<PAGE>

                                    PART I

ITEM 1.    BUSINESS.


INTRODUCTION

     Certain of the statements contained in this report are forward-looking
     statements based on current expectations which involve a number of
     uncertainties. The events described herein may not occur due to risks
     inherent in research and product development, the uncertainty of market
     acceptance of Company products, the possible inability to obtain financing,
     and other factors. Accordingly, the Company's future activities may differ
     materially from those projected in the forward-looking statements.

     OXIS International, Inc., (the "Company"), a Delaware corporation, is a
     leader in the discovery, development and commercialization of therapeutic
     and diagnostic products to diagnose, treat and prevent diseases of
     oxidative stress. Oxidative stress occurs when the concentration of free
     radicals and reactive oxygen species ("ROS"), highly reactive molecules
     produced during oxidative processes, exceed the body's antioxidant defense
     mechanisms.

     The Company consists of two closely related operating units: an
     international diagnostic business which markets research and commercial
     diagnostic assays and fine chemicals to research and clinical laboratories;
     and a drug discovery business focused on new drugs to treat diseases
     associated with tissue damage from free radicals and reactive oxygen
     species.


     The Company has targeted its drug discovery and development programs to
     address diseases that have underlying pathologies based on oxidative
     stress, and for which there is currently no optimum treatment. The Company
     has identified lead molecules from two series of small molecular weight
     antioxidants. The first of these lead molecules has completed Phase I
     clinical trials, and the second is in preclinical development. In addition,
     the Company is developing a series of earlier stage compounds for the
     treatment of cancer.

     The Company derives current business revenues from its diagnostic assays
     and two fine chemicals, ergothioneine and bovine superoxide dismutase
     ("bSOD"). The Company's diagnostic products portfolio includes fourteen
     commercial therapeutic drug monitoring ("TDM") assays based on fluorescence
     polarization immunoassay technology ("FPIA"); twelve drugs of abuse assays
     which utilize an enzyme-multiplied immunoassay technique ("EMIT"); and six
     assays to measure oxidative stress.

     The Company's twelve FDA-cleared therapeutic drug monitoring ("TDM") assays
     are sold to clinical and reference laboratories, primarily through a
     network of international distributors. The assays for markers of oxidative
     stress are sold through international distribution and catalog sales to
     basic researchers and clinicians working in oxidative stress research. The
     Company's TDM assays are designed to run on Abbott's TDx(R) and TDx/FLx(R)
     instruments, while the enzyme immunoassays and colorimetric assays run on a
     variety of commercially available instruments.

                                       1
<PAGE>

     The Company has invested significant resources to build an early and
     substantial patent position on both its antioxidant therapeutic
     technologies and selected oxidative stress assays.

     The Company's corporate offices are located in a 15,000 sq. ft. facility at
     6040 N. Cutter Circle, Suite 317, Portland, OR 97217. Research operations
     of the Company are located outside of Paris at Z.A. des Petits Carreaux, 2,
     av. des Coquelicots, 94385 Bonneuil-Sur-Marne, Cedex, France.


ACQUISITIONS/MERGERS

     In September 1994, the Company acquired Bioxytech S.A. located in Paris,
     France, and merged with International BioClinical, Inc. ("IBC"), an Oregon
     corporation, and changed its name from DDI Pharmaceuticals, Inc. to OXIS
     International, Inc. Bioxytech S.A. was subsequently renamed OXIS
     International S.A. ("OXIS S.A."). At the time of the acquisition, OXIS
     S.A.'s research and development programs were focused on the synthesis of
     novel antioxidant therapeutic molecules and assays to measure markers of
     oxidative stress. OXIS S.A. was also selling six research assays for
     measuring specific markers of oxidative stress. IBC was selling thirteen
     therapeutic drug monitoring ("TDM") assays at the time of its acquisition
     by the Company. It was also developing one additional TDM assay and a
     (beta)-lactamase rapid detection test, both of which were completed during
     1995.

     In July 1995, OXIS acquired Therox Pharmaceuticals, Inc. ("Therox"), a
     Delaware corporation, through an exchange of stock. Therox was merged into
     a subsidiary of the Company. Therox was founded in 1994 by S.R. One,
     Limited (the venture investment arm of SmithKline Beecham) and Brantley
     Venture Partners II, L.P. Therox was focused on the development of membrane
     active antioxidants and molecules that combine antioxidant activity with
     other key therapeutic effects. The acquisition provided the Company with
     complimentary therapeutic technologies, seven patents and several
     relationships with university scientists.

     Prior to the acquisitions of Bioxytech S.A. and International BioClinical,
     Inc. in 1994, substantially all of the Company's research and development
     efforts involved superoxide dismutase ("SOD") and poly-ethylene glycol
     ("PEG"). The 1994 and 1995 acquisitions substantially expanded the
     Company's research and development capabilities in the areas of synthetic
     chemistry, biochemistry and diagnostic assay development.


RESEARCH AND DEVELOPMENT

     The Company's research and development programs are focused primarily on
     the discovery and development of new therapeutic molecules to combat
     diseases related to damage from oxidative stress. OXIS believes that the
     control or elimination of oxidative stress represents an important but
     largely untapped area for drug development. The Company's technical

                                       2
<PAGE>

     approach is to supplement the natural defense systems through unique,
     synthetic molecules which, because of their pharmacological and/or
     distribution properties, will reduce oxidative stress in target cells and
     tissues.

     The Company has designed and synthesized several series of novel compounds,
     including: low-molecular-weight biomimetic antioxidants (Glutathione
     Peroxidase Mimics Program) and pro-oxidants (Cancer Therapeutics Program)
     that are based on unique selenium chemistry; and lipid soluble antioxidants
     and combination enzyme inhibitors/lipid soluble antioxidants (Lipid Soluble
     Antioxidants Program). OXIS has demonstrated that certain of its
     therapeutic molecules may act via two mechanisms to reduce oxidative stress
     in cells: through direct control of oxidative damage; and by decreasing
     specific signals that trigger the inflammatory cycle. Both of the Company's
     lead therapeutic molecules have been shown to inhibit levels of
     NF-(kappa)B, a transcription factor believed to be activated by elevated
     concentrations of ROS. NF-(kappa)B is known to activate genes involved in
     initiating the inflammatory response. The Company believes that the control
     of ROS, and associated decreases in NF-(kappa)B activation, will block the
     initiation of the inflammatory response earlier in the cycle than most
     drugs currently used to treat certain complex inflammatory diseases.

     A brief summary of the Company's synthetic therapeutics research and
     development programs follows:

     GLUTATHIONE PEROXIDASE MIMICS PROGRAM (GPX). The GPx mimics are small
     molecular weight, orally bioavailable compounds that were designed to
     catalyze the inactivation of toxic hydroperoxides. These molecules act as
     chemical catalysts. The lead molecule, BXT-51072, has demonstrated
     significant protection of endothelial cells from direct peroxidase damage
     and down regulates various inflammatory mediators and neutrophil adhesion.
     An oral formulation of BXT-51072 is being developed for the treatment of
     Inflammatory Bowel Disease ("IBD"), with Acute Respiratory Distress
     Syndrome ("ARDS") projected to be a secondary indication for the
     intravenous formulation of the drug. BXT-51072 has demonstrated activity in
     animal models of IBD, and in a porcine model of restenosis. A Phase I
     clinical trial was just completed at the end of 1996 and an investigational
     new drug application has been filed with the Food and Drug Administration
     (the "FDA") for a Phase II study in patients with IBD. This trial is
     expected to begin in mid-1997.

     A patent on this class of compounds has been issued in France and patent
     applications are pending in the United States, Japan, Canada, Australia and
     Europe.

     LIPID SOLUBLE ANTIOXIDANTS PROGRAM (LSA). The LSA compounds were designed
     to combine the antioxidant capabilities of ascorbic acid with the
     membrane-protecting effects of vitamin E. The lead molecule from this
     series, TX-153, has also shown significant protection of endothelial cells
     from direct peroxide damage, and, like BXT-51072, suppresses various
     inflammatory mediators and reduces neutrophil adhesion. Although TX-153
     apparently acts to control ROS in cells through a different pathway than
     the GPx mimics, it also appears to inhibit NF-(kappa)B.

                                       3
<PAGE>

     TX-153 is entering preclinical toxicology studies, with Phase I clinical
     studies anticipated to begin in 1998.

     The Company has four issued U.S. patents, and patent applications pending
     in the United States, Mexico, Japan, Canada and Europe on these compounds.

     CANCER THERAPEUTICS PROGRAM. The Company has designed compounds which
     utilize the destructive nature of free radicals to treat hormone-dependent
     cancers by selectively killing tumor cells by activating ROS.
     Hormone-dependent cancers such as breast and prostate cancer were chosen as
     potential indications for this series of molecules due to the specific
     hormone receptors on their cell membranes. Molecules that mimic the enzyme
     glutathione oxidase have been synthesized, and two strategies are being
     investigated to deliver the molecules to tumor cells and initiate the
     production of ROS inside these cells. Specific steroid molecules are being
     tested for their ability to target tumor cells, and a prodrug approach is
     being used to provide a source of ROS that can be turned on inside the
     cell. A lead molecule has not yet been selected for this series. The
     indications for this series of drugs include breast and prostate cancer,
     but the approach may also be applicable to other tumors.

     The Company has filed patent applications on this series of pro-oxidant
     molecules in the United States and France.

     In addition to its research and development programs in synthetic
     antioxidants, OXIS also has conducted research programs in the development
     of oxidative stress assays, bovine superoxide dismutase and poly-ethylene
     glycol technology. The status of these programs are as follows:

     OXIDATIVE STRESS ASSAYS. The Company has developed six research assay kits
     for markers of oxidative stress that are designed to ultimately facilitate
     diagnosis and optimize therapy of free radical-associated diseases. These
     assays also provide developmental synergy for the pharmaceutical research
     and development programs by facilitating the assessment of oxidative stress
     in laboratory studies and in patients. The Company intends to develop
     additional assays for key markers of oxidative stress as part of its
     ongoing research and development efforts in oxidative stress diagnostics.

     BOVINE SUPEROXIDE DISMUTASE (BSOD). The Company also has extensive
     experience in developing, manufacturing and marketing bovine superoxide
     dismutase ("bSOD"). Bovine superoxide dismutase has been previously studied
     in numerous clinical trials by OXIS and other companies. OXIS is not
     currently pursuing an active research program in bSOD, but supplies bulk
     bSOD for human use and sells an injectable dosage form of the drug for
     veterinary applications under the registered trademark Palosein(R).

     POLY-ETHYLENE GLYCOL TECHNOLOGY (PEG). Additionally, the Company has
     developed a patented, high-molecular weight PEG technology that extends the
     half-life of SOD and other therapeutic proteins. These derivatives reduce
     the immunogenicity of and extend the life of

                                       4
<PAGE>

     therapeutic proteins in the body . (The Company's PEG has been shown to
     extend the life of its bSOD in vivo by 250 times.) The Company has four
     issued U.S. patents as well as numerous issued patents world-wide on this
     technology. The Company is not currently pursuing an active research
     program in PEG technology, but is seeking potential partners for this
     technology for possible license or sale.

     Overall, the Company has an extensive portfolio of patents that cover its
     synthetic antioxidant therapeutic molecules, superoxide dismutase,
     polyethylene glycol technology, markers of oxidative stress and fine
     chemicals. The Company currently holds fifteen U.S. patents and eight
     French patents and has filed for eight additional U.S. patents.

     The Company's overall research and development strategy is to discover and
     advance its therapeutic molecules through early stage clinical trials to
     demonstrate efficacy in the target disease populations. The Company expects
     to seek strategic pharmaceutical partners for later stage clinical
     development and commercialization of its therapeutics, but, to date, has
     not entered into any such partnership.

     Much of the Company's success depends on its potential products which are
     in research and development and from which no material revenues have yet
     been generated. The Company must sucessfully partner, develop, obtain
     regulatory approval for and market or sell its potential therapeutic
     products to achieve profitable operations. No assurances can be given that
     the Company's product development efforts will be successfully completed,
     that required regulatory approvals will be obtained, or that any such
     products, if developed and introduced will be successfully marketed.
     Competition in the pharmaceutical industry is intense, and no assurances
     can be given that OXIS' competitors will not develop technologies and
     products that are more effective than those being developed by OXIS.

          Research and development expenses were $4,908,000, $4,299,000 and
     $1,670,000 for the years ended December 31, 1996, 1995 and 1994,
     respectively.


PRODUCTS

DIAGNOSTIC ASSAYS

     Revenues from sales of the Company's assays comprised 49% of 1996 revenues,
     and 44% of 1995 revenues.

OXIDATIVE STRESS ASSAYS

     The Company has six research assays available for sale which measure key
     markers in free radical biochemistry (markers of oxidative stress).
     Specifically, these assays measure levels of antioxidant protection,
     oxidative alterations, and pro-oxidant activation of specific white blood
     cells. OXIS' research assays include:

                           SOD-525 (superoxide dismutase)
                           GSH-400 (reduced glutathione)
                           pl-GPx-EIA (human plasma-specific glutathione
                            peroxidase)
                           LPO-586 (lipid peroxidation)
                           MPO-EIA (human myeloperoxidase)
                           Lactoferrin-EIA (human lactoferrin).

     These assay kits utilize either chemical (colorimetric) or immunoenzymatic
     (EIA) reactions that can be read using laboratory spectrophotometers and
     microplate readers, respectively. The

                                       5
<PAGE>

     Company's assays offer advantages over conventional laboratory methods,
     including ease of use, speed, specificity and accuracy.

     The assays for markers of oxidative stress are currently being sold to
     researchers in Europe, Japan and the United States, primarily through
     distributors. The Company estimates that there are more than 3,500
     scientists and clinicians who are working directly in research on free
     radical biochemistry, and who are potential customers for these research
     assays.

     Through June 1996, assays for markers of oxidative stress were manufactured
     at the Company's facility in France. Since July 1996, these assays have
     been manufactured at the Company's facility in Portland, Oregon. All of the
     oxidative stress assays are manufactured in batches in anticipation of
     customer orders. Orders are generally filled within a few days; therefore,
     the Company does not have any significant backlog of orders. The Company
     believes that adequate supplies of raw materials are either currently on
     hand, available from commercial suppliers or available through development
     on a custom basis by commercial contractors, as needed.

     The Company's assays for markers of oxidative stress are protected by trade
     secrets and patents. Seven French patent applications have been filed with
     respect to these assays, two of which have resulted in the issuance of
     patents. The oxidative stress assays are sold under the registered
     trademark "Bioxytech(R)".

     Several companies other than OXIS have developed assays for markers of
     oxidative stress. One company offers assays for superoxide dismutase and
     glutathione peroxidase which compete directly with the Company's products;
     and a few competitive assays for lipid peroxidation are available from
     selected companies. The Company believes that the number and range of its
     assay kits for markers of oxidative stress is a distinct competitive
     advantage.

THERAPEUTIC DRUG MONITORING (TDM) ASSAYS

     The Company sells fourteen TDM assays which are based on FPIA technology.
     These products are sold under the trade name INNOFLUOR(TM). The Company's
     test menu encompasses approximately 90% of the TDM tests performed by
     clinical and reference laboratories worldwide. These assays are designed
     for use on the Abbott Laboratories TDx(R) and TDx/FLx(R) analyzers.

     The TDM products are sold through a combination of direct customer sales
     and distributors in the United States, and through a network of
     distributors outside the United States, principally in Europe.

     The TDM assays are manufactured at the Company's facility in Portland,
     Oregon. All of the TDM assays are manufactured in batches in anticipation
     of customer orders. Orders are generally filled within a few days;
     therefore, the Company does not have any significant backlog of orders. The
     Company believes that adequate supplies of raw materials are either


                                       6
<PAGE>

     currently on hand, available from commercial suppliers or available through
     development on a custom basis by commercial contractors as needed.

     The Company has one pending U.S. patent application, in addition to relying
     on trade secrets, know-how and trademark laws to protect its TDM assays.
     The Company's TDM assays have been sold under the trade name INNOFLUOR(TM)
     since the mid-1980s.

     Six major diagnostic companies dominate the therapeutic drug monitoring
     market. Each of these six companies provides a range of both
     instrumentation and assays to clinical laboratories. Of these, Abbott
     Laboratories holds the largest market share. OXIS competes most directly
     with Abbott Laboratories, because OXIS' assays are designed to be run on
     Abbott's analyzers. The Company competes based on high product quality, an
     aggressive pricing strategy and technical services. Abbott Laboratories and
     certain of the Company's other competitors have substantially greater
     financial and other resources than the Company and there can be no
     assurances that the Company can effectively compete with Abbott
     Laboratories and such other competitors.

THERAPEUTIC PRODUCTS

     Revenues from sales of bulk bSOD, royalties on bSOD products sold by
     licensees, and sales of Palosein(R), the Company's veterinary bSOD product,
     comprised approximately 50% of the Company's total revenues in 1996, 48% in
     1995 and 76% in 1994.

BOVINE SOD (BSOD) PRODUCTS

     Commercial-scale manufacture and quality control of bulk bSOD, as well as
     subsequent quality control and processing of United States Department of
     Agriculture-inspected edible beef liver into highly purified bulk bSOD
     requires a complex, multi-step process, OXIS has significant knowledge
     regarding the manufacture of bSOD that is protected through trade secrets
     and proprietary know-how.

     The Company has an agreement with Diosynth B.V., a Dutch contract
     manufacturer of pharmaceutical ingredients, to manufacture bulk bSOD and
     supply it to OXIS under the terms of a license based on the Company's
     processes. Diosynth B.V. is an affiliate of AKZO-Nobel N.V., a large, Dutch
     multinational chemical and health care company. The Company believes that
     its present source of bSOD is adequate for its near-term foreseeable needs.

     With the exception of recently developed, patent protected long-acting SOD
     derivatives, the Company's older patents protecting the manufacture of bSOD
     have expired. Expiration of the Company's patents may enable other
     companies to benefit from research and development efforts of the Company,
     but such other companies would not receive the benefits of the Company's
     unpatented trade secrets and know-how or unpublished preclinical or
     clinical data. Such Companies would still be required to expend
     considerable resources to conduct preclinical

                                       7
<PAGE>

     and clinical studies of their own pharmaceutical preparations of SOD to
     gain regulatory approval.

     The Company sells bulk bSOD for human use, but does not market dosage forms
     of bSOD for human use. Palosein(R) is OXIS' registered trademark for its
     veterinary brand of bSOD. Although there are other sources of bSOD and
     other laboratory and pilot-scale processes to produce bSOD, the Company
     believes that it is the only company manufacturing bSOD on a commercial
     scale for pharmaceutical uses.

     The Company's Spanish licensee, Tedec-Meiji Farma, S.A., which distributes
     bSOD for human use in Spain, has been responsible for a substantial portion
     of the Company's revenues in recent years. Sales of bSOD to Tedec-Meiji
     were 39% of the Company's revenues in 1996, 16% in 1995 and 18% in 1994.


EMPLOYEES

     As of December 31, 1996, the Company had 51 employees (30 in the United
     States and 21 in France). Employees of the Company's French subsidiary are
     covered by a government-sponsored collective bargaining agreement. None of
     the United States employees are subject to a collective bargaining
     agreement. The Company has never experienced a work interruption.


FOREIGN OPERATIONS AND EXPORT SALES

     For information regarding the Company's foreign operations and export
     sales, see Note 10 to the consolidated financial statements.


ITEM 2.    PROPERTIES.

     The Company occupies, pursuant to leases, office and laboratory space in
     Portland, Oregon and near Paris, France.

     The Company's Portland, Oregon lease expires in 1997; the lease of the
     facility in France expires in 1998.

     Although the premises currently occupied are suitable for the Company's
     present requirements, other equally suitable premises are readily
     available.

                                       8
<PAGE>

ITEM 3.    LEGAL PROCEEDINGS.

     There are no material legal proceedings to which the Company is a party or
     to which any of its property is subject.


ITEM 4.    SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

     No matters were submitted to a vote of security holders of the Company
     during the fourth quarter of the year ended December 31, 1996.




                                    PART II


ITEM 5.    MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED SHAREHOLDER MATTERS.

     The Company's common stock is traded on the NASDAQ National Market System
using the symbol OXIS.

     Recent quarterly prices of the Company's common stock are as follows:
<TABLE>
<CAPTION>

                                 1996                                     1995
                                 ----                                     ----

                  4TH       3RD      2ND       1ST         4TH        3RD      2ND      1ST
<S>               <C>       <C>      <C>       <C>         <C>        <C>      <C>      <C>
         High     1 25/32   2 1/8    2 11/16   2           2 13/16    3 1/2    4 1/2    2 7/8

         Low      1 7/32    1 1/2    1 7/16    1 1/2       1 1/8      2 1/4    1 3/4    1 5/8
</TABLE>

     The Company has an estimated 7,800 shareholders, including approximately
     3,500 shareholders who have shares in the names of their stockbrokers. The
     Company utilizes its assets to develop its business and, consequently, has
     never paid a dividend and does not expect to pay dividends in the
     foreseeable future.

                                       9
<PAGE>

ITEM 6.   SELECTED FINANCIAL DATA.
<TABLE>
<CAPTION>
     FOR YEARS ENDED
       DECEMBER 31:                   1996              1995                1994              1993             1992
<S>                                 <C>                <C>                 <C>               <C>               <C>
       Total Revenues1/             $ 4,867,000        $ 5,136,000         $ 3,470,000       $ 3,044,000       $2,772,000
                     --

       Net income (loss)            $(5,992,000)       $(8,892,000)2/      $(5,567,000)3/    $(1,485,000)4/    $ (339,000)
                                                                   --                  --                --

       Net income (loss)
         per share                  $      (.47)       $      (.82)2/      $      (.88)3/    $      (.30)4/    $     (.07)
                                                                   --                  --                --
</TABLE>
<TABLE>
<CAPTION>
     AS OF DECEMBER 31:                    1996               1995                1994              1993             1992
<S>                                 <C>                <C>                 <C>                <C>              <C>

       Total assets                 $ 7,997,000        $ 9,870,000         $11,194,000        $3,124,000        $4,864,000

       Long-term
         obligations                $     2,000        $ 1,332,000         $   376,000                --               --

       Common shares
         outstanding                 13,790,736         12,124,423           9,322,762         4,982,670         4,982,670
</TABLE>

     1/ Earned interest not included in revenue.
     2/ Includes a charge of $3,329,000 ($.31 per share) for the write off of
     certain technology of an acquired company.
     3/  Includes a charge of $3,675,000 ($.58 per share) for the write off of
     certain technology of acquired companies.
     4/ Includes a charge of $1,531,000 ($.31 per share) for control contest
     expense.

     As explained under the caption "ACQUISITIONS" in Management's Discussion
     and Analysis of Financial Condition and Results of Operations below, the
     Company made significant acquisitions during 1994 and 1995 that affect the
     comparability of the amounts reflected in the table above.


ITEM 7.    MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
           RESULTS OF OPERATIONS.

ACQUISITIONS

     In September 1994, the Company significantly increased its scientific and
     technical staff, patent application portfolio, current product offerings,
     research and development programs, research and manufacturing facilities
     and its customer base by acquiring Bioxytech S.A. (now "OXIS S.A.") and
     International BioClinical, Inc. ("IBC") (together the "1994 acquired
     businesses"). Both acquisitions were completed through the exchange of
     stock, and were accounted for as purchases; accordingly, the acquired
     assets and liabilities were recorded at

                                       10
<PAGE>

     their estimated fair values as of the date of acquisition. IBC was merged
     into the Company. OXIS S.A. operates as a subsidiary of the Company.

     In July 1995, in a transaction which was also accounted for as a purchase,
     the Company acquired Therox Pharmaceuticals, Inc. ("Therox") through an
     exchange of stock. Therox was merged into a wholly-owned subsidiary of the
     Company. The acquisition of Therox provided the Company with a technology
     portfolio complementary to its novel therapeutics for treatment of free
     radical associated diseases together with university relationships and
     seven patents.

     Because the acquisitions have been accounted for as purchases, the
     Company's consolidated results of operations include the operating results
     of the acquired businesses from the dates of acquisition only. Therefore,
     the results of operations of the 1994 acquired businesses are included in
     the consolidated statements of operations from September 7, 1994, and the
     results of Therox's operations are included in the consolidated statements
     of operations from July 19, 1995.

     Costs relating to the acquisitions and the Company's more complex corporate
     structure and the increased research and development investments have
     placed significant demand on the Company's limited financial resources. See
     "Financial Condition, Liquidity and Capital Resources" below.


FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES

     During 1996 the Company's working capital deficit decreased slightly from
     $1,469,000 at December 31, 1995, to $1,405,000 at December 31, 1996. This
     decrease in the Company's working capital deficit resulted primarily from
     the effect of the net loss for 1996 ($5,992,000 less non-cash charges of
     $1,381,000), offset by proceeds from issuance of stock ($4,305,000) and
     convertible term notes ($1,000,000).

     Cash and cash equivalents declined from $727,000 at December 31, 1995, to
     $422,000 at December 31, 1996.

     The Company expects to continue to report losses in 1997 as the level of
     expenses is expected to continue to exceed revenues. The Company can give
     no assurances as to when and if its revenues will exceed its expenses. The
     Company must raise additional capital during the first half of 1997.
     Failure to raise such additional capital would cause the Company to
     severely curtail or cease operations. For more information concerning the
     Company's ability to continue as a going concern, see Note 1 to the
     consolidated financial statements.

     While the Company believes that its new products and technologies show
     considerable promise, its ability to realize significant revenues therefrom
     is dependent upon the Company's success in developing business alliances
     with biotechnology and/or

                                       11
<PAGE>

     pharmaceutical companies that have the required resources to develop and
     market certain of these products. There is no assurance that the Company's
     effort to develop such business alliances will be successful. Although the
     Company is currently seeking additional capital (described below), it
     cannot predict the source, terms, amount, form, and/or availability of
     additional capital to fund its operations to the end of the current year.

     During 1996, the Company raised approximately $5,300,000 cash through the
     sale of its Series C, Series D and Series E Preferred Stock and common
     stock, and convertible term notes. Substantial additional capital will be
     required during 1997 to continue operating in accordance with its current
     plans. The Company has engaged an agent to assist on a best-efforts basis
     to complete a private placement of its common stock. In addition, the
     Company has engaged a French investment banker to act as its underwriter
     for a planned public offering of its common stock on the newly opened
     French stock market, Le Nouveau Marche, subject to obtaining appropriate
     authorization from the French stock market regulatory authorities. However,
     no assurances can be given that the Company will successfully raise the
     needed capital. If the Company is unable to raise additional capital during
     the first half of 1997, it would endeavor to extend its ability to continue
     in business through the reduction of personnel and facility costs, by
     slowing its research and development efforts, and by reducing other
     operating costs, however, no assurances can be given that it will be able
     to do so.


RESULTS OF OPERATIONS

REVENUES

     The Company's sales for the past three years consisted of the following:
<TABLE>
<CAPTION>
                                                1996              1995              1994
<S>                                           <C>              <C>               <C>
     Diagnostic and research assays           $2,364,000       $2,240,000        $  645,000
     Bovine superoxide dismutase (bSOD)
         for research and human use            1,935,000        1,817,000         2,130,000
     Palosein/(R)/(bSOD for veterinary use)      480,000          555,000           346,000
     Other                                        23,000          370,000           204,000
                                              ----------       ----------        ----------
         Total sales                          $4,802,000       $4,982,000        $3,325,000
                                              ==========       ==========        ==========
</TABLE>

     Diagnostic and research assays are products acquired with the acquisitions
     of IBC and OXIS S.A. Sales of these products for 1994 represent sales from
     September 8 through the end of the year. The entire years' sales of
     diagnostic and research assays are included in the Company's sales for 1995
     and 1996.

     Bulk bSOD sales in 1994 and 1995 included sales to Sanofi Winthrop, Inc.
     Sales of bulk bSOD to Sanofi Winthrop ceased in 1995, when Sanofi Winthrop
     announced that the clinical trial in which it was using the Company's bSOD
     failed to show the desired results. The

                                       12
<PAGE>

     decline in sales to Sanofi Winthrop has been offset to a large extent by
     increases in sales of bSOD to Tedec-Meiji Farma S.A., the Company's Spanish
     licensee.

     Future sales of bulk bSOD are largely dependent on the needs of the
     Company's Spanish licensee. The Company expects its orders for 1997 from
     the Spanish licensee to be less than those for 1996. The Company's sales of
     bulk bSOD beyond 1997 are uncertain and difficult to predict and no
     assurances can be given with respect thereto.

     Sales of Palosein/(R)/, which was reintroduced to the U.S. market in 1993
     and is sold primarily to veterinary wholesalers in the United States,
     increased from $346,000 in 1994 to $555,000 in 1995 as a result of an
     active direct mail marketing campaign, but declined to $480,000 in 1996 due
     in part to large stocking orders by distributors in late 1995. The decrease
     in other sales was principally the result of the completion of an assay
     development contract in early 1996. Royalties and license fees are not
     expected to be material in 1997.


COSTS AND EXPENSES

     Cost of sales as a percent of product sales declined from 62% in 1994 to
     59% in 1995. In 1995 the cost of the Company's diagnostic and research
     assays declined slightly as a result of increased volumes, and the cost of
     bulk bSOD sales also declined from the 1994 level. In 1996 cost of sales
     increased to 63% of product sales. The increase was primarily caused by a
     decline in the gross margin on bulk bSOD sales. The Company's cost of sales
     includes amortization of technology acquired in 1994 ($239,000 in 1994, and
     $737,000 in 1995 and 1996).

     Research and development costs increased from $1,670,000 in 1994 to
     $4,299,000 in 1995, and $4,908,000 in 1996. The increase in 1995 was
     primarily due to the cost of the research and development activities
     associated with pharmaceutical technologies acquired in the September 1994
     and July 1995 business acquisitions. The increase of $609,000 in 1996 is
     the result of increased expenditures relating to preclinical development
     work and the Phase I clinical trial on the Company's lead therapeutics
     program (glutathione peroxidase mimics) of approximately $1,130,000, and a
     $230,000 increase in expenses of the former Therox operations, offset by a
     cost reduction of approximately $780,000 from the closure of the Company's
     Mountain View, California facility in the fourth quarter of 1995. The
     expenses of the Therox operations are included in the 1995 expenses
     starting in July 1995; the former Therox laboratory facility was closed in
     May 1996.

     Sales, general and administrative expenses increased in 1995 to $3,332,000
     from $1,652,000 in 1994. The increase in 1995 was due primarily to the
     inclusion for the entire year of general and administrative costs of the
     businesses acquired in 1994, further increases in sales and marketing costs
     relating to Palosein/(R)/ and the new products from the 1994 acquisitions,
     and increased legal fees and other expenses relating to the Company's
     ongoing need to raise capital and more complex corporate structure.

                                       13
<PAGE>

     In 1996, sales, general and administrative expenses decreased by $491,000,
     to $2,841,000. Most of the decrease was a decrease in the selling, general
     and administrative expenses of the Company's French subsidiary. In the
     third quarter of 1996 all of the Company's manufacturing operations were
     consolidated in the United States and the French subsidiary became a
     research facility. In connection with this restructuring, two
     administrative positions have been eliminated and certain other costs which
     were previously charged to administrative expenses are now being classified
     as research and development costs. The administrative costs of the
     Company's French subsidiary decreased $359,000 in 1996 as compared to 1995.

     Expenses included charges of $3,675,000 and $3,329,000 to operations for
     1994 and 1995, respectively, reflecting the write-off of purchased
     in-process technology, as described in Note 3 to the consolidated financial
     statements.


INTEREST INCOME AND EXPENSE

     Interest income decreased and interest expense increased in 1995 as the
     Company liquidated certificates of deposit and borrowed funds pursuant to
     short-term and long-term interest bearing obligations to finance increased
     research and development efforts.


NET LOSS

     The Company incurred net losses in 1994, 1995 and 1996. The 1994 loss
     includes a $3,675,000 ($.58 per share) charge to operations for the
     write-off of purchased in-process technology related to the acquisitions of
     OXIS S.A. and IBC. Similarly, the 1995 loss includes a $3,329,000 ($.31 per
     share) charge to operations for the write-off of purchased in-process
     technology related to the acquisition of Therox. Excluding these unusual
     charges, the Company would have incurred a net loss of $1,892,000, or $.30
     per share for 1994; a net loss of $5,563,000, or $.51 per share for 1995,
     as compared to a net loss of $5,992,000, or $.47 per share for 1996.

     Increased research and development expenditures and selling, general and
     administrative expenses from the businesses acquired late in the third
     quarter of 1994 and increased research and development expenditures
     relating to the acquisition of Therox early in the third quarter of 1995
     contributed to the increased losses in 1995 as compared to 1994. The
     increased loss for 1996 as compared to 1995 (excluding the unusual charge)
     is attributable primarily to the increased research and development costs
     relating to the Company's glutathione peroxidase mimics program.

     The Company expects to incur a substantial net loss for 1997. If
     substantial additional capital is raised through further sales of
     securities (See Financial Condition, Liquidity and Capital Resources), the
     Company plans to continue to invest in research and development activities
     and incur sales, general and administrative expenses in amounts greater
     than its anticipated near-term product margins. If the Company is unable to
     raise sufficient

                                       14
<PAGE>

     additional capital, it will have to cease, or severely curtail, its
     operations. In this event, while expenses will be reduced, expense levels,
     and the potential write down of various assets, would still be in amounts
     greater than anticipated revenues.

                                       15
<PAGE>

ITEM 8.    FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

                           CONSOLIDATED BALANCE SHEETS
                           DECEMBER 31, 1996 AND 1995

                                               1996              1995
ASSETS
Current assets:
     Cash and cash equivalents              $    422,000      $    727,000
     Accounts receivable                         861,000           823,000
     Inventories                                 591,000           953,000
     Prepaid and other                           191,000           262,000
                                              ----------        ----------

         Total current assets                  2,065,000         2,765,000

Property and equipment, net                    1,327,000         1,092,000

Assets under capital leases, net                 309,000         1,198,000

Technology for developed products and
     custom assays, net                        3,782,000         4,498,000

Other assets                                     514,000           317,000
                                              ----------        ----------

         Total assets                         $7,997,000        $9,870,000
                                              ==========        ==========



                             See accompanying notes.

                                       16
<PAGE>

                           CONSOLIDATED BALANCE SHEETS
                           DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
                                                                                        1996              1995
LIABILITIES AND SHAREHOLDERS' EQUITY
<S>                                                                                  <C>               <C>
Current liabilities:
     Notes payable                                                                   $  1,221,000      $  1,616,000
     Accounts payable                                                                   1,386,000         1,182,000
     Customer deposits                                                                    132,000           250,000
     Accrued liabilities                                                                  655,000           903,000
     Current portion of capital lease obligations                                          76,000           283,000
                                                                                   --------------    --------------
         Total current liabilities                                                      3,470,000         4,234,000

Capital lease obligations                                                                      --            47,000
8% convertible subordinated debentures                                                         --         1,255,000
Other liabilities                                                                           2,000            30,000

Commitments and contingencies (Notes 1, 3 and 11)

Shareholders' equity:
     Preferred stock - $.01 par value; 15,000,000 shares authorized:
         Series B - 642,583 shares issued and outstanding at December 31, 1996
         and 1995 (liquidation
         preference of $1,500,000)                                                          6,000             6,000
         Series C - 1,647,157 shares issued and outstanding
         at December 31, 1996                                                              17,000                --
         Series D - 1,650 shares issued and outstanding
         at December 31, 1996                                                                  --                --
         Series E - 2,200 shares issued and outstanding
         at December 31, 1996                                                                  --                --
     Common stock - $.50 par value; 40,000,000 shares
       authorized; 13,790,736 shares issued and outstanding                             6,895,000         6,062,000
     Additional paid in capital                                                        30,706,000        25,210,000
     Accumulated deficit                                                              (33,023,000)      (27,031,000)
     Accumulated translation adjustments                                                  (76,000)           57,000
                                                                                   --------------    --------------

       Total shareholders' equity                                                       4,525,000         4,304,000
                                                                                   --------------     -------------

              Total liabilities and shareholders' equity                           $    7,997,000     $   9,870,000
                                                                                   ==============     =============
</TABLE>

                             See accompanying notes.

                                       17
<PAGE>

                      CONSOLIDATED STATEMENTS OF OPERATIONS
                  YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
                                                                              1996              1995            1994
<S>                                                                    <C>                 <C>             <C>
Revenues:
     Sales                                                              $  4,802,000       $  4,982,000    $  3,325,000
     Royalties and license fees                                               65,000            154,000         145,000
                                                                        ------------       ------------   -------------

       Total revenues                                                      4,867,000          5,136,000       3,470,000


Costs and expenses:
     Cost of sales                                                         3,009,000          2,939,000       2,074,000
     Research and development                                              4,908,000          4,299,000       1,670,000
     Sales, general and administrative                                     2,841,000          3,332,000       1,652,000
     Purchased in-process technology (Note 3)                                     --          3,329,000       3,675,000
                                                                        ------------       ------------   -------------
       Total costs and expenses                                           10,758,000         13,899,000       9,071,000
                                                                        ------------       ------------   -------------

Operating loss                                                            (5,891,000)        (8,763,000)     (5,601,000)

Interest income                                                               37,000             42,000          82,000

Interest expense                                                            (138,000)         (171,000)        (48,000)
                                                                        ------------       ------------     -----------
Net loss                                                                $ (5,992,000)      $ (8,892,000)    $(5,567,000)
                                                                        ============       ============     ===========

Net loss per share                                                      $       (.47)      $     (0.82)     $     (0.88)
                                                                        ============       ============     ===========


Weighted average number of shares
     used in computation                                                  12,821,544         10,854,149       6,350,097
                                                                        ============       ============     ===========

</TABLE>
                              See accompanying notes.

                                       18
<PAGE>

                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                   YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
                                                                            1996               1995             1994
<S>                                                                      <C>                <C>             <C>
Cash flows from operating ativities:
     Net loss                                                            $(5,992,000)       $(8,892,000)    $(5,567,000)
     Adjustments to reconcile net loss to cash provided
       by (used for) operating activities:
         Depreciation and amortization                                     1,381,000          1,369,000         551,000
         Purchased in-process technology                                          --          3,329,000       3,675,000
         Changes in assets and liabilities:
           Accounts receivable                                               (50,000)           (70,000)        258,000
           Inventories                                                       355,000            (17,000)       (186,000)
           Other current assets                                               (2,000)           209,000         (19,000)
           Accounts payable                                                  220,000           (565,000)        562,000
           Customer deposits                                                (118,000)          (866,000)      1,116,000
           Accrued liabilities                                               (69,000)           251,000          (8,000)
                                                                         -----------        -----------    ------------

              Net cash provided by (used for)
                operating activities                                      (4,275,000)        (5,252,000)        382,000

Cash flows from investing activities:
     Redemption of certificates of deposit                                        --            496,000         884,000
     Purchase of equipment                                                   (58,000)           (99,000)        (40,000)
     Acquisition and stock issuance costs (Note 3)                                --                 --      (1,361,000)
     Cash of businesses acquired (Note 3)                                         --            143,000         273,000
     Additions to patent and deferred financing costs                       (350,000)                --              --
     Other                                                                    (1,000)          (136,000)         19,000
                                                                         -----------        -----------    ------------

              Net cash provided by (used for)
                investing activities                                        (409,000)           404,000        (225,000)

Cash flows from financing activities:
     Short-term borrowing                                                  1,061,000          1,366,000         296,000
     Proceeds from issuance of long-term debt                                     --          1,255,000              --
     Costs in connection with issuance of long-term debt                          --           (152,000)             --
     Proceeds from issuance of stock, net of related cost                  4,305,000          3,077,000              --
     Repayment of short-term notes                                          (690,000)          (340,000)             --
     Repayment of capital lease obligations and
       other liabilities                                                    (294,000)          (573,000)       (275,000)
                                                                         -----------        -----------    ------------

              Net cash provided by financing activities                    4,382,000          4,633,000          21,000

Effect of exchange rate changes on cash                                       (3,000)             6,000               --
                                                                         -----------        -----------    ------------

Net increase (decrease) in cash and cash equivalents                        (305,000)          (209,000)        178,000

Cash and cash equivalents - beginning of year                                727,000            936,000         758,000
                                                                         -----------        -----------    ------------

Cash and cash equivalents - end of year                                  $   422,000        $   727,000    $    936,000
                                                                         ===========        ===========    ============
</TABLE>

                             See accompanying notes.

                                       19
<PAGE>

                CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
                  YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
                                                                 1996         1995       1994
<S>                                                           <C>           <C>           <C>

Supplemental schedule of noncash operating and
  financing activities:
   Inventory purchase with deferred payment terms                     --     $250,000      --
   Common stock issued as incentive to purchase notes                 --     $156,000      --
   Issuance of Series C Preferred Stock in exchange
       for cancellation of notes                              $  844,000           --      --
   Conversion of 8% Convertible Subordinated Debentures
       into Common Stock                                      $1,312,000           --      --
   Conversion of Series C and D Preferred Stock into
       Common Stock                                           $  515,000           --      --

</TABLE>




                             See accompanying notes.

                                       20
<PAGE>

                 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
                  YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994

<TABLE>
<CAPTION>
                                    Preferred Stock             Common Stock            Additional
                                    ---------------             ------------              paid-in
                                 Shares         Amount      Shares         Amount         capital
<S>                            <C>          <C>           <C>          <C>             <C>
Balances,
  January 1, 1994                                           4,982,670  $ 2,491,000     $12,863,000
Series A preferred and
  common shares issued in
  connection with 1994
  business combinations
  (Note 3)                        40,000       $   --       4,340,092     2,170,000      7,367,000
Accumulated
  translation adjustments
Net loss
                              ----------        -------    ----------    ----------     ----------
Balances,
  December 31, 1994               40,000           --       9,322,762     4,661,000     20,230,000
Shares issued in
  connection with short-
  term notes                                                   93,300        47,000        109,000
Sale of common shares                                       1,227,625       614,000      1,089,000
Conversion of Series A
  preferred shares to
  common                         (40,000)          --          40,000        20,000       (20,000)
Shares issued in
  connection  with 1995
  business combination
  (Note 3)                                                  1,440,736       720,000     2,633,000
Series B preferred shares
  issued (Note 3)                642,583          6,000                                 1,169,000
Accumulated translation
  adjustments
Net loss
                              ----------        -------    ----------    ----------     ----------
Balances,
  December 31, 1995              642,583          6,000    12,124,423     6,062,000    25,210,000
Sale of Series C preferred
  shares for cash              1,125,590         11,000                                 1,225,000
Series C preferred shares
  issued in exchange for
  cancellation of notes          648,490          7,000                                   837,000
Sale of Series D
  preferred shares                 2,000           --                                   1,939,000

<CAPTION>

                                                  Accumulated         Total
                                Accumulated       translation      shareholders'
                                  deficit         adjustments         equity
                                  -------         -----------         ------
<S>                             <C>               <C>              <C>
Balances,
  January 1, 1994               $(12,572,000)                      $ 2,782,000
Series A preferred and
  common shares issued in
  connection with 1994
  business combinations
  (Note 3)                                                           9,537,000
Accumulated translation
  adjustments                                        $(53,000)         (53,000)
Net loss                          (5,567,000)                       (5,567,000)
                                 -----------          -------       ----------
Balances,
  December 31, 1994              (18,139,000)         (53,000)       6,699,000
Shares issued in
  connection with short-
  term notes                                                           156,000
Sale of common shares                                                1,703,000
Conversion of Series A
  preferred shares to
  common                                                                  --
Shares issued in
  connection  with 1995
  business combination
  (Note 3)                                                           3,353,000
Series B preferred shares
  issued (Note 3)                                                    1,175,000
Accumulated translation
  adjustments                                         110,000          110,000
Net loss                          (8,892,000)                       (8,892,000)
                                 -----------          -------       ----------
Balances,
  December 31, 1995              (27,031,000)          57,000        4,304,000
Sale of Series C preferred
  shares for cash                                                    1,236,000
Series C preferred shares
  issued in exchange for
  cancellation of notes                                                844,000
Sale of Series D
  preferred shares                                                   1,939,000
</TABLE>

                                       21
<PAGE>

           CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (CONTINUED)
                  YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994

<TABLE>
<CAPTION>
                                  Preferred Stock             Common Stock
                                  ---------------             ------------
                                  Shares    Amount        Shares        Amount
<S>                           <C>           <C>        <C>          <C>
Common shares issued
  upon conversion of
  debentures                                            1,050,217      525,000
Conversion of Series C
  preferred shares to
  common stock                  (126,923)    (1,000)      136,924       69,000
Conversion of Series D
  preferred shares to
  common stock                      (350)        --       360,839      180,000
Sale of Series E preferred
  and common shares for
  cash                             2,200         --        55,000       27,000
Other issuances of common
  shares                                                   63,333       32,000
Accumulated translation
  adjustments
Net Loss
                               ---------    -------    ----------   ----------
Balances,
  December 31, 1996            2,293,590    $23,000    13,790,736   $6,895,000
                               =========    =======    ==========   ==========
<CAPTION>

                                 Additional                  Accumulated        Total
                                  paid-in      Accumulated   translation     shareholders'
                                  capital        deficit     adjustments        equity
<S>                             <C>           <C>            <C>             <C>
Common shares issued
  upon conversion of
  debentures                      787,000                                     1,312,000
Conversion of Series C
  preferred shares to
  common stock                    (68,000)                                           --
Conversion of Series D
  preferred shares to
  common stock                   (180,000)                                           --
Sale of Series E preferred
  and common shares for
  cash                            923,000                                       950,000
Other issuances of common
  shares                           33,000                                        65,000
Accumulated translation
  adjustments                                                   (133,000)      (133,000)
Net Loss                                        (5,992,000)                  (5,992,000)
                              -----------     ------------     ---------     ----------
Balances,
  December 31, 1996           $30,706,000     $(33,023,000)    $ (76,000)    $4,525,000
                              ===========     ============     =========     ==========
</TABLE>


                            See accompanying notes.

                                       22
<PAGE>

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                  YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994


1.   DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION

     OXIS International, Inc. (the "Company") develops, manufactures and markets
     selected therapeutic and diagnostic products. The Company's research and
     development efforts are concentrated principally in the development of
     products to diagnose, treat and prevent diseases associated with free
     radicals and reactive oxygen species. The Company is headquartered in
     Portland, Oregon and operates a research and development facility near
     Paris, France.

     The Company has historically licensed and sold pharmaceutical forms of
     superoxide dismutase (SOD) for human and veterinary use. In 1994, with the
     acquisitions of businesses as described in Note 3, the Company began
     selling therapeutic drug monitoring assays and research assays to measure
     markers of oxidative stress.

     Therapeutic drug monitoring assays are manufactured by the Company in the
     United States and are sold to hospital clinical laboratories and reference
     laboratories by an in-house sales force and a network of distributors both
     within and outside the United States. Assays to measure markers of
     oxidative stress are manufactured by the Company in the United States (in
     France prior to July, 1996) and are sold directly to researchers and to
     distributors for resale to researchers, primarily in Europe, the United
     States and Japan.

     These financial statements have been prepared on a going concern basis
     which contemplates the realization of assets and the satisfaction of
     liabilities in the normal course of business. The Company has incurred
     losses in each of the last three years, and at December 31, 1996, the
     Company's current liabilities exceeded its current assets by $1,405,000.
     These factors, among others, may indicate that the Company may be unable to
     continue as a going concern for a reasonable period of time. These
     financial statements do not include any adjustments relating to the
     recoverability and classification of recorded asset amounts or the amounts
     and classification of liabilities that may be necessary should the Company
     be unable to continue as a going concern. The Company's continuation as a
     going concern is contingent upon its ability to obtain additional
     financing, and to generate revenue and cash flow to meet its obligations on
     a timely basis.

     During 1996, the Company raised approximately $5,300,000 cash through the
     sale of its Series C, Series D and Series E Preferred Stock and common
     stock, and convertible term notes. The Company expects that additional
     capital will be required during 1997 to continue operating in accordance
     with its current plans. The Company has engaged an agent to assist on a
     best-efforts basis to complete a private placement of its common stock. In
     addition, the Company has engaged a French investment banker to act as its
     underwriter for a planned public offering of its common stock on the newly
     opened French stock market, Le Nouveau

                                       23
<PAGE>

     Marche, subject to obtaining appropriate authorization from the French
     stock market regulatory authorities. If the Company is unable to raise
     additional capital it intends to curtail its operations through the
     reduction of personnel and facility costs and by reducing its research and
     development efforts. If the Company were to be unable to sufficiently
     curtail its costs in such a situation, it might be forced to seek
     protection of the courts through reorganization, bankruptcy or insolvency
     proceedings.


2.   SIGNIFICANT ACCOUNTING POLICIES

     PRINCIPLES OF CONSOLIDATION - The accompanying balance sheets include the
     accounts of the Company as well as its subsidiaries. The results of
     operations of the Company's French subsidiary since its purchase by the
     Company on September 7, 1994, are included in the accompanying statements
     of operations and cash flows. The functional currency of the Company's
     French subsidiary is the French franc. The French subsidiary's assets and
     liabilities are translated at the exchange rate at the end of the year, and
     its statement of operations is translated at the average exchange rates
     during the period for which its revenues and expenses are included in the
     consolidated statement of operations. Gains or losses resulting from
     foreign currency translation are accumulated as a separate component of
     shareholders' equity. All significant intercompany balances and
     transactions are eliminated in consolidation.

     CASH EQUIVALENTS consist of money market accounts with commercial banks.

     INVENTORIES are stated at the lower of cost or market. Cost has been
     determined by using the first-in, first-out and specific identification
     methods. Inventories at December 31, 1996 and 1995, consisted of the
     following:

                                    1996             1995

        Raw materials             $148,000         $173,000
        Work in process            200,000          354,000
        Finished goods             243,000          426,000
                                  --------         --------

        Total                     $591,000         $953,000
                                  ========         ========


     PROPERTY AND EQUIPMENT is stated at cost, or, in the case of property and
     equipment acquired in transactions accounted for by the purchase method, at
     the estimated fair market value at the date of the acquisition (which is
     then considered to be the Company's cost). Depreciation of equipment is
     computed using the straight-line method over estimated useful lives of
     three to ten years. Leasehold improvements are amortized over the shorter
     of five years or the remaining lease term. Assets acquired under capital
     leases are being amortized over estimated useful lives of four to ten
     years.

                                       24
<PAGE>

     Property and equipment at December 31, 1996 and 1995, consisted of the
     following:

                                                      1996             1995

        Furniture and office equipment            $   369,000       $  346,000
        Laboratory and manufacturing
          equipment                                 2,495,000          707,000
        Automobile                                     15,000           15,000
        Leasehold improvements                        766,000          806,000
                                                  -----------       ----------

            Property and equipment, at cost         3,645,000        1,874,000

        Accumulated depreciation and
          amortization                             (2,318,000)        (782,000)
                                                  -----------      -----------

            Property and equipment, net           $ 1,327,000       $1,092,000
                                                  ===========       ==========

     During 1996 certain equipment under capital lease was purchased, and the
     cost and accumulated amortization of that equipment was reclassified to
     property and equipment.

     TECHNOLOGY - Technology for developed products and custom assays, which was
     acquired in the 1994 business combinations described in Note 3, is being
     amortized over estimated useful lives of seven to ten years. Accumulated
     amortization of technology for developed products and custom assays was
     $1,682,000 as of December 31, 1996 and $973,000 as of December 31, 1995.
     The Company periodically reviews net cash flows from sales of products and
     projections of net cash flows from sales of products on an undiscounted
     basis to assess recovery of intangible assets.

     STOCK OPTIONS - The Company applies the intrinsic value based method
     described in Accounting Principles Board Opinion No. 25, "Accounting for
     Stock Issued to Employees", in accounting for its stock incentive plan.

     REVENUE RECOGNITION - The Company recognizes product sales upon shipment of
     the product to the customer.

     INCOME TAXES - Deferred income taxes, reflecting the net tax effects of
     temporary differences between the carrying amount of assets and liabilities
     recognized for financial reporting purposes and the amounts recognized for
     income tax purposes, are based on tax laws currently enacted. A valuation
     allowance is established when necessary to reduce deferred tax assets to
     the amount expected to be realized.

     NET LOSS PER SHARE - Net loss per share is computed based upon the average
     number of common shares outstanding and, if dilutive, the incremental
     shares issuable upon the assumed exercise of stock options or warrants and
     the assumed conversion of convertible debentures and preferred stock.

                                       25
<PAGE>

     USE OF 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 sales and expenses
     during the reporting period. Actual results could differ from those
     estimates.

     FAIR VALUE OF FINANCIAL INSTRUMENTS - The carrying amount reported in the
     balance sheet for cash and cash equivalents, accounts receivable, notes
     payable, customer deposits and accrued liabilities approximates fair value
     due to the short-term nature of the accounts. The carrying amount reported
     in the balance sheet for secured convertible term notes and 8% convertible
     subordinated debentures approximates fair value because the terms of the
     notes and debentures were determined and the notes and debentures were sold
     shortly before the dates of the balance sheets in which they appear.


3.   BUSINESS COMBINATIONS

     On September 7, 1994, the Company acquired Bioxytech S.A., a French
     company, and International BioClinical, Inc. ("IBC"), an Oregon
     corporation. The name of Bioxytech S.A. was subsequently changed to OXIS
     International S.A. ("OXIS S.A."). OXIS S.A. was acquired through an
     exchange of shares that resulted in the Company owning in excess of 99% of
     the outstanding stock of OXIS S.A., which thus became a subsidiary of the
     Company. IBC was acquired through a merger with and into the Company, which
     (1) terminated the separate existence of IBC by merging it into the
     Company, and (2) resulted in the conversion of the outstanding stock of IBC
     into stock of the Company. Two of the Company's directors were also
     directors and major shareholders of IBC.

     In exchange for the Bioxytech S.A. shares, the Company issued a total of
     2,341,599 shares of the Company's common stock and 40,000 shares of the
     Company's non-voting preferred stock (which have subsequently been
     converted into 40,000 shares of common stock). In addition, the Bioxytech
     S.A. shareholders may receive up to 107,670 shares of the Company's capital
     stock if they meet certain participation levels in a contemplated private
     placement of equity securities of the Company.

     The merger of IBC with and into the Company resulted in the conversion of
     IBC's common stock into 1,998,493 shares of the Company's common stock.

     The acquisitions of OXIS S.A. and IBC have been accounted for as purchases
     and, accordingly, the acquired assets and liabilities were recorded at
     their estimated fair market values as of the date of acquisition. The
     aggregate purchase price of $9,811,000 (4,380,092 shares issued times the
     average per share closing price of the Company's common stock for the five
     days ended September 8, 1994, discounted 30% for certain trading
     restrictions and less costs of $274,000 directly attributable to issuance
     of stock in connection with the acquisitions) plus direct costs for the
     acquisitions of $881,000 have been allocated to the

                                       26
<PAGE>

     assets and liabilities acquired. The Company also issued options to
     purchase 214,700 shares of the Company's common stock in connection with
     the acquisitions. No value was assigned to these options because the
     exercise price of the options was in excess of the market value of the
     common stock.

     The total cost of the acquisitions of Bioxytech and IBC has been allocated
     to the assets acquired and liabilities assumed as follows:
<TABLE>
<CAPTION>
                                                        OXIS S.A.              IBC            Total
                                                        ---------              ---            -----
<S>                                                    <C>               <C>             <C>
         Cash                                          $   150,000       $   123,000     $   273,000
         Other assets                                      369,000           611,000         980,000
         Property, equipment and capitalized
           leases                                        2,434,000           294,000       2,728,000
         Technology for developed products and
           custom assay development capabilities         1,503,000         3,995,000       5,498,000
         Technology for in-process products              3,368,000           307,000       3,675,000

         Less liabilities assumed                       (2,011,000)         (451,000)     (2,462,000)
                                                       -----------       -----------     -----------

         Total acquisition cost                        $ 5,813,000       $ 4,879,000     $10,692,000
                                                       ===========       ===========     ===========
</TABLE>


     The Company's consolidated results of operations include the operating
     results of the acquired companies since the acquisitions.

     Approximately $3,675,000 ($.58 per share) of the total purchase price
     represented technology relating to research and development projects that
     were in process by the acquired companies that had no alternative future
     use other than the completion of these projects. In accordance with
     generally accepted accounting principles, these costs have been charged to
     operations immediately upon completion of the acquisitions.

     The following table summarizes the unaudited pro forma combined results of
     operations for the year ended December 31, 1994 as if the acquisitions had
     occurred at the beginning of the year:

                                                                 1994

              Total revenues                                 $ 5,809,000

              Net loss                                       $(4,742,000)

              Net loss per share (based on 9,322,762
                shares outstanding)                          $      (.51)

                                       27
<PAGE>

     The above table includes, on an unaudited pro forma basis, the Company's
     financial information for the year ended December 31, 1994, combined with
     the financial information of OXIS S.A. and IBC for the same twelve-month
     period. The above table excludes the one-time $3,675,000 charge for
     purchased in-process technology arising from the acquisitions.

     The unaudited pro forma combined results of operations are presented for
     illustrative purposes only and are not necessarily indicative of the
     operating results that would have occurred had the acquisitions been
     consummated at the beginning of the period presented, nor are they
     necessarily indicative of future operating results.

     On July 19, 1995, the Company consummated the acquisition of Therox
     Pharmaceuticals, Inc. ("Therox") pursuant to a transaction wherein Therox
     was merged with and into a wholly-owned subsidiary of the Company. Therox
     was a Philadelphia-based start-up company focused on the development of
     therapeutics to treat diseases associated with damage from free radicals.
     The Company issued 1,440,736 shares of its common stock to Therox
     stockholders in exchange for all of the Therox capital stock. In addition,
     the acquisition agreement provides for payment of up to $2,000,000 by the
     Company to the Therox stockholders based on the successful
     commercialization of the Therox technologies.

     The acquisition of Therox has been recorded as a purchase and, accordingly,
     the acquired assets and liabilities were recorded at their estimated fair
     values as of the date of acquisition. The aggregate purchase price of
     $3,353,000 (1,440,736 shares issued times the average per share closing
     price of the Company's common stock for the five days ended July 20, 1995,
     discounted 30% for certain trading restrictions) has been allocated to the
     assets and liabilities acquired.

     The cost of the acquisition of Therox has been allocated to the assets
     acquired and liabilities assumed as follows:

                  Cash                                       $  143,000
                  Equipment                                      16,000
                  Technology for in-process products          3,329,000
                  Other assets                                   23,000
                  Less liabilities assumed                     (158,000)
                                                             ----------
                                    Acquisition cost         $3,353,000
                                                             ==========

     The Company's consolidated results of operations include the operating
     results of the acquired company since the acquisition.

     Approximately $3,329,000 of the purchase price represented technology
     related to research and development projects that are in process and that
     has no alternative future use other than the completion of these projects.
     Accordingly, these costs have been charged to operations immediately upon
     completion of the acquisition.

                                       28
<PAGE>

     The following table presents the unaudited pro forma combined results of
     operations for the years ended December 31, 1995 and 1994 as if the
     acquisition had occurred at the beginning of the periods presented:

                                                    1995              1994
                                                    ----              ----

          Total revenues                          $ 5,136,000     $ 3,470,000

          Net loss                                $(5,990,000)    $(6,088,000)

          Net loss per share (based
          on 12,124,423 shares outstanding)       $      (.49)    $      (.50)

     The above table includes, on an unaudited pro forma basis, the Company's
     financial information for the years ended December 31, 1995 and 1994,
     combined with the financial information of Therox for the same periods. The
     above table excludes the one-time $3,329,000 charge for purchased
     in-process technology arising from the 1995 acquisition, but includes
     non-recurring costs of $3,675,000 for purchased in-process technology from
     the Company's September 1994 business acquisitions.

     The unaudited pro forma combined results of operations are presented for
     illustrative purposes only and are not necessarily indicative of the
     operating results that would have occurred had the acquisition been
     consummated at the beginning of the periods presented, nor are they
     necessarily indicative of future operating results.

     Simultaneously with the Therox acquisition, a Series B Preferred Stock
     Purchase Agreement was entered into between the Company and two venture
     capital firms (S.R. One, Limited and Brantley Venture Partners II, L.P.)
     which were major stockholders of Therox. Pursuant to this agreement, the
     Company sold 642,583 shares of its Series B Preferred Stock for an
     aggregate price of $1,500,000.

     Costs of approximately $325,000 directly attributable to the issuance of
     the Series B Preferred Stock and the common stock issued in the Therox
     acquisition have been recorded as a reduction in the proceeds from the
     issuance of the shares.

                                       29
<PAGE>

4.   NOTES PAYABLE

     Notes payable at December 31, 1996 and 1995 consisted of the following:
<TABLE>
<CAPTION>
                                                                                 1996               1995
<S>                                                                           <C>               <C>

         Secured convertible term notes                                       $1,000,000        $       --

         8%  notes  payable  to  certain  shareholders  who are  former
         Bioxytech  S.A.  shareholders,  due February 5, 1996,  secured
         by assets  relating  to  certain of the  Company's  diagnostic
         products                                                                     --           766,000

         Note payable to Sanofi S.A., due May 4, 1996, interest at prime
         plus 2% (10-1/2% as of December 31, 1995), secured by  all of
         the Company's assets                                                         --           600,000

         Liability, without interest, under inventory purchase agreement,
         due May 1997 or earlier if 75% of the related inventory
         is sold                                                                 200,000           250,000

         Other                                                                    21,000                --
                                                                              ----------        ----------
                                                                              $1,221,000        $1,616,000
                                                                              ==========        ==========
</TABLE>

     In October 1996, the Company sold $1,000,000 of secured convertible term
     notes with warrants to two of the Company's current shareholders. The notes
     bear interest at 10% per annum, are due in June 1997, and are initially
     convertible into common stock at a price of $1.4125 per share. The warrants
     issued entitle the holders to purchase up to 300,000 shares of common
     stock, initially at an exercise price of $1.58 per share. The conversion
     rate of the convertible term notes and the exercise price of the warrants
     are subject to change under certain circumstances. The due date of the
     notes can be extended at the option of the Company for 120 days upon
     issuance of additional warrants to the holders. The convertible term notes
     are secured by assets relating to the Company's clinical diagnostic
     products.

     As described in Note 7, in May 1996, the 8% notes payable were canceled in
     exchange for issuance of Series C
     Preferred Stock.


5.   CAPITALIZED LEASES

     The Company's French subsidiary leases certain equipment, furniture and
     fixtures under capital leases. As of December 31, 1996, remaining minimum
     lease payments on these capital leases were approximately $48,000, all due
     in 1997.

                                       30
<PAGE>

     Leased assets, which consist principally of laboratory and office
     equipment, are reported in the December 31, 1996, balance sheet at $622,000
     less accumulated amortization of $313,000.


6.   8% CONVERTIBLE SUBORDINATED DEBENTURES

     In November and December 1995, the Company completed a private placement
     pursuant to which $1,255,000 of its 8% Convertible Subordinated Debentures
     were issued. The debentures were unsecured and were subordinated to other
     obligations of the Company up to an aggregate of $3,000,000.

     The debentures were convertible into shares of the Company's common stock
     at the option of the holders. Any time after six months following closing
     of the private placement, the Company had the right to require conversion
     of the debentures. In June 1996, $1,255,000 principal plus accrued interest
     of $57,000 on the Company's 8% Convertible Subordinated Debentures were
     converted into 1,050,217 shares of common stock.


7.   SHAREHOLDERS' EQUITY

     PREFERRED STOCK - Terms of the preferred stock are to be fixed by the Board
     of Directors at such time as the preferred stock is issued. The 40,000
     shares of Series A Preferred Stock issued during 1994 were nonvoting and
     were converted to common stock on a one share for one share basis during
     1995. The 642,583 shares of Series B Preferred Stock are convertible into
     common stock on a one-for-one basis and have the same voting rights as the
     common stock. The Series B Preferred Stock has certain preferential rights
     with respect to liquidation and dividends.

     During the first six months of 1996, the Company issued 1,125,590 shares of
     its Series C Preferred Stock for net cash proceeds of $1,236,000. In
     addition, in May 1996, the Company issued 648,490 shares of its Series C
     Preferred stock in exchange for the cancellation of $766,000 principal plus
     accrued interest of $78,000 on 8% notes payable to former shareholders of
     the Company's French subsidiary. The shares of Series C Preferred Stock are
     convertible into shares of the Company's common stock at the option of the
     holders at any time. The conversion ratio is based on the average closing
     bid price of the common stock for the fifteen consecutive trading days
     ending on the date immediately preceding the date notice of conversion is
     given, but cannot be less than one nor more than 1.4444 common shares for
     each Series C Preferred share. The conversion ratio may be adjusted under
     certain circumstances, and the Company has the right to automatically
     convert the Series C Preferred Stock into common stock under certain
     circumstances. Each share of Series C Preferred Stock is entitled to the
     number of votes equal to 1.30 divided by the average closing bid price of
     the Company's common stock during the fifteen consecutive trading days
     immediately prior to the date such shares of Series C Preferred Stock were
     purchased.

                                       31
<PAGE>

     In May 1996, the Company issued 2,000 shares of its Series D Preferred
     Stock and warrants to purchase 810,126 shares of common stock for net cash
     proceeds of $1,939,000. The Series D Preferred Stock entitles the holder
     thereof to convert its shares into a number of shares of common stock
     determined by dividing the stated value of the Series D Preferred Stock
     (i.e., $1,000 per share), plus a premium in the amount of 8% per annum of
     the stated value from the date of issuance, by a conversion price equal to
     the lesser of (i) $2.30 and (ii) 75% of the average of the closing bid
     prices for shares of common stock for the five trading days immediately
     prior to conversion, but limited to a maximum of 2,424,884 shares of common
     stock. The holders of Series D Preferred Stock have no voting power, except
     as specifically provided by Delaware General Corporation Law.

     In December 1996, the Company issued 2,200 shares of its Series E Preferred
     Stock and 55,000 shares of common stock for net cash proceeds of $950,000.

     The Series E Preferred Stock entitles the holder thereof, after the earlier
     of (i) April 9, 1997 or (ii) 30 days following the closing of a public
     offering by the Company, to receive in exchange for its shares of Series E
     Preferred Stock, a number of shares of common stock determined by dividing
     the stated value of the Series E Preferred Stock (i.e., $500 per share)
     ("Series E Stated Value"), by a conversion price equal to the lesser of (i)
     $2.00 and (ii) 75% of the average of the closing bid prices for shares of
     common stock for the five consecutive trading days ending one trading day
     prior to conversion, subject to adjustment upon the occurrence of certain
     dilutive events. However, the maximum number of shares of common stock
     issuable upon conversion of the Series E Preferred Stock plus the number of
     shares of common stock issued in connection with the sale of the Series E
     Preferred Stock is 2,733,799 shares (subject to adjustment upon the
     occurrence of certain dilutive events).

     Pursuant to the terms of the Series E Preferred Stock, each holder thereof
     can only acquire shares of common stock upon conversion of the Series E
     Preferred Stock to the extent that the number of shares of common stock
     thereby issuable, together with a number of shares of common stock then
     held by such holder and its affiliates (not including shares of common
     stock underlying converted shares of Series E Preferred Stock) would not
     exceed 4.9% of the then outstanding common stock.

     The Series E Preferred Stock has no voting power except as provided under
     the Delaware General Corporation Law.

     STOCK WARRANTS - In prior years, the Company issued warrants to purchase
     shares of common stock to certain officers and key employees (none of whom
     any longer hold a position with the Company) and to former directors. These
     warrants are exercisable at $2.875 per share and expire through 1999. At
     December 31, 1996 and 1995, warrants to purchase 1,012,500 shares were
     outstanding and exercisable. No warrants were exercised during 1994, 1995
     or 1996.

     In connection with the issuance of common stock, 8% Convertible
     Subordinated Debentures, and Series B, C and E Preferred Stock, the Company
     has issued to its placement agents

                                       32
<PAGE>

     warrants to purchase 614,573 shares of common stock at prices ranging from
     $1.375 to $3.25 per share. The warrants all remained outstanding and were
     exercisable at December 31, 1996.

     A warrant to purchase 810,126 common shares at $3.09 per share was issued
     to the purchaser of the Company's Series D Preferred Stock. The warrant was
     immediately exercisable and remained outstanding as of December 31, 1996.

     Warrants to purchase 300,000 common shares at $1.58 per share were issued
     to the purchasers of the secured convertible term notes in October 1996.
     The warrants were immediately exercisable and remained outstanding as of
     December 31, 1996.

     STOCK OPTIONS - The Company has a stock incentive plan under which
     2,200,000 shares of the Company's common stock are reserved for issuance.
     The plan permits granting stock options to acquire shares of the Company's
     common stock, awarding stock bonuses of the Company's common stock, and
     granting stock appreciation rights. Options granted pursuant to the Plan
     have a maximum term of ten years; vesting is determined by the Company's
     Compensation Committee. Options granted through 1996 have had vesting
     requirements of up to three years. Options granted and outstanding under
     the plan are summarized as follows:

<TABLE>
<CAPTION>
                                           1996                     1995                     1994
                                           ----                     ----                     ----
                                              Weighted                 Weighted                 Weighted
                                               average                  average                  average
                                              exercise                 exercise                 exercise
                                    Shares     price          Shares    price          Shares    price
<S>                              <C>           <C>            <C>       <C>            <C>       <C>
         Outstanding at
           beginning of year        382,900    $2.93           90,000    $3.44              --       --

         Granted                  1,090,000    $1.57          317,900    $2.73          90,000    $3.44

         Exercised                   (3,333)   $1.69               --    --                 --       --

         Forfeitures                (49,067)   $2.17          (25,000)   $2.25              --       --
                                  ---------    -----          -------    -----          ------    -----
         Outstanding at end
           of year                1,420,500    $1.92          382,900    $2.93          90,000    $3.44
                                  =========                   =======                   ======

         Exercisable at end
           of year                  619,331    $2.29          219,294    $3.18          75,000    $3.50
                                    =======                   =======                   ======
</TABLE>

     The number of shares under option, weighted average exercise price and
     weighted average remaining contractual life of all options outstanding as
     of December 31, 1996, by range of exercise price was as follows:

                                       33
<PAGE>

                                               Weighted         Weighted
               Range of                         average          average
               exercise                        exercise         remaining
                 price          Shares           price            life

           $1.31 - $1.69       1,050,000        $1.55          9.5 years
           $2.25 - $2.28         125,500        $2.26          7.7 years
           $3.00 - $3.50         245,000        $3.31          8.1 years

     The number of shares under option and weighted average exercise price of
     options exercisable as of December 31, 1996, by range of exercise price was
     as follows:

                                                          Weighted
                           Range of                        average
                           exercise                       exercise
                             price           Shares        price

                        $1.31 - $1.69        293,999       $1.48
                        $2.25 - $2.28         93,666       $2.26
                        $3.00 - $3.50        231,666       $3.33

     The Company applies Accounting Principles Board Opinion No. 25, "Accounting
     for Stock Issued to Employees", in accounting for its stock incentive plan.
     Accordingly, since the exercise price of all options issued under the plan
     has been less than or equal to the fair market value of the stock at the
     date of issue of the options, no compensation cost has been recognized for
     options granted under the plan. Had compensation cost for options granted
     under the plan been determined based on the fair value at the grant dates
     in a manner consistent with the method determined under Statement of
     Financial Accounting Standards No. 123, "Accounting for Stock-Based
     Compensation", the net loss and net loss per share for 1996 and 1995 would
     have been increased to the pro forma amounts indicated below:

                                          1996              1995
           Net loss:
                As reported          $(5,992,000)       $(8,892,000)
                Pro forma            $(6,389,000)       $(9,210,000)


           Net loss per share:
                As reported          $      (.47)       $      (.82)
                Pro forma            $      (.50)       $      (.85)

     For the purpose of computing the pro forma expense, the fair value of each
     option is estimated on the grant date using the Black-Scholes option
     pricing model with the following assumptions used for grants in both 1996
     and 1995: a dividend yield of zero percent;

                                       34
<PAGE>

     expected volatility of 75%; risk-free interest rate of 6%; and expected
     lives of three years. The weighted average fair value as of the option date
     was computed to be $.83 per share for options issued during 1996 and $1.53
     per share for options issued during 1995.


8.   INCOME TAXES

     INCOME TAX PROVISION - Income tax provisions were not necessary in 1996,
     1995 and 1994 due to net losses.

     DEFERRED TAXES - Deferred taxes reflect the net tax effects of (a)
     temporary differences between the carrying amounts of assets and
     liabilities for financial reporting purposes and the amounts used for
     income tax purposes, and (b) operating losses and tax credit carryforwards.

     The tax effects of significant items comprising the Company's deferred
     taxes as of December 31 were as follows:
<TABLE>
<CAPTION>

     United States taxes:                                                         1996            1995
<S>                                                                            <C>               <C>

               Deferred tax assets:
                  Federal net operating loss carryforward
                    and capitalized research and development
                    expenses                                                   $5,194,000        $4,829,000
                  Federal R&D tax credit carryforward                             522,000           495,000
                  State net operating loss carryforward and capitalized
                    research and development expenses                             211,000           125,000
              Deferred tax liabilities - book basis in excess
                of noncurrent assets acquired in the
                acquisition of IBC                                             (1,102,000)       (1,338,000)
                                                                               -----------       ----------

              Net deferred tax assets                                           4,825,000         4,111,000

              Valuation allowance                                              (4,825,000)       (4,111,000)
                                                                              -----------        ----------

              Net deferred taxes                                              $        --        $       --
                                                                              ===========        ==========

     French taxes:                                                                 1996                1995
              Deferred tax assets:
                  Net operating loss carryforward                              $5,426,000        $5,721,000
                  Impact of temporary differences                                (211,000)         (225,000)
                                                                             ------------       -----------

              Total                                                             5,215,000         5,496,000

              Valuation allowance                                              (5,215,000)       (5,496,000)
                                                                             ------------        ----------

              Net deferred taxes                                             $         --       $        --
                                                                             ============       ===========
</TABLE>

     Temporary differences for French taxes result primarily from leases treated
     as operating leases for French tax reporting and as capital leases in the
     consolidated financial statements.

                                       35
<PAGE>

     The tax benefits ($5,136,000) of the net operating losses of $15,410,000
     which existed at the date of acquisition (September 7, 1994) of the French
     subsidiary will be recorded as a reduction of the net unamortized balance
     of property, equipment, capitalized lease assets and intangible assets of
     $2,421,000 when and if realized, and the remaining benefit will be recorded
     as a reduction of income tax expense.

     Statement of Financial Accounting Standards No. 109 requires that the tax
     benefit of net operating losses, temporary differences and credit
     carryforwards be recorded as an asset to the extent that management
     assesses that realization is "more likely than not." Realization of the
     future tax benefits is dependent on the Company's ability to generate
     sufficient taxable income within the carryforward period. Because of the
     Company's recent history of operating losses, management has provided a
     valuation allowance for its net deferred tax assets.


     TAX CARRYFORWARDS - At December 31, 1996, the Company had net operating
     loss carryforwards of approximately $3,995,000 to reduce United States
     federal taxable income in future years, and research and development tax
     credit carryforwards of $522,000 to reduce United States federal taxes in
     future years. In addition, the Company's French subsidiary had operating
     loss carryforwards of $14,801,000 (76,812,000 French francs) to reduce
     French taxable income in future years. These carryforwards expire as
     follows:

                                 United States        R&D tax         French
                                 net operating       credit      operating loss
       Year of expiration    loss carryforward     carryforward   carryforward

            1997                    $2,670,000                     $ 1,200,000
            1998                       208,000                       1,240,000
            1999                       111,000                         220,000
            2000                            --                           6,000
            2001                        23,000      $123,000                --
            2002-2011                  983,000       399,000                --
            No expiration                   --            --        12,135,000
                                    ----------      --------       -----------

                                    $3,995,000      $522,000       $14,801,000
                                    ==========      ========       ===========

     Utilization of the United States tax carryforwards is subject to certain
     restrictions in the event of a significant change (as defined in Internal
     Revenue Service guidelines) in ownership of the Company.

                                       36
<PAGE>

9.   MAJOR CUSTOMERS AND CONCENTRATION OF CREDIT RISK

     One domestic customer and one foreign licensee have each accounted for
     significant portions of the Company's revenues during the past three years.
     The percentages of total revenues derived from sales to, and royalties
     from, these major customers are as follows:

                                      1996     1995    1994

              Domestic customer       --       18%     35%
              Spanish licensee        39%      16%     18%

     The Company's domestic customer to whom sales of bovine superoxide
     dismutase ("bSOD") accounted for 18% and 35% of the Company's revenues in
     1995 and 1994, respectively, announced in the fourth quarter of 1995 that
     the clinical trial in which it was using bSOD purchased from the Company
     failed to show the desired results, and sales of bSOD to this customer have
     ceased.

     The Company limits its foreign exchange risk by buying and selling bulk
     bSOD in a single currency, the Dutch guilder. The Company maintains a bank
     account in The Netherlands for receipt and disbursement of Dutch guilders
     and had the equivalent of $1,000 and $81,000 in that account at December
     31, 1996 and 1995, respectively. Foreign currency transaction gains and
     losses were not material.


10.  GEOGRAPHIC AREA INFORMATION

     The Company operates in a single industry segment: the development,
     manufacture and marketing of therapeutic and diagnostic products. The
     Company's foreign operations consist of research and development and
     manufacturing facilities and certain marketing activities conducted by the
     Company's subsidiary in France. Sales and costs associated with bSOD
     manufactured in the Netherlands are considered to be United States
     operations, since the contract to manufacture bSOD and all related sales
     activities are administered in the United States. Similarly, royalties from
     foreign customers that relate to bSOD-based products are considered to be
     export sales from the United States, since the product was developed in the
     United States.

     Sales, operating income and identifiable assets, classified by the major
     geographic areas in which the Company operates, are as follows:

                                       37
<PAGE>

<TABLE>
<CAPTION>
                                                       1996           1995            1994
<S>                                                 <C>             <C>             <C>
         Revenues from unaffiliated customers:
              United States                         $ 1,303,000     $ 2,686,000     $ 2,053,000
              Export sales from the U.S.              3,185,000       1,878,000       1,257,000
              France                                    379,000         572,000         160,000
                                                    -----------     -----------     -----------
                Total                               $ 4,867,000     $ 5,136,000     $ 3,470,000
                                                    ===========     ===========     ===========

         Operating loss:
              United States                         $(2,874,000)    $(5,653,000)    $(1,410,000)
              France                                 (3,017,000)     (3,110,000)     (4,191,000)
                                                    -----------     -----------     -----------
                Total                               $(5,891,000)    $(8,763,000)    $(5,601,000)
                                                    ===========     ===========     ===========

         Identifiable assets:
              United States                         $ 5,110,000     $ 7,824,000     $ 9,587,000
              France                                  2,942,000       3,866,000       2,570,000
              Eliminations                              (55,000)     (1,820,000)       (963,000)
                                                    -----------      ----------     -----------
                Total                               $ 7,997,000     $ 9,870,000     $11,194,000
                                                    ===========     ===========     ===========

</TABLE>

11.  LEASE COMMITMENTS

     The Company leases its facilities in Oregon under an operating lease that
     expires in 1997, and leases its facilities in France under an operating
     lease that expires in 1998. Future lease payments are scheduled as follows:

                           1997                $313,000
                           1998                 217,000

     Rental expense included in the accompanying statements of operations was
     $519,000 in 1996, $492,000 in 1995 and $193,000 in 1994.


12.  401(K) SAVINGS PLAN

     The Company has a 401(k) saving plan (the "Plan") which covers all United
     States employees who meet certain minimum age and service requirements. The
     Company's matching contribution to the Plan for each year is 100% of the
     first $1,000 of each employee's salary deferral and 33-1/3% of the next
     $3,000 of salary deferral. The Company's contributions have not been
     material.

                                       38
<PAGE>

     INDEPENDENT AUDITORS' REPORT

     To the Board of Directors and Shareholders of
     OXIS International, Inc.:

     We have audited the accompanying consolidated balance sheets of OXIS
     International, Inc. and subsidiaries as of December 31, 1996 and 1995, and
     the related consolidated statements of operations, shareholders' equity and
     cash flows for each of the three years in the period ended December 31,
     1996. These financial statements are the responsibility of the management
     of OXIS International, Inc. Our responsibility is to express an opinion on
     these financial statements based on our audits.

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

     In our opinion, such consolidated financial statements present fairly, in
     all material respects, the financial position of OXIS International, Inc.
     and subsidiaries at December 31, 1996 and 1995, and the results of their
     operations and their cash flows for each of the three years in the period
     ended December 31, 1996, in conformity with generally accepted accounting
     principles.

     The accompanying financial statements for the year ended December 31, 1996,
     have been prepared assuming that the Company will continue as a going
     concern. The Company is engaged in developing, manufacturing and marketing
     selected therapeutic and diagnostic products. As discussed in Note 1 to the
     financial statements, the Company has incurred losses in each of the last
     three years, and at December 31, 1996, the Company's
     current liabilities exceeded its current assets by $1,405,000, raising
     substantial doubt about its ability to continue as a going concern.
     Management's plans concerning these matters are also described in Note 1.
     The financial statements do not include any adjustments that might result
     from the outcome of this uncertainty.


     DELOITTE & TOUCHE LLP

     March 7, 1997
     Portland, Oregon

                                       39
<PAGE>

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

     Not applicable.

                                    PART III

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.

     The information required by this item is incorporated herein by reference
     from the material contained under the caption "Proposal No. 1-Election of
     Directors" in the Company's definitive proxy statement to be filed with the
     Commission pursuant to Regulation 14A.


ITEM 11.  EXECUTIVE COMPENSATION

     The information required under this item is incorporated herein by
     reference from the material contained under the caption "Compensation of
     Executive Officers" in the Company's definitive proxy statement to be filed
     with the Commission pursuant to Regulation 14A.


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

     The information required under this item is incorporated herein by
     reference from the material contained under the caption "Proposal No.
     1-Election of Directors" in the Company's definitive proxy statement to be
     filed with the Commission pursuant to Regulation 14A.


ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

     The information required under this item is incorporated herein by
     reference from the material contained under the caption "Proposal No.
     1-Election of Directors" in the Company's definitive proxy statement to be
     filed with the Commission pursuant to Regulation 14A.

                                       40
<PAGE>

                                     PART IV

ITEM 14.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.

(a)  The following documents are filed as part of this report:

     1.  FINANCIAL STATEMENTS

              See pages 16 to 39.

     2.  FINANCIAL STATEMENT SCHEDULES

              Schedules are omitted because they are not applicable or the
     required information is included in the financial statements and notes
     thereto.

     3.  EXHIBITS

              See Exhibit Index - page 43.

(b)  Reports on Form 8-K.

                                Two reports on Form 8-K were filed by the
              Company during the fourth quarter of 1996. The first, filed on
              November 4, 1996, reported the issuance of $1,000,000 in secured
              convertible term notes and the engagement of an investment banker
              to act as underwriter for a public offering of common stock on a
              French stock market. The second, filed December 30, 1996, reported
              a private placement of Series E Preferred Stock and common stock
              for an aggregate of $1,100,000.

(c)  Exhibits specified by item 601 of Regulation S-K.

         See Exhibit Index - page 43.

(d) Financial statement schedules required by Regulation S-K are omitted because
they are not applicable or the required information is included in the financial
statements and notes hereto.

                                       41
<PAGE>

                                   SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.

Dated:  March 25, 1997


                                  OXIS INTERNATIONAL, INC.
                                  Registrant

                                  By:  /s/ Anna D. Barker
                                       ---------------------------------------
                                       Anna D. Barker
                                       President and Chief Executive Officer
                                         (Principal Executive Officer)


                                       /s/ Jon S. Pitcher
                                       ---------------------------------------
                                       Jon S. Pitcher
                                       Chief Financial Officer
                                         (Principal Financial and
                                          Accounting Officer)


Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following directors on behalf of the Registrant.



/s/ Anna D. Barker       March 25, 1997   /s/ Timothy G. Biro     March 25, 1997
---------------------------------------   --------------------------------------
Anna D. Barker           Date             Timothy G. Biro         Date



/s/ Stuart S. Lang       March 25, 1997   /s/ Gerald D. Mayer     March 25, 1997
---------------------------------------   --------------------------------------
Stuart S. Lang.          Date             Gerald D. Mayer         Date



/s/ James D. McCamant    March 25, 1997   /s/ David Needham       March 25, 1997
---------------------------------------   --------------------------------------
James D. McCamant        Date             David Needham           Date



/s/ Ray R. Rogers        March 25, 1997   /s/ A.R. Sitaraman      March 25, 1997
---------------------------------------   --------------------------------------
Ray R. Rogers            Date             A.R. Sitaraman          Date


                                       42
<PAGE>

                                  EXHIBIT INDEX
<TABLE>
<CAPTION>

 EXHIBIT                                                                              PAGE
 NUMBER                  DESCRIPTION OF DOCUMENT NUMBER
<S>  <C>     <C>                                                                      <C>

2    (a)     Agreement and Plan of Reorganization and Merger between
             OXIS International, Inc., OXIS Acquisition Corporation
             and Therox Pharmaceuticals, Inc. Dated July 18, 1995                      (1)

2    (b)     Amendment No. 1 to Agreement and Plan for Reorganization
             and Merger between OXIS International, Inc., OXIS Acquisition
             Corporation and Therox Pharmaceuticals, Inc.                              (2)

3    (a)     Second Restated Certificate of Incorporation as filed
             September 10, 1996                                                         45

3    (b)     Certificate of Designations, Preferences, and Rights of Series E
             Preferred Stock of the Company                                            (3)

3    (c)     Bylaws of the Company as amended on June 15, 1994                         (4)

4    (a)     Securities Purchase Agreement, Registration Rights Agreement
             and Security Agreement                                                    (5)

10   (a)     1987 Stock Purchase Warrants                                              (6)

10   (b)     1988 Stock Purchase Warrants                                              (7)

10   (c)     Lease agreement between Bioxytech S.A. and Sofibus                        (8)

10   (d)     OXIS International, Inc. Series B Preferred Stock Purchase Agreement
             dated July 18, 1995                                                       (9)

10   (e)     Factoring (security) Agreement dated September 6, 1996 between
             Silicon Valley Financial Services and OXIS International, Inc.             77

21   (a)     Subsidiaries of OXIS International, Inc.                                   91

23   (a)     Independent Auditors' Consent                                              92

27   (a)     Financial data schedule                                                    93

</TABLE>

                                       43
<PAGE>

(1)  Incorporated by reference to the Company's Current Report on Form 8-K dated
     July 19, 1995.

(2)  Incorporated by reference to the Company's Annual Report on Form 10-K for
     1995 - Exhibit 2 (b).

(3)  Incorporated by reference to the Company's Form 8-K Current Report dated
     December 30, 1996.

(4)  Incorporated by reference to the Company's Quarterly Report on Form 10-Q
     for the quarter ended June 30, 1994.

(5)  Incorporated by reference to the Company's Form 8-K Current Report dated
     November 4, 1996.

(6)  Incorporated by reference to the Company's Annual Report on Form 10-K for
     1992 - Exhibit 10(b).

(7)  Incorporated by reference to the Company's Annual Report on Form 10-K for
     1992 - Exhibit 10(c).

(8)  Incorporated by reference to the Company's Annual Report on Form 10-K for
     1994.

(9)  Incorporated by reference to the Company's Quarterly Report on Form 10-Q
     for the quarter ended September 30, 1995.

                                       44