute
  Dilacor XR. The grant of rights to Watson Laboratories does not affect any entitlements
  of the Company or any of the material terms of the collaborative arrangement.

Injectable

In
  March 1994, DepoTech (renamed SkyePharma Inc.) entered into a collaboration
  agreement with Chiron. The objective of the collaboration is to develop and
  commercialize DepoCyt for use in the treatment of neoplastic meningitis from
  lymphomas and solid tumors, and to explore the use of DepoTechs DepoFoam
  for certain other Chiron compounds. The Chiron agreement, as amended, grants
  Chiron rights to market and sell DepoCyt in the U.S. Chiron has funded, and
  is obligated to fund, 50% of the clinical development expenses in the U.S. Canadian
  registration expenses and the cost of clinical trials required in Europe were
  funded by Chiron until June 1997, when the Chiron agreement was amended in connection
  with the agreement with Pharmacia & Upjohn (now known as Pharmacia Corporation)
  described below. SkyePharma Inc. will manufacture DepoCyt, Chiron will market,
  sell, and distribute DepoCyt in the U.S., and the parties will share all profits
  equally. The Company will also fund 50% of the sales and marketing expenses
  incurred for DepoCyt. Chiron also has a right of first refusal to obtain a license
  to alternate DepoFoam formulations of cytarabine under terms and conditions
  to be negotiated in the future. Following an evaluation of the markets and certain
  other factors, DepoTech and Chiron mutually agreed not to further develop certain
  additional generic cancer compounds named in the Chiron agreement.

F-68

---

SKYEPHARMA PLC
  Notes to the Consolidated Financial Statements (continued)

31 Summary of Material
  Differences between U.K. and U.S. GAAP (continued)

In
  June 1997, DepoTech and Chiron amended their agreement, and SkyePharma Inc.
  repurchased rights to DepoCyt in Canada and Europe from Chiron for aggregate
  cash payments of up to $13.7 million, of which $2.0 million was expensed and
  paid to Chiron in December 1997. The remaining $11.7 million originally was
  payable upon the earlier of six months following U.S. or European regulatory
  notification that the application to market or sell DepoCyt is approvable or
  approved. In March 1999, SkyePharma Inc. and Chiron further amended the agreement
  with Chiron, such that SkyePharma Inc. issued a note payable for $9.7 million
  on receipt of FDA approval of DepoCyt on April 1, 1999. During 2000 SkyePharma
  and Chiron amended the March 1999 agreement whereby SkyePharma Inc. would have
  issued a note payable for $3.5 million to Chiron upon the filing of an application
  for DepoCyt for pediatric indications in the U.S. Under the amendment dated
  October 4, 2000, this note became payable on the earlier of the filing of an
  application for DepoCyt for pediatric indications in the U.S. or the date on
  which Phase IV clinical trials, required by the FDA as a condition of product
  approval, commenced. The $3.5 million note was issued in December 2000. The
  notes are secured on the rights to DepoCyt and bear a floating rate of interest
  based on LIBOR. At December 31, 2001 $5.5 million (£3.8 million) was outstanding
  on the Chiron loan notes. The principal amounts are payable on June 30, 2002
  for the first tranche and in equal instalments on June 30, 2002 and 2003 for
  the second.

Both
  the Company and Chiron have the ability to terminate a portion or all of the
  collaboration at certain intervals and with advance notice.

In
  July 1997, DepoTech entered into a marketing and distribution agreement with
  Pharmacia & Upjohn (now known as Pharmacia Corporation). Under the agreement,
  Pharmacia Corporation acquired rights to market and sell DepoCyt in countries
  outside the United States. Pharmacia Corporation would generally be responsible
  for submitting regulatory filings, and for labeling, packaging, distributing,
  marketing and selling DepoCyt in this territory. SkyePharma Inc. would manufacture
  DepoCyt and receive a share of the net sales of this product from Pharmacia
  Corporation, if any. DepoTech received a cash payment of $2.0 million when the
  agreement was signed. The agreement also provides for reimbursement by Pharmacia
  Corporation of certain clinical trial expenses and regulatory fees incurred
  by SkyePharma Inc. In February 2000, the Company and Pharmacia Corporation renegotiated
  certain aspects of this agreement relating to milestone payments and reimbursement
  of clinical trials expenses. In addition, the Company recovered the rights to
  DepoCyt for Japan and Canada. In June 2000, Pharmacia Corporation notified the
  Company that it was terminating the 1997 Marketing and Distribution Agreement.
  Subsequently, Pharmacia Corporation assigned the European marketing application
  to the Company and the Company continued to pursue the European marketing approval.
  In April 2001, the Company received notification that the European Committee
  on Proprietary Medicinal Products (CPMP) had recommended the granting
  of marketing authorization for DepoCyte, for the treatment of neoplastic meningitis
  from lymphomas. The CPMPs recommendation was forwarded to the European
  Commission for ratification. In June 2001, the Company licensed the marketing
  and distribution rights for DepoCyte in Europe and the Philippines to Elan Pharma
  International Limited, an affiliate of Elan Corporation PLC (Elan).
  Under the terms of the agreement, SkyePharma received a $10  million signing
  fee and will receive significant milestone payments on commercialization of
  DepoCyte and additional milestone payments if DepoCyte reaches certain sales
  targets. These additional milestone payments could total $13 million. In addition,
  SkyePharma will manufacture and supply DepoCyte to Elan and will receive a supply
  price equal to a fixed percentage of net sales. In August 2001, the European
  Commission ratified the positive recommendation received from the CPMP by granting
  marketing authorization for DepoCyte through the European Union.

In
  June 2000, the Company licensed the marketing and distribution rights for DepoCyt
  in Canada to Paladin Inc. and in June 2001, the Company licensed the marketing
  and distribution rights for DepoCyt in Japan and Taiwan to Nippon-Shinyaku.

F-69

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SKYEPHARMA PLC
  Notes to the Consolidated Financial Statements (continued)

31 Summary of
  Material Differences between U.K. and U.S. GAAP (continued)

Inhalation

In
  November 1998, the Company and Novartis agreed to jointly develop a new formulation
  of Novartis Foradil asthma drug using the Companys multi-dose dry
  powder inhaler. The Company is responsible for development of the drug in its
  finished form, to include supplying both the powder and the device as a product
  to Novartis. Under the arrangement, Novartis has paid the Company a technology
  access fee of £0.4 million and has made an equity investment in the Company
  amounting to £6.1 million. Novartis has also agreed to pay the Company
  royalty income on future worldwide sales of the drug. In return, the Company
  has granted Novartis an exclusive worldwide license to market Foradil in the
  new delivery form.

In
  March 2000, the Company announced that it had entered into a collaboration agreement
  with PA Recruitment Services Holding S.A. (part of the PA Consulting Group)
  for the development of a range of non-CFC propelled metered dose asthma products
  in conjunction with a breath-actuated inhaler. Under the terms of the collaboration,
  the Company will provide its expertise in non-CFC metered dose formulation and
  PA Consulting will provide its breath-actuated inhaler device currently under
  development. The original collaboration agreement terminated on December 31,
  2001. A contract extension has been negotiated and was signed on June 13, 2002.

On
  July 16, 2001, the Company and Arakis Ltd announced that they had entered into
  an agreement to jointly develop AD 313, a novel tissue-remodelling agent for
  treating COPD, using the Companys proprietary inhalation formulation and
  device technology. The Company and Arakis will contribute proprietary intellectual
  property and know-how to the venture. The Company will contribute its proprietary
  inhalation formulation and device technology and expertise. Arakis will provide
  the initial AD 313 intellectual property along with clinical development expertise.
  The two companies will jointly fund AD 313, manage product development, and
  upon commercialization share rewards equally.

On
  January 7, 2002, the Company announced exclusive agreements with AstraZeneca
  PLC to develop the next generation of AstraZenecas Pulmicort metered dose
  inhaler. The Company will apply one of its inhalation delivery technologies
  using hydro-fluoro alkane (HFA) as propellant to replace CFCs
  in the currently marketed MDIs. Under the terms of the agreement, the Company
  will be responsible for all pre-clinical and clinical development, as well as
  compiling regulatory filings for marketing approval. The Company received a
  signing fee of £2 million and progress related payments could total up
  to $10 million once marketing approval is granted. AstraZeneca has also agreed
  to pay the Company royalty income on future net sales of the HFA-based product.
  The Company has already developed an internal formulation of budesonide, the
  active ingredient in Pulmicort that is pharmaceutically stable and suitable
  for use in an HFA-MDI. Phase I clinical studies on the AstraZeneca formulation
  are expected to commence in the second half of 2002.

Topical

As
  set out above under Drug Delivery Platforms  Topical  Approved
  Topical Products  Solaraze, the Company entered into two agreements
  with Bioglan; for the manufacture, marketing and distribution of Solaraze in
  Europe and; for the license of marketing rights to the U.S., Canada and Mexico.
  As set out above, during 2001, SkyePharma agreed the transfer of rights to market
  Solaraze in the U.S., Canada and Mexico from Bioglan to Quintiles. On May 13,
  2002, following negotiations with the Administrators of Bioglan, SkyePharma
  announced an agreement to transfer all rights to market Solaraze in Europe to
  Shire for a total consideration up to £15 million, plus royalties on European
  sales. Of this total consideration, £2.1 million is contingent on conditions
  including Solarazes launch in certain European countries.

F-70

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SKYEPHARMA PLC
  Notes to the Consolidated Financial Statements (continued)

31 Summary of
  Material Differences between U.K. and U.S. GAAP (continued) In
  June 2000, SkyePharma entered into a research and development collaboration
  with Kings College London for the investigation of the use of HA as a carrier
  or vector for active substances in drug delivery applications, principally for
  administration by the topical route. The projects being pursued under this agreement
  are all at the pre-clinical stage of development.

Solubilization
  SkyePharma
  Canada has signed an exclusive agreement with Baxter Healthcare Corporation
  (Baxter) to collaborate on the use of the IDD technology for the
  formulation of injectable medications. Details of this collaboration are set
  out above under Drug Delivery Platforms  Solubilization  Solubilization
  Products in Development  New Product Feasibility Programs.

Other Collaborative
  Arrangements In
  January 2001, SkyePharma announced that it entered into an agreement with the
  Paul Capital Royalty Acquisition Fund, L.P. (Paul Capital) to develop
  DepoMorphine. Under the agreement, Paul Capital will provide a total of $30
  million between 2000 and 2002, to fund the clinical development and regulatory
  submission of DepoMorphine, in return for the sale of a portion of potential
  future royalty and revenue streams from DepoMorphine, Xatral OD, Solaraze and
  DepoCyt. Between January 2003 and December 2014, Paul Capital will receive 15%
  of the annual royalties and revenues from the stated products up to an agreed
  ceiling. Once the predetermined ceiling is reached, the percentage participation
  will fall to 3% for the remainder of the period until December 31, 2014.

In
  March 2002, SkyePharma announced that it had entered into a second agreement
  with Paul Capital. Under the terms of the agreement, Paul Capital will pay SkyePharma
  $30 million over the next two years, principally to fund the clinical development
  of propofol and HFA-formoterol. In return, Paul Capital will receive a portion
  of the future royalty and revenue streams from these, and seven other products
  from the Companys pipeline. The seven products referred to are the lipid-lowering
  drug fenofibrate, an anti-cancer agent busulfan, an intravenious formulation
  of the anti-biotic oxytetracycline, oral budesonide to treat inflammatory bowel
  disease, HFA-budesonide and Foradil both treating asthma, and the anti-depressant
  Paxil CR. Between January 2002 and December 2015, Paul Capital could receive
  between 4% and 20% of the annual royalties and revenues from the total of nine
  products. Based on managements current projections, the 20% rate will
  apply from 2004 to 2008. The percentage then falls, when an agreed return is
  achieved, to 12.5% until a second ceiling is reached, before falling to 4% for
  the remainder of the period until December 31, 2015. During 2002 and 2003, the
  20% rate will be reduced based on the percentage of the total $30 million already
  funded. In addition, should the share of royalties received by Paul Capital
  not meet minimum returns, SkyePharma may issue SkyePharma ordinary shares up
  to a value of $7.5 million. The number of ordinary shares to be issued is capped
  based upon a minimum price of 55 pence per share. Also under the terms of these
  agreements, Paul Capital has been issued warrants carrying rights to subscribe
  for 5 million SkyePharma Ordinary Shares at an exercise price of 73.75 pence,
  representing a 25% premium to the average trading price for the five trading
  days immediately prior to the closing date.

On
  May 14, 2002 SkyePharma announced its intention to enter a wide ranging strategic
  collaboration with Kowa Company Ltd., a leading Japanese company with substantial
  pharmaceutical interests, which proposes, under a Subscription Agreement signed
  on May 13, 2002, to make a strategic investment in SkyePharma. Kowa and SkyePharma
  have signed a separate non-binding Letter of Intent to evaluate Kowas
  acquisition of a 50% interest in SkyePharmas manufacturing facility in
  Lyon.

F-71

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SKYEPHARMA PLC
  Notes to the Consolidated Financial Statements (continued)

31 Summary of
  Material Differences between U.K. and U.S. GAAP (continued) Kowa
  and SkyePharma have an active relationship involving the formulation and scaled-up
  manufacture for a new lipid-lowering agent NK-104 to support late-stage clinical
  development of the drug. The two parties now intend to strengthen their commercial
  relationship through NK-104 manufacturing.

Following
  shareholder approval at an Extraordinary General Meeting held on June 7, 2002,
  Kowa will acquire 30 million ordinary shares of 10p each in SkyePharma for a
  total consideration of approximately £25.3 million. This represents a
  holding of around 5% after the investment. As part of its investment, Kowa will
  have the right to appoint a non-executive director to the board of SkyePharma.

Kowa
  and SkyePharma have also identified areas of synergy to exploit further their
  respective product and development pipelines. Kowas sales and marketing
  experience should create opportunities to expand the market for SkyePharmas
  products into both Europe and Japan. In addition, SkyePharmas broad portfolio
  of drug delivery technology has the potential to create improved drugs from
  Kowas marketed products and development pipeline. SkyePharma and Kowa
  are already cooperating on an undisclosed project using SkyePharmas enhanced
  solubilization technology.

F-72

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Exhibit Index

The following exhibits are filed
  as part of this Form 20-F:

|1.1  | Memorandum and Articles
of Association of SkyePharma PLC                                                                           
|---- | -----------------------------------------------------------------------------------------------------------------------------------
|     |                                                                                                                                    
|     | 1.1.1                                                                                                                              
|     |                                                                                                                                    
|     | 1.1.2                                                                                                                              
|     |                                                                                                                                    
|4.1  | Directors and Officers
Service Contracts                                                                                           
|     |                                                                                                                                    
|     | 4.1.1                                                                                                                              
|     |                                                                                                                                    
|     | 4.1.2                                                                                                                              
|     |                                                                                                                                    
|     | 4.1.3                                                                                                                              
|     |                                                                                                                                    
|4.2  | Share Purchase Plans                                                                                                               
|     |                                                                                                                                    
|     | 4.2.1                                                                                                                              
|     |                                                                                                                                    
|4.3  | Amendments to the 1996
Acquisition Agreement, dated April 7, 2000 and May 11, 2000, between Dr Jacques
Gonella and SkyePharma PLC**
|     |                                                                                                                                    
|8.1  | List
of SkyePharma PLCs subsidiaries                                                                                              
|     |                                                                                                                                    
|10.1 | Consent
of independent auditors                                                                                                    

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|*  | Incorporated by reference to the Company’s
      Annual Report on Form 20-F for the financial year ended December 31, 2000
      (Commission File No. 0-29860)
|-- | --------------------------------------------------------------------------------------------------------------------------------------------------------------
|** | Filed with the Company’s Annual Report
      on Form 20-F for the year ended December 31, 1999 (Commission File No. 0-29860)