<PAGE>   1

                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                    FORM 10-K

(Mark one)
              ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
  [ X ]       THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED] For the
              FISCAL YEAR ENDED DECEMBER 31, 1995
   or
              TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF
  [   ]       THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]

                         Commission File Number 0-15006
                                                -------

                              T CELL SCIENCES, INC.
             (Exact name of registrant as specified in its charter)

                DELAWARE                     13-3191702
    (State or other jurisdiction of       (I.R.S. Employer
     incorporation or organization)      Identification No.)

                 115 FOURTH AVENUE, NEEDHAM, MASSACHUSETTS 02194
               (Address of principal executive offices)(Zip Code)

       Registrant's telephone number, including area code: (617) 433-0771

        Securities registered pursuant to Section 12(b) of the Act: NONE

           Securities registered pursuant to Section 12(g) of the Act:
                          COMMON STOCK, PAR VALUE $.001

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

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

The aggregate market value of common stock held by non-affiliates as of March
15, 1996 was $56,160,030 (excludes shares held by directors and executive
officers). Exclusion of shares held by any person should not be construed to
indicate that such person possesses the power, direct or indirect, to direct or
cause the actions of the management or policies of the Registrant, or that such
person is controlled by or under common control with the Registrant. The number
of shares of common stock outstanding at March 15, 1996 was:
19,896,804 shares.

                       Documents Incorporated by Reference

Portions of the Registrant's Proxy Statement for the Annual Meeting of
Stockholders to be held on May 21, 1996, are incorporated by reference into Part
III of this Form 10-K. 

                                       1.

<PAGE>   2

PART I



ITEM 1.   BUSINESS

A.    General

T Cell Sciences, Inc. ("T Cell" or "TCS") is a research-based emerging
biotechnology company specializing in the understanding and treatment of
diseases caused by the misregulation of the body's natural defense systems.
Currently, TCS is developing therapeutic products for diseases of inflammation
and immunology. In 1995, TCS completed two phase I trials of its first
anti-inflammatory product candidate, TP10 (soluble complement receptor type 1).
The first trial was in patients at risk for adult respiratory distress syndrome.
The second trial for reperfusion injury was in patients with first time
myocardial infarctions. A phase IIa trial for established adult respiratory
distress syndrome was begun in January 1996.

T Cell's therapeutic research is also evaluating second generation compounds as
part of its comprehensive complement inhibitor program. TCS, with partner Astra
AB ("Astra"), is developing products based on the T cell antigen receptor for
the treatment of autoimmmune diseases with two initial product candidates for
the treatment of multiple sclerosis now in the preclinical stage of development.
Additional TCS proprietary research programs directed toward the discovery and
development of new compounds that inhibit activated T cells and prevent
atherosclerosis are under way.

In March 1996, T Cell sold the operations and research product line of its
wholly owned subsidiary, T Cell Diagnostics, Inc. ("TCD") to Endogen, Inc.,
while retaining the TRAx[RegisteredTrademark] diagnostic product franchise. In
1995, TCD introduced five new preclinical products and received FDA clearance to
market TRAx CD4 for CD4 cell enumeration. The most prevalent use of CD4 cell
enumeration is in monitoring HIV infected patients. TCD began marketing TRAx CD4
in the second half of 1995 and in December signed an exclusive sales and
distribution agreement for TRAx CD4 and CD8 with Diamedix Corporation for the
United States market. The sale of the operations and research products business
to Endogen eliminates the losses previously incurred from the operations of TCD
while preserving the technology value and opportunities from TRAx diagnostics. T
Cell has also contracted with Endogen for the manufacturing of TRAx products for
the next five years at a cost expected to be less than what it would have cost T
Cell to make the products internally.

B.  Therapeutics

T Cell's lead therapeutic program is developing compounds that inhibit a part of
the immune system called the complement system. The complement system is a
series of proteins that are important initiators of the body's acute
inflammatory response against disease, infection, and injury. Excessive
complement activation also plays a role in chronic inflammatory conditions. When
complement is activated, it helps to identify and eliminate damaged tissue. In
certain situations, excessive complement activation may destroy viable and
healthy tissue and tissue which, though damaged, might recover. This excessive
response compounds the effects of the initial injury or introduces unwanted
tissue destruction in clinical situations such as transplants, other surgeries,
or treatment for heart attacks. An effective inhibitor of the complement system
might limit these destructive responses in many inflammatory situations such as
ARDS, reperfusion injury, organ transplant, and certain autoimmune diseases.

The TP10 program was started by T Cell in 1988. From 1989 through 1994, TP10 was
under development in a joint program with SmithKline Beecham, p.l.c., ("SB") and
Yamanouchi Pharmaceutical Co., ("YPC"). During 1994, TCS and SB negotiated
various changes in the agreement and in February 1995, the two companies agreed
to a mutual termination by which T Cell regained all rights to the program
except for co-marketing rights in Japan that are retained by SB and YPC.

Under T Cell's direction in 1995, TP10 completed the first phase I clinical
trial in 24 patients at risk for adult respiratory distress syndrome ("ARDS").
Results of this trial were presented in October, 1995 at The American College of
Chest Physicians meeting. In this study, TP10 demonstrated excellent safety with
no drug related adverse events, had a beta phase half life of more than 30 hours
and was able to inhibit complement activity in a dose dependent escalating
activity profile. A second phase I trial for reperfusion injury was completed in
December in 25 patients with first time myocardial infarctions. This study
confirmed the safety, pharmacokinetics, and complement inhibition results from
the ARDS trial. In January 1996, TCS began a phase IIa trial in patients with
established ARDS. Additional clinical trials are planned for 1996.

In addition to TP10, TCS has identified other products to inhibit the complement
system. The lead candidate under research evaluation is a modified form of sCR1
(TP10) which has been changed to add the sLex carbohydrate structures. sLex is
the sugar structure which binds to activated selectins on endothelial cells and
is 

                                       2.

<PAGE>   3

involved in the binding of neutrophils to endothelial cells in inflammation.
The combined sCR1sLex molecule has demonstrated increased activity benefits in
in vitro and early in vivo experiments. In addition, TCS has identified a small
molecule compound which blocks activated complement at the C5 step of the
cascade. At this time, TCS owns all rights to the development and marketing of
these compounds.

TCS was founded on the concept of using the T cell antigen receptor ("TCAR") as
a means of selectively targeting T cells that cause problems in autoimmune
diseases such as multiple sclerosis and rheumatoid arthritis. In early 1992, TCS
entered into a joint development program with Astra to develop products
resulting from TCS' proprietary TCAR technology. The original agreement was
modified in December 1993 with Astra assuming all responsibility for the
development of the lead antibody products and TCS retaining leadership of the
first peptide product candidate. Under the original and modified agreement, TCS
received funding support of approximately $15 million in the early years with
the potential of up to $17 million of additional funding based on clinical
progress. By the end of 1995, substantially all of the original funding payments
had been received by TCS. TCS and Astra have a current target for the lead
product candidates (TM27-monoclonal and TP12-peptide) to enter the clinic in
1997. (See Note 9(A), "Notes to Consolidated Financial Statements".)

Two new programs looking at small molecule inhibitors of activated T cells and
preventing atherosclerosis through vaccination have been established in the
research efforts at TCS. The small molecule T cell program is looking to find
molecules which have the same efficacy as calcineurin inhibitors such as
cyclosporin or FK506, but without the high level of side effect problems. TCS'
basic approach is to combine the biological skills and smart screens developed
by TCS with some of the newer smart libraries created by other biotechnology
companies, such as ArQule, Inc. and MYCOsearch, Inc. The atherosclerosis program
is seeking to create an autoimmune reaction against Cholesteryl Ester Transfer
Protein ("CETP"). By creating an autoimmune reaction, CETP activity can be
reduced or eliminated with potential improvements in HDL to LDL ratios and lower
levels of atherosclerotic lesions. Both of these programs are in early stages of
preclinical development.

C.  Diagnostics

TCD was formed as a subsidiary in 1991 to capitalize on the sales of diagnostic
and research products emanating from TCS' proprietary technology. The strategy
had been to build a business and product base in the research or preclinical
product markets and introduce new in vitro diagnostic products to provide the
growth of TCD into a profitable business unit. For the last several years, the
research products business has been one of intense competition and price
pressure, particularly in Europe. Sales of TCD products have declined from a
high of more than $ 4 million in 1991 and 1992 to less than $2.4 million in
1995.

The goal of introducing TRAx CD4 as the first of the Company's new in vitro
diagnostic products was achieved when the FDA cleared the product for marketing
in May of 1995. TCD initiated a direct sales effort in the second half of 1995.
While the technical evaluation of the product has been positive, initial sales
growth has been slow with minimal TRAx product sales in 1995. In December 1995,
plans for TCD were shifted from a focus on building an operating diagnostic
business to continued creation of exciting new diagnostic products to be sold
through contracts with other companies. TRAx CD4 is the first of these products
and the Company expects to file a 510(k) application for TRAx CD8 for FDA
clearance in the first half of 1996. The primary use of TRAx CD4 and CD8 is in
monitoring the immune status of HIV infected individuals.

As the first step in the revised strategy, TCD signed an exclusive sales and
distribution contract for the United States market with Diamedix Corporation in
December 1995. Diamedix is a wholly owned subsidiary of Ivax Corporation with a
history of selling enzyme immunoassays in the in vitro diagnostics market. The
contract covers the TRAx CD4 and CD8 microtiter plate format products. Under the
contract, TCD received a signing fee for TRAx CD4 in 1995 and will receive
supply and royalty income over a multiyear contract. Additional fee, supply, and
royalty income will begin when TRAx CD8 receives FDA clearance. (See Note 9(C),
"Notes to Consolidated Financial Statements".) Under a separate agreement, YPC
continues to have exclusive marketing rights for TRAx products in Japan and
Taiwan.

The reduction in base sales combined with the delay in receiving FDA clearance
to market TRAx CD4 and the low sales levels in 1995 has kept TCD under continued
financial pressure, despite a steady reduction in the costs of its operations
over the last two years. In March of 1996, the assets and research product lines
of TCD were sold to Endogen for $2.9 million. T Cell received a five year
convertible note for $1.9 million combined with a buy-out of approximately $1
million of facility and equipment lease obligations. The convertible note can be
converted to Endogen stock at T Cell's option at a price of $4.63 per share. T
Cell expects to recognize a gain on 

                                       3.

<PAGE>   4

this transaction of at least $300,000. This sale is expected to reduce annual
operating expenses by approximately $4 million and increase the Company's open
operating lease line by $1 million. (See Note 16, "Notes to Consolidated
Financial Statements".)

T Cell retains all rights to the TRAx product franchise and has agreed to source
TRAx kits from Endogen in a separate supply contract. With the primary kit
business contracts in place and the diagnostic part of the Company's business
now profitable, the Company's strategy is to enter into new product development
and distribution contracts for TRAx diagnostic related products.

D.    Patents and Proprietary Rights

The successful development and marketing of products by the Company will depend
in part on its ability to create and maintain intellectual property, including
patent rights. The Company has established a proprietary patent position in the
areas of complement inhibitor molecules, T cell antigen receptors, and
diagnostic technologies, and is the owner or exclusive licensee of numerous
patents and pending applications around the world, including more than 30 U.S.
patents. Although the Company continues to pursue patent protection for its
products, no assurance can be given that any pending application will issue as a
patent or that any issued patent will have a scope which will be of commercial
benefit or that the Company will be able to successfully enforce its patent
position against competitors.

In the area of complement molecules, T Cell has an exclusive license to patent
rights, which it co-owns with The Johns Hopkins University and Brigham and
Women's Hospital, covering CR1 inventions. These rights are based in part on the
work of Dr. Douglas Fearon and include U.S. patents which claim the nucleic acid
sequences of recombinant CR1, soluble CR1 (sCR1) and fragments, and
pharmaceutical uses of CR1. TCS also owns or has rights to a number of other
patent applications relating to CR1, sCR1sLex and other complement inhibitor
molecules.

In the area of T cell antigen receptors, T Cell holds exclusive licenses to the
pioneering patents filed on TCAR chain inventions. These patent applications
have resulted to date in U.S. patents covering the DNA, protein, protein
fragments and antibodies relating to the Alpha TCAR and the DNA, full length
proteins and antibodies relating to Beta TCAR, and two European patents covering
Beta TCAR inventions. In addition, the Company has filed on new T cell antigen
receptor inventions resulting from the partnership with Astra.

In the area of diagnostics, T Cell is the owner of several patent rights
relating to the TRAx CD4 and CD8 and other applications of the TRAx product
technologies. The first U.S. patent covering TRAx products is expected to issue
in April 1996.

The Company is aware that others, including universities and companies, have
filed patent applications and have been granted patents in the U.S. and other
countries which claim subject matter potentially useful or necessary to the
commercialization of the Company's products. The ultimate scope and validity of
existing or future patents which have or may be granted to third parties, and
the availability and cost of acquiring rights to those patents which are
necessary to manufacture, use or sale of the Company's products presently cannot
be determined by the Company.

Trade secrets and confidential know-how are important to the Company's
scientific and commercial successes. Although the Company takes measures to
protect its proprietary information, there can be no assurance that others will
not either develop independently or obtain access to this information.

E.    Competition

The Company is engaged in a rapidly expanding area of biotechnology in which
research is being conducted worldwide by universities, public and private
institutions, biotechnology and pharmaceutical companies. A number of these
entities are developing product candidates which may become competitors of the
Company's products in development. Several such companies are involved in
product development efforts aimed at treatments for autoimmune diseases and
inflammatory conditions and some are specifically developing products based on T
cell receptors and the human complement system. There can be no assurance that
the Company's products will be commercialized or that other companies,
universities and public and private foundations, among others, many of which
have greater financial resources than the Company, will not be able to develop
competing proprietary positions or products.

The Company's competitive position also depends upon its ability to attract and
retain qualified personnel, obtain patent protection or otherwise develop
proprietary technology and products, and secure sufficient capital resources to
fund product ideas to commercialization. There can be no assurance that the
Company will be successful in its efforts in these areas.


                                       4.

<PAGE>   5

F.    Government Regulation

The animal and human testing, manufacture, safety, efficacy, labeling, storage,
record keeping, approval, advertising, promotion and sale of the Company's
present and future products are closely regulated by federal and other
governmental authorities. The FDA and comparable government agencies in foreign
countries have established mandatory procedures and safety and efficacy
standards which must be met before the appropriate authority approves the
clinical testing, manufacturing and marketing of a human health care product.

The steps required before a pharmaceutical product may be marketed in the United
States include (i) in vitro and in vivo preclinical testing (ii) submission to
the FDA of an Investigational New Drug application which must become effective
before human clinical trials commence, (iii) adequate human clinical trials to
establish the safety and efficacy of the drug, (iv) the submission of a New Drug
Application ("NDA") or Product License Application ("PLA") to the FDA and (v)
FDA approval of the NDA or PLA prior to commercial sale or shipment of the
product. In addition to obtaining FDA approval for each product, each drug
manufacturing establishment must be registered with, and approved by, the FDA.

The steps required before an in vitro diagnostic product may be marketed in the
United States include (i) clinical trials which demonstrate that the product's
results are substantially equivalent to results obtained from a product
currently on the market, or if no product is currently marketed for the intended
use, then clinical trials which demonstrate safety and efficacy for the intended
clinical use, (ii) the submission of a 510(k) or Premarket Approval ("PMA")
application to the FDA, and (iii) FDA clearance to market the product. For
products with 510(k) clearance, the facility in which they are produced must
comply with certain Good Manufacturing Practices.

The Company's present and future business are and will be subject to regulation
under additional federal, state and local laws and regulations including
regulations by the U.S. Environmental Protection Agency and the U.S.
Occupational Safety and Health Administration.

G.    Employees;  Scientific Consultants

As of March 15, 1996, the Company employed 57 full time persons, 18 of whom have
doctoral degrees. Of these employees, 40 were engaged in or directly supported
research and development.

T Cell has also retained a number of scientific consultants and advisors in
various fields and has entered into consulting agreements with each of them.
These consultants include the members of the Scientific Advisory Board: Dr. Mark
Davis, Stanford University; Dr. Tak Mak, Ontario Cancer Institute; Dr. Peter
Ward, University of Michigan School of Medicine; Dr. Hans Wigzell, Karolinska
Institute; Dr. Peter Henson, National Jewish Center for Immunology and
Respiratory Medicine; and Dr. Peter Libby, Brigham and Women's Hospital.



I
TEM 2.  PROPERTIES

Until July 1994, the Company leased approximately 60,000 square feet of office,
research and production facility space in Cambridge, Massachusetts. Under the
lease agreement, the Company was obligated to pay a base annual rent of
approximately $1,100,000 until March 1994 and of approximately $1,200,000 until
the end of the initial term of March 1999. Aggregate rental payments for the
year ended December 31, 1994 for this facility were approximately $500,000 and
for December 31, 1993 were approximately $1,100,000. The Company terminated this
lease agreement in June 1994 as a result of an air quality problem unrelated to
its activities which forced the Company to evacuate all of its operations to
other facilities (See "Item 3. Legal Proceedings").

In October 1994, TCD relocated to Woburn, Massachusetts under a lease for five
years for approximately 27,000 square feet. This lease was assigned to Endogen,
Inc. in March 1996 in connection with the sale of the research products business
and operations of TCD. Beginning in September 1994, TCS relocated its
headquarters and therapeutic research operations to existing laboratory and
office space in Needham, Massachusetts, under a short-term lease and sublease
for approximately 33,000 square feet. The aggregate rental payments for the year
ended December 31, 1995 for this facility were approximately $590,000. The
Company is presently in negotiations for a longer-term lease agreement. (See
Note 3, "Notes to Consolidated Financial Statements".)



ITEM 3.   LEGAL PROCEEDINGS

In December 1994, the Company filed a lawsuit against the landlord of its former
Cambridge, Massachusetts headquarters for damages it has incurred as a result of
the forced evacuation and relocation of its operations in 1994 due to air
quality problems. The defendants in this lawsuit have counterclaimed alleging
that the Company has breached its lease obligations. The 


                                       5.

<PAGE>   6

lawsuit is currently in the pre-trial stage. The Company's insurance
carrier has agreed to reimburse the Company for certain legal expenses
associated with defense of certain of the counterclaims, under a reservation of
rights. In July 1995, the bank holding a mortgage on the building containing
the Company's former facilities filed a lawsuit in a different state court
against the Company to collect rents it alleges are due to the bank, instead of
the landlord, as a result of an agreement pertaining to the financing of the
initial build-out of the Cambridge facility in 1987. The Company has added its
former landlord as a third party defendant on a claim for indemnification in
the event the Company is not successful in its defense. A motion for summary
judgment filed by the bank is outstanding.

The Company brought suit in July 1995 against its insurance carrier and the
policy underwriter for a judgment that the Company is entitled to insurance
coverage for its property and business interruption losses incurred as a result
of the forced evacuation and relocation. This lawsuit has been dismissed as a
result of a November 1995 settlement agreement. (See Note 13, "Notes to
Consolidated Financial Statements".)



ITEM 4.   SUBMISSION OF MATTERS

None.




PART II


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


<TABLE>
The Company's common stock is traded in the over-the-counter market and is
quoted in the NASDAQ National Market System under the symbol TCEL. The following
table sets forth the high and low closing sales prices for the Company's common
stock as reported by NASDAQ.

<CAPTION>
                                      HIGH          LOW
FISCAL PERIOD

<S>                                   <C>          <C>
YEAR ENDED DECEMBER 31, 1994
1Q (Jan. 1 - March 31, 1994)          $8.50        $4.13
2Q (April 1 - June 30, 1994)           4.38         3.38
3Q (July 1 - Sep. 30, 1994)            3.88         2.94
4Q (Oct. 1 - Dec. 31, 1994)            3.25         2.13

YEAR ENDED DECEMBER 31, 1995

1Q (Jan. 1 - March 31, 1995)          $3.50        $2.38
2Q (April 1 - June 30, 1995)           4.38         2.63
3Q (July 1 - Sep. 30, 1995)            5.38         2.88
4Q (Oct. 1 - Dec. 31, 1995)            4.38         2.50
</TABLE>


As of March 25, 1996, there were approximately 698 shareholders of record of the
Company's common stock. The price of the Common Stock was $2.6875 as of the
close of March 25, 1996. The Company has not paid any dividends on its common
stock since its inception and does not intend to pay any dividends in the
foreseeable future. Declaration of dividends will depend, among other things,
upon the operating and future earnings of the Company, the capital requirements
of the Company and general business conditions.


                                       6.

<PAGE>   7



ItEM 6. SELECTED FINANCIAL DATA


<TABLE>
The selected consolidated financial data presented below for the years ended
December 31, 1995, 1994, 1993 and each of the two fiscal years ended April 30,
1992 and 1991 have been derived from the audited consolidated financial
statements of the Company. All amounts in thousands except per share data.

<CAPTION>
CONSOLIDATED STATEMENTS                            YEAR ENDED                YEAR ENDED
OF OPERATIONS DATA                                DECEMBER 31,                APRIL 30,
- -----------------------------------------------------------------------   -----------------
                                            1995       1994      1993       1992     1991
<S>                                       <C>        <C>       <C>        <C>       <C>

OPERATING REVENUE:

Product Sales, Product Development
     and Distribution Agreements          $ 3,963    $ 6,968   $ 9,018    $ 8,916   $10,240
- -----------------------------------------------------------------------   -----------------

OPERATING EXPENSE:

Research & Development                      8,005      8,697     9,438      7,956     8,247
Other Operating Expense                     7,821      9,365     8,841      7,417     6,343
- ----------------------------------------------------------------------    -----------------
Total Operating Expense                    15,826     18,062    18,279     15,373    14,590
- ----------------------------------------------------------------------    -----------------

Non-Operating Income(Expense), Net          3,605       (490)    1,193      1,562       909
- ----------------------------------------------------------------------    -----------------
Net Loss Before Minority Interest          (8,258)   (11,584)   (8,068)    (4,895)   (3,441)
Minority Interest Share of Loss                --         --       310        246        --
- ----------------------------------------------------------------------    -----------------

Net Loss                                  $(8,258)  $(11,584)  $(7,758)   $(4,649)  $(3,441)
======================================================================    =================

Net Loss Per Common Share                 $ (0.47)  $  (0.68)  $ (0.56)   $ (0.35)  $ (0.34)
======================================================================    =================
Weighted Average Common
     Shares Outstanding                    17,482     17,053    13,931     13,109    10,166
======================================================================    =================
</TABLE>



<TABLE>
<CAPTION>
CONSOLIDATED BALANCE
SHEETS DATA                                        DECEMBER 31,                APRIL 30,
=======================================================================   =================
                                            1995       1994      1993       1992     1991
<S>                                       <C>        <C>       <C>        <C>        <C>

Working Capital                            11,208     15,027    26,088     20,880      7,767
Total Assets                               18,532     20,685    33,067     27,023     13,233
Other Long Term Obligation                    182        500       500         --        --
Accumulated Deficit                       (46,339)   (38,081)  (26,497)   (15,107)   (10,458)
Total Stockholders' Equity                 16,000     17,586    29,134     23,090     10,401
</TABLE>



                                       7.

<PAGE>   8


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

T Cell Sciences' principal activity since its inception has been research and
product development conducted on its own behalf, as well as through joint
development programs with several companies. The Company was incorporated in the
State of Delaware in December 1983.

A significant portion of the Company's revenue has consisted of payments by
others to fund sponsored research, milestone payments under joint development
agreements, payments for material produced for preclinical studies, sales of
test kits and antibodies and interest earned on investments. Certain portions of
the collaborative payments are received in advance, recorded as deferred revenue
and recognized when earned in later periods.

Inflation and changing prices have not had a significant effect on continuing
operations and are not expected to have any in the near future.


FINANCIAL OVERVIEW

For the year ended December 31, 1995, the Company reported, a 29% decrease in
net loss of $8,258,000 or $0.47 per share compared to a net loss of $11,584,000
or $0.68 per share in 1994. Operating revenue of $3,963,000 for the year ended
December 31, 1995 decreased 43% from 1994 and operating expense decreased 12% to
$15,826,000 for 1995 compared to 1994. During 1995, the Company received
$2,900,000 from the settlement of a lawsuit with its insurance carrier. In 1994,
the Company incurred expenses of approximately $3,400,000 related to the
relocation of the Company's headquarters due to air quality problems and losses
on short-term investments. 

In May 1995, the Company received clearance from the U.S. Food and Drug
Administration to market the TRAx(R) CD4 test kit. The TRAx CD4 test kit is an
in vitro diagnostic test kit which provides a method for enumerating CD4 T
cells, a type of white blood cell monitored by physicians treating patients
infected with HIV.

On November 7, 1995 the Company closed a $6,375,000 private placement of        
2,550,000 shares of T Cell Sciences Common Stock, $.001 par value.  Several
institutional investors and private investors purchased shares of common stock
pursuant to stock purchase agreements.

In December 1995, the Company received a signing fee of $175,000 when it entered
into an exclusive U.S. distribution agreement with Diamedix Corporation
("Diamedix"), a wholly owned subsidiary of IVAX Corporation, for the sale and
promotion of the TRAx CD4 and CD8 microtiter plate diagnostic kits.

On March 5, 1996 the Company sold to Endogen, Inc. ("Endogen") the research
products and operations of its wholly owned subsidiary T Cell Diagnostics, Inc.
("TCD") for a purchase price of approximately $2,880,000, while retaining the
TRAx diagnostic product franchise. The purchase price was paid in the form of a
convertible subordinated note receivable in the principal amount of $1,900,000,
subject to final adjustment, and a combination of cash and a short-term note
used to repay approximately $980,000 of obligations under the Company's
operating lease.

The Company's cash and cash equivalents, including short-term and long-term
restricted cash, at December 31, 1995 totaled $13,125,000 and working capital
was $11,208,000. During the year ended December 31, 1995 cash used by operating
activities, including the receipt of $2,900,000 from the settlement of a lawsuit
with the Company's insurance carrier, totaled $7,948,000 compared to $9,066,000
in the year ended December 31, 1994.


RESULTS OF OPERATIONS

The Company reported a net loss of $8,258,000 or $0.47 per share for the year
ended December 31, 1995, compared with a net loss in 1994 of $11,584,000 or
$0.68 per share and a net loss of $7,758,000 or $0.56 in 1993. The operating
results for 1995, including interest income, reflect total revenue of $4,568,000
(a 45% decrease compared to the same period in 1994) offset by total operating
costs of $15,826,000 (a 4% decrease compared to 1994, excluding facility
relocation expense). The operating results for 1994, including interest income,
and excluding facility relocation expense, reflect total revenues of $8,330,000
(a 16% decrease compared to the same period in 1993) offset by total costs of 
$16,463,000 (a 10% decrease compared to the same period in 1993).

In 1995 revenue from collaborative product development and distribution
agreements of $1,609,000 decreased 57% from $3,737,000 in 1994 and 71% from
$5,624,000 in 1993. In December 1993, the Company signed an 


                                       8.

<PAGE>   9

amendment to the 1992 agreement with Astra for the joint development and
marketing of therapeutic products resulting from T Cell Sciences' proprietary
TCAR technology. As part of the amended agreement the responsibility for future
development and manufacturing of the two initial monoclonal antibody candidates
shifted to Astra while the Company continues to be responsible for the initial
peptide candidate. Product development revenue declines are in accordance with
the Astra program. In 1995 distribution agreement revenue was $175,000 compared
to $715,000 in 1994 and $500,000 in 1993. These revenues represent signing fees
or milestone payments related to distribution and marketing agreements for TRAx
products with Diamedix Corporation ("Diamedix") in 1995, Yamanouchi
Pharmaceutical Co., Ltd. ("YPC") and INCSTAR Corporation in 1994, and YPC in
1993. (See Note 9, "Notes to Consolidated Financial Statements".)

Product sales revenue for 1995, 1994 and 1993 were $2,354,000, $3,231,000 and
$3,394,000, reflecting a decline of 27%, 5% and 18%, respectively, when compared
to the prior year. In May 1995, the Company received marketing clearance from
the U.S. Food and Drug Administration and during the latter half of 1995 shifted
its sales focus to the launch of TRAx CD4. Sales of preclinical products
decreased in 1995 due to the shift in sales focus to the launch of TRAx combined
with increasing competition with certain preclinical products and continued
weakness in the international diagnostic product market. Initial sales growth 
has been slow with minimal TRAx product sales for 1995. To further advance the 
marketing of TRAx products, in December 1995, the Company signed an exclusive
sales and distribution contract for the United States market with Diamedix
Corporation, an experienced seller in the in vitro immunoassays market. In
March 1996, the Company sold the research products and operations of its
subsidiary, while retaining its TRAx diagnostic product franchise.

Cost of product sales amounted to $1,879,000, 80% of product sales, $2,008,000,
62% of product sales and $2,317,000, 68% of product sales for 1995, 1994 and
1993, respectively. The fluctuation in gross margin is the result of several
factors: costs associated with the inefficiencies of producing products at lower
volumes, the disruption and change in facilities during 1994 and costs
associated with replacing the manufacturing facility in 1995, costs related to
staff reductions in the third quarter of 1995 and 1993 and expenses to increase
manufacturing proficiency in anticipation of increased sales volume associated
with the TRAx CD4 test kit.

Research and development expense decreased 8% from $8,697,000 in 1994 to
$8,005,000 in 1995 primarily due to cost containment programs implemented in
1994 combined with a restructuring program implemented in the third quarter of
1995 which further focused the Company on priority projects. Costs associated
with two phase I clinical trials evaluating the use of TP10 partially offset the
effects of the Company's cost containment programs and restructuring in 1995.
Research and development cost during 1994 decreased approximately 8%, from
$9,438,000 in 1993, primarily due to lower rent resulting from facilities not
being available for the full year and cost containment programs in place during
1994.

General and administrative expense of $4,217,000 reflected a 3% decrease for the
year ended December 31, 1995 compared to 1994. General and administrative
expense for the year ended December 31, 1994 of $4,346,000 decreased 4% compared
to 1993. The decrease for 1995 and 1994 was mainly due to spending controls
implemented during the years.

Marketing and sales costs increased 13% in 1995 to $1,598,000 compared to
$1,411,000 in 1994. The increase is primarily due to marketing costs associated
with the launch of the TRAx CD4 test kit during the latter half of 1995. The 30%
decrease in marketing and sales in 1994 compared to 1993 is primarily due to the
restructuring and staff reductions during the third quarter of 1993 and expenses
incurred early in 1993 for product introduction efforts in Europe and marketing
costs in preparation for the TRAx CD4 product launch in the United States.

Facility relocation expense represents costs incurred directly associated with 
the forced evacuation of the Company's former Cambridge facility due to air
quality. The Company incurred incremental costs when it vacated its Cambridge 
facility and moved to alternative temporary sites, including costs to 
physically move property, establish computer and telephone networks at 
alternate sights and legal and other costs directly resulting from vacating the
facility and terminating the lease. The amounts recorded in 1995 and 1994 were 
$126,000 and $688,000, respectively. Also included in 1994 is $911,000 to 
write off the net book value of leasehold improvements at the Cambridge 
facility. (See Notes 13 and 14, "Notes to Consolidated Financial Statements.")

Other non-operating income of $3,605,000 in 1995, includes $2,900,000 received
from the settlement of a lawsuit the Company brought against its insurance
carrier and interest income of $605,000. Other non-operating expense, of
$490,000 in 1994, includes losses recognized on redemption of the Company's
short-term bond fund, the change in net asset value of its short-term 


                                       9.

<PAGE>   10

bond fund during the year offset by interest and dividend income of $1,362,000.
During 1993, the Company earned $867,000 of interest on its investments and
recorded gains of $326,000 on the sale of certain securities.

During 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 123 ("SFAS 123"), "Accounting for Stock-Based
Compensation". The Company plans to adopt SFAS 123 in 1996 through disclosure
only, therefore, such adoption has no impact on the Company's results from
operations.


LIQUIDITY AND CAPITAL RESOURCES

The Company's cash, cash equivalents and short-term investments (including
short-term restricted cash of $958,000) at December 31, 1995, decreased
$3,909,000 to $12,275,000. The decrease is mainly due to the net operating loss
of $11,863,000, which was partially offset by non-operating income of $3,605,000
and approximately $6,105,000 from the private placement of 2,550,000 newly
issued shares of the Company's common stock. Cash used in operations
approximated $10,848,000 in 1995, after adjusting for $2,900,000 received
from the settlement of the lawsuit, compared with $8,633,000, adjusted for 
facility relocation expense, and $5,458,000 during the twelve months ended 
December 31, 1994 and 1993, respectively. The increase in cash used by 
operations during 1995, is primarily due to lower product development revenue 
from Astra, decreased product sales revenue and increased working capital 
requirements.

During 1994, the Company entered into a five-year agreement to lease up to
$2,000,000 of equipment. The lease arrangement requires that the Company
maintain certain restrictive covenants, determined at the end of each fiscal
quarter, including a cash, cash equivalents and short-term investments balance
of not less than $10,000,000. At September 30, 1995 the Company's cash, cash
equivalents and short-term investment balance was below the minimum covenant
requirement. In November 1995, in accordance with the lease agreement, the
Company pledged as collateral cash equal to the amount outstanding on the lease
which is to remain in a certificate of deposit until the end of the lease, or as
otherwise agreed by the lessor and the Company. At December 31, 1995 the Company
had approximately $1,784,000 outstanding on the lease. In March 1996 the Company
repaid approximately $980,000 of the outstanding obligation under the lease in
conjunction with the sale of the research products and operations of its
subsidiary. As a result, the amount remaining as collateral as of March 21, 1996
was reduced to $850,000.

On March 5, 1996 the Company sold the research products and operations of its
subsidiary, T Cell Diagnostics, for a purchase price of approximately
$2,880,000, while retaining the TRAx diagnostic product franchise. The purchase
price was paid in the form of a convertible subordinated note receivable in the
principal amount of $1,900,000 and a combination of cash and a short-term note
used to repay approximately $980,000 of obligations under the Company's
operating lease. The Company expects to recognize a gain on the sale of between
$300,000 and $400,000 in the first quarter of 1996. In addition to the proceeds
from the transaction, the sale will result in reduced operating expenses and the
Company expects lower cash usage for 1996 compared to 1995.

The Company believes its current cash, cash equivalents and short-term
investments, combined with anticipated product sales, research and development
revenue under collaborative agreements and interest income will be sufficient to
meet working capital requirements into 1997. These requirements will depend on
several factors, including but not limited, to the progress and costs associated
with research and development programs; preclinical and clinical studies; time
and costs associated with obtaining regulatory approval; timing and scope of
collaborative arrangements; long term facility costs; and expenses and outcome
of pending litigation on the air quality problem. The Company will consider
alternative sources of funding and capital when available and appropriate.


                                      10.

<PAGE>   11


I
TEM 8.   FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

                                                                       Page

Index to Consolidated FinancialStatements and Supplementary
  Schedules

Report of Independent Accountants

Consolidated Balance Sheet at December 31, 1995 and
  December 31, 1994

Consolidated Statement of Operations for the Years ended
  December 31, 1995, December 31, 1994 and December 31, 1993

Consolidated Statement of Stockholders' Equity for the 
  Years ended December 31, 1995, December 31, 1994 and 
  December 31, 1993

Consolidated Statement of Cash Flows for the Years ended 
  December 31, 1995 December 31, 1994, and December 31, 1993


Notes to Consolidated Financial Statements


                                       11.

<PAGE>   12


 
                       REPORT OF INDEPENDENT ACCOUNTANTS



TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF
T CELL SCIENCES, INC.:

In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations, of stockholders' equity and of cash flows
present fairly, in all material respects, the financial position of T Cell
Sciences, Inc., and its subsidiary at December 31, 1995 and 1994, and the
results of their operations and their cash flows for the years then ended in
conformity with generally accepted accounting principles. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.

Price Waterhouse LLP
Boston, Massachusetts
March 5, 1996





THE BOARD OF DIRECTORS 
T CELL SCIENCES, INC.:

We have audited the accompanying consolidated statements of operations, 
stockholders' equity, and cash flows of T Cell Sciences, Inc. and Subsidiary 
for the year ended December 31, 1993. These consolidated financial 
statements are the responsibility of the Company's management. Our 
responsibility is to express an opinion on these consolidated financial 
statements based on our audit.

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 audit provides a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the result of operations and cash flows for 
the year ended December 31, 1993 in conformity with generally accepted 
accounting principles.

KPMG PEAT MARWICK LLP
Boston, Massachusetts
January 28, 1994

                                      12.

<PAGE>   13


<TABLE>
CONSOLIDATED BALANCE SHEET

<CAPTION>
                                                                                 DECEMBER 31,    DECEMBER 31,
                                                                                      1995            1994
- --------------------------------------------------------------------------------------------------------------
<S>                                                                               <C>            <C> 

ASSETS

Current Assets:
     Cash and Cash Equivalents, Including Restricted Cash                         $ 12,275,217   $  7,644,653
     Short-term Investments                                                             --          8,539,666
- --------------------------------------------------------------------------------------------------------------
                                                                                    12,275,217     16,184,319
     Accounts Receivable, Net of the Allowance for
          Doubtful Accounts of  $17,187 and $10,000                                    339,167        471,824
     Inventories                                                                       403,293        409,266
     Prepaid and Other Current Assets                                                  541,411        560,145
- --------------------------------------------------------------------------------------------------------------

          Total Current Assets                                                      13,559,088     17,625,554

Property and Equipment, Net                                                          1,172,137      1,060,193
Restricted Cash                                                                        850,000         --
Other Assets                                                                         2,951,062      1,998,784
- --------------------------------------------------------------------------------------------------------------

              Total Assets                                                        $ 18,532,287   $ 20,684,531
==============================================================================================================

LIABILITIES AND STOCKHOLDERS' EQUITY

Current Liabilities:
     Accounts Payable                                                                  724,944        786,344  
     Accrued Expenses                                                                1,504,586      1,812,508 
     Deferred Revenue                                                                  121,083         --
- --------------------------------------------------------------------------------------------------------------

         Total Current Liabilities                                                   2,350,613      2,598,852
- --------------------------------------------------------------------------------------------------------------

Collaborator Advance                                                                   181,573        500,000
- --------------------------------------------------------------------------------------------------------------

Commitments and Contingent Liabilities (Notes 3 and 14)

Stockholders' Equity:
     Class B preferred stock, $2 Par Value; 1,163,102
         Shares Authorized                                                              --             --
     Class C preferred stock, $.01 Par Value; 3,000,000
         Shares Authorized                                                              --             --
     Class C-1 Junior Participating Cumulative preferred stock
          $.01 par value; 350,000 Shares Authorized                                     --             --
     Common Stock, $.001 Par Value; 50,000,000 Shares Authorized; 
         19,904,706 and 19,882,730 Issued and Outstanding in 1995, respectively
         17,054,222 and 17,037,899 Issued and Outstanding in 1994, respectively         19,905         17,054         
     Additional Paid-in Capital                                                     62,399,255     55,726,143
     Less:  21,976 and 16,323 Common Treasury Shares at Cost                           (80,523)       (76,931)
     Accumulated Deficit                                                           (46,338,536)   (38,080,587)
- --------------------------------------------------------------------------------------------------------------

         Total Stockholders' Equity                                                 16,000,101     17,585,679
- --------------------------------------------------------------------------------------------------------------

              Total Liabilities and Stockholders' Equity                          $ 18,532,287   $ 20,684,531
==============================================================================================================
</TABLE>



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


                                      13.

<PAGE>   14



<TABLE>
CONSOLIDATED STATEMENT OF OPERATIONS


<CAPTION>
                                                YEAR              YEAR             YEAR
                                                ENDED             ENDED            ENDED
                                             DECEMBER 31,      DECEMBER 31,     DECEMBER 31,
                                                 1995             1994             1993
- ---------------------------------------------------------------------------------------------
<S>                                          <C>               <C>              <C> 

OPERATING REVENUE:

Product Development and
      Distribution Agreements                $  1,608,677      $  3,737,143     $  5,624,204
Product Sales                                   2,354,377         3,230,815        3,394,119
- ---------------------------------------------------------------------------------------------

      Total Operating Revenue                   3,963,054         6,967,958        9,018,323
- ---------------------------------------------------------------------------------------------

OPERATING EXPENSE:

Cost of Product Sales                           1,879,387         2,008,279        2,317,036
Research and Development                        8,004,598         8,697,174        9,438,365
General and Administrative                      4,217,345         4,345,972        4,515,139
Marketing and Sales                             1,597,888         1,411,420        2,008,793
Facility Relocation                               126,419         1,598,609           --
- ---------------------------------------------------------------------------------------------

      Total Operating Expense                  15,825,637        18,061,454       18,279,333

Operating Loss                                (11,862,583)      (11,093,496)      (9,261,010)
Non-Operating Income (Expense), Net             3,604,634          (490,055)       1,193,452
- ---------------------------------------------------------------------------------------------

Net Loss Before Minority Interest              (8,257,949)      (11,583,551)      (8,067,558)
Minority Interest Share of Loss                    --                --              310,038
- ---------------------------------------------------------------------------------------------

Net Loss                                     $ (8,257,949)      (11,583,551)      (7,757,520)
=============================================================================================

Net Loss Per Common Share                    $      (0.47)      $     (0.68)    $      (0.56)
=============================================================================================
Weighted Average Common
  Shares Outstanding                           17,482,143        17,053,443       13,930,643
=============================================================================================
</TABLE>




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


                                      14.

<PAGE>   15



<TABLE>
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993


<CAPTION>
                                        COMMON STOCK      ADDITIONAL    TREASURY                      TOTAL
                                        ------------       PAID-IN       STOCK      ACCUMULATED   STOCKHOLDERS'
                                     SHARES   PAR VALUE    CAPITAL        COST        DEFICIT        EQUITY
================================================================================================================
<S>                                <C>         <C>       <C>           <C>         <C>             <C>
BALANCE AT
   DECEMBER 31, 1992               13,452,832  $13,453   $38,568,352   $(125,075)  $(18,739,516)   $19,717,214

Purchase of Minority
    Interest in T Cell
    Diagnostics                       660,000      660          (660)         --             --             --
Issuance at $0.60 to $6.63
    per Share upon Exercise           102,085      102       379,141          --             --        379,243
    of Stock Options
Private Placement Proceeds          2,834,780    2,835    16,792,445          --             --     16,795,280
Net Loss for the Year
    Ended December 31, 1993                --       --            --          --     (7,757,520)    (7,757,520)
- ----------------------------------------------------------------------------------------------------------------
BALANCE AT
   DECEMBER 31, 1993               17,049,697  $17,050   $55,739,278   $(125,075)  $(26,497,036)   $29,134,217

Issuance at $2.13 to $5.25
    per Share upon Exercise             
    of Stock Options                    4,525        4        13,302          --             --         13,306
Employee Stock Purchase
     Plan Issuance at $2.13                
     per Share                             --       --       (26,437)     48,144             --         21,707
Net Loss for the Year
    Ended December 31, 1994                --       --            --          --    (11,583,551)   (11,583,551)
- ----------------------------------------------------------------------------------------------------------------

BALANCE AT
   DECEMBER 31, 1994               17,054,222  $17,054   $55,726,143    $(76,931)  $(38,080,587)   $17,585,679


Issuance at $.60 to $4.25
    per Share upon Exercise            
    of Stock Options                   88,668       89       244,664          --             --        244,753
Employee Stock Purchase
     Plan Issuance at $2.13                
     and $2.71 per Share                   --       --       (23,169)     47,864             --         24,695
Private Placement Proceeds          2,550,000    2,550     6,102,332          --             --      6,104,882
Issuance at $1.65 upon
     Exercise of Stock Warrants       211,816      212       349,285          --             --        349,497
Purchase of 16,466 Shares of               
     Treasury Stock at Cost                --       --            --     (51,456)            --        (51,456)      
Net Loss for the Year
    Ended December 31, 1995                --       --            --          --     (8,257,949)    (8,257,949)

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

BALANCE AT
     DECEMBER 31, 1995             19,904,706  $19,905   $62,399,255    $(80,523)  $(46,338,536)   $16,000,101
- ----------------------------------------------------------------------------------------------------------------
</TABLE>




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


                                      15.

<PAGE>   16




<TABLE>
CONSOLIDATED STATEMENT OF CASH FLOWS

<CAPTION>
                                                            YEAR               YEAR               YEAR
                                                            ENDED              ENDED              ENDED
                                                         DECEMBER 31,       DECEMBER 31,       DECEMBER 31,
Increase in Cash and Cash Equivalents                        1995              1994               1993
===========================================================================================================
<S>                                                     <C>                <C>               <C>   

CASH FLOWS FROM OPERATING ACTIVITIES:

       Net Loss                                         $ (8,257,949)      $(11,583,551)     $ (7,757,520)
       Adjustments to Reconcile Net Loss to Cash
         used by Operating Activities:
            Depreciation and Amortization                    719,573            844,741           854,820
            Minority Interest                                     --                 --          (310,038)
            Write off of Leasehold Improvements                   --            910,812                --
            Losses on Short-term Investments                      --          1,851,782                --
            Decrease in Collaborator Advance                (318,427)                --                --

      Changes in Assets and Liabilities:
            Accounts Receivable                              132,657             22,429            19,492
            Inventories                                        5,973             (7,288)          165,653
            Prepaid and Other Current Assets                  18,734           (270,753)          533,112
            Accounts Payable and Accrued Expenses           (369,322)          (401,237)          603,842
            Deferred Revenue                                 121,083           (433,000)          433,000
- ----------------------------------------------------------------------------------------------------------
Net Cash Used by Operating Activities                     (7,947,678)        (9,066,065)       (5,457,639)
- ----------------------------------------------------------------------------------------------------------

CASH FLOWS FROM INVESTING ACTIVITIES:

      Purchase of Short-term Investments                          --         (1,190,608)      (22,164,512)
      Redemption ofShort-term Investments                  8,539,666         13,983,558        13,001,504
      Acquisition of Property and Equipment                 (577,263)          (770,344)         (538,664)
      Increase in Patents and Licenses                    (1,216,884)          (493,885)         (682,561)
      Transfer of Cash into Long-term Restricted Cash       (850,000)                --                --
      Other                                                   10,352             (4,435)           13,557
- ----------------------------------------------------------------------------------------------------------
Net Cash Provided (Used) by Investing Activities           5,905,871         11,524,286       (10,370,676)
- ----------------------------------------------------------------------------------------------------------

CASH FLOWS FROM FINANCING ACTIVITIES:

      Advance from Collaborators                                  --                 --           500,000
      Proceeds from Sale of Stock                          6,129,577             21,707        16,795,280
      Proceeds from Exercise of Stock Warrants               349,497                 --                --
      Proceeds from Exercise of Stock Options                244,753             13,306           379,243
      Purchases of Treasury Stock                            (51,456)                --                --
- ----------------------------------------------------------------------------------------------------------
Net Cash Provided by Financing Activities                  6,672,371             35,013        17,674,523
- ----------------------------------------------------------------------------------------------------------

Increase in Cash and Cash Equivalents                      4,630,564          2,493,234         1,846,208

Cash and Cash Equivalents at Beginning of Period           7,644,653          5,151,419         3,305,211
- ----------------------------------------------------------------------------------------------------------

Cash and Cash Equivalents at End of Period               $12,275,217       $  7,644,653      $  5,151,419
==========================================================================================================
Cash, Cash Equivalents, Short-term Investments 
      and Marketable Securities at End of Period         $12,275,217       $ 16,184,319      $ 28,335,817
==========================================================================================================
</TABLE>



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


                                      16.

<PAGE>   17


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993

1.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

(A)   Nature of Business

T Cell Sciences, Inc. (the "Company") is a research-based emerging biotechnology
company specializing in the understanding and treatment of diseases caused by
misregulation of the body's natural defense systems. The Company is developing
therapeutic products for diseases of inflammation and immunology. T Cell 
Sciences develops and commercializes products on a proprietary basis and in 
collaboration with established pharmaceutical partners, including Astra AB and 
Yamanouchi Pharmaceutical Co., Ltd. The Company's wholly owned subsidiary, T 
Cell Diagnostics, Inc. ("TCD") is commercializing a line of diagnostic products
to detect and monitor immune-related disorders.

(B)   Basis of Consolidation

The financial statements include the accounts of T Cell Sciences, Inc. and its
wholly owned subsidiary, T Cell Diagnostics, Inc. T Cell Diagnostics was 84%
owned until September 22, 1993. All intercompany transactions have been
eliminated.

(C)   Cash, Cash Equivalents and Short-term Investments

Cash equivalents and investments are stated at the lower of amortized cost or
market value. The majority of the Company's cash and cash equivalents are held
by one bank and two investment brokers. The Company does not believe that it is
subject to any unusual credit risk beyond the normal risk encountered in
operating its business. Included in cash and cash equivalents at December 31,
1995 is $958,000 of short-term restricted cash (Note 3).

(D)   Revenue Recognition

The Company has entered into separate agreements with corporate collaborators
for the performance of certain specified product developments. The product
development agreements generally provide for periodic nonrefundable payments
which are recognized as revenue as the work is performed. Cash payments received
by the Company in advance of performing the work are recorded as deferred
revenue.

Revenues from product sales are recorded when the product is shipped.

(E)   Research and Development Costs

Research and development costs are expensed as incurred. Such costs include
internal research and development activities and expenses associated with
external product development agreements.

(F)   Inventories

Inventories are stated at the lower of cost or market. Cost is determined using
the first-in, first-out (FIFO) method.

(G)   Property and Equipment

Property and equipment is stated at cost and depreciated over the estimated
useful lives of the related assets using the straight-line method. Laboratory
equipment and office furniture and equipment are depreciated over a five year
period and computer equipment is depreciated over a three year period. Leasehold
improvements are amortized over the shorter of the estimated useful life or the
noncancelable term of the related lease.

(H)   Licenses, Patents and Trademarks

Included in other assets are purchased licenses, patents and trademarks which
are capitalized and amortized over the shorter of the estimated useful lives or
ten years using the straight-line method.


                                      17.

<PAGE>   18

(I)   Loss Per Share

Net loss per share of common stock is based on the weighted average number of
common shares outstanding during each period. Common stock equivalents are not
included for any period presented, as their effect is antidilutive.

(J)   Stock-Based Compensation

In October 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 123 ("SFAS 123"), "Accounting for Stock-Based
Compensation". SFAS 123 allows the Company to account for its stock-based
employee compensation plans based upon either a fair value method or under the
intrinsic value method currently followed by the Company. If the current method
is retained, SFAS 123 requires certain additional disclosures regarding the
impact which the fair value method would have on the results of the Company's
operations. The Company expects to adopt SFAS 123 in 1996 through disclosure
only and therefore, such adoption will have no impact on the Company's financial
position or results of operations.

(K)   Use of Estimates

The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingencies at December 31, 1995 and 1994 and the reported
amounts of revenue and expense for the years ended December 31, 1995, 1994 and
1993. Actual results could differ from those estimates.

(L)   Reclassifications

Certain prior year information was reclassified to conform with the current year
presentation.

2.    SHORT-TERM INVESTMENTS AND RESTRICTED CASH


<TABLE>
As of January 1, 1994, the Company adopted Statement of Financial Accounting
Standards No. 115, "Accounting for Certain Debt and Equity Securities". Under
this standard, the Company is required to classify its investments in debt and
equity securities into one or more of the following three categories:
held-to-maturity, trading or available-for-sale. All debt and equity securities
classified as held-to-maturity are recorded at amortized cost. Trading
securities are classified at fair market value and unrealized gains and losses
are included in earnings. Available-for-sale securities are also recorded at
fair market value with unrealized gains and losses reported in stockholders'
equity. At December 31, 1995, the Company did not hold any debt and equity
securities as all excess cash was held in money market funds. At December 31,
1994, the Company's excess cash was held in money market funds and debt and
equity securities; all of the Company's debt and equity securities were
classified as available-for-sale. The following is a summary of debt and equity
securities as of December 31, 1994:

<CAPTION>
                                              Unrealized
                          Amortized     -----------------------
   Security Type           Cost          Gains        Losses       Market Value
- --------------------------------------------------------------------------------
<S>                      <C>                <C>       <C>           <C>
Short-term bond fund     $9,513,000         --        $973,000      $8,540,000
</TABLE>


Proceeds from maturities and other sales of securities for the year ended
December 31, 1994 were $13,984,000, the related gross realized losses on such
maturities and sales were $879,000 and gross realized gains were immaterial.
Additionally, in December 1994, the Company decided, as a result of the duration
and extent of the unrealized losses on its bond fund, that the unrealized loss
was other than temporary and realized a loss of $973,000. In February 1995, the
Company liquidated its investment in the bond fund; actual losses incurred
approximated the amount recognized in 1994.

At December 31, 1995 $1,808,000 is pledged as collateral in accordance with the
terms of the Company's operating lease agreement. In March 1996, the Company
repaid a portion of the outstanding obligation under the operating lease, in
conjunction with the sale of the research products and operations of TCD (Note
16). As a result, the amount remaining as collateral was reduced to $850,000 and
$958,000 is included in cash equivalents.


                                      18.

<PAGE>   19

3.    PROPERTY, EQUIPMENT AND LEASES


<TABLE>
Property and equipment includes the following:

<CAPTION>
                                                 DECEMBER 31,     DECEMBER 31,
                                                     1995             1994
                                               ================================
          <S>                                   <C>              <C>

          Laboratory Equipment                  $ 2,800,649      $ 3,153,536
          Office Furniture and Equipment            953,189          792,758
          Leasehold Improvements                    614,616          111,119
                                               --------------------------------

          Property and Equipment, Total           4,368,454        4,057,413
          Less Accumulated Depreciation
            and Amortization                     (3,196,317)      (2,997,220)
                                               --------------------------------

          Property and Equipment, Net           $ 1,172,137      $ 1,060,193
                                               ================================
</TABLE>


Depreciation expense related to equipment and leasehold improvements was
approximately $465,000, $649,000 and $676,000 for the years ended December 31,
1995, 1994 and 1993, respectively.

In June 1994, the Company evacuated its former Cambridge, Massachusetts 
facility due to air quality problems and in October 1994 entered into a
five-year lease for laboratory, office and warehouse space in Woburn,
Massachusetts for its diagnostic business, and entered into a short-term
sublease agreement for laboratory facilities and a short-term lease for office
space in Needham, Massachusetts for its therapeutic business, which were
combined into two-year agreements in March 1995. As part of the sale of the
research products and operations of TCD, the lease for the Woburn facilities
was assigned to Endogen.


<TABLE>
Obligations for base rent under these and other noncancelable operating leases
as of December 31, 1995 are approximately as follows:

   <S>                                                     <C>
   Year ending December 31, 1996                           $1,217,000
                            1997                              711,000
                            1998                              551,000
                            1999                              508,000
                            2000                               92,000
                            Thereafter                             --
                                                           ----------
                            Total minimum lease payments   $3,079,000
                                                           ----------
</TABLE>


The Company's total rent expense was approximately $1,100,000, $1,100,000 and
$1,200,000 for the years ended December 31, 1995, 1994 and 1993, respectively.
Beginning in March 1996, the Company's lease obligations were reduced as a
result of the sale of the research products and operations of TCD to Endogen,
Inc.

In August 1994, the Company entered into a five-year lease agreement to lease up
to $2,000,000 of equipment. The lease agreement requires that the Company
maintain certain restrictive covenants determined at the end of each fiscal
quarter, including a cash, cash equivalents and short-term investments balance
of not less than $10,000,000 and certain financial ratios. At September 30, 1995
the Company's cash, cash equivalents and short-term investments balance was
below the minimum covenant requirement. In accordance with the lease agreement,
in November 1995, the Company pledged as collateral to the lessor the cash
amount outstanding on the lease. At December 31, 1995, $958,000 and $850,000 are
recorded as short-term and long-term restricted cash, respectively. Under this
agreement, the Company determines when lease payments will begin and interest is
payable on all outstanding amounts until lease payments commence. At December
31, 1995 and 1994, $899,000 and $570,000, respectively, was outstanding for
which the schedule for lease payments had not yet been established. In March
1996, the Company repaid approximately $980,000 of the outstanding total
obligation under the lease in conjunction with the sale of the research products
and operations of TCD, which has increased the amount of lease financing 
available to the Company.


                                      19.

<PAGE>   20

4.    OTHER ASSETS


<TABLE>
Other assets include the following:

<CAPTION>
                                         DECEMBER 31,        DECEMBER 31,
                                             1995                1994
                                        =================================
       <S>                               <C>                <C>
       Capitalized Patent Costs          $3,272,109         $2,131,202
       Accumulated Amortization            (577,624)          (403,099)
                                        ---------------------------------

       Capitalized Patent Costs, Net      2,694,485          1,728,103
       Other Non Current Assets             256,577            270,681
                                        ---------------------------------

                                         $2,951,062         $1,998,784
                                        =================================
</TABLE>


Amortization expense for the years ended December 31, 1995, 1994 and 1993
relating to patent costs, purchased licenses and trademarks was approximately
$254,000, $196,000 and $179,000, respectively.


5.    ACCRUED EXPENSES


<TABLE>
Accrued expenses include the following:

<CAPTION>
                                               DECEMBER 31,       DECEMBER 31,
                                                   1995               1994
                                             ==================================
       <S>                                     <C>                <C>    

       Accrued License Fees                    $   47,584         $  397,779
       Accrued Funded Research                     19,350            127,529 
       Accrued Royalties                           13,809            255,124 
       Accrued Payroll and Employee Benefits      210,961            197,256 
       Accrued Relocation Expenses                 79,725            255,000 
       Accrued Clinical Trials                    195,944                 -- 
       Accrued Patent Costs                       228,981                 -- 
       Other Accrued Expenses                     708,232            579,820 
                                             ----------------------------------

                                               $1,504,586         $1,812,508
                                             ==================================
</TABLE>



<TABLE>
6.    INCOME TAXES

<CAPTION>
                                                   YEAR ENDED DECEMBER 31,
                                          -------------------------------------------
                                              1995           1994           1993
                                          -------------------------------------------
<S>                                       <C>             <C>            <C>
Income tax benefit:
        Federal                           $ 2,984,812     $3,705,826     $2,777,761
        State                                 354,821      1,013,701        969,339
                                          -------------------------------------------

                                            3,339,633      4,719,527      3,747,100
Deferred tax assets valuation allowance    (3,339,633)    (4,719,527)    (3,747,100)
                                          -------------------------------------------

                                          $        --    $        --    $        --
                                          ===========================================
</TABLE>



                                      20.

<PAGE>   21



<TABLE>
Deferred tax assets are comprised of the following at December 31:

<CAPTION>
                                                       1995           1994
                                                  =============================
<S>                                               <C>             <C>         

Net Operating Loss Carryforwards                  $ 17,207,019    $ 14,072,019
Tax Credit Carryforwards                             2,921,484       2,690,852
Other                                                1,159,815       1,185,814
                                                  -----------------------------

Gross Deferred Tax Assets                           21,288,318      17,948,685
Deferred Tax Assets Valuation Allowance            (21,288,318)    (17,948,685)
                                                  -----------------------------

                                                  $         --    $         --
                                                  =============================
</TABLE>



<TABLE>
In reconciliation between the amount of reported income tax expenses and the
amount computed using the U.S. Statutory rate of 35% follows:

<CAPTION>
                                                             1995           1994           1993
                                                        ===========================================
<S>                                                      <C>            <C>             <C> 
Loss at Statutory Rates                                  $(2,890,282)   $(4,054,243)   $(2,715,132) 
Research and Development Credits                            (255,752)      (165,657)      (472,512) 
State tax benefit, net of federal tax liabilities           (231,249)      (573,354)      (485,482)
Other                                                         37,650         73,727        (73,974) 
Benefit of losses and credits not recognized,             
     increase in valuation allowance                       3,339,633      4,719,527      3,747,100
                                                        -------------------------------------------

                                                         $        --    $        --    $        --
                                                        ===========================================
</TABLE>


The Company has provided a full valuation allowance for deferred tax assets as
management has concluded that it is more likely than not that the Company will
not recognize any benefits from its net deferred tax asset. The timing and
amount of future earnings will depend on numerous factors, including the
Company's future profitability. The Company will assess the need for a valuation
allowance as of each balance sheet date based on all available evidence.

At December 31, 1995, the Company has U.S. net operating loss carryforwards of
$44,328,137, U.S. capital loss carryforwards of $1,852,324, and U.S. tax credits
of $2,419,849 which expire at various dates from 1999 through 2010.

Under the Tax Reform Act of 1986, certain substantial changes in the Company's
ownership could result in an annual limitation on the amount of net operating
loss carryforwards, research and development tax credits, and capital loss
carryforwards which could be utilized.


7.    STOCKHOLDERS' EQUITY

(A)   Public and Private Stock Offerings

On November 7, 1995 the Company completed a private placement of 2,550,000 newly
issued shares of common stock. Net proceeds were approximately $6,100,000 after
deducting all associated expenses.

On December 10, 1993 the Company completed a private placement of 2,834,780
newly issued shares of common stock. Net proceeds were approximately $16,800,000
after deducting all associated expenses.

On September 22, 1993 the Company issued 660,000 shares of common stock in
exchange for the outstanding 16% minority interest in T Cell Diagnostics.


                                      21.

<PAGE>   22

(B)   Stock Purchase Warrants

In connection with the sale of Class B preferred stock, the Company sold 322,767
warrants in December 1985 and 201,731 warrants in February 1986 at $.02 per
warrant to purchase an equal amount of common stock for $1.65 per share. As of
December 31, 1995, all warrants were exercised.

(C)   Stock Options

The Company's 1991 Stock Compensation Plan (the "1991 Plan"), which is an
amendment and restatement of the Company's 1985 Incentive Option Plan, permits
the granting of incentive stock options (intended to qualify as such under
Section 422A of the Internal Revenue Code of 1986, as amended), non-qualified
stock options, stock appreciation rights, performance share units, restricted
stock and for other awards of restricted stock in lieu of cash bonuses to
employees, consultants and outside directors.

The Plan allows for a maximum of 3,700,000 shares of common stock to be issued
prior to December 1, 2001. The Board of Directors determines the term of each
option, option price, number of shares for which each option is granted and the
rate at which each option is exercisable. The term of each option cannot exceed
ten years (five years for options granted to holders of more than 10% of the
voting stock of the Company). The exercise price of stock options shall not be
less than the fair market value of the common stock at the date of grant (110%
of fair market value for options granted to holders of more than 10% of the
voting stock of the Company).


<TABLE>
A summary of the Stock Compensation Plan option activity is as follows:

<CAPTION>
                                                  OPTIONS          PRICE RANGE
================================================================================
<S>                                             <C>               <C> 
OPTIONS OUTSTANDING AT DECEMBER 31, 1992        1,619,574         $ .60 - 20.00

      Options granted                             645,986          5.06 -  7.81
      Exercised                                  (102,085)          .60 -  6.63
      Canceled                                   (153,319)         3.00 - 10.88
- --------------------------------------------------------------------------------
OPTIONS OUTSTANDING AT DECEMBER 31, 1993        2,010,156         $ .60 - 20.00

      Options granted                             926,089          2.50 -  6.81
      Exercised                                    (4,525)         2.13 -  5.25
      Canceled                                   (371,900)         3.00 - 13.19
- --------------------------------------------------------------------------------
OPTIONS OUTSTANDING AT DECEMBER 31, 1994        2,559,820         $ .60 - 20.00

      Options granted                             620,523          2.50 -  4.59
      Exercised                                   (88,668)         2.63 -  5.25
      Canceled                                   (575,362)         2.13 - 13.19
================================================================================
OPTIONS OUTSTANDING AT DECEMBER 31, 1995        2,516,313         $ .60 - 20.00
================================================================================
</TABLE>


In December 1995, the Company canceled 211,405 stock options and regranted      
169,123 stock options resulting in a 42,282 decrease in options outstanding in
connection with a repricing offer to non-officer employees, most of whom were 
long-term employees. Of the above, 2,516,313 stock options outstanding at
December 31, 1995, 1,007,109 were incentive stock options and 1,509,204 were
nonqualified stock options. At December 31, 1995, 454,455 of the outstanding
incentive stock options were exercisable at $0.60 to $10.88 per share and
1,043,946 of the outstanding nonqualified stock options were exercisable at
$2.00 to $20.00 per share. At December 31, 1995, options to purchase 571,516
shares of common stock were available for future grant under this plan.


                                      22.

<PAGE>   23

(E)   Employee Stock Purchase Plan

The 1994 Employee Stock Purchase Plan (the "1994 Plan") was adopted on June 30,
1994. All full time employees of the Company are eligible to participate in the
1994 Plan. A total of 150,000 shares are reserved for issuance under this plan.
An employee may participate voluntarily in any offering for up to 15% of their
compensation to purchase up to 500 shares per year and may withdraw from any
offering at any time before stock is purchased. Participation terminates
automatically upon termination of employment. The purchase price per share of
common stock in an offering is 85% of the lower of its fair market value at the
beginning of the offering period or the applicable exercise date. As of December
31, 1995, 21,028 shares had been purchased under the purchase plan, with shares
issued from treasury shares.

(F)   Shareholder Rights Plan

On November 10, 1994, the Company's Board of Directors declared a dividend of
one preferred share purchase right for each share of common stock outstanding.
Each right entitles the holder to purchase from the Company one-one thousandth
of a share of Series C-1 Junior Participating Cumulative Preferred Stock (a
"Unit"), par value $.01 at a price of $16.00 per one-one thousandth of a share,
subject to certain adjustments. The Units are exercisable only if a person or a
group acquires 15% or more of the outstanding common stock of the Company or
commences a tender offer which would result in the ownership of 15% or more of
the Company's outstanding common stock. Once a Unit becomes exercisable, the
plan allows the Company's shareholders to purchase common stock at a substantial
discount. Unless earlier redeemed, the Units expire on November 10, 2004. The
Company is entitled to redeem the Units at $.01 per Unit subject to adjustment
for any stock split, stock dividend or similar transaction.

As of December 31, 1995 the Company has authorized the issuance of 350,000
shares of Series C-1 Junior Participating Cumulative Preferred Stock for use in
connection with the shareholder rights plan.

8.    RESEARCH AND LICENSING AGREEMENTS

The Company funds certain portions of its research externally. The total costs
funded externally were approximately $120,000, $140,000 and $760,000 for the
years ended December 31, 1995, 1994 and 1993.

The Company enters into licensing agreements with several universities and
research organizations. Under the terms of these agreements, the Company has
received licenses or options to license technology, certain patents or patent
applications. The Company is required to make payments of nonrefundable license
fees and royalties which amounted to approximately $200,000, $336,000 and
$153,000 for the years ended December 31, 1995, 1994 and 1993.

9.    PRODUCT DEVELOPMENT AND DISTRIBUTION AGREEMENTS

The Company's product development revenues were received from contracts with
different organizations. Total revenue received by the Company in connection
with these contracts for the years ended December 31, 1995, 1994 and 1993 were
approximately $1,600,000, $3,700,000 and $5,600,000, respectively. A summary of
these contracts is as follows:

(A)   Astra AB

In January 1992, the Company entered into a product development and distribution
agreement with Astra AB ("Astra"), a worldwide pharmaceutical company
headquartered in Sodertalje, Sweden, for the joint development and marketing of
therapeutic products resulting from T Cell Sciences' proprietary T cell antigen
receptor ("TCAR") technology. The products to be developed exclusively and
jointly with Astra are monoclonal antibodies and protein-derived
immunomodulators that may have efficacy in treating autoimmune diseases such as
multiple sclerosis, Crohn's disease, and rheumatoid arthritis. The agreement
calls for approximately $15,000,000 of initial funding and, in conjunction with
the achievement of milestones and pursuant to options, the potential of
additional 


                                      23.

<PAGE>   24

funding up to $17,000,000 over several years. Revenue recognized for the years
ended December 31, 1995, 1994 and 1993 was $1,400,000, $3,000,000 and
$5,100,000, respectively.

In December 1993 the Company amended its January 1992 product development and
distribution agreement with Astra. In the amendment, Astra reaffirmed its
original funding and agreed to increase its commitment by assuming
responsibility for future development and manufacturing of the two initial
monoclonal antibody candidates, TM27 and TM29, while the Company continues to be
responsible for the initial peptide candidate, TP12. The royalty on future
product sales to be paid to the Company by Astra has been adjusted to reflect
Astra's substantial additional development and manufacturing commitment.

Included in revenue for 1995 is $318,000 from the reduction of the collaborator
advance liability. The funds were advanced from Astra for the expansion of
additional research space dedicated to joint TCAR product research. The
collaborator advance liability was reduced based on the amended agreement and
management's assessment of the Company's obligations with the agreement.

(B)   Yamanouchi Pharmaceutical Co., Ltd.

In December 1986 the Company entered into an agreement with Yamanouchi
Pharmaceutical Co., Ltd. ("YPC") for the development and marketing of certain
diagnostic products in Japan and in April 1989, the Company executed a new joint
development agreement for several new diagnostic products for Japan. In May
1992, the Company expanded its relationship with YPC to include a product
marketing arrangement for Japan and Taiwan related to several TRAx products in
development. Revenues of approximately $500,000 were recognized under these
agreements for the years ended December 31, 1994 and 1993.

(C)   Diamedix Corporation

In December 1995, the Company received a $175,000 signing fee associated with an
exclusive distribution agreement with Diamedix Corporation to market TRAx CD4
and TRAx CD8 microtiter plate diagnostic kits to clinical diagnostic
laboratories in the United States. The Company retains the rights to sell kits
to certain research laboratories and pharmaceutical companies. Under the term of
the agreement, the Company, in addition to the signing fee, will receive a
purchase price for the supply of the kits and annual order commitments from
Diamedix. The initial term of the agreement is five years.

(D)   SmithKline Beecham, p.l.c

In 1989, the Company signed an exclusive development and distribution contract
for TP10 (sCR1) with SmithKline Beecham. The Company entered into a new
agreement in October 1994, with SmithKline Beecham, superseding the original
agreement. Under the new agreement, the Company regained exclusive rights to
sCR1 in North America, including clinical development and marketing rights and
SmithKline Beecham was granted an option for clinical development and marketing
of injectable sCR1 outside of North America. The Company and SmithKline Beecham
mutually agreed to terminate the October agreement in February 1995, with no
future financial obligations to either party.

(E)   INCSTAR

In March 1994, the Company received a $250,000 signing fee associated with a
distribution agreement with INCSTAR Corporation to market TRAx CD4 and TRAx CD8
kits in North America, Europe and most other countries of the world. During
1995, the Company and INCSTAR Corporation mutually agreed to terminate the
agreement without any future financial obligations.


                                      24.

<PAGE>   25

10.   NON-OPERATING INCOME(EXPENSE)


<TABLE>
Non-Operating income(expense) includes the following:

<CAPTION>
                                                  YEAR ENDED DECEMBER 31,
                                           --------------------------------------
                                               1995         1994          1993
                                           ======================================
   <S>                                     <C>           <C>           <C>       
   Interest and Dividend Income            $  604,634    $1,361,727    $  867,141
   Settlement of Lawsuit                    2,900,000            --            --
   Gain on Sale of Investments                100,000            --       326,311
   Realized Loss on Sale of Investments            --      (878,924)           --
   Other than Temporary Loss   
     on Writedown of Investment                    --      (972,858)           --
                                           --------------------------------------

                                           $3,604,634    $ (490,055)   $1,193,452
                                           ======================================
</TABLE>


11.   DEFERRED SAVINGS PLAN

Under section 401(k) of the Internal Revenue Code of 1986, the Board of
Directors adopted, effective May 1990, a tax-qualified deferred compensation
plan for employees of the Company. Participants may make tax deferred
contributions up to 15%, or $9,240, of their total salary in 1995. The Company
may, at its discretion, make contributions to the plan each year matching up to
1% of the participant's total annual salary. Company contributions amounted to
$39,000, $42,000 and $35,000 for the years ended December 31, 1995, 1994 and
1993.

12.   FOREIGN SALES AND SALES TO SIGNIFICANT CUSTOMER

Foreign Sales:
- -------------


<TABLE>
Product sales were generated geographically as follows:

<CAPTION>
NET PRODUCT SALES FOR THE
TWELVE MONTHS ENDED              EUROPE          USA         ASIA         OTHER        TOTAL
- ----------------------------------------------------------------------------------------------
<S>                           <C>           <C>            <C>          <C>         <C>       

December 31, 1995             $  732,000    $  992,000     $491,000     $139,000    $2,354,000
December 31, 1994              1,187,000     1,455,000      526,000       63,000     3,231,000
December 31, 1993              1,754,000     1,162,000      424,000       54,000     3,394,000
</TABLE>


Sales to Significant Customer:
- -----------------------------

In 1995 the Company had product sales to one customer of 12%.

13.   FACILITY RELOCATION EXPENSE

In June 1994, the Company temporarily vacated its headquarters building at 38
Sidney Street in Cambridge, Massachusetts due to air quality problems within the
building causing certain employees to experience skin and respiratory
irritation. During the third quarter of 1994, the Company determined that it
could not return to the building and ensure the protection of its employees
health. As a result, the Company moved its headquarters to Needham,
Massachusetts and its diagnostic subsidiary to Woburn, Massachusetts. The costs
to physically move property and establish computer and telephone networks at
alternate sights, write-off the net book value of leasehold improvements and
legal and other costs directly associated with vacating the Sidney Street
location are included as relocation expense.

The total amount charged to relocation expense was included in the Company's
property and business interruption claims with its insurer. In July 1995, the
Company brought suit against its insurance carrier and the policy underwriter
for a judgment that the Company is entitled to insurance coverage for its
property and business 


                                      25.

<PAGE>   26

interruption losses incurred as a result of the forced evacuation and
relocation. In November 1995, the Company received $2,900,000 as a result of a
settlement agreement and the lawsuit was dismissed.

14.   LITIGATION

In December 1994, the Company filed a lawsuit in the Superior Court of
Massachusetts against the landlord of its former Cambridge, Massachusetts
headquarters, to recover the damages incurred by the Company resulting from the
evacuation of the building, due to air quality problems which caused skin and
respiratory irritation to a significant number of employees. The landlord       
defendant has filed counterclaims, alleging the Company has breached its lease
obligations and the landlords mortgagor has filed claims against the Company
for payment of the same rent alleged to be owed. The Company believes at this 
time that it will prevail on the merits of the lawsuits and is vigorously
defending the claims brought against it.  Due to the pre-trial stage of the
lawsuits, a range of potential losses, which the Company believes are unlikely,
cannot be estimated at this time. Accordingly, no accrual has been made in
the financial statements relative to any potential effects on the Company's
future operating results.  The Company's insurance carrier is reimbursing the
Company for certain legal expenses associated with the counterclaims, under
reservation of rights.  (See Item 3., Legal Proceedings.)

15.   RELATED PARTY TRANSACTION

During 1995, the Company entered into a Placement Agency Agreement with a firm
whereby the Company paid $165,000 in fees for the private placement of stock of
the Company with certain investors. A Managing Director of the firm is also a
Director of the Company.

16.   SALE OF PORTION OF DIAGNOSTIC BUSINESS

On March 5, 1996 the Company sold to Endogen, Inc. the research products and
operations of TCD for a purchase price of approximately $2,880,000, while
retaining the TRAx diagnostic product franchise. The consideration for this sale
was paid in the form of a convertible subordinated note receivable (the
"Convertible Note") in the principal amount of $1,900,000, subject to final
purchase price adjustment, and a combination of cash and a short-term note used
to repay approximately $980,000 of obligations under the Company's operating
lease. The Convertible Note is due in semi-annual installments over a five year
period commencing September 1, 1996 with interest receivable thereon at a rate
of 7% per annum. The outstanding principal balance of the Convertible Note is
convertible at any time at the option of the Company into shares of common stock
of Endogen. Additionally, the Company may receive a royalty on certain of
Endogen's sales of research products.

Assets included in the December 31, 1995 consolidated balance sheet relating to
the portion of the diagnostic business sold to Endogen in March 1996 include
net accounts receivable of approximately $329,000, inventories of approximately
$403,000, other current and long-term assets of approximately $288,000 and
property and equipment of approximately $537,000. Certain payables and accruals
at December 31, 1995 attributable to the portion of the business sold amounted  
to approximately $227,000. In addition, substantially all product sales and
approximately $1,836,000 of cost of product sales for the year ended December
31, 1995 relate to the portion of the business sold.




I
TEM 9.      CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
             ACCOUNTING AND FINANCIAL DISCLOSURES

The Company's Form 8-K dated February 10, 1994, reporting a change of the
Company's independent accountant effective February 10, 1994, is hereby
incorporated by reference.



PART III


ITEM 10.     DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The information under the Sections "Proposal 1 - Election of Directors" and
"Management" in the Company's Proxy Statement for the Annual Meeting of
Stockholders to be held on May 21, 1996, is hereby incorporated by reference.


                                      26.

<PAGE>   27


ITEM 11.     EXECUTIVE COMPENSATION

The information under the Section "Management" of the Registrant's Proxy
Statement for the Annual Meeting of Stockholders to be held on May 21, 1996 is
hereby incorporated by reference.


ITEM 12.     SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
             MANAGEMENT

The information under the Section "Beneficial Ownership of Common Stock" of the
Registrant's Proxy Statement for the Annual Meeting of Stockholders to be held
on May 21, 1996, is hereby incorporated by reference.


ITEM 13.     CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information under the Sections "Proposal 1 - Election of Directors" and
"Management" of the Registrant's Proxy Statement for the Annual Meeting of
Stockholders to be held on May 21, 1996, is hereby incorporated by reference.



PART IV


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

(A) The following documents are filed as part of this Form 10-K:

      (1)    Financial Statements:
             --------------------

      See "Index to Consolidated Financial Statements" at Item 8.

      (2)    Financial Statement Schedules:
             -----------------------------

      Schedules are omitted since the required information is not applicable or
      is not present in amounts sufficient to require submission of the
      schedule, or because the information required is included in the
      Consolidated Financial Statements or Notes thereto.


<TABLE>
      (3)    Exhibits:
             --------

<CAPTION>
  No.              Description                      Page No.
- --------------------------------------------------------------------------------
  <S>      <C>                             <C>
  2.1      Agreement of Merger             Incorporated by reference
           among the Company, T            to the Company's report
           Cell Acquisition Corp.          on form 8-K filed
           and T Cell Diagnostics,         September 22, 1993
           Inc. dated August 20,
           1993 relating to
           reconsolidation of the
           Company's subsidiary

  2.2      Asset Purchase                  Incorporated by reference
           Agreement among                 to the Company's report
           Endogen, Inc., T Cell           on form 8-K filed March
           Diagnostics, Inc., with         20, 1996
           the Company dated
           March 4, 1996

  3.1      Third Restated Certificate      Incorporated by reference
           of Incorporation of the         to the Company's Annual
           Company                         Report on Form 10-K for
                                           the year ended April 30,
                                           1991

  3.2      Certificate of Amendment        Incorporated by reference
           of Third Restated               to the Company's Annual
           Certificate of                  Report on Form 10-K for
           Incorporation of the            the year ended December
           Company                         31, 1992

  3.3      Certificate of Designation      Incorporated by reference
           for series C-1 Junior           to the Company's Annual
           Participating Cumulative        Report on Form 10-K for
           Preferred Stock                 the year ended December
                                           31, 1994
</TABLE>



                                      27.

<PAGE>   28


<TABLE>
  <S>      <C>                             <C>
  3.4      Amended and Restated            Incorporated by reference
           By-Laws of the Company          to the Company's report
           as of November 10, 1994         on Form 8-K dated
                                           November 10, 1994

  4.1      Form of Purchase                Incorporated by reference
           Agreement dated                 to Exhibit 10.1 of the
           November 23, 1993               Company's Registration
           relating to the Company's       Statement on Form S-3
           private placement of            (Reg. No. 33-72172)
           Common Stock

  4.2      Shareholder Rights              Incorporated by reference
           Agreement dated                 to the Company's report
           November 10, 1994               on Form 8-K dated
           between the Company             November 10, 1994
           and State Street Bank and
           Trust Company as Rights
           Agent

  4.3      Form of Stock Purchase          Incorporated by reference
           Agreement dated October         to Exhibit 10.1 of the
           27, 1995 relating to the        Company's Registration
           Company's private               Statement on Form S-3
           placement of  Common            (Reg. No. 33-64021)
           Stock

  4.4      Form of Stock Purchase          Incorporated by reference
           Agreement dated                 to Exhibit 10.1 of the
           November 3, 1995                Company's Registration
           relating to the Company's       Statement on Form S-3
           private placement of            (Reg. No. 33-64021)
           Common Stock

  10.1     Amended and Restated            Page
           1991 Stock Compensation
           as of April 1, 1995

  10.2     1994 Employee Stock             Incorporated by reference
           Purchase Plan                   to the Company's
                                           Registration Statement on
                                           Form S-8 filed June 8,
                                           1994

  10.3     Product Development and         Incorporated by reference
           Distribution Agreement          to the Company's report
           between Astra AB and the        on Form 8-K filed on
           Company dated January           February 13, 1992
           30, 1992, portions of
           which are subject to
           confidential treatment

  10.4     Commercial Lease                Incorporated by reference
           Agreement of October 15,        to the Company's Annual
           1994 between T Cell             Report on Form 10-K for
           Diagnostics, Inc. and           the year ended December
           Cummings Properties             31, 1994
           Management

  10.5     Performance Plan of the         Incorporated by reference to the 
           Company                         Company's Annual Report on Form 
                                           10-K for the transition period
                                           ended December 31, 1992

  10.6     Employment Agreement            Incorporated by reference
           between the Company             to the Company's Annual
           and Alan W. Tuck dated          Report on Form 10-K for
           February 6, 1992                the transition period
                                           ended December 31, 1992

  10.7     Consulting Agreement            Page
           between the Company
           and Patrick C. Kung
           dated January 1, 1996

  10.8     Form of Agreement               Incorporated by reference
           relating to Change of           to the Company's Annual
           Control                         Report on Form 10-K for
                                           the transition period
                                           ended December 31, 1992

  10.9     Termination Agreement           Incorporated by reference
           between the Company             to the Company's report
           and SmithKline Beecham          on Form 8-K filed April
           p.l.c. relating to sCR1         27, 1995
           dated April 7, 1995,
           portions of which are
           subject to confidential
           treatment

  10.10    Pledge Agreement                Incorporated by reference
           between the Company             to the Company's
           and Fleet Credit                Quarterly Report on Form
           Corporation dated               10-Q for September dated
           October 24, 1995                September 30, 1995

  16.0     Letter regarding Change         Incorporated by reference
           in Certifying Accountant        to the Company's report
                                           on Form 8-K dated
                                           February 10, 1994

  21.0     List of Subsidiaries            Incorporated by reference
                                           to the Company's Annual
                                           Report on Form 10-K for
                                           the fiscal year ended
                                           December 31, 1993
</TABLE>



                                      28.

<PAGE>   29



<TABLE>
  <S>      <C>                             <C>
  23.0     Consents of Independent         Page
           Accountants
</TABLE>



(B) Reports on Form 8-K.

During 1995, the following reports on Form 8-K were filed: Form 8-K dated April
7, 1995 (portions of which is subject to confidential treatment) and Form 8-K
dated May 19, 1995.


                                      29.

<PAGE>   30


SIGNATURES

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

T CELL SCIENCES, INC.                                           DATE

by: s/Alan W. Tuck                                        April 1, 1996
    --------------
    Alan W. Tuck
    President and Chief Executive Officer


<TABLE>
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed by the following persons in the capacities and on the dates
indicated.

<CAPTION>
   SIGNATURE                       TITLE                                            DATE
    <S>                            <C>                                              <C>

    s/Alan W. Tuck                 President, Chief Executive Officer,              April 1, 1996
    ----------------               Acting Chief Financial Officer and Director
    (Alan W. Tuck)                       

    s/James D. Grant               Chairman of the Board and Director               April 1, 1996
    ----------------
    (James D. Grant)

    s/Patrick C. Kung              Vice Chairman of the Board and Director          April 1, 1996
    -----------------
    (Patrick C. Kung)

    s/John P. Munson               Director                                         April 1, 1996
    ----------------
    (John P. Munson)

    s/Thomas R. Ostermueller       Director                                         April 1, 1996
    ------------------------
    (Thomas R. Ostermueller)

    s/John Simon                   Director                                         April 1, 1996
    ------------
    (John Simon)
</TABLE>



                                      30.





<PAGE>   1
                                                As Amended & Restated
                                                         as of 4/1/95



                              T CELL SCIENCES, INC.
                AMENDED AND RESTATED 1991 STOCK COMPENSATION PLAN

SECTION 1.  INTRODUCTION.
            ------------

     1.1 Purpose. The purpose of this Amended and Restated 1991 Stock
Compensation Plan (the "Plan") of T Cell Sciences, Inc. and affiliated companies
is to advance and promote the interests of T Cell Sciences, Inc. and its
affiliated companies, including T Cell Diagnostics, Inc., by encouraging and
enabling their employees, consultants, advisers and non-employee directors to
acquire shares of common stock of T Cell Sciences, Inc. and by providing for
payments to such persons based on the appreciation value or value of such
shares. The Plan is intended as a further means not only of retaining and
attracting outstanding management, but also of promoting a close identity of
interests between management and the shareholders of T Cell Sciences, Inc.

     1.2 Definitions. The following definitions are applicable to the Plan:

     "Award" means the grant of any Option, Performance Share Unit, Restricted
Common Share, or any combination thereof, by the Committee to a Participant.

     "Beneficiary" means the beneficiary or beneficiaries designated in
accordance with Section 6.9 to receive the amount, if any,
 payable under the
Plan upon the death of a Participant.

     "Board of Directors" means the Board of Directors of T Cell Sciences, Inc.

     "Change in Control" means that any of the following events has occurred:

     (i) twenty percent (20%) or more of the Common Shares has been acquired by
     any person (as defined by Section 3(a)(9) of the Securities Exchange Act of
     1934) other than directly from the Corporation; (ii) there has been a
     merger or equivalent combination after which 49% or more of the voting
     stock of the surviving corporation is held by persons other than former
     shareholders of the Corporation; or (iii) twenty percent (20%) or more of
     the directors elected by shareholders to the Board of Directors of the
     Corporation are persons who were not nominated by management in the most
     recent proxy statement of the Corporation;

provided, however, that notwithstanding anything in the Plan to the contrary, no
Change in Control shall be deemed to have occurred and no rights arising upon a
Change in Control described in Sections 2.2(E), 4.7 and 5.10 shall exist unless
the Board of Directors adopts a resolution providing for a Change of Control
prior to the effective date of the Change in Control, or not later than
forty-five (45) days after the effective date of the Change in Control under
clauses (i) or (iii) of the Change in Control. Any resolution of the Board of
Directors adopted in accordance with the provisions of this Section directing
that this Section and Sections 2.2(E), 4.7 and 5.10 or any of such Sections,
become effective may be rescinded or countermanded by the members of the Board
of Directors who participated in such resolution at any time with or without
retroactive effect.

     "Code" means the Internal Revenue Code of 1986 as amended from time to
time.



                                       1

<PAGE>   2
                                                As Amended & Restated
                                                         as of 4/1/95

     "Committee" means the Compensation Committee of the Board of Directors;
provided, however, no member of the Committee shall be a participant in the
Plan, except as provided for in Section 3 of the Plan hereof.

     "Common Shares" means the common stock ($.001 par value) of the
Corporation.

     "Corporation" means T Cell Sciences, Inc. or any affiliated company
designated by the Board of Directors of T Cell Sciences, Inc. as eligible, of
which a majority of the voting common or capital stock is owned directly or
indirectly by the Corporation.

     "Determined Value" means the higher of (i) the highest bid price per Common
Share during the twelve (12) months immediately preceding the date of a Change
in Control, or (ii) the highest price per Common Share actually paid in
connection with any Change in Control (including, without limitation, prices
paid in any subsequent merger or combination with any entity that acquires
control of the Corporation).

     "Incentive Stock Option" means an option to purchase Common Shares that
qualifies as an incentive stock option within the meaning of Section 422 of the
Code.

     "Employee" means any employee of the Corporation, including officers and
directors who are also employees, and consultants and advisers, who, in the
judgment of the Committee, is considered important to the future of the
Corporation, provided however, nothing shall limit the Committee from
designating all or substantially all employees as eligible for grants.

     "Nonqualified Stock Option" means an option to purchase Common Shares that
does not qualify as an Incentive Stock Option.

     "Option" means an Incentive Stock Option or a Nonqualified Stock Option.

     "Participant" means an Employee of the Corporation who is selected to
participate in the Plan in the manner described in Section 1.4 and a
non-employee director who participates in the Plan pursuant to Section 3 and
Section 4.

     "Performance Cycle" means the period of time, designated by the Committee,
during which performance is measured for the purpose of determining whether an
Award of Performance Share Units has been earned.

     "Performance Goals" means the performance objectives of the Corporation
during a Performance Cycle for the purpose of determining whether, and to what
extent, Awards of Performance Share Units will be earned for a Performance
Cycle.

     "Performance Share Unit" and "Stock Equivalent" mean a unit of measurement
equivalent to one Common Share with none of the attendant rights of a
shareholder of such share, including, without limitation, the right to vote such
share and the right to receive dividends thereon, except to the extent otherwise
specifically provided herein.

     "Restricted Common Shares" means Common Shares which are subject to the
Restrictions set forth in Section 4 of the Plan hereof, and any new, additional
or different securities a Participant 



                                       2


<PAGE>   3

                                                As Amended & Restated
                                                         as of 4/1/95

may become entitled to receive with respect to such shares by virtue of a stock 
split or stock dividend, merger or consolidation or any other change in 
corporate or capital structure of the Corporation.

     "Restricted Period" means the period of time Restricted Common Shares are
subject to Restrictions as set forth in Section 4 of the Plan hereof.

     "Restrictions" means those restrictions on the transfer of Restricted
Common Shares as set forth in Section 4 of the Plan hereof.

     "Stock Appreciation Right" means a right granted in connection with an
Option or separately to receive the appreciation in value of Common Shares.

     1.3 Administration. The Plan shall be administered by the Committee, except
as otherwise provided herein. Except as otherwise provided in Section 3 and
Section 4 hereof, in no event shall a member of the Committee be eligible for an
Award under the Plan. A majority of the members of the Committee shall
constitute a quorum. The Committee may act at a meeting, including a telephone
meeting, by action of a majority of the members present, or without a meeting by
unanimous written consent. The Committee shall have the authority to:

       (i) select the Participants;

      (ii) grant Options, Restricted Common Shares, and Performance Share Units 
           to Participants in such combination and in such amounts as it shall 
           determine, subject to the terms and conditions of the Plan;

     (iii) determine the nature of the Restrictions and the duration of the 
           Restricted Period applicable to each Award of Restricted Common 
           Shares in accordance with Section 4 hereof;

      (iv) determine the duration of each Performance Cycle;

       (v) establish the Performance Goals for each Performance Cycle;

      (vi) determine  the actual amount earned by each Participant with respect 
           to such Awards;

     (vii) determine consistent with the Code whether an Option that is granted
           to a Participant is a Nonqualified Stock Option or an Incentive Stock
           Option, the number of Common Shares to be covered by each such Option
           and the time or times when and the manner in which each Option shall 
           be exercisable and modify the terms and restrictions not 
           inconsistent with the Plan of any Award which terms may differ among 
           the Participants;

    (viii) amend any Incentive Stock Option with the consent of the Participant 
           so as to make it a Nonqualified Stock Option;

      (ix) amend any previously granted Option with the consent of a Participant
           to rescind a previously granted Stock Appreciation Right;



                                       3



<PAGE>   4

                                                As Amended & Restated
                                                         as of 4/1/95


       (x) grant a Stock Appreciation Right in connection with the grant of an 
           Option or separately;

      (xi) treat all or any portion of any period during which a Participant is
           on military leave or on an approved leave of absence from the
           Corporation as a period of employment of such Participant by the
           Corporation for purposes of accrual of such Participant's rights in 
           any Awards; and

     (xii) establish, alter and repeal from time to time guidelines or
           regulations for the administration of the Plan, interpret the Plan,
           cause appropriate records to be established, and make all 
           determinations and take all other actions considered necessary or 
           advisable for the administration of the Plan.

All decisions, actions or interpretations of the Committee that are within the
scope of this Section 1.3 shall be final, binding and conclusive upon all
parties.

     1.4 Participation. Participants in the Plan shall be limited to those 
Employees who have received written notification from the Committee, or from a 
person designated by the Committee, that they have been selected to participate 
in the Plan. No Employee shall at any time have the right to be selected as a 
Participant. No Participant, having been granted an Award, shall have the right 
to be granted an additional Award in the future.

     1.5 Maximum number of Common Shares available for Awards. Notwithstanding
any other provision of the Plan, the maximum number of Common Shares reserved
and available for issuance under the Plan shall be three million (3,000,000)
Common Shares plus any Common Shares from the seven hundred thousand (700,000)
Common Shares previously approved by the shareholders under the Corporation's
1985 Incentive Stock Option Plan, or any other stock option or stock plan
previously approved by shareholders, which become available for issuance due to
termination or expiration of an Award. In the event (i) any Option granted under
the Plan shall terminate or expire or (ii) Awards of Performance Share Units or
Restricted Common Shares shall be forfeited, the number of Common Shares no
longer subject to such Option or no longer payable under such Award, or
Restricted Common Shares that are forfeited, shall thereupon be released and
shall thereafter be available for new Awards under the Plan. Furthermore, in
determining the number of Common Shares available for Awards under the Plan,
only the number of Common Shares paid in satisfaction of Awards of Performance
Share Units in accordance with Section 5.4, and Stock Equivalents in accordance
with Section 5.8, shall be considered to have been used with respect to such
Awards; provided, however, that the number of Common Shares represented by
Performance Share Units and Stock Equivalents paid for in cash lump sums
pursuant to Section 5.10 shall not again become available for use under the
Plan. The limitation provided by this Section is subject to adjustment as
provided in Section 6.1. The Common Shares distributed under the Plan may be
authorized and unissued shares, shares held in the treasury of the Corporation,
or shares purchased on the open market by the Corporation (at such time or times
and in such manner as it may determine). The Corporation shall be under no
obligation to acquire Common Shares for distribution to Participants before
payment in Common Shares is due.


                                       4




<PAGE>   5

                                                As Amended & Restated
                                                         as of 4/1/95

SECTION 2. STOCK OPTIONS FOR EMPLOYEES.
           ---------------------------

     2.1 Awards of Options. Subject to the provisions of the Plan, the
Committee shall determine and designate from time to time those Participants to
whom Incentive Stock Options, or Nonqualified Stock Options, or both, are to be
granted and the number of Common Shares to be optioned to each Participant;
provided, however, (i) that the aggregate fair market value (determined at the
time the Option is granted) of the Common Shares with respect to which the
Incentive Stock Options are exercisable for the first time by any Participant
during any calendar year shall not exceed the maximum amount allowable under
Section 422 of the Code, and (ii) that no Participant shall be awarded Options
or Stock Appreciation Rights to purchase or receive the appreciation in value of
more than 100,000 Common Shares in any calendar year.

     2.2 Terms and Conditions of Options. Each Option granted under the Plan
shall be evidenced by an agreement, in a form approved by the Committee. Such
agreement shall be subject to the following express terms and conditions and to
such other terms and conditions as the Committee may deem appropriate:

     (A)  Option Period. Each Option agreement shall specify the period for
          which the Option thereunder is granted (which in no event shall exceed
          ten (10) years from the date of grant) and shall provide that the
          Option shall expire at the end of such period. The Committee may
          extend such period; provided, however, that such extension shall not
          in any way disqualify the Option as an Incentive Stock Option unless
          the holder of such Option shall otherwise agree. In no case shall such
          period, including any such extensions, exceed (i) ten (10) years from
          the date of grant, or (ii) in the case of Incentive Stock Options
          granted to a Participant who, at the time the Incentive Stock Option
          is granted, owns shares possessing more than ten percent (10%) of the
          total combined voting power of all classes of shares of his or her
          employer corporation or of its parent or subsidiary corporation (a
          "Ten Percent Shareholder"), five (5) years from the date of grant.

     (B)  Purchase Price. The purchase price per Common Share shall be
          determined by the Committee at the time any Option is granted, and
          shall be not less than (i) the fair market value, or (ii) in the case
          of Incentive Stock Options granted to a Ten Percent Shareholder, one
          hundred ten percent (110%) of the fair market value (but in no event
          less than the par value) of a Common Share on the date the Incentive
          Stock Option is granted as determined by the Committee. For purposes
          of this Section, fair market value means the average, on the date of
          grant, of the high bid and low asked Common Share price of the
          over-the-counter market, as reported with respect to securities listed
          in the National Market System ("NMS") of the National Association of
          Securities Dealers, Inc. Automated Quotation (NASDAQ) System, or as
          otherwise determined by the Committee.

     (C)  Exercise of Option. Except as otherwise provided under the Plan, no
          part of any Option may be exercised until the Participant shall have
          remained in the employ of the Corporation for such period after the
          date on which the Option is granted as the Committee may specify in
          the option agreement or otherwise and the option agreement may provide
          for exercisability in installments. The Committee may at any time
          accelerate the exercisability of all or any portion of any Option.


                                       5



<PAGE>   6

                                                As Amended & Restated
                                                         as of 4/1/95

     (D)  Payment of Purchase Price upon Exercise. Each Option shall provide
          that the purchase price of the Common Shares as to which an Option
          shall be exercised shall be paid to the Corporation at the time of
          exercise either in cash or in such other consideration as the
          Committee deems appropriate, including, but not limited to, Common
          Shares already owned by the Participant not subject to any restriction
          under any other plan having a total fair market value, as determined
          by the Committee, equal to the purchase price, or a combination of
          cash and Common Shares having a total fair market value, as so
          determined, equal to the purchase price. The Committee in its sole
          discretion may also provide that the purchase price may be paid by
          delivering a properly executed exercise notice in a form approved by
          the Committee together with irrevocable instructions to a broker to
          promptly deliver to the Corporation the amount of applicable sale or
          loan proceeds to pay the purchase price.

     (E)  Exercise in the Event of Death, Disability, Retirement or Other
          Termination of Employment, or Change in Control.

     (1)  If a Participant's employment by the Corporation shall terminate
          because of his or her death or permanent disability, the Committee
          may, in its sole discretion, accelerate in whole or in part, any or
          all Options which the Participant shall not then have been entitled to
          exercise and the Participant Beneficiary or legal representative shall
          have the right to exercise all Options so accelerated on the date of
          such termination.

     (2)  If a Participant shall die (i) while an employee of the Corporation,
          or (ii) within twelve (12) months after termination of his or her
          employment with the Corporation because of his or her permanent
          disability, such Participant's Options may be exercised, to the extent
          that such Participant shall have been entitled to do so on the date of
          his or her death or such termination of employment, by the
          Participant's Beneficiary or by the person or persons to whom the
          Participant's rights under the Option pass by will or applicable law,
          or if no such person has such right, by his or her executors or
          administrators, at any time, or from time to time, but not later than
          the expiration date specified in paragraph (A) of this Section 2.2 or
          three (3) years after the Participant's death, whichever date is
          earlier.

     (3)  If a Participant's employment by the Corporation shall terminate
          because of his or her permanent disability, such Participant may
          exercise his or her Options, to the extent that such Participant shall
          have been entitled to do so at the date of the termination of his or
          her employment, at any time, or from time to time, but not later than
          the expiration date specified in paragraph (A) of this Section 2.2 or
          three (3) years after termination of employment because of his or her
          permanent disability, whichever date is earlier. The Committee shall
          have sole authority and discretion to determine whether a
          Participant's employment has been terminated by reason of disability.

     (4)  Subject to Section 6.14, if a Participant's employment shall terminate
          for any reason other than death or permanent disability as aforesaid,
          all rights to exercise his or her Option shall terminate at the
          earlier of the expiration date specified in paragraph (A) of this
          Section 2.2 or up to twelve (12) months after termination of
          employment as determined by the Committee; provided, however, that the
          Committee may, in its sole 


                                       6


<PAGE>   7

                                                As Amended & Restated
                                                         as of 4/1/95

          discretion, grant new Options or modify outstanding Options to permit
          their exercise upon a Participant's termination of employment due to
          retirement with the consent of the Corporation until the earlier of
          the expiration date specified in paragraph (A) of this Section 2.2 or
          up to three (3) years after termination of employment.

     (5)  In addition, in the event of a Change in Control, all Options granted
          under the Plan which the Participant shall not then have been entitled
          to exercise shall be accelerated immediately prior to or concurrently
          with the occurrence of the Change in Control and the Participant shall
          have the right to exercise all such Options.

     (F)  Transferability of Options. No Option granted under the Plan shall be
          transferable other than by will or by the laws of descent and
          distribution. During the lifetime of the Participant, an Option shall
          be exercisable only by him or her.

     (G)  Investment Representation. Each option agreement may provide that,
          upon demand by the Committee for such a representation, the
          Participant (or any person acting under Paragraph E of this Section
          2.2) shall deliver to the Committee, at the time of any exercise of an
          Option or portion thereof, a written representation that the shares to
          be acquired upon such exercise are to be acquired for investment and
          not for resale or with a view to the distribution thereof. Upon such
          demand, delivery of such representation prior to the delivery of any
          Common Shares issued upon exercise of an Option and prior to the
          expiration of the Option period shall be a condition precedent to the
          right of the Participant or such other person to purchase any Common
          Shares. In the event certificates for Common Shares are delivered
          under the Plan with respect to which such an investment representation
          has been obtained, the Committee may cause a legend or legends to be
          placed on such certificates to make appropriate reference to such
          representations and to restrict transfer in the absence of compliance
          with applicable federal or state securities laws.

     (H)  Participants to Have no Rights as Shareholders. No Participant shall
          have any rights as a shareholder with respect to any Common Shares
          subject to his or her Option prior to the date of issuance to him or
          her of such Common Shares.

     (I)  Other Option Provisions. The form of Option agreement authorized by
          the Plan shall also contain the applicable terms and conditions set
          forth in Sections 6.1 and 6.7 and may contain such other provisions as
          the Committee may, from time to time, determine. Without limiting the
          foregoing sentence, the Committee may require a Participant to agree,
          as a condition to receiving an Option under the Plan, that part or all
          of any Options previously granted to such Participant under the Plan
          or any prior plan of the Corporation be terminated.

     (J)  Sequential Exercise of Options Not Required. Options granted under the
          Plan may be exercised in any order, regardless of the date of grant or
          the existence of any other outstanding Option.



                                       7



<PAGE>   8
                                                As Amended & Restated
                                                         as of 4/1/95


SECTION 3. STOCK OPTIONS FOR NON-EMPLOYEE DIRECTORS.
           ----------------------------------------

     3.1 Options. Each director of the Corporation who is not an employee,
shall be granted upon his or her election to the Board of Directors and on each
subsequent annual meeting of stockholders in which he or she is re-elected or
remains a director,, a Nonqualified Stock Option (a "Director's Option") to
purchase five thousand (5,000) Common Shares of the Corporation. Such option
grant shall be nondiscretionary and shall be evidenced by a single Option
agreement in the form approved by the Committee.

     3.2 Terms and Conditions of Options. Each Director's Option granted under
the Plan shall be subject to the following express terms and conditions and to
such other terms and conditions consistent therewith as the Committee may deem
appropriate:

     (A)  Option Period. The Director's Option period for each Director shall be
          ten (10) years from the date of grant and shall expire at the end of
          such period.

     (B)  Purchase Price. The purchase price per Common Share shall be the fair
          market value (as such term is defined in Section 2.2(B)) of the Common
          Shares on the date of grant.

     (C)  Exercise of Option. Except as otherwise provided under the Plan, no
          part of any Director's Option may be exercised until the Participant
          shall have remained as anon-employee director of the Corporation for
          one year from the date of grant.

     (D)  Payment of Purchase Price upon Exercise. Each Director's Option shall
          provide that the purchase price of the Common Shares as to which an
          Director's Option shall be exercised shall be paid to the Corporation
          at the time of exercise either in cash or in Common Shares already
          owned by the non-employee director having a total fair market value,
          as determined by the Committee, equal to the purchase price, or a
          combination of cash and Common Shares having a total fair market
          value, as so determined, equal to the purchase price. The purchase
          price may also be paid by delivering a properly executed exercise
          notice in a form approved by the Committee together with irrevocable
          instructions to a broker to promptly deliver to the Corporation the
          amount of applicable sale or loan proceeds to pay the purchase price.

     (E)  Exercise in the Event of Death, Disability, Retirement or Other
          Termination of Service, or Change in Control. (1) If a non-employee
          director's service as a director shall terminate because of his or her
          death, permanent disability or retirement with the consent of the
          Corporation, the Participant, Beneficiary or legal representative
          shall have the right to exercise all Director's Options regardless of
          whether vested, for a period of three (3) years following the date of
          death, disability or retirement, or the expiration date specified in
          Section 3.2(A), whichever is earlier. (2) If a non-employee director's
          service shall terminate for any reason other than death, disability or
          retirement as aforesaid, all right to exercise the Option shall
          terminate at the earlier of the expiration date specified in Section
          3.2(A) or three (3) months after termination of service.

     (F)  Transferability of Options. No Director's Option granted under this
          Section shall be transferable other than by will or by the laws of
          descent and distribution. During the 


                                       8


<PAGE>   9

                                                As Amended & Restated
                                                         as of 4/1/95

          lifetime of the non-employee director, a Director's Option shall be 
          exercisable only by him or her.

     (G)  Non-employee Directors to Have no Rights as Shareholders. No
          non-employee director shall have any rights as a shareholder with
          respect to any shares subject to his or her Director's Option prior to
          the date of issuance to him or her of such shares.

     (H)  Sequential Exercise of Options Not Required. Options granted under
          this Section may be exercised in any order, regardless of the date of
          grant or the existence of any other outstanding Director's Option.

SECTION 4. RESTRICTED COMMON SHARES.
           ------------------------

       4.1 Awards of Restricted Common Shares. Restricted Common Shares awarded
under this Plan are subject to certain conditions and restrictions as provided
below. All conditions and restrictions imposed on any such Award shall be made
by and at the discretion of the Committee, subject to the provisions of the
Plan, and are binding on the Corporation and the Participants, their
Beneficiaries and legal representatives. Any non-employee director may elect to
receive Restricted Common Shares in lieu of all or a portion of the annual
retainer or other cash compensation payable for serving on the Board of
Directors or a Committee thereof, provided such election is made in writing at
least six (6) months before the applicable due date of the compensation and that
such election is not revoked or changed thereafter except as to compensation due
at least six (6) months after the written revocation or change. The Restricted
Common Shares shall be equal to the number of shares obtained by dividing the
compensation amount by the fair market value (as determined in Section 2.2(B))
of unrestricted Common Shares on the date on which compensation would have been
paid, rounded up to the nearest whole share.

       4.2 Restricted Period. At the time each Award of Restricted Common Shares
is granted, the Committee shall establish a period within which Restricted
Common Shares awarded to the Participants may not be sold, assigned,
transferred, made subject to gift, or otherwise disposed of, mortgaged, pledged
or otherwise encumbered. The Committee may impose such other restrictions on any
Restricted Common Shares as it may deem advisable.

       4.3 Rights as Shareholders. Except for the Restrictions outlined in
Section 4.2, and the forfeiture conditions described in Section 4.5, each
Participant will have all rights of a holder of Common Shares including the
right to receive all dividends or other distributions made or paid in respect of
such shares and the right to vote such shares at regular or special meetings of
the shareholders of the Corporation.

       4.4 Delivery of Shares. Restricted Common Share awarded to a Participant
under the Plan will be held under the Participant's name in an account
maintained by the Corporation. At the conclusion of the Restricted Period
imposed on any Award granted to a Participant, or upon the prior approval of the
Committee as described in Section 4.5, and subject to the satisfaction of the
Corporation's withholding obligations described in Section 6.8, certificates
representing Restricted Common Shares will be delivered to the Participant, or
the Beneficiary or legal representative of the Participant, free of the
Restrictions set forth in Section 4.2. Restricted or unrestricted Common Share
Awards can be paid, in the sole discretion of the Compensation Committee, in
lieu of cash bonuses under the Corporation's bonus Performance Plan or any other
bonus arrangement based on 


                                       9


<PAGE>   10

                                                As Amended & Restated
                                                         as of 4/1/95

the fair market value (as determined in Section 2.2(B)) of unrestricted 
Common Shares on the date of transfer.

     4.5 Termination of Employment. In the event of the termination of
employment of any Participant, all Restricted Common Shares awarded under the
Plan which are then subject to Restrictions will be forfeited by the Participant
and become the property of the Corporation. However, the Committee may, if the
Committee in its sole discretion determines that the circumstances warrant such
action, approve the release of all or any part of the Restricted Common Shares
which would otherwise be forfeited pursuant to this Section, upon such
conditions as it shall determine.

     4.6 Section 83(b) Elections. A Participant who files an election with the
Internal Revenue Service to include the fair market value of any Restricted
Common Shares in gross income while they are still subject to Restrictions shall
promptly furnish the Corporation with a copy of such election together with the
amount of any federal, state, local or other taxes required to be withheld to
enable the Corporation to claim an income tax deduction with respect to such
election.

    4.7 Change in Control. In the event of a Change in Control, all Restricted
Periods shall end, the Restrictions applicable to all previously granted Awards
of Restricted Common Shares shall lapse and such shares shall be delivered to
the Participants free from such Restrictions as soon as practicable following
such Change in Control.

SECTION 5. PERFORMANCE SHARE UNITS.
           -----------------------

     5.1 Awards of Performance Share Units. The Committee may make awards in
the form of Performance Share Units to any Participant. Awards of Performance
Share Units will be earned on the basis of performance measured against
preestablished Performance Goals which will be determined by the Committee for
each Performance Cycle. The Committee shall have the authority to adjust
Performance Goals, or performance measurement standards for any Performance
Cycle as it deems equitable in recognition of (i) extraordinary or nonrecurring
events experienced by the Corporation during the Performance Cycle, (ii) changes
in applicable accounting rules or principles or changes in the Corporation's or
in any other such corporation's methods of accounting during the Performance
Cycle, or (iii) the occurrence of a reorganization, recapitalization, stock
split, stock dividend, combination of shares, merger, consolidation, rights
offering, or any other change in the capital structure of the Corporation, or of
any other such corporation.

     The amount allocated to each Participant shall be expressed in cash and
shall then be converted into and expressed in Performance Share Units by
dividing the dollar value of the cash amount so allocated by the average fair
market value (for purposes of this Section, average fair market value means
average of high bid and low asked Common Share price in the over-the-counter
market, as reported with respect to securities listed in the National Market
System ("NMS") of the National Association of Securities Dealers, Inc. Automated
Quotation (NASDAQ) System), of one Common Share either during the thirty (30)
day period preceding the month in which the Performance Cycle begins or, in the
case of a Employee who becomes a Participant in a Performance Cycle after it has
begun, during the thirty (30) day period selected by the Committee and completed
on or prior to the date such participation commenced.



                                       10



<PAGE>   11

                                                As Amended & Restated
                                                         as of 4/1/95

     5.2 Amount of Payment. The amount payable to a Participant with respect to
an Award of Performance Share Units earned under the Plan shall be equal to (i)
the number of Performance Share Units to which such Participant shall have
become entitled by reason of the level of attainment of Performance Goals,
multiplied by (ii) the average fair market value (determined as provided in
Section 5.1) of one Common Share during the thirty (30) day period in which the
Performance Cycle ends. The Committee may, in its sole discretion, establish the
amount of payment by the amount of the appreciation of the fair market value of
the Performance Share Units from the date of Award to the date of payment.

     5.3 Deferral Elections. A Participant may file a written election with the
Committee to defer the payment of any amount payable on account of an Award to a
period commencing at such future date as specified in the election. Such
election must be filed with the Committee no later than the last day of the
month which is two-thirds of the way through the Performance Cycle during which
such Award is earned unless the Committee specifies an earlier filing date.

     5.4 Payment of Non-deferred Awards. The portion of an amount payable on
account of an Award of Performance Share Units which is not deferred shall be
paid as soon as practicable after the end of the Performance Cycle in cash or in
Common Shares as the Committee shall determine in its sole discretion.

     5.5 Separate Accounts. At the conclusion of each Performance Cycle, the
Committee shall cause a separate account to be maintained in the name of each
Participant with respect to whom all or a portion of an Award of Performance
Share Units earned under the Plan has been deferred. Such account shall be
credited with the number of shares earned and deferred ("Stock Equivalents").

     5.6 Dividend Equivalents. Within thirty (30) days from the payment of a
dividend by the Corporation on its Common Shares, the Stock Equivalents of each
Participant's account shall be credited, as of the date such dividend was paid,
with additional Stock Equivalents, the number of which shall be determined by
(i) multiplying the dividend per share paid on the Common Shares by the number
of Stock Equivalents credited to his or her account at the time such dividend
was declared, then (ii) dividing such amount by the average fair market value
(determined as provided in Section 5.1) of one Common Share on the payment date
for such dividend.

     5.7 Payment of Deferred Awards. Payment with respect to amounts credited to
the account of a Participant shall be made in a series of annual installments
over a period of ten (10) years. Payments shall commence on the date specified
by the Participant in his or her deferral election or on the date determined
initially by the Committee, whichever is applicable, unless the Committee in its
sole discretion determines that payment shall be made over a shorter period or
in more frequent installments, or commence on an earlier date, or any or all of
the above. If a Participant dies prior to the date on which payment with respect
to all amounts credited to his or her account shall have been completed, payment
with respect to such amounts shall be made to the Participant's Beneficiary in a
series of annual installments over a period of five (5) years, or, if shorter,
the participant's remaining payment period, unless the Committee in its sole
discretion determines that payment shall be made over a shorter period or in
more frequent installments, or both.

     5.8 Composition of Payment. Payment with respect to the Stock Equivalent
Portion of a Participant's account shall be made in Common Shares. One Common
Share shall be distributed to the 


                                       11


<PAGE>   12

                                                As Amended & Restated
                                                         as of 4/1/95

Participant for each Stock Equivalent for which payment is being made. 
Fractional shares shall be paid in cash.

     5.9 Partial Awards. An Employee who is a Participant for less than a full
Performance Cycle, whether by reason of commencement or termination of
employment or otherwise, shall receive such portion of an Award of Performance
Share Units, if any, for that Performance Cycle as the Committee shall determine
in its sole discretion.

     5.10 Change in Control. In the event of a Change in Control, all
incomplete Performance Cycles in effect on the date the Change in Control occurs
shall end on the date of such change, and the Performance Goals with respect to
each such Performance Cycle which is more than 1/2 completed shall be deemed to
have been attained to the full and maximum extent. The Committee shall (i) cause
to be paid to each Participant full Awards with respect to Performance Goals for
each such Performance Cycle, and (ii) cause all previously deferred Awards to be
settled in full. All Awards of Performance Share Units which are deemed to have
been earned to the full and maximum extent upon the Change in Control shall be
payable in a single cash lump sum (reduced by any taxes withheld pursuant to
Section 6.8), determined by multiplying the number of Performance Share Units
corresponding to such full Awards by the Determined Value of one Common Share.
All settlements of previously deferred Awards shall be payable in single cash
lump sums or in Common Shares or in a combination of single cash lump sums and
Common Shares as the Committee shall determine in its sole discretion. The
amount to be paid for Stock Equivalents shall be determined by multiplying the
number of Stock Equivalents with respect to which payment is being made by the
Determined Value of one Common Share. All such amounts shall be payable as soon
as practicable following the Change in Control.

SECTION 6. GENERAL PROVISIONS.
           ------------------

     6.1 Certain Adjustments to Plan Shares. In the event of any change in the
Common Shares by reason of any stock dividend, recapitalization, reorganization,
merger, consolidation, split-up, combination or exchange of shares, or any
rights offering to purchase Common Shares at a price substantially below fair
market value, or of any similar change affecting the Common Shares, the number
and kind of shares available for Awards under the Plan, the number and kind of
shares represented by Performance Share Units or Stock Equivalents and the
number and kind of shares subject to Restrictions or subject to Options in
outstanding Option agreements and the purchase price per share thereof shall be
appropriately adjusted consistent with such change in such manner as the
Committee may deem equitable to prevent substantial dilution or enlargement of
the rights granted to, or available for, the Participants hereunder; provided,
however, that no fractional Common Shares shall be subject to such adjustment
and that any adjustment will be adjusted downward to the nearest full share. Any
adjustment of an Incentive Stock Option pursuant to this Section shall be made
only to the extent not constituting a "modification" within the meaning of
Section 424(h) (3) of the Code, unless the holder of such Option shall agree
otherwise. The Committee shall give notice to each Participant of any adjustment
made pursuant to this Section and, upon notice, such adjustment shall be
effective and binding for all purposes of the Plan.

     6.2 Successor Corporation. The obligations of the Corporation under the
Plan shall be binding upon any successor corporation or organization resulting
from the merger, consolidation or other reorganization of the Corporation, or
upon any successor corporation or organization succeeding to substantially all
of the assets and business of the Corporation. The Corporation agrees 


                                       12


<PAGE>   13

                                                As Amended & Restated
                                                         as of 4/1/95

that it will make appropriate provision for the preservation of Participants' 
rights under the Plan in any agreement or plan which it may enter into or adopt 
to effect any such merger, consolidation, reorganization or transfer of assets.

     6.3 Non-Alienation of Benefits. A Participant shall not assign, sell,
encumber, transfer or otherwise dispose of any rights or interests under the
Plan and any attempted disposition shall be null and void.

     6.4 General Creditor Status. Participants shall have no right, title, or
interest whatsoever in or to any investments which the Corporation may make to
aid it in meeting its obligations under the Plan. Nothing contained in the Plan,
and no action taken pursuant to its provisions, shall create or be construed to
create a trust of any kind, or a fiduciary relationship between the Corporation
and any Participant, Beneficiary, legal representative or any other person. To
the extent that any person acquires a right to receive payments from the
Corporation under the Plan, such right shall be no greater than the right of an
unsecured general creditor of the Corporation. All payments to be made hereunder
shall be paid from the general funds of the Corporation and no special or
separate fund shall be established and no segregation of assets shall be made to
assure payment of such amounts except as expressly set forth in the Plan. In its
sole discretion, the Compensation Committee may authorize the creation of trusts
or other arrangements to meet the obligations created under the Plan to deliver
Common Shares or pay cash; provided, however, that, unless the Committee
otherwise determines with the consent of the affected Participant, the existence
of such trusts or other arrangements shall be consistent with the "unfunded"
status of the Plan.

     6.5 No Claim or Right Under the Plan.  Neither the Plan nor any
action taken thereunder shall be construed as giving any employee any
right to be retained in the employ of the Corporation or any subsidiary.

     6.6 Awards Not Treated as Compensation Under Benefit Plans. No Award shall
be considered as compensation under any employee benefit plan of the
Corporation, except as specifically provided in any such plan or as otherwise
determined by the Board of Directors.

     6.7 Listing and Qualification of Common Shares. The Corporation, in its
discretion, may postpone the issuance or delivery of Common Shares upon any
exercise of an Option or pursuant to an Award of Restricted Stock or Performance
Share Units until completion of such stock exchange listing or other
qualification of such shares under any state or federal law, rule or regulation
as the Corporation may consider appropriate, and may require any Participant,
Beneficiary or legal representative to make such representations and furnish
such information as it may consider appropriate in connection with the issuance
or delivery of the shares in compliance with applicable laws, rules and
regulations.

     6.8 Taxes. The Corporation may make such provisions and take such steps as
it may deem necessary or appropriate for the withholding of all federal, state
and local taxes required by law to be withheld with respect to Awards granted
pursuant to the Plan including, but not limited to (i) deducting the amount
required to be withheld from any other amount then or thereafter payable to a
Participant, Beneficiary or legal representative, and (ii) requiring a
Participant, Beneficiary or legal representative to pay to the Corporation the
amount required to be withheld as a condition of releasing Common Shares. In
addition, subject to the discretion of the Committee and such rules and
regulations as the Committee shall from time to time establish, Participants
shall be permitted to 


                                       10


<PAGE>   14

                                                As Amended & Restated
                                                         as of 4/1/95

satisfy federal, state and local taxes, if any, imposed upon the payment of 
Awards in Common Shares at a rate up to such Participant's maximum marginal tax 
rate with respect to each such tax by (i) irrevocably electing to have the 
Corporation deduct from the number of Common Shares otherwise deliverable in 
payment of an Award such number of Common Shares as shall have a value equal to 
the amount of tax to be withheld, (ii) delivering to the Corporation such 
portion of the Common Shares delivered in payment of the Award as shall have a 
value equal to the amount of tax to be withheld, or (iii) delivering to the 
Corporation such number of Common Shares or combination of Common Shares and 
cash as shall have a value equal to the amount of tax to be withheld.

     6.9 Designation and Change of Beneficiary. Each Participant shall file
with the Committee a written designation of one or more persons as the
Beneficiary who shall be entitled to receive the amount, if any, payable under
the Plan upon his or her death. A Participant may, from time to time, revoke or
change his or her Beneficiary designation without the consent of any prior
Beneficiary by filing a new designation with the Committee. The last such
designation received by the Committee shall be controlling; provided, however,
that no designation, or change or revocation thereof, shall be effective unless
received by the Committee prior to the Participant's death, and in no event
shall it be effective as of a date prior to such receipt.

     6.10 Payments to Persons Other Than Participant. If the Committee shall
find that any person to whom any amount is payable under the Plan is unable to
care for his or her affairs because of illness or accident, or is a minor, or
has died, then any payment due to such person or his or her estate (unless a
prior claim therefor has been made by a duly appointed legal representative),
may, if the Committee so directs the Corporation, be paid to his or her spouse,
a child, a relative, an institution maintaining or having custody of such
person, or any other person deemed by the Committee to be a proper recipient on
behalf of such person otherwise entitled to payment. Any such payment shall be a
complete discharge of the liability of the Committee and the Corporation
therefor.

     6.11 No Liability of Committee Members. No member of the Committee shall
be personally liable by reason of any contract or other instrument executed by
such member or on his or her behalf in his or her capacity as a member of the
Committee nor for any mistake of judgment made in good faith, and the
Corporation shall indemnify and hold harmless each employee, officer or director
of the Corporation to whom any duty or power relating to the administration or
interpretation of the Plan may be allocated or delegated, against any cost or
expense (including counsel fees) or liability (including any sum paid in
settlement of a claim with the approval of the Board of Directors) arising out
of any act or omission to act in connection with the Plan unless arising out of
such person's own fraud or bad faith. The indemnification provided for in this
Section shall be in addition to any rights of indemnification such Committee
member has as a director or officer pursuant to law, under the Certificate of
Incorporation or By-Laws of the Corporation.

     6.12 Term and Termination; Amendment. Subject to earlier termination
pursuant to the provisions of this Section, and unless the shareholders of the
Corporation shall have approved an extension of the Plan beyond such date, no
further Awards shall be made under the Plan after the expiration of ten (10)
years from the effective date of the Plan specified in Section 6.15. Except as
to matters that in the opinion of the Corporation's legal counsel require
shareholder approval, any provision of the Plan may be modified as to a
Participant by an individual agreement approved by the Committee. The Board of
Directors may, with prospective or retroactive effect, amend, suspend 


                                       14


<PAGE>   15

                                                As Amended & Restated
                                                         as of 4/1/95

or terminate the Plan or any portion thereof at any time; provided, however, 
that (i) no amendment that would materially increase the cost of the Plan to the
Corporation may be made by the Board of Directors without the approval of the
shareholders of the Corporation and (ii) no amendment, suspension or termination
of the Plan shall deprive any Participant of any rights to Awards previously
made under the Plan without his or her written consent.

     6.13 Unfunded Plan; Governing Law. The Plan is intended to constitute an
unfunded deferred compensation arrangement and shall be governed by and
construed in accordance with the laws of the Commonwealth of Massachusetts,
without reference to the principles of conflicts of law thereof.

     6.14 Termination for Cause. Notwithstanding anything herein contained to
the contrary, if a Participant's employment or service is terminated for cause,
all awards shall be forfeited. Cause shall be defined to include the
dissemination of trade secrets or similar information, fraud or willful
misconduct or any activity which is materially prejudicial to the interests of
the Corporation.

     6.15 Supercesion; Effective Date. The Plan is effective as of December 1,
1990. In the event the Company's stockholders do not approve this Amended and
Restated 1991 Stock Compensation Plan at the 1994 Annual Meeting of
Stockholders, then such Awards granted to employees shall be deemed made under
the Corporation's 1991 Stock Compensation Plan with any such Awards which exceed
the amount of Awards available for grant under the 1991 Stock Compensation Plan
to be deemed as canceled and all rights of Participants therein as ceased.
Notwithstanding the foregoing, if the Plan has been approved by the Board of
Directors prior to such shareholder approval, Awards may be made by the
Committee as provided herein subject to such subsequent shareholder approval.




                                       15



<PAGE>   1
                              CONSULTING AGREEMENT

     THIS AGREEMENT, dated this 1st of January 1996, between DR. PATRICK C.
KUNG, residing at 5 Joseph Comee Road, Lexington, Massachusetts 02173 (the
"Consultant"), and T CELL SCIENCES, INC., with its headquarters at 115 Fourth
Avenue, Needham, Massachusetts 02194 (the "Company").

     WHEREAS the Company wishes to retain the services of the Consultant as a
consultant, to include the Consultant's service as Vice Chairman of the
Company's Board of Directors (the "Board"), for the period and upon the terms
and conditions hereinafter set forth; and

     WHEREAS the Consultant desires to consult with the Company in such capacity
upon such terms and conditions;

     NOW, THEREFORE, in consideration of the covenants and agreements herein
contained, the Company and the Consultant hereby agree to amend the Agreement as
follows:

1. Consulting Duties.
   -----------------

The Consultant hereby agrees to consult exclusively with the Company in the
following fields:

     (a)  Actively contribute to the further development and advancement of TCAR
          products by assisting the Company in meeting its obligation in the
          Company's agreements with Astra AB, providing scientific counsel to
          the Company's scientists, and helping the Company evaluate competitive

          technologies and products;

     (b)  Assist the Company's management in technical evaluation of new
          scientific and product opportunities in East Asia; and

     (c)  Assist the Company and its subsidiary in establishing business
          contacts in Southeast Asia; and

     (d)  Be an active member of the Company's Scientific Advisory Board and,
          provided he is duly nominated and elected, be an active Director of
          the Board.



                                      -1-



<PAGE>   2

2.  Compensation and Expenses.
    -------------------------

In consideration for Consultant's services hereunder (including his services as
Director of the Board):

     (a)  The Company shall pay the Consultant a total of $2,500 per month,
          payable on a monthly basis.

     (b)  During the term of this Agreement, the Company agrees to pay the costs
          of continuing medical and dental benefits elected by the Consultant
          under the Consolidated Omnibus Budget Reconciliation Act of 1985
          ("COBRA").

     (c)  The Consultant shall be reimbursed by the Company for reasonable
          travel, lodging and meal expenses incurred by him in connection with
          performing his services hereunder in accordance with the Company's
          policy at the time.

     (d)  The Company will furnish the Consultant with office space and
          secretarial and other services at the Company's Needham office
          reasonably commensurate with his position and work schedule at the
          Company.

     (e)  The Consultant shall be eligible for non-employee Director stock
          option grants pursuant to the Company's Amended and Restated 1991
          Stock Compensation Plan.

3.  Termination.
    -----------

     The term of this Agreement shall be for a period of twelve (12) months,
     subject to renewal by mutual agreement in writing. Either party shall have
     the right to terminate this Agreement at any time after giving three (3)
     months written notice. The provisions of Paragraphs 4 and 5 shall survive
     any termination or expiration of this Agreement.

4.  Confidentiality.
    ---------------

     (a)  Consultant shall treat as confidential any proprietary, confidential
          or secret information relating to the business or interests of the
          Company, including, without limitation, its organizational structure,
          operations, business plans, technical projects, research data or
          results, inventions, trade secrets, customer lists or other work
          product developed by or for the Company whether on the premises of the
          Company or elsewhere ("Confidential Information"). Employee shall not
          disclose in any manner or in any forum or make use of in any way or
          manner any Confidential Information other 


                                      -2-


<PAGE>   3

          than in performing the services required of him under this Agreement 
          or as required by law, without the prior written consent of the 
          Company.

     (b)  The provisions of this Paragraph 4 shall not apply to any proprietary,
          confidential or secret information which is, at the commencement of
          the Agreement or at some later date, publicly known under
          circumstances involving no breach of this Agreement or is lawfully and
          in good faith made available to Consultant without restrictions as to
          disclosure by a third party.

     (c)  Any and all inventions and discoveries, whether or not patentable,
          which Consultant conceives or makes during term of this Agreement and
          any extensions thereof, and which are a direct result of work
          performed hereunder, shall be the sole and exclusive property of the
          Company. Consultant shall promptly execute any and all applications,
          assignments or other instruments which an officer of the Company or
          its Board shall deem necessary or useful in order to apply for and
          obtain Letters Patent in the United States and all foreign countries
          for said inventions and discoveries an in order to assign and convey
          to his employment by the Company the sole and exclusive right, title
          and interest in and to said patent inventions, discoveries, patent
          applications and patents thereon. The Company will bear the cost of
          preparation of all such patent applications and assignments, and the
          cost of prosecution of all such patent applications in the United
          States Patent Office and in the patent offices of foreign countries.

     (d)  Consultant and the Company agree that any breach of this Paragraph 4
          will cause the Company irreparable harm for which the Company will
          have no adequate remedy at law. As a result, the Company will be
          entitled to the issuance by an arbitrator or court of competent
          jurisdiction of an injunction, restraining order or other equitable
          relief in favor of itself restraining Consultant from committing or
          continuing in any such violation. Any right to obtain an injunction,
          restraining order or other equitable relief hereunder shall not be
          deemed to be a waiver of any right to assert a claim or remedy which
          the Company may have under this Agreement or otherwise at law or in
          equity.

     (e)  The Company acknowledges that the Consultant is employed by Global
          Pharma Ltd. and that this Paragraph 4 is not intended to compromise
          Consultant's relationship with Global Pharma Ltd.

5. Limitation on Competition.
   -------------------------

     (a)  For so long as Consultant is consulting with the Company and for a
          period of one year thereafter, Consultant shall not, without the prior
          written 


                                      -3-


<PAGE>   4

          consent of the Board of Directors, participate, engage, or be
          interested in, whether as a director, officer, employee, advisor,
          consultant, stockholder, partner, joint venturer, owner or in any
          other capacity, whether directly or indirectly, any business engaged
          in the development, production or sale of any products or services
          related to the T Cell Antigen Receptor, complement system or TRAx
          product technology.

     (b)  During the term of this Agreement, and for a period of one year
          thereafter, Consultant shall not, directly or indirectly, solicit,
          raid, entice or otherwise induce any employee of the Company or any of
          its subsidiaries or affiliated companies to be employed by a
          competitor of the Company.

     (c)  Consultant acknowledges that the foregoing restrictions are fair and
          reasonable and that his breach, or threatened or attempted breach, of
          any provision of this Paragraph 5 would cause irreparable harm to the
          Company no compensable in money damages, and that the Company shall be
          entitled, in addition to all other applicable remedies, to a temporary
          and permanent injunction and a decree for specific performance of the
          terms of this Paragraph 5 without being required to prove damages or
          furnish any bond or other security.

     (d)  The Company agrees that the Consultant's employment by Global Pharma
          Ltd. does not apply to this Paragraph 5.

6. Miscellaneous
   -------------

     Enforceability.
     --------------

     If the provisions of this Agreement shall be deemed invalid or
     unenforceable as written, it shall be construed, to the greatest extent
     possible, or modified, to the extent allowable by law, in a manner which
     shall render it valid and enforceable and any limitation on the scope or
     duration of any such provision necessary to make it valid and enforceable
     shall be deemed to be part thereof; no invalidity or unenforceability shall
     affect any other portion of this Agreement unless the provision deemed to
     be so invalid or unenforceable is a material element of this Agreement,
     taken as a whole.

     Notices.
     -------

     All notices which either party is required or permitted to give to the
     other shall be given by express, registered or certified mail, addressed to
     the address referred to above, or at such other place as a party may from
     time to time designate in writing, or by personal delivery.



                                      -4-



<PAGE>   5

     Waivers.
     -------

     No waiver by either party of any breach or nonperformance of any provision
     or obligation of this Agreement shall be deemed to be a waiver of any
     preceding or succeeding breach of the same or any other provision of this
     Agreement.

     Entire Agreement; Amendments.
     ----------------------------

     This instrument is the entire agreement of the parties with respect to the
     subject matter hereof and supersedes the Employment Agreement dated October
     1, 1994 between the parties. This Agreement may not be amended,
     supplemented, canceled or discharged except by a written instrument
     executed by both of the parties hereto.

     Nonassignability.
     ----------------

     This Agreement and the rights and obligations hereunder are personal to the
     Company and Executive and are not assignable or transferable to any other
     person, firm or corporation.

     Governing Law.
     -------------

     This Agreement will be governed by and construed in accordance with the
     laws of the Commonwealth of Massachusetts applicable to agreements made and
     to be performed entirely within such state.

     IN WITNESS WHEREOF, the parties below have executed this Agreement
effective as of the date set forth above.


DR. PATRICK C. KUNG                T CELL SCIENCES, INC.

By: /s/ Patrick C. Kung            By: /s/ Alan W. Tuck
    -------------------------          -------------------------------
                                           Alan W. Tuck
                                           President and
                                           Chief Executive Officer



                                      -5-

WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.


<TABLE> <S> <C>

<ARTICLE> 5
<MULTIPLIER> 1
       
<S>                             <C>
<PERIOD-TYPE>                   12-MOS
<FISCAL-YEAR-END>                          DEC-31-1995
<PERIOD-START>                             JAN 01-1995
<PERIOD-END>                               DEC-31-1995
<EXCHANGE-RATE>                                      1
<CASH>                                      12,275,217
<SECURITIES>                                         0
<RECEIVABLES>                                  420,480
<ALLOWANCES>                                  (17,187)
<INVENTORY>                                    403,293
<CURRENT-ASSETS>                            13,559,088
<PP&E>                                       4,368,454
<DEPRECIATION>                             (3,196,317)
<TOTAL-ASSETS>                              18,532,287
<CURRENT-LIABILITIES>                        2,350,613
<BONDS>                                              0
<COMMON>                                        19,905
<PREFERRED-MANDATORY>                                0
<PREFERRED>                                          0
<OTHER-SE>                                  15,980,196
<TOTAL-LIABILITY-AND-EQUITY>                18,532,287
<SALES>                                      2,354,377
<TOTAL-REVENUES>                             3,963,054
<CGS>                                        1,879,387
<TOTAL-COSTS>                               13,946,250
<OTHER-EXPENSES>                           (3,000,000)
<LOSS-PROVISION>                                     0
<INTEREST-EXPENSE>                           (604,634)
<INCOME-PRETAX>                            (8,257,949)
<INCOME-TAX>                                         0
<INCOME-CONTINUING>                        (8,257,949)
<DISCONTINUED>                                       0
<EXTRAORDINARY>                                      0
<CHANGES>                                            0
<NET-INCOME>                               (8,257,949)
<EPS-PRIMARY>                                   (0.47)
<EPS-DILUTED>                                   (0.47)
        

</TABLE>