SEQUUS PHARMACEUTICALS INC, 424B5, 1995-10-27

SEQUUS PHARMACEUTICALS INC
424B5, 1995-10-27
PHARMACEUTICAL PREPARATIONS

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<PAGE> 1
Filed Pursuant to Rule 424(b)(5)
Registration Statement No. 33-58495

PROSPECTUS SUPPLEMENT TO PROSPECTUS DATED JUNE 26, 1995

LOGO

3,900,000 SHARES

COMMON STOCK

All of the 3,900,000 shares of Common Stock offered hereby are being issued
and sold by SEQUUS Pharmaceuticals, Inc. ("SEQUUS" or the "Company"). On October
24, 1995, the last sale price of the Company's Common Stock, as reported on the
Nasdaq National Market, was $11.00 per share. See "Price Range of Common Stock."
The Common Stock is traded on the Nasdaq National Market under the symbol
"SEQU."

---------------------

THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" BEGINNING ON PAGE S-5.
---------------------

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS SUPPLEMENT OR
THE ATTACHED PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.

<TABLE>
<CAPTION>
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PRICE TO PROCEEDS TO
PUBLIC UNDERWRITING COMPANY(1)
DISCOUNTS AND
COMMISSIONS
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share................................ $11.00 $0.65 $10.35
- -----------------------------------------------------------------------------------------------
Total(2)................................. $42,900,000 $2,535,000 $40,365,000
- -----------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------
</TABLE>

(1) Before deducting expenses payable by the Company, estimated at $540,000,
including a financial advisory fee. See "Underwriting."

(2) The Company has granted the Underwriters a 30-day option to purchase up to
an additional 585,000 shares of Common Stock solely to cover
over-allotments, if any. See "Underwriting." If such option is exercised in
full, the total Price to Public, Underwriting Discounts and Commissions and
Proceeds to Company will be $49,335,000, $2,915,250 and $46,419,750,
respectively.

---------------------

The Common Stock is offered by the Underwriters as stated herein, subject
to receipt and acceptance by them and subject to their right to reject any order
in whole or in part. It is expected that delivery of such shares will be made
through the offices of Robertson, Stephens & Company, L.P. ("Robertson, Stephens
& Company"), San Francisco, California, on or about October 30, 1995.

ROBERTSON, STEPHENS & COMPANY

DILLON, READ & CO. INC.
OPPENHEIMER & CO., INC.
PUNK, ZIEGEL & KNOELL

The date of this Prospectus Supplement is October 25, 1995

<PAGE> 2

TABLE OF CONTENTS

PROSPECTUS SUPPLEMENT PROSPECTUS
<TABLE>
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PAGE
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<S> <C>
Summary.................................... S-3
Risk Factors............................... S-5
Use of Proceeds............................ S-13
Dividend Policy............................ S-13
Price Range of Common Stock................ S-14
Capitalization............................. S-15
Dilution................................... S-16
Selected Financial Data.................... S-17
Management's Discussion and Analysis of
Financial Condition and Results of
Operations............................... S-18
Business................................... S-22
Management................................. S-40
Underwriting............................... S-43
Legal Matters.............................. S-44
Experts.................................... S-44
Additional Information..................... S-44
Index to Financial Statements.............. F-1

Available Information...................... 2
Information Incorporated by Reference...... 2
The Company................................ 3
Risk Factors............................... 3
Use of Proceeds............................ 4
Dilution................................... 5
Ratios of Earnings to Fixed Charges and
Earnings to Combined Fixed Charges and
Preferred
Stock Dividends.......................... 5
General Description of Securities.......... 6
Description of Debt Securities............. 6
Description of Preferred Stock............. 13
Description of Common Stock................ 17
Description of Warrants.................... 18
Plan of Distribution....................... 20
Legal Matters.............................. 21
Experts.................................... 21
</TABLE>

SEQUUS (formerly, Liposome Technology, Inc.) was incorporated in California
in 1981 and was reincorporated in Delaware in 1987. The Company's principal
executive offices are located at 960 Hamilton Court, Menlo Park, California
94025 and its telephone number is (415) 323-9011.
------------------------
To the extent applicable, the information in this Prospectus Supplement
supersedes the information in the attached Prospectus.
------------------------
No dealer, sales representative or any other person has been authorized in
connection with the offering made hereby to give any information or to make any
representation other than those contained in this Prospectus Supplement and the
attached Prospectus and, if given or made, such information or representation
must not be relied upon as having been authorized by the Company or any of the
Underwriters. This Prospectus Supplement and the attached Prospectus do not
constitute an offer to sell, or a solicitation of an offer to buy, any of the
securities other than the registered securities to which they relate or an offer
to, or a solicitation of, any person or by anyone in any jurisdiction in which
it is unlawful to make such offer or solicitation. Neither the delivery of this
Prospectus Supplement nor any offer or sale made hereunder shall, under any
circumstances, create any implication that there has been no change in the
affairs of the Company or that the information contained herein is correct as of
any date subsequent to the date hereof.
------------------------
STEALTH(R) is a registered trademark of SEQUUS and is used throughout this
Prospectus Supplement to describe the Company's proprietary long-circulating
liposomes. SEQUUS has filed for the registration of the AMPHOTEC(TM) tradename
used throughout this Prospectus Supplement to describe the Company's AMPHOTEC
(amphotericin B colloidal dispersion) Injection product. AMPHOTEC is marketed
under the trade name AMPHOCIL(TM) outside of the United States and is also known
as ABCD. DOXIL(R) is a registered trademark of SEQUUS and is used throughout
this Prospectus Supplement to describe the Company's DOXIL (pegylated liposomal
doxorubicin HCl) Injection product. DOXIL is also called DOX-SL and S-Dox. This
Prospectus Supplement also includes trademarks of companies other than SEQUUS.
------------------------
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK OF
THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET, OR
OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
------------------------
IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS AND SELLING GROUP
MEMBERS OR THEIR AFFILIATES MAY ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS IN
THE COMMON STOCK OF THE COMPANY ON THE NASDAQ NATIONAL MARKET IN ACCORDANCE WITH
RULE 10B-6A UNDER THE EXCHANGE ACT. SEE "UNDERWRITING."

S-2
<PAGE> 3

SUMMARY

The following summary is qualified in its entirety by the more detailed
information, including "Risk Factors" and Financial Statements and Notes
thereto, appearing elsewhere in this Prospectus Supplement and in the attached
Prospectus.
THE COMPANY

SEQUUS Pharmaceuticals, Inc. is a leader in the development and
commercialization of liposome and lipid-based biopharmaceutical products
primarily to treat cancer and certain fungal infections. SEQUUS recently
received an approvable letter from the United States Food and Drug
Administration (the "FDA") for the use of DOXIL to treat patients with
AIDS-related Kaposi's sarcoma ("KS") in whom prior systemic combination
chemotherapy has failed either due to disease progression or unacceptable
toxicity ("refractory KS"). The Company is currently conducting clinical trials
for the use of DOXIL to treat certain solid tumors. AMPHOTEC, the Company's
first approved product, is being marketed in the United Kingdom and recently
received marketing approval in three additional European countries for treating
systemic fungal infections in patients for whom conventional therapy
(amphotericin B) is contraindicated due to toxicity or renal (kidney) failure or
for whom previous antifungal therapy was unsuccessful. The Company is further
developing its proprietary drug delivery technology, STEALTH liposomes, to
address additional indications.

Liposomes, which are microscopic lipid spheres, are typically used to
encapsulate drugs for delivery to targeted areas of the body in order to
increase efficacy and reduce toxicity. By attaching polyethylene glycol ("PEG")
to the surface of the liposome, SEQUUS has created its patented STEALTH
technology. STEALTH liposomes are engineered to avoid the body's natural defense
mechanisms and degrade more slowly than conventional liposomes, which
significantly increase their circulation time in the body. STEALTH liposomes
accumulate in tissues where new blood vessels are forming, such as tumors and
sites of inflammation or injury, delivering sustained and increased drug
concentration to these tissues. The PEG on the surface of the liposome also
allows the attachment of other therapeutic agents, facilitating additional
applications of this technology.

SEQUUS has utilized STEALTH liposomes to develop DOXIL, a proprietary
cancer therapeutic formulation encapsulating generic doxorubicin. To support the
Company's New Drug Application ("NDA") filed with the FDA in September 1994, the
Company submitted data from 77 refractory KS patients from an open label Phase
II clinical trial. A subset of these, the evaluable patients, demonstrated a
tumor response rate ranging from 27% to 48% depending on the method of
assessment. The Company also included safety data on 705 patients in the NDA
showing that DOXIL was generally well tolerated with manageable side effects. In
September 1995, SEQUUS received from the FDA an approvable letter for DOXIL as a
treatment for refractory KS. Accordingly, the FDA may approve the marketing of
DOXIL upon the satisfactory responses by the Company and its supplier of
doxorubicin to items regarding labeling and chemistry, manufacturing and control
and the Company's agreement to conduct post-marketing clinical trials and other
studies. SEQUUS has also applied for approval of DOXIL as a first line therapy
to treat KS in 15 European countries.

The Company is seeking to expand the indicated uses for DOXIL to include
the treatment of a variety of solid tumors. The Company is currently conducting
clinical trials for the treatment of ovarian, breast, primary liver, and
prostate cancer. Based on preliminary clinical results in a limited number of
patients, SEQUUS plans to expand these trials, test DOXIL in combination with
other chemotherapies (such as Taxol), and conduct additional clinical trials as
appropriate.

The Company's strategy is to build an integrated biopharmaceutical company
that develops, clinically tests, obtains regulatory approval of and
commercializes innovative drug formulations of existing and new therapeutics
based primarily on proprietary STEALTH liposome technology. The Company intends
to focus its near-term efforts on: (i) obtaining approval of and commercializing
DOXIL and AMPHOTEC in the United States and selected international markets; (ii)
expanding the use of its products by establishing clinical efficacy in a range
of additional indications; (iii) developing new products by encapsulating other
drugs in STEALTH liposomes; and (iv) expanding, either alone or through
strategic alliances, the STEALTH platform to create additional methods of drug
delivery.

If FDA approvals are obtained in the United States, SEQUUS expects to
market and sell its products directly, or possibly co-promote them with
strategic partners, and has recruited a sales and marketing group experienced in
the sale of pharmaceutical and biotechnology products. Outside of the United
States, the Company's strategy is to market its products in conjunction with
corporate partners. SEQUUS is distributing AMPHOTEC in the United Kingdom
through an agreement with Zeneca Limited ("Zeneca"), a major United
Kingdom-based pharmaceutical company.

S-3
<PAGE> 4

THE OFFERING

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<S> <C>
Common Stock Offered by the Company................... 3,900,000 shares
Common Stock Outstanding after the Offering........... 25,459,566 shares(1)
Use of Proceeds....................................... For sales and marketing, clinical and pre-
clinical development, manufacturing,
research and development, capital
expenditures and other general corporate
purposes.
Nasdaq National Market Symbol......................... SEQU
</TABLE>

SUMMARY FINANCIAL DATA

<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
---------------------------------- ---------------------
1992 1993 1994 1994 1995
-------- -------- -------- -------- --------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Sales............................. $ 293 $ 1,299 $ 3,664 $ 946 $ 1,040
Research revenue, royalties and
license fees................... 425 5,458(2) 91 40 38
-------- -------- -------- -------- --------
Total revenues...................... 718 6,757 3,755 986 1,078
Operating expenses:
Cost of goods sold................ 13 232 916 222 275
Research and development.......... 15,769 21,128 25,378 12,893 10,729
General and administrative........ 2,723 6,653 7,622 3,813 6,193
-------- -------- -------- -------- --------
Total operating expenses............ 18,505 28,013 33,916 16,928 17,197
Loss from operations................ (17,787) (21,256) (30,161) (15,942) (16,119)
Interest income..................... 2,427 1,647 1,002 598 254
Interest/other expenses............. (33) (45) (26) (14) (54)
-------- -------- -------- -------- --------
Net loss............................ $(15,393) $(19,654) $(29,185) $(15,358) $(15,919)
======== ======== ======== ======== ========
Net loss per share.................. $ (0.84) $ (1.05) $ (1.54) $ (0.81) $ (0.80)
======== ======== ======== ======== ========
Weighted average shares
outstanding....................... 18,270 18,789 18,978 18,915 19,880
</TABLE>

<TABLE>
<CAPTION>
JUNE 30, 1995
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ACTUAL AS ADJUSTED(3)
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(in thousands)
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents and short-term investments.............. $ 21,465 $ 61,290
Total assets...................................................... 26,593 66,418
Accumulated deficit............................................... (115,771) (115,771)
Total stockholders' equity........................................ 20,551 60,376
</TABLE>

- ---------------

(1) Based on the number of shares outstanding on September 12, 1995 and excludes
7,103,189 shares issuable upon exercise of outstanding options and warrants
and 1,616,160 shares that would be issuable upon conversion of the Series A
Convertible Reset Preferred Stock.

(2) Includes a signing fee and regulatory milestone fee totaling $5.3 million
from Zeneca.

(3) Adjusted to reflect the sale by the Company of 3,900,000 shares of Common
Stock offered hereby at a public offering price of $11.00 per share and the
application of the estimated net proceeds therefrom. See "Use of Proceeds."

Except as otherwise indicated, the information contained in this Prospectus
Supplement assumes no exercise of the Underwriters' over-allotment option.

S-4
<PAGE> 5

RISK FACTORS

In addition to the other information in this Prospectus Supplement and the
attached Prospectus, the following risk factors should be considered carefully
in evaluating the Company and its business before purchasing shares of the
Common Stock offered hereby.

UNCERTAINTY OF MARKET ACCEPTANCE

Even if regulatory approvals are obtained, uncertainty exists as to whether
the Company's products will be accepted by the market. The only product marketed
by the Company to date is AMPHOTEC, which has been marketed only in the United
Kingdom ("U.K.") and which has generated only limited revenues. A number of
factors may limit the market acceptance of AMPHOTEC, DOXIL and any other
products developed by the Company, including the timing of regulatory approval
and market entry relative to competitive products, the availability of alternate
therapies, the price of the Company's products relative to alternative
therapies, the availability of third-party reimbursement and the extent of
marketing efforts by third-party distributors or agents retained by the Company.
No therapeutic product based on liposome or lipid-based technology is presently
commercially available in the United States. As a result, unanticipated side
effects or unfavorable publicity concerning any product incorporating liposome
or lipid-based technologies could have an adverse effect on the Company's
ability to obtain physician, patient or third-party payor acceptance and to sell
the Company's products. There can be no assurance of the Company's ability, or
the length of time required, to achieve commercialization of the Company's
products or that physicians, patients or third-party payors will accept liposome
products or any of the Company's products as readily as traditional forms of
medication or at all. See "Business -- Products and Products Under Development."

UNCERTAINTY OF PRODUCT DEVELOPMENT

There are a number of challenges the Company must address successfully to
develop commercial products in each of its development programs. The Company's
potential products will require significant additional research and development
efforts, including process development and significant additional clinical
testing, prior to any commercial use. There can be no assurance that the Company
will successfully address any of these technological challenges, or others that
may arise in the course of development. In addition, the Company may not have
sufficient resources to commercialize new products successfully.

Successful product development requires, among other things, the design and
completion of clinical trials. The rate of completion of the Company's clinical
trials is dependent upon, among other factors, the rate of patient enrollment.
Patient enrollment is a function of many factors, including the size of the
patient population, the nature of the protocol, the Company's ability to manage
the clinical trial, the proximity of patients to clinical sites and the
eligibility criteria for the study. Several factors, such as delays in planned
patient enrollment may result in increased costs and delays, or termination of
clinical trials prior to completion, which could have a material adverse effect
on the Company's business, financial condition and results of operations. See
"Business -- Products and Products Under Development" and "-- Government
Regulation."

S-5
<PAGE> 6

COMPETITION

The drugs being developed by the Company compete with existing and new
drugs being created by pharmaceutical, biopharmaceutical and biotechnology
companies. Many of these companies, as well as university-related entities, both
in the United States and abroad are developing products based on improved drug
delivery technologies as well as novel therapeutics for the treatment of cancer,
infectious diseases and other indications targeted by the Company. Some of these
companies are active in the development of liposome and lipid-based research and
product development and many have financial and technical resources and
production and marketing capabilities substantially greater than those of the
Company. In addition, most such companies have significantly greater experience
than the Company in preclinical and clinical development activities and in
obtaining regulatory approval to manufacture and market biopharmaceutical
products.

The Company's two principal competitors in liposomal drug delivery are
NeXstar Pharmaceuticals, Inc. ("NeXstar") and The Liposome Company ("TLC").
NeXstar has regulatory approval for its liposomal amphotericin B product in
approximately 18 countries, primarily in Europe, and its product, therefore, at
present has a marketing advantage over AMPHOTEC, which has approvals in four
European countries and received those approvals after its competitor. NeXstar
reported sales of approximately $26.2 million in the six months ended June 30,
1995, as compared to approximately $1.0 million by the Company. In both cases,
sales represent primarily revenues received for amphotericin B products. TLC has
submitted a NDA to the FDA and Market Authorization Applications ("MAAs") in
several European countries for a liposomal amphotericin B product and has
received approval for this product in the U.K. TLC recently introduced its
liposomal amphotericin B product as the third entrant in the U.K. market at a
price substantially below the price of NeXstar's and SEQUUS' lipid-based
antifungals. This could have an adverse effect on AMPHOTEC's market penetration.
Zeneca, the Company's distributor of AMPHOTEC, has engaged in some price
competition, and if increased price competition results, it would have a
material adverse effect on the Company's business, financial condition and
results of operations.

NeXstar has received an approvable letter from the FDA with respect to its
liposome-based daunorubicin product for use in first line therapy of KS.
Approval as a first line treatment may give it a competitive advantage over
DOXIL which has received an approvable letter for treatment of refractory KS.
Neither product has received approval to be marketed in the United States. To
the extent either company receives approval first, that company may enjoy a
significant competitive advantage. If physicians prescribe DOXIL for first line
therapy, DOXIL's limited approval may restrict reimbursement by certain
third-party payors.

SEQUUS believes that competition in all pharmaceutical products and in all
forms of drug delivery will continue to be intense. There can be no assurance
that other pharmaceutical companies will not develop more effective therapeutics
or drug delivery technologies than those of the Company or will not market and
sell their products more effectively than the Company. See
"Business -- Competition."

UNCERTAINTY OF PHARMACEUTICAL PRICING AND REIMBURSEMENT

The Company's business may be materially adversely affected by the
continuing efforts of worldwide governmental and third-party payors to contain
or reduce the costs of health care in general and drugs in particular. For
example, in most foreign markets, including markets the Company is seeking to
enter, pricing of prescription pharmaceuticals is subject to government pricing
control. In these markets, once marketing approval is received, pricing
negotiation could take as long as another six to 12 months or longer. In the
United States, there has been, and the Company expects that there will continue
to be, a number of federal and state proposals to implement similar government
pricing control. In addition, an increasing emphasis on managed care and
consolidation of hospital purchasing in the United States has and will continue
to put pressure on pharmaceutical pricing. Such initiatives and proposals, if
adopted, could decrease the price that the Company receives for any products it
may develop and sell in the future and thereby have a material adverse effect on
the Company's business, financial condition and results of operations. Further,
to the extent that such proposals or initiatives have a material adverse effect
on pharmaceutical companies that are collaborators or prospective collaborators
for certain of the Company's potential products, the Company's ability to
commercialize its potential products may be materially adversely affected. In
addition, price competition may result

S-6
<PAGE> 7

from competing product sales, attempts to gain market share or introductory
pricing schemes, which would have a material adverse effect on the Company's
business, financial condition and results of operations.

The Company's ability to commercialize biopharmaceutical products may
depend in part on the extent to which reimbursement for such products and
related treatments will be available from government health administration
authorities, private health insurers and other third-party payors. Significant
uncertainty exists as to the reimbursement status of newly approved health care
products, and third-party payors are increasingly challenging the prices charged
for medical products and services. There can be no assurance that any third-
party insurance coverage will be available to patients for any products
developed by the Company. Government and other third-party payors are
increasingly attempting to contain health care costs by limiting both coverage
and the level of reimbursement for new therapeutic products, and by refusing, in
some cases, to provide coverage for off-label uses of approved products, i.e.,
uses for indications as to which the FDA has not granted marketing approval.
Moreover, reimbursement may be denied even for FDA-approved indications. If
adequate coverage and reimbursement levels are not provided by the government
and third-party payors for the Company's products, the Company's business,
financial condition and results of operations would be materially adversely
affected. See "Business -- Government Regulation."

NO ASSURANCE OF REGULATORY APPROVALS

The production and marketing of the Company's products are subject to
rigorous manufacturing requirements, preclinical testing and clinical trials and
approval by the FDA, by comparable agencies in other countries and by state
regulatory authorities prior to marketing. The process of conducting clinical
trials and obtaining regulatory approval for a product typically takes a number
of years and involves substantial expenditures. In addition, product approvals
may be withdrawn or limited for noncompliance with regulatory standards or the
occurrence of unforeseen problems following initial marketing. The Company has
not received regulatory approval in the United States for the commercial sale of
any of its principal products. The Company may encounter significant delays or
excessive costs in its efforts to secure and maintain necessary approvals or
licenses. Future federal, state, local or foreign legislative or administrative
acts could also prevent or delay regulatory approval of the Company's or its
licensees' products. There can be no assurance that the Company will be able to
obtain or maintain the necessary approvals for manufacturing or marketing the
Company's products for current or expanded indications or that the data it
obtains in clinical trials will be sufficient to establish the safety and
efficacy of its products. Even if the Company obtains regulatory approval for
any particular product, there can be no assurance that it will be economically
feasible for the Company to commercialize such product. In addition,
identification of certain side effects after a drug is on the market or the
occurrence of manufacturing problems could cause subsequent withdrawal of
approval, reformulation of the drug, additional preclinical testing or clinical
trials, and changes in labeling of the product. Failure to obtain or maintain
requisite governmental approvals, failure to obtain approvals of the clinically
intended uses or the identification of side effects could delay or preclude the
Company from further developing particular products or from marketing its
products, or could limit the commercial use of its products, which would have a
material adverse effect on the Company's business, financial condition and
results of operations.

DOXIL Regulatory Status

In September 1995, SEQUUS received a FDA approvable letter for DOXIL as a
treatment for refractory KS in accordance with the FDA's procedures for
Accelerated Approval of New Drugs for Serious or Life-Threatening Illnesses. The
FDA may approve the marketing of DOXIL upon the satisfactory responses by the
Company and its supplier of doxorubicin to items regarding labeling and
chemistry, manufacturing and control. SEQUUS recently submitted a response to
the items raised by the FDA in the approvable letter and will work with its
supplier to assist the supplier in responding to certain chemistry items. The
Company cannot control the responses of its supplier to the FDA or the timing of
such responses, and there can be no assurance that such responses will be
adequate to meet the FDA's requirements or as to how long it will take to
satisfy such requirements. Accelerated approval regulations require that an
applicant study an investigational drug following product launch to verify and
describe the drug's clinical benefit. In the letter, the FDA acknowledged
SEQUUS' commitment to a post-marketing clinical trial designed to meet
accelerated approval requirements. There can be no assurance that final approval
will be granted on a timely basis, if at all, and under FDA accelerated approval
regulations, the FDA may withdraw approval following product launch if

S-7
<PAGE> 8

the Company fails to show due diligence in conducting a post-marketing clinical
trial or if this clinical trial fails to demonstrate clinical benefit to the
FDA's satisfaction. There can be no assurance that the Company will be able to
conduct a satisfactory post-marketing clinical trial.

The Company has submitted MAAs for DOXIL in 15 European Union ("EU")
countries seeking approval to use DOXIL in the first line treatment of KS. There
can be no assurance that the Committee on Proprietary and Medicinal Products
("CPMP"), which is composed of representatives from the respective regulatory
bodies in the EU countries, will determine that the Company's clinical data have
provided evidence of safety and efficacy in humans adequate to support approval
or that any of the MAAs will be approved on a timely basis, if at all.

AMPHOTEC Regulatory Status

SEQUUS has received marketing approval for AMPHOTEC in the U.K., the
Republic of Ireland ("Ireland"), Finland and Russia for treating systemic fungal
infections in patients for whom conventional amphotericin B is contraindicated
due to toxicity or renal failure or for whom previous antifungal therapy was
unsuccessful. The Company and Zeneca have submitted MAAs for AMPHOTEC in 11
other EU countries and similar applications in other countries. The EU
submissions were made in accordance with CPMP multistate procedures. On
September 13, 1995, the CPMP reviewed the Company's application for product
marketing approval. Germany, France, Spain, Greece and Luxembourg did not accept
the MAAs. Subsequently, the Company and Zeneca have withdrawn the application in
Germany. Based primarily on the CPMP review, SEQUUS believes national approvals
will be forthcoming in Austria, Denmark, Italy, The Netherlands, Portugal and
Sweden, although the CPMP is an advisory committee only, its vote is not binding
on member countries, and there can be no assurance that approvals will be
forthcoming on a timely basis, or at all. In addition, the CPMP review indicates
that Belgium can approve AMPHOTEC for marketing upon the receipt of additional
clinical information, although there can be no assurance that the Company will
be able to provide additional data or, if provided, that approval will be
forthcoming on a timely basis, or at all. If approvals are received, SEQUUS and
Zeneca intend to negotiate pricing in each of these countries, which the Company
believes will take as long as six to 12 months or longer following marketing
approval.

The Company continues to prepare a NDA for AMPHOTEC based upon certain data
from open label clinical trials. There can be no assurance that the Company's
NDA for AMPHOTEC will be accepted for filing by the FDA, that the FDA will
determine that the Company's NDA provides sufficient evidence of safety and
efficacy in humans to support FDA approval or that the NDA will be approved on a
timely basis, or at all. See "Business -- Government Regulation."

DEPENDENCE ON THIRD-PARTY DISTRIBUTOR AND AGENTS; LIMITED MARKETING AND SALES
EXPERIENCE

In 1994, all of the Company's product revenues came from sales either to a
third-party distributor (Zeneca) or through third-party agents. Ninety-one
percent (91%) of the Company's product revenues in fiscal 1994 and 80% of
product revenues for the six-month period ended June 30, 1995 came from sales of
AMPHOTEC to Zeneca. As a consequence of this current dependence on Zeneca for
the distribution of AMPHOTEC, and unless and until the Company receives any
approvals for and begins to sell DOXIL, the Company's future revenues are
largely dependent on Zeneca's success in selling AMPHOTEC in approved markets
and Zeneca's forecasts of future sales, including such factors as timing of
additional approvals for AMPHOTEC, if any, and inventory requirements. The level
of the Company's future sales of AMPHOTEC to Zeneca will depend upon the rate at
which the product penetrates the existing approved markets of the U.K., Ireland,
Finland and Russia, as well as the timing of additional approvals in other
countries, if any. Sales of AMPHOTEC to date have been below expectations, and
Zeneca and the Company have initiated discussions regarding modifications to
their agreement. The Company expects to ship no additional product to Zeneca for
the remainder of 1995, and may not ship product to Zeneca during the first half
of 1996. In addition, the Company may elect to use certain Zeneca inventory for
its clinical trials in return for partial credits on future product sales to
Zeneca. Additional terms under discussion include the scheduling of regulatory
milestone payments, possibly modifying the territories in which Zeneca has
distribution rights and implementing a mechanism to give Zeneca greater pricing
flexibility. It also is possible that other terms of the agreement between the
parties will be amended as appropriate. Accordingly, there can be no assurance
that

S-8
<PAGE> 9

Zeneca will elect to maintain distribution rights to AMPHOTEC in any or all
markets or that the terms of such rights will remain the same. In addition, the
delay in regulatory approvals of AMPHOTEC in the EU countries will affect the
timing, and any failure to obtain regulatory approval would affect the receipt,
of additional milestone payments from Zeneca. There can be no assurance that
these or other factors, including the amount and timing of resources devoted to
AMPHOTEC sales by Zeneca, will not lead to substantial fluctuations in the
Company's revenues from period to period. Any delays in the receipt, or denial,
of marketing approvals or material changes to the terms of the agreement with
Zeneca would have a material adverse effect on the Company's business, financial
condition and results of operations.

If FDA approvals are obtained in the United States, the Company expects to
market and sell its products directly, or possibly co-promote them with
strategic partners. In this regard, the Company has hired a sales force
experienced in the sale of pharmaceutical and biotechnology products of 22
individuals in anticipation of FDA approval to market DOXIL to physicians,
hospitals and clinics, including managed care providers. The Company intends to
increase the size of this staff if warranted. Developing such a marketing and
sales organization will require significant additional expenditures, management
resources and time. The Company has no experience marketing and selling its
products. In addition, the loss of certain key sales personnel would delay and
adversely affect the sales effort and would have a material adverse effect on
the Company's business, financial condition and results of operations. There can
be no assurance that the Company will be able to implement its marketing plan
successfully. If the Company enters into any marketing partnerships in the
United States, such as those currently under consideration, this would
significantly reduce the Company's margins on these products. There can be no
assurance that the Company will be able to establish such a marketing and sales
organization successfully or manage its marketing organization successfully. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business -- Marketing and Sales" and "-- Strategic Alliances."

PRODUCT LIABILITY

Testing, manufacturing, marketing and use of the Company's products will
entail substantial risk of product liability. The Company currently maintains
product liability insurance in an amount of $5.0 million per occurrence and $5.0
million in the aggregate. A single product liability claim could exceed the $5.0
million coverage limit, and there is a possibility of multiple claims. There can
be no assurance that the amount of insurance the Company has obtained against
the risk of product liability will be adequate, that the amount of such
insurance can be renewed or that the amount and scope of any coverage obtained
will be adequate to protect the Company in the event of a successful product
liability claim. The Company's business could be materially adversely affected
by one or more successful product liability claims.

In addition, if the Company receives approval to sell its products
commercially in the United States, the Company will have significantly greater
risk in connection with product liability claims due to the greater frequency of
lawsuits and higher claims paid in courts in the United States as opposed to
most other countries. The Company is required by governmental regulations to
test its products even after they have been sold and used by patients. As a
result of such tests, the Company may be required to, or may determine that it
should, recall products when most of such products have already been sold. Such
later testing and product recalls may increase the Company's potential exposure
to product liability claims.

DEPENDENCE ON THIRD-PARTY MANUFACTURER; MANUFACTURING RISKS

The Company's present internal manufacturing capabilities are limited to
producing products for preclinical development. The Company is dependent on Ben
Venue Laboratories, Inc. ("Ben Venue"), a United States-based contract
manufacturer, to manufacture commercial-scale quantities of AMPHOTEC and DOXIL
pursuant to supply agreements. Under these agreements the Company has agreed to
indemnify Ben Venue against certain liabilities. As of September 1995, the
Company and Ben Venue have manufactured 13 commercial-scale batches of DOXIL,
including the three registration batches which are required as part of the FDA's
NDA approval process. There can be no assurance that Ben Venue will continue to
meet FDA or product specification standards or that the Company's manufacturing
goals can be met in a consistent and timely manner. There is only a limited
number of other manufacturers with the capability of manufacturing AMPHOTEC and
DOXIL, and any alternative manufacturer would require regulatory qualification
to manufacture the product which would likely take several months. The Company
has not qualified alternative

S-9
<PAGE> 10

manufacturers for its products. In the event of any interruption of supply from
the contract manufacturer due to regulatory or other causes, there can be no
assurance that the Company could make alternative manufacturing arrangements on
a timely basis, if at all. Such an interruption would have a material adverse
effect on the Company's business, financial condition and results of operations.

The Company relies on certain suppliers of key raw materials to provide an
adequate supply of such materials for production of finished products. Certain
materials are purchased from single sources. In particular, amphotericin B and
doxorubicin are currently each supplied to the Company by single sources, and
the number of alternative sources is severely limited. For example, the Company
has a five-year, sole-source supply agreement with Meiji Seika Pharma
International Ltd. ("Meiji Seika") to supply the Company with doxorubicin for
DOXIL. There can be no assurance that the doxorubicin supplied under the
agreement will meet FDA requirements applicable to DOXIL, which could delay or
prevent future sales of DOXIL, if any, by the Company. Although the Company has
supply agreements in place with the suppliers of its key raw materials, the
number of alternative qualified suppliers of key raw materials required for the
manufacture of AMPHOTEC and DOXIL is limited. The disqualification or loss of a
sole source supplier could have a material adverse effect on the Company because
of a delay or inability in obtaining and qualifying an alternate supplier and
the costs associated with such delay and in finding and qualifying an alternate
supplier. Regulatory requirements applicable to pharmaceutical products tend to
make the substitution of suppliers costly and time consuming. The unavailability
of adequate commercial quantities, the loss of a supplier's regulatory approval,
the inability to develop alternative sources, a reduction or interruption in
supply or a significant increase in the price of materials could have a material
adverse effect on the Company's ability to manufacture and market its products
and its results of operations. See "Business -- Strategic Alliances" and
" -- Manufacturing and Production."

PATENTS AND TRADE SECRETS

There has been increasing litigation in the biomedical, biotechnology and
pharmaceutical industries with respect to the manufacture, use and sale of new
therapeutic products that are the subject of conflicting patent rights. A
substantial number of patents relating to liposomes have been issued to, or are
controlled by, other public and private entities, including academic
institutions. In addition, others, including competitors of SEQUUS, may have
filed applications for, or may have been issued patents or may obtain additional
patents and proprietary rights relating to products or processes competitive
with those of SEQUUS. The patent positions of pharmaceutical, biopharmaceutical,
biotechnology and drug delivery companies, including SEQUUS, are uncertain and
involve complex legal and factual issues. Additionally, the coverage claimed in
a patent application can be significantly reduced before the patent is issued.
As a consequence, the Company does not know whether any of its patent
applications will result in the issuance of patents or whether any of the
Company's patents will provide significant proprietary protection or will be
circumvented or invalidated. Since patent applications in the United States are
maintained in secrecy until patents issue, and since publication of discoveries
in the scientific or patent literature often lag behind actual discoveries, the
Company cannot be certain that it was the first inventor of inventions covered
by its pending patent applications or that it was the first to file patent
applications for such inventions. Moreover, the Company may have to participate
in interference proceedings to determine priority of invention, which could
result in substantial cost to the Company, even if the eventual outcome is
favorable to the Company. There can be no assurance that any patents owned or
controlled by the Company will protect SEQUUS against infringement litigation or
afford commercially significant protection of the Company's technology. Almost
none of the Company's patents has been tested in court to determine their
validity and scope. Moreover, the patent laws of foreign countries differ from
those of the United States and the degree of protection, if any, afforded by
foreign patents may, therefore, be different.

In November 1991, the Company received a letter from TLC bringing to
SEQUUS' attention TLC's United States Patent No. 5,059,591 (the "'591 Patent")
containing claims directed to amphotericin B/sterol compositions and their
method of use. Subsequently, SEQUUS' patent counsel delivered an opinion to the
Company that, among other things, AMPHOTEC does not infringe any valid claim of
the '591 Patent. However, no assurance can be given that TLC will not make a
claim against SEQUUS with respect to the

S-10
<PAGE> 11

'591 Patent, which could have a material adverse effect on the Company's ability
to commercialize AMPHOTEC.

The Company has a practice of monitoring patents and other developments in
the liposome field. To the extent that the Company becomes aware of patents of
other parties which the Company's processes or products might infringe, it is
the Company's practice to seek review of such patents by the Company's patent
counsel. With respect to the Company's DOXIL product, the Company is aware of
TLC's United States Patent No. 5,077,056 relating to the loading of therapeutic
drugs into liposomes. The Company's patent counsel has rendered an opinion that
its DOXIL product would not infringe any valid claim of this patent. The Company
is also aware of TLC's United States Patent No. 5,008,050 relating to reducing
liposome size by extrusion, and NeXstar's United States Patent No. 5,435,989
relating to targeting of liposomes to solid tumors. The Company's patent counsel
has rendered an opinion that its DOXIL product would not infringe any valid
claim of either of these patents. In addition, the Company is aware of certain
patents covering lyophilization of liposomes. Neither of the Company's principal
products involves the lyophilization of liposomes.

Generally, the Company refers patents to its patent counsel for review.
Even if the Company's patent counsel renders advice that the Company's products
do not infringe any valid claim under such patents, there can be no assurance
that any third party will not commence litigation to enforce such patents or
that the Company will not incur substantial expense, or that it will prevail, in
any patent litigation.

The Company has been required to defend itself in patent litigation in the
past and the uncertainties inherent in any other lawsuit that may be commenced
in the future with respect to any alleged patent infringement by the Company
make the outcome of any such litigation difficult to predict. The Company may
decide to pay a royalty or make other concessions to settle a patent dispute. In
the event of litigation, there can be no assurance that the Company will be
successful. A judgment adverse to the Company in any such litigation could
materially adversely affect the Company's business, financial condition and
results of operations, and the expense of such litigation may be substantial,
whether or not the Company is successful in such litigation.

The Company relies on unpatented trade secrets and proprietary know-how to
protect certain aspects of its production and lipid purification technologies
and other proprietary information. Although SEQUUS has entered into
confidentiality agreements with its employees, consultants, representatives and
other business associates, there can be no assurance that trade secrets and
know-how will remain undisclosed or that similar trade secrets or know-how will
not be independently developed by others. See "Business -- Patents and Trade
Secrets."

HISTORY OF OPERATING LOSSES; NEED FOR ADDITIONAL FINANCING

The Company has incurred losses in each year since its inception and has
accumulated approximately $115.8 million in net losses through June 30, 1995.
The Company to date has generated limited revenues. There can be no assurance
that revenues from product sales will be significant or sufficient to fund
operations. Owing to expenditures associated with self-funded research,
preclinical and clinical programs, marketing expenses and other activities
related to seeking regulatory approval and achieving commercialization of its
products, the Company expects operating losses to continue for at least several
years. Additional financing is likely to be required to fund the Company's
continuing operations and product and business development activities in the
form of debt or equity securities or bank financing. There can be no assurance
that such financing will be available on acceptable terms, if at all. The
unavailability of such financing could delay or prevent the development,
testing, regulatory approval, manufacturing or marketing of some or all of the
Company's products and could have a material adverse effect on the Company. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."

DEPENDENCE ON KEY PERSONNEL; MANAGEMENT TRANSITION

The Company's success depends largely upon its ability to attract and
retain qualified scientific, engineering, manufacturing, sales and marketing and
management personnel. The Company faces competition for such personnel from
other companies, academic institutions, government entities and other
organizations. There can be no assurance that the Company will be successful in
hiring or retaining such personnel.

S-11
<PAGE> 12

In the summer of 1995, the Board of Directors appointed I. Craig Henderson,
M.D. as Chairman of the Board and Chief Executive Officer and L. Scott Minick as
President, Chief Operating Officer and a director of the Company. In addition,
Nick V. Arvanitidis, Ph.D., a founder of the Company who served as Chairman and
Chief Executive Officer, retired from the Company and from the Board of
Directors; Peter V. Leigh resigned his position as Vice President and Chief
Financial Officer; and Richard E. Mamelok, M.D. resigned his position as Vice
President and Medical Director. The new management team will face significant
challenges in transitioning the Company from research and development to
manufacturing and marketing if the Company's products obtain regulatory
approval. There can be no assurance that the management team can successfully
manage the transition of the Company's business. See "Business -- Employees" and
"Management."

HAZARDOUS MATERIALS

As with many biopharmaceutical companies, the Company's research and
development involves the controlled use of hazardous materials and chemical
compounds. There can be no assurance that the Company's safety procedures for
handling and disposing of such materials will comply with the standards
prescribed by federal, state and local regulations or that it will not be
subject to the risk of accidental contamination or injury from these materials.
In the event of such an accident, the Company could be held liable for any
damages that result and any such liability could materially adversely affect the
Company's business, financial condition and results of operations. See
"Business -- Government Regulation."

VOLATILITY OF STOCK PRICE

The market price of the Common Stock, like the stock prices of many
publicly traded biopharmaceutical companies, has been and may continue to be
highly volatile. A variety of events, both concerning and unrelated to the
Company and the biopharmaceutical industry, such as the level of sales of the
Company's products, problems with clinical development of the Company's
potential products, announcements of technological innovations, regulatory
developments or new commercial products by the Company or its competitors,
government regulation, delays or other developments relating to regulatory
approvals, developments or disputes relating to patent or proprietary rights,
product liability claims, as well as period-to-period fluctuations in the
Company's financial results, may have a significant negative impact on the
market price of the Common Stock. Although the Common Stock trades on the Nasdaq
National Market, the trading volume has fluctuated and at times has been quite
low. Any large sale of securities of the Company could have a significant
adverse effect on the market price of the Common Stock. See "Price Range of
Common Stock."

SHARES ELIGIBLE FOR FUTURE SALE

Sales of substantial amounts of Common Stock in the public market after
this offering could adversely affect the market price of the Common Stock.
Certain directors and officers of the Company, who own approximately 752,130 of
the shares of Common Stock (including currently exercisable options to purchase
Common Stock), have agreed with the Underwriters not to sell or otherwise
dispose of any shares of Common Stock for a period of 90 days following
commencement of this offering without the consent of Robertson, Stephens &
Company. As of September 12, 1995 there were options outstanding to purchase
3,938,024 shares of Common Stock (including the options of the executive
officers described above), as well as warrants to purchase 3,165,165 shares of
Common Stock (all of which have exercise prices significantly below the trading
price of the Common Stock as of October 24, 1995), and 480,000 shares of Series
A Convertible Reset Preferred Stock which are convertible at any time into
1,616,160 shares of Common Stock. Additional shares may also become available
for sale in the public market from time to time in the future. Exercise of such
options and warrants and conversion of the Series A Convertible Reset Preferred
Stock would dilute the percentage ownership interest of existing holders of
Common Stock and the sale of such shares could have a significant adverse effect
on the market price of the Common Stock. See "Capitalization."

DILUTION

Purchasers of shares of Common Stock in this offering will experience
immediate and substantial dilution of net tangible book value per share.
Additional dilution will occur upon the exercise of outstanding stock options.
See "Dilution."

S-12
<PAGE> 13

USE OF PROCEEDS

The net proceeds to the Company from the sale of the 3,900,000 shares of
Common Stock offered hereby are estimated to be approximately $39,825,000
($45,879,750 if the Underwriters' over-allotment option is exercised in full).

The Company intends to use the proceeds of this offering for (i) activities
related to the sale and marketing of its products, including the introduction of
DOXIL, if FDA approval is obtained in the United States, and commercialization
of AMPHOTEC in certain European countries; (ii) conducting additional trials in
pursuit of broader indications for DOXIL and AMPHOTEC; (iii) if certain
regulatory approvals are obtained, manufacturing scale-up in support of expanded
production capabilities; (iv) research and development related to new product
opportunities; and (v) other general corporate purposes, including working
capital and capital expenditures. The Company may also use a portion of its
available cash to acquire technologies or products complementary to its
business, although no such acquisitions are currently planned.

The precise allocation of the proceeds and the timing of expenditures will
vary depending on numerous factors, including the progress of the Company's
research and development efforts, the results of clinical trials, the timing of
regulatory approvals and strategic partnering activities. Such expenditures are
likely to be substantial and to exceed the proceeds of this offering. However,
the Company believes that at planned spending rates, its existing cash balances,
interest income, revenues from operations and the net proceeds of this offering
will be adequate to fund its planned activities at least through the end of
1996, although it may seek additional financing sooner. Pending their ultimate
application, the net proceeds will be invested in high-quality, short-term,
interest-bearing investments and deposit accounts. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources."

DIVIDEND POLICY

The Company has not paid any dividends since its inception and does not
anticipate paying any dividends in the foreseeable future.

S-13
<PAGE> 14

PRICE RANGE OF COMMON STOCK

The Company's Common Stock is traded on the Nasdaq National Market under
the symbol "SEQU." The following table sets forth, for the calendar periods
indicated, the range of high and low sale prices for the Company's Common Stock
on the Nasdaq National Market.

<TABLE>
<CAPTION>
HIGH LOW
---- ---
<S> <C> <C>
1993
First Quarter............................................................... $12 $ 6 1/2
Second Quarter.............................................................. 11 5 1/2
Third Quarter............................................................... 11 1/2 7
Fourth Quarter.............................................................. 14 1/4 7 3/4
1994
First Quarter............................................................... 12 1/2 7 1/2
Second Quarter.............................................................. 8 3/4 5 3/4
Third Quarter............................................................... 7 3/4 4 3/4
Fourth Quarter.............................................................. 8 1/8 4 1/2
1995
First Quarter............................................................... 9 1/4 5 1/2
Second Quarter.............................................................. 12 1/8 5 3/4
Third Quarter............................................................... 15 1/8 10 1/4
Fourth Quarter (through October 24)......................................... 12 1/2 9 3/4
</TABLE>

As of September 21, 1995, there were approximately 551 holders of record of
the Common Stock. On October 24, 1995, the last sale price reported on the
Nasdaq National Market for the Company's Common Stock was $11.00.

S-14
<PAGE> 15

CAPITALIZATION

The following table sets forth the actual capitalization of the Company as
of June 30, 1995, and as adjusted to reflect the sale of 3,900,000 shares of
Common Stock offered hereby at a public offering price of $11.00 per share and
the application of the estimated net proceeds therefrom:

<TABLE>
<CAPTION>
JUNE 30, 1995
-------------------------
ACTUAL AS ADJUSTED
--------- -----------
(in thousands)
<S> <C> <C>
Stockholders' equity:
Preferred Stock, par value $0.01; 4,000,000 shares authorized,
issuable in series; 480,000 shares issued and outstanding
(480,000 shares issued and outstanding, as adjusted) Liquidation
preference: $12,000,000......................................... $ 5 $ 5
Common Stock, par value $0.0001; 35,000,000 shares authorized(1)
21,379,591 shares issued and outstanding (25,279,591 shares as
adjusted)(2).................................................... 2 3
Additional paid-in capital......................................... 136,315 176,139
Accumulated deficit................................................ (115,771) (115,771)
--------- ---------
Total stockholders' equity...................................... 20,551 60,376
--------- ---------
Total capitalization.......................................... $ 20,551 $ 60,376
========= =========
</TABLE>

- ---------------
(1) The number of authorized shares of Common Stock was increased from
35,000,000 to 45,000,000 on September 13, 1995.

(2) Excludes 7,103,189 shares of Common Stock at a weighted average price of
$5.72 issuable upon exercise of outstanding options and warrants and
1,616,160 shares of Common Stock issuable upon conversion of Series A
Convertible Reset Preferred Stock as of September 12, 1995.

S-15
<PAGE> 16

DILUTION

The net tangible book value of the Company at June 30, 1995 was
approximately $20,307,000 (excluding patents of $244,000), or $0.95 per share of
Common Stock. After giving effect to the sale by the Company of the 3,900,000
shares of Common Stock offered hereby at a public offering price of $11.00 per
share and the receipt of the net proceeds therefrom, the pro forma net tangible
book value of the Company as of June 30, 1995 would have been $60,132,000 or
$2.38 per share. This represents an immediate increase in net tangible book
value of $1.43 per share to existing stockholders and an immediate dilution in
net tangible book value of $8.62 per share to new investors purchasing shares at
the assumed public offering price. The following table illustrates this per
share dilution:

<TABLE>
<S> <C> <C>
Public offering price per share(1).................................. $ 11.00
Net tangible book value before offering(2)........................ $ 0.95
Increase attributable to new investors............................ 1.43
------
Pro forma net tangible book value after offering.................... 2.38
------
Dilution to new investors........................................... $ 8.62
======
</TABLE>

- ---------------
(1) Before deduction of underwriting discounts and estimated offering expenses
payable by the Company.

(2) Net tangible book value per share is equal to total tangible assets of the
Company less total liabilities divided by the number of shares of Common
Stock outstanding.

S-16
<PAGE> 17

SELECTED FINANCIAL DATA

The selected financial data set forth below as of December 31, 1993 and
1994 and for each of the three years in the period ended December 31, 1994 are
derived from the Company's financial statements which have been audited by Ernst
& Young LLP, independent auditors, which are included elsewhere in this
Prospectus Supplement. The selected financial data set forth below as of
December 31, 1990, 1991 and 1992 and for each of the two years in the period
ended December 31, 1991 are derived from audited financial statements not
included or incorporated by reference in this Prospectus Supplement. The
unaudited financial data as of June 30, 1995 and for the six months ended June
30, 1994 and 1995 have been prepared on a basis consistent with the audited
financial statements and, in the opinion of management, include all adjustments
(consisting only of normal recurring adjustments) necessary to present fairly
the financial condition and results of operations for the periods presented.
This data should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" included in this
Prospectus Supplement and the financial statements and related notes included in
this Prospectus Supplement.

<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
--------------------------------------------------- ---------------------
1990 1991 1992 1993 1994 1994 1995
------- -------- -------- -------- -------- -------- --------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Sales......................... $ -- $ -- $ 293 $ 1,299 $ 3,664 $ 946 $ 1,040
Research revenue.............. 1,390 -- 300 -- -- -- --
Royalties and license fees.... 13 326 125 5,458 91 40 38
------- -------- -------- -------- -------- -------- --------
Total revenues.................. 1,403 326 718 6,757 3,755 986 1,078
Operating expenses:
Cost of goods sold............ -- -- 13 232 916 222 275
Research and development...... 7,484 7,284 15,769 21,128 25,378 12,893 10,729
General and administrative.... 1,909 1,796 2,723 6,653 7,622 3,813 6,193
------- -------- -------- -------- -------- -------- --------
Total operating expenses........ 9,393 9,080 18,505 28,013 33,916 16,928 17,197
------- -------- -------- -------- -------- -------- --------
Loss from operations............ (7,990) (8,754) (17,787) (21,256) (30,161) (15,942) (16,119)
Interest income................. 660 618 2,427 1,647 1,002 598 254
Interest/other expenses......... (141) (77) (33) (45) (26) (14) (54)
------- -------- -------- -------- -------- -------- --------
Net loss........................ $(7,471) $ (8,213) $(15,393) $(19,654) $(29,185) $(15,358) $(15,919)
======= ======== ======== ======== ======== ======== ========
Net loss per share.............. $ (0.80) $ (0.66) $ (0.84) $ (1.05) $ (1.54) $ (0.81) $ (0.80)
======= ======== ======== ======== ======== ======== ========
Weighted average shares
outstanding................... 9,348 12,445 18,270 18,789 18,978 18,915 19,880
</TABLE>

<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------------------- JUNE 30,
1990 1991 1992 1993 1994 1995
-------- -------- -------- -------- -------- ---------
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents and
short-term investments....... $ 4,802 $ 32,202 $ 41,325 $ 34,658 $ 11,757 $ 21,465
Long-term marketable
investments.................. -- 3,985 12,782 2,520 500 --
Total assets................... 10,510 41,046 60,523 45,179 18,198 26,593
Long-term debt and lease
obligations.................. 445 102 -- -- -- --
Accumulated deficit............ (27,408) (35,621) (51,014) (70,668) (99,865) (115,771)
Total stockholders' equity..... 8,463 39,127 58,577 39,318 10,938 20,551
</TABLE>

S-17
<PAGE> 18

MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

OVERVIEW

The Company is a leader in the development and commercialization of
liposome and lipid-based biopharmaceutical products primarily to treat cancer
and certain fungal infections. The Company has incurred losses in each year
since its inception and had accumulated approximately $115.8 million in net
losses through June 30, 1995. Although the Company has commenced marketing its
first product, AMPHOTEC, in the U.K. and has received marketing approval in
three additional European countries, the Company expects operating losses to
continue for a number of years because of expenditures associated with research,
preclinical testing and clinical trials, marketing expenses and other expenses
relating to seeking regulatory approvals and commercialization of its products,
if approved. The Company also anticipates that clinical activity and research
and development spending will increase in 1995 and 1996 as expenditures for
clinical trials of DOXIL in solid tumors are increased.

AMPHOTEC has been approved in the U.K. since August 1993, in Ireland since
October 1994, in Finland since June 1995, and in Russia since July 1995 for
treating systematic fungal infections in patients for whom conventional
amphotericin B is contraindicated due to toxicity or renal failure or for whom
previous antifungal therapy was unsuccessful. The Company and Zeneca have
submitted MAAs for AMPHOTEC in 11 other EU countries and similar applications in
other countries. The EU submissions were made in accordance with the CPMP
multistate procedures. On September 13, 1995, the CPMP reviewed the Company's
application for AMPHOTEC marketing approval in the EU countries. Germany,
France, Spain, Greece and Luxembourg did not accept the MAAs. Subsequently, the
Company and Zeneca have withdrawn the application in Germany. Based primarily on
the CPMP review, SEQUUS believes national approval will be forthcoming in
Austria, Denmark, Italy, The Netherlands, Portugal and Sweden, although the CPMP
is an advisory committee only, its vote is not binding on member countries, and
there can be no assurance that approvals will be forthcoming on a timely basis,
or at all. In addition, the CPMP review indicates that Belgium can approve
AMPHOTEC for marketing upon the receipt of additional clinical information,
although there can be no assurance that the Company will be able to provide
additional data or, if provided, that approval will be forthcoming on a timely
basis, or at all. If approvals are received, SEQUUS and Zeneca intend to
negotiate pricing in each of these countries, which the Company believes will
take as long as six to 12 months or longer following market approval. NeXstar, a
competitor of the Company, has regulatory approval in approximately 18
countries, primarily in Europe, to sell a liposomal amphotericin B product which
targets indications similar to those targeted by AMPHOTEC. TLC recently
introduced its liposomal amphotericin B product as the third entrant in the U.K.
market at a price substantially below the price of the other lipid-based
antifungals. This could have an adverse effect on AMPHOTEC's market penetration.
Zeneca has engaged in some price competition, and if increased price competition
results, it would have a material adverse effect on the Company's business,
financial condition and results of operations.

In August 1993, the Company signed a distribution agreement with Zeneca
under which Zeneca will market and sell AMPHOTEC in most European countries. In
March 1994, SEQUUS and Zeneca announced the expansion of their August 1993
agreement to cover all countries not previously covered with the exception of
the United States, Canada, Japan and selected small markets. SEQUUS announced
Zeneca's commercial launch of AMPHOTEC in the U.K. in May 1994. SEQUUS currently
is dependent on Zeneca for the distribution of AMPHOTEC, and unless and until
the Company receives any approvals for and begins to sell DOXIL, the Company's
future revenues are largely dependent upon Zeneca's success in selling AMPHOTEC
in approved markets and Zeneca's forecasts of future sales, including such
factors as additional approvals for AMPHOTEC, if any, and inventory
requirements. The level of the Company's future sales of AMPHOTEC to Zeneca will
depend upon the rate at which the product penetrates the existing approved
markets of the United Kingdom, Ireland, Finland and Russia, as well as the
timing of additional product approvals in other countries, if any. Sales of
AMPHOTEC to date have been below expectations, and Zeneca and the Company have
initiated discussions regarding modifications to their agreement. The Company
expects to ship no additional product to Zeneca for the remainder of 1995, and
may not ship product to Zeneca during the first half of 1996. In addition, the
Company may elect to use certain Zeneca inventory for its clinical trials in
return

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<PAGE> 19

for partial credits on future product sales to Zeneca. Additional terms under
discussion include the scheduling of regulatory milestone payments, possibly
modifying territories in which Zeneca has distribution rights and implementing a
mechanism to give Zeneca greater pricing flexibility. It also is possible that
other terms of the agreement between the parties will be amended as appropriate.
Accordingly, there can be no assurance that Zeneca will elect to maintain
distribution rights to AMPHOTEC in any or all markets or that the terms of such
rights will remain the same. In addition, the delay in regulatory approvals of
AMPHOTEC in the EU countries will affect the timing, and any failure to obtain
regulatory approval would affect the receipt, of additional milestone payments
from Zeneca. There can be no assurance that these or other factors, including
the amount and timing of resources devoted to AMPHOTEC sales by Zeneca, will not
lead to substantial fluctuations in the Company's revenues from period to
period. Any delays in the receipt, or denial of, marketing approvals or material
changes to the terms of the agreement with Zeneca would have a material adverse
effect on the Company's business, financial condition and results of operations.

In September 1995, SEQUUS received an approvable letter from the FDA for
DOXIL as a treatment for refractory KS. The Company expects its marketing and
sales expenses to increase significantly as it prepares for and, if FDA approval
is received, proceeds with the commercialization of DOXIL in the United States.
In the United States, SEQUUS intends to market and sell its products directly,
or possibly co-promote them with strategic partners, and the Company has
recruited a marketing and sales group of 22 individuals experienced in the sale
of pharmaceutical and biopharmaceutical products. In addition, the Company
currently uses Ben Venue, a contract manufacturer, for the commercial-scale
manufacturing of its products. If certain regulatory approvals are obtained, the
Company expects to incur manufacturing scale-up costs in support of expanded
production at Ben Venue.

RESULTS OF OPERATIONS

Six Months Ended June 30, 1995 and 1994

Revenues

Total revenues, of which the majority were product sales, were $1.1
million, during the six months ended June 30, 1995, which were comparable to the
$1.0 million recorded in the same period of the prior year. For the six months
ended June 30, 1995, 80% of the Company's product sales represent sales of
AMPHOTEC to Zeneca as compared to 62% for the first half of 1994. A significant
portion of the 1994 and 1995 sales reflect pipeline-filling (inventory) orders.

Operating Expenses

Generally, most of the Company's operating expenses are incurred for
research and development ("R&D"), including preclinical testing and clinical
trials required for new pharmaceutical products. The principal items of R&D
expense are personnel costs, costs of clinical trials, clinical production and
supplies. R&D decreased to $10.7 million in the first six months of 1995, from
$12.9 million in the first six months of 1994, a reduction of $2.2 million. This
reduction in expenses resulted from higher spending in 1994 associated with
clinical trials in preparation for the NDA filing for DOXIL in the treatment of
KS.

General and administrative ("G&A") expenses increased to $6.2 million in
the first six months of 1995 from $3.8 million in the same period in 1994, an
increase of $2.4 million, principally reflecting accrued expenses in connection
with the departure of certain officers, reduced by decreased legal activities
due to the settlement of patent-related litigation.

Net Interest Income

Net interest income decreased to $200,000 in the first six months of 1995
from $584,000 in the first six months of 1994, a decrease of $384,000 due to the
decrease in cash available for investment.

Net Loss

The Company's net loss increased to $15.9 million for the six months ended
June 30, 1995 from $15.4 million for the first six months of 1994, an increase
of $561,000. The net loss per share was $0.80 in the

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<PAGE> 20

six months ended June 30, 1995 compared to a net loss per share of $0.81 in the
six months ended June 30, 1994.

Years Ended December 31, 1994 and 1993

Revenues

Total revenues for fiscal 1994 decreased to $3.8 million from $6.8 million
in 1993, a decrease of $3.0 million. During the year ended December 31, 1994,
product sales increased to $3.7 million from $1.3 million in fiscal 1993, an
increase of $2.4 million. Ninety-one percent (91%) of the Company's product
revenues in 1994 and 39% of the Company's product revenues in 1993 represented
AMPHOTEC sales to Zeneca. The increase in sales revenue is attributable
principally to the Company's shipments of AMPHOTEC to Zeneca, the majority of
which was pipeline-filling (inventory) orders. The prior year revenues also
included a signing fee and regulatory milestone payment totaling $5.3 million
received from Zeneca.

Operating Expenses

In fiscal 1994, R&D expenses increased to $25.4 million from $21.1 million
in 1993, an increase of $4.3 million. The increase was principally due to the
larger number of ongoing clinical trials and increased patient enrollments. R&D
expenses declined in the second half of 1994, principally as a result of the
completion of enrollment of patients in certain of the Company's trials of
DOXIL.

G&A expenses increased to $7.6 million in fiscal 1994 from $6.7 million in
1993, an increase of $969,000, principally reflecting increased legal expenses
associated with patent litigation, which has since been concluded, and marketing
expenses incurred in preparation for product commercialization.

Net Interest Income

Net interest income decreased to $1.0 million in fiscal 1994, compared to
$1.6 million in 1993, a decrease of $626,000, as the result of the decrease in
the Company's available cash for investment offset in part by higher rates.

Net Loss

The Company did not receive signing or milestone fees and had higher
expenses in fiscal 1994. As a result, the Company's net loss for fiscal 1994
increased to $29.2 million from $19.7 million in 1993, an increase of $9.5
million. The net loss per share was $1.54 in 1994 compared to a net loss per
share of $1.05 in the prior year.

Years Ended December 31, 1993 and 1992

Revenues

Total revenues for fiscal 1993 increased to $6.8 million from $718,000 in
the prior year, an increase of $6.0 million, primarily due to a signing fee and
milestone payment from Zeneca in the amount of $5.3 million. During the same
period, sales revenues increased to $1.3 million from $293,000, an increase of
$1.0 million, principally because 1993 was the first full year of product sales
and included the Company's first shipment of AMPHOTEC.

Operating Expenses

In fiscal 1993, R&D expenses increased to $21.1 million from $15.8 million
in 1992, an increase of $5.3 million, principally because of expanded patient
enrollment in the Company's KS clinical trials.

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<PAGE> 21

G&A expenses increased to $6.7 million in fiscal 1993 from $2.7 million in
1992, an increase of $3.9 million, principally reflecting higher staffing levels
and increased legal fees. Legal fees increased from $162,000 to $1.3 million, an
increase of $1.1 million, principally as a result of the Company's defense of
two patent lawsuits. See Note 6 of the Notes to Financial Statements.

Net Interest Income

Net interest income decreased to $1.6 million in fiscal 1993 from $2.4
million in 1992, a decrease of $792,000. The decrease in net interest income was
a result of the decrease in the Company's cash available for investment and
generally lower interest rates in 1993.

Net Loss

As a result of increased expense levels, the Company's net loss for the
fiscal year ended December 31, 1993, increased to $19.7 million from $15.4
million in 1992, an increase of $4.3 million. The net loss per share was $1.05
in 1993 compared to a net loss per share of $0.84 in the prior year.

LIQUIDITY AND CAPITAL RESOURCES

The Company's cash and cash equivalents and investments at June 30, 1995
were approximately $21.5 million, an increase of $9.2 million from $12.3 million
at December 31, 1994. This increase represents principally cash provided by
equity financing activities offset by operating expenditures.

The Company's strategy is to fund from its own cash resources the
preclinical and clinical development of two of its proprietary products,
AMPHOTEC and DOXIL, and the continued research and development of additional
STEALTH liposome products. This strategy will require significant operating and
capital expenditures including the construction of a pilot production facility
which is currently in the planning phase.

During the six months ended June 30, 1995, the Company raised an aggregate
of $27.0 million (net proceeds of $25.2 million) from two equity financings. On
March 30, 1995 and April 13, 1995, the Company raised an aggregate of $12.0
million (net proceeds of $11.0 million) from a private placement of 480,000
shares of a new issue of Series A Convertible Reset Preferred Stock and warrants
to purchase 808,320 shares of Common Stock. On May 25, 1995, the Company raised
$15.0 million (net proceeds of $14.2 million) in a private placement of Units
composed of one share of Common Stock and a warrant to purchase one-half share
of Common Stock; the warrant is only exercisable if the initial Unit purchaser
retains the associated Common Stock for one year. See Note 7 of the Notes to
Financial Statements for a description of the terms of these financings. The
Company believes that at planned spending rates its existing cash balances,
interest income earned thereon, revenues from operations and the net proceeds of
this offering will be adequate to fund its planned activities at least through
the end of 1996, although it may seek additional financing sooner. There can be
no assurance that adequate financing will be available on satisfactory terms, if
at all.

As of December 31, 1994, the Company had Federal and California net
operating loss carryforwards of approximately $65.0 million and $8.0 million,
respectively. The Company also has Federal and California research and
development tax credit carryforwards of approximately $2.5 million and $1.5
million, respectively. The net operating loss credit carryforwards will expire
at various dates beginning in 1995 through 2009, if not utilized. Of the $65.0
million Federal net operating loss carryforward, approximately $64.0 million
will begin to expire after the year 1999, if not utilized. Utilization of the
net operating losses and credits may be subject to a substantial annual
limitation due to the ownership change limitations provided by the Internal
Revenue Code of 1986 and similar California provisions. The annual limitation
may result in the expiration of net operating losses and credits before
utilization.

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BUSINESS

OVERVIEW

SEQUUS Pharmaceuticals, Inc. is a leader in the development and
commercialization of liposome and lipid-based biopharmaceutical products
primarily to treat cancer and certain fungal infections. SEQUUS recently
received an approvable letter from the FDA for the use of DOXIL to treat
refractory KS. The Company is currently conducting clinical trials for the use
of DOXIL to treat certain solid tumors. AMPHOTEC, the Company's first approved
product, is being marketed in the U.K. and recently received marketing approval
in three additional European countries for treating systemic fungal infections
in patients for whom conventional therapy (amphotericin B) is contraindicated
due to toxicity or renal failure or for whom previous antifungal therapy was
unsuccessful. The Company is further developing its proprietary drug delivery
technology, STEALTH liposomes, to address additional indications.

TECHNOLOGY

When liposomes were discovered in the mid-1960s, scientists believed that
liposomes held promise for intravenous drug delivery if they could reduce drug
toxicity by targeting diseased sites in the body and avoiding healthy tissue. As
development of potential liposome products progressed, two serious limitations
emerged. First, in many cases conventional liposomes were attacked by proteins
in the blood, causing rupture or premature release of the drug in the
bloodstream. Second, liposomes that survived rupture were quickly removed from
circulation, primarily by the liver.

While focusing its research on drugs that would benefit from the reduced
toxicity made possible by conventional liposomes, the Company also recognized
that the key to improved liposome performance was to solve two problems that
limited the utility of liposomes -- premature drug release and rapid entrapment
in the liver. As a result, SEQUUS developed a unique patented liposome capable
of avoiding breakdown in the bloodstream and clearance by the body's filtering
system. This was achieved by attaching PEG to the surface of the liposome to
form the Company's proprietary STEALTH liposomes. Clinical data demonstrate that
the chemotherapeutic drug, doxorubicin, encapsulated in STEALTH liposomes has a
circulating half-life of approximately 50 hours compared to a half-life of 15
minutes and eight hours for doxorubicin and daunorubicin, respectively,
encapsulated in conventional liposomes. This increased half-life enables STEALTH
liposomes to concentrate and release the drug in areas of the body where new
blood vessels are being formed or where blood vessels have been damaged and are
leaky, such as tumors and sites of inflammation and injury. At the same time,
STEALTH liposomes preserve the safety advantages of conventional liposomes by
significantly reducing peak drug concentration levels, thereby reducing the
serious side effects, such as heart damage, of some unencapsulated therapeutic
agents.

An additional significant benefit of STEALTH technology is that drugs can
be attached to the PEG on the surface of the liposomes. The Company believes
that this should enable it to develop additional drug delivery products using
its STEALTH technology.

The Company employs additional liposome and lipid-based technology in the
development of its proprietary products. For example, AMPHOTEC contains a novel
lipid-based formulation of amphotericin B to form a stable suspension. The
Company believes the stability of the formulation allows a reduction in
manufacturing costs, longer shelf-life and easier preparation of the product
prior to administration relative to other lipid-based products.

BUSINESS STRATEGY

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<PAGE> 23

STEALTH liposomes; and (iv) expanding, either alone or through strategic
alliances, the STEALTH platform to create additional methods of drug delivery.

If FDA approvals are obtained in the United States, SEQUUS expects to
market and sell its products directly, or possibly co-promote them with
strategic partners, and it has recruited a sales and marketing group experienced
in the sale of pharmaceutical and biotechnology products. Outside of the United
States, the Company's strategy is to market its products in conjunction with
corporate partners. In addition to marketing its own proprietary products,
SEQUUS may in-license rights to other products applicable to its target markets.

SEQUUS currently uses a contract manufacturer for the commercial-scale
production of its products, thus deferring the need to invest in manufacturing
infrastructure in the near term while retaining future flexibility.

PRODUCTS AND PRODUCTS UNDER DEVELOPMENT

The table on the following page lists the primary therapeutic indications
for and current status of SEQUUS' principal products, potential products under
development and research projects. The table is qualified in its entirety by
reference to the more detailed descriptions elsewhere in this Prospectus
Supplement.

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<PAGE> 24

PRODUCTS AND DEVELOPMENT PROJECTS

<TABLE>
<CAPTION>
MARKETING/
PRODUCT/DEVELOPMENT PRIMARY INDICATION(S) STATUS(1) DISTRIBUTION RIGHTS
- ------------------------- ---------------------------------- ------------------------------ -------------------
<S> <C> <C> <C>
DOXIL Refractory KS FDA approvable letter SEQUUS
(STEALTH KS (first-line therapy) Phase III; MAAs submitted in SEQUUS
doxorubicin) 15 EU countries
Ovarian cancer Phase II SEQUUS
Breast cancer Phase I/II (Europe); Phase II SEQUUS
Planned (U.S.)
Primary liver cancer Phase I/II SEQUUS
Prostate cancer Phase II SEQUUS
Small cell lung cancer Phase II planned SEQUUS
Doxorubicin refractory tumors Phase II planned SEQUUS
Solid tumor combination Phase I/II planned SEQUUS
chemotherapy (e.g. DOXIL/Taxol) (DOXIL only)
AMPHOTEC EU: Systemic fungal infections Approved in the U.K., Ireland, Zeneca
(Lipid-based where amphotericin B therapy Finland and Russia; MAAs
amphotericin B) has failed or is contraindicated submitted in 11 other EU
countries
U.S.: Aspergillosis (second-line NDA submission planned SEQUUS
therapy)
Aspergillosis (first-line therapy) Phase III SEQUUS/Zeneca(2)
Fever of unknown origin Phase II SEQUUS/Zeneca(2)
SPI-77 Solid tumors Preclinical SEQUUS
(STEALTH
cisplatin)
SPI-49 Solid tumors Preclinical (3)
(Monoclonal antibodies)
SPI-42 AND SPI-29 Heart attack, stroke and Preclinical (3)
(Small molecules) angiogenesis
SPI-40 Solid tumors Research SEQUUS
(Radio-
sensitizer)
SPI-01 Genetic diseases Research (3)
(Gene therapy)
</TABLE>

- --------------------------------------------------------------------------------

(1) The meanings of terms used to describe the status of the Company's product
development activities are as set forth below. See "-- Government
Regulation" for a more complete description.

"NDA": "New Drug Application" filed with FDA for approval to market product
for certain treatment indications.

"NDA submission planned": The Company intends to submit the NDA within six
months. No assurance can be given that the NDA will be submitted when
planned or that it will be accepted.

"MAA": "Marketing Authorization Application" (the European equivalent of a
NDA).

"FDA approvable letter" indicates that the FDA may approve the drug for
marketing upon satisfactory response to labeling, chemistry, manufacturing
and control items.

"Phase I/II" clinical trials: Safety and efficacy tests in human patients
required to file a NDA or a MAA and seek approval to commercialize in the
U.S. and abroad.

"Phase II" clinical trials: Testing of compounds in humans for safety and
efficacy in a limited patient population.

"Phase II planned": The Company intends to commence Phase II clinical trials
within approximately the next 12 months. No assurance can be given that
Phase II clinical trials will begin when planned, or at all.

"Phase III" clinical trials: Testing of compounds in humans for safety and
efficacy compared to a controlled population not receiving the drug or
combination of drugs under study.

"Preclinical": Laboratory pharmacology and/or toxicology testing.

"Research": Early stage work to explore feasibility.

(2) SEQUUS has all rights in the U.S., Canada and Japan; Zeneca has distribution
rights in the rest of the world. See "-- Strategic Alliances."

(3) SEQUUS is working with one or more additional parties, and commercialization
rights are under discussion.

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<PAGE> 25

DOXIL for Treating Refractory KS

Patients with AIDS have an increased incidence of developing certain
cancers. The most common cancer in this group of patients is KS, a tumor that
occurs only rarely in the general population. The most characteristic features
of KS are disfiguring soft nodules or tumors (usually reddish purple or brown).
Such tumors frequently occur on the surface of the skin, including the face,
feet or legs, and can cause painful swelling or limit mobility. Less frequently,
KS involves vital organs such as the lung where it may cause shortness of
breath, and the gastrointestinal tract where it may cause internal bleeding.

Interferon is currently the only FDA-approved treatment for KS, but it is
effective only for patients who have less advanced forms of AIDS. Interferon is
associated with side effects such as fever and flu-like symptoms. When KS
patients are no longer responsive to interferon, they are commonly treated with
the same chemotherapy agents that are used for other types of cancers. The ones
used most commonly for KS include generic doxorubicin, bleomycin, and
vincristine in combination ("ABV") or bleomycin and vincristine in combination
("BV"). The combination of all three drugs generally results in side effects
such as neutropenia (decrease in white blood cells), nausea, vomiting, hair
loss, rash, numbness and tingling of the hands and feet and increased
susceptibility to bleeding because of a reduction in platelets. Patients with
AIDS are often more sensitive to the side effects of chemotherapy than non-HIV
patients, and this is often manifested as an increased incidence of infection or
bleeding when chemotherapy is given. For this reason, the doses of these drugs
must frequently be reduced in order to limit side effects. There is no
established therapy for refractory KS.

The Company has conducted clinical trials of DOXIL, a STEALTH liposome
formulation of generic doxorubicin. To support the Company's NDA filed with the
FDA in September 1994, the Company submitted data from 77 refractory KS patients
from an open label Phase II clinical trial. A subset of these, the evaluable
patients, demonstrated a tumor response rate ranging from 27% to 48%, depending
on the method of assessment. The Company also included safety data on 705
patients in the NDA which showed that DOXIL was generally well tolerated with
manageable side effects. See "-- Results of KS Clinical Trials."

In September 1995, SEQUUS received a FDA approvable letter for DOXIL as a
treatment for refractory KS in accordance with the FDA's procedures for
Accelerated Approval of New Drugs for Serious or Life Threatening Illnesses. The
FDA may approve the marketing of DOXIL upon the satisfactory responses by the
Company and its supplier of doxorubicin to items regarding labeling and
chemistry, manufacturing and control. SEQUUS recently submitted a response to
the items raised by the FDA in the approvable letter and will work with its
supplier to assist the supplier in responding to certain chemistry items. The
Company cannot control the responses of its supplier to the FDA or the timing of
such responses, and there can be no assurance that the Company's and its
supplier's responses will be adequate to meet the FDA's requirements or as to
how long it will take to satisfy such requirements. Accelerated approval
regulations require that an applicant study an investigational drug following
product launch to verify and describe the drug's clinical benefit. In the
letter, the FDA acknowledged SEQUUS' commitment to a post-marketing clinical
trial designed to meet accelerated approval requirements. There can be no
assurance that final approval will be obtained on a timely basis, if at all, and
under FDA accelerated approval regulations, the FDA may withdraw approval
following product launch if the Company fails to show due diligence in
conducting post-marketing studies or if these studies fail to demonstrate
clinical benefit to the FDA's satisfaction.

The Company has submitted MAAs for DOXIL in 15 EU countries seeking
approval to use DOXIL in the first line treatment of KS, and the Company has
received a set of questions to which the Company is preparing responses. The
U.K. will act as the sponsoring country (rapporteur) for DOXIL. There can be no
assurance that the CPMP, which is composed of representatives from the
respective regulatory bodies in the EU countries, will determine that the
Company's clinical data have provided evidence of safety and efficacy in humans
adequate to support approval or that any of the MAAs will be approved on a
timely basis, if at all.

DOXIL for Treating Solid Tumors

Most solid tumors are treated by surgery, radiation, chemotherapy or a
combination of these therapies. When used appropriately, chemotherapy can
relieve suffering, and sometimes prolong life. However, only a very small
percentage of patients with cancer are cured by the use of chemotherapy alone.
This is especially true for common solid tumors, such as cancer of the lung,
breast, ovary and colon. The drugs used are

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<PAGE> 26

associated with considerable toxicity. The side effects include increased
susceptibility to infection due to a reduction in white blood cells, nausea,
vomiting, hair loss, rash, numbness and tingling of the hands and feet and
increased susceptibility to bleeding due to a reduction in platelets. In almost
all cases where chemotherapy is effective, a combination of drugs is used.
Generally, the drugs chosen to be used in a combination are those that have
different side effects. For example, the combination might include two drugs
that are known to cause tumor shrinkage, one of which causes a depression of the
white blood cell count that has little effect on the nervous system while the
other may have a lesser effect on the white blood cell count but causes numbness
and tingling. Because these drugs have different side effects, each can be used
at a higher dose than if two drugs were used that had the same side effect.
Because of the limited benefits of chemotherapy for most solid tumors and the
toxicities of the treatments used, physicians are constantly searching for drugs
that are more effective, less toxic, or, ideally, both more effective and less
toxic.

The Company is conducting clinical trials on the use of DOXIL for a number
of solid tumors described below. The clinical results reported below are
preliminary and may not be indicative of results that may be obtained in an
expanded patient population.

- Ovarian cancer. Ovarian cancer is the fifth most common tumor in women
in the United States according to the American Cancer Society, which
estimates that in 1995 the annual incidence in the United States will be
approximately 26,600. Surgical removal of the ovary is typically
performed in early stages of the disease, sometimes in conjunction with
chemotherapy. Chemotherapy is typically used in advanced stages of the
disease, often without surgery. Chemotherapy has been shown to reduce
symptoms and prolong the survival of patients with this cancer. The most
effective drugs, and those now used most often in first line treatment,
are cisplatin or carboplatin and Taxol, usually in combination.
Doxorubicin is also used against ovarian cancer, but is not considered as
effective. The Company is currently conducting Phase II clinical trials
of 35 patients using DOXIL in patients who have failed cisplatin and may
also have been treated with Taxol. The patients are being treated with
doses of 50 mg/M2 every three to four weeks.

- Breast cancer. Breast cancer is the most common tumor in women in the
United States according to the American Cancer Society, which estimates
that in 1995 the annual incidence in the United States will be
approximately 182,000. Standard therapy may involve a mastectomy (removal
of the mammary gland), a lumpectomy (removal of the tumor) and radiation
therapy and chemotherapy, or some combination of these. Among solid
tumors, breast cancer is generally considered one of the most responsive
to chemotherapy. There are currently seven drugs approved by the FDA to
treat breast cancer: cyclophosphamide, doxorubicin, Taxol, thiotepa,
methotrexate, 5-fluorouracil and vinblastine. The most common
combinations of drugs are cyclophosphamide, methotrexate, and
5-fluorouracil and cyclophosphamide and doxorubicin. Taxol is the most
recently approved drug. Currently it is approved only as a second-line
treatment for patients who have failed to respond to conventional regimes
of chemotherapeutic agents. The Company is currently conducting a Phase
I/II clinical trial in Europe. As of September 16, 1995, 52 patients had
been treated with doses of DOXIL ranging between 40-60 mg/M2 at intervals
of every three to four weeks.

- Primary liver cancer. Although relatively uncommon in the United States,
primary liver cancer results in the largest number of cancer deaths in
parts of Asia and Africa. Currently, doxorubicin is the only recommended
chemotherapeutic regime for the treatment of primary liver cancer.
Surgery is indicated in only a small proportion of patients. The Company
has recently initiated a Phase I/II dose escalation clinical trial. Doses
are currently administered at 50 mg/M2 every three to four weeks. The
Company plans to initiate Phase II clinical trials by the first half of
1996.

- Prostate cancer. This is the most common cancer among men in the United
States. The American Cancer Society estimates that in 1995, the annual
incidence in the United States will be approximately 244,000. The most
commonly used therapies are surgery, radiation or a combination of both.
Chemotherapy is used relatively infrequently due to its toxicity and the
generally elderly patient population. Although prostate cancer is
responsive to a variety of chemotherapies, it has not been shown that
these will substantially prolong survival. The most effective agents
include

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<PAGE> 27

doxorubicin, 5-fluorouracil, cisplatin and estramustine phosphate. At
present there are no standard or widely accepted combinations. The
Company has initiated a Phase II study treating prostate cancer with
DOXIL and expects to begin treating patients by the end of 1995.

- Small cell lung cancer. Among the various types of cancer of the lung,
this sub-type has the worst prognosis but, at the same time, is most
sensitive to chemotherapy. Based on American Cancer Society data, the
Company estimates that the annual incidence of small cell carcinoma will
be approximately 42,500 in the United States in 1995, and almost all of
these patients will be treated with chemotherapy. Combinations of drugs
will both decrease patient symptoms and prolong survival. The most common
drugs used for this disease are cisplatin, etoposide, doxorubicin,
cyclophosphamide and mitomycin C. Most combinations used today include
cisplatin and etoposide. However, a combination of cyclophosphamide,
doxorubicin and cisplatin is also widely used. The Company plans to
initiate clinical trials of DOXIL in this disease in the first half of
1996.

- Other solid tumors. Small numbers of additional patients with different
types of solid tumors have also been treated with DOXIL. Antitumor
responses were observed in renal cancer, mesothelioma and head and neck
cancer. No responses to DOXIL were observed in patients with non-small
cell lung cancer. The Company believes that the numbers of patients
involved in these studies are too small for any conclusions to be drawn.

As of September 16, 1995, DOXIL has been studied in more than 190 patients
with many types of solid tumors, including those listed above. The side effect
from doxorubicin that limits how much of the drug may be given, and thus limits
the amount of drug that can reach the tumor, is suppression of the patient's
white blood cell count. For this reason, it is standard medical practice to
reduce the dose of doxorubicin whenever a patient demonstrates very low white
blood cell counts during treatment. In addition, since most of the drugs used to
treat cancer have a similar effect on the white blood cell count, the dose of
each drug must be reduced when several drugs are used together. Preliminary
clinical trial results indicate that there is relatively less depression of the
white blood cell counts from treatment with DOXIL compared to doxorubicin.
Instead, the side effect that limits how much DOXIL can be given is
palmar-plantar erythema (reddening of the skin; sometimes swelling and pain in
the hands, feet, and other pressure points; and, infrequently, loss of
superficial skin). The Company believes that this difference in the principal
toxicity from using DOXIL compared to doxorubicin reflects the change in
distribution of DOXIL with relatively less going to the bone marrow where white
blood cells are made and more going to other areas of the body. Because of the
long circulation time of DOXIL, variations in palmar-plantar erythema seen in
individual patients are controlled by increasing the time-period between doses
rather than by reducing dose. Practically this means that it may not be
necessary to reduce the doses of DOXIL when combining it with other drugs that
cause depression of the white count, and this may eventually prove to be another
way in which the total amount of drug reaching the tumor is increased. The
Company believes that DOXIL may be associated with less hair loss, nausea and
vomiting, but more mouth sores, than might be expected with a conventional
dose-schedule of doxorubicin.

SEQUUS plans to initiate Phase I/II clinical trials of combination
DOXIL/Taxol therapy in patients afflicted with ovarian or breast cancer. In
addition, the Company plans to initiate a Phase I/II clinical trial of
cyclophosphamide and DOXIL in breast cancer. The Company also plans to initiate
Phase II clinical trials with DOXIL for the treatment of certain tumors
refractory to doxorubicin.

Results of KS Clinical Trials

The pivotal trial used by SEQUUS in its NDA included 383 patients treated
with DOXIL alone at a dose of 20 mg/M2 once every three weeks. A cohort of 77
patients with advanced KS was retrospectively identified as having disease
progression while receiving conventional chemotherapy or as being intolerant to
this conventional therapy. Forty-nine of the 77 patients had received prior
doxorubicin therapy. SEQUUS used two methods to assess responses of KS to
treatment in compiling its NDA: the "investigator assessment" based on the
treating physician's assessment of changes in the lesions on the patient's
entire body and the "indicator lesion" assessment based on changes in the
characteristics of up to five representative lesions. As reviewed by the FDA, 34
patients were evaluable using the investigator assessment of response. Of these,
27%

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achieved a partial response (primarily due to flattening of at least 50% of
previously raised lesions), 29% had stable disease, and 44% had disease
progression. Again based on the FDA review, using the indicator lesion
assessment, 42 patients were evaluable. Of these, 48% achieved a partial
response (primarily based on flattening of at least 50% of previously raised
lesions), 26% had a stable disease, and 26% had disease progression. Similar
results were also observed in those patients who received doxorubicin as part of
their prior systemic chemotherapy. In these patients, six of 20 evaluable
patients achieved a partial response using the investigator assessment, and 12
of 23 evaluable patients achieved a partial response using the indicator lesion
method of assessment. Generally, a "partial" response is a reduction in the size
of a lesion or tumor by at least 50%, and a "complete" response is a reduction
in the size of a lesion or tumor so that there is no measurable tumor remaining.

Many of the patients in this study had received prior doxorubicin treatment
and had become refractory to doxorubicin. The response rate to DOXIL among these
patients was substantially the same as that for patients who had not previously
received doxorubicin. This observation occurred in patients whose KS lesions had
grown while receiving doxorubicin immediately before beginning treatment with
DOXIL. The Company plans to pursue this observation in other tumor types.

The side effects observed in the patients treated with DOXIL were somewhat
difficult to evaluate because these patients were usually receiving other drugs
and had many symptoms from their underlying AIDS. The major side effect of DOXIL
was a decrease in white blood cell count in 60% of the patients. Investigators
scored this leukopenia as "severe" for 26% of the patients. Only 1.5% of the
patients discontinued treatment due to the effect of DOXIL on the white blood
cells. However, only 5% of the patients had sepsis; of this 5%, the
investigators felt that the infection was related to treatment with DOXIL in
only 0.7% of the patients. There was also an acute reaction in some patients
consisting of flushing, facial swelling, chills, headache, hair loss, nausea,
vomiting and sometimes a fall in blood pressure. Approximately 3.4% of the
patients experienced palmar plantar erythema, and approximately 4.3% of the
patients experienced cardiac events that were thought to be possibly or probably
related to DOXIL. Three of the patients who experienced palmar plantar erythema
withdrew from the study due to this adverse event.

In a study to determine the cardiotoxicity of DOXIL, five patients with KS
who had received cumulative doses of DOXIL underwent heart biopsies. The Company
believes these biopsies demonstrated little or no doxorubicin-induced cardiac
damage. This is in contrast to the higher degree of damage historically
demonstrated with similar cumulative doses of doxorubicin alone.

Subsequent to the submission of the NDA, SEQUUS has completed two Phase III
trials of DOXIL as first line therapy in previously untreated patients. In one
of these, patients were randomized to receive either DOXIL or ABV, and in the
other the patients received either DOXIL or BV. These results have not yet been
fully analyzed, but a preliminary analysis of the DOXIL/ABV trial suggests a
favorable response rate and less toxicity among patients receiving DOXIL alone
compared to the ABV combination. There can be no assurance that these
preliminary results will be supported by additional analysis.

AMPHOTEC

Systemic fungal infections are serious illnesses with high mortality rates,
which occur primarily in patients whose immune systems have been compromised. In
addition to its prevalence in AIDS patients, the incidence of such infections is
increasing with the more aggressive use of chemotherapeutics for cancer and
immuno-suppressive drugs for organ transplants. Currently, amphotericin B is the
standard treatment in the United States for patients with severe fungal
infections that do not respond to other drugs. Amphotericin B is a well
established drug whose use is widespread. Unlike newer compounds, such as
Diflucan, which inhibit growth of fungal infections, amphotericin B works to
kill the fungus. As a result, amphotericin B is considered to be the most
powerful anti-fungal drug available and is used when other compounds fail.
However, amphotericin B has a number of serious side effects, the most
significant of which is renal toxicity. In many cases, treatment with
amphotericin B must be discontinued because of renal impairment.

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The Company developed AMPHOTEC, a lipid-based colloidal dispersion of
amphotericin B, to provide effective therapy while reducing the dose-limiting
toxicities typically associated with conventional amphotericin B. AMPHOTEC is
produced in a lyophilized dosage form with a shelf-life at room temperature of
over two years. SEQUUS has formulated AMPHOTEC so that the product readily
reconstitutes with water for injection and is stable after reconstitution.

Based upon clinical studies, the Company believes that AMPHOTEC is a safe
and effective agent for use in treating a variety of life-threatening fungal
infections that are increasingly common in immuno-compromised patients -- those
who have undergone organ or bone marrow transplants, are being treated with
chemotherapeutic compounds that suppress the immune system or have leukemia or
AIDS. The most common fungal infections include candidiasis, aspergillosis,
histoplasmosis and cryptococcal meningitis. Aspergillosis is generally believed
to be the most difficult to treat.

AMPHOTEC is believed to have efficacy comparable to amphotericin B, but
with reduced incidence of renal failure in comparison to standard amphotericin.
Based upon five open label Phase II clinical trials, 149 of 260 patients were
reported to have had a therapeutic response, including 39 of 80 responses with
aspergillosis and 75 of 107 patients with candida infections. Accordingly, three
major market segments have been identified. These include patients with severe
fungal disease for whom amphotericin B has failed, patients with aspergillosis
and possibly other severe fungal infections who have not yet been treated and
patients with fever of unknown origin ("FUO").

Severe fungal infections. Patients who have severe fungal infections and
who have failed amphotericin B, usually because of dose limitations related to
renal toxicity, are the best candidates for AMPHOTEC. In essence, these patients
have limited options as they will either die from the fungal infection or suffer
possibly fatal kidney failure.

Aspergillosis. Patients diagnosed with aspergillosis but who have not yet
been treated with amphotericin B constitute the second group of potential
patients for AMPHOTEC. Some percentage of this group will be candidates for
AMPHOTEC based on a prior history of kidney problems or a risk profile that
suggests that amphotericin B is contraindicated. Subject to regulatory approval
and reimbursement, these patients may be given AMPHOTEC because the physician
does not want to expose them to the risk of renal impairment or because the cost
of managing the potential side effects of amphotericin B may be excessive. In
cases where aspergillosis is neither diagnosed nor strongly suspected, other
less toxic agents may be administered instead of amphotericin B.

FUO. Patients who have FUO potentially represent the largest number of
candidates for AMPHOTEC, but market penetration is expected to be lower than for
those actually diagnosed with severe fungal infections. FUO patients may have a
fungal infection, but their fever may also be caused by other factors, including
bacterial infections which would respond to standard antibiotic therapy.
Moreover, if the cause of the fever is a fungal infection, it is most likely
candidiasis which can be treated with amphotericin B, but which also responds to
other treatments with fewer side effects. Current medical practice is to treat
these patients with antibiotics first and then evaluate other agents if the
fever does not respond to the antibiotic therapy. Because of its side effect
profile, use of amphotericin B in FUO patients prior to a confirmation of fungal
infection is relatively rare.

AMPHOTEC has been approved in the U.K. since August 1993, in Ireland since
October 1994, in Finland since June 1995, and in Russia since July 1995 for
treating systemic fungal infections in patients for whom conventional
amphotericin B is contraindicated due to toxicity or renal failure or for whom
previous antifungal therapy was unsuccessful. Under an August 1993 agreement
with Zeneca, Zeneca has marketing and distribution rights to the drug worldwide,
except for the United States, Canada and Japan. Zeneca has been marketing
AMPHOTEC in the U.K. since May 1994 but has experienced limited sales. See
"-- Strategic Alliances."

The Company and Zeneca have submitted MAAs for AMPHOTEC in 11 other EU
countries and similar applications in other countries. The EU submissions were
made in accordance with the CPMP multistate procedures. On September 13, 1995
the CPMP reviewed the Company's application for product marketing approval.
Germany, France, Spain, Greece and Luxembourg did not accept the MAAs.
Subsequently, the Company and Zeneca have withdrawn the application in Germany.
Based primarily on the CPMP review, SEQUUS believes national approvals will be
forthcoming in Austria, Denmark, Italy, The

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Netherlands, Portugal and Sweden, although the CPMP is an advisory committee
only, its vote is not binding on member countries, and there can be no assurance
that approvals will be forthcoming on a timely basis, or at all. In addition,
the CPMP review indicates that Belgium can approve AMPHOTEC for marketing upon
the receipt of additional clinical information, although there can be no
assurance that the Company will be able to provide additional data or, if
provided, that approval will be forthcoming on a timely basis, or at all. If
approvals are received, SEQUUS and Zeneca intend to negotiate pricing in each of
these countries, which the Company believes will take as long as six to 12
months following marketing approval. The Company and Zeneca will continue to
work with certain of the non-approving countries to meet their requirements for
approval, if possible. There can be no assurance that marketing approval will be
received for AMPHOTEC in any of these countries. See "-- Government Regulation."

Based on the results of five open label AMPHOTEC clinical trials conducted
in patients with disseminated fungal disease, SEQUUS is currently preparing, and
plans to submit within the next six months, a NDA for AMPHOTEC for treating
patients with aspergillosis and renal impairment. There can be no assurance that
the Company will submit the NDA for AMPHOTEC, that such NDA, if submitted, will
be accepted for filing by the FDA, that the FDA will determine that the
Company's NDA provides sufficient evidence of safety and efficacy in humans
adequate to support FDA approval or that the NDA will be approved in a timely
manner, if at all.

SEQUUS is conducting a Phase III double-blind, randomized study comparing
AMPHOTEC with amphotericin B in treating patients with first-line aspergillus
infections and has initiated a Phase II double blind study for the treatment of
patients with FUO who have not responded to antibiotic therapy. There can be no
assurance that the Company will complete either of these clinical trials, that
the results of such trials, if completed, will demonstrate the safety and
efficacy of AMPHOTEC in treating aspergillosis or any other fungal disease, or
that a NDA amendment, if filed by the Company, will be accepted or approved by
the FDA.

The development of new pharmaceutical products is subject to a number of
significant risks. Potential products that appear to be promising at various
stages of development may not receive regulatory approval, reach the market or
achieve widespread use for a number of reasons. For example, DOXIL is being
clinically tested in various types of solid tumors. Although the Company
believes that preliminary results suggest activity in some but not all of these
tumors, these results are not conclusive nor are they predictive of future
results. Moreover, even when a drug does demonstrate activity, this does not
mean it will prove sufficiently effective to be better than existing therapies.
The reasons for a product not being successful include the possibilities that
the potential products will be found insufficiently effective or unduly toxic
during preclinical testing or clinical trials, fail to receive necessary
regulatory approvals, be difficult to manufacture on a large scale, be
uneconomical to market or not achieve market acceptance, be inferior or
significantly later to market than competing products or be precluded from
commercialization by proprietary rights of third parties. There are a number of
challenges the Company must address successfully to develop commercial products
in each of its development programs. The Company's potential products will
require significant additional research and development efforts, including
process development and significant additional clinical testing, prior to any
commercial use. There can be no assurance that the Company will successfully
address any of these technological challenges, or others that may arise in the
course of development. In addition, the Company may not have sufficient
resources to commercialize new products successfully.

RESEARCH AND DEVELOPMENT

The primary focus of SEQUUS' ongoing product development and research
efforts is to capitalize on the STEALTH liposome technology. This includes
identifying additional therapeutic drugs that can be formulated using the
existing technology and creating advanced applications by attaching therapeutics
to the outside

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of the STEALTH liposome to expand its possible applications. The Company is
conducting exploratory programs with other companies and, in some cases, is
dependent upon these companies for their technologies.

The following is a brief summary of the Company's additional research and
development projects:

Encapsulation of Other Drugs in STEALTH Liposomes. SEQUUS has developed
STEALTH liposome formulations of other anticancer drugs such as vincristine and
cisplatin. The Company has undertaken preclinical development of its cisplatin
formulation, which it calls SPI-77. While effective in the treatment of many
solid tumors, cisplatin is characterized by considerable toxicity. Therefore, a
STEALTH liposome formulation has the potential to be less toxic than free
cisplatin while achieving the efficacy advantages of
tumor targeting. If successful, SPI-77 would complement DOXIL in the Company's
product line because cisplatin is often used to treat tumors that are not
responsive to doxorubicin. Preclinical studies have demonstrated that, relative
to free cisplatin, SPI-77 has a prolonged circulation time, enhanced antitumor
activity and less chronic renal and bone marrow toxicity.

DOXIL, Monoclonal Antibody Combination Therapy (Co-therapy). The Company
believes that monoclonal antibodies to growth factor receptors may slow the
growth of human cancers. Clinical studies also suggest that monoclonal
antibodies in combination with chemotherapy drugs, such as doxorubicin and
cisplatin, appear to be more effective than the chemotherapy agent or the
monoclonal antibody alone. The Company believes that the results of preclinical
studies conducted by SEQUUS in collaboration with a biotechnology company
suggest that the therapeutic effect of monoclonal antibodies combined with DOXIL
is greater than the combination of monoclonal antibodies and free doxorubicin.
SEQUUS is conducting feasibility studies to evaluate combining DOXIL with
monoclonal antibodies to treat a broad array of solid tumors. This project has
been named SPI-49. If preclinical tests are successful, the Company intends to
proceed with clinical development in collaboration with the biotechnology
companies providing the monoclonal antibodies.

Small Molecules. Recent advances in drug development have resulted in
small molecule drugs that have the potential for therapeutic efficacy with
reduced toxicity, but they are generally cleared rapidly from the body. Several
of these small molecules can be attached to the PEG on the surface of the
long-circulating STEALTH liposomes to present a large number of binding sites.
SEQUUS has begun to study the application of this technology to two small
molecules. The Company has named this project SPI-42. One of these molecules, a
small peptide called YIGSR, is an angiogenesis inhibitor which blocks a cancer's
ability to form new blood vessels. The Company believes this drug might inhibit
the local growth and spread of many different types of cancer. The other small
molecule, part of a natural carbohydrate called sialyl Lewisx, blocks the
passage of white blood cells into sites of inflammation and lessens the damage
caused to organs when blood flow is temporarily stopped, such as during a heart
attack or stroke. The Company is conducting preclinical studies using these
molecules in conjunction with STEALTH liposomes for these indications. Results
in a preclinical heart attack model indicate that, relative to the free sialyl
Lewisx, the same level of protection against reperfusion damage is achieved with
30-fold less drug when presented on STEALTH liposomes.

Radiosensitizers. SEQUUS is also conducting several preclinical programs
focused on placing established radiosensitizers in STEALTH liposomes, which the
Company calls SPI-40. Radiosensitizers are agents that amplify the effect of
radiation therapy on tumor cells. The Company believes that this would enhance
the utility of radiosensitizers by increasing their concentration at the site of
the tumor and decreasing their concentration in other tissues.

Gene Therapy. SEQUUS is conducting basic research projects in
collaboration with academic institutions and other companies to develop a
liposome delivery system for gene therapy, called SPI-01. Although less specific
than gene therapy delivery systems that utilize retroviruses, the Company
believes that liposome-based delivery of genetic material may provide a safer
and more effective method of administering gene therapy.

The Company's research and development expenses for 1992, 1993 and 1994
were $15.8 million, $21.1 million and $25.4 million, respectively.

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MARKETING AND SALES

If FDA approvals are obtained in the United States, SEQUUS expects to
market and sell its products directly, or possibly co-promote them with
strategic partners. In this regard, the Company has hired a sales force
experienced in the sale of pharmaceutical and biotechnology products of 22
individuals in anticipation of FDA approval to market DOXIL to physicians,
hospitals and clinics, including managed care providers. Each salesperson is
assigned to handle sales within a specific geographic territory as well as to
facilitate reimbursement with third-party payors on behalf of the Company's
customers. The Company intends to expand this sales force if warranted. The
Company intends to invest significant resources and management time in
developing its sales and marketing organization.

The sales force has substantial experience in selling oncology products.
However, the Company has no experience in marketing and selling its products. In
addition, the loss of certain key sales personnel would delay and adversely
impact the sales effort and would have a material adverse effect on the
Company's business, financial condition and results of operations. There can be
no assurance that the Company will be able to implement its marketing plan
successfully. If the Company enters into any marketing partnerships in the
United States, such as those currently under discussion, this would
significantly reduce the Company's margins on these products. There can be no
assurance that the Company will be able to establish such a marketing and sales
organization successfully or manage its marketing organization successfully.

Outside of the United States, the Company's strategy is to establish
marketing and distribution agreements with pharmaceutical companies, agents or
distributors. Pursuant to this strategy in August 1993, the Company signed a
distribution agreement with Zeneca under which Zeneca obtained marketing rights
to AMPHOTEC in most European countries. In March 1994, SEQUUS and Zeneca
announced the expansion of their August 1993 agreement to cover all countries
not previously covered with the exception of the United States, Canada, Japan
and selected small markets. The Company is also engaged in discussions with
several pharmaceutical and biotechnology companies regarding marketing and sales
alliances for DOXIL, although there can be no assurance that such discussions
will lead to an agreement on terms satisfactory to the Company, or at all. Under
the terms of a financing completed in May 1995, the Company granted the
investors the first right to negotiate with the Company to participate in the
commercial development of DOXIL in certain Asian countries excluding Japan.
These negotiations are currently in progress. If Zeneca or any other distributor
were to terminate its agreement with the Company or be unsuccessful in meeting
its sales objectives, the Company's business, financial condition and results of
operations would be materially adversely affected. Sales of AMPHOTEC to date
have been below expectations, and Zeneca and the Company have initiated
discussions regarding amendments to their agreement. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Overview" and "-- Strategic Alliances".

MANUFACTURING AND PRODUCTION

SEQUUS' present internal manufacturing capabilities are limited to
producing products for preclinical development. The Company is dependent on Ben
Venue to manufacture commercial-scale quantities of AMPHOTEC and DOXIL pursuant
to supply agreements. SEQUUS has established production technologies for
AMPHOTEC and DOXIL which it is applying at Ben Venue, a United States-based
contract manufacturer of parenteral drug products, pursuant to supply agreements
for commercial-scale manufacturing. As of September 1995, SEQUUS and Ben Venue
have manufactured 13 commercial-scale batches of DOXIL, including the three
registration batches which are required as part of the FDA's NDA approval
process. In February 1995, the Company announced that the FDA had satisfactorily
completed its pre-approval inspection of Ben Venue's facility, processes and
procedures for DOXIL. There can be no assurance, however, that Ben Venue and the
Company will continue to meet FDA or product specification standards for the
manufacture of DOXIL, that Ben Venue and the Company will meet FDA standards for
the manufacture of AMPHOTEC or that the Company's manufacturing goals can be met
in a consistent and timely manner. There is only a limited number of contract
manufacturers with the capability of manufacturing AMPHOTEC and DOXIL, and any
alternative manufacturer would require regulatory qualification to manufacture
the product which would likely take several months. The Company has not
qualified alternative manufacturers for its products. In the event of any
interruption of supply from the contract manufacturer due to regulatory or

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other causes, there can be no assurance that the Company could make alternative
manufacturing arrangements on a timely basis, if at all. Such an interruption
would have a material adverse effect on the Company's business, financial
condition and results of operations. See "-- Government Regulation."

SEQUUS devotes considerable resources to developing manufacturing
technologies and process controls for its products to achieve and maintain
regulatory approval, suitable shelf-life, stability and ease of use. Such
activities include scaling up production methods, developing quality control
systems, establishing batch-to-batch reproducibility, testing sterilization
methods, establishing reliable sources of raw materials and synthesizing new
proprietary raw materials (such as the chemical linkers used to attach
monoclonal antibodies to STEALTH liposomes). Generally, the equipment used in
SEQUUS' processing technologies is commercially available in industrial sizes
and is currently used in pharmaceutical industry operations.

In the future, SEQUUS may elect to manufacture some or all of its products
internally in lieu of using third-party contract manufacturers. However, the
Company does not currently have a commercial-scale manufacturing facility and,
as a result, an election by the Company to pursue in-house manufacturing would
require the commitment of significant capital and other resources. The Company
currently has no plans to develop in-house a commercial manufacturing facility.
The Company has produced and will continue to endeavor to produce certain of its
products in quantities sufficient for clinical trials in compliance with the
FDA's Good Manufacturing Practices ("GMPs"). However, SEQUUS expects to continue
to use contract manufacturers for final processing and packaging of the clinical
supplies that SEQUUS itself produces.

On February 15, 1994, the Company entered into a five-year, sole-source
supply agreement with A.L. Laboratories, Inc. ("A.L. Labs") to supply the
Company with amphotericin B for AMPHOTEC. Under the agreement the Company is
required to purchase its forecasted three months requirements. The agreement may
be automatically renewed for one-year periods unless either party provides the
other party with six months notice prior to the expiration of the current term.
The Company agreed to indemnify A.L. Labs for certain liabilities.

On September 27, 1994, the Company entered into a five-year,
principal-source supply agreement with Meiji Seika to supply the Company with
doxorubicin for DOXIL. Under the agreement the Company is required to purchase
its forecasted three months requirements in yen. The agreement may be
automatically renewed for one-year periods unless either party provides the
other party with six months notice prior to the expiration of the current term.
The Company agreed to indemnify Meiji Seika for certain liabilities. There can
be no assurance that the doxorubicin supplied under the agreement will meet FDA
requirements applicable to DOXIL, which could delay or prevent future sales of
DOXIL, if any, by the Company.

Although the Company has supply agreements in place with the suppliers of
its key raw materials, the number of alternative qualified suppliers of key raw
materials required for the manufacture of AMPHOTEC and DOXIL is limited. The
disqualification or loss of a sole-source supplier could have a material adverse
effect on the Company because of a delay or inability in obtaining and
qualifying an alternate supplier and the costs and lost revenues associated with
such delays and in finding and qualifying an alternate supplier. Regulatory
requirements applicable to pharmaceutical products tend to make the substitution
of suppliers costly and time consuming. The unavailability of adequate
commercial quantities, the loss of a supplier's regulatory approval, the
inability to develop alternative sources, a reduction or interruption in supply
or a significant increase in the price of materials could have a material
adverse effect on the Company's ability to manufacture and market its products
and on its results of operations.

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STRATEGIC ALLIANCES

Zeneca Limited

In August 1993, the Company signed a distribution agreement with Zeneca
under which Zeneca will market and sell AMPHOTEC in most European countries.
Under the terms of the agreement, the Company received and recognized in the
third quarter of 1993 a signing fee and a milestone payment in the amount of
$5.3 million which was earned by the Company's receipt of a product license
authorizing the sale of AMPHOTEC in the U.K. The Company manufactures and sells
AMPHOTEC to Zeneca at a price which, subject to a minimum, reflects the price(s)
achieved by Zeneca in the market. The agreement provides for additional
milestone payments upon receipt of product licenses in certain other European
countries and upon the achievement of certain cumulative sales totals.

In March 1994, SEQUUS and Zeneca announced the expansion of their August
1993 agreement to cover all countries not previously covered with the exception
of the United States, Canada, Japan and selected small markets. Subsequently,
SEQUUS announced Zeneca's commercial launch of AMPHOTEC in the U.K. in May 1994.
For the six months ended June 30, 1995, 80% of the Company's product sales
represent sales of AMPHOTEC to Zeneca as compared to 62% for the first half of
1994. A significant portion of these sales reflect pipeline-filling (inventory)
orders. As a consequence of this current dependence on Zeneca for the
distribution of AMPHOTEC, and unless and until the Company receives any
approvals for and begins to sell DOXIL, the Company's future revenues are
largely dependent on Zeneca's success in selling AMPHOTEC in approved markets,
Zeneca's assessment of the timing and likelihood of additional approvals for
AMPHOTEC and on Zeneca's assessment of inventory requirements. The level of the
Company's future sales of AMPHOTEC to Zeneca will depend upon the rate at which
the product penetrates the existing approved markets of the U.K., Ireland,
Finland and Russia, as well as the timing of additional approvals in other EU
countries, if any. Sales of AMPHOTEC to date have been below expectations, and
Zeneca and the Company have initiated discussions regarding modifications to
their agreement. The Company expects to ship no additional product to Zeneca for
the remainder of 1995, and may not ship product to Zeneca during the first half
of 1996. In addition, the Company may elect to use certain Zeneca inventory for
its clinical trials in return for partial credits on future product sales to
Zeneca. Additional terms under discussion include the scheduling of regulatory
milestone payments, possibly modifying the territories in which Zeneca has
distribution rights and implementing a mechanism to give Zeneca greater pricing
flexibility. It also is possible that other terms of the agreement between the
parties will be amended as appropriate. Accordingly, there can be no assurance
that Zeneca will elect to maintain distribution rights to AMPHOTEC in any or all
markets or that the terms of such rights will remain the same. In addition, the
delay in regulatory approvals of AMPHOTEC in the EU countries will affect the
timing, and any failure to obtain regulatory approval would affect the receipt
of, additional milestone payments from Zeneca. There can be no assurance that
these or other factors, including the amount and timing of resources devoted to
AMPHOTEC sales by Zeneca, will not lead to substantial fluctuations in the
Company's revenues from period to period. Any delays in the receipt, or denial,
of marketing approvals or material changes to the terms of the agreement with
Zeneca would have a material adverse effect on the Company's business, financial
condition and results of operations.

Ben Venue Laboratories, Inc

Effective January 1993, the Company entered into a manufacturing and supply
agreement with Ben Venue pursuant to which Ben Venue will be the principal
manufacturer and supplier of DOXIL and AMPHOTEC. Ben Venue is required to supply
SEQUUS with quantities of DOXIL and AMPHOTEC sufficient to meet SEQUUS'
forecasted requirements for research and, ultimately, for commercial production.
The Company has agreed to indemnify Ben Venue against certain liabilities.

PATENTS AND TRADE SECRETS

SEQUUS currently owns or controls 55 United States patents, which expire at
various times between 1998 and 2013, including seven claiming various aspects of
the Company's long-circulating STEALTH liposomes, which expire at various times
between 2006 and 2013. SEQUUS has filed numerous patent applications on
inventions claiming specific liposome compositions and methods of use, liposome
processing

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methods, drug/lipid compositions, and surface-modified liposomes and methods.
SEQUUS has also filed corresponding foreign patent applications with respect to
certain of its key technologies and owns or controls foreign counterpart
applications and issued patents in various countries with respect to its most
important United States patents and pending applications. SEQUUS intends to file
additional patent applications, when appropriate, relating to improvements in
its technologies and other specific inventions and products that it develops.

In prior litigation in the Patents County Court in the U.K., a suit brought
by NeXstar alleging that the Company's DOXIL product infringes NeXstar's EPO
Patent No. 0,179,444 was settled by the parties dropping their respective claims
against one another. The U.K. Patent Court dismissed all claims in the case with
prejudice.

In November 1991, SEQUUS received a letter from TLC bringing to SEQUUS'
attention TLC's United States Patent Number 5,059,591 for "Reduced Toxicity"
(the "'591 Patent") containing claims directed to amphotericin B/sterol
compositions and their method of use. Subsequently, SEQUUS' patent counsel
delivered an opinion that, among other things, AMPHOTEC does not infringe any
valid claim of the '591 Patent. However, no assurance can be given that TLC will
not make a claim against SEQUUS with respect to the '591 Patent, which could
have a material adverse effect on the Company's ability to commercialize
AMPHOTEC.

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GOVERNMENT REGULATION

Regulation by governmental authorities in the United States and other
countries is a significant consideration in all aspects of the clinical
development, production and marketing of SEQUUS' products and in its on-going
research and development activities. In order to clinically test, produce and
sell products for human therapeutic use, mandatory procedures and safety
standards established by the FDA and comparable agencies in foreign countries
must be followed. SEQUUS prepares and files regulatory documents required to
begin clinical trials, recruits and monitors clinical investigators, analyzes
and synthesizes clinical trial data and prepares and files documents requesting
approval to sell pharmaceutical products.

The standard process required by the FDA before a pharmaceutical agent may
be marketed in the United States includes: (i) laboratory and preclinical tests,
(ii) submission to the FDA of an application for use of an investigational new
drug, which must become effective before clinical trials may commence, (iii)
adequate and well-controlled clinical trials to establish the safety and
efficacy of the drug in its intended application, (iv) submission to the FDA of
a NDA with respect to a drug or a product license application ("PLA") with
respect to a biologic, and (v) FDA approval of the NDA or PLA prior to any
commercial sale or shipment of the drug or biologic. In addition to obtaining
FDA approval for each product, each domestic drug manufacturing establishment
must be registered or licensed by the FDA. Domestic and foreign manufacturing
establishments are subject to inspections by the FDA and by other federal, state
and local agencies and must comply with GMPs as appropriate for production. If a
product is approved under the FDA procedures for Accelerated Approval of New
Drugs for Serious or Life-Threatening Illnesses, such approval is subject to the
additional requirement that, following product launch, a company continue to
study the drug to verify and describe its clinical benefit. Under these FDA
Accelerated Approval Procedures, the FDA may withdraw approval if the company
fails to show due diligence in conducting post-marketing clinical trials or if
these clinical trials fail to demonstrate clinical benefit to the FDA's
satisfaction.

Clinical trials are typically conducted in three sequential phases, which
phases may overlap. In Phase I, the initial introduction of a drug to humans,
the drug is tested for safety (adverse effects), dosage tolerance, absorption,
distribution, metabolism and excretion. Phase II involves studies in a limited
patient population to determine the efficacy of the drug for specific targeted
indications, dosage tolerance and optimal dosage, and possible adverse effects
and safety risks. When a product is found to show clinical effectiveness and to
have an acceptable safety profile in Phase II evaluations, Phase III trials are
undertaken to evaluate further its clinical efficacy and to test further for
safety within an expanded patient population at geographically dispersed
clinical study sites.

S-36
<PAGE> 37

Upon accepting a company's NDA, the FDA generally convenes an advisory
committee to review clinical trial results and make a non-binding recommendation
concerning the drug's approval. After considering the advisory committee
recommendation and other information, the FDA may or may not issue an approvable
letter. This letter sets out the specific terms and conditions that the company
must satisfy in order to receive final FDA approval to market.

Sales of pharmaceutical products outside of the United States are subject
to regulatory requirements that vary widely from country to country and that
often include approval of the price at which a product may be sold. In the EU
countries, a company may seek product marketing authorization in other member
countries with the sponsorship of the country which first granted marketing
approval under CPMP procedures. Since the CPMP is an advisory committee, its
vote is not binding on member countries.

Whether undertaken by SEQUUS or an agent or collaborator of SEQUUS, the
regulatory approval process for a new product is likely to take several years
and will involve the expenditure of substantial resources. There can be no
assurance that any such approvals will be granted on a timely basis, if at all.
In addition, the FDA may require post-marketing testing and surveillance
programs to monitor a drug's efficacy and side effects. Results of the
post-marketing programs may prevent or limit the further marketing of a product.

All SEQUUS manufacturing facilities and contract manufacturing facilities
used by SEQUUS will be subject to periodic inspections by the FDA and comparable
state agencies. If violations of applicable regulations are noted during these
inspections, SEQUUS may be restrained from continued marketing of the product
manufactured until such violations are corrected, if possible. SEQUUS is also
subject to regulation under numerous federal, state and local laws regarding,
among other things, occupational safety, laboratory practices, the use and
handling of radioisotopes and hazardous chemicals, prevention of illness and
injury, environmental protection and hazardous substance control.

As with many biotechnology companies, the Company's research and
development involves the controlled use of hazardous materials and chemical
compounds. There can be no assurance that the Company's safety procedures for
handling and disposing of such materials will comply with the standards
prescribed by federal, state and local regulations or that it will not be
subject to the risk of accidental contamination or injury from these materials.
In the event of such an accident, the Company could be held liable for any
damages that result and any such liability could materially adversely affect the
Company.

The Company's business may be materially adversely affected by the
continuing efforts of worldwide governmental and third-party payors to contain
or reduce the costs of health care in general and drugs in particular. For
example, in most foreign markets, including markets the Company is seeking to
enter, pricing of prescription pharmaceuticals is subject to government control.
In these markets, once marketing approval is received, pricing negotiation could
take as long as another six to 12 months or longer. In the United States, there
has been, and the Company expects that there will continue to be, a number of
federal and state proposals to implement similar government pricing control. In
addition, an increasing emphasis on managed care and consolidation of hospital
purchasing in the United States has and will continue to put pressure on
pharmaceutical pricing. Such initiatives and proposals, if adopted, could
decrease the price that the Company receives for any products it may develop and
sell in the future and thereby have a material adverse effect on the Company's
business, financial condition and results of operations. Further, to the extent
that such proposals or initiatives have a material adverse effect on
pharmaceutical companies that are collaborators or prospective collaborators for
certain of the Company's potential products, the Company's ability to
commercialize its potential products may be materially adversely affected. In
addition, price competition may result from competing product sales, attempts to
gain market share or introductory pricing schemes, which would have a material
adverse effect on the Company's business, financial condition and results of
operations.

S-37
<PAGE> 38

party insurance coverage will be available to patients for any products
developed by the Company. Government and other third-party payors are
increasingly attempting to contain health care costs by limiting both coverage
and the level of reimbursement for new therapeutic products, and by refusing, in
some cases, to provide coverage for off-label uses of approved products, i.e.,
uses for indications as to which the FDA has not granted marketing approval.
Moreover, reimbursement may be denied even for FDA-approved indications. If
adequate coverage and reimbursement levels are not provided by the government
and third-party payors for the Company's products, the Company's business,
financial condition and results of operations would be materially adversely
affected.

COMPETITION

Generally, competition in the pharmaceutical field is based on such factors
as product performance, safety, acceptance by doctors, patient compliance,
available reimbursement, patent protection, ease of use, price and marketing
efforts. The Company believes that earlier entry into a market is an advantage
for a new drug, but it also believes that clinical benefits and
pharmacoeconomics are important to a product's success.

The drugs being developed by the Company compete with existing and new
drugs being created by pharmaceutical, biopharmaceutical and biotechnology
companies. Many of these companies, as well as university-related entities both
in the United States and abroad are developing products based on improved drug
delivery technologies and novel therapeutics for the treatment of cancer,
infectious diseases and other indications targeted by the Company. Some of these
companies are active in liposome and lipid-based research and product
development and many have financial and technical resources and production and
marketing capabilities substantially greater than those of the Company. In
addition, most such companies have significantly greater experience than the
Company in preclinical and clinical development activities and in obtaining
regulatory approval to manufacture and market biopharmaceutical products.

The Company's two principal competitors in liposomal drug delivery are
NeXstar and TLC. NeXstar has regulatory approval for its liposomal amphotericin
B product in approximately 18 countries, primarily in Europe, and its product,
therefore, at present has a marketing advantage over AMPHOTEC, which has
approvals in four European countries and received those approvals after its
competitor. NeXstar reported sales of approximately $26.2 million in the six
months ended June 30, 1995, as compared to approximately $1.0 million by the
Company. In both cases, sales represent primarily revenues received for
amphotericin B products. TLC has submitted a NDA to the FDA and MAAs in several
European countries for a liposomal amphotericin B product and has received
approval for this product in the U.K. TLC recently introduced its liposomal
amphotericin B product as the third entrant in the U.K. market at a price
substantially below the price of the other lipid-based antifungals. This could
have an adverse effect on AMPHOTEC's market penetration. Zeneca has engaged in
some price competition, and if increased price competition results, it would
have a material adverse effect on the Company's business, financial condition
and results of operations.

NeXstar has received an approvable letter from the FDA with respect to its
liposome-based daunorubicin product for use in first line therapy of KS
patients. Approval as a first line treatment may give it a competitive advantage
over DOXIL which has received an approvable letter for treatment of refractory
KS. Neither product has received approval to be marketed in the United States.
To the extent either company receives approval first, that company may enjoy a
significant competitive advantage. If physicians prescribe DOXIL for first line
therapy, DOXIL's limited approval may restrict reimbursement by certain
third-party payors.

EMPLOYEES

As of August 31, 1995 SEQUUS had 174 full-time employees, of whom 18 hold
Ph.D. or M.D. degrees. 126 employees are engaged in research, development,
clinical and regulatory affairs and pilot manufacturing, 31 employees are
engaged in sales and marketing and 17 work primarily in finance, human resources
and

S-38
<PAGE> 39

administration. The Company from time to time also hires temporary employees and
consultants in all areas of the Company's operations.

In order to continue development and commercialization of products in
clinical trials as well as to continue research and development of other
products and programs, it will be necessary for SEQUUS to continue to increase
significantly the number of its employees. In particular, in order to
commercialize its products, it will be necessary for the Company to hire
additional employees in sales and marketing and in administration. The Company's
success depends largely upon its ability to attract and retain qualified
scientific, engineering, manufacturing, sales and marketing and management
personnel. The Company faces competition for such personnel from other
companies, academic institutions, government entities and other organizations.
There can be no assurance that the Company will be successful in hiring or
retaining such personnel.

None of the Company's employees is represented by a union, and SEQUUS
considers its relations with its employees to be good.

FACILITIES

SEQUUS currently leases approximately 70,000 square feet of laboratory,
office and warehouse space in Menlo Park, California under leases that expire
beginning in 1996, which are subject to two consecutive five-year renewal
options upon timely written notice by the Company before the expiration of the
current term. The Company leases approximately 1,200 square feet in London,
England under a short-term lease. Rent expense for 1994 was $766,000.

LEGAL PROCEEDINGS

The Company is not party to any legal proceedings. See "-- Patents and
Trade Secrets."

S-39
<PAGE> 40

MANAGEMENT

Information with respect to the executive officers and directors of the
Company as of September 15, 1995 is set forth below:

<TABLE>
<CAPTION>
NAME AGE POSITION WITH THE COMPANY
- ----------------------------------- --- --------------------------------------------------
<S> <C> <C>
I. Craig Henderson, M.D.,
F.A.C.P. ........................ 54 Chairman of the Board and Chief Executive Officer
L. Scott Minick.................... 43 President, Chief Operating Officer and Director
Carl F. Grove...................... 41 Vice President for Regulatory Affairs
Marc J. Gurwith, M.D., J.D. ....... 56 Vice President and Associate Medical Director
Joseph M. Limber................... 42 Executive Vice President
Anthony A. Huang, Ph.D. ........... 43 Vice President for Product Development
Francis J. Martin, Ph.D. .......... 47 Vice President and Chief Scientific Officer
Joseph J. Vallner, Ph.D. .......... 48 Senior Vice President for Research and Development
Sally A. Davenport................. 59 Secretary
Donald J. Stewart.................. 39 Vice President for Finance and Treasurer
Peter K. Working, Ph.D. ........... 47 Vice President for Preclinical Research
Robert G. Faris(1)(2).............. 57 Director
Richard C.E. Morgan(1)(2).......... 51 Director
E. Donnall Thomas, M.D............. 75 Director
</TABLE>

- ---------------
(1) Member of the Compensation and Plan Committee of the Board of Directors.
(2) Member of the Audit Committee of the Board of Directors.

The Company's By-laws authorize the Board of Directors to set the number of
directors, which is currently fixed at five.

All directors hold office until the next annual meeting of stockholders and
until their successors have been elected. Officers are appointed to serve,
subject to the discretion of the Board of Directors, until their successors are
appointed.

I. Craig Henderson, M.D. has been Chief Executive Officer of SEQUUS since
June 1995 and Chairman of the Board since July 1995 and has served as a director
of the Company since July 1993. Since July 1995, Dr. Henderson has been an
Adjunct Professor of Medicine at University of California, San Francisco. From
1992 until July 1995, he served as Professor of Medicine, Chief of Medical
Oncology and Director of Clinical Cancer Programs at the University of
California, San Francisco. From 1989 to 1992 he served as a member and, for most
of this time, as Chairman of the Oncologic Drugs Advisory Committee of the FDA.
From 1974 to 1992, Dr. Henderson held an academic appointment at Harvard Medical
School, most recently as Associate Professor of Medicine. Dr. Henderson founded
the Breast Evaluation Center at the Dana-Farber Cancer Institute in 1980 and
served as its director until 1992. He received a M.D. degree from Columbia
University.

L. Scott Minick has been President and Chief Operating Officer of the
Company since June 1995 and a director of the Company since July 1995. From 1994
to 1995, he served as a director, Interim President and Chief Executive Officer
of Oncotherapeutics, Inc. Before that, Mr. Minick was a director, President and
Chief Executive Officer of LXR Biotechnology, Inc. From 1981 to 1993, he was an
executive of Baxter Healthcare, Inc., most recently as President of the Pacific
Rim/Latin America business unit of Baxter Diagnostics. Mr. Minick received a
M.B.A. degree from Northwestern University.

Carl F. Grove was appointed Vice President for Regulatory Affairs of the
Company in January 1992, having served as Vice President for R&D Administration
and Planning since July 1989. Previously, he served the Company and a prior
SEQUUS joint venture, Cooper-Lipotech, in various positions related to R&D
project administration and planning since 1982. Mr. Grove received a M.S. degree
in Urban Planning from the University of Oregon.

S-40
<PAGE> 41

Marc J. Gurwith, M.D., J.D. joined SEQUUS in January 1995 as Vice President
and Associate Medical Director. Prior to joining SEQUUS, Dr. Gurwith was
employed by Boehringer Mannheim Pharmaceuticals, most recently as Vice President
of Medical and Scientific Affairs and previously as Senior Director of Clinical
Research. In addition to over 10 years of pharmaceutical industry experience,
Dr. Gurwith has over 20 years experience in teaching and consultation in the
area of infectious disease control and therapy. Dr. Gurwith received his M.D.
degree from Harvard Medical School and his J.D. degree from Temple University
School of Law.

Joseph M. Limber has been Executive Vice President of the Company since
April 1995 and from June 1992 through March 1995 served as Vice President for
Marketing and Sales. Prior to joining SEQUUS, Mr. Limber was employed by Syntex
Corporation (Syntex), most recently as Director of Marketing Planning, with
responsibility for developing worldwide strategic plans for R&D compounds and
product line extensions. Before joining Syntex in 1987, Mr. Limber held various
marketing and sales positions with Ciba-Geigy Corporation (1975-1987). Mr.
Limber received a B.A. degree in Liberal Arts from Duquesne University.

Anthony H. Huang, Ph.D. has been Vice President of Product Development of
SEQUUS since April 1995. He has served in various technical capacities with the
Company for the last 12 years. Before joining the Company, he was a Research
Investigator at Oak Ridge National Laboratory in Oak Ridge, Tennessee. Dr. Huang
received a Ph.D. degree in Pharmacology from the University of California, San
Francisco.

Francis J. Martin, Ph.D. was appointed Vice President and Chief Scientific
Officer of the Company in July 1994. From October 1986 he served as Vice
President for Research and Principal Scientist, with responsibility for guiding
and coordinating SEQUUS internal and extramural research activities for STEALTH
liposome products. From 1981 to 1986, Dr. Martin served the Company in various
capacities, including Director of Liposome Research and Formulations and was the
Technical Director of SEQUUS' former joint venture, Cooper-Lipotech. Dr. Martin
received a Ph.D. degree in Biochemistry from Northwestern University.

Joseph J. Vallner, Ph.D. joined SEQUUS in February 1992 as Vice President
for Development and was appointed Senior Vice President for Research and
Development in April 1995. From 1986 to 1992, Dr. Vallner was Director,
Corporate Technology Transfer, of Syntex. While at Syntex, he also performed
various pharmaceutical development functions ranging from drug design and
development to responsibility for regulatory filings with the FDA. Before
joining Syntex, Dr. Vallner was a Group Leader with G.D. Searle, where he
supervised pharmaceutical formulation development and development of new drug
delivery systems. From 1974 to 1984, Dr. Vallner was Associate Professor of
Pharmaceutics at the University of Georgia. Dr. Vallner received a Ph.D. in
Pharmaceutics from the University of Wisconsin.

Sally A. Davenport is a Company founder and has served as the SEQUUS'
Secretary since the Company's inception. She has been responsible for various
administrative and corporate functions since 1981. Ms. Davenport received a B.S.
degree in Technical Journalism from Iowa State University.

Donald J. Stewart joined the Company in 1984 as Treasurer and Controller
and was appointed Vice President for Finance in April 1995. Previously, he was
Comptroller at Softcom, Inc. and a certified public accountant with Arthur Young
& Company. Mr. Stewart received a M.B.A. from Santa Clara University.

Peter K. Working, Ph.D., D.A.B.T., has been Vice President of Preclinical
Research at SEQUUS since April 1995. From 1994 to 1995, he served as Senior
Director of Pharmacology and Toxicology, and from 1992 to 1994 as Director of
Pharmacology and Toxicology at SEQUUS. From 1988 to 1992, Dr. Working was a
Senior Experimental Toxicologist at Genentech, Inc. From 1984 to 1988, he was a
Staff Scientist in the Department of Cellular and Molecular Toxicology at the
Chemistry Industry Institute of Toxicology in Research Triangle Park, North
Carolina, where he was a Post-Doctoral Fellow from 1982 to 1984. He was
board-certified in toxicology in 1989. Dr. Working received a Ph.D. degree in
Human Anatomy from the University of California at Davis.

Robert G. Faris has served as a director of the Company since March 1985.
Since 1990, he has been President, Chief Executive Officer and a director of the
Polish American Enterprise Fund, which invests United States government funds in
Poland. From 1971 to 1987, he served as President of Alan Patricof

S-41
<PAGE> 42

Associates, Inc., an investment advisor to venture capital partnerships, and
from 1987 to 1990, Mr. Faris was a private investor.

Richard C.E. Morgan has served as a director of SEQUUS since May 30, 1990.
Since 1986, he has been a general partner of Wolfensohn Partners L.P., a venture
capital limited partnership, and the general partner of Wolfensohn Associates
L.P. From 1984 to 1986, he served as an executive of James D. Wolfensohn, Inc.,
and from 1977 to 1984, he served as General Manager of The Schroder Strategy
Group and director of J. Henry Schroder Wagg & Co. Ltd. (London). He is a
director of Lasertechnics, Inc., a laser systems company, Celgene Corporation, a
biotechnology company, Quidel Corporation, a medical diagnostics company, and
MediSense, Inc., a blood glucose monitoring system company.

E. Donnall Thomas, M.D. has served as a director of SEQUUS since May 27,
1993. Dr. Thomas currently is Professor Emeritus of Medicine, University of
Washington School of Medicine in Seattle and a member of the Fred Hutchinson
Cancer Research Center in Seattle. Dr. Thomas previously served, from 1974 to
1989, as Director of Medical Oncology and Director of Clinical Research Programs
at the Fred Hutchinson Cancer Research Center and, from 1963 to 1985, he headed
the Division of Oncology at the University of Washington School of Medicine in
Seattle. Dr. Thomas received the Nobel Prize in Medicine and the Presidential
Medal of Science in 1990. He received a M.D. degree from Harvard Medical School.

S-42
<PAGE> 43

UNDERWRITING

The Underwriters named below, acting through their representatives,
Robertson, Stephens & Company, L.P., Dillon, Read & Co. Inc., Oppenheimer & Co.,
Inc. and Punk, Ziegel & Knoell, L.P.
(the "Representatives"), have severally agreed, subject to the terms and
conditions of the Underwriting Agreement, to purchase from the Company the
numbers of shares of Common Stock set forth opposite their names below. The
Underwriters are committed to purchase and pay for all such shares if any are
purchased.

<TABLE>
<CAPTION>
UNDERWRITER NUMBER OF SHARES
- ----------------------------------------------------------------------------- ----------------
<S> <C>
Robertson, Stephens & Company, L.P. ......................................... 897,000
Dillon, Read & Co. Inc. ..................................................... 897,000
Oppenheimer & Co., Inc. ..................................................... 897,000
Punk, Ziegel & Knoell, L.P. ................................................. 897,000
Lehman Brothers Inc. ........................................................ 120,000
Auerbach Pollak & Richardson Inc. ........................................... 96,000
Hoefer & Arnett, Inc. ....................................................... 96,000
---------
Total.............................................................. 3,900,000
=========
</TABLE>

The Company has been advised by the Representatives that the Underwriters
propose to offer the shares of Common Stock to the public at the public offering
price set forth on the cover page of this Prospectus Supplement and to certain
dealers at such price less a concession of not more than $0.37 per share, of
which $0.10 may be reallowed to other dealers. After the public offering, the
public offering price, concession and reallowance to dealers may be reduced by
the Representatives. No such reduction shall change the amount of proceeds to be
received by the Company as set forth on the cover page of this Prospectus
Supplement.

The Company granted to the Underwriters an option, exercisable during the
30-day period after the date of this Prospectus Supplement, to purchase up to
585,000 additional shares of Common Stock at the same price per share as the
Company receives for the 3,900,000 shares that the Underwriters have agreed to
purchase. To the extent that the Underwriters exercise such option, each of the
Underwriters will have a firm commitment to purchase approximately the same
percentage of such additional shares that the number of shares of Common Stock
to be purchased by it shown in the above table represents as a percentage of the
3,900,000 shares offered hereby. If purchased, such additional shares will be
sold by the Underwriters on the same terms as those on which the 3,900,000
shares are being sold.

The Underwriting Agreement contains covenants of indemnity between the
Underwriters and the Company against certain civil liabilities, including
liabilities under the Securities Act of 1933, as amended.

Each executive officer and director of the Company has agreed with the
Representatives for a period of 90 days from the date of this Prospectus
Supplement (the "Lock-Up Period") not to offer to sell, contract to sell, or
otherwise sell, dispose of, loan, pledge or grant any rights with respect to any
shares of Common Stock, any options or warrants to purchase any shares of Common
Stock or any securities convertible into or exchangeable for shares of Common
Stock now owned or hereafter acquired directly by such holders or with respect
to which they have or hereinafter acquire the power of disposition without the
prior written consent of Robertson, Stephens & Company, L.P. which may, in its
sole discretion and at any time or from time to time, without notice, release
all or any portion of the shares subject to the lock-up agreements. In addition,
the Company has agreed that during the Lock-Up Period, the Company will not,
without the prior written consent of Robertson, Stephens & Company, L.P. issue,
sell, contract to sell or otherwise dispose of any shares of Common Stock, any
options or warrants to purchase any shares of Common Stock or any securities
convertible into, exercisable for or exchangeable for shares of Common Stock
other than the issuance of Common Stock upon the exercise of outstanding options
and under the existing employee stock purchase plan and the Company's issuance
of options under existing employee stock option plans.

The offering price for the Common Stock has been determined by negotiations
among the Company and the Representatives of the Underwriters, based largely
upon the market price for the Common Stock as reported on the Nasdaq National
Market.

S-43
<PAGE> 44

The rules of the Securities and Exchange Commission generally prohibit the
Underwriters and other members of the selling group from making a market in the
Company's Common Stock during the period immediately preceding the commencement
of sales in the offering. The Securities and Exchange Commission has, however,
adopted an exemption from these rules that permits passive market making under
certain conditions. These rules permit an Underwriter or other member of the
selling group to continue to make a market in the Company's Common Stock subject
to the conditions, among others, that its bid not exceed the highest bid by a
market maker not connected with the offering and that its net purchases on any
one trading day not exceed prescribed limits. Pursuant to these exemptions,
certain Underwriters and other members of the selling group intend to engage in
passive market making in the Company's Common Stock during such period.

Oppenheimer & Co., Inc. is receiving a financial advisory fee of $150,000
in connection with this offering.

The Underwriters do not intend to confirm sales to any accounts over which
they exercise discretionary authority.

LEGAL MATTERS

The validity of the shares of Common Stock offered hereby is being passed
upon for the Company by Heller Ehrman White & McAuliffe, Palo Alto, California.
Certain legal matters relating to the offering will be passed upon for the
Underwriters by Wilson Sonsini Goodrich & Rosati, Professional Corporation, Palo
Alto, California.

EXPERTS

The financial statements of SEQUUS Pharmaceuticals, Inc. at December 30,
1993 and 1994 and for each of the three years in the period ended December 31,
1994, appearing in this Prospectus Supplement have been audited by Ernst & Young
LLP, independent auditors, as set forth in their report thereon appearing
elsewhere herein, and are included in reliance upon such report given upon the
authority of such firm as experts in accounting and auditing.

The portions of this Prospectus Supplement entitled "Risk
Factors -- Patents and Trade Secrets" and "Business -- Patents and Trade
Secrets," insofar as they constitute a summary of matters of law, have been
reviewed and approved by Peter J. Dehlinger, Esq., patent counsel for SEQUUS, as
an expert in patent law.

ADDITIONAL INFORMATION

The Company has filed with the Securities and Exchange Commission a
Registration Statement on Form S-3 under the Securities Act, with respect to the
Common Stock offered hereby. This Prospectus does not contain all of the
information set forth in the Registration Statement and the exhibits and
schedules thereto. For further information with respect to the Company and such
Common Stock, reference is made to the Registration Statement and the exhibits
and schedules thereto. Statements contained in this Prospectus as to the
contents of any contract or any other document referred to are not necessarily
complete. In each instance, reference is made to the copy of such contract or
document filed as an exhibit to the Registration Statement, and each such
statement is qualified in all respects by such reference. Copies of the
Registration Statement, including exhibits and schedules thereto, may be
inspected without charge at the Commission's principal office in Washington,
D.C., or obtained at prescribed rates from the Public Reference Section of the
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549.

S-44
<PAGE> 45

INDEX TO FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Report of Ernst & Young LLP, Independent Auditors..................................... F-2
Balance Sheets........................................................................ F-3
Statements of Operations.............................................................. F-4
Statements of Stockholders' Equity.................................................... F-5
Statements of Cash Flows.............................................................. F-6
Notes to Financial Statements......................................................... F-7
</TABLE>

F-1
<PAGE> 46

REPORT OF INDEPENDENT AUDITORS

The Board of Directors and Stockholders
SEQUUS Pharmaceuticals, Inc.

We have audited the accompanying balance sheets of SEQUUS Pharmaceuticals,
Inc. (formerly Liposome Technology, Inc.) as of December 31, 1993 and 1994, and
the related statements of operations, stockholders' equity and cash flows for
each of the three years in the period ended December 31, 1994. 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 audit 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 SEQUUS Pharmaceuticals, Inc.
at December 31, 1993 and 1994, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1994, in
conformity with generally accepted accounting principles.

ERNST & YOUNG LLP

Palo Alto, California
February 10, 1995, except as to the first
paragraph of Note 7, as to which the date is
March 30, 1995

F-2
<PAGE> 47

SEQUUS PHARMACEUTICALS, INC.

BALANCE SHEETS
(in thousands, except per share and share amounts)

<TABLE>
<CAPTION>
DECEMBER 31,
--------------------- JUNE 30,
1993 1994 1995
-------- -------- -----------
(unaudited)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................ $ 3,073 $ 5,448 $ 14,515
Short-term investments................................... 31,585 6,309 6,950
Trade accounts and interest receivable................... 1,527 285 120
Inventories.............................................. 420 558 678
Prepaid expenses......................................... 1,119 922 703
-------- -------- --------
Total current assets............................. 37,724 13,522 22,966
Net equipment and improvements............................. 4,190 3,808 3,317
Long-term marketable investments........................... 2,520 500 --
Patents, net of accumulated amortization of $1,200, $1,441,
and $1,507 (unaudited) at December 31, 1993 and 1994 and
June 30, 1995, respectively.............................. 550 309 244
Other assets............................................... 195 59 66
-------- -------- --------
Total assets..................................... $ 45,179 $ 18,198 $ 26,593
======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable......................................... $ 1,294 $ 1,586 $ 781
Accrued clinical costs................................... 2,913 3,954 3,077
Accrued compensation..................................... 850 797 1,359
Other accrued liabilities................................ 786 923 825
Short-term portion of obligations under capital lease.... 18 -- --
-------- -------- --------
Total current liabilities........................ 5,861 7,260 6,042
Commitments and contingencies
Stockholders' equity:
Preferred stock, par value $0.01; 4,000,000 shares
authorized, issuable in series; 480,000 shares issued
and outstanding at June 30, 1995 (unaudited) (none at
December 31, 1993 and 1994). Liquidation
preference -- $12,000 (unaudited)..................... -- -- 5
Common stock, par value $0.0001; 35,000,000 shares
authorized, 18,875,192, 19,095,867 and 21,379,591
(unaudited) shares issued and outstanding at December
31, 1993 and 1994 and June 30, 1995, respectively..... 2 2 2
Additional paid-in capital............................... 109,984 110,801 136,315
Accumulated deficit...................................... (70,668) (99,865) (115,771)
-------- -------- --------
Total stockholders' equity....................... 39,318 10,938 20,551
-------- -------- --------
Total liabilities and stockholders' equity....... $ 45,179 $ 18,198 $ 26,593
======== ======== ========
</TABLE>

See accompanying notes.

F-3
<PAGE> 48

SEQUUS PHARMACEUTICALS, INC.

STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)

<TABLE>
<CAPTION>
SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
---------------------------------- ---------------------
1992 1993 1994 1994 1995
-------- -------- -------- -------- --------
(unaudited)
<S> <C> <C> <C> <C> <C>
Revenues:
Sales............................. $ 293 $ 1,299 $ 3,664 $ 946 $ 1,040
Research revenue.................. 300 -- -- -- --
Royalties and license fees........ 125 5,458 91 40 38
-------- -------- -------- -------- --------
Total revenues...................... 718 6,757 3,755 986 1,078
Operating expenses:
Cost of goods sold................ 13 232 916 222 275
Research and development.......... 15,769 21,128 25,378 12,893 10,729
General and administrative........ 2,723 6,653 7,622 3,813 6,193
-------- -------- -------- -------- --------
Total operating expenses............ 18,505 28,013 33,916 16,928 17,197
-------- -------- -------- -------- --------
Loss from operations................ (17,787) (21,256) (30,161) (15,942) (16,119)
Interest income..................... 2,427 1,647 1,002 598 254
Interest/other expense.............. (33) (45) (26) (14) (54)
-------- -------- -------- -------- --------
Net loss............................ $(15,393) $(19,654) $(29,185) $(15,358) $(15,919)
======== ======== ======== ======== ========
Net loss per share.................. $ (0.84) $ (1.05) $ (1.54) $ (0.81) $ (0.80)
======== ======== ======== ======== ========
Weighted average shares
outstanding....................... 18,270 18,789 18,978 18,915 19,880
</TABLE>

See accompanying notes.

F-4
<PAGE> 49

SEQUUS PHARMACEUTICALS, INC.

STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands)

<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK ADDITIONAL TOTAL
--------------- --------------- PAID-IN ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT EQUITY
------ ------ ------ ------ ---------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1991......... -- $-- 16,193 $ 2 $ 74,746 $ (35,621) $ 39,127
Shares issued for contribution to
401(k) Plan...................... -- -- 1 -- 26 -- 26
Shares issued under the Employee
Stock Purchase Plan.............. -- -- 4 -- 25 -- 25
Exercise of stock options.......... -- -- 149 -- 202 -- 202
Sale of Common Stock in secondary
offering net of issuance costs of
$2,629,000....................... -- -- 2,300 -- 34,171 -- 34,171
Exercise of warrants............... -- -- 93 -- 395 -- 395
Shares issued in exchange for
consulting services.............. -- -- 2 -- 24 -- 24
Net loss........................... -- -- -- -- -- (15,393) (15,393)
-
--- ------ --- -------- --------- --------
BALANCE AT DECEMBER 31, 1992......... -- -- 18,742 2 109,589 (51,014) 58,577
Shares issued for contribution to
401(k) Plan...................... -- -- 4 -- 40 -- 40
Shares issued under the Employee
Stock Purchase Plan.............. -- -- 22 -- 150 -- 150
Exercise of stock options.......... -- -- 107 -- 205 -- 205
Net loss........................... -- -- -- -- -- (19,654) (19,654)
-
--- ------ --- -------- --------- --------
BALANCE AT DECEMBER 31, 1993......... -- -- 18,875 2 109,984 (70,668) 39,318
Shares issued for contribution to
401(k) Plan...................... -- -- 15 -- 124 -- 124
Shares issued under the Employee
Stock Purchase Plan.............. -- -- 45 -- 265 -- 265
Exercise of stock options.......... -- -- 161 -- 428 -- 428
Unrealized loss on available for
sales securities................. -- -- -- -- -- (12) (12)
Net loss........................... -- -- -- -- -- (29,185) (29,185)
-
--- ------ --- -------- --------- --------
BALANCE AT DECEMBER 31, 1994......... -- -- 19,096 2 110,801 (99,865) 10,938
Shares issued for contribution to
401(k) Plan (unaudited).......... -- -- 24 -- 157 -- 157
Shares issued under the Employee
Stock Purchase Plan
(unaudited)...................... -- -- 23 -- 128 -- 128
Exercise of stock options and
warrant (unaudited).............. -- -- 13 -- 35 -- 35
Sale of Preferred Stock in
secondary offering net of
issuance costs of $962
(unaudited)...................... 480 5 -- -- 11,033 -- 11,038
Sale of Units in secondary offering
net of issuance costs of $885
(unaudited)...................... -- -- 2,224 -- 14,161 -- 14,161
Unrealized gain on available for
sales securities (unaudited)..... -- -- -- -- -- 13 13
Net loss (unaudited)............... -- -- -- -- (15,919) (15,919)
-
--- ------ --- -------- --------- --------
BALANCE AT JUNE 30, 1995
(unaudited)........................ 480 $5 21,380 $ 2 $136,315 $(115,771) $ 20,551
=== = ====== === ======== ========= ========
</TABLE>

See accompanying notes.

F-5
<PAGE> 50

SEQUUS PHARMACEUTICALS, INC.

STATEMENTS OF CASH FLOWS
(in thousands)

<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
-------------------------------- ---------------------------
1992 1993 1994 1994 1995
-------- -------- ---------- ----------- -------------
(unaudited)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss..................................... $(15,393) $(19,654) $(29,185) $ (15,358) $ (15,919)
Adjustments to reconcile net loss to net cash
used by operating activities:
Depreciation and amortization.............. 1,235 1,441 1,902 870 971
Write-off of leasehold improvements........ 750 -- -- -- --
Stock grant to consultant.................. 24 -- -- -- --
Decrease (increase) in assets:
Trade accounts and interest receivable..... (564) (877) 1,242 177 165
Inventories................................ (591) 171 (138) (17) (120)
Prepaid expenses........................... (452) (489) 197 431 219
Other assets............................... 35 25 136 -- (7)
Increase (decrease) in liabilities:
Accounts payable........................... 47 941 292 (104) (805)
Accrued clinical costs..................... 573 1,779 1,041 834 (877)
Accrued compensation....................... (189) 637 (53) (284) 562
Other accrued liabilities.................. (49) 665 137 52 (98)
-------- -------- -------- -------- --------
Net cash used by operating activities........ (14,574) (15,361) (24,429) (13,399) (15,909)
Cash flows from investing activities:
Available-for-sale securities:
Purchases.................................. (87,841) (35,953) (13,512) (12,401) (9,849)
Sales...................................... 10,933 597 26,329 20,560 --
Maturities................................. 55,130 47,247 14,467 7,679 9,721
Capital expenditures......................... (1,839) (1,856) (1,279) (908) (415)
Patents...................................... (392) -- -- -- --
Certificates of deposit...................... 261 -- -- -- --
-------- -------- -------- -------- --------
Net cash provided (used) by investing
activities................................. (23,748) 10,035 26,005 14,930 (543)
Cash flows from financing activities:
Sale of common stock......................... 34,819 395 817 291 14,481
Sale of preferred stock...................... -- -- -- -- 11,038
Principal payments on debt obligations....... (250) -- -- -- --
Principal payments under capital lease
obligation................................. (105) (107) (18) (18) --
-------- -------- -------- -------- --------
Net cash provided by financing activities.... 34,464 288 799 273 25,519
Net increase (decrease) in cash and
cash equivalents............................. (3,858) (5,038) 2,375 1,804 9,067
Cash flows from operating activities:
Cash and cash equivalents, beginning of
the period................................. 11,969 8,111 3,073 3,073 5,448
-------- -------- -------- -------- --------
Cash and cash equivalents, end of the
period..................................... $ 8,111 $ 3,073 $ 5,448 $ 4,877 $ 14,515
======== ======== ======== ======== ========
Supplemental disclosure of cash flow
information:
Cash paid during the period for interest..... $ 30 $ 20 $ -- $ -- $ --
======== ======== ======== ======== ========
</TABLE>

See accompanying notes.

F-6
<PAGE> 51

SEQUUS PHARMACEUTICALS, INC.

NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1994
(Information for the six months ended
June 30, 1995 and 1994 is unaudited)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

BUSINESS

SEQUUS Pharmaceuticals, Inc. (formerly Liposome Technology, Inc.) is
engaged in the development of proprietary liposome and lipid-based products to
treat life-threatening illnesses. SEQUUS' strategic emphasis is on injectable
pharmaceutical products designed to improve the efficacy and reduce the toxicity
of selected existing and new drugs used to treat cancer and infectious diseases.

INTERIM FINANCIAL INFORMATION

In the opinion of management, the accompanying unaudited condensed
financial statements of SEQUUS contain all adjustments (consisting of only
normal recurring adjustments) necessary to present fairly the financial position
as of June 30, 1995, and the results of operations and cash flows for the six
months ended June 30, 1994 and 1995.

Although the nature of the business is not seasonal, the results of
operations for the interim periods presented are not necessarily indicative of
the results to be expected for the full year.

INVENTORIES

Inventories are stated at the lower of cost (principally first-in,
first-out) or market. The inventory detail at December 31, 1994 and 1993 and
June 30, 1995 is as follows:

<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1994 1995
DECEMBER 31, -------------- ------------
1993
------------ (in thousands) (unaudited)
<S> <C> <C> <C>
Raw materials............................ $176 $268 $188
Work-in-process.......................... 184 201 386
Finished goods........................... 60 89 104
---- ---- ----
$420 $558 $678
==== ==== ====
</TABLE>

EQUIPMENT AND IMPROVEMENTS

<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1994 1995
DECEMBER 31, -------------- -----------
1993
------------ (in thousands) (unaudited)
<S> <C> <C> <C>
Office and laboratory equipment........... $ 5,035 $ 6,308 $ 6,736
Leasehold improvements.................... 3,947 3,953 3,940
------ ------ ------
8,982 10,261 10,676
Accumulated depreciation and
amortization............................ (4,792) (6,453) (7,359)
------ ------ ------
$ 4,190 $ 3,808 $ 3,317
====== ====== ======
</TABLE>

DEPRECIATION AND AMORTIZATION

Equipment is recorded at cost and depreciated on a straight-line basis over
estimated useful lives of three to seven years. Leasehold improvements are
recorded at cost and amortized over the remaining term of the lease, or useful
life of the asset, whichever is less.

F-7
<PAGE> 52

SEQUUS PHARMACEUTICALS, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

CLINICAL COSTS

Clinical costs include costs associated with preclinical testing of
compounds for safety and efficacy, clinical testing and of company-funded
research performed by third parties.

REVENUE RECOGNITION

Product revenue is recognized when shipment is made to the customer.

Payments under research and development agreements are generally received
in advance and are recognized as revenue, ratably, over the periods of time
stated in such agreements, which recognition approximates incurrence of related
costs. Royalties are recognized as revenue based on licensed product sales.
License fees and milestone payments are recognized on terms set forth in the
related license agreements.

For the years ended December 31, 1993 and 1994 and for the six months ended
June 30, 1994 and 1995, one major customer contributed $512,000, $3,300,000,
$584,000 and $830,000 to sales revenues, respectively. This customer also
contributed $5,250,000 to licensing fees in 1993. Another major customer
contributed $125,000, $208,000, $91,000, $40,000 and $38,000 to royalties and
license fees for the years ended December 31, 1992, 1993 and 1994 and the six
months ended June 30, 1994 and 1995, respectively.

LOSS PER SHARE

Loss per share is computed using the weighted average number of common
shares outstanding during each period. Common Stock equivalents, consisting of
outstanding Preferred Stock, stock options and warrants, are excluded from the
computation as their effect is anti-dilutive.

CASH AND CASH EQUIVALENTS AND INVESTMENTS

The Company invests its excess cash principally in U.S. Treasury Bills and
high-grade investment paper. The Company maintains its cash, cash equivalents
and investments in several different instruments with various banks and
brokerage houses. The diversification of risk is consistent with Company policy
to maintain liquidity and ensure the safety of principal.

As of January 1, 1994 the Company adopted Statement of Financial Accounting
Standards No. 115, "Accounting for Certain Investments in Debt and Equity
Securities." The impact of adopting the Statement was not significant to the
Company's results of operations or financial position.

Management determines the appropriate classification of debt securities at
the time of purchase and reevaluates such designation as of each balance sheet
date. During 1994, all investments were classified as available-for-sale
securities and are carried at fair value, with the unrealized gains and losses
reported as a component of accumulated deficit. The amortized cost of debt
securities in this category is adjusted for amortization of premiums and
accretion of discounts to maturity. Such amortization is included in interest.
Realized gains and losses and declines in value judged to be
other-than-temporary on available-for-sale securities are included in interest.
The cost of securities sold is based on the specific identification method.
Interest and dividends on securities classified as available-for-sale are
included in interest.

F-8
<PAGE> 53

SEQUUS PHARMACEUTICALS, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

The following is a summary of available-for-sale securities:

<TABLE>
<CAPTION>
GROSS UNREALIZED
---------------- ESTIMATED
COST GAINS LOSSES FAIR VALUE
------ ----- ------ ----------
(in thousands)
<S> <C> <C> <C> <C>
DECEMBER 31, 1994
United States government securities..................... $1,321 $-- $ -- $1,321
United States corporate securities...................... 2,805 -- (13) 2,792
Other debt securities................................... 2,695 1 -- 2,696
--
------ ----- ------
$6,821 $ 1 $(13) $6,809
====== == ===== ======
Short-term investments due in one year or less.......... $6,321 $ 1 $(13) $6,309
Long-term investments due after one year................ 500 -- -- 500
--
------ ----- ------
$6,821 $ 1 $(13) $6,809
====== == ===== ======
JUNE 30, 1995 (UNAUDITED)
United States government securities..................... $4,450 $ 1 $ -- $4,451
United States corporate securities...................... 1,499 -- -- 1,499
Foreign corporate debt securities....................... 1,000 -- -- 1,000
--
------ ----- ------
$6,949 $ 1 $ -- $6,950
====== == ===== ======
</TABLE>

The gross realized gains and losses on sales of available-for-sale
securities have been immaterial.

FINANCIAL STATEMENT PROVISION

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

2. DISTRIBUTION AGREEMENT

In August 1993, the Company signed a distribution agreement with Zeneca
Limited under which Zeneca has the exclusive right to market and sell SEQUUS'
proprietary AMPHOTEC product in most European countries. Under the terms of the
agreement, the Company received and recognized in the third quarter of 1993 a
signing fee and a milestone payment in the amount of $5.3 million which was
earned by the Company's receipt of a product license authorizing the sale of
AMPHOTEC in the United Kingdom. The Company will manufacture and sell AMPHOTEC
to Zeneca at a price which, subject to a minimum, will reflect the price(s)
achieved by Zeneca in the market. The Company will also receive additional
milestone payments upon receipt of product licenses in certain other European
countries and upon the achievement of certain cumulative sales totals.

3. COMMITMENTS

The Company leases its facility and certain equipment under operating
leases. Rent expense under these leases was $919,000, $886,000, $856,000,
$449,000 and $534,000 for the years ended December 31, 1992,

F-9
<PAGE> 54

SEQUUS PHARMACEUTICALS, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

1993 and 1994 and the six months ended June 30, 1994 and 1995, respectively.
Rent expense is being recognized on a straight-line basis over the lease term of
the facility lease which has scheduled rental payment increases.

Minimum annual rental commitments under all operating leases at December
31, 1994, total $979,000 in 1995, $325,000 in 1996, and $5,000 in 1997.

4. STOCKHOLDERS' EQUITY

Common Stock

At December 31, 1994, warrants to purchase 1.25 million shares of Common
Stock at $4.25 per share were outstanding. At June 30, 1995, warrants to
purchase 3.16 million shares of Common Stock at prices ranging from $4.25 to
$7.43 per share remain outstanding. All unexercised warrants will expire on
various dates ranging from March 1997 through May 1999.

Stock Purchase Plan and Stock Option Plans

In fiscal 1988, the 1987 Employee Stock Option Plan, and the 1987
Consultant Stock Option Plan were adopted. Under the 1987 Employee Stock Option
Plan, as amended, the Company is authorized to grant stock options to purchase
up to 3.35 million shares of Common Stock. Options granted under this plan will
be either non-qualified options or incentive stock options and are immediately
exercisable. The stock delivered upon exercise of any option under this plan may
be subject to a right of repurchase (subject to determination by the Board of
Directors) upon employee termination; these rights of repurchase generally
expire over a period of three to five years. The non-qualified options are
exercisable at a price not less than 85 percent of fair market value at the date
of grant. The incentive stock options are exercisable at a price not less than
fair market value on the date of grant. Options, if unexercised, terminate
generally after ten years following the date of grant and for a period ranging
from three to seven months after termination of employment.

Under the 1987 Consultant Stock Option Plan, as amended, the Company is
authorized to grant non-qualified options for up to 100,000 shares of Common
Stock. The terms and conditions are identical to those for the non-qualified
options issued under the 1987 Employee Stock Option Plan. These options may
terminate in a period ranging from three to seven months after the optionee
ceases to be a consultant of the Company.

Under the 1990 Director Stock Option Plan adopted in January 1990, as
amended, the Company is authorized to grant options for up to 350,000 shares of
Common Stock. Each eligible director is entitled to receive an initial grant to
purchase 25,000 shares; and, on the first anniversary of the initial grant, each
eligible director then in office is entitled to receive a grant to purchase
12,500 shares. Upon each annual grant date, an option to purchase an additional
5,000 shares of Common Stock will be granted. The maximum number of shares each
eligible director is entitled to receive is 50,000 shares. The options generally
can be immediately exercised and are not subject to any repurchase rights. The
exercise price will not be less than the fair market value on the date of grant.
Options, if unexercised, terminate 10 years from the date of grant and one year
following termination of directorship.

The Company has a 401(k) Plan under which it may make employer
contributions at the discretion of the Board of Directors, but no such
contributions are required. The Board also has the discretion to determine the
amount of any employer contribution. The Company has reserved 150,000 shares for
issuance under the Plan. For the years ended December 31, 1992, 1993, and 1994
the Company contributed Common Stock to the Plan valued at approximately
$26,000, $40,000 and $124,000, respectively.

In June 1993, the Company offered all active employees (non-officers)
holding options with exercise prices at $17 per share or more, the opportunity
to return 25% of the options held in exchange for a repricing of

F-10
<PAGE> 55

SEQUUS PHARMACEUTICALS, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

the remaining options at $9.25 per share, the fair market value on the offer
date. In response to the offer 54,000 options were returned by employees and
made available for future grants.

In September 1994, the Company offered all active employees (including
officers) holding options with exercise prices at $9.25 or more, the opportunity
to exchange these options (the Old Options) for new options priced at $6.75 per
share, the fair market value on the offer date (the New Options). The New
Options vest over the three years following the offer date, one-third on the
first anniversary of the offer date, with the remaining two-thirds vesting
ratably over the subsequent two years. However, none of the New Options is
exercisable until the earlier of (i) such date as the Food and Drug
Administration approves the NDA filed by SEQUUS for DOXIL or (ii) September 12,
1999. The New Options are also subject to the same continuous employment and
post-employment expiry conditions of the Old Options issued under the 1987
Employee Stock Option Plan. In response to the offer, 956,000 Old Options were
exchanged by employees.

Activities under the stock option plans are as follows (amounts in
thousands, except per share information):

<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
-------------------------------------------------
OPTIONS AVAILABLE NUMBER OF PRICE
FOR GRANT SHARES PER SHARE
----------------- --------- -------------
<S> <C> <C> <C>
Balance, December 31, 1991......................... 746 1,662 $1.12-$18.88
Additional authorized.............................. 195 --
Granted............................................ (638) 638 $7.75-$20.00
Cancellations...................................... 25 (25) $1.12-$18.88
Exercised.......................................... -- (149) $1.12-$ 5.25
------ ------
Balance, December 31, 1992......................... 328 2,126 $1.12-$20.00
Additional authorized.............................. 1,200 --
Granted............................................ (1,018) 1,018 $6.50-$12.50
Cancellations...................................... 294 (294) $1.12-$18.88
Exercised.......................................... -- (91) $1.12-$ 9.25
------ ------
Balance, December 31, 1993......................... 804 2,759 $1.12-$20.00
Granted............................................ (1,599) 1,599 $6.50-$ 9.25
Cancellations...................................... 1,185 (1,185) $1.88-$20.00
Exercised.......................................... -- (161) $1.12-$ 8.88
------ ------
Balance, December 31, 1994......................... 390 3,012 $1.12-$18.88
====== ======
Additional authorized (unaudited).................. 2,150 --
Granted (unaudited)................................ (1,060) 1,060 $6.25-$ 8.56
Cancellations (unaudited).......................... 138 (138) $6.75-$12.50
Exercised (unaudited).............................. -- (5) $1.12-$ 1.88
------ ------
Balance, June 30, 1995 (unaudited)................. 1,618 3,929 $1.12-$18.88
====== ======
</TABLE>

No shares purchased under the option plans are subject to repurchase at
December 31, 1994.

The Company's Employee Stock Purchase Plan is administered by the Board of
Directors and the Company has reserved for sale under the plan 150,000 shares of
Common Stock. Employees who own less than 5% of the total outstanding Common
Stock of the Company are eligible to participate in the plan, which provides for
the option to purchase a defined number of shares at 85% of the lower of the
fair market value of the stock at the enrollment or purchase date. At December
31, 1994, approximately 80,000 shares of Common Stock had been issued under this
plan.

F-11
<PAGE> 56

SEQUUS PHARMACEUTICALS, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

As of December 31, 1994, the total number of shares of Common Stock
reserved for future issuance under the Company's stock purchase plans, stock
option plans, warrants outstanding and its 401(k) Plan is 4.8 million.

5. INCOME TAXES

The Company accounts for income taxes under Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes."

As of December 31, 1994, the Company has Federal and California net
operating loss carryforwards ("NOLs") of approximately $65,000,000 and
$8,000,000, respectively. The Company also has Federal and California research
and development tax credit carryforwards of approximately $2,500,000 and
$1,500,000, respectively. The net operating loss credit carryforwards will
expire at various dates beginning in 1995 through 2009, if not utilized. Of the
$65,000,000 Federal net operating loss carryforward, approximately $64,000,000
will begin to expire after the year 1999, if not utilized.

<TABLE>
<CAPTION>
YEAR(S) ENDING FEDERAL NOL
DECEMBER 31 EXPIRING
------------------------------------------------ -----------
<S> <C>
1995-1999....................................... $ 1,000,000
2000 and later.................................. 64,000,000
-------------
-
Total......................................... $65,000,000
==============
</TABLE>

Utilization of the net operating losses and credits may be subject to a
substantial annual limitation due to the ownership change limitations provided
by the Internal Revenue Code of 1986 and similar California provisions. The
annual limitation may result in the expiration of net operating losses and
credits before utilization.

The Federal net operating loss carryforward differs from the accumulated
deficit principally due to timing differences in the recognition of certain
revenue and expense items for financial and federal tax reporting purposes,
consisting primarily of capitalized research and development costs and stock
option deductions.

Significant components of the Company's current deferred tax assets for
federal and state income taxes (amounts in thousands) are as follows:

<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1993 1994
-------- --------
<S> <C> <C>
Capitalized Research and Development........................... $ 10,170 $ 11,890
Net Operating Loss Carryforwards............................... 13,900 23,050
Research Credits............................................... 2,360 3,630
Other -- Net................................................... 640 1,250
Valuation Allowance............................................ (27,070) (39,820)
-------- --------
Total................................................ $ -- $ --
======== ========
</TABLE>

The valuation allowance increased by approximately $4,180,000 in 1992,
$8,743,000 in 1993 and $12,750,000 in 1994 due to the Company's continuing
operating losses. Approximately $1,600,000 of the valuation allowance for
deferred tax assets relates to benefits of stock option deductions which, when
recognized, will be allocated directly to contributed capital.

6. LEGAL PROCEEDINGS

On January 19, 1993, SEQUUS announced the issuance of United States Patent
No. 5,180,713 (the " '713 Patent") claiming a method of preparing a stable
liposome-entrapped amphotericin B drug product.

F-12
<PAGE> 57

SEQUUS PHARMACEUTICALS, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

The Company is not using the newly patented method to produce its AMPHOTEC
product, which is not a liposome. On January 19, 1993, NeXstar Pharmaceuticals,
Inc. filed an action in United States District court (the "Court") for a
declaratory judgment that the '713 patent is invalid, unenforceable and not
infringed by NeXstar. The Company filed a counterclaim alleging that NeXstar has
been infringing the patent and asking that the '713 patent be held valid and
enforceable. On December 3, 1993, NeXstar filed a motion for summary judgment,
arguing, inter alia, that a key claim of the '713 patent should be interpreted
narrowly. On January 25, 1994, the Court issued a Memorandum Opinion and Order
denying NeXstar's motion for summary judgment but indicating that the Court
agreed with NeXstar's narrow interpretation of the '713 claim. SEQUUS, believing
this interpretation to be erroneous, and wishing to appeal the decision as soon
as possible, entered into an agreement with NeXstar for the immediate entry of a
stipulated judgment in favor of NeXstar, which SEQUUS could then appeal. In
November 1994, following a hearing in the Court of Appeal for the Federal
Circuit, the Company's appeal was denied.

On February 26, 1993, NeXstar filed an action in the Patents County Court
in the United Kingdom (the "United Kingdom Patent Court") alleging that the
Company's DOXIL product infringes European Patent No. 0,179,444 (the " '444
Patent"), which claims the use of certain liposomes encapsulating a
chemotherapeutic agent for intravenous targeting to tumors. The action asked the
United Kingdom Patent Court to restrain the Company from infringing the '444
Patent and to order the Company to pay NeXstar an unspecified amount for alleged
damages and for court costs. On June 21, 1993, SEQUUS filed its answer denying
NeXstar's claim of infringement and asserting a counterclaim asking that the
'444 Patent be held invalid. In January 1995, the parties agreed to drop their
respective claims against each other, and the United Kingdom Patent Court
entered a judgment dismissing all claims in the case with prejudice.

From time to time, the Company is notified of potential claims or
litigation against it arising out of the ordinary course of business. It is the
view of management, after consultation with counsel, that the ultimate
resolution of all pending claims should not have a materially adverse effect on
the financial position of the Company.

7. SUBSEQUENT EVENTS

On March 31, 1995, the Company raised $10.9 million (net proceeds $10.1
million) of equity capital with the sale of 436,000 shares of Series A
Convertible Reset Preferred Stock ("Convertible Reset Preferred Stock") together
with warrants to purchase 734,000 shares of Common Stock. Each share of
Convertible Reset Preferred Stock is convertible into Common Stock at an initial
conversion price of $7.425 per share of Common Stock, representing a 10% premium
to the closing price of the Common Stock on March 24, 1995, the date the
offering was priced. The Convertible Reset Preferred Stock will automatically
convert into Common Stock at the option of the Company, in whole or in part, in
the event that the Common Stock has closed for 20 out of 30 consecutive trading
days at a price in excess of approximately $13.00 per share. This condition for
automatic conversion was met as of September 12, 1995, and the Company may elect
to convert the Convertible Reset Preferred Stock at any time. In the event that
the Convertible Reset Preferred Stock remains outstanding on March 25, 1996, the
conversion price will be reset to the lesser of (i) the initial conversion price
and (ii) the lowest 30-day consecutive average closing market price of the
Common Stock in the preceding 12-month period, subject to a floor of $3.713 per
share. In the event of any liquidation, dissolution or winding up of the
Company, the holders of the outstanding shares of Convertible Reset Preferred
Stock are entitled to receive, prior and in preference to any distribution of
any assets or surplus funds of the Company to the holders of Common Stock, an
amount equal to $25.00 per outstanding share of Convertible Reset Preferred
Stock. The warrants have a three-year life and are exercisable at a fixed rate
of $7.425 per share of Common Stock.

F-13
<PAGE> 58

SEQUUS PHARMACEUTICALS, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

On April 13, 1995, the Company raised an additional $1.1 million (net
proceeds of $900,000) of equity capital with the sale of 44,000 shares of
Convertible Reset Preferred Stock together with warrants to purchase 74,320
shares of Common Stock. The additional shares of Convertible Reset Preferred
Stock were issued under the same terms as those described above.

On May 25, 1995, the Company raised $15 million (net proceeds $14.2
million) through a private placement of Units. Each Unit consisted of one share
of Common Stock and a warrant to purchase one-half share of Common Stock at an
exercise price per share of $7.4328. The warrants are only exercisable if the
Common Stock portion of the Unit is held for one year by the initial Unit
purchaser. The price per Unit was $6.7571. Under the terms of this financing,
the investors also receive the first right to negotiate with the Company to
participate in the commercial development of the Company's anticancer product,
DOXIL, in Brunei, China, Hong Kong, Indonesia, Malaysia, Singapore, Taiwan and
Thailand.

In June 1995, the Company's Board of Directors authorized an additional
2,150,000 shares of Common Stock be reserved for the Company's 1987 Employee
Stock Option Plan, 1990 Director Stock Option Plan and the 1987 Consultant Stock
Option Plan and an additional 100,000 shares of Common Stock for the Company's
Employee Stock Purchase Plan, each subject to stockholder approval. On September
12, 1995, stockholders approved the reservation of these additional shares. Also
on September 12, 1995, the Company's stockholders approved an increase in the
number of authorized shares of Common Stock from 35,000,000 to 45,000,000.

F-14
<PAGE> 59

LOGO

Debt Securities
Common Stock
Preferred Stock
Warrants to Purchase Common Stock
---------------------

SEQUUS Pharmaceuticals, Inc., formerly Liposome Technology, Inc. (the
"Company"), directly or through agents, dealers, or underwriters designated from
time to time, may offer, issue and sell, together or separately, up to
$50,000,000 in the aggregate of (a) secured or unsecured debt securities (the
"Debt Securities") of the Company, which may be either senior debt securities
(the "Senior Debt Securities"), senior subordinated debt securities (the "Senior
Subordinated Debt Securities") or subordinated debt securities (the
"Subordinated Debt Securities"), (b) shares of preferred stock of the Company,
par value $0.01 per share (the "Preferred Stock"), in one or more series, (c)
shares of common stock of the Company, par value $.0001 per share (the "Common
Stock"), and (d) warrants to purchase Common Stock (the "Warrants"), or any
combination of the foregoing, either individually or as units consisting of one
or more of the foregoing, each on terms to be determined at the time of sale.
The Debt Securities may be issued as exchangeable and/or convertible Debt
Securities exchangeable for or convertible into shares of Common Stock or
Preferred Stock. The Preferred Stock may also be exchangeable for and/or
convertible into shares of Common Stock or any other series of Preferred Stock.
The Debt Securities, the Preferred Stock, the Common Stock and the Warrants are
collectively referred to herein as the "Securities." When a particular series of
Securities is offered, a supplement to this Prospectus (each a "Prospectus
Supplement") will be delivered with this Prospectus. The Prospectus Supplement
will set forth the terms of the offering and sale of the offered securities.

Except as described more fully herein or as set forth in the Prospectus
Supplement relating to any offered Debt Securities, the Indenture will not
provide holders of Debt Securities protection in the event of a highly-leveraged
transaction, reorganization, restructuring, merger or similar transaction
involving the Company which could adversely affect holders of Debt Securities.
See "Description of Debt Securities -- Consolidation, Merger and Sale of
Assets."

The Company's Common Stock is traded over-the-counter on the Nasdaq
National Market under the symbol SEQU. On May 9, 1995, the last reported sale
price of the Common Stock as reported by Nasdaq was $6.63 per share. The Company
has not yet determined whether any of the Debt Securities, Preferred Stock or
Warrants offered hereby will be listed on any exchange or over-the-counter
market. If the Company decides to seek listing of any such Securities, the
Prospectus Supplement relating thereto will disclose such exchange or market.
---------------------

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A FEDERAL
OFFENSE.
---------------------

The Securities may be sold directly by the Company, through agents
designated from time to time or to or through underwriters or dealers. The
Company reserves the sole right to accept, and together with its time, to reject
in whole or in part any proposed purchase of Securities to be made directly or
through agents. See "Plan of Distribution." If any such agents or underwriters
are involved in the sale of any Securities, the names of such agents or
underwriters and any applicable fees, commissions or discounts will be set forth
in the applicable Prospectus Supplement.

This Prospectus may not be used to consummate sales of Securities unless
accompanied by the applicable Prospectus Supplement.

The date of this Prospectus is June 26, 1995.
<PAGE> 60

IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE SECURITIES AT
LEVELS ABOVE THOSE WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH
STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.

IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS AND SELLING GROUP
MEMBERS MAY ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS IN THE COMMON STOCK ON
NASDAQ IN ACCORDANCE WITH RULE 10B-6A UNDER THE SECURITIES ACT OF 1934. SEE
"PLAN OF DISTRIBUTION."

AVAILABLE INFORMATION

The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form S-3 (together with all amendments
and exhibits thereto, the "Registration Statement") under the Securities Act of
1933, as amended (the "Securities Act"), with respect to the Securities offered
hereby. This Prospectus does not contain all of the information set forth in the
Registration Statement, part of which has been omitted in accordance with the
rules and regulations of the Commission. For further information about the
Company and the Securities offered hereby, reference is made to the Registration
Statement, including the exhibits filed as a part thereof and otherwise
incorporated therein. Statements made in this Prospectus as to the contents of
any document referred to herein are not necessarily complete, and in each
instance reference is made to such document for a more complete description, and
each such statement is qualified in its entirety by such reference.

The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and, in accordance
therewith, files periodic reports, proxy statements and other information with
the Commission. The Registration Statement, including the exhibits thereto, as
well as such reports and other information filed by the Company with the
Commission, can be inspected, without charge, and copied at the public reference
facilities maintained by the Commission at 450 Fifth Street, N.W., Room 1024,
Washington D.C., 20549; 7 World Trade Center, New York, New York 10048 and 500
West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of such
materials can be obtained from the Public Reference Section of the Commission at
450 Fifth Street, N.W., Washington, D.C. 20549 at prescribed rates. Reports and
other information concerning the Company can also be inspected at the offices of
the National Association of Securities Dealers, Inc., 1735 K Street, N.W.,
Washington, D.C. 20006.

INFORMATION INCORPORATED BY REFERENCE

The following documents filed by the Company with the Commission pursuant
to the Exchange Act are incorporated by reference in this Prospectus: (1) the
Company's Annual Report on Form 10-K for the year ended December 31, 1994, as
amended by the Company's Form 10K/A-1 filed May 1, 1995, and the Company's Form
10-K/A-2 filed May 26, 1995; (2) the Company's Quarterly Report on Form 10-Q for
the quarter ended March 31, 1995; (3) the description of the Company's Common
Stock set forth in its Registration Statement on Form 8-A filed with Commission
on May 8, 1987; and (4) all other documents subsequently filed pursuant to
Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act after the date of this
Prospectus and before the termination of the offering, which shall be deemed to
be a part hereof from the date of filing of such documents.

Any statement contained in a document incorporated or deemed to be
incorporated by reference herein shall be deemed to be modified or superseded
for purposes of this Prospectus to the extent that a statement contained herein
or in any other subsequently filed document which also is incorporated or deemed
to be incorporated by reference herein modifies or supersedes such statement.
Any such statement so modified or superseded shall not be deemed, except as so
modified or superseded, to constitute a part of this Prospectus.

2
<PAGE> 61

The Company will provide without charge to each person, including any
beneficial owner, to whom this Prospectus is delivered, upon request, a copy of
any documents incorporated into this Prospectus by reference (other than
exhibits incorporated by reference into such document). Requests for documents
should be submitted to SEQUUS Pharmaceuticals, Inc., 960 Hamilton Court, Menlo
Park, California 94025, Attention: Secretary (telephone (415) 323-9011). The
information relating to the Company contained in this Prospectus does not
purport to be comprehensive and should be read together with the information
contained in the documents incorporated or deemed to be incorporated by
reference herein.

THE COMPANY

SEQUUS Pharmaceuticals, Inc. ("SEQUUS" or the "Company") is engaged in the
development, manufacture, marketing and sale of proprietary liposome and
lipid-based pharmaceutical products to treat life-threatening illnesses,
including cancer and infectious diseases. Liposome and lipid-based drug delivery
offers the potential to improve drug effectiveness and to reduce the side
effects associated with certain injectable drugs.

Liposomes are microscopic spheres formed of thin but durable lipid
membranes which regulate the passage of an entrapped drug into the bloodstream
over a period of time. The Company's current priority products use proprietary
Stealth(R) liposomes or a colloidal dispersion of lipids to entrap therapeutic
agents.

SEQUUS' near-term product development strategy includes: (i) obtaining
approval from the U.S. Food and Drug Administration of New Drug Applications for
its key products, AmphocilTM1 and DOXIL(R)2, and of Market Authorization
Application dossiers from regulatory agencies in non-U.S. markets; (ii)
completing the full clinical development, registration and expanded labeling of
these products for a range of indications; (iii) exploring additional
applications for DOXIL Technology; and (iv) creating advanced technology for
future products.

Stealth(R) and DOXILTM are trademarks of the Company and are used
throughout this Prospectus to describe, respectively, the Company's proprietary
long-circulating liposomes and Stealth liposome doxorubicin product. The Company
has filed for registration of the AmphocilTM tradename used throughout this
Prospectus to describe the Company's proprietary amphotericin B product.

The Company was founded in 1981 and was reincorporated in Delaware in 1987.
Its principal offices are located at 960 Hamilton Court, Menlo Park, California
94025, and its telephone number is (415) 323-9011.

RISK FACTORS

In addition to the other information in this Prospectus, prospective
purchasers of the Securities offered hereby should carefully consider the risk
factors set forth under the heading "Risk Factors" in "Management's Discussion
and Analysis of Financial Condition, Results of Operations and Risk Factors"
included in the Company's most recently incorporated Annual Report on Form 10-K
or Quarterly Report on Form 10-Q.

- ---------------

1Also called AmphotecTM and ABCD(R).

2Also called DOX-SL(R) and S-Dox.

3
<PAGE> 62

USE OF PROCEEDS

The Company currently has no specific plans for the use of the net proceeds
from the sale of Securities offered hereby. However, the Company currently
anticipates that any such net proceeds would be used for general corporate
purposes, which may include funding clinical, regulatory, marketing and sales
activities with respect to Amphocil and DOXIL, and research and development of
new products. When a particular series of Securities is offered, the Prospectus
Supplement relating thereto will set forth the Company's intended use for the
net proceeds received from the sale of such Securities.

Allocation of the net proceeds and the timing of expenditures will vary
depending on numerous factors, including the progress of the Company's research
and development efforts, the results of clinical trials, the timing of
regulatory approvals and the level of product sales. Pending their application,
the net proceeds will be invested in investment grade, short-term,
interest-bearing securities and deposit accounts.

Companies in the pharmaceutical and biotechnology industries generally
expend significant capital resources in product research and development and
commercialization. The Company believes that its existing cash balances and
interest income earned thereon together with revenues from sales will be
adequate to fund SEQUUS' planned activities through the fourth quarter of 1995.
The Company will need additional financing to support the continuing development
and commercialization of its products, but no assurance can be given that
adequate financing will be available on satisfactory terms, if at all. Such
capital may be raised through the sale of the Securities offered hereby,
additional securities offerings, borrowing, product sales and other available
sources.

4
<PAGE> 63

DILUTION

The net tangible book value of the Company at December 31, 1994, was
approximately $10,629,000, or $0.56 per share of Common Stock. "Net tangible
book value" per share represents the amount of total tangible assets of the
Company reduced by the amount of its total liabilities and divided by the number
of shares of Common Stock outstanding. Assuming the Company issues an aggregate
of $50,000,000 of Common Stock at an assumed public offering price of $6.63 per
share (the last reported sale price of the Common Stock on the Nasdaq National
Market on May 9, 1995), with estimated net proceeds to the Company (after
assumed commissions and expenses) of $46,800,000, the pro forma net tangible
book value of the Company at December 31, 1994, would have been $57,429,000 or
$2.16 per share. This represents an immediate increase in net tangible book
value of $1.60 per share to existing stockholders and an immediate dilution of
$4.47 per share to new investors purchasing Common Stock in such offering, as
illustrated in the following table:

<TABLE>
<S> <C> <C>
Assumed public offering price per share of Common Stock(1)........... $ 6.63
Net tangible book value per share before this offering............. $ 0.56
Increase attributable to new investors............................. 1.60
-----
Pro forma net tangible book value per share of Common Stock after
this offering...................................................... $ 2.16
-----
Dilution to new investors............................................ $ 4.47
=====
</TABLE>

- ---------------
(1) The Company assumed an offering price of $6.63 per share based on the last
reported sale price of the Common Stock on the Nasdaq National Market on May
9, 1995. The assumed offering price of the Common Stock at the time any
Common Stock is offered hereby may differ significantly from the offering
price assumed for purposes of this Prospectus.

The above table does not give effect to the sale by the Company in March
and April 1995 of an aggregate of 480,000 shares of Series A Convertible Reset
Preferred Stock. See "Description of Preferred Stock -- Outstanding Preferred
Stock."

If the Securities offered hereby are Common Stock, the Prospectus
Supplement relating thereto will include a revised dilution table setting forth
any increase in net tangible book value to existing stockholders and any
dilution to new investors based on the proposed number of shares of Common Stock
to be offered and the assumed public offering price at the time of such
offering.

RATIOS OF EARNINGS TO FIXED CHARGES AND EARNINGS TO
COMBINED FIXED CHARGES AND PREFERRED STOCK DIVIDENDS

For the fiscal years ended December 31, 1990, 1991, 1992, 1993 and 1994,
earnings were insufficient to cover fixed charges by $7,471,000, $8,213,000,
$15,393,000, $19,654,000 and $29,185,000, respectively. There was no preferred
stock of the Company issued or outstanding during any of the years in the five
year period ended December 31, 1994. For these reasons, no ratios are provided.

5
<PAGE> 64

GENERAL DESCRIPTION OF SECURITIES

The Company directly or through agents, dealers, or underwriters designated
from time to time, may offer, issue and sell, together or separately, up to
$50,000,000 in the aggregate of (a) secured or unsecured debt securities (the
"Debt Securities") of the Company, which may be either senior debt securities
(the "Senior Debt Securities"), senior subordinated debt securities (the "Senior
Subordinated Debt Securities") or subordinated debt securities (the
"Subordinated Debt Securities"), (b) shares of preferred stock of the Company,
par value $0.01 per share (the "Preferred Stock"), in one or more series, (c)
shares of common stock of the Company, par value $0.0001 per share (the "Common
Stock"), and (d) warrants to purchase Common Stock (the "Warrants"), or any
combination of the foregoing, either individually or as units consisting of one
or more of the foregoing, each on terms to be determined at the time of sale.
The Debt Securities may be issued as exchangeable and/or convertible Debt
Securities exchangeable for or convertible into shares of Common Stock or
Preferred Stock. The Preferred Stock may also be exchangeable for and/or
convertible into shares of Common Stock or another series of Preferred Stock.
The Debt Securities, the Preferred Stock, the Common Stock and the Warrants are
collectively referred to herein as the "Securities." When a particular series of
Securities is offered, a supplement to this Prospectus (each a "Prospectus
Supplement") will be delivered with this Prospectus. The Prospectus Supplement
will set forth the terms of the offering and sale of the offered Securities.

DESCRIPTION OF DEBT SECURITIES

The following description sets forth certain general terms and provisions
of the Debt Securities to which any Prospectus Supplement may relate. The
particular terms of the Debt Securities offered by any Prospectus Supplement and
the extent, if any, to which such general provisions do not apply to the Debt
Securities so offered will be described in the Prospectus Supplement relating to
such Debt Securities.

Debt Securities may be issued from time to time in series under an
indenture, and one or more indentures supplemental thereto (collectively, the
"Indenture"), between the Company and a trustee to be identified in the
applicable Prospectus Supplement (the "Trustee"). The terms of the Debt
Securities will include those stated in the Indenture and those made part of the
Indenture by reference to the Trust Indenture Act of 1939 (the "TIA") as in
effect on the date of the Indenture. The Debt Securities will be subject to all
such terms, and potential investors of the Debt Securities are referred to the
Indenture and the TIA for a statement thereof. The following summary of certain
provisions of the Indenture does not purport to be complete and is qualified in
its entirety by reference to the Indenture, including the definitions therein of
certain terms used below. A copy of the proposed form of Indenture has been
filed as an exhibit to the Registration Statement of which this Prospectus is a
part. As used under this caption, unless the context otherwise requires, Offered
Debt Securities shall mean the Debt Securities offered by this Prospectus and
the accompanying Prospectus Supplement.

GENERAL

The Indenture will provide for the issuance of Debt Securities in series
and will not limit the principal amount of Debt Securities which may be issued
thereunder. In addition, except as may be provided in the Prospectus Supplement
relating to such Debt Securities, the Indenture will not limit the amount of
additional indebtedness the Company may incur.

The applicable Prospectus Supplement or Prospectus Supplements will
describe the following terms of the series of Offered Debt Securities in respect
of which this Prospectus is being delivered: (1) the title of the Offered Debt
Securities; (2) whether the Offered Debt Securities are Senior Debt Securities,
Senior Subordinated Debt Securities or Subordinated Debt Securities or any
combination thereof; (3) any limit upon the aggregate principal amount of the
Offered Debt Securities; (4) the date or dates on which the principal of the
Offered Debt Securities is payable; (5) the rate or rates at which the Offered
Debt Securities will bear interest, if any, or the manner in which such rate or
rates are determined; (6) the date or dates from which any such interest will
accrue, the interest payment dates on which any such interest on the Offered
Debt Securities will be payable and the record dates for the determination of
holders to whom interest is payable; (7) the place

6
<PAGE> 65

or places where the principal of and any interest on the Offered Debt Securities
will be payable; (8) the obligation of the Company, if any, to redeem, purchase
or repay the Offered Debt Securities in whole or in part pursuant to any sinking
fund or analogous provisions or at the option of the holders and the price or
prices at which and the period and periods within which and the terms and
conditions upon which the Offered Debt Securities shall be redeemed, purchased
or repaid pursuant to such obligation; (9) the denominations in which any
Offered Debt Securities will be issuable, if other than denominations of U.S.
$1,000 and any integral multiple thereof; (10) if other than the principal
amount thereof, the portion of the principal amount of the Offered Debt
Securities of the series which will be payable upon declaration of the
acceleration of the maturity thereof; (11) any addition to or change in the
covenants which apply to the Offered Debt Securities; (12) any Events of Default
with respect to the Offered Debt Securities, if not otherwise set forth under
"Events of Default"; (13) whether the Offered Debt Securities will be issued in
whole or in part in global form; the terms and conditions, if any, upon which
such global Offered Debt Securities may be exchanged in whole or in part for
other individual securities, and the depositary for the Offered Debt Securities;
(14) the terms and conditions, if any, upon which the Offered Debt Securities
shall be exchanged for or converted into other securities or property; (15) the
nature and terms of the security for any secured Offered Debt Securities; and
(16) any other terms of the Offered Debt Securities which terms shall not be
inconsistent with the provisions of the Indenture.

Debt Securities may be issued at a discount from their principal amount
("Original Issue Discount Securities"). Federal income tax considerations and
other special considerations applicable to any such Original Issue Discount
Securities will be described in the applicable Prospectus Supplement.

Debt Securities may be issued in bearer form, with or without coupons.
Federal income tax considerations and other special considerations applicable to
bearer securities will be described in the applicable Prospectus Supplement.

Unless otherwise indicated in this Prospectus or a Prospectus Supplement,
the Debt Securities will not have the benefit of any covenants that limit or
restrict the Company's business or operations, the pledging of the Company's
assets or the incurrence of indebtedness by the Company.

STATUS OF DEBT SECURITIES

The Senior Debt Securities will be unsubordinated obligations of the
Company and shall be senior in rank to all such other Debt (as defined below) of
the Company hereafter incurred to the extent the terms of such Debt expressly
provide that the Debt is subordinate to the Senior Debt Securities. The Senior
Debt Securities will rank on a parity with all other unsecured and
unsubordinated indebtedness of the Company.

The obligations of the Company pursuant to Senior Subordinated Debt
Securities will be subordinate in right of payment, to the extent and in the
manner set forth in the Indenture, to all Senior Indebtedness of the Company.
Except to the extent set forth in the Prospectus Supplement, "Senior
Indebtedness" of the Company is defined to mean the principal of, and premium,
if any, and any interest (including interest accruing subsequent to the
commencement of any proceeding for the bankruptcy or reorganization of the
Company under any applicable bankruptcy, insolvency or similar law now or
hereafter in effect) on (a) all indebtedness of the Company whether heretofore
or hereafter incurred (i) for borrowed money or (ii) in connection with the
acquisition by the Company or a subsidiary of assets other than in the ordinary
course of business, for the payment of which the Company is liable directly or
indirectly by guarantee, letter of credit, obligation to purchase or acquire or
otherwise, or the payment of which is secured by a lien, charge or encumbrance
on assets acquired by the Company, (b) amendments, modifications, renewals,
extensions and deferrals of any such indebtedness, and (c) any indebtedness
issued in exchange for any such indebtedness (clauses (a) through (c) hereof
being collectively referred to herein as "Debt"); provided, however, that the
following will not constitute Senior Indebtedness with respect to Senior
Subordinated Debt Securities: (1) any Debt as to which, in the instrument
evidencing such Debt or pursuant to which such Debt was issued, it is expressly
provided that such Debt is subordinate in right of payment to all Debt of the
Company not expressly subordinated to such Debt; (2) any Debt which by its terms
refers explicitly to the Senior Subordinated Debt Securities and states that
such Debt shall not be senior in right of payment; and (3) any Debt of the
Company

7
<PAGE> 66

in respect of the Senior Subordinated Debt Securities or any Subordinated Debt
Securities. The Company will not issue Debt which is subordinated in right of
payment to any other Debt of the Company and which is not expressly made pari
passu with, or subordinate and junior in right of payment to, the Senior
Subordinated Debt Securities.

The obligations of the Company pursuant to Subordinated Debt Securities
will be subordinate in right of payment to all Senior Indebtedness of the
Company and to any Senior Subordinated Debt Securities; provided, however, that
the following will not constitute Senior Indebtedness with respect to
Subordinated Debt Securities: (1) any Debt as to which, in the instrument
evidencing such Debt or pursuant to which such Debt was issued, it is expressly
provided that such Debt is subordinate in right of payment to all Debt of the
Company not expressly subordinated to such Debt; and (2) any Debt of the Company
in respect of Subordinated Debt Securities and any Debt which by its terms
refers explicitly to the Subordinated Debt Securities and states that such Debt
shall not be senior in right of payment.

No payment pursuant to the Senior Subordinated Debt Securities or the
Subordinated Debt Securities, as the case may be, may be made unless all amounts
of principal, premium, if any, and interest then due on all applicable Senior
Indebtedness of the Company shall have been paid in full or if there shall have
occurred and be continuing beyond any applicable grace period a default in any
payment with respect to any such Senior Indebtedness, or if there shall have
occurred any event of default with respect to any such Senior Indebtedness
permitting the holders thereof to accelerate the maturity thereof, or if any
judicial proceeding shall be pending with respect to any such default. However,
the Company may make payments pursuant to the Senior Subordinated Debt
Securities or the Subordinated Debt Securities, as the case may be, if a default
in payment or an event of default with respect to the Senior Indebtedness
permitting the holder thereof to accelerate the maturity thereof has occurred
and is continuing and judicial proceedings with respect thereto have not been
commenced within a certain number of days of such default in payment or event of
default. Upon any distribution of the assets of the Company upon dissolution,
winding-up, liquidation or reorganization, the holders of Senior Indebtedness of
the Company will be entitled to receive payment in full of principal, premium,
if any, and interest (including interest accruing subsequent to the commencement
of any proceeding for the bankruptcy or reorganization of the Company under any
applicable bankruptcy, insolvency or similar law now or hereafter in effect)
before any payment is made on the Senior Subordinated Debt Securities or
Subordinated Debt Securities, as applicable. By reason of such subordination, in
the event of insolvency of the Company, holders of Senior Indebtedness of the
Company may receive more, ratably, and holders of the Senior Subordinated Debt
Securities or Subordinated Debt Securities, as applicable, having a claim
pursuant to the Senior Subordinated Debt Securities or Subordinated Debt
Securities, as applicable, may receive less, ratably, than the other creditors
of the Company. Such subordination will not prevent the occurrence of any Event
of Default in respect of the Senior Subordinated Debt Securities or the
Subordinated Debt Securities.

CONVERSION RIGHTS

The terms, if any, on which Debt Securities of a series may be exchanged
for or converted into shares of Common Stock or Preferred Stock will be set
forth in the Prospectus Supplement relating thereto.

EXCHANGE, REGISTRATION, TRANSFER AND PAYMENT

Unless otherwise specified in the applicable Prospectus Supplement, payment
of principal, premium, if any, and any interest on the Debt Securities will be
payable, and the exchange of and the transfer of Debt Securities will be
registerable, at the office of the Trustee or at any other office or agency
maintained by the Company for such purpose subject to the limitations of the
Indenture. Unless otherwise indicated in the applicable Prospectus Supplement,
the Debt Securities will be issued in denominations of U.S. $1,000 or integral
multiples thereof. No service charge will be made for any registration of
transfer or exchange of the Debt Securities, but the Company may require payment
of a sum sufficient to cover any tax or other governmental charge imposed in
connection therewith.

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BOOK-ENTRY DEBT SECURITIES

The Debt Securities of a series may be issued in the form of one or more
Global Securities that will be deposited with a Depositary or its nominee
identified in the applicable Prospectus Supplement. In such a case, one or more
Global Securities will be issued in a denomination or aggregate denominations
equal to the portion of the aggregate principal amount of Outstanding Debt
Securities of the series to be represented by such Global Security or
Securities. Each Global Security will be deposited with such Depositary or
nominee or a custodian therefor and will bear a legend regarding the
restrictions on exchanges and registration of transfer thereof referred to below
and any such other matters as may be provided for pursuant to the applicable
Indenture.

Notwithstanding any provision of the Indenture or any Debt Security
described herein, no Global Security may be transferred to, or registered or
exchanged for Debt Securities registered in the name of, any Person other than
the Depositary for such Global Security or any nominee of such Depositary, and
no such transfer may be registered, unless (i) the Depositary has notified the
Company that it is unwilling or unable to continue as Depositary for such Global
Security or has ceased to be qualified to act as such as required by the
applicable Indenture, (ii) the Company executes and delivers to the Trustee an
order that such Global Security shall be so transferable, registrable and
exchangeable, and such transfers shall be registrable, or (iii) there shall
exist such circumstances, if any, as may be described in the applicable
Prospectus Supplement. All Debt Securities issued in exchange for a Global
Security or any portion thereof will be registered in such names as the
Depositary may direct.

The specific terms of the depositary arrangement with respect to any
portion of a series of Debt Securities to be represented by a Global Security
will be described in the applicable Prospectus Supplement. The Company expects
that the following provisions will apply to depositary arrangements.

Unless otherwise specified in the applicable Prospectus Supplement, Debt
Securities which are to be represented by a Global Security to be deposited with
or on behalf of a Depositary will be represented by a Global Security registered
in the name of such Depositary or its nominee. Upon the issuance of such Global
Security, and the deposit of such Global Security with or on behalf of the
Depositary for such Global Security, the Depositary will credit, on its
book-entry registration and transfer system, the respective principal amounts of
the Debt Securities represented by such Global Security to the accounts of
institutions that have accounts with such Depositary or its nominee
("participants"). The accounts to be credited will be designated by the
underwriters or agents of such Debt Securities or by the Company, if such Debt
Securities are offered and sold directly by the Company. Ownership of beneficial
interests in such Global Security will be limited to participants or Persons
that may hold interests through participants. Ownership of beneficial interests
by participants in such Global Security will be shown on, and the transfer of
that ownership interest will be effected only through, records maintained by the
Depositary or its nominee for such Global Security. Ownership of beneficial
interests in such Global Security by Persons that hold through participants will
be shown on, and the transfer of that ownership interest within such participant
will be effected only through, records maintained by such participant. The laws
of some jurisdictions require that certain purchasers of securities take
physical delivery of such securities in certificated form. The foregoing
limitations and such laws may impair the ability to transfer beneficial
interests in such Global Securities.

So long as the Depositary for a Global Security, or its nominee, is the
registered owner of such Global Security, such Depositary or such nominee, as
the case may be, will be considered the sole owner or holder of the Debt
Securities represented by such Global Security for all purposes under the
Indenture. Unless otherwise specified in the applicable Prospectus Supplement,
owners of beneficial interests in such Global Security will not be entitled to
have Debt Securities of the series represented by such Global Security
registered in their names, will not receive or be entitled to receive physical
delivery of Debt Securities of such series in certified form and will not be
considered the Holders thereof for any purposes under the Indenture.
Accordingly, each person owning a beneficial interest in such Global Security
must rely on the procedures of the Depositary and, if such person is not a
participant, on the procedures of the participant through which such person owns
its interest, to exercise any rights of a Holder under the Indenture.

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If the Company requests any action of holders or an owner of a beneficial
interest in such Global Security desires to give any notice or take any action a
holder is entitled to give or take under the Indenture or the TIA, the
Depositary will authorize the participants to give such notice or take such
action, and participants will authorize beneficial owners owning through such
participants to give such notice or take such action or would otherwise act upon
the instructions of beneficial owners owning through them.

Notwithstanding any other provisions to the contrary in the Indenture, the
rights of the beneficial owners of the Debt Securities to receive payment of the
principal and premium, if any, of and interest on such Debt Securities, on or
after the respective due dates expressed in such Debt Securities, or to
institute suit for the enforcement of any such payment on or after such
respective dates, shall not be impaired or affected without the consent of the
beneficial owners.

Principal of and any interest on a Global Security will be payable in the
manner described in the applicable Prospectus Supplement.

CONSOLIDATION, MERGER AND SALE OF ASSETS

The Company, without the consent of any holders of outstanding Debt
Securities, may not consolidate with or merge into, or sell, assign, transfer,
lease, convey or otherwise dispose of all or substantially all of its property
or assets to any person unless (a) the Company is the surviving corporation or
the entity or the person formed by or surviving any such consolidation or merger
(if other than the Company) or to which such sale, assignment, transfer, lease,
conveyance or other disposition shall have been made is a corporation organized
and existing under the laws of the United States, any state thereof or the
District of Columbia; (b) the entity or person formed by or surviving any such
consolidation or merger (if other than the Company) or the entity or person to
which such sale, assignment, transfer, lease, conveyance or other disposition
shall have been made assumes all the obligations of the Company under the Debt
Securities and the Indenture; and (c) immediately prior to and after the
transaction no Default or Event of Default exists.

COVENANTS OF THE COMPANY

The applicable Prospectus Supplement will describe any material covenants
in respect of a series of Offered Debt Securities. Other than the covenants of
the Company included in the Indenture as described above or as described in the
applicable Prospectus Supplement, Indenture will not provide holders of Debt
Securities protection in the event of a highly leveraged transaction
reorganization, restructuring, merger or similar transaction involving the
Company which could adversely affect holders of Debt Securities.

EVENTS OF DEFAULT

Unless otherwise specified in the applicable Prospectus Supplement, the
following will constitute Events of Default under the Indenture with respect to
Debt Securities of any series: (a) failure to pay principal of any Debt Security
of that series when due and payable at maturity, upon redemption or otherwise;
(b) failure to pay any interest on any Debt Security of that series when due,
and the Default continues for 30 days; (c) an Event of Default, as defined in
the Debt Securities of that series, occurs and is continuing, or the Company
fails to comply with any of its other agreements in the Debt Securities of that
series or in the Indenture with respect to that series and the Default continues
for the period and after the notice provided therein (and described below); and
(d) certain events of bankruptcy, insolvency or reorganization. A Default under
clause (c) above is not an Event of Default with respect to a particular series
of Securities until the Trustee or the Holders of at least 25% in principal
amount of the then outstanding Securities of that series notify the Company of
the Default and the Company does not cure the Default within 30 days after
receipt of the notice. The notice must specify the Default, demand that it be
remedied and state that the notice is a "Notice of Default".

If an Event of Default with respect to Outstanding Debt Securities of any
series (other than an Event or Default relating to certain events of bankruptcy,
insolvency or reorganization) shall occur and be continuing, either the Trustee
or the holders of at least 25% in principal amount of the outstanding Debt
Securities of that series by notice, as provided in the Indenture, may declare
the unpaid principal amount (or, if the Debt

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Securities of that series are Original Issue Discount Securities, such lesser
amount as may be specified in the terms of that series) of, and any accrued and
unpaid interest on, all Debt Securities of that series to be due and payable
immediately. However, at any time after a declaration of acceleration with
respect to Debt Securities of any series has been made, but before a judgment or
decree based on such acceleration has been obtained, the Holders of a majority
in principal amount of the outstanding Debt Securities of that series may, under
certain circumstances, rescind and annul such acceleration. For information as
to waiver of defaults, see "Modification and Waiver" below.

The Indenture will provide that, subject to the duty of the Trustee during
an Event of Default to act with the required standard of care, the Trustee will
be under no obligation to exercise any of its rights or powers under the
applicable Indenture at the request or direction of any of the holders, unless
such holders shall have offered to the Trustee reasonable security or indemnity.
Subject to certain provisions, including those requiring security or
indemnification of the Trustee, the holders of a majority in principal amount of
the outstanding Debt Securities of any series will have the right to direct the
time, method and place of conducting any proceeding for any remedy available to
the Trustee, or exercising any trust or power conferred on the Trustee, with
respect to the Debt Securities of that series.

The Company will be required to furnish to the Trustee under the Indenture
annually a statement as to the performance by the Company of its obligations
under that Indenture and as to any default in such performance.

MODIFICATION AND WAIVER

Subject to certain exceptions, the Company and the Trustee may amend the
Indenture or the Debt Securities with the written consent of the holders of a
majority in principal amount of the then outstanding Debt Securities of each
series affected by the amendment with each series voting as a separate class.
The holders of a majority in principal amount of the then outstanding Debt
Securities of any series may also waive compliance in a particular instance by
the Company with any provision of the Indenture with respect to the Debt
Securities of that series; provided, however, that without the consent of each
holder of Debt Securities affected, an amendment or waiver may not (i) reduce
the percentage of the principal amount of Debt Securities whose holders must
consent to an amendment or waiver; (ii) reduce the rate or change the time for
payment of interest on any Debt Security; (iii) reduce the principal of or
change the fixed maturity of any Debt Security, or alter the redemption
provisions which respect thereto; (iv) make any Debt Security payable in money
other than that stated in the Debt Security; (v) make any change in the
provisions concerning waivers of Default or Events of Default by holders or the
rights of holders to recover the principal of or interest on any Debt Security;
or (vi) waive a default in the payment of the principal of, or interest on, any
Debt Security, except as otherwise provided in the Indenture. The Company and
the Trustee may amend the Indenture or the Debt Securities without notice to or
the consent of any holder of a Debt Security: (i) to cure any ambiguity, defect
or inconsistency; (ii) to comply with the Indenture's provisions with respect to
successor corporations; (iii) to comply with any requirements of the Commission
in connection with the qualification of the Indenture under the TIA; (iv) to
provide for Debt Securities in addition to or in place of certificated Debt
Securities; (v) to add to, change or eliminate any of the provisions of the
Indenture in respect of one of more series of Debt Securities, provided,
however, that any such addition, change or elimination (A) shall neither (1)
apply to any Debt Security of any series created prior to the execution of such
amendment and entitled to the benefit of such provision, nor (2) modify the
rights of a holder of any such Debt Security with respect to such provision, or
(B) shall become effective only when there is no outstanding Debt Security of
any series created prior to such amendment and entitled to the benefit of such
provision; (vi) to make any change that does not adversely affect in any
material respect the interest on any holder; or (vii) to establish additional
series of Debt Securities as permitted by the Indenture.

Subject to certain exceptions, the holders of a majority in principal
amount of the then outstanding Debt Securities of any series, by notice to the
Trustee, may waive an existing Default or Event of Default and its consequences
except a Default or Event of Default in the payment of the principal of or
interest on any Debt Security with respect to the Debt Securities of that
series.

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TERMINATION OF THE COMPANY'S OBLIGATIONS UNDER THE DEBT SECURITIES AND THE
INDENTURE

Except as otherwise described below, the Company may terminate its
obligations under the Debt Securities and the Indenture with respect to the Debt
Securities if:

(a) all previously authenticated and delivered (other than destroyed, lost
or stolen Debt Securities which have been replaced or Debt Securities which are
paid or Debt Securities for whose payment money or securities has theretofore
been held in trust and thereafter repaid to the Company) have been delivered to
the Trustee for cancellation and the Company has paid all sums payable by it
under the Indenture; or

(b) (1) the Debt Securities mature within one year; and

(2) the Company irrevocably deposits in trust with the Trustee during
such one-year period, under the terms of an irrevocable trust agreement in
form and substance satisfactory to the Trustee, as trust funds solely for
the benefit of the holders of Debt Securities for that purpose, money or
U.S. Government Obligations, or a combination thereof, with the U.S.
Government Obligations maturing as to principal and interest in such
amounts and at such times as are sufficient, without consideration of any
reinvestment of such interest, to pay principal of and interest on the Debt
Securities to maturity and to pay all other sums payable by it under the
Indenture; or

(c) (1) the Company irrevocably deposits in trust with the Trustee under
the terms of an irrevocable trust agreement in form and substance
satisfactory to the Trustee, as trust funds solely for the benefit of the
holders of Debt Securities for that purpose, money or U.S. Government
Obligations, or a combination thereof, with the U.S. Government Obligations
maturing as to principal and interest in such amounts and at such times as
are sufficient, without consideration of any reinvestment of such interest,
to pay principal of and interest on the Debt Securities to maturity;

(2) The Company shall have delivered to the Trustee (A) a ruling
directed to the Trustee received from the Internal Revenue Service to the
effect that the holders of the Debt Securities will not recognize income,
gain or loss for federal income tax purposes as a result of the Company's
exercise of its option under this clause (c) and will be subject to federal
income tax on the same amount and in the same manner and at the same times
as would have been the case if such option had not been exercised, of (B)
an opinion of counsel to the same effect as the ruling described in
subclause (A) above accompanied by a ruling to that effect published by the
Internal Revenue Service, unless there has been a change in the applicable
federal income tax law since the date of the Indenture such that a ruling
from the Internal Revenue Service is no longer required;

(3) The Company has paid or caused to be paid all sums then payable by
the Company under the Indenture; and

(4) the Company has delivered to the Trustee an officers' certificate
and an opinion of counsel, each stating that all conditions precedent
provided for in this clause (c) relating to termination of obligations of
the Company have been complied with.

The Company's obligations under sections of the Indenture relating to the
registrar and the paying agent, their obligations, the maintenance of a list of
holders, transfers of Debt Securities, replacement of securities, payment
(together with payment obligations under the Debt Securities), compensation and
indemnity of the Trustee (Section 7.07), replacement of the Trustee and
repayment to the Company of excess money held by the Trustee or the paying Agent
(Section 8.03), shall survive until the Debt Securities are no longer
outstanding. Thereafter, and after any discharge pursuant to clause (a) above,
only the Company's obligations in Sections 7.07 and 8.03 of the Indenture shall
survive. If the ruling from the Internal Revenue Service or opinion of counsel
referred to in clause (c)(2) above is based on or assumes that the Company's
payment obligations under the Indenture or its payment obligations under the
Debt Securities will continue (or is silent with respect thereto), then such
discharge shall constitute only a "covenant defeasance" and, consequently, the
Company shall remain liable for the payment of the Debt Securities. However, if
and when a ruling from the Internal Revenue Service or opinion of counsel
referred to in clause (c)(2) above is able to be provided specifically without
regard to, and not in reliance upon, the continuance of the Company's payment
obligations

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under the Indenture and its payment obligations under the Debt Securities, then
the Company's payment obligations under the Indenture and the Debt Securities
shall cease upon delivery to the Trustee of such ruling or opinion of counsel
and compliance with the other conditions precedent provided for in clause (c)
above relating to the satisfaction and discharge of the Indenture. In such a
case (a "legal defeasance") holders would be able to look only to the trust fund
for payment of principal or interest on the Debt Securities.

REGARDING THE TRUSTEES

The Trustee with respect to the first series of Debt Securities, if any,
will be identified in the Prospectus Supplement relating to such Debt
Securities. Other Trustees may be designated for any subsequent series of Debt
Securities. The Indenture and provisions of the TIA incorporated by reference
therein, contain certain limitations on the rights of the Trustee, should it
become a creditor of the Company, to obtain payment of claims in certain cases,
or to realize on certain property received in respect of any such claim, as
security or otherwise. The Trustee and its affiliates engage in, and will be
permitted to continue to engage in, other transactions with the Company and its
affiliates; PROVIDED, HOWEVER, that if it acquires any conflicting interest (as
defined), it must eliminate such conflict or resign.

The holders of a majority in principal amount of the then outstanding Debt
Securities of any series will have the right to direct the time, method and
place of conducting any proceeding for exercising any remedy available to the
Trustee. The TIA and the Indenture provide that in case an Event of Default
shall occur (and be continuing), the Trustee will be required, in the exercise
of its rights and powers, to use the degree of care and skill of a prudent man
in the conduct of his own affairs. Subject to such provision, the Trustee will
be under no obligation to exercise any of its rights or powers under the
Indenture at the request of any of the holders of the Debt Securities issued
thereunder, unless they have offered to the Trustee indemnity satisfactory to
it.

DESCRIPTION OF PREFERRED STOCK

The following description of the terms of the Preferred Stock sets forth
certain general terms and provisions of the Preferred Stock to which any
Prospectus Supplement may relate. Certain other terms of any series of the
Preferred Stock offered by any Prospectus Supplement will be described in such
Prospectus Supplement. The description of certain provisions of the Preferred
Stock set forth below and in any Prospectus Supplement does not purport to be
complete and is subject to and qualified in its entirety by reference to the
Company's Restated Certificate of Incorporation (the "Certificate of
Incorporation"), and the certificate of designation (a "Certificate of
Designation") relating to each series of the Preferred Stock which will be filed
with the Commission and incorporated by reference in the Registration Statement
of which this Prospectus is a part at or prior to the time of the issuance of
such series of the Preferred Stock.

GENERAL

The Company has the authority to issue 4,000,000 shares of preferred stock,
$0.01 par value per share ("preferred stock of the Company," which term, as used
herein, includes the Preferred Stock offered hereby). As of the date hereof, the
Company has designated 600,000 shares of preferred stock of the Company as
Series A Convertible Reset Preferred Stock, of which 480,000 shares are issued
and outstanding as of April 30, 1995. See "-- Outstanding Preferred Stock."
Under the Certificate of Incorporation, the Board of Directors of the Company is
authorized without further stockholder action to designate and provide for the
issuance of up to 3,400,000 additional shares of preferred stock of the Company,
in one or more series, with such voting powers, full or limited, and with such
designations, preferences and relative participating, optional or other special
rights, and qualifications, limitations or restrictions thereof, as shall be
stated in the resolution or resolutions providing for the issue of a series of
such stock adopted, at any time or from time to time, by the Board of Directors
of the Company (as used herein the term "Board of Directors of the Company"
includes any duly authorized committee thereof).

The Preferred Stock shall have the dividend, liquidation, redemption and
voting rights set forth below unless otherwise provided in a Prospectus
Supplement relating to a particular series of the Preferred Stock.

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Reference is made to the Prospectus Supplement relating to the particular series
of the Preferred Stock offered thereby for specific terms, including: (i) the
designation and stated value per share of such Preferred Stock and the number of
shares offered; (ii) the amount of liquidation preference per share; (iii) the
initial public offering price at which such Preferred Stock will be issued; (iv)
the dividend rate (or method of calculation), the dates on which dividends shall
be payable and the dates from which dividends shall commence to cumulate, if
any; (v) any redemption or sinking fund provisions; (vi) any conversion or
exchange rights; and (vii) any additional voting, dividend, liquidation,
redemption, sinking fund and other rights, preferences, privileges, limitations
and restrictions.

The Preferred Stock will, when issued, be fully paid and nonassessable and
will have no preemptive rights. The rights of the holders of each series of the
Preferred Stock will be subordinate to those of the Company's general creditors.

DIVIDEND RIGHTS

Holders of the Preferred Stock of each series will be entitled to receive,
when, as and if declared by the Board of Directors of the Company, out of funds
of the Company legally available therefor, cash dividends on such dates and at
such rates as are set forth in, or as are determined by the method described in,
the Prospectus Supplement relating to such series of the Preferred Stock. Such
rate may be fixed or variable or both. Each such dividend will be payable to the
holders of record as they appear on the stock books of the Company on such
record dates, fixed by the Board of Directors of the Company, as specified in
the Prospectus Supplement relating to such series of Preferred Stock.

Such dividends may be cumulative or noncumulative, as provided in the
Prospectus Supplement relating to such series of Preferred Stock. If the Board
of Directors of the Company fails to declare a dividend payable on a dividend
payment date on any series of Preferred Stock for which dividends are
noncumulative, then the right to receive a dividend in respect of the dividend
period ending on such dividend payment date will be lost, and the Company will
have no obligation to pay any dividend for such period, whether or not dividends
on such series are declared payable on any future dividend payment dates.
Dividends on the shares of each series of Preferred Stock for which dividends
are cumulative will accrue from the date on which the Company initially issues
shares of such series.

Unless otherwise specified in the applicable Prospectus Supplement, so long
as the shares of any series of the Preferred Stock are outstanding, unless (i)
full dividends (including if such Preferred Stock is cumulative, dividends for
prior dividend periods) have been paid or declared and set apart for payment on
all outstanding shares of the Preferred Stock of such series and all other
classes and series of preferred stock of the Company (other than Junior Stock,
as defined below) and (ii) the Company is not in default or in arrears with
respect to the mandatory or optional redemption or mandatory repurchase or other
mandatory retirement of, or with respect to any sinking or other analogous funds
for, any shares of Preferred Stock of such series or any shares of any other
preferred stock of the Company of any class or series (other than Junior Stock),
the Company may not declare any dividends on any shares of Common Stock of the
Company or any other stock of the Company ranking as to dividends or
distributions of assets junior to such series of Preferred Stock (the Common
Stock and any such other stock being herein referred to as "Junior Stock"), or
make any payment on account of, or set apart money for, the purchase, redemption
or other retirement of, or for a sinking or other analogous fund for, any shares
of Junior Stock or make any distribution in respect thereof, whether in cash or
property or in obligations of stock of the Company, other than in Junior Stock
which is neither convertible into, nor exchangeable or exercisable for, any
securities of the Company other than Junior Stock.

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LIQUIDATION PREFERENCES

Unless otherwise specified in the applicable Prospectus Supplement, in the
event of any liquidation, dissolution or winding up of the Company, whether
voluntary or involuntary, the holders of each series of the Preferred Stock will
be entitled to receive out of the assets of the Company available for
distribution to stockholders, before any distribution of assets is made to the
holders of Common Stock or any other shares of stock of the Company ranking
junior as to such distribution to such series of the Preferred Stock, the amount
set forth in the Prospectus Supplement relating to such series of the Preferred
Stock. If, upon any voluntary or involuntary liquidation, dissolution or winding
up of the Company, the amounts payable with respect to the Preferred Stock of
any series and any other shares of preferred stock of the Company (including any
other series of the Preferred Stock) ranking as to any such distribution on a
parity with such series of the Preferred Stock are not paid in full, the holders
of the Preferred Stock of such series and of such other shares of preferred
stock of the Company will share ratably in any such distribution of assets of
the Company in proportion to the full respective preferential amounts to which
they are entitled. After payment to the holders of the Preferred Stock of each
series of the full preferential amounts of the liquidating distribution to which
they are entitled, unless otherwise provided in the applicable Prospectus
Supplement, the holders of each such series of the Preferred Stock will be
entitled to no further participation in any distribution of assets by the
Company.

REDEMPTION

A series of the Preferred Stock may be redeemable, in whole or from time to
time in part, at the option of the Company, and may be subject to mandatory
redemption pursuant to a sinking fund or otherwise, in each case upon terms, at
the times and at the redemption prices set forth in the Prospectus Supplement
relating to such series. Shares of the Preferred Stock redeemed by the Company
will be restored to the status of authorized but unissued shares of preferred
stock of the Company.

In the event that fewer than all of the outstanding shares of a series of
the Preferred Stock are to be redeemed, whether by mandatory or optional
redemption, the number of shares to be redeemed will be determined by lot or pro
rata (subject to rounding to avoid fractional shares) as may be determined by
the Company or by any other method as may be determined by the Company in its
sole discretion to be equitable. From and after the redemption date (unless
default is made by the Company in providing for the payment of the redemption
price plus cumulated and unpaid dividends, if any) dividends will cease to
accumulate on the shares of the Preferred Stock called for redemption and all
rights of the holders thereof (except the right to receive the redemption price
plus accumulated and unpaid dividends, if any) will cease.

Unless otherwise specified in the applicable Prospectus Supplement, so long
as any dividends on shares of any series of the Preferred Stock or any other
series of preferred stock of the Company ranking on a parity as to dividends and
distribution of assets with such series of the Preferred Stock are in arrears,
no shares of any such series of the Preferred Stock or such other series of
preferred stock of the Company will be redeemed (whether by mandatory or
optional redemption) unless all such shares are simultaneously redeemed, and the
Company will not purchase or otherwise acquire any such shares; PROVIDED,
HOWEVER, that the foregoing will not prevent the purchase or acquisition of
share shares pursuant to a purchase or exchange offer made on the same terms to
holders of all such shares outstanding.

CONVERSION AND EXCHANGE RIGHTS

The terms, if any, on which shares of Preferred Stock of any series may be
exchanged for or converted into shares of Common Stock, or another series of
Preferred Stock, or any other security will be set forth in the Prospectus
Supplement relating thereto. Such terms may include provisions for conversion,
either mandatory, at the option of the holder, or at the option of the Company,
in which case the number of shares of Common Stock or the number of shares of
another series of Preferred Stock or the amount of any other securities to be
received by the holders of Preferred Stock would be calculated as of a time and
in the manner stated in the Prospectus Supplement.

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VOTING RIGHTS

Except as indicated in a Prospectus Supplement relating to a particular
series of the Preferred Stock, or except as required by applicable law, the
holders of the Preferred Stock will not be entitled to vote for any purpose.

OUTSTANDING PREFERRED STOCK

As of the date hereof, the Company has designated 600,000 shares of the
preferred stock of the Company as Series A Convertible Reset Preferred Stock. In
March and April 1995, the Company sold an aggregate of 480,000 shares of Series
A Convertible Reset Preferred Stock in private placements.

The Series A Convertible Reset Preferred Stock is not entitled to receive a
dividend other than on an as converted into Common Stock basis, when, as and if
declared on the Common Stock by the Board of Directors out of funds legally
available therefor. In the event of any liquidation, dissolution or winding up
of the Company, the holders of the outstanding shares of Series A Convertible
Reset Preferred Stock are entitled to receive, prior and in preference to any
distribution of any of the assets or surplus funds of the Company to the holders
of the Common Stock by reason of their ownership of such shares, an amount equal
to $25.00 per outstanding share of Series A Convertible Reset Preferred Stock
(subject to adjustment in the event of any stock dividend, stock split, stock
distribution or combination with respect to such shares), plus any accrued and
unpaid dividends. After payment of such amount, the holders of the Series A
Preferred Stock shall have no further rights to participate in any remaining
assets of the Company.

Holders of Series A Convertible Reset Preferred Stock are entitled to the
number of votes equal to the number of shares of Common Stock into which each
such share of Series A Convertible Reset Preferred Stock could then be converted
pursuant to the terms of the Certificate of Designation with respect to any and
all matters presented to the stockholders of the Company for their action and
consideration. Except as provided by law, holders of Series A Convertible Reset
Preferred Stock vote together with the holders of Common Stock as a single
class; provided, however, the consent of the holders of a majority of the
holders of the outstanding shares of Series A Convertible Reset Preferred Stock
shall be required for the Company to take any action that amends or repeals any
provision of the Company's charter if such action would materially and adversely
change the rights, preferences or privileges of the Series A Convertible Reset
Preferred Stock.

Each holder of Series A Convertible Reset Preferred Stock has the right, at
the holder's option, at any time beginning 60 days following the date of
issuance of such share, and prior to the close of business on any redemption
date with respect to such share, to convert each such share into the number of
fully paid and nonassessable shares of Common Stock as is determined by dividing
$25.00 by the conversion price per share in effect for the Series A Convertible
Reset Preferred Stock at the time of conversion (the "Conversion Price"). The
initial Conversion Price is $7.425 per share (the "Initial Conversion Price"),
subject to adjustment for stock splits, consolidations, reclassifications and
reorganizations. On March 25, 1996, the Conversion Price with respect to all
outstanding shares of Series A Convertible Reset Preferred Stock shall be reset
to an amount equal to the lesser of (i) the Initial Conversion Price or (ii) the
lowest average closing price of the Company's Common Stock on the Nasdaq
National Market for any 30 consecutive trading days in the preceding one-year
period; provided, however, in no event will the Conversion Price be reset below
$3.713. In addition, the Conversion Price shall be reset to an amount equal to
90% of the Conversion Price immediately upon the first occurrence, if any, after
March 31, 1996, of (A) the failure by the Company to timely make any material
required filing under the Securities Exchange Act of 1934, as amended, or (B)
delivery of a "qualified" report by the Company's independent public
accountants.

The Series A Convertible Reset Preferred Stock shall automatically convert
to Common Stock at the Conversion Price then in effect, with the Series A
Convertible Preferred Stock being deemed to have a value of $25.00 per share, at
any time on or after 60 days from the date of issuance of the Series A
Convertible Reset Preferred Stock, on the fifth day following the day on which
the Company gives notice to the holders of record of the Series A Convertible
Reset Preferred Stock that both (i) the closing price of the Common Stock on the
Nasdaq National Market for 20 out of 30 consecutive trading days has been in
excess of 175% of the Conversion Price on the last day of any such period and
(ii) the Common Stock may immediately be resold

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pursuant to an effective registration statement under the Securities Act or
pursuant to Rule 144(k) of the Securities Act.

The Series A Convertible Reset Preferred Stock may be redeemed by the
Company, in whole or in part, for cash or may be converted into Common Stock at
the Conversion Price then in effect, in each case with the Series A Convertible
Reset Preferred Stock being deemed to have a value of $25.00 per share, (a) at
any time on or after two years from the date of issuance of the Series A
Convertible Reset Preferred Stock or (b) in the event of a merger of the
Company, a sale of all or substantially all of the Company's assets, or such
other transaction in which all or substantially all of the Company is
effectively sold.

All shares of Series A Convertible Reset Preferred Stock not previously
converted into Common Stock or redeemed or repurchased by the Company shall be
redeemed for cash or, at the Company's option, automatically converted into
Common Stock at the Conversion Price then in effect, in each case with the
Series A Convertible Reset Preferred Stock being deemed to have a value of
$25.00 per share, on March 31, 2000.

DESCRIPTION OF COMMON STOCK

The Company has authority to issue 35,000,000 shares of Common Stock, par
value $0.0001 per share. As of March 29, 1995, there were approximately
19,143,800 shares of Common Stock issued and outstanding. The holders of Common
Stock are entitled to one vote per share on all matters to be voted on by
shareholders, including the election of directors. Shareholders are not entitled
to cumulative voting rights, and, accordingly, the holders of a majority of the
shares voting for the election of directors can elect the entire Board if they
choose to do so and, in that event, the holders of the remaining shares will not
be able to elect any person to the Board of Directors.

The holders of Common Stock are entitled to receive such dividends, if any,
as may be declared from time to time by the Board of Directors, in its
discretion, from funds legally available thereof and subject to prior dividend
rights of holders of any shares of preferred stock of the Company which may be
outstanding. Upon liquidation or dissolution of the Company subject to prior
liquidation rights of the holders of preferred stock of the Company, the holders
of Common Stock are entitled to receive on a pro rata basis the remaining assets
of the Company available for distribution. Holders of Common Stock have no
preemptive or other subscription rights, and there are no conversion rights or
redemption or sinking fund provisions with respect to such shares.

Chemical Mellon Shareholder Services acts as transfer agent and registrar
for the Common Stock.

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DESCRIPTION OF WARRANTS

Any Warrants offered pursuant to this Prospectus will be warrants to
purchase shares of Common Stock. The following summary contains a description of
certain general terms of the Warrants to which any Prospectus Supplement may
relate. Certain terms of any Warrant offered by any Prospectus Supplement will
be described in the Prospectus Supplement relating thereto. If so indicated in
the Prospectus Supplement, the terms of any Warrant may differ from the terms
set forth below. The description of certain provisions of the Warrants does not
purport to be complete and is subject to and qualified in its entirety by
reference to the provisions of the Warrant Agreement (the "Warrant Agreement")
relating to such Warrant, a form of which will be filed or incorporated by
reference, as the case may be, as an exhibit to the Registration Statement of
which this Prospectus is a part at or prior to the time of the issuance of such
Warrant.

GENERAL

The Warrants, evidenced by warrant certificates (the "Warrant
Certificates"), may be issued independently or together with any other
Securities offered by any Prospectus Supplement and may be attached to or
separate from such other Securities. If Warrants are offered, the related
Prospectus Supplement will describe the terms of the Warrants, including the
following: (1) the offering price, if any; (2) the number of shares of Common
Stock purchasable upon exercise of one Warrant and the initial price at which
such shares may be purchased upon exercise; (3) the date on which the right to
exercise the Warrants shall commence and the date on which such right shall
expire; (4) federal income tax consequences; (5) call provisions, if any; (6)
the antidilution provisions of the Warrants; and (7) any other terms of the
Warrants. The shares of Common Stock issuable upon exercise of the Warrants
will, when issued in accordance with the Warrant Agreement, be fully paid and
nonassessable.

EXERCISE OF WARRANTS

Warrants may be exercised by surrendering the Warrant Certificate signed by
the warrantholder, or its duly authorized agent, indicating the warrantholder's
election to exercise all or a portion of the Warrants evidenced by the
certificate. Surrendered Warrant Certificates shall be accompanied by payment of
the aggregate exercise price of the Warrants to be exercised, as set forth in
the related Prospectus Supplement, which payment may be made in the form of cash
or a check equal to the exercise price. Certificates evidencing duly exercised
Warrants will be delivered by the Company to the transfer agent for the Common
Stock. Upon receipt thereof, the transfer agent shall deliver or cause to be
delivered, to or upon the written order of the exercising warrantholder, a
certificate representing the number of shares of Common Stock purchased. If
fewer than all of the Warrants evidenced by any certificate are exercised, the
Company shall deliver to the exercising warrantholder a new Warrant certificate
representing the unexercised Warrants.

ANTIDILUTION PROVISIONS

The exercise price payable and the number of shares of Common Stock
purchasable upon the exercise of each Warrant will be subject to adjustment in
certain events, including the issuance of a stock dividend to holders of Common
Stock or a stock split, reverse stock split, combination, subdivision or
reclassification of Common Stock. In lieu of adjusting the number of shares of
Common Stock purchasable upon exercise of each Warrant, the Company may elect to
adjust the number of Warrants. No adjustments in the number of shares
purchasable upon exercise of the Warrants will be required until cumulative
adjustments require an adjustment of at least 1% thereof. The Company may, at
its option, reduce the exercise price at any time. No fractional shares will be
issued upon exercise of Warrants, but the Company will pay the cash value of any
fractional shares otherwise issuable. Notwithstanding the foregoing, in case of
any consolidation, merger, or sale or conveyance of the property of the Company
as an entirety or substantially as an entirety, the holder of each outstanding
Warrant shall have the right to the kind and amount of shares of stock and other
securities and property (including cash) receivable by a holder of the number of
shares of Common Stock into which such Warrant was exercisable immediately prior
thereto.

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<PAGE> 77

NO RIGHTS AS STOCKHOLDERS

Holders of Warrants will not be entitled, by virtue of being such holders,
to vote, to consent, to receive dividends, to receive notice as stockholders
with respect to any meeting of stockholders for the election of directors of the
Company or any other matter, or to exercise any rights whatsoever as
stockholders of the Company.

OUTSTANDING WARRANTS

As of April 30, 1995, the Company had issued and outstanding warrants to
purchase 1,230,000 shares of common stock at $4.25 per share, all of which
expire on March 28, 1997. In addition, in connection with the private placement
of the Company's Series A Convertible Reset Preferred Stock in March and April
1995, the Company issued warrants to purchase an aggregate of 808,320 shares of
common stock at $7.425 per share, all of which expire approximately three years
from the date of issuance.

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<PAGE> 78

PLAN OF DISTRIBUTION

The Company may sell the Securities to one or more underwriters for public
offering and sale by them or may sell the Securities to investors directly or
through agents. Any such underwriter or agent involved in the offer and sale of
Securities will be named in the applicable Prospectus Supplement. The Company
has reserved the right to sell Securities directly to investors on its own
behalf in those jurisdictions where and in such manner as it is authorized to do
so.

Underwriters may offer and sell Securities at a fixed price or prices,
which may be changed, at market prices prevailing at the time of sale, at prices
related to such prevailing market prices, or at negotiated prices. The Company
also may, from time to time, authorize dealers, acting as the Company's agents,
to offer and sell Securities upon the terms and conditions as are set forth in
the applicable Prospectus Supplement. In connection with the sale of Securities,
underwriters may receive compensation from the Company in the form of
underwriting discounts or commissions and may also receive commissions from
purchasers of the Securities for whom they may act as agent. Underwriters may
sell Securities to or through dealers, and such dealers may receive compensation
in the form of discounts, concessions or commissions from the underwriters
and/or commissions from the purchasers for whom they may act as agent.

Any underwriting compensation paid by the Company to underwriters or agents
in connection with the offering of Securities, and any discounts, concessions or
commissions allowed by underwriters to participating dealers, will be set forth
in the applicable Prospectus Supplement. Dealers and agents participating in the
distribution of Securities may be deemed to be underwriters, and any discounts
and commissions received by them and any profit realized by them on resale of
the Securities may be deemed to be underwriting discounts and commissions.
Underwriters, dealers and agents may be entitled, under agreements entered into
with the Company, to indemnification against and contribution toward certain
civil liabilities, including liabilities under the Securities Act of 1933.

If so indicated in the Prospectus Supplement, the Company will authorize
dealers acting as the Company's agents to solicit offers by certain institutions
to purchase the Securities from the Company at the public offering price set
forth in the applicable Prospectus Supplement pursuant to delayed delivery
contracts ("Contracts") providing for payment and delivery on the date or dates
stated in such Prospectus Supplement. Each Contract will be for an amount not
less than the amounts stated in the applicable Prospectus Supplement.
Institutions with whom Contracts, when authorized, may be made include
commercial and savings banks, insurance companies, pension funds, investment
companies, educational and charitable institutions, and other institutions but
will in all cases be subject to the approval of the Company. Contracts will not
be subject to any conditions except (i) the purchase by the institution of the
Securities covered by its Contract shall not at the time of delivery be
prohibited under the laws of any jurisdiction in the United States to which such
institution is subject, and (ii) if the Common is being sold to underwriters,
the Company shall have sold to such underwriters the total amount specified in
the applicable Prospectus Supplement. A commission indicated in the applicable
Prospectus Supplement will be paid to underwriters and agents soliciting
purchases of Securities pursuant to Contracts accepted by the Company.

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<PAGE> 79

LEGAL MATTERS

Certain legal matters with respect to the Securities offered hereby will be
passed upon for the Company by Latham & Watkins, San Francisco, California.
Christopher L. Kaufman, a partner of Latham & Watkins, beneficially owns less
than 1% of the Common Stock, 2,000 shares of the Company's Series A Convertible
Reset Preferred Stock and warrants to purchase up to 3,368 shares of Common
Stock at an exercise price of $7.425 per share. Certain legal matters will be
passed upon for any agents or underwriters by counsel for such agents or
underwriters identified in the applicable Prospectus Supplement.

EXPERTS

The financial statements of SEQUUS Pharmaceuticals, Inc. appearing in
SEQUUS Pharmaceutical, Inc.'s Annual Report (Form 10-K) for the year ended
December 31, 1994, have been audited by Ernst & Young LLP, independent auditors,
as set forth in their report thereon included therein and incorporated herein by
reference. Such financial statements are incorporated herein by reference in
reliance upon such report given upon the authority of such firm as experts in
accounting and auditing.

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NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION IN CONNECTION WITH THIS OFFERING OTHER
THAN THOSE CONTAINED IN THIS PROSPECTUS. AND, IF GIVEN OR MADE, SUCH INFORMATION
OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN SO AUTHORIZED BY THE
COMPANY OR ANY UNDERWRITER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL
OR A SOLICITATION OF AN OFFER TO BUY BY ANYONE IN ANY JURISDICTION IN WHICH SUCH
OFFER TO SELL IS NOT AUTHORIZED, OR IN WHICH THE PERSON IS NOT QUALIFIED TO DO
SO OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION.
NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE HEREUNDER SHALL, UNDER ANY
CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE
AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE INFORMATION CONTAINED
HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE.

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TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Available Information................. 2
Information Incorporated by
Reference........................... 2
The Company........................... 3
Risk Factors.......................... 3
Use of Proceeds....................... 4
Dilution.............................. 5
Ratios of Earnings to Fixed Charges
and Earnings to Combined Fixed
Charges and Preferred Stock
Dividends........................... 5
General Description of Securities..... 6
Description of Debt Securities........ 6
Description of Preferred Stock........ 13
Description of Common Stock........... 17
Description of Warrants............... 18
Plan of Distribution.................. 20
Legal Matters......................... 21
Experts............................... 21
</TABLE>

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LOGO
SEQUUS PHARMACEUTICALS, INC.
$50,000,000
DEBT SECURITIES
COMMON STOCK
PREFERRED STOCK
WARRANTS TO PURCHASE COMMON STOCK
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PROSPECTUS
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June 26, 1995
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LOGO