10-K

                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549
                                    Form 10-K

Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934 for the fiscal year ended December 31, 1996

                         Commission File Number 0-15313

                          BIO-TECHNOLOGY GENERAL CORP.
             (Exact name of Registrant as specified in its charter)

Delaware                                                              13-3033811
(State or other jurisdiction of                                 (I.R.S. Employer
incorporation or organization)                            Identification Number)

70 Wood Avenue South, Iselin, New Jersey                                08830
(Address of principal executive offices)                           (Zip Code)

       Registrant's telephone number, including area code: (908) 632-8800

           Securities registered pursuant to Section 12(b) of the Act:
                          Common Stock, $.01 par value
                                (Title of class)

           Securities registered pursuant to Section 12(g) of the Act:
         7 1/2% Convertible Senior Subordinated Notes Due April 15, 1997
             11% Convertible Senior Subordinated Debentures Due 2006
     Warrants to Purchase Shares of Common Stock, par value $.01 per share,
                     at a purchase price of $5.49 per Share
                              (Title of each class)

Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
                          YES  X           NO

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]

Aggregate market value of the Registrant's Common Stock held by non-affiliates
at March 20, 1997 (based on the closing sale price for such shares as reported
by the National Association of Securities Dealers Automated Quotation System):
$630,373,411. Common Stock outstanding as of March 20, 1997: 46,645,885 shares.

                   DOCUMENTS INCORPORATED BY REFERENCE:

Portions of the Registrant's definitive proxy statement for its 1997 annual
meeting of stockholders are incorporated by reference into Part III of this
report.


                                     PART I
ITEM 1. BUSINESS

GENERAL OVERVIEW

      Bio-Technology General Corp. ("BTG" or the "Company"), founded in 1980, is
principally engaged in the research, development, manufacture and marketing of
products for human health care. The Company is focusing primarily on the
development of therapeutic products that address serious conditions such as
endocrine and metabolic disorders, cardio/pulmonary diseases and skin disorders,
as well as products used in ophthalmic surgery.

      The Company's marketed products include Bio-Tropin(TM) (human growth
hormone), which is currently being marketed in several countries in Europe,
Latin America, Asia and the Far East for the treatment of growth hormone
deficiency in children; Oxandrin(R) (oxandrolone), which is primarily marketed
in the United States, for the treatment of weight loss due to general trauma,
chronic infection or extensive surgery and for the treatment of weight loss due
to unknown pathophysiology; BioLon(TM) (sodium hyaluronate), which is currently
marketed in several countries in North and Latin America, Europe, Asia, Africa
and the Far East for the protection of the corneal endothelium during
intraocular surgery; Delatestryl(R) (injectable testosterone), which is
currently marketed in the United States for hypogonadism and delayed puberty;
and Silkis(R), a vitamin D derivative, which is currently approved in two
European countries for the topical treatment of recalcitrant psoriasis. During
1996 the Company expanded its sales and marketing force in the United States,
initially established in 1995, to promote the distribution of Oxandrin and other
BTG products in the United States.

      The Company's principal products in registration, advanced stages of
development and clinical testing include Oxandrin for the treatment of Turner
syndrome in girls and constitutional delay of growth and puberty in boys;
Androtest-SL(R) (sublingual testosterone) for hypogonadism; Bio-Hep-B(TM), a
third generation vaccine against hepatitis B virus; a higher dose formulation of
oxandrolone for AIDS cachexia; OxSODrol(TM) (human superoxide dismutase) for the
treatment of bronchopulmonary dysplasia in premature infants; and Imagex(TM), a
clot-imaging agent. BTG's current pre-clinical research focus is on
cardiovascular drugs, principally BioFlow(TM), an anti-reocclusion agent, and
Factorex(TM), an anti-coagulant.

      The Company's headquarters are located at 70 Wood Avenue South, Iselin,
New Jersey, where the Company has leased approximately 23,000 square feet of
office space. The Company's overall administration, licensing, human clinical
studies, marketing activities, quality assurance and regulatory affairs are
primarily coordinated at the Company's headquarters. Pre-clinical studies,
research and development activities and manufacturing of the Company's
genetically engineered products are primarily carried out through its
wholly-owned subsidiary in an approximately 80,000 square foot research and Good
Manufacturing Practice ("GMP") designed manufacturing facility located in
Rehovot, Israel. All references herein to BTG or the Company mean Bio-Technology
General Corp. and its wholly-owned subsidiaries, Bio-Technology General (Israel)
Ltd. ("BTG-Israel"), BTG Pharmaceuticals Ltd. and BTG Pharmaceuticals Ltd. N.V.

PRODUCTS AND APPLICATIONS

Products under Commercialization

      Bio-Tropin (human growth hormone)--Growth Hormone Deficiency

      Human growth hormone ("hGH") is naturally secreted by the pituitary gland
and controls many physiological functions that are essential for normal
development and maturation. A deficiency of hGH results in diminished growth
and, in extreme cases, dwarfism. The Company estimates that worldwide sales of
human growth hormone for


                                       -1-


treating hGH deficiency in 1996 were more than $1 billion. Geographic
distribution of worldwide sales of human growth hormone is estimated by the
Company to be approximately 30% in North America and 25% in Europe, with the
balance in Japan and other countries.

      Company scientists first produced hGH by recombinant DNA methods in the
early 1980's. The Company has licensed exclusive marketing rights for
growth-related indications in Japan, Europe, the Pacific Rim, Canada and certain
Latin American countries to certain pharmaceutical partners. Pursuant to these
agreements, the Company manufactures bulk hGH or finished product for all its
partners. BTG-Israel currently distributes hGH in Israel.

      In 1988, the Company granted exclusive distribution rights in Japan to JCR
Pharmaceuticals Co., Ltd. ("JCR") for all hGH-related pharmaceutical
indications. JCR conducted clinical testing of the Company's hGH for
short-stature and filed for Japanese regulatory approval in August 1991, which
approval was received in April 1993, and JCR began marketing hGH in June 1993.
JCR has also completed a clinical trial to test the efficacy of the Company's
hGH in treating Turner syndrome, a condition in which girls born with
non-functioning ovaries do not develop secondary sexual characteristics and are
of shorter stature than normal, and filed for regulatory approval in January
1994. JCR expects to obtain approval to market hGH for Turner syndrome during
1997, although there can be no assurance that such approval will be obtained in
this time frame, or at all. In January 1995, the Company granted JCR exclusive
distribution rights in The People's Republic of China for all hGH-related
pharmaceutical indications. Sales of hGH to JCR in 1996 were approximately $13
million, representing 32% of the Company's total 1996 product sales and 71% of
the Company's total 1996 hGH product sales. In September 1993 JCR received a
letter from attorneys representing Genentech Inc. ("Genentech") and its
licensee, Kabi Pharmacia AV, claiming that JCR's sale of the Company's hGH
infringed certain Genentech patents and patent applications and demanding that
JCR cease the sale of the Company's hGH in Japan. During 1994, JCR and BTG filed
oppositions to two Genentech patent applications in Japan that were first
published for opposition in the first half of 1994. Decisions on these
oppositions are pending. There can be no assurance that BTG and/or JCR will be
successful in their oppositions to these patents. Although the Company does not
believe that it is infringing or has ever infringed any valid Genentech patent
or patent application, there can be no assurance that BTG's hGH will not be
found to infringe certain Genentech patents in Japan. If the Company's hGH is
found to infringe certain Genentech patents in Japan, JCR and/or the Company may
be obligated to pay damages, and would need to obtain a license from Genentech
in order to continue sales of hGH in Japan. There can be no assurance that such
a license will be granted by Genentech, or that JCR will not be required to stop
selling the Company's hGH in Japan. See "--Patents and Proprietary Rights."

      In November 1992, the Company entered into an exclusive distribution
agreement with the Ferring Group for the marketing of the Company's human growth
hormone for the enhancement of growth and stature in growth hormone deficient
children in Europe and the countries comprising the former Soviet Union. Sales
began during the fourth quarter of 1994 and is now approved in 16 countries in
Ferring's territory. Sales of hGH to the Ferring Group in 1996 were
approximately $3.2 million, representing 8% of the Company's total 1996 product
sales and 17% of the Company's total 1996 hGH product sales. See "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations."

      In September 1987, E.I. Du Pont de Nemours and Company, Inc. ("Du Pont"),
the Company's licensee for hGH in the United States at the time, filed for U.S.
Food and Drug Administration ("FDA") approval for the use of the Company's hGH
in the treatment of hGH deficient children. In 1987, Eli Lilly & Co. ("Lilly")
was granted FDA approval and Orphan Drug status for short-stature applications
of its hGH, a product whose molecular structure is identical to the Company's
hGH. As a result, under Orphan Drug legislation, Du Pont's application was put
on hold until the expiration in March 1994 of Lilly's exclusivity under the
Orphan Drug Act. In June 1991, the Company re-acquired all the rights licensed
to Du Pont, together with all rights to all data generated in the Phase I and II
clinical studies and encompassed in the Investigational New Drug Application
("IND") and New Drug Application


                                       -2-


files ("NDA"), from The Du Pont Merck Pharmaceutical Company ("Du Pont Merck"),
Du Pont's assignee. See "Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources."

      In June 1993, the Company filed an update of the NDA for Bio-Tropin with
the FDA, which approved Bio-Tropin for marketing in the United States in May
1995. In August 1995, Genentech obtained a preliminary injunction prohibiting
the commercial introduction of Bio-Tropin in the United States pending the
outcome of litigation with Genentech regarding the validity and infringement of
certain U.S. Genentech patents relating to human growth hormone. The Company's
appeal of the grant of the preliminary injunction to the United States Court of
Appeals for the Federal Circuit (the "CAFC"), and a subsequent petition for writ
of certiorari filed in the U.S. Supreme Court, were denied. See "Item 3.
Legal Proceedings."

      In December 1993, BTG entered into an agreement with Novopharm Ltd.
("Novopharm") pursuant to which Novopharm is the Company's exclusive distributor
for hGH in Canada. Novopharm is pursuing approval for hGH in Canada, although
there can be no assurance that approval will be obtained. In December 1994 the
Canadian Bureau of Biologics requested additional data and information necessary
for the Bureau to continue its review of the application for approval; the
requested data and information were submitted in March 1995. In connection with
the approval process, inspections of the Company's manufacturing plant were
conducted in 1991 and early 1995 by the Canadian Bureau of Biologics. In October
1996, the Bureau conducted an inspection of the Company's filling contractor,
Dr. Madhaus. However, Canadian third party patents and Canadian legal issues may
preclude introduction of the Company's hGH in Canada prior to 2003.

      In 1988, the Company granted Scitech Medical Products, Pte. Ltd., a
Singapore company ("Scitech"), exclusive hGH distribution rights in Taiwan, Hong
Kong, Singapore, Thailand and South Korea, which rights were subsequently
extended to Australia, New Zealand, the Philippines and certain other Pacific
Rim countries. Scitech has sublicensed exclusive hGH distribution rights in
South Korea to Korean Green Cross Corporation, a major South Korean
pharmaceutical company, which began marketing the Company's hGH in South Korea
under the Sci-Tropin(TM) trademark in 1991. In 1995, Sci-Tropin was approved and
launched in Singapore. Sci-Tropin was approved in Australia in 1996 and Scitech
expects to begin marketing Sci-Tropin when regulatory approval of the delivery
device for Sci-Tropin is approved, which approval is not expected before 1998 at
the earliest. Scitech expects that during 1997 approvals for the marketing of
hGH in Hong Kong, Indonesia, Malaysia, New Zealand and Taiwan will be granted on
the basis of European approval, a Free Sale Certificate from the FDA and
additional information provided by BTG for registration filings in these
countries. There can be no assurance that such approvals will be received within
this time frame or at all.

      The Company received approval for hGH from the Israel Ministry of Health
in April 1988 and began direct marketing in Israel under the Bio-Tropin
trademark in October 1988. In July 1992, the Company's hGH was approved by the
Israel Ministry of Health for the treatment of a second indication, Turner
syndrome.

      The Company's growth hormone is also being sold by third party
distributors in Mexico, Argentina, Uruguay and Brazil. In addition, regulatory
approval to market BTG's growth hormone is pending in 14 Latin American
countries, South Africa and Cyprus.

      The Company's human growth hormone product is currently being marketed by
Ferring in Europe and JCR in Japan in conjunction with a needleless delivery
device. Most of the Company's other third-party distributors are expected to
utilize this delivery device as well. BTG has licensed exclusive rights to this
delivery device in the United States for use with the Company's hGH.


                                       -3-


      Oxandrin (oxandrolone)

      The Company's oxandrolone product, trademarked Oxandrin, is an oral
anabolic agent that is an analogue of testosterone.

      In 1964, the FDA approved oxandrolone for weight gain following weight
loss due to severe trauma, chronic infection or extensive surgery and for
patients who, without definite pathophysiologic reasons, fail to gain or to
maintain normal weight. BTG subsequently obtained the rights to oxandrolone from
G.D. Searle & Co. ("Searle") through BTG's acquisition of Gynex Pharmaceuticals
Inc. in August 1993, and in December 1995 re-launched the product in the U.S.
for this indication. The Company believes that Oxandrin is the only FDA approved
oral anabolic agent for this indication.

      Weight Loss. Involuntary weight loss is a serious (and sometimes
life-threatening) condition that affects patients with a wide variety of chronic
and acute disease processes. The causes of this weight loss are believed to be
multifactorial, with inadequate nutrient intake and an altered metabolic state
playing central roles. Disease- or therapy-induced nausea and vomiting and
gastrointestinal obstruction or dysfunction are some of the other causes of
weight loss. Malnutrition, the pathophysiology of which is unknown, is the one
condition common to all weight loss disorders, regardless of etiology. Such
involuntary weight loss is seen in cancer, AIDS, chronic obstructive pulmonary
disease, muscular dystrophies, burns, surgery, recovery and trauma. The Company
is currently conducting Phase IV (post approval) clinical trials to further
support the role of Oxandrin in the treatment of many of these conditions.
Protein breakdown (catabolism), which often results in loss of lean body mass,
increases in serious diseases and after severe trauma or extensive surgery. If
not reversed, catabolism can lead to morbidity and mortality.

      It has been widely published that anabolic agents promote protein
synthesis which may promote the building of lean body mass and ultimately weight
gain. The Company estimates the incidence of involuntary weight loss in the
United States exceeds several million persons each year.

      Natural androgens, such as testosterone, stimulate protein-building,
anabolic activity in skeletal muscle, bone and kidneys, resulting in a positive
nitrogen balance and increased protein synthesis. In patients recovering from
catabolic conditions such as severe trauma, infections, burns and other
debilitating illnesses, testosterone and testosterone derivatives have been
found to increase anabolic activity. However, because natural androgens also
possess androgenic or virilizing properties, which are considered undesirable
side-effects in the treatment of weight loss, particularly in women, a potent
anabolic effect and weak androgenic effect are preferable drug properties for
this condition.

      Oxandrolone is an oral anabolic steroid with a wide separation between
anabolic and androgenic activities. Clinical trials have shown that oxandrolone
is an effective adjunctive therapy to promote weight gain in a variety of
pathophysiologic conditions with a low potential for androgenic activity. Unlike
many other anabolic steroids, Oxandrin undergoes little overall metabolic
transformation in the liver, which the Company believes offers a safety
advantage over other androgenic/anabolic alternatives that are metabolized in
the liver and have the potential to cause liver toxicity.

      The Company is currently conducting Phase III clinical trials in severe
AIDS wasting using a higher dosage formulation than the marketed product. The
Company has received orphan drug designation for AIDS wasting and, if approved
prior to any other company receiving FDA approval of oxandrolone to treat AIDS
wasting, will receive seven years of market exclusivity for this indication and
for the new formulation used in this study. Orphan Drug designation is reserved
for drugs that may be useful in the treatment of diseases or conditions that
affect fewer than 200,000 people.

      In addition to a long term exclusive supply agreement with Searle, BTG has
an alternative exclusive agreement with Societa Prodotti Antibiotici S.p.A.
("SPA") covering, if


                                       -4-


necessary, the supply of oxandrolone to BTG through at least 2003 for
distribution in certain countries, primarily those outside of Europe, where the
SPA process is approved. Currently none of these countries have yet approved the
use of the SPA product. BTG is working with SPA to obtain the necessary
approvals. Should Searle for any reason be unable to supply Oxandrin to BTG
prior to SPA obtaining the necessary approvals, BTG's business, results of
operations and financial condition could be materially adversely affected.

      BTG has engaged Quantum Health Resources ("QHR"), a national pharmacy and
service provider for patients suffering with chronic disorders, as BTG's
exclusive wholesale and retail distributor of BTG's Oxandrin and Delatestryl
products in the United States. QHR also manages the patient reimbursement of
both products. Sales of Oxandrin in 1996 were primarily to QHR and amounted to
approximately $15.0 million, representing 37% of the Company's total 1996
product sales. In July 1996 Olsten Corporation acquired QHR.

      Pediatric Growth Disorders. Published literature indicates that
oxandrolone has been used by pediatric endocrinologists over the past 20 years
to treat growth disorders, including Turner syndrome in girls and constitutional
delay of growth and puberty in boys. BTG believes that Searle, from which the
Company acquired exclusive worldwide rights, never conducted safety and efficacy
studies of oxandrolone in the treatment of these pediatric growth disorders and
therefore never requested FDA approval to market the product for these
disorders. The Company has conducted a phase III placebo-controlled study to
evaluate the safety and efficacy of Oxandrin to increase the growth rate and
improve the self-image of girls with Turner syndrome. A phase III
placebo-controlled study to evaluate the safety and efficacy of Oxandrin to
increase the growth rate and self-image of boys with constitutional delay of
growth and puberty has also been completed and an NDA supplement to the existing
approval of Oxandrin for weight gain was submitted to the FDA in 1996 for both
pediatric indications. The Company has supplemented its submission with
biopharmaceutic data pursuant to an FDA request. The Company has been informed
by the FDA that the data provided in the Company's NDA submission for Turner
syndrome was not sufficient for approval. The Company is assessing how to
supplement the NDA with the additional data requested by the FDA, and there can
be no assurance it will be able to do so. The Company currently sells Oxandrin
for both pediatric indications in the United States on a cost recovery basis
pursuant to Treatment INDs granted in 1993.

      In response to Company submissions made in 1990, the FDA has designated
the Oxandrin product as an Orphan Drug for both the treatment of Turner syndrome
and for the treatment of constitutional delay of growth and puberty. BTG
estimates there are approximately 5,000 to 8,000 girls and women with treatable
Turner syndrome and approximately 30,000 boys with treatable constitutional
delay of growth and puberty in the United States. Under current Orphan Drug
legislation, if the FDA approves the Oxandrin product for Turner syndrome in
girls or for the treatment of constitutional delay of growth and puberty in boys
before any other company receives FDA approval of oxandrolone to treat such
conditions, BTG will receive certain benefits, including seven years of
marketing exclusivity for the approved indication(s).

      In January 1994 the Company obtained approval to market oxandrolone for
pediatric growth disorders in Australia. This is the first regulatory approval
for the marketing of oxandrolone for pediatric growth disorders anywhere in the
world. BTG has granted CSL Limited ("CSL") of Australia exclusive marketing
rights for oxandrolone in Australia, New Zealand, and the nearby South Pacific
region. CSL commenced sales of oxandrolone in Australia in February 1994 under
the trade name Lonavar(R).

      BioLon (sodium hyaluronate)

      Sodium Hyaluronate ("HA") is a high-viscosity, gel-like fluid. The Company
has developed a sodium hyaluronate-based product, trademarked BioLon, for use in
ophthalmic surgery procedures such as cataract and intraocular lens
transplantation. The BioLon product is a syringe filled with a 1% sodium
hyaluronate solution.


                                       -5-


      The Company has concluded agreements for the commercialization and
distribution of the BioLon product with several companies covering most
countries in Europe and Latin America and several countries in Africa, Asia and
the Far East. These agreements provide for license fees and/or royalties and
most require minimum guaranteed sales in the first years after registration and
commencement of commercialization. Product sales of BioLon commenced in early
1993 and BioLon is currently approved for sale in approximately 30 countries.

      In June 1995, BioLon was approved as a medical device by mdc, a notified
body of the European Economic Community. As a result, a CE mark granted to the
product and appearing on the product box allows the Company's partners to freely
market BioLon throughout Europe. Following the European-wide approval, BioLon
was launched in several European countries.

      A Pre Marketing Approval ("PMA") was submitted to the FDA in May 1996. The
Company is currently preparing a response to questions regarding the submission
which were raised by the FDA. Commercialization of the product in the United
States was previously precluded by a patent licensed to Pharmacia AB, which
expired in February 1996.

      In December 1996, the Company licensed to Rohto Pharmaceutical Company
Ltd. the right to pursue the commercialization of BioLon in Japan and certain
other Pacific Rim countries. Rohto will pay up front license fees upon reaching
certain milestones, of which $500,000 was paid in 1996, and royalties on sales
of product.

      The Company is also developing a second-generation product having a higher
viscosity than BioLon. Following testing and the receipt of regulatory approval,
of which there can be no assurance, the new product will be included in the
existing CE certification.

      Delatestryl(R) (testosterone enanthate)

      Delatestryl is the Company's injectable testosterone product currently
used to treat men with hypogonadism (testosterone deficiency), a condition
associated with impotence, reduced libido, insufficient muscle development and
bone loss. The Company believes approximately 400,000 men in the United States
suffer from this condition. The product is also prescribed for delayed puberty,
which BTG believes is a problem for approximately 80,000 boys in the United
States. Under an agreement with Bristol-Myers Squibb ("Bristol"), the Company
acquired the approved NDA and trademark for Delatestryl and Bristol has agreed
to manufacture Delatestryl for the Company for up to five years ending in 1997.
The Company is currently negotiating with Bristol to extend the term of the
supply agreement, although there can be no assurance an extension can be
obtained on reasonable terms or at all. If Bristol is unwilling to extend the
supply agreement, the Company will need to find a new manufacturer of
Delatestryl, and there can be no assurance the Company will be able to do so.
Additionally, the need to find a new manufacturer could delay the
commercialization of Delatestryl. The Company pays Bristol a fee based on its
sales of Delatestryl. The Company began the sale and distribution of Delatestryl
in mid-1992.

      Vitamin D Derivative -- Anti-Psoriasis/Contact Dermatitis Agent

      The Company has licensed exclusive rights to patents covering the
composition and use of certain vitamin D derivatives in the topical treatment of
psoriasis, dermatitis and other skin disorders. Patents have issued in the
United States, Israel and in major countries in Europe, including Great Britain.
The British patent has also been extended to Singapore and Hong Kong. In March
1996, the Company sublicensed exclusive rights under the patents in the United
States to Galderma S.A. ("Galderma"). Galderma has agreed to pay license fees
upon the attainment of certain milestones and a royalty on sales of products. In
1987 and 1989, respectively, the Company sublicensed exclusive rights under the
patents in the United States to Hoffmann-La Roche, Inc. ("Roche") and in the
major Western European countries to Solvay Duphar B.V. ("Duphar"), a subsidiary
of Solvay & Cie. Duphar completed clinical studies on psoriasis necessary to
obtain regulatory approvals in Europe


                                    -6-


and submitted applications for approvals in The Netherlands, Ireland, England
and Switzerland. In 1993 Duphar determined to discontinue its efforts in the
dermatological field and, with BTG's consent, in January 1994 Duphar sublicensed
its rights to Cilag S.A. ("Cilag"), an affiliate of Johnson & Johnson, which
received an approval for the drug in The Netherlands and Switzerland in 1995.
Cilag terminated the sublicense agreement in mid-1995, and Duphar subsequently
sublicensed its rights to Galderma in 1996. The Company is to receive a royalty
on all commercial sales of products containing these vitamin D derivatives in
countries in which the vitamin D derivative patents have issued. In March 1996
the Company received $2 million as a result of Cilag's termination of its
agreement with Duphar. Unlike the ointment formulation used by Duphar in Europe,
the cream formulation clinically tested by Roche produced side effects that
slowed the U.S. clinical program. Roche decided not to pursue commercialization
of this product and the license was terminated by mutual agreement.


Products in Registration and Clinical Trials

      Androtest-SL (sublingual testosterone).

      Testosterone, which is presently administered by deep intramuscular
injection or transdermal patch, is used to treat male hypogonadism, a condition
which BTG believes affects approximately 400,000 men in the United States. The
condition is associated with impotence, suppressed libido, insufficient muscle
development, bone loss and other conditions. Testosterone injections are also
used to treat boys with constitutional delay of growth and puberty, of which
there are, in BTG's estimation, approximately 80,000 in the United States.

      In 1986, the Company licensed from the U.S. Department of Commerce a U.S.
patent relating to the sublingual delivery of sex steroids, in which the drug is
absorbed into the bloodstream through the mucosal membrane under the tongue.
Subsequently the Company licensed from the U.S. Department of Commerce one claim
of a related U.S. patent, which patent is currently the subject of an
interference action. See "--Patents and Proprietary Rights" and "Item 3. Legal
Proceedings." Potential uses of this delivery system include the treatment of
conditions in which testosterone, estradiol (an estrogen), or progesterone
replacement therapy may be necessary. The Company is currently using such a
delivery system for its Androtest-SL sublingual testosterone product for the
treatment of hypogonadism and constitutional delay of growth and puberty.

      An advantage of delivery by the sublingual route is that the drug to be
delivered is not initially processed in the liver (where drugs are commonly
broken down), but is largely absorbed directly into the bloodstream. As a
result, lower doses of drug may achieve the desired effect, while potentially
reducing adverse side effects.

      Although patents related to the Company's sublingual delivery system exist
in the United States, which patents have been assigned to the Company, the
Company does not expect to be able to prevent other companies from introducing
sublingual steroid replacement products using other delivery systems in the
United States or similar delivery systems outside the United States.
Additionally, one of the licensed patents is the subject of an interference
action. See "-- Patents and Proprietary Rights."

      Androtest-SL is the Company's sublingual testosterone product for the
treatment of hypogonadism and constitutional delay of growth and puberty. A
multicenter Phase III human clinical trial of the product for the treatment of
hypogonadism, initiated in 1993, has been completed. Results indicate that the
Androtest-SL product can effectively deliver native testosterone without
reported adverse effects. The men in the study reported restoration of libido
and potency. These men also preferred the sublingual route of delivery over
their previous injectable therapy. BTG's NDA filing was accepted by the FDA in
October 1996.


                                       -7-


      Until October 1993, native testosterone was not available for patient
therapy in the United States. To that date only testosterone (e.g., testosterone
enanthate) given by injection or an anabolic given orally were available.
Injections are painful and may cause severe mood swings and orally active
synthetic androgens have been reported to be toxic to the liver. Androtest-SL
avoids the need for injection as it is taken by mouth (sublingually). Daily
dosing may allow physicians to better individualize their patients' therapy
versus painful intramuscular injections, which are given every 2-3 weeks.
Androtest-SL may allow for the delivery of native testosterone in an amount
approximately equal to a normal man's daily production of this hormone. The
sublingual route of administration may be preferred over injectable therapy and
may result in fewer side effects and better control of hypogonadism and
constitutional delay of growth and puberty than either injectable or oral
testosterone analogs.

      Androtest-SL is currently being manufactured for BTG by ProCyte
Corporation, Kirkland, Washington and Applied Analytical Industries Inc.,
Wilmington, N.C.

      In October 1993 ALZA Corp. ("ALZA") received FDA approval to market a
transdermal native testosterone patch for hypogonadism, which was introduced in
1994. The Company believes that sublingual administration may be preferred over
ALZA's transdermal patch because of the possibility of skin irritation caused by
the patch and the fact that ALZA's patch is designed to be worn on shaven
scrotal skin only. In 1995, through a licensing agreement with SmithKline
Beecham, Theratech, Inc. introduced a transdermal testosterone patch that
requires daily application of two large patches at alternating sites on the
back, hip and abdomen. The Company understands that these patches also
frequently cause skin irritation.

      It is estimated that with all current forms of therapy, only 50,000 to
60,000 men between the ages of 18 and 60 out of a potential 400,000 are
currently being treated for hypogonadism. The Company believes this is primarily
a result of patients' and doctors' dissatisfaction with existing products. The
Company believes its sublingual formulation offers distinct advantages over the
competition.

      Bio-Hep-B(R) (hepatitis-B vaccine)

      The Company has genetically engineered a third generation vaccine against
the hepatitis-B virus. The Company's Bio-Hep-B vaccine integrates the S, pre-S1
and pre-S2 surface proteins of the virus. The first stage of clinical trials in
adults has been completed and showed the vaccine to be safe and highly
immunogenic. The Company has expanded its clinical research program to include
different target groups focusing on: protective efficacy in neonates;
immunogenicity and protection in high risk children; achievement of immune
response in immunosuppressed individuals, such as dialysis patients; and
non-responders to other commercial vaccines. These studies are aimed at
establishing the beneficial effect and advantages of the Company's vaccine.

      The Company has licensed marketing rights to Scitech for the
commercialization of the Bio-Hep-B vaccine in certain Pacific Rim territories,
excluding Japan and the People's Republic of China. The Company and Scitech have
conducted clinical trials in several countries. The Company has been advised by
Scitech that in April 1993 Biogen initiated suit against Scitech in Singapore
asserting that Scitech's conduct of clinical trials in Singapore constitutes
infringement of Biogen's patent rights in Singapore and claiming rights in the
data obtained by Scitech through its clinical trials in Singapore and that an
interlocutory hearing was held in September 1993, although to date no final
decision has been rendered. Biogen's Singapore patent rights are based on the
registration of its corresponding UK patents, and the validity of patents in
Singapore depends on the validity of the corresponding UK patents. Biogen's
broad U.K. patent (on which Singapore registration is based) was invalidated by
the U.K. Court of Appeals in October 1994, which decision was upheld by the
House of Lords in October 1996. Three claims of a narrower UK patent were
upheld, although the Company believes these claims will not affect
commercialization of the Company's vaccine.


                                       -8-


      In September 1995 the Israeli Registrar of Patents ruled that BTG-Israel
is entitled to receive a compulsory license to manufacture the Company's vaccine
under Biogen's Israeli patent. In late 1996, the Registrar set the terms of the
compulsory license, including royalties to be paid by BTG-Israel to Biogen.
Biogen appealed the Registrar's decision to the Tel Aviv District Court. With
its appeal Biogen also moved for a stay of the license, which was granted ex
parte pending hearings with both parties. Following the hearings which took
place in December 1996, the motion was denied in January 1997; however, the ex
parte stay was left in force pending Biogen's appeal to the Supreme Court and
maintained by the Supreme Court pending the decision by the District Court on
the merits of Biogen's appeal. The District Court heard the appeal in early
March 1997, and a decision is pending.

      In 1992 Biogen sued BTG-Israel for allegedly infringing its Israeli patent
(which is the subject of the compulsory license application) by virtue of the
Company's preparation of its Bio-Hep-B vaccine for use in clinical trials. These
proceedings are continuing. See "Item 3. Legal Proceedings."

      The Company is aware that certain other patents have been granted or are
pending that may prevent the Company from selling its vaccine in the United
States, Europe and certain other countries. The Company's failure to obtain any
needed license, or a determination that its vaccine infringes the patent rights
of Biogen or others, would substantially limit, if not prohibit, the
commercialization of the Bio-Hep-B vaccine in those countries in which Biogen or
others have a patent until such patent is revoked or expires. The ability of the
Company to secure any necessary licenses or sublicenses to these patents or
applications cannot be predicted.

      Oxandrin (oxandrolone) -- Other Indications

      AIDS Wasting Syndrome. Based on the pharmacologic actions of Oxandrin,
published literature and discussions with experts in the AIDS field, the Company
believes that Oxandrin used at a higher than currently approved level may be
useful in further increasing lean body mass, improving the quality of life and
possibly increasing the survival time of AIDS patients by reversing the
progressive weight loss experienced by AIDS patients with AIDS wasting syndrome.
According to the Center for Disease Control, this is the third most frequent
cause of death in AIDS patients. In 1991, based on submissions made to the FDA,
Oxandrin was designated an Orphan Drug as adjunctive therapy for AIDS patients
suffering from HIV wasting syndrome. The Company has completed two Phase II
studies for this indication, one of which showed a significant weight gain with
Oxandrin compared to placebo while the other smaller study did not. Phase III
studies at higher doses were initiated in 1996 to determine optimal dosing. The
Company estimates that approximately 100,000 AIDS patients currently suffer from
wasting syndrome. The Company believes that a significant portion of its current
Oxandrin sales are for treatment of patients suffering from AIDS.

      Alcoholic Hepatitis. Alcoholic hepatitis is an acute form of
alcohol-induced liver disease characterized by liver cell death, inflammation,
fat accumulation, jaundice and an enlarged liver. Malnutrition is seen in the
vast majority of patients. In 1991 the Department of Veterans Affairs (the "VA")
granted the Company access to, and use of, the results of two major VA clinical
trials using its Hepandrin product (oxandrolone) in patients with moderate to
severe alcoholic hepatitis and malnutrition. The VA research indicates that
Hepandrin reduced the mortality rate at six months in patients with moderate to
severe alcoholic hepatitis and moderate malnutrition by approximately 50% versus
placebo. In February 1994 BTG voluntarily withdrew its Hepandrin product NDA
filed in December 1993 based on conversations with the FDA during which the FDA
took the position that the two VA clinical trials which formed the basis of the
NDA submission are not sufficient for approval, but would qualify as one of the
two required studies. The Company expects to initiate a phase III clinical trial
to meet FDA requirements, although there can be no assurance when such trial
will be initiated or that the results will demonstrate efficacy. Since there are
fewer than 200,000 patients with moderate to severe alcoholic hepatitis and


                                       -9-


moderate malnutrition, the FDA has granted Orphan Drug designation for this
drug. The Company believes there currently is no approved therapy for these
patients.

      OxSODrol(TM) -- (human superoxide dismutase)

      The Company has developed a process for the manufacture of a fully active
analog of copper/zinc human superoxide dismutase ("hSOD" or "SOD"), an enzyme
produced in body tissues to detoxify oxygen free-radicals (i.e., superoxides).
These free-radicals, which are natural by-products of cellular respiration, can
cause cell injury unless they are neutralized in the body. If exposed to a surge
of these superoxides, the cell is unable to cope with the excessive level of
free-radicals, which can then inflict devastating cell and tissue injury.

      A U.S. patent assigned to the Company which is directed to a method for
producing enzymatically active copper/zinc SOD in bacteria is the subject of an
interference action with Chiron Corp ("Chiron"), which also holds a U.S. patent
for bacterially produced human copper/zinc SOD. An Israeli patent application
assigned to Chiron which relates to copper/zinc SOD is being opposed by the
Company. See "-- Patents and Proprietary Rights."

      OxSODrol for Bronchopulmonary Dysplasia. Bronchopulmonary dysplasia
("BPD") is a chronic lung disease that develops following treatment with oxygen
and mechanical ventilation in premature infants who experience respiratory
distress. During 1992, the Company completed additional BPD-related pre-clinical
and toxicological studies requested by the FDA and in February 1993 received FDA
permission to initiate a Phase I BPD human clinical study, which was completed
in December 1993. The Company has completed a Phase I(b) study of the safety of
repetitive doses, and on the basis of this study, a multicenter double blind
Phase III clinical efficacy and safety trial commenced in January 1997. There
can be no assurance that the results obtained in the clinical trials will be
consistent with those obtained to date. In 1991 the Company received Orphan Drug
designation for BPD in premature neonates. If the FDA approves the OxSODrol
product for the treatment of BPD before any other company receives FDA approval
for the use of SOD to treat BPD, BTG will receive seven years of marketing
exclusivity under current Orphan Drug legislation. The Company estimates that
there are 50,000 premature infants born in the U.S. each year who are at risk of
developing respiratory distress. In January 1995 SOD was licensed to JCR for the
treatment of BPD in Japan.

      The Company holds a U.S. patent relating to intratracheal delivery of
copper/zinc SOD to protect human lungs from injury due to hyperoxia and
hyperventilation.

      Imagex -- Thrombus-Imaging Agent

      Imagex is the Company's novel agent for detection of blood clots (i.e.,
thrombi) in patients suffering from deep vein thrombosis or pulmonary embolism,
consisting of a genetically engineered portion of the fibrin binding domain of
fibronectin attached to a radiopharmaceutical tag. Once Imagex is injected in
the patient, it targets and binds to fibrin, a substance that is essentially
present only in blood clots. Company scientists demonstrated the capacity of the
product to bind to thrombi both in vitro and in vivo using rat and rabbit
thrombosis models. The Company, in collaboration with Merck Frosst Canada Inc.
("Merck Frosst"), a subsidiary of Merck & Co., completed a pilot study outside
the United States to test the safety and efficacy of Imagex in humans. In this
trial, the specificity and sensitivity of clot detection by the product in 62
patients suspected to be suffering from deep vein thrombosis was confirmed. Deep
vein thrombosis causes a reduction in the venous blood flow, changes in the
vessel walls and changes in the composition of blood resulting from the
development of thrombi. Pulmonary embolism is the dislodgement of a piece of
thrombus and its relocation via the circulatory system to the lungs. During
1993, the Company was granted a U.S. patent directed to this imaging agent, the
plasmid expressing the fibrin binding domain polypeptide component and the
purified polypeptide itself. During 1995 the Company was granted a second,
related U.S. patent and corresponding patents in Australia and New Zealand. In
August 1994, worldwide rights to Imagex were licensed to Merck Frosst, which
intends to use such agent in the development


                                      -10-


and commercialization of a diagnostic imaging agent for the detection of
thromboembolism. Merck Frosst filed an IND with the Canadian Bureau of Biologics
in April 1996 and plans to initiate a phase I study of Imagex in Canada.

      Ethinyl Estradiol for Turner Syndrome

      The Company has developed an ultra-low dose of ethinyl estradiol, a
synthetic form of estrogen, which is one of the two active ingredients in
virtually all of today's oral contraceptives. This ultra-low dose product is
designed to treat young girls with Turner syndrome. BTG estimates there are
approximately 5,000 to 8,000 treatable Turner syndrome patients in the United
States. Studies have shown young girls with Turner syndrome may be treated with
very low doses of estrogen to stimulate development of secondary sexual
characteristics. The Company's ethinyl estradiol product has been designated as
an Orphan Drug by the FDA for the treatment of Turner syndrome.

      In 1994 the Company completed a Phase III study of the Company's low dose
estradiol, which was partially funded by an Orphan Drug clinical research grant
from the FDA of approximately $100,000 per year for three years through the end
of 1993 and was conducted under an FDA-approved IND application. The study
evaluated the effect of low doses of ethinyl estradiol on the development of the
patients' secondary sexual characteristics. Results of the phase III study
indicated that the Company's product has a positive effect on pubertal
development with no significant negative side effects.

      Oral Contraceptive Dosing Regimen

      In 1988, the Company acquired an exclusive license to a unique oral
contraceptive dosing regimen. Patents covering this regimen have been granted in
Australia, Israel, Hungary, Mexico and South Africa. A corresponding U.S. patent
issued on May 1, 1990 has been withdrawn in favor of a pending reissue
application. The Company has been informed orally by the Examiner that the
claims are allowable and that a Notice of Allowance should issue shortly. Patent
applications are also pending in Europe, Japan, Canada, Taiwan and several other
countries. This new approach to oral contraception is expected to reduce both
the risk of pregnancy, in the event a woman forgets to take a pill, and the
breakthrough bleeding and spotting many women experience when using conventional
low-dose oral contraceptives.

      In December 1990, the Company entered into an agreement with Organon, Inc.
("Organon"), a subsidiary of AKZO of The Netherlands, which gave Organon an
option to license the Company's patented oral contraceptive dosage regimen for
future use with Organon's present and future proprietary progestogens. Oral
contraceptives use various combinations of estrogen and progestogen and various
dosing regimens. The Company's patented dosing regimen may use a variety of
progestogens. Therefore, the Company remains free to license to other companies
the right to use progestogens other than Organon's under the Company's patent.

      Under the agreement, Organon conducted human clinical studies to determine
the efficacy and potential superiority of the Company's patented oral
contraceptive dosing regimen. The studies were completed in 1992, and on January
13, 1993, Organon exercised its option and licensed the technology. Upon
signing, Organon paid $175,000 to the Company. Additional milestone payments,
pending successful development of the product, of up to $275,000 for rights in
the United States and up to $500,000 for rights in foreign markets, may be paid
to the Company. The agreement provides for royalties on sales and an advance
royalty payment of $250,000 at the time of FDA approval to market the product.
Organon is conducting a Phase III study utilizing the Company's oral
contraceptive dosing regimen.

      On March 30, 1992, the Company licensed to Bristol certain rights to use
the Company's patented oral contraceptive dosing regimen with norethindrone, the
progestogen contained in Bristol's currently marketed oral contraceptives.
Bristol is responsible for the


                                      -11-


clinical development of the new oral contraceptive and if Bristol eventually
markets a product covered by the patent, it will pay royalties to the Company on
any sales of that product. Under the agreement, Bristol also transferred its
U.S. rights to Delatestryl to the Company. See "-- Products under
Commercialization -- Delatestryl." The license agreement with Bristol requires
that the Company use its best efforts to obtain a reissue of its dosing regimen
patent. A Notice of Allowance regarding this reissue application should issue
shortly.

      The market for oral contraceptives in the United States is estimated by
BTG to exceed $1 billion annually. Because of the large size and competitive
nature of this market, the Company will depend on its current and potential
future licensees to develop and market products under its patent. In addition to
licensees paying the cost of development of the new oral contraceptive, the
Company expects licensees to pay royalties if the product receives regulatory
approval for marketing.

      Animal Growth Hormones

      In 1983, the Company entered into an agreement with American Cyanamid
Company ("ACY"), now a subsidiary of American Home Products, granting ACY an
exclusive worldwide license to manufacture and market animal growth hormones.
ACY agreed to conduct all necessary testing of the animal growth hormones, and
to obtain all regulatory approvals necessary for the commercialization of the
animal growth hormones. The Company is to receive royalties on animal growth
hormone product sales by ACY. To date, BTG has developed two animal growth
hormones, porcine and bovine.

      Porcine growth hormone ("pGH") is a product designed to produce leaner
meat in pigs. ACY has conducted considerable development work including field
trials. The acquisition of ACY by American Home Products resulted in a
reassessment of the investment needed to commercialize the product. American
Home Products and the Company are assessing various financial models that would
allow for the commercialization of pGH. There can be no assurance that the
Company's pGH will be commercialized.

      In 1986, ACY filed an NDA for the Company's bovine growth hormone ("bGH"),
which has a role in controlling milk production. In 1994 the FDA requested that
ACY conduct additional field trials prior to the FDA's consideration of ACY's
NDA. Despite FDA approval of Monsanto's bGH, ACY has concluded that
commercialization of bGH at this time is inadvisable. With ACY's consent, BTG
intends to approach other companies to ascertain whether they might have
interest in pursuing the commercialization of bGH; however, there can be no
assurance that BTG can find a company interested in pursuing the
commercialization of bGH or, if such a company is found, that an agreement can
be reached on reasonable terms or at all.

Products in Laboratory and Pre-clinical Research

      Bio-Flow(TM) -- Anti-Reocclusion Agent

      The Company is evaluating a genetically engineered discrete component of
the body's extracellular matrix proteins for use in blocking thrombosis (blood
clot) formation and reocclusion. Extracellular matrix proteins are a family of
multifunctional proteins, each composed of several domains, involved in a
variety of biological activities ranging from platelet aggregation and blood
clotting to wound healing and tumor metastasis. Among the proteins from which
discrete therapeutic and diagnostic domains have been derived are fibronectin
and von Willebrand Factor ("vWF").

      The Company has cloned and expressed in bacteria and in yeast a
recombinant domain of vWF, a component of the blood vessel wall. Gram quantities
of active protein were produced in yeast and purified. This protein (trademarked
Bio-Flow) has been found to be effective in inhibiting platelet aggregation in
several in vitro and in vivo models.


                                      -12-


Following damage to the vascular endothelium (the inner wall of a blood vessel),
a large number of platelets bind to vWF in the subendothelium via the platelet
receptor gp1b. Blocking of vWF binding by Bio-Flow may prevent platelet adhesion
to these substrates in a clinical situation and thus prevent complications such
as reocclusion (the re-closure of the artery by a blood clot) and/or restenosis
(the re-narrowing of the coronary arteries) following angioplasty or
thrombolytic therapies. Bio-Flow was shown to prevent thrombus formation in a
variety of animal models in guinea pigs, dogs and baboons. The Company believes
that the baboon model, in which effective results were obtained, is closely
related to humans and therefore may provide a good indication of the outcome
that may be achieved in human clinical trials, although there can be no
assurance of this. Bio-Flow prevented reocclusion when administered to dogs
following thrombolysis with a combination of tPA, heparin and aspirin. Moreover,
the product exerted its antithrombotic effect rapidly, thus shortening the time
to thrombolysis (i.e., dissolution of the thrombus) without a decrease in the
number of platelets or an increase in the bleeding time. Additionally, a study
in a rat model indicated the potential of Bio-Flow as a drug for the prevention
of restenosis. Bio-Flow is currently in advanced stages of pre-clinical
development, with toxicology studies planned for late 1997. The Company has
opposed an allowed third party patent application in Israel relating to the
cloning of vWF fragments. See "--Patents and Proprietary Rights."

Factorex(TM) - Anti Coagulant

      A highly selective protein anticoagulant (trademarked Factorex) is being
developed by BTG for cardiovascular applications. This product is a recombinant
Factor Xa inhibitor. The naturally occurring Factor Xa inhibitor was originally
isolated from the saliva of the blood sucking leech Hirudo medicinalis, which
harbors an entire array of agents that antagonize the human hemostatic process.
The blood coagulation process is a multi-step, complex cascade of reactions
which ultimately lead to the formation of fibrin as an integral component of the
clot. Factor Xa catalyzes the conversion of prothrombin to thrombin, which, in
turn, converts fibrinogen into fibrin. Therefore, by inhibiting Factor Xa, thus
blocking the catalytic conversion of prothrombin, Factorex may inhibit the
creation and deposition of fibrin in clots. The Company believes that, like
other leech-derived peptides, Factorex should have very low immunogenicity in
man, facilitating multiple administration. The product is manufactured via
recombinant DNA technology in E. coli and is biochemically configured in a
proprietary process to its active configuration. It has been shown to possess
Factor Xa inhibitory activity in vitro and in pre-clinical analysis in animal
models. Potential indications ranging from deep vein thrombosis to arterial
reocclusion and restenosis are among the targets for therapy with the product.
Pre-clinical studies have been completed and the Company has initiated process
development of clinical grade material for toxicology studies.

RESEARCH AND DEVELOPMENT, MANUFACTURING AND QUALITY
ASSURANCE INFRASTRUCTURE AND FACILITIES

      The Company's research and development, manufacturing and quality
assurance organization at February 17, 1997 comprised 149 scientists, associates
and related personnel with expertise in molecular biology, cell biology and
protein chemistry. These individuals have received various undergraduate and
advanced degrees at prestigious universities throughout the world. Thirty-four
received Ph.D. or M.D. degrees and several have completed post-doctoral studies
under the direction of internationally renowned scientists in the area of
biotechnology.

      Commercialization of genetically engineered and related products requires
development of technologies that use microorganisms to manufacture products in
sufficient quantities and purity. Such products are manufactured through a
fermentation process, whereby bacteria and other microorganisms containing the
genetic materials are reproduced in large quantities in fermentation tanks with
the desired product then being separated from the fermentation medium and
purified to usable quality. In addition to its bacterial E. coli production
technology, the Company has integrated a mammalian expression technology for the
production of its hepatitis-B vaccine and established the basic technology for
expression


                                      -13-


of proteins in yeast and baculovirus. The Company's products which are not
produced by a fermentation process are sourced through supply agreements with
third parties.

      The Company's facilities in Israel contain research laboratories and
pilot-plant facilities, including a fermentor of 750 liters. All bulk
manufacturing activities for the Company's genetically engineered products are
conducted in the Company's GMP-designed facility, which possesses sufficient
capacity to accommodate the expected manufacturing demands of the Company's
commercial products for the next several years. The Company has completed a
modern filling suite for its BioLon syringes which has undergone inspection by
European regulatory authorities and, based on one of these inspections, European
Device approval (CE Mark) was granted. All dosages of hGH are formulated, filled
and packed in vials by Dr. Madaus GmbH in Germany, which functions as the
Company's subcontractor for these purposes. See "-- Products under
Commercialization -- Bio-Tropin (human growth hormone) -- Growth Hormone
Deficiency." Delatestryl is manufactured for the Company by Bristol. Oxandrin is
manufactured for the Company by Searle.

      In February 1995, BTG-Israel was awarded an ISO 9002 Certification by the
Standards Institution of Israel (SII). The Certificate of Registration was
issued in respect of the manufacture, packaging and dispatch of BTG's
pharmaceutical products for human use. ISO 9002 is one of a series of Quality
Management System Standards established by the International Organization for
Standardization ("ISO") based in Geneva, Switzerland. It is equivalent to the
European Community Standard EN 29002. An ISO Certification issued by the SII is
recognized and accepted by several organizations and countries such as
Underwriters Laboratories of the United States, DQS of Germany, SQS of
Switzerland, BSI of the United Kingdom, QMI of Canada, JQA of Japan and others.
Receipt of ISO certification was a significant milestone in the process of
obtaining the BioLon CE mark.

GOVERNMENTAL REGULATION

      Regulation by governmental authorities in the United States and other
countries is a significant factor affecting the timing of the commercialization
of the Company's products and its ongoing research and development activities.
The Company's policy is to conduct its research and development activities in
compliance with current United States National Institutes of Health Guidelines
for Research Involving Recombinant DNA Molecules, and with comparable guidelines
in Israel and other countries where the Company may be conducting clinical
trials or other developmental activities.

      Prior to clinically testing, manufacturing and marketing human
pharmaceutical products, approval from the FDA and comparable agencies in
foreign countries must first be obtained. The FDA has established mandatory
procedures and safety and efficacy standards that apply to the testing,
manufacture and marketing of such products in the United States. In the United
States, these procedures include pre-clinical studies, the filing of an
Investigational New Drug application, human clinical trials and approval of a
New Drug Application. European countries follow generally the same procedures.
The EEC has established a unified filing system administered by the Committee
for Proprietary Medicinal Products ("CPMP") designed to reduce the
administrative burden of prosecuting applications for new pharmaceutical
products. Following CPMP review and approval, marketing applications are
submitted to member countries for final approval and pricing approval, as
appropriate. The commercial manufacture and marketing of some animal health
products also requires approval by the United States Department of Agriculture
("USDA") and by comparable agencies in foreign countries. These processes are
likely to take a number of years and often involve substantial expenditures.
There can be no assurance that any approval will be granted and, even if
granted, such approval may be withdrawn if compliance with regulatory standards
is not maintained. In addition, certain environmental and consumer groups are
generally opposed to genetically engineered products, primarily in the
agricultural field. There can be no assurance that opposition from such groups
will not adversely affect the FDA approval process with respect to the Company's
biotechnology products.


                                      -14-


      In addition to the foregoing, the Company's present and future business
may be subject to regulation under the United States Atomic Energy Act, Clean
Air Act, Clean Water Act, Occupational Safety and Health Act, National
Environmental Policy Act, Toxic Substances Control Act, Resource Conservation
and Recovery Act, Comprehensive Environmental Response, Compensation and
Liability Act and similar state and foreign statutes, as well as national
restrictions on technology transfer, and import, export and customs regulations
and similar laws and regulations in foreign countries.

PATENTS AND PROPRIETARY RIGHTS

      The Company's scientific staff and consultants are actively working in
various areas of biotechnology to develop techniques, microorganisms, processes
and products to achieve the Company's commercial aims. It is the Company's
policy to protect its intellectual property rights in this work by a variety of
means, including filing patent applications in the United States and major
industrialized countries. The Company also relies upon trade secrets and
improvements, unpatented proprietary know-how and continuing technological
innovation to develop and maintain its competitive position.

      As of January 1, 1997, approximately 300 patents, owned or exclusively
licensed by the Company, have been granted and are being maintained worldwide,
including 39 in the United States, 12 patents granted by the European Patent
Office ("EPO"), and 15 Israeli patents. Additionally, approximately 240 patent
applications owned or exclusively licensed by the Company are pending in various
countries. During 1996 the U.S. Patent and Trademark Office granted 5 patents,
the EPO granted 2 patents (equivalent to 24 national patents), in each case
assigned or exclusively licensed to BTG. Additionally, approximately 16 other
patents exclusively licensed or assigned to BTG were granted in various
countries.

      The Company has initiated proceedings in Israel to oppose the grant to
several of its competitors of patents relating to vector systems, and may oppose
corresponding patents in other jurisdictions. The Company has also initiated
proceedings in Israel to oppose the grant to one of its competitors of a patent
relating to production of human growth hormone. Additionally, during 1991 and
1992, two additional proceedings were initiated in Israel to oppose the grant to
others of patents which may relate to the OxSODrol and Bio-Flow products,
respectively. Although the outcome of these proceedings cannot be predicted with
certainty and will likely not be determined for several years, the Company
believes that the outcome will be favorable, although there can be no assurance
of this. The Company is aware of patent applications filed by, or patents issued
to, other entities with respect to technology potentially useful to the Company
and, in some cases, related to products and processes being developed by the
Company. The Company cannot presently assess the effect, if any, that these
patents may have on its operations. The extent to which efforts by other
researchers have or will result in patents and the extent to which the issuance
of patents to others would have a materially adverse effect on the Company or
would force the Company to obtain licenses from others are currently unknown.

      During 1991, the Company received notification from the United States
Patent and Trademark Office (the "Patent Office") Board of Patent Appeals and
Interferences of the declaration of an interference between an issued patent
assigned to the Company covering a method for producing enzymatically active
human copper/zinc SOD in bacteria and a pending application of Chiron
Corporation ("Chiron"), which claims an earlier filing date. While the Company
is vigorously defending its patent, it cannot predict the outcome of such
interference. However, should the Company's patent be disallowed and a
corresponding patent be issued to Chiron, the Company's present method of
producing enzymatically active human copper/zinc SOD in bacteria may need to be
altered, which may or may not be possible; alternatively, the Company could seek
a license to market under Chiron's patent, which may or may not be available.
Subsequent to the interference being declared, Chiron was issued a U.S. patent
for the bacterially produced form of recombinant human copper/zinc SOD. The
Company is seeking to have the Patent Office either expand the scope of the
existing interference action or declare a separate interference to determine
that the


                                      -15-


Company rather than Chiron should hold the patent for the bacterially produced
form of recombinant human copper/zinc SOD on the basis that the Company's
scientists, not Chiron scientists, invented the method for producing recombinant
human copper/zinc SOD in bacteria. Unless the Company is able to prevail in this
effort or to obtain a license from Chiron, the Company may be unable to
commercialize OxSODrol in the United States. This matter is currently under
consideration by the Patent Office. In addition, the Israeli Patent Office has
accepted a Chiron patent application covering a DNA construct having certain
specified features for expression of active copper/zinc SOD and a method for
production of active copper/zinc SOD in a microorganism harboring this
construct. The Company is opposing the grant of this patent; however, there can
be no assurance that this opposition will be successful. If the opposition is
unsuccessful, the Company may be precluded from manufacturing OxSODrol in
Israel. See "-- Products and Applications -- Products in Registration and
Clinical Trials -- OxSODrol (human superoxide dismutase)."

      In March 1993, the U.S. Patent Office granted a patent exclusively
licensed to the Company containing broad claims for the gene encoding human
copper/zinc SOD, related recombinant expression vectors and genetically
engineered cells containing the gene. The Company believes that Chiron could not
commercialize its yeast-produced SOD product in the United States without
infringing this patent. However, the issuance of this patent does not assure the
Company's ability to commercialize OxSODrol.

      In September 1995, the Israeli Registrar of Patents ruled that BTG-Israel
is entitled to a compulsory license to manufacture the Company's Bio-Hep-B
vaccine under Biogen's Israeli patent, which license will enable the Company to
produce the vaccine in Israel and likely to export the vaccine to countries in
which neither Biogen nor others have been granted a blocking patent. In late
1996, the Registrar set the terms of the compulsory license, including royalties
to be paid by BTG-Israel to Biogen. Biogen appealed the Registrar's decision to
the Tel Aviv District Court. With its appeal Biogen also moved for a stay of the
license, which was granted ex parte pending hearings with both parties.
Following the hearings which took place in December 1996, the motion was denied
in January 1997; however, the ex parte stay was left in force pending Biogen's
appeal to the Supreme Court and maintained by the Supreme Court pending the
decision by the District Court on the merits of Biogen's appeal. The District
Court heard the appeal in early March 1997, and a decision is pending. There can
be no assurance that a compulsory license will finally be issued and, if issued,
there can be no assurance that the grant of license will not subsequently be
overturned by the Israel Patent Office or by a court.

      In 1992 Biogen sued BTG-Israel for allegedly infringing its Israeli patent
(which is the subject of the compulsory license application) by virtue of BTG's
preparation of its Bio-Hep-B vaccine for use in clinical trials. See "--
Products and Applications -- Products in Registration and Clinical Trials --
Hepatitis-B Vaccine" and "Item 3. Legal Proceedings." These proceedings are
continuing.

      Three patent applications of Genentech in Israel which cover general
methods relating to genetically engineered products and to human growth hormone
were accepted in 1983 (two) and 1985 (one). BTG is opposing the grant of these
three patents. One of these three Israeli applications corresponds to two of the
three U.S. patents which are the subject of patent infringement litigation
between BTG and Genentech in the United States District Court for the Southern
District of New York. See "Item 3. Legal Proceedings." Additionally, in 1984 an
Israeli patent application of Biogen which relates to an expression vector was
accepted; BTG is opposing the grant of this patent. There can be no assurance
that BTG will be successful in its opposition to the grant of these patents. If
BTG is unsuccessful in its oppositions in Israel, then BTG may be unable to
manufacture its products in Israel.

      In 1994 BTG filed oppositions to two allowed Genentech patent applications
in Japan relating to human growth hormone, in 1993 to one Biogen vector patent
in the EPO, and in 1995 to the corresponding Biogen vector patent application in
Japan. These patents and patent applications correspond to the Genentech and
Biogen patent applications being opposed in Israel. There can be no assurance
that BTG will be successful in its oppositions


                                      -16-


to these patents and patent applications. If BTG is unsuccessful in these
oppositions in Japan, BTG and licensees of its products may be unable to sell
certain of its products, including hGH and SOD, in Japan.

      BTG has a license agreement with the National Technical Information
Service ("NTIS"), an operating unit of the United States Department of Commerce
(the "DOC Agreement"), under which it obtained exclusive United States rights to
a U.S. patent relating to the sublingual delivery of sex steroids, in which the
drug is absorbed into the bloodstream through the mucosal membrane under the
tongue. Under the terms of the DOC Agreement, the Company has exclusive rights
to make, have made, use and sell certain steroid products for a period
terminating five years from the date of first commercial sale of a product;
however, the Department of Commerce has notified the Company that BTG must pay a
portion of the legal fees relating to the interference action referred to below.
The Company is currently in discussions with the Department of Commerce, but
there can be no assurance as to the outcome of this discussion. The Company also
has a non-exclusive license under the patent to make, have made, use and sell
such products in the United States after the expiration of the exclusive license
term. The DOC Agreement requires the Company to expend reasonable efforts and
resources to develop and bring licensed products to the point of practical
application by January 1, 1997, unless this period is extended by mutual
agreement of the parties. The Company believes that its October 1996 filing of
an NDA for Androtest-SL satisfied this requirement. The Company will pay NTIS an
administration and royalty fee of five percent of the net sales of licensed
products during the exclusive period of the DOC Agreement, except that no
administration and royalty fee will be payable for direct sales of licensed
products by the Company to the U.S. Government. BTG also has a license under a
claim of a related United States Government patent, which is currently the
subject of an interference proceeding brought by Janssen, a division of Johnson
& Johnson. The Company is currently in negotiations to secure a license to
Janssen's patents and technology, although there can be no assurance a license
can be obtained on reasonable terms or at all. If Janssen is successful in this
interference action and BTG is unable to obtain a license, BTG may be prohibited
from commercializing its Androtest-SL product. See "-- Products in Registration
and Clinical Trials -- Androtest-SL" and "Item 3. Legal Proceedings."

      The Company is aware of third party patents and patent applications
related to the cloning of vWF fragments, assigned to Scripps Clinic and Research
Foundation and assigned to Stichting Vrienden van de Stichting. The Company
believes that the likely scope of any patents granted from these applications
will be such that the manufacture, use and sale of Bio-Flow should not infringe
any valid claim of these patents, although there can be no assurance of this.
The Company believes that no valid issued claim of the Scripps U.S. patent
encompasses Bio-Flow. During 1995, the Scripps patent was issued by the EPO. The
Company believes that the granted claims do not encompass the Bio-Flow product
and has not opposed this patent. However, the corresponding Scripps application
has been allowed in Israel with broad claims; the Company is vigorously opposing
the grant of this patent, but there can be no assurance that the Company's
opposition will be successful or that the scope of the patent will not preclude
the manufacture, use and sale of Bio-Flow in Israel.

      The Company holds an exclusive worldwide license to patents and patent
applications filed jointly by Yissum Research Development Company of the Hebrew
University of Jerusalem and American National Red Cross directed to leech factor
Xa inhibitor. To date, two related patents have issued in the United States, and
patents have been granted in the EPO and Israel. BTG has also filed subsequent
applications in the U.S. and abroad directed to cloning and expression of
Factorex, a recombinant factor Xa inhibitor. The Company is aware of patents and
patent applications filed by Pennsylvania Hospital and Merrell Dow
Pharmaceuticals Inc. directed to other Factor Xa inhibitors, but believes that
the claims of these patents and patent applications do not encompass the
Factorex product, although there can be no assurance of this.

      There can be no assurance that any of the patent applications assigned to
or licensed to BTG will mature into granted patents, or that granted patents
will not be circumvented


                                      -17-


or invalidated. The Company believes that important legal issues remain to be
resolved as to the extent and scope of patent protection, and the Company
expects that litigation may be necessary to determine the validity and scope of
its and others' proprietary rights. Such litigation may consume substantial
resources. See "Item 3. Legal Proceedings."

INSTITUTIONAL AND GOVERNMENTAL RELATIONSHIPS

      The Company believes its relationships with research institutions in the
United States, Europe and Israel and with the Government of Israel to be
important in its research and product development efforts. In addition to
conducting research and development at its own facilities, a portion of which is
funded through the Office of the Chief Scientist of the Ministry of Industry and
Commerce of the State of Israel (the "Chief Scientist"), the Company has funded,
and expects to continue to fund, research at universities and private research
institutions. The Company believes that these relationships greatly enhance its
research and product development efforts, and the Company intends to develop and
maintain relationships with leading universities and research institutions even
as it continues to expand its capability to conduct research and product
development at its own facilities.

      The State of Israel supports and encourages research and development in
the field of high technology, as well as manufacturing for export through
programs that provide for research and development funding, export financing,
tax benefits and capital investment incentives. The Company's research and
development activities in Israel through BTG-Israel enable it to take advantage
of these programs. There can be no assurance, however, that such programs will
continue.

OPERATIONS IN ISRAEL

      The Company's primary research and development and production activities
are conducted in Israel and are affected by economic, military and political
conditions there. Israel has been involved in a number of armed conflicts with
its bordering countries. During the course of military operations, Israel's
military reserves, which include a number of the Company's employees and
executives, may be called up. To date, the Company has been able to continue its
research and development and production activities during periods of military
mobilization, although there can be no assurance that such activities could be
continued in the event of future hostilities.

      Because BTG-Israel is involved in a technological industry and is an
exporter of Israeli goods, the Company has enjoyed the benefits of certain
programs promulgated by the Government of Israel in order to encourage the
development of technology and export of Israeli products. However, there can be
no guarantee that these programs will continue.

COMPETITION

      Therapeutic drug development is conducted by numerous companies throughout
the world. Competition is intense in the product areas in which the Company has
focused its efforts. Significant competition comes from independent, dedicated
biotechnology companies as well as from large, established pharmaceutical
companies. In addition, the Company's products may compete against products
developed by non-recombinant techniques. The primary competitive factors in this
field are the ability to attract and retain highly qualified scientists and
technicians, to create and maintain scientifically advanced technology during a
period of rapid technological development and to develop proprietary products or
processes.

      The principal parameters influencing competition are the efficacy of
products and their production processes, the patent protection available for
such products, the timing of commercialization vis-a-vis competitors' products
and, to a limited extent, price. The Company's competitive position in the
industry varies on a product-by-product and country-by-country basis depending
upon the efficacy of the Company's products as


                                      -18-


compared to competing products, the scope of patent protection in each country
for the Company's products as compared to competing products, whether the
Company's product is the first such product to be commercialized and, where
there are a number of similar products, the price of the Company's product as
compared to its competitors' products, and the relative strength of the
Company's partner in said territory.

      Many of the Company's current competitors have significantly greater
financial and organizational resources than the Company. The growth of the
biotechnology field is expected to attract new companies with significantly
greater financial resources that will enter the field through acquisitions of
existing biotechnology companies. Since technological developments are expected
to continue at a rapid pace in the biotechnology industry, the successful
development of the Company's products will be dependent upon its ability to
maintain a competitive position with respect to its technology.

EMPLOYEES

      As of February 17, 1997, the Company had 235 employees, most of whom are
engaged in research, development, manufacturing, quality assurance and marketing
activities, including 39 who hold Ph.D. or M.D. degrees. In addition, the
Company has consulting arrangements with scientists at various institutions and
universities in the United States and Israel.

      The Company's ability to develop marketable products and to establish and
maintain its competitive position in light of technological developments will
depend, in part, on its ability to attract and retain qualified scientific,
marketing and management personnel. Competition for such personnel is intense.

      None of the Company's employees is represented by a labor union and the
Company has experienced no work stoppages. The Company believes its relations
with its employees are good and has experienced a low turnover rate among its
employees.


                                      -19-


EXECUTIVE OFFICERS OF THE COMPANY

    The executive officers and other key personnel of the Company are as
follows:

Name                         Age       Positions
- ----                         ---       ---------
Sim Fass                     55        Chairman of the Board, President, Chief
                                       Executive Officer and Treasurer;
                                       President of BTG-Israel; Director

Norman Barton, M.D., Ph.D.   49        Vice-President--Medical Affairs

Zvi Ben-Hetz                 53        Vice President--Operations and Logistics
                                       BTG-Israel

Lionel Edwards, M.D.         55        Vice President--Clinical Research

Marian Gorecki, Ph.D.        56        Senior Vice President--Chief Technical
                                       Officer

David Haselkorn, Ph.D.       52        Senior Vice President, Chief Operating
                                       Officer; Managing Director, BTG-Israel

Abraham Havron, Ph.D.        50        Vice President--Manufacturing, BTG-
                                       Israel

Dov Kanner, Ph.D.            43        Vice President--Quality Assurance and
                                       Regulatory Affairs, BTG-Israel

Nadim Kassem, M.D.           65        Senior Vice President--Chief Medical
                                       Officer

Ernest Kelly, Ph.D.          47        Senior Vice President--Quality
                                       Assurance, Quality Control and
                                       Regulatory Affairs

Amos Panet, Ph.D.            56        Chief Scientist--BTG-Israel

Annmarie Petraglia           58        Vice President--Regulatory Affairs

William Pursley              43        Senior Vice President--Marketing, Sales
                                       and Commercial Development

Ronald Simko                 46        Vice President--Manufacturing

Yehuda Sternlicht            42        Vice President--Finance, Chief Financial
                                       Officer

The background of these individuals is as follows:

      Sim Fass, Ph.D. was elected a Director and Treasurer of the Company in
August 1983 and served as Chief Operating Officer of BTG-Israel from August 1983
to May 1987 and as President of BTG-Israel from May 1984. Dr. Fass became
President and Chief Executive Officer of the Company in May 1984 and Chairman of
the Board in March 1997. From April 1980 to August 1983, he was Vice President,
General Manager of Wampole Laboratories, a division of Carter-Wallace, Inc., a
company that manufactures health care related products. Prior to that, he held
various positions at Pfizer, Inc. from September 1969 until March 1980,
including Director, Marketing Research and Planning, Pfizer Pharmaceutical, and
Vice President, Marketing and Sales, Pfizer Diagnostics Division of Pfizer
Pharmaceutical and


                                      -20-


Group Marketing Manager of Pfizer Laboratories.  Dr. Fass received his Ph.D. in
developmental biology/biochemistry from the Massachusetts Institute of
Technology.

      Norman Barton, M.D., Ph.D. joined the company in April 1996 in the newly
created position of Vice President--Medical Affairs. Prior to joining the
Company, from 1985 to 1996 Dr. Barton served as Chief of the Clinical
Investigations and Therapeutics Section of the National Institute of
Neurological Disorders and Stroke in Bethesda, Maryland. During that time, he
was instrumental in the development and clinical investigation of
macrophage-targeted glucocerebrosidase (CEREDASE(TM)), the first enzyme
replacement product for Gaucher disease, a genetic disorder of lipid metabolism.
Between 1978 and 1985, Dr. Barton held positions as a staff neurologist at The
New York Hospital and the National Institute of Neurological Disorders and
Stroke. Dr. Barton is a board-certified neurologist and holds a Ph.D. in
Biological Chemistry.

      Zvi Ben-Hetz joined BTG-Israel in December 1980 as facility manager. His
work included the organization and construction of the facility and logistics
system of the Company in Israel. Between 1986 and 1988, he headed the unit
involved in the construction of the present facility in Israel, where all the
Company's research, development and manufacturing activities take place. In 1988
he was appointed Operations and Logistics Manager of BTG-Israel and in 1992 was
appointed Vice President--Operations and Logistics of BTG-Israel. From 1976
until he joined BTG-Israel, Mr. Ben-Hetz worked at the Volcani Institute - the
National Institute for Agriculture Research in Israel, as a Junior Agricultural
Engineer.

      Lionel Edwards, M.D. joined the Company in March 1995 as Vice
President--Clinical Research. Prior to joining the Company he was Assistant Vice
President-International Research at Hoffmann-La Roche, Inc., based in the United
States. From 1983 to 1992 he was Senior Director International Research and
Director U.S. Research at Schering Plough. From 1992 to 1994 he served on a
committee of the Institute of Medicine and a Sub-Committee for International
Harmonization (United States, European Community, Japan). He received his M.D.
degree from Guys Hospital, London University in 1966.

      Marian Gorecki, Ph.D. was elected Senior Vice President--Chief Technical
Officer of the Company in June 1992. In 1986 he was appointed Vice President and
Chief Technical Officer of BTG-Israel. Prior thereto, he had served as Vice
President, Research and Development of BTG-Israel since August 1981. Prior to
that, he was on the staff of the Weizmann Institute of Science for twelve years,
during which time he was an associate professor for two years. Dr. Gorecki
received his Ph.D. in biochemistry from the Weizmann Institute of Science in
1972. He has broad experience in the fields of molecular biology and genetic
engineering as well as in peptide protein chemistry. Dr. Gorecki served as a
director of the Company from June 1992 through December 1994.

      David Haselkorn, Ph.D. was appointed Vice President of the Company and
Managing Director of BTG-Israel in May 1987. In 1990, he was promoted to Senior
Vice President and Chief Operating Officer of the Company. He received his M.Sc.
degree in biochemistry from the Hebrew University in 1970 and a Ph.D degree in
chemical immunology from the Weizmann Institute of Science in 1973. From 1973 to
1982, Dr. Haselkorn rose to the rank of colonel and was appointed head of a
research and development division of the Israel Defense Forces. From 1982
through May 1987 he served as Chief Scientist of the International Eisenberg
Group of Companies. Dr. Haselkorn served as a director of the Company from
February 1992 through June 1995.

      Abraham Havron, Ph.D. joined BTG-Israel in September 1987 as Director,
Manufacturing and in 1992 was appointed Vice President--Manufacturing of
BTG-Israel. Dr. Havron obtained his Ph.D. degree in bio-organic chemistry from
the Weizmann Institute of Science in 1978 and subsequently did post-doctoral
research in the Department of Radiology at Harvard Medical School. Before
joining the Company, Dr. Havron served as Production and R&D Manager at
InterPharm Laboratories Ltd., a subsidiary of Ares Serono, Inc., a multinational
pharmaceutical company.


                                      -21-


      Dov Kanner, Ph.D. was appointed to the newly-created position of Vice
President--Quality Assurance and Regulatory Affairs of BTG-Israel in September
1994. Dr. Kanner joined BTG-Israel in 1981 as a staff scientist, served as Head
of Fermentation from 1984 to 1989 and as Deputy Director, Manufacturing and
Process Development, from 1989 to 1994. He obtained his Ph.D. in microbiology
from Rutgers University in 1980.

      Nadim Kassem, M.D. joined the Company in June 1992 as Senior Vice
President--Chief Medical Officer. He received his M.D. degree from the Hebrew
University Hadassah Medical School in 1962 and trained at Hadassah Medical
Center in Jerusalem and the VA Medical Center in the Bronx. Prior to joining BTG
he consulted extensively within the pharmaceutical industry in the pre-clinical,
clinical and regulatory affairs areas for six years. He was Vice President,
Clinical Development, for Advanced Therapeutics International from 1986 to 1988
after serving as Director, Division of Medical Research for Revlon from 1985 to
1986. Prior to that he served for over fifteen years at Schering Plough
Corporation in a variety of senior clinical research positions.

      Ernest Kelly, Ph.D. joined the Company in February 1996 in the newly
created position of Senior Vice President--Quality Assurance, Quality Control
and Regulatory Affairs. Prior to joining the Company he was Vice President,
Worldwide Quality Assurance for Rhone-Poulenc Rorer ("RPR"). From 1979 to 1996,
Dr. Kelly served in positions at RPR in both research and development and
industrial operation quality assurance. Prior to joining RPR he served Merck
Sharp and Dohme from 1974 to 1979 and McNeil Labs from 1972 to 1974 in quality
assurance and analytical research positions. Dr. Kelly received his Ph.D. in
Physical Chemistry from Villanova University, served on several United States
Pharmacopeia Advisory Panels and also served as Adjunct Professor of
Pharmaceutics, Temple University.

      Amos Panet, Ph.D. joined BTG-Israel in September 1986 as Assistant to the
Vice President, Research and Development. In March 1987, he was appointed Chief
Scientist. Dr. Panet obtained his Ph.D. in the field of biochemistry from the
Hebrew University of Jerusalem, and subsequently served as a post-doctoral
fellow with Drs. D. Khorana and D. Baltimore at the Massachusetts Institute of
Technology. Dr. Panet is a Professor of Virology at the Hadassah School of
Medicine of the Hebrew University.

      Annmarie Petraglia joined BTG in May 1994 as Senior Director, Regulatory
Affairs and was appointed Vice President--Regulatory Affairs in April, 1995.
Previously Ms. Petraglia was Director, Regulatory Affairs and Scientific
Documentation, Daiichi Pharm. Corp. from 1991 to 1994; Vice President Regulatory
Affairs, Zambon Corp. from 1988 to 1991; Senior Vice President, Regulatory
Affairs, Advanced Therapeutics Communications from 1986 to 1988; and Director,
Regulatory Affairs, American Home Products from 1984 to 1986. She served in
various regulatory affairs capacities at Schering Plough Corporation from 1980
to 1984; as Director, Medical Analysis/Writing at Bristol Myers International
from 1973 to 1978; and Product Manager at Hoffmann-La Roche Inc. from 1967 to
1973. Ms. Petraglia is a registered pharmacist.

      William Pursley joined the Company in April 1995 in the newly created
position of Senior Vice President--Marketing, Sales and Commercial Development.
From November 1993 until April 1994, Mr. Pursley was Chairman and CEO of
TriGenix, Inc., a virtual sales, marketing and reimbursement organization for
the biotechnology industry. Mr. Pursley was Vice President of Sales and
Marketing at Genzyme Corp. from December 1990 until November 1993. Mr. Pursley
managed the growth hormone business in the Southeast region of the U.S. for
Genentech from October 1985 until December 1990. From 1979 through October 1985,
Mr. Pursley held several sales, marketing and middle management positions at
Merck.

      Ronald Simko joined the Company in August 1994 as Vice
President--Manufacturing. From 1977 to 1989, Mr. Simko worked in numerous
manufacturing capacities at Schering Plough managing the process validation
organization as well as the sterile products and


                                      -22-


tablet production operations. From 1989 to 1994, he was at Enzon, Inc., where he
served as Senior Director, Manufacturing and Materials Management.

      Yehuda Sternlicht joined BTG-Israel in July 1992 as financial manager and
in January 1993 was appointed Chief Financial Officer of the Company. In June
1995 he was appointed Vice President--Finance and Chief Financial Officer of the
Company. From 1988 until he joined BTG-Israel he was financial manager of
Bordeaux Textile Ltd., an Israeli company. From 1985 to 1988 he served as
controller of Laser Industries Ltd., an Israeli company listed on the American
Stock Exchange. Prior to that, he held various positions at Haft & Haft, one of
the largest CPA firms in Israel. From 1983 to 1985 he worked at Haft & Haft's
affiliate's New York office. Mr. Sternlicht is qualified as a Certified Public
Accountant in the State of Israel.

ITEM 2. PROPERTY

     The Company's administrative offices are currently located in Iselin, New
Jersey, where the Company has leased approximately 23,000 square feet of office
space. The lease has a base average annual rental expense of approximately
$414,000 and expires in October 2003. The Company's research, development and
manufacturing facility is located in Rehovot, Israel, where BTG leases
approximately 80,000 square feet at an annual rental of approximately
$1,146,000. Construction of this facility was completed in 1988 and occupancy
commenced shortly thereafter. The lease term expires in January 1999. BTG also
leases 5,000 square feet of warehouse space near its research and manufacturing
facility. The Company believes its space will be suitable and adequate for its
current activities; however, the Company anticipates that it will require a new,
larger manufacturing facility in Israel within the next several years to meet
anticipated increased demand for its products and increased regulatory
requirements. The Company believes there will be adequate space available in
Israel to construct a new facility.

ITEM 3. LEGAL PROCEEDINGS

      On March 16, 1993, Genentech filed a complaint with the U.S. International
Trade Commission (the "ITC") alleging, among other things, that BTG's
importation of hGH into the United States violates Section 337 of the Tariff Act
of 1930 because of the existence of certain claims in U.S. patents of Genentech.
Genentech sought an immediate investigation and an order that BTG cease and
desist from importing hGH into the United States. The trial on the Genentech
complaint was held in April 1994. In January 1995 the ITC issued a final
decision dismissing the complaint with prejudice as a sanction for Genentech's
conduct which resulted in an incomplete record and violated the due process
rights of BTG and Novo-Nordisk A/S, another respondent in the proceeding. The
ITC also found no violation by BTG of Section 337 of the Tariff Act of 1930.
Genentech appealed the ITC decision to the United States Court of Appeals for
the Federal Circuit (the "CAFC"). The appeal was heard on December 4, 1995, and
a decision is pending. During 1993 and 1994, BTG incurred total legal fees of
approximately $4.2 million relating to the ITC proceeding. See "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Results of Operations."

      On December 1, 1994, Genentech filed a lawsuit against BTG in the United
States District Court for the District of Delaware alleging that BTG's
importation of hGH infringed two Genentech process patents. In January 1995, BTG
commenced an action against Genentech in the United States District Court for
the Southern District of New York seeking, among other things, declaratory
judgments as to the non-infringement, invalidity and unenforceability of such
Genentech patents as well as damages resulting from Genentech's actions in the
ITC proceedings. The Delaware action was consolidated with the New York action,
and in August 1995 the United States District Court for the Southern District of
New York granted a preliminary injunction prohibiting the commercial
introduction in the U.S. of BTG's hGH. In April 1996 the CAFC rejected BTG's
appeal of the grant of the preliminary injunction. In May 1996 the CAFC rejected
BTG's request for


                                      -23-


a rehearing and a rehearing en banc. BTG filed a petition for a writ of
certiorari with the U.S. Supreme Court, which was denied in October 1996. BTG is
now precluded from marketing and distributing its human growth hormone in the
United States pending the outcome of the patent infringement action. Although
BTG believes that it does not infringe any valid Genentech patent, there can be
no assurance that BTG will not be found to be infringing Genentech's patents. If
BTG is ultimately found by the district court to infringe one or more claims in
Genentech's U.S. patents, it likely will be precluded from selling its hGH in
the United States during the life of these Genentech patents. The Company is
currently evaluating its options in light of the district court and CAFC
decisions. During 1995, the Company incurred total legal fees relating to this
litigation of approximately $824,000, which amount was initially capitalized but
subsequently written off in the first quarter of 1996 following the CAFC
decision.

      During 1991, BTG received notification from the U.S. Patent Office Board
of Patent Appeals and Interferences of the declaration of an interference
between an issued patent assigned to BTG covering a method for producing
enzymatically active human copper/zinc SOD in bacteria and a pending application
of Chiron which claims an earlier filing date. While BTG is vigorously defending
its patent, it cannot predict the outcome of such interference. However, should
BTG's patent be disallowed and a corresponding patent be issued to Chiron, BTG's
present method of producing enzymatically active human copper/zinc SOD in
bacteria may need to be altered, which may or may not be possible;
alternatively, BTG could seek a license to market under Chiron's patent, which
may or may not be available. Subsequent to the interference being declared,
Chiron was issued a U.S. patent for the bacterially produced form of recombinant
human copper/zinc SOD. BTG is seeking to have the Patent Office either expand
the scope of the existing interference action or declare a separate interference
to determine that BTG rather than Chiron should hold the patent for the
bacterially produced form of recombinant human copper/zinc SOD on the basis that
BTG scientists, not Chiron scientists, invented the method for producing
recombinant human copper/zinc SOD in bacteria. Unless BTG is able to prevail in
this effort or to obtain a license from Chiron, BTG may be unable to
commercialize its OxSODrol product in the United States. This matter is
currently under consideration by the Patent Office. In addition, the Israeli
Patent Office has accepted a Chiron patent application covering a DNA construct
having certain specified functions for expression of active copper/zinc SOD and
a method for production of active copper/zinc SOD in a microorganism harboring
this construct. BTG is opposing the grant of this patent; however, there can be
no assurance that this opposition will be successful. If the opposition is
unsuccessful, BTG may be precluded from manufacturing OxSODrol in Israel. See
"Item 1. Business -- Products and Applications -- Products in Registration and
Clinical Trials -- OxSODrol (human superoxide dismutase)."

      In March 1993, the U.S. Patent Office issued a patent exclusively licensed
to BTG containing broad claims for the gene encoding human copper/zinc SOD,
related recombinant expression vectors and genetically engineered cells
containing the gene. BTG believes that Chiron could not commercialize its
yeast-produced SOD product in the United States without infringing this patent.
However, the issuance of this patent does not assure BTG's ability to
commercialize its OxSODrol product.

      In September 1991, the Company received a letter from Biogen stating that
it believed that the Company's recombinant surface antigen of the hepatitis-B
virus, which is an active ingredient of the Company's Bio-Hep-B vaccine, or the
Company's intermediates for the process of making such antigen, falls within the
claims of one or more of Biogen's patents and/or patent applications. To date,
the Company's activities with respect to its Bio-Hep-B vaccine have been limited
to research and clinical evaluations, which activities the Company believes do
not infringe Biogen's patent rights. The Company has also made inquiries of
Biogen and SmithKline Beecham (the exclusive licensee of all of Biogen's
hepatitis-B patents except those in Japan) requesting that the Company be
granted a license to the Biogen patents; however, such efforts have not been
successful to date.


                                      -24-


      In January 1992, BTG-Israel filed an application in the Israeli Patent
Office for a compulsory license to manufacture BTG's Bio-Hep-B vaccine under
Biogen's Israeli patent which license, upon approval, would enable BTG to
produce the vaccine in Israel and likely to export the vaccine to countries in
which neither Biogen nor others have been granted a blocking patent. In
September 1995 the Registrar ruled in an interlocutory decision that BTG-Israel
is entitled to a compulsory license to the Biogen patent. Biogen's appeal of the
interlocutory decision was rejected. In late 1996, the Registrar set the terms
of the license, including royalties to be paid by BTG to Biogen. This decision
(and consequently the license) was to come into effect in December 1996. Biogen
appealed the Registrar's decision to the District Court of Tel Aviv, Israel.
With its appeal Biogen also moved for a stay of the license, which was granted
ex parte pending hearings with both parties. Following hearings which took place
in December 1996, the motion was denied in January 1997; however, the ex parte
stay was left in force pending Biogen's appeal to the Supreme Court and
maintained by the Supreme Court pending the decision by the District Court on
the merits of Biogen's appeal. The District Court heard the appeal in early
March 1997, and a decision is pending. There can be no assurance that a
compulsory license will finally be issued and there can be no assurance that if
it issues, the license will not be subsequently overturned by the Israel Patent
Office or by a court. If a compulsory license is not issued or, if after
issuance, the license is overturned, BTG may not be able to manufacture or sell
its Bio-Hep-B vaccine in Israel or to export such product from Israel unless the
patent expires or is revoked.

      In August 1992, Biogen sued BTG-Israel for allegedly infringing its
Israeli patent (which is the subject of the compulsory license application) by
virtue of its preparation of BTG's Bio-Hep-B vaccine for use in clinical trials,
and applied for an interlocutory injunction restraining BTG-Israel from
continuing research and development activities and clinical trials. In June
1993, the District Court of Tel Aviv, Israel denied Biogen's application for an
interlocutory injunction in connection with research and development and
clinical trials, but did enjoin BTG-Israel from commercial marketing of its
Bio-Hep-B vaccine unless permitted by Biogen or its exclusive licensee, until a
compulsory license is obtained, or until the patent expires or is revoked. These
proceedings are continuing. There can be no assurance that the outcome of these
proceedings will be favorable to BTG, and the Company cannot predict what effect
it may have on the compulsory license or on the ability of BTG to successfully
commercialize and market the Bio-Hep-B vaccine. An outcome unfavorable to BTG
may adversely affect the ability of BTG to commercialize and market the
Bio-Hep-B vaccine. See "Item 1. Business -- Products and Applications --
Products in Registration and Clinical Trials -- Hepatitis-B Vaccine."

      Three patent applications of Genentech in Israel which cover general
methods relating to genetically engineered products and to human growth hormone
were accepted in 1983 (two) and 1985 (one). BTG is opposing the grant of these
patents. One of these three Israeli applications corresponds to the two U.S.
patents which are the subject of the complaint asserted by Genentech against BTG
in the United States District Court in Delaware (subsequently consolidated with
related proceedings in New York). Additionally, in 1984 an Israeli patent
application of Biogen which relates to expression vectors was accepted; BTG is
opposing the grant of this patent. There can be no assurance that BTG will be
successful in its opposition to the grant of these patents. If BTG is
unsuccessful in its opposition in Israel, then BTG may be unable to manufacture
its products in Israel.

      In 1994 BTG filed oppositions to two allowed Genentech patent applications
in Japan relating to human growth hormone, in 1993 to one Biogen vector patent
in the EPO, and in 1995 to the corresponding Biogen vector patent application in
Japan. These patents and patent applications correspond to the Genentech and
Biogen patent applications being opposed in Israel. There can be no assurance
that BTG will be successful in its oppositions to these patents and patent
applications. If BTG is unsuccessful in these oppositions in Japan, BTG and
licensees of its products may be unable to sell certain of its products,
including hGH and OxSODrol, in Japan.

      The Company has also initiated proceedings in Israel to oppose the grant
to several of its competitors of patents relating to vector systems, and may
oppose corresponding


                                      -25-


patents in other jurisdictions.  Additionally, during 1991 and 1992, proceedings
were initiated in Israel to oppose the grant of patents relating to the OxSODrol
and Bio-Flow  products,  respectively.  Although the outcome of the  proceedings
cannot be predicted with certainty and will likely not be determined for several
years, the Company  believes that the outcome will be favorable,  although there
can be no assurance of this. The Company is aware of patent  applications  filed
by, or patents issued to, other entities with respect to technology  potentially
useful to the  Company  and, in some cases,  related to products  and  processes
being developed by the Company.  The Company cannot presently assess the effect,
if any,  that  these  patents  may have on its  operations.  The extent to which
efforts by other  researchers  have or will  result in patents and the extent to
which the issuance of patents to others would have a materially  adverse  effect
on the  Company or would force the  Company to obtain  licenses  from others are
currently unknown.

      In 1986, the Company licensed from the U.S. Department of Commerce a U.S.
patent relating to the sublingual delivery of sex steroids, in which the drug is
absorbed into the bloodstream through the mucosal membrane under the tongue.
Subsequently the Company licensed from the U.S. Department of Commerce one claim
of a related U.S. patent, which patent is currently the subject of an
interference action by Janssen, a division of Johnson & Johnson. The Company is
currently in negotiations to secure a license to Janssen's patents and
technology, although there can be no assurance it will be able to obtain a
license on reasonable terms or at all. If Janssen is successful in this
interference action and BTG is unable to obtain a license, BTG may be prohibited
from commercializing Androtest-SL. See "Item 1. Business -- Products in
Registration and Clinical Trials -- Androtest-SL (sublingual testosterone)" and
"-- Patents and Proprietary Rights."

ITEM 4. SUBMISSION OF MATTERS TO A VOTE

      None


                                      -26-


                                     PART II

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

     The Company's common stock is quoted on the National Association of
Securities Dealers Automated Quotation System ("Nasdaq") National Market under
the symbol BTGC. The following table sets forth, for the periods indicated, the
high and low sale prices per share of the Company's common stock from January 1,
1995 through December 31, 1996 as reported by the Nasdaq National Market.


                                           High          Low
      1995                                 ----          ---
      ----
      First Quarter........................2 3/4         2
      Second Quarter.......................4 1/4         2
      Third Quarter........................3 11/16       2 13/16
      Fourth Quarter.......................5             3 1/16

      1996
      ----
      First Quarter........................9 1/8         4 1/2
      Second Quarter.......................8 11/16       5
      Third Quarter........................9 11/16       6 7/16
      Fourth Quarter.......................13 1/4        6 5/16

     The number of stockholders of record of the Company's common stock on March
20, 1997 was approximately 1,600.

     The Company's warrants to purchase common stock at a purchase price of
$5.49 per share are quoted on the Nasdaq National Market under the symbol BTGCL.
See Note 4 of Notes to Consolidated Financial Statements.

     The Company has never declared or paid a cash dividend on its common stock,
and it is not expected that cash dividends will be paid to the holders of common
stock in the foreseeable future. In addition, the indentures under which the 7
1/2% Convertible Senior Subordinated Notes due April 15, 1997, and the Series B
11% Senior Secured Convertible Notes due October 15, 1998 were issued prohibit
the payment of cash dividends on the Company's common stock.

     The Company no longer meets the requirements under Israeli law for
treatment as an Israeli Industrial Holding Company and therefore Israeli
investors in the Company's common stock are not exempt from capital gains tax on
sale of the Company's common stock.


                                      -27-


ITEM 6.  SELECTED CONSOLIDATED FINANCIAL DATA
         (in thousands except per share data)

                                         For the year ended December 31,
                                -----------------------------------------------
                                  1992    1993(1)    1994     1995(2)   1996(3)
                                -----------------------------------------------

STATEMENT OF OPERATIONS DATA:

Total revenues ...............  $ 8,025  $ 13,867   $17,440   $27,960   $47,738
Total expenses................   18,560    36,692    26,359    24,544    36,798
Extraordinary gain............      --        --      1,500     1,363       --
Net income (loss).............  (10,535)  (22,825)   (7,419)    4,779    22,915
Extraordinary gain per share..      --        --       0.04      0.03       --
Net income (loss) per share:
  Primary.....................    (0.32)    (0.63)    (0.19)     0.11      0.47
  Fully-diluted...............      --        --        --        --       0.45
Weighted average shares
 outstanding:
  Primary.....................   33,410    36,180    38,725    43,784    48,259
  Fully-diluted...............      --        --        --        --     50,704

                                             As of December 31,
                                --------------------------------------------

                                 1992     1993     1994      1995     1996
                                --------------------------------------------
BALANCE SHEET DATA:

Working capital...............  $20,863  $12,274  $13,652  $15,309  $40,626
Total assets..................   36,831   31,086   32,340   33,679   73,575
Long-term liabilities.........    5,987    3,648    1,389    3,641    3,927
Stockholders' equity..........   27,487   20,082   23,182   25,689   60,558
- -------------------------------------
(1) a. On August 6, 1993, the Company completed its acquisition of Gynex
Pharmaceuticals Inc. ("Gynex"), a publicly traded corporation quoted on the
Nasdaq Small Cap Market, by merging Gynex into a wholly owned subsidiary of the
Company. As a result of the merger, in August 1993, the Company issued an
aggregate of approximately 9.94 million shares of its common stock and reserved
for issuance up to 1.25 million shares of its common stock upon exercise of
options and up to 0.82 million shares of its common stock upon exercise of
warrants. In addition, the Company recorded merger expenses of $1.4 million. The
merger was accounted for as a pooling of interests for accounting and financial
reporting purposes. The 1992 financial statements were restated to reflect this
merger as if it occurred on January 1, 1992.

b. In connection with the financing with Bio-Cardia Corporation ("Bio-Cardia"),
the Company in December 1993 issued Warrants to purchase an aggregate of
6,206,250 shares of common stock, consisting of (i) 5,625,000 Warrants issued to
investors in Bio-Cardia in consideration of their grant to the Company of an
option to purchase their shares of Bio-Cardia common stock (the "Stock Purchase
Option"), (ii) 562,500 Warrants issued to the placement agent in the financing,
and (iii) 18,750 Warrants issued to the directors of Bio-Cardia. The Company
expensed $10,241,000 for the year ended December 31, 1993, equal to the
aggregate value of the Warrants, as determined by an independent investment
banking firm, representing (i) the uncertain realizability of the value of such
Stock Purchase Option, (ii) the Company's expenses of the financing and (iii)
director


                                      -28-


compensation expense, respectively. See "Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Financing with
Bio-Cardia Corporation" and note 13 of Notes to Consolidated Financial
Statements.

(2) Revenues in 1995 include $3,004,000 of research and development revenues
under collaborative agreements resulting from the receipt by the Company of
Warrants to purchase 2,670,000 shares of the Company's common stock obtained by
Bio-Cardia from its defaulted stockholders in partial satisfaction of amounts
owed by Bio-Cardia to BTG for research and development. Expenses in 1995 include
research and development financing expenses of $806,000, representing the net
funds provided to Bio-Cardia by BTG in respect of an exchange offer and the
deferred revenues received from Bio-Cardia prior to such exchange offer. See
"Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations -- Financing with Bio-Cardia Corporation" and note 13 of Notes to
Consolidated Financial Statements.

(3) a. For the year ended December 31, 1996, the Company reduced the valuation
allowance recorded against its income tax assets by $18,587,000, which resulted
in an $11,975,000, or $0.24 per share, increase in net income.

b. For the year ended December 31, 1996, fully diluted earnings per share is
presented because the market value of the Company's common stock as of December
31, 1996 was substantially higher than the average price used in computing
primary earnings per share (treasury stock repurchase calculation). See note 11
of Notes to Consolidated Financial Statements.


                                      -29-


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

      Statements in this Annual Report on Form 10-K concerning the Company's
business outlook or future economic performance; anticipated profitability,
revenues, expenses or other financial items; introductions and advancements in
development of products, and plans and objectives related thereto; and
statements concerning assumptions made or expectations as to any future events,
conditions, performance or other matters, are "forward-looking statements" as
that term is defined under the Federal Securities Laws. Forward-looking
statements are subject to risks, uncertainties and other factors which could
cause actual results to differ materially from those stated in such statements.
Such risks, uncertainties and factors include, but are not limited to, changes
and delays in product development plans and schedules, changes and delays in
product approval and introduction, customer acceptance of new products, changes
in pricing or other actions by competitors, patents owned by the Company and its
competitors, changes in healthcare reimbursement, risk of operations in Israel,
risk of product liability, governmental regulation, dependence on third parties
to manufacture products and commercialize products, general economic conditions,
as well as other risks detailed in the Company's filings with the Securities and
Exchange Commission, including this Annual Report on Form 10-K.

RESULTS OF OPERATIONS

      The Company has been principally engaged in research and product
development activities since it commenced operations in October 1980 and
currently has several products being marketed. The Company has been profitable
since 1995.

      Revenues from product sales, derived primarily from the Company's hGH,
Oxandrin, BioLon and Delatestryl products, amounted to $11,047,000, $21,428,000
and $40,356,000, or 65%, 79% and 87%, respectively, of total revenues (exclusive
of interest income), for the years ended 1994, 1995 and 1996, respectively. Net
sales of hGH were $7,218,000, $12,074,000 and $18,218,000 in 1994, 1995 and
1996, respectively, representing 65%, 56% and 45% of product sales,
respectively, and 43%, 44% and 39% of total revenues (exclusive of interest
income), respectively. During 1994, 1995 and 1996, JCR Pharmaceuticals Co.,
Ltd., the Company's licensee in Japan, purchased approximately $5,170,000,
$9,853,000 and $12,906,000 of hGH, representing 47%, 46% and 32%, respectively,
of total product sales. In December 1995 the Company launched Oxandrin for the
treatment of disease-related weight loss, which accounted for approximately
$2,992,000, or 14%, of 1995 product sales and approximately $15,098,000, or 37%,
of 1996 product sales. During the years ended December 31, 1994, 1995 and 1996,
sales of BioLon were approximately $1,871,000, $3,781,000 and $4,737,000,
respectively, representing 17%, 18% and 12%, respectively, of product sales. See
"Item 1. Business--Products under Commercialization."

      For the years ended December 31, 1994, 1995 and 1996, contract fees, which
consist of licensing and option to license fees, amounting to $762,000, $591,000
and $4,887,000, or 4%, 2% and 10%, respectively, of total revenues (exclusive of
interest income), were earned from certain of the Company's collaborative
partners. In 1994 contract fees of $500,000, $160,000 and $87,000 were earned in
respect of the license of marketing rights of oxandrolone in Australia, hGH in
Canada and Latin America and BioLon in Europe and Latin America, respectively.
Of the contract fees earned in 1995, $345,000 was earned in respect of the
license of marketing rights of hGH in Latin America and the Far East and
$245,000 in respect of BioLon in Latin America and Europe. Of the contract fees
earned in 1996, $2,500,000 was earned in respect of vitamin D, of which
$2,000,000 was earned in respect of a fee paid in lieu of royalties in
connection with termination of a European


                                      -30-


sublicense and $500,000 was earned in connection with the license of
distribution rights in the United States, $500,000 was earned in respect of the
license of marketing rights of BioLon in Japan, $400,000 was earned in respect
of the license of marketing rights of SOD in Japan, and $1,000,000 represents a
one-time payment by a third party for the exclusive right to evaluate one of the
Company's products under development. This third party subsequently determined
not to pursue a license of the product for reasons which the Company believes do
not relate to the safety and efficacy of the product.

      For the years ended December 31, 1994 and 1995, research and development
revenues under collaborative agreements, which consist of research funding
(other than funding from the Chief Scientist of the Israeli government ("Chief
Scientist")), amounting to $3,652,000 and $4,041,000, or 22% and 15%,
respectively, of total revenues (exclusive of interest income), were earned
primarily from Bio-Cardia Corporation ("Bio-Cardia") and the National Institutes
of Health ("NIH") and in 1994 from the U.S. Army. The Company did not have
research and development revenues under collaborative agreements in 1996. Of the
research and development revenues under collaborative agreements earned in the
year ended December 31, 1994, $2,950,000, or 81% of total research and
development revenues under collaborative agreements, was earned in respect of
research and development activities conducted pursuant to the research and
development agreement and service agreement which the Company entered into with
Bio-Cardia in December 1993, including $275,000 representing reimbursement of
previously incurred research and development expenses. In 1995, $3,486,000, or
86% of total research and development revenues under collaborative agreements,
resulted from the receipt by the Company of warrants to purchase shares of its
common stock, obtained by Bio-Cardia from its defaulted stockholders in the
amount of $3,004,000 and net cash received from Bio-Cardia in the amount of
$482,000. Of the remainder of research and development revenues under
collaborative agreements, $507,000 was earned in respect of research and
development for the NIH in respect of genetic, biochemical and immunological
characterization of certain human immunodeficiency virus proteins as well as
proteins derived from parasites infecting AIDS patients such as P. Carinii and
Toxoplasma. Research and development revenues under collaborative agreements
from the NIH represented 18% and 13% of total research and development revenues
under collaborative agreements in 1994 and 1995, respectively. See "--Financing
with Bio-Cardia Corporation" and Note 13 of Notes to Consolidated Financial
Statements.

      Other revenues, which include partial funding of several of the Company's
research and development projects by the Chief Scientist, aggregated $1,476,000,
$1,113,000 and $1,390,000 for the years ended December 31, 1994, 1995 and 1996,
respectively. Other revenues represented 9%, 4% and 3% of total revenues
(exclusive of interest income) in the years ended December 31, 1994, 1995 and
1996, respectively. Funding from the Chief Scientist represented 96%, 99% and
98% of other revenues in the years ended December 31, 1994, 1995 and 1996,
respectively. The Company annually applies to the Chief Scientist for research
and development funding for its various projects for the coming year. The
projects and amount funded each year are within the sole discretion of the Chief
Scientist. There can be no assurance that the Company will be able to continue
to secure additional funds from the Chief Scientist at the same levels or at
all. The Company is obligated, for products resulting from research and
development partially funded by the Chief Scientist, to pay royalties to the
Chief Scientist of 3% to 5% on commercial sales, if any, of these products if
produced in Israel up to the amount so funded, or royalties of 4% to 6% if
produced outside Israel up to 120% to 300% of the amount so funded. During 1996,
the Company completed payment of its entire obligation for royalties to the
Chief Scientist in respect of its human growth hormone.


                                      -31-


      Interest income was $503,000, $787,000 and $1,105,000 for the years ended
December 31, 1994, 1995 and 1996, respectively. The increase in interest income
in 1995 was derived primarily from an increase in cash balances resulting from
$9,000,000 received from financing transactions consummated in October 1994 as
well as higher yields on cash investments. The increase in interest income in
1996 is mainly due to an increase in cash balances resulting from $5,254,000 and
$3,401,000 received from the exercise of stock options and warrants,
respectively, increased product sales and better cash management.

      In the years ended December 31, 1994 and 1995, the Company recognized an
extraordinary gain of $1,500,000 and $1,363,000, respectively, resulting from
the Company's payment, in January 1994, of $1,500,000 to Smithkline Beecham
("SB") in full satisfaction of its $3,000,000 obligation to SB and from the
Company's payment, in July 1995, of $1,000,000 to the Du Pont Merck
Pharmaceutical Company ("Du Pont Merck") in full satisfaction of its $2,363,000
obligation to Du Pont Merck. The obligations to SB and Du Pont Merck were
incurred in connection with BTG's reacquisition of hGH marketing rights from
these companies. See "--Liquidity and Capital Resources."

      Expenditures for research and development were $13,714,000, $10,935,000
and $12,431,000 for the years ended December 31, 1994, 1995 and 1996,
respectively. The increase in research and development expenditures in 1996 is
primarily due to an increase in expenses and headcount associated with the
clinical studies conducted by the Company. The decrease in research and
development expenditures in 1995 is mainly due to the change in the focus of the
Company's activities from research and development towards the Company's
commercialized products and those that are nearing commercialization and away
from early stage research and development activities. Of total research and
development expenses, expenditures for research and development conducted on
behalf of Bio-Cardia pursuant to a research and development agreement were
approximately $5,314,000 and $4,467,000 in the years ended December 31, 1994 and
1995, respectively. However, due to default by certain Bio-Cardia stockholders
in 1994, Bio-Cardia was only able to pay BTG $2,467,000 (plus management fees)
of the $5,314,000 due; the remaining $2,847,000 was not recognized as revenues
because of the uncertainty of the realizability of such amounts. Of the
$4,467,000 due BTG from Bio-Cardia in 1995, only $482,000 was reimbursed to the
Company in cash and $3,004,000 was reimbursed through the return of warrants to
purchase the Company's common stock obtained by Bio-Cardia; the remaining
$981,000 has not been recognized as revenues. See "--Financing with Bio-Cardia
Corporation."

      Cost of product sales, primarily related to commercial sales of hGH,
Oxandrin, BioLon and Delatestryl, were $2,168,000, $3,913,000 and $7,264,000 in
1994, 1995 and 1996, respectively. Cost of product sales as a percentage of
product sales varies from year to year and quarter to quarter depending on the
quantity and mix of products sold.

      General and administrative expenses were $9,743,000, $6,420,000 and
$7,458,000 in the years ended December 31, 1994, 1995 and 1996, respectively.
Included in 1994 are substantial legal fees relating to the complaint filed by
Genentech with the ITC relating to hGH, on which the Company spent approximately
$2.0 million, and the suit filed by Biogen Inc. and the application for a
compulsory license filed by the Company in respect of the hepatitis-B vaccine,
as well as the amortization of marketing rights of hGH in Europe. The decrease
in 1995 resulted primarily from the decrease in legal expenses as a result of
the completion of the ITC proceedings relating to hGH and the Company's decision
to capitalize the $824,000 of its legal fees incurred in respect of the
Company's litigations with Genentech relating to hGH, which fees were
subsequently expensed in the first quarter of 1996 as a result of the
affirmation by the United States Court of Appeals for the Federal Circuit
("CAFC") of a preliminary injunction obtained by Genentech prohibiting BTG from


                                      -32-


marketing its hGH in the United States. The increase in 1996 was primarily due
to an increase in salaries expenditures and expenses associated with public
relations. See "Item 1. Business--Patents and Proprietary Rights" and "Item 3.
Legal Proceedings."

      Marketing and sales expenses were $1,585,000 and $6,107,000 in 1995 and
1996, respectively. These expenses primarily relate to the sales and marketing
force in the United States which the Company established principally in the
second half of 1995 and during 1996 to promote distribution of Oxandrin and the
Company's other products in the United States.

      Commissions and royalties expenses for the years ended December 31, 1994,
1995 and 1996 were $444,000, $726,000 and $1,994,000, respectively. These
expenses consist primarily of royalties to the Chief Scientist and to entities
from which the Company licensed certain of its products and commissions to
marketing intermediaries.

      In 1996, the Company wrote off $1,383,000 of capitalized expenses relating
to human growth hormone as a result of the affirmation by the CAFC of a
preliminary injunction obtained by Genentech prohibiting the Company from
marketing its human growth hormone in the United States. The write-off consists
of legal costs related to the litigation with Genentech and U.S. hGH launch
preparation costs.

      In 1996, management determined that it has become more likely than not
that it will realize its net deferred tax assets (other than approximately
$4,096,000) and it has, therefore, reduced the valuation allowance by
approximately $18,587,000. The determination that the net tax asset is
realizable is based on 1996 being BTG's first full year of profitability in each
quarter, and the performance and penetration of Oxandrin (first introduced in
December 1995). The Company's reversal of the valuation allowance against its
net deferred tax assets resulted in a realization of income tax benefit of
approximately $11,975,000, net of income tax expense, in 1996.

      In December 1995, Bio-Cardia returned to BTG warrants to purchase
2,670,000 shares of the Company's common stock in partial payment of amounts
Bio-Cardia owed to BTG; as a result, BTG recognized research and development
revenues under collaborative agreements of $3,004,000. In 1995, the Company
expensed $806,000 relating to Bio-Cardia, representing the net funds provided to
Bio-Cardia following Bio-Cardia's default under its agreements with the Company.
The net funding provided to Bio-Cardia consisted of: (i) $1,710,000 received
from Bio-Cardia in 1994 but not recognized as revenues, which amount was
included in other current liabilities on the December 31, 1994 balance sheet and
was returned to Bio-Cardia by BTG to fund the Exchange Offer discussed below;
(ii) $210,000 received from Bio-Cardia in 1995, prior to the Exchange Offer, but
not recognized as revenues and returned to Bio-Cardia by the Company to fund the
Exchange Offer discussed below; and (iii) $2,726,000 provided to Bio-Cardia to
fund the Exchange Offer discussed below (including the $1,920,000 referred to in
(i) and (ii) above). See "--Financing with Bio-Cardia Corporation."

LIQUIDITY AND CAPITAL RESOURCES

      The Company's working capital at December 31, 1996, was $40,626,000 as
compared to $15,309,000 at December 31, 1995.

      The major portion of the Company's revenues is derived from product sales.
In addition, the Company derives revenue from collaborative arrangements with
third parties,


                                      -33-


under which the Company may earn up-front contract fees, may receive funding for
additional research, is reimbursed for producing certain experimental materials,
may be entitled to certain milestone payments, may sell product at specified
prices, and may receive royalties on sales of product. Revenues have in the past
displayed and will in the immediate future continue to display significant
variations due to changes in demand for its products, new product introductions
by competitors, the obtaining of new research and development contracts and
licensing arrangements, the completion or termination of such contracts and
arrangements, the timing and amounts of milestone payments, and the timing of
regulatory approvals of products.

      BTG manages its Israeli operations with the objective of protecting
against any material net financial loss in U.S. dollars from the impact of
Israeli inflation and currency devaluations on its non-U.S. dollar assets and
liabilities. The Bank of Israel's monetary policy is to manage the exchange rate
while allowing the Consumer Price Index to rise by approximately 14% in 1994, 8%
in 1995 and 11% in 1996. For those expenses linked to the Israeli Shekel, such
as salaries and rent, this resulted in corresponding increases in these costs in
U.S. dollars. In 1994, 1995 and 1996, the Shekel was devalued by approximately
1%, 4% and 4%, respectively, against the U.S. dollar. Because of the
insignificant devaluation of the Shekel against the U.S. dollar despite the
annual rate of increase in the Consumer Price Index, BTG's costs of local goods
and services, to the extent linked in whole or in part to the Consumer Price
Index, increased in U.S. dollar terms. To the extent that expenses in Shekels
exceed BTG's revenues in Shekels (which to date have consisted primarily of
research funding from the Chief Scientist and product sales in Israel), the
devaluations of Israeli currency have been and will continue to be a benefit to
BTG's financial condition. However, should BTG's revenues in Shekels exceed its
expenses in Shekels in any material respect, the devaluation of the Shekel will
adversely affect BTG's financial condition. Further, to the extent the
devaluation of the Shekel with respect to the U.S. dollar does not substantially
offset the increase in the costs of local goods and services in Israel, BTG's
financial results will be adversely affected as local expenses measured in U.S.
dollars will increase. There can be no assurance that the government of Israel
will continue to devalue the Shekel from time to time to offset the effects of
inflation in Israel.

      The Company maintains its funds in money market funds, commercial papers
and other liquid debt instruments. BTG's investment policy is to preserve
principal and to avoid risk. See Notes 1c and 1d of Notes to Consolidated
Financial Statements.

      The cash flows of the Company have fluctuated significantly due to the
impact of net income and losses, capital spending, working capital requirements
and issuance of common stock and other financings. The Company expects that cash
flow in the near future will be primarily determined by the levels of net income
(loss), and financings, if any, undertaken by the Company. In 1996, net cash
increased by $119,000, primarily as a result of net income of $22,915,000 (after
net income tax benefits of $11,975,000 and depreciation and amortization and
write-off in connection with litigation aggregating $4,128,000), an increase in
current liabilities of $4,436,000 and proceeds of $8,655,000 from the issuance
of common stock upon the exercise of outstanding warrants and options, partially
offset by increases in current assets of $15,946,000 (primarily resulting from
an increase in accounts receivable due to increased product sales and the
extension of payment terms for QHR for Oxandrin from 90 to 180 days) and net
investing activities of $12,759,000. In the year ended December 31, 1995, net
cash decreased by $10,005,000 (after depreciation and amortization aggregating
$2,622,000), primarily as a result of an increase in accounts receivable
($3,621,000), inventories ($486,000), short-term investments of $8,445,000,
capital expenditures of $1,354,000, changes in patents of $836,000 and repayment
of long-term debt in the amount of $1,000,000, partially offset by income before
extraordinary gain of


                                      -34-


$3,416,000 (including $3,004,000 of research and development revenues under
collaborative agreements resulting from the receipt by the Company of warrants
to purchase shares of its common stock obtained by Bio-Cardia from its defaulted
stockholders), and net investing activities of $7,738,000. In the year ended
December 31, 1994 net cash increased by $840,000 (after depreciation and
amortization aggregating $2,849,000), primarily resulting from proceeds of
$9,843,000 derived from issuance of common stock, of which $9,000,000 was
received from financing transactions consummated in October 1994, and an
increase in accounts payable and other current liabilities of $1,065,000, which
was partially offset by net loss of $7,419,000 (including $2,847,000 of research
and development expenditures made on behalf of Bio-Cardia which were not
reimbursed), extraordinary gain resulting from debt forgiveness of $1,500,000
and payment of long-term debt of $1,800,000 (consisting of the payments to SB
and to Du Pont Merck described below). The net cash used in investment
activities during 1994 was approximately $2,103,000.

      BTG does not currently have any material commitments for capital
expenditures.

      In June 1991, the Company concluded an agreement with Du Pont Merck
pursuant to which it reacquired all the rights relating to the Company's hGH
that had been licensed by BTG to Du Pont, together with all rights to all data
generated in pharmacological, toxicological and clinical studies and encompassed
in the Investigational New Drug Application and New Drug Application files then
pending with the U.S. Food and Drug Administration for the treatment of human
growth hormone deficient children. The Company issued to Du Pont Merck 275,000
shares of common stock, which the Company subsequently registered for resale by
Du Pont Merck and which Du Pont Merck sold. In addition, the Company agreed to
pay Du Pont Merck royalties on net sales of hGH, including a minimum royalty of
$2,000,000 (using a 10% 1991 present value). In 1995 the Company paid Du Pont
Merck $1,000,000 in full satisfaction of its royalty obligation to Du Pont
Merck. As a result, the Company recorded an extraordinary gain of approximately
$1,363,000 in 1995.

      In November 1992, the Company and SB entered into an agreement, effective
July 17, 1992, whereby the Company reacquired all rights to its human growth
hormone in Europe and certain other countries previously licensed to SB. The
reacquired rights include the EEC CPMP approval of the use of the Company's hGH
for growth hormone deficient children, together with all individual EEC member
country approvals and pricing approvals obtained by SB to date. Simultaneous
with the execution of the agreement with SB, the Company entered into an
exclusive distribution agreement with the Ferring Group for the marketing of the
Company's human growth hormone for the enhancement of growth and stature in
children. In connection with the reacquisition of rights from SB, the Company
agreed to pay SB an aggregate of $3,000,000 over a period of up to five years,
approximating SB's payments to the Company under the license agreement. In 1994
the Company paid SB $1,500,000 in full satisfaction of its obligation to SB.
Accordingly, the Company recorded an extraordinary gain of $1,500,000 during
1994.

      At December 31, 1996 intangibles, net, consist of (i) $2,165,000 (net of
amortization) relating to the purchase of all rights to hGH previously licensed
to Du Pont Merck, together with all rights to all data generated in
pharmacological, toxicological and clinical studies and encompassed in the
Investigational New Drug Application and New Drug Application files then pending
with the U.S. Food and Drug Administration for the treatment of human growth
hormone-deficient children, and (ii) $1,286,000 (net of amortization) relating
to the reacquisition of all rights to human growth hormone licensed to SB.


                                      -35-


      The Company believes that its remaining cash resources as of December 31,
1996, together with anticipated product sales, scheduled payments to be made to
BTG under its current agreements with pharmaceutical partners and third parties,
the proceeds from sales of equity and continued funding from the Chief Scientist
at current levels, will be sufficient to fund the Company's ongoing operations
for the foreseeable future. There can, however, be no assurance that product
sales will occur as anticipated, that scheduled payments will be made by third
parties, that current agreements will not be canceled, that the Chief Scientist
will continue to provide funding at current levels, or that unanticipated events
requiring the expenditure of funds will not occur. The satisfaction of the
Company's future cash requirements will depend in large part on the status of
commercialization of the Company's products, the Company's ability to enter into
additional research and development and licensing arrangements, and the
Company's ability to obtain additional equity investments, if necessary. There
can be no assurance that the Company will be able to obtain additional funds or,
if such funds are available, that such funding will be on favorable terms. In
addition, the indentures under which the Company's debt securities were issued
limit the ability of the Company to satisfy its cash requirements through
borrowings or the issuance of debt securities. The Company continues to seek
additional collaborative research and development and licensing arrangements, in
order to provide revenue from sales of certain products and funding for a
portion of the research and development expenses relating to the products
covered, although there can be no assurance that the Company will be able to
obtain such agreements.

RECENTLY ISSUED ACCOUNTING STANDARDS

      Subsequent to December 31, 1996, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards ("SFAS") No. 128, Earnings
Per Share. This statement establishes standards for computing and presenting
earnings per share ("EPS"), replacing the presentation of currently required
primary EPS with a presentation of Basic EPS. For entities with complex capital
structures, the statement requires the dual presentation of both Basic EPS and
Diluted EPS on the face of the statement of operations. Under this new standard,
Basic EPS is computed based on the weighted average number of shares actually
outstanding during the year. Diluted EPS includes the effect of potential
dilution from the exercise of outstanding dilutive stock options and warrants
into common stock using the treasury stock method. SFAS 128 is effective for
financial statements issued for periods ending after December 15, 1997, and
earlier application is not permitted. When adopted, the Company will be required
to restate its EPS data for all prior periods presented.


                                      -36-


Had the Company applied the principals of SFAS 128, earnings per share data for
the last three years would be as follows:

                                             PRO FORMA
                                             ---------
                                   1994         1995           1996
                                   ----         ----           ----
BASIC EPS

Income (loss) before
  extraordinary gain            $  (0.23)     $   0.08       $   0.52

Extraordinary gain                  0.04          0.03            ---
                                --------      --------       --------
Net Income                      $  (0.19)     $   0.11       $   0.52
                                ========      ========       ========
DILUTED EPS

Income before
  extraordinary gain            $    ---      $   0.08       $   0.47

Extraordinary gain                   ---          0.03            ---
                                --------      --------       --------
Net income                      $    ---      $   0.11       $   0.47
                                ========      ========       ========
Shares used in calculation
 ('000s)

  Basic EPS                       38,725        43,174         44,195
                                ========      ========       ========
  Diluted EPS                        ---        43,784         48,259
                                ========      ========       ========

FINANCING WITH BIO-CARDIA CORPORATION

      On December 31, 1993, the Company and Bio-Cardia completed a private
placement of 375 units (the "Financing"), each unit ("Unit") consisting of four
shares of common stock of Bio-Cardia and Warrants to purchase 15,000 shares of
the Company's common stock. The Warrants are exercisable at any time on or prior
to December 31, 1998 at an exercise price of $5.49 per share. The purchase price
per Unit was $100,000, of which $15,000 was paid at the closing, with the
remainder paid with a promissory note ("Investor Note") due in five installments
over a period of three years. All of the cash proceeds of the Financing were to
be received by Bio-Cardia. In consideration of the Warrants included in the
Units, the Company received from each purchaser of Units an option (the "Stock
Purchase Option"), exercisable at any time on or prior to December 31, 1997, to
purchase the Bio-Cardia stock at a purchase price beginning at 125% and
increasing over time to 200% of the cash paid to Bio-Cardia at the closing of
the Financing and in respect of the Investor Note, with any amounts then
outstanding under the Investor Note being canceled. Such purchase price could be
paid in cash, shares of the Company's common stock or both, at the Company's
discretion. In connection with the closing of the Financing, the Company
licensed to Bio-Cardia the right to pursue (i) the worldwide development and
commercialization of the Company's Imagex, Bio-Flow, Factorex and Bio-Lase
products for all cardiovascular indications, the Company's OxSODrol product for
the inhibition of reocclusion of coronary arteries during and after thrombolysis
or angioplasty or in cases of unstable angina, and for the prevention of
restenosis, and the Company's OxSODrol product for the treatment of
bronchopulmonary dysplasia in pre-mature neonates, and (ii) the development and


                                      -37-


commercialization of the Company's sodium hyaluronate-based products for
ophthalmic applications in the United States and Japan to protect the corneal
endothelium during intraocular surgery and other pharmaceutical applications
where a shock-absorbing and lubricating material compatible with the human body
is required. The Company conducted research, development and clinical testing of
these products on behalf of Bio-Cardia, had the exclusive option, during the
period the Stock Purchase Option was outstanding with respect to each product,
to commercialize, directly or through others, such product, and was obligated to
supply Bio-Cardia with all its requirements for such products.

      In connection with the Financing, on December 31, 1993 the Company issued
Warrants to purchase an aggregate of 6,206,250 shares of common stock,
consisting of (i) the 5,625,000 Warrants issued to investors in Bio-Cardia in
consideration of their grant of the Stock Purchase Option to the Company, (ii)
the 562,500 Warrants issued to D. Blech & Company, Incorporated, the placement
agent in the Financing, and (iii) the 18,750 Warrants issued to the directors of
Bio-Cardia. The Company expensed in 1993 $10,241,000, equal to the aggregate
value of the Warrants as determined by an independent investment banking firm,
representing (i) the uncertain realizability of the value of such Stock Purchase
Option, (ii) the Company's expenses of the Financing and (iii) director
compensation expense, respectively.

      Bio-Cardia and the Company had originally budgeted approximately $32
million of the net proceeds of the Financing (less if the Stock Purchase Option
was exercised prior to January 1, 1997) to fund development and
commercialization of the products licensed to Bio-Cardia over a period of four
years and to reimburse the Company for previously incurred research and
development expenses. However, holders of 221 Units failed to make the required
July 1, 1994 payment of $10,000 per Unit, which resulted in Bio-Cardia being
unable to pay approximately $1,540,000 of the $3,250,000 in reimbursement of
previously incurred research and development expenses and approximately $500,000
of the $1,521,000 of development costs due the Company during the three months
ended September 30, 1994 under a research and development agreement between the
Company and Bio-Cardia pursuant to which the Company performed research and
development services on behalf of Bio-Cardia in respect of the products licensed
to Bio-Cardia (the "R&D Agreement"). In October 1994, Bio-Cardia reached
settlements with certain of the defaulting stockholders, holding an aggregate of
178 Units, who surrendered to Bio-Cardia their Bio-Cardia stock and Warrants to
purchase an aggregate of 2,670,000 shares of the Company's common stock (the
"Surrendered Warrants") in exchange for a release from their future funding
obligations to Bio-Cardia. The net effect of this settlement was to reduce the
funding expected by Bio-Cardia by approximately $14,240,000. In addition,
Bio-Cardia commenced legal action against the remaining defaulting stockholders,
holding an aggregate of 43 Units, who owed an aggregate of $3,440,000, which
actions were settled during 1995 without the payment (in the case of holders of
40 Units) or recovery by Bio-Cardia of any monies. Accordingly, Bio-Cardia was
not in a position to fund the up to $32 million research and development program
originally contemplated by Bio-Cardia and the Company. The Company did not
recognize as revenues the amounts due from Bio-Cardia during the second half of
1994 or during 1995 because of the uncertainty of realizability of such amounts.

      The Company funded a revised research and development budget for 1995. In
addition, in May 1995, Bio-Cardia, with the Company's consent, completed an
exchange offer with all those Bio-Cardia stockholders who were not in default
under their Investor Note, who held an aggregate of 157 Units, including holders
of three Units against which Bio-Cardia commenced litigation (the "Exchange
Offer"). Under the terms of the Exchange Offer, Bio-Cardia exchanged $4,250 in
cash (together with interest on $2,500 from the date Bio-Cardia received such
funds) and forgiveness of $17,500 principal amount of the Investor


                                      -38-


Note remaining outstanding for each one share of Bio-Cardia common stock and an
unconditional release. In addition, Bio-Cardia agreed that if by December 15,
1995 neither (i) the average daily price of the Company's common stock for any
20 trading days in a 30 consecutive trading day period exceed $3.50 nor (ii) the
best closing bid price of the Warrants exceeds $1.10 during any 20 trading days,
then Bio-Cardia would distribute to the Bio-Cardia stockholders accepting the
Exchange Offer some or all of the Surrendered Warrants such that, in the
aggregate, the 15,000 Warrants issued in the Financing in each Unit, together
with the Surrendered Warrants distributed by Bio-Cardia, have a value of $16,500
as determined using the Black Scholes option pricing formula using an assumption
of no dividends and a volatility of 70%. At September 27, 1995, the best closing
bid price of the Warrants had exceeded $1.10 for 20 trading days and, as a
result, Bio-Cardia's obligation to distribute the Surrendered Warrants expired.

      At December 29, 1995, there was due to the Company from Bio-Cardia in
excess of $7,000,000 for research and development performed by the Company on
behalf of Bio-Cardia during 1994 and 1995 and for product purchases and advances
for general and administrative expenses, which amounts had not been recognized
as revenue by the Company because of the uncertainty of realizability of such
amounts for the reasons set forth above. On December 29, 1995, Bio-Cardia
transferred to BTG its interest in the Surrendered Warrants, the technology
previously licensed to Bio-Cardia by the Company and the improvements to such
technology resulting from the research and development conducted by the Company
on behalf of Bio-Cardia in partial satisfaction of amounts owed to the Company
by Bio-Cardia. As a result, the Company recognized research and development
revenues under collaborative agreements of $3,004,000, representing the product
determined by multiplying the Surrendered Warrants by $1.125, the closing bid
price on the Nasdaq National Market of the Warrants on September 27, 1995, the
date Bio-Cardia ceased to be obligated to distribute any portion of the
Surrendered Warrants under certain circumstances as set forth in the immediately
preceding paragraph.

      In 1995, the Company expensed $806,000 as research and development
financing relating to Bio-Cardia, representing the net funds provided to
Bio-Cardia following Bio-Cardia's default under its agreements with the Company.
The net funding provided to Bio-Cardia consisted of: (i) $1,710,000 received
from Bio-Cardia in 1994 but not recognized as revenues, which amount was
included in other current liabilities on the December 31, 1994 balance sheet and
was returned to Bio-Cardia by BTG to fund the Exchange Offer discussed above;
(ii) $210,000 received from Bio-Cardia in 1995, prior to the Exchange Offer, but
not recognized as revenues and returned to Bio-Cardia by the Company to fund the
Exchange Offer discussed above; and (iii) $2,726,000 provided to Bio-Cardia to
fund the Exchange Offer discussed above (including the $1,920,000 referred to in
(i) and (ii) above).


                                      -39-


ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

         Index to Consolidated Financial Statements

                                                                     Page

         Report of Independent Public Accountants.................... 41

         Consolidated Financial Statements:

         Consolidated Balance Sheets as of
         December 31, 1995 and 1996.................................. 42

         Consolidated Statements of Operations for the
         years ended December 31, 1994, 1995 and 1996................ 43

         Consolidated Statements of Changes in
         Stockholders' Equity for the years
         ended December 31, 1994, 1995 and 1996...................... 44

         Consolidated  Statements  of Cash Flows for
         the years ended December 31, 1994, 1995 and 1996............ 45

         Notes to Consolidated Financial Statements.................. 46


                                      -40-


                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Board of Directors and Stockholders of
Bio-Technology General Corp.:

We have audited the accompanying consolidated balance sheets of Bio-Technology
General Corp. (a Delaware corporation) and subsidiaries as of December 31, 1995
and 1996, and the related consolidated statements of operations, changes in
stockholders' 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 Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.

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

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Bio-Technology General Corp.
and subsidiaries as of December 31, 1995 and 1996, 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.


                                                             ARTHUR ANDERSEN LLP

New York, New York
February 28, 1997


                                      -41-


                                   BIO-TECHNOLOGY GENERAL CORP. AND SUBSIDIARIES

                           CONSOLIDATED BALANCE SHEETS
                        (in thousands, except share data)
                                                           December 31,
                                                           ------------
                                                        1995          1996
                                                        ----          ----
- --------------------------------------------------------------------------------
ASSETS
Current Assets:
 Cash and cash equivalents...............................  $  6,886    $  7,005
 Short-term investments..................................     3,989      12,760
 Accounts receivable.....................................     6,347      18,273
 Inventories.............................................     2,118       5,328
 Deferred income taxes (Note 11).........................        --       6,000
 Prepaid expenses and other current assets...............       318         350
                                                           --------    --------
    Total current assets.................................    19,658      49,716
                                                           
Deferred income taxes (Note 11)  ........................        --       9,379
Severance pay funded (Note 2)  ..........................     1,942       2,318
Property and equipment, net (Note 3).....................     4,796       6,039
Intangibles, net of accumulated amortization of $1,778            
 in 1995 and $2,580 in 1996..............................     5,078       3,451
Patents, net of accumulated amortization of $208 in 1995        
 and $318 in 1996........................................       457         538
Other assets.............................................     1,748       2,134
                                                           --------    --------
    Total assets.........................................  $ 33,679    $ 73,575
                                                           ========    ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:                
 Short-term bank loans...................................  $     --    $    266
 Current portion of long-term debt ......................        27         291
 Accounts payable........................................     1,123       3,358
 Other current liabilities (Note 8)......................     3,199       5,175
                                                           --------    --------
    Total current liabilities............................     4,349       9,090
                                                           --------    --------
Long-term liabilities (Note 2)...........................     3,641       3,927
                                                           --------    --------
Commitments and contingent liabilities (Note 7)            

Stockholders' Equity (Notes 4 and 5):                      
 Preferred stock - $.01 par value; 4,000,000               
    shares authorized; no shares issued .................        --          --
 Common stock - $.01 par value; 150,000,000                
    shares authorized; issued: 43,275,000 in 1995          
    and 45,682,000 in 1996...............................       433         457
 Capital in excess of par value..........................   117,390     129,130
 Deficit.................................................   (91,528)    (68,613)
 Less - treasury stock at cost (83,000 shares)...........      (340)       (340)
      - deferred compensation............................      (266)        (76)
                                                           --------    --------
    Total stockholders' equity...........................    25,689      60,558
                                                           --------    --------
 Total liabilities and stockholders' equity..............  $ 33,679    $ 73,575
                                                           ========    ========

The accompanying notes are an integral part of these consolidated balance
sheets.


                                      -42-


                                   BIO-TECHNOLOGY GENERAL CORP. AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF OPERATIONS
                      (in thousands except per share data)

                                                    Year Ended December 31,
                                              ----------------------------------
                                                 1994        1995        1996
- --------------------------------------------------------------------------------

Revenues (Note 9):
  Product sales..............................   $11,047     $21,428     $40,356
  Contract fees..............................       762         591       4,887
  Research and development revenues             
    under collaborative agreements (Note 13).     3,652       4,041         --
  Other revenues.............................     1,476       1,113       1,390
  Interest income............................       503         787       1,105
                                                -------     -------     -------
                                                 17,440      27,960      47,738
                                                -------     -------     -------
Expenses:
  Research and development...................    13,714      10,935      12,431
  Cost of product sales......................     2,168       3,913       7,264
  General and administrative.................     9,743       6,420       7,458
  Marketing and sales........................       --        1,585       6,107
  Commissions and royalties..................       444         726       1,994
  Interest and finance.......................       290         159         161
  Research and development 
    financing (Note 13)......................       --          806          --
  Write-off in connection with litigation
    (Note 10)................................       --          --        1,383
                                                -------     -------     -------
                                                 26,359      24,544      36,798
                                                -------     -------     -------
Income (loss) before income taxes
  and extraordinary gain.....................    (8,919)      3,416      10,940
Income tax benefit, net (Note 11)............       --         --        11,975
                                                -------     -------     -------
Income (loss) before extraordinary gain......    (8,919)      3,416      22,915
Extraordinary gain (Note 12).................     1,500       1,363         --
                                                -------     -------     -------
Net income (loss)............................   $(7,419)    $ 4,779     $22,915
                                                =======     =======     =======
Earnings (loss) per common share:
Primary:
  Income (loss) per common share
    before extraordinary gain............       $ (0.23)    $  0.08     $  0.47
  Extraordinary gain per common share....          0.04        0.03         --
                                                -------     -------     -------
  Net income (loss) per common share.....       $ (0.19)    $  0.11     $  0.47
                                                =======     =======     =======
Fully-diluted:                                  
  Net income per common share............                               $  0.45
Weighted average number of common                                       =======
  and common equivalent shares:
  Primary................................        38,725      43,784      48,259
                                                =======     =======     =======
  Fully-diluted..........................                                50,704
                                                                        =======
The accompanying notes are an integral part of these consolidated financial
statements.


                                      -43-


                                   BIO-TECHNOLOGY GENERAL CORP. AND SUBSIDIARIES

           CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
                                      (in thousands)



                                          Common Stock
                                         --------------  Capital in                                  Common Stock     Total
                                                  Par    Excess of           Treasury   Deferred    Subscriptions  Stockholders'
                                         Shares  Value   Par Value  Deficit   Stock   Compensation    Receivable     Equity
- --------------------------------------------------------------------------------------------------------------------------------
                                                                                                
Balance, December 31, 1993..........     37,063  $371    $109,950  $(88,888)  $(303)     $(871)         $(177)      $20,082
Issuance of common stock............      5,171    52       9,033                                                     9,085
Issuance of common stock on series 
  A and B note conversions 
  (including capitalized interest) 
  and on conversion of convertible 
  debentures........................          1                 4                                                        4
Repayment of common stock 
  subscriptions.....................                                                                      102          102
Exercise of stock options...........        616     6         781                                                      787
Exercise of warrants................         25                56                                                       56
Deferred compensation...............                          184                        (184)
Amortization of deferred 
  compensation .....................                                                      485                          485
Net loss for 1994 ..................                                 (7,419)                                        (7,419)
                                         ------  ----    --------  --------  -----      -----           -----      -------
Balance, December 31, 1994..........     42,876   429     120,008   (96,307)   (303)     (570)            (75)      23,182
Issuance of common stock............         28                84                                                       84
Issuance of common stock on series 
  A and B note conversions 
  (including capitalized interest)
  and on conversion of convertible 
  debentures........................        107     1         184                                                      185
Repayment of common stock 
  subscriptions.....................                                                                       75           75
Exercise of stock options...........        264     3         118                                                      121
Retirement of warrants (Note 13) ...                       (3,004)                                                  (3,004)
Purchase of treasury stock..........                                            (37)                                   (37)
Amortization of deferred 
  compensation .....................                                                      304                          304
Net income for 1995 ................                                  4,779                                          4,779
                                         ------  ----    --------  --------  -----      -----           -----      -------
Balance, December 31, 1995..........     43,275  $433    $117,390  $(91,528)  $(340)    $(266)          $  --      $25,689
Issuance of common stock............          9                74                                                       74
Issuance of common stock on series 
  A and B note conversions
  (including capitalized interest) 
  and on conversion of convertible 
  debentures........................         41                91                                                       91
Tax benefit derived from exercise
  of stock options..................                        2,944                                                    2,944
Exercise of stock options...........      1,790    18       5,236                                                    5,254
Exercise of warrants................        567     6       3,395                                                    3,401
Amortization of deferred
  compensation .....................                                                      190                          190
Net income for 1996 ................                                 22,915                                         22,915
                                         ------  ----    --------  --------  -----      -----           -----      -------
Balance, December 31, 1996..........     45,682  $457    $129,130  $(68,613) $(340)     $ (76)          $  --      $60,558
                                         ======  ====    ========  ========  =====      =====           =====      =======


The accompanying notes are an integral part of these consolidated financial
statements.


                                      -44-


                                   BIO-TECHNOLOGY GENERAL CORP. AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (in thousands)
                                                      Year Ended December 31,
                                                  ------------------------------

                                                      1994       1995     1996
- --------------------------------------------------------------------------------

Cash flows from operating activities:
  Net income (loss).............................     $(7,419)  $ 4,779  $22,915
  Adjustments to reconcile net income (loss) to
   net cash (used in) provided by operating 
   activities:
   Deferred income tax benefit..................         --        --   (12,435)
   Receipt of warrants from Bio-Cardia..........         --     (3,004)      --
   Depreciation and amortization................       2,849     2,622    2,745
   Write-off in connection with litigation......          --       --     1,383
   Provision for severance pay..................         749       434      665
   Extraordinary gain resulting from debt 
     forgiveness................................      (1,500)   (1,363)      --
   Gain on disposal of fixed assets ............         (37)      (10)     (18)
   Gain on sales of short-term investments......          --       (19)     (33)
   Common stock as payment for services.........          85        84       74
   Changes in:..................................
     receivables ...............................        (175)   (3,621) (11,926)
     inventories................................        (721)     (486)  (3,210)
     prepaid expenses and other current assets..         (55)     (146)    (590)
     accounts payable...........................         444        32    2,235
     other current liabilities..................         621      (661)   2,441
                                                     -------  --------  -------
  Net cash (used in) provided by operating 
   activities...................................      (5,159)   (1,359)   4,246
                                                     -------  --------  -------
Cash flows from investing activities:
  Purchases of short-term investments...........          --    (8,445) (18,258)
  Capital expenditures..........................      (1,777)   (1,354)  (2,945)
  Intangibles...................................          --      (836)     (61)
  Severance pay funded..........................        (312)     (300)    (376)
  Other assets..................................          23    (1,173)    (531)
  Change in patents.............................        (104)     (162)    (191)
  Proceeds from sales of short-term investments.          --     4,475    9,520
  Proceeds from sales of fixed assets...........          67        57       83
                                                     -------  --------  -------
  Net cash (used in) investing activities.......      (2,103)   (7,738) (12,759)
                                                     -------  --------  -------
Cash flows from financing activities:
  Repayment of long-term debt...................      (1,800)   (1,000)       --
  Proceeds from issuances of common stock, net..       9,843       121    8,655
  Other.........................................          59       (29)     (23)
                                                     -------  --------  -------
  Net cash provided by (used in) financing 
   activities...................................       8,102      (908)   8,632
                                                     -------  --------  -------
  Net increase (decrease) in cash and cash 
   equivalents..................................         840   (10,005)     119
  Cash and cash equivalents at beginning of year      16,051    16,891    6,886
                                                     -------  --------  -------
  Cash and cash equivalents at end of year......     $16,891  $  6,886  $ 7,005
                                                     =======  ========  =======
Supplementary Information 
Non-cash investing and financing activities:
  Series A and B note conversions (including
  capitalized interest) and conversion of 
  convertible debentures........................     $    4   $    185  $    91

Other information:
  Interest paid.................................     $   77   $    729  $    55

The accompanying notes are an integral part of these consolidated financial
statements.


                                      -45-


                                   BIO-TECHNOLOGY GENERAL CORP. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

      Bio-Technology General Corp. ("BTG") and its wholly owned subsidiary,
Bio-Technology General (Israel) Ltd. ("BTG-Israel"), were formed in 1980 to
research, develop, manufacture and market products through the application of
genetic engineering and related biotechnologies. A substantial amount of
research and development activities has been conducted on behalf of the parent
by BTG-Israel.

      a.    Basis of consolidation:

      The consolidated financial statements include the accounts of BTG,
BTG-Israel and BTG Pharmaceuticals Corp. (through March 15, 1996, the date it
was merged into BTG), hereinafter collectively referred to as the "Company". All
material intercompany transactions and balances have been eliminated. Certain
prior year amounts have been reclassified to conform with current year
presentation.

      b.    Translation of foreign currency:

      The functional currency of BTG-Israel is the U.S. dollar. Accordingly, its
accounts are remeasured in dollars, and translation gains and losses (which are
immaterial) are included in the statements of operations.

      c.    Cash and cash equivalents:

      At December 31, 1995 and 1996, cash and cash equivalents included cash of
$788,000 and $1,780,000, respectively, and money market funds, commercial paper
and other liquid short-term debt instruments (with maturities as at acquisition
of ninety days or less) of $6,098,000 and $5,225,000, respectively.

      d.    Short-term investments:

      The Company applies Statement of Financial Accounting Standards ("SFAS")
No. 115 "Accounting for Certain Investments in Debt and Equity Securities."
Under SFAS 115, marketable debt and equity securities are reported at fair
value, with unrealized gains and losses from those securities which are
classified as "trading securities" included in net income and unrealized gains
and losses from those securities which are classified as "available-for-sale
securities" reported as a separate component of stockholder's equity. Debt
securities classified as "held to maturity" are reported at amortized cost.

      Short-term investments consist primarily of investments in U.S. Treasury
and corporate bonds and mutual funds that have been classified as
"available-for-sale securities". At December 31, 1995 and 1996, the market value
of these investments approximated cost.

      e.    Inventories:

      Inventories are stated at the lower of average cost or market on the
weighted average method. At December 31, 1995 and 1996, inventories include raw
materials of $601,000 and $656,000, work-in-process of $278,000 and $661,000,
and finished goods of $1,239,000 and $4,011,000, respectively.


                                      -46-

                                   BIO-TECHNOLOGY GENERAL CORP. AND SUBSIDIARIES

      f.    Property and equipment, accumulated depreciation and amortization:

      Depreciation has been calculated using the straight-line method over the
estimated useful lives of the assets, ranging from 5 to 17 years. Leasehold
improvements are amortized over the lives of the respective leases, which are
shorter than the useful life. The cost of maintenance and repairs is expensed as
incurred.

      g.    Intangibles:

      Intangibles consist of capitalized marketing rights and are amortized,
using the straight-line method over the shorter of the life of the related
revenue stream or seven years, commencing with the initial sale of the related
product.

      h.    Patents:

      Patent costs related to products approved by any regulatory agency
worldwide or being sold have been capitalized. Amortization has been calculated
using the straight-line method over 17 years commencing the date of grant with
respect to each project.

      i.    Long-lived assets:

      The Company's policy is to record long-lived assets at cost, amortizing
these costs over the expected useful lives of related assets. In accordance with
SFAS 121 "Accounting for the Impairment of Long-lived Assets and for Long-lived
Assets to be Disposed Of", these assets are reviewed on a quarterly and annual
basis for impairment whenever events or changes in circumstances indicate that
the carrying amounts of the assets may not be recoverable. Furthermore, the
assets are evaluated for continuing value and proper useful lives by comparison
with expected future cash flows. For the year ended December 31, 1996 the
adoption of SFAS 121 did not have a material effect on the Company.

      j.    Revenue recognition:

      Product sales are recognized when the product is shipped. Contract fees
for grants of licenses and other rights are recognized when the relevant terms
of each contract have been performed by the Company. Research and development
revenues under collaborative agreements and Other revenues represent funds
received by the Company for research and development projects that are partially
funded by collaborative partners and the Chief Scientist of the Israeli
government, respectively. The Company recognizes revenue upon performance of
such funded research. In general, these contracts are cancelable by the
Company's collaborative partners at any time.

      k.    Stock-based compensation:

      The Company grants stock options for a fixed number of shares to
employees. The Company accounts for stock option grants in accordance with
Accounting Principal Board ("APB") Opinion No. 25, "Accounting for Stock Issued
to Employees".

      The Company has not adopted the measurement requirements of SFAS 123
"Accounting for Stock Based Compensation", for stock option grants to employees
and, accordingly, has made all of the required proforma disclosures for the
years ended December 31, 1995 and 1996 in note 5.


                                      -47-

                                   BIO-TECHNOLOGY GENERAL CORP. AND SUBSIDIARIES

      l.    Income taxes:

      Deferred taxes are recognized for the tax consequences of temporary
differences by applying the enacted statutory tax rates to differences between
the financial statement carrying amounts and the tax bases of existing assets
and liabilities.

      BTG-Israel files separate income tax returns and provides for taxes under
Israeli regulations.

      m.    Earnings (loss) per common share:

      Earnings (loss) per common share ("EPS") has been calculated using the
weighted average number of shares of common stock outstanding and common stock
equivalents. In the year ended December 31, 1994, convertible notes and
debentures, warrants and options granted to purchase common stock were not
included in the calculation of EPS because of their anti-dilutive effect. For
the year ended December 31, 1996, fully-diluted EPS is presented because the
market value of the Company's common stock as of December 31, 1996 was
substantially higher than the average price used in computing primary earnings
per share.

      n.    Use of estimates in preparation of financial statements:

      The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. These assets and liabilities include BTG's marketing rights,
patents, prepaid and deferred expenses, fixed assets and severance accruals, as
management has made estimates as to their useful lives and realizability and
future obligations. Actual results could differ from those estimates.

NOTE 2 - LONG-TERM LIABILITIES

Long-term liabilities consist of:
                                                         December 31,
                                                    ---------------------
                                                      1995         1996
                                                      ----         ----
                                                        (in thousands)

Provision for severance pay......................   $2,980        $3,645
Long-term debt...................................      661           282
                                                    ------        ------
Total............................................   $3,641        $3,927
                                                    ======        ======

       BTG-Israel participates in a defined contribution pension plan and makes
regular deposits with a pension fund to secure pension rights on behalf of some
of its employees. The custody and management of the amounts so deposited are
independent of the Company and accordingly such amounts funded (included in
expenses on an accrual basis) and related liabilities are not reflected in the
balance sheet. The Company's obligation for severance pay, in addition to the
amount funded, is included within long-term liabilities in the accompanying
balance sheets.


                                      -48-

                                   BIO-TECHNOLOGY GENERAL CORP. AND SUBSIDIARIES

       In respect of its other employees, BTG-Israel purchases individual
insurance policies intended to cover its severance obligations. The amount
funded in the insurance policy and its obligation for severance pay to those
employees, is reflected in the balance sheet as severance pay funded and
included in the provision for severance pay, respectively.

       The liability of the Company for severance pay is calculated on the basis
of the latest salary paid to its employees and the length of time they have
worked for the Company. The liability is covered by the amounts deposited,
including accumulated income thereon, as well as by the unfunded provision.

       The expense related to severance and pension pay for the years ended
December 31, 1994, 1995 and 1996, was $916,000, $681,000, and $844,000,
respectively.

NOTE 3 - PROPERTY AND EQUIPMENT, NET
                                                             December 31,
                                                       -----------------------
                                                          1995          1996
                                                          ----          ----
                                                            (in thousands)
   Cost:
   Laboratory and manufacturing equipment...........   $  8,461      $  9,634
   Office equipment.................................      1,525         2,345
   Air conditioning and other.......................      1,966         2,241
   Leasehold improvements...........................      6,835         7,126
                                                       --------      --------
                                                         18,787        21,346

   Accumulated depreciation and amortization........   (13,991)      (15,307)
                                                       --------      --------
      Total.........................................   $  4,796      $  6,039
                                                       ========      ========

   Depreciation expense was approximately $1,898,000, $1,311,000 and $1,637,000
for the years ended December 31, 1994, 1995 and 1996, respectively.

NOTE 4 - STOCKHOLDERS' EQUITY

      In 1994, the Company issued 5,142,857 shares of common stock in a private
placement, resulting in net proceeds to the Company of approximately $9,000,000.

      In the years ended December 31, 1994 and 1996, the Company issued 25,000
shares and 567,000 shares, respectively, of the Company's common stock upon the
exercise of outstanding warrants having an aggregate purchase price of $56,000
and $3,401,000, respectively.

      In the years ended December 31, 1994, 1995 and 1996, the Company issued
616,000 shares, 264,000 shares and 1,790,000 shares, respectively, of the
Company's common stock upon the exercise of outstanding stock options having an
aggregate purchase price of $787,000, $121,000 and $5,254,000, respectively.

      In accordance with the respective terms of the Company's 7 1/2% Senior
Subordinated Notes due April 15, 1997, Series B 11% Senior Secured Convertible
Notes due October 15, 1998 and 11% Convertible Subordinated Debentures due 2006,
the Company had reserved, at


                                      -49-

                                   BIO-TECHNOLOGY GENERAL CORP. AND SUBSIDIARIES

December 31, 1996, 134,000 shares of common stock for holders of those
securities in the event they elect to convert their securities to common stock.

      As of December 31, 1996, the following warrants to purchase the Company's
common stock were outstanding: (i) 3,533,250 warrants issued in December 1993 in
connection with research and development financing at an exercise price of $5.49
per common share, expiring in December 1998 (see Note 13), (ii) 813,233 Class A
warrants at an exercise price of $4.92 per common share, expiring in March 1998,
and (iii) 406,666 Class B warrants at an exercise price of $9.84 per common
share, expiring in March 1999.

NOTE 5 - STOCK OPTIONS

      The Company's Stock Option Plan (the "Plan") permits the granting of
options to purchase up to an aggregate of 3,900,000 shares of the Company's
common stock to employees, consultants and directors of the Company. Under the
Plan, the Company may grant either incentive stock options, at an exercise price
of not less than 100% of the fair market value of the underlying shares ("market
value") on the date of grant, or restricted stock options, at an exercise price
of not less than the lower of (i) 50% of the book value per share of the
Company's common stock, or (ii) 50% of the market value on the date of grant.
Options generally become exercisable ratably over a four-year period, with
unexercised options expiring shortly after employment termination. Terminated
options are available for reissuance. No additional options can be granted under
the Plan.

      In 1992, the Company adopted the Bio-Technology General Corp. 1992 Stock
Option Plan (the "1992 Stock Option Plan"). The 1992 Stock Option Plan currently
permits the granting of options to purchase up to an aggregate of 6,000,000
shares of the Company's common stock to key employees (including employees who
are directors) and consultants of the Company. Under the plan, the Company may
grant either incentive stock options, at an exercise price of not less than 100%
of the fair market value of the underlying shares on the date of grant, or
non-qualified stock options, at an exercise price not less than the par value of
the common stock on the date of grant. Options generally become exercisable
ratably over a four-year period, with unexercised options expiring shortly after
employment termination. Terminated options are available for reissuance.

      The Company also established a Stock Option Plan for New Directors (the
"New Director Plan") that, upon an individual's initial election or appointment
to the Board of Directors, provides for the grant of an option to purchase
20,000 shares of common stock at an exercise price equal to the market value of
the common stock on the date of grant. Options become exercisable over a
three-year period.

      The Company accounts for all plans under APB Opinion No. 25, under which
no compensation cost has been recognized as all options granted during 1995 and
1996 have been granted at the fair market value of the Company's common stock.
Had compensation cost for


                                      -50-

                                   BIO-TECHNOLOGY GENERAL CORP. AND SUBSIDIARIES

these plans been determined in accordance with SFAS 123, the Company's net
income and EPS would have been reduced as follows:

                                                      Year Ended December 31,
                                                      -----------------------
                                                        1995          1996
                                                        ----          ----
                                                        (in thousands except
                                                           per share data)

 Net income:        As reported ....................   $ 4,779       $22,915
                    Proforma    ....................     4,342        21,575

 Primary EPS:       As reported ....................   $  0.11       $  0.47
                    Proforma    ....................      0.10          0.45

 Fully-diluted EPS: As reported ....................                 $  0.45
                    Proforma    ....................                    0.43

      Under SFAS 123, the fair value of each option is estimated on the date of
grant using the Black-Scholes option-pricing model with the following weighted
average assumptions used for grants in 1995 and 1996: (1) expected life of
option of seven years; (2) dividend yield of 0%; (3) expected volatility of 72%;
and (4) risk-free interest rate of 6.39% and 6.66%, respectively.

      Because SFAS 123 method of accounting has not been applied to options
granted prior to January 1, 1995, the resulting pro forma compensation cost may
not be representative of that to be expected in future years.

      In May 1991, the Company granted restricted stock options to purchase up
to an aggregate of 265,000 shares to senior employees of the Company at an
exercise price of $3.00 per share. The amount of deferred compensation of
$265,000 arising from the difference between the exercise price and the $4.00
per share market price of the Company's common stock on the date of grant is
included in stockholders' equity and has been amortized over the vesting period
of four years. In September 1991, the Company granted restricted stock options
to employees of the Company to purchase up to an aggregate of 655,000 shares at
an exercise price of $5.25 per share. The amount of deferred compensation of
$655,000 arising from the difference between the exercise price and the $6.25
per share market price of the Company's common stock on the date of grant is
included in stockholders' equity and has been amortized over the vesting period
of four years. During 1993 the Company granted restricted stock options to
employees of the Company to purchase up to an aggregate of approximately 990,000
shares at exercise prices that were $1.00 less than the market price of the
common stock on the date of grant. The amount of deferred compensation of
$990,000 arising from the difference between the exercise price and the market
price of the Company's common stock on the date of grant is included in
stockholders' equity and is being amortized over four years, the vesting periods
of the options.


                                      -51-

                                   BIO-TECHNOLOGY GENERAL CORP. AND SUBSIDIARIES

      Transactions under the Plan, the New Director Plan, the 1992 Stock Option
Plan and other plans during 1994, 1995 and 1996 were as follows:



                                                          Year ended December 31,
                                          --------------------------------------------------------
                                                  1994               1995              1996
                                          -------------------  ----------------- -----------------
                                                     Weighted           Weighted          Weighted
                                                      Average           Average           Average
                                           Shares    Exercise   Shares  Exercise Shares   Exercise
                                           ('000s)     Price   ('000s)   Price   ('000s)   Price
                                           -------   --------  -------  -------- -------  --------
                                                                           
Options outstanding at beginning of year.   5,839      $3.63    5,399    $3.75    6,004    $3.83
Granted..................................     610       2.99    1,250     3.39      751     8.04
Exercised................................    (616)      1.28     (264)    0.46   (1,790)    2.93
Terminated...............................    (434)      4.58     (381)    3.59      (32)    5.40
                                            -----               -----             -----
Options outstanding at end of year.......   5,399       3.75    6,004     3.83    4,933     4.79
                                            =====               =====             =====

Exercisable at end of year ..............   3,369               3,689             2,808
                                            =====               =====             =====
Weighted average fair value of
 options granted ........................                                $2.48             $5.90
                                                                         =====             =====



      Of the 4,933,000 options outstanding as of December 31, 1996:

            - 1,110,000 have exercise prices between $1.06 and $3.13 with a
      weighted average exercise price of $2.65 and a weighted average remaining
      contractual life of 5.63 years. Of these 1,110,000 options, 778,000 are
      exercisable; their weighted average exercise price is $2.56.

            - 2,978,000 options have exercise prices between $3.28 and $7.00
      with a weighted average exercise price of $4.64 and a weighted average
      remaining contractual life of 6.99 years. Of these 2,978,000 options,
      1,765,000 are exercisable; their weighted average exercise price is $4.96.

            - 845,000 options have exercise prices between $7.19 and $11.00 with
      a weighted average exercise price of $8.14 and a weighted average
      remaining contractual life of 8.50 years. Of these 845,000 options,
      265,000 are exercisable; their weighted average exercised price is $7.66.

      Subsequent to December 31, 1996, options to purchase an aggregate of
919,000 shares of common stock have been exercised, having an aggregate purchase
price of $3,803,000.


                                      -52-

                                   BIO-TECHNOLOGY GENERAL CORP. AND SUBSIDIARIES

NOTE 6 - FOREIGN OPERATIONS

     Information about the Company's operations in the United States and Israel
is presented below:

                                                                        Consol-
                                         U.S.    Israel  Eliminations   idated
                                         ----    ------  ------------   ------
                                           (in thousands of U.S. dollars)

Year ended December 31, 1994:
   Revenues.......................... (1)14,177    3,263               17,440
   Intercompany purchases/sales......     1,041    2,010    (3,051)
   Reimbursement of subsidiary's                
     expenses........................              9,812    (9,812)
   Net loss..........................    (6,694)    (675)      (50)    (7,419)
   Identifiable assets(2)............    49,725    5,942   (23,327)    32,340
   Foreign liabilities(2)............           (3)2,859                2,859
   Investment in subsidiaries                   
     (cost basis)(2).................   17,226            (17,226)
                                                
Year ended December 31, 1995:                   
   Revenues.......................... (1)24,791    3,169               27,960
   Intercompany purchases/sales......     1,447    3,690    (5,137)
   Reimbursement of subsidiary's                
     expenses........................              9,120    (9,120)
   Net income........................     4,982       60      (263)     4,779
   Identifiable assets(2)............    48,027    7,086   (21,434)    33,679
   Foreign liabilities(2)............           (3)3,796                3,796
   Investment in subsidiaries                   
     (cost basis)(2).................    17,226            (17,226)
                                                
Year ended December 31, 1996:                   
   Revenues.......................... (1)43,833    3,905               47,738
   Intercompany purchases/sales......     1,213    7,329    (8,542)
   Reimbursement of subsidiary's                
     expenses........................              8,994    (8,994)
   Net income........................    21,908    1,231      (224)    22,915
   Identifiable assets(2)............    73,706    9,775    (9,906)    73,575
   Foreign liabilities(2)............           (3)4,643                4,643
   Investment in subsidiaries                   
     (cost basis)(2).................     5,797             (5,797)
                                               
- ------------------------------
(1) Includes export sales of $8,295,000, $15,189,000 and $22,334,000 in 1994,
1995 and 1996, respectively.
(2)  At year end.
(3)  Excludes liability to parent.

NOTE 7 - COMMITMENTS AND CONTINGENT LIABILITIES

      a. The Company has leased approximately 23,000 square feet of office space
in New Jersey for its executive office, having an average annual rental expense
of approximately $414,000. The lease expires in October 2003. In addition, the
Company is obligated to pay its proportional share of any annual increase in
taxes and operating expenses. BTG-Israel currently leases approximately 80,000
square feet of space for its research, development and


                                      -53-

                                   BIO-TECHNOLOGY GENERAL CORP. AND SUBSIDIARIES

production facilities in Israel. This lease will expire in January 1999.
BTG-Israel also leases 5,000 square feet of wharehouse space near its research
and manufacturing facility pursuant to a lease which expires in March 1997. Rent
expense was approximately $932,000, $1,195,000 and $1,450,000 for the years
ended December 31, 1994, 1995 and 1996, respectively. The future consolidated
annual minimum rentals (exclusive of amounts for real estate taxes, maintenance,
etc.) for each of the next five years and thereafter are as follows:
1997--$1,546,000, 1998--$1,595,000, 1999--$519,000, 2000--$414,000, 2001--
$414,000 and $759,000 thereafter. Additionally, included in other assets at
December 31, 1996, are certificates of deposit of $300,000 made in support of a
letter of credit with respect to BTG-Israel's lease, which funds are restricted
as to use. There is also a bank guarantee outstanding in favor of the lessor for
$370,000 secured by the assets of BTG-Israel.

      b. The Company is obligated, for products resulting from research and
development projects partially funded by the Chief Scientist, to pay royalties
to the Israeli government of 3%-5% on commercial sales, if any, of these
products if produced in Israel up to the amount so funded, or royalties of 4%-6%
if produced outside Israel up to 120%-300% of the amount so funded. As of
December 31, 1996, the Company is obligated to repay to the Chief Scientist, out
of revenue from future product sales, a minimum of $4,030,000 of research and
development funding for products that are currently being sold and a minimum of
$7,149,000 of research and development funding for products currently under
development if these products will be sold. During the years ended December 31,
1994, 1995 and 1996, the Company accrued approximately $191,000, $338,000 and
$907,000, respectively, as royalties to the Chief Scientist.

      The Company is also committed to pay royalties on future sales, if any, of
certain of its products to licensees from which the Company licensed these
products.

      c. The Company currently has employment agreements with six senior
officers. Under these agreements, the Company has committed to total aggregate
base compensation per year of approximately $1,231,000 plus other normal
customary fringe benefits and bonuses, as well as a minimum annual increase in
compensation. These employment agreements generally have a term of two years and
are automatically renewed for successive two year periods unless either party
gives the other notice of nonrenewal.

      d. The Company has received notification of claims filed against certain
of its patents. Management believes that these claims have no merit, and the
Company intends to defend them vigorously.

NOTE 8 - OTHER CURRENT LIABILITIES
                                                                December 31,
                                                           --------------------
                                                             1995         1996
                                                             ----         ----
                                                               (in thousands)

Salaries and related expenses ..................           $1,569       $1,909
Accrued subcontracting payable .................              542        1,670
Legal and professional fees.....................              507          272
Royalties.......................................              387          650
 Other..........................................              194          674
                                                           ------       ------
                                                           $3,199       $5,175
                                                           ======       ======


                                      -54-

                                   BIO-TECHNOLOGY GENERAL CORP. AND SUBSIDIARIES

NOTE 9 - CONCENTRATIONS

      In 1994, 1995 and 1996, one customer for human growth hormone, located
solely in Japan, represented $5,170,000, $9,853,000 and $12,906,000 or 31%, 36%
and 28% of revenues (exclusive of interest income), respectively. In 1995 and
1996, one customer for Oxandrin and Delatestryl, located solely in the United
States, represented $3,589,000 and $15,540,000 or 13% and 33% of revenues
(exclusive of interest income), respectively. In 1996, the Company's product
sales consisted primarily of sales of human growth hormone, Oxandrin and BioLon
in the amount of approximately $18,218,000, $15,098,000 and $4,737,000, or 45%,
37% and 12% of total product sales, respectively. During 1994 and 1995, the
Company earned $2,950,000 and $3,486,000 or 17% and 12% of revenues (exclusive
of interest income), respectively, from Bio-Cardia as research and development
revenues under collaborative agreements. As of December 31, 1994 and 1995, one
customer accounted for 57% and 18% of total receivables, respectively. Another
customer accounted for 55% and 72% of total receivables as of December 31, 1995
and 1996, respectively. As of December 31, 1996, another customer accounted for
15% of total receivables. BTG has one supplier for its Oxandrin product.

NOTE 10 - WRITE-OFF IN CONNECTION WITH LITIGATION

      In 1996, the Company wrote off $1,383,000 of capitalized expenses relating
to human growth hormone, as a result of the affirmation by the United States
Court of Appeals for the Federal Circuit of a preliminary injunction obtained by
Genentech, Inc. prohibiting the Company from marketing its human growth hormone
in the United States. The write-off consists of legal costs related to the
litigation with Genentech and U.S. hGH launch preparation costs.

NOTE 11 - INCOME TAXES

      Taxable income in 1995 and 1996 was substantially offset by the
utilization of net operating loss carryforwards ("NOLs"). At December 31, 1996,
BTG has NOLs of approximately $39,300,000 available to offset future taxable
income, which expire from 1998 through 2010, and which are limited to annual
maximum amounts, due to ownership changes, as defined by regulations under the
Internal Revenue Code. In addition, at December 31, 1996, BTG has a capital loss
carryover of approximately $10,200,000 available to offset future capital gains,
which expires in 2000.

      In 1996, management determined that it has become more likely than not
that it will realize its net deferred tax assets (other than approximately
$4,096,000) and it has therefore reduced the valuation allowance by
approximately $18,587,000. The determination that the net tax asset is
realizable is based on 1996 being BTG's first full year of profitability in each
quarter, and the performance and penetration of Oxandrin (first introduced in
December 1995). The Company's reversal of the valuation allowance against its
net deferred tax assets resulted in a realization of income tax benefit of
approximately $12,435,000 in 1996 and increased capital in excess of par value
by approximately $2,944,000, representing, for tax purposes, the deductible
compensation resulting from the exercise of stock options.


                                      -55-

                                   BIO-TECHNOLOGY GENERAL CORP. AND SUBSIDIARIES

      The components of current and deferred income tax expense (benefit) for
the year ended December 31, 1996 are as follows (in thousands):

Current:
   State     ................................................     $  1,155
   Federal   ................................................        3,156
   Benefit of NOLs...........................................       (3,851)
                                                                  --------
                                                                       460
                                                                  --------
Deferred:
   State     ................................................       (1,840)
   Federal   ................................................      (10,595)
                                                                  --------
                                                                   (12,435)
                                                                  --------
Total income tax benefit.....................................     $(11,975)
                                                                  ========

      The domestic and foreign components of income (loss) before income taxes
are as follows:

                                                   Year Ended December 31,
                                               ----------------------------
                                                 1994       1995      1996
                                                 ----       ----      ----
                                                       (in thousands)

   Domestic  ................................. $(8,068)    $3,483   $ 9,654
   Foreign   .................................    (851)       (67)    1,286
                                               -------     ------   -------
                                               $(8,919)    $3,416   $10,940
                                               =======     ======   =======

      The components of deferred income tax expense (benefit) are:

                                                   Year Ended December 31,
                                               ----------------------------
                                                1994       1995      1996
                                                ----       ----      ----
                                                       (in thousands)

   Net operating loss ........................  $1,756    $1,328   $(4,989)
   Change in valuation allowance exclusive
     of stock options.........................  (2,439)    2,375    16,286
   Research and development financing ........   1,118    (3,228)       --
   Other......................................    (435)     (475)    1,138
                                               -------    ------   -------
                                                $   --    $   --   $12,435
                                               =======    ======   =======


                                      -56-

                                   BIO-TECHNOLOGY GENERAL CORP. AND SUBSIDIARIES

      A reconciliation of income taxes between the statutory and effective tax
rates on income before income taxes and extraordinary gain is as follows:

                                                   Year Ended December 31,
                                               -----------------------------
                                                  1994      1995      1996
                                                  ----      ----      ----
                                                       (in thousands)

   Income tax at U.S. statutory rate..........  $(3,032)   $1,162   $  3,720
   Extraordinary item.........................      510       463        --
   Current year benefit of NOLs ..............       --        --     (3,851)
   State and local income taxes (net of 
     federal benefit).........................     (366)      356        850
   Change in valuation allowance exclusive
     of stock options.........................    2,439    (2,375)   (12,435)
   Other......................................      449       394       (259)
                                                -------    ------   --------
                                                $    --    $   --   $(11,975)
                                                =======    ======   ======== 

      The components of deferred incomes taxes are as follows:

                                                              December 31,
                                                            1995      1996
                                                            ----      ----
                                                             (in thousands)

NOLs  ..........................................           $19,363   $15,016
Capital loss carryforward.......................             4,096     4,096
Accrued amounts and other.......................               196     1,155
                                                          --------   -------
                                                            23,655    20,267
Depreciation and amortization...................              (972)     (792)
                                                          --------   -------
                                                            22,683    19,475
Valuation allowance.............................           (22,683)   (4,096)
                                                          --------   -------
                                                          $     --   $15,379
                                                          ========   =======

NOTE 12  - EXTRAORDINARY GAIN

     In 1995, the Company recognized an extraordinary gain of $1,363,000
resulting from the Company's payment, in July 1995, of $1,000,000 to a former
licensee in full satisfaction of its $2,363,000 obligation to this former
licensee. In 1994, the Company recognized an extraordinary gain of $1,500,000
resulting from the Company's payment, in January 1994, of $1,500,000 to another
former licensee in full satisfaction of its $3,000,000 obligation to this former
licensee.


                                      -57-

                                   BIO-TECHNOLOGY GENERAL CORP. AND SUBSIDIARIES

NOTE 13 - RESEARCH AND DEVELOPMENT FINANCING

      On December 31, 1993, the Company and Bio-Cardia completed a private
placement of 375 units (the "Financing"), each unit ("Unit") consisting of four
shares of common stock of Bio-Cardia and Warrants to purchase 15,000 shares of
the Company's common stock. The Warrants are exercisable at any time on or prior
to December 31, 1998 at an exercise price of $5.49 per share. The purchase price
per Unit was $100,000, of which $15,000 was paid at the closing, with the
remainder paid with a promissory note ("Investor Note") due in five installments
over a period of three years. All of the cash proceeds of the Financing were to
be received by Bio-Cardia. In consideration of the Warrants included in the
Units, the Company received from each purchaser of Units an option (the "Stock
Purchase Option"), exercisable at any time on or prior to December 31, 1997, to
purchase the Bio-Cardia stock at a purchase price beginning at 125% and
increasing over time to 200% of the cash paid to Bio-Cardia at the closing of
the Financing and in respect of the Investor Note, with any amounts then
outstanding under the Investor Note being canceled. Such purchase price could be
paid in cash, shares of the Company's common stock or both, at the Company's
discretion. In connection with the closing of the Financing, the Company
licensed to Bio-Cardia the right to pursue (i) the worldwide development and
commercialization of the Company's Imagex, Bio-Flow, Factorex and Bio-Lase
products for all cardiovascular indications, the Company's OxSODrol product for
the inhibition of reocclusion of coronary arteries during and after thrombolysis
or angioplasty or in cases of unstable angina, and for the prevention of
restenosis, and the Company's OxSODrol product for the treatment of
bronchopulmonary dysplasia in premature neonates, and (ii) the development and
commercialization of the Company's sodium hyaluronate-based products for
ophthalmic applications in the United States and Japan to protect the corneal
endothelium during intraocular surgery and other pharmaceutical applications
where a shock-absorbing and lubricating material compatible with the human body
is required. The Company conducted research, development and clinical testing of
these products on behalf of Bio-Cardia, had the exclusive option, during the
period the Stock Purchase Option was outstanding with respect to each product,
to commercialize, directly or through others, such product, and was obligated to
supply Bio-Cardia with all its requirements for such products.

      In connection with the Financing, on December 31, 1993 the Company issued
Warrants to purchase an aggregate of 6,206,250 shares of common stock,
consisting of (i) the 5,625,000 Warrants issued to investors in Bio-Cardia in
consideration of their grant of the Stock Purchase Option to the Company, (ii)
the 562,500 Warrants issued to D. Blech & Company, Incorporated, the placement
agent in the Financing, and (iii) the 18,750 Warrants issued to the directors of
Bio-Cardia. The Company expensed in 1993 $10,241,000, equal to the aggregate
value of the Warrants as determined by an independent investment banking firm,
representing (i) the uncertain realizability of the value of such Stock Purchase
Option, (ii) the Company's expenses of the Financing and (iii) director
compensation expense, respectively.

      Bio-Cardia and the Company had originally budgeted approximately $32
million of the net proceeds of the Financing (less if the Stock Purchase Option
was exercised prior to January 1, 1997) to fund development and
commercialization of the products licensed to Bio-Cardia over a period of four
years and to reimburse the Company for previously incurred research and
development expenses. However, holders of 221 Units failed to make the required
July 1, 1994 payment of $10,000 per Unit, which resulted in Bio-Cardia being
unable to pay approximately $1,540,000 of the $3,250,000 in reimbursement of
previously incurred research and development expenses and approximately $500,000
of the $1,521,000 of development costs due


                                      -58-

                                   BIO-TECHNOLOGY GENERAL CORP. AND SUBSIDIARIES

the Company during the three months ended September 30, 1994 under a research
and development agreement between the Company and Bio-Cardia pursuant to which
the Company performed research and development services on behalf of Bio-Cardia
in respect of the products licensed to Bio-Cardia (the "R&D Agreement"). In
October 1994, Bio-Cardia reached settlements with certain of the defaulting
stockholders, holding an aggregate of 178 Units, who surrendered to Bio-Cardia
their Bio-Cardia stock and Warrants to purchase an aggregate of 2,670,000 shares
of the Company's common stock (the "Surrendered Warrants") in exchange for a
release from their future funding obligations to Bio-Cardia. The net effect of
this settlement was to reduce the funding expected by Bio-Cardia by
approximately $14,240,000. In addition, Bio-Cardia commenced legal action
against the remaining defaulting stockholders, holding an aggregate of 43 Units,
who owed an aggregate of $3,440,000, which actions were settled during 1995
without the payment (in the case of holders of 40 Units) or recovery by
Bio-Cardia of any monies. Accordingly, Bio-Cardia was not in a position to fund
the up to $32 million research and development program originally contemplated
by Bio-Cardia and the Company. The Company did not recognize as revenues the
amounts due from Bio-Cardia during the second half of 1994 or during 1995
because of the uncertainty of realizability of such amounts.

      The Company funded a revised research and development budget for 1995. In
addition, in May 1995, Bio-Cardia, with the Company's consent, completed an
exchange offer with all those Bio-Cardia stockholders who were not in default
under their Investor Note, who held an aggregate of 157 Units, including holders
of three Units against which Bio-Cardia commenced litigation (the "Exchange
Offer"). Under the terms of the Exchange Offer, Bio-Cardia exchanged $4,250 in
cash (together with interest on $2,500 from the date Bio-Cardia received such
funds) and forgiveness of $17,500 principal amount of the Investor Note
remaining outstanding for each one share of Bio-Cardia common stock and an
unconditional release. In addition, Bio-Cardia agreed that if by December 15,
1995 neither (i) the average daily price of the Company's common stock for any
20 trading days in a 30 consecutive trading day period exceed $3.50 nor (ii) the
best closing bid price of the Warrants exceeds $1.10 during any 20 trading days,
then Bio-Cardia would distribute to the Bio-Cardia stockholders accepting the
Exchange Offer some or all of the Surrendered Warrants such that, in the
aggregate, the 15,000 Warrants issued in the Financing in each Unit, together
with the Surrendered Warrants distributed by Bio-Cardia, have a value of $16,500
as determined using the Black Scholes option pricing formula using an assumption
of no dividends and a volatility of 70%. At September 27, 1995, the best closing
bid price of the Warrants had exceeded $1.10 for 20 trading days and, as a
result, Bio-Cardia's obligation to distribute the Surrendered Warrants expired.

      At December 29, 1995, there was due to the Company from Bio-Cardia in
excess of $7,000,000 for research and development performed by the Company on
behalf of Bio-Cardia during 1994 and 1995 and for product purchases and advances
for general and administrative expenses, which amounts had not been recognized
as revenue by the Company because of the uncertainty of realizability of such
amounts for the reasons set forth above. On December 29, 1995, Bio-Cardia
transferred to BTG its interest in the Surrendered Warrants, the technology
previously licensed to Bio-Cardia by the Company and the improvements to such
technology resulting from the research and development conducted by the Company
on behalf of Bio-Cardia in partial satisfaction of amounts owed to the Company
by Bio-Cardia. As a result, the Company recognized research and development
revenues under collaborative agreements of $3,004,000, representing the product
determined by multiplying the Surrendered Warrants by $1.125, the closing bid
price on the Nasdaq National Market of the Warrants on September 27,


                                      -59-

                                   BIO-TECHNOLOGY GENERAL CORP. AND SUBSIDIARIES

1995, the date Bio-Cardia ceased to be obligated to distribute any portion of
the Surrendered Warrants under certain circumstances as set forth in the
immediately preceding paragraph.

      In 1995, the Company expensed $806,000 as research and development
financing relating to Bio-Cardia, representing the net funds provided to
Bio-Cardia following Bio-Cardia's default under its agreements with the Company.
The net funding provided to Bio-Cardia consisted of: (i) $1,710,000 received
from Bio-Cardia in 1994 but not recognized as revenues, which amount was
included in other current liabilities on the December 31, 1994 balance sheet and
was returned to Bio-Cardia by BTG to fund the Exchange Offer discussed above;
(ii) $210,000 received from Bio-Cardia in 1995, prior to the Exchange Offer, but
not recognized as revenues and returned to Bio-Cardia by the Company to fund the
Exchange Offer discussed above; and (iii) $2,726,000 provided to Bio-Cardia to
fund the Exchange Offer discussed above (including the $1,920,000 referred to in
(i) and (ii) above).


                                      -60-

                                   BIO-TECHNOLOGY GENERAL CORP. AND SUBSIDIARIES

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

            None

                                   PART III

ITEM 10.    DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

Directors

      The section entitled "Proposal No. 1 - Election of Directors" in the
Company's Proxy Statement for the Annual Meeting of Stockholders is incorporated
herein by reference.

Executive Officers

      See "Part I - Item 1. Business - Executive Officers of the Company".

ITEM 11.    EXECUTIVE COMPENSATION

      The section entitled "Executive Compensation" in the Company's Proxy
Statement for the Annual Meeting of Stockholders is incorporated herein by
reference.

ITEM 12.    SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
            MANAGEMENT

      The section entitled "Beneficial Ownership of Common Stock" in the
Company's Proxy Statement for the Annual Meeting of Stockholders is incorporated
herein by reference.

ITEM 13.    CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

      The sections entitled "Executive Compensation - Compensation Committee
Interlocks and Insider Participation" and "Certain Transactions" in the
Company's Proxy Statement for the Annual Meeting of Stockholders is incorporated
herein by reference.


                                      -61-

                                     PART IV

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

(a)   Financial Statements

      (1) and (2) See "Index to Consolidated Financial Statements" at Item 8 of
this Annual Report on Form 10-K.

      (3)   Exhibits

      Certain exhibits presented below contain information that has been granted
or is subject to a request for confidential treatment. Such information has been
omitted from the exhibit. Exhibit Nos. 10(a), (q), (r), (s), (u), (v), (w), (z),
(oo) and (qq) are management contracts, compensatory plans or arrangements.

Exhibit No.   Description
- -----------   -----------

 3(a)      Certificate of Incorporation of the Registrant, as amended. *(1)

  (b)      By-laws of the Registrant, as amended through October 24, 1994. *(2)

10(a)      Bio-Technology General Corp. Stock Option Plan, as amended through
           May 29, 1991.*(3)

  (b)      Agreement, dated as of November 23, 1983, between the Company and
           American Cyanamid Company. *(4)

  (c)      Agreement, dated January 25, 1981, between Bio-Technology General
           (Israel) Ltd. and Yeda Research and Development Co., Ltd. ("Yeda").
           *(5)

  (d)      Agreement, dated February 12, 1982, between Bio-Technology General
           (Israel) Ltd. and the Office of the Chief Scientist of the Ministry
           of Industry, Commerce and Tourism (the "Chief Scientist") (Cattle
           Growth Hormone). *(5)

  (e)      Agreement, dated March 21, 1983, between Bio-Technology General
           (Israel) Ltd. and the Chief Scientist (Anti-depressant). *(5)

  (f)      Letter from the Chief Scientist to Bio-Technology General (Israel)
           Ltd. *(5)

  (g)      Letter from the Company to Yeda relating to bGH and hSOD. *(4)

  (h)      Agreement, dated January 20, 1984, between Bio-Technology General
           (Israel) Ltd., and the Chief Scientist with regard to certain
           projects. *(6)

  (i)      Agreement, dated July 9, 1984, between the Company and Yeda. *(6)

  (j)      Agreement, dated as of January 1, 1984, between the Company and
           Yissum. *(7)


                                      -62-

EXHIBIT NO.   DESCRIPTION
- -----------   -----------

  (k)      Indenture, dated as of February 15, 1986, between the Company and
           United States Trust Company of New York, as Trustee. *(8)

  (l)      Indenture, dated as of April 15, 1987, between the Company and United
           States Trust Company of New York, as Trustee. *(9)

  (m)      Supplemental Indenture, dated as of October 27, 1989 to the Indenture
           dated as of April 15, 1987, between the Company and United States
           Trust Company of New York, as Trustee. *(10)

  (n)      Indenture, dated as of October 30, 1989, between the Company and
           Continental Stock Transfer and Trust Company, as Trustee, relating to
           the Series A 7 1/2% Senior Secured Convertible Notes due 1995 and the
           Series B 11% Senior Secured Convertible Notes due 1998. *(10)

  (o)      Form of Indemnity Agreement between the Company and its directors and
           officers. *(11)

  (p)      Agreement, dated November 18, 1988, between the Company and Yeda.
           *(12)

  (q)      Employment Agreement, dated as of January 1, 1990, between the
           Company and Dr. Sim Fass.*(13)

  (r)      Bio-Technology General Corp. Stock Compensation Plan for Outside
           Directors, as amended through March 1991. *(3)

  (s)      Bio-Technology General Corp. Stock Option Plan for New Directors, as
           amended through March 1991. *(3)

  (t)      Reacquisition of Rights Agreement, effective June 12, 1991 between
           the Company and The Du Pont Merck Pharmaceutical Company. *(14)

  (u)      Employment Agreement, dated as of September 5, 1990, between the
           Company and David Haselkorn. *(15)

  (v)      Employment Agreement, dated as of September 5, 1990, between
           Bio-Technology General (Israel) Ltd. and Marian Gorecki. *(15)

  (w)      Employment Agreement, dated as of June 1, 1992, between the Company
           and Nadim Kassem. *(15)

  (x)      Agreement, dated as of November 17, 1992, between the Company and
           SmithKline Beecham Intercredit B.V. *(15)

  (y)      Exclusive Distribution Agreement, dated as of November 9, 1992,
           between the Company and Ferring B.V. *(15)

  (z)      Bio-Technology General Corp. 1992 Stock Option Plan, as amended. *(1)


                                      -63-


EXHIBIT NO.   DESCRIPTION
- -----------   -----------

 (aa)      Technology License Agreement, dated as of December 31, 1993, between
           Bio-Technology General Corp. and Bio-Cardia Corporation. *(16)

 (bb)      Research and Development Agreement, dated as of December 31, 1993,
           between Bio-Technology General Corp. and Bio-Cardia Corporation.
           *(16)

 (cc)      Marketing Option Agreement, dated as of December 31, 1993, between
           Bio-Technology General Corp. and Bio-Cardia Corporation. *(16)

 (dd)      Supply Agreement, dated as of December 31, 1993, between
           Bio-Technology General (Israel) Ltd. and Bio-Cardia Corporation.
           *(16)

 (ee)      Form of Warrant to purchase shares of Bio-Technology General Corp.
           Common Stock. *(16)

 (ff)      Registration Rights Agreement, dated as of December 31, 1993, made by
           Bio-Technology General Corp. in favor of the Warrant holders. *(16)

 (gg)      Exclusive Distribution Agreement, dated as of December 29, 1993,
           between Bio-Technology General Corp. and Novopharm Limited. *(17)

 (hh)      Bio-Technology General Corp. Common Stock Purchase Agreement, dated
           as of October 4, 1994, by and between the Company and Elliott
           Associates, L.P. *(18)

 (ii)      Bio-Technology General Corp. Common Stock Purchase Agreement, dated
           as of October 4, 1994, by and between the Company and Grace Holdings,
           L.P. *(18)

 (jj)      Bio-Technology General Corp. Common Stock Purchase Agreement, dated
           as of October 4, 1994, by and between the Company and Momar
           Corporation. *(18)

 (kk)      Bio-Technology General Corp. Common Stock Purchase Agreement, dated
           as of October 4, 1994, by and between the Company and WACO Partners.
           *(18)

 (ll)      Purchase and Supply Agreement, dated as of December 1, 1995, between
           Bio-Technology General Corp. and Quantum Health Resources. *+(19)

 (mm)      Support Services Agreement, dated as of December 1, 1995, between
           Bio-Technology General Corp. and Quantum Health Resources. *+(19)

 (nn)      Amended and Restated Research and Development Services Agreement,
           dated as of December 28, 1995 by and between Bio-Technology General
           Corp. and Bio-Technology General (Israel) Ltd. *(19)

 (oo)      Employment Agreement, dated as of January 29, 1996, between
           Bio-Technology General Corp. and Ernest L. Kelly. *(19)

 (pp)      Agreement, dated as of December 29, 1995, by and among Bio-Technology
           General Corp., Bio-Cardia Corporation and Bio-Technology General
           (Israel) Ltd. *(19)


                                      -64-


EXHIBIT NO.   DESCRIPTION
- -----------   -----------

 (qq)      Employment Agreement, dated as of April 24, 1995, between
           Bio-Technology General Corp. and William Pursley. *(20)

  11       Computation of Earnings Per Share.

  21       Subsidiaries of Bio-Technology General Corp.

23.1       Consent of Arthur Andersen LLP.

  27       Financial Data Schedule.

      Exhibits have been included in copies of this Report filed with the
Securities and Exchange Commission. Stockholders of the Company will be provided
with copies of these exhibits upon written request to the Company.

- -------------------
+    Confidential treatment has been granted for portions of such document.

* Previously filed with the Commission as Exhibits to, and incorporated herein
by reference from, the following documents:

 (1)  Company's Quarterly Report on Form 10-Q for the quarter ended June 30,
      1994.
 (2)  Company's Quarterly Report on Form 10-Q for the quarter ended September
      30, 1994.
 (3)  Company's Annual Report on Form 10-K for the year ended December 31, 1991.
 (4)  Company's Annual Report on Form 10-K for the year ended December 31, 1983.
 (5)  Registration Statement on Form S-1 (File No. 2-84690).
 (6)  Registration Statement on Form S-1 (File No. 33-2597).
 (7)  Registration Statement on Form S-2 (File No. 33-12238).
 (8)  Company's Annual Report on Form 10-K for the year ended December 31, 1985.
 (9)  Company's Quarterly Report on Form 10-Q for the quarter ended March 31,
      1987.
(10)  Company's Quarterly Report on Form 10-Q for the quarter ended September
      30, 1989, as amended on Form 8 dated November 15, 1989.
(11)  Company's Quarterly Report on Form 10-Q for the quarter ended June 30,
      1987.
(12)  Company's Annual Report on Form 10-K for the year ended December 31, 1988.
(13)  Company's Annual Report on Form 10-K for the year ended December 31, 1989.
(14)  Company's Quarterly Report on Form 10-Q for the quarter ended June 30,
      1990.
(15)  Report on Form 8-K dated May 16, 1991.
(14)  Registration Statement on Form S-3 (File No. 33-39018).
(15)  Company's Annual Report on Form 10-K for the year ended December 31, 1992.
(16)  Company's Current Report on Form 8-K dated December 31, 1993.
(17)  Company's Annual Report on Form 10-K for the year ended December 31, 1993.
(18)  Company's Current Report on Form 8-K dated October 12, 1994.
(19)  Company's Annual Report on Form 10-K for the year ended December 31, 1995.
(20)  Company's Quarterly Report on Form 10-Q for the quarter ended March 31,
      1995.

 (b)  Reports on Form 8-K

      None


                                      -65-


 (c)  Exhibits

      See (a) (3) above.

 (d)  Financial Statement Schedule

      See "Index to Consolidated Financial Statements and Supplemental Schedule"
      at Item 8 of this Annual Report on Form 10-K. Schedules not included
      herein are omitted because they are not applicable or the required
      information appears in the Consolidated Financial Statements or notes
      thereto.


                                      -66-


                                   SIGNATURES

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

                                    Bio-Technology General Corp.
                                             (Registrant)

                                    By:     /s/ Sim Fass
                                        ---------------------------------
                                                (Sim Fass)
                                                 President and CEO

March 26, 1997

     Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this report has been signed below by the following persons on behalf of
the Registrant and in the capacities and on the dates indicated.

Signature                           Title                            Date
- ---------                           -----                            ----

/s/ Sim Fass                        President, CEO and          March 26, 1997
- ------------------------            Director (Principal
(Sim Fass)                          Executive Officer)

/s/ Herbert Conrad                  Director                    March 26, 1997
- ------------------------
(Herbert Conrad)

/s/ Hoffer Kaback                   Director                    March 26, 1997
- ------------------------
(Hoffer Kaback)

/s/ Charles MacDonald               Director                    March 26, 1997
- ------------------------
(Charles MacDonald)

/s/ Moses Marx                      Director                    March 26, 1997
- ------------------------
(Moses Marx)

/s/ David Tendler                   Director                    March 26, 1997
- ------------------------
(David Tendler)


                                      -67-


Signature                           Title                            Date
- ---------                           -----                            ----

/s/ Virgil Thompson                 Director                    March 26, 1997
- ------------------------
(Virgil Thompson)

/s/ Dan Tolkowsky                   Director                    March 26, 1997
- ------------------------
(Dan Tolkowsky)

/s/ Yehuda Sternlicht               Vice President-Finance      March 26, 1997
- ------------------------            and Chief Financial
(Yehuda Sternlicht)                 Officer (Principal
                                    Financial and Accounting
                                    Officer)


                                      -68-

EX-11

                                                                     EXHIBIT 11

                  BIO-TECHNOLOGY GENERAL CORP. AND SUBSIDIARIES

                        COMPUTATION OF EARNINGS PER SHARE

                      (IN THOUSANDS, EXCEPT PER SHARE DATA)




                                                                       FOR THE YEAR ENDED DECEMBER 31,
                                                                  ---------------------------------------
                                                                     1994           1995           1996
                                                                  ---------       -------        --------
                                                                                        
PRIMARY EARNINGS PER SHARE
    Income (loss) before extraordinary gain ...............       $(8,919)         $3,416        $22,915
    Extraordinary gain ....................................         1,500           1,363            --
                                                                  -------         -------        -------
    Net income (loss) .....................................       $(7,419)         $4,779        $22,915
                                                                  =======          ======        =======     

   Weighted average number of common and
    common equivalent shares...............................        38,725          43,174         44,195
   Add--Dilutive effect of outstanding equivalents
    (as determined by the application of the treasury
     stock method) ........................................            --             610          4,064
                                                                  -------         -------        -------
   Weighted average common and common
    equivalent shares outstanding .........................        38,725          43,784         48,259
                                                                  =======         =======        =======

Primary Earnings Per Common Share:
    Income (loss) before extraordinary gain ...............        $(0.23)          $0.08          $0.47
    Extraordinary gain ....................................          0.04            0.03             --      
                                                                   ------           -----          -----
    Net income (loss) .....................................        $(0.19)          $0.11          $0.47
                                                                   ======           =====          =====


FULLY DILUTED EARNINGS PER SHARE:

   Weighted average number of common and
    common equivalent shares outstanding ..................                                       44,195

   Add--Dilutive effective of outstanding
    equivalents (as determined by the application
    of the treasury stock method) .........................                                        6,509
                                                                                                  ------
   Weighted average common and common
    equivalent shares outstanding .........................                                       50,704
                                                                                                  ======
Fully Diluted Earnings Per Common Share ...................                                       $ 0.45
                                                                                                  ======

EX-21

                                                                     EXHIBIT 21

Subsidiary                                         Jurisdiction of Organization
                                                    or Incorporation

Bio-Technology General (Israel) Ltd.                Israel

BTG Pharmaceutical Ltd.                             Bermuda

BTG Pharmaceuticals Ltd. N.V.                       Netherlands Antilles

EX-23.1

                                                                   EXHIBIT 23.1


                   CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS

As independent public accountants, we hereby consent to the incorporation of our
report included in this Form 10-K, into the Company's previously filed
Registration Statements File Numbers 33-41591, 33-41592, 33-41593, 33-43718,
33-44359, 33-51202, 33-83902, 33-83904, 33-88224 and 333-02685.



                                                             ARTHUR ANDERSEN LLP

New York, New York
March 26, 1997

EX-27

 


<ARTICLE>                     5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AND THE CONSOLIDATED STATMENT OF OPERATIONS AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.

<MULTIPLIER>                    1,000
       
                                      
<PERIOD-TYPE>                            YEAR
<FISCAL-YEAR-END>                        DEC-31-1996
<PERIOD-END>                             DEC-31-1996
<CASH>                                         7,005
<SECURITIES>                                  12,760
<RECEIVABLES>                                 18,273
<ALLOWANCES>                                       0
<INVENTORY>                                    5,328
<CURRENT-ASSETS>                              49,716
<PP&E>                                        21,346
<DEPRECIATION>                                15,307
<TOTAL-ASSETS>                                73,575
<CURRENT-LIABILITIES>                          9,090
<BONDS>                                          282
<PREFERRED-MANDATORY>                              0
<PREFERRED>                                        0
<COMMON>                                         457
<OTHER-SE>                                    60,101
<TOTAL-LIABILITY-AND-EQUITY>                  73,575
<SALES>                                       40,356
<TOTAL-REVENUES>                              47,738
<CGS>                                          7,264
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<OTHER-EXPENSES>                                   0
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<INCOME-PRETAX>                               10,940
<INCOME-TAX>                                       0
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<CHANGES>                                          0
<NET-INCOME>                                  22,915
<EPS-PRIMARY>                                   0.47
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