<PAGE>

      As filed with the Securities and Exchange Commission on June 25, 1999
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                                  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

/x/               ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
                     OF THE SECURITIES EXCHANGE ACT OF 1934
                  For the fiscal year ended: December 31, 1998
                                       OR

/ /                  TRANSITION REPORT PURSUANT TO SECTION 13
                 OR 15(d) OF THE SECURITIES 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 W1V 9FN, 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 427,098,454

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
       ---          ---

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<PAGE>


                                TABLE OF CONTENTS

<TABLE>
<CAPTION>
                                                                                                        Page
<S>                                                                                                     <C>
                                     PART I

Item 1 - Description of Business .........................................................................    5

Item 2 - Description of Property .........................................................................   50

Item 3 - Legal Proceedings ...............................................................................   51

Item 4 - Control of Registrant ...........................................................................   51

Item 5 - Nature of Trading Market ........................................................................   51

Item 6 - Exchange Controls and Other Limitations Affecting Shareholders ..................................   52

Item 7 - Taxation ........................................................................................   52

Item 8 - Selected Financial Data .........................................................................   60

Item 9 - Management's Discussion and Analysis of Financial Condition and Results of Operations ...........   64

Item 9A - Quantitative and Qualitative Disclosures About Market Risk  ....................................   74

Item 10 - Directors and Officers of the Registrant .......................................................   75

Item 11 - Compensation of Directors and Officers .........................................................   77

Item 12 - Options to Purchase Securities from the Registrant or its Subsidiaries .........................   78

Item 13 - Interest of Management in Certain Transactions .................................................   83

                                     PART II

Item 14 - Description of Securities to be Registered .....................................................   N/A

                                    PART III

Item 15 - Defaults Upon Senior Securities.................................................................   87

Item 16 - Changes in Securities, Changes in Security for Registered Securities and Use of Proceeds .......   87

                                     PART IV

Item 17 - Financial Statements ...........................................................................   N/A

Item 18 - Financial Statements ...........................................................................   87

Item 19 - Financial Statements and Exhibits ..............................................................   87
</TABLE>

-------
Omitted items are not applicable.

                                      -2-
<PAGE>


                           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").

         The Company publishes its consolidated financial statements expressed
in pounds sterling. In this Form 20-F, references to "pounds sterling",
"L", "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 "French francs" or "Ffr" are to the lawful currency of
France; 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 29 of SkyePharma's Consolidated Financial Statements included
in Item 18 of this Form 20-F.

         In 1996, SkyePharma changed its fiscal year end to December 31 to
conform its fiscal year of that of Jago.

                               CERTAIN DEFINITIONS

         In this document, references to:

         "SkyePharma", the "Company" or "we" refer to SkyePharma PLC and its
consolidated subsidiaries, including Jago, Brightstone and SkyePharma Inc.,
unless the context requires reference to SkyePharma PLC only;

         "Jago" refer to the Company's wholly owned subsidiary, Jago Holding AG,
and its subsidiaries;

         "Brightstone" refer to Brightstone Pharma Inc., a wholly owned
subsidiary of the Company;

         "Kypton" refer to Krypton Limited, a wholly owned subsidiary of the
Company;

         "Joint Venture" refer to Genta-Jago Technologies B.V., a Netherlands
corporation in which the Company is a 50/50 partner with Genta Incorporated, a
Delaware corporation ("Genta"); and

         "SkyePharma Inc." refer to DepoTech Corporation, a California
corporation, which was renamed as of June 1, 1999 as SkyePharma Inc.

                                      -3-

<PAGE>


                                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. Heath, Inc. ("IMS"). IMS is a market research firm
internationally recognized by the pharmaceutical industry. For 1998, IMS data
were compiled in terms of value on the basis of representative samples of
pharmaceutical product data from 80 countries.

         IMS data may differ from that compiled by the Company with respect to
its products. Of particular significance in this regard are the following: (1)
the Company publishes its financial results on a financial year and half-year
basis, whereas IMS issues its data on a monthly and quarterly basis; (2) the
on-line IMS database is updated quarterly and uses the average exchange rates
for the relevant quarter; (3) IMS data from the United States are not adjusted
for the Medicaid and similar state rebates described under "Item 1. Description
of Business - Government Regulation"; and (4) IMS sales data are compiled using
actual wholesaler data and data from statistically representative panels of
retail and hospital pharmacies, which data are then projected by IMS to give
figures for national markets.

                            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 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.

<TABLE>
<CAPTION>
                                                                 PERIOD
                                         HIGH          LOW       AVERAGE     PERIOD END
                                        ------       ------      --------    ----------
     <S>                                <C>          <C>         <C>           <C>
     1995                               1.6440       1.5302       1.5803       1.5535
     1996                               1.7123       1.4948       1.5733       1.7123
     1997                               1.7035       1.5775       1.6397       1.6427
     1998                               1.7222       1.6114       1.6602       1.6628
     1999 (through June 23, 1999)       1.6585       1.5787       1.6146       1.5787
</TABLE>

         For a discussion of the impact of exchange rate fluctuations on the
Company's operating results, see "Item 9. Management's Discussion and Analysis
of Financial Condition and Results of Operations".

                                      -4-

<PAGE>


                                     PART I

ITEM 1 - DESCRIPTION OF BUSINESS

OVERVIEW

         The Company develops methods for delivering drugs in the human body.
The major part of the Company's business is developing applications of its
GeomatrixTM 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.

         There are four drugs currently being marketed that use The Company's
Geomatrix technologies, one in the United States (Dilacor XR-Registered
Trademark-) two in Germany and one in Switzerland. In February 1999,
SmithKline Beecham Corporation received U.S. Food and Drug Administration
("FDA") approval for the 12.5 and 25 mg. dosage forms of a new version of its
Paxil (also known as Seroxat) anti-depressant drug using The Company's
Geomatrix technology. Paxil is the eighth-largest selling drug in the world
based on 1998 sales data from IMS. The Company is also collaborating with
several other large international pharmaceutical companies to commercialize
its Geomatrix technologies, including Abbott Laboratories, Eli Lilly and
Company, Hoffmann-La Roche and Rhone Poulenc Rorer. In addition to Paxil,
there are five drugs using Geomatrix technologies currently in human studies.

         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. The first Geomatrix system
developed by the Company, the Zero Order Release system, ensures a constant rate
of drug release over a specified period of time, allowing once or twice daily
dosing. Subsequently, the Company developed systems with more complex release
profiles. These include Geomatrix systems capable of delivering an initial burst
of a drug followed by controlled-release at a constant rate and systems designed
to deliver the drug to different areas of the patient's digestive system. In
addition, the Geomatrix systems can be used to allow the simultaneous release of
two different drugs, at different rates, which may increase the effectiveness of
the active components. 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 take 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.

         In addition to its Geomatrix technologies, the Company also is
developing advanced technologies to deliver medicines via a patient's lungs
without relying on CFC-based propellants, which are



                                      -5-
<PAGE>

considered environmentally harmful. The Company is working with two types of
such pulmonary systems. The first is a metered dose inhaler that relies on
non-CFC propellants to deliver the required therapy. The other is a dry powder
inhaler that requires no propellant but instead is breath-activated to deliver
drugs in a fine powder suspension. In its metered dose inhaler development work,
the Company focuses on the formulation of drugs for use in metered dose inhalers
manufactured by others. The Company currently has metered dose inhaler
formulations for four generic products, including salbutamol (also known as
albuterol), a drug for the treatment of bronchospasm, under development. The
salbutamol formulation is presently the subject of ongoing clinical trials. In
its dry powder inhaler development work, the Company focuses both on the
development of the device and on dry powder formulation. The Company has
developed a prototype dry powder inhaler which will be utilized in future
clinical trials. The Company has recently entered into two collaborative
arrangements to commercialize its pulmonary drug delivery technology. 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. In
November 1998, the Company and Novartis agreed to jointly develp a new
formulation of Novartis' Foradilu asthma drug using the Company's multi-dose dry
powder inhaler.

         The Company also applies the Geomatrix technologies to off-patent
(generic) drugs. In many of these cases, the Company is developing
controlled-release versions of brand-name pharmaceuticals whose patent
protection or marketing exclusivity has expired or is about to expire. The
Company conducts such development work both on its own behalf and for third
parties. The Company's strategy is to focus its development efforts on
products for which competition from other generic pharmaceutical companies is
potentially less intense due to such factors as the complexity of the drug
formulation or the limited access to raw materials. To provide additional
generic product offerings for marketing, the Company has also contracted with
third-party drug developers to sell and distribute other drugs, not utilizing
controlled-release systems, such as injectable drugs. To date, the Company
has filed ANDAs for six generic products, one for a Geomatrix formulation of
Imdur-Registered Trademark- (ISMN), three for a group of injectable drugs
developed for the Company by Synthon, one for a Geomatrix formulation of
Naprelan-Registered Trademark- (Naproxen) and a generic version of Cylert
(Pemoline) developed together with Oread. The combined 1998 U.S. brand-name
and generic sales for these products were approximately $635 million.

         The Company's strategy for the sale and distribution of its generic
pharmaceutical product candidates has been to develop its own marketing
capability through its Brightstone subsidiary in the U.S. However, in late 1998
the Company concluded that is unlikely to maximize the value of its generic
pharmaceutical product candidates using its own marketing resources and is
currently seeking 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 has
therefore decided to discontinue its own generic drug sales and marketing
operations in the U.S. The Company expects the discontinuance of its generic
sales and marketing operations, together with the planned integration of
Brightstone's clinical development and finance functions with SkyePharma Inc.,
to result in an annual cost savings of approximately L2.0 million. The
Company incurred a one-time charge in connection with this restructuring of
approximately L1.3 million in 1998.

ACQUISITION OF SKYEPHARMA INC.

         On March 10, 1999, the Company acquired SkyePharma Inc. (formerly named
DepoTech) in a stock-for-stock merger. As consideration for the merger, the
Company issued to the former SkyePharma Inc. shareholders 28,311,070 SkyePharma
ordinary shares in the form of ADSs, 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 SkyePharma Inc. shareholders an additional
16,176,930 SkyePharma ordinary shares in the form of ADSs. If the second
condition, the signing by March 31, 2000 by a corporate partner of a development
and commercialization agreement for DepoMorphine or a macromolecule for the
delivery of drugs using DepoFoam, occurs, the Company will be obligated to issue
an additional approximately 12,133,388 ordinary shares in the form of ADSs.



                                      -6-
<PAGE>

         SkyePharma Inc. develops potential drug products designed to release
over a period of time a drug which has already been shown to be useful or
potentially useful in humans. These potential drug products are based on the
DepoFoamTM technology and are generally designed to be administered to humans
with an injection. 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. DepoTech 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. The Company is currently developing products in cancer, pain
management and other medical fields alone or funded by corporate partners.

         SkyePharma Inc.'s first drug product was DepoCytTM. DepoCyt combines
SkyePharma Inc.'s DepoFoam with cytarabine, a drug used to treat certain
cancers. DepoCyt is being developed in collaboration with Chiron Corporation in
the United States and with Pharmacia & Upjohn S.p.A., an affiliate of Pharmacia
& Upjohn, Inc., outside the United States. DepoCyt is being developed for the
treatment of cancers which have spread to the fluid surrounding the brain and
spinal cord. Since April 1994, SkyePharma Inc. has been conducting clinical
trials of DepoCyt for the treatment of these cancers.

         In April 1997, SkyePharma Inc. completed the filing of a new drug
application 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 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 treatment of those cancers and the product
was launched in the U.S. in May 1999.

         On behalf of Pharmacia & Upjohn, SkyePharma Inc. has also filed for
marketing approval of DepoCyt in Canada to be used in the treatment of cancers
which have spread to the fluid surrounding the brain and spinal cord from solid
tumors. Pharmacia & Upjohn filed for marketing approval of DepoCyt to be used in
the treatment of these cancers in Europe but subsequently withdrew the
application until additional data could be provided.

         A Phase IV clinical trial of DepoCyt in solid tumor patients is
continuing, as are clinical trials of DepoCyt in leukaemia and lymphoma
patients. In addition, during 1997, SkyePharma Inc. and its U.S. corporate
partner, Chiron, began a clinical trial in children.

         In addition to DepoCyt, SkyePharma Inc. is working on the following
potential drug products based on DepoFoam:

-        DepoMorphineTM sustained-release encapsulated morphine sulphate, for
         acute pain management following surgery;

-        DepoBupivacaineTM, a DepoFoam formulation of the local anaesthetic
         bupivacaine, for the treatment of regional pain; and

-        DepoAmikacinTM sustained-release encapsulated amikacin, an antibiotic
         for the treatment and prevention of bacterial infections.



                                      -7-
<PAGE>

         SkyePharma Inc. is also evaluating, in conjunction with the Monsanto
Company, Synthelabo and other undisclosed corporate partners, the feasibility of
DepoFoam encapsulation of several more drug products, including certain
macromolecules.

STRATEGY

         The Company's strategy is to become a leading provider of integrated
drug delivery services to the pharmaceutical industry. The focus of the Company
is to provide a full complement of drug delivery products and services to
pharmaceutical companies ranging from formulation and development through to
commercial manufacturing. The Company's strategy for achieving this objective
consists of the following elements:

-        FOCUS ON DEVELOPMENT OF THE COMPANY'S CORE TECHNOLOGIES. The Company
         currently has a portfolio of eight Geomatrix systems, of which three
         have already been commercialized. The Company is focusing on developing
         and commercializing the remaining five systems either in conjunction
         with its collaborative partners or through its own internal development
         activities. Similarly, the Company seeks to exploit its existing
         pulmonary technologies and the recently acquired DepoFoam injectable
         technology 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.

-        EXPAND SCOPE OF TECHNOLOGY BASE. The Company's pharmaceutical customers
         are increasingly requesting a broader range of delivery solution. The
         Company is currently well placed with its existing oral Geomatrix
         technologies and the recent acquisition of SkyePharma Inc. has extended
         the Company's technology base to include the sustained release of drugs
         via injection. The Company is also developing advanced pulmonary drug
         development systems designed to deliver medication via a patient's
         lungs. In addition to these developments, the Company plans to develop
         and commercialize further drug delivery technologies. The Company will
         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. The management's primary focus
         will be on platforms that have the potential to deliver macromolecules
         and offer enhanced solubility to create new product opportunities.

         Expanding the scope of the technology base will enable the Company to:

         -        market a broader range of drug delivery solutions to its
                  existing oral, pulmonary and injectable customer base and to
                  new customers.

         -        decrease the risk normally associated with a single technology
                  or product base.

         -        provide a more competitive company in the drug delivery
                  industry, better able to negotiate corporate partnerships on
                  attractive terms.

         -        realize research and development synergies between the Company
                  technologies. For example, the DepoFoam technology's ability
                  to encapsulate a wide spectrum of water-stable drugs,
                  involving small molecules, proteins and peptides, could expand
                  the scope of the Company's oral and pulmonary technologies,
                  particularly in the field of proteins and peptides.

-        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



                                      -8-
<PAGE>

         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
         will 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. In order to manufacture products using the Company's
         technologies, the Company employs personnel who specialize in
         manufacturing, to commercial quantities, products utilizing the
         Company's technologies. With the acquisition of SkyePharma Inc., the
         Company acquired a 14,400sq. ft purpose built facility which is FDA
         approved for the commercial manufacture of DepoCyt. In addition to this
         facility, SkyePharma Inc. occupies an 82,200 sq. ft. facility which
         houses its administrative, research and development and future
         injectable manufacturing capacity. Both facilities are approved by the
         U.S. Drug Enforcement Administration (the "DEA") for the manufacture of
         drug products containing opiates. The two facilities combined will
         provide sufficient capacity for the forecast demand for the Company's
         injectable products in the short to medium term. The Company's
         pharmaceutical manufacturing and production facility in Lyon has
         completed validation trials. The FDA has inspected the Lyon facility
         and notified the Company that it plans to approve the Lyon facility for
         commercial manufacturing of Naproxen (this does not imply the FDA will
         approve Naproxen). The Company believes that this will enable it to
         supply commercial quantities in 1999. The Company has substantially
         completed its Geomatrix manufacturing suite at the Lyon facility at a
         capital cost of approximatelyL6.3 million. In addition, the Company
         believes that it has substantially brought the facility into compliance
         with cGMP and FDA standards at a cost of approximatelyL0.5 million.
         Management does not anticipate that future significant capital
         expenditure will be required before revenue is received from Geomatrix
         manufacturing. The Company plans to further expand its operations at
         the Lyon facility to include production activities for DPI products
         pursuant to the Novartis collaboration. See "- Pulmonary Products".

-        SEEK LICENSING AND DEVELOPMENT PARTNERS FOR EXISTING GENERIC PORTFOLIO.
         The Company has recently concluded a licensing agreement in respect of
         one of its generic products and is currently seeking further strategic
         collaborative partners with U.S. generic marketing capability to sell
         and distribute the balance of the generic products and candidates in
         the U.S. and other non-U.S. markets where appropriate.

DRUG DELIVERY TECHNOLOGIES

THE GEOMATRIX 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.



                                      -9-
<PAGE>

         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 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 percent 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: Dilacor XR in
                           the United States and Cordicant-Uno in Germany.

-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



                                      -10-
<PAGE>

                           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.

-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.

-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, Quick Slow and Binary 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, Multiple Pulse or Positioned Release
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.

         PULMONARY TECHNOLOGIES

         In addition to its Geomatrix technologies, the Company is developing
advanced pulmonary 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 of dry powder
inhalers ("DPIs"). The Company is currently working with two types of pulmonary
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.



                                      -11-
<PAGE>

         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 pulmonary 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. 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-activated
                           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. A pre-production version of the
                           Company's DPI is currently undergoing feasibility
                           testing. Through its development work, the Company is
                           developing an extensive body



                                      -12-
<PAGE>

                           of knowledge of dry powder formulations, including
                           knowledge relation to powder flow characteristics and
                           solubility within the lung, as well as physical and
                           chemical properties of various excipients.

         The Company has recently entered into collaborative arrangements with
Novartis and Sepracor to commercialize its pulmonary drug delivery technology.
The Company is continuing to seek additional collaborative partners to further
develop and commercialize its pulmonary 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 intends to receive royalties from its partners based on
sales of products incorporating the Company's pulmonary drug delivery
technologies.

         DEPOFOAM INJECTABLE TECHNOLOGIES

         In March 1999, the Company acquired DepoFoam injectable technologies.
DepoFoam is a technology that delivers drugs over a period of time. 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 synthetic duplicates of 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 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 to date
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.



                                      -13-
<PAGE>

         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 PROFIT MARGINS 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.

         PROPRIETARY PRODUCTS

         APPROVED GEOMATRIX PRODUCTS

         To date, five Geomatrix formulations of pharmaceutical products have
received regulatory approval. Of these products, one is currently being marketed
in the United States, two are currently being marketed in Germany, one is
currently being marketed in Switzerland, and one has yet to be launched.

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

<TABLE>
<CAPTION>
                                                                                REGULATORY
                                                                               APPROVALS AND
                                                                               YEAR OF FIRST      GEOMATRIX        COLLABORATIVE
PRODUCT                                                INDICATION                APPROVAL          SYSTEM            PARTNER
-----------------------------------------------   ------------------------      ------------     -----------      ---------------
<S>                                               <C>                          <C>               <C>              <C>
Dilacor XR-Registered Trademark-                  Hypertension and chronic      U.S. (1992)      Zero Order       Rhone
                                                  stable angina                                                   Poulenc Rorer

Cordicant-Uno-Registered Trademark-               Hypertension                  Germany          Zero Order       Mundipharma
                                                                                (1994)

Diclofenac-ratiopharm-uno-Registered Trademark-   Arthritis                     Germany          Quick Slow       ratiopharm
                                                                                (1995)

Madopar DR-Registered Trademark-                  Parkinson's Disease           Switzerland      Binary           Hoffmann-La
                                                                                (1996)                            Roche

Paxil CR-Registered Trademark-                    Depression                    U.S. (1999)      Positioned       SmithKline
                                                                                                 Release/Zero     Beecham
                                                                                                 Order
</TABLE>

         Paxil/Seroxat (paroxetine) 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 CR, the version filed with the FDA by the
Company's client in December 1997 and approved by the FDA in February 1999 for
the 12.5 and 25 mg dosage forms is a modified release version using a
combination of the Positioned Release and Zero



                                      -14-
<PAGE>

Order Geomatrix systems. The Company's client, SmithKline Beecham has not yet
indicated when the product will be launched.

         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 and is marketed by Rhone Poulenc Rorer and had
1998 reported U.S. sales of $121 million. The Company received royalty revenues
of approximately L1.9 million in 1998 which represented 17% of its 1998
revenues. Rhone Poulenc Rorer contracted with the Company to develop a
controlled-release formulation of diltiazem hydrochloride to compete with
Cardizem CDu, a product of Hoechst Marion Roussel. 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. In June 1997, Rhone Poulenc Rorer
granted Watson Pharmaceuticals an exclusive worldwide license to market Dilacor
XR. Marketing exclusivity for this product in the United States expired in June
1995. Accordingly, increased competition from generic manufacturers of
controlled-release formulations of Dilacor XR has been experienced.

         CORDICANT-UNO is 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-UNO is 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 DR is 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
L0.1 million royalty revenues were earned in respect of
Diclofenac-ratiopharm-uno and Madopar in the accounting periods to December 31,
1998. Marketing for Madopar began in September 1997.

PRODUCTS IN DEVELOPMENT

         GEOMATRIX PRODUCTS

         The Company's collaborative partners have two products which have been
filed with the FDA or regulators in other countries and five products in
clinical trials that utilize the Geomatrix technologies, including three
products that are in pivotal (Phase III) clinical trials. 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,
see "- Research and Development-Geomatrix Development Process."


                                      -15-
<PAGE>

<TABLE>
<CAPTION>
                     MODIFIED          THERAPEUTIC          DEVELOPMENT           GEOMATRIX         COLLABORATIVE
  DRUG COMPOUND      RELEASE            CATEGORY              STATUS               SYSTEM              PARTNER
------------------   ---------       ----------------     ---------------     ------------------     -------------
<S>                  <C>             <C>                  <C>                 <C>                   <C>
Xatral                  Yes           Genito-Urinary      filed 12/98         Positioned Release     Synthelabo
Zileuton                Yes           Asthma              Pivotal Trials      Quick Slow             Abbott
Bucindolol(1)           No            Cardiovascular      Pilot Trials        Undisclosed            Intercardia
Undisclosed #1(1)       Yes           Undisclosed         Pivotal Trials      Zero Order             Undisclosed
</TABLE>

(1)      New chemical entity. The Company expects that additional information
         about this project will be made public around the time that the first
         regulatory filing is made for this product, if the product is
         successfully formulated and regulatory approval is sought.

         XATRAL is an approved drug marketed primarily in Europe and certain
countries of Latin America, Asia, Africa and the Middle East. The currently
marketed product is an immediate-release formulation taken twice or three times
a day and is prescribed for the treatment of enlarged prostrate. In December
1998 Synthelabo submitted a marketing authorization application for a once-daily
formulation in France, Ireland, the Netherlands and the United Kingdom. To date,
14 filings have been made in Europe and the Rest of the World. The project is
currently in pre-pivotal clinical trials in the United States.

         ZILEUTON is currently a four times per day treatment for mild to
moderate asthma developed by Abbott Laboratories under the brand name
Zyflo-Registered Trademark-. Zyflo was approved by the FDA in December 1996
for sale in the United States. The Company is developing a twice per day
Quick Slow Geomatrix formulation of Zyflo. The Geomatrix formulation is
designed to enhance patient compliance and convenience by reducing the dosing
requirement from four times per day to twice per day. In addition, the Quick
Slow formulation is expected to enhance therapy by providing a burst of
medication shortly after ingestion followed by constant release for sustained
therapy without side effects. The Company believes that the Geomatrix
formulation of Zyflo has recently completed pivotal (Phase III) clinical
trials and that Abbott is in the process of looking for a marketing partner
prior to filing an NDA for the Geomatrix formulation of Zyflo.

         BUCINDOLOL is a new chemical entity being developed by Intercardia,
Inc. Bucindolol is a non-selective beta blocker with mild vasodilatory activity.
If successfully developed and approved, bucindolol is expected to be indicated
for the treatment of congestive heart failure. The U.S. Department of Veterans
Affairs and the National Heart, Lung and Blood Institute are currently
conducting a clinical trial of a twice-daily version of bucindolol in 2800
patients with heart failure. The Company is developing a once per day Geomatrix
formulation of bucindolol. Pilot clinical trials of the Geomatrix formulation
have been initiated. The Company believes that if the once per day Geomatrix
formulation bucindolol is successfully developed and approved for sale, it may
replace the twice-daily formulation Intercardia currently has in clinical
trials. If approved, bucindolol is expected to be marketed in Europe by BASF
Pharma/Knoll. In September 1998 Intercardia reacquired the marketing rights for
the United States.

         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 is currently in pivotal (Phase III) clinical trials in Europe. 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.

         There can be no assurance that any of the above products will be
successfully formulated. In addition, even if a product is successfully
formulated, there can be no assurance of its regulatory approval or commercial
success. The decision to conduct clinical trials, secure regulatory approval and
market Geomatrix formulations of their products is taken by the collaborative
partners and not by the Company. There can be no assurance that the Company's
partners will elect to do so, or if they do that they will devote the necessary
resources and skill to commercialize successfully the products formulated with
the Geomatrix technologies.



                                      -16-
<PAGE>

         One of the Company's products in development, which the Company was
developing with Eli Lilly has been discontinued by the collaborative partner
which the Company believes was unrelated to the Geomatrix technology.

PULMONARY PRODUCTS

         MDI PRODUCTS. The Company currently has four aerosol formulations of
generic pharmaceuticals in development for use with non-CFC MDIs. The Company's
most advanced product is a formulation of salbutamol (albuterol), a selective
beta2-adrenergic bronchodilator indicated for the prevention and relief of
bronchospasm in patients with reversible obstructive airway disease and for the
prevention of exercise induced bronchospasm. Albuterol is the official generic
name of this drug in the United States. Schering Corporation, a subsidiary of
Schering-Plough, and Glaxo Wellcome market inhalation aerosol formulations of
salbutamol in the United States under the brand-names Proventilu and Ventolinu,
respectively. In a clinical trial involving 24 patients, the Company's
formulation of salbutamol was compared to Ventolin and in all of the patients
the Company's formulation was found to be, in the opinion of the Company, an
acceptable alternative and the therapeutic equivalent to Ventolin.

         In addition to salbutamol, the Company has aerosol formulations of
beclomethasone, budesonide and ipratropium in early stage feasibility testing.

         DPI PRODUCTS. The Company has developed a prototype DPI that it plans
to use in future clinical trials. Although the device is subject to additional
testing and validation, the Company believes that its DPI benefits from the
following features:

         - 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 has recently entered into two collaborative arrangements to
commercialize its pulmonary drug delivery technology. 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.

         In November 1998, the Company and Novartis agreed to jointly develop
a new formulation of Novartis' Foradilu asthma drug using the Company's
multi-dose dry powder inhaler. 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 L0.4 million and has made an equity
investment in the Company amounting to L6.1 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 50 countries and achieved worldwide sales in 1998 of
Sfr. 224 million.



                                      -17-
<PAGE>

DEPOFOAM INJECTABLE PRODUCTS

         The table below summarizes DepoFoam products currently under
development. "Preclinical" means additional testing following initial
feasibility studies and other studies, including additional animal studies,
necessary to prepare and file an investigational new drug application.
"Dose-finding" means a study to determine the appropriate dose in patients such
as children. "Phase I" means initial human studies designed to establish the
safety, dose tolerance and duration of exposure in the blood of a compound.
"Phase II" means human studies designed to demonstrate preliminary effectiveness
of a compound and to select appropriate dose(s) and patient populations for
further studies. "Phase III" means human studies designed to lead to
accumulation of data sufficient to support a new drug application. "Phase IV"
means human studies that are generally performed after approval of a new drug.

<TABLE>
<CAPTION>
PRODUCT CANDIDATE (ACTIVE COMPOUND)                  INTENDED USE                    STATUS
-----------------------------------              --------------------------      -----------------------
<S>                                              <C>                             <C>
DepoCyt (cytarabine)                             Cancers which have spread
                                                 to the fluid surrounding
                                                 the brain and spinal cord
                                                 arising from:
                                                 Lymphomas                       FDA Approved April 1999
                                                 Solid tumors                    Phase IV
                                                 Solid tumors                    NDS filed Canada
                                                 Leukaemia                       Phase III
                                                 Paediatric use                  Dose-finding
DepoMorphine (morphine)                          Acute post-surgical pain        Phase II
DepoBupivacaine (bupivacaine)                    Regional pain                   Preclinical
DepoAmikacin (amikacin)                          Bacterial infections            Phase I completed
</TABLE>

         The Company is also evaluating, in conjunction with the Monsanto
Company, Synthelabo and other undisclosed corporate partners, the feasibility of
DepoFoam formulations of several additional compounds, including certain
macromolecules.

DEPOCYT

         SkyePharma Inc.'s first approved drug product is DepoCyt. DepoCyt
combines the Company's DepoFoam with cytarabine, a drug used to treat certain
cancers. DepoCyt is being developed in collaboration with Chiron in the United
States, and with Pharmacia & Upjohn outside the United States.

         BACKGROUND

         Cancer from either solid tumors, leukaemia (a form of cancer involving
white blood cells) or lymphomas (a form of cancer involving tissues of the
lympohatic 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 the two drugs most commonly used for this therapy. Cytarabine acts by
inhibiting a vital enzyme in DNA synthesis, resulting in death of a dividing
cell. 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 two weeks after a single injection as compared to less than
one day with traditional injections of cytarabine. As a



                                      -18-
<PAGE>

consequence, the use of DepoCyt results in less frequent injections and may
extend effective levels of the drug in the fluid which surrounds the brain and
spinal cord.

         CLINICAL DEVELOPMENT

         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 leukaemia 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.
An interim analysis of the Phase III trial for neoplastic meningitis from
lymphomas was included in a new drug application amendment in April 1998. The
amendment included data from 28 patients and led to an invitation by the FDA to
submit a new drug application for that indication. This new drug application was
filed in October 1998. In April 1999, the FDA approved DepoCyt for treatment of
neoplastic meningitis from lymphomas.

         ADDITIONAL TERRITORIES AND INDICATIONS

         A Phase IV clinical trial of DepoCyt in solid tumor patients is
continuing, as are Phase III trials of DepoCyt in leukaemia and lymphoma
patients. To establish the appropriate use of DepoCyt in children afflicted with
neoplastic meningitis, SkyePharma Inc., in conjunction with Chiron, began a
paediatric dose finding trial in 1997. This study will evaluate the safety and
level of drug exposure in the blood of DepoCyt in children of various ages. In
addition, the study is expected to provide information regarding the
effectiveness of DepoCyt in children and to collect data on the long-term use of
the drug.

         The Company is planning to explore additional indications for DepoCyt,
including its use in the treatment of other cancers including ovarian, lung and
breast cancer, and AIDS-related non-Hodgkin's lymphoma.

         DEPOMORPHINE

         The 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.

         The Company has completed formulation development, initial
manufacturing scale-up and preclinical studies of DepoMorphine. Preclinical
studies in animals showed that DepoMorphine provided a minimum of two to three
days of pain control following a single 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.

         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, the Company 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. Patient enrollment in a Phase II
clinical study designed to assess the safety and effectiveness of the drug is
expected to conclude in mid-1999.



                                      -19-
<PAGE>

         DEPOBUPIVACAINE

         SkyePharma Inc. has completed formulation studies of DepoBupivacaine, a
DepoFoam formulation of the widely used local pain medicine bupivacaine for
controlling post-surgical or post-injury pain. 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 Depo Bupivacaine 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 expects to begin Phase I clinical trials
for DepoBupivacaine in Europe in mid-1999. The Company believes that a DepoFoam
formulation of a local anaesthetic may complement its current DepoMorphine
program and that the DepoMorphine and local anaesthetic formulations may give
physicians improved drugs to manage post-operative pain.

         BACKGROUND

         Pain associated with surgery or injury is often treated with local
anaesthetics. However, the usefulness of local anaesthetics 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. A DepoFoam formulation of a local anaesthetic may be
useful to provide long-lasting pain relief of approximately 24 hours.

         DEPOAMIKACIN

         Another product in the Company's development pipeline is DepoAmikacin,
a DepoFoam formulation of an antibiotic, amikacin. The Company believes that
DepoFoam offers the opportunity to reformulate amikacin, which became a generic
antibiotic in 1990, into a patented new product and to improve its effectiveness
and usefulness. 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. SkyePharma
Inc. has conducted additional studies and defined Phase II clinical targets.
Prior to its acquisition by the Company, in order to focus SkyePharma Inc.'s
resources on DepoCyt, DepoMorphine, DepoBupivacaine and partner-funded
feasibility programs, SkyePharma Inc. had ceased further development of
DepoAmikacin, pending other financing options for this program. This product is
currently under consideration by the Company.

NEW PRODUCT FEASIBILITY PROGRAMS

         The Company is also evaluating, in conjunction with the Monsanto
Company, Synthelabo and other undisclosed corporate partners, the feasibility of
DepoFoam formulations of several additional compounds. The objectives of the
feasibility 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.

         GENERIC PRODUCT CANDIDATES

         In addition to developing Geomatrix formulations of brand-name drugs,
the Company is engaged in the development, licensing and marketing of a range of
generic pharmaceuticals. The Company's generic drug development strategy is to
focus on those products for which competition is expected to be less intense due
to such factors as the complexity of the drug formulation or the limited access
to raw materials. The Company intends to obtain raw materials for certain
off-patent generic drugs it intends to market through supply contracts, on an
exclusive or semi-exclusive basis, with FDA-approved raw material suppliers. See
"- Product and Raw Material Supply". Many of the products in the Company's
generic product development pipeline are controlled-release versions of
brand-name



                                      -20-
<PAGE>

pharmaceuticals for which marketing exclusivity or patent rights have expired or
are about to expire. Most of these projects are being developed internally using
the Geomatrix or other controlled-release systems. In addition, the Company has
contracted with third-party drug developers to source additional products for
its U.S. marketing operations. To date, the Company has filed ANDAs for six
generic products, one for a Geomatrix formulation of Imduru (ISMN), three for a
group of injectable drugs developed for the Company by Synthon, one for a
Geomatrix formulation of Naprelanu (Naproxen) and a generic version of Cylert
(Pemoline) developed together with Oread. The combined 1998 U.S. brand-name and
generic sales for these products were approximately $635 million.

         The Company's strategy for the sale and distribution of its generic
pharmaceutical product candidates has been to develop its own marketing
capability through its Brightstone subsidiary in the U.S. 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 is
currently seeking 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 has
signed one Licensing agreement and is in discussions with a number of parties in
respect of the balance of the portfolio.

         ISOSORBIDE MONONITRATE(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 Company
is aware of three ANDAs that have been filed for this product. The U.S. patent
for this product expired in April 1997.

         IOPAMIDOL is a non-ionic imaging agent indicated for angiography, adult
and paediatric intravenous excretory urography and contrast enhancement of head
and body computed tomography. The brand-name product, Isovue, is marketed by
Bracco. The Company is aware of four ANDAs for this product that have been
approved by the FDA and believes that there will be significant generic
competition. The U.S. patent for this product expired in January 1997.

         ACYCLOVIR STERILE POWDER is an antiviral drug formulated for
intravenous administration that is indicated for the treatment of initial and
recurrent mucosal and cutaneous Herpes simplex (HSV-1 and HSV-2) and
varicella-zoster (shingles) infections in immunocompromised patients. The
brand-name product, ZOVIRAX, is marketed by Glaxo Wellcome. The Company is aware
of multiple ANDAs for this product that have been approved by the FDA and
believes that there will be significant generic competition. The U.S. patent for
this product expired in April 1997.

         ATRACURIUM BESYLATE is an intermediate-duration skeletal muscle
relaxant formulated for intravenous administration that is indicated as an
adjunct to general anesthesia to facilitate endotracheal intubation. The
brand-name product, TRACURIUM, is marketed by Glaxo Wellcome. The Company is
aware of three ANDAs for this product that have been approved by the FDA and
believes that there will be significant generic competition. The U.S. patent for
this product expired in June 1997.

         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 pursuant to the agreement with Genta, Genta is entitled to half of
any royalty revenues generated by sales of this product. See "Joint Venture with
Genta".

         PEMOLINE is an oxazolidine compound indicated in Attention Deficit
Disorder ("ADD") with hyperactivity as an integral part of a total treatment
program, which typically includes other remedial measures (psychological,
education, social) for stabilizing effects in children with ADD. The brand-



                                      -21-
<PAGE>

name product, Cylert, is marketed by Abbott Laboratories in both tablet and
chewable tablet form. The Company is aware of two ANDAs that have been filed for
this product. The U.S. patent for this product expired prior to 1990.

         In addition to the above products, the Company has other product
candidates in earlier stages of development.

         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 patented 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.

         One of the difficulties in developing an AB-rated equivalent of a
controlled-release product is that the precise release profile of the targeted
drug must be replicated. Some drug compounds have extremely complex in vivo
release profiles that are difficult to reproduce. Bioequivalence studies have
demonstrated that ISMN is bioequivalent to the branded product Imdur. The FDA
granted a waiver from conducting bioequivalence studies for the injectable
products, acyclovir and atracurium, because they are made to the exact formula
as the original product. A waiver has been applied for in respect of iopamidol
which has not yet been granted.

         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 13. Interest of Management
in Certain Transactions Certain Arrangements in Respect of the Krypton
Acquisition".

COLLABORATIVE ARRANGEMENTS

         The Company has collaborative arrangements with each of its
pharmaceutical partners. 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 Geomatrix 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. 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 (typically between 2% and 5% of
net sales) for successfully developed and marketed products. In some cases,
the partners agree 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 Geomatrix 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 Geomatrix
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 Geomatrix
formulations of competitive products. In some cases, however, the Company will
agree not to develop Geomatrix 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 take responsibility for conducting
clinical trials and for preparing and pursuing all necessary regulatory
approvals. 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 Geomatrix 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



                                      -22-
<PAGE>

reasons wholly independent of the Company and the Geomatrix technologies. In
most cases if a client does not proceed to market a Geomatrix version of their
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 when it is
non-refundable and when the Company has no further obligations to make refunds.
Certain refundable income is treated as deferred income until the Company has no
further obligations to make refunds. In addition, in one case, if the agreement
is terminated because of a breach or default by the Company, milestone payments
would need to be repaid by the Company. As of December 31, 1998 no milestone
payments were made under that agreement and, consequently, the Company has no
obligation to refund any payments.

         The only collaborative arrangement under which the Company is currently
receiving significant royalty revenues is the development and license agreement
for Dilacor XR made with Rorer, a member of the Rhone Poulenc Rorer Group in
1988. Under the terms of that agreement, Rorer bore all of the costs of research
and development according to a budget agreed by the Company and Rorer. For
countries where a patent claiming Dilacor XR has been issued and is in effect,
Rorer is obligated to pay the Company continuing royalties of 3% of net sales.
For countries where no patent claiming Dilacor XR has been issued, Rorer is
obligated to pay the Company continuing royalties of 1.5% of net sales. In
return, the Company granted Rorer an exclusive license to market Dilacor XR
throughout the world. The agreement continues for ten years from the date of the
first marketing in each country or for the life of the patent in such country
(which includes all patents owned or controlled by the Company which would be
infringed by the manufacture, use or sale of the products covered by the license
agreement), whichever is longer. After termination of the agreement, Rorer may
continue to sell the product and use the Geomatrix technology in connection with
the product on a non-exclusive basis without any obligations to the Company
unless otherwise agreed in writing. 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.

         The Company has entered into collaborative arrangements for the
development of the non-Geomatrix generic pharmaceuticals that it plans to market
upon regulatory approval in the United States. The injectable drugs in its
generic product candidate portfolio are being developed by Synthon pursuant to
development agreements with the Company. Under these contracts, Synthon develops
the products in specified dosage forms and is obligated to do all that is
necessary to enable Brightstone to obtain marketing approval in the U.S. from
regulatory authorities. Brightstone is committed to obtain its requirement of
bulk products from Synthon, and it has the exclusive right to sell these
products in the specified dosage forms in the U.S. upon regulatory approval.
Brightstone, however, has no ownership rights associated with these products.
The agreements with Synthon provide for certain development payments to Synthon
at signing, upon filing with the FDA and upon market authorization of the ANDAs
by the FDA.

         In March 1994, 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 cancer, and to explore the use of SkyePharma
Inc.'s DepoFoam for certain other Chiron compounds.

         The Chiron agreement, as amended, grants Chiron rights to market and
sell DepoCyt in the United States. Chiron has funded, and is obligated to fund,
50% of the clinical development expenses in the United States. 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. SkyePharma Inc. will
manufacture DepoCyt, Chiron will market, sell, and distribute DepoCyt, and the
parties will share all profits equally. 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



                                      -23-
<PAGE>

factors, SkyePharma Inc. and Chiron mutually agreed not to further develop
certain additional generic cancer compounds named in the Chiron agreement.

         In June 1997, SkyePharma Inc. 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. The Company and Chiron have amended the existing
agreement with Chiron under which the Company issued a note payable for $9.7
million upon FDA approval of DepoCyt in the U.S. The amendment also provides
that the Company will issue a note payable for $3.5 million to Chiron upon the
filing of an application for DepoCyt for paediatric indications. There can be no
assurances that the Company will have the financial resources available to make
any payments to Chiron when due.

         The Company will fund 50% of the sales and marketing expenses incurred
for DepoCyt. The Company may receive additional payments upon achievement of
certain DepoCyt developmental milestones, as described above.

         The Chiron agreement also provides for the joint development of
DepoFoam formulations of certain compounds with Chiron. The agreement provides
that Chiron must fund one feasibility program for these compounds per year or
lose its option to develop DepoFoam formulations of additional Chiron compounds.
Through April 1998, SkyePharma Inc. had completed feasibility studies on four
Chiron compounds. No further studies on Chiron compounds will be performed under
the Chiron agreement.

         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 connection with the agreement, Chiron made a $2.5 million equity
investment in SkyePharma Inc. In addition, Chiron paid $1.0 million in March
1994 for a warrant which was converted in January 1995 to a DepoCyt marketing
rights fee. Further, in January 1995, upon achievement of a development
milestone, Chiron reimbursed SkyePharma Inc. approximately $2.5 million for
Chiron's share of DepoCyt's clinical trial and development costs from July 1993
through December 1994 and will continue to share equally in DepoCyt's United
States clinical trials and development costs. Finally, in 1997, SkyePharma Inc.
received a $1.0 million milestone payment from Chiron upon completing the filing
of the new drug application for DepoCyt in the U.S.

         In July 1997, SkyePharma Inc. entered into a marketing and distribution
agreement with Pharmacia & Upjohn. Under the agreement, Pharmacia & Upjohn has
rights to market and sell DepoCyt in countries outside the United States.
Pharmacia & Upjohn will generally be responsible for submitting regulatory
filings, and for labeling, packaging, distributing, marketing and selling
DepoCyt in this territory. SkyePharma Inc. will manufacture DepoCyt and receive
a share of the net sales of this product from Pharmacia & Upjohn, if any.
SkyePharma Inc. received a cash payment of $2.0 million when the agreement was
signed and may receive additional payments upon achievement of certain
regulatory milestones. The agreement also provides for reimbursement by
Pharmacia & Upjohn of certain clinical trial expenses and regulatory fees
incurred by SkyePharma Inc. The Company and Pharmacia & Upjohn are in the
process of renegotiating certain aspects of this agreement relating to milestone
payments. Both the Company and Pharmacia & Upjohn have the ability to terminate
a portion or all of the agreement upon certain events and with advance notice.

RESEARCH AND DEVELOPMENT

         The Company's oral and pulmonary research and development activities
are conducted primarily at Jago's headquarters in Muttenz, Switzerland. The
Company employs 94 scientists in its research and development operations, 32 of
whom hold Ph.D.s, masters or medical degrees. In addition, as of December 31,
1998 SkyePharma Inc. had approximately 53 employees in research, development and
operations, 18 of whom hold Ph.Ds, masters or medical degrees.



                                      -24-
<PAGE>

         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 development costs reimbursed by
collaborative partners, excluding reimbursable general and administrative costs,
are characterized as cost of sales in the financial statements of the Company
and Jago, and the Company's own research and development is separately
characterized as Research and Development. The aggregate amount that the Company
and Jago, prior to its acquisition, spent on research and development and the
aggregate amount that was reimbursed by collaborative partners was as follows:

<TABLE>
<CAPTION>
                                                          JAGO
                                                        4 MONTHS                THE COMPANY
                                                          ENDED            YEAR ENDED DECEMBER 31,
                                                        APRIL 30,     --------------------------------
                                                          1996         1996         1997         1998
                                                         ------       ------       ------       ------
                                                                                   (in thousands)
<S>                                                     <C>           <C>          <C>          <C>
Research and Development:

Client sponsored product development                     L1,840       L5,178       L3,136       L2,998
Internal sponsored product development                      132        2,098        6,109        5,712
                                                         ------       ------       ------       ------
                                                          1,972        7,276        9,245        8,710
                                                         ------       ------       ------       ------
Client sponsored developments reimbursed by:

Research and Development costs recharged                 3,853        4,340        4,053        2,117
Milestone payments                                          --        1,641          980          336
                                                        ------       ------       ------       ------
                                                        L3,853       L5,981       L5,033       L2,453
                                                        ------       ------       ------       ------
                                                        ------       ------       ------       ------
</TABLE>

         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,
and the amounts are non-refundable even if the research is not successful.
Certain refundable income is treated as deferred income until the Company has no
further obligations to make refunds. The Group's self-sponsored research and
development costs are expensed as incurred.

DEVELOPMENT PROCESS FOR BRAND-NAME PHARMACEUTICALS

         The development of improved outcome or new pharmaceuticals using the
Geomatrix technologies takes place in several steps. The first step, called the
"preliminary assessment", is to assess the suitability of the drug candidate for
the Geomatrix systems through 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 Geomatrix systems, 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 Geomatrix formulation of the
                                    product candidate can be achieved. The
                                    Company usually develops up to 20 prototype
                                    formulations for in vitro feasibility
                                    studies and selects the most promising two
                                    or three for further study and analysis.



                                      -25-
<PAGE>

-           PILOT TRIALS            Once a successful feasibility study has been
                                    conducted, the Company (or in some cases,
                                    its collaborative partner) manufactures
                                    small batches of the selected prototypes for
                                    in vivo (human) testing in pilot trials.
                                    Pilot trials usually involve 12 patients.
                                    The purpose is to determine whether the in
                                    vitro results can be replicated in the human
                                    body. The Company does not conduct the pilot
                                    trials. These trials are conducted either by
                                    the Company's collaborative partners or by
                                    third-party contractors. If the pilot trials
                                    demonstrate sub-optimal results, the product
                                    candidate may be reformulated and this stage
                                    of the development process will be repeated.

-           SCALE-UP/BIO-BATCH      After a successful pilot trial, the Company
                                    or its collaborative partners will
                                    manufacture a "bio-batch" of the product
                                    formulation of an amount of product equal to
                                    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 in
                                    commercial quantities.

-          PRE-PIVOTAL TRIALS       If formulation changes are made during
            (OPTIONAL)              scale-up/bio-batch, additional in vivo
                                    testing may be performed in pre-pivotal
                                    trials involving a small patient population.

-          PIVOTAL (PHASE III)      The last step of the development process is
            TRIALS                  a pivotal (Phase III) trial of the product
                                    formulation in an expanded patient
                                    population, typically at dispersed sites.
                                    All of the improved outcome or new products
                                    under development require a Phase III trial.
                                    Such trials are conducted either by the
                                    Company's collaborative partners or by
                                    third-party contractors. Upon the conclusion
                                    of the trial, the Company will assist its
                                    clients in analyzing the data and in helping
                                    to compile the necessary regulatory filings,
                                    although the Company is not generally
                                    apprised of the results of the clinical
                                    trials.

-          REGULATORY FILING        Upon a successful pivotal clinical trial,
                                    the Company's partners are able to file for
                                    regulatory approval in the jurisdictions in
                                    which it is intended that the Geomatrix
                                    product will be marketed. In the United
                                    States, this will require the filing of an
                                    NDA with the FDA. See "Government
                                    Regulation".

         The Company's research and development efforts in respect of its
Geomatrix 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 Geomatrix systems. 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 in lieu of pivotal (Phase III) trials a smaller
bioequivalence study may be conducted. For a controlled-release pharmaceutical,
the drug delivery technology utilized to replicate the release rates of the
brand-name pharmaceutical must do so without infringing any unexpired patents.
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. In creating a formulation of a
                                    controlled-release drug, the developer may
                                    utilize or adapt its drug delivery
                                    technologies to the product candidate or
                                    develop a new drug delivery technology for
                                    that



                                      -26-
<PAGE>

                                    product candidate. Once a suitable generic
                                    version has been formulated, it is then
                                    evaluated in in vitro (laboratory)
                                    dissolution studies to determine whether in
                                    vivo (human) bioequivalence studies should
                                    be conducted.

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

-          BIOEQUIVALENCE           If the formulation yields a blood level
            STUDIES                 profile comparable to the brand-name drug,
                                    full-scale bioequivalence 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 bioequivalent to the brand-name drug,
                                    an ANDA is prepared for submission to the
                                    FDA. This ANDA includes the results of the
                                    bioequivalence 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".

PATENTS AND PROPRIETARY RIGHTS

         The Company believes that patent and trade secret protection,
particularly 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 trade secret protection and operate without infringing the
proprietary rights of others.

         The Company has obtained two patents in respect of its core Geomatrix
technologies. The first patent, issued in Europe, the United States, Australia,
Canada and New Zealand, will expire in 2002 in Australia and New Zealand, 2005
in Italy, 2006 in the rest of Europe, Japan and the United States, and 2009 in
Canada. The second patent will expire in 2010 in Europe and 2012 in the United
States. These two patents cover a variety of different swellable and gellable
polymers for the core of a tablet containing an active drug and various surfaces
covering the core.

         In addition, the Company has obtained four patents in the United States
and five patents in Italy in respect of more recent innovations and
modifications to its core Geomatrix technologies. These patents will begin to
expire in 2010. Patent applications in respect of such innovations and
modifications have been filed mainly in Europe, Canada and Japan, but are still
pending. The Company has filed two further patent applications in Europe, the
United States, Canada, Australia and New Zealand in respect of further
applications and variations of its core Geomatrix technologies. These patents
have been approved in New Zealand and are currently pending in the other
jurisdictions. A third patent application has also been filed in Italy. The
patent applications are still pending.



                                      -27-
<PAGE>

         In December 1995, the Company filed a patent application in Switzerland
for its DPI. In December 1996, this patent application was also filed in other
parts of Europe, the United States, Canada, Japan and South Africa. The patent
applications cover the device itself, as well as several of the structural
elements and features incorporated therein. The patent applications are still
pending. The Company expects to apply for additional patents in the U.S. and
other jurisdictions in the future.

         The Company relies on a combination of technical leadership, patent,
trade secret, copyright and trademark protection and nondisclosure agreements to
protect its proprietary rights. As of November 1, 1998, SkyePharma Inc. owned or
had exclusive rights to 11 issued or allowed United States patents, 12 pending
United States patent applications, 48 issued foreign patents and 49 pending
foreign applications on file covering various aspects of its drug delivery
technology. The Company intends to file additional patent applications in the
future. There can be no assurance that the Company will be issued any additional
patents or that, if any patents are issued, they will provide the Company with
significant protection or will not be challenged. Even if such patents are
enforceable, the Company anticipates that any attempt to enforce its patents
would be time consuming and costly. Moreover, the laws of some foreign countries
do not protect the Company's proprietary rights in the products to the same
extent as do the laws of the United States. The United States Patent and
Trademark Office has instituted changes to the United States 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.

         In February 1994, SkyePharma Inc. entered into an assignment agreement
with the Research Development Foundation, pursuant to which the Research
Development Foundation assigned to SkyePharma Inc. exclusive rights to certain
intellectual property relating to DepoFoam, including corresponding patents and
patent applications for such property. SkyePharma Inc. is obligated under the
assignment agreement to prosecute certain patent applications and maintain
issued patents relating to the assigned intellectual property. The term of the
assignment agreement extends through the life of the last to expire of the
patents or patent applications included in the assigned intellectual property.
The Research Development Foundation retains the right to terminate the agreement
or to convert the exclusive nature of the rights granted under the agreement
into a nonexclusive license in the event that SkyePharma Inc. does not satisfy
its contractual obligations, including making certain minimum annual payments.
Additional termination events include bankruptcy, an uncured material breach of
the agreement or a contest by SkyePharma Inc. of the patents included in the
assigned intellectual property. The termination of the assignment agreement or
the conversion of its exclusive nature to a nonexclusive agreement would have a
material adverse effect on the Company.

         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
for 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



                                      -28-
<PAGE>

developing generic versions are covered by one or more patents. Under the
Waxman-Hatch 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
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

         The Company presently manufactures three Geomatrix products,
Cordicant-Uno, Diclofenac-ratiopharm-uno and Madopar DR, and produces
bio-batches for its collaborative partners. All of the present Geomatrix
manufacturing operations take place at the Company's 3,435 square meter (36,961
square feet) facility in Muttenz, Switzerland. Historically, the chief limiting
factor on the Company's manufacturing ability has been the lack of suitable
space at its Muttenz site.

         To address this problem, 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 complex near Lyon, France by acquiring
100% of the issued and outstanding share capital of Laboratories Novalis
Production SAS ("Novalis"), a French company, from Wyeth-Lederle, a wholly-owned
subsidiary of AHP, for a total consideration, excluding acquisition expenses, of
two French francs and the assumption of liabilities in the amount of
L891,000 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 allow the Company to gradually transfer
manufacturing activities into the new facility over a three-year period without
assuming all of the operating costs of the facility up front. The Company
packages certain pharmaceutical products and other products ("Contract
Products") on behalf of certain subsidiaries of AHP. The current manufacturing
space is 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 has European regulatory approval to package the Contract Products. The
agreement expires on December 31, 1999, subject to AHP's right to extend the
term for up to three months.

         AHP's subsidiaries compensate the Company on a sliding scale of 100%,
85% and 50% during the first, second and third year of the agreement,
respectively (subject to accelerated phasing-out of the Contract Products by
mutual agreement), for the costs of operating the Lyon facility. AHP's
subsidiaries are responsible for the registration of the Contract Products with
all proper health, customs, and other authorities under applicable law, but the
Company furnishes assistance to AHP's subsidiaries from time to time in
connection with their filing of documentation as is necessary for such
registrations.

         The Company agreed to the continued employment of certain members of
management of the Lyon facility for the entire three-year period of the
agreement unless there is serious cause (faute grave) or other circumstances
that materially affect the proper management and direction of the Lyon facility
or the proper performance of the agreement. In addition, the Company agreed to
assume responsibility



                                      -29-
<PAGE>

for 109 employees of the facility. The Company assumed the pension liability of
the employees and recorded a provision for retirement commitments based upon an
actuarial valuation at the date of the acquisition.

         The Company has substantially completed its Geomatrix manufacturing
suite in the Lyon facility at a capital cost of approximately L6.3
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 pulmonary products. Only
the current manufacturing and large pilot batch operations will be transferred
to the Lyon facility. Pilot batch operations began in November 1997 in the Lyon
facility and full scale commercial manufacturing is expected to commence in the
second half of 1999.

         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 L0.5 million. The
Company has hired a firm of U.S. FDA consultants to oversee the process. The FDA
has inspected the Lyon facility and notified the Company that it plans to
approve the Lyon facility for commercial manufacturing of Naproxen. This does
not imply FDA approval of Naproxen. 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.

         In connection with its collaborative arrangements, the Company intends
to maintain exclusive formulation and manufacturing rights to any DepoFoam
encapsulated drugs, including products of corporate partners, and expects to
receive compensation based on both manufacturing costs of the product and the
value added by the Company to the partner's product. The Company is currently
manufacturing DepoCyt for commercial distribution and sale following approval of
this drug in April 1999. Manufacturing is in a 14,400 sq.ft. facility built for
this purpose. This facility complies with current good manufacturing practice
regulations and has been approved for the manufacture of DepoCyt by the FDA 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 United States, 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 addition, SkyePharma Inc. occupies an 82,000 square foot facility
housing its administrative, research and development and future manufacturing
activities. Effective June 1999, the Company subleased to a third party
approximately 14,900 square feet of this facility. 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 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



                                      -30-
<PAGE>

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 injectible 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 third-party drug developers 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 it 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 or its manufacturers to
procure raw materials, would have a material adverse effect on the Company's
generic business. There can be no assurance that the Company will be able to
obtain adequate supplies of manufactured products in a timely fashion, or at
all.

         The principal components used in the Company's generic product
candidates are active and inactive pharmaceutical ingredients and certain
packaging materials. Source suppliers for 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 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 formulation, require substances which are classified as Scheduled
Drugs 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. The Company's generic product candidates, which are in early
stages of formulation, 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.

         Although the Company does not presently anticipate encountering
difficulty in obtaining materials, and sources of supply are considered adequate
for the Company's current requirements, there can be no assurance that the
Company will be able to obtain materials as required.

         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.

                                      -31-

<PAGE>

GENERIC DRUG SALES AND MARKETING

         Prior to December 1998, the Company's strategy for the sale and
distribution of its generic pharmaceutical product candidates was to implement
marketing strategies through its U.S. subsidiary, Brightstone.

         In December 1998, the Company reached the conclusion that it is
unlikely to maximize the value of its generic pharmaceutical product candidates
using its own marketing resources. The Company has therefore decided to
discontinue its own generic drug sales and marketing operations in the U.S.
Management of the Company believes that the discontinuance of its generic sales
and marketing operations, together with the planned integration of Brightstone's
clinical development and finance functions with SkyePharma Inc., may provide
opportunities to achieve annual cost savings of up to $3.5 million. The Company
recorded a one-time charge in connection with this restructuring of
approximately L1.3 million in 1998.

         The Company's current strategy is to seek one or more strategic
collaborative partners who already have significant and complementary U.S.
generic marketing capability to sell and distribute its generic candidates in
the U.S. The Company has signed one licensing agreement in respect of one of the
generic product candidates and is currently evaluating options, including the
licensing out of, or co-marketing partnerships in respect of the balance of its
generic candidates in the U.S. and other non-U.S. markets where appropriate. It
is expected that such development partners will also fund a significant element
of on-going research and development in respect of those products still in
development.

JOINT VENTURE WITH GENTA

         The Company has a Joint Venture with Genta to develop Geomatrix
controlled-released formulations of a range of drugs that have lost, or are
about to lose, marketing exclusivity or patent protection. The Joint Venture was
established in 1992. Pursuant to a working capital agreement, Genta funds the
Joint Venture's operations. For its part, Jago contributed to the Joint Venture
licenses to the Geomatrix technologies to develop controlled release
formulations for an agreed upon list of off-patent (or soon to be off-patent)
drugs. All of the development work in respect of the products in the Joint
Venture is performed by Jago at its research facility in Muttenz, Switzerland.

         The Joint Venture was structured such that funding from Genta was
made in the form of working capital loans that bear interest and by their
terms were to be repaid in full in October 1998, or earlier in the event
certain revenues were received by the Joint Venture from third parties. If
any products in the Joint Venture were successfully developed and
commercialized, the Joint Venture was obligated to repay the outstanding
working capital loan to Genta and pay Jago a predetermined royalty on net
sales of such products. Following such payments, all earnings of the Joint
Venture were to be shared equally by Jago and Genta.

         The Joint Venture gained rights from Jago to develop, commercialize and
manufacture Geomatrix versions of approximately 50 additional products. In
October 1996, as a result of ongoing 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. If such products are successfully formulated and approved, the
Company expects that they would be marketed in the United States by licensing
partners. Not all of these products are currently in active development.

         Over recent years Genta has been unwilling or unable to meet its
funding obligations to the Joint Venture in the opinion of the Company. In May
1997 Jago served formal notices of default on the Joint Venture under various
agreements it has with the Joint Venture, with respect to amounts due and



                                      -32-
<PAGE>

outstanding under these agreements. The Joint Venture has not formally replied
to these notices of default nor cured the claimed breaches of contract pursuant
to the relevant provisions of the agreements. Since that time Genta and the
Company have been involved in negotiations to resolve all issues on an amicable
basis. Consequently 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 are to be 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 becomes 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 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.

         The agreement relating to the Joint Venture will be accounted for in
1999. The Company does not consider it will suffer any material adverse
financial consequences from its implementation of the agreement.

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.

         In its generic pharmaceutical distribution business, the Company will
compete with a number of large wholesalers and other distributors of generic
pharmaceuticals, many of which have substantially greater financial, marketing
and other resources than the Company. Typically, selling prices of
immediate-release and injectable drugs have declined and profit margins have
narrowed after generic equivalents of brand name products are introduced and the
number of competitive products has increased. Similarly, the maintenance of
particular levels of profitability for the Company's generic controlled-release
products will depend, in large part, on the Company's ability to introduce new
products before its competitors and on the intensity of competition with respect
to existing 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 United States and
Europe, the Company's two principal markets. In the United States, 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, each country
has its own regulatory



                                      -33-
<PAGE>

agency. In both the United States 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 bioequivalence 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 Waxman-Hatch Act, established abbreviated application procedures for
obtaining FDA approval for those drugs which are off-patent and whose non-patent
exclusivity under the Waxman-Hatch Act has expired and which are shown to be
bioequivalent to brand-name drugs. Approval to manufacture these 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 preclinical
testing and clinical trials to demonstrate that a product is safe and effective
for its intended use(s). The Company intends to file ANDAs to obtain approval to
manufacture and market its generic products. No assurance can be given that
ANDAs or other abbreviated applications will be suitable or available for the
Company's products, or that the Company's proposed products will receive FDA
approval on a timely basis, if at all. 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 Waxman-Hatch Act established the ANDA, it has also fostered
pharmaceutical innovation through such incentives as market exclusivity and
patent restoration. The Waxman-Hatch 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



                                      -34-
<PAGE>

entitlement to patent marketing exclusivity under the Waxman-Hatch Act is based
upon the term of the original patent plus any patent extension granted under the
Waxman-Hatch 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 Waxman-Hatch
Act provides 180-day marketing exclusivity against effective approval of another
ANDA for the first ANDA applicant who (a) submits a certification challenging a
listed patent as being invalid or not infringed and (b) 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 preclinical 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
("IND") application, or its equivalent in countries outside the United States,
where clinical trials are to be conducted. The preclinical 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,
although the phases may overlap. The Company typically enters into collaborative
agreements with its pharmaceutical partners after the completions of Phase I and
Phase II trials. In Phase I, which frequently begins with the initial
introduction of the compound into healthy human subjects prior to introduction
into patients, the product is tested for safety, adverse effects, dosage,
tolerance, absorption, metabolism, excretion and other elements of clinical
pharmacology. Phase II typically involves studies in a small sample of the
intended patient population to assess the efficacy of the compound for a
specific indication, to determine dose tolerance and the optimal dose range as
well as to gather additional information relating to safety and potential
adverse effects. Phase III trials are undertaken to further evaluate clinical
safety and efficacy in an expanded patient population at typically dispersed
study sites, in order to determine the overall risk-benefit ratio of the
compound and to provide an adequate basis for product labeling. Each trial is
conducted in accordance with certain standards under protocols that detail the
objectives of the study, the parameters to be used to monitor safety and the
efficacy criteria to be evaluated. Each protocol must be submitted to the FDA as
part of the IND.

         Data from preclinical 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
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



                                      -35-
<PAGE>

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 Drug Enforcement Agency, the HPB in Canada, the EMEA/CPMP
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
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. Drug Enforcement Administration.

         EUROPEAN REGULATION

         In Europe, each member state of the European Union has its own
individual licensing system. In the United Kingdom this role is performed by the
Medicines Control Agency of the Department of Health. However, since January
1995, companies have been able to apply to the European Medicines Evaluation
Agency for a single product license and marketing authorization that is
recognized in all Member States. This process involves a single filing and a
single fee. However, the older system, operated by the Committee for Proprietary
Medical Products, whereby a product that receives marketing authorization in one
Member State can apply for authorization by mutual recognition in at least two
other Member States, is still in operation.

         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



                                      -36-
<PAGE>

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.

EMPLOYEES

         As of December 31, 1998, the Company had 274 employees, of whom 34 were
involved in corporate management and administration and 26 were involved in
marketing operations. The Company had 99 employees in its research and
pharmaceutical development operations and 115 in manufacturing operations. The
Company's employees include approximately 94 scientists, of whom 32 hold Ph.D.s,
masters or medical degrees.

         In addition, as of December 31, 1998, SkyePharma Inc. had approximately
61 full-time employees, including 53 in research, development and operations,
and 8 in finance and administration. Of these employees, 18 hold advanced
degrees, of which 12 are M.D.s or Ph.D.s. SkyePharma Inc.'s employees are not
represented by any collective bargaining agreements, and SkyePharma Inc. has
never experienced a work stoppage.



                                      -37-
<PAGE>

RISK FACTORS

RISK FACTORS RELATING TO THE DRUG DEVELOPMENT INDUSTRY

         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 FDA and
European and other national regulatory authorities require rigorous preclinical
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 preclinical 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.

         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 United States. Based on current practice, the Company expects
that it will take approximately 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.

         In addition, all of the AB-rated generic drugs that the Company is
developing require an abbreviated new drug application filing with the FDA.
Patent certification requirements for generic controlled-release drugs could
result in significant delays in obtaining FDA approval if patent infringement
litigation is instituted by the holder of the brand name patents. Delays in
obtaining FDA approval of such applications can also result from a marketing
exclusivity period or an extension of patent terms available for brand name
drugs. If SkyePharma generic drugs are ineligible to use abbreviated application
procedures, as would be the case with any controlled-release versions of
immediate-release generic drugs that the Company developed, the FDA approval
process may require time consuming and expensive clinical studies.

         DepoFoam products are at an early stage of development. In March 1999,
DepoCyt was approved by the FDA for lymphoma. 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, preclinical 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



                                      -38-
<PAGE>

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 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 SkyePharma 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 not 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; the
Company relies on indemnity provisions in its agreements with such partners
to protect the Company against the possibility of product liability claims.
However, the Company maintains product liability insurance in respect of all
products that had been marketed in its generic drug distribution business in
the United States.

         The Company has obtained clinical trial product liability insurance for
current human clinical trials involving DepoFoam products and product liability
insurance for the commercial sale of DepoCyt. The Company intends to obtain
insurance for future clinical trials of other DepoFoam products under
development and for potential product liability associated with the commercial
sale of other DepoFoam products. The Company cannot be certain, however, that it
will be able to obtain or maintain insurance for any of its future clinical
trials or commercial products.

         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 business.



                                      -39-
<PAGE>

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 United
States and the growth of organizations such as health maintenance organizations
in the United States 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.

HEALTH CARE REFORM MEASURES 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 DepoFoam 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 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, 1998 the Company had accumulated consolidated
shareholders' funds of L6.2 million. The Company expects negative cash flow and
net losses to continue at least through 1999. The time required to reach
profitability is highly uncertain and the Company cannot assure that it will be
able to achieve profitability, or sustain profitability if it is attained. See
"Item 9. Management's Discussion and Analysis of Financial Condition and Results
of Operations".

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

         -        develop products utilizing the Geomatrix technologies, either
                  independently or in collaboration with other pharmaceutical
                  companies;

         -        receive necessary regulatory and marketing approvals;

         -        establish and enhance its manufacturing;

         -        obtain partners for its generic product portfolio;

         -        achieve market acceptance for such products; and

         -        maintain sufficient funds to finance its activities.

THE COMPANY IS DEPENDENT ON GEOMATRIX 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 technologies. Approximately 33% of the
Company's revenues for the year ended December 31, 1998 was derived from
royalties, contract development and milestone payments relating to its Geomatrix
technologies. In order to increase revenues from Geomatrix technologies the
Company must continue to obtain new development contracts for third parties. The
Company cannot assure that it will be able to obtain such contracts.



                                      -40-
<PAGE>

         The Company has successfully developed drug products incorporating
three Geomatrix technologies which are currently on the market. However, the
Company cannot assure 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 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.

         Even after a product incorporating the Geomatrix systems 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 Company is developing generic controlled-release pharmaceuticals
utilizing the Company's proprietary Geomatrix technologies. Except for licensing
and other fees received for certain generic products under development, the
Company has not generated revenues from its generic product development
activities. The Company's generic product candidates are in various stages of
development, and the period necessary to achieve market success for any
individual product is uncertain and could be long. Many of the products in the
Company's generic drug development pipeline are intended to be AB-rated generic
drugs. An AB-rated generic drug is one that is proven in a filing with the FDA
to be bioequivalent to an already approved drug on the market. One of the
difficulties in developing an AB-rated equivalent of a controlled-release
product is that the precise release profile of the targeted drug must be
replicated. This can be a difficult and expensive process. Some drug compounds,
such as nifedepine, have extremely complex in vivo release profiles that are
difficult to reproduce. To date, the Company has not received FDA approvals to
market any of its generic product candidates. The Company cannot assure you that
its generic product development activities will be successfully completed, that
required regulatory approvals will be obtained, or that any approved products
can be manufactured at an acceptable cost with appropriate quality or
successfully marketed by the Company's collaborative partners.

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 Geomatrix technologies. The Company
generally depends upon its collaborative partners for the funding of such
efforts. An inability to continue to obtain funding for its development
activities through its collaborative arrangements 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 Geomatrix technologies.
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 Geomatrix
technologies. In addition, the Company's partners may choose not to file for
regulatory approval of a product successfully formulated with the Geomatrix
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 marketing of
improved outcome or new products formulated with the Geomatrix technologies. The
Company depends on its collaborative



                                      -41-
<PAGE>

partners for such marketing. The Company's partners are not obligated to market
products incorporating Geomatrix 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
Geomatrix 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.

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.

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.

         For more information on the Company's liquidity and capital resources,
see "Item 9. Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "- Collaborative Arrangements."



                                      -42-
<PAGE>

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 has been issued two patents in the United States and Europe relating to
its core Geomatrix technologies and has five additional patents in the United
States and Italy relating to more recent innovations and modifications to its
drug delivery technologies. In addition, the Company has filed two further
patent applications in Europe, the United States, Canada and Australia in
respect of further applications and variations of its core Geomatrix
technologies. A third patent application has also been filed in Italy. The
Company has also filed patent applications for its dry powder inhalation device.
The Company expects to apply for additional patents in the future.

         However, the issuance of a patent is not conclusive as to its validity
or as to the enforceable scope of the claims of the patent. In addition, there
can be no assurance that the patents owned and licensed by the Company, or any
future patents, will prevent other companies from developing similar or
therapeutically equivalent products or that others will not be issued patents
that may prevent the sale of the Company's products or require licensing and the
payment of significant fees or royalties by the Company. The Company settled an
action in December 1996 it had commenced against one of its competitors relating
to a product that the Company initially believed utilized technology which
infringed one of its Geomatrix patents. The other party counterclaimed against
the Company challenging the validity of the Geomatrix patent. The counterclaim
was also settled at the same time without prejudice, which means that it can be
reinitiated by either party.

         Patents have been issued to third parties covering various aspects of
technologies that are similar to or competitive with the Geomatrix technologies.
The Company does not believe that its current activities, including its
Geomatrix technologies, infringe upon the patent or proprietary rights of
others. However, there can be no assurance that the Company will not infringe
any third-party patents or be subject to claims of patent infringement by third
parties. In such a situation, the Company may have to obtain a license, defend
an infringement action, or challenge the validity of any infringed or allegedly
infringed patents in court. There can be no assurance that a license will be
available to the Company, if at all, on terms and conditions acceptable to the
Company, or that the Company will prevail in any patent litigation. Patent
litigation is costly and time consuming, and there can be no assurance that the
Company will have or will devote sufficient resources to pursue such litigation.
If the Company does not obtain a license under such patents, is found liable for
infringement or is not able to have such patents declared invalid, the Company
may be liable for significant money damages, may encounter significant delays in
bringing products to market, or may be precluded from participating in the
manufacture, use, or sale of products or methods of treatment requiring such
licenses.

         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.



                                      -43-
<PAGE>

         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.

         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 U.S. 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 U.S. government, the institutions or researchers or other
third parties will not have rights to such inventions to the extent permitted
under applicable law.

         Several legislative bills affecting patent rights have been introduced
in the United States Congress. These bills address various aspects of patent
law, including publication, patent term, re-examination subject matter and
enforceability. It is not certain whether any of these bills will be enacted
into law or what form such new laws may take. Accordingly, the effect of such
potential legislative changes on the Company's intellectual property is
uncertain.

         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 RESEARCH DEVELOPMENT FOUNDATION

         The Company's DepoFoam business depends on its ability to continue to
use exclusive technology rights that Research Development Foundation assigned to
a SkyePharma subsidiary. Under the Research Development Foundation 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. Research Development Foundation 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 Research Development Foundation 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 "Waxman-Hatch 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



                                      -44-
<PAGE>

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 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 EFFECTIVELY MANAGE EXPANSION COULD ADVERSELY AFFECT THE COMPANY'S
BUSINESS

         Management 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 NEW LYON MANUFACTURING FACILITY FAILS TO MEET REQUIRED
STANDARDS, IT COULD RESULT IN DELAYS IN MANUFACTURING AND ADDITIONAL COSTS

         Currently, the Company conducts only limited manufacturing activities
at its principal facility in Muttenz, Switzerland. The Company has acquired an
additional larger facility in Lyon, France that it plans to use for additional
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 has substantially brought the facility into compliance
with current good manufacturing practices and FDA standards. 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 current good manufacturing practices or other regulatory
requirements. The Company cannot assure you that it will be able to successfully
complete its plans for additional scale-up manufacturing or for manufacturing
commercial quantities of its product candidates.

A FAILURE TO SUCCESSFULLY SCALE-UP THE COMPANY'S DEPOFOAM MANUFACTURING
OPERATIONS COULD ADVERSELY AFFECT THE COMPANY'S BUSINESS.

         If the Company fails to successfully scale-up its DepoFoam
manufacturing operations or to comply with applicable regulations, its
business will be adversely affected. In particular, the Company could lose
its manufacturing rights under its key collaboration agreements with Chiron
and Pharmacia & Upjohn. The Company's DepoFoam manufacturing operations in
San Diego 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. For all other DepoFoam products, the
Company will need to significantly scale-up its current manufacturing
operations. The Company will also need to comply with regulations in the
United States

                                      -45-
<PAGE>

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 NECESSARY RAW MATERIALS FOR ITS GENERIC
PRODUCT CANDIDATES

         The principal components of the Company's generic product candidates
are active and inactive pharmaceutical ingredients and certain packaging
materials. Many of these components are available only from single source
suppliers. The Company cannot assure you that it will be able to establish or
maintain good relationships with such suppliers or that such suppliers will
continue to exist or be able to supply ingredients in conformity with regulatory
requirements. The Company also cannot assure you that its third-party
manufacturers or developers will be able to supply finished products in
conformity with current good manufacturing practices or that there will not be
an interruption of the availability of such finished products due to
non-compliance with current good manufacturing practices.

         In addition, development and approval of the Company's generic product
candidates are dependent upon the Company's ability to procure active
ingredients and certain packaging materials from FDA-approved sources. Because
the FDA approval process requires manufacturers to specify their proposed
suppliers of active ingredients and certain packaging materials in their
applications, FDA approval of any new supplier would be required if active
ingredients or such packaging materials were no longer available from the
specified supplier. The qualification of a new supplier could delay the
Company's development and marketing efforts.

         Two of the Company's generic product candidates, which are in early
stages of formulation, require substances which are classified as Scheduled
Drugs by the U.S. Drug Enforcement Agency (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. The Company's
generic product candidates, which are in early stages of formulation, 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.

THE COMPANY MAY NOT BE ABLE TO OBTAIN THE MATERIALS NECESSARY TO MANUFACTURE ITS
DEPOFOAM PRODUCTS

         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. 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.

THE COMPANY'S MANUFACTURING PROCESS MAY NOT BE SUITABLE FOR ALL OF THE DEPOFOAM
PRODUCTS THE COMPANY DESIRES TO COMMERCIALIZE

         To 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



                                      -46-
<PAGE>

-        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 RELATED TO EXISTING AND
POTENTIAL LEGAL PROCEEDINGS

         In April 1998, a class action lawsuit was filed against 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 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 Plaintiffs' complaint with leave to
amend by June 8, 1999. The Plaintiffs have timely filed an amended complaint.
The Company believes the lawsuit is without merit and intends to defend it
vigorously. This litigation will and any future litigation brought against
the Company or its employees, regardless of the outcome, may result in
substantial cost and expense and significant diversions of time and effort by
its employees. Depending on the amount and timing, an unfavorable resolution
of litigation would adversely affect the Company's business.

THE COMPANY MAY NOT BE ABLE TO OBTAIN THE RIGHTS TO THE DRUGS IT DESIRES TO
DELIVER THROUGH DEPOFOAM

         The 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
MATERIALS

         The 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 BUSINESS

         The 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 TRANSACTIONS

         The Company and certain of its principal shareholders or their
affiliates 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.



                                      -47-
<PAGE>

         The Company acquired its Jago subsidiary in May 1996 from Dr. Jacques
Gonella, who is 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 is entitled to receive payments
dependent on certain revenues related to Geometrix technologies. For a
description of the earn-out arrangement with Dr. Gonella, see "Item 13. Interest
of Management in Certain Transactions - Certain Arrangements in Respect of the
Jago Acquisition".

         The Company acquired its Krypton subsidiary 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 an
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 13. Interest of Management in
Certain Transactions - Certain Arrangements in Respect of the Krypton
Acquisition".

         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. 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 INTEREST

         As of May 31, 1999, the directors and officers of the Company as a
group owned approximately 30.2% of the outstanding ordinary shares. As a result,
certain directors, officers and shareholders may be in a position to exert
significant 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 10 people, including Dr. Gonella and the
other individuals mentioned above under"- Potential conflicts of interests may
arise from related party transactions". As of May 31, 1999, Dr. Gonella owned
19.2% of the Company's then outstanding ordinary shares. The ownership of a
large percentage of the ordinary shares by a few parties and the principal
shareholders being members of the Board of Directors may hinder or prevent a
change in control of the Company, may discourage bids for the ordinary shares or
ADSs and may adversely affect the market price of the ordinary shares or ADSs.

EXCHANGE RATE FLUCTUATIONS MAY ADVERSELY AFFECT THE COMPANY'S RESULTS OF
OPERATIONS AND FINANCIAL POSITION

         Approximately 98% of the Company's sales for the year ended December
31, 1998 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, French francs 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 9.
Management's Discussion and Analysis of Financial Condition and Results of
Operations".

         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.



                                      -48-
<PAGE>

THE MARKET PRICES OF THE COMPANY ORDINARY SHARES AND ADSS MAY BE ADVERSELY
AFFECTED BY MARKET VOLATILITY

         Companies 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;

-        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 PRICE

         Sales of substantial amounts of ordinary shares or ADSs could adversely
affect the market price of the ordinary shares and ADS. As of May 31, 1999, the
directors and officers of the Company, as a group, held 30.2% 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 SHARES

         The 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.

THE COMPANY IS SUBJECT TO YEAR 2000 RISKS FOR WHICH IT MAY NOT BE PREPARED AND
WHICH COULD HAVE AN ADVERSE EFFECT ON ITS BUSINESS

         The Year 2000 issue refers to the inability of certain date-sensitive
computer chips, software, and systems to recognize a two-digit date field as
belonging to the 21st century. Mistaking "00" for 1900 or any other incorrect
year could result in a failure in:

-        the Company's information technology, or "IT", hardware and software;

-        the Company's non-IT hardware and software, such as its manufacturing
         and research equipment, telephone systems, alarm systems and air
         conditioning; and

-        systems used by the Company's primary suppliers, which are principally
         third parties undertaking clinical trials on the Company's behalf and
         component suppliers for generic drug product candidates.

         Failure in any or all of such systems could result in disruptions to
operations, primarily in the Company's research and development and
manufacturing activities, and could cause delays in the analysis of clinical
data and regulatory filings. Also, failures in IT or non-IT systems used by the
Company's collaborative partners could significantly impact the timing and
commercialization of improved outcome or new products using the Company's
technologies for delivering drugs to the body. The Year 2000 issue may create
additional unforeseen risks to the Company as well as others with whom the
Company deals which could adversely impact the Company's ability to conduct its
business.

         In December 1997 the Company commenced a review of the Year 2000
compliance of its IT and non-IT systems and the systems of its suppliers. The
Company is reviewing its internal IT and non-IT systems to ensure that such
systems are either Year 2000 compliant or that remedial measures are



                                      -49-
<PAGE>

taken to correct non-compliance no later than June 1999. The Company plans to
complete the simulation and testing of its systems for Year 2000 compliance by
December 1999.

         As a part of its Year 2000 readiness review the Company is also
identifying important suppliers of products and services to it and is contacting
them to determine what exposure the Company might have to any Year 2000
non-compliance by them. This process, including site visits to certain such
suppliers, is expected to continue through 1999.

         To the extent the Company identifies deficiencies in its IT and non-IT
systems and in the Year 2000 compliance program of its suppliers, the Company
will consider contingency plans such as moving to currently identified alternate
suppliers or identifying new alternate suppliers. Where possible, the Company
intends to develop and maintain contingency plans for the back-up of its IT and
non-IT systems and to develop alternative sources of products and services. The
Company plans to complete its contingency planning by December 1999. However,
the Company expects that for some of these systems, products and services, it
may not be possible to devise effective contingency plans.

         The Company does not expect the cost of its Year 2000 program,
including internally redeployed resources, to be material. However, actual costs
could be higher than the Company currently estimates. Also, the dates by which
the Company expects to complete its review and remediation are estimates and may
change. There is no assurance that the Company will not experience problems with
its internal computer systems. Further, there is no assurance that the systems
of other companies on which the Company relies will be Year 2000-compliant on a
timely basis and will not adversely affect the Company's business.

ITEM 2 - DESCRIPTION OF PROPERTY

         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 ("Novalis"), a French company,
from Wyeth-Lederle for a total consideration of two French francs and the
assumption of certain liabilities. See "Item 1. Description of Business -
Manufacturing; Acquisition of Lyon Facility".

         In addition, the Company owns a 3,435 square meter (36,961 square foot)
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 6,212 square
meters (66,865 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 L3.1 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 Company's principal executive offices are located in an
approximately 8,800 square meter (94,700 square foot) facility in London,
England. The premises are occupied pursuant to leases expiring December 2005
at a total annual rent of approximately L190,000 per year. The Company also
leases a small office space in New York City, U.S., for a total annual rent
of approximately $300,000 pursuant to a leasing agreement expiring January
2001. Approximately one-third of this facility is subleased for an annual
rental of approximately $100,000.

         On March 10, 1999, the Company acquired SkyePharma Inc. (formerly
named DepoTech Corporation) which maintains its principal operations in a
leased 82,000 square foot building in San Diego, California. The facility
houses production, research and development and administrative functions.
The future minimum annual rental commitment ranges from $2.5 million to
$4.3 million per year over the balance of the remaining lease term of
approximately 17 years based upon pre-established annual rent increases.
Effective June 1999, the Company subleased to a third party approximately
14,900 square feet of this facility. Also, the Company maintains two
additional leased facilities containing production, office and laboratory
space, with lease terms expiring in January 2006.

                                      -50-
<PAGE>

One of these facilities is currently subleased with annual rental income ranging
from $223,000 to $290,000.

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

ITEM 3 - LEGAL PROCEEDINGS

         In April 1998, a class action suit was filed against SkyePharma Inc.
and two of its former officers in the United States District Court for the
Southern District of California. The lawsuit alleges violations of the federal
securities laws and asks for unspecified monetary damages on behalf of a class
of shareholders who purchased SkyePharma Inc.'s 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 Plaintiffs' complaint with
leave to amend by June 8, 1999. The Plaintiffs have timely filed an amended
complaint. The Company believes that the lawsuit is without merit and intends
to defend it vigorously. The pending litigation against the Company and any
future litigation against the Company or its employees, regardless of the
outcome, may result in substantial costs and expense to the Company and
significant diversions of time and effort by the Company's personnel. Depending
on the amount and timing, an unfavorable resolution of such litigation would
have a material adverse effect on the Company.

ITEM 4 - CONTROL OF REGISTRANT

         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.

         As of May 31, 1999 the Company had notice that the following persons
owned more than 10% of the outstanding ordinary shares:

<TABLE>
<CAPTION>
                                                                NO. OF
                                                               ORDINARY
            NAME                                                SHARES          PERCENT
------------------------------------------------              -----------       --------
<S>                                                           <C>               <C>
Dr. Jacques Gonella ............................               90,472,890        19.2
Directors and Officers as a group (11 persons) .              142,284,987        30.2
</TABLE>

ITEM 5 - NATURE OF TRADING MARKET

         As of May 31, 1999, there were 11,424 holders of record of ordinary
shares and eight of such holders, holding less than 1% of the ordinary shares,
had a registered address in the United States.

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



                                      -51-
<PAGE>

         The SkyePharma ADSs have been quoted on The Nasdaq National Market
under the symbol "SKYEY" since July 8, 1998. Each ADS represents ten ordinary
shares.

         The table below sets forth, for the periods indicated, the highest
and lowest middle-market quotations for the SkyePharma 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 1, 1999 was 58 pence per
ordinary share and $9.25 per ADS. See "- Exchange Rate Information" with
respect to the exchange rates applicable to the periods set forth below.

<TABLE>
<CAPTION>
                                                             SKYEPHARMA                SKYEPHARMA
                                                           ORDINARY SHARES                ADSs
                                                        ---------------------      ----------------------
                                                          HIGH         LOW           HIGH          LOW
                                                        --------     --------      --------      --------
                                                       (PENCE PER THE COMPANY      ($ PER THE COMPANY
                                                         ORDINARY SHARE)(1)            ADS)(1)(2)
<S>                                                    <C>            <C>         <C>            <C>
YEAR ENDED DECEMBER 31, 1997

First Quarter ...............................            83.5          65.5             --             --
Second Quarter ..............................            93.0          66.0             --             --
Third Quarter ...............................            88.5          48.0             --             --
Fourth Quarter ..............................            63.5          48.5             --             --
YEAR ENDED DECEMBER 31, 1998

First Quarter ...............................           103.5          48.5             --             --
Second Quarter ..............................            93.5          64.5             --             --
Third Quarter ...............................            75.1          44.5        12 1/4           7 3/8
Fourth Quarter ..............................            83.5          44.5        13 9/16          7 1/8
YEAR ENDED DECEMBER 31, 1999

First Quarter ...............................            88.0          62.0        15 1/8           9 3/8
Second Quarter (through May 31, 1999) .......            75.0          51.5        12 1/8           8 1/8
</TABLE>

----------

(1)      As adjusted to reflect the Company's ten-to-one reverse stock split of
         May 3, 1996.
(2)      Solely for convenience of the reader, pound sterling amounts have been
         translated into U.S. dollars at the Noon Buying Rates in effect on the
         dates for which information is presented.

ITEM 6 - EXCHANGE CONTROLS AND OTHER LIMITATIONS AFFECTING SHAREHOLDERS

         There 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 vote 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.

ITEM 7 - TAXATION

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

         This summary does not take into account the specific circumstances of
any particular investors (such as tax-exempt entities, certain insurance
companies, dealers in securities and currencies, traders in securities that
elect to mark to market, 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 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 thereunder, published rulings and court decisions) and
on the tax laws of the United Kingdom as in effect on the date hereof, as well
as on the Convention Between the Government of the United States of America and
the



                                      -52-
<PAGE>

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. In addition, the 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

(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, or

(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.

         Prospective investors are urged to consult their own tax advisors
regarding the United States federal, state and local tax consequences and the
United Kingdom and other tax consequences of acquiring, owning and disposing of
ordinary shares and ADSs.

         In general, and taking into account the earlier assumptions, for United
States federal income and United Kingdom tax purposes, holders of ADRs
evidencing ADSs will be treated as the beneficial owners of the ordinary shares
represented by those ADSs.

TAXATION OF DIVIDENDS

         UNITED KINGDOM TAXATION

         The 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.



                                      -53-
<PAGE>

         The Company, when paying a dividend, prior to April 6, 1999 was
normally required to pay to the U.K. Inland Revenue a payment of advance
corporation tax ("ACT") levied at the rate of 25% of the dividend paid. A
U.K. resident individual shareholder was generally entitled to a tax credit
in respect of any dividend received equal to the ACT attributable to the
dividend. Under legislation introduced in the Finance Act 1994, the Company
may have elected to pay a dividend which was a "foreign income dividend" for
U.K. tax purposes and which did not carry any right to receive a tax credit.
It should be noted that under the provisions of the Finance (No. 2) Act 1997
a company is no longer able to elect for dividends to be treated as "foreign
income dividends" with respect to any dividend paid on or after April 6,
1999. The Company has not elected to pay a foreign income dividend.
Accordingly, the summary set out below assumes that dividends have not been
paid by the Company pursuant to such an election.

         An Eligible U.S. Holder (as defined below) would, prior to April 6,
1999, have generally been entitled under the Treaty to receive from the U.K.
Inland Revenue in respect of a cash dividend a payment (a "Treaty Payment")
equal to the amount of the tax credit to which an individual resident in the
United Kingdom for tax purposes would have been entitled had he received the
dividend (the "Tax Credit Amount"), 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"). For example, at rates immediately prior to April 6, 1999,
for an Eligible U.S. Holder that received a cash dividend payment of L80, in
respect of which the Tax Credit Amount would have been L20, the Treaty
Payment would have been L20 less the 15% U.K. Withholding Tax. The 15% U.K.
Withholding Tax would have been 15% of aggregate of the cash dividend of L80
and the Tax Credit Amount of L20, i.e. 15% of L100 which is L15. The Tax
Credit Amount less the 15% U.K. Withholding Tax is L20 less L15, i.e. L5,
resulted in a total receipt by the Eligible U.S. Holder (before applicable
U.S. taxes) of L85, being the cash dividend of L80 plus the Treaty Payment of
L5.

         The Finance Act 1998 contained changes to be made to the taxation of
dividends. From April 6, 1999 ACT has been abolished with complex transitional
provisions to preserve companies' existing surplus ACT.

         For dividends paid on or after April 6, 1999, the available tax credit
is an amount equal to one-ninth of the amount of the cash dividend. Accordingly,
an Eligible U.S. Holder will not be entitled to a Treaty Payment after that
date. The 15% U.K. Withholding Tax will not, however, exceed such amount as
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 a person who owns more than 10% of
         the ordinary shares, and



                                      -54-
<PAGE>

(6)      under certain circumstances, is not exempt from federal income tax on
         dividend income in the United States.

         A U.S. Holder that is a partnership, trust or estate may have been
entitled under the Treaty to receive a Treaty Payment in respect of a cash
dividend paid by the Company prior to April 6, 1999, but only to the extent that
dividend income derived by such U.S. Holder is taxable in the United States as
the income of a U.S. resident in the hands of such U.S. Holder or of its
partners or beneficiaries, as the case may be.

         Under certain arrangements (known as "H" arrangements) (which applied
specifically to ADRs, which the Company may have entered into with the U.K.
Inland Revenue when it anticipated paying dividends) the Treaty Payment may
(subject to certain exceptions) have been paid by the Company to an Eligible
U.S. Holder of ADSs together with and at the same time as the cash dividend in
respect of the ordinary shares. These arrangements generally applied to Eligible
U.S. Holders of ADSs other than

(1)      estates or trusts any of the beneficiaries of which are not resident in
         the United States,

(2)      persons exempt from U.S. federal income tax with respect to cash
         dividends paid on the ADSs evidenced by the ADRs such as pension funds
         or foundations (other than certain pension funds),

(3)      investment or holding companies, 25% or more of the capital of which is
         owned directly or indirectly by persons who are not individuals
         resident in, and are not nationals of, the United States,

(4)      any person owning 10% or more of the ordinary shares,

(5)      a U.S. corporation that controls, alone or with one or more associated
         corporations, 10% or more of the voting stock of the Company, and

(6)      persons engaged in business or performing independent personal services
         through a permanent establishment or fixed base in the United Kingdom.

         The operation of these arrangements required the agreement of the
U.S. banks which operated the ADR system for U.K. companies who were required
to give certain undertakings to the Inland Revenue. The dividend plus the
Treaty Payment, once the dividend was made, would have been remitted to the
New York office of the U.S. bank which would then have issued checks for the
dividend plus the Treaty Payment appropriate to the holding. Each check
should have had on the reverse a declaration for completion by the payee
which constituted a check endorsement and if not completed the payment of the
check would have been refused. Each check must have been presented within
three months of date of issue; otherwise it would have been void. Where an
Eligible U.S. Holder that was entitled to the benefit of these arrangements
held its ADSs through The Depository Trust Company ("DTC"), a declaration as
to the conditions entitling the eligible U.S. Holder to the Treaty Payment
must have been completed by the bank member of DTC which held the ADSs on
behalf of the Eligible U.S. Holder. The "H" arrangements applied at the
discretion of the U.K. Inland Revenue and could have been terminated without
notice. The "H" arrangements ceased on April 6, 1999.

         Where certain criteria are fulfilled, the Company may have entered into
other arrangements (known as "G" arrangements) by virtue of which the Treaty
Payment may (subject to certain exceptions) have been paid by the Company
together with and at the same time as the associated dividend to an Eligible
U.S. Holder of ordinary shares who did not come within the "H" arrangements,
provided that he held his shares through a nominee approved by the U.K. Inland
Revenue who was prepared to cooperate with the operation of the arrangements and
file a general undertaking with the U.K. Inland Revenue. The Eligible U.S.
Holder must

(a)      be resident in the United States and not in the United Kingdom, and not
         have a permanent establishment in the United Kingdom; and

(b)      not own 10% or more of the ordinary shares.



                                      -55-
<PAGE>

         If the Eligible U.S. Holder is a company, it must in addition

(a)      be liable to federal income tax on the dividends;

(b)      have at least 75% of its capital owned directly or indirectly by
         persons who are U.S. residents; and

(c)      not be a U.S. corporation that controls, alone or with one or more
         associated corporations, 10% or more of the voting stock of the
         Company.

         Again, these arrangements may have been withdrawn by the U.K. Inland
Revenue at any time, and ceased on April 6, 1999.

         An Eligible U.S. Holder who did not come within these "H" or "G"
arrangements (if such were entered into by the Company) should claim the
Treaty Payment to which he is entitled directly from the U.K. Inland Revenue
with respect to any dividends paid to him, in the manner and at the time
described in U.S. Revenue Procedure 80-18, 1980-1 C.B. 623, and U.S. Revenue
Procedure 81-58, 1981-2 C.B. 678, summarized below. Claims for payment must
be made within six 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
Director of the U.S. Internal Revenue Service Center with which the
shareholder's last federal income tax return was filed. 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 TAXATION

         U.S. HOLDERS

         Under 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.

                                      -56-
<PAGE>

         Subject to certain limitations, the United Kingdom tax withheld in
accordance with the Treaty will be creditable against the U.S. Holder's United
States federal income tax liability.

         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").

         NON-U.S. HOLDERS

         Dividends 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 percent rate or such lower rate as
may be specified by an applicable income tax treaty.

TAXATION OF CAPITAL GAINS

         UNITED KINGDOM TAXATION

         U.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 TAXATION

         U.S. HOLDERS

         Subject to the 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 capital 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. HOLDERS

         A Non-U.S. Holder will not be subject to United States federal income
tax in respect of a 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 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 apply.

         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.



                                      -57-
<PAGE>

ADDITIONAL UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS

         PFIC RULES

         In 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 American
Depositary Shares or ordinary shares, either

(1)      at least 75% of the gross income of the Company for the taxable year is
         passive income or

(2)      at least 50% of the value (determined on the basis of a quarterly
         average) 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. 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 clear, 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, but 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
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,

(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.

         The special PFIC tax rules described above will not apply to a U.S.
Holder if the U.S. Holder elects to have the Company treated as a qualified
electing fund (a "QEF election") and the Company provides certain required
information to holders. If necessary, the Company intends to provide U.S.
Holders with such information as may be required to make a QEF election
effective.

         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 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.



                                      -58-
<PAGE>

         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 of 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 CONSIDERATIONS

         GIFT AND INHERITANCE TAXES

         An individual who is domiciled in the United States for the purposes of
the Estate Tax Treaty 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 TAX

         A transfer for value of the ordinary shares will generally be subject
to U.K. ad valorem stamp duty, normally at the rate of 50 pence per L100 (or
part thereof) of the amount or value of the consideration given for the
transfer. Stamp duty is normally a payable by the Purchaser.

         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 considerations 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 L1.50 per L100 (or part
thereof), 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% rates 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, (a) the Company
will pay all U.K. stamp duty or SDRT charges that arise as a result of the
initial deposit by the Company of ordinary shares with the Depositary pursuant
to the merger and (b) any tax or duty payable by the Depositary or the Custodian
of the Depositary on the subsequent deposit of ordinary shares will be charged
by the Depositary to the holder of the ADS.



                                      -59-
<PAGE>

         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 50 pence per L100 or 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 50 pence per instrument of
transfer only will be payable.

ITEM 8 - SELECTED FINANCIAL DATA
(In thousands, except per share data)

         The selected financial data set forth below for the Company as of
December 31, 1998 and 1997, and for the years ended December 31, 1998, 1997 and
1996 have been derived from, and should be read in conjunction with, the
Consolidated Financial Statements of the Company included elsewhere in this Form
20-F. The selected financial data set forth below for the Company as of December
31, 1996 and 1995 and for the 5 months ended December 31, 1995 and the years
ended July 31, 1995 and 1994 have been derived from audited Consolidated
Financial Statements of the Company. The Consolidated Financial Statements of
the Company for the year ended December 31, 1998 have been audited by
PricewaterhouseCoopers, independent chartered accountants. The Consolidated
Financial Statements of the Company for the years ended December 31, 1997 and
1996 and for the five months ended December 31, 1995 were audited by Price
Waterhouse, independent chartered accountants. The Consolidated Financial
Statements of the Company for the years ended July 31, 1995 and 1994 were
audited by Coopers & Lybrand, independent chartered accountants.

         The Company's current operations include the drug delivery business of
Jago which was acquired by the Company in May 1996. The financial data set forth
below for Jago for the four month period ended April 30, 1996 have been derived
from, and should be read in conjunction with, the audited Consolidated Financial
Statements of Jago included elsewhere in this Form 20-F. The selected financial
data set forth below for Jago as of April 30, 1996 and December 31, 1995 and
1994 and for the years ended December 31, 1995 and 1994 have been derived from
the audited Consolidated Financial Statements of Jago.

         In this selected information, the Company has presented its operating
results from discontinued operations and the net (loss) profit on sale thereof
on a single line net basis for U.K. GAAP purposes, while the Company's U.K. GAAP
consolidated financial statements present these amounts on a gross basis. Also,
the Company has reclassified "share of operating profit/loss in joint venture"
outside of group operating profit/loss as required by U.K. FRS 9 "Associates and
Joint Ventures", which is effective for all periods ending after June 25, 1998.
For purposes of comparison, the Company has also reclassified this item for
periods prior to the effectiveness of FRS 9 in the table presented below.
Turnover in the table below is net of share of turnover related to the joint
venture, and net interest below is net of share of interest relating to the
joint venture.

         In November 1995 the Company sold its former operating business, a tent
hire business. The selected information below omits financial data for this
business for the years ended July 31, 1994 and 1995 because such data relate to
the discontinued operations of the Company and the Company does not consider it
relevant to its ongoing business.

         The four months of operations of Jago to April 30, 1996 and the results
of the Company for the year ended December 31, 1996 (which include eight months
of Jago operations), excluding discontinued operations, represent the continuing
operations of the Company. The four months of operations of Jago to April 30,
1996 include turnover of L1,056,000 which relates to sales from Jago to the
Company. The Company has included this amount in its cost of sales for the year
ended December 31, 1996.



                                      -60-
<PAGE>

         In January 1997, the Company acquired a manufacturing facility, and the
Company's financial statements include the results of that facility from that
date. The Company's 1998 results include L4.6 million of turnover (1997: L5.4
million) and L5.2 million cost of sales (1997: L5.2 million) from the
manufacturing operations. Net assets of the acquired operation were
approximately L13.0 million.

         The Company has calculated loss per share data using the weighted
average number of shares in issue for each period, adjusted for the effects of a
rights issue in January 1996 and a share consolidation in May 1996. The
information below does not include net loss per share for Jago because it was a
privately-held company, all of the shares of which were owned by a single
shareholder.

         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, 1998 and
1997 and for the years ended December 31, 1998, 1997 and 1996 is set out in Note
29 of the Notes to the Consolidated Financial Statements of the Company. A
reconciliation to U.S. GAAP of Jago's net loss for the four month period ended
April 30, 1996 is set out in Note 15 of the Notes to the Consolidated Financial
Statements of Jago also included herein. Total assets for U.S. GAAP comprise
total assets under U.K. GAAP adjusted for the U.S. GAAP adjustments set out on
page F-57.

         In 1996 the Company changed its fiscal year end from July 31 to
December 31 to conform its fiscal year to that of Jago.

         The Company has not paid dividends in the past nine 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, 1998 have been
translated into U.S. dollars at the noon buying rate on December 31, 1998 of
$1.6628 per L1.00.

         For a discussion of the impact of exchange rate fluctuations on the
Company's operating results, see "Item 9. Management's Discussion and Analysis
of Financial Condition and Results of Operations".


                                      -61-
<PAGE>


<TABLE>
<CAPTION>
                                                                       JAGO HOLDING AG
                                                       ----------------------------------------------
                                                                                            4 MONTHS
                                                         YEAR ENDED DECEMBER 31,              ENDED
                                                       --------------------------           April  30,
Consolidated Income Statement Data:                      1994               1995               1996
                                                       -------            -------             ------
                                                                      (IN THOUSANDS)
<S>                                                    <C>                <C>                <C>
U.K. GAAP
Continuing:

Turnover ...................................           L11,430            L14,156            L4,751
Cost of sales ..............................            (7,202)            (9,699)            (2,393)
                                                       -------            -------             ------
Gross profit ...............................             4,228              4,457              2,358
Selling, marketing & distribution expenses .              (589)              (790)              (299)
Administration expenses ....................            (2,757)            (3,352)            (1,407)
Research and development expenses ..........              (295)              (354)              (132)
Other operating income .....................             1,766              1,852                179
Other operating expenses ...................              (552)            (1,525)              (115)
                                                       -------            -------             ------
Group operating profit......................             1,801                288                584
Share in operating loss of joint venture ...            (2,478)              (854)              (467)
                                                       -------            -------             ------
                                                          (677)              (566)               117
Net interest ...............................              (327)              (462)              (194)
Taxation ...................................              --                 --                 (154)
                                                        -------            -------            -----
Net loss ...................................           L(1,004)           L(1,028)             L(231)
                                                       -------            -------             ------
                                                       -------            -------             ------
U.S. GAAP

Loss from continuing operations ............              (834)              (802)              (231)
Net loss ...................................              (834)              (802)              (231)
</TABLE>

<TABLE>
<CAPTION>
                                                            AS OF DECEMBER 31,                AS OF
                                                       --------------------------            APRIL 30,
Consolidated Balance Sheet Data:                         1994              1995                1996
                                                       -------            -------             ------
                                                                      (IN THOUSANDS)
<S>                                                    <C>                <C>                <C>
U.K. GAAP

Fixed assets ...............................            L4,892             L6,021             L5,541
Cash at bank and in hand ...................                90                 22                893
Total assets ...............................             7,776              9,673              9,735
Long-term obligations (excluding provisions)            (4,152)            (2,629)            (2,420)
Share of net capital deficiency of Joint Venture        (3,228)            (4,320)            (5,207)
Equity shareholders' deficit ...............            (4,712)            (5,047)            (5,532)

U.S. GAAP

Total assets ...............................                                9,833              9,891
Equity shareholders' funds .................                               (4,887)            (5,376)
</TABLE>

                                      -62-

<PAGE>


<TABLE>
<CAPTION>
                                                                     SKYEPHARMA PLC
                          ------------------------------------------------------------------------------------------------------
                                                       5 MONTHS
                                                         ENDED
                            YEAR ENDED JULY 31,       DECEMBER 31,                     YEAR ENDED DECEMBER 31,
Consolidated Income       ----------------------      ------------     ---------------------------------------------------------
Statement Data:             1994           1995           1995           1996            1997            1998             1998
                          -------        -------         ------        --------        --------        --------         --------
                                                         (in thousands, except per share data)
<S>                       <C>            <C>          <C>             <C>              <C>             <C>              <C>
U.K. GAAP
Continuing:
Turnover ..............     L--            L--            L--            L9,013         L13,839         L10,925         $ 18,166
Cost of sales .........      --             (156)          --            (7,028)        (10,193)        (10,630)         (17,675)
                          -------        -------         ------        --------        --------        --------         --------
Gross (loss)/profit ...      --             (156)          --             1,985           3,646             295              491
Selling, marketing &
  distribution expenses      --             --             --            (2,539)         (3,063)         (4,230)          (7,034)
Administration
  expenses ............      --             (603)          (328)         (6,384)         (6,422)         (6,781)         (11,275)
Research and
  development expenses       --             --             --            (2,098)         (6,109)         (5,712)          (9,498)
Other operating
  income ..............      --             --             --               313            --              --               --
                          -------        -------         ------        --------        --------        --------         --------
Group operating loss         --             (759)          (328)         (8,723)        (11,948)        (16,428)         (27,316)
Share of operating
  profit/(loss) in
Joint Venture .........      --             --             --              (492)           (346)             14               23
                          -------        -------         ------        --------        --------        --------         --------
                             --             (759)          (328)         (9,215)        (12,294)        (16,414)         (27,293)
Group operating
  profit/(loss) from
  discontinued
  operations ..........       340         (5,095)          --                27            --              --               --
                          -------        -------         ------        --------        --------        --------         --------
Total operating
  profit/(loss) .......       340         (5,854)          (328)         (9,188)        (12,294)        (16,414)         (27,293)
Gain on disposal of
  fixed
  assets/(provision)
  for loss on disposal
  of fixed asset
  investment ..........      --               61           --            (1,823)           --              --               --
Provision for loss
on disposal of
discontinued
  operations (net) ....      (967)        (3,959)          --              (121)           --              --               --
                           -------        -------         ------        --------        --------        --------         --------
Loss on ordinary
activities before
  interest and taxation      (627)        (9,752)          (328)        (11,132)        (12,294)        (16,414)         (27,293)
Interest receivable ...      --               32           --             1,000             808           1,396            2,321
Interest payable ......      (440)          (261)           (57)         (4,098)         (6,229)         (6,993)         (11,628)
Taxation ..............      --               75           --                72             (66)            (85)            (141)
                          -------        -------         ------        --------        --------        --------         --------
Net loss ..............   L(1,067)       L(9,906)         L(385)       L(14,158)       L(17,781)       L(22,096)        $(36,741)
                          -------        -------         ------        --------        --------        --------         --------
                          -------        -------         ------        --------        --------        --------         --------
Loss per share ........      (1.6)p        (13.8)p         (0.6)p          (5.3)p          (5.1)p          (5.7)p       $  (0.09)

U.S. GAAP
Loss from continuing
  operations ..........                     (759)          (385)        (51,952)        (18,658)        (21,789)         (36,231)
Net loss ..............                   (9,036)          (385)        (52,046)        (18,658)        (21,789)         (36,231)
Per Share:
Loss from continuing
  operations ..........                     (1.1)p         (0.6)p         (19.3)p          (5.3)p          (5.7)p       $  (0.09)
Net loss ..............                    (12.6)p         (0.6)p         (19.3)p          (5.3)p          (5.7)p       $  (0.09)
</TABLE>


                                      -63-
<PAGE>


<TABLE>
<CAPTION>
                                                                          SKYEPHARMA PLC
                                                      -----------------------------------------------------------
                                                                         AS OF DECEMBER 31,
                                                      -----------------------------------------------------------
Consolidated Balance Sheet Data:                       1995         1996         1997         1998         1998
                                                      ------       -------      -------      -------      -------
                                                                          (IN THOUSANDS)
<S>                                                   <C>          <C>         <C>           <C>         <C>
U.K. GAAP

Fixed assets ...................................           L2       L9,297      L24,034      L30,337      $50,444
Cash and short term bank deposits ..............           --       21,318        8,671       30,925       51,422
Total assets ...................................        1,244       34,354       42,430       68,855      114,492
Long-term obligations (excluding provisions) ...           --       (4,918)      (4,150)      (6,248)     (10,389)
Share of net capital deficiency of Joint Venture           --       (5,106)      (6,099)      (6,262)     (10,412)
Provisions .....................................         (797)     (62,572)     (70,015)     (40,539)     (67,408)
Equity shareholders' (deficit)/funds ...........       (9,681)     (44,486)     (46,110)       6,235       10,368

U.S. GAAP

Total assets ...................................        1,244      157,588      148,559      169,788      282,323
Equity shareholders' funds .....................       (3,431)     141,320      129,847      146,668      243,880
</TABLE>


ITEM 9.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
         OF OPERATIONS

         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 and related notes of the Company and the
Consolidated Financial Statements and related notes of Jago, each contained
elsewhere in 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. The Financial Statements have been prepared under accounting
principles generally accepted in the United Kingdom which vary in certain
important respects from accounting principles generally accepted in the United
States. See "Summary of Material Differences between U.K. and U.S. GAAP" in Note
29 to the Financial Statements on F-50.

OVERVIEW

         The Company, as currently operated, was formed substantially from the
1996 acquisition of two pharmaceutical companies: Jago and Krypton. Jago, a
Swiss drug delivery company which commenced operations in 1983, was acquired by
the Company in May 1996 and now constitutes the principal operating subsidiary
of the Company. The total consideration paid by the Company to acquire Jago was
approximately L100.8 million in cash (plus a prepayment of $6.0 million (L3.9
million)) and approximately 30.7 million ordinary shares (valued at 75 pence per
share). 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. The Company has agreed to pay additional consideration in
respect of the Jago acquisition pursuant to an earn-out arrangement. See "Item
13. Interest of Management in Certain Transactions - Certain Arrangements in
Respect of the Jago Acquisition". 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.

         Krypton, which the Company acquired in January 1996, is a
Gibraltar-based company which holds development rights to certain generic drugs.
The total consideration paid by the Company to acquire Krypton was L12.0 million
satisfied by the issue of 30 million ordinary shares, and warrants to

                                      -64-

<PAGE>

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 13. Interest of Management in Certain
Transactions - Certain Arrangements in Respect of the Krypton Acquisition".

         The interest of the Company's management in the above transactions
results substantially from management's interest in Jago and Krypton prior to
their acquisition and management's funding of certain pharmaceutical activities
while the discontinued tent hire operations were in the process of disposal.

         The Company's management's continuing interest in those transactions is
in the earn-out arrangement in respect of the Jago acquisition, the additional
consideration in respect of the Krypton acquisition and a non-executive
director's interest in VECAP Venture Capital Partners AG and continuing
professional services provided by a law firm with which the director is also
associated. To date, no payments have been made under the Jago and Krypton
earn-out arrangements. See "Item 13. Interest of Management in Certain
Transactions".

         In January 1997, the Company acquired a pharmaceutical manufacturing
and production facility near Lyon, France. See "Item 1. Description of Business
- Manufacturing".

         On March 10, 1999 the Company completed the acquisition of SkyePharma
Inc., a San Diego based drug delivery company, for 28.3 million ordinary shares
in ADS form, having a market value of L20.0 million. In addition, on April 1,
1999 a further 16.2 million ordinary shares were issued to the former SkyePharma
Inc. shareholders on FDA approval of DepoCyt as part of the contingent payments
arrangements. The net assets of the acquired company at December 31, 1998
amounted to approximately L5.5 million. See "Item 1. Description of Business -
Acquisition of SkyePharma Inc."

         On May 19, 1999 the Company announced an agreement with Hyal
Pharmaceutical Corporation ("Hyal") of Mississauga, Ontario to acquire all of
the issued and outstanding shares and the 12% subordinated debentures of Hyal.
The transaction is subject to satisfaction of a number of conditions including
completion of due diligence and the approval of Hyal shareholders. The maximum
consideration payable is approximately L3.5 million of which approximately L2.6
million is payable in shares.

         The Company's strategy for the sale and distribution of its generic
pharmaceutical product candidates has been to develop its own marketing
capability through its Brightstone subsidiary in the U.S. However, during 1998
the Directors concluded that the Company was unlikely to maximise the value of
its generic pharmaceutical product candidates using its own marketing resources.
The Company has signed one licensing agreement and is in discussion with a
number of strategic collaborative partners who already have significant and
complementary U.S. generic drug manufacturing capability to sell and distribute
the Company's products in the U.S. In December 1998 the Company discontinued its
own generic drug sales and marketing operations in the U.S. and has since
integrated Brightstone's clinical development and finance functions with
SkyePharma Inc., resulting in the termination of employment for 22 staff
involved in sales and marketing activities. The exit plan was substantially
completed by April 30, 1999 and the actual costs incurred were not materially
different from the provisions made. This should provide annual cost savings of
up to L2 million. The Company recorded a one-time exceptional charge with this
restructuring of L1.3 million in 1998.

         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 royalty revenue from
sales by third parties of products developed by the Company. See "Item 1.
Description of Business Risk Factors - Risk Factors Relating to the Drug
Development Industry - The Company's results of operations tend to fluctuate".
In the periods under review, the Company also received contract development
revenue, including milestone payments from the Joint Venture. During 1997 and
1998 revenues from the Joint Venture have declined. On

                                      -65-

<PAGE>

March 4, 1999 the Company reached an agreement with Genta relating to the
outstanding liabilities and the future operation of the Joint Venture. The
Company does not consider it will suffer any material adverse financial
consequences from its implementation of the agreement. See "Item 1.
Description of Business - Joint Venture with Genta" for a discussion of the
terms of this agreement. Commencing in 1997 the Company began generating
revenue from contract manufacturing at its Lyon facility. See "Item 1.
Description of Business - Manufacturing".

         The following table summarizes revenues by class of business and
geographical segment.

<TABLE>
<CAPTION>
                                                             YEAR ENDED DECEMBER 31,
                                                          1996          1997         1998
                                                         ------       -------      -------
                                                                 (in thousands)
<S>                                                      <C>          <C>          <C>
By class of business:

Pharmaceuticals
 Contract development, including Milestone payments
  Receivable from third parties ...................      L4,296        L4,614       L2,401
  Receivable from the Joint Venture ...............       1,685           419           52
                                                         ------       -------      -------
                                                          5,981         5,033        2,453
Manufacturing and distribution ....................         826         6,569        6,485
Royalties receivable ..............................       2,206         2,237        1,987
                                                         ------       -------      -------
                                                         L9,013       L13,839      L10,925
                                                         ------       -------      -------
                                                         ------       -------      -------
By location of customer:

 U.K. .............................................      L1,308        L1,151          207
 Continental Europe ...............................       4,110        10,333        6,865
 U.S ..............................................       3,570         2,355        3,434
 Rest of the world ................................          25          --            419
                                                         ------       -------      -------
                                                         L9,013       L13,839      L10,925
                                                         ------       -------      -------
                                                         ------       -------      -------
</TABLE>

         Historically, the contributions to total revenues generated by each of
these sources 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.

         After cost of sales, the Company's principal expenditures have related
to administrative expenses, the Company's internal research and development
costs, the costs of the corporate offices, and interest expense and, prior to
December 1998, the build-up of the sales and marketing organization in the
United States. In 1997 the Company began to incur costs relating to contract
manufacturing at its Lyon facility. See "Item 1. Description of Business -
Manufacturing".

         As the majority of the Company's 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.

                                      -66-
<PAGE>

LIQUIDITY AND CAPITAL RESOURCES

         Since the inception of its pharmaceutical business in 1995, the Company
has financed its operations primarily by the sale of equity and debt securities,
interest income and cash from operations.

         In January 1996, the Company raised approximately L9.0 million in a
rights issue in the United Kingdom. In May 1996, the Company raised L140.8
million through a public offering in the United Kingdom, of which L114.1
million was used to fund the cash portion of the Jago acquisition of L109.3
million and acquisition expenses.

         In September 1997, the Company placed 17.3 million ordinary shares,
representing 5% of its existing share capital, with directors and other
investors at a price of 45 pence per share. The placing raised approximately
L7.4 million, net of expenses. A total of 6.1 million shares, with an aggregate
value of L2.75 million at the placing price, were placed with directors of the
Company and their associated companies and trusts.

         In March 1998, the Company issued unsecured Debentures in the aggregate
principal amount of $18,576,359 due February 2001, providing it with
approximately L9.8 million of funding, net of expenses. The Debentures were
issued at a discount equivalent to an annual rate of 3%. The Debentures confer
upon the holders thereof the right to apply the principal sum to subscribe for
ordinary shares at any time in the three year period following the issue. The
subscription price is to be calculated as the average of the three highest of
the five lowest closing bid prices during the 20 day period prior to
subscription, subject to a maximum subscription price of 90 pence per ordinary
share. The amount of the Debentures to be applied in subscription for ordinary
shares on any date is calculated by applying the 3% per annum discount rate to
the principal sum.

         To issue these Debentures the Company required the approval of its
Shareholders in a General Meeting. Under the terms of the Debentures, the
maximum number of new ordinary shares which may be issued on subscription after
taking account of the subscription rights exercisable under the Class "C"
Warrant is 30 million. If the exercise of the subscription rights taken together
with the subscription rights exercisable under the Class "C" Warrant would lead
to an issue of more than 30 million ordinary shares, the residual liability
under the Debentures becomes repayable in full within 30 days of the maximum
number of shares being issued together with a premium of 5%, unless shareholder
approval is sought and obtained to issue more than 30 million ordinary shares.

         During 1998 Debentures in an aggregate principal amount of $14,358,000
were applied to the subscription of an aggregate of 16,070,203 ordinary shares
at prices between 44 pence and 65 pence per share, leaving a remaining
outstanding aggregate principal amount of Debentures of $4,219,000 at December
31, 1998. As of May 31, 1999, Debentures in an aggregate principal amount of
$14,463,195 had been applied to the subscription of an aggregate of 16,170,204
ordinary shares at between 44 pence and 65 pence per share, leaving a remaining
outstanding aggregate principal amount of Debentures of $4,113,164.

         In consideration for the services provided to the Company by GEM
Advisors Inc. in connection with the subscription for and issue of the
Debentures, the Company granted an option to GEM, Ltd. and Global Strategic
Holdings, Ltd., affiliates of GEM, on the terms of the agreement constituting
the Class "C" Warrant, to purchase up to 1.8 million ordinary shares at an
exercise price of 120 pence per ordinary share at any time up to March 11, 2001.
The aggregate number of ordinary shares which may be exercised under the terms
of the Class "C" Warrant and the Debentures shall not exceed 30 million. The
subscription rights under the Class "C" Warrant are subordinate to those of the
holders of the Debentures.

         In July 1998 the Company issued 36 million ordinary shares in the form
of shares or ADSs in a public offering in the United States. The offering raised
L22.7 million net of expenses at an offering price of 70 pence per share or
$11.48 per ADS. Each ADS represents 10 ordinary shares.

                                      -67-
<PAGE>

         In November 1998, the Company issued 8,628,500 ordinary shares to
Novartis Pharma in association with a collaborative agreement to jointly develop
a new formulation of Foradil, for the treatment of asthma. The issue at a price
of 70 pence per share resulted in proceeds to the Company of L6.1 million.

         In April 1999, pursuant to the terms of a collaboration agreement with
Chiron Corporation of San Diego, SkyePharma Inc. issued a secured promissory
note for US$9.7 million payable in three equal installments in June 2000, 2001
and 2002.

         In May 1999 the Company signed an agreement with Silicon Valley Bank
for the financing arrangements of SkyePharma Inc. Under the agreement, the
Company covenanted to hold cash balances equivalent to the greater of 75%
outstanding loan balances or three months' cash burn, and the Company covenanted
to hold on a consolidated basis, cash balances equivalent to six months' cash
burn, all balances being held on an unrestricted basis. At March 10, 1999, the
date of acquisition, SkyePharma Inc.'s outstanding loan balances amounted to
L5.2 million.

         Under the terms of the agreement with Hyal Pharmaceutical Corporation
the Company provided interim financing of approximately L0.3 million on May 19,
1999 on a secured basis. The agreement, which is subject to a number of
conditions including completion of due diligence and the approval of Hyal
shareholders, provides that the Company will pay approximately L0.9 million in
cash upon FDA approval of Hyal's lead product, Solarase, if the product is
approved on or before December 31, 2000.

         Total cash outflow from operations (before use of liquid resources
and financing) in 1998 was L17.1 million, including some L4.3 million on the
purchase of tangible fixed assets, primarily for the Company's own Geomatrix
manufacturing capacity in Lyon, and L2.9 million initial investment in the
Company Inc.

         The Company's cash position including short-term bank deposits at
December 31, 1998 amounted to L29.0 million, net of bank overdrafts of L1.9
million. In addition, at December 31, 1998 the Company had short-term
borrowings, including obligations under finance leases, amounting to L1.5
million and long-term borrowings, including obligations under finance leases and
Debentures, amounting to L6.2 million.

         The Company is an emerging pharmaceutical company and expects to absorb
cash until products are fully commercialized, and to generate losses at least
through 1999. Much of the Company's cash requirement is of an investment nature
and is to a great extent discretionary. Substantial funds will be used for the
Company's own product development efforts and capital expenditures for further
expansion of the manufacturing facility in Lyon, France, in connection with the
Novartis agreement.

         Based upon the Company's business plan the Directors anticipate that
the Company will have sufficient resources to fund its current operations
through at least the next twelve months.

         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 Geomatrix drug delivery technologies. See "Item 1.
Description of Business - Risk Factors Relating to the Drug Development Industry
- The Company is dependent on Geomatrix technologies as to which further
successful development is uncertain; 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".

         During 1997, the Company's tangible fixed assets increased by
approximately L14.2 million. Approximately L13.1 million of the increase
resulted from the acquisition of the manufacturing and production facility in
Lyon, France in January 1997. In addition, the Company incurred costs of
approximately L5.0 million in the purchase of tangible fixed assets and
approximately L0.7 million on the acquisition of product rights in 1997. Of this
total, approximately L3.7 million related to the upgrade of the Lyon facility
for additional scale-up manufacturing as well as for full scale commercial

                                      -68-
<PAGE>

manufacturing. In 1998 expenditure on tangible fixed assets amounted to
approximately L4.3 million including expenditure on the upgrade of the Lyon
facility of approximately L2.6 million.

         The Company's balance sheet at December 31, 1998 shows shareholders'
funds of approximately L6.2 million compared with a deficit of L46.1 million at
December 31, 1997. The balance sheet is significantly impacted by goodwill and
deferred consideration. At December 31, 1998 the goodwill recorded within the
profit and loss reserve amounted to approximately L170.9 million and the
deferred consideration and shares to be issued amounted to approximately L45.8
million. The Directors have deemed that it is in the best interests of the
Company to try to settle the deferred consideration as this will remove a
significant uncertainty that complicates the evaluation of the Group. The
Directors are currently in discussion with the Jago vendor to explore the terms
on which the obligation may be settled. In addition the Company will need to
renegotiate elements of the Krypton acquisition agreement following the change
in the Company's strategy for the sale of its generics. Consequently, at
December 31, 1998 the Company reduced the deferred consideration and shares to
be issued by L52.2 million which represents the Directors' reasonable estimate
of the deferred consideration payable. See the Company's consolidated balance
sheets in "The Company's Financial Statements".

         In January 1997 the Company acquired a pharmaceutical manufacturing and
production facility in Lyon, France that it plans to use to manufacture products
both for collaborative partners and for the Company. The Company has spent
approximately L6.3 million in capital cost and L0.5 million in cGMP and FDA
compliance costs since January 1, 1996 to upgrade the facility to meet its
projected manufacturing and distribution needs. See "Item 1. Description of
Business - Manufacturing".

         Capital commitments, contracted for but not provided in the accounts,
were L1.2 million at December 31, 1997 and Lnil at December 31, 1998.
Such commitments relate principally to capital expenditures on the upgrade of
the Lyon facility to meet projected manufacturing requirements and additional
payments due for product rights to three generic drugs acquired from a third
party. In addition, the Company had total annual commitments under operating
leases for rentals amounting to L1.2 million at December 31, 1997 and L1.0
million at December 31, 1998. The Company expects to fund its commitments from
its existing cash resources.

RESULTS OF OPERATIONS

         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 it will continue to experience
fluctuations in its results of operations in the near to medium term. Since
December 31, 1998, the Company has continued to realize net losses.

         YEAR ENDED DECEMBER 31, 1998 COMPARED WITH THE YEAR ENDED
DECEMBER 31, 1997

         The presentation of the Company's accounts has been modified to reflect
the adoption of U.K. Financial Reporting Standard No. 9 : Associates and Joint
Ventures and U.K. Financial Reporting Standard No. 10: Goodwill and Intangible
Assets. The prior period has been restated for comparability. See Note 1 to the
Financial Statements on F-9.

                                      -69-

<PAGE>


<TABLE>
<CAPTION>
                                                                  BEFORE                            YEAR TO           YEAR TO
                                                                EXCEPTIONAL      EXCEPTIONAL       DECEMBER 31,      DECEMBER 31,
                                                                   ITEMS            ITEMS             1998              1997
                                                                  -------           ------           -------           -------
                                                                                          (in thousands)
<S>                                                             <C>              <C>               <C>               <C>
Turnover
Group and share of Joint Venture .......................          L11,038             --             L11,038           L13,839
Less: share of Joint Venture ...........................             (113)            --                (113)             --
                                                                  -------           ------           -------           -------
Group turnover .........................................           10,925             --              10,925            13,839
Cost of sales ..........................................          (10,284)            (346)          (10,630)          (10,193)
                                                                  -------           ------           -------           -------
Gross profit ...........................................              641             (346)              295             3,646
Selling, marketing and distribution expenses ...........           (3,251)            (979)           (4,230)           (3,063)
Administration expenses ................................           (6,781)            --              (6,781)           (6,422)
Research and development expenses ......................           (5,712)            --              (5,712)           (6,109)
                                                                  -------           ------           -------           -------
Group operating loss ...................................          (15,103)          (1,325)          (16,428)          (11,948)
                                                                  -------           ------           -------           -------
Share of operating profit/(loss) in Joint Venture ......                                                  14              (346)
                                                                                                     -------           -------
Loss on ordinary activities before interest and taxation                                             (16,414)          (12,294)
Interest receivable ....................................                                               1,396               808
Interest payable
 Group .................................................                                              (6,619)           (5,864)
 Joint Venture .........................................                                                (374)             (365)
Total interest payable .................................                                              (6,993)           (6,229)
                                                                                                     -------           -------
Loss on ordinary activities before taxation ............                                             (22,011)          (17,715)
Taxation ...............................................                                                 (85)              (66)
                                                                                                     -------           -------
Retained loss ..........................................                                             (22,096)          (17,781)
                                                                                                     -------           -------
                                                                                                     -------           -------
</TABLE>

         During 1998 the Company recorded a one-time exceptional charge of
approximately L1.3 million (1997: Lnil) relating to the restructuring of
its activities in North America, through the integration of Brightstone's
clinical development and finance functions with SkyePharma Inc. The exceptional
charges are shown separately above, and comprise cost of sales L0.3 million and
selling, marketing and distribution expenses L1.0 million.

         Group turnover in 1998 was L10.9 million, a decrease of L2.9 million
compared to L13.8 million in 1997, primarily due to a reduction in contract
development income from customers. Contract research and development including
milestone payments was L2.5 million compared to L5.0 million in 1997, due to the
increased number of projects in later stage clinical trials in 1998. By the
clinical trial stage of project development, the Company's work is substantially
complete and its customers pay directly for clinical trials. Manufacturing and
distribution revenues remained stable at L6.5 million in 1998 compared to L6.6
million in 1997. Included in these numbers are sales by Brightstone of
multi-source generics of L0.8 million during 1998 compared to L0.2 million in
1997. Royalty income declined slightly during the year to L2.0 million from L2.2
million in 1997. Royalty income is earned primarily from Dilacor XR but a modest
contribution was received for the first time from Madopar.

         During 1998 the Company also received L6.5 million from Novartis in
association with a collaboration agreement. This total included L0.4 million of
technology access fees. Novartis paid the balance in exchange for shares rather
than as a technology access fee and milestone payments.

         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; the direct
costs of generic sales; and royalties payable. Cost of sales before exceptional
items remained stable during 1998 at L10.3 million compared to L10.2 million in
1997.
                                      -70-
<PAGE>

Gross profit in 1998 before exceptional items remained positive at L0.6 million
compared to L3.6 million in 1997.

         Selling, marketing and administration expenses for 1998 before
exceptional items were L10.0 million compared to L8.8 million before exceptional
items in 1997. The Company's own research and development expenses for 1998 were
L5.7 million, a decrease of L0.4 million compared to 1997. Of the total R&D
expenditure in 1998, L3.7 million related to the Company's generic portfolio and
L2.0 million was spent on the development of its GEOMATRIX and pulmonary
technologies.

         The share of operating loss in the Joint Venture was Lnil in
1998 compared to L0.3 million in 1997. On March 4, 1999 the Company reached an
agreement with Genta Inc., relating to the outstanding liabilities and the
future operation of the Joint Venture. The Company does not consider it will
suffer any material adverse financial consequences from its implementation of
the agreement. See "Item 1. Description of Business - Joint Venture with Genta".

         The operating loss for 1998 excluding exceptional items, was L15.1
million, an increase of L3.5 million compared to L11.6 million excluding
exceptional items in 1997. This is due primarily to the decrease in contract
development income from customers.

         The Company's loss on ordinary activities before taxation was L22.0
million in 1998 compared to L17.7 million in 1997. This includes a non-cash
expense of L5.9 million in 1998 and L5.5 million in 1997 for the interest on the
deferred consideration relating to the acquisition of Jago.

         The loss per share for the year was 5.7 pence, a 12% increase over
1997. While losses increased by 24% the average number of shares rose by 10% to
385 million shares.

         Foreign currency exchange movements did not have a material impact on
the turnover or results of operations in 1998 compared to 1997.

   YEAR ENDED DECEMBER 31, 1997 COMPARED WITH THE YEAR ENDED DECEMBER 31, 1996

<TABLE>
<CAPTION>
                                                                   YEAR ENDED DECEMBER 31,
                                                                    1996              1997
                                                                  --------          --------
                                                                       (in thousands)
<S>                                                                <C>              <C>
Turnover ...............................................           L9,013           L13,839
Cost of sales ..........................................           (7,028)          (10,193)
                                                                  --------          --------
Gross profit ...........................................            1,985             3,646
Selling, marketing and distribution expenses ...........           (2,539)           (3,063)
Administration expenses ................................           (6,384)           (6,422)
Research and development expenses ......................           (2,098)           (6,109)
Other operating income .................................              313              --
                                                                  --------          --------
Group operating loss ...................................           (8,723)          (11,948)
Share of operating loss in joint venture ...............             (492)             (346)
                                                                  --------          --------
                                                                   (9,215)          (12,294)
Group operating profit from discontinued operations ....               27              --
                                                                  --------          --------
Total operating loss ...................................           (9,188)          (12,294)
Provision for loss on disposal of fixed asset investment           (1,823)             --
Loss on disposal of discontinued operations (net) ......             (121)             --
                                                                  --------          --------
Loss on ordinary activities before interest and taxation          (11,132)          (12,294)
Interest receivable ....................................            1,000               808
Interest payable .......................................           (4,098)           (6,229)
Taxation ...............................................               72               (66)
                                                                  --------          --------
Net loss ...............................................          L(14,158)         L(17,781)
                                                                  --------          --------
                                                                  --------          --------
</TABLE>

                                      -71-

<PAGE>

         Turnover for the combined pharmaceutical operations (the Company's
continuing business) in 1997 was approximately L13.8 million, an increase of
approximately L4.8 million compared to turnover of approximately L9.0 million in
1996. Of the 1997 turnover, L13.6 million was generated by the Company's
operations in continental Europe compared with L9.0 million in 1996.
Approximately L3.7 million of the increase is attributable to the inclusion of
only eight months of Jago's activities in 1996 and approximately L5.4 million
from contract manufacturing since January 1997 under an agreement with
Wyeth-Ayerst International Inc. ("Wyeth-Ayerst"), a wholly-owned subsidiary of
American Home Products ("AHP"). These have been offset mainly by the decline in
contract development revenue from the Joint Venture as discussed below, and
approximately L1.3 million is attributable to adverse currency translation
movements due to the strengthening of the pound sterling relative to the Swiss
franc and the U.S. dollar in 1997 compared to 1996.

         Contract development revenue from third parties was approximately L4.6
million in 1997, an increase of approximately L0.3 million from approximately
L4.3 million in 1996. These amounts include approximately L1.0 million in
milestone payments in 1997 and L1.6 million in 1996. Approximately L1.1 million
of the increase is attributable to the inclusion of only eight months of Jago's
activities in 1996. Approximately L0.8 million is attributable to adverse
currency translation movements due to the strengthening of the pound sterling
relative to the Swiss franc and the U.S. dollar in 1997 compared to 1996.

         Contract development revenue from the Joint Venture with Genta was
approximately L0.4 million in 1997, a decrease of approximately L1.3 million
from approximately L1.7 million in 1996. In the four months prior to its
acquisition in May 1996 Jago's contract development revenue from the Joint
Venture amounted to approximately L1.7 million. Approximately L0.3 million is
attributable to adverse currency translation movements due to the strengthening
of pound sterling relative to the Swiss franc and U.S. dollar in 1997 compared
to 1996. On March 4, 1999, the Company reached with Genta resolution for the
outstanding liabilities and the future operation of the Joint Venture. The
Company does not consider it will suffer any material adverse financial
consequences from its implementation of the agreement. See "Item 1. Description
of Business - Joint Venture with Genta". In addition, in October 1996, the
Company acquired from the Joint Venture rights to develop six compounds, and it
assumed a third party's obligations relating to the development of Nifedipine.
Revenues from these contracts are eliminated on consolidation in 1997.

         Manufacturing and distribution revenue was approximately L6.6 million
in 1997, an increase of approximately L5.8 million from approximately L0.8
million in 1996. Approximately L5.4 million of the increase in revenues in 1997
related to the Company's new manufacturing facility in Lyon, France acquired
from Wyeth-Ayerst in January 1997.

         Royalty revenue, which is in respect of sales of Dilacor XR, amounted
to approximately L2.2 million or 16% of the Company's 1997 revenues. Royalty
revenue for the Company was approximately L2.2 million in 1996. Additionally, in
the four months prior to its acquisition in May 1996, Jago received
approximately L0.5 million in royalty revenues. The decrease in royalty revenues
of L0.5 million is a result of the loss of Dilacor XR marketing exclusivity in
the United States in June 1995.

         Cost of sales consists of research and development expenditure,
including the costs of certain clinical trials, incurred by the Company on
behalf of its collaborative partners, the direct costs of contract manufacturing
under the agreement with Wyeth-Ayerst and others and royalties payable.
Substantially all research and development expenditures are reimbursed by the
Company's partners through contract development revenue received from such
parties. Cost of sales in 1997 amounted to approximately L10.2 million, an
increase of approximately L3.2 million compared to 1996 cost of sales of L7.0
million. Approximately L2.4 million of the increase is attributable to the
inclusion of only eight months of Jago's activities in 1996. Approximately L5.2
million of the increase relates to the Company's new manufacturing facility
acquired from Wyeth-Ayerst in January 1997. These have been offset by a
reduction in cost of sales in line with the fall in contract development revenue
from the Joint Venture. Cost of sales has also been reduced by approximately
L1.3 million attributable to favorable currency translation movements due to the
strengthening of pound sterling relative to the Swiss franc

                                      -72-
<PAGE>

and U.S. dollar in 1997 compared to 1996. Royalties payable amounted to
approximately L1.1 million in 1997 compared with approximately L1.2 million in
1996. Royalties payable primarily represent payments by the Company on receipt
of royalties on Dilacor XR sales, being retained royalty rights on the purchase
of the Geomatrix technology in 1996.

         Selling, marketing and administration expenses were approximately L9.5
million in 1997, an increase of approximately L0.6 million compared to
continuing expenses of approximately L8.9 million in 1996. Approximately L1.6
million of the increase is attributable to the inclusion of only eight months of
Jago's activities in 1996, offset by a reduction in the level of Jago expenses
post acquisition and by approximately L0.5 million favorable currency
translation movements due to the strengthening of pound sterling relative to the
Swiss franc and U.S. dollar in 1997 compared to 1996. Approximately L1.0 million
of the increase is attributable to the Company's manufacturing facility acquired
from Wyeth-Ayerst in January 1997, primarily start up costs for the Company's
own manufacturing and approximately L0.7 million on the development of the
Company's planned ADR facility. In addition, there were approximately L1.4
million adverse currency translation effects in 1996 relating to intercompany
balances. Currency translation effects relating to intercompany balances have
been taken to reserves in 1997 as the Company has changed its designation of the
nature of these balances from temporary to permanent. This change reflects the
longer term cash needs of the subsidiaries funded through these advances, and
the anticipation of management that such balances were no longer intended or
anticipated to be settled in the foreseeable future. Such balances amounted to
L12,176,000 and L29,539,000 at December 31, 1996 and 1997, respectively.

         Research and development expenses for the Company's proprietary
research program were approximately L6.1 million in 1997, an increase of
approximately L4.0 million compared to approximately L2.1 million in 1996. The
increase is attributable to the Company's own research and development
activities in support of its strategic objectives.

         The Company's share of operating losses in the Joint Venture was
approximately L0.3 million in 1997 compared to approximately L0.5 million in
1996. In the four months prior to its acquisition in May 1996 Jago's share of
losses in the Joint Venture amounted to approximately L0.5 million.

         Other operating income was zero in 1997 compared to approximately L0.3
million in 1996. No Genta shares were received by the Company in 1997 compared
to approximately L0.3 million in 1996.

         The provision for loss on disposal of the Company's shares in Genta was
approximately L1.8 million in 1996 and reduced the value of the investment to
zero. No provisions were made in 1997.

         Approximately 30% of the loss before interest in 1997 compared to
approximately 29% in 1996 originated from the Company's domestic operations in
the U.K., which comprised primarily corporate office activities. In 1997 the
relative size of loss before interest originating from the U.S. operations
increased compared to the relative size of loss before interest originating from
continental Europe, mainly because of increased research and development
expenditures in the U.S.

         Net interest expense was approximately L5.4 million in 1997, an
increase of approximately L2.3 million compared to approximately L3.1 million in
1996. The increase mainly resulted from an increase in the interest component of
the deferred consideration relating to the acquisition of Jago of approximately
L1.9 million.

         The Company's continuing operations incurred a net loss of
approximately L17.8 million in 1997 compared with a net loss of approximately
L14.2 million in 1996.

YEAR 2000

         Certain of the computer systems used by the Company may be affected by
problems resulting from the use of only two digits to identify a year in the
date field, such as "98" for "1998" and, therefore, may not be above to
recognize dates subsequent to the year 1999. The Company is updating its
computer software applications for compatibility with the Year 2000 at a cost
that is not expected to be

                                      -73-
<PAGE>

material. See "Item 1. Description of Business - Risk Factors - Risks relating
to the Drug Development Industry - The Company is subject to Year 2000 risks for
which it may not be prepared and which could have an adverse effect on its
business".

ECONOMIC AND MONETARY UNION

         On January 1, 1999, eleven participating member nations of the EU
adopted the euro as their official legal currency. For participating countries,
the fixed conversion rates between the euro and the existing national currencies
were established, and the euro was adopted as their legal currency. These
participating member states have also transferred authority for conducting
monetary policy to a European Central Bank. The euro will exist in parallel with
national currencies, and transactions may be denominated in either currency
until December 31, 2001 (though only notes and coins of the national currencies
will be available for physical exchange). From January 1, 2002, euro notes and
coins will be introduced and national currencies will be withdrawn by June 30,
2002. The United Kingdom has not participated initially in EMU, but may do so at
a later time. The current policy of the U.K. government is that any decision to
join EMU will only be taken after a national referendum of the people and, in
any event, not before 2002.

         The Company conducts business in certain participating countries and
anticipates that there will be increased efficiencies from the introduction of
the euro, although no estimate has been made and there can be no assurance as to
such efficiencies. The Company has analyzed the commercial risks involved with
pricing transparency, with a view to reducing any impact in this area over the
transition period. The Company does not expect that euro-related expenditures
which will be incurred prior to 2002 will be material as the additional
functionality has been built in to routine upgrades of the Group's systems. The
incomplete or untimely resolution of systems modifications to accommodate the
conversion to the euro where necessary in its operations may result in
unfavorable costs and consequences to the company. It is not anticipated that
such costs will be material. The Company is exposed to exchange rate
fluctuations in counties in the euro zone, but it is difficult to predict
whether the euro will affect the level or volatility of short-and long-term
foreign exchange rates. The Company does not, however, expect that the
introduction of the euro will have a material impact on financial condition,
liquidity or results of operations.

ITEM 9A - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

         Where appropriate, the Company seeks to hedge its future exchange rate
exposure on U.S. dollar, Swiss franc and French franc expenditure. The Company
does not however, hedge against the effect of exchange rate differences
resulting from the translation in its balance sheet of foreign currency
denominated assets and liabilities.

         Beginning in June 1996, the Company has selectively entered into
forward currency contracts to fix certain of the non-sterling funding
requirements of its principal subsidiaries. The primary non-sterling exposures
are denominated in U.S. dollars, Swiss francs and French francs. The contracts
generally have maturities not exceeding six 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. The losses
on forward contracts maturing during the year ended December 31, 1996 were
L106,000, an amount that increased to L484,000 during the year ended December
31, 1997 due primarily to a significant increase in the value of forward
contracts maturing during 1997. Losses on forward contracts maturing during 1998
were L126,000.

         The unrecognized losses from such contracts at December 31, 1996 and
December 31, 1997 were L350,000 and L105,000 respectively. The Company does not
use any other financial derivatives. At December 31, 1998 the Company had no
outstanding contracts to buy foreign currency.

         At December 31, 1998 the Company had outstanding loans amounting to
L7.7 million. The Company's management have assessed the interest rate exposure
and deemed it not to be material.

                                      -74-
<PAGE>

ITEM 10 - DIRECTORS AND OFFICERS OF THE REGISTRANT

BOARD OF DIRECTORS

         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.

DIRECTORS AND EXECUTIVE MANAGEMENT

<TABLE>
<CAPTION>
NAME                                                       AGE           POSITION
--------                                                 --------        --------
<S>                                                      <C>             <C>
Ian Gowrie-Smith (1) ..............................         51           Executive Chairman
Michael Ashton (1) ................................         53           Chief Executive Officer
Donald Nicholson (1) ..............................         41           Finance Director and Executive Director
Peter Warburton (1)(2) ............................         54           Secretary and International Counsel
Air Chief Marshal Sir Michael Beavis (3)(4)(5) ....         69           Non-Executive Director
Dr. Jacques Gonella ...............................         57           Non-Executive Director
R. Stephen Harris (3)(4) ..........................         56           Non-Executive Director
Dr. Keith Mansford (4)(5) .........................         67           Non-Executive Director
Dr. Thomas Rinderknecht ...........................         45           Non-Executive Director
Nigel Wray (3) ....................................         51           Non-Executive Director
Walter Zeller (3)(5) ..............................         68           Non-Executive Director
</TABLE>

--------
(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 12 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 almost 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 joined the Company in February 1996 as Chief Financial
Officer and was appointed to the Board in March 1997. He was recently named
Finance Director. He has more than 10 years of experience in the healthcare
industry. Prior to joining the Company he was 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.

                                      -75-
<PAGE>

         PETER WARBURTON joined the Company in February 1996 as Company
Secretary and International Counsel. He has more than 25 years of experience as
a commercial lawyer, most recently as International Counsel and Secretary of
Corange Ltd., the parent company of Boehringer Mannheim and DePuy. He has a law
degree from the University of Sheffield and was called to the Bar in 1966.

         SIR MICHAEL BEAVIS was appointed to the Board in 1989. He retired from
the Royal Air Force in 1987 as an Air Chief Marshal. He graduated from the Royal
Air Force Staff College in 1963 and from the Royal College of Defense Studies in
1974.

         DR. JACQUES GONELLA became Deputy Executive Chairman of the Company in
May 1996 when the Company acquired Jago. He stepped down from that position,
becoming a non-executive director in April 1998. He founded Jago in 1983 and was
its sole shareholder until its acquisition by the Company. He has more than 25
years of experience in the pharmaceutical industry. He received a Ph.D. in
Chemistry from the Polytechnic Institute in Lausanne, Switzerland in 1968.

         STEPHEN HARRIS was appointed to the Board in November 1995. He has more
than 25 years of experience in the pharmaceutical industry and is a
non-executive director of several European pharmaceutical companies. 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. KEITH MANSFORD was appointed to the Board in March 1996. He is a
Professor of Biochemistry at the University of Buckingham and a member of the
Scientific Advisory Board of Gemini Research Limited. He is the Chairman of the
Scientific Advisory Board of Electrophoretics International PLC and of Mansford
Associates, an international healthcare consultancy. He is also a non-executive
director of Plant Sciences International PLC. 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.

         DR. THOMAS RINDERKNECHT was appointed to the Board in May 1996. He is a
founding partner of the law firm Rinderknecht Glaus Stadelhofer, based in
Switzerland. He obtained an LL.D. degree from the University of Zurich in 1984.

         NIGEL WRAY was appointed to the Board in January 1995. He is Executive
Chairman of Burford Holdings Plc and Non-Executive Chairman of Carlisle Group
Plc. He is an Executive Director for Brendon Street Investments, Moneypitch Ltd,
Saracens Plc, Nottingham Forest plc, Enid Blyton Ltd and Domino's Pizza Group
Ltd. He is also a Non-Executive Director for Singer & Friedlander Group Plc,
Trocadero Plc, Grantchester Holdings Plc and Columbus Group Plc.

         WALTER ZELLER was appointed to the Board in February 1996. He has more
than 30 years of experience in the pharmaceutical industry. Until 1995 he was
the Chief Financial Officer of Corange Ltd., the parent company of Boehringer
Mannheim and DePuy. He is a non-executive director of Henkel AG and Cie AG. He
obtained a B.Sc in Business Administration from State Commercial College,
Zurich.

COMMITTEES OF THE BOARD OF DIRECTORS

         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 members
of 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 twice each year.

                                      -76-
<PAGE>

         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 was formed in 1999 and 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.

ITEM 11 - COMPENSATION OF DIRECTORS AND OFFICERS

         The following table sets forth certain information regarding the
compensation paid to directors and officers of the Company in the year ended
December 31, 1998.

<TABLE>
<CAPTION>
                                                                 PENSION     ALL OTHER
                                       SALARY        BONUS       BENEFITS  COMPENSATION (1)
      NAME                               (L)          (L)          (L)           (L)
-------------------------            ----------     --------     --------  ----------------
<S>                                  <C>            <C>          <C>       <C>
Ian Gowrie-Smith ..........            250,000       62,500       31,250       20,690
Dr. Jacques Gonella .......             62,611           --        5,835        5,692
Richard Stewart (2) .......             98,295           --       12,215        8,543
Donald Nicholson ..........            120,000       30,000       15,000        8,919
Peter Warburton (3) .......            105,000       26,250       13,125       10,012
Michael Ashton (4) ........            142,449       36,440       13,887       50,291
Joseph Bozman, Jr (5) .....            147,788           --       18,534      174,438
Sir Michael Beavis ........             20,000           --           --           --
Stephen Harris ............             20,000           --           --           --
David Lees (6) ............             20,000           --           --           --
Dr. Keith Mansford ........             20,000           --           --           --
Dr. Thomas Rinderknecht ...             33,251           --           --           --
Nigel Wray ................             20,000           --           --           --
Walter Zeller .............             32,423           --           --           --
</TABLE>

----------

(1)      Includes company car allowance, medical and life insurance for
         directors and their families.
(2)      Mr. Stewart resigned effective November 20, 1998.
(3)      Mr. Warburton is an officer who is not a director.
(4)      Includes temporary living accommodation and school fees.
(5)      Includes compensation for loss of office L153,556. Mr. Bozman resigned
         effective October 31, 1998.
(6)      Mr. Lees resigned effective May 19, 1999.

         In the year ended December 31, 1998, the Company paid L1,635,438 in
aggregate compensation to its directors and officers as a group (14 persons).

         The Remuneration Committee of the Board of Directors administers a
bonus plan for the Company's executive directors and officers. Pursuant to the
plan, executive directors and officers may receive a bonus of up to 25 percent
of their base salary. 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.

PENSION AND SAVINGS PLANS

         The Company operates various defined contribution plans for its
employees in the United Kingdom, Switzerland and the United States. 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 1998, the Company contributed L526,000 to pension and
savings plans.

                                      -77-
<PAGE>

ITEM 12 - OPTIONS TO PURCHASE SECURITIES FROM THE REGISTRANT

         The aggregate number of ordinary shares underlying the Company's
outstanding options and warrants as of May 31, 1999 was 29,360,540 (excluding
the approximately 14 million ordinary shares authorized to be issued on the
conversion of the Debentures).

SHARE OPTION PLANS

         The Company has three share option schemes: the SkyePharma plc 1999
Share Option Scheme, the European and North American Scheme and the SkyePharma
plc 1999 Stock Option Plan for SkyePharma Holdings Inc. Employees.

SKYEPHARMA PLC 1999 SHARE OPTION SCHEME

         The SkyePharma 1999 Share Option Scheme (the "New Scheme") amends,
updates and re-introduces an immediately pre-existing scheme. The New Scheme is
divided into two parts, the first of which is intended to be approved by the
Inland Revenue and the second of which will be unapproved. The unapproved part
is designed for the grant of options to employees the value of which may exceed
the approved limit of L30,000. Except to the extent required to obtain Inland
Revenue approval, the two parts of the New Scheme are similar in all material
respects.

         The New Scheme is governed by the Rules of the New Scheme and is
administered by the Board of Directors of the Company. Eligibility for
participation in the New 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 New Scheme.

         Options may be granted under the New Scheme within six weeks of the day
on which the Company first announces its annual or interim results in any year
which the New Scheme subsists or any date on which the Directors determine that
exceptional circumstances exist which justify the grant of options at that date.
Initially, offers to participate may also be made within six weeks of the date
of approval of the New 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 when added to
the subscription price of ordinary shares issued or capable of issue to him
under options previously granted to him under the New Scheme or any other share
scheme of the Company, exceeds four times his remuneration in that or the
previous tax year. In the case of super options, this limit is increased to
eight times remuneration. Remuneration includes salary, commission and bonuses,
but excludes benefits in kind. In the case of the approved part of the New
Scheme, participants may only be granted options up to a value of L30,000. 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 New Scheme are not pensionable.

         Over a ten year period, the aggregate number of options which may be
granted (excluding super options) under the New Scheme or any other option
scheme of the Company is not to exceed 5% of the Company's issued share capital
from time to time. No option (other than a super option) shall be granted under
the New Scheme to replace options which have been exercised under any other
scheme of the Company in the period of four years from the date of adoption of
the New Scheme which exceeds 2.5% of the Company's ordinary shares in issue at
the date the option is granted.

         The total number of ordinary shares which may be issued pursuant to
options (other than super options) granted under the New Scheme over a five year
period together with shares issued or issuable pursuant to options (other than
super options) granted under the New Scheme or any other option scheme of the
Company shall not exceed 5% of the ordinary shares in issue at the date any
option is granted. The total number of ordinary shares which may be issued
pursuant to options granted under the New Scheme on any date together with
shares issued or issuable pursuant to options granted in the previous ten years
under the Scheme or any other option scheme or sharesave scheme of the Company
shall not exceed 10% of the ordinary shares in issue at the date any option is
granted. The

                                      -78-
<PAGE>

total number of ordinary shares which may be issued pursuant to options (other
than super options) under the New Scheme granted on any date, together with
shares issued or issuable pursuant to options (other than super options) granted
in any period of three years from the date of adoption of the New Scheme, under
the New Scheme or any other option scheme or sharesave scheme of the Company
shall not exceed 3% of the ordinary shares in issue at the date any option is
granted.

         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 New Scheme may not be exercised prior
to the third anniversary of their grant and must be exercised before the expiry
of ten years from the date of grant. Super options may not be exercised prior to
the fifth anniversary of their grant and must be exercised 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 exercised 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 New 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, such participant will be entitled to exercise any options
within six months of leaving the service of the Company.

         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 becomes entitled to acquire
the shares under Sections 428-430 of the Companies Act 1985 (the "Act") or
(iii) a compromise or arrangement is 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.

SKYEPHARMA PLC 1999 STOCK OPTION PLAN
FOR SKYEPHARMA INC. EMPLOYEES

         The SkyePharma PLC 1999 Stock Option Plan (the "New 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 New Plan will be
available to all officers and key employees of SkyePharma 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 New Plan.

                                      -79-
<PAGE>

         Options may be granted under the New Plan within six weeks of the day
on which the Company first announces its annual or interim results in the year
which the New Plan subsists or any date on which the Remuneration Committee
determine that exceptional circumstances exist which justify the grant of
options at that date. Initially, options may be granted which six weeks of the
date of approval of the New Plan by shareholders. An option may not be granted
to an individual selected to participate if the total subscription price
thereunder would, when added to the subscription price of ordinary shares issued
or capable of issue to him under options previously granted to him under the
Scheme or any other share scheme of the Company, exceed four times his
remuneration in that or the previous tax year. Remuneration includes salary,
commission and bonuses, but exclude benefits in kind.

         The aggregate number of ordinary shares which may be issued pursuant to
options granted under the New Plan over a five year period together with shares
issued or issuable pursuant to options (other than super options) granted under
the New Plan or any other option scheme of the Company shall not exceed 5% of
the ordinary shares in issue at the date any option is granted. The total number
of ordinary shares which may be issued pursuant to options granted in the
previous ten years under the New Plan or any other option scheme or sharesave
scheme of the Company shall not exceed 10% of the ordinary shares in issue at
the date any option is granted. The total number of ordinary shares which may be
issued pursuant to options granted under the New Plan on any date, together with
shares issued or issuable pursuant to options (other than super options) granted
in any period of three years from the date of adoption of the New Plan under the
New Plan or any other option scheme or sharesave scheme of the Company shall not
exceed 3% of the ordinary shares in issue at the date any option is granted. No
option shall be granted under the New Plan to replace options which have been
exercised under any other scheme of the Company in the period of four years from
the date of adoption of the New Plan which exceed 25% of the Company's ordinary
shares in issue at the date the option is granted.

         In an option is to qualify for tax benefits under certain provisions of
the U.S. Internal Revenue code of 1986 as amended, ("income 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
New 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 New Plan in
such a way as complies with best U.K. practice.

         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 New Plan. 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, such participant will be entitled to exercise any options
within 90 days of leaving the service of the Company.

                                      -80-

<PAGE>

         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 becomes entitled to acquire the
shares under Sections 428-430 of the Companies Act 1985 (the "Act") or (iii) a
compromise or arrangement is 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.

OUTSTANDING OPTIONS

         The following table 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 May 31, 1999:

Ordinary Options

<TABLE>
<CAPTION>
                                   NUMBER OF
                                 ORDINARY SHARES
                               UNDERLYING OPTIONS      EXERCISE         FIRST                 LAST
          NAME                      GRANTED              PRICE       EXERCISE DATE        EXERCISE DATE
-----------------------------  ------------------      ---------     --------------      --------------
<S>                            <C>                     <C>           <C>                 <C>
Ian Gowrie-Smith (1)(2) .....      1,234,568             81.0p         Dec. 6, 1999        Dec. 6, 2006
                                     575,539             69.5p       April 19, 2002      April 19, 2009
Peter Warburton (1)(3) ......        533,333             75.0p       April 29, 1999      April 29, 2006
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
Michael Ashton (4) ..........        639,077             93.0p       March 31, 2001      March 31, 2008
                                     871,451             69.5p       April 19, 2002      April 19, 2009
</TABLE>

Super Options

<TABLE>
<CAPTION>
                         NUMBER OF ORDINARY
                         SHARES UNDERLYING                      FIRST EXERCISE     LAST EXERCISE
      NAME               OPTIONS GRANTED       EXERCISE PRICE        DATE               DATE
---------------------    ------------------    --------------   --------------     ---------------
<S>                      <C>                   <C>              <C>                <C>
Ian Gowrie-Smith ....      2,385,009              57.67p         May 25, 2004        May 25, 2009
Donald Nicholson ....      1,022,147              57.67p         May 25, 2004        May 25, 2009
Michael Ashton ......      2,044,293              57.67p         May 25, 2004        May 25, 2009
Directors and officers as a
  group (11 persons) .... 10,097,434               N/A                  N/A                 N/A

--------
(1)      Issued pursuant to the Executive Scheme. (Now referred to as the
         Company PLC 1999 Share Option Scheme)
(2)      Also holds "B" Warrants. See "- Warrants".
(3)      An officer who is not a director.
(4)      Issued pursuant to the Unapproved Scheme. (Now referred to as the
         European and North American Scheme)

</TABLE>

         The aggregate number of ordinary shares underlying outstanding options
as of May 31, 1999 was 23,487,741. Such options have exercise prices ranging
between 44.8 pence and 145 pence and expire between December 14, 1999 and May
25, 2009.

                                      -81-
<PAGE>

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 13. Interest of
Management in Certain 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 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 reserved (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 LSE's
Alternative Investment Market on January 9, 1996 and on May 3, 1996 they were
admitted to the LSE'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).

                                      -82-

<PAGE>


         The following table sets forth certain information concerning the "B"
Warrants exercisable over the Company's ordinary shares:



<TABLE>
<CAPTION>
                                                                      ORDINARY SHARES
                                                                       ISSUABLE UPON
                                                     NUMBER OF "B"      EXERCISE "B"
NAME                                                    WARRANTS         WARRANTS          EFFECTIVE EXERCISE
------------------------------------                 ------------  ----------------------  ------------------
                                                                      AT MAY 31, 1999
<S>                                                  <C>              <C>                   <C>
Ian Gowrie-Smith(1)...........................         19,797,143       1,979,714                 40p
Sir Michael Beavis............................             84,000           8,400                 40p
Nigel Wray(2).................................          1,589,510         158,951                 40p
Directors and officers as a group
(11 persons)..................................         21,470,653       2,147,065                 40p
</TABLE>

-----------

(1)      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 Walkvale
         Limited. The entire issued share capital of Walkvale 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,
         18,387,000 "B" Warrants are registered in the name of Buttress Nominees
         Limited, and 93,000 "B" Warrants are registered in the name of Fortress
         Nominees Limited. All of the "B" Warrants registered in the name of
         Buttress Nominees Limited and Fortress Nominees Limited are owned by
         Cangary Limited as trustee of the I.R. Gowrie-Smith Family Trust.

(2)      Of the "B" Warrants in which Mr. Wray is shown above as having an
         interest, (i) 270,871 "B" Warrants are registered in the name of Abacus
         Nominees on behalf of The Priory Accumulation and Maintenance Trust, a
         family trust whose principal beneficiaries are Mr. Wray's children;
         (ii) 50,000 "B" Warrants are registered in the name of Bank of Scotland
         Central Nominees on behalf of The Priory Accumulation and Maintenance
         Trust; and (iii) 270,871 "B" Warrants registered in the name of NW Wray
         + Wray + Bunyard on behalf of a charitable trust known as The Priory
         Foundation, of which Mr. Wray is trustee.

         ASSUMPTION OF SKYEPHARMA INC. WARRANTS

     In connection with the acquisition of SkyePharma Inc., the Company
agreed that outstanding warrants to purchase SkyePharma Inc. 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:

<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------
Ordinary Shares Issuable Upon         Exercise Price Per
Exercise of Warrants(1)               Ordinary Share                   Expiration Date
------------------------------------------------------------------------------------------
<S>                                   <C>                               <C>
                      123,579         $0.942                            2000
------------------------------------------------------------------------------------------
                       65,358         $2.142                            2000
------------------------------------------------------------------------------------------
                    1,322,728         $2.399                            2001
------------------------------------------------------------------------------------------
                      291,778         $1.499                            2001
------------------------------------------------------------------------------------------

</TABLE>

----------------
(1) As part of the consideration in the SkyePharma Inc. acquisition, former
SkyePharma Inc. shareholders have the right to receive additional shares of
the Company in the event of the signing by March 31, 2000 by a corporate
partner of a development and commercialization agreement for DepoMorphine or
a macromolecule for the delivery of drugs using DepoFoam. See "Item 1.
Description of Business -- Acquisition of SkyePharma Inc". If such condition
occurs, the number of ordinary shares issuable under the warrants will be
adjusted such that warrantholders will have the right to acquire additional
ordinary shares under the warrants for no additional exercise price in an
amount based on the same ratio used for determining the distribution of
additional ordinary shares to the former SkyePharma Inc. shareholders.

ITEM 13 - INTEREST OF MANAGEMENT IN CERTAIN TRANSACTIONS

         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 L101 million in cash (plus a prepayment of $6 million) and
30,711,856 ordinary shares (valued at 75 pence per share or approximately L23
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


                                      -83-
<PAGE>

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 will pay Dr. Gonella an earn-out of the lesser of

         (1)      $250 million or

         (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 is 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 will 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 has 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 has the option to pay $123
million to Dr. Gonella when the first $30 million threshold is reached, in full
satisfaction of its earn-out obligation.

         The Directors have recently deemed that it is in the best interests of
the Company to try to settle the deferred consideration as this will remove a
significant uncertainty that complicates the evaluation of the Group. The
Directors are currently in discussion with Dr. Gonella to explore the terms on
which the obligation may be settled. Any agreement reached on this matter will
have to gain the approval of the shareholders before it can be implemented. In
the discussions referred to, both Dr. Gonella and Dr. T. Rinderknecht (his legal
advisor), being Directors of the Company, have declared a personal interest and
have not participated in the Board review of the estimate of fair value. 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, the
Directors' current estimate is that not more than approximately L40 million
would be payable in shares, in satisfaction of the deferred consideration
obligation, under any settlement agreement.

         In the years ended December 31, 1996, 1997 and 1998, the Company made
no payments to Dr. Gonella in respect to the foregoing earn-out arrangement.

         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

                                      -84-
<PAGE>

million ordinary shares at an effective exercise price of 40 pence per share.
The agreement provides that

         (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.

         In the event that any two of hurdles (a), (b) and (c) 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.
The Company will therefore need to renegotiate elements of the Krypton
acquisition agreement.

         The Directors have formed the opinion that until 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, 1998 relates to the extent that the
hurdle discussed above is reasonably expected to be met. Consequently, an
estimate of L6.3 million has been recognized as contingent consideration payable
in respect of the Krypton acquisition at December 31, 1998 for 7.5 million
ordinary shares and 7.5 million "B" Warrants (based on the market price for the
ordinary shares at December 31, 1998).

         In January 1996, the Company repaid an amount of approximately L1
million that had been loaned interest-free to Krypton by the Ian Gowrie-Smith
Family Trust to fund certain drug development and milestone payments.

                                      -85-
<PAGE>

         CERTAIN ARRANGEMENTS IN RESPECT OF VECAP

         Dr. Thomas Rinderknecht, a non-executive director of the Company, 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. 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. See "Item 1. Description of Business -
Joint Venture with Genta".

         OTHER ARRANGEMENTS

         Dr. Thomas Rinderknecht, a non-executive director of the Company, is a
partner at the law firm Rinderknecht, Glaus & Stadelhofer, based in Switzerland.
During 1998 fees of L66,000 (1997: L163,000) were paid to Rinderknecht, Glaus &
Staudelhofer in respect of legal advice to the Company AG and the Company.

         At the end of December 1998, Ian Gowrie-Smith, through a family trust,
acquired a 50% interest in 10 East 63rd Street Inc., the company which owns 10
East 63rd Street, a property in New York. The Company 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. The lease has
been renewed subsequent to the year end on the same terms.


                                      -86-
<PAGE>


                                     PART II

ITEM 14 - DESCRIPTION OF SECURITIES TO BE REGISTERED

         Not applicable

                                    PART III

ITEM 15 - DEFAULTS UPON SENIOR SECURITIES

         None

ITEM 16 - CHANGES IN SECURITIES, CHANGES IN SECURITY FOR REGISTERED SECURITIES
          AND USE OF PROCEEDS

         None

                                     PART IV

ITEM 17 - FINANCIAL STATEMENTS

         (Not supplied as Item 18 is complied with)

ITEM 18 - FINANCIAL STATEMENTS

         Reference is made to Item 19 for a list of all financial statements
filed as part of this Form 20-F.

ITEM 19 - FINANCIAL STATEMENTS AND EXHIBITS

            (a) The following financial statements are filed as part of this
Form 20-F:

<TABLE>
<CAPTION>
                                                                                            Page
                <S>                                                                         <C>
                SkyePharma PLC Consolidated Financial Statements ..................         F-3
                Report of Independent Accountants .................................         F-2
                Consolidated Income Statements for the years ended
                  December 31, 1996; 1997 and 1998 ................................         F-3
                Consolidated Balance Sheets at December 31, 1997 and 1998 .........         F-4
                Consolidated Cash Flow Statements for the years ended
                  December 31, 1996; 1997 and 1998 ................................         F-5
                Notes to the Consolidated Cash Flow Statements ....................         F-6
                Consolidated Recognized Gains and Losses ..........................         F-8
                Reconciliation of Movement in Shareholder's Funds .................         F-8
                Notes to the Consolidated Financial Statements ....................         F-9

                Jago Holding AG Consolidated Financial Statements .................         F-59
                Report of Independent Accountants .................................         F-58
                Consolidated Income Statement for the four month period
                  ended April 30, 1996 ............................................         F-59
                Consolidated Cash Flow Statements for the four month period ended
                  April 30, 1996 ..................................................         F-60
                Notes to the Consolidated Cash Flow Statements ....................         F-61
                Statement of Total Recognised Gains and Losses ....................         F-62
                Reconciliation of Movement in Shareholder's Funds .................         F-62
                Notes to the Consolidated Financial Statements ....................         F-63

            (b) The following exhibits are filed as part of this Form 20-F:

                I.       Consent of Independent Auditors (SkyePharma plc)                   E-1

                II.      Consent of Independent Auditors (Jago Holding AG)                  E-2


</TABLE>
                                      -87-

<PAGE>


                                   SIGNATURES

         Pursuant to the requirements of Section 12 of the Securities Exchange
Act of 1934, the registrant certifies that it meets all of the requirements for
filing on Form 20-F and has duly caused this Annual Report to be signed on its
behalf by the undersigned thereunto duly authorized.

Date: June 25, 1999

                                             By: /s/ Donald Nicholson
                                                -------------------------
                                                Name: Donald Nicholson
                                                Title: Finance Director

                                      -88-

<PAGE>





                  [THIS PAGE HAS BEEN INTENTIONALLY LEFT BLANK]







                                      F-1
<PAGE>

SKYEPHARMA PLC

REPORT OF INDEPENDENT ACCOUNTANTS


TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF SKYEPHARMA PLC

         We have examined the accompanying Consolidated Financial Statements of
SkyePharma PLC and its subsidiaries contained on pages F-3 to F-57 of the Annual
Report as at December 31, 1997 and 1998 and the years ended December 31, 1996,
1997 and 1998, which are expressed in pounds sterling except where specifically
identified. 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.

         Our examinations of these statements were made in accordance with
auditing standards generally accepted in the United Kingdom and the United
States and accordingly included such tests of the accounting records and such
other auditing procedures as we considered necessary in the circumstances.

         In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
SkyePharma PLC and its subsidiaries at December 31, 1997 and 1998 and the
results of their operations and their cash flows for the years ended December
31, 1996, 1997 and 1998 in conformity with accounting principles generally
accepted in the United Kingdom consistently applied.

         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, 1996, 1997 and 1998 and the determination of
consolidated stockholders' equity and consolidated financial position also
expressed in pounds sterling at December 31, 1997 and 1998 to the extent
summarised in Note 29 to the consolidated financial statements.

PRICEWATERHOUSECOOPERS
London,
United Kingdom

April 19, 1999


                                      F-2
<PAGE>


SKYEPHARMA PLC


CONSOLIDATED INCOME STATEMENTS

<TABLE>
<CAPTION>

                                          YEAR TO DECEMBER 31, 1996            YEAR TO           YEAR TO DECEMBER 31, 1998
                                                                              DECEMBER
                                                                               31, 1997
                                   NOTES CONTINUING DISCONTINUED TOTAL      TOTAL               BEFORE    EXCEPTIONAL  TOTAL
                                           L'000       L'000     L'000      L'000             EXCEPTIONAL  ITEMS       L'000
                                                                                                ITEMS      L'000
                                                                                                L'000
                                   ------ --------  -------  --------      --------  -------    -------   -------  --------
<S>                                    <C> <C>      <C>       <C>         <C>        <C>       <C>       <C>      <C>
TURNOVER

Group and share of Joint Venture ..          9,013       --     9,013        13,839              11,038        --    11,038

Less: share of Joint Venture ......             --       --        --            --               (113)        --     (113)

                                          --------  -------  --------      --------   -------  --------   -------  --------
GROUP TURNOVER ....................    2     9,013       --     9,013        13,839              10,925        --    10,925


Cost of sales .....................    2   (7,028)       --   (7,028)      (10,193)            (10,284)     (346)  (10,630)

                                          --------  -------  --------      --------   -------  --------   -------  --------
GROSS (LOSS)/PROFIT ...............          1,985       --     1,985         3,646                 641     (346)       295

Selling, marketing and distribution
expenses ..........................        (2,539)       --   (2,539)       (3,063)             (3,251)     (979)   (4,230)

Administration expenses ...........        (6,384)    (523)   (6,907)       (6,422)             (6,781)        --   (6,781)

Less: utilisation of prior period
provision .........................             --      550       550            --                  --        --        --

Research and development expenses .        (2,098)       --   (2,098)       (6,109)             (5,712)        --   (5,712)

Other operating income ............            313       --       313            --                  --        --        --

                                          --------  -------  --------      --------   -------  --------   -------  --------
GROUP OPERATING (LOSS)/PROFIT .....    4   (8,723)       27   (8,696)      (11,948)            (15,103)   (1,325)  (16,428)

Share of operating (loss) /profit
in Joint Venture ..................   11     (492)       --     (492)         (346)                                      14
                                          --------  -------  --------      --------   -------   -------   ------- ---------
                                           (9,215)       27   (9,188)      (12,294)                                (16,414)
Provision for loss on disposal of
fixed asset investment.                3   (1,823)       --   (1,823)            --                                      --

Loss on disposal of operations ....    3        --    (368)     (368)            --                                      --

Less: utilisation of prior period
provision .                            3        --      247       247            --                                      --

                                          --------  -------  --------      --------   -------   -------   -------  --------
LOSS ON ORDINARY ACTIVITIES
BEFORE INTEREST AND TAXATION.......       (11,038)     (94)  (11,132)      (12,294)                                (16,414)
                                          --------  -------  --------      --------   -------   -------   -------  --------
Interest receivable ...............                             1,000           808                                   1,396

Interest payable

- Group                                6                      (3,887)       (5,864)                                 (6,619)

- Joint Venture ...................   11                        (211)         (365)                                   (374)

                                                             --------      --------                                --------
Total interest payable ............                           (4,098)       (6,229)                                 (6,993)

                                                             --------      --------                                --------
LOSS ON ORDINARY ACTIVITIES BEFORE
TAXATION...........................                          (14,230)      (17,715)                                (22,011)

Taxation ..........................    7                           72          (66)                                    (85)

                                                             --------      --------                                --------
RETAINED LOSS .....................                          (14,158)      (17,781)                                (22,096)

                                                             --------      --------                                --------
BASIC AND DILUTED LOSS PER
ORDINARY SHARE (PENCE)........         8                       (5.3)p        (5.1)p                                  (5.7)p
                                                             --------      --------                                --------

</TABLE>
-------------------
There was no material difference between the loss on ordinary activities before
taxation and historic cost loss before taxation for these periods. All 1997 and
1998 results represent continuing activities.

See Notes to the Consolidated Financial Statements.


                                      F-3
<PAGE>

SKYEPHARMA PLC

CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>

                                                                       NOTES          DECEMBER     DECEMBER
                                                                                         31,          31,
                                                                                        1997         1998
                                                                                        L'000        L'000
                                                                      --------         --------     --------
<S>                                                                       <C>               <C>        <C>
FIXED ASSETS
Intangible assets .................................................       9                 969        1,399
Tangible assets ...................................................      10              23,065       25,999
Investments .......................................................      11                  --        2,939
                                                                                       --------     --------
                                                                                         24,034       30,337
                                                                                       --------     --------
CURRENT ASSETS
Stocks ............................................................      12               1,582        1,186
Debtors ...........................................................      13               8,143        6,407
Cash and short term bank deposits .................................     (c)               8,671       30,925
                                                                                       --------     --------
                                                                                         18,396       38,518
                                                                                       --------     --------
CREDITORS: AMOUNTS FALLING DUE WITHIN ONE YEAR ....................      14             (8,276)      (9,571)
                                                                                       --------     --------
NET CURRENT ASSETS ................................................                      10,120       28,947
                                                                                       --------     --------
TOTAL ASSETS LESS CURRENT LIABILITIES .............................                      34,154       59,284
CREDITORS: AMOUNTS FALLING DUE AFTER MORE THAN ONE YEAR                  15              4,150)      (6,248)
(INCLUDING CONVERTIBLE DEBENTURES) ................................                --------         --------
                                                                                         30,004       53,036
                                                                                      =========    =========
PROVISIONS FOR LIABILITIES AND CHARGES
Deferred consideration ............................................      16              69,828       39,500
Net capital deficiency of Joint Venture
 Share of gross assets ............................................      11               (447)      (1,144)
 Share of gross liabilities ......................................       11               6,546        7,406
                                                                                       --------     --------
                                                                                          6,099        6,262
Other .............................................................      16                 187        1,039
                                                                                       --------     --------
                                                                                         76,114       46,801
                                                                                       --------     --------
CAPITAL AND RESERVES
Called up share capital ...........................................      20              36,395       42,710
Share premium .....................................................      22             155,868      186,215
Other reserves ....................................................      22              10,791       11,060
Currency translation reserve ......................................      22               (640)          662
Shares and warrants to be issued ..................................      21              15,744        6,281
Profit and loss account ...........................................      22           (264,268)    (240,693)
                                                                                        -------     --------
SHAREHOLDERS' (DEFICIT)/FUNDS - ENTIRELY ATTRIBUTABLE TO EQUITY
INTERESTS .........................................................                    (46,110)        6,235
                                                                                       --------     --------
                                                                                         30,004       53,036
                                                                                       --------     --------
                                                                                       --------     --------
</TABLE>

---
For details of contingent liabilities and commitments, see Notes 18 and 19 to
Consolidated Financial Statements. See Notes to the Consolidated Financial
Statements.

                                      F-4
<PAGE>

SKYEPHARMA PLC


CONSOLIDATED CASH FLOW STATEMENTS

<TABLE>
<CAPTION>
                                                                              YEAR TO      YEAR TO      YEAR TO
                                                                             DECEMBER 31, DECEMBER 31, DECEMBER 31,
                                                                                  1996         1997         1998
                                                                  NOTES           L'000        L'000        L'000
                                                                 -------         --------     --------     --------
<S>                                                                 <C>          <C>          <C>          <C>
NET CASH OUTFLOW FROM OPERATING ACTIVITIES ....................      (b)         (15,005)     (14,996)     (10,302)
RETURNS ON INVESTMENTS AND SERVICING OF FINANCE
Interest received .............................................                     1,019          743        1,237
Interest paid .................................................                     (291)        (332)        (284)
Interest element of finance lease payments ....................                      (42)         (45)         (34)
                                                                                  -------     --------     --------
                                                                                      686          366          919
                                                                                 --------     --------     --------
TAXATION ......................................................                      (43)         (23)         (77)
                                                                                 --------     --------     --------
CAPITAL EXPENDITURE AND FINANCIAL INVESTMENT
Purchase of intangible fixed assets ...........................                     (378)        (738)        (444)
Purchase of tangible fixed assets .............................                     (784)      (3,710)      (4,310)
Purchase of fixed asset investment ............................       11               --           --      (2,939)
Proceeds from sale of tangible fixed assets ...................       24              810           26           72
                                                                                 --------     --------     --------
                                                                                    (352)      (4,422)      (7,621)
                                                                                 --------     --------     --------
ACQUISITIONS AND DISPOSALS
Purchase of subsidiary undertakings ...........................       23        (109,306)        (316)           --
Net (overdrafts)/cash acquired with subsidiary undertakings ...       23          (1,647)           73           --
Sale of subsidiary undertakings ...............................       24             (68)           --           --
                                                                                 --------     -------      --------
                                                                                (111,021)        (243)           --
                                                                                 --------     --------     --------
CASH OUTFLOW BEFORE USE OF LIQUID RESOURCES AND FINANCING .....                 (125,735)     (19,318)     (17,081)
                                                                                 --------     --------     --------
MANAGEMENT OF LIQUID RESOURCES
Amounts placed on deposit .....................................                  (92,925)     (21,932)     (43,304)
Deposits released .............................................                    73,777       34,214       23,157
                                                                                 --------     --------     --------
NET (INCREASE)/DECREASE OF AMOUNTS HELD ON DEPOSIT ............                  (19,148)       12,282     (20,147)
                                                                                 --------     --------     --------
FINANCING
Issue of ordinary share capital ...............................                   150,826        7,789       31,490
Expenses of share issue .......................................                   (5,315)        (368)      (2,456)
Issue of debentures ...........................................                        --           --       10,259
Expenses of debenture issue ...................................                        --           --        (486)
Debt due within one year:
 Increase in borrowings .......................................                        --           --          382
 Repayment of loans ...........................................                     (101)        (166)        (166)
Repayment of capital element of finance lease payments ........                     (260)         (49)        (268)
                                                                                 --------     --------     --------
                                                                                  145,150        7,206       38,755
                                                                                 --------     --------     --------
INCREASE IN CASH ..............................................       (a)             267          170        1,527
                                                                                 --------     --------     --------
                                                                                 --------     --------     --------

</TABLE>


----------
See Notes to the Consolidated Financial Statements.

                                      F-5

<PAGE>

SKYEPHARMA PLC

NOTES TO THE CONSOLDATED CASH FLOW STATEMENTS

<TABLE>
<CAPTION>
(A) RECONCILIATION OF MOVEMENTS IN NET FUNDS/(DEBT) (NOTE (C))                  YEAR TO         YEAR TO         YEAR TO
                                                                              DECEMBER 31,    DECEMBER 31,    DECEMBER 31,
                                                                                  1996            1997            1998
                                                                                 L'000           L'000           L'000
                                                                              -----------     -----------    ------------
<S>                                                                           <C>             <C>             <C>
Increase in cash in the year ..................................                     267             170           1,527
Cash outflow from decrease in debt and lease financing ........                     361             215              52
Cash outflow/(inflow) from change in liquid resources .........                  19,148        (12,282)          20,147
Issue of debentures ...........................................                      --              --         (9,773)
                                                                               --------       ---------        --------
Change in net funds/debt resulting from cash flows ............                  19,776        (11,897)          11,953
Loans and finance leases acquired with subsidiary .............                 (7,159)              --              --
Capitalisation of loan notes ..................................                   1,200              --              --
New finance leases ............................................                   (420)           (142)            (34)
Conversion of debentures ......................................                      --              --           7,626
Issue of `C' Warrants .........................................                      --              --             271
Debenture interest ............................................                      --              --           (419)
Translation differences .......................................                   2,729             553           (432)
                                                                               --------       ---------        --------
Movement in net funds/debt in the year ........................                  16,126        (11,486)          18,965
Net (debt)/funds at beginning of the year .....................                 (2,302)          13,824           2,338
                                                                               --------       ---------        --------
Net funds at end of the year ..................................                  13,824           2,338          21,303
                                                                               --------       ---------        --------
                                                                               --------       ---------        --------
</TABLE>


---
Net (debt)/funds is defined as cash and liquid resources less borrowings.

<TABLE>
<CAPTION>
(B) RECONCILIATION OF GROUP OPERATING LOSS TO NET CASH
OUTFLOW FROM OPERATING ACTIVITIES                                                YEAR TO         YEAR TO         YEAR TO
                                                                               DECEMBER 31,    DECEMBER 31,    DECEMBER 31,
                                                                                    1996            1997            1998
                                                                                   L'000           L'000           L'000
                                                                               -----------     -----------     -----------
<S>                                                                            <C>             <C>             <C>
Group operating loss ..........................................                   (8,696)        (11,948)        (16,428)
Exceptional charges within operating loss (Note 3).............                     --               689           1,325
                                                                                 -------         -------         -------
Operating loss excluding exceptional items ....................                   (8,696)        (11,259)        (15,103)
Depreciation and amortisation .................................                      868           2,470           2,561
Non-cash royalty income .......................................                   (1,340)           --              --
Vesting of shares of Genta Incorporated .......................                     (313)           --              --
Other .........................................................                    1,388              40               6
(Increase)/decrease in stocks .................................                      259          (1,345)            111
(Increase)/decrease in debtors ................................                     (202)         (4,798)          2,158
Increase/(decrease) in creditors ..............................                   (6,419)            344             177
Increase/(decrease) in provisions .............................                     (550)           --                29
                                                                                 -------         -------         -------
                                                                                 (15,005)        (14,548)        (10,061)
Outflow related to exceptional items ..........................                     --              (448)           (241)
                                                                                 -------         -------         -------
Net cash outflow from operating activities ....................                  (15,005)        (14,996)        (10,302)
                                                                                 -------         -------         -------
                                                                                 -------         -------         -------
</TABLE>


                                      F-6
<PAGE>
SKYEPHARMA PLC

NOTES TO THE CONSOLDATED CASH FLOW STATEMENTS

<TABLE>
<CAPTION>
(C) ANALYSIS OF NET FUNDS/(DEBT)
                                                                ACQUISITION
                                          AT                     (EXCL CASH       OTHER NON                        AT
                                      JANUARY 1,       CASH           &              CASH          EXCHANGE    DECEMBER 31,
                                         1998          FLOW      OVERDRAFTS)       CHANGES        MOVEMENTS      1998
                                        L'000          L'000         L'000           L'000           L'000         L'000
                                      ----------      ------     ------------     ---------       ----------   ------------
<S>                                   <C>             <C>        <C>              <C>             <C>          <C>
Cash at bank and in hand......          1,805          2,222           --             --            (44)           3,983
Overdrafts ...................         (1,127)          (695)          --             --            (95)          (1,917)
Short term bank deposits......          6,866         20,147           --             --            (71)          26,942
                                      ----------      ------     ------------     ---------       --------     ------------
                                        7,544         21,674           --             --           (210)          29,008
Debt due after one year.......         (3,750)        (9,773)          --           7,644          (141)          (6,020)
Debt due within one year......           (792)          (216)          --            (166)          (60)          (1,234)
Finance leases ...............           (664)           268           --             (34)          (21)            (451)
                                      ----------      ------     ------------     ---------       --------     ------------
                                       (5,206)        (9,721)          --           7,444          (222)          (7,705)
                                      ----------      ------     ------------     ---------       --------     ------------
                                        2,338         11,953           --           7,444          (432)          21,303
                                      ----------      ------     ------------     ---------       --------     ------------
                                      ----------      ------     ------------     ---------       --------     ------------
</TABLE>

<TABLE>
<CAPTION>
                                                                ACQUISITION
                                          AT                     (EXCL CASH       OTHER NON                        AT
                                      JANUARY 1,       CASH           &              CASH          EXCHANGE    DECEMBER 31,
                                         1997          FLOW      OVERDRAFTS)       CHANGES        MOVEMENTS        1997
                                        L'000          L'000         L'000           L'000           L'000        L'000
                                      ----------      ------     ------------     ---------       ----------   ------------
<S>                                   <C>             <C>        <C>              <C>             <C>          <C>
Cash at bank and in hand......            2,170         (635)         --              --               270          1,805
Overdrafts ...................           (2,009)         805          --              --                77         (1,127)
Short term bank deposits......           19,148      (12,282)         --              --              --            6,866
                                      ----------      ------     ------------     ---------       ----------   ------------
                                         19,309      (12,112)         --              --               347          7,544
Debt due after one year.......           (4,069)        --            --               166             153         (3,750)
Debt due within one year......             (823)         166          --              (166)             31           (792)
Finance leases ...............             (593)          49          --              (142)             22           (664)
                                      ----------      ------     ------------     ---------       ----------   ------------
                                         (5,485)         215          --              (142)            206         (5,206)
                                      ----------      ------     ------------     ---------       ----------   ------------
                                         13,824      (11,897)         --              (142)            553          2,338
                                      ----------      ------     ------------     ---------       ----------   ------------
                                      ----------      ------     ------------     ---------       ----------   ------------
</TABLE>

<TABLE>
<CAPTION>
                                                                ACQUISITION
                                          AT                     (EXCL CASH       OTHER NON                        AT
                                      JANUARY 1,       CASH           &              CASH          EXCHANGE    DECEMBER 31,
                                         1996          FLOW      OVERDRAFTS)       CHANGES        MOVEMENTS        1996
                                        L'000          L'000         L'000           L'000           L'000        L'000
                                      ----------      ------     ------------     ---------       ----------   ------------
<S>                                   <C>             <C>        <C>              <C>             <C>          <C>
Cash at bank and in hand......             --          1,604          --              --                566        2,170
Overdrafts ...................           (1,102)      (1,337)         --              --                430       (2,009)
Short term bank deposits......             --         19,148          --              --              --          19,148
                                      ----------      ------     ------------     ---------       ----------   ------------
                                         (1,102)      19,415          --              --                996       19,309
Debt due after one year.......             --           --          (5,579)           202             1,308       (4,069)
Debt due within one year......           (1,200)         101        (1,017)           998               295         (823)
Finance leases ...............             --            260          (563)          (420)              130         (593)
                                      ----------      ------     ------------     ---------       ----------   ------------
                                         (1,200)         361        (7,159)           780             1,733       (5,485)
                                      ----------      ------     ------------     ---------       ----------   ------------
                                         (2,302)      19,776        (7,159)           780             2,729       13,824
                                      ----------      ------     ------------     ---------       ----------   ------------
                                      ----------      ------     ------------     ---------       ----------   ------------
</TABLE>

--------------
Cash at bank and in hand and short term deposits are aggregated on the balance
sheet. Debt includes secured mortgage and convertible debentures. Other non-cash
changes in 1998 relate mainly to conversion of debentures, debenture interest
and issue of `C' Warrants.


                                      F-7
<PAGE>


SKYEPHARMA PLC

STATEMENT OF TOTAL RECOGNISED GAINS AND LOSSES

<TABLE>
<CAPTION>
                                                            YEAR TO        YEAR TO        YEAR TO
                                                          DECEMBER 31,   DECEMBER 31,   DECEMBER 31,
                                                              1996           1997           1998
                                                             L'000          L'000          L'000
                                                          -----------    -----------    -----------
<S>                                                       <C>            <C>            <C>
LOSS ATTRIBUTABLE TO SHAREHOLDERS ..................         (14,158)       (17,781)        (22,096)
Net currency translation effect
 Group .............................................           2,358         (2,476)          1,105
 Share of Joint Venture ............................            (804)           282             197
                                                             -------        -------         -------
                                                               1,554         (2,194)          1,302
                                                             -------        -------         -------
Total recognised gains and losses for the year               (12,604)       (19,975)        (20,794)
                                                             -------        -------         -------
                                                             -------        -------         -------
</TABLE>


         This statement discloses the component gains and losses that have been
recognised in the periods in so far they are attributable to shareholders.
Recognised gains and losses include the net loss accounted for in the
consolidated statements of income and those directly taken to shareholders'
equity.

RECONCILIATION OF MOVEMENT IN SHAREHOLDERS' FUNDS

<TABLE>
<CAPTION>
                                                            YEAR TO        YEAR TO        YEAR TO
                                                          DECEMBER 31,   DECEMBER 31,   DECEMBER 31,
                                                              1996           1997           1998
                                                             L'000          L'000          L'000
                                                          -----------    -----------    -----------
<S>                                                       <C>            <C>            <C>
Shareholders' deficit at the beginning of the year .        (3,431)         (44,486)       (46,110)
                                                           --------        --------       --------
Total recognised gains and losses for the year .....       (12,604)         (19,975)       (20,794)
Goodwill on acquisition ............................      (244,664)          12,697           --
Goodwill adjustments on deferred consideration .....        11,049            4,352         45,671
Ordinary shares issued, net of expenses ............       172,492            7,421         36,662
Revaluation of shares and warrants to be issued ....        21,863           (6,119)        (9,463)
Issue of warrants ..................................          --             --                269
Merger and other reserves ..........................        10,809           --               --
                                                          --------         --------       --------
Net movement in the year ...........................       (41,055)          (1,624)        52,345
                                                          --------         --------       --------
Shareholders' (deficit)/funds at the end of the year       (44,486)         (46,110)         6,235
                                                          --------         --------       --------
                                                          --------         --------       --------
</TABLE>

--------------
See Notes to the Consolidated Financial Statements.


                                      F-8
<PAGE>

SKYEPHARMA PLC

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

1 ACCOUNTING POLICIES
  ACCOUNTING CONVENTION AND PRESENTATION

         The financial statements have been prepared under the historical cost
convention and in accordance with applicable accounting standards in the U.K.
The principal accounting policies, which have been applied consistently, are set
out below. There has been a minor reclassification of manufacturing expenses in
1998, the effect of which is immaterial.

         The Group (defined as the Company and its consolidated undertakings)
has presented the profit and loss account in columnar form to illustrate the
respective effect on the results for the period of the continuing SkyePharma
business and disposals. The analysis by column is defined as follows:

Continuing        Reflects the trading results of the SkyePharma pharmaceuticals
                  business.

Discontinued      Reflects the results of the tent hire business, Black &
                  Edgington, which was sold on November 21, 1995.

         The financial statements have been prepared on a going concern basis.

         The Group prepares its consolidated financial statements in accordance
with accounting principles generally accepted in the U.K. ("U.K. GAAP"). A
reconciliation to U.S. GAAP of certain amounts at December 31, 1997 and 1998 and
for the years ended December 31, 1996, 1997 and 1998 is set forth in Note 29 of
the Notes to the Consolidated Financial Statements.

  CONSOLIDATION

         The consolidated financial information includes the financial
statements for the Company and its subsidiary undertakings. The Company has 50%
ownership of a corporate joint venture company which is accounted for under the
gross equity method. 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.

         Compared with the financial statements for the year ended 31 December
1997 the presentation of these accounts has been modified to reflect the
adoption of FRS 9: Associates and Joint Ventures and FRS 10: Goodwill and
Intangible Assets. Following the introduction of FRS10 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 capitalised and amortised rather than written off to reserves
as was the previous policy adopted. No such goodwill has arisen in the year to
31 December 1998. 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 would be charged to the profit and loss account on disposal of
the related business. Similarly where management consider that there has been a
permanent diminution in the value of goodwill previously charged against
reserves, this element of the goodwill is charged to the profit and loss
account.

         Goodwill written off was previously shown in a reserve set up for that
purpose. As required by FRS 10, this balance has been transferred to the profit
and loss reserve as shown in note 22; Reserves.

         Following the introduction of FRS9 the presentation of the profit and
loss account has been modified to show separately the Group's share of the
operating result and interest charge of the Joint Venture. Similarly the balance
sheet shows separately the Group's share of the Joint Venture gross assets and
liabilities. The changes have had no effect on retained loss or net assets.

  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


                                      F-9
<PAGE>

SKYEPHARMA PLC

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

1 ACCOUNTING POLICIES (CONTINUED)
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 or billable to customers for services rendered under development
contracts or for non-refundable milestone payments and technology access fees in
accordance with the contract terms. Non-refundable income is credited to the
income statement when earned. Certain refundable income is treated as deferred
income until such time as there is no further obligation on the Company to make
refunds. Manufacturing and distribution revenues represent principally, the toll
manufacturing fees invoiced to Wyeth-Ayerst International Inc and its affiliated
companies under a three year manufacturing contract entered into on the
acquisition of the Group's manufacturing facility in Lyon, plus other contract
manufacturing revenue and income from product sales. Revenue arising from
manufacturing and distribution is recognised on dispatch of finished products.
Advance royalties received are treated as deferred income until earned, when
they are recognised as income.

  RESEARCH AND DEVELOPMENT COSTS

         Research costs are charged as an expense in the period in which they
are incurred. Development costs are also recognised 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 define
clearly the product or process, demonstration of its technical feasibility and
that a market for it exists. Development costs recognised as an asset do not
exceed the probable net amount to be recovered in marketing the product or
process and they are amortised over the estimated economic life.

  FOREIGN CURRENCIES

         Foreign currency transactions by Group companies are booked 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. Unrealised gains and losses on
forward contracts undertaken to manage foreign currency exposure are deferred
and are recognised in the same period that the foreign currency exposure is
recognised. Exchange differences which relate to the translation of net equity
of overseas companies and intercompany foreign currency balances that are
designated as long-term in nature are taken directly to reserves. All other
foreign exchange differences relating principally to intercompany balances are
taken to the profit and loss account in the year in which they arise. With
effect from January 1, 1997, the group designated certain intercompany balances
as long-term in nature. Previously, exchange differences on these balances were
charged or credited to administrative expenses in the profit and loss account.

         The Group uses the average of exchange rates prevailing during the
period to translate the results of overseas Group subsidiary and associated
undertakings into sterling and period 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



                                      F-10
<PAGE>


SKYEPHARMA PLC

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

1 ACCOUNTING POLICIES (CONTINUED)
  INTANGIBLE FIXED ASSETS

         Intangible fixed assets comprise intellectual property and capitalised
development costs. Intellectual property comprises acquired patents, trade
marks, know-how and other similarly identified rights. These are recorded at
their acquisition cost and are amortised over the lower of the legal or
estimated economic lives, not to exceed five years. Costs associated with
internally developed intellectual property are generally treated as research and
development costs. Development costs are recognised under the criteria stated
above.

  FIXED ASSET INVESTMENTS

         Fixed asset investments of marketable equity securities are recorded at
cost, less provision for permanent diminution in value.

  STOCKS AND WORK-IN-PROGRESS

         Stocks and work-in-progress are valued at the lower of cost and net
realisable 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.

  DEFERRED CONSIDERATION

         The provision for deferred consideration comprises the net present
value of contingent consideration arising from acquisitions. The eventual
outcome is subject to the Group's future performance. 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. 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 crystallise
within the foreseeable future.

  LEASED AND HIRED ASSETS

         Assets acquired under hire purchase and finance lease agreements are
included in tangible fixed assets. 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 benefit pension scheme is 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.



                                      F-11
<PAGE>


SKYEPHARMA PLC

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

1 ACCOUNTING POLICIES (CONTINUED)
  CONVERTIBLE DEBENTURES

         On issue, convertible debentures are stated at the amount of net
proceeds after deducting issue costs. On conversion the amount recognised in
shareholders' funds in respect of the shares issued is equal to the carrying
value at the date of conversion.

         Debentures were issued during 1998 at a discount equivalent to an
annual interest rate of 3% (note 15; Creditors - Amounts falling due after more
than one year). Interest payable is calculated to unwind the issue costs and the
discount on issue at a constant rate over the term of the debenture.

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 and net assets by business and geographical segment together with
analysis of cost of sales, capital expenditure and depreciation by business
segment. 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-12
<PAGE>

SKYEPHARMA PLC

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

2 SEGMENTAL ANALYSIS (CONTINUED)
(A) GROUP TURNOVER

<TABLE>
<CAPTION>
                                                       YEAR TO        YEAR TO        YEAR TO
                                                     DECEMBER 31,   DECEMBER 31,   DECEMBER 31,
                                                        1996           1997           1998
                                                       L'000          L'000          L'000
                                                       --------       --------       --------
<S>                                                   <C>            <C>            <C>
By class of business:
Pharmaceuticals
Contract development, including milestone payments:
 Receivable from third parties ....................      4,296          4,614          2,401
 Receivable from the Joint Venture ................      1,685            419             52
                                                        ------         ------         ------
                                                         5,981          5,033          2,453
Manufacturing & Distribution ......................        826          6,569          6,485
Royalties receivable ..............................      2,206          2,237          1,987
                                                        ------         ------         ------
Total and consolidated ............................      9,013         13,839         10,925
                                                        ------         ------         ------
                                                        ------         ------         ------
Contract development split:
 R&D costs recharged ..............................      4,340          4,053          2,117
 Milestone payments ...............................      1,641            980            336
                                                        ------         ------         ------
                                                         5,981          5,033          2,453
                                                        ------         ------         ------
                                                        ------         ------         ------
By location of customer:
 U.K ..............................................      1,308          1,151            207
 Continental Europe ...............................      4,110         10,333          6,865
 U.S.A ............................................      3,570          2,355          3,434
 Rest of the world ................................         25             --            419
                                                        ------         ------         ------
Total and consolidated ............................      9,013         13,839         10,925
                                                        ------         ------         ------
                                                        ------         ------         ------
By location of operation:
 Continental Europe ...............................      9,013         13,593         10,085
 U.S.A ............................................         --            246            840
                                                        ------         ------         ------
Total and consolidated ............................      9,013         13,839         10,925
                                                        ------         ------         ------
                                                        ------         ------         ------
</TABLE>

         Royalties receivable in 1996, 1997 and 1998 related predominantly to
one customer.

         In 1998, L4,054,000 (1997: L5,357,000, 1996: LNil) of Manufacturing &
Distribution revenues represent toll manufacturing fees invoiced to Wyeth-Ayerst
International Inc. and affiliated companies.

(B) COST OF SALES

<TABLE>
<CAPTION>
                                   YEAR TO      YEAR TO      YEAR TO
                                  DECEMBER     DECEMBER     DECEMBER
                                     31,          31,          31,
                                     1996         1997         1998
                                    L'000        L'000        L'000
                                  --------    ---------     --------
<S>                               <C>         <C>           <C>
By class of business:
 Pharmaceuticals.............
 Contract development .......      (5,178)      (3,136)      (2,998)
 Manufacturing & Distribution        (617)      (5,966)      (6,592)
 Royalties payable ..........      (1,233)      (1,091)      (1,040)
                                  -------      -------      -------
Total and consolidated ......      (7,028)     (10,193)     (10,630)
                                  -------      -------      -------
                                  -------      -------      -------
</TABLE>

                                      F-13
<PAGE>

SKYEPHARMA PLC

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

2 SEGMENTAL ANALYSIS (CONTINUED)
C LOSS BEFORE INTEREST

<TABLE>
<CAPTION>
                                YEAR TO          YEAR TO          YEAR TO
                              DECEMBER 31,     DECEMBER 31,     DECEMBER 31,
                                  1996             1997             1998
                                 L'000            L'000            L'000
                              ------------    -------------     ------------
<S>                           <C>             <C>               <C>
By class of business:
 Pharmaceuticals ........       (11,038)         (12,294)          (16,414)
 Discontinued activities            (94)            --                --
                                -------          -------           -------
Total and consolidated ..       (11,132)         (12,294)          (16,414)
                                -------          -------           -------
By location of operation:
 U.K ....................        (3,210)          (3,662)           (3,336)
 Continental Europe .....        (5,529)          (4,999)           (8,615)
 U.S.A ..................        (2,393)          (3,633)           (4,463)
                                -------          -------           -------
Total and consolidated ..       (11,132)         (12,294)          (16,414)
                                -------          -------           -------
                                -------          -------           -------
</TABLE>

         Turnover and operating results of the Joint Venture relates wholly to
pharmaceuticals and arises in continental Europe. The net loss in the Joint
Venture included in the income statement for the year to December 31, 1998 was
L360,000 (1997: L711,000; 1996: L703,000).


                                      F-14
<PAGE>

SKYEPHARMA PLC

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

2 SEGMENTAL ANALYSIS (CONTINUED)
         Reconciliation of reported segmental loss before interest to
consolidated retained loss.

<TABLE>
<CAPTION>
                                                 YEAR TO        YEAR TO         YEAR TO
                                               DECEMBER 31    DECEMBER 31,    DECEMBER 31,
                                                  1996           1997            1998
                                                 L'000          L'000           L'000
                                               -----------    -----------     -----------
<S>                                            <C>            <C>             <C>
Total segmental loss before interest ......      (11,132)       (12,294)       (16,414)
Interest receivable .......................        1,000            808          1,396
Interest payable
 - Group ..................................       (3,887)        (5,864)        (6,619)
 - Joint Venture ..........................         (211)          (365)          (374)
                                                 -------        -------        -------
Total interest payable ....................       (4,098)        (6,229)        (6,993)
                                                 -------        -------        -------
LOSS ON ORDINARY ACTIVITIES BEFORE TAXATION      (14,230)       (17,715)       (22,011)
Taxation ..................................           72            (66)           (85)
                                                 -------        -------        -------
Retained loss .............................      (14,158)       (17,781)       (22,096)
                                                 -------        -------        -------
                                                 -------        -------        -------
</TABLE>

(D) TOTAL ASSETS AND NET (LIABILITIES)/ASSETS

<TABLE>
<CAPTION>
                                        TOTAL ASSETS               NET (LIABILITIES)/ASSETS
                                -----------------------------    ---------------------------
                                DECEMBER 31,     DECEMBER 31,    DECEMBER 31,   DECEMBER 31,
                                    1997            1998            1997           1998
                                   L'000           L'000           L'000          L'000
                                ------------     ------------    ------------   ------------
<S>                             <C>              <C>             <C>            <C>
By class of business:
 Pharmaceuticals ........           42,430          68,855         (46,110)           6,235
                                   -------         -------         -------          -------
By location of operation:
 U.K ....................            9,217          31,881          38,039           74,247
 Continental Europe .....           31,403          35,422         (78,467)         (57,228)
 U.S.A ..................            1,810           1,552          (5,682)         (10,784)
                                   -------         -------         -------          -------
Total and consolidated ..           42,430          68,855         (46,110)           6,235
                                   -------         -------         -------          -------
                                   -------         -------         -------          -------
</TABLE>


(E) CAPITAL EXPENDITURE

<TABLE>
<CAPTION>
                                                     YEAR TO          YEAR TO          YEAR TO
                                                   DECEMBER 31,     DECEMBER 31,     DECEMBER 31,
                                                      1996             1997             1998
                                                     L'000            L'000            L'000
                                                   -----------      -----------      -----------
<S>                                                <C>              <C>              <C>
By class of business:
 Pharmaceuticals ..........................            1,107            4,962            4,308
                                                    ---------        --------         --------
                                                    ---------        --------         --------
</TABLE>

F DEPRECIATION & AMORTISATION

<TABLE>
<CAPTION>
                                                     YEAR TO          YEAR TO          YEAR TO
                                                   DECEMBER 31,     DECEMBER 31,     DECEMBER 31,
                                                      1996             1997             1998
                                                     L'000            L'000            L'000
                                                   -----------      -----------      -----------
<S>                                                <C>              <C>              <C>
By class of business:
 Pharmaceuticals ..........................              868            2,470            2,731
                                                     --------         --------          -------
                                                     --------         --------          -------
</TABLE>


                                      F-15
<PAGE>

SKYEPHARMA PLC

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

2 SEGMENTAL ANALYSIS (CONTINUED)
(G) LONG LIVED ASSETS

<TABLE>
<CAPTION>
                                                        YEAR TO         YEAR TO
                                                      DECEMBER 31,    DECEMBER 31,
                                                         1997            1998
                                                        L'000           L'000
                                                      -----------     -----------
<S>                                                   <C>             <C>
By location of operation:
 U.K ............................................             396             333
 Continental Europe .............................          22,661          26,343
 U.S.A. .........................................             977             722
                                                         --------        --------
                                                           24,034          27,398
                                                         --------        --------
                                                         --------        --------
</TABLE>

3 EXCEPTIONAL ITEMS

(A) ITEMS INCLUDED IN OPERATING LOSS

<TABLE>
<CAPTION>
                                                                             YEAR TO         YEAR TO         YEAR TO
                                                                           DECEMBER 31,    DECEMBER 31,    DECEMBER 31,
                                                                               1996            1997            1998
                                                                              L'000           L'000           L'000
                                                                            --------        --------        --------
<S>                                                                          <C>            <C>             <C>
Establishment of ADR facility                                                     --             689              --
Provision for withdrawal from sales and marketing activities of                   --              --           1,325
Brightstone Pharma Inc.
                                                                            --------        --------        --------
                                                                                  --             689           1,325
                                                                            --------        --------        --------
                                                                            --------        --------        --------
</TABLE>

         A decision was made in November 1998 to withdraw from the sales and
marketing activities of Brightstone Pharma Inc. The major actions comprising
this plan were;

         i        To identify and provide for costs of exit from these
                  activities in particular severance compensation and costs
                  associated with termination of on going contracts with
                  suppliers.

         ii       To provide against the value of related inventory and fixed
                  assets rendered obsolete.

         The total provision amounted to approximately L1.3 million made up as
         follows:

<TABLE>
<CAPTION>
                                                            L'000
                                                          --------
<S>                                                            <C>
Write down of tangible fixed assets                            170
Write down of inventory                                        346
Provision made for costs of closure                            809
                                                          --------
                                                             1,325
                                                          --------
                                                          --------
</TABLE>


                                      F-16
<PAGE>

SKYEPHARMA PLC

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

3 EXCEPTIONAL ITEMS (CONTINUED)
         Included in the provision for costs of closure is L506,000 relating to
severance compensation. This represents the termination benefits for 22 staff
involved in sales and marketing activities. This amount has been charged to
selling, marketing and distribution expenses.

         The related inventory and tangible fixed assets were written off in
1998 resulting in L516,000 being charged to the provision.

         The exit plan was substantially completed by April 30, 1999 and the
actual costs incurred were not materially different from the provision.

         1997 exceptional costs of L689,000 included in administrative expenses
relate to the cost of the Company's decision to make SkyePharma shares more
accessible in the US in the form of an American Depositary Receipt facility.
Much of the work was undertaken in 1997 and the facility was successfully
established in July 1998.

(B) EXCEPTIONAL ITEMS SEPARATELY DISCLOSED AFTER OPERATING PROFIT

         1996 exceptional costs relate mainly to the provision for loss on
disposal of shares in Genta Inc (see Note 11). Exceptional costs in 1996 for
discontinued operations relate to the disposal of the Company's tent hire
business in November 1995.

4 GROUP OPERATING LOSS

         The group operating loss is stated after charging:

<TABLE>
<CAPTION>
                                                 YEAR TO        YEAR TO        YEAR TO
                                               DECEMBER 31,   DECEMBER 31,   DECEMBER 31,
                                                   1996           1997           1998
                                                  L'000          L'000          L'000
                                               -----------    -----------    -----------
<S>                                             <C>           <C>             <C>
Auditors remuneration
 Audit of SkyePharma PLC - U.K ................         21           32           32
 Audit of subsidiary undertakings-overseas ....         33           63           59

Depreciation of tangible fixed assets
 owned assets .................................        612        1,804        2,332
 assets held under finance leases .............        148          372          147
 Exceptional write down of assets .............         --           --          170

Research and Development expenditure
 current year expenditure .....................      1,990        5,815        5,712
 amortised from deferred expenditure ..........         49          208           --
Amortisation of intellectual property .........         59           86           82

Operating lease rentals
 hire of plant and machinery ..................         33          153           69
 other ........................................        316          662          823
                                                     -----        -----        -----
                                                     -----        -----        -----
</TABLE>

         In addition to the above, Auditors' remuneration in respect of
non-audit services, including payments made to the Company's previous auditors
during their term of office, are analysed as follows:

<TABLE>
<CAPTION>
                                                 YEAR TO        YEAR TO        YEAR TO
                                               DECEMBER 31,   DECEMBER 31,   DECEMBER 31,
                                                   1996           1997           1998
                                                  L'000          L'000          L'000
                                               -----------    -----------    -----------
<S>                                              <C>              <C>            <C>
PricewaterhouseCoopers                                 --              --            649
Price Waterhouse                                      664             499              *
Coopers & Lybrand                                     569              --              *
                                                 --------        --------       --------
                                                    1,233             499            649
                                                 --------        --------       --------
                                                 --------        --------       --------
</TABLE>

* Non-audit fees of L649,000 for PricewaterhouseCoopers in 1998 include L95,000
paid to Price Waterhouse and L17,000 paid to Coopers & Lybrand prior to the date
of appointment of PricewaterhouseCoopers as auditors.


                                      F-17
<PAGE>

SKYEPHARMA PLC

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

4 GROUP OPERATING LOSS (CONTINUED)
         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:

<TABLE>
<CAPTION>
                                                         YEAR TO        YEAR TO         YEAR TO
                                                       DECEMBER 31,   DECEMBER 31,    DECEMBER 31,
                                                           1996            1997            1998
                                                          L'000           L'000           L'000
                                                       -----------     -----------     -----------
<S>                                                    <C>             <C>             <C>
Due diligence and other audit-related work .....          1,034             395             620
Tax advice .....................................            110              48              29
Consultancy ....................................             89              56              --
                                                        --------        --------        --------
Total non-audit fees ...........................          1,233             499             649
                                                        --------        --------        --------
                                                        --------        --------        --------
</TABLE>

5        EMPLOYEES

<TABLE>
<CAPTION>
                                                         YEAR TO        YEAR TO         YEAR TO
                                                       DECEMBER 31,   DECEMBER 31,    DECEMBER 31,
                                                           1996            1997            1998
                                                          L'000           L'000           L'000
                                                       -----------     -----------     -----------
<S>                                                    <C>             <C>             <C>
EMPLOYMENT COSTS
Wages and salaries .............................            5,770           9,031           9,085
Social security costs ..........................              392           1,197           1,209
Pension costs ..................................              277             506             526
                                                         --------        --------        --------
                                                            6,439          10,734          10,820
                                                         --------        --------        --------
                                                         --------        --------        --------
</TABLE>

         The average number of persons employed by the Group during the year was
as follows:

<TABLE>
<CAPTION>
                                                YEAR TO      YEAR TO      YEAR TO
                                              DECEMBER 31, DECEMBER 31, DECEMBER 31,
                                                  1996         1997         1998
                                                 NUMBER       NUMBER       NUMBER
                                               --------      --------    --------
<S>                                                 <C>          <C>          <C>
Pharmaceuticals ..........................          135          280          279
                                               --------      --------    --------
                                               --------      --------    --------
</TABLE>



                                      F-18
<PAGE>


SKYEPHARMA PLC

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

5 EMPLOYEES (CONTINUED)
         DIRECTORS' REMUNERATION The tables below set out details of the
Directors' aggregate emoluments and pension contributions for the years ended
December 31, 1996, 1997 and 1998.

<TABLE>
<CAPTION>
YEAR TO DECEMBER 31, 1998                         BASE                     COMPENSATION
                                                SALARY &                     FOR LOSS
                                                  FEES        BENEFITS       OF OFFICE       BONUSES       TOTAL
                                                  L'000        L'000           L'000          L'000        L'000
                                                --------      --------     ------------      -------       ------
<S>                                             <C>           <C>          <C>               <C>           <C>
EXECUTIVE DIRECTORS
I R Gowrie-Smith (Executive Chairman) .....          250           21                --           63          334
M Ashton ..................................          142           50                --           36          228
J F Bozman Jr. (to October 30, 1998) ......          148           21               154           --          323
D Nicholson ...............................          120            9                --           30          159
R A B Stewart (to November 20, 1998) ......           98            9                --           --          107
Dr J Gonella (to April 22, 1998) ..........           49            6                --           --           55
                                                --------      --------     ------------      -------       ------
                                                     807          116               154          129        1,206
                                                --------      --------     ------------      -------       ------
NON-EXECUTIVE DIRECTORS
Sir M G Beavis ............................           20           --                --           --           20
Dr J Gonella (Executive Director prior to
 April 22, 1998) ..........................           13           --                --           --           13
R S Harris ................................           20           --                --           --           20
D J Lees ..................................           20           --                --           --           20
Dr K Mansford .............................           20           --                --           --           20
Dr T Rinderknecht .........................           33           --                --           --           33
N W Wray ..................................           20           --                --           --           20
W Zeller ..................................           32           --                --           --           32
                                                --------      --------     ------------      -------       ------
                                                     178           --                --           --          178
                                                --------      --------     ------------      -------       ------
                                                     985          116               154          129        1,384
                                                --------      --------     ------------      -------       ------
                                                --------      --------     ------------      -------       ------
</TABLE>


                                      F-19
<PAGE>

SKYEPHARMA PLC

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

5 EMPLOYEES (CONTINUED)
         The emoluments of Dr J Gonella up to April 22, 1998 and for 1997 and
1996 relate to his role as Executive Director. The emoluments of Dr T
Rinderknecht and W Zeller include remuneration in respect of their capacity as
Non-Executive Directors of subsidiary companies. Benefits for Mr M Ashton
include a living allowance and school fees.

<TABLE>
<CAPTION>
                                                               BASE
                                                             SALARY &
                                                               FEES       BENEFITS     BONUSES       TOTAL
YEAR TO DECEMBER 31, 1997                                      L'000        L'000        L'000        L'000
                                                             --------     --------     --------      --------
<S>                                                          <C>           <C>         <C>           <C>
EXECUTIVE DIRECTORS
I R Gowrie-Smith (Executive Chairman) ................           250           20           --          270
Dr J Gonella .........................................           198           17           --          215
M Ashton (from March 24, 1997) .......................           118           37           --          155
J F Bozman ...........................................           168           22           --          190
E Gutzwiller (to March 24, 1997) .....................            19            1            3           23
D Nicholson (from March 24, 1997) ....................            78            5           --           83
R A B Stewart ........................................           100            7           --          107
Dr R H Zimmer (to March 24, 1997) ....................            22            2            3           27
                                                             --------     --------     --------      --------
                                                                 953          111            6        1,070
                                                             --------     --------     --------      --------
NON-EXECUTIVE DIRECTORS
Sir M G Beavis .......................................            20           --           --           20
R S Harris ...........................................            20           --           --           20
D J Lees .............................................            20           --           --           20
Dr K Mansford ........................................            20           --           --           20
Dr T Rinderknecht ....................................            32           --           --           32
N W Wray .............................................            20           --           --           20
W Zeller .............................................            32           --           --           32
                                                             --------     --------     --------      --------
                                                                 164           --           --          164
                                                             --------     --------     --------      --------
                                                               1,117          111            6        1,234
                                                             --------     --------     --------      --------
                                                             --------     --------     --------      --------
</TABLE>



                                      F-20
<PAGE>

SKYEPHARMA PLC

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

5 EMPLOYEES (CONTINUED)
         In September 1997, the Company placed 17.3 million ordinary shares,
representing 5 percent of its existing share capital, with directors and other
investors at a price of 45 pence per share. The placing raised approximately
L7.4 million, net of expenses. A total of 6.1 million shares, with an aggregate
value of L2.75 million at the placing price, were placed with directors of
SkyePharma and their associated companies and trusts.

<TABLE>
<CAPTION>
                                                                BASE
                                                              SALARY &
                                                                FEES       BENEFITS     BONUSES       TOTAL
YEAR TO DECEMBER 31, 1996                                      L'000         L'000       L'000        L'000
                                                               --------    --------    --------      --------
<S>                                                            <C>         <C>         <C>           <C>
EXECUTIVE DIRECTORS
I R Gowrie-Smith (Executive Chairman) ...............             231            2           50          283
Dr J Gonella (from May 3, 1996) .....................             179           22           --          201
J F Bozman ..........................................             146           22           36          204
E Gutzwiller (from May 3, 1996) .....................              74            9           10           93
R A B Stewart .......................................             108            7           62          177
Dr R H Zimmer (from May 3, 1996) ....................              85           10           19          114
                                                             --------     --------     --------      --------
                                                                  823           72          177        1,072
                                                             --------     --------     --------      --------
NON-EXECUTIVE DIRECTORS
Sir M G Beavis ......................................              20           --           --           20
R S Harris ..........................................              20           --           --           20
D J Lees ............................................              20           --           --           20
Dr K Mansford (from March 1, 1996) ..................              16           --           --           16
Dr T Rinderknecht (from May 3, 1996) ................              22           --           --           22
N W Wray ............................................              20           --           --           20
W Zeller (from February 28, 1996) ...................              25           --           --           25

                                                             --------     --------     --------      --------
                                                                  143           --           --          143
                                                             --------     --------     --------      --------
                                                                  966           72          177        1,215
                                                             --------     --------     --------      --------
                                                             --------     --------     --------      --------
</TABLE>

         In addition to the amounts reported above JF Bozman received L33,680 as
reimbursement of relocation expenses during the year to December 31, 1997 (year
to December 31, 1996: L89,012).

PENSIONS

         Contributions made to defined contribution pension schemes on behalf of
the Directors are set out below:

<TABLE>
<CAPTION>
                                                          YEAR TO         YEAR TO         YEAR TO
                                                        DECEMBER 31,    DECEMBER 31,    DECEMBER 31,
                                                            1996            1997            1998
                                                           L'000           L'000           L'000
                                                        -----------     -----------     -----------
<S>                                                     <C>             <C>              <C>
I R Gowrie-Smith ..................................              29              31              31
M Ashton (from March 24, 1997) ....................              --               9              14
J F Bozman Jr. (to October 30, 1998) ..............              18              21              19
D Nicholson (from March 24, 1997) .................              --              10              15
R A B Stewart (to November 20, 1998) ..............              13              13              12
Dr J Gonella ......................................              11              21               6
E Gutzwiller ......................................               5               1              --
Dr R H Zimmer .....................................               6               2              --
                                                        -----------     -----------     -----------
                                                                 82             108              97
                                                        -----------     -----------     -----------
                                                        -----------     -----------     -----------
</TABLE>

                                      F-21
<PAGE>

SKYEPHARMA PLC

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

5 EMPLOYEES (CONTINUED)
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, 1996, December 31, 1997 and December 31, 1998.

<TABLE>
<CAPTION>
                                         DECEMBER 31, 1996
NUMBER OF ORDINARY SHARES             (OR DATE OF APPOINTMENT)   DECEMBER 31, 1997   DECEMBER 31, 1998
-------------------------              ----------------------    -----------------   -----------------
<S>                                   <C>                       <C>                 <C>
I R Gowrie-Smith ...................         35,021,143               35,782,254          37,122,972
Dr J Gonella .......................        103,206,201              108,095,090          90,472,890
M Ashton (from March 24, 1997) .....                 --                  110,000             110,000
J F Bozman (to October 30, 1998) ...          4,433,833                4,433,833                  --
E Gutzwiller (to March 24, 1997) ...             10,638                       --                  --
D Nicholson (from March 24, 1997) ..            104,000                  137,000             137,000
R A B Stewart (to November 20, 1998)          1,395,833                1,395,833                  --
Dr R H Zimmer (to March 24, 1997) ..             14,184                       --                  --
Sir M G Beavis .....................            164,000                  172,000             172,000
R S Harris .........................             40,000                   46,500              46,500
D J Lees ...........................          7,892,783                7,892,783           6,967,376
Dr K Mansford ......................                 --                   16,000              16,000
Dr T Rinderknecht ..................          5,675,065                5,785,065           5,785,065
N W Wray ...........................          7,625,204                7,845,202           8,367,560
W Zeller ...........................                 --                   55,000              55,000
                                            -----------              -----------         -----------
                                            165,582,884              171,766,560         149,252,363
                                            -----------              -----------         -----------
                                            -----------              -----------         -----------

</TABLE>

<TABLE>
<CAPTION>
NUMBER OF `A' WARRANTS                     DECEMBER      DECEMBER     DECEMBER
                                           31, 1996      31, 1997     31, 1998
                                           --------      --------    --------
<S>                                       <C>            <C>            <C>
I R Gowrie-Smith ....................     13,407,184     13,407,184          --
D J Lees ............................      5,745,936      5,745,936          --
N W Wray ............................      5,223,580      5,223,580          --
                                          ----------     ----------     -------
                                          24,376,700     24,376,700          --
                                          ----------     ----------     -------
                                          ----------     ----------     -------
</TABLE>

         All `A' Warrants were exercised in December 1998 resulting in the issue
of 2,437,670 ordinary shares for a consideration of L243,767.

<TABLE>
<CAPTION>
NUMBER OF `B' WARRANTS                               DECEMBER     DECEMBER     DECEMBER
                                                     31, 1996     31, 1997     31, 1998
                                                     --------     --------     --------
<S>                                                  <C>          <C>          <C>
I R Gowrie-Smith ............................        19,797,143   19,797,143   19,797,143
J F Bozman (to October 30, 1998) ............         3,670,833    3,670,833           --
R A B Stewart (to November 20, 1998) ........         1,520,833    1,520,833           --
Sir M G Beavis ..............................            84,000       84,000       84,000
D J Lees ....................................         1,693,475    1,693,475    1,693,475
N W Wray ....................................         1,589,510    1,589,510    1,589,510
                                                     --------     --------     ----------
                                                     28,355,794   28,355,794   23,164,128
                                                     --------     --------     ----------
                                                     --------     --------     ----------
</TABLE>


                                      F-22
<PAGE>

SKYEPHARMA PLC

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

5 EMPLOYEES (CONTINUED)

<TABLE>
<CAPTION>

OPTIONS OVER ORDINARY SHARES OF                                                           DATE FROM
10 PENCE EACH                                                                                WHICH
                                                                                            OPTIONS
                                       JANUARY 1,                DECEMBER 31,   EXERCISE     CAN BE
                                          1998        GRANTED       1998        PRICE     EXERCISED  EXPIRY DATE
                                       ---------     --------    ---------     --------  -----------  -----------
<S>                                    <C>            <C>           <C>            <C>     <C>          <C>
I R Gowrie-Smith ...............       1,234,568           --    1,234,568          81p     06-12-99     06-12-06
Dr J Gonella ...................       1,234,568           --    1,234,568          81p     06-12-99     06-12-06
M Ashton .......................              --      639,077      639,077          93p     31-03-01     31-03-08
D Nicholson ....................         533,333       86,022      619,355          75p     29-04-99     29-04-06
                                                                                 to 93p  to 31-03-01  to 31-03-08
                                       ---------     --------    ---------     --------  -----------  -----------
                                       3,002,469      725,099    3,727,568
                                       ---------     --------    ---------
                                       ---------     --------    ---------
</TABLE>

---------------
Details of the rights of warrant holders and terms of the Share Option schemes
are shown in note 20.

6 GROUP INTEREST PAYABLE

<TABLE>
<CAPTION>
                                                                             YEAR TO        YEAR TO        YEAR TO
                                                                           DECEMBER 31,   DECEMBER 31,   DECEMBER 31,
                                                                                1996          1997           1998
                                                                               L'000         L'000          L'000
                                                                           -----------    -----------    -----------
<S>                                                                              <C>           <C>          <C>
Interest payable on bank loans and overdrafts:
 Repayable within five years, not by instalments .....................           (135)         (94)         (56)
 Repayable wholly or partly in more than five years ..................           (156)        (237)        (230)
Finance leases .......................................................            (42)         (45)         (34)
Interest on debentures ...............................................             --           --         (419)
Interest on deferred consideration ...................................         (3,554)      (5,488)      (5,880)
                                                                              --------     --------      --------
                                                                               (3,887)      (5,864)      (6,619)
                                                                              --------     --------      --------
                                                                              --------     --------      --------
</TABLE>

         Financial Reporting Standard No 7; Fair Values in Acquisition
Accounting, requires the Group to record a reasonable estimate of the fair value
of future amounts expected to be payable to the vendor in respect of the
acquisition of Jago. This amount has been discounted at the Group's estimated
cost of debt and the above interest amount represents the unwinding of that
discount during the above periods. Further details on the deferred consideration
are provided in note 23, Acquisitions.

7 TAXATION

         Profit/(Loss) from ordinary activities before taxes, as shown in the
consolidated statements of income, is analysed over its component parts as
follows:

<TABLE>
<CAPTION>
                                                   YEAR TO         YEAR TO         YEAR TO
                                                DECEMBER 31,    DECEMBER 31,    DECEMBER 31,
                                                    1996            1997            1998
                                                   L'000           L'000           L'000
                                                -----------     -----------     -----------
<S>                                             <C>             <C>             <C>
United Kingdom ............................        (5,801)         (1,358)             207
Overseas ..................................        (8,429)        (16,357)         (22,218)
                                                  --------        --------        --------
                                                  (14,230)        (17,715)         (22,011)
                                                  --------        --------        --------
                                                  --------        --------        --------
</TABLE>


                                      F-23
<PAGE>

SKYEPHARMA PLC

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

7 TAXATION (CONTINUED)
         Taxation charge based on results for the period:

<TABLE>
<CAPTION>
                                                            YEAR TO         YEAR TO        YEAR TO
                                                          DECEMBER 31,    DECEMBER 31,   DECEMBER 31,
                                                              1996            1997           1998
                                                             L'000           L'000          L'000
                                                          ------------    -----------    -----------
<S>                                                            <C>             <C>          <C>
U.K. corporation tax ................................            --              --           --
Overseas taxation ...................................          (69)            (66)         (85)
Overprovision in previous years - overseas ..........           141              --           --
                                                             --------        --------   --------
                                                                 72            (66)         (85)
                                                             --------        --------   --------
                                                             --------        --------   --------
</TABLE>

         There was no deferred tax component in the tax charge for the years
presented.

         The Group has estimated total tax losses available to be set off
against future taxable profits of L53.2 million (December 31 1997: L34.7
million, December 31, 1996: L13.0 million). These losses arise primarily in the
U.K., Switzerland and U.S.A. L8.6 million of the estimated tax losses can be
carried forward indefinitely. The remaining L44.6 million begins to expire from
year 1999.

         The above charges, including exceptional items reconcile with the
applicable U.K. statutory corporation tax rates as follows:

<TABLE>
<CAPTION>
                                                                             YEAR TO        YEAR TO      YEAR TO
                                                                           DECEMBER 31,   DECEMBER 31,   DECEMBER 31,
                                                                               1996           1997          1998
                                                                                %              %             %
                                                                           ----------     -----------    -----------
<S>                                                                          <C>            <C>          <C>
Statutory U.K. Corporation tax rate ...............................             33.0           31.5         31.0
Tax rate differences ..............................................            (5.6)          (8.8)        (7.0)
Tax losses not recognised as deferred tax assets ..................           (16.3)         (26.8)       (15.9)
Prior year items ..................................................            (1.0)             --           --
Other items not recognised as deferred tax assets .................            (7.1)          (3.6)        (3.1)
Other .............................................................            (2.5)            7.3        (5.4)
                                                                            --------        -------     --------
Effective tax rate ................................................              0.5          (0.4)        (0.4)
                                                                            --------        -------     --------
                                                                            --------        -------     --------
</TABLE>

8        LOSS PER ORDINARY SHARE

<TABLE>
<CAPTION>
                                                                           YEAR TO         YEAR TO         YEAR TO
                                                                         DECEMBER 31,    DECEMBER 31,    DECEMBER 31,
                                                                            1996            1997            1998
                                                                         -----------     -----------     -----------
<S>                                                                      <C>             <C>             <C>
Attributable loss (L'000)                                                  (14,158)        (17,781)        (22,096)
Weighted average number of shares in issue ('000)                           269,111         350,963         384,871
                                                                           --------        --------        --------
Loss per share (pence)                                                       (5.3)p          (5.1)p          (5.7)p
                                                                           --------        --------        --------
                                                                           --------        --------        --------
</TABLE>

         There is no difference between basic and diluted loss per share. All
potential ordinary shares including convertible debentures, warrants and options
are anti-dilutive. Subsequent to December 31, 1998, 28 million shares were
issued on the acquisition of DepoTech Corporation. In addition, the Company is
obliged to issue a further 16 million shares to the former shareholders of
DepoTech as deferred consideration following the approval for sale of DepoCyt in
the US on April 1, 1999 (note 27; Post Balance Sheet Events). Shares in issue
for the year ended December 31, 1996 have been adjusted for the effects of the
rights issue in January 1996, the share conversion in March 1996 and share
consolidation in May 1996.


                                      F-24
<PAGE>

SKYPHARMA PLC

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

9 INTANGIBLE FIXED ASSETS

<TABLE>
<CAPTION>

                                              INTELLECTUAL   DEVELOPMENT
                                                PROPERTY        COSTS        TOTAL
                                                 L'000          L'000        L'000
                                                --------     -----------    -------
<S>                                               <C>           <C>           <C>
COST
At January 1, 1996 ..........................      --            --            --
Exchange adjustments ........................     (50)          (12)          (62)
Additions ...................................     108           217           325
Acquisition of subsidiary undertakings ......     264            61           325
                                               ------        ------        ------
At December 31, 1996 ........................     322           266           588
Exchange adjustments ........................     (19)          (12)          (31)
Additions ...................................       6           732           738
Acquisition of subsidiary undertaking .......      72            --            72
                                               ------        ------        ------
At December 31, 1997 ........................     381           986         1,367
Exchange adjustments ........................      57            82           139
Additions ...................................      22           423           445
                                               ------        ------        ------
At December 31, 1998 ........................     460         1,491         1,951
                                               ------        ------        ------
AMORTISATION
At January 1, 1996 ..........................      --            --            --
Charge for the year .........................      59            49           108
                                               ------        ------        ------
At December 31, 1996 ........................      59            49           108
Exchange adjustments ........................      (2)           (2)           (4)
Charge for the year .........................      86           208           294
                                               ------        ------        ------
At December 31, 1997 ........................     143           255           398
Exchange adjustments ........................      48            24            72
Charge for the year .........................      82            --            82
                                               ------        ------        ------
At December 31, 1998 ........................     273           279           552
                                               ------        ------        ------
Net book value at December 31, 1996 .........     263           217           480
                                               ------        ------        ------
                                               ------        ------        ------
Net book value at December 31, 1997 .........     238           731           969
                                               ------        ------        ------
                                               ------        ------        ------
Net book value at December 31, 1998 .........     187         1,212         1,399
                                               ------        ------        ------
                                               ------        ------        ------
</TABLE>

                                      F-25
<PAGE>

SKYPHARMA PLC

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

10 TANGIBLE FIXED ASSETS

<TABLE>
<CAPTION>

                                                 LABORATORY   ASSETS IN THE  OFFICE AND
                                     LAND AND    EQUIPMENT      COURSE OF     OTHER        MOTOR
                                     BUILDINGS  AND MACHINES  CONSTRUCTION   EQUIPMENT   VEHICLES     TOTAL
                                      L'000        L'000          L'000        L'000       L'000      L'000
                                     --------    ----------   ------------  ----------    --------   --------
<S>                                  <C>           <C>            <C>       <C>            <C>       <C>
COST
At January 1, 1996 .............          --           --           --           6           --            6
Exchange adjustments ...........      (1,263)        (633)          --         (58)         (33)      (1,987)
Additions ......................         107          325           --         490          185        1,107
Disposals ......................          --          (20)          --          (6)         (65)         (91)
Acquisition of subsidiary
 undertakings ..................       6,631        3,330           --         305          172       10,438
                                     -------      -------      -------     -------      -------      -------
At December 31, 1996 ...........       5,475        3,002           --         737          259        9,473
Exchange adjustments ...........      (1,324)        (303)          --         (38)          (7)      (1,672)
Additions ......................       1,393        2,878           --         662           29        4,962
Disposals ......................          --          (44)          --          (8)         (31)         (83)
Acquisition of subsidiary
 undertaking ...................      11,523        1,288           --         337           --       13,148
                                     -------      -------      -------     -------      -------      -------
At December 31, 1997 ...........      17,067        6,821           --       1,690          250       25,828
Exchange adjustments ...........       1,132          555           --          69           12        1,768
Additions ......................       1,998        1,599          505         165           41        4,308
Disposals ......................          --         (190)          --         (63)          --         (253)
                                     -------      -------      -------     -------      -------      -------
At December 31, 1998 ...........      20,197        8,785          505       1,861          303       31,651
                                     -------      -------      -------     -------      -------      -------
DEPRECIATION

At January 1, 1996 .............          --           --           --           4           --            4
Exchange adjustments ...........         (28)         (59)          --         (14)          (3)        (104)
Disposals ......................          --           --           --          (4)          --           (4)
Charge for the period ..........         209          412           --         112           27          760
                                     -------      -------      -------     -------      -------      -------
At December 31, 1996 ...........         181          353           --          98           24          656
Exchange adjustments ...........         (25)         (21)          --          (6)          --          (52)
Disposals ......................          --          (17)          --          --           --          (17)
Charge for the period ..........         874          845           --         407           50        2,176
                                     -------      -------      -------     -------      -------      -------
At December 31, 1997 ...........       1,030        1,160           --         499           74        2,763
Exchange adjustments ...........         112          181           --          44            6          343
Disposals ......................          --          (67)          --         (36)          --         (103)
Charge for the year ............       1,009          953           --         461           56        2,479
Exceptional write down of assets
 (note 3) ......................          --           --           --         170           --          170
                                     -------      -------      -------     -------      -------      -------
At December 31, 1998 ...........       2,151        2,227           --       1,138          136        5,652
                                     -------      -------      -------     -------      -------      -------
Net book value at
 December 31, 1996 .............       5,294        2,649           --         639          235        8,817
                                     -------      -------      -------     -------      -------      -------
                                     -------      -------      -------     -------      -------      -------
Net book value at
 December 31, 1997 .............      16,037        5,661           --       1,191          176       23,065
                                     -------      -------      -------     -------      -------      -------
                                     -------      -------      -------     -------      -------      -------
Net book value at
 December 31, 1998 .............      18,046        6,558          505         723          167       25,999
                                     -------      -------      -------     -------      -------      -------
                                     -------      -------      -------     -------      -------      -------
</TABLE>

                                      F-26
<PAGE>

SKYPHARMA PLC

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

10 TANGIBLE FIXED ASSETS (CONTINUED)
         Land and buildings, at net book value, is as follows:

<TABLE>
<CAPTION>
                                    YEAR TO         YEAR TO         YEAR TO
                                  DECEMBER 31,    DECEMBER 31,    DECEMBER 31,
                                     1996            1997            1998
                                    L'000           L'000           L'000
                                   ---------       ---------       ----------
<S>                                   <C>          <C>             <C>
Freehold property ................... 5,199         15,953           17,973
Short leaseholds ....................    95             84               73
                                     ------         ------           ------
                                      5,294         16,037           18,046
                                     ------         ------           ------
                                     ------         ------           ------
</TABLE>

         Included in freehold property is an amount of L2,276,000 (December 31,
1997: L2,150,000; December 31, 1996: L1,030,000) in respect of land which is not
depreciated.

         Laboratory equipment and machinery include cost of L1,913,000 (December
31, 1997: L1,787,000; December 31, 1996: L1,417,000) and accumulated
depreciation of L791,000 (December 31, 1997: L605,000; December 31, 1996:
L437,000) in respect of assets held under finance leases and hire purchase
contracts.

11 JOINT VENTURE AND INVESTMENTS

 JOINT VENTURE

         The Group, through Jago, has a 50% interest in a Joint Venture with
Genta Incorporated, a US 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 licences 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 commercialised, 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. The Group paid $1 million for these
rights. The payment was expensed as research and development costs.

         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 has been in negotiations with Genta for some time to resolve outstanding
issues and the future operation of the Joint Venture. On March 4, 1999
SkyePharma and Genta signed an agreement modifying the basis under which the
Joint Venture is conducted. This is explained further in note 27; Post Balance
Sheet Events.




                                      F-27
<PAGE>

SKYPHARMA PLC

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

11 JOINT VENTURE AND INVESTMENTS (CONTINUED)
         The following is a summary of the financial information of the Joint
Venture extracted from unaudited financial statements for the years ended.

<TABLE>
<CAPTION>
                                    DECEMBER 31,  DECEMBER 31,  DECEMBER 31,
                                       1996          1997           1998
                                      L'000         L'000          L'000
                                     --------      --------       --------
<S>                                       <C>            <C>          <C>
Current assets ....................       618            892          2,288
Current liabilities ...............    (1,804)        (3,222)        (5,294)
Non current assets ................         7              2              1
Genta loan notes ..................    (9,033)        (9,870)        (9,519)
                                      -------        -------        -------
Net liabilities ...................   (10,212)       (12,198)       (12,524)
                                      -------        -------        -------
                                      -------        -------        -------
Net contract and royalty income ...     3,535          2,215          1,382
Costs and expenses ................    (5,453)        (2,907)        (1,354)
Interest expense ..................      (620)          (730)          (748)
                                      -------        -------        -------
Net loss ..........................    (2,538)        (1,422)          (720)
                                      -------        -------        -------
                                      -------        -------        -------
</TABLE>

         Transactions between the Joint Venture and other Group companies not
eliminated on consolidation were L226,000 (1997:Lnil) milestone revenues
receivable from the Group and L124,000 (1997:L65,000) of interest payable to the
Group.

         Current assets and liabilities relate principally to amounts due from
and due to SkyePharma Group companies.

         The Group has fully recognised its 50% share of the capital deficiency
and net loss on operations in the Joint Venture in these financial statements.
The net loss arising in the Joint Venture included in the income statement for
the year to December 31, 1998 was L360,000 (Year to December 31, 1997: L711,000;
Year to December 31, 1996: L703,000).

<TABLE>
<CAPTION>
                                                                      1996          1997           1998
                                                                     L'000         L'000          L'000
                                                                    --------      --------       --------
<S>                                                                      <C>          <C>            <C>
Share of net capital deficiency of Joint Venture at 1 January ....      --          (5,106)       (6,099)
Share of net capital deficiency of Joint Venture on acquisition ..    (5,207)         --            --
Currency translation effect ......................................       804          (282)          197
Share of operating (loss)/profit .................................      (492)         (346)           14
Share of interest payable ........................................      (211)         (365)         (374)
                                                                      ------        ------        ------
Share of net capital deficiency of Joint Venture at 31 December ..    (5,106)       (6,099)       (6,262)
                                                                      ------        ------        ------
                                                                      ------        ------        ------
</TABLE>

         The share of capital deficiency is disclosed within provisions for
liabilities and charges in the balance sheet.



                                      F-28
<PAGE>

SKYPHARMA PLC

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

11       JOINT VENTURE AND INVESTMENTS (CONTINUED)
 INVESTMENTS

<TABLE>
<CAPTION>
                                                                    OTHER
                                                                 INVESTMENTS
                                                                    LISTED
                                                                    L'000
                                                                   --------
<S>                                                                  <C>
COST
At January 1, 1996 ..............................................       --
Acquisition of subsidiary undertaking ...........................    1,510
Additions .......................................................      313
                                                                     -----
At December 31, 1996 and 1997 ...................................    1,823
                                                                     -----
Additions .......................................................    2,939
                                                                     -----
At December 31, 1998 ............................................    4,762
                                                                     -----
                                                                     -----
PROVISION
At January 1, 1996 ..............................................       --
Charge for the year .............................................    1,823
                                                                     -----
At December 31, 1996, 1997 and 1998 .............................    1,823
                                                                     -----
                                                                     -----
Net book value at December 31, 1996 and 1997                            --
                                                                     -----
Net book value at December 31, 1998                                  2,939
                                                                     -----
                                                                     -----
</TABLE>

         On May 3, 1996 the Group acquired 2,020,150 unregistered shares in
Genta, and the rights to vest in a further 300,411 shares through its
acquisition of Jago. The rights to these 300,411 shares accrued to the Group
during 1996 under licensing agreements previously granted by Jago to Genta. The
Group recorded the share rights accruing in 1996 as other operating income based
upon the estimated value of the shares on the date of vesting.

         A provision for loss on disposal of these shares amounting to
L1,823,000, representing the historical cost, was made in the year to December
31, 1996 as Genta was unwilling or unable to register the shares while the
ultimate resolution of Joint Venture was being discussed.

         On April 4, 1997 Genta effected a one-for-ten reverse stock split of
its common stock. On this basis the Company's holding in Genta shares at
December 31, 1998 was 232,056 ordinary shares which are unregistered.

         As a result of the agreement regarding the future operation of the
Joint Venture the parties intend to undertake the necessary steps to register
the shares and enable the Group to dispose of them. This will be accounted for
in 1999. At December 31, 1998 the quoted market price for publicly registered
Genta shares was $1.75.

         On October 19, 1998 the Group acquired 2,857,143 shares representing
approximately 16% of Common Stock in DepoTech Corporation of San Diego, a
company listed on the Nasdaq National Market for a consideration of L2,939,000
($5,000,000). The remaining share capital of the company was acquired in March
1999, see note 27; Post Balance Sheet Events.

         The market value of the listed investment in DepoTech at December 31,
1998 was L3,971,000.


                                      F-29
<PAGE>

SKYPHARMA PLC

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

12 STOCKS

<TABLE>
<CAPTION>
                                             DECEMBER     DECEMBER
                                                31,          31,
                                                1997         1998
                                               L'000        L'000
                                             --------     --------
<S>                                             <C>       <C>
Raw materials and consumables ..........        998       1,177
Work in progress .......................         39           2
Finished goods .........................        545           7
                                              -----       -----
                                              1,582       1,186
                                              -----       -----
                                              -----       -----
</TABLE>

         The replacement cost of stocks is not materially different from
original cost. Finished goods valuation at December 31, 1998 is stated after the
exceptional write-off of inventory as a result of restructuring of the Group's
activities in North America described in note 3; Exceptional Items.

13       DEBTORS

<TABLE>
<CAPTION>
                                             DECEMBER     DECEMBER
                                                31,          31,
                                                1997         1998
                                               L'000        L'000
                                             --------     --------
<S>                                            <C>         <C>
Trade debtors ...............................  4,383       3,335
Amounts owed by Joint Venture ...............  1,091       1,175
Other debtors ...............................    291         646
Royalties receivable ........................    931         368
Prepayments and accrued income ..............  1,437         714
Interest receivable .........................     10         169
                                               -----       -----
                                               8,143       6,407
                                               -----       -----
                                               -----       -----
</TABLE>


         Trade debtors includes allowance for doubtful accounts amounting to
LNil (December 31, 1997: LNil).

14 CREDITORS: AMOUNTS FALLING DUE WITHIN ONE YEAR

<TABLE>
<CAPTION>
                                                      DECEMBER     DECEMBER
                                                         31,          31,
                                                         1997         1998
                                                        L'000        L'000
                                                      --------     --------
<S>                                                      <C>         <C>
Bank overdrafts ..................................       1,127       1,917
Other bank loans .................................         625       1,059
Current portion secured Mortgage (note 15) .......         167         175
Trade creditors ..................................       2,680       3,309
Corporation Tax ..................................          66          74
Other taxation and social security costs .........         900       1,054
Royalties payable ................................       1,092         203
Accrued legal and professional fees ..............         360         120
Obligations under hire purchase and finance leases         264         223
Other creditors and accruals .....................         995       1,437
                                                         -----       -----
                                                         8,276       9,571
                                                         -----       -----
                                                         -----       -----
</TABLE>

         At December 31, 1998 the Group had an unsecured overdraft facility of
L2.1 million with the Basellandschaftliche Kantonalbank. In addition the
Kantonalbank has extended a Fixed Credit Facility



                                      F-30
<PAGE>

SKYPHARMA PLC

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


14 CREDITORS: AMOUNTS FALLING DUE WITHIN ONE YEAR (CONTINUED)
of L0.6million which is renewable on an annual basis. The latter facility bears
interest at 5.75%, is secured by the assets of Jago Pharma AG and is guaranteed
by SkyePharma PLC.

         At December 31, 1998, the Group also had an overdraft facility with
Societe Generale of L0.3 million, guaranteed by SkyePharma PLC bearing interest
at EURIBOR plus 0.86% and renewable on an annual basis in September and a credit
facility of up to L0.8 million secured by the trade debtors of SkyePharma
Production SAS bearing interest at EURIBOR plus 0.8%.

         Obligations under hire purchase and finance leases at December 31, 1998
derive from the purchase of laboratory equipment and machinery. There are
various agreements with a range of maturities between one and three years
bearing interest ranging from 5% to 8%. The weighted average interest rate
across all borrowings at December 31, 1998 was 5.75%.

15 CREDITORS: AMOUNTS FALLING DUE AFTER MORE THAN ONE YEAR

<TABLE>
<CAPTION>
                                                              DECEMBER     DECEMBER
                                                                 31,          31,
                                                                 1997         1998
                                                                L'000        L'000
                                                              --------      --------
<S>                                                              <C>         <C>
Secured Mortgage .........................................       3,750       3,763
Obligations under finance leases .........................         400         228
Convertible debentures due February 2001 .................        --         2,257
                                                                 -----       -----
                                                                 4,150       6,248
                                                                 -----       -----
                                                                 -----       -----
Bank and other loans are repayable as follows:
Between one and two years ................................         167         175
Between two and three years ..............................         167         175
Between three and four years .............................         167         175
Between four and five years ..............................         167         175
After five years .........................................       3,082       3,063
                                                                 -----       -----
                                                                 3,750       3,763
                                                                 -----       -----
                                                                 -----       -----
Obligations under finance leases are repayable as follows:
Between one and two years ................................         205         141
Between two and three years ..............................         127          85
Between three and four years .............................          68           2
                                                                 -----       -----
                                                                   400         228
                                                                 -----       -----
                                                                 -----       -----
</TABLE>

         At December 31, 1998 the Group had a Property Mortgage facility with
the Basellandschaftliche Kantonalbank of L3.9 million including short term
portion. The Mortgage against which assets of Jago are pledged, bears interest
at 5.25% to 6% and is repayable by instalments over 22 years semi-annually.

ISSUE OF CONVERTIBLE DEBENTURES

         On March 11, 1998, the Company issued unsecured debentures (the
"Debentures") in the aggregate principal amount of $18,576,000 due in February
2001, at a discount equivalent to an annual rate of 3%. The net proceeds
recognised on issue were L9,502,000 being gross proceeds of L10,259,000 less
cash expenses of L486,000 and the fair value of `C' Warrants issued, L271,000
(note 20; Share Capital).

         The Debentures confer upon the holders thereof the right to apply the
principal sum to subscribe for ordinary shares at any time in the three year
period following the issue. The subscription price is



                                      F-31
<PAGE>

SKYPHARMA PLC

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


15 CREDITORS: AMOUNTS FALLING DUE AFTER MORE THAN ONE YEAR (CONTINUED)
calculated as the average of the three highest of the five lowest closing bid
prices during the 20 day period prior to subscription, subject to a maximum
subscription price of 90 pence per Ordinary Share. The amount of the Debentures
to be applied in subscription for ordinary shares on any date is calculated by
applying the 3% per annum discount rate to the principal sum. During the year
$14,358,000 of the amount of the Debentures were exercised at prices between 44
pence per share and 65 pence per share, resulting in the issuance of 16,070,203
ordinary shares. At December 31, 1998 the principal amount of the Debentures
remaining unconverted was $4,218,000 (L2,536,000). The carrying value of the
Debentures at December 31, 1998 was L2,257,000 being the present value of the
principal outstanding discounted at 5.68%, the interest rate implicit in
unwinding the issue costs and the discount on issue.

16 PROVISIONS FOR LIABILITIES AND CHARGES

<TABLE>
<CAPTION>
                                                                            OTHER
                                                            --------------------------------------
                                DEFERRED     DISCONTINUED               RESTRUCTURING
                              CONSIDERATION   OPERATIONS      PENSION     PROVISION         TOTAL
                                 L'000           L'000         L'000        L'000           L'000
                               ----------     -----------     --------     --------        -------
<S>                              <C>             <C>            <C>           <C>             <C>
At January 1, 1996 ...........       --            797             --             --             --
Utilised in the year .........       --           (797)            --             --             --
Acquisition of subsidiary
  undertaking ................   66,630             --             --             --             --
Charged in the year ..........    3,554             --             --             --             --
Exchange adjustments .........   (7,612)            --             --             --             --
                                -------        -------        -------        -------        -------
At December 31, 1996 .........   62,572             --             --             --             --
Acquisition of subsidiary
  undertaking ................       --             --            193             --            193
Charged in the year ..........    5,488             --              9             --              9
Exchange adjustments .........    1,768             --            (15)            --            (15)
                                -------        -------        -------        -------        -------
At December 31, 1997 .........   69,828             --            187             --            187
Utilised in the year .........       --             --             --           (516)          (516)
Charged in the year ..........    5,880             --             29          1,325          1,354
Revaluation ..................  (35,424)            --             --             --             --
Exchange adjustments .........     (784)            --             14             --             14
                                -------        -------        -------        -------        -------
At December 31, 1998 .........   39,500             --            230            809          1,039
                                -------        -------        -------        -------        -------
                                -------        -------        -------        -------        -------
</TABLE>

JAGO DEFERRED CONSIDERATION

         Under the terms of the Acquisition agreement for Jago in 1996 certain
earn out payments are payable to the vendor. The deferred consideration is
payable as follows;

(i)         Subject to an annual sales threshold of $30 million an earn out
            payment being the lesser of $250 million and the aggregate of (A)
            20% of the Group's consolidated gross GEOMATRIX(R) licence income
            and (B) 2% of the Group's consolidated gross GEOMATRIX(R) sales
            revenues,over a period of 10 years commencing May 1996;

(ii)        A further cash payment of up to $5 million on any licence income,
            royalties, milestones and contract fees received by the Group from
            the Joint Venture.

(iii)       A further cash payment of up to $5 million on receipt by the Group
            of the same amount of any payments for the value of Jago's
            inhalation technology under the terms of any future Joint Venture or
            other similar arrangement.



                                      F-32
<PAGE>

SKYPHARMA PLC

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

16 PROVISIONS FOR LIABILITIES AND CHARGES (CONTINUED)
         In preparing the accounts, the Directors are obliged to provide a
reasonable estimate of the fair value of the earn-out likely to be payable.

         The Directors have deemed that it is in the best interests of the
Company to try to settle the deferred consideration as this will remove a
significant uncertainty that complicates the evaluation of the Group. The
Directors are currently in discussion with the vendor (Dr J Gonella) to explore
the terms on which the obligation may be settled. Any agreement reached on this
matter will have to gain the approval of the shareholders before it can be
implemented. In the discussions referred to, both Dr Gonella and Dr T
Rinderknecht (his legal advisor), being Directors of the Company, have declared
a personal interest and have not participated in the Board review of the
estimate of fair value. Having regard to these matters, the Directors' current
estimate is that not more than approximately L40 million would be payable, in
satisfaction of the deferred consideration obligation, under any settlement
agreement.

         The restructuring provision is described in note 3; Exceptional Items.

         The pension provision relates to retirement commitments under a defined
benefit scheme for SkyePharma Production SAS employees (note 25; Pension
Agreements).

         See also note 11, Provision for share of net capital deficiency of
Joint Venture.

17 DEFERRED TAXATION

<TABLE>
<CAPTION>
                                                    FULL POTENTIAL               PROVIDED
                                               ------------------------  ------------------------
                                               AT DECEMBER  AT DECEMBER  AT DECEMBER  AT DECEMBER
                                                    31,          31,          31,          31,
                                                   1997         1998         1997         1998
                                                  L'000        L'000        L'000        L'000
                                                --------     --------     --------      --------

<S>                                                 <C>           <C>          <C>        <C>
Accelerated capital allowances ..............      (38)            20         (38)         --
Other timing differences ....................      890          1,655          --          --
Tax benefits from losses carried forward ....    7,003         11,480          38          --
                                               -------        -------     -------       -----
                                                 7,855         13,155          --          --
                                               -------        -------     -------       -----
                                               -------        -------     -------       -----
</TABLE>

         No deferred tax asset is recognised, given the uncertainty of the
recoverability of the Group's tax losses carried forward.

18       CONTINGENT LIABILITIES AND GUARANTEES

         At December 31, 1998 the Group had provided guarantees to third parties
of L0.4 million (1997: L0.5 million) in respect of leasing arrangements by a
subsidiary.

         At December 31, 1998 the Company had provided a guarantee to the
Kantonalbank in respect of a Fixed Credit facility of Jago amounting to L0.6
million (1997: L0.6 million) which is renewable on an annual basis.

         In common with most business enterprises, group companies are subject
to a number of potential claims from third parties, the outcome of which cannot
at present be determined but which 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 materialise from such potential
claims.


                                      F-33
<PAGE>

SKYPHARMA PLC

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

19 COMMITMENTS/SIGNIFICANT RESEARCH AND DEVELOPMENT ARRANGEMENTS

<TABLE>
<CAPTION>
                                                                                           DECEMBER      DECEMBER
                                                                                           31, 1997      31, 1998
                                                                                             L'000         L'000
                                                                                           --------      --------
<S>                                                                                            <C>       <C>
CAPITAL COMMITMENTS
Contracted for but not provided in the accounts.......................................         1,182           --
                                                                                            --------     --------
                                                                                               1,182           --
                                                                                            --------     --------
                                                                                            --------     --------
</TABLE>

<TABLE>
<CAPTION>
                                                                                             DECEMBER    DECEMBER
                                                                                             31, 1997    31, 1998
                                                                                               L'000       L'000
                                                                                             --------    --------
<S>                                                                                              <C>        <C>
COMMITMENTS UNDER OPERATING LEASES FROM 31 DECEMBER
1998................................................................................           1,158           --
1999................................................................................             940        1,007
2000................................................................................             564          755
2001................................................................................             550          594
2002................................................................................             389          388
2003................................................................................             247          247
                                                                                            --------     --------
                                                                                               3,848        2,991
                                                                                            --------     --------
                                                                                            --------     --------
</TABLE>

<TABLE>
<CAPTION>
                                                                                            DECEMBER     DECEMBER
                                                                                            31, 1997     31, 1998
                                                                                             L'000        L'000
                                                                                            --------     --------
<S>                                                                                              <C>          <C>
COMMITMENTS UNDER OPERATING LEASES TO PAY RENTALS FOR THE NEXT YEAR
 Operating leases on land and buildings which expire:
In one year or less...............................................................               140          180
Between one and two years.........................................................               369          155
Between two and three years.......................................................                --          195
Between three and four years......................................................               161           --
Between four and five years.......................................................                --           --
In five years or more.............................................................               247          247
                                                                                              --------      ------
                                                                                                 917          777
                                                                                              --------      ------
                                                                                              --------      ------
Operating leases on plant and equipment which expire:
In one year or less...............................................................                78           72
Between one and two years.........................................................                 7            6
Between two and three years.......................................................                14           11
Between three and four years......................................................                --          141
Between four and five years.......................................................               142           --
                                                                                              --------      ------
                                                                                                 241          230
                                                                                              --------      ------
                                                                                              --------      ------
</TABLE>

------
In addition, contingent upon the achievement of specified milestones by the
collaborative partner, the total amounts payable under collaborative agreements
at December 31, 1998 amounted to L0.4million (December 31, 1997:
L0.4 million).

SIGNIFICANT RESEARCH AND DEVELOPMENT ARRANGEMENTS

         The Group conducts R&D activities under a number of collaboration
arrangements with pharmaceutical companies to develop products utilising its
Geomatrix technology. 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



                                      F-34
<PAGE>

SKYPHARMA PLC

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

19 COMMITMENTS/SIGNIFICANT RESEARCH AND DEVELOPMENT ARRANGEMENTS (CONTINUED)
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.

 DILACOR

         The only collaborative arrangement under which the Group is currently
receiving material royalty revenues is the Development and License Agreement for
Dilacor XR made with the Rorer Group, Inc., ("Rorer") in 1988. Under the terms
of that agreement Rorer bore all the costs of research and development. For
countries where a patent claiming Dilacor XR has been issued and is in effect,
Rorer is obliged to pay the Group continuing royalties of 3% of net sales. For
countries where no patent claiming Dilacor XR has been issued, Rorer is obliged
to pay the Group continuing royalties of 1.5% of net sales. In return, the Group
granted Rorer an exclusive license to market Dilacor XR throughout the world.
The agreement continues for ten years from the date of the first marketing in
each country or for the life of the patent in such country, (which includes all
patents owned or controlled by the Group which was infringed by the manufacture,
use or sale of the products covered by the License Agreement) whichever is
longer. After termination of the agreement, Rorer may continue to sell the
product and use the Geomatrix technology in connection with the product on a
non-exclusive basis without any obligations to the Group unless otherwise agreed
in writing. In 1997 (with the consent of the Group), Rorer transferred to Watson
Laboratories, exclusive rights to market, advertise, promote, sell and
distribute the royalty bearing product throughout the Rorer territory.

         The Group recognises royalty income on the sale of Dilacor. Revenue
resulting from this contract amounted to L2,206,000, L2,237,000 and L1,880,000
in the years ended December 31, 1996, 1997 and 1998 respectively. Royalties
payable and included in cost of sales relating to this contract amounted to
L1,233,000, L1,091,000 and L1,142,000 in the years ended December 31, 1996 ,
1997 and 1998 respectively.

 JOINT VENTURE DEVELOPMENT ACTIVITIES

         The arrangements with the joint venture for the development of products
utilising Geomatrix technologies are discussed in note 11. Revenues from those
development activities with client companies are non-refundable and are reported
as contract development revenue.

20       SHARE CAPITAL

<TABLE>
<CAPTION>
                                                                        CONVERTIBLE
                             ORDINARY SHARES OF 10P EACH          PREFERENCE SHARES OF L1             TOTAL
                           -----------------------------      ------------------------------
AUTHORISED                 NO. OF SHARES        L'000         NO OF SHARES          L'000             L'000
-------------------------  -------------    ------------      ------------       -----------      ------------
<S>                         <C>                    <C>           <C>                   <C>              <C>
At January 1, 1996 ......   83,746,584             8,375         6,250,000             6,250            14,625
                           -----------       -----------       -----------       -----------       -----------
                           -----------       -----------       -----------       -----------       -----------
At December 31, 1996 ....  545,000,000            54,500                --                --            54,500
                           -----------       -----------       -----------       -----------       -----------
                           -----------       -----------       -----------       -----------       -----------
At December 31, 1997 ....  545,000,000            54,500                --                --            54,500
                           -----------       -----------       -----------       -----------       -----------
                           -----------       -----------       -----------       -----------       -----------
At December 31, 1998 ....  545,000,000            54,500                --                --            54,500
                           -----------       -----------       -----------       -----------       -----------
                           -----------       -----------       -----------       -----------       -----------
</TABLE>


                                      F-35
<PAGE>

SKYPHARMA PLC

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

20       SHARE CAPITAL (CONTINUED)

<TABLE>
<CAPTION>
                                                                    ORDINARY
                                                                   SHARES OF       NOMINAL
                                                                    10P EACH        VALUE
                                                                     NUMBER         L'000
                                                                    --------      --------
<S>                                                                <C>                 <C>
ISSUED, ALLOTTED AND FULLY PAID

At January 1, 1996 ..............................................  54,477,415          5,448
Exercise of share options .......................................     324,485             33
Issued on placing January 1996 ..................................   7,500,000            750
Issued on rights issues .........................................  17,354,522          1,735
Issued as consideration for capitalisation of loan notes ........   4,589,180            459
Initial consideration for Krypton ...............................  30,000,000          3,000
Conversion of convertible preference shares .....................  12,500,000          1,250
Jago consideration ..............................................  30,711,856          3,071
Issued as consideration for costs of placing ....................   1,333,333            133
Issued on placing May 1996 ...................................... 187,776,644         18,777
Exercise of `B' Warrants ........................................      45,342              5
                                                                  -----------    -----------
At December 31, 1996 ............................................ 346,612,777         34,661
Exercise of share options .......................................      35,000              4
Issued on placing September 1997 ................................  17,292,434          1,729
Exercise of `B' warrants ........................................      10,398              1
                                                                  -----------    -----------
At December 31, 1997 ............................................ 363,950,609         36,395
Exercise of `A' Warrants ........................................   2,437,670            244
Exercise of `B' Warrants ........................................      11,472              1
Conversion of debentures ........................................  16,070,203          1,607
Issued to Novartis ..............................................   8,628,500            863
Issued on placing July 1998 .....................................  36,000,000          3,600
                                                                  -----------    -----------
At December 31, 1998 ............................................ 427,098,454         42,710
                                                                  -----------    -----------
                                                                  -----------    -----------
</TABLE>

         In May 1996 the Company effected a 10:1 consolidation of its ordinary
share capital. The numbers of all ordinary shares and related earnings per share
for all periods presented have been restated to reflect this share
consolidation.

         At January 1, 1996 there were 6,250,000 convertible preference shares
in issue with a nominal value of L6,250,000. These were converted to ordinary
shares in March 1996.

         Consideration received on issue of ordinary shares in 1998 amounted to
L31,490,000. (Year to December 31, 1997: L7,789,000, year to December 31, 1996:
L150,826,000).

 WARRANTS

         The Company has the following warrants outstanding:

(A)      `A' WARRANTS

         At December 31, 1997 and 1996 various trusts and companies in which Ian
Gowrie-Smith, David Lees and Nigel Wray (Directors of the Company) are
interested had `A' Warrants to subscribe for 2,437,670 ordinary shares at 10p
per share at any time up to December 15, 1998. There was no activity in 1996 or
1997 relating to these warrants. All `A' Warrants were exercised in December
1998 resulting in the issue of 2,437,670 ordinary shares for a consideration of
L243,767.


                                      F-36
<PAGE>

SKYPHARMA PLC

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

20       SHARE CAPITAL (CONTINUED)
(B)      `B' WARRANTS

<TABLE>
<CAPTION>
                                                                 NUMBER
                                                               -----------
<S>                                                             <C>
At January 1, 1996 .........................................            --
Issued on placing ..........................................     7,500,000
Issued on rights issue .....................................    17,354,055
Issued as consideration for capitalisation of loan notes ...     4,589,180
Issued as initial consideration for Krypton ................    30,000,000
Warrants exercised .........................................      (453,420)
                                                               -----------
At December 31, 1996 .......................................    58,989,815
Warrants exercised .........................................      (103,980)
                                                               -----------
At December 31, 1997 .......................................    58,885,835
Warrants exercised .........................................      (114,720)
                                                               -----------
At December 31, 1998 .......................................    58,771,115
                                                               -----------
                                                               -----------
</TABLE>

         The `B' Warrants, which were all issued in January 1996 on the basis of
one warrant for every ten Existing ordinary shares subscribed pursuant to the
placing and rights issue or issued in respect of the capitalisation of loan
notes or as consideration in respect of the acquisition of Krypton, entitle the
holders at December 31, 1998 to subscribe for 5,877,112 ordinary shares at any
time to 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 L1,809,000 was recorded as a
separate component of shareholders' funds, see reserves note 22, 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, 1998 was 5.25 pence
(December 31, 1997: 3.25 per pence; December 31, 1996: 6.0 pence). The market
value of `B' warrants during the period from January 1, 1998 to December 31,
1998 ranged from the lowest midprice of 2.5 pence to the highest midprice of
8.25 pence per `B' warrant.

(C)      `C' WARRANTS

         The class `C' Warrant issued in March 1998 in consideration of services
provided in connection with the debenture issue entitles holders to purchase up
to 1.8 million ordinary shares at an exercise price of 120 pence per Ordinary
share at any time up to three years from 11 March 1998. There was no other
activity relating to this warrant in 1998. The aggregate number of ordinary
shares which may be issued under the terms of the class `C' Warrant and the
Debentures (note 15; Creditors - Amounts falling due after more than one year)
shall not exceed 30,000,000. The fair value of the Warrant at issue was L271,000
(note 22; Reserves).

 SHARE OPTIONS

         The Company encourages employee participation in its shares through
ownership and continues to operate the Executive Share Option Scheme and the
European and North American Share Option Scheme. Under the terms of these
schemes the board may offer options to purchase ordinary shares in the Company
to permanent full-time employees, including directors, at a price not less than
the higher of the nominal value and the market value of the shares.



                                      F-37
<PAGE>

SKYPHARMA PLC

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

20       SHARE CAPITAL (CONTINUED)
         These options vest from the third anniversary and are exercisable until
the 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 from
April 1996 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.

         The following table summarises the activity in share options for the
year to December 31, 1996, the year to December 31, 1997 and the year to
December 31, 1998:

<TABLE>
<CAPTION>
                                      SHARE OPTIONS     OPTION PRICE
                                      -------------     -------------
<S>                                   <C>               <C>
At January 1, 1996 ................      394,500        12.5p - 145.0p
Granted ...........................   10,491,836        75.0p - 92.0p
Exercised .........................     (321,500)               12.5p
Cancelled or expired ..............      (35,000)              145.0p
                                     -----------        --------------
At December 31, 1996 ..............   10,529,836        12.5p - 145.0p
Granted ...........................    1,937,344                 66.5p
Exercised .........................      (35,000)                12.5p
Cancelled or expired ..............     (809,649)       66.5p - 81.5p
                                     -----------        --------------
At December 31, 1997 ..............   11,622,531        66.5p - 145.0p
Granted ...........................    5,361,690        44.8p - 93.0p

Cancelled or expired ..............   (1,642,577)       66.5p - 145.0p
                                     -----------        --------------
At 31 December, 1998 ..............   15,341,644        44.8p - 145.0p
                                     -----------        --------------
                                     -----------        --------------
</TABLE>

         The market value of ordinary shares as at December 31, 1998 was 78.5
pence (December 31, 1997: 54 pence). The market value of ordinary shares during
1998 ranged from the lowest closing mid price of 44.5 pence to the highest
closing midprice of 103.5 pence per share.

         At December 31, 1998 the following ordinary shares were under option to
employees or former employees of the Group:

<TABLE>
<CAPTION>
                                   NUMBER OF
                                    OPTIONS
              OPTION PRICE FOR       OVER
               EACH ORDINARY       ORDINARY
                  SHARE OF         SHARES OF         EXPIRY
                  10 PENCE         10 PENCE           DATE
              ----------------    ------------      --------
              <S>                  <C>            <C>
                   145.0 pence          3,000       14-12-99
                    75.0 pence      4,770,077       29-04-06
                    92.0 pence      1,567,784       28-05-06
                    81.5 pence        429,788       28-11-06
                    81.0 pence      2,469,136       06-12-06
                    66.5 pence      1,513,285       07-04-07
                    51.0 pence        326,175       28-01-08
                    93.0 pence      1,001,473       31-03-08
                    44.8 pence      3,260,926       05-10-08
                                   ----------
                                   15,341,644
                                   ----------
                                   ----------
</TABLE>
         The only options exercisable at December 31, 1998, are the 3,000
options which expire on December 14, 1999 (1997: 3,000; 1996: 38,000). All other
options are subject to a vesting period and certain performance criteria, and
are exercisable from April 29, 1999 to October 5, 2001 at the earliest. The
number of outstanding options under these schemes is limited to a total of 5% of
the issued share capital.

                                      F-38
<PAGE>

SKYPHARMA PLC

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

21 SHARES AND WARRANTS TO BE ISSUED
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 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.

         During 1998, SkyePharma revised its strategy for the sale and
distribution of its generic products in the US 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. SkyePharma will therefore need to renegotiate elements of the
Krypton acquisition agreement.

         The Directors have formed the opinion that until agreement is reached
with the Krypton vendors, certain elements of deferred consideration cannot be
estimated with any degree of certainty. Therefore the deferred consideration
recognised in the accounts at December 31, 1998 relates only to the extent that
hurdle (i) is reasonably expected to be met.

         Consequently, an estimate of L6.3 million has been recognised as
deferred consideration based on market prices on December 31, 1998 for 7.5
million ordinary shares and 7.5 million `B' Warrants. (1997 and 1996 based on
market prices of 27.5 million ordinary shares and 27.5 million `B' Warrants).


                                      F-39
<PAGE>

SKYPHARMA PLC

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

21 SHARES AND WARRANTS TO BE ISSUED (CONTINUED)

<TABLE>
<CAPTION>
                                                                                L'000
                                                                               -------
<S>                                                                             <C>
At January 1, 1996 .......................................................          --
Acquisition of subsidiary undertaking ....................................      25,300
Revaluation ..............................................................      (3,437)
                                                                               -------
At December 31, 1996 .....................................................      21,863
Revaluation ..............................................................      (6,119)
                                                                               -------
At December 31, 1997 .....................................................      15,744
Revaluation ..............................................................      (9,463)
                                                                               -------
At December 31, 1998 .....................................................       6,281
                                                                               -------
                                                                               -------
</TABLE>

22       RESERVES

<TABLE>
<CAPTION>
                                                                                            CURRENCY
                                                            SHARE          OTHER          TRANSLATION       PROFIT AND
                                                           PREMIUM        RESERVES          RESERVE        LOSS ACCOUNT
                                                            L'000          L'000             L'000            L'000
                                                         --------          --------         --------        --------
<S>                                                        <C>              <C>              <C>          <C>
At January 1, 1996 .................................            635              --              --         (15,763)
Merger reserve on acquisition ......................             --           9,000              --              --
Warrant reserve on issue of warrants ...............             --             896              --              --
Warrant reserve on acquisition of Krypton ..........             --             913              --              --
On issue of shares and warrants ....................        149,606              --              --              --
Expenses of issue ..................................         (6,315)             --              --              --
On capitalisation of loan notes ....................          1,237              --              --              --
On conversion of preference shares .................          5,000              --              --              --
Goodwill on acquisition of Jago and Krypton ........             --              --              --        (244,664)
Goodwill adjustments on deferred consideration .....             --              --              --          11,049
Exchange adjustments ...............................             --              --           1,554              --
Loss for the year ..................................             --              --              --         (14,158)
                                                           --------        --------        --------        --------
At December 31, 1996 ...............................        150,163          10,809           1,554        (263,536)
On issue shares and warrants .......................          5,705             (18)             --              --
Goodwill on acquisition of SkyePharma Production SAS             --              --              --          12,697
Goodwill adjustments on deferred consideration .....             --              --              --           4,352
Exchange adjustments ...............................             --              --          (2,194)             --
Loss for the year ..................................             --              --              --         (17,781)
                                                           --------        --------        --------        --------
At December 31, 1997 ...............................        155,868          10,791            (640)       (264,268)
On issue of shares and warrants ....................         24,328             271              --              --
On conversion of debentures ........................          6,019              --              --              --
On exercise of warrants ............................             --              (2)             --              --
Goodwill adjustment on deferred consideration ......             --              --              --          45,671
Exchange adjustments ...............................             --              --           1,302              --
Loss for the year ..................................             --              --              --         (22,096)
                                                           --------        --------        --------        --------
At December 31, 1998 ...............................        186,215          11,060             662        (240,693)
                                                           --------        --------        --------        --------
                                                           --------        --------        --------        --------
</TABLE>

         Other reserves at December 31, 1998 relate to merger reserve on
acquisition and warrant reserve on issue of warrants.



                                      F-40
<PAGE>

SKYPHARMA PLC

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

22       RESERVES (CONTINUED)
         As at December 31, 1998, the cumulative amount of goodwill eliminated
against reserves was L170,895,000 (1997: L216,566,000; 1996: L233,615,000). As
described in note 1, goodwill eliminated against reserves was previously taken
to a separate goodwill write off reserve. The above table has been restated to
show the elimination of goodwill and subsequent goodwill adjustments against the
profit and loss reserve.

23       ACQUISITIONS

(A)      JAGO PRODUCTION SAS (FORMERLY LABORATORIES NOVALIS PRODUCTION SAS)

         On September 11, 1996 the Group entered into a conditional agreement to
acquire 100% of the issued share capital of Laboratories Novalis Production SAS,
of which the principal asset was a manufacturing facility near Lyon in France,
for 2 French francs from Wyeth-Ayerst International Inc., a subsidiary of
American Home Products Inc. The acquisition was effective from January 14, 1997
and the net assets of the acquired operations have been consolidated from that
date, and accounted for under the acquisition method.

         Under the terms of the agreement, the Company agreed to manufacture
certain pharmaceutical products and other products ("Contract Products") on
behalf of certain subsidiaries of American Home Products ("AHP") at the
facility. The agreement expires on December 31, 1999, subject to AHP's right to
extend the term for up to three months.

         AHP has agreed to purchase minimum guaranteed quantities of products
such that the Group can recover 100%, 85% and 50% during the first, second and
third year of the agreement, respectively, (subject to accelerated phasing-out
of the Contract Products by mutual agreement) of the costs of operating the Lyon
facility. AHP's subsidiaries are responsible for the registration of the
Contract Products with all proper health, customers and other authorities under
applicable law, but the Group furnishes assistance to AHP's subsidiaries from
time to time in connection with their filing of documentation as is necessary
for such registrations.

         The assets and liabilities assumed on the date of acquisition, and the
adjustments to fair values, are set out below:

<TABLE>
<CAPTION>
                                         BOOK VALUE  REVALUATIONS    FAIR VALUE
                                           L'000        L'000           L'000
                                        ----------   -----------     -----------
<S>                                       <C>           <C>              <C>
Fixed assets ...........................  16,479        (3,259)*1         13,220
Debtors ................................     853               --            853
Cash at bank and in hand ...............      73               --             73
Creditors and provisions ...............    (891)         (242)*2         (1,133)
                                         -------        ---------        -------
Net assets .............................  16,514        (3,501)           13,013
                                         -------        ---------        -------
                                         -------        ---------        -------
Expenses of acquisition ................                                    (316)
                                                                         -------
Negative goodwill on acquisition .......                                  12,697
                                                                         -------
                                                                         -------
Expenses of acquisition ................                                     316
Cash and cash equivalents acquired .....                                     (73)
                                                                         -------
Net cash movement on acquisition .......                                     243
                                                                         -------
                                                                         -------
</TABLE>

-------
*1       Revaluation of Land and Buildings to fair value based upon independent
         Chartered Surveyors' valuation.
*2       Actuarial valuation adjustments to pension provisions and accrued
         charges.

                                      F-41
<PAGE>

SKYPHARMA PLC

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

23 ACQUISITIONS (CONTINUED)
         Jago Production SAS, contributed L484,000 to the Group's net operating
cash flows, paid L166,000 in respect of net returns on investments and servicing
of finance, paid LNil in respect of taxation and paid L2,631,000 on capital
expenditure in the year to December 31, 1997.

         Financial information for Jago Production SAS for the period prior to
acquisition is not disclosed as the company did not trade during the period.

(B)      JAGO HOLDINGS AG

         On May 3, 1996, the Company acquired Jago Holdings AG ("Jago"),
including a property and related mortgage acquired by Jago on this date from its
principal shareholder, an established supplier of innovative drug delivery
technologies for an initial consideration of L128 million; an earn-out payment,
being the lesser of $250 million and the aggregate of 20% of the Jago Group's
consolidated gross license income from its GEOMATRIXu drug delivery technology;
a further cash payment of up to $5 million on receipt by Jago of the same amount
in respect of certain entitlements under its joint venture agreements with Genta
Inc and a further cash payment of up to $5 million on the receipt of any
payments for the value of Jago's inhalation technology. Further details are
provided in note 26, Related Party Transactions.

         The Directors have deemed that it is in the best interests of the
Company to try to settle the deferred consideration as this will remove the
significant uncertainty that complicates the evaluation of the Group. The
Directors are currently in discussion with the vendor (Dr J Gonella) to explore
the terms on which the obligation may be settled. Any agreement reached on this
matter will have to gain the approval of the shareholders before it can be
implemented. In the discussions referred to, both Dr Gonella and Dr T
Rinderknecht (his legal advisor), being directors of the company, have declared
a personal interest and have not participated in the Board review of the
estimate of fair value. Having regard to these matters, the Directors' current
estimate is that not more than approximately L40 million would be payable, in
satisfaction of the deferred consideration obligation, under any settlement
agreement.

         The assets and liabilities of Jago Holding AG on the date of
acquisition, and the adjustments to fair values, are set out below:

<TABLE>
<CAPTION>                                                                       FAIR VALUE
                                                                    BOOK VALUE  ADJUSTMENTS   FAIR VALUE
                                                                       L'000       L'000        L'000
                                                                    ----------  -----------   -----------
<S>                                                                   <C>           <C>        <C>
Intangible fixed assets ......................................            325        --            325
Tangible fixed assets ........................................         10,438        --         10,438
Investments ..................................................          1,510        --          1,510
Stocks .......................................................            530        --            530
Debtors ......................................................          2,771        --          2,771
Cash at bank and in hand .....................................            893        --            893
Creditors ....................................................        (16,792)       --        (16,792)
Equity in net capital deficiency of joint venture ............         (5,207)       --         (5,207)
                                                                     --------    ------       --------
Net liabilities ..............................................         (5,532)       --         (5,532)
                                                                     --------    ------
                                                                     --------    ------

Purchase consideration .......................................                                 198,917
                                                                                              --------
Goodwill arising on acquisition of Jago Holding AG ...........                                 204,449
                                                                                              --------
                                                                                              --------
Purchase consideration in ordinary shares and cash ...........                                 198,917
Non cash element of consideration:
Shares issued (30,711,856 ordinary shares) ...................                                 (23,033)
Deferred and contingent consideration, note 16, Provisions for                                 (66,630)
liabilities and charges.......................................
                                                                                              --------
Cash consideration paid ......................................                                 109,254
Cash and cash equivalents acquired ...........................                                   1,647
                                                                                              --------
Net cash payment on acquisition ..............................                                 110,901
                                                                                              --------
                                                                                              --------
</TABLE>
                                      F-42
<PAGE>


SKYPHARMA PLC

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

23 ACQUISITIONS (CONTINUED)
         Jago Holding AG, contributed L(4,557,000) to the Group's net operating
cash flows, paid L457,000 in respect of net returns on investments and servicing
of finance, paid L43,000 in respect of taxation and paid L202,000 from investing
activities in the period to December 31, 1996.

(C)      KRYPTON LIMITED

         On January 8, 1996 the approval of ordinary shareholders was given for
the acquisition of the outstanding 10,000 ordinary shares of L1 each and
warrants of Krypton Limited ("Krypton") for an initial consideration of 300
million Existing ordinary shares (30 million New ordinary shares) and 30 million
`B' warrants and a further consideration of up to 375 million Existing ordinary
shares (37.5 million New ordinary shares) and 37.5 million `B' warrants subject
to the satisfaction of certain performance hurdles. Further details are provided
in note 26, Related Party Transactions.

         The Directors have estimated that the contingent consideration warrants
based on market prices at December 31, 1998 will amount to L6,281,000 comprising
7.5 million New ordinary shares and 7.5 million `B' Warrants. (December 31,
1997: L15,743,750; December 31, 1996: L21,862,500 comprising 27.5 million
ordinary shares and 27.5 million `B' Warrants). See also note 21; Shares and
Warrants to be issued. The eventual outcome is subject to the uncertainties
inherent in future sales performance and future market prices of the Company's
ordinary shares. Accordingly the fair value of the contingent consideration may
vary in future.

         The assets and liabilities of Krypton on the date of acquisition, and
the adjustments to fair values, are set out below:

<TABLE>
<CAPTION>                                                            FAIR VALUE
                                                       BOOK VALUE   ADJUSTMENTS*     FAIR VALUE
                                                         L'000         L'000*          L'000
                                                       ----------   -----------     ----------
<S>                                                     <C>             <C>             <C>
Intangible fixed assets ........................         4,164         (4,164)            --
Debtors ........................................            30             --             30
Creditors: amounts falling due within one year
Loan from Ian Gowrie-Smith Family Trust ........        (1,149)            --         (1,149)
Development costs ..............................        (3,028)         2,197           (831)
                                                       -------        -------        -------
Net assets/(liabilities) .......................            17         (1,967)        (1,950)
                                                       -------        -------
                                                       -------        -------
Purchase consideration .........................                                      38,265
                                                                                     -------
Goodwill arising on acquisition of Krypton .....                                      40,215
                                                                                     -------
                                                                                     -------
Total purchase consideration in ordinary shares,                                      38,265
  warrants and cash.............................
Non cash element of consideration:
Shares issued ..................................                                    (12,000)
Warrants issued ................................                                       (913)
Deferred and contingent consideration ..........                                    (25,300)
Cash and cash equivalents acquired .............                                         --
                                                                                    -------
Net cash payment on acquisition ................                                         52
                                                                                    -------
                                                                                    -------
</TABLE>

------

*        Adjustments to conform accounting policies. Prior to the acquisition,
         Krypton had accrued and capitalised future development costs relating
         to potential milestone liabilities which had yet to be achieved. Under
         the Group's policies, costs relating to development projects are
         expensed when incurred.

         In accordance with the Group's accounting policy the goodwill arising
         on consolidation at December 31, 1998 of L21.2 million; (December 31,
         1997: L30.7 million; December 31, 1996: L36.8 million) has been written
         off to reserves. As noted above the contingent consideration, and hence
         the goodwill arising, may vary in the future.

         Krypton contributed L(176,000) to the Group's net operating cash flows,
         paid L176,000 in respect of net returns on investments and servicing of
         finance, paid LNil in respect of taxation and received LNil from
         investing activities in the period to December 31, 1996.





                                      F-43
<PAGE>


SKYPHARMA PLC

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


24 DISPOSALS
BLACK & EDGINGTON HIRE LIMITED

         On November 21, 1995 an agreement was reached to sell Black & Edgington
Hire Limited, the Company's only trading subsidiary, and the freehold properties
from which it traded to Sellers Arenascene and its parent, Sellers International
of Huddersfield, for a total consideration of L1.66 million plus 33% of the net
profit which may arise on any subsequent sale within five years by the purchaser
of the freehold property. L790,000 of the total consideration was received in
the five month period ended December 31, 1995 and the remaining consideration in
the year ended December 31, 1996. L900,000 of the total proceeds related to the
sale of freehold properties, whereof L90,000 was received in the five month
period ended December 31, 1995 and L810,000 was received in the year ended
December 31, 1996. The proceeds relating to the sale of freehold properties are
included in sale of tangible fixed assets in the consolidated cash flow
statement.

25       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 year to which they relate, and the
assets are held in separate trustee administered funds. The charge for the year
ended December 31, 1998 amounted L497,000 (1997: L497,000; 1996: L277,000)

         Following the acquisition in January 1997 of SkyePharma Production SAS,
the Group operates a defined benefit scheme in France in respect of its
employees of that company, the assets of which are not held by an externally
administered fund. On acquisition, the retirement commitments were valued at
December 31, 1996 and a provision was set up. The actuarial method used was the
unit credit with service prorate actuarial cost method. Main assumptions include
a discount rate of 6.29% and a rate of salary increase of 3.5%. The calculation
of accrued benefits used in valuing the retirement benefit commitment was
prepared on the basis of the pharmaceutical industry's collective bargaining
agreement applying to the relevant employees. The charge for the year amounted
to L29,000 (year to December 31, 1997; L9,000).

26       RELATED PARTY TRANSACTIONS

         During the year ended December 31, 1998 fees amounting to L66,000
(1997: L163,000; 1996: L634,500, see note (g) below) were paid to Rinderknecht,
Glaus & Stadelhofer, in which Dr Rinderknecht a Director of the Company is a
partner, in respect of legal advice to the Group.

         At the end of December 1998, Ian Gowrie-Smith, (through a family
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.
The lease has been renewed subsequent to the year end on the same terms.

         The following transactions with the Directors of the Company existed
during the year ended December 31, 1996.

(a)      On May 3, 1996 the Company acquired 100% of Jago Holdings AG from Dr
         Jacques Gonella on terms described in the Circular sent to Shareholders
         on April 4, 1996. Under the terms of the Acquisition Agreement Dr
         Gonella was paid:

         (i)      A prepayment of $6,000,000;

         (ii)     A cash payment of L100,800,000;

         (iii)    The issue of ordinary shares in the Company having a value at
                  the time of issue of $35,000,000 being in total 30,711,856
                  ordinary shares.



                                      F-44
<PAGE>


SKYPHARMA PLC

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


26 RELATED PARTY TRANSACTIONS (CONTINUED)
         The above items together with the estimated net present value of the
         contingent consideration below were included in the purchase
         consideration as described in Note 23.

         Further consideration is payable to Dr Gonella as follows:

         (i)      An earn-out payment being the lesser of $250 million and the
                  aggregate of 20% of the Jago Group's consolidated gross
                  licence income from its Geomatrix drug delivery technology;

         (ii)     A further cash payment of up to $5 million on receipt by Jago
                  of the same amount in respect of certain entitlements under
                  its joint venture agreement with Genta;

        (iii)     A further cash payment of up to $5 million on receipt by
                  any member company of the SkyePharma Group of the same amount
                  of any payments for the value of Jago's inhalation technology
                  under the terms of any future joint venture or other similar
                  arrangement.

         The Company has an option to prepay the earn-out arrangements described
         above at any time in cash for the present value of $250,000,000,
         discounted from 2006 at an annual rate of 8.5%, less any amount paid
         under the earn-out prior to the exercise of the option.

(b)      On December 11, 1995, Mr Gowrie-Smith entered into a letter of intent
         with Dr J Gonella pursuant to which the I R Gowrie-Smith Family Trust,
         the beneficiaries of which are certain members of Mr Gowrie-Smith's
         family, paid $3 million (including a loan from a third party) for a
         period of exclusive negotiations with the Vendor for the acquisition of
         Jago. These transactions were the subject of an Assignment and
         Assumption Agreement made at the time of the purchase of Jago between
         Mr Gowrie-Smith and the Company which was described in the Circular to
         shareholders dated April 4, 1996 and which was approved by the
         shareholders in general meeting on April 26, 1996. The agreement was
         subsequently performed in all its particulars, and the amount paid was
         included in the purchase consideration (See Note 23).

(c)      On May 3, 1996, Dr J Gonella owned the laboratory research and office
         building located in Muttenz, which was financed by mortgages amounting
         to L6.4 million and was covered by various letters of indebtedness for
         a total amount of L10.2 million. In addition Dr J Gonella had an
         outstanding balance due from the company of L0.4 million. In
         consequence of the overall Jago acquisition, the Muttenz property was
         transferred to Jago in May 1996 concurrent with the acquisition and Dr
         Gonella was released from the mortgage and the letters of indebtedness.
         The fair value of the property, determined by independent appraisal,
         was L6.6 million on this date and was reflected within the fair value
         of assets acquired (See Note 23). The amount outstanding to Dr Gonella
         was settled on July 29, 1996.

(d)      Dr J Gonella received commissions of L793,495 pursuant to his
         participation in the placing that took place on the Company's
         acquisition of Jago on May 3, 1996. The amount was accounted for as a
         fund raising cost and recorded as a reduction of share premium within
         the purchase accounting.

(e)      On the acquisition of Jago amounts totalling SFr 532,500 were due to
         Jago from VECAP Venture Capital Partners AG relating to the 1995
         repurchase by VECAP of certain rights previously acquired by Jago. The
         sole Director of VECAP is Dr T Rinderknecht who was appointed to the
         SkyePharma Board subsequent to the acquisition of Jago. The amount was
         paid in full on June 27, 1996.

(f)      Under the Joint Venture agreement dated May 12, 1995 the Joint Venture
         became obligated to pay to VECAP and to Jagotec AG an aggregate amount
         of $3.0 million, in equal shares on the receipt by the Joint Venture of
         qualifying revenues. In October 1996 the Joint Venture received
         payments from Krypton Ltd amounting to $1.0 million relating to the
         acquisition of certain rights (See Note 11) which is qualifying revenue
         and which therefore was required to be distributed. The



                                      F-45
<PAGE>


SKYPHARMA PLC

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


26 RELATED PARTY TRANSACTIONS (CONTINUED)
         revenue was recognised by the Joint Venture as the payment did not
         result in any contingent future performance obligation and the amount
         was not refundable. The payment was expensed as research and
         development costs by Krypton. Jagotec agreed to defer its entitlement
         and in February 1997 loaned $500,000 to the Joint Venture to enable it
         to satisfy, in part, its obligation to VECAP.

(g)      As disclosed in the Circular to shareholders, fees in respect of the
         acquisition of Jago amounting to L415,000 were paid to the law firm of
         Rinderknecht, Glaus & Stadelhofer, in which Dr Rinderknecht is a
         partner. This was accounted for as part of the purchase consideration.
         In addition the firm provides ongoing legal advice to Jago. In the year
         to December 31, 1996 fees amounting to L219,500 were paid and charged
         to income.

(h)      An agreement commenced in January 1995 between the Company and
         Brightstone Consultants, a company owned by Ian Gowrie-Smith and David
         Lees, whereby the Company was charged L3,750 per month for offices at
         20 Cockspur Street, London, England. L7,500 was charged in the year
         ended December 31, 1996 by Brightstone Consultants under this
         agreement. The agreement ended on February 29, 1996.

(i)      Ian Gowrie-Smith provided a L355,000 personal guarantee to Midland Bank
         plc on behalf of the Company. Furthermore, Ian Gowrie-Smith provided a
         personal guarantee up to a maximum of L900,000 to Sellers Arenascene
         Limited in respect of any shortfall in the net assets of Black &
         Edgington Hire Limited at completion of the sale until such time as the
         Company received the funds from its capital raising approved on January
         8, 1996.

(j)      During January 1996 the Company repaid an amount of L1,089,000 which
         had been loaned to Krypton by the Ian Gowrie-Smith Family Trust in
         respect of the funding of certain drug development and milestone
         payments.

(k)      On January 8, 1996, the approval of ordinary shareholders was given for
         the acquisition of the outstanding 10,000 ordinary shares of L1 each
         and warrants of Krypton for an initial consideration of 300 million
         existing ordinary shares and 30 million `B' Warrants and a further
         consideration of up to 375 million existing ordinary shares and 37.5
         million `B' Warrants, subject to the satisfaction of certain
         performance hurdles. The Krypton vendors include certain trusts in
         which Messrs I Gowrie-Smith, Joe Bozman and Richard Stewart are
         interested.

         The revised arrangements, which were approved by the shareholders in
         general meeting on April 26, 1996, are set out below.

         The consideration for the purchase of the share capital of Krypton may
         increase by the issue of up to a maximum of a further 37.5 million
         ordinary shares and 37.5 million `B' Warrants, subject to the
         satisfaction of the following conditions and hurdles:

         (i)      2.5 million ordinary shares and 2.5 million `B' Warrants on
                  the occasion of each Product obtaining ANDA approval subject
                  to a maximum of 7.5 million ordinary shares and 7.5 million
                  `B' Warrants;

         (ii)     10 million ordinary shares and 10 million `B' Warrants on the
                  occasion of the aggregate annual sales of the Products, in the
                  first calendar year up to and including the year ended
                  December 31, 2003, exceeding $50 million if the Group is
                  profitable in respect of the Products;

         (iii)    10 million ordinary shares and 10 million `B' Warrants on the
                  occasion of the aggregate annual sales of the Products and the
                  annual revenues of the Jago Group, in the first calendar year
                  up to and including the year ended December 31, 2003,
                  exceeding $200 million if the Group is profitable in respect
                  of the Products;



                                      F-46
<PAGE>


SKYPHARMA PLC

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


26 RELATED PARTY TRANSACTIONS (CONTINUED)
         (iv)     10 million ordinary shares and 10 million `B' Warrants on the
                  occasion of the aggregate annual sales of the Products and the
                  annual revenues of the Jago Group, in the first calendar year
                  up to and including the year ended December 31, 2003,
                  exceeding $275 million, if the Group is profitable in respect
                  of the Products. In the event that any 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.

         The shares and warrants were valued at market value at the date of the
         acquisition and accounted for as set out in Note 23.

27 POST BALANCE SHEET EVENTS

DEPOTECH ACQUISITION

         On 19 October 1998 the Group acquired 2,857,143 shares representing
approximately 16% of the Common Stock in DepoTech Corporation of San Diego, a
company listed on the Nasdaq National Market, for a consideration of $5 million,
and on the same date entered into a conditional agreement to acquire the
Company's outstanding shares. As at 31 December 1998 the initial investment of
$5 million has been included within fixed asset investments. On 10 March 1999
the Group completed the acquisition by the issue of 28,311,070 ordinary shares
in ADS form with a market value of L20.0 million for the remaining 15,247,623 of
Common Stock in DepoTech.

         The agreement provides for additional contingent payments as follows:

            1.          an additional 1.62 million ADSs if DepoTech's lead
                        compound DepoCyt, for the treatment of neoplastic
                        meningitis from lymphomas, is granted final approval by
                        the FDA for sale, marketing and distribution in the US
                        no later than 31 March 2000; and

            2.          an additional 1.21 million ADSs if either of the
                        following events occur before 31 March 2000:


                        (i)   a development agreement is signed with a corporate
                              partner for DepoMorphine, an injectable sustained
                              release formulation of encapsulated morphine
                              sulphate for acute post operative pain management;
                              or

                        (ii)  a development agreement is signed with a corporate
                              partner for a macromolecule using DepoTech's
                              DepoFoam technology.

         The FDA approved DepoCyt for sale in the US on 1 April 1999, and
consequently the Company will issue an additional 16,177,849 ordinary shares in
ADS form to the former shareholders of DepoTech.

         The assets and liabilities of DepoTech as at December 31, 1998, based
upon DepoTech's unaudited balance sheet are set out below:

<TABLE>
<CAPTION>
                                                            L'000
                                                         --------
<S>                                                         <C>
Fixed assets .......................................        7,841
Current assets excluding cash and liquid investments          896
Cash and liquid investments ........................        5,643
Current liabilities ................................       (3,709)
Long term liabilities ..............................       (5,140)
                                                           ------
Net assets .........................................        5,531
                                                           ------
                                                           ------
</TABLE>

         Fixed assets relate primarily to property and equipment. Cash and
liquid investments available for sale include short-term investments of L1.7
million, held in US Government securities and corporate obligations. Current and
long term liabilities include L4.4 million and L1.3 million of bank debt and
lease obligations respectively.


                                      F-47
<PAGE>

SKYPHARMA PLC

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


27 POST BALANCE SHEET EVENTS (CONTINUED)
         Under a collaboration agreement with Chiron Corporation, DepoTech had
an obligation at December 31, 1998 to pay Chiron $11.7 million within six months
of US or European marketing approval of DepoCyt. Consequent upon the
acquisition, SkyePharma, DepoTech and Chiron further amended the agreement with
Chiron in March 1999 to provide that the Company will issue a note payable to
Chiron for $9.7 million upon FDA approval of DepoCyt in the US. The amendment
also provides that the Company will issue a note payable for $3.5 million to
Chiron upon the filing of an application for DepoCyt for paediatric indications
in the US. The unpaid principal balance of each note shall be payable in three
equal instalments on June 30, 2000, June 30, 2001 and June 30, 2002.

         Expenses relating to the transaction incurred by SkyePharma PLC are
approximately L2.1 million. SkyePharma intends to account for the DepoTech
acquisition under the acquisition method of accounting, and to write off
goodwill over a 20 year period.

         In May 1999 SkyePharma signed an agreement with Silicon Valley Bank for
the financing arrangements of DepoTech Corporation. Under the agreement,
DepoTech covenanted to hold cash balances equivalent to the greater of 75% of
outstanding loan balances or three months' cash burn, and SkyePharma covenanted
to hold on a consolidated basis, cash balances equivalent to six months' cash
burn, all balances being held on an unrestricted basis.

         The following unaudited pro forma combined condensed financial
information of SkyePharma and DepoTech has been prepared in accordance with UK
GAAP. The unaudited combined condensed balance sheet and income statement has
been prepared to reflect the DepoTech acquisition as if they occurred on
December 31, 1998 and January 1, 1998, respectively. The unaudited pro forma
combined condensed financial information of SkyePharma and DepoTech, as of and
for the year ended December 31, 1998, after giving effect to certain pro forma
adjustments, including the issuance of the contingent shares relating to FDA
approval of DepoCyt and the L9.7 million note payable to Chiron and excluding
the remaining contingent shares and note payable as the conditions relating to
these items are not probable of occurring beyond a reasonable doubt, is as
follows:

UNAUDITED COMBINED CONDENSED BALANCE SHEET

<TABLE>
<CAPTION>
                                          DECEMBER 31,
                                              1998
                                            L'000
                                           --------
<S>                                          <C>
Current assets ......................        44,695
Fixed assets ........................        33,317
Goodwill and intangible assets ......        37,738
                                            -------
Total assets ........................       115,750
                                            -------
                                            -------
Current liabilities .................        15,749
Other liabilities ...................        64,019
Shareholders Funds ..................        35,982
                                            -------
Total Liabilities & Shareholder funds       115,750
                                            -------
                                            -------
</TABLE>


                                      F-48
<PAGE>

SKYPHARMA PLC

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

27       POST BALANCE SHEET EVENTS (CONTINUED)
UNAUDITED COMBINED CONDENSED INCOME STATEMENT

<TABLE>
<CAPTION>
                                                                        YEAR TO
                                                                        DECEMBER
                                                                        31, 1998
                                                                         L'000
                                                                        --------
<S>                                                                      <C>
Revenue ....................................................             12,861
Loss on ordinary activities before taxation ................            (42,702)
Net Loss ...................................................            (42,787)
Earnings per share .........................................            (10.0)p
                                                                        -------
</TABLE>

JOINT VENTURE

         On 4 March 1999 an agreement was signed between SkyePharma PLC and
Genta Inc. 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 are to be waived. These are principally unpaid development cost
invoices due to SkyePharma and the loan notes due to Genta. In addition Genta is
released from future funding obligations.

         SkyePharma becomes responsible for all obligations under existing
development and licence 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.

         The agreement relating to the Joint Venture will be accounted for in
1999. The Company does not consider it will suffer any material adverse
financial consequences from its implementation of the agreement.

PROPOSED ACQUISITION OF HYAL PHARMACEUTICAL CORPORATION -- UNAUDITED

         On May 19, 1999 the company announced an agreement with Hyal
Phramaceutical Corporation of Mississauga, Ontario ("Hyal") to acquire all of
the issued and outstanding shares and 12% subordinated debentures of Hyal. The
transaction is subject to a number of conditions including completion of due
diligence and the approval of Hyal shareholders. The maximum consideration
payable, including contingent consideration is L3.5 million.

28       PRINCIPAL GROUP UNDERTAKINGS

<TABLE>
<CAPTION>
                                    COUNTRY OF
COMPANY                             INCORPORATION   PERCENTAGE HELD  PRINCIPAL ACTIVITIES
--------                            -------------   ---------------  ------------------------------------------------------------
<S>                                 <C>               <C>            <C>
Krypton Limited                     Gibraltar         100%           Development of pharmaceuticals
Brightstone Pharma Inc*             USA               100%           Sale of pharmaceuticals
SkyePharma Holding AG*              Switzerland       100%           Holding company
Jago Holding AG                     Switzerland       100%           Holding company
SkyePharma AG                       Switzerland       100%           Contract research and manufacturing
Jago Research AG                    Switzerland       100%           Holding company for intellectual property rights
Jagotec AG                          Switzerland       100%           Holding company for patent and intellectual property rights
SkyePharma Production SAS*          France            100%           Manufacturing of pharmaceuticals
Jago Finance Limited                Jersey            100%           Finance company
Genta Jago Technologies BV          Netherlands       50%            Development of pharmaceuticals
Laboratoires Jago SA                France            100%           Marketing and development of pharmaceuticals
</TABLE>

---
* Denotes investment directly held by the Company

                                      F-49
<PAGE>

SKYPHARMA PLC

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

29 SUMMARY OF MATERIAL DIFFERENCES BETWEEN U.K. AND U.S. GAAP
         The principal differences between U.K. and U.S. GAAP arise from
accounting for the acquisitions made by SkyePharma PLC during 1996 and 1997, and
the treatment of foreign currency balances and fixed asset investments.

(1)      BUSINESS COMBINATIONS

         Under both U.K. and U.S. GAAP the acquisitions during the periods of
Jago Production SAS (formerly Laboratories Novalis Production SAS), Jago
Holdings AG and Krypton Limited 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, differences between U.K. and U.S. GAAP
arise as set out below.

(A)      GOODWILL AND INTANGIBLE FIXED ASSETS

         U.K. GAAP requires an allocation of purchase consideration to
intangible assets which are separable from the business. Under U.K. GAAP no
intangible assets have been recognised as a result of purchase accounting as the
intangible assets are considered to be an integral part of the business acquired
and are, therefore, included within goodwill and eliminated against
shareholders' funds. Following the introduction of FRS10 there is a requirement
to capitalise such goodwill and amortise 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,
irrespective of whether they are separable. Intangible fixed assets recognised
under U.S. GAAP purchase accounting requirements are depreciated over their
estimated revenue earning life. For the purposes of U.S. GAAP, the estimated
revenue earning life has been taken to be 20 years, being the estimated
remaining life of the Geomatrix patents plus five years. The carrying value of
intangible assets is reviewed annually for any permanent impairment in value.

         Goodwill impairment is evaluated in relation to events or changes in
circumstances that indicate that the carrying amount may not be recoverable.
Where such events or changes have occurred, the carrying value of goodwill is
evaluated against an estimate of future cash flows from the related business and
assets acquired, and where appropriate, reduced to fair value measured in
conjunction with such related assets.

(B)      NEGATIVE GOODWILL ON ACQUISITION

         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. Since the introduction of FRS10 negative goodwill is to be capitalised
as a negative asset below positive goodwill. Under U.S. GAAP such excess is
eliminated by proportionately reducing the value of the non-current assets
acquired.

(C)      ACQUIRED IN-PROCESS RESEARCH AND DEVELOPMENT

         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.

         Acquired in process research and development in 1996 related to the
fair value of efforts previously undertaken under drug development contracts
held by Krypton (L14,915,000) and



                                      F-50
<PAGE>

SKYPHARMA PLC

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

29 SUMMARY OF MATERIAL DIFFERENCES BETWEEN U.K. AND U.S. GAAP (CONTINUED)
efforts related to the inhalation technology under development by Jago
(L10,336,000). As of the acquisition date such efforts had not resulted in any
commercial products or tangible assets with alternative future use, but rather
development knowledge related to the contracts in-process. For Krypton the
entire amount of the excess purchase price was allocated to in-process research
and development as Krypton had no identifiable assets and no operations beyond
the research and development activities acquired that were in-process and had no
other alternative future use than the completion of these projects. At the date
of the acquisition of Krypton, Krypton had five products in early stages of
development. The development being undertaken by Krypton involved the
application of specified technologies exclusively to the five products. The
feasibility of using the technologies with the products had not been determined,
and in the event that the technologies are not transferable to the products, the
development projects will have no alternative future use. The amount allocated
to in-process research and development for Jago was based upon an independent
valuation of the research and development efforts, which were related solely to
progress towards the ultimate commercialisation of the inhalation technology. As
at the date of the Jago acquisition, the technological feasibility of the
inhalation technology acquired, Meter Dose Inhaler ("MDI") and Dry Powder
Inhaler ("DPI") had not been established. The MDI had not entered into clinical
trials and a prototype of DPI had not yet been manufactured. As these
technologies were not yet proven and, because of the uniqueness of their design
and anticipated application, the Company could see no alternative future use for
them.

(D)      MEASUREMENT OF PURCHASE CONSIDERATION

         The Company effected its acquisition of Krypton through the exchange of
shares and warrants and recorded the consideration at the estimated fair value
of the shares and warrants.

         During the period from November 21, 1995 to January 9, 1996, the
trading of the Company's shares was suspended. During this period, the Krypton
acquisition, a rights issue and a public placing occurred.

         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, APB Opinion 16 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 market prices of the shares issued in the
acquisition, after adjusting for the 1 for 10 reverse stock split in May 1996,
was 76.10 pence per Ordinary Share. The market price of the warrants was 6.75
pence. The effect of this difference was to increase the value measurement of
purchase consideration which is allocated to acquired in-process research and
development with an offsetting adjustment to share premium on acquisition.

(E)      DEFERRED CONSIDERATION

         U.K. GAAP requires a reasonable estimate of the fair value of any
deferred consideration to be included in the cost of acquisition. Under U.S.
GAAP deferred consideration is only recognised when the amount is determinable
beyond reasonable doubt.

(2)      DEFERRED TAX

         Under U.K. GAAP, deferred tax is recognised to the extent that it is
probable that a tax liability will become payable or an asset will be
recoverable in the foreseeable future. Under U.S. GAAP, full provision is
required for deferred tax liabilities and deferred tax assets including losses
carried forward recognised subject to valuation allowances. Given the
uncertainty of the recoverability of the Group's tax losses carried forward, no
deferred tax asset is recognised under U.K. GAAP and a valuation allowance has
been provided in full for the deferred tax assets recognised under U.S. GAAP
(December 31, 1998: L13,155,000; December 31, 1997: L7,855,000).



                                      F-51
<PAGE>

SKYPHARMA PLC

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

29 SUMMARY OF MATERIAL DIFFERENCES BETWEEN U.K. AND U.S. GAAP (CONTINUED)
(3)      WRITE DOWN OF INVESTMENT IN GENTA

         In the year to December 31, 1996 exceptional items included L1,823,000
relating to the provision for loss on disposal of shares in Genta Inc. Under
U.S. GAAP the write-off would be classified as an operating expense to arrive at
operating profit/(loss).

(4)      FINANCIAL INSTRUMENTS

 CONCENTRATIONS OF CREDIT RISK

         Financial instruments that potentially subject the Group to
concentration of credit risk consists 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 counterparties and, by policy, limits the amount of
credit exposure with any one counterparty.

 DISCLOSURE ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS

         The carrying amounts of cash, accounts receivable, accounts payable and
accrued expenses approximate fair value because of the short maturity of these
items.

         The carrying amount of the secured mortgage and debt issued pursuant to
the Group's bank credit arrangements approximate fair values because the
interest rates on these instruments are variable and negotiated each year.
Long-term debt at December 31, 1998 included deferred consideration amounting to
L39,500,000 (December 31, 1997: L69,828,000; December 31, 1996: L62,572,000) and
represented the directors' estimate of the current value of the earn-out payment
payable to the vendor in respect of the acquisition of Jago. Further details are
provided in note 23 Acquisitions.

         The carrying value and estimated fair values of the Group's financial
instruments at December 31:

<TABLE>
<CAPTION>
                                         CARRYING                   CARRYING
                                          AMOUNT     FAIR VALUE      AMOUNT      FAIR VALUE
                                           1997          1997          1998          1998
                                          L'000         L'000         L'000         L'000
                                         -------       -------       -------       -------
<S>                                        <C>           <C>           <C>           <C>
ON BALANCE SHEET
Assets
Cash and cash equivalents ........         6,371         6,371         30,925        30,925
Short-term bank deposits .........         2,300         2,300             --            --
Fixed asset investment ...........            --            --          2,939         3,971
                                         -------       -------        -------       -------
                                           8,671         8,671         33,864        34,896
                                         -------       -------        -------       -------
                                         -------       -------        -------       -------
Liabilities
Short-term borrowings ............         2,183         2,183          3,374         3,374
Long-term debt ...................        73,978        73,978         45,748        45,748
                                         -------       -------        -------       -------
                                          76,161        76,161         49,122        49,122
                                         -------       -------        -------       -------
                                         -------       -------        -------       -------
OFF BALANCE SHEET
Foreign currency forward contracts            --          (105)            --            --
                                         -------       -------        -------       -------
                                         -------       -------        -------       -------
</TABLE>

         The estimated fair value of foreign currency forward contracts reflects
the estimated amounts that the Group would receive or pay to terminate the
contracts at the reporting date.



                                      F-52
<PAGE>

SKYPHARMA PLC

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

29 SUMMARY OF MATERIAL DIFFERENCES BETWEEN U.K. AND U.S. GAAP (CONTINUED)
 FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK

         Beginning in 1996, the Group has selectively entered into forward
currency contracts to fix certain of the non-sterling funding requirements of
its principal subsidiaries. The primary non-sterling exposures are denominated
in U.S. dollars, Swiss francs and French francs. The contracts generally have
maturities not exceeding 6 months. Gains or losses on these contracts are not
recorded until the maturity of the contracts, where upon they are recorded as an
adjustment to administrative expenses, consistent with the underlying
non-sterling expenses that are required to be funded. The losses on forward
contracts maturing during the years ended December 31, 1996, 1997 and 1998 were
L106,000, L484,000 and L126,000 respectively. The unrecognised losses from such
contracts at December 31, 1996 and 1997 were L350,000 and L105,000 respectively.
There were no forward foreign exchange contracts outstanding at December 31,
1998. At December 31, 1997 there were outstanding contracts to buy US$2,650,000
at rates from 1.6030 to 1.6071 expiring from January 2, 1998 to March 2, 1998
and CHF3,750,000 at rates from 2.2940 to 2.3140 expiring from January 5, 1998 to
March 2, 1998. The Group does not use any other financial derivatives.

(5)      FOREIGN CURRENCY BALANCES

         During 1997 the Company changed its designation of the nature of
foreign currency inter-company balances from "temporary" to "permanent". This
change reflected the longer term cash needs of the subsidiaries funded through
these advances, and the anticipation of management that such balances were no
longer intended or anticipated to be settled in the foreseeable future. Under
U.K. GAAP such designation was made with effect from 1 January 1997, and all
1997 exchange differences relating to such balances were recorded within
shareholders' equity. Such balances, amounted to L12,176,000 and L29,539,000 at
31 December 1996 and 1997, respectively. Under U.S. GAAP changes in accounting
resulting from the redesignation of inter-company balances are recorded on a
prospective basis from the date such designation is formally made, and
accordingly, the effect of exchange differences during 1997 related to these
inter-company balances would be recorded within the profit and loss account
prior to the date of its redesignation.

         Furthermore, under U.K. GAAP the Company accounts for foreign exchange
contracts on a deferral basis and records gains/losses from such contracts upon
their maturity within its profit and loss account. Under U.S. GAAP, such
contracts do not qualify for hedge accounting treatment and hence gains/losses
would not be deferred. However, the unrecognised losses related to these
contracts are not considered material for adjustment.

(6)      FIXED ASSET INVESTMENTS

         Under U.K. GAAP, fixed asset investments are stated at cost less
provision for permanent diminution in value. Under U.S. GAAP, fixed asset
investments classified as available for sale are stated at market value and the
unrealised gains/losses are accounted for in shareholders' equity. In the year
to December 31, 1998 unrealised gains accounted for in shareholders' equity
increased by L1,032,000 (1997 and 1996: Lnil).

(7)      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


                                      F-53
<PAGE>

SKYPHARMA PLC

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

29 SUMMARY OF MATERIAL DIFFERENCES BETWEEN U.K. AND U.S. GAAP (CONTINUED)
would, with the exception of dividends paid, be included as operating activities
under U.S. GAAP. Cashflows 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.

         Set out below, for illustrative purposes, is a summary consolidated
statement of cash flows under U.S. GAAP.

<TABLE>
<CAPTION>
                                                            YEAR TO         YEAR TO         YEAR TO
                                                            DECEMBER        DECEMBER        DECEMBER
                                                            31, 1996        31, 1997        31, 1998
                                                             L'000           L'000           L'000
                                                            --------        --------        --------
<S>                                                         <C>             <C>             <C>
Net cash used in operating activities ..............        (14,362)        (14,653)        (9,460)
Net cash used in investing activities ..............       (117,381)           (957)        (5,321)
Net cash provided by financing activities ..........        146,487           6,401         39,450
                                                           --------        --------       --------
Net (decrease)/increase in cash and cash equivalents         14,744          (9,209)        24,669
Cash and cash equivalents at beginning of year .....             --          15,310          6,371
Exchange adjustments ...............................            566             270           (115)
                                                           --------        --------       --------
Cash and cash equivalents at end of year ...........         15,310           6,371         30,925
                                                           --------        --------       --------
                                                           --------        --------       --------
</TABLE>


(8)      STOCK COMPENSATION PLANS

         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 in accounting for its plans. For awards
under the Company's option plans 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 recognised. 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.
Based on the Company's share price performance since the respective grant dates
in relation to the underlying performance conditions, it is not yet probable
that the performance conditions will be met. As a result, no compensation
expense has been recognised under APB 25 in 1996, 1997 or 1998. Had the Company
elected to recognise compensation expense based upon the fair value at the grant
date for awards under these plans consistent with the methodology prescribed by
FAS 123, the Company's U.S. GAAP net income and earnings per share would have
been reduced in the year to December 31, 1998 by L1,119,198 and 0.3p per share
(1997: L1,210,786 and 0.3p per share; 1996: L512,084 and 0.2p per share).

         These pro forma amounts may not be representative of future disclosures
since the estimated fair value of stock options is amortised 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, 1998: dividend yield 0.0% (1997 and
1996: 0.0%); expected volatility 57.6% (1997: 40.2%, 1996: 30.5%); risk-free
interest rate 6.5% to 6.75% (1997: 7.9%, 1996: 7.5%); and expected option term 7
years (1997 and 1998: 7 years). The weighted average fair value of options
granted during the year ended December 31, 1998 for which the exercise price
equals the market price



                                      F-54
<PAGE>
SKYPHARMA PLC

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

29 SUMMARY OF MATERIAL DIFFERENCES BETWEEN U.K. AND U.S. GAAP (CONTINUED)
on the grant date was 36.3p (1997: 37.8p, 1996: 40.5p). No options were granted
for which the exercise price was below or exceeded the market price.

         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.

(9)      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:

<TABLE>
<CAPTION>
                                                                                YEAR TO           YEAR TO           YEAR TO
                                                                              DECEMBER 31,      DECEMBER 31,      DECEMBER 31,
                                                                                 1996              1997              1998
                                                                                NUMBER            NUMBER            NUMBER
                                                                              ------------      ------------      ------------
<S>                                                                            <C>               <C>               <C>
Stock outstanding in terms of basic earnings per share .................       269,111,000       350,963,000       384,871,000
`A' Warrants outstanding ...............................................         2,437,670         2,437,670                --
`B' Warrants outstanding ...............................................         5,898,982         5,888,584         5,877,112
`C' Warrants outstanding ...............................................                --                --         1,800,000
Employee stock options outstanding .....................................        10,529,836        11,622,531        15,341,644
Convertible debentures .................................................                --                --         3,230,269
                                                                               -----------       -----------       -----------
Stock outstanding in terms of diluted EPS ..............................       287,977,488       370,911,785       411,120,025
Contingent shares relating to Krypton consideration (see note 21; Shares
and Warrants to be issued) .............................................        27,500,000        27,500,000         7,500,000
Contingent warrants relating to Krypton consideration (see note 21;
Shares and Warrants to be issued) ......................................         2,750,000         2,750,000           750,000
                                                                               -----------       -----------       -----------
                                                                               318,227,488       401,161,785       419,370,025
                                                                               -----------       -----------       -----------
                                                                               -----------       -----------       -----------
</TABLE>

         Stock outstanding in terms of basic earnings per share during the year
ended December 31, 1996 have been adjusted for the effects of the rights issue
in January 1996 and the share conversion and consolidation in May 1996.

         Contingent shares and warrants to be issued relating to Krypton have
been set out above. Whilst 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.

         In March 1998, the Company issued convertible unsecured debentures (the
"Debentures") and `C' Warrants. The aggregate number shares which may be issued
under the terms of the Warrants and Debentures shall not exceed 30,000,000. The
debentures issued had an aggregate principal amount of U.S.$18,576,359 due
February 2001 with the option to convert at any time prior to that. During the
first six months, conversion may only take place at a price of 90 pence per
share. Thereafter, the subscription price depends on the share price during the
20 day period prior to subscription subject to a maximum of 90 pence per share.
The Warrants can be converted to share at an exercise price of 120 pence per
ordinary share at any time up to 3 years from issue.



                                      F-55
<PAGE>

SKYPHARMA PLC

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

29 SUMMARY OF MATERIAL DIFFERENCES BETWEEN U.K. AND U.S. GAAP (CONTINUED)
         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 US on April 1,
1999. A further 12 million ordinary shares may be issued subject to certain
milestones being achieved before March 31, 1999, note 27; Post Balance Sheet
Events.

(10)     IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS

         The US Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative
Instruments and Hedging Activities". SFAS No. 133 requires extensive fair value
disclosure, for financial instruments. The Company has not yet evaluated the
likely impact on the level of disclosure provided. SFAS No. 133 is effective for
the Company's 2001 financial year.

RECONCILIATION TO U.S. ACCOUNTING PRINCIPLES

         The tables below summarise the material adjustments to the loss for the
period and equity shareholders' funds which would be required if U.S. GAAP
(Generally Accepted Accounting Principles) had been applied instead of U.K.
GAAP.

<TABLE>
<CAPTION>
LOSS                                                                         YEAR TO      YEAR TO      YEAR TO
                                                                           DECEMBER 31, DECEMBER 31, DECEMBER 31,
                                                                              1996         1997         1998
                                                                   NOTE 29    L'000        L'000        L'000
                                                                   -------  ---------   -----------  ------------
<S>                                                                   <C>       <C>          <C>          <C>
Loss under U.K. GAAP......................................                     (14,158)     (17,781)     (22,096)
US GAAP adjustments:
Purchase accounting and goodwill
 Depreciation of tangible fixed assets (Novalis) .........            (1b)          --          818          801
 Amortisation of intangible assets (Jago) ................            (1a)      (4,249)      (6,374)      (6,374)
 Acquired in-process research and development
  Jago ...................................................            (1c)     (10,336)           --           --
  Krypton - as measured under U.K. GAAP ..................            (1c)     (14,915)           --           --
   - adjustment to consideration for market price ........            (1d)     (11,942)           --           --
 Interest on deferred consideration (Jago) ...............            (1e)        3,554        5,488        5,880
Foreign currency balances ................................             (5)           --        (809)           --
                                                                              ---------    ---------    ---------
Approximate net loss under U.S. GAAP .....................                     (52,046)     (18,658)     (21,789)
                                                                              ---------    ---------    ---------
                                                                              ---------    ---------    ---------
Represented by:
Loss from continuing operations before tax on income .....                     (52,024)     (18,592)     (21,704)
Taxes on income ..........................................                           72         (66)         (85)
                                                                              ---------    ---------    ---------
Loss from continuing operations after tax ................                     (51,952)     (18,658)     (21,789)
Loss from discontinued operations (net of taxes) .........                         (94)           --           --
                                                                              ---------    ---------    ---------
Approximate net loss under U.S. GAAP .....................                     (52,046)     (18,658)     (21,789)
                                                                              ---------    ---------    ---------
                                                                              ---------    ---------    ---------
Approximate net loss per ordinary share
per U.S.  GAAP (pence) ...................................             (9)      (19.3)p       (5.3)p       (5.7)p
                                                                              ---------    ---------    ---------
                                                                              ---------    ---------    ---------
</TABLE>


                                      F-56
<PAGE>

SKYPHARMA PLC

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

29 SUMMARY OF MATERIAL DIFFERENCES BETWEEN U.K. AND U.S. GAAP (CONTINUED)

<TABLE>
<CAPTION>
STATEMENT OF COMPREHENSIVE INCOME                                            YEAR TO      YEAR TO      YEAR TO
                                                                           DECEMBER 31, DECEMBER 31, DECEMBER 31,
                                                                               1996         1997         1998
                                                                              L'000        L'000        L'000
                                                                             --------    ---------    ----------
<S>                                                                            <C>          <C>          <C>
Approximate net loss under U.S. GAAP ................................          (52,046)     (18,658)     (21,789)
Foreign currency translation adjustments ............................           (6,058)          722        (137)
Unrealised gains on equity investments ..............................                --           --        1,032
                                                                              ---------    ---------    ---------
Comprehensive income ................................................          (58,104)     (17,936)     (20,894)
                                                                              ---------    ---------    ---------
                                                                              ---------    ---------    ---------
</TABLE>

<TABLE>
<CAPTION>
EQUITY SHAREHOLDERS' FUNDS                                                                DECEMBER 31,   DECEMBER 31,
                                                                                             1997            1998
                                                                               NOTE 29      L'000           L'000
                                                                              --------    ----------      ----------
<S>                                                                                <C>      <C>           <C>
Equity shareholders' funds under U.K. GAAP...........................                       (46,110)        6,235
U.S. GAAP adjustments:
Purchase accounting and goodwill
 Tangible fixed assets - gross (Novalis).............................              (1b)     (11,522)     (12,271)
 Tangible fixed assets - accumulated depreciation (Novalis)..........              (1b)          791        1,686
 Intangible fixed assets - gross (Jago)..............................              (1a)      127,483      127,483
 Intangible fixed assets - accumulated amortisation (Jago)...........              (1a)     (10,623)     (16,997)
 Deferred consideration (Jago).......................................              (1e)       69,828       39,500
 Deferred consideration charged to goodwill reserve (Krypton)........              (1e)       15,744        6,281
 Shares and warrants to be issued (Krypton)..........................              (1e)     (15,744)      (6,281)
 Share market price and warrant reserve (Krypton)....................              (1d)       11,942       11,942
 Acquired in-process research and development (Krypton)..............              (1d)     (11,942)     (11,942)
Unrealised gains on equity investments...............................              (6)           --        1,032
                                                                                           ---------     ---------
Approximate equity shareholders' funds under U.S. GAAP...............                       129,847      146,668
                                                                                           ---------     ---------
                                                                                           ---------     ---------
</TABLE>


                                      F-57



<PAGE>

JAGO GROUP

REPORT OF INDEPENDENT ACCOUNTANTS


TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF JAGO HOLDING AG

         We have examined the accompanying Consolidated Financial Statements of
Jago Holding AG ("Jago") and its subsidiaries contained on pages F-59 to
F-77 of the Annual Report for the four months ended April 30, 1996, which are
expressed in Pounds sterling except where specifically identified. These
financial statements are the responsibility of Jago's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

         Our examinations of these statements were made in accordance with
auditing standards generally accepted in the United Kingdom and the United
States and accordingly included such tests of the accounting records and such
other auditing procedures as we considered necessary in the circumstances.

         In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the results of operations and the cash
flows of Jago Holding AG and its subsidiaries for the four month period ended
April 30, 1996 in conformity with accounting principles generally accepted in
the United Kingdom consistently applied.

         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 four
months ended April 30, 1996 to the extent summarised in Note 15 to the
consolidated financial statements.

REVISUISSE PRICE WATERHOUSE AG

Ralph R Reinertsen                                       Alexia Senkowski

Basel, Switzerland
April 28, 1997


                                      F-58
<PAGE>

JAGO GROUP
CONSOLIDATED INCOME STATEMENT
<TABLE>
<CAPTION>

                                                                                                           4 MONTHS
                                                                                                            ENDED
                                                                                                           APRIL 30,
                                                                                                             1996
                                                                                            NOTES           L'000
                                                                                          --------         --------
<S>                                                                                      <C>           <C>
Turnover-continuing operations................................................              3               4,751
Cost of sales.................................................................                             (2,393)
                                                                                                         --------
GROSS PROFIT..................................................................                              2,358
Selling, marketing and distribution expenses..................................                               (299)
Administration expenses.......................................................                             (1,407)
Research and development expenses.............................................                               (132)
Other operating income........................................................               4                179
Other operating expenses......................................................               5               (115)
Share in loss in Joint Venture................................................                               (566)
                                                                                                         --------
OPERATING PROFIT..............................................................               6                 18
Net interest..................................................................               9                (95)
                                                                                                         --------
LOSS ON ORDINARY ACTIVITIES BEFORE TAXATION...................................                                (77)
Taxation......................................................................               10              (154)
                                                                                                         --------
LOSS FOR THE PERIOD...........................................................                               (231)
                                                                                                         --------
                                                                                                         --------
</TABLE>

         The Group prepares its Consolidated Financial Statements in accordance
with accounting principles generally accepted in the U.K. ("U.K. GAAP"). A
reconciliation to accounting principles generally accepted in the United States
of America ("U.S. GAAP") for the four month period ended April 30, 1996 is set
forth in Note 15 of the Notes to the Consolidated Financial Statements.

         See Notes to the Consolidated Financial Statements.




                                      F-59
<PAGE>
JAGO GROUP
CONSOLIDATED CASHFLOW STATEMENT

<TABLE>
<CAPTION>

                                                                                                           4 MONTHS
                                                                                                            ENDED
                                                                                                           APRIL 30,
                                                                                                             1996
                                                                                            NOTES           L'000
                                                                                          --------         --------
<S>                                                                                      <C>              <C>
NET CASH PROVIDED BY OPERATING ACTIVITIES............................................       (b)             2,481
RETURN ON INVESTMENTS AND SERVICING OF FINANCE
Interest received....................................................................                           3
Interest paid........................................................................                        (76)
Interest paid on finance leases......................................................                        (18)
                                                                                                         --------
NET CASH INFLOW BEFORE INVESTING ACTIVITIES AND FINANCING............................                       2,390

TAXATION
Corporation tax paid.................................................................                          --

INVESTING ACTIVITIES
Purchase of tangible fixed assets....................................................                        (56)
Purchase of intangible fixed assets..................................................                         (8)
Investments in new business activities net of cash acquired..........................                         (7)
                                                                                                         --------
NET CASH OUTFLOW FROM INVESTING ACTIVITIES...........................................                        (71)
                                                                                                         --------
NET CASH INFLOW BEFORE FINANCING.....................................................                       2,319
FINANCING
Capital element of finance leases payments...........................................                       (131)
                                                                                                         --------
NET CASH OUTFLOW FROM FINANCING......................................................       (c)             (131)
                                                                                                         --------
Net effect of currency translation on cash...........................................                        (23)
                                                                                                         --------
INCREASE IN CASH AND CASH EQUIVALENTS................................................       (a)             2,165
                                                                                                         --------
                                                                                                         --------
</TABLE>

See Notes to the Consolidated Financial Statements.


                                      F-60
<PAGE>

JAGO GROUP
NOTES TO THE CONSOLIDATED CASH FLOW STATEMENT

(a)      ANALYSIS OF CHANGES IN CASH AND CASH EQUIVALENTS

<TABLE>
<CAPTION>
                                            CASH AT
                                         BANK AND IN      BANK
                                            HAND       OVERDRAFTS     TOTAL
                                            L'000         L'000       L'000
                                         -----------   -----------   --------
<S>                                         <C>       <C>          <C>
Balance at January 1, 1996 .........            22        (3,590)      (3,568)
Change in 1996 .....................           871         1,294        2,165
                                            ------        ------       ------
Balance at April 30, 1996 ..........           893        (2,296)      (1,403)
                                            ------        ------       ------
                                            ------        ------       ------
</TABLE>

(b)      RECONCILIATION OF OPERATING PROFIT TO NET CASH INFLOW FROM OPERATING
         ACTIVITIES

<TABLE>
<CAPTION>
                                                                          4 MONTHS
                                                                           ENDED
                                                                         APRIL 30,
                                                                            1996
                                                                           L'000
                                                                          --------
<S>                                                                          <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income from operating activities ...............................         18
Adjustments for:
Depreciation and amortisation ......................................        355
Non-cash royalty income third party ................................       (247)
Vesting of shares in Genta Incorporated ............................       (179)
Provision for loss on investment (note 5) ..........................        115
Net loss in Joint Venture ..........................................        566
Other non-cash movements ...........................................        285
                                                                         ------
CASH FLOWS FROM OPERATING ACTIVITIES BEFORE WORKING CAPITAL CHANGES         913
Increase in stocks .................................................        (75)
Decrease in accounts receivable and prepayments ....................        404
Increase in accounts payable and other current liabilities .........      1,239
                                                                         ------
NET CASH PROVIDED BY OPERATING ACTIVITIES ..........................      2,481
                                                                         ------
                                                                         ------
</TABLE>

(c)      ANALYSIS OF CHANGES IN FINANCING DURING THE PERIOD

<TABLE>
<CAPTION>
                                                            SHARE         FINANCE
                                                           CAPITAL        LEASES
                                                            L'000         L'000
                                                           --------      --------
<S>                                                      <C>             <C>
Balance at January 1, 1996 ........................         1,760           680
New finance lease obligations .....................            --            22
Repayment of principal on finance leases ..........            --          (131)
                                                            -----         -----
Balance at April 30, 1996 .........................         1,760           571
                                                            -----         -----
                                                            -----         -----
</TABLE>




                                      F-61
<PAGE>

JAGO GROUP
STATEMENT OF TOTAL RECOGNISED GAINS AND LOSSES

<TABLE>
<CAPTION>
                                                                        4 MONTHS
                                                                         ENDED
                                                                        APRIL 30,
                                                                          1996
                                                                         L'000
                                                                        --------
<S>                                                                     <C>
Loss attributable to shareholders ...............................          (231)
Net currency translation effect .................................          (254)
                                                                           ----
TOTAL RECOGNISED GAINS AND LOSSES FOR THE PERIOD ................          (485)
                                                                           ----
                                                                           ----

</TABLE>

RECONCILIATION OF MOVEMENT IN SHAREHOLDER'S FUNDS

<TABLE>
<CAPTION>
                                                                        4 MONTHS
                                                                         ENDED
                                                                        APRIL 30,
                                                                          1996
                                                                          L'000
                                                                        --------
<S>                                                                      <C>
Shareholder's funds at the beginning of the period .............         (5,047)
Total recognised gains and losses for the period ...............           (485)
                                                                         ------
SHAREHOLDER'S FUNDS AT THE END OF THE PERIOD ...................         (5,532)
                                                                           ----
                                                                           ----

</TABLE>



                                      F-62
<PAGE>

JAGO GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1 ACCOUNTING POLICIES

         The financial statements have been prepared under the historical cost
convention and in accordance with accounting standards currently applicable in
the United Kingdom. The principal accounting policies, which have been applied
consistently, are set out below.

 CONSOLIDATION

         The financial information includes the consolidated financial
statements of Jago Holding AG and its subsidiary undertakings (the "Group").

         Subsidiary undertakings, being those companies in which the Group is
able to exercise control over the operations (generally when the Group directly,
or indirectly, has an interest of more than one half of the voting rights), have
been fully consolidated. Separate disclosure is made of minority interests.

         Inter-company balances, transactions and unrealised profits between
companies of the Group have been eliminated.

         The company has a 50% ownership in a corporate joint venture company
which is accounted for under the equity method.

         The Group is an emerging pharmaceutical company and is financially
dependent on the sole shareholder, Dr J Gonella. The directors have a reasonable
expectation that the Group has, or can reasonably expect to obtain, adequate
cash resources to continue in operational existence. For this reason, they
continue to adopt the going concern basis in preparing the financial statements.

 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.

 REPORTING CURRENCY

         The reporting currency of the Group for these consolidated financial
statements is the English Pound Sterling. The financial information of Group
companies subsidiaries and joint venture entities are included in the Group's
consolidated financial statements using the currency of the primary economic
environment in which they operate, being primarily the Swiss franc. Assets and
liabilities are translated into the reporting currency at the exchange rate at
the balance sheet date; all revenues, expenses, gains and losses are translated
using the average of the exchange rates during the respective periods and all
translation effects of exchange rates are included as a cumulative translation
adjustment in shareholder's equity.

 FOREIGN CURRENCY TRANSACTIONS

         Transactions denominated in currencies other than the currency of the
primary economic environment are recorded in the books of the Group companies at
the exchange rate ruling at the date of the transaction. Exchange gains and
losses are included in the statement of operations. Balances denominated in
foreign currencies at the reporting period end are translated at period end
rates prevailing at that date.

 REVENUE RECOGNITION

         Turnover comprises contract development and royalty income. Contract
development income represents amounts invoiced to customers for services
rendered under development contracts or for



                                      F-63
<PAGE>
JAGO GROUP
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

1 ACCOUNTING POLICIES (CONTINUED)


milestone payments in accordance with the contract terms. Advance royalties
received are treated as deferred income until earned, when they are recognised
as income.

 RESEARCH AND DEVELOPMENT COSTS

         Research costs are charged as an expense in the period in which they
are incurred. Development costs are also recognised 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, its technical feasibility can be
demonstrated and a market for it exists. Development costs recognised as an
asset do not exceed the probable net amount to be recovered in marketing the
product or process and they are amortised over the estimated economic life
thereof, not to exceed five years.

 TANGIBLE FIXED ASSETS

         Tangible fixed assets are carried at cost less accumulated
depreciation. Provision for depreciation is made on a straight-line basis at
rates calculated to reduce the cost of the assets to their estimated residual
values over their expected useful lives. Depreciation rates for financial
accounting purposes are:

Land                                          Not depreciated
Buildings                                     2% - 5%
Laboratory equipment & machines               10% - 331/3%
Office & other equipment                      121/2% - 331/3%
Vehicles                                      20%

INTELLECTUAL PROPERTY

         Intellectual property comprises acquired patents, trade marks and
know-how and Other Similarly Identified Rights. These are Recorded At Their
acquisition cost and are amortised over the lower of the legal or estimated
economic lives, not to exceed five years. Costs associated with internally
developed intellectual property are generally treated as research and
development costs.

 FIXED ASSET INVESTMENTS

         Fixed asset investments of non-registered securities are shown at cost,
being fair value at date of vesting, adjusted for changes in market value below
original fair value.

 STOCKS AND WORK-IN-PROGRESS

         Stocks include bought-in supplies and are stated at the lower of cost
(calculated using the first-in, first-out basis) and net realisable value.

 LEASES AND HIRED ASSETS

         Leases of laboratory equipment & machines and office & other equipment
where the Group assumes substantially all the risks and rewards of ownership are
classified as finance leases. Finance leases are capitalised at the estimated
present value of the underlying lease payments. The corresponding rental
obligations, net of finance charges, are included in creditors. The interest
element of the finance charge is charged to the income statement over the lease
period. Payments made under operating leases are charged to the income statement
in equal instalments, over the period of the lease.

 DEFERRED TAXATION

         Deferred taxation is provided on timing differences using the liability
method where it is probable that tax liabilities or assets will crystallise
within the foreseeable future.

                                      F-64
<PAGE>
JAGO GROUP
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

1 ACCOUNTING POLICIES (CONTINUED)

 PENSION COSTS

         The Group operates a defined contribution plan, the assets of which are
held in a separate trustee administered fund. The Group's contributions to the
defined contribution pension plan are charged to the income statement in the
year to which they relate.

2        ORGANISATION AND BUSINESS

         The Group, with operating headquarters in Muttenz, canton Basle-Land,
is involved in contract research and development work for the pharmaceutical
industry, with principal customers in Europe and the United States of America.
The Group's main area of activity is the development of products using
specialised drug delivery systems in the oral, inhalation and topical fields.

         The following table summarises the significant subsidiaries and joint
venture companies of the Group together with the percentage holding of the Group
at April 30, 1996:

<TABLE>
<CAPTION>
                                                                         APRIL 30,
                                                                           1996
                                                                          --------
<S>                                                                         <C>
Subsidiaries:
Switzerland:
Jago Pharma AG, Muttenz ...............................................     100%
Jago Research AG, Hergiswil ...........................................     100%
Jagotec AG, Hergiswil .................................................     100%

Channel Islands:
Jago Finance Ltd, Jersey ..............................................     100%

France:
Laboratoires Jago S.A .................................................     100%

Joint venture companies:
Netherlands:
Genta Jago Technologies B.V., Amsterdam ...............................      50%
</TABLE>

3        SEGMENTAL ANALYSIS

         The Group has one class of business which relates to contract research
and development work for the pharmaceutical industry. An analysis of turnover,
cost of sales and operating profit by geographical segment is set out below.

a)       TURNOVER

<TABLE>
<CAPTION>
                                                                          4 MONTHS
                                                                        ENDED APRIL
                                                                          30, 1996
                                                                           L'000
                                                                         --------
<S>                                                                        <C>
By class of business:
Pharmaceuticals
Contract development, including milestone payments:
--receivable from third parties ..................................         1,186
--receivable from the Joint Venture ..............................         1,701
--receivable from Krypton Limited ................................         1,056
--receivable from Laboratoires Jago S.A ..........................           314
                                                                           -----
                                                                           4,257
Royalties receivable .............................................           494
                                                                           -----
                                                                           4,751
                                                                           -----
                                                                           -----
</TABLE>

         All royalties receivable relate to one customer.

                                      F-65

<PAGE>
JAGO GROUP
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

3 SEGMENTAL ANALYSIS (CONTINUED)

<TABLE>
<CAPTION>
                                                                         4 MONTHS
                                                                          ENDED
                                                                        APRIL  30,
                                                                           1996
                                                                          L'000
                                                                         --------
<S>                                                                     <C>
By location of customer:
U.K .......................................................                  238
Continental Europe ........................................                3,710
U.S.A .....................................................                  803
                                                                           -----
                                                                           4,751
                                                                           -----
                                                                           -----
By location of subsidiary:
U.K .......................................................                   --
Continental Europe ........................................                4,751
U.S.A .....................................................                   --
                                                                           -----
                                                                           4,751
                                                                           -----
                                                                           -----
</TABLE>

b) COST OF SALES

<TABLE>
<CAPTION>
                                                                         4 MONTHS
                                                                          ENDED
                                                                        APRIL 30,
                                                                          1996
                                                                          L'000
                                                                         --------
<S>                                                                      <C>
Pharmaceuticals:
Contract development ...................................                 (2,120)
Royalties payable ......................................                   (273)
                                                                         ------
                                                                         (2,393)
                                                                         ------
                                                                         ------
</TABLE>

c) OPERATING PROFIT
<TABLE>
<CAPTION>

                                                                         4 MONTHS
                                                                         ENDED
                                                                         APRIL 30,
                                                                          1996
                                                                          L'000
                                                                         --------
<S>                                                                          <C>
By location of subsidiary:
U.K ................................................................          --
Continental Europe .................................................          18
U.S.A ..............................................................          --
                                                                              --
                                                                              18
                                                                              ==
</TABLE>











4 OTHER OPERATING INCOME
<TABLE>
<CAPTION>

                                                                          4 MONTHS
                                                                           ENDED
                                                                          APRIL 30,
                                                                            1996
                                                                           L'000
                                                                          --------
<S>                                                                       <C>
Shares in Genta Incorporated (Note 11) .................................     179
                                                                             ===

</TABLE>



                                      F-66
<PAGE>
JAGO GROUP
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

5 OTHER OPERATING EXPENSES

<TABLE>
<CAPTION>
                                                                           4 MONTHS
                                                                          ENDED APRIL
                                                                           30, 1996
                                                                            L'000
                                                                            ---------
<S>                                                                       <C>
Provision for loss on investment (see Note 11) .........................      115
                                                                              ===
</TABLE>

6 OPERATING PROFIT
<TABLE>
<CAPTION>
                                                                         4 MONTHS
                                                                        ENDED APRIL
                                                                          30, 1996
                                                                           L'000
                                                                         --------
<S>                                                                         <C>
Operating profit is stated after charging the following:
Director's remuneration ................................................      81
Auditor's remuneration
--audit ................................................................      22
--non-audit services ...................................................      --
Depreciation of tangible fixed assets
--owned assets .........................................................     209
--assets held under finance leases .....................................      75
Amortisation of intangible fixed assets ................................      71
Operating lease rentals
--land & buildings: payable to Director and shareholder ................     187
--land & buildings: payable to third parties ...........................      54
Loss on sale of fixed assets ...........................................       1
</TABLE>

7 EMPLOYEES

<TABLE>
<CAPTION>
                                                                          4 MONTHS
                                                                         ENDED APRIL
                                                                          30, 1996
                                                                           L'000
                                                                          --------
<S>                                                                        <C>
Employment cost:
Wages and salaries .......................................                 1,676
Social security costs ....................................                   112
Other pension costs ......................................                   141
Other benefits ...........................................                    67
                                                                           -----
                                                                           1,996
                                                                           =====
</TABLE>

<TABLE>
<CAPTION>
                                                                          4 MONTHS
                                                                        ENDED APRIL
                                                                          30, 1996
                                                                           NUMBER
                                                                          --------
<S>                                                                          <C>
Average number of persons employed by the Group:
Pharmaceuticals ........................................................     104
                                                                             ===
</TABLE>



                                      F-67
<PAGE>
JAGO GROUP
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

8 DIRECTOR'S EMOLUMENTS

         The chairman and director, who is the sole shareholder of Jago Holding
AG, was remunerated as follows:

<TABLE>
<CAPTION>
                                                                          4 MONTHS
                                                                         ENDED APRIL
                                                                          30, 1996
                                                                            L'000
                                                                          --------
<S>                                                                           <C>
Emoluments ..............................................................     75
Pension contributions ...................................................      6
                                                                              --
                                                                              81
                                                                              ==
</TABLE>

9        NET INTEREST PAYABLE
<TABLE>
<CAPTION>
                                                                           4 MONTHS
                                                                         ENDED APRIL
                                                                          30, 1996
                                                                            L'000
                                                                          --------
<S>                                                                       <C>
Interest on loans and bank overdrafts repayable within 5 years ........     (76)
Finance lease interest ................................................     (18)
Interest payable on loan to Director and shareholder ..................      (4)
Other interest receivable .............................................       3
                                                                            ---
                                                                            (95)
                                                                            ===
</TABLE>

10       TAXATION

         Losses from ordinary activities before taxes, as shown in the
consolidated statements of income, is analysed over its component parts as
follows:

<TABLE>
<CAPTION>
                                                                          4 MONTHS
                                                                         ENDED APRIL
                                                                          30, 1996
                                                                           L'000
                                                                         -----------
<S>                                                                      <C>
Switzerland ...........................................................      (24)
Other countries .......................................................      (53)
                                                                             ---
                                                                             (77)
                                                                             ===
</TABLE>

<TABLE>
<CAPTION>
                                                                          4 months
                                                                         ended April
                                                                          30, 1996
                                                                           L'000
                                                                          --------
<S>                                                                   <C>
Taxation charge based on results for the period:
Swiss corporation tax at 25.5% (1995; 25.5%) ....................          (154)
                                                                           ----
                                                                           (154)
                                                                           ====
Comprising:
Current tax .....................................................          (154)
                                                                           ----
                                                                           (154)
                                                                           ====

</TABLE>

                                      F-68
<PAGE>

JAGO GROUP
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

10       TAXATION (CONTINUED)

         The above charges reconcile with the applicable Swiss statutory
corporation tax rates as follows:
<TABLE>
<CAPTION>

                                                                          4 MONTHS
                                                                         ENDED APRIL
                                                                          30, 1996
                                                                               %
                                                                          --------
<S>                                                                          <C>
Statutory Swiss Corporation tax rate ............................            25.5
Effect of income tax in entities without group relief ...........          (200.0)
Tax losses not recognised as deferred tax assets ................           (25.5)
                                                                          --------
Effective tax rate ..............................................          (200.0)
                                                                          --------
                                                                          --------
</TABLE>

         At April 30, 1996 the Group's subsidiaries in Switzerland had unexpired
Swiss canton and federal net operating losses to carry forward totalling
approximately L1.4 million and L1.6 million respectively. These tax losses
carried forward, which are valid for between four and seven years for cantonal
tax purposes and seven years for federal tax purposes, shall begin to expire as
from 1997 unless previously utilised.

11 JOINT VENTURES AND INVESTMENTS

         Balances comprised the following:
<TABLE>
<CAPTION>
                                                                        APRIL 30,
                                                                           1996
                                                                          L'000
                                                                        --------
<S>                                                                      <C>
Share of net capital deficiency of Genta Jago Technologies B.V ....      (5,207)
                                                                         ------
Investment in shares of joint venture partner acquisition value ...       4,120
Provision .........................................................      (2,610)
                                                                         ------
Investments, net ..................................................       1,510
                                                                         ------
                                                                         ------
</TABLE>

 JOINT VENTURE COMPANIES

         In December 1992, the Jago Group, through Jagotec AG, entered into a
series of agreements (the "Genta agreements") with Genta Incorporated, a U.S.
company based in San Diego, California ("Genta"). The Genta agreements formed
Genta Jago Technologies B.V., a 50%/50% joint venture (the "Joint Venture"). The
Joint Venture was established primarily to develop and commercialise, on a
world-wide basis, products in certain major therapeutic areas. Under the Genta
agreements, Jagotec AG granted the Joint Venture an exclusive licence to its
Geomatrix oral controlled-release technology for the development and
commercialisation of specified products. Genta granted the Joint Venture an
exclusive licence to its own technology for the development and
commercialisation of further products. The Joint Venture is managed under the
direction of a Board of Managing Directors consisting of two members appointed
from each of Genta and Jagotec AG and one outside member. All research and
development activities of the Joint Venture are performed by Jago (see Note 3).
Genta and the Joint Venture agreed to enter into a working capital agreement
which required Genta to make loans to the Joint Venture up to a mutually agreed
upon maximum principal amount.

         In January 1993, the Joint Venture entered into a collaboration
agreement ("the Gensia agreement") with Gensia Pharmaceuticals, Inc. ("Gensia")
for the development and commercialisation of several oral controlled-release
pharmaceutical products for treatment of cardiovascular disease. Under the
Gensia agreement, Gensia funds formulations and pre-clinical development
conducted by the Joint Venture and is responsible for clinical development,
regulatory submissions and marketing. Effective October 1996, this collaboration
agreement was discontinued and the SkyePharma Group assumed all the rights,
benefits and obligations of Gensia under the agreement.

                                      F-69
<PAGE>
JAGO GROUP
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

11 JOINT VENTURE AND INVESTMENTS (CONTINUED)

         The Joint Venture receives milestone payments triggered upon regulatory
submissions and approvals, and will share in profits on the sale of such
products. Terms of the Gensia agreement provide Gensia exclusive rights to
market and distribute the products in North America, Europe and certain other
countries. In addition, Gensia was granted a right of first refusal for certain
other cardivascular products incorporating the Joint Venture's Geomatrix
technology in the future.

         In March 1996, the Joint Venture entered into a collaborative licensing
and development agreement with Apothecon, Inc. ("Apothecon"), the multisource
subsidiary of Bristol-Myers Squibb. Under the terms of the agreement, Apothecon
will provide funding to the Joint Venture up to a specified maximum amount for
the formulation, development and clinical testing of a Geomatrix
controlled-release formulation of QD-CR ketoprofen (Oruvail7), subject to
certain early termination rights. The agreement also provides for the Joint
Venture to receive potential milestone payments and royalties on product sales.
Terms of the agreement provide Apothecon exclusive rights to market and
distribute the products on a worldwide basis.

         The following is a summary of the financial information of the Joint
Venture:

<TABLE>
<CAPTION>
                                                                         APRIL 30,
                                                                           1996
                                                                          L'000
                                                                        -------
<S>                                                                    <C>
Current assets ...........................................                1,645
Current liabilities ......................................               (2,573)
Non current assets .......................................                    5
Long term liabilities ....................................               (9,491)
                                                                        -------
                                                                        (10,414)
                                                                        -------
                                                                        -------
Net contract and royalty income ..........................                1,462
Costs and expenses .......................................               (2,396)
Interest expense .........................................                 (198)
                                                                        -------
                                                                         (1,132)
                                                                        -------
                                                                        -------
</TABLE>

         The long term liabilities of the Joint Venture represent a Term Note
repayable to Genta in October 1998, or before then, if the Joint Venture has
sufficient cash or cash equivalents available. In 1995, Genta agreed to exchange
U.S.$4.4 million of the amount outstanding under this working capital loan in
exchange for the return of previously granted product rights: see below. The
Joint Venture recorded the loan credit and accrued interest as a gain on waiver
of debt in exchange for return of license rights to Genta.

 OPTION AGREEMENT FOR SECOND JOINT VENTURE PROJECT

         During 1994 the Group extended an option to Genta to participate in a
second joint venture (Technologies II) which would have exclusive rights to
develop Geomatrix formulations of more than 150 additional branded
pharmaceuticals currently marketed by other companies.

         To obtain this option, Genta paid U.S.$1.75 million in consideration to
the Group which the Group recorded as other operating income upon receipt and
when the consideration for granting the option was non-refundable. The Group has
no future performance obligations regarding these fees. Genta also paid an
additional U.S.$3.5 million to VECAP Venture Capital Partners AG ("VECAP"), a
related party (see Note 13), to acquire certain rights previously transferred by
the Group to VECAP.

         In May 1995, Genta decided not to exercise the option. However, it was
agreed between the parties that certain of the additional products would be
continued as part of the Joint Venture and the Joint Venture would be expanded
(see additional agreements below), and in consideration the

                                      F-70
<PAGE>
JAGO GROUP
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

11 JOINT VENTURE AND INVESTMENTS (CONTINUED)


Group received Genta's 50% share of Technologies II, valued at L267,000, which
the Group recorded as other operating income (see Note 4), on the basis that the
cash in the investment formed part of the consideration for transferring the
additional products to the Joint Venture.

 ADDITIONAL AGREEMENTS

         In May 1995, Genta entered into an agreement with the Group and related
entities to substantially expand the Joint Venture by adding the rights to
develop and commercialise world-wide oral controlled-release formulations of
additional products currently marketed by other companies. These products have
lost, or will in the near-to-mid-term lose, patent protection or marketing
exclusivity. With the additional products, the Joint Venture now has the rights
to develop controlled release formulations of approximately 60 products using
the Group's Geomatrix technology. Under the agreement, the Joint Venture also
acquired certain manufacturing rights with respect to these products. Since this
agreement was entered into, Krypton Ltd and Brightstone Pharma Inc., wholly
owned subsidiaries of SkyePharma, the Group's parent, have obtained rights for
the development of six of the significant products referred to from the Joint
Venture.

         In connection with obtaining the additional product and manufacturing
rights, Genta issued 1,240,000 unregistered shares of its common stock to the
Group which were recorded as income when vested (see Investment in shares of
Joint Venture Partner below). The Joint Venture must pay certain additional fees
to the Group and VECAP. The Joint Venture also must pay manufacturing royalties
to the Group. In addition, Genta is obligated to continue to provide loans to
the Joint Venture for research and development and other business purposes. The
parties are to agree on the total amount of such loans. The parties also elected
to focus on the Joint Venture's development efforts on Geomatrix-based products.
As a result, the Joint Venture returned to Genta the right to develop and
commercialise six Anticode products licensed from Genta in December 1992. In
connection with the return of the Anticode product rights, the working capital
loan payable from the Joint Venture to Genta was credited with a principal
reduction of approximately U.S.$4.4 million, which the Joint Venture recorded as
a gain.

         The Joint Venture is dependent on future funding from Genta and certain
other customers and is considered a development stage company. Genta has
incurred significant operating losses since its inception and requires
substantial additional sources of financing to fund its operations through 1997,
conditions which raise substantial doubt about Genta's ability to continue as a
going concern. In the event that funding sources prove to be unavailable or
inadequate to Genta, Genta's ability to provide further funding to the Joint
Venture could be significantly limited.

         Terms of the Genta agreements also grant Genta an option to purchase
the Group's interest in the Joint Venture exercisable from December 1998 through
2000 with the purchase price based upon a specified formula.

         The Group has fully recognised its fifty-percent share of the net
equity and net loss on operations in the Joint Venture. In the event of Genta
exercising its purchase option or winding up the Joint Venture, the Group has no
contractual obligation for funding its share of the net losses in excess of the
value of equity investment received in exchange for granting the license.

         The Group's share in the Joint Venture activities was recorded as
follows:
<TABLE>
<CAPTION>

                                                                         APRIL 30,
                                                                           1996
                                                                          L'000
                                                                         --------
<S>                                                                    <C>
Value of equity investment received in exchange for granting license      1,456
Share in net losses brought forward ................................     (5,659)
Share in net losses of current year ................................       (566)
Translation differences ............................................       (438)
                                                                         ------
Equity in net capital deficiency of Joint Venture at period end ....     (5,207)
                                                                         ------
                                                                         ------
</TABLE>

                                      F-71
<PAGE>
JAGO GROUP
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

11 JOINT VENTURE AND INVESTMENTS (CONTINUED)

 INVESTMENT IN SHARES OF JOINT VENTURE PARTNER

         In 1992, the Group granted Genta a world-wide licence to its Geomatrix
technology restricted to certain chemical compounds, for the use by Genta in its
own development programmes, in exchange for 700,000 unregistered shares of
Genta's common stock. The Group's investment in this common stock was subject to
forfeiture in connection with the licence agreement, based upon a specific
formula. The shares that would not be forfeited during the period under the
terms of these agreements have been recorded as other operating income using the
estimated value of the shares on the dates of vesting. The value of the vested
unregistered shares is estimated with reference to the price of quoted shares in
U.S. dollars, adjusted for the exchange rate.

         As described above, the Group received an additional 1,240,000 shares
in Genta's unregistered common stock in connection with the expansion of the
Joint Venture in 1995. These were subject to the forfeiture formula referred to
above and based on the period December 17, 1992 to December 1996.

         On December 31, 1995, Jago Finance Ltd, a subsidiary of Jago Holdings
AG acquired 380,561 unregistered shares of Genta from Dr J Gonella for no
consideration. These were recorded as a capital contribution against equity
based upon the fair value of the shares on the date contributed.

<TABLE>
<CAPTION>
                                                                      APRIL 30,
                                                                       1996
                                                                        NUMBER
                                                                      --------
<S>                                                                   <C>
Shares issued to the Group .................................          2,320,561
Less: shares subject to forfeiture at period end ...........           (300,411)
                                                                     ----------
Shares not subject to forfeiture at period end .............          2,020,150
                                                                     ----------
                                                                     ----------
</TABLE>

         At each balance sheet date the carrying value of the investment in the
unregistered Genta shares not subject to forfeiture is reviewed against the
changes in the estimated value of the shares by reference to the price quoted
for registered shares in U.S. dollars as adjusted for the rate of exchange. The
carrying value of the investment in the unregistered Genta shares is adjusted
for such changes in value when the value falls below cost. During 1995,
management revised their estimates of the fall in value of the shares to reflect
substantial doubt about whether funding sources would be available and adequate
for Genta to continue to fund its operations. An increase in the provision for
loss on investment was made during the period (see Note 5). Subsequent to April
30, 1996 the quoted price for registered shares of Genta decreased from
U.S.$2.06 to U.S.$0.26 per share on March 31, 1997. The U.S. dollar's rate of
exchange into Pound Sterling changed from $1.56 to $1.62 over the same period.
The effects of the changes have not been reflected in the consolidated financial
statements.

12       PENSION AND SIMILAR OBLIGATIONS

         The Group makes defined contributions on behalf of all its employees
based on their salaries to a separate pension company. The assets are held and
administered separately from the Group's funds. Costs are detailed in Note 7.

13       RELATED PARTY TRANSACTIONS

         The Director and sole shareholder is Dr J Gonella. During the period he
owned the laboratory research and office building located in Muttenz, which is
the Group's main operating facility. The building was rented by the Group during
the four months ended April 30, 1996 for CHF 332,000 (1995: CHF 1,020,000). Dr.
J Gonella entered into an agreement in March 1996 to sell the property to Jago
Pharma AG. This was a result of an option agreement between Dr. J. Gonella and
SkyePharma, entered into during 1995. Details of this agreement are set out
below.



                                      F-72
<PAGE>

JAGO GROUP
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

13 RELATED PARTY TRANSACTIONS (CONTINUED)


         During 1994 and 1995, a loan was made to the Group by VECAP Venture
Capital Partners AG ("VECAP"), the sole director of which, Dr T Rinderknecht, is
also a director of several Jago Group companies. The Group has entered into
various other transactions involving VECAP. Further details are provided in Note
11. In addition, the Joint Venture has agreed to pay VECAP US$1.5 million for
the rights to manufacture certain products. The payment will only become due if
and when manufacturing commences.

         During 1993, the Group acquired certain rights from VECAP for a cost of
CHF 800,000. These costs were capitalised and amortised over a five year period
commencing on the date of acquisition. In the year ending December 31, 1995 the
rights were sold back to VECAP for a consideration of CHF 532,500 which was
recorded as a debtor in the Group's books, with the net of the consideration and
carrying value of the rights, amounting to CHF 20,000, recorded as a profit. The
debtor balance was settled in full after April 30, 1996.

         On December 31, 1995, Dr. J. Gonella acquired Jago Biosystems SA, which
was put into voluntary liquidation during 1996.

         Dr. J. Gonella owned 85% of Laboratoires Jago SA, France, which is not
a member of the Group. The Group performs product development for which
Laboratoires Jago SA receives a commission in return for marketing services.

         On February 26, 1996, the Company beneficially acquired all issued and
outstanding shares in Laboratoires Jago SA (of which three shares are required
to be held and registered in the name of the directors of Laboratoires Jago SA,
i.e. one share per director) together with the assignment of a shareholder's
loan in the amount of FRF 898,830 associated with such shares, for an aggregate
consideration of FRF 1,300,000, based on net assets of Laboratoires Jago SA at
that date.

         At April 30, 1996, the Group had a loan of U.S.$125,000 due from
Permatec Laboratorios SA, an Argentinian company in which Dr. J. Gonella owns a
controlling interest. Repayment of this loan occurred after the period end.

         Dr. J. Gonella has personal guarantees to the Company's bankers
amounting to CHF 2.2 million.

 AGREEMENTS ARISING FROM AN OPTION AGREEMENT

         During 1995, Dr. J. Gonella entered into an Option Agreement with
SkyePharma plc to grant an exclusive option for SkyePharma PLC to acquire the
share capital of the Company and the Group. Arising from this Option Agreement
the following agreements were entered into subsequently:

         1)       Under the terms of a Stock Purchase Agreement entered into on
                  March 18, 1996, SkyePharma PLC agreed to acquire the entire
                  share capital of the Company.

         2)       In March 1996, Jago Pharma AG, a subsidiary of the Company,
                  entered into an agreement to acquire the Group's laboratory
                  research and office property in Muttenz from Dr J Gonella for
                  a consideration of CHF 12.4 million based on the estimated
                  fair market value of the property based on reports by
                  independent valuers. The transfer of ownership of the property
                  was contingent upon the completion of the acquisition of the
                  Company by SkyePharma PLC (see Note 14 Subsequent events).

         3)       Dr. J. Gonella agreed to transfer certain unregistered shares
                  of Genta Incorporated owned by himself to Jago Finance Ltd, a
                  subsidiary of the Company and on December 31, 1995, Jago
                  Finance Ltd acquired 380,561 of the unregistered shares at no
                  consideration.

         4)       As part of the acquisition of the Company by SkyePharma PLC,
                  the Group's lines of credit with the bank as described were
                  reviewed and renegotiated. Under the new arrangements the
                  Group has been granted a mortgage facility totalling of CHF 10
                  million (L5.4 million) secured by a charge on the Muttenz
                  property (see 2 above), a fixed credit line of CHF 1.5 million
                  (L0.8 million) secured by a Guarantee from SkyePharma and a
                  current account credit line of CHF 5 million (L2.7 million).

                                      F-73
<PAGE>
JAGO GROUP
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

14 SUBSEQUENT EVENTS

         On April 30, 1996, Dr. J. Gonella owned the laboratory research and
office building located in Muttenz. On May 3, 1996, Dr. J. Gonella sold Jago
Holding AG and the Group to SkyePharma PLC and, as described in Note 13, the
Muttenz property was transferred to the Group during May 1996 and Dr. J. Gonella
was released from the mortgage and letters of indebtedness. This transaction was
funded as described in Note 13.

         The effect of these transactions is as follows:
<TABLE>
<CAPTION>
                                                                  PROPERTY
                                                   AS REPORTED    PURCHASE
                                                     APRIL 30,   AND CREDIT
                                                      1996       TRANSACTION   PRO-FORMA
                                                      L'000        L'000        L'000
                                                     -------      --------      -------
<S>                                                    <C>          <C>         <C>
ASSETS
FIXED ASSETS
Intangible assets ..............................         325            --          325
Tangible assets ................................       3,706         6,732       10,438
Investments (note 11) ..........................       1,510            --        1,510
                                                     -------      --------      -------
                                                       5,541         6,732       12,273
CURRENT ASSETS
Stocks .........................................         530            --          530
Debtors ........................................       2,771            --        2,771
Cash at bank and in hand .......................         893            --          893
                                                     -------      --------      -------
                                                       4,194            --        4,194
CREDITORS: amounts falling due within one year .      (7,640)       (1,297)      (8,937)
                                                     -------      --------      -------
NET CURRENT LIABILITIES ........................      (3,446)       (1,297)      (4,743)
TOTAL ASSETS LESS CURRENT LIABILITIES ..........       2,095         5,435        7,530
CREDITORS: amounts falling due after one year ..      (2,420)       (5,435)      (7,855)
Share of net capital deficiency of joint venture      (5,207)           --       (5,207)
                                                     -------      --------      -------
NET LIABILITIES ................................      (5,532)           --       (5,532)
                                                     -------      --------      -------
                                                     -------      --------      -------
</TABLE>

15       RECONCILIATION TO U.S. ACCOUNTING PRINCIPLES

         The Group prepares its financial statements in accordance with
generally accepted accounting principles in the U.K. ("U.K. GAAP"). U.K. GAAP
differs in certain respects from generally accepted accounting principles in the
United States of America ("U.S. GAAP"). The relevant differences relate
principally to the following areas.

(1)      INTANGIBLE FIXED ASSETS

         U.K. GAAP requires intellectual property to be amortised over the lower
of the legal or estimated useful lives not to exceed five years.

         Intangible fixed assets recognised under U.S. GAAP accounting
requirements are depreciated over their estimated revenue earning life. For the
purposes of U.S. GAAP, the estimated revenue earning life has been taken to be
20 years, being the estimated remaining life of the Geomatrix patents plus five
years. The carrying value of intangible assets is reviewed annually for any
permanent impairment in value, using projected earnings and the cash flow
method.

                                      F-74
<PAGE>
JAGO GROUP
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

15 RECONCILIATION TO U.S. ACCOUNTING PRINCIPLES (CONTINUED)

(2)      RESEARCH AND DEVELOPMENT EXPENDITURE

         Under U.K. GAAP development expenditure may be capitalised, provided
that it can be separately related to commercially viable projects. Costs
capitalised in this manner are then amortised by matching them to the projects'
future revenue flows. U.S. GAAP requires development expenditure to be expensed
in the period incurred.

(3)      DEFERRED TAX

         Under U.K. GAAP, deferred tax is recognised to the extent that it is
probable that a tax liability will become payable or an asset will be
recoverable in the foreseeable future. Under U.S. GAAP, full provision is
required for deferred tax liabilities and deferred tax assets, including losses
carried forward, and recognised subject to valuation allowances. Given the
uncertainty of the recoverability of the Group's tax losses carried forward, no
deferred tax asset is recognised under either U.K. or U.S. GAAP.
<TABLE>
<CAPTION>
                                                                                   APRIL 30,
                                                                                     1996
                                                                                     L'000
                                                                                     ------
<S>                                                                               <C>
Deferred tax asset under U.K. GAAP
Tax effects of timing differences
-- Tax losses ..................................................................        767
-- Other timing differences deferred ...........................................        480
                                                                                     ------
Gross deferred tax assets in accordance with U.S. GAAP .........................      1,247
                                                                                     ------
                                                                                     ------

Deferred tax assets ............................................................      1,247
Valuation allowance ............................................................     (1,247)
                                                                                     ------
                                                                                     ------
Net deferred tax assets in accordance with U.S. GAAP ...........................         --
                                                                                     ------
                                                                                     ------
</TABLE>

         For U.S. GAAP purposes such gains would be recorded as an extraordinary
item in the consolidated income statement.

(4) FINANCIAL INSTRUMENTS

 CONCENTRATIONS OF CREDIT RISK

         Financial instruments that potentially subject the Group to
concentration of credit risk consist primarily of receivables determined in a
currency other than Pounds sterling and investments in shares of Genta Inc.

 DISCLOSURE ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS

         The carrying amounts of cash, debtors, creditors and accrued expenses
approximate fair value because of the short maturity of these items.
<TABLE>
<CAPTION>
                                                              Carrying    Fair value
                                                             value April   April 30,
                                                               30, 1996      1996
                                                                L'000        L'000
                                                               --------    --------
<S>                                                          <C>          <C>
Cash at bank and in hand .................................         893          893
Debtors ..................................................       2,771        2,771
Creditors and accrued expenses falling due within one year     (10,060)     (10,060)
and after one year........................................
                                                               -------      -------
                                                                (6,396)      (6,396)
                                                               -------      -------
                                                               -------      -------
</TABLE>

                                      F-75
<PAGE>
JAGO GROUP
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

15 RECONCILIATION TO U.S. ACCOUNTING PRINCIPLES (CONTINUED)

(5)      CONSOLIDATED CASH FLOW STATEMENTS

         The consolidated cash flow statement prepared under U.K. GAAP in
accordance with FRS 1 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, investing
activities 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, with the exception of dividends
paid, would be included as operating activities under U.S. GAAP.

         Under U.S. GAAP, cash and cash equivalents do not include bank loans
and overdrafts repayable within three months from the date of the advance as is
the case under U.K. GAAP. Under FAS95 all short-term borrowings and bank
overdrafts are included in financing activities.

         Set out below, for illustrative purposes, is a summary consolidated
statement of cash flows under U.S. GAAP.
<TABLE>
<CAPTION>
                                                                        4 MONTHS
                                                                          ENDED
                                                                        APRIL 30,
                                                                          1996
                                                                          L'000
                                                                        --------
<S>                                                                       <C>
Net cash provided by operating activities ......................          2,390
Net cash used in investing activities ..........................            (71)
Net cash used in financing activities ..........................         (1,425)
Translation difference .........................................            (23)
                                                                         ------
Net increase in cash and cash equivalents ......................            871
Cash and cash equivalents at beginning of the period ...........             22
                                                                         ------
Cash and cash equivalents at end of the period .................            893
                                                                         ======
</TABLE>

(6)      SIGNIFICANT RESEARCH AND DEVELOPMENT ARRANGEMENTS

         The Group conducts R&D activities under a number of collaboration
arrangements with pharmaceutical companies to develop products utilising its
Geomatrix technology. 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 obligation
to deliver successful results under any of these arrangements, and amounts
earned under these contracts are not refundable, even if the research effort is
unsuccesful. Except as described below, the Group does not consider any
individual contract to be significant.

 DILACOR

         The only collaborative arrangement under which the Group is currently
receiving royalty revenues is the Development and License Agreement for Dilacor
XR made with the Rorer Group, Inc., ("Rorer") in 1988. Under the terms of the
agreement Rorer bore all the costs of research and development. For countries
where a patent claiming Dilacor XR has been issued and is in effect, Rorer is
obliged to pay the Group continuing royalties of 3% of net sales. For countries
where no patent claiming Dilacor XR has been issued, Rorer is obliged to pay the
Group continuing royalties of 1.5% of net sales. In return, the Group granted
Rorer an exclusive license to market Dilacor XR throughout the world. The
agreement continues for ten years from the date of the first marketing in each
country or for the life of the patent in such country, (which includes all
patents owned or controlled by the Group which was



                                      F-76
<PAGE>
JAGO GROUP
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

15 RECONCILIATION TO U.S. ACCOUNTING PRINCIPLES (CONTINUED)

infringed by the manufacture, use or sale of the products covered by the License
Agreement) whichever is longer. After termination of the agreement, Rorer may
continue to sell the product and use the Geomatrix technology in connection with
the product on a non-exclusive basis without any obligations to the Group unless
otherwise agreed in writing.

 JOINT VENTURE DEVELOPMENT ACTIVITIES

         The arrangements with the joint venture for the development of products
utilising Geomatrix technologies are discussed in note 11. Revenues from those
development activities with client companies are non-refundable and are reported
as contract development revenue.

         The tables below summarise the material adjustments to the loss for the
periods which would be required if U.S. GAAP had been applied instead of U.K.
GAAP.

<TABLE>
<CAPTION>
Loss                                                                                   4 MONTHS
                                                                                         ENDED
                                                                                       APRIL 30,
                                                                                         1996
                                                                                         L'000
                                                                                       --------
<S>                                                                                     <C>
Loss under U.K. GAAP ..............................................................     (231)
U.S. GAAP adjustments:
--Amortisation over economic useful life of intellectual property beyond five years
  (Note 15(1)) ....................................................................       17
--Effect of expensing development expenditure (Note 15(2)) ........................      (17)
                                                                                        ----
Net loss under U.S. GAAP ..........................................................     (231)
                                                                                        ====

</TABLE>



                                      F-77