SERAGEN INC, 10-K, 1997-04-02

SERAGEN INC
10-K, 1997-04-02
BIOLOGICAL PRODUCTS, (NO DIAGNOSTIC SUBSTANCES)

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

Form 10-K

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

Commission file number 0-19855

SERAGEN, INC.
(Exact name of registrant as specified in its charter)

Delaware 04-2662345
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)

97 South Street, Hopkinton, MA 01748
(Address of principal executive offices)(Zip Code)

(508) 435-2331
(Registrant's telephone number, including area code)

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

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

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]

Aggregate market value, based upon the closing sale price of the shares as
reported by the Nasdaq Stock Market, of voting stock held by non-affiliates at
March 27, 1997: $9,478,775 (excludes shares held by executive officers,
directors, and beneficial owners of more than 10% of the Company's Common
Stock). 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 direction of management or policies of the registrant, or that
such person is controlled by or under common control with the registrant.
Common Stock outstanding at March 27, 1997 was 18,048,881 shares.

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PART I

ITEM 1. BUSINESS

General

Seragen is a leader in the discovery and development of a new class of
therapeutic products called fusion proteins or fusion toxins ("fusion
proteins"). This technology has led to the discovery of a number of molecules,
two of which have been studied in clinical trials for the treatment of cancers
and autoimmune diseases. The Company's lead molecule, DAB389IL-2, is currently
completing Phase III clinical trials for cutaneous T-cell lymphoma ("CTCL") and
a Phase I/II clinical trial for psoriasis. Seragen plans to file, in 1997, a
Biologic License Application ("BLA") with the U.S. Food and Drug Administration
("FDA") for approval of the molecule's use in CTCL patients who have received
previous treatment with other agents. The Company has requested consideration
for accelerated approval from the FDA, a process which provides for a decision
in as little as six months on applications for products intended to treat
certain life-threatening illnesses. The FDA will decide at the time of filing
if the Company's BLA qualifies for the accelerated approval process. A second
molecule developed from the same technology, DAB389EGF, is in a Phase I/II
clinical trial for non-small cell lung cancer.

Seragen's proprietary Fusion proteins consist of fragments of diphtheria
toxin genetically fused to a ligand (a targeting and binding mechanism) that
targets specific receptors on the surface of disease-causing cells. The Fusion
proteins are designed to:

- bind to specific receptors present on the surface of disease-causing
cells;
- penetrate the target cells; and
- destroy the target cells' ability to manufacture proteins, thereby
killing the targeted cells and destroying their ability to spread
disease.

Seragen builds its Fusion proteins from a template based on the genetic
components of the diphtheria toxin molecule. Using this platform, the Company
has genetically engineered six Fusion proteins, each of which consists of
fragments of diphtheria toxin fused to a different targeting ligand, such as a
polypeptide hormone or growth factor. The Company has conducted clinical trials
of two proteins, DAB389IL-2 and DAB389EGF, for applications in oncology,
dermatology, HIV, and autoimmune disorders. Although it has created four other
proteins, namely DAB389IL-4, DAB389IL-6, DAB389CD-4, and DAB389MSH, for
oncology,
infectious disease, and autoimmune disorders, the Company has, at this point,
focused its clinical efforts on its two leading molecules, DAB389IL-2 and
DAB389EGF.

The Company entered into a strategic alliance with Eli Lilly and Company
("Lilly") in 1994 to develop DAB389IL-2 for cancer. The Lilly alliance has
provided Seragen with funding to take its first product through Phase III
clinical trials for CTCL. Through this alliance, Lilly has exclusive worldwide
development, distribution, and marketing rights to DAB389IL-2 for the treatment
of cancer, except in certain Asian countries. All pre-clinical and clinical
programs other than those covered by the Lilly alliance have thus far been
funded by the Company independently.

During 1996, the Company effected three issuances of preferred stock to
meet certain of its financing needs. On May 29, 1996, the Company raised net
proceeds of $3.8 million through the sale of 4,000 shares of the Company's
non-voting convertible Series A Preferred Stock ("Series A Shares") to investors
outside the United States. On July 1, 1996, the Company restructured its
arrangement with certain guarantors of the Company's June 1995 $23.8 million
bank financing so that the guarantors directly assumed the Company's liability
to the banks. In exchange for the guarantors satisfaction of the Company's
liability to the banks, the Company issued 23,800 shares of its Series B
Preferred Stock ("Series B Shares") to the guarantors. The Series B
shareholders also received warrants to purchase a total of 5,950,000 shares of
Seragen Common Stock at an exercise price of $4.00 per share. In addition to
these warrants, the investors may receive additional warrants pursuant to
anti-dilution provisions. In connection with this, the Company entered into a

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number of transactions by which the Company transferred all of its patents to a
subsidiary, which in turn made a collateral assignment of the patents to the
Series B shareholders as security for dividend payments. See "Liquidity and
Capital Resources." On September 30, 1996, the Company raised proceeds of $5
million through the sale of 5,000 shares of the Company's non-voting convertible
Series C Preferred Stock ("Series C Shares") in a private placement with Boston
University.

On February 18, 1997, the Company entered into an agreement to sell its
manufacturing and clinical operations facilities to Boston University ("Boston
University" or "B.U.") or a designated affiliate for $5 million. The closing of
the transaction is subject to, among other things, approval by the Company's
stockholders. B.U. has paid the Company $4.5 million as a deposit and has
assumed responsibility for the facility's operations, including responsibility
for operating costs. The Company currently may use this deposit to fund its
operations. At the closing, a majority of the Company's employees involved in
the manufacturing and clinical operations will become employees of B.U. Both
the deposit and the operating costs paid by B.U. are subject to refund in the
event that conditions for closing are not met.

Simultaneously, the Company entered into a service agreement with B.U.
providing for the purchase by the Company of certain services related to product
research, development, manufacturing, clinical trials, quality control, and
quality assurance. This service contract expires in January 1999 and is subject
to early termination provisions, as defined, including the option of B.U. to
terminate the agreement if losses during a contract year exceed $9.0 million and
the Company does not reimburse B.U. for the losses in excess of $9.0 million.
The service contract may be renewed for two successive one-year terms at the
option of the Company. The Company has the option to repurchase the assets
comprising the manufacture and clinical operations facilities. The Company has
agreed to pay B.U. approximately $5.5 million and $6.6 million in years 1 and 2
of this contract, respectively. The fees can be mutually increased or
decreased, but may not be reduced to less than $4.3 million per contract year.
The service agreement is expected to substantially reduce operating costs in
research and development as Seragen will be contracting solely for the services
that the Company requires for clinical and manufacturing purposes.

The Company was organized as a Massachusetts corporation in 1979 in a joint
venture between Boston University and several of its scientific faculty members.
It adopted its present name in 1980 and was reincorporated as a Delaware
corporation in February 1982. Since 1985, the Company has focused substantially
all of its efforts and resources on research and development of its Fusion
protein technology. Boston University became the Company's majority stockholder
in 1987 and was the Company's principal source of working capital from that time
until the Company's initial public offering in April 1992. The Company's
executive offices and laboratories are located at 97 South Street, Hopkinton,
Massachusetts 01748, and its telephone number is (508) 435-2331.

Product Development Update

The Company's Fusion protein technology has led to the discovery of a
number of molecules, two of which have been subjects of clinical trials for the
treatment of cancers and/or autoimmune diseases. The Company's lead molecule,
DAB389IL-2, is currently in Phase III clinical trials for CTCL and a Phase I/II
clinical trial for psoriasis. A second molecule developed from the same
technology, DAB389EGF, is in a Phase I/II clinical trial for non-small cell lung
cancer and may be applicable in a variety of solid tumor cancers.

Interleukin-2 ("IL-2") Fusion Protein (DAB389IL-2)

Seragen has designed two versions of an Interleukin-2 fusion protein that
combine the cell-killing action of diphtheria toxin and the specific
cell-targeting ability of the growth factor, IL-2. IL-2 Fusion proteins bind to
the IL-2 receptor ("IL-2R") on activated lymphocytes and malignant T-cells and
B-cells. Once bound to the surface receptor, the molecule is internalized and
the cell-killing portion of the fusion toxin passes into the cell where it
inhibits protein synthesis, ultimately causing cell death.

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DAB486IL-2, Seragen's first version of IL-2 Fusion protein to be studied,
was evaluated in a series of Phase I/II clinical trials and established the
Company's rationale for IL-2R targeted therapy. Clinical evaluation of
DAB486IL-2 was discontinued shortly after the development of DAB389IL-2 because
DAB389IL-2 is more potent biologically and more economical to manufacture.

Cancer

Cancer is characterized by uncontrolled growth of malignant cells capable
of forming secondary tumors or metastases at remote sites. Conventional cancer
therapy includes surgery, chemotherapy and radiation. Patients may be treated
with one of these approaches but are more commonly treated with combinations.
Although chemotherapy and radiation are effective methods for killing cells,
they can not target specific cells and, therefore, they cause serious adverse
effects in patients. Response rates to cancer therapy vary enormously depending
on the stage of disease and the type of cancer. In the case of some solid
tumors, early diagnosis and treatment can result in cures and/or long-term
remissions. In later stage disease, treatment is generally ineffective. New
therapies are particularly needed to induce remission of any duration in
patients with solid tumors and refractory non-Hodgkin's lymphoma.

Recent efforts to improve cancer therapy have focused on ways to target
malignant cells more selectively. Seragen's receptor-targeted Fusion proteins
are part of the emerging field of targeted therapeutics, a field which also
includes monoclonal antibodies and receptor antagonists.

Research indicates that IL-2 receptors are expressed on the surface of some
malignant cells in a variety of T-cell and B-cell leukemias and lymphomas,
including non-Hodgkin's lymphoma and CTCL. In 1995, 50,900 new patients were
diagnosed with non-Hodgkin's lymphoma alone in the U.S. (See Table I.)

<TABLE>

Table 1
<CAPTION>
ESTIMATED NEW BLOOD AND LYMPH CANCER CASES, U.S. 1995
- -----------------------------------------------------
<S> <C>
Leukemia:
Lymphocytic Leukemia................... 11,000
Granulocytic Leukemia.................. 11,100
Other & Unspecified Leukemia........... 3,600
Total............................... 25,700

Other Blood & Lymph Tissues:
Hodgkin's Disease...................... 7,800
Non-Hodgkin's Lymphoma................. 50,900
Multiple-Myeloma....................... 12,500
Total .............................. 71,200

</TABLE>
Source: A Journal of the American Cancer Society.
January/February 1996 Vol.46 No.1

Based on research data and screening studies conducted by Seragen, the
Company estimates that approximately 50% of these new patients will have IL-2
receptors on the surface of their malignant cells. This population of patients
represents the initial potential market for the use of DAB389IL-2 in treating
cancer.

Cutaneous T-Cell Lymphoma (CTCL)

CTCL is an infrequent, low-grade, non-Hodgkin's lymphoma, composed of
malignant T-lymphocytes, and typically manifesting itself in the skin.
Worldwide, the prevalence and incidence are low. In the United States,
estimates of prevalence range from 5,000 to 10,000 cases with an incidence of
500 to 1,000 new cases diagnosed each year.

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There is currently no formally approved drug therapy for CTCL. CTCL
patients experience significant disability from frequent skin infection,
disfigurement, pruritus (itching), and pain, and the disease is ultimately
fatal. Patients with patch/plaque skin lesions alone are often treated with
topical therapies such as nitrogen mustard, psoralen phototherapy, or electron
beam radiation. However, remission without maintenance therapy is unusual, and
patients often experience acute and chronic adverse effects and may eventually
become unresponsive to these agents. Patients with generalized skin
involvement, lymph node enlargement, and/or visceral involvement require
combination and/or systemic therapies. These therapies (chemotherapy,
interferon-alpha, and/or retinoids) are variably applied depending on the
particular treating center's experience. Efficacy of these treatments is
inconsistent and often associated with significant short and long term adverse
effects. In addition, extension of survival does not appear to be influenced by
aggressive combination therapy. There is a critical medical need, therefore,
for an additional, more effective and less toxic therapy to manage this
malignancy.

CTCL Clinical Trial Status

Seragen has been investigating the usefulness of IL-2 fusion toxin proteins
(DAB486IL-2 and DAB389IL-2) in patients with refractory IL-2 receptor-expressing
lymphomas, including CTCL, since 1988. Treatment courses have consisted of an
intravenous infusion of 15-60 minutes daily for five days, administered either
once a month or every three weeks. Patients treated were no longer experiencing
any clinical benefit from previously administered therapies. Six of 36 patients
treated with the first molecule (DAB486IL-2) demonstrated a response as measured
by at least a 50% reduction in tumor burden. The duration of response ranged
from 3 months to more than six years in one patient who had a complete response
and was still in remission as of this writing.

Investigation continued in a Phase I/II dose-escalation trial of DAB389IL-2
in which 13 of 35 CTCL patients responded to treatment with at least a 50%
reduction in tumor burden. Five of these patients cleared completely. Duration
of response ranged from two to 23 months (as of the latest available
information) with a median duration of six months; responses occurred at varying
dose levels without a discernible difference in effectiveness among the doses
used. These responses are notable because the patients enrolled in these early
clinical trials were not receiving any clinical benefit from a variety of
previously administered treatments.

Based on the response rates seen in the Phase I/II patients, Seragen
designed a Phase III program with extensive consultation from oncologists and
dermatologists experienced in treating CTCL. Seragen designed this program
together with its strategic alliance partner, Lilly. See "Strategic Alliance
with Eli Lilly and Company." The FDA also provided guidance and comments.
Seragen and Lilly finalized the protocol and initiated the Phase III program in
May 1995. The first Phase III study targeted more seriously ill patients who
have received extensive previous therapy and need immediate systemic (as opposed
to topical) treatment. The second Phase III study is a placebo-controlled trial
for earlier stage patients who have received less extensive therapy. Both of
these studies are randomized and blinded to evaluate two dose levels of
DAB389IL-2 in different CTCL patient populations. A third Phase III study is an
open-label study for CTCL patients who have relapsed after a previous response
to DAB389IL-2, patients with stable disease after eight courses of therapy in
the second study and patients who had progressive disease while on placebo in
the second study. The criteria for response in each of these studies have been
strictly defined based on objective, measurable assessments of the patients'
disease. Seragen believes these criteria set the standard for determining
meaningful clinical responses among patients with CTCL.

Enrollment in the first study was completed in July 1996, and approximately
one-half of the number of patients sought have been enrolled in the second
study. Thirty-two patients have enrolled in the third study. Based on a
preliminary analysis of the first study and discussions with the FDA, Seragen
plans to file a BLA during the third quarter of 1997. The BLA filing will be
based on data from the first Phase III study together with data from the earlier
Phase I/II clinical trials in CTCL. The Company will request consideration for

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accelerated approval from the FDA, a process which can provide for a decision in
as little as six months on applications for products intended to treat certain
life-threatening illnesses. The FDA will decide at the time of filing if the
Company's BLA qualifies for the accelerated approval process. The FDA has
already granted "Orphan Drug" status to DAB389IL-2 for the treatment of CTCL.
This designation provides incentives to manufacturers to undertake development
and marketing of products to treat relatively rare diseases and includes a
seven-year marketing exclusivity for qualified products.

Autoimmune Diseases

To defend the body against foreign agents, the human immune system employs
specialized cells, including T-cells, which recognize disease-causing viruses,
bacteria, and parasites as foreign. T-cells, an important component of the
immune system, control the network of immune responses by regulating the
activity of other cells in the immune system and by killing foreign cells. The
same immune response that protects the body from foreign agents can also cause
disease when it inappropriately attacks the body's own cells and proteins. In
autoimmune diseases, the immune network mistakenly identifies "self" as
"foreign" and, among other actions, produces T-cells that attack normal body
cells. Such prevalent diseases as rheumatoid arthritis, psoriasis, multiple
sclerosis and alopecia areata are autoimmune diseases. (See Table II.)

<TABLE>
Table II

<CAPTION>
AUTOIMMUNE DISEASE PREVALENCE (U.S.)
-----------------------------------------
<S> <C>
Psoriasis(Total)................................... 6,000,000
(Moderate-to-Severe) ............................... 1,500,000
Rheumatoid Arthritis................................ 2,500,000
Multiple Sclerosis.................................. 350,000
Alopecia Areata..................................... 2,000,000
Other............................................... 1,500,000

</TABLE>

Source: Scientific American Medicine and National Psoriasis
Foundation

Conventional approaches for treating autoimmune diseases rely on broadly
active immunosuppressive agents, such as corticosteroids, cyclosporine A, and
methotrexate. These agents do not have specific targets, may be difficult to
tolerate, and are not selective in their suppression of the immune response.
Typically, they must be administered continuously to achieve therapeutic effect;
resistance may develop and/or toxicity may require discontinuation of therapy.
Seragen believes that specifically targeted cytotoxic agents, such as
DAB389IL-2, could induce remission in certain autoimmune diseases following a
brief course of therapy and may not cause the long-term toxicity that can occur
with broad spectrum immunosuppressants.

Research indicates that activated, high affinity IL-2 receptor-expressing
lymphocytes are present in the circulation and in the affected tissue of
patients in acute phases of certain autoimmune diseases, including rheumatoid
arthritis, psoriasis, multiple sclerosis and alopecia areata. These findings
suggest that autoimmune disorders characterized by the presence of high affinity
IL-2 receptor-bearing lymphocytes may, therefore, be treatable with DAB389IL-2.

Psoriasis

Psoriasis is one of the most common chronic skin disorders, with an
estimated two to three percent of the world population affected, including
approximately 6 million Americans. In the United States, some 150,000 to
260,000 new cases are reported annually. A 1993 estimate placed the overall
cost of treating psoriasis in the U.S. at over $3.0 billion. The major markets
for psoriasis treatments are in the United States and Europe, while incidence
rates are much lower in Asia (<=0.3%).

Psoriasis is a lifelong disease characterized by chronic recurrence of
thickened, red patches of skin covered with silvery scales. Occurrence involves

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excessive proliferation of the outer layer of the skin, the epidermis.
Normally, a person's epidermis is renewed by the formation of new cells about
once a month, unnoticeably. In psoriasis, however, new cell production speeds
up and a new outer layer of skin is reproduced every three or four days,
creating psoriatic lesions. Skin involvement can range from a few psoriatic
plaques on less visible parts of the body to involvement of large, prominent
areas. Treatment may be required for local symptoms (such as pain, itching and
the reduction of manual dexterity), cosmetic problems (such as prominent and
unsightly hand, leg, or facial lesions), or both. The social and economic
impact of the disease is often underestimated by physicians, other health care
providers, and the general public. Especially in more severe cases, the
emotional and physical impact can be disabling.

The majority (approximately 70%) of psoriatic cases are mild (with <=10%
body surface area ("BSA") involvement); 20 to 25% of psoriasis cases are
moderate (10-20% BSA) to severe (>=20% BSA). Standard treatment for mild cases
is topical medication with steroids and emollients. Light treatment with
augmented ultraviolet A ("UVA") and ultraviolet B ("UVB") irradiation of the
skin and systemic drugs (methotrexate and etretinate), either alone or in
combination, are used to treat the patient with moderate-to-severe psoriasis.

Because psoriasis is a chronic disease, the treatment goal is first to
induce remission and then to use maintenance therapy to sustain the remission
for as long as possible. Many of the current treatments for moderate-to-severe
psoriasis have toxic side effects. To keep the toxicity of the treatments under
control and to extend their usefulness, a maintenance treatment strategy is
frequently employed whereby light treatment and systemic drugs are rotated.
Even with this rotational therapy, however, estimates indicate that treatment is
ineffective or causes unacceptable side effects for 40-50% of the
moderate-to-severely affected patient population.

The most commonly used therapies to treat moderate-to-severe psoriasis are
light treatments (known as "PUVA" and "Goeckerman" treatments). PUVA therapy is
time-consuming, inconvenient, and expensive. Patients can receive these
treatments only for a limited time because of the significantly increased risk
of skin cancer. Although methotrexate is now being used to treat psoriasis, it
has the potential for inducing serious adverse effects on the liver and can
generally be prescribed for limited periods of time. Dermatologists are also
apprehensive about treatment with cyclosporine because of its potent
immunosuppression, and its toxicity to the kidneys.

DAB389IL-2 Opportunity in Psoriasis

Intravenous ("IV") Formulation

Seragen believes that the opportunity for an intravenous formulation of
DAB389IL-2 in the psoriasis market lies in the moderate-to-severe patient
population. An agent like DAB389IL-2 could provide targeted immunomodulation
therapy against the component of the immune system believed to be involved in
the pathogenesis of psoriasis, the CD8+ cytotoxic T-lymphocyte. An IV product's
market would probably be limited to administration by clinics and major
hospitals. Cost comparisons to current therapies, however, suggest that
treatment with DAB389IL-2 could compete successfully with other systemic
therapies.

Subcutaneous ("SC") Formulation

Seragen believes that the market for DAB389IL-2 as a psoriasis therapeutic
would be substantially increased if the agent did not require frozen storage and
IV administration (as the Company's present formulation does). For a
subcutaneous product to capture a significant share of the psoriasis market, the
product would have to be as effective as PUVA treatment, have a good safety
profile and be easily administered. A lyophilized formulation would enable the
dermatologist (or patient) to store the drug in a refrigerator. Subcutaneous
delivery would eliminate the need for a professional trained in IV
administration and could permit the local dermatologist, primary care physician,
or even the patient to administer the drug. The Company is investigating
subcutaneous administration of its newly developed lyophilized formulation of
the agent to meet this need. Although there is no good animal model of
psoriasis, encouraging results from subcutaneous administration of DAB389IL-2 in
an animal tumor model have demonstrated that this route of administration can
reduce tumor burden. This result is expected to be indicative of a potential
anti-psoriatic effect. Seragen currently plans to initiate its first clinical
trial of a subcutaneous formulation of DAB389IL-2 for psoriasis in 1998.

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Topical Administration

Some 70% of psoriatics have mild disease, for which the primary current
treatments are emollients and steroids. A topically applied product for
patients with mild disease could generate a much larger market opportunity,
estimated at 3 to 4 million patients in the U.S. Preliminary investigation of a
topical delivery technology is currently under way at Seragen.

Status of Clinical Trials of DAB389IL-2 in Psoriasis

Two clinical studies of DAB389IL-2 in moderate-to-severe psoriasis patients
who had received prior treatment with multiple systemic therapies have been
completed. A third trial is currently underway. The studies are summarized
below. In both of the two completed studies, the patients' psoriasis was
evaluated according to the standard Psoriasis Area and Severity Index ("PASI").
Both schedules investigated in these trials showed a significant decrease in
disease severity with DAB389IL-2 administration. The trials recorded
approximately 40% mean improvement in patients who had long-standing psoriasis,
little or no history of spontaneous improvement or resolution, and a history of
failure with treatments ranging from topical treatments to phototherapy to
methotrexate and cyclosporine. In both trials, disease severity scores
continued to decrease after the end of dosing. The weekly schedule of dosing
produced a more rapid initial rate of improvement than the monthly schedule.

Open-label, Dose Escalation Study

The first clinical study of DAB389IL-2 in psoriasis was an open-label,
dose-escalation trial evaluating DAB389IL-2 at dose levels of 2 to 9 micrograms
per kilogram of body weight per day ("ug/kg/d") administered daily for five days
a week every four weeks. Twenty-four patients (15 males and 9 females) were
enrolled in the study. Ages ranged from 21 to 62 years with a mean age of 43.
All patients had chronic, extensive plaque-type psoriasis of long-standing
duration with a mean disease duration of 16.3 years. In 50% of the patients,
psoriatic lesions covered 10% to 29% of the body surface area. Scalp and nails
were affected in 22 of the 24 patients (92%), and 11 of the 24 patients (46%)
had arthritis, a condition often associated with advanced psoriasis.

The mean disease severity score declined steadily over the study period.
By the end of the second course, the mean disease severity score had decreased
by 34% from baseline in all dose groups. Improvement continued after the third
course with a mean decrease in severity of 49%, after the fourth course with a
mean decrease in severity of 54%, and after the sixth course with a mean
decrease in severity of 68%. All these decreases were statistically significant
(p<0.05). This early trial, indicated that treatment with DAB389IL-2 could
reduce disease severity scores in this severely affected group of patients and
warranted further study.

Double-blind, Placebo Controlled Study

The second study of DAB389IL-2 in psoriasis was a randomized,
double-blind, placebo controlled study with three dose groups of 5, 10, and 15
ug/kg/d administered three consecutive days per week for four consecutive weeks.
Forty-one patients (22 males and 19 females) were enrolled in the study. Ages
ranged from 20 to 75 years with a mean age of 45; the patients had suffered from
psoriasis from one to 53 years, with a mean disease duration of 18.3 years.
Patients were randomly assigned to one of four protocol groups at each of eight
investigational sites. Twelve patients were assigned to the placebo group, 11
were assigned to the low dose group, ten were assigned to the mid-dose group,
and eight were assigned to the high dose group.
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This trial was terminated prematurely (in December 1995) to allow the
Company to conduct a broad safety review of DAB389IL-2 when one patient in the
trial experienced unexpected blood clotting. After a review of this event, of
the data from this trial, and the data from other trials of DAB389IL-2, the FDA
authorized the Company to resume its investigation of DAB389IL-2 in psoriasis.
Analysis of the available data indicated that the degree of patient improvement
in this second psoriasis trial was consistent with the results of the earlier
study.

Overall, 12 of the 27 patients (44%) who received at least one dose of
DAB389IL-2, and who had not been responding well to other therapies, exhibited
at least 50% improvement from baseline disease severity scores. Statistical
analysis of mean PASI scores showed that there was a statistically significant
decrease in the mean disease severity score compared to baseline in all dose
groups (p<0.05) and that the decrease in disease severity scores was
statistically significant in DAB389IL-2 treated patients compared to placebo
patients (p<0.05). Skin thickness of psoriatic plaque in the treated patients
was reduced also (as measured by the difference in epidermal thickness observed
in microscopic evaluation of specific plaques). Furthermore, quality-of-life
index scores of patients treated with DAB389IL-2 suggested that quality of life
improved with treatment. Similar responses were observed at all dose levels
evaluated, although the frequency and severity of adverse events were less at
lower doses. This suggested that efficacy of DAB389IL-2 in psoriasis should be
further tested at the more economically desirable lower dose levels.

Current Open-label, Dose Escalation Study

The accumulated data from the first two psoriasis studies indicated that
induced meaningful clinical responses in as many as 50% of psoriasis patients
who had previously been treated heavily with other therapies. Tolerability
issues suggest that three doses per week administered weekly, especially at the
higher doses tested, may be too frequent. Other observations indicate that
clinical improvement after a single five-day treatment may induce maximum
response two weeks after administration. These data suggest that monthly
administration may not be frequent enough. Therefore, the Company designed a
third psoriasis trial to evaluate the safety and efficacy of administration of
the lower dose range of DAB389IL-2 on a bi-weekly schedule. This ongoing Phase
I/II study is designed to enroll 30 patients. Based on previous enrollment
rates, Seragen expects enrollment to be complete by mid-1997. If the data from
this study, in combination with data from the previous two studies, warrant it,
the Company plans to design a Phase III program in moderate-to-severe psoriasis
to commence as early as the first half of 1998.

Other Potential Opportunities for DAB389IL-2

Rheumatoid Arthritis

Rheumatoid arthritis ("RA") is a chronic, systemic disease characterized by
persistent inflammation of the joints. RA is believed to be caused by an
autoimmune response against joint tissue. Furthermore, expression of the
high-affinity IL-2 receptor on activated lymphocytes is known to play a pivotal
role in the pathogenesis of many autoimmune diseases, including RA. The
Rheumatic Disease Clinics of North America report that RA affects approximately
1% of the world's population, including approximately 7,500,000 people in the
United States, Western Europe and Japan. An estimated 20% of RA patients suffer
from a severe form of the disease. The Company believes that this population
may represent a potential market for DAB389IL-2, although the Company is not
currently pursuing clinical development of this application for DAB389IL-2.

In the past Seragen conducted three clinical trials of DAB389IL-2 in
patients with rheumatoid arthritis: one double-blind, placebo-controlled
dose-finding trial evaluating at three dose levels versus placebo; one
follow-up open-label study evaluating the safety of up to four courses per year;
and one open-label study evaluating the safety of concurrent administration of
DAB389IL-2 and methotrexate ("MTX") in patients using methotrexate as
anti-arthritic therapy. Patients in the double-blind, placebo controlled trial
had suffered from severe progressive RA for an average of ten years and were not
experiencing clinical benefit from currently available therapies, including

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methotrexate. A number of patients who received DAB389IL-2 in that study
demonstrated improvement according to at least four standard rheumatological
criteria. As commonly noted in studies of RA, however, patients who received
placebo in this study also showed some improvement, to the extent that the
results in the treated patients were not deemed statistically significant. No
additive toxicities were seen in the combination MTX study during concurrent
administration of DAB389IL-2 and MTX. Depending on the availability of
financial resources, the Company may evaluate further clinical development of
DAB389IL-2 (including subcutaneous administration) in patients with RA.

HIV Infection/AIDS

Human immunodeficiency virus ("HIV") infection ultimately leads to severe
life-threatening impairment of the immune system, resulting in the viral disease
state known as acquired immune deficiency syndrome ("AIDS"). HIV causes
immunosuppression by attacking and destroying T-cells, which coordinate much of
the network of normal immune responses. The World Health Organization estimates
that between 8,000,000 and 10,000,000 people are currently infected with HIV
worldwide.

Research has demonstrated that T-cell activation is required for
replication of HIV. The activation event results in expression of the high
affinity IL-2 receptor on HIV-infected lymphocytes. Seragen has performed a
series of in vitro experiments which demonstrated the ability of DAB389IL-2 to
target specifically and kill HIV-infected lymphocytes. Thus, administration of
DAB389IL-2 may decrease the number of HIV-infected cells in the body,
potentially reducing the amount of virus.

Because the target for DAB389IL-2 is a receptor present on the activated
T-cells that reproduce HIV, the use of DAB389IL-2 is an approach to treating HIV
infection that should not be affected by the high rate of viral mutation that is
a hallmark of the disease. This approach, therefore, would presumably not lead
to viral resistance. The HIV-related application for DAB389IL-2 may lie in
adjunctive therapy in combination with the nucleotide analogs (AZT, ddC, ddI,
3TC) and protease inhibitors, all of which target viral replication but are
expected eventually to become ineffective as viral resistance develops.

A preliminary safety study of DAB389IL-2 has been conducted in HIV infected
patients. Twenty four patients were enrolled in a double-blind, randomized,
dose-ranging study in patients with HIV infection. DAB389IL-2 was found to be
safe at the very low doses tested. An additional study is currently planned
which will evaluate subcutaneous administration of DAB389IL-2. However, the
Company currently lacks the financial resources to pursue development of this
application for DAB389IL-2 at this time. There can be no assurance that
DAB389IL-2 or any of the Company's other potential products will have an
application in treating HIV. Subcutaneous administration, however, should lead
to higher dose concentrations of DAB389IL-2 in the lymphatics at the sites of
HIV replication.

Additional Potential Applications for DAB389IL-2

Agents like DAB389IL-2, which specifically target immune system cells, may
offer a new therapeutic approach to the treatment of other disorders, such as
multiple sclerosis ("MS") and alopecia areata ("AA"). However, the Company has
not conducted any trials to evaluate the efficacy of DAB389IL-2 or the Company's
other potential products in treating these disorders. There can be no
assurance that any of the Company's products will have an application in
treating MS or AA.

Multiple Sclerosis

MS is a disorder that affects the central nervous system. The pathological
hallmark of the disease are zones of demyelination of nerve tissue, known as
plaques, that vary in size and location. The cause is unknown, but abnormal
immune mechanisms appear to play a role in the disease, and a viral cause is
possible. It is postulated that viral infection, followed by an autoimmune
response in genetically susceptible individuals, initiates the disease process.

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MS is a disease that most commonly begins in young adulthood (onset of
symptoms is rare before 15 years of age or after 40 years of age), and the
course of disease is remarkably variable. There are approximately 350,000 cases
in the U.S. now, and incidence of the disease appears to be increasing.
Although new therapies have been approved to treat MS, therapy remains
unsatisfactory. Agents like DAB389IL-2, which specifically target activated
immune-system cells, may offer a new therapeutic approach to the treatment of
MS. The Company is currently evaluating alternatives for studying the effects
of DAB389IL-2 on this devastating disease.

Alopecia Areata

AA is an inflammatory disease of the hair follicle resulting in hair loss
in small patches, or in the total scalp (alopecia totali), or in the total body
(alopecia universalis). It affects both children and adults and affects both
sexes equally. The total number of AA patients in the United States is about
two million, with 50,000 to 100,000 new cases occurring annually. It affects
all races and is seen worldwide.

Evidence indicates that an immune system mechanism may be involved in the
process leading to AA. Scientists speculate that AA follows a path similar to
psoriasis, where an inflammatory component contributes to the development and
maintenance of the condition. Because there are currently no effective
therapies for AA, there may be an opportunity for DAB389IL-2 in this market.
Dermatologists may be interested in DAB389IL-2 because it is targeted against a
key component believed to be involved in the pathogenesis of the disease, the
activated T-cell. The Company is currently evaluating options for studying the
effects of DAB389IL-2 in AA.

EGF Fusion Protein (DAB389EGF)

In the U.S., the American Cancer Society estimates approximately one
million new cases of solid tumor cancers per year, with approximately 500,000
related deaths each year. A significant percentage of these cases are possible
candidates for treatment with a targeted therapeutic approach utilizing
DAB389EGF. In several carcinomas, research has indicated that the level of
EGF-receptor expression correlates strongly with the progression of the disease.
Increased EGF-receptor expression is associated with refractory tumors.
Enhanced EGF-receptor expression may, therefore, characterize a subset of highly
aggressive tumor cells with greater metastatic potential.

DAB389EGF binds specifically to the Epidermal Growth Factor ("EGF")
receptor on target cells and may have therapeutic potential in solid tumors,
including breast, bladder, lung, colon, prostate, esophageal, thyroid, gastric,
renal, endometrial, cervical, brain and ovarian carcinomas, all of which express
the EGF receptor. A cell-killing agent such as DAB389EGF may be useful for a
variety of solid tumors bearing EGF receptors, including a number of tumors that
are inadequately treated by any currently available therapy. Pre-clinical tests
involving animal models have indicated that DAB389EGF administration results in
cell death and tumor regression of EGF-receptor expressing malignancies.

Lung Cancer

Lung cancer is the most common organ malignancy in the U.S., with an
estimated 170,000 new cases occurring in 1995. The 1995 incidence rate for lung
cancer worldwide was 517,000, with worldwide incidence expected to reach
2,000,000 by the year 2000. About 60% of newly diagnosed lung malignancies are
non-small cell tumors. In 1995, 157,000 Americans died of lung cancer;
worldwide deaths aggregate 457,000. Lung cancer is now the leading cause of
cancer deaths in the U.S.

Non-small cell lung cancer ("NSCLC") has been selected as the first cancer
indication to be investigated for DAB389EGF, based upon: 1) in vitro studies
comparing the sensitivity of various primary tumors to DAB389EGF, and 2) the
clinical improvement of an NSCLC patient in the Company's Phase I clinical trial
of DAB389EGF.
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If responses can be demonstrated, there may be an opportunity for DAB389EGF
to be used in combination with the commonly used chemotherapeutic, cisplatin,
as a first-line, post surgical therapy in stage II and III NSCLC. In the longer
term, opportunities may exist for DAB389EGF to be used in combination with
Lilly's gemcitabine, recently approved for pancreatic cancer. In early studies,
gemcitabine in combination with other chemotherapeutic agents has demonstrated
some promise in NSCLC.

Status of Clinical Trials of DAB389EGF in Solid Tumor Cancers

To date, the Company has conducted two companion Phase I clinical trials in
patients with EGF-receptor expressing malignancies. The trials enrolled 52
patients to evaluate the safety of five different doses administered either
consecutively or episodically. The doses administered ranged from 0.3 to 15
ug/kg/d. The patients enrolled had varying types of EGF-receptor ("EGF-R")
expressing tumors, most of which were prostate, gastrointestinal, or breast
tumors. All patients had metastatic disease.

One of two patients enrolled with lung cancer (adenocarcinoma) had a
greater than 50% reduction in tumor burden at the 6.0 ug/kg/d dose level in the
episodic schedule. Three additional patients judged to have stable disease for
the six-month study period were one patient with head and neck cancer (0.6
ug/kg/d, episodic dosing schedule) and two patients with prostate cancer (1.2
and 4.2 ug/kg/d, consecutive dosing schedule).

A Phase I/II study is currently being conducted in patients with NSCLC.
This is a dose escalation study with projected enrollment of more than 30
patients. Results are expected late in 1997.

Adverse Events Associated with Clinical Trials of Fusion Proteins

In all clinical trials of Seragen's Fusion proteins described in this
document, and as commonly noted during investigation of and treatment with most,
if not all, biological agents, adverse events associated with administration of
the particular Fusion protein under investigation did occur. These events
included, but were not limited to, flu-like symptoms, rash, and transient
elevation of liver enzyme (transaminase) levels. Some patients have experienced
adverse events requiring hospitalization. These adverse events included
problems associated with the patients' underlying disease as well as those
associated with treatment. In some cases, patients experiencing adverse events
discontinued participation in the trial. In the majority of cases, patients
continued to participate.

Further testing in a larger number of patients is required to determine the
safety and effectiveness of Seragen's Fusion proteins in psoriasis, rheumatoid
arthritis, and lung cancer. Further testing may also be required to determine
the safety and effectiveness of DAB389IL-2 in CTCL.

Strategic Alliance with Eli Lilly and Company

On August 3, 1994, the Company and Lilly signed an agreement to form a
global strategic alliance that gives Lilly exclusive worldwide development,
distribution, and marketing rights, except in certain Asian countries, to the
Company's IL-2 Fusion protein for the treatment of cancer. Lilly also has the
option to obtain worldwide development, distribution, and marketing rights for
additional indications for IL-2 Fusion protein and for other Company products
under development upon presentation of Phase II data. The Company retains
exclusive rights to promote IL-2 Fusion protein and future Fusion proteins for
dermatologic applications outside of oncology and will be responsible for bulk
manufacturing for all indications.

On August 4, 1994, under the terms of the alliance, Lilly made an initial
payment to the Company of $10 million, $5 million representing payment for
787,092 shares of Company Common Stock at approximately $6.35 per share and $5
million representing an advance against Lilly's purchase of bulk product from
the Company. Lilly is also required to pay the Company an additional $3 million
based on the meeting of certain regulatory milestones in the development of IL-2
Fusion protein for cancer therapy. No regulatory milestone payments have been
achieved to date under the agreement. In addition, Lilly reimburses the Company
for costs incurred in the clinical development of IL-2 Fusion protein for cancer
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<PAGE>

therapy, including costs for Phase III clinical trials, the preparation of an
FDA application and any FDA filing fees. The Company recorded approximately
$588,000, $3,337,000 and $3,979,000 of contract revenue for such reimbursed
development costs during the years ended December 31, 1994, 1995 and 1996,
respectively.

On May 28, 1996, Lilly and the Company amended the Sales and Distribution
Agreement relating to the $5.0 million advance paid by Lilly in August 1994
against Lilly's future purchases of bulk product from the Company. The amended
agreement states that the $5.0 million payment is non-refundable and Seragen has
no obligation to refund the advance should no bulk purchases be made by Lilly.
To the extent Lilly purchases bulk product in the future, the Company is
required to pay Lilly a royalty equal to 75% of the purchase price, up to $5.0
million of total royalties. The Company has determined that the sale of bulk
products under these terms will result in a potential obligation of $1.2 million
if all of the $5.0 million in royalties are paid to Lilly. Accordingly, the
Company recorded $5.0 million in revenue and a $1.2 million obligation on the
potential sales of bulk material in the year ended December 31, 1996.

Manufacturing

The manufacture of the Company's Fusion proteins originates at the genetic
level. First, genes that direct production of the toxic and translocation
domains of the diphtheria toxin molecule are fused with genes that direct
production of the desired receptor targeting domain to create a new, recombinant
gene. The recombinant gene is then placed in a strain of bacteria (E. coli)
which is grown by fermentation using standard biotechnology techniques. During
fermentation, the recombinant gene is expressed in the bacteria resulting in the
production of Fusion proteins. The fusion protein is then extracted from the
bacteria and purified. Since fusion proteins are produced in recombinant
bacteria using well established technology, the Company believes that its fusion
proteins can be reliably produced in commercial quantities. To date the Company
has produced all of its fusion proteins in the laboratory and has produced its
IL-2 Fusion Protein and EGF Fusion Protein in its manufacturing facilities. The
Company's manufacturing facilities are operated in accordance with current Good
Manufacturing Practices ("cGMP").

The Company entered into an agreement to sell its manufacturing facility to
Boston University in February 1997 pursuant to an asset purchase agreement (see
"Business -- General"). Simultaneously, the Company entered into a service
agreement with B.U. under which B.U. will provide certain services related to
product research, development, manufacturing, clinical trials, quality control
and quality assurance required by Seragen to continue clinical trials and to
produce commercial quantities of DAB389IL-2 for sale. Such services will be
performed to specifications outlined in the service contract. In order for this
manufacturing facility to produce material that can be marketed, it must be
inspected and licensed by the FDA. The Company regularly contracts with a
variety of firms for certain quality control testing and fill-finish services,
some of which services are essential to the Company. As of January 1996, Lilly
is the Company's fill/finish contractor. Generally, these agreements may be
terminated at any time by any of the parties thereto.

Competition

The therapeutic products which the Company is developing will compete with
existing therapies for market share. In addition, a number of companies,
including biotechnology companies and pharmaceutical companies, acting
independently or in collaboration, are pursuing the development of novel
pharmaceuticals which target the same diseases which the Company is targeting.
Furthermore, academic institutions, government agencies and other public
organizations conducting research may seek patent protection, discover new drugs
or establish collaborative arrangements for drug research which may be
competitive with the targeted therapeutic products being developed by the
Company.
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<PAGE>

The Company's fusion proteins are designed to target cells bearing specific
receptors implicated in a variety of diseases. Accordingly, competition will
depend in part on the specific therapeutic applications for which the Company's
compounds are developed and ultimately approved. Many of the Company's existing
or potential competitors (including competitors that may be in the process of
developing fusion protein products utilizing other toxins) have substantially
greater financial, technical and human resources than the Company and may be
better equipped to develop, manufacture and market products. In addition, many
of these competitors have greater experience in pre-clinical testing and human
clinical trials than the Company. These competitors may develop and introduce
products and processes competitive with or superior to those of the Company. In
addition, the Company expects that competition among products approved for sale
will be based, among other things, on product efficacy, safety, reliability,
availability, price and patent position. The development by others of new
treatment methods for those diseases for which the Company is developing
targeted therapeutic products could render such products non-competitive or
obsolete.

The Company's competitive position also depends upon its ability to attract
and retain qualified personnel, obtain patent protection or otherwise develop
proprietary products or processes and secure sufficient capital resources for
the often substantial period between technological conception and commercial
sales.

A number of companies, including both large pharmaceutical companies and
biotechnology companies, have been actively pursuing the development of
monoclonal antibodies and immunotoxin conjugates for more than a decade. The
Company is aware of two patents issued to the National Cancer Institute, United
States Patent 4,892,827 and United States Patent 5,082,927 (the "Pastan
Patents"), which relate to fusion proteins similar to those of the Company, in
which the cytotoxic agent is pseudomonas exotoxin. Certain competitors of the
Company, including certain large pharmaceutical companies, are known to have
been engaged, at least in the past, in the development of fusion proteins under
the Pastan Patents as potential therapeutic products for some of the same
diseases which the Company is targeting. The Company is unable to assess the
effect that such efforts may have on the Company's competitive position or
business.

Patents, Licenses and Proprietary Rights

In November 1983, the Company entered into an agreement with Harvard
University in Cambridge, Massachusetts, whereby the Company was granted a
worldwide license under United States Patent 4,675,382 and all foreign patents
and patent applications corresponding to United States Patent 4,675,382 (the
"Murphy Patents"). The Harvard license provides the Company with the exclusive
right to manufacture, have manufactured, sell or have sold, products made in
accordance with the Murphy Patents for human and veterinary therapeutic and
diagnostic uses for the life of the patents. Under certain circumstances, the
license may become non-exclusive. Under the license, the Company has agreed to
pay Harvard University an annual license fee until a product is marketed, and
thereafter, a royalty on net sales, including a minimum royalty amount if
certain sales levels are not met. The Murphy Patents relate to fusion proteins
expressed as the product of a fused gene wherein the protein's naturally
occurring binding domain is deleted and replaced at the genetic level by a gene
encoding a cell-specific polypeptide ligand. The Company believes that the
Murphy Patents are fundamental to the use of the genetically constructed
diphtheria toxin molecules being developed by the Company. Although the scope
of patent protection is difficult to quantify, the Company believes that, due in
large part to the Murphy Patents, its patents or licenses to patents should
afford adequate protection to conduct its business.

The Company has also been prosecuting a patent application family directed
to its core fusion protein technology and which represents an improvement in the
technology disclosed in the Murphy patents. Applications are pending in the
United States and many foreign countries. The Company expects that several U.S.
patents directed to these improvements will issue within the next twelve months.
Once issued, these patents should provide intellectual property protection of
the Company's core technology for many years after the expiration of the Murphy
patents.
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<PAGE>

The Company also has the rights to obtain licenses (many of which are, or
will be, exclusive licenses) to patents and patent applications which have been
filed by its institutional collaborators. Worldwide, the Company owns or holds
exclusive licensing rights to over 40 issued patents, covering certain aspects
of its technology, products, and the methods for their production and use. The
Company intends to file patent applications with respect to subsequent
developments and improvements when it believes patent protection is in its best
interest. There can be no assurance that the Company's patent applications will
result in patents being issued or that, if issued, the patents will afford
protection against competitors with similar technology.

Boston University acquired Nycomed's majority interest and technology
rights in the Company in August of 1987. Under the terms of the purchase and
sale agreement, Nycomed received a grant of a royalty on future sales of the
Company's fusion protein products as well as a right of first negotiation to
market the Company's fusion protein products in Norway, Denmark, Sweden,
Finland, Iceland, Belgium, the Netherlands and Luxembourg (the "Territory").
The agreement provides that, when in the business judgment of the Company it is
appropriate for the Company to enter into agreements with third parties with
respect to the marketing of such products, the Company will negotiate
exclusively with Nycomed for 90 days with respect to the rights to market the
Company's fusion protein products in the Territory. The Company has conducted
such negotiations with Nycomed regarding the Company's IL-2 Fusion Protein and
EGF Fusion Protein, and no agreement was reached for the marketing of these
products. The Company therefore believes that any rights Nycomed may have had
for marketing of the Company's IL-2 Fusion Protein and EGF Fusion Protein in the
Territory have expired.

The Company may need to obtain other licenses to other patents of which it
is unaware. There can be no assurance that licenses will be available from the
owners of such patents, or, if available, will be available on terms acceptable
to the Company. Moreover, there can be no assurance that all United States or
foreign patents that may pose a risk of infringement have been identified.

The Company pursues a policy of seeking patent protection to preserve its
proprietary technology and its right to capitalize on the results of its
research and development activities and, to the extent it may be necessary and
advisable, to exclude others from appropriating its proprietary technology.
While the Company pursues such a policy, it also relies upon trade secrets,
unpatented proprietary information and continuing technological innovation to
develop and maintain its competitive position. There can be no assurance,
however, that others will not independently develop substantially equivalent
proprietary information and techniques or otherwise gain access to such trade
secrets, proprietary information or technology or that the Company can
meaningfully protect its rights in such secrets, information and technology.

All employees of the Company have signed confidentiality agreements under
which they agree not to use or disclose proprietary information of the Company
without the consent of the Company. Relationships between the Company's
scientific consultants and collaborative research partners provide access to the
Company's know-how that is generally protected by confidentiality agreements
with the parties involved. However, there can be no assurance that these
confidentiality agreements will be honored.

In July 1996, the Company transferred all of its patents (the "Patents") to
Seragen Technology, Inc. ("STI") in exchange for 214,200 shares of STI Class A
Common Stock and 23,800 shares of STI Class B Common Stock. STI provided the
Company with an irrevocable worldwide exclusive license from STI to the Company
with respect to the Patents (the "Irrevocable License Agreement"). Under the
Irrevocable License Agreement, the Company is obligated to pay quarterly
royalties in an amount equal to the amount of any dividend that the Series B
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<PAGE>

shareholders are entitled to receive but have not received by the royalty due
date (which is one day after each quarterly dividend payment date for the Series
B Shares). The Company delivered the 23,800 shares of STI Class B Common Stock
to Company's Series B shareholders. STI's Class B Common Stock provides for
cumulative dividends payable in the same amount as any royalties payable by the
Company under the Irrevocable License Agreement. STI also provided the Company
with a collateral assignment of the Patents made by STI in favor of the Series B
shareholders. Pursuant to an escrow arrangement, the collateral assignment of
the Patents is required to be delivered to the Series B shareholders in the
event that, after notice, STI fails for 60 days to pay any dividend due in
respect of its Class B Common Stock. The Company did not make its royalty
payment due January 1, 1997, and does not anticipate making its royalty payment
due April 1, 1997. STI did not pay Class B Common Stock dividends due January
1, 1997 and April 1, 1997, and does not anticipate paying Class B Common Stock
dividends due April 1, 1997. To the Company's knowledge, the Series B
shareholders have not provided notice of the STI dividend payment failure to the
escrow agent. In the event that STI redeems its Class B Common Stock, the
escrow agent is required to deliver a reassignment of the Patents to the
Company.

Research and Licensing Agreements

The Company has engaged in sponsored research programs through external
research under agreements with various academic institutions and companies, and
under consulting agreements with scientists affiliated with such institutions.
Under the agreements, the Company provides periodic research funding and
typically maintains options to obtain exclusive licenses to patents and patent
applications which may be filed as a result of the sponsored research by the
institutional partner. In general, where a patent is licensed, the license is
co-terminus with the patent.

From April 1, 1984, through December 31, 1996, the Company maintained a
research agreement with Boston University Medical Center Hospital, formerly
known as University Hospital, in Boston, Massachusetts (the "UH Research
Agreements") in support of research on fusion proteins under the direction of
Dr. John R. Murphy. The Company has entered into a license agreement with
University Hospital (the "UH License Agreement") under which the Company has
acquired exclusive rights to certain patent applications and patents arising out
of the research under the UH Research Agreements. Under the UH License
Agreement, the Company has been granted an exclusive license to six existing
U.S. patents and patent applications and to their foreign counterparts.

The Company maintained a research agreement with Beth Israel Hospital in
Boston, Massachusetts (the "BIH Research Agreement"), which began August 1984
and continued until December 31, 1995, related to the control of T-cell mediated
response by targeted agents under the direction of Dr. Terry B. Strom. Under
the BIH Research Agreement, the Company was granted an option to obtain an
exclusive license to any patent application filed on any invention conceived or
reduced to practice during the course of the research. Several patent
applications have been filed pursuant to the BIH Research Agreement. Two of
these describe methods of treating immunological diseases and transplant
rejection and have been issued as United States Patents 5,011,684 and 5,336,489
and both have been exclusively licensed to the Company. The Company believes
that this method will be broadly useful in the treatment of autoimmune diseases
and allograft rejection. The third, which issued as United States Patent
5,152,980, relates to a method of inducing tolerance to a foreign antigen, which
the Company believes will be useful in helping it to keep therapies from being
disabled by the body's immune system. The Company has exercised its option on
this patent to obtain an exclusive license.

Including the arrangements described above, the Company has incurred
consulting fees to a stockholder and directors of approximately $162,000,
$173,000 and $181,000 in 1994, 1995 and 1996, respectively. The Company has
also incurred expenses relating to research grants to, and clinical trials
performed at, Boston University Medical Center Hospital and Beth Israel Hospital
of approximately $367,000, $335,000 and $175,000 in 1994, 1995 and 1996,
respectively.
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Government Regulation

Regulation by governmental authorities in the United States and foreign
countries is a significant factor in the future manufacturing and marketing of
the Company's potential products and in its ongoing research and product
development activities. All of the Company's products currently under
development will require regulatory approval by governmental agencies prior to
their commercialization. In particular, human therapeutic products are subject
to rigorous pre-clinical and clinical testing and other premarket approval
procedures by the FDA and similar authorities in many foreign countries.
Various other federal, and in some cases state and local, statutes and
regulations also govern or influence the manufacturing, safety, labeling,
storage, transport, recordkeeping, promotion and marketing of such products.
The lengthy process of seeking these approvals, and the subsequent ongoing
compliance with applicable federal, state and local statutes and regulations,
require the expenditure of substantial resources. There can be no assurance
that, even after such time and expenditures, regulatory approvals will be
obtained for any products developed by the Company. Moreover, if regulatory
approval of a product is granted, such approval will entail limitations on the
indicated uses for which it may be marketed. Further, even if such regulatory
approval is obtained, a marketed product and its manufacturer are subject to
continual review, and discovery of previously unknown problems with a product or
manufacturer or non-compliance with FDA regulations may result in restrictions
on such product or manufacturer, including withdrawal of the product from the
market. The manufacturer is also subject to continuing FDA inspection, review
and post-market requirements. In addition, there can be no assurance that this
regulatory framework will not change or that additional regulation will not
arise at any stage of the Company's product development which may affect
approval or delay an application or require additional expenditures by the
Company. Delays in obtaining regulatory approvals would adversely affect the
marketing of products developed by the Company and the Company's ability to
receive product revenues or royalties.

The Company has entered into a strategic alliance with Lilly in connection
with the development, production, marketing and sale of its IL-2 Fusion Protein
for cancer and cancer related bone marrow transplantation. The Company may
enter into additional corporate partnerships and other agreements in connection
with the development, manufacturing, marketing and sale of IL-2 Fusion Proteins
for other indications and for all other fusion proteins for any indications.
Such arrangements would be subject to fair trade regulation by numerous
governmental authorities in the United States and other countries. There can be
no assurance that any agreements entered into by the Company and international
pharmaceutical partners on terms favorable to the Company would be found to be
binding and enforceable if subject to any judicial or administrative action by
any governmental authority. If the agreement with Lilly were terminated, and
the Company failed to establish additional partnerships in developing,
producing, marketing and selling certain of its products, such failure could
have a material adverse effect on the Company.

In both the U.S. and foreign markets, the Company's ability to
commercialize its products successfully may also depend in part on the extent to
which reimbursement for the cost of such products and related treatment will be
available from government health administration authorities, private health
insurers and other organizations. Third-party payors are increasingly
challenging the price and cost-effectiveness of medical products and services.
Significant uncertainty may exist as to the reimbursement status of newly
approved health care products, and there can be no assurance that adequate
third-party coverage will be available to enable the Company to maintain price
levels or sales volume sufficient to realize an appropriate return on its
investment in product development.

Clinical Trials Process

The Company expects that its potential products in the United States will
be regulated by the Center for Biologics Evaluation and Research ("CBER") of the
FDA. Currently, the steps required before a new biological product can be
produced and marketed include pre-clinical studies, the filing of an
Investigational New Drug ("IND") application, human clinical trials, and the
approval of a Biologic License Application ("BLA"). Pre-clinical studies are
conducted in the laboratory and in animal model systems to gain preliminary
information on the drug's efficacy and metabolism and to identify potential
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safety issues. The results of these studies are submitted to the FDA as part of
the IND application for review and approval before the commencement of testing
in humans. Human clinical testing typically includes a three-phase process. In
Phase I, clinical trials are conducted with a small number of subjects to
determine a safety profile and the pattern of drug distribution and metabolism.
In Phase II, clinical trials are conducted with groups of patients afflicted
with a specific disease in order to develop preliminary efficacy data, optimal
dosages and additional safety data. In Phase III, large scale, multicenter,
well-controlled clinical trials are conducted with patients afflicted with a
target disease in order to provide enough data for the statistical proof of
efficacy and safety required by the FDA. In some cases, the initial human
testing is in patients rather than in healthy volunteers. Since these patients
are already afflicted with the target disease, it is possible that such studies
may provide efficacy results traditionally obtained in Phase II clinical trials.
These trials are frequently referred to as Phase I/II clinical trials. Phase
II/III clinical trials refer to a combined phase of human pharmaceutical trials
designed to provide evidence of efficacy and safety of a compound in patients
with the targeted disease. In some instances, a product license application may
be approved based on data from Phase II/III clinical trials. The FDA has issued
regulations governing clinical trials, and the failure to comply with these
regulations can result in delay in obtaining approvals or the denial of the
application.

The results of the pre-clinical and clinical testing, together with
chemistry and manufacturing information, product labeling and other information
are then submitted to the FDA in the form of a BLA. The Company's application
may be subject to the provisions of the Prescription Drug User Fee Act of 1992
which would require payment at the time of submission. Commercial manufacturing
and marketing of biologic products may occur only after approval of a BLA. In
responding to a BLA, the FDA may grant marketing approval, request additional
information, or deny the application if it determines that the application does
not satisfy its regulatory approval criteria. There can be no assurance that
approvals will be granted on a timely basis, if at all, or if granted will cover
all the clinical indications for which the Company is seeking approval. In
addition, approvals may contain significant limitations in the form of warnings,
precautions or contraindications with respect to conditions of clinical use.

Seeking and obtaining regulatory approval, including the full clinical
trial process, for a new therapeutic product may take at least several years and
may require the expenditure of substantial resources.

Orphan Drug Designation

The Orphan Drug Act of 1983 generally provides incentives to manufacturers
to undertake development and marketing of products to treat relatively rare
diseases or conditions affecting fewer than 200,000 persons in the United
States. These incentives include a seven-year marketing exclusivity and funding
for qualified clinical trials. The Company has received Orphan Drug designation
for DAB389IL-2 in CTCL and may seek Orphan Drug designation for other qualified
products. From time to time, proposals have been introduced in Congress to
limit Orphan Drug exclusivity.

Accelerated Drug Approval

Under current guidelines, the FDA will accelerate approval of certain new
drugs and biological products for serious or life-threatening illnesses, with
provisions for any necessary continued study of the drugs' clinical benefits
after approval or with restrictions on use, if necessary. These procedures are
intended to expedite marketing of drugs or biologicals for patients suffering
from such illnesses when the product provides meaningful therapeutic benefit
compared to existing treatment. Drugs or biological products approved under
these procedures must meet the requisite standards for safety and effectiveness
under the Federal Food, Drug, and Cosmetic Act or the Public Health Service Act,
and thus will have full approval for marketing, but will be subject to
significant post-approval limitations at least for some period of time. The
Company believes that several of its intended products may qualify for
accelerated approval under these regulations. The Company has requested
consideration for accelerated approval from the FDA for DAB389IL-2 in heavily
pretreated CTCL patients. No final decision will be made by the FDA until the
time of BLA submission.
-18-
<PAGE>

National Institutes of Health Regulations

The Company has complied with National Institutes of Health ("NIH")
Recombinant DNA Guidelines on a voluntary basis and expects to continue to do
so. Such guidelines, among other things, restrict or prohibit certain
recombinant DNA experiments and establish levels of biological and physical
containment that must be met for various types of research. The federal
government has proposed a new interagency biotechnology science coordinating
committee to obtain a unified approach to the regulation of recombinant DNA
activities.

Foreign Regulations

Regulations concerning the marketing of human therapeutic products are
generally imposed by foreign governments and may have an impact on the Company's
anticipated operations. The requirements governing the conduct of clinical
trials, product licensing, pricing and reimbursement levels vary widely from
country to country. The Company attempts to conduct its development activities
in a manner that will comply with most foreign regulations.

Other Regulations

The Company's activities will also be regulated in part by the Atomic
Energy Act, the Occupational Safety and Health Act, the Environmental Protection
Act, and other local, state and federal regulations, including those governing
the use and disposal of hazardous materials. Any violation of, and the cost of
compliance with, these regulations could adversely impact the Company's
operations. From time to time other federal, state and local agencies have
indicated an interest in implementing further regulation of biotechnology
activities. There can be no assurance that additional regulations will not be
adopted and, if adopted, that such regulations will not have a material adverse
impact on the Company.

Research and Development Spending

During each of the three fiscal years ended December 31, 1994, 1995 and
1996, the Company spent approximately $18.1 million, $14.1 million and $14.0
million, respectively, on research and development activities. In 1994,
approximately $2.8 million of the research and development activities related to
a charge to licensed technology for research and development. None of this
spending involved customer-sponsored research.

Employees

As of December 31, 1996, the Company had a total of 126 employees, each of
whom has entered into a confidentiality agreement with the Company. Thirteen of
them held Ph.D. degrees. None of the Company's employees is covered by a
collective bargaining agreement.

In connection with the agreement to sell the Company's manufacturing and
clinical operations to B.U., at the closing, approximately 100 of the Company's
employees involved in the manufacturing and clinical operations will become
employees of B.U.

Business Outlook

This report contains forward-looking statements that are based on the
Company's current expectations. Among the forward-looking statements in this
report are (i) the statements in this "Business" section discussing the
potential applications of the Company's fusion proteins existing or in
development, (ii) the potential markets for the Company's products, (iii) the
status and anticipated timing of the Company's product development, (iv) the
potential efficacy of the Company's products, the methods by which the Company
may develop its products, (v) the effect of the Company's patent and other
intellectual property rights, (vi) the anticipated results of the Company's
clinical trials and other tests, and (vii) the Company's arrangements with B.U.,

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<PAGE>

Lilly, Ajinomoto, the Company's agreement to sell a portion of its assets to
B.U. and the contract with B.U. for the provision of certain services. Other
forward-looking statements are the statements in the "Management's Discussion
and Analysis" section including (i) the Company's anticipated future operating
results and liquidity requirements, (ii) the Company's ability to fund
operations, (iii) the Company's ability to restructure its agreements with
Ajinomoto, (iv) the Company's agreement to sell a portion of its assets to B.U.
and the contract with B.U. for the provision of certain services, (v) the
Company's ability to restructure its obligations to its preferred shareholders,
(vi) the Company's ability to satisfy its obligations under the Seragen
Biopharmaceuticals, Ltd. ("SBL") Shareholders' Agreement, and (vii) the
Company's ability to raise funds through an equity offering or through
collaborative or other arrangements with others. However, this paragraph does
not necessarily include an exhaustive list of the forward-looking statements
contained in this report.

Because the Company's actual results may differ materially from any
forward-looking statements made by or on behalf of the Company, this section
discusses important factors that could affect the Company's actual future
results, including its revenues, expenses, and net income.

Early Stage of Product Development. Seragen has not yet marketed or
generated revenues from the commercialization of its potential therapeutic
products. All of the Company's potential products require significant
development, laboratory and clinical testing and regulatory review prior to
their commercialization, which takes a number of years. The Company expects
that even its products currently at the most advanced stages of development will
not be available for commercial sale or use for several years, if at all. The
Company's products now in pre-clinical trials may not be successful in human
clinical trials. Products currently in, or which in the future advance to,
various phases of human clinical trials, may not prove to be efficacious, or
unintended or toxic side effects may occur.

There can be no assurance that regulatory approvals will be obtained for
any products developed by the Company. Generally, only a small percentage of
new pharmaceutical products are approved for sale. Moreover, if regulatory
approval of a product is granted, the approval may limit the indicated uses for
which the product may be marketed.

Even if regulatory approval is obtained, a marketed product and its
manufacturer are subject to continual review. Discovery of previously unknown
problems with a product or manufacturer may result in restrictions on the use of
this product or its manufacturer, including withdrawal of the product from the
market.

History of Operating Losses and Accumulated Deficit. The Company has
experienced significant operating losses in each year since its inception and,
as of December 31, 1996, had an accumulated deficit of approximately $187
million. The Company expects to incur significant additional operating losses
over the next several years and expects cumulative losses to increase as the
Company's research and development and clinical trial efforts continue. The
Company's ability to achieve a profitable level of operations depends in large
part on completing product development and commercialization, obtaining
regulatory approvals for its products, and making the transition from research
and development to manufacturing and marketing. There can be no assurance that
the Company will ever achieve a profitable level of operations.

Additional Financing Requirements and Access to Capital Funding. The
Company has expended and will continue to expend substantial funds on the
research and development of its products, establishment of commercial-scale
manufacturing facilities and marketing of its products.

It is assumed that the Company's strategic partner Lilly will provide the
funds required for the CTCL clinical trial under the terms of its agreement with
the Company. However, Lilly has the right to terminate its funding of this
trial based on findings that occur as clinical trials progress and based on
input from regulatory agencies. If Lilly exercises its option to terminate its
funding of the CTCL trial, the Company may need additional funding in order to
continue the trial if the Company elects to and the Company may not be able to
-20-
<PAGE>

negotiate other collaborative arrangements on acceptable terms. There can be no
assurance that the Company's alliance with Lilly will continue.
The Company's ability to finance its operations beyond May 1997 is
dependent upon its ability to raise additional capital primarily through
additional financings or strategic alliances. No assurance can be given that
additional funds will be available to the Company to finance its development on
acceptable terms, if at all, or, if available, that such arrangements would not
require the Company to relinquish rights to certain products or markets in
exchange for funding. If adequate additional funds cannot be raised the
Company's business will be materially and adversely affected and the Company may
be required to suspend operations.

Reliance on Fusion Protein Technology; Technological Change and
Competition. The Company's future success is entirely dependent on the clinical
and commercial viability of its fusion protein products. The biotechnology
industry is subject to rapid and significant technological change. The Company
has numerous competitors, including major pharmaceutical and chemical companies,
specialized biotechnology firms, universities and other research institutions,
and others. The Company's competitors may succeed in developing other fusion
proteins, technologies and products that are more effective than any being
developed by the Company, or that would render the Company's technology and
products obsolete and noncompetitive. Many of these competitors (including
certain competitors developing other fusion protein products) have substantially
greater financial and technical resources, and production and marketing
capabilities than the Company.

Many of the Company's competitors have significantly greater experience
than the Company in undertaking pre-clinical testing and human clinical trials
of new or improved pharmaceutical products and obtaining FDA and other
regulatory approvals of products for use in health care. The Company has
limited experience in conducting and managing pre-clinical and clinical testing
necessary to obtain these approvals. The Company's competitors may succeed in
obtaining FDA approval for products more rapidly than the Company. If the
Company commences significant commercial sales of its products, it will also be
competing with respect to manufacturing and marketing capabilities, areas in
which it has limited or no experience.

Dependence on Boston University for Services. Assuming that the Company
completes its planned sale of its manufacturing and clinical operations to B.U.,
the Company will have no independent manufacturing and clinical operations and
will depend upon B.U.'s ability to provide certain services relating to product
research, development, manufacturing, clinical trials, quality control, and
quality assurance. The initial employees providing such services will be former
employees of Seragen. B.U.'s success will depend, in large part, on its
continued ability to attract and retain highly qualified scientific and business
personnel. Competition for such personnel and relationships is intense. B.U.
may terminate its service agreement if its annual losses exceed $9 million. The
Company may not be able to contract with another party for these services in
that event, may be required to pay more for these services, and may incur
significant delays in its product development and clinical trial efforts if it
should be unable to continue to utilize the services of the operating facilities
it has agreed to sell to B.U.

Dependence on Collaborative Partners. If Lilly terminates its funding of
the CTCL clinical trials or declines to exercise its options with respect to
other fusion protein indications, the Company may be required to seek other
collaborative arrangements to develop and commercialize its products in the
future. There can be no assurance that the Company will be able to negotiate
any other collaborative arrangements on acceptable terms, or that any such
collaborative arrangements will be successful.

Patents, Licenses and Proprietary Rights. There can be no assurance that
any of the Company's licenses or issued patents will provide it with significant
protection against competitors, that patent applications will result in patents
being issued to the Company or its institutional collaborators, or that the
Company will be able to exercise its rights to obtain such licenses. Moreover,
in certain circumstances, exclusive licenses may become nonexclusive.

The Company's success will depend, in part, on its ability to obtain patent
protection for its products, both in the United States and in other countries.
The patent position of biotechnology firms generally is highly uncertain and

-21-
<PAGE>

involves complex legal and factual questions. There can be no assurance that
the Company's patent applications will result in patents being issued or that,
if issued, patents will afford protection against its competitors.

Competitors have filed applications for patents or have been issued
patents, and they may obtain additional patents and other proprietary rights
relating to products intended to be comparable in function to products being
developed by the Company, as well as products or processes competitive with
those of the Company. The scope and validity of these patents, the extent to
which the Company may be required to obtain licenses under any such patents or
other proprietary rights, and the cost and availability of license agreements
are presently unknown.

The Company is required to pay Boston University and Nycomed certain
royalties on the sales by the Company of certain products. In addition, Boston
University retains a security interest in certain technology and could reacquire
all ownership rights in the technology upon a default by the Company under the
terms of its agreement.

The Company's Patents are the subject of a collateral assignment made by
STI in favor of the Series B shareholders. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations." If the Patents were
to be transferred pursuant to this collateral assignment, the Company would not
have any direct or indirect ownership interest in the Patents. If the Company
failed in these circumstances to make all required payments under the
Irrevocable License Agreement with STI, the Company could lose the right
afforded by the Irrevocable License Agreement to use the Patents and could then
be required to renegotiate the terms of its license for use of the Patents.
There is no assurance that the Company would be able to renegotiate on terms
advantageous to the Company.

The Company may need to obtain licenses to certain other United States and
foreign patents for certain products or processes contemplated by the Company.
There can be no assurance that licenses will be available from the owners of
such patents or will be available on terms acceptable to the Company. Moreover,
there can be no assurance that all United States and foreign patents that may
pose a risk of infringement have been identified.

The Company also relies on unpatented proprietary technology. There can be
no assurance that the Company can adequately protect its rights in unpatented
proprietary technology, or that others will not independently develop
substantially equivalent proprietary technology or otherwise gain access to the
Company's proprietary technology.

Absence of Manufacturing Experience. To be successful, the Company's
products must be manufactured in commercial quantities, in compliance with
regulatory requirements, and at acceptable costs. Production in commercial
quantities will create technical, regulatory and financial challenges for the
Company. The Company has never engaged in large-scale manufacturing.

The Company regularly contracts with a variety of firms for testing and
manufacturing services, some of which services are essential to the Company.
Generally, these agreements may be terminated at any time by any of these third
parties.

Need for Commercial Sales and Marketing Capabilities. Although the Company
may market certain of its products through a direct sales force if and when
regulatory approvals are obtained, it currently has no marketing or sales staff.
Significant additional expenditures, management resources and time will be
required to develop a sales force to the extent that the Company determines not
to, or is unable to, arrange third party distribution for its products.

Product Liability. The testing, marketing and sale of human health care
products entail an inherent risk of product liability or allegations thereof.
Product liability claims may be asserted against the Company. The Company's
existing product liability coverage may not be adequate either currently or as
and when the Company further develops products. There can be no assurance that
the Company will be able to maintain or increase its current insurance coverage

-22-
<PAGE>

in the future on acceptable terms or that any claims against the Company will
not exceed the amount of its coverage.

ITEM 2. PROPERTIES

The Company leases approximately 87,000 square feet of laboratory, office
and production space in three buildings in Hopkinton, Massachusetts. A portion
of this space contains production operations which the Company believes it
operates in compliance with cGMP as defined by the FDA. One of the current
leases on a portion of the larger of the Company's facilities (38,400 of 64,000
square feet) was guaranteed by Boston University. This guarantee expired in
1996. The lease on this 64,000 square foot facility expires in July 2002. The
Company has options to renew this lease for two additional successive periods of
five years each. The Company believes that these facilities are adequate for
its operations as currently contemplated.

In connection with the agreement to sell the Company's manufacturing and
clinical operations to B.U., it is anticipated that the facility leases will be
assigned to B.U. at the closing. The Company plans to sublease a portion of
this space from B.U.

ITEM 3. LEGAL PROCEEDINGS

The Company is not a party to any material legal proceedings and no
proceedings are known to be contemplated by governmental agencies.

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

A special meeting of Shareholders of the Company was held on December 18,
1996. The following matter was voted upon:

(1) The shareholders approved an amendment to the Company's Restated
Certificate of Incorporation to increase the number of shares of authorized
common stock from 30 million shares to 70 million shares. This proposal was
approved with 13,237,682 votes for the proposal, 1,245,018 votes against the
proposal and 42,155 abstentions.

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<PAGE>
<PAGE>
PART II

ITEM 5. MARKET FOR THE REGISTRANT'S SECURITIES AND RELATED STOCK MATTERS

The Company's common stock is quoted on the Nasdaq National Market System
("Nasdaq NMS") under the symbol SRGN. The following table sets forth for the
periods indicated high and low reported sale prices for the Company's common
stock as reported on Nasdaq.

<TABLE>
<CAPTION>
High Low
---- ---
<S> <C> <C>
1995
First Quarter........................ 7 4 1/2
Second Quarter....................... 7 1/8 5 3/8
Third Quarter........................ 7 63/64 5 3/16
Fourth Quarter....................... 6 3/4 4 1/8
1996
First Quarter........................ 5 1/4 3 1/8
Second Quarter....................... 5 1/2 3 7/8
Third Quarter........................ 4 1/4 2 5/8
Fourth Quarter....................... 3 1/8 1

</TABLE>

As of March 27, 1997, there were 682 holders of record of the Company's
common stock. The last reported sale price of the common stock as reported on
Nasdaq NMS on March 27, 1997 was $1.00.

The Company has never paid cash dividends on its common stock. The Company
pays cash dividends on its Series B Preferred Stock, although these dividends
currently are in arrears, and pays common stock dividends on its Series A and C
Preferred Stock.

Among the criteria that must be satisfied in order to qualify for continued
designation on the Nasdaq NMS is the requirement that the Company maintain net
tangible assets of at least $4 million. As of December 31, 1996, the Company
had net tangible assets deficit of $4.8 million. Therefore, the Company
currently does not satisfy this requirement.

Another requirement for continued designation on the Nasdaq NMS is that the
Company's shares of Common Stock have a minimum bid price of at least $1.00 per
share. On March 27, 1997, the Company's Common Stock price was quoted on Nasdaq
NMS at a high bid price of $1.00 and a low bid price of $.938.

Nasdaq has not yet notified the Company that the Common Stock fails to meet
these requirements, but the Company anticipates receiving such a notification
from Nasdaq in the near future.

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<PAGE>

ITEM 6. SELECTED FINANCIAL DATA

The following table presents selected financial data for, and as of the end
of, each of the years in the five-year period ended December 31, 1996 which have
been derived from the audited financial statements of the Company. Financial
statements for the three fiscal years ended December 31, 1996 are included
elsewhere in this report. This selected financial data should be read in
conjunction with the financial statements and notes thereto and "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
included elsewhere in this report.

<TABLE>

<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
----------------------------------------------------------------------------------------
1992 1993 1994 1995 1996
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Contract revenue and
license fees ........................... $ 12,500 $ 138,226 $ 588,350 $ 3,337,388 $ 10,542,315

Operating Expenses:
Cost of contract revenue
and license fees .................... - - 588,350 3,337,388 5,704,243
Research and development .............. 15,319,750 13,718,973 15,240,195 14,086,632 13,959,405
General and administrative ............ 5,096,643 4,357,583 4,903,963 4,904,226 7,208,465
Licensed technology for research
and development ..................... - - 2,824,217 - -
------------ ------------ ------------ ------------ ------------
Total operating expenses ............ 20,416,393 18,076,536 23,556,725 22,328,246 26,872,113
------------ ------------ ------------ ------------ ------------
Loss from operations .................. (20,403,893) (17,938,310) (22,968,375) (18,990,858) (16,329,798)

Loss incurred in connection with
Canadian affiliate .................. - - - (390,136) (2,923,864)
Interest income ....................... 610,033 611,784 438,338 92,924 120,740
Interest expense ...................... (1,554,102) (53,505) (113,756) (1,813,128) (5,453,638)
------------ ------------ ------------ ------------ ------------
Net loss .............................. (21,347,962) (17,380,031) (22,643,793) (21,101,198) (24,586,580)
============ ============ ============ ============ ============
Preferred stock dividends ............. - - - - 10,394,918
============ ============ ============ ============ ============

Net loss applicable to common
stockholders ........................ $(21,347,962) $(17,380,031) $(22,843,793) $(21,101,198) $(34,981,478)
============ ============ ============ ============ ============
Net loss per common share ............. $ (2.13) $ (1.26) $ (1.45) $ (1.29) $ (2.09)
============ ============ ============ ============ ============
Weighted average common shares
used in computing net loss
per share ........................... 10,030,965 13,775,341 15,631,333 16,355,587 16,724,493
=========== =========== =========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------------------------------------------------
1992 1993 1994 1995 1996
------------ ------------ ------------ ------------ ------------

BALANCE SHEET DATA:

<S> <C> <C> <C> <C> <C>
Cash and cash equivalents ............... $ 12,196,639 $ 10,104,179 $ 5,536,782 $ 435,460 $ 1,548,392
Marketable securities ................... - - 2,034,948 - -
Working capital (deficit) ............... 10,605,189 8,612,996 3,859,854 (1,298,886) (5,927,902)
Total assets ............................ 17,726,047 18,099,705 17,039,292 16,299,508 8,444,608
Short-term debt ......................... - 170,572 197,453 248,494 5,402,268
Long-term debt .......................... - 483,364 3,038,778 15,977,899 1,200,000
Deferred revenue ........................ - - 5,000,000 5,000,000 -
Canadian affiliate put option
liability ............................. - - - 2,076,000 2,400,000
Total liabilities ....................... 2,007,588 2,893,194 13,255,070 26,741,003 13,291,212
Accumulated deficit ..................... (91,148,311) (108,528,342) (131,172,135) (152,273,333) (187,254,811)
Total stockholders's equity (deficit) . 15,718,459 15,206,511 3,784,222 (10,441,495) (4,846,604)

</TABLE>

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<PAGE>

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

Overview

The Company is engaged in the discovery, research and development of
pharmaceutical products for human therapeutic applications. Since 1985, the
Company has focused substantially all of its efforts and resources on research
and development of its fusion protein technology. The Company's fusion proteins
were developed using proprietary technology and have potential applications in a
wide range of human diseases. To date, the Company has not generated any
revenues from the sale of fusion protein products, and the Company does not
expect to receive any such revenues in 1997. The Company has generated no
profit since its inception and expects to incur additional operating losses over
the next several years.

In February 1997, the Company entered into an agreement to sell its
manufacturing and clinical operations facilities to B.U. or a designated
affiliate for $5 million and in connection therewith entered into a service
agreement with B.U. pursuant to which B.U. will provide the Company with certain
services related to product research, development, manufacturing, clinical
trials, quality control and quality assurance. The terms of this transaction are
discussed more fully below under "Liquidity and Capital Resources".

The Company's business is subject to significant risks, including the
ability to raise additional capital, the uncertainties associated with the
regulatory approval process and with obtaining and enforcing patents important
to the Company's business. The Company expects to incur substantial operating
losses over the next several years due to continuing expenses associated with
its research and development programs, including pre-clinical testing and
clinical trials. Operating losses may also fluctuate from quarter to quarter as
a result of differences in the timing of expenses incurred.

Results of Operations

1996 to 1995

The Company incurred a net loss of $35.0 million for the year ended
December 31, 1996 compared to $21.1 million for the year ended December 31,
1995. The increase in net loss during 1996 was primarily due to (i) the payment
and accretion of a total of $10.4 million in dividends associated with the
Series A, B and C Preferred Stock in 1996 including warrants valued at $8.6
million issued to the Series B shareholders, (ii) the expensing of $3.0 million
of prepaid interest associated with the restructuring of the June 1995
guaranteed loans, and (iii) an increase of $2.5 million in the charge for the
potential obligation of the Company to the investors in SBL in connection with
certain put rights. These increases in expense were partially offset by a net
decrease in loss from operations of $2.7 million primarily due to increases in
revenue discussed below.

The Company's revenues for the year ended December 31, 1996 were $10.5
million as compared to $3.3 million for the year ended December 31, 1995. This
increase of $7.2 million in 1996 was primarily the result of the receipt of a
one-time $1.5 million fee relating to the exercise by a third party of a prepaid
option to license certain patents in the field of transplantation in the third
quarter of 1996, the recognition of $5.0 million of revenue in the second
quarter of 1996 for which cash had been previously paid by Lilly in August 1994
and an increase of $700,000 primarily in contract revenue from Lilly associated
with the Phase III clinical trial for IL-2 Fusion Protein for cancer therapy.

Total operating expenses increased by $4.6 million to $26.9 million in 1996
from $22.3 million in 1995. Expenses associated with the cost of contract
revenue and license fees increased by $2.4 million to $5.7 million in 1996
compared to $3.3 million in 1995. This increase reflects the potential
obligation of $1.2 million on the potential sales of bulk product to Lilly, an
increase of approximately $700,000 for the acceleration of clinical development
activity under the Phase III clinical trial for IL-2 Fusion Protein for cancer

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<PAGE>

therapy and an increase of $500,000 related to a sub-license fee payable on the
$1.5 million patent license revenue mentioned above. Research and development
expenses were substantially unchanged for the year ended December 31, 1996 as
compared to the year ended December 31, 1995. However, there was a decrease of
approximately $300,000 due to the decision by the Company in 1996 to focus its
financial resources on IL-2 Fusion Protein for cancer and psoriasis therapies
thereby reducing clinical development in other IL-2 Fusion Protein indications.
There was also a decrease of $200,000 in non-reimbursable research grants and
outside pre-clinical testing. These decreases were partially offset by an
increase of $400,000 in facility engineering and validation fees. General and
administrative expenses increased by $2.3 million to $7.2 million in 1996 from
$4.9 million in 1995. This increase was primarily the result of a non-cash
charge of $2.1 million in the second quarter of 1996 for commission expense
associated with the amendment to the Sales and Distribution Agreement between
the Company and Lilly.

Losses incurred in connection with the Company's Canadian affiliate
increased $2.5 million to $2.9 million in 1996 from $400,000 in 1995. This
increase reflects the Company's decision in 1996 to reduce its investment in the
affiliate to zero and reflect a liability for the current put obligation of $2.4
million held by the shareholders of the Canadian affiliate. Interest income was
substantially unchanged for the year ended December 31, 1996 as compared to the
year ended December 31, 1995.

Interest expense increased $3.7 million in 1996 to $5.5 million from $1.8
million in 1995 primarily due to the expensing of $3.0 million of prepaid
interest and $475,000 of debt issuance costs associated with the repayment of
the June 1995 loans and to higher loan balances in 1996 as compared to 1995.

The Company recorded $10.4 million in preferred stock dividends in 1996
related to the Series A, B and C Preferred Stock issuances. The $10.4 million in
preferred stock dividends consisted of (i) the value associated with the Series
B Preferred Stock warrants of $8.6 million, (ii) cash dividends of $1.2 million,
and (iii) stock dividends and issuance costs of $610,000.

1995 to 1994

The Company incurred a net loss of $21.1 million for the year ended
December 31, 1995 compared to a net loss of $22.6 million for the year ended
December 31, 1994.

The Company's revenues for the year ended December 31, 1995 were $3.3
million associated with contract revenue from Lilly for certain development
costs of IL-2 Fusion Protein for cancer therapy, as compared to $588,000 for the
year ended December 31, 1994.

Total operating expenses decreased by $1.3 million to $22.3 million in 1995
from $23.6 million in 1994. The decrease in total operating expenses was
primarily due to a 1994 non-cash charge in research and development for the
acquisition of a license and reductions in research and development expenses,
partially offset by increases in expenses associated with the cost of contract
revenue. Expenses associated with the cost of contract revenue were $3.3
million in 1995 as compared to $588,000 in 1994. This increase of $2.7 million
reflects the acceleration of clinical development activity under the corporate
strategic alliance with Lilly. For comparative purposes, the following
discussion of research and development expenses includes the cost of contract
revenue. Research and development expenses increased $1.6 million to $17.4
million in 1995 from $15.8 million in 1994. This increase was primarily due to
the cost associated with the Phase III clinical trial for IL-2 Fusion Protein
for cancer therapy, the hiring of additional scientists and support staff, and
the initiation of a Phase II clinical trial for IL-2 Fusion Protein for
psoriasis. This increase was partially offset by reductions in external
research grants, consulting fees and seminar expenses. In 1994, a non-cash
charge of $2.8 million was charged to research and development for the
acquisition of an exclusive worldwide license from Ajinomoto Company, Inc. for
the rights to the IL-2 gene. General and administrative expenses were
substantially unchanged for the year ended December 31, 1995 as compared to the
year ended December 31, 1994.
-27-
<PAGE>

In 1995, a non-cash charge of approximately $390,000 was recorded to
reflect the obligation by the Company to the shareholders of the Canadian
affiliate.

Interest income decreased approximately $345,000 to $93,000 in 1995 from
$438,000 in 1994 primarily due to lower average balances of cash equivalents and
marketable securities in 1995. Interest expense increased approximately $1.7
million in 1995 to $1.8 million due to borrowings under the lines of credit
which commenced in June 1995.

Liquidity and Capital Resources

As of March 28, 1997, the Company had approximately $2.4 million in cash
and cash equivalents including a deposit of $4.5 million made by Boston
University in connection with the sale of the Company's manufacturing and
clinical operations. The net book value of the assets to be sold to Boston
University was $4.6 million representing substantially all of the property and
equipment, consisting primarily of leasehold improvements to the Company's
manufacturing facility, laboratory facilities and laboratory equipment
as of February 14, 1997.

The Company expects to incur further substantial research and development
expenses as it continues development of its fusion proteins. The Company also
expects to incur substantial administrative and commercialization expenses in
the future. The Company's continuing operating losses and requirements for
working capital will depend on many factors, including the progress and costs
associated with its research, pre-clinical and clinical development efforts, and
the level of resources which the Company must devote to obtaining regulatory
approvals to manufacture and sell its products.

On February 18, 1997, the Company entered into an agreement to sell its
manufacturing and clinical operations facilities to B.U. or a designated
affiliate for $5 million. The closing of the transaction is subject to, among
other things, approval by the Company's stockholders. B.U. has paid the Company
$4.5 million as a deposit and has assumed responsibility for the facility's
operations, including responsibility for operating costs. The Company currently
may use this deposit to fund its operations. At the closing, a majority of the
Company's employees involved in the manufacturing and clinical operations will
become employees of B.U. Both the deposit and the operating costs paid by B.U.
are subject to refund in the event that conditions for closing are not met.

On August 3, 1994, the Company and Lilly signed an agreement to form a
global strategic alliance that gives Lilly exclusive worldwide development,
distribution, and marketing rights, except in certain Asian countries, to the
IL-2 fusion protein for the treatment of cancer. Lilly reimburses the Company
for costs incurred in the clinical development of IL-2 Fusion Protein for cancer
therapy, including costs for Phase III clinical trials, the preparation of an
FDA application and any FDA filing fees. The Company recorded approximately
$588,000, $3,337,000 and $3,979,000 of contract revenue for such reimbursed

-28-
<PAGE>

development costs during the years ended December 31, 1994, 1995 and 1996,
respectively. Lilly is also required to pay the Company an additional $3
million based on the Company meeting certain regulatory milestones in the
development of IL-2 Fusion Protein for cancer therapy. No regulatory milestone
payments have been achieved to date under the agreement.

In December 1994, the Company entered into a license agreement with
Ajinomoto Company, Inc. which provides the Company with exclusive worldwide
rights under Ajinomoto's IL-2 gene patents for the Company's fusion proteins.
The Company has made an up-front payment of $100,000 under this agreement. In
addition, the Company is required to pay a royalty of 4% of Seragen revenues or
end-user revenues depending on certain conditions. Seragen is required to pay
minimum royalties of $100,000 in 1997, $200,000 in 1998 and $300,000 each year
thereafter. Under the terms of the license agreement, the Company was required
to make a payment of $4.3 million by March 31, 1997. However, Ajinomoto has
deferred this payment to May 31, 1997. The Company is in discussions with
Ajinomoto regarding amending the terms of the agreement. The Company also is
exploring alternative sources of funding to make the May 31 payment. No
agreement in principle has been reached, however, and there can be no assurance
that the Company will be able to make the required payment.

On November 21, 1995, the Company formed Seragen Biopharmaceuticals Ltd.
("SBL"), a privately held Canadian research and development company located in
Montreal. In a private financing, a group of six Canadian investors contributed
approximately $10.0 million, acquiring units representing 51% of SBL. The
investors have the option to exercise one of three different put rights related
to their SBL shares after January 1, 1999, or earlier upon the occurrence of
certain events. Included among these certain events is any failure of the
Company's common stock to be listed on a national security exchange or an
inter-dealer quotation system. Issues regarding the Company's continued
eligibility for listing on the Nasdaq National Market System (see "Market for
the Registrant's Securities and Related Stock Matters") may make the investors'
put rights currently exercisable. Put Right 1 obligates the Company to purchase
the investors' 1,557,097 shares at $8.57 (Canadian $) plus 11.4% compounded
annually. Put Right 2 obligates the Company to purchase the investors' shares
at a price of 20 times SBL's per share income over the four most recent
quarters. Put Right 3 obligates the Company to exchange the investors' shares
for the Company's shares (or the value of such shares) using the product of
$8.57 (Canadian $) and the number of puts exercised divided by 9.487. The
Company has the option to settle Put Right 1 in cash or common stock, but the
investor can require 50% of the price to be paid in cash. The Company has the
option to settle the Put Rights 2 and 3 in cash or Seragen common stock. In
certain specific circumstances relating to the trading status of Seragen's
common stock when the Company must settle the put rights in cash. The put
rights will terminate if SBL sells shares in an initial public offering. As of
December 31, 1996, the Company has recorded a $2.4 million liability which
reflects the Company's current put obligation. The Company is currently in
default of its obligation to file a registration statement relating to resale of
shares underlying the put rights.

On May 29, 1996, the Company raised net proceeds of $3.8 million through
the sale of 4,000 shares of convertible Series A Preferred Stock ("Series A
Shares") to investors outside the United States under Regulation S of the
Securities Act of 1993. The Series A Shares are convertible at the option of
the holders, beginning July 15, 1996, into shares of common stock. As of
December 31, 1996, 895 Series A Shares had been converted into 566,400 shares of
Common Stock at conversion prices ranging from $1.022 to $2.774 per share. The
Series A Shares were reflected at $2,015,522 at December 31,1996 representing
their liquidation value, which includes accrued dividends payable from the
issuance date through December 31, 1996. See Note J to the Company's financial
statements.

On July 1, 1996, the Company restructured its arrangement with the
guarantors of the Company's $23.8 million bank financing under which the
guarantors directly assumed the liability with the banks and the Company was
released from its liability to the banks. In exchange for the guarantors
satisfying the Company's liability to the banks, the guarantors were issued
23,800 shares of Series B Preferred Stock ("Series B Shares"). Each Series B
Share is convertible at any time at the holder's option into shares of Seragen
common stock.

-29-
<PAGE>

royalties in an amount equal to the amount of any dividend that the Series B
shareholders are entitled to receive but have not received by the royalty due
date (which is one day after each quarterly dividend payment date for the Series
B Shares). The Company delivered the 23,800 shares of STI Class B Common Stock
to the guarantors. STI's Class B Common Stock provides for cumulative dividends
payable in the same amount as any royalties payable by the Company under the
Irrevocable License Agreement. STI also provided the Company with a collateral
assignment of the Patents made by STI in favor of the Series B shareholders.
Pursuant to an escrow arrangement, the collateral assignment of the Patents is
required to be delivered to the Series B shareholders in the event that, after
notice, STI fails for 60 days to pay any dividend due in respect of its Class B
Common Stock. The Company did not make its royalty payment due January 1, 1997,
and does not anticipate making its royalty payment due April 1, 1997. STI did
not pay Class B Common Stock dividends due January 1, 1997, and does not
anticipate paying Class B Common Stock dividends due April 1, 1997. To the
Company's knowledge, the Series B shareholders have not provided notice of the
STI dividend payment failure to the escrow agent. In the event that STI redeems
its Class B Common Stock, the escrow agent is required to deliver a reassignment
of the Patents to the Company.

The holders of the Series B shares also received warrants to purchase a
total of 5,950,000 shares of Seragen common stock at an exercise price of $4.00
per share. The Company has estimated the average fair market value of the
warrants to be $1.45 per warrant or $8,617,951 for the 5,950,000 issued and
outstanding warrants. The value ascribed to the warrants and the restructuring
costs have been accreted through a charge to retained deficit and an offset to
additional paid-in capital. In addition, subject to the antidilution provisions
of the warrants, the Company issued 2,217,196 warrants at an exercise price of
$4.00 per share in the year ended December 31, 1996. Dividends payable of
approximately $583,000 were outstanding at December 31, 1996 and are included in
accrued expenses. See Note E to the Company's financial statements. The
Company does not anticipate making the dividend payment of approximately
$600,000 due on March 31, 1997.

On September 30, 1996, the Company raised net proceeds of approximately $5
million through the sale of 5,000 shares of the Company's non-voting convertible
Series C Preferred Stock ("Series C Shares") in a private placement with Boston
University under Regulation D of the Securities Act of 1933. The Series C
Shares are convertible at the option of the holder into shares of Seragen Common
Stock. See Note J to the Company's financial statements.

The Company anticipates that existing cash and cash equivalents and the
reimbursement for clinical costs for the development of IL-2 Fusion Protein for
cancer therapy will be sufficient to fund the Company's working capital
requirements through approximately May 1997 provided that the Company is able to
amend its current agreement with Ajinomoto or have the May 31, 1997 $4.3 million
payment that is required under the agreement made by another party. In
addition, the Company must complete the sale of its manufacturing and clinical
operation facilities to B.U. or the $4.5 million deposit and operating expenses
will be subject to refund to B.U. (See Notes B, E, I and L in the "Notes to the
Financial Statements" regarding significant future obligations.) The Report of
Independent Accountants on the Company's Financial Statements for the fiscal
year ended December 31, 1996 includes an explanatory paragraph concerning
uncertainties surrounding the Company's ability to continue as a going concern.
This may adversely affect the Company's ability to raise additional capital.
See Note A in the "Notes to the Financial Statements." The Company's ability to
finance its operations beyond May 1997 is dependent upon its ability to raise
additional capital through debt or equity financings, possible additional
payments under the strategic alliance with Lilly, or such other sources of
financing, including strategic partnerships, as may be available.

The Company is exploring a possible equity offering, although the terms of
such offering have not been finalized. There can be no assurance that the
Company will be successful in an equity offering or that the amount raised will
be sufficient to fund the Company's operating expenses until other sources of
funds can be secured. Management of the Company believes that to be able to
complete a new equity financing successfully, the holders of the Company's
-30-
<PAGE>

Series A, Series B and Series C Preferred stock will be required to convert such
securities in connection with the offering. Management is in discussions with
such holders but there is no assurance that such agreements can be reached or if
reached will be on satisfactory terms. The Company is seeking to obtain
additional funds through collaborative or other arrangements with corporate
partners and others. There can be no assurance that the Company will be
successful in securing collaborative or other arrangements with corporate
partners or others on acceptable terms, if at all.

If the Company does not consummate an equity financing or additional
collaborative or other arrangements with corporate partners, then the Company's
current cash position may not be sufficient to meet its financial obligations
and may fund operations only through May 1997. If adequate additional funds are
not available, the Company may be required to delay, scale back or eliminate
certain of its clinical trials, manufacturing or development activities or
certain other aspects of its business and may be required to cease operations,
which would have a material adverse affect on the Company.

-31-
<PAGE>
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Page
Index to Financial Statements and Schedule

Reports of Independent Accountants. . . . . . . . . . . . . . . . . . . . 33

Financial Statements:

Balance Sheets as of December 31, 1995 and 1996. . . . . . . . . . . 35
Statements of Operations for the years ended December 31, 1994,
1995 and 1996. . . . . . . . . . . . . . . . . . . . . . . . . . . 36
Statements of Stockholders' Equity (Deficit) for the years
ended December 31, 1994, 1995 and 1996 . . . . . . . . . . . . . . 37
Statements of Cash Flows for the years ended December 31,
1994, 1995 and 1996. . . . . . . . . . . . . . . . . . . . . . . . 38
Notes to Financial Statements. . . . . . . . . . . . . . . . . . . . 39

-32-
<PAGE>
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and Stockholders of Seragen, Inc.:

We have audited the accompanying balance sheet of Seragen, Inc. (a Delaware
Corporation) as of December 31, 1996, and the related statements of operations,
stockholders' equity (deficit) and cash flows for the year ended December 31,
1996. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our 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 financial statements referred to above present fairly,
in all material respects, the financial position of Seragen, Inc. as of December
31, 1996 and the results of its operations and its cash flows for the year
ended December 31, 1996, in conformity with generally accepted accounting
principles.

The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As described in Note A, the Company
has experienced significant operating losses since inception and has a working
capital deficit as of December 31, 1996. These factors raise substantial doubt
about the Company's ability to continue as a going concern. Management's plans
in regard to these matters are also discussed in Note A. The accompanying
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.

Arthur Andersen LLP

Boston, Massachusetts
March 28, 1997
-33-
<PAGE>

REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and Stockholders of Seragen, Inc.:

We have audited the balance sheet of Seragen, Inc. as of December 31, 1995
and the related statements of operations, stockholders' equity (deficit) and
cash flows for each of the two years in the period ended December 31, 1995.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.

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

In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Seragen, Inc. as of December
31, 1995 and the results of its operations and its cash flows for each of the
two years in the period ended December 31, 1995, in conformity with generally
accepted accounting principles.

The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As described in Note A, the Company
has experienced recurring operating losses and has a working capital deficit.
These factors raise substantial doubt about the Company's ability to continue as
a going concern. Management's plans in regard to these matters are also
discussed in Note A. The accompanying financial statements do not include any
adjustments that might result from the outcome of this uncertainty.

Coopers & Lybrand L.L.P.

Boston, Massachusetts
February 23, 1996

-34-
<PAGE>

SERAGEN, INC.

<TABLE>
BALANCE SHEETS
<CAPTION>

DECEMBER 31,
-------------------------------
ASSETS 1995 1996
------------- --------------
<S> <C> <C>
Current assets:
Cash and cash equivalents......................................................... $ 435,460 $ 1,548,392
Restricted cash................................................................... 435,318 610,318
Contract receivable............................................................... 686,055 485,261
Unbilled contract receivable...................................................... 496,147 833,983
Prepaid expenses and other current assets......................................... 335,238 285,356
------------- -------------
Total current assets................................................. 2,388,218 3,763,310

Property and equipment, net......................................................... 5,198,136 4,604,115
Investment in affiliate............................................................. 2,599,864 --
Deferred commission................................................................. 2,060,000 --
Prepaid interest.................................................................... 3,528,677 --
Other assets........................................................................ 524,613 77,183
------------- -------------
Total assets......................................................... $ 16,299,508 $ 8,444,608
============= =============

LIABILITIES AND STOCKHOLDERS' (DEFICIT)
Current liabilities:
Accounts payable.................................................................. 725,326 1,111,477
Current maturities of long-term debt.............................................. 248,494 37,418
Accrued commission payable........................................................ 300,000 --
Accrued expenses.................................................................. 2,413,284 3,177,467
Preferred stock redemption liability............................................... -- 1,236,753
Short-term obligation, less unamortized discount.................................. -- 4,128,097
------------- -------------
Total current liabilities............................................ 3,687,104 9,691,212
------------- -------------

Non-current liabilities:
Long-term debt, less current maturities........................................... 12,537,417 --
Deferred revenue.................................................................. 5,000,000 --
Long-term obligation, less unamortized discount................................... 3,440,482 --
Lilly contract obligation......................................................... -- 1,200,000
Canadian affiliate put option liability........................................... 2,076,000 2,400,000
------------- -------------
Total non-current liabilities........................................ 23,053,899 3,600,000
------------- -------------

Commitments and contignencles
Stockholders' (deficit);
Preferred stock, $.01 par value; 5,000,000 shares authorized
Convertible preferred stock, Series A, $.01 par value; issued and
outstanding 3,105 shares at December 31, 1996, $2,015,522
liquidation preference........................................................ -- 2,015,522
Convertible preferred stock, Series B, $.01 par value; issued and
outstanding 23,800 shares at December 31, 1996, $23,800,000
liquidation preference........................................................ -- 23,800,000
Convertible preferred stock, Series C, $.01 par value; issued and
outstanding 5,000 shares at December 31, 1996, $5,100,000
liquidation preference........................................................ -- 5,100,000
Common Stock, $.01 par value; 70,000,000 shares authorized;
issued 16,521,212 and 17,199,458 shares at December 31,
1995 and 1996, respectively................................................... 165,212 171,994
Additional paid in capital...................................................... 141,759,580 151,323,022
Accumulated deficit............................................................. (152,273,333) (187,254,811)
------------- -------------
(10,348,541) (4,844,273)

Less-treasury stock (14,632 and 777 shares at cost at December 31,
1995 and 1996, respectively).................................................. (92,954) (2,331)
------------- -------------
Total stockholders' (deficit)........................................ (10,441,495) (4,846,604)
------------- -------------
Total liabilities and stockholders' (deficit)........................ $ 16,299,508 $ 8,444,608
============= =============
</TABLE>

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

-35-
<PAGE>
<TABLE>

SERAGEN, INC.
STATEMENTS OF OPERATIONS

FOR THE YEARS ENDED
DECEMBER 31,
-------------------------------------------
1994 1995 1996
----------- ------------ ------------
<CAPTION>
<S> <C> <C> <C>
Revenue:
Contract revenue and license fees ....... $ 588,350 $ 3,337,388 $ 10,542,315
Operating expenses:
Cost of contract revenue and license fees 588,350 3,337,388 5,704,243
Researcg and development ................ 15,240,195 14,086,632 13,959,405
General and administrative .............. 4,903,963 4,904,226 7,208,465
Licensed technology for research and
development .......................... 2,824,217 - -
------------ ------------ ------------
23,556,725 22,328,246 26,872,113
------------ ------------ ------------
Loss from operations ................. (22,968,375) (18,990,858) (16,329,798)

Loss incurred in connection with Canadian
affiliate ............................... - 390,136 2,923,864
Interest Income ........................... 438,338 92,924 120,740
Interest expense .......................... 113,756 1,813,128 5,453,638
------------ ------------ ------------

Net loss ........................ (22,643,793) (21,101,198) (24,586,560)
============ ============ ============
Preferred stock dividends and accretion ... - - 10,394,918
============ ============ ============
Net loss applicable to common
stockholders ............................ $(22,643,793) ($21,101,198) ($34,981,478)
============ ============ ============

Net loss per common share ................. $ (1.45) ($ 1.29) ($ 2.09)
============ ============ ============
Weighted average common shares
used in computing net loss per share .... 15,631,333 16,355,587 16,724,493
============ ============ ============
</TABLE>

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

-36-
PAGE
<PAGE>
<TABLE>

SERAGEN, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)

For the Years Ended December 31, 1994, 1995 and 1996

<CAPTION>
Series A Series B Series C
Convertible Convertible Convertible Additional
Preferred Stock Preferred Stock Preferred Stock Common Stock Paid-In Capital
--------------- --------------- --------------- ------------ ---------------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1993 ................. - - - $142,698 $123,899,530
Private placement of units net of
offering costs, exercise of stock
options .................................. - - - 11,442 6,831,268
Shares issued under corporate partner
agreement, net of costs .................. - - - 7,871 4,857,667
Purchase of treasury stock ................. - - - -
Sales of treasury stock .................... - - - 130 (20,342)
Net loss ................................... - - - - -
----------- ----------- ---------- -------- ------------
Balance, December 31, 1994 ................. - - - 162,141 134,858,314
Exercise of stock options .................. - - - 872 84,216
Warrants issued in connection with
lines of credit .......................... - - - - 4,104,898
Warrants issued in connection with
investment in affiliate .................. - - - - 814,000
Shares issued for commission related
to corporate partner agreement - - - 2,200 1,757,800
Purchase of treasury stock ................. - - - - -
Sales of treasury stock .................... - - - 289 (29,748)
Net loss ................................... - - - - -
----------- ----------- ---------- -------- ------------
Balance, December 31, 1995 ................. - - - 165,212 141,708,580
Exercise of stock options .................. - - - 1,088 79,144
Stock issuance ............................. - - - 50 20,457
Issuance of preferred stock ................ $ 4,000,000 $23,800,000 $8,000,000 - -
Warrants issued in connection with
Series B preferred stock ................. - - - - 8,815,000
Preferred stock redemption liability ....... (1,236,753) - - - -
Dividends .................................. 171,688 - 100,000 - -
Preferred stock conversion ................. (919,413) - - 5,004 813,749
Purchase of treasury stock ................. - - - - -
Sale of treasury stock ..................... - - - - (67,903)
Net loss ................................... - - - - -
----------- ----------- ---------- -------- ------------
Balance, December 31, 1996 ................. $ 2,015,622 $23,800,000 $6,100,000 $171,884 $151,323,022
=========== =========== ========== ======== ============

Accumulated Treasury Stockholder's
Deficits Stock Equity (Deficit)
-------- ----- ----------------
<S> <C> <C> <C>
Balance, December 31, 1993 ................. $(108,826,342) $ (7,376) $ 15,203,811
Private placement of units net of
offering costs, exercise of stock
options .................................. - - 6,642,711
Shares issued under corporate partner
agreement, net of costs .................. - - 4,665,726
Purchase of treasury stock ................. - (150,800) (150,800)
Sales of treasury stock .................... - 83,777 83,585
Net loss ................................... (22,643,793) - (22,843,783)
-------------- --------- ------------
Balance, December 31, 1994 ................. (131,172,136) (74,098) 3,784,222
Exercise of stock options .................. - - 84,788
Warrants issued in connection with
loss of credit .......................... - - 4,154,896
Warrants issued in connection with
investment in affiliate .................. - - 914,000
Shares issued for commission related
to corporate partner agreement ........... - - 1,750,000
Purchase of treasury stock ................. - (201,939) (201,839)
Sales of treasury stock .................... - 183,083 153,636
Net loss ................................... (21,101,195) - (21,101,198)
-------------- --------- ------------
Balance, December 31, 1995 ................. (152,273,333) (92,964) (10,441,495)
Exercise of stock options .................. - - 80,212
Stock issuance ............................. - - 20,502
Issuance of preferred stock ................ (338,840) - 32,481,360
Warrants issued in connection with
Series B preferred stock ................. (8,181,000) - -
Preferred stock redemption liability ....... - - (1,238,753)
Dividends .................................. (1,438,278) - (1,166,590)
Preferred stock conversion ................. - - -
Purchase of treasury stock ................. - (107,780) (107,750)
Sale of treasury stock ..................... - 188,373 130,470
Net loss ................................... (24,588,580) - (24,588,560)
-------------- --------- ------------
Balance, December 31, 1996 ................. $(137,264,,811) $ (2,331) $ (4,848,804)
============== ========= ============

</TABLE>

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

-37-
<PAGE>

<TABLE>

SERAGEN, INC.
STATEMENTS OF CASH FLOWS

<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------------------
1994 1995 1996
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss ................................................... $(22,643,793) $(21,101,198) $(24,586,560)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization ............................ 1,131,144 969,104 945,225
Loss incurred in connection with Canadian affiliate ...... - 390,136 2,923,884
Loss on disposal of property and equipment ............... (49,229) 2,240 71,811
Loss from sale of marketable securities .................. 42,650 - -
Compensation associated with stock issuance .............. - - 20,502
Purchase of technology license ........................... 2,724,217 - -
Amortization of discount on long-term debt ............... 28,651 687,614 687,615
Amortization of prepaid interest ......................... - 636,319 3,528,677
Amortization of debt issuance costs ...................... - 79,719 442,117

Changes in operating assets and liabilities:
Grant receivable ......................................... 121,139 - -
Contract receivable ...................................... (246,571) (439,484) 200,794
Unbilled contract receivable ............................. (341,779) (154,368) (337,836)
Prepaid expenses and other current assets ................ 51,416 192,955 49,882
Accounts payable ......................................... 26,760 94,701 386,151
Deferred commission ...................................... (2,060,000) - 2,060,000
Accrued commission payable ............................... 2,360,000 (300,000) (300,000)
Accrued expenses ......................................... 392,821 385,070 180,888
Deferred revenue ......................................... 5,000,000 - (5,000,000)
Lilly contract obligation ................................ - - 1,200,000
------------ ------------ ------------
Net cash used in operating activities ...................... (13,482,574) (18,557,192) (17,526,870)
------------ ------------ ------------

Cash flows from investing activities:
Purchase of marketable securities ........................ (20,878,601) - -
Proceeds from sales of marketable securities ............. 18,800,903 2,034,948 -
Purchases of property and equipment ...................... (348,398) (351,840) (423,015)
Proceeds from sales of property and equipment ............ 9,000 - -
Decrease in other assets ................................. 14,363 2,970 5,353
(Increase) decrease restricted cash account .............. (169,974) (47,445) (175,000)
------------ ------------ ------------
Net cash (used in) provided by investing activities ........ 2,572,607 1,638,633 (592,662)
------------ ------------ ------------

Cash flows from financing activites:
Proceeds from preferred stock issuances .................. - - 9,000,000
New proceeds from common stock issuances ................. 11,372,004 238,424 210,682
Purchases of treasury stock .............................. (150,500) (201,939) (107,750)
Proceeds from sale/leaseback ............................. 416,853 - -
Proceeds from issuance of long-term debt ................. - 12,500,000 11,300,000
Repayments of long-term debt ............................. (170,573) (197,452) (248,493)
Debt and preferred stock issuance costs .................. - (521,796) (338,680)
Dividends paid ........................................... - - (583,295)
------------ ------------ ------------
Net cash provided by financing activities .................. 11,467,784 11,817,237 19,232,464
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents ....... (4,567,397) (5,101,322) 1,112,932
Cash and cash equivalents, beginning of period ............. 10,104,179 5,536,782 435,460
------------ ------------ ------------
Cash and cash equivalents, end of period ................... $ 5,536,782 $ 435,460 $ 1,548,392
============ ============ ============
Supplemental disclosures of cash flows information:
Cash paid for interest ................................... $ 85,105 $ 489,195 $ 761,981
============ ============ ============

Supplemental non cash activities:
Issuance of common stock for strategic alliance with Lilly $ - $ 1,760,000 $ -
Issuance of warrants and put rights to shareholders of
Canadian affiliate ..................................... $ - $ 2,990,000 $ -
Conversion of series A preferred stock to common stock ... $ - $ - $ 919,413
Conversion of long-term debt to series B preferred stock . $ - $ - $ 23,800,000
Issuance of warrants to series B preferred stockholders .. $ - $ - $ 8,618,000
Preferred stock dividends ................................ $ - $ - $ 271,688

</TABLE>

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

-38-
<PAGE>
SERAGEN, INC.
NOTES TO FINANCIAL STATEMENTS

A. NATURE OF BUSINESS:

Seragen, Inc. (the "Company" or "Seragen") is engaged in the research and
development of a new class of therapeutic products known as fusion proteins.
The Company was established in 1979 and became a majority-owned investment of
Boston University ("Boston University" or "B.U.") in 1987. Substantially all of
the Company's cash requirements from that time until the Company's initial
public offering in April 1992 were funded by loans from B.U. The Company
completed its initial public offering in April 1992, a second public offering of
common stock in March 1993 and a private placement of units in February 1994.
In August 1994, the Company signed an agreement to form a global strategic
alliance with Eli Lilly and Company ("Lilly") (see Notes D and J). In June
1995, the Company finalized three separate lines of credit which guaranteed a
total of $23.8 million in bank financing (see Note E) which were subsequently
converted into Series B Preferred Stock. In November 1995, the Company formed
Seragen Biopharmaceuticals Ltd. ("SBL"), an affiliate to conduct research and
development and clinical trials of the Company's proprietary fusion protein
products in Canada (see Note G).

In May 1996, the Company raised $3.8 million through the sale of Series A
Preferred Stock (see Note J). On September 30, 1996, the Company raised $5
million through the sale of Series C Preferred Stock (see Note J). In February
1997, substantially all property and equipment was sold to Boston University for
$5 million (see Note B) and the Company entered into a service agreement under
which B.U. will perform research and development activities on behalf of the
Company. In connection with the sale, at closing, approximately 100 of the
Company's employees will be transferred to B.U.

The Company has incurred losses of approximately $187 million since
inception and has funded these losses principally through the issuance of debt
and equity securities. The Company has a working capital deficit as of December
31, 1996, and is dependent on raising additional capital in the short term to
satisfy its ongoing capital needs and to continue its operations. Management
continues to pursue additional funding arrangements and strategic partnerings;
however, no assurance can be given that such financing will in fact be available
to the Company. These conditions raise substantial doubt about the Company's
ability to continue as a going concern. If the Company is unable to obtain
financing on acceptable terms in order to maintain operations through the next
fiscal year, it could be forced to curtail or discontinue its operations. The
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.

B. SALE OF ASSETS TO BOSTON UNIVERSITY:

Simultaneously, the Company entered into a service agreement with B.U.
providing for the purchase by the Company of certain services related to product
research, development, manufacturing, clinical trials, quality control, and
quality assurance. This service contract expires in January 1999 and is subject
to early termination provisions, as defined, including the option of B.U. to
terminate the agreement if losses during a contract year exceed $9.0 million and
the Company does not reimburse B.U. for the losses in excess of $9.0 million.
The service contract may be renewed for two successive one-year terms at the
option of the Company. The Company has the option to repurchase the assets
-39-
<PAGE>
SERAGEN, INC.
NOTES TO FINANCIAL STATEMENTS
comprising the manufacture and clinical operations facilities. The Company has
agreed to pay B.U. approximately $5.5 million and $6.6 million in years 1 and 2
of this contract, respectively. The fees can be mutually increased or
decreased, but may not be reduced to less than $4.3 million per contract year.
(See Pro Forma information at Note O).

C. SIGNIFICANT ACCOUNTING POLICIES:

Cash Equivalents

The Company considers all highly liquid investments that have a maturity on
date of acquisition of three months or less to be cash equivalents. Cash
equivalents at December 31, 1995 and 1996 consist of money market funds.

Restricted Cash

The Company maintains a restricted cash balance of $610,318 at December 31,
1996, of which $435,318 is available under a letter of credit required by a
lessor with whom the Company has entered into a sale/leaseback arrangement. The
remaining $175,000 is available under a letter of credit required by an officer
of the Company with whom the Company has entered into an employment agreement.

Concentration of Credit Risk

The Company invests its excess cash in deposits with federally insured
banks and money market funds. At December 31, 1995 and 1996, all investments
are in funds which have an average maturity of less than one year. The Company
recorded revenues of greater than 10% of total revenues under its corporate
alliance with Lilly and Novartis (see Note D).

Property and Equipment

Property and equipment are stated at cost. Betterments and major repairs
are capitalized and included in property and equipment accounts while
expenditures for maintenance and repairs are charged to expense. When assets
are retired or otherwise disposed of, the cost of the assets and related
accumulated depreciation and amortization are removed from the accounts and any
resulting gain or loss is reflected in income. The accompanying statements of
operations provides for depreciation and amortization using the straight-line
method over their useful lives, as follows:

DECEMBER, 31
ESTIMATED ------------------------------
USEFUL LIFE 1995 1996
----------- ----------- -----------
<S> <C> <C> <C>
Laboratory equipment ....................... 3 - 7 Years $ 3,563,970 $ 3,302,145
Production equipment ....................... 3 - 7 Years 292,738 378,474
Furniture and fixtures ..................... 3 - 8 Years 595,887 627,989
Leasehold improvements ..................... Life of Lease 9,519,120 9,683,789
Laboratory equipment not placed in service .. - 67,200 -
----------- -----------
14,038,915 13,992,397

Less accumulated depreciation and

amortization (8,840,779) (9,388,282)
----------- -----------
$ 5,198,136 $ 4,604,115
=========== ===========
</TABLE>

Subsequent to December 31, 1996, substantially all property and equipment was
sold to B.U., see Note B.

-40-
<PAGE>
SERAGEN, INC.
NOTES TO FINANCIAL STATEMENTS

Net Loss Per Common Share

The net loss per common share is computed based upon the weighted average
number of common shares outstanding. Preferred stock and common equivalent
shares are not included in the per share calculation where the effect of their
inclusion would be antidilutive.

Income Taxes

Deferred tax assets and liabilities are recognized for the expected future
tax consequences of events that have been included in the financial statements
or tax returns. Under this method, deferred tax liabilities and assets are
determined based on the difference between the financial statement and tax basis
of assets and liabilities using enacted tax rates in effect for the year in
which the differences are expected to reverse.

Revenue Recognition

Contract revenue is recognized as earned under the contract provisions.
License fees are recognized as earned.

Use of Estimates

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date(s) of the financial
statements and the reported amounts of revenues and expenses during the
reporting period(s). Actual results could differ from those estimates.

Industry Uncertainties

The Company is subject to risks common to companies in the biotechnology
industry including, but not limited to, the ability to raise additional capital,
development by the Company or its competitors of new technological innovations,
dependence on key personnel, protection of proprietary technology, and
compliance with FDA government regulations.

D. COLLABORATIVE ARRANGEMENTS:

Eli Lilly

On August 3, 1994, the Company and Lilly signed an agreement to form a
global strategic alliance that gives Lilly exclusive worldwide development,
distribution, and marketing rights, except in certain Asian countries, to the
Company's Interleukin-2 Fusion Protein (IL-2 Fusion Protein) for the treatment
of cancer. Lilly also has the option to obtain worldwide development,
distribution, and marketing rights for additional indications for IL-2 Fusion
Protein and for other Company products under development. The Company retains
exclusive rights to promote IL-2 Fusion Protein and future fusion proteins for
dermatologic applications outside of oncology and will be responsible for bulk
manufacturing for all indications.

On August 4, 1994, under the terms of the alliance, Lilly made an initial
payment to the Company of $10 million, $5 million representing payment for
787,092 shares of common stock at approximately $6.35 per share and $5 million
representing an advance against Lilly's purchase of bulk product from the
Company. Lilly is also required to pay the Company an additional $3 million
based on the meeting of certain regulatory milestones in the development of IL-2
-41-
<PAGE>
SERAGEN, INC.
NOTES TO FINANCIAL STATEMENTS

Fusion Protein for CTCL. No regulatory milestone payments have been achieved
to date under this agreement. In addition, Lilly reimburses the Company for
costs incurred in the clinical development of IL-2 Fusion Protein for cancer
therapy, including costs for Phase III clinical trials. The Company recorded
approximately $588,000, $3,337,000 and $3,979,000 of contract revenue for such
reimbursed development costs during the years ended December 31, 1994, 1995 and
1996, respectively. In connection with this agreement, the Company paid
$600,000 in cash and issued 220,000 shares of common stock valued at $1,760,000
to its investment bank for services provided in connection with the Lilly
agreement. In 1995, the Company charged $300,000 of such payments to additional
paid in capital and recorded the additional payments as prepaid expense to be
recognized upon the recognition of contract revenues and license fees from Lilly
in future periods.

On May 28, 1996, Lilly and the Company amended the Sales and Distribution
Agreement relating to the $5.0 million advance paid by Lilly in August 1994
against Lilly's future purchases of bulk product from the Company. Associated
with the original agreement was $2,060,000 of deferred commission expense. The
amended agreement states that the $5.0 million payment is non-refundable and
Seragen has no obligation to refund the advance should no bulk purchases be made
by Lilly. To the extent Lilly purchases bulk product in the future, the Company
is required to pay Lilly a royalty equal to 75% of the purchase price, up to
$5.0 million of total royalties. The Company has determined that the sale of
bulk products under these terms will result in a potential obligation of $1.2
million if all of the $5.0 million in royalties are paid to Lilly. Accordingly,
the Company recorded $5.0 million in revenue, a $1.2 million obligation on the
potential sales of bulk material and $2,060,000 in commission expense in the
year ended December 31, 1996.

Novartis

In March 1996, the Company entered into a license agreement with Novartis,
formerly Sandoz Pharmaceutical, Limited, whereby the Company granted Novartis a
non-exclusive sub-license of certain patents in exchange for a $1.5 million
non-refundable payment. Under the terms of the license agreement, beginning on
January 1, 2001 Novartis will be required to pay a 0.75% royalty on the net
sales price of licensed products that are sold under the sub-license agreement.
The agreement is to remain in effect until expiration of the Company's licensed
patents, or earlier upon termination as defined.

E. LOAN GUARANTEES AND SERIES B PREFERRED STOCK:

On June 7, 1995, the Company finalized three separate lines of credit which
were guaranteed by three different entities for a total of $23.8 million in bank
financing for the Company. Boston University, the Company's majority
stockholder, was the lead guarantor and provided a guaranty of $11.8 million.
Two other guarantors guaranteed a total of $12 million. Upon the closing of the
lines of credit, the Company issued warrants to the guarantors to purchase
2,776,664 shares of its common stock at an exercise price of $4.75 per share.
The warrants were exercisable immediately and expire in 2005. The Company
estimated the fair market value of the warrants on the date of issuance to be
$1.50 per warrant or a total of $4,164,996. The Company recorded this amount as
prepaid interest to be recognized as interest expense over the four-year life of
the loan guarantees.

As of December 31, 1995, the Company borrowed $12.5 million of the total
$23.8 million and recorded the borrowings as long-term debt. The Company
borrowed the remaining $11.3 million available through June 30, 1996. On July
1, 1996, the Company restructured its arrangement with the guarantors of the
Company's $23.8 million bank financing under which the guarantors directly
assumed the liability with the banks and the Company was released from its
liability to the banks. In exchange for the guarantors satisfying the Company's
liability to the banks, the guarantors were issued 23,800 shares of Series B
Convertible Preferred Stock ("Series B Shares"). Each Series B Share is
convertible at any time at the holder's option into a number of shares of
Seragen Common Stock determined by dividing $1,000 by the average of the closing
sale prices of the Company's Common Stock as reported on the Nasdaq Stock Market
for the ten consecutive trading days immediately preceding the conversion date.

-42-
<PAGE>
SERAGEN, INC.
NOTES TO FINANCIAL STATEMENTS

The holders of Series B Shares are entitled to receive a cumulative cash
dividend payable quarterly in arrears on the last day of March, June, September,
and December of each year commencing on September 30, 1996 at an annual rate
equal to the prime rate plus 1 1/2% through June 1999 and at an increasing
percentage rate thereafter up to a maximum rate of the prime rate plus 5% in
July 2003. The Series B shareholders also received warrants to purchase a total
of 5,950,000 shares of Seragen Common Stock at an exercise price of $4.00 per
share. The Company has estimated the average fair market value of the warrants
to be $1.45 per warrant or $8,617,951 for the 5,950,000 issued and outstanding
warrants at the time of issuance. The value ascribed to the warrants and the
issuance costs have been recorded as a preferred stock dividend with an offset
to additional paid-in capital. The warrants are exercisable commencing on
January 1, 1997 and expire on July 1, 2006. In addition to the warrants issued
on July 1, 1996, the investors may receive additional warrants for certain
dilutive events, subject to various provisions as defined. As of December 31,
1996 the investors received warrants to purchase an additional 2,217,196 shares
of Seragen Common Stock related to the antidilution provisions. These
additional warrants are priced, exercisable and expire under the same terms of
the initial July warrants.

The holders of the Series B Shares are entitled to vote, on any matter
submitted to a vote of the shareholders of the Company, and are entitled to the
number of votes equal to the product of (x) the number of Series B Shares held
on the record date for the determination of the stockholders entitled to vote on
such matters or, if no record date is established, in accordance with applicable
provisions of Delaware law, and (y) $1,000, divided by $4.00. Each Series B
Share has a liquidation preference equal to the sum of (a) $1,000, plus (b) an
amount equal to any accrued and unpaid dividends from the date of issuance of
the Series B Shares so that such amount must be paid on each Series B Share in
the event of a voluntary or involuntary liquidation, dissolution or winding up
of the Company before any distribution or payment is made to any holders of any
shares of the Common Stock or any other class or series of the Company's capital
stock which is junior to the Series B Shares. At any time, with the approval of
the Company's Board of Directors, Audit Committee or comparable body, the
Company may redeem any or all of the Series B Shares at a price of $1,000 per
share plus any accrued and unpaid dividends from the date of issuance.

In connection with the restructuring of the bank debt into Series B
Preferred Stock, the Company expensed approximately $3.0 million of prepaid
interest and $558,000 of debt issuance costs associated with the outstanding
loans. Preferred stock dividends related to the Series B Shares were
approximately $9.9 million in 1996, which consists of $8.6 million for the value
ascribed to the warrants, $1.2 million in cash dividends and $99,000 in
preferred stock issuance costs. Dividends payable of approximately $583,000
were outstanding at December 31, 1996 and are included in accrued expenses in
the accompanying balance sheets.

F. TECHNOLOGY PURCHASE AND ROYALTY AGREEMENT:

In 1988, B.U. sold to the Company all rights, title and interest to certain
technology in exchange for a continuing royalty on all revenue derived from such
technology, as defined, until the expiration of all patents relative to the
technology. Upon the expiration of all patents, the Company will pay B.U. a
royalty on revenues, as defined, for a period of 10 years after the expiration
of all patents. B.U. has retained a collateral interest in the technology as
long as royalties are due. Upon an event of default, the technology will revert
to B.U. No royalty amounts were due or have been paid to date under this
agreement. This technology has been assigned as collateral to the Series B
Preferred Stockholders.

G. INVESTMENT IN CANADIAN AFFILIATE:

-43-
<PAGE>
SERAGEN, INC.
NOTES TO FINANCIAL STATEMENTS

consists of either a share of Class A or Class B Common Stock of SBL and a
warrant to acquire of a share of Seragen Common Stock. The Company issued
warrants to purchase 519,033 shares of Seragen Common Stock at an exercise price
of $8.79 per share. The warrants become exercisable on October 1, 1997 and
expire on September 30, 2005. The Canadian investors have the option to
exercise one of three different put rights related to their SBL shares after
January 1, 1999, or earlier upon the occurence of certain events as defined.
The Company is currently in default of its obligation to register certain shares
underlying certain put rights of SBL. Put Right 1 obligates the Company to
purchase the investors' 1,557,097 shares at $8.57 (Canadian $) plus 11.4%
compounded annually. The Company has the option to settle in cash or common
stock but the investor can require 50% of the purchase price to be paid in cash.
Put Right 2 obligates the Company to purchase the investors' shares at a price
of 20 times SBL's per share income over the four most recent quarters. Put
Right 3 obligates the Company to exchange the investors' shares for the
Company's shares (or the value of such shares) using the product of $8.57
(Canadian $) and the number of puts exercised divided by 9.487. The Company has
the option to settle Put Rights 2 and 3 in cash or Seragen common stock. The
put rights will terminate if SBL sells shares in an initial public offering.
The Company received 49% of SBL's Class A and Class B shares in exchange for the
warrants to purchase Seragen Common Stock, granting of the put rights and
granting SBL the exclusive right to promote, sell and distribute in Canada
pharmaceutical formulations comprising fusion proteins for all indications of
fusion proteins and for the treatment of HIV in certain countries (subject to
the rights granted to Lilly). SBL, with the Company's assistance, will conduct
research and development and clinical trials of the Company's proprietary fusion
protein products in Canada.

In 1995, the Company determined the fair market value of the warrants and
the put rights to be $914,000 and $2,076,000, respectively. The Company
recorded these amounts as an investment in affiliate under the equity method.
Loss incurred in connection with Canadian affiliate consists of the Company's
proportionate share of SBL's loss, based on the equity method and accretion of
its obligation under the put rights. At December 31, 1996, the Company reduced
its investment to zero and reflected an affiliate put option liability of
$2,400,000 which reflects the Company's maximum current obligation under the put
options as of December 31, 1996.

Summarized unaudited financial information for Seragen Biopharmaceuticals
Ltd. for 1996 as follows:

<TABLE>
Summarized unaudited financial information for Seragen Biopharmaceuticals
Ltd. for 1996 as follows:

BALANCE SHEET DATA AS OF STATEMENT OF OPERATIONS DATA
------------------------ ----------------------------
DECEMBER 31, 1996 FOR THE YEAR ENDED DECEMBER 31, 1996
----------------- ------------------------------------
(Unaudited) (Unaudited)

<S> <C> <C> <C>
Current assets $9,231,018 Investment income $419,111
Noncurrent assets 10,410 Operating expenses 440,338
Current liabilities 14,743 Net loss (21,227)
Stockholders' Equity 9,226,685
</TABLE>

H. INCOME TAXES:

As of December 31, 1996, the Company had net operating loss carryforwards
for federal income tax purposes of approximately $176 million expiring at
various dates from 1997 through 2011 which are available to reduce future
federal income taxes. Pursuant to a quasi-reorganization in 1985, approximately
$11 million of these loss carryforwards will be credited to additional paid-in
capital if realized. (Upon consummation of this quasi-reorganization,
approximately $14 million of accumulated deficit was charged to additional
paid-in capital.) In addition, the Company had research and experimental and
investment tax credit carryforwards of approximately $5 million. The tax
credits expire at various dates from 1997 through 2011. The Tax Reform Act of
1986 contains provisions which may limit the net operating loss and credit
carryforwards available to be used in any given year as the result of
significant changes in equity ownership.

-44-
<PAGE>
SERAGEN, INC.
NOTES TO FINANCIAL STATEMENTS

The net operating loss carryforwards and tax credits expire approximately as
follows:

NET OPERATING RESEARCH INVESTMENT TAX
LOSS TAX CREDIT CREDIT
EXPIRATION DATE CARRYFORWARDS CARRYFORWARDS CARRYFORWARDS
- --------------- ------------- ------------- ---------------
<S> <C> <C> <C>
1997 1,765,000 109,000 4,000
1998 2,504,000 168,000 7,000
1999 3,548,000 216,000 19,000
2000 2,224,000 - 15,000
2001 223,000 - -
2002 - 2011 165,408,000 4,419,000 -
------------ ---------- -------
$175,672,000 $4,912,000 $45,000
------------ ---------- -------
</TABLE>

<TABLE>
The components of the Company's deferred tax assets are as follows:

<CAPTION>
<S> <C> <C>
Net Operating loss carryforwards $ 62,631,000 $ 69,694,000
Research and development credits 4,625,000 4,912,000
Investment tax credits 49,000 45,000
Temporary differences 266,000 1,727,000
------------ ------------
67,571,000 76,378,000
Valuation allowance (67,571,000) (76,378,000)
------------ ------------
$ - $ -
============ ============

</TABLE>

The valuation allowance has been provided due to the uncertainty surrounding the
realization of the deferred tax assets.

I. SHORT-TERM OBLIGATIONS:

Equipment Loan

On February 19, 1993, the Company obtained an equipment loan of $750,000
collateralized by certain existing used equipment. The Company also issued a
warrant to purchase 10,757 shares of common stock at a purchase price of $12.55
per share in connection with this equipment loan. The warrant expires on
February 19, 2000. The loan bears interest at 10.68% per annum. Amounts
outstanding under this loan were approximately $248,000 and $37,000 as of
December 31, 1995 and 1996, respectively.

License Fees

In December 1994, the Company entered into a license agreement with
Ajinomoto Company, Inc. which provides the Company with exclusive worldwide
rights with respect to the Company's fusion proteins under Ajinomoto's IL-2 gene
patents. As a result of this agreement, the Company has acquired the right to
market IL-2 Fusion Protein products in Japan, Korea, China, Hong Kong and

-45-
<PAGE>
SERAGEN, INC.
NOTES TO FINANCIAL STATEMENTS

Taiwan. The Company has made an up-front payment of $100,000 under this
agreement and is required to make a payment of $4.3 million by May 31, 1997.
The future obligation has been discounted at a 20% discount rate, resulting in
an obligation of $3.4 million and $4.1 million at December 31, 1995 and 1996,
respectively. The present value of this license fee was recorded as research
and development expense in the year ended December 31, 1994.

J. CAPITAL STOCK:

In December 1996, the stockholders approved an increase in the number of
authorized shares of common stock to 70,000,000. The Company has 5,000,000
shares of preferred stock authorized to be issued from time to time in one or
more series. Each series of preferred stock shall have such number of shares,
designations, preferences, voting powers, qualifications and special or relative
rights or privileges as shall be determined by the Board of Directors, which may
include, among others, dividend rights, voting rights, redemption and sinking
fund provisions, liquidation preferences, conversion rights and preemptive
rights.

On September 30, 1996, the Company raised $5 million through the sale of
5,000 shares of the Company's non-voting convertible Series C Preferred Stock
("Series C Shares") in a private placement to Boston University under Regulation
D of the Securities Act of 1933. The Series C Shares are convertible at the
option of the holder into shares of Seragen Common Stock at a per share
conversion price equal to the lesser of $2.75 or 73 percent of the average
closing bid prices for a five day period prior to the conversion date. Terms of
the Series C Shares also provide for 8% cumulative dividends payable in shares
of Seragen Common Stock at the time of each conversion. Each Series C Share has
a liquidation preference equal to $1,000 plus an amount equal to any accrued and
unpaid dividends from the date of issuance of the Series C Shares in the event
of a voluntary or involuntary liquidation, dissolution or winding up of the
Company. Series C Shares which remain outstanding on March 30, 1998 will be
automatically converted into shares of the Company's Common Stock. The
Company's Series C Shares were reflected at $5,100,000 (including $100,000
dividend payable) at December 31, 1996.

In July 1996, the Company issued 23,800 shares of Seragen convertible
Series B Preferred Stock pursuant to the conversion of the loan guarantees (see
Note E).

On May 29, 1996, the Company raised gross proceeds of $4 million
(approximately $3.8 million net of offering fees) through the sale of 4,000
shares of Seragen convertible Series A Preferred Stock ("Series A Shares") to
investors outside the United States under Regulation S of the Securities Act of
1993. The Series A Shares are convertible at the option of the holders,
beginning July 15, 1996, into shares of Seragen Common Stock at a per share
conversion price equal to the lesser of $4.125 or 73 percent of the average
closing bid prices for a five day period prior to the conversion date up to a
maximum of 3,321,563 shares of Seragen Common Stock. Any shares the investor is
unable to convert due to this limitation may be exchanged for $1,150 per share
in cash. Terms of the Series A Shares also provide for 8% cumulative dividends
payable in shares of Seragen Common Stock at the time of each conversion. The
holders of the Series A Shares are not entitled to vote separately, as a series
or otherwise, on any matter submitted to a vote of the shareholders of the
Company. Each Series A Share has a liquidation preference equal to the sum of
(a) $1,000, plus (b) an amount equal to any accrued and unpaid dividends from
the date of issuance of the Series A Shares so that such amount must be paid on
each Series A Share in the event of a voluntary or involuntary liquidation,
dissolution or winding up of the Company before any distribution or payment is
made to any holders of any shares of the Common Stock or any other class or
series of the Company's capital stock which is junior to the Series A Shares.
Any shares which remain outstanding on November 29, 1997 will be automatically
converted into shares of Seragen Common Stock. As of December 31, 1996, 895
Series A Shares were converted into 566,400 shares of Common Stock at conversion
prices ranging from $1.022 to $2.774 per share. The Series A Shares were
reflected at $2,015,522 at December 31,1996 representing their liquidation value
which includes accrued dividends payable from the issuance date through December
31, 1996. At December 31, 1996, $1,236,753 was reclassified to a current
liability representing the 1,361,313 shares of common stock that would be

-46-
<PAGE>
SERAGEN, INC.
NOTES TO FINANCIAL STATEMENTS

required to be redeemed due to the conversion cap limitation as of December 31,
1996.

In June 1995, the Company issued 220,000 shares of common stock at $8.00
per share in payment of commissions incurred in connection with the formation of
the alliance with Lilly.

In August 1994, under the terms of the alliance with Lilly, the Company
received $5 million representing payment for 787,092 shares of common stock at
approximately $6.35 per share.

In February 1994, the Company completed a private placement of units
consisting of 1,127,004 shares of common stock at $6.00 per share and warrants
to purchase an additional 281,751 shares of common stock at an exercise price of
$10 per share which were immediately exercisable and expire on February 4, 1999.
The net proceeds of this private placement were approximately $6.5 million.

K. STOCK OPTIONS AND WARRANTS:

Employee Stock Option Plans

The Company's stock option plans allow for the grant of incentive stock
options at prices not less than fair value on the date of grant, as determined
by the Board of Directors, and nonqualified stock options at prices determined
by the Board of Directors.

The Company granted options under the 1981 Stock Option Plan until the
plan termination in 1991. Accordingly, no additional grants may be made under
this plan; however, options outstanding may still be exercised prior to their
expiration date. The options generally vest ratably over 4 years and expire 10
years from date of issuance.

The Company's 1992 Long Term Incentive Plan (the "1992 Plan") provides for the
grant of incentive stock options, nonstatutory options, stock appreciation
rights, restricted stock, deferred stock and other stock based awards.
Officers, employees and consultants are eligible to receive awards under this
plan; however, only officers and employees of the Company are eligible to
receive incentive stock options. Incentive stock options will not be granted at
less than fair market value or exercisable later than ten years from the date of
the grant. Nonstatutory options will be exercisable at the price established by
the Board of Directors or a committee thereof. Common shares in the amount of
2,300,000 were reserved for issuance pursuant to this plan in January 1992. In
December 1996, the Board of Directors approved an amendment to the Company's
1992 Plan increasing the number of shares available under the plan from
2,300,000 to 8,000,000. The Company is seeking shareholder approval at its 1997
Annual Meeting of Shareholders for such amendment. All incentive stock options
issued to date pursuant to this plan vest over a three to five-year period.

Non-Employee Directors Non-Qualified Stock Option Plan

The Company's 1992 Non-Employee Directors Non-Qualified Stock Option Plan
provides for the granting of nonstatutory stock options at fair market value to
Directors of the Company who are not officers or employees of the Company or
Trustees of B.U. There are 200,000 common shares reserved for issuance pursuant
to this plan. Commencing with the first date on which elected to serve as a
director of the Company or on February 5, 1992, whichever is later, each
eligible Director shall be granted an option to purchase 5,000 shares of Common
Stock at the fair market value of the Common Stock on the date the option is
granted, provided, however, that for any eligible Director who has previously

-47-
<PAGE>
SERAGEN, INC.
NOTES TO FINANCIAL STATEMENTS

been awarded options to purchase stock in connection with his service as a
director of the Company, the grant shall be reduced by the number of shares
underlying the previous grants. At the commencement of each subsequent twelve
month period in which the Director is elected to continue in office, an
additional option to purchase 1,000 shares at fair market value shall be
granted. The options acquired under the plan shall be exercisable upon
completion of a full term of office as a member of the Board of Directors after
the grant and if for any reason the term is not completed, or if the Director
has failed to attend at least seventy-five percent (75%) of the regularly called
meetings of the Board of Directors during such term, the option will be
forfeited.

Employee Stock Purchase Plan

The Company's Employee Stock Purchase Plan (the "Purchase Plan") allows
employees to purchase the Company's common stock, and 200,000 common shares were
reserved for issuance pursuant to this plan.

All employees of the Company who have been employed for at least three
months by the Company are eligible to participate in this plan. Shares are
purchased through the accumulation of payroll deductions of 1% to 10% of each
participant's compensation (up to a maximum of $25,000 per year). The purchase
price of the shares is 85% of the fair market value of the stock at certain
predetermined dates, as defined. The Company issued 34,432, 29,864, and 42,855
shares under the Purchase Plan in the years ended December 31, 1994, 1995 and
1996, respectively. In February 1997, the Board of Directors voted to terminate
the Purchase Plan.

A summary of the status of the Company's stock options as of December 31,
1994, 1995 and 1996 and changes during the year ended on those dates is
presented below:

<TABLE>
<CAPTION>
1994 1995 1996
------------------- ------------------- --------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
--------- -------- --------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year.... 1,637,570 $10.02 1,954,330 $9.12 1,773,440 $8.36
Granted........................... 452,432 6.25 283,264 5.57 5,728,529 1.37
Exercised......................... (43,189) 1.50 (117,014) 0.98 (111,825) 0.72
Canceled.......................... (92,483) 13.38 (347,140) 12.46 (587,178) 9.79
--------- --------- ---------
Outstanding at end of year.......... 1,954,330 9.12 1,773,440 8.36 6,803,029 2.60
========= ========= =========
Options exercisable at year-end..... 1,130,500 1,072,887 1,283,802
========= ========= =========
Options available for future grant.. 901,759 904,349 1,416,006
========= ========= =========

</TABLE>

The Company applies APB Opinion No. 25 and related interpretations in
accounting for its stock option and purchase plans. In October 1995, Statement
of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS No. 123") was issued and requires the Company to elect
either expense recognition or disclosure-only alternative for stock-based
employee compensation. The expense recognition provision encouraged by SFAS No.
123 would require fair-value based financial accounting to recognize
compensation expense for the employee stock compensation plans. The Company has
determined that it will elect the disclosure-only alternative.

The Company has computed the pro forma disclosures required under SFAS No.
123 for all stock options granted and stock issued pursuant to the employee
stock purchase plan as of December 31, 1996 using the Black Scholes option
pricing model prescribed by SFAS No. 123.

-48-
<PAGE>
SERAGEN, INC.
NOTES TO FINANCIAL STATEMENTS

The assumptions used and the weighted average information for the years
ended December 31, 1995 and 1996 are as follows:
<TABLE>

The assumptions used and the weighted average information for the years ended December 31, 1995
and 1996 are as follows:

<CAPTION>
DECEMBER 31, 1995 DECEMBER 31, 1996
----------------- -----------------
<S> <C> <C>
Risk-free interest rates............... 6.01% - 7.47% 5.52% - 6.73%
Expected dividend yield................ - -
Expected lives......................... 7.5 years 7.5 years
Expected volatility.................... 96% 96%
Weighted-average grant-date fair
value options granted during
the period........................... $5.57 $1.37

Weighted-average exercise price........

Weighted-average remaining contractual $8.36 $2.60
life of options oustanding........... 6.20 years 9.25 years

Weighted-average exercise price of
1,072,987 and 1,283,802 options
exercisable at December 31, 1995
and 1996, respectively............... $8.16 $7.37

<CAPTION>
The effect of applying SFAS No. 123 would be as follows:
DECEMBER 31, 1995 DECEMBER 31, 1996
----------------- -----------------
<S> <C> <C>
Pro forma net loss applicable to common stockholders..... $(21,311,315) $(35,932,478)

Pro forma net loss per common share...................... $ (1.30) $ (2.15)

</TABLE>

The Black-Scholes option-pricing model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and are
fully transferable. In addition, option-pricing models require the input of
highly subjective assumptions including expected stock price volatility.
Because the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.

The total fair value of the options granted and stock issued under the
employee stock purchase plan during 1995 and 1996 was computed as approximately
$1,235,000 and $6,795,000, respectively. Of these amounts approximately
$210,000 and $951,000 would be charged to operations for the years ended
December 31, 1995 and 1996, respectively. The remaining amount, approximately
$6,230,000 would be amortized over the remaining vesting periods. The resulting
pro forma compensation expense may not be representative of the amount to be
expected in future years as pro forma compensation expense may vary based upon
the number of options granted.

The pro forma net loss applicable to common stockholders and pro forma net
loss per common share presented above have been computed assuming no tax
benefit. The effect of a tax benefit has not been considered since a
substantial portion of the stock options granted are incentive stock options and
the Company does not anticipate a future deduction associated with the exercise
of these stock options.

Warrants

As of December 31, 1996, the following warrants were outstanding:
<TABLE>

As of December 31, 1996, the following warrants were outstanding:

WARRANTS OUTSTANDING EXERCISE PRICE EXPIRATION DATE
-------------------- -------------- ---------------
<S> <C> <C> <C>
Equipment Loan 10,757 $12.55 Feb. 2, 2000
Private Placement 281,751 10.00 Feb. 4, 1999
Loan Guarantee 2,776,664 4.75 Jun. 7, 2005
Canadian Affiliate 519,033 8.79 Sep. 30, 2005
Series B Preferred Stock 8,167,196 4.00 Jul. 1, 2006

</TABLE>

-49-
<PAGE>
SERAGEN, INC.
NOTES TO FINANCIAL STATEMENTS

L. COMMITMENTS AND CONTINGENCIES:

Lease Commitments

The Company has a renewable 10-year lease for its primary operating
facility which expires in August 2002. Rent includes the Company's
proportionate share of all real estate taxes and operating costs related to the
facility.

The Company leases certain other facilities and equipment under leases with
varying terms and containing renewal options and escalation clauses related to
increases in certain operating costs of the lessor. The rental expense for all
operating leases was approximately $1,014,000, $1,281,000 and $1,420,000 for the
years ended December 31, 1994, 1995 and 1996, respectively.

Approximate future minimum lease payments at December 31, 1996 are as
follows:
<TABLE>

<CAPTION>
OPERATING
LEASES
-----------

<S> <C>
1997 ...................................................... 1,372,000
1998 ...................................................... 1,064,000
1999 ...................................................... 870,000
2000 ...................................................... 776,000
2001 ...................................................... 776,000
Thereafter ................................................
----------
Total minimum lease payments .............................. $5,891,000
==========
</TABLE>

Substantially all of the Company's operating leases and commitments were
assumed by B.U. in connection with the sale of substantially all of the
Company's assets to B.U. (see Note B).

Royalty Arrangements

The Company has several royalty arrangements, whereby it is obligated to
pay royalties on revenue as defined.

Employment Contracts

The Company has entered into employment contracts with key employees that
provide for minimum salary and severance payments as defined.

Employee Benefits

The Company has a 401(k) savings plan in which substantially all of its
permanent employees are eligible to participate. Participants may contribute up

-50-
<PAGE>
SERAGEN, INC.
NOTES TO FINANCIAL STATEMENTS

to 15% of their annual compensation to the plan, subject to certain limitations.
Although the Company may make matching contributions, there were no such
contributions to the plan in 1994, 1995 and 1996.

M. RELATED PARTIES

Consulting Contracts

The Company incurred consulting fees to stockholders and directors of
approximately $126,000, $155,000 and $169,000 for the years ended December 31,
1994, 1995 and 1996, respectively. The Company also incurred expenses relating
to research grants to, and clinical trials performed at, the institution
employing a stockholder and a director of approximately $219,000, $185,000 and
$175,000 for the years ended December 31, 1994, 1995 and 1996, respectively.
The Company also recorded $63,000 of grant revenue on an NIH grant relating to a
subcontract from this institution in 1996. The full amount is paid as of
December 31, 1996.

The Company incurred consulting fees to other option holders of
approximately $36,000, $18,000 and $12,000 for the years ended December 31,
1994, 1995 and 1996, respectively. The Company also incurred expenses relating
to research grants to the institution employing one of the option holders of
approximately $150,000 for each of the years ended December 31, 1994 and 1995,
respectively.

N. ACCRUED EXPENSES:

Accrued expenses consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------
1995 1996
---------- ----------

<S> <C> <C>
Clinical and research .................. $ 845,426 $1,158,421
Professional service fees .............. 131,632 219,062
Payroll, vacation and benefits ......... 736,965 632,778
Other expenses ......................... 699,261 583,911
Dividends .............................. -- 583,295
---------- ----------
$2,413,284 $3,177,467
========== ==========
</TABLE>

O. PRO FORMA INFORMATION (UNAUDITED):

-51-
<PAGE>
SERAGEN, INC.
NOTES TO FINANCIAL STATEMENTS

agreed to pay B.U. approximately $5.5 million and $6.6 million in years 1 and 2
of this contract, respectively. The fees can be mutually increased or
decreased, but may not be reduced to less than $4.3 million per contract year.
The service agreement is expected to substantially reduce operating costs in
research and development as Seragen will be contracting solely for the services
that the Company requires for clinical and manufacturing purposes.

The following unaudited pro forma financial information reflects the
Company's balance sheet, as of December 31, 1996 and the Company's historical
statement of operations for the year ended December 31, 1996, assuming the
transactions described above were consummated on January 1, 1996. The unaudited
pro forma financial statements do not purport to be indicative of the results
which would actually have been reported if the transactions had been effected on
that date or which may be reported in the future.

-52-
<PAGE>
SERAGEN, INC.
NOTES TO FINANCIAL STATEMENTS

<TABLE>

SERAGEN, INC.
UNAUDITED PRO FORMA BALANCE SHEET
AS OF DECEMBER 31, 1996

ASSETS HISTORICAL ADJUSTMENTS PRO FORMA
---------- ----------- ---------
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents................................................. $ 1,548,392 $5,000,000(a) $ 6,548,392
Restricted cash........................................................... 610,318 - 610,318
Contract receivable....................................................... 485,261 - 485,261
Unbillied contract receivalbe............................................. 833,983 - 833,983
Prepaid expenses and other current assets................................. 285,356 - 285,356
------------- ---------- -------------
Total current assets................................................. 3,763,310 5,000,000 8,763,310

Property and equipment, net.................................................. 4,604,115 (4,595,594)(b) 8,521
Other assets................................................................. 77,183 - 77,183
------------- ---------- -------------
Total assets......................................................... $ 8,444,608 $ 404,406 $ 8,849,014
============= ========== =============
LIABILITIES AND STOCKHOLDERS' (DEFICIT)
Current liabilities:
Accounts payable.......................................................... 1,111,477 - 1,111,477
Current maturities of long-term debt...................................... 37,418 - 37,418
Accrued expenses.......................................................... 3,177,467 - 3,177,467
Preferred stock redemption liability...................................... 1,236,753 - 1,236,753
Short-term obligation, less unamortized discount.......................... 4,128,097 - 4,128,097
------------- ---------- -------------
Total current liabilities............................................ 9,691,212 - 9,691,212
------------- ---------- -------------

Non-current liabilities:
Lilly contract obligation................................................. 1,200,000 - 1,200,000
Canadian affiliate put option liability................................... 2,400,000 - 2,400,000
------------- ---------- -------------
Total non-current liabilities........................................ 3,600,000 - 3,600,000
------------- ---------- -------------
Commitments and contingencies
Stockholders' (deficit):
Preferred stock, $.01 par value; 5,000,000 shares authorized
Convertible preferred stock, Series A, $.01 par value; issued
and outstanding 3,105 shares at December 31, 1996, $2,015,522
liquidation preference................................................. 2,015,522 - 2,015,522
Convertible preferred stock Series B, $.01 par value; issued
and oustanding 23,800 shares at December 31, 1996, $23,800,000
liquidation preference................................................. 23,800,000 - 23,800,000
Convertible preferred stock Series C, $.01 par value; issued
and oustanding 5,000 shares at December 31, 1996, $5,100,000
liquidation preference................................................. 5,100,000 - 5,100,000
Common stock, $.01 par value; 70,000,000 shares authorized; issued
17,199,458 shares at December 31, 1996................................. 171,994 - 171,994
Additional paid in capital................................................... 151,323,022 404,406(c) 151,727,428
Accumulated deficit.......................................................... (187,254,811) - (187,254,811)
------------- ---------- -------------
(4,844,273) 404,406 (4,439,867)

Less-treasury stock (777 shares at cost at December 31, 1996................. (2,331) - (2,331)
------------- ---------- -------------
Total stockholders' (deficit)..................................... (4,846,604) 404,406 (4,442,198)
------------- ---------- -------------
Total liabilities and stockholders' (deficit)..................... $ 8,444,608 $ 404,406 $ 8,849,014
============= ========== =============

</TABLE>

-53-
<PAGE>
SERAGEN, INC.
NOTES TO FINANCIAL STATEMENTS

SERAGEN, INC.
UNAUDITED PRO FORMA BALANCE SHEET
AS OF DECEMBER 31, 1996

The following pro forma adjustments are required to reflect the sale
of the majority of the Company's property and equipment, the assignment of
certain capital and operating leases to Boston University and the Company's
service contract with Boston University as discussed in Note B above. The net
book value and estimated disposition costs are based on the estimated fair
value, as determined by the management of the Company. Such allocation will be
revised to reflect changes in assets through the date of closing and the
determination of actual disposition costs.

Notes to Pro Forma Balance Sheet

(a) Reflects an increase in cash for the receipt
of the purchase price. $5,000,000

(b) Reflects a reduction in property and equipment
for the net book value of assets sold. $4,595,594

(c) Reflects the excess of the purchase price over
the net book value of the asset sold as
additional paid in capital. $404,406

-54-
<PAGE>
SERAGEN, INC.
NOTES TO FINANCIAL STATEMENTS

<TABLE>

UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996
<CAPTION>

HISTORICAL ADJUSTMENTS PRO FORMA
------------ ------------- ------------

<S> <C> <C> <C>
Revenue:
Contract revenue and license fees ....... $ 10,542,315 $ -- $ 10,542,315

Operating expenses:
Cost of contract revenue and license fees 5,704,243 -- 5,704,243
Research and development ................ 13,959,405 (13,236,892)(a) 722,513
Contract R&D with affiliate ............. -- 5,521,342 (b) 5,521,342
General and administrative .............. 7,208,465 (1,669,337)(a) 5,539,128
------------ ------------ ------------
26,872,113 (9,384,887) 17,487,226
------------ ------------ ------------
Loss from operations ................. (16,329,798) 9,384,887 (6,944,911)

Loss incurred in connection with
Canadian affiliate ...................... 2,923,864 -- 2,923,864
Interest income ........................... 120,740 -- 120,740
Interest expense .......................... 5,453,638 -- 5,453,638
------------ ------------ ------------

Net loss ............................. (24,586,560) 9,384,887 (15,201,673)
============ ============ ============

Preferred stock dividends ................. 10,394,918 -- 10,394,918
------------ ------------ ------------

Net loss applicable to common stockholders $(34,981,478) $ 9,384,887 $(25,596,591)
============ ============ ============

Net loss per common share ................. $ (2.09) $ -- $ (1.53)
============ ============ ============
Weighted average common shares used
in computing net loss per share ........ 16,724,493 -- 16,724,493
============ ============ ============
</TABLE>

The following pro forma adjustments are required to reflect the sale of the
majority of the Company's property and equipment, the assignment of certain
capital and operating leases to Boston University, the Company's service
contract with Boston University and the transfer of the majority of the
Company's employees to B.U. as discussed in Note B. The pro forma adjustments
will be revised to reflect changes in assets through the date of closing and the
determination of actual disposition costs.

Notes to Pro Forma Balance Sheet

(a) Reflects the estimated reduction of operating expenses
due to the sale of property and equipment, the transfer
of employees to B.U. and reductions in the related research
and development and general and administrative activities. $14,906,229

(b) Reflects the contracted cost for the initial contract
year of research and development activities to be
received through the service contact with B.U. $5,521,342

-55-
<PAGE>

ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURES

On March 12, 1997, the Board of Directors of the Company at the
recommendation of the Company's Audit Committee voted to replace Coopers &
Lybrand L.L.P. with Arthur Andersen LLP as the Company's independent accountants
effective March 12, 1997. Coopers & Lybrand L.L.P.'s reports for the last two
fiscal years contained no adverse opinions, disclaimers, or qualifications or
modifications as to uncertainty, audit scope or accounting principles, except
that the report on the 1995 financial statements included an explanatory
paragraph concerning factors which raise substantial doubt about the Company's
ability to continue as a going concern. During such two fiscal year period and
the subsequent interim period since then, there have been no disagreements with
Coopers & Lybrand L.L.P. on any matter of accounting principles or practices,
financial statement disclosure or auditing scope or procedure which, if not
resolved to the satisfaction of Coopers & Lybrand L.L.P., would have caused it
to make reference to the subject matter of disagreement in connection with its
reports.

-56-
<PAGE>

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The following identifies the Company's current directors, each of the eight
persons who has been nominated by the Board of Directors for election as a
Director of the Company, and the Company's executive officers. All ages
indicated are as of March 28, 1997.

NAME AGE POSITIONS WITH THE COMPANY
- ---- --- --------------------------

<S> <C> <C>
Reed R. Prior ................ 45 Chairman of the Board of Directors,
Chief Executive Officer and Director

Gerald S. J. Cassidy ......... 56 Director

Elizabeth Chen ............... 33 Vice President of Business
Development

Kenneth G. Condon ............ 49 Director

Norman A. Jacobs ............. 59 Director

Jean C. Nichols, Ph.D. ........ 45 President, Chief Technology Officer
and Director

John R. Silber, Ph.D. ......... 34 Director

</TABLE>

Each director holds office until the next annual meeting of shareholders
and until his or her successor is duly elected and qualified, or until his or
her earlier resignation or removal. The Company's by-laws authorize the Board
of Directors from time to time to determine the number of its members.

The Company's officers are elected annually by the Board of Directors at a
meeting held immediately following each annual meeting of shareholders or as
soon thereafter as necessary and convenient in order to fill vacancies or newly
created offices. Each officer holds office until his or her successor is duly
elected and qualified, or until his or her earlier death, resignation, or
removal. The Board of Directors may remove any officer elected or appointed by
the Board whenever in its judgement the best interests of the Company will be
served, but removal of an executive officer is to be without prejudice to any
contractual rights of the person so removed.

There are no family relationships among any of the Company's directors and
executive officers. There are no arrangements or understandings between any
director or executive officer and any other person pursuant to which that
director or executive officer was or is to be selected.

Reed R. Prior -- Mr. Prior was elected Chairman of the Board of Directors
and a member of the Executive Committee of the Company and Chief Executive
Officer and Treasurer in November 1996. Prior to joining the Company, Mr. Prior
served as President and Chief Executive Officer of ActiMed Laboratories, a
privately-held medical diagnostics company. From 1992 to 1995, he was President
and Chief Executive Officer of Receptor Laboratories, Inc., a start-up
biopharmaceutical firm which was sold to Cytel Corporation in July 1995. From
1990 to 1991, Mr. Prior served as President and Chief Executive Officer of Genex
Corporation, which merged with Enzon, Inc. in October 1991. From 1986 to 1990,
Mr. Prior was President and Chief Executive Officer of i-Stat Corporation, a
development stage medical diagnostics company. Mr. Prior earned a B.S. in
biophysics from Lyman Briggs College, a residential science and mathematics

-57-
<PAGE>

college within Michigan State University, and received an M.B.A. from Harvard
Business School.

John E. Bagalay, Jr., Ph.D., Esq.; -- Dr. Bagalay has served as a member of
the Board of Directors of the Company since March 1991. Dr. Bagalay has been
Managing Director of Community Technology Fund, the venture capital fund of
Boston University, since 1989. From 1984 to 1988, Dr. Bagalay served as General
Counsel of Lower Colorado River Authority, a regulated electric utility in
Austin, Texas. Prior to that time, he was General Counsel of Houston First
Financial Group and General Counsel of Texas Commerce Bancshares, Inc. He is a
director of Cytogen Corp., a director and member of the Compensation Committee
of Wave Systems Corp. and of Hymedix, Inc., and a director of several privately
held companies.

Gerald S.J. Cassidy -- Mr. Cassidy has served as a member of the Board of
Directors of the Company since December 1987. Mr. Cassidy is the founder since
1975, Chairman of The Cassidy Companies, Inc., a holding company specializing in
corporate public affairs services. Prior to the establishment of The Cassidy
Companies, he worked as a Trial Attorney in the South Florida Migrant Legal
Services Program, as Executive Director and General Counsel of the Democratic
National Committee's 1973 Reform Commission, and on two separate occasions, from
1969 to 1973 and from 1974 to 1975, as General Counsel of the U.S. Senate's
Select Committee on Nutrition and Human Needs. He has been a featured speaker
on legislative issues at numerous governmental, university, industry, and trade
association conferences. He is a member of the Board of Trustees of Tougaloo
College, the Steering Committee of the Capital Campaign for Villanova
University, the Board of Overseers for the School of Nutrition at Tufts
University, the Board of Trustees of Fontbonne College, the Board of Directors
of the Children's Inn at the National Institute of Health, and a member of the
Board of Trustees of the Washington Theological Union. Mr. Cassidy holds a B.S.
from Villanova University and a J.D. from the Cornell University School of Law.
In 1995 he received an Honorary Doctor of Social Science Degree from Villanova
University.

Elizabeth C. Chen -- Ms. Chen joined the Company in January 1997 as Vice
President of Business Development. Prior to joining the Company, Ms. Chen had
been Vice President - General Manager of ActiMed Laboratories, Inc., a
privately-held medical technology company. From 1992 - 1996, Ms. Chen was an
independent consultant to a number of venture capital funds and a variety of
start-up biotech companies. From 1985 - 1992, Ms. Chen held a number of
positions in business development and marketing planning at Merck & Company,
Inc., Migliara/Kaplan and T. Rowe Price. Ms. Chen holds a B.A. in
Organizational Behavior from Yale and an M.B.A. from The Wharton School of the
University of Pennsylvania.

Kenneth G. Condon, C.P.A. -- Mr. Condon has served as a member of the Board
of Directors of the Company since January 1992. Mr. Condon has also served as
Boston University's Treasurer since 1992 and its Vice President for Financial
Affairs since 1986. Prior to his serving in such capacity, Mr. Condon served as
Associate Vice President for Financial and Business Affairs, Comptroller, Acting
Comptroller and Manager of Unrestricted Funds of Boston University. Mr. Condon
is Chairman of the Board and Director of Bayfunds, Inc. and a member of several
advisory boards of BayBanks, Inc. Mr. Condon also serves as Treasurer and as a
Director of the Financial Executives Institute of Massachusetts, and as a member
of the Board of Trustees of Newbury College. Mr. Condon is a Certified Public
Accountant and holds a B.S. in Economics and Mathematics from Tufts University
and an M.B.A. in Finance from the Wharton School of Finance.

Norman A. Jacobs -- Mr. Jacobs has served as a member of the Board of
Directors of the Company since 1990. Mr. Jacobs has served as President of
Becton Dickinson Transdermal Systems, a unit of Becton Dickinson and Company,
since September 1990. From January 1990 to September 1990, Mr. Jacobs acted as a
consultant to biotechnology companies, including Seragen. From 1986 through
1989, Mr. Jacobs was President of BioTechnica International, a genetic
engineering research company. Mr. Jacobs was one of the founders, in 1962, of
Amicon Corporation, which is a manufacturer of laboratory separation systems and
adhesives and polymer specialty materials. He served as President of Amicon from
1971 through 1983, and as President of the Amicon Division of W.R. Grace from
1983 to 1985. He earned an M.B.A. from Harvard Business School, an M.S. in
Chemical Engineering from M.I.T., and a B.E. in Chemical Engineering from Yale.

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<PAGE>

John R. Murphy, Ph.D.; -- Dr. Murphy has served as a member of the Board of
Directors of the Company since 1985. Since 1984, he has held various positions
at the Boston University School of Medicine and is currently Professor of
Medicine, Biochemistry and Microbiology at the Boston University School of
Medicine, and Chief of Biomolecular Medicine at the Boston University Medical
Center/University Hospital. From 1973 to 1984, he was an Assistant and Associate
Professor of Microbiology and Molecular Genetics at Harvard University. Dr.
Murphy holds a Bachelor of Arts degree in Zoology and a Masters degree in
Microbiology from the University of Connecticut and a Doctorate degree from the
University of Connecticut School of Medicine. Dr. Murphy completed his
postdoctoral training at Harvard University as a Research Fellow of Biology.

Jean C. Nichols, Ph.D. -- Dr. Nichols was elected President and Chief
Technology Officer and a member of the Board of Directors of the Company in
November 1996. From 1992 to 1996, she served as Senior Vice President, and from
1987 to August 1992, as Vice President of Development for the Company. From 1984
to 1987, Dr. Nichols was Director of Research and Development, and from 1983 to
1984, served as the Company's scientific liaison. Dr. Nichols received a B.S. in
Biology and a Ph.D. in Bacteriology and Immunology from the University of North
Carolina. Upon completion of her studies, Dr. Nichols was a Research Fellow at
the Harvard Medical School. Before joining the Company, she held the position of
Instructor in the Department of Microbiology and Molecular Genetics at the
Harvard Medical School.

John R. Silber, Ph.D. -- Dr. Silber has served as a member of The Board of
Directors of the Company since August 1987. He is the Chancellor of Boston
University and has been a member of its Board of Trustees since 1971. Dr. Silber
received a B.A. from Trinity University and an M.A. and Ph.D. in philosophy from
Yale University. Dr. Silber is Chairman of the Massachusetts State Board of
Education, a Trustee of the WGBH Educational Foundation, Vice President of the
United States Strategic Institute in Washington, D.C., and a director of U.S.
Surgical Corporation. Dr. Silber is also Chairman of Americans for Medical
Progress.

Section 16(a) Beneficial Ownership Reporting Compliance

Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
directors and executive officers, and persons who own more than 10% of the
Company's Common Stock to file with the Securities and Exchange Commission (the
"SEC") initial reports of ownership and reports of changes in ownership of
Common Stock and other equity securities of the Company. Officers, directors and
greater than 10% beneficial owners are required by SEC regulations to furnish
the Company with copies of all Section 16(a) reports they file.

To the Company's knowledge, based solely on review of the copies of such
reports furnished to the Company and written representations that no other
reports were required, there was compliance during the fiscal year ended
December 31, 1996 with all Section 16(a) filing requirements applicable to its
officers, directors and greater than 10% beneficial owners.

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<PAGE>

ITEM 11. EXECUTIVE COMPENSATION

Summary of Executive Compensation

The following table summarizes the compensation for services rendered in
all capacities to the Company during the fiscal years ended December 31, 1996,
1995, and 1994, of the chief executive officer of the Company and each of the
four most highly compensated persons who served as executive officers of the
Company during the last fiscal year (the "Named Executive Officers").

SUMMARY COMPENSATION TABLE

<TABLE>

SUMMARY COMPENSATION TABLE
<CAPTION>

ANNUAL COMPENSATION(1)
----------------------

OTHER LONG-TERM
NAME AND ANNUAL COMPENSATION
PRINCIPAL POSITION YEAR SALARY($) BONUS($) COMPENSATION SECURITIES
- ------------------ ---- --------- -------- ------------ UNDERLYING
OPTIONS #
---------
<S> <C> <C> <C> <C> <C>
Reed R. Prior 1996 $ 55,417(2) $100,000(3) $17,845(4) 4,885,747
Chairman, Chief Executive
Officer and Treasurer

George W. Masters(5) 1996 237,812(6) 30,000(7) 41,130(8) 50,000
Chairman, Chief Executive 1995 300,000 - 42,248(9) 40,000
Officer and Treasurer 1994 275,000(10) 70,000(11) 44,716(12) 40,000

Jean C. Nichols, Ph.D. 1996 195,542(13) - - 692,752(14)
President and Chief 1995 190,000 - - 18,000(15)
Technology Officer 1994 175,000 38,500(11) - 17,500(15)

Leonard F. Estis, Ph.D.(14) 1996 146,667 - - 9,328
Vice President for Research & 1995 160,000 - - 15,000
Development 1994 152,000 30,000(11) - 17,500

Thomas N. Konatich(15) 1996 138,125(16) - 21,372(17) 10,348
Vice President for Finance, 1995 145,000 - - 12,000
Chief Financial Officer 1994 130,000 26,000(11) - 15,000

</TABLE>
____________

(1) Portions of Annual Compensation have been deferred under the
Company's Employee Savings Plan. These amounts are included in calculation of
"Salary" and "Bonus" as reflected in the table.

(2) In fiscal year 1996, Mr. Prior was paid $55,417 base salary for his
partial year of service to the Company. His annual base salary was $350,000.

(3) In fiscal year 1996, Mr. Prior was paid a $100,000 signing bonus.

(4) Amount includes payment of a housing allowance of $17,845.

(5) Mr. Masters served as Vice Chairman, Chief Executive Officer and
President through November 5, 1996. Pursuant to the terms of his Retirement and
Consulting Contract, he remained a consultant to the Company through February
28, 1997.

(6) Mr. Masters was paid $237,812 for his partial year of service to the
Company. His annual base salary was $300,000. Included in Mr. Masters' salary
is $25,000 for consulting fees rendered to the Company in 1996 pursuant to Mr.
Masters' Retirement and Consulting Agreement.

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<PAGE>

(7) Pursuant to Mr. Masters' Retirement and Consulting Agreement, bonus
payment for services rendered to the Company in fiscal 1996 were paid in fiscal
year 1997.

(8) Amount includes payment of a housing allowance of $21,130 and accrued
vacation payment of $20,000.

(9) Amount includes payment of a housing allowance of $35,248.

(10) In fiscal year 1994, Mr. Masters was paid $275,000, which represents
three months at $200,000 base salary, and nine months at $300,000 base salary.

(11) Bonus payments for services rendered to the Company in fiscal year
1994 were paid in fiscal year 1995.

(12) Amount includes payment of a housing allowance of $44,716.

(13) In fiscal year 1996, Dr. Nichols was paid $195,542, which represents
$190,000 base salary through November 5, 1996, and $225,000 base salary from
November 6, 1996 through December 31, 1996.

(14) Represents an option granted on December 18, 1996 comprised of (i)
514,164 shares and (ii) 164,409 shares which were granted upon cancellation of
options for an equal number of shares. Also includes an option for 14,179
shares which was canceled on December 18, 1996. See "Aggregated Fiscal Year-end
Option Values" table and "Ten-Year Option Repricings" table.

(15) Represents options which were canceled as of December 18, 1996, and
reissued at a lower price, such options are included in fiscal year 1996. See
"Aggregated Fiscal Year-end Option Values" table and "Ten-Year Option
Repricings" table.

(16) Dr. Estis served as Vice President of Research and Development
through November 29, 1996.

(17) Mr. Konatich served as Vice President for Finance and Chief Financial
Officer through November 15, 1996.

(18) In fiscal year 1996, Mr. Konatich was paid $138,125, which represents
six months at $145,000 base salary, and four and one-half months at $175,000
base salary.

(19) Amount includes payment of accrued vacation of $21,372.

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PAGE
<PAGE>
Option Grants

The following table sets out the material terms of each grant of a stock
option to a Named Executive Officer during the last fiscal year, including the
number of options granted, the exercise price and the expiration date of each
option, as well as the percent that the grant represents of total options
granted to employees during the fiscal year. In addition, in accordance with
SEC rules, the table discloses hypothetical gains that would exist for the
respective options. These gains are based on assumed rates of annual compound
stock price appreciation of 5% and 10% from the date the options were granted
over the full option term. Actual gains, if any, on stock option exercises and
Common Stock holdings are dependent on the future performance of the Common
Stock and overall market conditions.

OPTION GRANTS IN LAST FISCAL YEAR

<TABLE>

OPTION GRANTS IN LAST FISCAL YEAR

INDIVIDUAL GRANTS POTENTIAL REALIZED VALUE
------------------------- AT ASSUMED ANNUAL RATE
% OF TOTAL OF STOCK PRICE
NO. OF SECURITIES OPTIONS APPRECIATION FOR OPTION
UNDERLYING GRANTED TO EXERCISE TERM
OPTIONS EMPLOYEES IN PRICE EXPIRATION ----
NAME GRANTED(#)(1) FISCAL YEAR ($/SH) DATE 5%($) 10%($)
- ---- ------------- ----------- ------ ---- ----- ------

<S> <C> <C> <C> <C> <C> <C>
Reed R. Prior 4,885,747 85.4% $1.31 12/18/06 4,034,350 10,223,835

George W. Masters(2) 50,000 0.9% $5.00 12/05/06 -- --

Jean C. Nichols, Ph.D. 14,179(3) 0.2% $4.25 04/26/06 37,897 96,040

678,573(4) 11.9% $1.31 02/18/06 560,324 1,419,970

Leonard F. Estis, Ph.D.(5) 9,328 0.2% $4.25 04/26/06 24,932 63,182

Thomas N. Konatich(6) 10,348 0.2% $4.25 04/26/06 27,658 70,091

</TABLE>
____________
(1) All options were granted under the Company's Amended 1992 Long Term
Incentive Plan ("1992 Plan") and were based on the fair market value of the
Company's Common Stock on the date of grant except in the case of the option
granted to George Masters. All options vest either monthly or quarterly over a
three to five year period. Under the terms of the 1992 Plan, upon a change in
control or a potential change in control (each as defined in the 1992 Plan), the
vesting of all options listed above will be accelerated such that the options
will be fully vested and, unless otherwise determined by the committee
administering the plan, those options will be cashed out. In the event of a
merger or consolidation, the options terminate unless they are assumed by the
merged or consolidated corporation or that corporation issues substitute
options; however, if that corporation does not assume the options or issue
substitute options, the options immediately vest in full. Additionally, under
the 1992 Plan, optionees may settle any tax withholding obligations with the
Company's Common Stock. The Committee that administers the 1992 Plan has
authority: to substitute new options for previously granted options (including
previously granted options having higher option exercise prices); to accelerate
the vesting of options upon the occurrence of the optionee's termination due to
death, disability or retirement; and generally to amend the terms of any option,
including the exercise price (so long as the optionee consents to any amendment
that impairs his or her rights).

(2) Mr. Masters terminated employment with the Company on November 6, 1996.

(3) Represents options which were canceled as of December 18, 1996 and
reissued at a lower price. See "Summary Compensation Table" and "Ten-Year
Option Repricings".

(4) Represents an option granted on December 18, 1996 comprised of (i)
514,164 shares and (ii) 164,409 shares which were granted upon cancelation of
options for an equal number of shares. See "Summary Compensation Table" table
and "Ten-Year Option Repricings".

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<PAGE>
(5) Dr. Estis terminated employment with the Company on November 29, 1996.

(6) Mr. Konatich terminated employment with the Company on November 15,
1996.

Fiscal Year-End Option Values

<TABLE>

The following table sets forth the number of shares covered by both
exercisable and unexercisable stock options as of December 31, 1996, and the
value of the "in-the-money" options, which represent the positive spread
between the exercise price of any such existing stock options and the year-end
price of Common Stock.

AGGREGATED FISCAL YEAR-END OPTION VALUES

<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED IN-THE-
UNDERLYING UNEXERCISED MONEY OPTIONS AT FISCAL YEAR
OPTIONS AT FISCAL YEAR END(#) END($)(1)
----------------------------- ----------------------------

NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Reed R. Prior 203,571 4,682,176 0 0

George W. Masters(2) 246,000 154,000 0 0

Jean C. Nichols, Ph.D. 87,698 640,874 0 0

Leonard F. Estis, Ph.D.(3) 115,903 0 0 0

Thomas N. Konatich(4) 48,198 0 0 0

</TABLE>

_____________

(1) Amounts based on the last reported sale price of the Common Stock as
of December 31, 1996 of $1.00.

(2) Mr. Masters terminated employment with the Company on November 6,
1996.

(3) Dr. Estis terminated employment with the Company on November 29, 1996.

(4) Mr. Konatich terminated employment with the Company on November 15,
1996.

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<PAGE>

TEN-YEAR OPTION REPRICINGS

<TABLE>
The following table sets forth information regarding all repricing of
options held by the Named Executive Officers during the last ten fiscal years.

<CAPTION>
NUMBER OF MARKET PRICE EXERCISE
SECURITIES OF STOCK AT PRICE AT TIME LENGTH OF ORIGINAL
UNDERLYING TIME OF OF REPRICING OPTION TERM
OPTIONS REPRICING OR OR NEW REMAINING AT DATE OF
REPRICED OR AMENDMENT AMENDMENT EXERCISE REPRICING OR
NAME DATE AMENDED(#) ($) ($) PRICE($) AMENDMENT NAME
- ---- ---- ---------- --- --- -------- --------------
<S> <C> <C> <C> <C> <C> <C>
Reed R. Prior - - - - - -

George W. Masters(1) - - - - - -

Jean C. Nichols,
Ph.D.(2) 12/18/96 19,230 1.313 15.00 1.313 1 Year & 9 Months

12/18/96 15,000 1.313 15.00 1.313 2 Years & 2 Months

12/18/96 80,500 1.313 15.00 1.313 5 Years & 1 Month

12/18/96 17,500 1.313 6.50 1.313 7 Years & 2 Months

12/18/96 18,000 1.313 5.50 1.313 8 Years & 4 Months

12/18/96 14,179 1.313 4.25 1.313 9 Years & 4 Months

Leonard F. Estis,
Ph.D.(3) - - - - - -

Thomas N. Konatich(4) - - - - - -

</TABLE>

_____________

(1) Mr. Masters terminated employment with the Company on November 6,
1996.

(2) All prior vesting of original options for Dr. Nichols has been
forfeited. All repriced options commenced vesting on December 18, 1996, and
have a three year term.

(3) Dr. Estis terminated employment with the Company on November 29, 1996.

(4) Mr. Konatich terminated employment with the Company on November 15,
1996.

Director Compensation

Fees. The Company pays its Directors who are neither officers nor
employees of the Company, nor Trustees of Boston University, an annual retainer
of $10,000, plus $1,000 per meeting of the Board of Directors of the Company and
$500 per meeting of any committee of the Board of Directors which occurs on a
day other than that on which a Board of Directors meeting occurs.

Non-Employee Director Stock Options. Under the Company's 1992 Non-Employee
Director Non-Qualified Stock Option Plan (the "Director Plan"), Directors who
are not officers or employees of the Company, or Trustees of Boston University
(as long as Boston University owns greater than 5% of any class of the Company's
outstanding securities), and who are elected to serve as a Director of the
Company on any date on or after February 5, 1992, are awarded options under the
Director Plan. Commencing on the first date on which elected to serve, each such
Director is granted an option to purchase 5,000 shares of Common Stock at a
purchase price equal to the fair market value of the Common Stock (e.g., the

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<PAGE>

last reported sale price on the Nasdaq NMS) on the day the option is granted,
except that any such grant to a Director who was awarded options to purchase
stock in connection with his service as a Director of the Company prior to
February 5, 1993 is to be reduced by the number of shares underlying the
previous grants. At the commencement of each subsequent 12 month period in
which a Director is elected to continue in office, an additional option to
purchase 1,000 shares of Common Stock at fair market value is to be granted.
Each option has a term of five years and becomes exercisable in full upon the
recipient's completion after the date of grant of a full term of office as a
member of the Board of Directors. If the term is not completed, or if the
Director has failed to attend at least 75% of the regularly called meetings
during the term, the option will be forfeited. Options cease to be exercisable
60 days after the date the optionee ceases to be a Director for any reason other
than death or disability. Options cease to be exercisable 180 days after the
date the optionee ceases to be a Director by reason of disability or death. In
no event, however, is an option exercisable after the expiration date of the
option.

On May 13, 1996, Dr. Bagalay, Mr. Cassidy, Mr. Condon, Mr. Jacobs and Dr.
Murphy each received an option to purchase 1,000 shares at an exercise price of
$4.625 per share under the Director Plan. As of March 21, 1997, no other
directors have received options under the Director Plan.

Other Director Arrangements. Dr. Murphy, a Director, and Dr. Howell, a
former Director, have consulting agreements with the Company. See "Executive
Compensation -- Employment and Consulting Agreements; Change in Control
Arrangements" and "Certain Transactions."

Employment and Consulting Agreements; Change in Control Arrangements

Employment Agreement with Reed R. Prior. In November 1996, the Company
entered into an employment agreement with Reed R. Prior pursuant to which Mr.
Prior is serving as Chief Executive Officer and Chairman of the Board. Mr.
Prior is also the Treasurer of the Company. Mr. Prior's initial annual base
salary is $350,000. In addition, the Company pays Mr. Prior up to $4,500 per
month as reimbursement for rental of an apartment, living expenses and weekly
commuting between the Company's offices and his permanent residence. Mr. Prior
was reimbursed for his moving expenses to relocate to an apartment in the Boston
area. The Company will reimburse Mr. Prior for any additional taxes as a result
of living, commuting or moving expenses. Mr. Prior is entitled to participate
in the bonus and benefit programs that are available to the Company's employees,
and is entitled to health, life and disability insurance.

Pursuant to Mr. Prior's employment agreement, in December 1996, the Company
issued to Mr. Prior an option to purchase 4,885,747 shares of common stock equal
to 8.5% of the Company's common stock, on a fully diluted basis, at a price of
$1.31 per share, to vest in 48 monthly increments during the term of the
agreement. The agreement also provides for anti-dilution protections which,
among other things, require the Company to issue additional options as necessary
to cause the number of shares underlying his stock option to equal but not
exceed 8.5% of the Company's outstanding Common Stock on a fully diluted basis.
These anti-dilution provisions will be applicable until the Company sells
$20,000,000 in equity or convertible securities to non-affiliated persons. The
Company has the obligation to register and maintain registration for resale of
such shares on Form S-8.

Mr. Prior is entitled to receive payments in the event of certain
transactions that may be deemed a "change in ownership" of the Company. A
"change in ownership" includes (1) any acquisition of all or substantially all
of the Company's equity securities or operating assets, whether by way of
merger, sale of assets, stock purchase, tender offer or otherwise, or (2) the
sale or out-licensing of the majority (in value) of the Company's technology
assets. In this event, Mr. Prior is entitled to receive an "Asset Value
Realization Bonus" equal to 8.5% of the net proceeds from the change in
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<PAGE>
ownership transaction. The amount that the Company must pay Mr. Prior will be
reduced by the amount of gain recognized by Mr. Prior as a result of his sale of
Common Stock of the Company acquired as a result of exercise of options (or
deemed sales in certain circumstances when he is able to, but does not, sell).
Mr. Prior has executed a waiver releasing the Company from any obligations that
it may have under his employment agreement with respect to the Company's sale of
its operating facility to B.U.

The Company's agreement with Mr. Prior continues until terminated by either
party on written notice of not less than 30 days. The employment agreement may
be terminated by the Company with or without "just cause." In the event the
Company terminates Mr. Prior's employment other than for "just cause," or in the
event that Mr. Prior terminates his employment for "good reason," the Company is
required to pay Mr. Prior as severance a lump sum payment equal to one year's
salary based on the annual rate in effect on the date of termination. Upon such
termination, the Company will also provide Mr. Prior with accelerated vesting of
his stock options. "Just cause," as defined in the agreement, consists of
fraud, a felony conviction, or a breach of a material term of the agreement or
willful failure to perform material duties which are not cured following written
notice (all as defined in the agreement). "Good reason," as defined in the
agreement, includes (i) the refusal by the Board of Directors of a bona fide
financing offer, (ii) refusal of the Board of Directors to approve major
spending cuts or operational changes, (iii) breach by the Company of a material
term under the employment agreement, (iv) a change in ownership, and (v) a
change in control. Mr. Prior is entitled to receive a lump sum payment equal to
one year's salary in the event of death or of physical or mental disability of a
nature sufficient to result in his termination by the Board. Pursuant to the
terms of the agreement, the Company established an irrevocable letter of credit
in an amount equal to $175,000, naming Mr. Prior as the beneficiary as partial
security for the payment of severance. The agreement also includes
non-competition, confidentiality and indemnification provisions.

Employment Agreement with Jean C. Nichols. On November 6, 1996, the Company
entered into an employment agreement with Jean C. Nichols, Ph.D., pursuant to
which Dr. Nichols was promoted to and serves as President and Chief Technology
Officer of the Company. Dr. Nichols' agreement also provides that she serve as
a director of the Company. Dr. Nichols' annual base salary is $225,000. Dr.
Nichols is entitled to participate in the bonus and benefit programs that are
available to the Company's employees, and is entitled to health, life and
disability insurance.

Pursuant to Dr. Nichols' employment agreement, in December 1996, the
Company issued to Dr. Nichols an option to purchase 678,573 shares of common
stock at a price of $1.31 per share, to vest in 36 equal monthly increments
during the term of the agreement and canceled options for 164,409 shares of
common stock. Such option in addition to an existing option for 50,000 shares
equal 1.275% of the Company's common stock, on a fully diluted basis. The
agreement also provides for anti-dilution protections which, among other things,
require the Company to issue additional options as necessary to cause the number
of shares underlying her stock options to equal but not exceed 1.275% of the
Company's outstanding Common Stock on a fully diluted basis. These
anti-dilution provisions will be applicable until the Company sells $20,000,000
in equity or convertible securities to non-affiliated persons. The Company has
the obligation to register and maintain registration for resale of such shares
on Form S-8.

The Company's agreement with Dr. Nichols continues until terminated by
either party on written notice of not less than 30 days. The employment
agreement may be terminated by the Company for cause. In the event the Company
terminates Dr. Nichols' employment other than for cause, the Company is required
to pay to Dr. Nichols one year's salary based on the annual rate in effect on
the date of termination. "Cause," as defined in the agreement, consists of
fraud, a felony conviction, or a breach of a material term of the agreement or
willful failure to perform material duties which are not cured following written
notice (all as defined in the agreement). Dr. Nichols is entitled to receive
one year's salary in the event of death or disability. The agreement also
includes non-competition, confidentiality and indemnification provisions.

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<PAGE>

Option plans. Under the Company's 1992 Plan, upon a change in control or a
potential change in control (each as defined in the 1992 Plan), the vesting of
options granted to the named executive officers under the 1992 Plan will be
accelerated, and the value of the options will, unless otherwise determined by
the Compensation Committee, be cashed out at a price to be determined at the
time of the cash out. See footnote 1 to the "Option Grants in Last Fiscal Year"
table. Although the exact amount to be paid by the Company cannot be
determined, such amount could be in excess of $100,000 for each of the Named
Executive Officers.

Agreements with others. In November 1996, the Company entered into a
retirement and consulting agreement with Mr. Masters, former chief executive
officer and president. Pursuant to this agreement, Mr. Masters was paid a
consulting fee of $12,500 per month during the initial consulting period
beginning November 6, 1996 and ending December 31, 1996. Mr. Masters was paid
$5,000 per month during the period beginning January 1, 1997 and ending February
28, 1997. Mr. Masters was also entitled to receive a $30,000 bonus for services
rendered during fiscal year 1996, which was paid in 1997.

The Company had a consulting agreement with Dr. Murphy, a Director of the
Company who has declined to stand for reelection in 1997. Pursuant to this
agreement, Dr. Murphy was paid a consulting fee of $100,000 per year, and was
paid that amount during the fiscal year ended 1996, to provide consulting
services on biotechnology matters. The agreement expired December 31, 1996.
The Company anticipates extending this agreement into 1997 at a rate of $50,000
per year. The Company may elect to impose a two year noncompetition period
following the termination or cancellation of the agreement, provided the Company
compensates Dr. Murphy during such period at one-half the rate of compensation
in effect at the time the termination or cancellation occurs.

Dr. James M. Howell, former Chairman of the Board of Directors, also had a
consulting agreement with the Company. Pursuant to this agreement, Dr. Howell
was paid a consulting fee of $68,750 in fiscal year 1996 to provide consulting
services on business matters. The agreement was terminated on November 30,
1996. Pursuant to the agreement, Dr. Howell agreed not to compete with the
Company during the term of the agreement and for a period of one year following
the termination of the agreement. Dr. Howell is also subject to certain
confidentiality obligations.

Compensation Committee Interlocks and Insider Participation

The members of the Compensation Committee during fiscal year 1996 were
Messrs. Cassidy and Jacobs.

In June 1995, the Company finalized three separate lines of credit which
were guaranteed by three different entities for a total of $23.8 million in
guaranteed bank financing for the Company. Seragen issued warrants to the
guarantors for the purchase of 2,776,664 shares of Common Stock at an exercise
price of $4.75 per share. These warrants are immediately exercisable and expire
in 2005. Boston University, Seragen's majority stockholder, was the lead
guarantor, providing a guaranty of $11.8 million in exchange for a warrant to
purchase 1,376,666 shares of Common Stock. Two other guarantors provided
guarantees to secure loans of $12 million. Gerald S.J. Cassidy, a member of the
Company's Board of Directors, was one of the two guarantors, providing a
guaranty of $2 million in exchange for a warrant to purchase 233,332 shares of
Common Stock. Leon C. Hirsch and Turi Josefsen provided guaranties of the
remaining $10 million in exchange for warrants to purchase an aggregate of
1,166,666 shares of Common Stock (see "Share Ownership").

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<PAGE>

the lines of credit with shares of the Company's convertible Series B Preferred
Stock ("Series B Shares"). Each Series B Share is convertible at any time at
the investor's option into a number of shares of Seragen Common Stock determined
by dividing $1,000 by the average of the closing sale prices of the Common Stock
as reported on the Nasdaq Stock Market for the ten consecutive trading days
immediately preceding the conversion date. The holders of Series B Shares are
entitled to receive a cumulative dividend payable in arrears in cash quarterly
on the last day of each calendar quarter commencing on September 30, 1996 at an
annual rate equal to the prime rate plus 1 1/2% through June 1999 and at an
increasing percentage rate thereafter up to a maximum rate of the prime rate
plus 5% form and after July 1, 2003. The holders of Series B shares are
entitled to vote on any matters submitted to the Company's shareholders. Each
share is entitled to a vote equivalent to 250 shares of common stock. The
investors also received warrants to purchase a total of 5,950,000 shares of
Seragen Common Stock (250,000 warrants for every $1,000,000 of preferred stock
purchased) at an exercise price of $4.00 per share. The warrants are
exercisable commencing on January 1, 1997 and expire on July 1, 2006. In
addition, each investor is entitled to receive additional warrants pursuant to
certain anti-dilution provisions. Each additional warrant will be issued at an
exercise price of $4.00 per share and will be exercisable commencing on January
1, 1997 and expiring on July 1, 2006 (see "Share Ownership").

Each Series B Share has a liquidation preference equal to $1,000, plus an
amount equal to any accrued and unpaid dividends from the date of issuance of
the Series B Shares. At any time, with the approval of the Company's Board of
Directors, Audit Committee or comparable body, the Company may redeem any or all
of the Series B Shares for cash. The redemption price per share of Series B
Preferred Stock is $1,000, plus an amount equal to any accrued and unpaid
dividends from the date of issuance of the Series B Preferred Stock.

In addition, the Company transferred all of its patents (the "Patents") to
Seragen Technology, Inc. ("STI") in exchange for 214,200 shares of STI Class A
Common Stock and 23,800 shares of STI Class B Common Stock. STI provided the
Company with an irrevocable worldwide exclusive license from STI to the Company
with respect to the Patents (the "Irrevocable License Agreement"). Under the
Irrevocable License Agreement, the Company is obligated to pay quarterly
royalties in an amount equal to the amount of any dividend that the Series B
shareholders are entitled to receive but have not received by the royalty due
date (which is one day after each quarterly dividend payment date for the Series
B Shares). The Company delivered the 23,800 shares of STI Class B Common Stock
to the guarantors. STI's Class B Common Stock provides for cumulative dividends
payable in the same amount as any royalties payable by the Company under the
Irrevocable License Agreement. STI also provided the Company with a collateral
assignment of the Patents made by STI in favor of the Series B shareholders.
Pursuant to an escrow arrangement, the collateral assignment of the Patents is
required to be delivered to the Series B shareholders in the event that, after
notice, STI fails for 60 days to pay any dividend due in respect of its Class B
Common Stock. The Company did not make its royalty payment due January 1, 1997,
and does not anticipate making its royalty payment due April 1, 1997. STI did
not pay Class B Common Stock dividends due January 1, 1997, and does not
anticipate paying Class B Common Stock dividends due April 1, 1997. To the
Company's knowledge, the Series B shareholders have not provided notice of the
STI dividend payment failure to the escrow agent. In the event that STI redeems
its Class B Common Stock, the escrow agent is required to deliver a reassignment
of the Patents to the Company.
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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

COMMON STOCK OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following table sets forth certain information regarding the beneficial
ownership of the Company's Common Stock as of March 28, 1997 by (i) each person
known by the Company to own beneficially 5% or more of its outstanding Common
Stock, (ii) each Director of the Company, (iii) each named executive officer of
the Company and (iv) all Directors and executive officers as a group. Except as
otherwise indicated, the named beneficial owner has sole voting and investment
power with respect to the shares beneficially owned.

<TABLE>

SHARE OWNERSHIP
<CAPTION>

PERCENTAGE
BENEFICIALLY
OWNED (1)(2)
NAME(**) NUMBER OF SHARES PERCENT
- -------- ---------------- -------

<S> <C> <C>
Boston University 28,949,368(3)(4)(5) 74.8%
881 Commonwealth Avenue
Boston, MA 02215

Leon C. Hirsch 10,247,681(3)(6) 36.2%
150 Glover Avenue
Norwalk, CT 06856

Turi Josefsen 4,391,862(3)(7) 19.6%
150 Glover Avenue
Norwalk, CT 06856

P.R.I.F., L.P. 1,905,042(8) 9.5%
175 Bloor Street East
South Tower, 6th Floor
Toronto, Canada AG

John E. Bagalay, Jr 4,000(9) *

Gerald S.J. Cassidy 2,958,084(3)(10) 14.1%
700 13th Street, N.W., Suite 400
Washington, DC 20005

Kenneth G. Condo, C.P.A. 5,200(5)(11) *

Leonard F. Estis, Ph.D. 1,136 *

Norman A. Jacobs 19,000(12) *

Thomas N. Konatich 905(13) *

George W. Masters 42,313(14) *

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John R. Murphy, Ph.D. 175,050(15) *

Jean C. Nichols, Ph.D. 190,450(16) 1.0%

Reed R. Prior 712,503(17) 3.8%

John R. Silber, Ph.D. 178,500(18) *

All Officers and Directors as a Group 4,287,141 19.4%

</TABLE>

______________________

* Represents beneficial ownership of less than 1% of the Common Stock.
** Addresses are given for persons who beneficially own 5% or more of the
Company's outstanding Common Stock only.

(1) For purposes of this table, a person or group of persons is deemed to
have "beneficial ownership" of any shares as of March 28, 1997 that such person
or persons has the right to acquire within 60 days after such date.

(2) Percentage of ownership is based on 18,048,881 shares of Common Stock
outstanding as of March 28, 1997.

(3) Includes 23,494,571 shares of Common Stock issuable upon conversion
of 23,800 shares of Series B Preferred Stock and assumes that shares of Series B
Preferred Stock are convertible at a conversion price of $1.013, the conversion
price in effect on March 28, 1997, based on the average of the closing sale
prices of the Common Stock for the ten consecutive trading days preceding that
date.

(4) Includes 3,360,625 shares of Common Stock issuable upon conversion of
5,000 shares of Series C Preferred Stock and accrued dividends thereon (the
maximum number of shares of Common Stock into which the Series C shares may
convert).

(5) The Boston University Nominee Partnership is a partnership that was
created to act as the record holder of certain securities owned by Boston
University. Dr. Bagalay and Mr. Condon are general partners of such partnership
and are required to vote and take other actions with respect to such shares of
Common Stock as instructed by duly authorized officers of Boston University.
Officers of Boston University are duly authorized by the actions of the Trustees
of Boston University. General partners of the Boston University Nominee
Partnership (Dr. Bagalay and Mr. Condon) and the Trustees of Boston University
(Dr. Silber) disclaim beneficial ownership of such shares. Includes 15,000
shares issuable upon exercise of stock options exercisable within 60 days, a
warrant to purchase 1,376,666 shares exercisable at $4.75 per share, a warrant
to purchase 4,249,431 shares exercisable at $4.00 per share, 11,648,569 shares
of Common Stock issuable upon conversion of 11,800 shares of Series B Preferred
Stock and 3,360,625 shares of Common Stock issuable upon conversion of 5,000
shares of Series C Preferred Stock. Boston University has entered into a
Stockholders Agreement with respect to the election of directors and other
matters (see "Certain Transactions").

(6) Represents a warrant to purchase 816,666 shares exercisable at $4.75
per share, a warrant to purchase 2,520,847 shares exercisable at $4.00 per
share, and Series B Preferred Stock convertible into 6,910,168 shares of Common
Stock. Does not include 1,430,362 shares issuable upon exercise of warrants and
does not include 2,961,500 shares of Common Stock issuable upon conversion of
3,000 shares of Series B Preferred Stock held by Turi Josefsen, Mr. Hirsch's
wife, as to which Mr. Hirsch disclaims beneficial ownership. Mr. Hirsch has
entered into a Stockholders Agreement with respect to the election of directors.
(See "Certain Transactions").

(7) Represents a warrant to purchase 350,000 shares exercisable at $4.75
per share, a warrant to purchase 1,080,362 shares exercisable at $4.00 per
share, and Series B Preferred Stock convertible into 2,961,500 shares of Common
Stock. Does not include 3,337,513 shares issuable upon exercise of warrants and

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<PAGE>
does not include 6,910,168 shares of Common Stock issuable upon conversion of
7,000 shares of Series B Preferred Stock held by Leon C. Hirsch, Ms. Josefsen's
husband, as to which Ms. Josefsen disclaims beneficial ownership. Ms. Josefsen
has entered into a Stockholders Agreement with respect to the election of
directors. (See "Certain Transactions").

(8) Includes 1,905,042 shares of Common Stock issuable upon conversion of
2,402 shares of Series A Preferred Stock and accrued dividends thereon (the
maximum number of shares of Common Stock that the Series A shares may convert
into). P.R.I.F., L.P. ("PRIF") is a limited partnership, the sole general
partner of which is HB and Co., Inc. ("HB"). HB has the exclusive authority to
manage, control and administer investments and affairs of PRIF. The holder of
all issued and outstanding shares of HB is Lillian Brachfeld. Henry Brachfeld
is the sole director of HB and, as the sole executive officer of HB, is its
President and Secretary. This information is based solely on a Schedule 13D
filed with the Securities and Exchange Commission and dated June 21, 1996.

(9) Represents 4,000 shares issuable upon exercise of options held by Dr.
Bagalay that are exercisable within 60 days.

(10) Includes 9,000 shares issuable upon exercise of options held by Mr.
Cassidy that are exercisable within 60 days, a warrant to purchase 233,332
shares exercisable at $4.75 per share, a warrant to purchase 720,249 shares
exercisable at $4.00 per share, and 1,974,334 shares of Common Stock issuable
upon conversion of 2,000 shares of Series B Preferred Stock. Mr. Cassidy's
shares of Series B Preferred Stock and warrant are owned jointly with his wife,
Loretta P. Cassidy. Mr. and Mrs. Cassidy have entered into a Stockholders
Agreement with respect to the election of directors and other matters (see
"Certain Transactions").

(11) Represents 4,000 shares issuable upon exercise of options held by Mr.
Condon that are exercisable within 60 days.

(12) Represents 19,000 shares issuable upon exercise of options held by
Mr. Jacobs that are exercisable within 60 days.

(13) Mr. Konatich resigned as Chief Financial Officer effective November
15, 1996.

(14) Includes 25,000 shares issuable upon exercise of options exercisable
by Mr. Masters within 60 days and a warrant to purchase 1,250 shares exercisable
at $10.00 per share. Mr. Masters retired from his position as Vice Chairman,
Chief Executive Officer, President and a member of the Board of Directors
effective November 6, 1996.

(15) Represents 124,000 shares issuable upon exercise of options held by
Dr. Murphy that are exercisable within 60 days.

(16) Represents 181,944 shares issuable upon exercise of options held by
Dr. Nichols that are exercisable within 60 days.

(17) Represents 712,503 shares issuable upon exercise of options held by
Mr. Prior that are exercisable within 60 days. Mr. Prior has entered into a
Stockholders Agreement with respect to the election of directors. See "Certain
Transactions."

(18) Includes a warrant to purchase 7,500 shares exercisable at $10.00 per
share. Dr. Silber's shares and warrant are owned jointly with his wife, Kathryn
U. Silber.

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<PAGE>

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

In August 1987, Boston University, Nycomed (formerly Nyegaard & Co. AS) and
the Company entered into a purchase and sale agreement whereby Boston
University, which then owned approximately 6% of the Company's outstanding
Common Stock, acquired from Nycomed 1,691,761 shares of the Company's Common
Stock, which represented all of Nycomed's ownership interest in the Company and
approximately 71% of the then outstanding Common Stock of the Company. As part
of this transaction, Boston University acquired all of Nycomed's rights to
technology, inventions, patents and other proprietary rights (the "Technology")
which were primarily related to or useful in the development of the Company's
fusion protein products and also acquired the world-wide exclusive rights to
manufacture, use, sell and market the products (the "Products") which were
derived from or include the Technology (the "Technology and Marketing Rights").
In exchange for the acquisition of these assets, Boston University paid
$25,000,000 to Nycomed and assumed Nycomed's obligations to the Company,
including a commitment to finance and carry out the Company's research and
development program and an obligation to guaranty the Company's leases at its
facilities in Hopkinton, Massachusetts. In addition, pursuant to the agreement,
the Company is obligated to pay Nycomed a continuing royalty with respect to
sales of the Products and to give Nycomed rights of first negotiation to market
the Products in the territory covered by the agreement. In connection with this
agreement, Nycomed and Boston University entered into a Noncompetition and
Confidentiality Agreement, whereby Nycomed agreed to maintain in confidence
proprietary information and intellectual property in connection with the
Company's business and not to compete with the Company's business. The
Noncompetition and Confidentiality Agreement expired in August 1992. The Company
believes that the expiration of this Agreement will not materially adversely
affect the Company's business.

In connection with the sale of stock to Boston University, Nycomed also
transferred to Boston University a debt owed to Nycomed by the Company in the
principal amount of $1,050,000. In 1988, Boston University converted this debt
plus accrued interest thereon into 95,488 shares of Common Stock, based on a
conversion price equal to $15.00 per share of Common Stock.

In connection with Boston University's acquisition of the majority interest
in the Company in 1987, Boston University guaranteed the Company's obligations
under a $10,000,000 line of credit with The First National Bank of Chicago (the
"Bank") to provide short-term operating funds for the Company (the "Guaranty").
Boston University pledged certain collateral to the Bank to secure the Guaranty.
In 1992, the Company repaid the Bank's line of credit and thereby terminated the
Guaranty. In return for providing the Guaranty, the Company issued to Boston
University a warrant (the "Bank Warrant"), which enabled Boston University to
purchase up to 500,000 shares of Common Stock at an exercise price of $11.80 per
share, at any time prior to January 28, 1993. The Bank Warrant expired
unexercised.

In January 1988, pursuant to a Technology Purchase and Royalty Agreement
(the "Technology Agreement") which was contemplated at the time Boston
University acquired the Technology from Nycomed, Boston University transferred
to the Company the Technology and Marketing Rights obtained from Nycomed in
exchange for a continuing royalty with respect to sales of the Products until
the expiration of all patents relative to the Technology. Thereafter, the
Company agreed to pay Boston University a reduced royalty based on a percentage
of net sales for a period of 10 years after the expiration of such patents. The
Technology Agreement provides Boston University with a security interest in the
Technology and Marketing Rights, whereby upon a default by the Company in the
terms of the Technology Agreement, the Technology and Marketing Rights would
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<PAGE>
automatically be transferred back to Boston University. A default under the
Technology Agreement shall occur if, among other things, the Company breaches is
obligations under the Technology Agreement.

As of March 28, 1997, Boston University beneficially owned 8,299,077 shares
(or approximately 46%) of the Company's outstanding Common Stock. In addition,
Boston University beneficially owns a stock option to purchase 15,000 shares, a
warrant to purchase 1,376,666 shares, a warrant to purchase 2,950,000 shares
subject to anti-dilution provisions (as defined), shares issuable on conversion
of 11,800 shares of Series B Preferred Stock and shares issuable on conversion
of 5,000 shares of Series C Preferred Stock. As of March 28, 1997, if all
securities were converted to common stock, Boston University would own
28,949,368 shares of common stock.

Dr. John R. Murphy, a director of the Company who has declined to stand for
reelection in 1997, had a consulting agreement with the Company pursuant to
which he received consulting fees of $100,000 in the fiscal year ended 1996.

Dr. James M. Howell, former Chairman of the Board of Directors, had a
consulting agreement with the Company pursuant to which he received consulting
fees of $68,750 in the fiscal year ended 1996.

In July 1996, the Company restructured its arrangement with the guarantors
of the Company's $23.8 million loan financing obtained in June 1995 to release
the Company of its liability to the banks involved. The new agreement replaced
the lines of credit with shares of the Company's convertible Series B Preferred
Stock ("Series B Shares"). Each Series B Share is convertible at any time at
the investor's option into a number of shares of Seragen Common Stock determined
by dividing $1,000 by the average of the closing sale prices of the Common Stock
as reported on the Nasdaq Stock Market for the ten consecutive trading days
immediately preceding the conversion date. The holders of Series B Shares are
entitled to receive a cumulative dividend payable in arrears in cash quarterly
on the last day of each calendar quarter commencing on September 30, 1996 at an
annual rate equal to the prime rate plus 1 1/2% through June 1999 and at an
increasing percentage rate thereafter up to a maximum rate of the prime rate
plus 5% form and after July 1, 2003. The holders of Series B shares are
entitled to vote on any matters submitted to the Company's shareholders. Each
share is entitled to a vote equivalent to 250 shares of common stock. The
investors also received warrants to purchase a total of 5,950,000 shares of
Seragen Common Stock (250,000 warrants for every $1,000,000 of preferred stock
purchased) at an exercise price of $4.00 per share. The warrants are
exercisable commencing on January 1, 1997 and expire on July 1, 2006. In
addition, each investor is entitled to receive additional warrants pursuant to
certain anti-dilution provisions. Each additional warrant will be issued at an
exercise price of $4.00 per share and will be exercisable commencing on January
1, 1997, and expiring on July 1, 2006 (see "Share Ownership").

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<PAGE>

In September 1996, the Company raised $5 million through the sale of 5,000
shares of the Company's non-voting convertible Series C Preferred Stock ("Series
C Shares") in a private placement with Boston University Regulation D under the
Securities Act of 1933. The Series C Shares are convertible at the option of
the holder into shares of Seragen Common Stock at a per share conversion price
equal to the lesser of $2.75 or 73% of the average closing bid. Terms of the
Series C shares also provide for 8% cumulative dividends payable in shares of
Seragen Common Stock at the time of each conversion (see "Share Ownership").

Notwithstanding this, however, the maximum aggregate number of shares of
Common Stock that the Company may issue on exercise of Series C Shares is
3,360,625. Any holder of Series C Shares unable to convert Series C Shares as a
result of the limitation described in the preceding sentence is entitled to
require the Company to repurchase those shares for $1,150 per Series C Share.
Each Series C Shares has a liquidation preference equal to $1,000, plus an
amount equal to any accrued and unpaid dividends from the date of issuance of
the Series C Shares, in the event of liquidation, dissolution or winding up of
the Company. Series C Shares that remain outstanding on March 30, 1998, will be
converted automatically into shares of Common Stock.

On November 6, 1996, the Company entered into a Stockholders Agreement (the
"Stockholders Agreement") together with Boston University, Leon C. Hirsch, Turi
Josefsen, Gerald S.J. Cassidy and Loretta P. Cassidy (collectively, together
with Boston University, the "Stockholders"), and Reed R. Prior with respect to
the election of directors and other matters. Pursuant to this agreement, the
Stockholders have agreed to vote their respective shares to (i) maintain the
number of persons comprising the Board of Directors at nine, (ii) not to elect
more than two persons designated by or affiliated with Boston University to the
Board of Directors, and (iii) to elect three outside directors with experience
in the pharmaceutical industry reasonably acceptable to Mr. Prior. In addition,
the agreement grants Mr. Prior rights of co-sale in the event Boston University
chooses to sell over 50% of its stock in the Company to a third party. Boston
University also agrees to pay its pro-rata share of Mr. Prior's Asset Value
Realization Bonus (as defined in Mr. Prior's employment agreement) in the event
that the Company fails to pay such bonus.

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PART IV

ITEM 14. EXHIBITS AND REPORTS ON FORM 8-K

Location in
Form 10-K
(a) 1. Financial Statements of Seragen, Inc.

Reports of Independent Accountants................................33
Balance Sheets as of December 31, 1995 and 1996...................35
Statements of Operations for the years ended
December 31, 1994, 1995 and 1996..................................36
Statements of Stockholders' Equity (Deficit) for the
years ended December 31, 1994, 1995 and 1996......................37
Statements of Cash Flows for the years ended December 31,
1994, 1995 and 1996...............................................38
Notes to Financial Statements.....................................39

2. Schedules - None

3. Exhibits

The exhibits listed in the accompanying Exhibit Index on pages 77 - 84 hereof
are filed or incorporated by reference as part of this Annual Report on Form
10-K.

4. Executive Compensation Plans and Arrangements

The Company's Compensation Plans and Arrangements are denoted by (***) on the
Exhibit Index appearing on pages 77 - 84 hereof and are incorporated by
reference as a part of this Annual Report on Form 10-K.

(b) Reports on Form 8-K

A Current Report on Form 8-K for November 6, 1996 event, relating to the
Registrant's announcement that, effective immediately, the board had elected
Reed R. Prior chairman, chief executive officer and treasurer of the company.
The board also elected Jean Nichols president, chief technology officer, and
a member of Seragen's board of directors. Former vice chairman and CEO
George Masters announced his retirement but that he would remain as a
consultant to the company. In addition, James Howell stepped down as
chairman and also retired from the board of directors; and chief financial
officer Thomas N. Konatich resigned from the company, effective November 12,
1996.

A Current Report on Form 8-K for February 18, 1997 event, relating to the
Registrant's announcement that it had entered into an agreement to sell its
manufacturing and clinical operations facility to B.U. or its designated
affiliate for $5,000,000.

A Current Report on Form 8-K for March 12, 1997 event, relating to the
Registrant's announcement that the Board of Directors of the Company, at the
recommendation of the Company's Audit Committee, voted to replace Coopers &
Lybrand L.L.P. with Arthur Andersen LLP as the Company's independent
accountants effective March 12, 1997.

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<PAGE>

EXHIBIT INDEX

Exhibit
Number Notes Description Page
- ------- ----- ----------- ----

(2.1) (16) Asset Purchase Agreement, dated as of February 14,
1997, between the Registrant and Trustees of
Boston University

(3.3) (14) Restated Certificate of Incorporation, as amended,
of the Registrant, dated May 28, 1996 (previously
filed as Exhibit 3.1 to the Registrant's
Registration Statement on Form S-1,
File No. 33-45515)

(3.4) (15) Restated By-Laws of the Registrant, as amended
(previously filed as Exhibit 3.3 to the Registrant's
Registration Statement on Form S-1,
File No. 33-45515)

(4.1) (1) Article 4 of the Restated Certificate of
Incorporation (see Exhibit 3.3)

(4.2) (1) Form of Common Stock Certificate (previously filed as
Exhibit 4.2 thereto)

(4.3) (1) Form of Purchase Agreement executed by Gerald M.
Stern, Gerald M. Stern-Keogh Account, Gerald
M. Stern-IRA Account, Ira A. Lipman, Guardsmark,
Inc., Aegis Select Limited Partnership, BancBoston
Ventures Inc., Charles River Partnership II,
Charles River Partnership III, Charles River
Partnership IV, Allstate Insurance Company, Robert E.
Thorne, William R. Breetz, Gerald S. J. Cassidy,
James R. Welch and John R. Whiting, Jonathan D.
Schiller, Walter J. Zackrison, Francis D. Burke, Fred
Chicos, Donald E. Griesdorn, Edward J. King,
Maximillian Ma, Morrie Moss and David R. Thissen
(previously filed as Exhibit 4.3 thereto)

(4.4) (1) Agreement and Plan of Corporate Reorganization, among
the Registrant, Seragen Diagnostics, Inc., Nyegaard
& Co. A.S. and certain stockholders of the
Registrant, dated May 28, 1985 (previously filed as
Exhibit 4.4 thereto)

(4.5) (14) Amended Certificate of Designation of Series A
Preferred Stock of the Registrant, dated May 28, 1996

(4.6) (14) Certificate of Designation of Series B Preferred
Stock of the Registrant, dated June 28, 1996

(4.7) (14) Certificate of Correction of Amended Certificate of
Designation of Series A Preferred Stock of the
Registrant, dated August 6, 1996

(4.8) (16) Certificate of Designation of Series C Preferred
Stock of the Registrant, dated September 27, 1996.

(9.1) (1) Voting Trust Agreement, dated May 28, 1985, among
Stein H. Annexstad and certain stockholders of the
Registrant (previously filed as Exhibit 9.1 thereto)

(9.2) (1) Assignment of Voting Trust Agreement, dated
August 28, 1987, between Stein H. Annexstad and
Charles W. Smith (previously filed as Exhibit 9.2
thereto)

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(10.1) (1) Agreement and Plan of Recapitalization, dated as of
January 1, 1992, by and between the Trustee of Boston
University and the Registrant (previously filed as
Exhibit 10.1 thereto)

(10.2) (1) First Amendment to Agreement and Plan of
Recapitalization, dated as of March 17, 1992, by and
between the Trustees of Boston University and the
Registrant (previously filed as Exhibit 10.1A
thereto)

(10.3) Lease Agreement for premises at 97 A-F South Street,
Hopkinton, Massachusetts, dated June 26, 1986,
between the Registrant and Harold Nahigian, as
amended June 13, 1988 (previously filed as Exhibit
10.2 to the Registrant's Registration Statement on
Form S-1, File No. 33-45515) and Lease Agreement
extending the original lease for premises at 97 A-K
South Street, Hopkinton, Massachusetts, between the
Registrant and Harold Nahigian (previously filed as
Exhibit 10.45 to the Registrant's Form 10-Q for the
three months ending March 31, 1995).

(10.4) (1) Guaranty of Lease, dated August 28, 1987, made by
Boston University to Harold Nahigian (previously
filed as Exhibit 10.3 thereto)

(10.5)*** (1) 1981 Stock Option Plan, as amended and restated
October 19, 1988 (previously filed as Exhibit 10.7
thereto)

(10.6)*** (1) 1992 Long Term Incentive Plan (previously filed as
Exhibit 10.8 thereto)

(10.7)*** (1) 1992 Non-Employee Director Non-Qualified Stock Option
Plan (previously filed as Exhibit 10.9 thereto)

(10.8)* (1) Development Agreement, dated June 30, 1982, between
the Registrant and I.S.V.T. Sclavo, SPA, as amended
January 1, 1986 (previously filed as Exhibit 10.10
thereto)

(10.9) (1) Scientific and Product Development Collaborative
Agreement, dated July 25, 1983, between the
Registrant and the Chemo-Sero-Therapeutic Research
Institute, as amended February 28, 1985 (previously
filed as Exhibit 10.11 thereto)

(10.10)* (1) License Agreement, dated November 29, 1983, between
the Registrant and Harvard College (previously filed
as Exhibit 10.14 thereto)

(10.11)* (1) License and Royalty Agreement, dated June 1, 1990,
between the Registrant and the Beth Israel Hospital
Association (previously filed as Exhibit 10.15
thereto)

(10.12)* (1) Purchase and Sale Agreement, dated August 28, 1987,
by and among Nycomed AS, Boston University and the
Registrant (previously filed as Exhibit 10.18
thereto)

(10.13) (1) Noncompetition and Confidentiality Agreement, dated
August 28, 1987, by and between the Registrant and
Nycomed AS (previously filed as Exhibit 10.19
thereto)

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(10.14)* (1) Royalty Agreement, dated August 28, 1987, by and
among the Registrant, Boston University and Nycomed
AS (previously filed as Exhibit 10.20 and 10.20A
thereto)

(10.15)* (1) Technology Purchase and Royalty Agreement, dated
January 28, 1988, by and between the Registrant and
Boston University (previously filed as Exhibit 10.21
thereto)

(10.16)* (1) License Agreement by and between Molecular Genetics,
Inc., and Stanford University, and assigned,
effective September 1, 1989 from Molecular Genetics,
Inc., to The Registrant (previously filed as Exhibit
10.26 thereto)

(10.17)*** (1) Consulting Agreement, dated as of January 1, 1992, by
and between the Registrant and Dr. John R. Murphy
(previously filed as Exhibit 10.32 to the
Registrant's Registration Statement on Form S-1, File
No. 33-45515), amended as of October 1, 1994
(previously filed as Exhibit 10.19 to the
Registrant's Annual Report on Form 10-K for the year
ending December 31, 1994), Amended as of October 1,
1995 (previously filed as Exhibit 10.51 to the
Registrant's Form 10-Q for the nine months ending
September 30, 1995) and as amended January 1, 1996
(previously filed as Exhibit 10.17 to the
Registrant's Annual Report on Form 10-K for the year
ending December 31, 1995)

(10.18)*** (1) Consulting Agreement, dated as of January 1, 1992, by
and between the Registrant and James M. Howell
(previously filed as Exhibit 10.33 thereto) and
amended as of June 1, 1995 (previously filed as
Exhibit 10.46 to the Registrant's Form 10-Q for the
six months ending June 30, 1995 thereto)

(10.19) (1) Lease Agreement for premises at 116 South Street,
Hopkinton, Massachusetts, dated April 15, 1987,
between the Registrant and Jelric Realty Trust, as
amended October 31, 1987 (previously filed as Exhibit
10.4 to the Registrant's Registration Statement on
Form S-1, File No. 33-45515), and amended December
15, 1992 previously filed as Exhibit 10.34 to the
Registrant's Registration Statement on Form S-1, File
No. 33-57002)

(10.20) (1) Lease Agreement for premises at 118 South Street,
Hopkinton, Massachusetts, dated May 8, 1986, between
the Registrant and Jelric Realty Trust, as amended
January 1987 and October 31, 1989 (previously filed
as Exhibit 10.5 to the Registrant's Registration
Statement on Form S-1, File No. 33-45515), and
amended December 15, 1992 (previously filed as
Exhibit 10.35 to the Registrant's Registration
Statement on Form S-1, File No. 33-57002)

(10.21) (1) Lease Agreement for premises at 120 South Street,
dated December 15, 1985, between the Registrant and
Jelric Realty Trust, as amended January 1987 and
October 31, 1989 (previously filed as Exhibit 10.6 to
the Registrant's Registration Statement on Form S-1,
File No. 33-45515), and amended December 15, 1992
(previously filed as Exhibit 10.36 to the
Registrant's Registration Statement on Form S-1, File
No. 33-57002)

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<PAGE>

(10.22)* (2) License and Royalty Agreement dated November 18,
1992, between the Registrant and University Hospital
(previously filed as Exhibit 10.37 thereto)

(10.23)* (1) Sponsored Research Agreement, effective August 1,
1984, between the Registrant and Beth Israel
Hospital, as amended January 1, 1986, August 1, 1986,
August 18, 1987, July 14, 1988, June 1, 1991
(previously filed as Exhibit 10.16 to the
Registrant's Registration Statement on Form S-1, File
No. 33-45515), and amended as of January 1, 1993
(previously filed as Exhibit 10.38 to the
Registrant's Registration Statement on Form S-1 File
No. 33-57002), Amendment 7, Sponsored Research
Agreement dated March 1, 1994 (previously filed as
Exhibit 10.36 to the Registrant's Form 10-K for year
ending December 31, 1993), and Amendment 8, Sponsored
Research Agreement dated June 1, 1994 (previously
filed as Exhibit 10.36 to the Registrant's Form 10-Q
for the six months ending June 30, 1994)

(10.24) (1) Consulting Agreement, dated January 15, 1987, by and
between the Registrant and Dr. Terry B. Strom, as
amended July 14, 1987, August 18, 1987 (previously
filed as Exhibit 10.30 to the Registrant's
Registration Statement on Form S-1 File No.
33-45515), amended as of January 1, 1993 (previously
filed as Exhibit 10.39 to the Registrant's
Registration Statement on Form S-1 File No.
33-57002), amended as of January 1, 1995 (previously
filed as Exhibit 10.47 to the Registrant's Form 10-Q
for the six months ending June 30, 1995) and amended
as of January 1, 1996 (previously filed as Exhibit
10.24 to the Registrant's Annual Report on Form 10-K
for the year ending December 31, 1995)

(10.25) (2) License Agreement, dated as of December 28, 1992,
between the Registrant and Genentech, Inc.
(previously filed as Exhibit 10.40 thereto)

(10.26) (2) License Agreement, dated as of December 28, 1992,
between the Registrant and Genentech, Inc.
(previously filed as Exhibit 10.41 thereto)

(10.27) (2) Letter Agreement, dated January 20, 1993, between the
Registrant and Goldman, Sachs & Co. (previously
filed as Exhibit 10.42 thereto)

(10.28) (2) Loan and Security Agreement, dated February 19, 1993,
between the Registrant and MMC/GATX Partnership No. I
(previously filed as Exhibit 10.43 thereto)

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<PAGE>

(10.29) (2) Research Agreement, effective as of January 1, 1992,
between the Registrant, Dr. John R. Murphy and
University Hospital (previously filed as Exhibit
10.44 to the Registrant's Registration Statement on
Form S-1 File No. 33-57002), amended as of January 1,
1994 (previously filed as Exhibit 10.42 to the
Registrant's Form 10-Q for the three months ending
March 31, 1994), amended as of January 1, 1995
between the Registrant, Dr. John R. Murphy and Boston
University Medical Center (formerly University
Hospital) (previously filed as Exhibit 10.31 to the
Registrant's Annual Report on Form 10-K for the year
ending December 31, 1994), amended as of January 1,
1996 (previously filed as Exhibit 10.29 to the
Registrant's Annual Report on Form 10-K for the year
ending December 31, 1995)

(10.30)*** (3) Employment Agreement, dated March 18, 1993, by and
between the Registrant and Mr. George W. Masters
(previously filed as Exhibit 10.43)

(10.31)*** (4) Employment Agreement, dated June 1, 1993, by and
between the Registrant and Mr. Anthony J. Clemento,
Jr. (previously filed as Exhibit 10.44)

(10.32)*** (4) Employment Agreement, dated June 20, 1993, by and
between the Registrant and Mr. Thomas N. Konatich.
(previously filed as Exhibit 10.45)

(10.33) (5) Master Lease Agreement, dated November 5, 1993, by
and between the Registrant and Comdisco Electronics
Group (previously filed as Exhibit 10.46)

(10.34)* (7) License Agreement, dated as of May 23, 1994, between
the Registrant and Genentech, Inc. (previously filed
as Exhibit 10.47)

(10.35) (7) Stock Purchase Agreement, dated August 3, 1994, by
and between the Registrant and Eli Lilly and Company
(previously filed as Exhibit 10.48)

(10.36)* (7) Development Agreement, dated August 3, 1994, by and
between the Registrant and Eli Lilly and Company
(previously filed as Exhibit 10.49)

(10.37)* (7) Sales and Distribution Agreement, dated August 3,
1994, by and between the Registrant and Eli Lilly and
Company (previously filed as Exhibit 10.50)

(10.38) (8) Equipment Lease Agreement, dated September 16, 1994
by and between the Registrant and Comdisco
Electronics Group (previously filed as Exhibit 10.51)

(10.39) (9) Equipment Lease Agreement, dated December 20, 1994,
by and between the Registrant and Comdisco
Electronics Group (previously filed as Exhibit 10.44)

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<PAGE>

(10.40)* (10) Amendment to (1) the Development Agreement, dated
August 3, 1994, by and between the Registrant and Eli
Lilly and Company (previously filed as Exhibit 10.49
to the Registrant's Form 10-Q for the six months
ending June 30, 1994), and (2) the Sales and
Distribution Agreement dated August 3, 1994, by
Exhibit 10.50 to the Registrant's Form 10-Q for the
six months ending June 30, 1994 (previously filed as
Exhibit 10.48)

(10.41)*** (10) Employment Agreement, dated January 1, 1995, by and
between the Registrant and Dr. Jean C. Nichols
(previously filed as Exhibit 10.49)

(10.42) (11) Sublease Agreement for premises at 99 South Street,
Hopkinton, Massachusetts, dated October 12, 1995,
between the Registrant and SierraCom, a division of
Sierra Networks, Inc. (previously filed as Exhibit
10.50)

(10.43) (12) Credit Agreement dated as of May 22, 1995 between the
Registrant and The First National Bank of Chicago
(previously filed as Exhibit 99.2)

(10.44) (12) Credit Agreement dated as of May 22, 1995 between the
Registrant and The Bank of New York (previously filed
as Exhibit 99.3)

(10.45) (12) Credit Agreement dated as of May 22, 1995 between the
Registrant and NationsBank, N.A. (previously filed as
Exhibit 99.4)

(10.46) (12) Subscription and Registration Agreement dated as of
May 31, 1995 by and among the Registrant and the
investors listed therein (previously filed as Exhibit
99.5)

(10.47) (12) Collateral Assignment of Patents by the Registrant
and jointly in favor of the guarantors listed therein
(previously filed as Exhibit 99.6)

(10.48) (12) Escrow Agreement dated as of May 22, 1995 between the
Registrant, the guarantors listed therein and Mintz,
Levin, Cohn, Ferris, Glovsky and Popeo, P.C., as
escrow agent (previously filed as Exhibit 99.7)

(10.49) (12) Reassignment of Patents by the Registrant to the
guarantors listed therein (previously filed as
Exhibit 99.8)

(10.50) (13) Shareholders' Agreement, dated November 22, 1995, by
and between the Registrant and Seragen
Biopharmaceuticals, LTD (previously filed as Exhibit
10.53 to the Registrant's Annual Report on Form 10-K
for the year ending December 31, 1995)

(10.51)* (13) Technology Rights and Marketing Agreement dated
November 21, 1995, by and between the Registrant and
Seragen Biopharmaceuticals, LTD (previously filed as
Exhibit 10.54 to the Registrant's Annual Report on
Form 10-K for the year ending December 31, 1995)

(10.52) (13) Warrant Indenture Agreement, dated November 21, 1995,
by and between the Registrant and Seragen
Biopharmaceuticals, LTD (previously filed as Exhibit
10.55 to the Registrant's Annual Report on Form 10-K
for the year ending December 31, 1995)

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<PAGE>

(10.53)* (14) Sales and Distribution Agreement, dated August 3,
1994 (previously filed as Exhibit 10.50 to the
Registrant's Form 10-Q, for the six months ending
June 30, 1994) as amended by Amendment dated June 30,
1995 (previously filed as Exhibit 10.48 to the
Registrant's Form 10-Q, for the six months ending
June 30, 1995) as amended by Amendment dated May 28,
1996 (previously filed as Exhibit 10.56)

(10.54) (14) Subscription and Registration Agreement, dated June
28, 1996, by and between the Registrant, Seragen
Technology, Inc. and the persons listed on Schedule 1
thereto (previously filed as Exhibit 10.57)

(10.55) (14) Form of Warrant due July 1, 2006 (previously filed as
Exhibit 10.58)

(10.56) (14) Collateral Assignment of Patents, dated July 1, 1996,
by and between Seragen Technology, Inc. and the
persons listed on Schedule A thereto (previously
filed as Exhibit 10.59)

(10.57) (14) Reassignment of Patents, dated July 1, 1996, by and
between the Registrant and the persons listed on
Schedule A thereto (previously filed as Exhibit
10.60)

(10.58) (14) Escrow Agreement, dated July 1, 1996, by and between
Seragen Technology, Inc. and the persons listed on
Schedule A thereto (previously filed as Exhibit
10.61)

(10.59) (14) Assignments of Patents, dated June 28, 1996, by and
between the Registrant and Seragen Technology, Inc.
(previously filed as Exhibit 10.62)

(10.60) (14) Irrevocable License Agreement, dated June 28, 1996 by
and between the Registrant and Seragen Technology,
Inc. (previously filed as Exhibit 10.63)

(10.61)*** (15) Employment Agreement, dated November 6, 1996, by and
between the Registrant and Reed Prior (previously
filed as Exhibit 10.64)

(10.62)*** (15) Employment Agreement, dated November 6, 1996, by and
between the Registrant and Jean C. Nichols, Ph.D.
(previously filed as Exhibit 10.65)

(10.63) (15) Stockholders Agreement, dated November 6, 1996, by
and between the Registrant and Boston University,
Leon Hirsch, Turi Josefsen, Gerald S.J. Cassidy,
Loretta P. Cassidy and Reed R. Prior (previously
filed as Exhibit 10.66)

(10.64)*** (15) Retirement and Consulting Agreement, dated November
6, 1996, by and between the Registrant and Mr. George
W. Masters (previously filed as Exhibit 10.67)

(10.65)** (16) Service Agreement, dated as of February 14, 1997,
between the Registrant and Trustees of Boston
University (portions of this exhibit have been
omitted pursuant to a request for confidential
treatment) (previously filed as Exhibit 10.68)

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<PAGE>

(10.66)*** Amendment to Employment Agreement, dated December 88
18, 1996, by and between the Registrant and Mr. Reed
R.Prior (filed herewith)

(10.67)*** Amendment to Employment Agreement, dated December 91
18,1996, by and between the Registrant and Dr. Jean
C.Nichols (filed herewith)

(10.68)*** Waiver to Employment Agreement, dated January 6, 94
1997, by and between the Registrant and Mr. Reed R.
Prior (filed herewith)

(10.69)*** Waiver to Employment Agreement, dated January 6, 95
1997, by and between the Registrant and Dr. Jean C.
Nichols (filed herewith)

(10.70)*** Waiver No.2 to Employment Agreement, dated January 96
31, 1997, by and between the Registrant and Mr. Reed
R. Prior (filed herewith)

(10.71)*** Waiver No.2 to Employment Agreement, dated January 97
31, 1997, by and between the Registrant and Dr. Jean
C. Nichols (filed herewith)

(10.72)*** Amendment to 1992 Long Term Incentive Plan, dated 98
December 18, 1996, (filed herewith)

(10.73)*** Employment Agreement, dated as of January 15, 1997, 121
by and between the Registrant and Ms. Elizabeth C.
Chen (filed herewith)

(10.74)*** Waiver to Employment Agreement, dated 3/28/97, by 140
and between the Registrant and Mr. Reed R. Prior
(filed herewith)

(10.75)*** Waiver to Employment Agreement, dated 3/28/97, by 141
and between the Registrant and Ms. Elizabeth C.
Chen (filed herewith)

(21) List of Subsidiaries (filed herewith) 142

(23.1) Consent of Arthur Andersen LLP (filed herewith) 143

(23.1) Consent of Coopers & Lybrand L.L.P (filed herewith) 144

(27) Financial Data Schedule 145

NOTES:
(*) All exhibit descriptions followed by (*) indicate documents with
respect to which Confidential Treatment has been granted.

(**) All exhibit descriptions followed by (**) indicate documents with
respect to which the Registrant has filed a Confidential Treatment
request with the Commission.

(***) All exhibit descriptions followed by (***) indicate documents
herein provided or incorporated by reference with respect to
Executive Compensation Plans and Arrangements.

(1) All exhibit descriptions followed by (1) were previously filed as
Exhibits to, and incorporated herein by reference from, the
Registrant's Registration Statement on Form S-1, File No. 33-45515.

(2) All exhibit descriptions followed by (2) were previously filed with
the Commission as Exhibits to, and incorporated by reference from,
the Registrant's Registration Statement on Form S-1 File No.
33-57002.

(3) All exhibit descriptions followed by (3) were previously filed as
Exhibits to, and incorporated by reference from, the Registrant's
Annual Report on Form 10-K for the year ending December 31, 1992.

(4) All exhibit descriptions followed by (4) were previously filed as
Exhibits to, and incorporated by reference from, the Registrant's
Form 10-Q, for the six months ending June 30, 1993.

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<PAGE>

(5) All exhibit descriptions followed by (5) were previously filed as
Exhibits to, and incorporated by reference from, the Registrant's
Annual Report on Form 10-K for the year ending December 31, 1993.

(6) All exhibit descriptions followed by (6) were previously filed as
Exhibits to, and incorporated by reference from, the Registrant's
Form 10-Q, for the three months ending March 31, 1994.

(7) All exhibit descriptions followed by (7) were previously filed as
Exhibits to, and incorporated by reference from, the Registrant's
Form 10-Q, for the six months ending June 30, 1994.

(8) All exhibit descriptions followed by (8) were previously filed as
Exhibits to, and incorporated by reference from, the Registrant's
Form 10-Q, for the six months ending September 30, 1994.

(9) All exhibit descriptions followed by (9) were previously filed as
Exhibits to, and incorporated by reference from, the Registrant's
Annual Report on Form 10-K for the year ending December 31, 1994.

(10) All exhibit descriptions followed by (10) were previously filed as
Exhibits to, and incorporated by reference from, the Registrant's
Form 10-Q, for the six months ending June 30, 1995.

(11) All exhibit descriptions followed by (11) were previously filed as
Exhibits to, and incorporated by reference from, the Registrant's
Form 10-Q, for the nine months ending September 30, 1995.

(12) All exhibit descriptions followed by (12) were previously filed as
Exhibits to, and incorporated by reference from, the Registrant's
Form 8-K for June 7, 1995 event.

(13) All exhibit descriptions followed by (13) were previously filed as
Exhibits to, and incorporated by reference from, the Registrant's
Annual Report on Form 10-K for the year ending December 31, 1995.

(14) All exhibit descriptions followed by (14) were previously filed as
Exhibits to, and incorporated by reference from, the Registrant's
Form 10-Q, for the six months ending June 30, 1996.

(15) All exhibits descriptions followed by (15) were previously filed as
Exhibits to, and incorporated by reference from, the Registrant's
Form 10-Q, for the nine months ending September 30, 1996.

(16) All exhibit descriptions followed by (16) were previously filed as
Exhibits to, and incorporated by reference from, the Registrant's
Form 8-K for February 18, 1997 event.

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<PAGE>

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Annual Report on
Form 10-K to be signed on its behalf by the undersigned, thereunto duly
authorized.

Seragen, Inc.

By: /s/ Reed R. Prior Dated: March 31, 1997
------------------------------
Reed R. Prior
Chairman of the Board
And Chief Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this
Annual Report on Form 10-K has been signed below by the following persons on
behalf of the Registrant and in the capacities and on the dates indicated.

Signatures Title Date

/s/ Reed R. Prior Chairman of the Board, March 31, 1997
------------------------------- Chief Executive Officer
Reed R. Prior and Director
(Principal Executive
Officer)

/s/ Jean C. Nichols, Ph.D. President, Chief Technology March 31, 1997
------------------------------- Officer and Director
Jean C. Nichols, Ph.D. (Principal Financial and
Accounting Officer)

/s/ John E. Bagalay, Jr., Ph.D. Director March 31, 1997
-------------------------------
John E. Bagalay, Jr. Ph.D.

/s/ Gerald S. J. Cassidy Director March 31, 1997
-------------------------------
Gerald S.J. Cassidy

/s/ Kenneth G. Condon Director March 31, 1997
-------------------------------
Kenneth G. Condon

/s/ Norman A. Jacobs Director March 31, 1997
-------------------------------
Norman A. Jacobs

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<PAGE>

/s/ John R. Murphy, Ph.D. Director March 31, 1997
-------------------------------
John R. Murphy, Ph.D.

/s/ John R. Silber, Ph.D. Director March 31, 1997
-------------------------------
John R. Silber, Ph.D.

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<PAGE>

<PAGE>
Exhibit No. 10.66

AMENDMENT NO. 1 TO EMPLOYMENT AGREEMENT

Amendment No. 1 to Employment Agreement (the "Amendment") dated as of
December 18, 1996 between Seragen, Inc. (the "Company") and Reed Prior
("Prior").

WHEREAS, the Company and Prior entered an Employment Agreement dated as of
November 6, 1996 (the "Employment Agreement"); and

WHEREAS, the Company and Prior desire to amend the Employment Agreement;

NOW, THEREFORE, the parties hereto agree as follows:

1. Capitalized terms used herein and not otherwise defined shall have the
same meaning herein as in the Employment Agreement.

2. Paragraph 3(c) of the Employment Agreement is hereby amended to read as
follows:

(c) Stock Options. On or before December 18, 1996, the Company
shall grant Prior stock options under the Seragen, Inc. 1992 Long Term
Incentive Plan, a true copy of which is attached as Exhibit D (the
"Plan"), to purchase sufficient shares of the Company's common stock, par
value $0.01 per share ("Common Stock"), to equal 8.5% of the then
outstanding Common Stock, measured on a Fully Diluted Basis (as the term
is defined in Paragraph 4), at the then fair market value per share of
Common Stock. To the extent permitted by federal income tax law, options
issued under the Plan to Prior shall be "incentive stock options". The
stock options shall be evidenced by an Incentive Stock Option Agreement
and, if required, a Non-Qualified Stock Option Agreement substantially in
the form of Exhibits A and B to this Agreement (the "Stock Option
Agreements") except as expressly provided otherwise herein. Both Stock
Option Agreements shall provide that: (i) the options issued thereunder
shall vest, i.e., become exercisable, 2.0833% on the date of execution of
this Agreement (the "Effective Date") and on the first day of each
calendar month thereafter so that Prior shall be fully (100%) vested on
the first day of the month immediately before the fourth anniversary of
the Effective Date; (ii) upon a Change in Ownership (as the term is
defined in Paragraph 4), in place of the vesting schedule provided in
clause "i" above the options shall vest retroactively as of the Effective
Date 25% on the Effective Date and an additional 2.0833% on the first day
of each calendar month thereafter so that Prior shall be fully (100%)
vested on the first day of the month immediately following the third
anniversary of the Effective Date; (iii) upon the termination by the
Company of Prior's employment without Just Cause or Prior's termination
for Good Reason (as the terms are defined in Paragraph 4), in place of the

-1-

<PAGE>
vesting schedules provided in clauses "i" and "ii" above the options shall
vest retroactively as of the Effective Date 25% on the Effective Date and
at the accelerated rate of an additional 3.125% on the first day of each
calendar month thereafter so that Prior shall be fully (100%) vested on
the first day of the month immediately following the second anniversary of
the Effective Date; (iv) options issued shall, to the extent vested, be
fully exercisable until the tenth (10th) anniversary of the Effective
Date; (v) the options shall be exercisable in accordance with the terms of
the Plan, including the right to pay the option exercise price in whole or
in part by surrendering shares of the Company's common stock held by Prior
for at least six months prior to the exercise date with an aggregate fair
market value equal to the option exercise price or in accordance with a
cashless exercise program established with a securities brokerage firm and
approved by the Company, and shall provide that stock certificates shall
be issued outright and free of escrow no later than three (3) days after
the date of exercise; (vi) stock certificates issued pursuant to the
exercise of an option shall not include any legends or be subject to any
transfer restrictions, except for restrictions required by Section 16 of
the Securities Act of 1933, as amended, and the rules and regulations
promulgated thereunder; (vii) the Company shall not terminate any option
issued to Prior upon a "Change in Control" as defined in the Plan without
Prior's written approval; (viii) in the event that before a Target Equity
Financing (as defined in Paragraph 4) the Company grants options or other
equity interests to management, employees, directors or consultants or the
Company sells shares of its Common Stock or any equity securities or
securities convertible or exchangeable into any equity securities of the
Company, as part of a plan or series of plans of financing, or the number
of shares of Common Stock outstanding on a Fully Diluted Basis increases
as a result of a change in the conversion ratio of any class of securities
convertible or exchangeable into any equity securities of the Company, the
Company shall grant Prior additional stock options under the Plan covering
that number of shares of Common Stock necessary to cause Prior's
proportionate holdings of the outstanding Common Stock, on a Fully Diluted
Basis, immediately after the grant or sale of such options, shares or
other equity interests to equal his proportionate holdings of the
outstanding Common Stock, on a Fully Diluted Basis, immediately prior to
the grant or sale of such options, shares or other equity interests, but
not to exceed 8-1/2% of the Common Stock on a Fully Diluted Basis; (ix)
all additional stock options shall have the same terms and conditions, and
shall vest as though they were granted on the same date as the initial
options that are required to be issued on or before December 18, 1996; (x)
each option shall include all other rights and benefits under the Plan,
including Section 11 of the Plan (regarding accelerated vesting on Change
in Control); and (xi) the Company has registered, or within 60 days of the
Effective Date shall at its own expense register, under the Securities Act
of 1933 all shares issued or to be issued pursuant to the exercise of the
stock options on Form S-8, the obligation to maintain such registration to
continue following Prior's termination of employment. Prior agrees that,
if requested by an underwriter of the Company's securities, Prior will
comply with any reasonable customary lock-up periods in connection with
the

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<PAGE>
Company's offering of securities provided that all other executive
officers and directors of the Company also must comply with such
restrictions and provided that no such lock-up periods shall exceed 180
days. The Plan shall be amended as necessary to provide or permit the
issuance of the options described in this Paragraph 3(c).

The Board shall in good faith take all necessary action to effect
the terms of this Agreement and to register the underlying shares of
Common Stock under applicable securities laws as provided herein.

3. Except as modified herein, the Employment Agreement shall remain in
full force and effect.

IN WITNESS WHEREOF, the parties have executed this Amendment effective as
of the day and year first above written.

/s/ Reed R. Prior
---------------------------------
Reed R. Prior

SERAGEN, INC.

By: /s/ Jean C. Nichols
------------------------------
Jean C. Nichols
President and Chief
Technology Officer

rpemp.amd

Exhibit No. 10.67

AMENDMENT NO. 1 TO EMPLOYMENT AGREEMENT

Amendment No. 1 to Employment Agreement (the "Amendment") dated as of
December 18, 1996 between Seragen, Inc. (the "Company") and Jean C. Nichols,
Ph.D. (the "Executive").

WHEREAS, the Company and the Executive entered an Employment Agreement
dated as of November 6, 1996 (the "Employment Agreement"); and

WHEREAS, the Company and the Executive desire to amend the Employment
Agreement;

NOW, THEREFORE, the parties hereto agree as follows:

1. Capitalized terms used herein and not otherwise defined shall
have the same meaning herein as in the Employment Agreement.

2. The first paragraph of Section 3.6 of the Employment Agreement
is hereby amended to read as follows:

3.6 Stock Options. On or before December 18, 1996,
the Company shall grant the Executive stock options under the Seragen,
Inc. 1992 Long Term Incentive Plan (the "Plan") to purchase a number of
shares of the Company's common stock, par value $0.01 per share
("Common Stock"), equal to (a) 1.275% of the outstanding Common Stock
on the date of grant, measured on a fully diluted basis, taking into
account all options, warrants, conversion rights and other rights
issued by the Company to acquire equity securities issued prior to the
actual date of grant and based upon the exercise or conversion price
that would apply if such options, warrants, conversion rights, and
other rights were exercised or converted on the grant date, less (b)
the stock options to purchase 54,000 shares of Common Stock previously
granted by the Company to the Executive listed on Schedule I hereto.
All stock options previously granted by the Company to the Executive
other than the stock options to purchase 54,000 shares of Common Stock
listed on Schedule I hereto shall be cancelled immediately upon the
grant of options pursuant to this Agreement. To the extent permitted by
federal income tax law, options issued under the plan to the Executive
shall be "incentive stock options". The stock options shall be
evidenced by an Incentive Stock Option Agreement and, if required, a
Non-Qualified Stock Option Agreement substantially in the form of
Exhibits A and B to this Agreement (the "Stock Option Agreements"),
except as expressly provided otherwise herein. The exercise price per
share of Common Stock for Stock Options granted pursuant to this
Agreement shall be the Fair Market Value as defined in the Plan. Both
Stock Option Agreements

<PAGE>
shall provide that (i) the options issued thereunder shall vest, i.e., become
exercisable, in monthly installments of 2.7778% commencing on the Effective Date
and on the first day of each calendar month thereafter so that the Executive
shall be fully (100%) vested on the first day of the month immediately before
the third anniversary of the Effective Date; (ii) upon a Change in Ownership (as
hereinafter defined) in place of the vesting schedule provided in clause "i"
above the options shall vest retroactively as of the Effective Date 25% on the
Effective Date and an additional 2.0833% on the first day of each calendar month
thereafter so that the Executive shall be fully (100%) vested on the first day
of the month immediately following the third anniversary of the Effective Date;
(iii) upon the termination by the Company of the Executive's employment without
Just Cause or the Executive's termination for Good Reason (as the terms are
defined in Section 4) in place of the vesting schedules provided in clauses "i"
and "ii" above, the options shall vest retroactively as of the Effective Date
25% on the Effective Date and at the accelerated rate of an additional 3.125% on
the first day of each calendar month thereafter so that the Executive shall be
fully (100%) vested on the first day of the month immediately following the
second anniversary of the Effective Date; (iv) options issued shall, to the
extent vested, be fully exercisable until the tenth (10th) anniversary of the
date of grant; (v) the options shall be exercisable in accordance with the terms
of the Plan, including the right to pay the option exercise price in whole or in
part by surrendering shares of the Company's common stock held by the Executive
for at least six months prior to the exercise date with an aggregate fair market
value equal to the option exercise price or in accordance with a cashless
exercise program established with a securities brokerage firm and approved by
the Company, and shall provide that stock certificates shall be issued outright
and free of escrow no later than three (3) days after the date of exercise; (vi)
stock certificates issued pursuant to the exercise of an option shall not
include any legends or be subject to any transfer restrictions, except for
restrictions required by Section 16 of the Securities Exchange Act of 1934, as
amended; (vii) the Company shall not terminate any option issued to the
Executive upon a "Change in Control" (as defined in the Plan) without the
Executive's prior written approval; (viii) in the event that at any time before
a Target Equity Financing (as hereinafter defined), the Company grants options
or other equity interests to management, employees, directors or consultants or
the Company sells shares of its Common Stock or any equity securities or
securities convertible or exchangeable into any equity securities of the
Company, as part of a plan or series of plans of financing, or the number of
shares of Common Stock outstanding on a fully diluted basis increases as a
result of a change in the conversion ratio of any class of securities
convertible or exchangeable into an equity securities of the Company, the
Company shall grant to the Executive additional stock options under the Plan
covering that number of shares of Common Stock necessary to cause the
Executive's proportionate holdings of the outstanding Common Stock, on a fully
diluted basis, immediately after the grant or sale of such options, shares or
other equity interests to equal her proportionate holdings of the outstanding
Common Stock, on a fully diluted basis, immediately prior to the grant or sale
of such options, shares or

<PAGE>
other equity interests, but not to exceed 1.275% of the Common Stock on a fully
diluted basis; (ix) all additional stock options shall have the same terms and
conditions, and shall vest as though they were granted on the same date as the
initial options that are required to be issued on or before December 18, 1996;
(x) each option shall include all other rights and benefits under the Plan,
including Section 11 of the Plan (regarding accelerated vesting on Change in
Control); and (xi) the Company has registered, or within 60 days of the
Effective Date shall at its own expense register, under the Securities Act of
1933 all shares issued or to be issued pursuant to the exercise of the stock
options on Form S-8, the obligation to maintain such registration to continue
following the Executive's termination of employment. The Executive agrees that,
if requested by an underwriter of the Company's securities, the Executive will
comply with any reasonable customary lock-up periods in connection with the
Company's offering of securities provided that all other executive officers and
directors of the Company also must comply with such restrictions and provided
that no such lock-up periods shall exceed 180 days. The Plan shall be amended as
necessary to provide or permit the issuance of the options described in this
Section 3.6. All additional stock options shall have the same terms and
conditions, and shall vest as though they were granted on the same date, as the
options issued pursuant to this Section. For purposes of determining the
outstanding Common Stock on a fully diluted basis, all shares of Common Stock
issuable upon exercise of options outstanding under the Plan or any other stock
option plan (including the options granted to the Executive pursuant to this
Agreement) and all shares of Common Stock issuable on exercise of all other
outstanding options, warrants, conversion rights or other rights issued by the
Company to acquire equity securities shall be deemed to be outstanding.

3. Except as modified herein, the Employment Agreement shall remain
in full force and effect.

IN WITNESS WHEREOF, the parties have executed this Amendment effective
as of the day and year first above written.

/s/ Jean C. Nichols
--------------------------
Jean C. Nichols

SERAGEN, INC.

By: /s/ Reed R. Prior
--------------------------
Reed R. Prior
Chief Executive Officer,
President and Treasurer

jnemp.amd
3
<PAGE>

Exhibit No. 10.68

WAIVER

Reference is made to the Employment Agreement dated as of November 6,
1996 between Seragen, Inc. (the "Company") and the undersigned, as amended by an
Amendment No. 1 to Employment Agreement dated as of December 18, 1996 between
the Company and the undersigned (together the "Agreement"). Pursuant to the
Agreement, the Company agreed to file a registration statement on Form S-8 (the
"Registration Statement") registering under the Securities Act of 1993 all
shares issued or to be issued pursuant to the exercise of the stock options
granted to Prior pursuant to the Agreement on or before January 6, 1997.

The undersigned hereby waives with respect to the Agreement the
Company's obligation to file the Registration Statement by the January 6, 1997
deadline, and agrees that the Company shall have met its obligation to file the
Registration Statement if the Registration Statement is filed on or before July
1, 1997.

Except as expressly waived herein, all other obligations of the Company
contained in the Agreement shall remain in full force and in effect.

EXECUTED as of the 6th day of January, 1997.

/s/ Reed R. Prior
----------------------------
Reed R. Prior

<PAGE>

Exhibit No. 10.69
WAIVER

Reference is made to the Employment Agreement dated as of November 6,
1996 between Seragen, Inc. (the "Company") and the undersigned, as amended by an
Amendment No. 1 to Employment Agreement dated as of December 18, 1996 between
the Company and the undersigned (together the "Agreement"). Pursuant to the
Agreement, the Company agreed to file a registration statement on Form S-8 (the
"Registration Statement") registering under the Securities Act of 1993 all
shares issued or to be issued pursuant to the exercise of the stock options
granted to Nichols pursuant to the Agreement on or before January 6, 1997.

Except as expressly waived herein, all other obligations of the Company
contained in the Agreement shall remain in full force and in effect.

EXECUTED as of the 6th day of January, 1997.

/s/ Jean C. Nichols, Ph.D.
-------------------------------
Jean C. Nichols, Ph.D.

<PAGE>

Exhibit No. 10.70

WAIVER NO. 2

Reference is made to the Employment Agreement dated as of November 6,
1996 between Seragen, Inc. (the "Company") and the undersigned, as amended by an
Amendment No. 1 to Employment Agreement dated as of December 18, 1996 between
the Company and the undersigned and as amended by Waiver to Employment Agreement
dated as of January 6, 1997 between the Company and the undersigned (together
the "Agreement"). Pursuant to Section 3 (c)(viii) of the Agreement, the Company
agreed to grant Mr. Prior certain additional options upon the occurrence of
certain events.

The undersigned hereby waives with respect to the Agreement the
Company's obligation to grant the additional options immediately upon the
occurrence of such events and agrees that the Company may grant such additional
options based on the number of shares of Common Stock outstanding on a Fully
Diluted Basis on the last day of each calendar quarter.

Except as expressly waived herein, all other obligations of the Company
contained in the Agreement shall remain in full force and in effect.

EXECUTED as of the 31st day of January, 1997.

/s/ Reed R. Prior
---------------------------
Reed R. Prior

<PAGE>

Exhibit No.10.71

WAIVER NO. 2

Reference is made to the Employment Agreement dated as of November 6,
1996 between Seragen, Inc. (the "Company") and the undersigned, as amended by an
Amendment No. 1 to Employment Agreement dated as of December 18, 1996 between
the Company and the undersigned and as amended by Waiver to Employment Agreement
dated as of January 6, 1997 between the Company and the undersigned (together
the "Agreement"). Pursuant to Section 3.6 (viii) of the Agreement, the Company
agreed to grant Dr. Nichols certain additional options upon the occurrence of
certain events.

Except as expressly waived herein, all other obligations of the Company
contained in the Agreement shall remain in full force and in effect.

EXECUTED as of the 31st day of January, 1997.

/s/ Jean C. Nichols, Ph.D.
-------------------------------
Jean C. Nichols, Ph.D.

<PAGE>

Exhibit No. 10.72

As amended through December 18, 1996

SERAGEN, INC.

1992 LONG TERM INCENTIVE PLAN

SECTION 1. Purpose

The purpose of the Seragen, Inc. 1992 Long Term Incentive Plan (the
"Plan") is to promote the interests of Seragen, Inc. (the "Company") and its
Subsidiaries, Affiliates and stockholders by enabling the Company to attract,
retain and reward persons who serve as employees of and consultants to the
Company and its Subsidiaries and Affiliates, and strengthening the mutuality of
interests between such employees, consultants and the Company's shareholders, by
offering them performance-based stock incentives and/or other equity interests
or equity-based incentives in the Company, as well as performance based
incentives payable in cash.

Certain terms used herein are defined in Section 17 of the Plan.

SECTION 2. Stock Subject to the Plan.

The maximum aggregate number of shares of Stock reserved and available
for distribution under the Plan shall be eight million, (8,000,000) shares of
Stock. Such shares may consist, in whole or in part, of authorized and unissued
shares or treasury shares.

Subject to Section 6(b)(iv) below, if any shares of Stock that have
been optioned under the Plan cease to be subject to a Stock Option, or if any
such shares of Stock that are subject to any Restricted Stock or Deferred Stock
award, Stock Purchase Right or Other Stock-Based award granted hereunder are
forfeited or any such award otherwise terminates, without a payment being made
to the participant in the form of Stock, such shares shall be available for
distribution in connection with future awards under the Plan. Notwithstanding
any other provision of the Plan, shares issued under the Plan and later
repurchased by the Company shall not become available for future distribution
under the Plan.

In the event of any recapitalization, Stock dividend, Stock split,
reclassification or other change in corporate structure affecting the Stock, the
aggregate number of shares reserved for issuance under the Plan, the number and
option price of shares subject to outstanding options granted under the Plan,
the number and purchase price of shares subject to outstanding Stock
Appreciation Rights under the Plan, and the number of shares subject to other
outstanding awards granted under the Plan, shall be appropriately increased or
decreased proportionately, provided that the number of shares subject to any
award shall always be a whole number. Such adjusted option price shall also be
used to determine the amount payable by the Company upon the exercise of any
stock

<PAGE>
Appreciation Right or Limited Stock Appreciation Right associated with any
Stock Option.

Subject to the provisions of Section II hereof, in the event of a
merger or consolidation of the Company with another corporation, all the
outstanding Stock Options issued hereunder shall terminate unless otherwise
determined by the Committee and all Deferred Stock and Restricted Stock which is
subject to forfeiture or which has not been received shall be forfeited or not
received, unless otherwise determined by the Committee or unless the Board
arranges to have the merged or consolidated corporation assume such Stock
Options, Deferred Stock or Restricted Stock or issue substitute Stock Options,
Deferred Stock or Restricted Stock therefor; provided, however, that in the
event the merged or consolidated corporation does not assume such Stock Options,
Deferred Stock or Restricted Stock or issue substitute Stock Options, Deferred
Stock or Restricted Stock therefor, (i) each optionee shall have the right,
immediately prior to such merger or consolidation, to exercise his Stock
Option(s) in whole or in part without regard to any installment restrictions as
to time of exercise otherwise imposed under the Plan, and (ii) each holder of
Deferred Stock or Restricted Stock shall have the right, immediately prior
thereto, to receive and own all such stock without regard to any restrictions
otherwise imposed under the Plan.

SECTION 3. Eligibility.

Employees (including employees who serve as officers and directors) and
consultants (including directors who serve as consultants) and members of the
Scientific and Medical Advisory Board (whether or not employees or serving in
other consulting roles) of the Company and its Subsidiaries and Affiliates and
who are responsible for or contribute to the management, growth and/or
profitability of the business of the Company and/or its Subsidiaries and
Affiliates are eligible to be granted awards under the Plan; provided, however,
that only Employees of the Company and its Subsidiaries are eligible to be
granted Incentive Stock Options under the Plan.

SECTION 4. Administration.

The Plan shall be administered by a Committee of not less than two (2)
Disinterested Persons, who shall be appointed by the Board and who shall serve
at the pleasure of the Board. If no Committee has been appointed to administer
the Plan, the functions of the Committee specified in the Plan shall be
administered by the Board, except that at any time after a registration of the
Company's Stock under Section 12 of the Exchange Act, administration by a
Committee of two (2) or more Disinterested Persons is required.

The Committee shall have full authority to grant, pursuant to the terms
of the Plan, to Employees eligible under Section 3: (i) Stock Options, (ii)
Stock Appreciation Rights, (iii) Limited Stock Appreciation Rights, (iv)
Restricted Stock, (v) Deferred Stock, (vi) Stock Purchase Rights or (vii) Other
Stock-Based Awards.

<PAGE>
In particular, the Committee shall have the authority:

(i) to select the persons to whom Stock Options, Stock
Appreciation Rights, Limited Stock Appreciation Rights,
Restricted Stock, Deferred Stock, Stock Purchase Rights and/or
Other Stock-Based Awards may from time to time be granted
hereunder;

(ii) to determine whether and to what extent Incentive Stock
Options, Non-Qualified Stock Options, Stock Appreciation Rights,
Limited Stock Appreciation Rights, Restricted Stock, Deferred
Stock, Stock Purchase Rights and/or Other Stock-Based Awards, or
any combination thereof, are to be granted hereunder to one or
more eligible persons;

(iii) to determine the number of shares to be covered by each
such award granted hereunder;

(iv) to determine the terms and conditions, not inconsistent
with the terms of the Plan, of any award granted hereunder
(including, but not limited to, the share price and any
restriction or limitation, or any vesting, acceleration or
waiver of forfeiture restrictions regarding any Stock Option or
other award and/or Deferred Stock under Sections 5(k) or 5(l) as
applicable, instead of Stock);

(v) to determine whether and under what circumstances a Stock
Option may be settled in Stock, Restricted Stock and/or Deferred
Stock under Sections 5(k) or (l), as applicable, instead of
cash;

(vi) to determine whether, to what extent and under what
circumstances grants and/or other awards under the Plan and/or
other cash awards made by the Company are to be made, and
operate, on a tandem basis vis-a-vis other awards under the
Plan and/or cash awards made outside of the Plan, or on an
additive basis;

(vii) to determine whether, to what extent and under what
circumstances Stock and other amounts payable with respect to an
award under this Plan shall be deferred either automatically or
at the election of the participant (including providing for and
determining the amount (if any) of any deemed earnings on any
deferred amount during any deferral period); and

(viii) to determine the terms and restrictions applicable to
Stock Purchase Rights and the Stock purchased by exercising such
Rights.

The Committee shall have the authority to adopt, alter and repeal such
rules, guidelines and practices governing the Plan as it shall, from time to
time, deem advisable; to interpret the terms and provisions of the Plan and any
award issued under the Plan (and any agreements relating thereto);

<PAGE>
and to otherwise supervise the administration of the Plan.

All decisions made by the Committee pursuant to the provisions of the
Plan shall be made in the Committee's sole discretion and shall be final and
binding on all persons, including the Company and Plan participants.
The Plan is intended to comply with Rule 16b-3 under the Exchange Act
(and with any amended or successor rule) for those persons who are subject to
Section 16(b) of said Act. If any provision in this Plan with respect to such
persons would be contrary to said Rule, it shall be deemed to be null and void
to the extent permissible by law and deemed appropriate by the Committee.

SECTION 5. Stock Options.

Stock Options may be granted alone, in addition to or in tandem with
other awards granted under the Plan and/or cash awards made outside of the Plan.
Each Stock Option granted under the Plan shall be in such form as the Committee
may from time to time approve.

Stock Options granted under the Plan may be of two types:
(i) Incentive Stock Options, and (ii) Non-Qualified Stock Options.

The Committee shall have the authority to grant to any optionee
Incentive Stock Options, Non-Qualified Stock Options, or both types of Stock
Options (in each case with or without Stock Appreciation Rights or Limited Stock
Appreciation Rights); provided that in no event shall any employee be granted in
any calendar year Stock Options to purchase more than five million (5,000,000)
shares of Stock:

Options granted under the Plan shall be subject to the following terms
and conditions and shall contain such additional terms and conditions, not
inconsistent with the terms of the Plan, as the Committee shall deem desirable:

a. Option Price. The option price per share of Stock purchasable under
a Stock Option shall be determined by the Committee at the time of grant and may
be equal to, greater than or less than one hundred percent (100%) of the Fair
Market Value of the Stock at the date of grant; provided, however, that the
option price per share of Stock purchasable under an Incentive Stock Option
shall not be less than one hundred percent (100%) of the Fair Market Value of
the Stock at the date of grant; and provided further however, that in the case
of an Incentive Stock Option granted to an Employee who, at the time of grant,
owns Stock possessing more than ten percent (10%) of the total combined voting
power of all classes of Stock of the Company, its Subsidiaries or Affiliates,
the option price per share of Stock shall not be less than one hundred ten
percent (110%) of the Fair Market Value of the Stock at the date of grant.

b. Option Term. The term of each Stock Option shall be fixed by the
Committee, but no

<PAGE>
Stock Option shall be exercisable more than ten (10) years after the date the
Option is granted or more than five (5) years after grant in the case of any
employee who owns stock constituting ten percent (10%) of the total combined
voting power of the Company or any parent or Subsidiary.

c. Exercisability. Stock Options shall be exercisable at such time or
times and subject to such terms and conditions as shall be determined by the
Committee at or after grant; provided, however, that, except as provided in
Sections 2, 5(f) and 5(g), unless otherwise determined by the Committee at or
after grant, no Stock Option shall be exercisable in the first six (6) months
following the granting of the Option. If the Committee provides, in its sole
discretion, that any Stock Option is exercisable only in installments, the
Committee may waive such installment exercise provisions at any time at or after
grant in whole or in part, based on such factors as the Committee shall
determine in its sole discretion.

d. Method of Exercise. Subject to whatever installment exercise
provisions apply under Section 5(c), Stock Options may be exercised in whole or
in part at any time during the option period, by giving written notice of
exercise to the Company specifying the number of shares to be purchased.

Such notice shall be accompanied by payment in full of the purchase
price, either by check, note or such other instrument as the Committee may
accept. As determined by the Committee, in its sole discretion, at or after
grant, (a) payment in full or in part may be made in the form of unrestricted
Stock already owned by the optionee, (b) in the case of the exercise of a
Non-Qualified Stock Option, payment in full or in part may be made in the form
of Restricted Stock or Deferred Stock subject to an award hereunder (based, in
each case, on the Fair Market Value of the Stock on the date the option is
exercised, as determined by the Committee), (c) payment in full or in part may
be made in accordance with a cashless exercise program established with a
securities brokerage firm, and approved by the Committee, or (d) payment in full
or in part may be made by any combination of (a), (b) or (c) above.

If payment of the option exercise price of a Non-Qualified Stock Option
is made in whole or in part in the form of Restricted Stock or Deferred Stock,
such Restricted Stock or Deferred Stock (and any replacement shares relating
thereto) shall remain (or be) restricted or deferred, as the case may be, in
accordance with the original terms of the Restricted Stock award or Deferred
Stock award in question, and any additional Stock received upon the exercise
shall be subject to the same forfeiture restrictions or deferral limitations,
unless otherwise determined by the Committee, in its sole discretion, at or
after grant.

No shares of Stock shall be issued until full payment therefor has been
made. Until the issuance (as evidenced by the appropriate entry on the books of
the Company or of a duly authorized transfer agent of the Company) of the stock
certificate evidencing such Stock, and compliance with the applicable
requirements, if any, of Section 13(a), no right to vote or receive dividends or
any other rights as a shareholder shall exist with respect to such Stock Option.

<PAGE>
e. Non-Transferability of Options. No Stock Option shall be
transferable by the optionee other than by will or by the laws of descent and
distribution or as required pursuant to a qualified domestic relations order as
defined by the Code or Title I of the Employee Retirement Income Security Act or
the rules thereunder, or as otherwise deemed appropriate by the Committee and
set forth in the applicable option agreement.

f. Termination by Death. Subject to Section 5(j), if an optionee's
employment by the Company and any Subsidiary or Affiliate terminates by reason
of death, any Stock Option held by such optionee may thereafter be exercised, to
the extent such option was exercisable at the time of death or on such
accelerated basis as the Committee may determine at or after grant (or as may be
determined in accordance with procedures established by the Committee), by the
legal representative of the estate or by the legatee of the optionee under the
will of the optionee, for a period of one year (or such other period as the
Committee may specify at grant) from the date of such death or until the
expiration of the stated term of such Stock Option, whichever period is the
shorter.

g. Termination by Reason of Disability. Subject to Section 5(j), if an
optionee's employment by the Company and any Subsidiary or Affiliate terminates
by reason of Disability, any Stock Option held by such optionee may thereafter
be exercised by the optionee, to the extent it was exercisable at the time of
termination or on such accelerated basis as the Committee may determine at or
after grant (or as may be determined in accordance with procedures established
by the Committee), for a period of twelve (12) months (or such period as the
Committee may specify at grant) from the date of such termination of employment
or until the expiration of the stated term of such Stock Option, whichever
period is the shorter; provided, however, that, if the optionee dies within such
twelve (12) months period (or such shorter period as the Committee shall specify
at grant), any unexercised Stock Option held by such optionee shall thereafter
be exercisable to the extent to which it was exercisable at the time of death
for a period of twelve (12) months from the date of such death or until the
expiration of the stated term of such Stock Option, whichever period is the
shorter. In the event of termination of employment by reason of Disability, if
an Incentive Stock Option is exercisable after the expiration of the exercise
periods that apply for purposes of Section 422 of the Code, such Stock Option
will thereafter be treated as a Non-Qualified Stock Option.

h. Termination by Reason of Retirement. Subject to Section 5(j), if an
optionee's employment by the company and any Subsidiary or Affiliate terminates
by reason of Normal or Early Retirement, any Stock Option held by such optionee
may thereafter be exercised by the optionee, to the extent it was exercisable at
the time of such Retirement or on such accelerated basis as the Committee may
determine at or after grant (or as may be determined in accordance with
procedures established by the Committee), for a period of ninety (90) days (or
such other period as the Committee may specify at grant) from the date of such
termination of employment or the expiration of the stated term of such Stock
Option, whichever period is the shorter; provided, however, that, if the
optionee dies within such ninety (90) day period (or such other period as the
Committee may specify at grant), any unexercised Stock Option held by such
optionee shall

<PAGE>
thereafter be exercisable, to the extent to which it was exercisable at the time
of death, for a period of twelve (12) months from the date of such death or
until the expiration of the stated term of such Stock Option, whichever period
is the shorter. In the event of termination of employment by reason of
Retirement, if an Incentive Stock Option is exercised after the expiration of
the exercise periods that apply for purposes of Section 422 of the Code, such
Stock option will thereafter be treated as a Non-Qualified Stock Option.

i. Other Termination. Unless otherwise determined by the Committee (or
pursuant to procedures established by the Committee) at or after grant, if an
optionee's employment by the Company and any Subsidiary or Affiliate terminates
for any reason other than death, Disability or Normal or Early Retirement, the
Stock Option shall thereupon terminate, except that such Stock Option may be
exercised, to the extent otherwise then exercisable, for the lesser of three (3)
months or the balance of such Stock Option's term if the optionee is
involuntarily terminated without Cause by the Company and any Subsidiary or
Affiliate. For purposes of the Plan, "Cause" means a felony conviction of a
participant or the failure of a participant to contest prosecution for a felony,
or a participant's willful misconduct or dishonesty, any of which is directly
and materially harmful to the business or reputation of the Company or any
Subsidiary or Affiliate.

j. Incentive Stock Options. Anything in the Plan to the contrary
notwithstanding, no term of this Plan relating to Incentive Stock Options shall
be interpreted, amended or altered, nor shall any discretion or authority
granted under the Plan be so exercised, so as to disqualify the Plan under
Section 422 of the Code, or, without the consent of the optionee(s) affected, to
disqualify any Incentive Stock Option under such Section 422.

Incentive Stock options shall not be treated as "incentive stock
options" to the extent that the aggregate Fair Market Value (determined at the
time an Incentive Stock Option is granted) of Stock with respect to which
Incentive Stock Options meeting the requirements of Section 422(b) of the Code
are exercisable for the first time by any participant during any calendar year
(under all plans of the Company and its Subsidiaries) exceeds $100,000, and such
excess shall be treated as a Non-Qualified Stock Option.

To the extent permitted under Section 422 of the Code or the applicable
regulations thereunder or any applicable Internal Revenue Service pronouncement:

(i) if (x) a participant's employment is terminated by reason of
death, Disability or Normal or Early Retirement, and (y) the
portion of any Incentive Stock Option exercisable during the
post-termination period specified under Sections 5(f), (g) or
(h) that is greater than the portion of such option that is
exercisable as an "incentive stock option" during such
post-termination period under Section 422, shall be treated as a
Non-Qualified Stock Option; and

(ii) if the exercise of an Incentive Stock Option is accelerated
by reason of a Change

<PAGE>
in Control, any portion of such option that is not exercisable
as an Incentive Stock Option by reason of the $100,000
limitation contained in Section 422(d) of the Code shall be
treated as a Non-Qualified Stock Option.

k. Buyout Provisions. The Committee may at any time offer to purchase
an Option previously granted for a payment in cash, Stock, Deferred Stock or
Restricted Stock, based on such terms and conditions as the Committee shall
establish and communicate to the optionee at the time that such offer is made.

l. Settlement Provisions. If the option agreement so provides at grant
or is amended after grant and prior to exercise to so provide (with the
optionee's consent), the Committee may require that all or part of the shares to
be issued with respect to an exercised Option take the form of Deferred or
Restricted Stock, which shall be valued on the date of exercise on the basis of
the Fair Market Value (as determined by the Committee) of such Deferred or
Restricted Stock determined without regard to the deferral limitations and/or
forfeiture restrictions involved.

m. Additional Options. The Committee in its sole discretion may
authorize the grant of Non-Qualified Stock Options which provide for the
subsequent grant of additional Non-Qualified Stock Option effective upon the
occurrence of certain events specified in the applicable option agreement

SECTION 6. Stock Appreciation Rights.

a. Grant and Exercise. Stock Appreciation Rights may be granted in
conjunction with all or part of any Stock Option granted under the Plan. In the
case of a Non-Qualified Stock Option, such rights may be granted either at or
after the time of the grant of such Stock Option. In the case of an Incentive
Stock Option, such rights may be granted only at the time of the grant of such
Stock Option.

A Stock Appreciation Right or applicable portion thereof granted with
respect to a given Stock Option shall terminate and no longer be exercisable
upon the termination or exercise of the related Stock Option, subject to such
provisions as the Committee may specify at grant where a Stock Appreciation
Right is granted with respect to less than the full number of shares covered by
a related Stock Option.

A Stock Appreciation Right may be exercised by an optionee, subject to
Section 6(b), in accordance with the procedures established by the Committee for
such purpose. Upon such exercise, the optionee shall be entitled to receive an
amount determined in the manner prescribed in Section 6(b). Stock Options
relating to exercised Stock Appreciation Rights shall no longer be exercisable
to the extent that the related Stock Appreciation Rights have been exercised.

b. Terms and Conditions. Stock Appreciation Rights shall be subject
to such terms and

<PAGE>
conditions, not inconsistent with the provisions of the Plan, as shall be
determined from time to time by the Committee, including the following:

(i) Stock Appreciation Rights shall be exercisable only at
such time or times and to the extent that Stock Options to which
they relate shall be exercisable in accordance with the
provisions of Section 5 and this Section 6 of the Plan;
provided, however, that any Stock Appreciation Right granted to
an optionee subject to Section 16(b) of the Exchange Act shall
not be exercisable during the first six (6) months of its term
and exercise shall be permitted only in accordance with Rule
16b-3 under the Exchange Act to the extent applicable.

(ii) Upon the exercise of a Stock Appreciation Right, an
optionee shall be entitled to receive an amount in cash and/or
shares of Stock equal in value to the excess of the Fair Market
Value of one share of Stock over the option price per share
specified in the related Stock Option multiplied by the number
of shares in respect of which the Stock Appreciation Right shall
have been exercised, with the Committee having the right to
determine the form of payment.

(iii) Stock Appreciation Rights shall be transferable only when
and to the extent that the underlying Stock option would be
transferable under Section 5(e) of the Plan.

(iv) Upon the exercise of a Stock Appreciation Right, the Stock
Option or part thereof to which such Stock Appreciation Right is
related shall be deemed to have been exercised for the purpose
of the limitation set forth in Section 3 of the Plan on the
number of shares of Stock to be issued under the Plan, but only
to the extent of the number of shares issued under the Stock
Appreciation Right at the time of exercise based on the value of
the Stock Appreciation Right at such time.

(v) In its sole discretion, the Committee may grant Limited
Stock Appreciation Rights under this Section 6, i.e., Stock
Appreciation Rights that become exercisable only in the event of
a Change in Control or a Potential Change in Control, subject to
such terms and conditions as the Committee may specify or grant.
Such Limited Stock Appreciation Rights shall be settled solely
in cash.

(vi) The Committee, in its sole discretion, may also provide
that, in the event of a Change in Control or a Potential Change
in Control, the amount to be paid upon the exercise of a Stock
Appreciation Right or Limited Stock Appreciation Right shall be
based on the Change of Control Price, subject to such terms and
conditions as the Committee may specify at grant.

<PAGE>
SECTION 7. Restricted Stock.

a. Administration. Shares of Restricted Stock may be issued either
alone, in addition to or in tandem with other awards granted under the Plan
and/or cash awards made outside the Plan. The Committee shall determine the
eligible persons to whom, and the time or times at which, grants of Restricted
Stock will be made, the number of shares to be awarded, the price (if any) to be
paid by the recipient of Restricted Stock (subject to Section 7 (b)), the time
or times within with such awards may be subject to forfeiture, and all other
terms and conditions of the awards.

The Committee may condition the grant of Restricted Stock upon the
attainment of specified performance goals or such other factors as the Committee
may determine, in its sole discretion.

The provisions of Restricted Stock awards need not be the same with
respect to each recipient.

b. Awards and Certificates. The prospective recipient of a Restricted
Stock award shall not have any rights with respect to such award, unless and
until such recipient has executed an agreement evidencing the award and has
delivered a fully executed copy thereof to the Company, and has otherwise
complied with the applicable terms and conditions of such award.

(i) The purchase price for shares of Restricted Stock shall be
equal to, less than or greater than their par value and may be
zero.

(ii) Awards of Restricted Stock must be accepted within a
period of sixty (60) days (or such shorter period as the
Committee may specify at grant) after the award date, by
executing a Restricted Stock award agreement and paying whatever
price (if any) is required under Section 7(b)(i).

(iii) Each participant receiving a Restricted stock award shall
be issued a stock certificate in respect of such shares of
Restricted Stock. Such certificate shall be registered in the
name of such-participant, and shall bear an appropriate legend
referring to the terms, conditions, and restrictions applicable
to such award.

(iv) The Committee shall require that the stock certificates
evidencing such shares be held in custody by the Company until
the restrictions thereon shall have lapsed, and that, as a
condition of any Restricted Stock award, the participant shall
have delivered a stock power, endorsed in blank, relating to the
Stock covered by such award.

c. Restrictions and Conditions. The shares of Restricted Stock
awarded pursuant to this Section 7 shall be subject to the following
restrictions and conditions:

<PAGE>
(i) Subject to the provisions of the Plan and the award
agreement, during a period set by the Committee commencing with
the date of such award (the "Restricted Period"), the
participant shall not be permitted to sell, transfer, pledge or
assign shares of Restricted Stock awarded under the Plan. Within
these limits, the Committee, in its sole discretion, may provide
for the lapse of such restrictions in installments and may
accelerate or waive such restriction in whole or in part, based
on service, performance and/or such other factors or criteria as
the Committee may determine, in its sole discretion. Shares
issued to any person subject to Section 16(b) of the Exchange
Act may not be disposed of within six (6) months of grant,
except as may be permitted under Rule 16b-3(c) issued under the
Exchange Act.

(ii) Except as provided in this paragraph (ii) and Section
7(c)(i), the participant shall have, with respect to the shares
of Restricted Stock, all of the rights of a shareholder of the
Company, including the right to vote the shares, and the right
to receive any cash dividends. The Committee, in its sole
discretion, as determined at the time of award, may permit or
require the payment of cash dividends to be deferred and, if the
Committee so determines, reinvested, subject to Section 13(e),
in additional Restricted Stock to the extent shares are
available under Section 3, or otherwise reinvested. Pursuant to
Section 3 above, Stock dividends issued with respect to
Restricted Stock shall be treated as additional shares of
Restricted Stock that are subject to the same restrictions and
other terms and conditions that apply to the shares with respect
to which such dividends are issued.

(iii) Subject to the applicable provisions of the award
agreement and this Section 7, upon termination of a
participant's employment with the Company and any Subsidiary or
Affiliate for any reason during the Restriction Period, all
shares still subject to restriction will vest, or be forfeited,
in accordance with the terms and conditions established by the
Committee at or after grant.

(iv) If and when the Restriction Period expires without a prior
forfeiture of the Restricted Stock subject to such Restriction
Period, certificates for an appropriate number of unrestricted
shares shall be delivered to the participant promptly.

d. Minimum Value Provision. In order to better ensure that award
payments actually reflect the performance of the Company and service of the
participant, the Committee may provide, in its sole discretion, for a tandem
performance-based or other award designed to guarantee a minimum value, payable
in cash or Stock to the recipient of a Restricted Stock award, subject to such
performance, future service deferral and other terms and conditions as may be
specified by the Committee.

<PAGE>
SECTION 8. Deferred Stock.

a. Administration. Deferred Stock may be awarded either alone, in
addition to or in tandem with other awards granted under the Plan and/or cash
awards made outside the Plan. The Committee shall determine the eligible persons
to whom and the time or times at which Deferred Stock shall be awarded, the
number of shares of Deferred Stock to be awarded to any person, the price (if
any) to be paid by the recipient of Deferred Stock, the duration of the period
(the "Deferral Period") during which, and the conditions under which, receipt of
the Stock will be deferred, and the other terms and conditions of the award in
addition to those set forth in Section 8(b).

The Committee may condition the grant of Deferred Stock upon the
attainment of specified performance goals or such other factors or criteria as
the Committee shall determine, in its sole discretion.

The provisions of Deferred Stock awards need not be the same with
respect to each recipient.

b. Terms and Conditions. The shares of Deferred Stock awarded
pursuant to this Section 8 shall be subject to the following terms and
conditions:

(i) Subject to the provisions of the Plan and the award
agreement referred to in Section 8(b)(vi) below, Deferred Stock
awards may not be sold, assigned, transferred, pledged or
otherwise encumbered during the Deferral Period. At the
expiration of the Deferral Period (or the Elective Deferral
Period referred to in Section 8(b)(v), where applicable), share
certificates shall be delivered to the participant, or his legal
representative, in a number equal to the shares covered by the
Deferred Stock award. In the case of any person subject to
Section 16(b) of the Exchange Act, no share certificates will be
delivered earlier than six (6) months from the date on which
such shares are deemed to have been granted (according to the
opinion of Company's counsel) under Rule 16b-3 of the Exchange
Act.

(ii) Unless otherwise determined by the Committee at grant,
amounts equal to any dividends declared during the Deferral
Period with respect to the number of shares covered by a
Deferred Stock award will be paid to the participant currently,
or deferred and deemed to be reinvested in additional Deferred
Stock, or otherwise reinvested, all as determined at or after
the time of the award by the Committee, in its sole discretion.

(iii) Subject to the provision of the award agreement and this
Section 8, upon termination of a participant's employment with
the Company and any Subsidiary or Affiliate for any reason
during the Deferral Period for a given award, the Deferred Stock
in question will vest, or be forfeited, in accordance with the
terms and conditions established by the Committee at or after
grant.

<PAGE>
(iv) Based on service, performance and/or such other factors or
criteria as the Committee may determine, the Committee may, at
or after grant, accelerate the vesting of all or any part of any
Deferred Stock award and/or waive the deferral limitations for
all or any part of such award.

(v) A participant may elect to further defer receipt of an
award (or an installment of an award) for a specified period or
until a specified event (the "Elective Deferral Period"),
subject in each case to the Committee's approval and to such
terms as are determined by the Committee, all in its sole
discretion. Subject to any exceptions adopted by the Committee,
such election must generally be made at least twelve (12) months
prior to completion of the Deferral Period for such Deferred
Stock award (or such installment).

(vi) Each award shall be confirmed by, and subject to the terms
of, a Deferred Stock agreement executed by the Company and the
participant.

c. Minimum Value Provisions. In order to better ensure that award
payments actually reflect the performance of the Company and service of the
participant, the Committee may provide, in its sole discretion, for a tandem
performance-based or other award designed to guarantee a minimum value, payable
in cash or Stock to the recipient of a Deferred Stock award, subject to such
performance, future service, deferral and other terms and conditions as may be
specified by the Committee.

SECTION 9. Stock Purchase Rights.

a. Awards and Administration. Subject to Section 3 above, the Committee
may grant eligible participants Stock Purchase Rights which shall enable such
participants to purchase Stock (including Deferred Stock and Restricted Stock):

(i) at its Fair Market Value on the date of grant;

(ii) at fifty percent (50%) of such Fair Market Value on such
date;

(iii) at an amount equal to Book Value on such date; or

(iv) at an amount equal to the par value of such Stock on such
date.

The Committee shall also impose such deferral, forfeiture and/or other
terms and conditions as it shall determine, in its sole discretion, on such
Stock Purchase Rights or the exercise thereof.

The terms of Stock Purchase Rights awards need not be the same with
respect to each

<PAGE>
participant.

Each Stock Purchase Right award shall be confirmed by, and be subject
to the terms of, a Stock Purchase Rights Agreement.

b. Exercisability. Stock Purchase Rights shall generally be exercisable
for such period after grant as is determined by the Committee not to exceed
thirty (30) days. Stock which may be purchased pursuant to Stock Purchase Rights
of persons potentially subject to Section 16(b) of the Exchange Act shall not be
sold until six (6) months and one (1) day after the grant date.

SECTION 10. Other Stock-Based Awards.

a. Administration. Other awards of Stock and other awards that are
valued in whole or in part by reference to, or are otherwise based on, Stock
("Other Stock-Based" Awards"), including, without limitation, performance
shares, convertible preferred stock, convertible debentures, exchangeable
securities and Stock awards or options valued by reference to Book Value or
Subsidiary performance, may be granted alone, in addition to or in tandem with
Stock Options, Stock Appreciation Rights, Restricted Stock, Deferred Stock or
Stock Purchase Rights granted under the Plan and/or cash awards made outside of
the Plan.

Subject to the provisions of the Plan, the Committee shall have
authority to determine the persons to whom and the time or times at which such
awards shall be made, the number of shares of Stock to be awarded pursuant to
such awards, and all other conditions of the awards. The Committee shall also
provide for the grant of Stock upon the completion of a specified performance
period.

The provisions of Other Stock-Based Awards need not be the same with
respect to each recipient.

b. Terms and Conditions. Other Stock-Based Awards made pursuant to
this Section 10 shall be subject to the following terms and conditions:

(i) Subject to the provisions of this Plan and the award
agreement referred to in Section 10(b)(v) below, shares subject
to awards made under this Section 10 may not be sold, assigned,
transferred, pledged or otherwise encumbered prior to the date
on which the shares are issued, or, if later, the date on which
any applicable restriction, performance or deferral period
lapses. The Committee may further provide, in its sole
discretion, that shares subject to awards under this Section 10
made to persons potentially subject to Section 16(b) of the
Exchange Act may not be sold until six (6) months and one (1)
day after the grant date.

<PAGE>
(ii) Subject to the provisions of this Plan and the award
agreement and unless otherwise determined by the Committee at
grant, the recipient of an award under this Section 10 shall be
entitled to receive, currently or on a deferred basis, interest
or dividends or interest or dividend equivalents with respect to
the number of shares covered by award, as determined at the time
of the award by the Committee, in its sole discretion, and the
Committee may provide that such amounts (if any) shall be deemed
to have been reinvested in additional Stock or otherwise
reinvested.

(iii) Any award under Section 10 and any Stock covered by any
such award shall vest or be forfeited to the extent so provided
in the award agreements, as determined by the Committee, in its
sole discretion.

(iv) In the event of the participant's Retirement, Disability
or death, or in cases of special circumstances, the Committee
may, in its sole discretion, waive in whole or in part any or
all of the remaining limitations imposed hereunder (if any) with
respect to any or all of an award under this Section 10.

(v) Each award under this Section 10 shall be confirmed by,
and subject to the terms of, an agreement or other instrument by
the Company and by the participant.

(vi) Stock (including securities convertible into Stock) issued
on a bonus basis under this Section 10 may be issued for no cash
consideration. Stock (including securities convertible into
Stock) purchased pursuant to a purchase right awarded under this
Section 10 shall be priced at least fifty percent (50%) of the
Fair Market Value of the Stock on the date of grant.

SECTION 11. Change in Control Provisions.

a. Impact of Event. In the event of:

(1) a Change in Control, or

(2) a Potential Change in Control, but only if and to the extent
so determined by the Committee or the Board at or after grant
(subject to any right of approval expressly reserved by the
Committee or the Board at the time of such determination), the
following acceleration and valuation provisions shall apply:

(i) Any Stock Appreciation Rights (including, without
limitation, any Limited Appreciation Rights) outstanding for at
least six (6) months and any Stock Options awarded under the
Plan not previously exercisable and vested shall become fully

<PAGE>
exercisable and vested.

(ii) The restrictions and deferral limitations applicable to
any Restricted Stock, Deferred Stock, Stock Purchase Rights and
Other Stock-Based Awards, in each case to the extent not already
vested under the Plan, shall lapse and such shares shall be
deemed fully vested.

(iii) The value of all outstanding Stock Options, Stock
Appreciation Rights, Restricted Stock, Deferred Stock, Stock
Purchase Rights and Other Stock-Based Awards, in each case to
the extent vested, shall, unless otherwise determined by the
Committee in its sole discretion at or after grant but prior to
any Change in Control, be cashed out on the basis of the Change
in Control Price as of the date such Change in Control or such
Potential Change in Control is determined to have occurred or
such other date as the Committee may determine prior to the
Change in Control.

(b) Definition of "Change in Control". For purposes of Section
11(a), a "Change in Control" means the happening of any of the following:

(i) When any "person" as defined in Section 3(a)(9) of the
Exchange Act and as used in Sections 13(d) and 14(d) thereof,
other than Boston University (collectively, the Group),
including a "group" as defined in Section 13(d) of the Exchange
Act but excluding the Company and any Subsidiary and any
employee benefit plan sponsored or maintained by the Company or
any Subsidiary (including any trustee of such plan acting as
trustee), directly or indirectly, becomes the "beneficial owner"
(as defined in Rule 13(d)-3 under the Exchange Act), of
securities of the Company representing twenty percent (20%) or
more of the combined voting power of the Company's then
outstanding securities; or

(ii) When, during any period, of twenty-four (24) consecutive
months during the existence of the Plan, the individuals who, at
the beginning of such period, constitute the Board (the
"Incumbent Directors") cease for any reason other than death to
constitute at least a majority thereof, provided, however, that
a director who was not a director at the beginning of such
twenty-four (24) month period shall be deemed to have satisfied
such twenty-four (24) month requirement (and be an Incumbent
Director) if such director was elected by, or on the
recommendations or with the approval of, at least two-thirds of
the directors who then qualified as Incumbent Directors either
actually (because they were directors at the beginning of such
twenty-four (24) month period) or by prior operations of this
Section 11(b)(ii); or

(iii) The occurrence of a transaction requiring shareholder
approval for the acquisition of the Company by an entity other
than the Company or a Subsidiary through purchase of assets, or
by merger, or otherwise.

<PAGE>
(c) Definition of Potential Change in Control. For purposes of
Section 11(a), a "Potential Change in Control" means the happening of any one
of the following:

(i) The approval by shareholders of an agreement by the
Company, the consummation of which would result in a Change in
Control of the Company as defined in Section 11(b); or

(ii) The acquisition of beneficial ownership, directly or
indirectly, by an entity, person or group other than the Company
or a Subsidiary or any Company employee benefit plan (including
any trustee of such plan acting as such trustee), or Boston
University of securities of the Company representing five
percent (5%) or more of the combined voting power of the
Company's outstanding securities and the adoption by the Board
of a resolution to the effect that a Potential Change in Control
of the Company has occurred for the purposes of the Plan.

d. Change in Control Price. For purposes of this Section 11, "Change in
Control Price" means the highest price per share paid in any transaction
reported on the National Association of Securities Dealers Automated Quotation
System, or paid or offered in any bona fide transaction related to a potential
or actual Change in Control of the Company at any time during the sixty (60) day
period immediately preceding the occurrence of the Change in Control period (or,
where applicable, the occurrence of the Potential Change in control event), in
each case as determined by the Committee except that, in the case of Incentive
Stock Options and Stock Appreciation Rights relating to Stock Options, such
price shall be based only on transactions reported for the date on which the
optionee exercises such Stock Appreciation Rights (or Limited Stock Appreciation
Rights) or, where applicable, the date on which a cashpoint occurs under Section
11(a)(ii).

SECTION 12. Amendment and Termination.

The Board may amend, alter, or discontinue the Plan, but no amendment,
alteration, or discontinuation shall be made which would impair the rights of an
optionee or participant under a Stock Option, Stock Appreciation Right, Limited
Stock Appreciation Right, Restricted or Deferred Stock award, Stock Purchase
Right or Other Stock-Based Award theretofore granted, without the optionee or
participant's consent, or which, without the approval of the Company's
shareholders, would:

a. change the pricing terms of Section 9(a);

b. change the classification of persons eligible to participate in the
Plan;

c. extend the maximum option period under Section 5(d) of the Plan.

<PAGE>
The Committee may amend the terms of any Stock Option or other award
theretofore granted, prospectively or retroactively, but, subject to Section 3
above, no such amendment shall impair the rights of any holder without the
holder's consent. The Committee may also substitute new Stock Options for
previously granted Stock Options (on a one for one or other basis), including
previously granted Stock Options having higher option exercise prices.

Subject to the above provisions, the Board shall have broad authority
to amend the Plan to take into account changes in applicable securities and tax
laws and accounting rules, as well as other developments. However, no amendment
shall be effective if shareholder approval is required under Section 16 of the
Exchange Act or Section 422 of the Code unless the shareholders approve or
ratify the amendment within the requisite time frame pursuant to procedures as
may be required by the Exchange Act or the Code, as applicable.

SECTION 13. Unfunded Status of Plan.

The Plan is intended to constitute an "unfunded" plan for incentive and
deferred compensation. With respect to any payments not yet made to a
participant or optionee by the Company, nothing contained herein shall give any
such participant or optionee any rights that are greater than those of a general
creditor of the Company. In its sole discretion, the Committee may authorize the
creation of trusts or other arrangements to meet the obligations created under
the Plan to deliver Stock or payments in lieu of or with respect to awards
hereunder, provided, however, that, unless the Board determines otherwise with
the consent of the affected participant, the existence of such trusts or other
arrangements is consistent with the "unfunded" status of the Plan.

SECTION 14 General Provisions.

a. The Committee may require each person purchasing shares of Stock
pursuant to a Stock Option or other award under the Plan to represent to and
agree with the Company in writing that the optionee or participant is acquiring
the shares without a view to distribution thereof. The certificates for such
shares may include any legend which the Committee deems appropriate to reflect
any restrictions on transfer.

All certificates for shares of Stock or other securities delivered
under the Plan shall be subject to compliance with such stock-transfer orders
and other restrictions as the Committee may deem advisable under the rules,
regulations, and other requirements of the Commission, any stock exchange upon
which the Stock is then listed, and any applicable Federal or state securities
law, and shall further be subject to the approval of counsel for the Company
with respect to such compliance. The Committee may cause a legend or legends to
be put on any such certificates to make appropriate reference to such
restrictions.

<PAGE>
b. Nothing contained in this Plan shall prevent the Board from adopting
other or additional compensation arrangements, subject to shareholder approval
if such approval is required; and such arrangements may be either generally
applicable or applicable only in specific cases.

c. The adoption of the Plan shall not confer upon any person any right
to continue employment or in any other status with the Company or a Subsidiary
or Affiliate, as the case may be, nor shall it interfere in any way with the
right of the Company or a Subsidiary or Affiliate to terminate the employment or
any contractual arrangement of any person participating hereunder at any time.

d. No later than the date as of which an amount first becomes
incredible in the gross income of the participant for Federal income tax
purposes with respect to any award under the Plan, the participant shall pay to
the Company, or make arrangements satisfactory to the Committee regarding the
payment of, any Federal, state, or local taxes of any kind required by law to be
withheld with respect to such amount. Unless otherwise determined by the
Committee, withholding obligations may be settled with Stock, including Stock
that is part of the award that gives rise to the withholding requirement. The
obligations of the Company under the Plan shall be conditional on such payment
or arrangements and the Company and its Subsidiaries or Affiliates shall, to the
extent permitted by law, have the right to deduct any such taxes from any
payment of any kind otherwise due to the participant.

e. The actual or deemed reinvestment of dividends or dividend
equivalents in additional Restricted Stock (or in Deferred Stock or other types
of Plan awards) at the time of any dividend payment shall only be permissible if
sufficient shares of Stock are available under Section 3 for such reinvestment
(taking into account then outstanding Stock Options, Stock Purchase Rights and
other Plan awards).

f. The Plan and all awards made and actions taken thereunder shall be
governed by and construed in accordance with the laws of the State of Delaware.

g. No security or derivative security hereunder shall be transferable
by a participant other than by will or the laws of descent and distribution or
pursuant to a qualified domestic relations order as referenced in Rule 16b-3 of
the Exchange Act.

SECTION 15. Effective Date of Plan.

The Plan shall be effective as of January 31, 1992 subject to the
approval of the Plan by a majority of the votes cast by the holders of the
Company's Common Stock pursuant to Rule 16b-3 (b) of the Exchange Act. Any
grants made under the Plan prior to such approval shall be effective when made
(unless otherwise specified by the Board at the time of grant), but shall be

<PAGE>
conditioned on, and subject to, such approval of the Plan by such shareholders.

SECTION 16. Term of Plan.

No Stock Option, Stock Appreciation Right, Restricted Stock award,
Deferred Stock award, Stock Purchase Right or Other Stock-Based Award shall be
granted pursuant to the Plan on or after the tenth anniversary of the date of
shareholder approval or Board approval, whichever is earlier, but awards granted
prior to such tenth anniversary may extend beyond that date.

SECTION 17. Definitions.

For purposes of the Plan, the following terms shall be defined as set
forth below:

a. "Affiliate" means any entity other than the Company and its
Subsidiaries that is designated by the Board as a participating employer under
the Plan, provided that the Company directly or indirectly owns at least twenty
percent (20%) of the combined voting power of all classes of stock of such
entity or at least twenty percent (20%) of the ownership interests in such
entity.
b. "Board" means the Board of Directors of the Company.

c. "Book Value" means, as of any given date, on a per share basis, (i)
the shareholders' equity in the Company as of the end of the immediately
preceding fiscal year as reflected in the Company's consolidated balance sheet,
subject to such adjustments as the Board shall specify at or after grant,
divided by (ii) the number of then outstanding shares of Stock as of such
year-end date (as adjusted by the Committee for subsequent events).

d. "Cause" shall have the meaning set forth in Section 5(i) above.

e. "Change in Control" shall have the meaning set forth in Section
11(b) above.

f. "Change in Control Price" shall have the meaning set forth in
Section 11(d) above.

g. "Code" means the Internal Revenue Code of 1986, as amended.

h. "Commission" means the Securities and Exchange Commission.

i. "Committee" means the Committee referred to in Section 4 of the
Plan.

<PAGE>
j. "Company" means Seraglio, Inc., a Delaware corporation.

k. "Deferral Period" shall have the meaning set forth in
Section 8(a) above.

l. "Deferred Stock" means an award made pursuant to Section 8 above of
the right to receive Stock at the end of a specified deferral period.

m. "Disability" means disability as determined under
procedures established by the Committee for purposes of the Plan.

n. "Disinterested Person" shall have the meaning set forth in Rule
16b-3(c)(2)(i) as promulgated by the Commission under the Exchange Act, or any
successor definition adopted by the Commission.

o. "Elective Deferral Period" shall have the meaning set forth in
Section 8(b)(v) above.

p. "Employee" means any person, including officers and directors,
employed by the Company or any Affiliate or Subsidiary of the Company. The
payment of a director's fee by the Company shall not be sufficient to constitute
"employment" by the Company.

q. "Exchange Act" means the Securities Exchange Act of 1934, as
amended.

r. "Early Retirement" means retirement, with the express consent of the
Company at or before the time of such retirement, from active employment with
the Company and any Subsidiary or Affiliate pursuant to the early retirement
provisions of the applicable qualified retirement plan of such entity.

s. "Fair Market Value" means, as of any given date the last reported
sales price of such share on the current day (or most recent business day for
trading if a holiday or weekend) on the New York Stock Exchange, or, if the
Common Stock is not then listed or admitted to trading on the New York Stock
Exchange, on such other principal stock exchange on which such stock is then
listed or admitted to trading, or, if no sale takes place on such day on any
such exchange, the average of the closing bid and asked prices on such day as
officially quoted on any such exchange, or, if the Common Stock is not then
listed or admitted to trading on any stock exchange, the market price for each
such trading day shall be the last sale reported on the NASDAQ National Market
System as published in The Wall Street Journal or, if no such sale is so
reported, the average of the reported closing bid and asked prices on such day
in the over-the-counter market, as furnished by the National Association of
Securities Dealers Automated Quotation system, or, if such price at the time is
not available from such system, as furnished by any similar system then engaged
in the business of reporting such prices and selected by the Board or, if there
is no such system, as furnished by any member of the National

<PAGE>
Association of Securities Dealers, selected by the Board. If the Common Stock is
neither listed on a national securities exchange nor reported on the NASDAQ
National Market System nor traded on the over-the-counter market, fair market
value shall be such value as the Board, in good faith, shall determine.
Notwithstanding any provision of the Plan to the contrary, no determination made
with respect to the Fair Market Value of Common Stock subject to an Option shall
be inconsistent with the method required for incentive options under Code
Section 422.

t. "Incentive Stock Option" means any Stock option intended to
qualify as an "Incentive Stock option" within the meaning of Section 422 of the
Code.

u. "Incumbent Directors" shall have the meaning set forth in Section
11(b)(ii) above.

v. "Limited Stock Appreciation Right" shall have the meaning set
forth in Section 6(b)(v) above.

w. "Non-Qualified Stock Option" means any Stock Option that is not an
Incentive Stock Option.

x. "Normal Retirement" means retirement from active employment with
the Company and any Subsidiary or Affiliate on or after age 65.

y. "Other Stock-Based Award" means an award under Section 10 above
that is valued in whole or in part by reference to, or is otherwise based on,
Stock.

z. "Plan" means this Seraglio, Inc. 1992 Long Term Incentive Plan, as
amended from time to time.

aa. "Potential Change" shall have the meaning set forth in Section
11(c) above.

bb. "Restricted Period" shall have the meaning set forth in Section
7(c)(i) above.

cc. "Restricted Stock" means an award of shares of Stock that is
subject to restrictions under Section 7 above.

dd. "Retirement" means Normal or Early Retirement.

ee. "Stock" means the Common Stock, $.01 par value, of the Company.

ff. "Stock Appreciation Right" means the right pursuant to an award
granted under Section 6 above to surrender to the Company all (or a portion) of
a Stock Option in exchange for an amount equal to the difference between (i) the
Fair Market Value, as of the date such Stock

<PAGE>
Option (or portion thereof) is surrendered, of the shares of Stock covered by
such Stock Option (or such portion thereof), subject, where applicable, to the
pricing provisions in Section 6(b)(ii), and (ii) the aggregate exercise price of
such Stock Option (or such portion thereof).

gg. "Stock Option" or "Option" means any option to purchase shares of
Stock (including Restricted Stock and Deferred Stock, if the Committee so
determines) granted pursuant to Section 5 above.

hh. "Stock Purchase Right" means the right to purchase Stock pursuant
to Section 9.

ii. "Subsidiary" means a "subsidiary corporation", whether now or
hereafter existing, as defined in Section 424(f) of the Code.

<PAGE>

Exhibit No. 10.73

EMPLOYMENT AGREEMENT

Employment Agreement dated as of January 15, 1997 between
Seragen, Inc. (the "Company"), having an office at 97 South Street, Hopkinton,
Massachusetts 01748, and Elizabeth Chen ("Chen"), residing at 122 West
Montgomery Street, Baltimore, Maryland 21230.

Unless otherwise specifically provided, all capitalized terms
are defined in Section 5.

1. Term of Employment.

Subject to the terms and conditions of this Agreement, the
Company hereby employs Chen, and Chen hereby accepts employment by the Company,
commencing on January 15, 1997 (the "Effective Date") and continuing until the
date Chen is terminated or otherwise resigns pursuant to Section 4 of this
Agreement, except that any rights or obligations arising before such date
(including the right to future severance payments) shall remain in full force
and effect after such date.

2. Duties.

(a) General. Effective as of the Effective Date, Chen is hereby engaged
to serve as Vice President of Business Development of the Company. Chen shall
report solely to the Chief Executive Officer of the Company, shall perform such
executive duties as may be assigned to her from time to time by the Company's
Chief Executive Officer and shall possess such other titles, without additional
compensation, as may be assigned or granted to her from time to time by the
Company's Chief Executive Officer or Board of Directors. If such additional
titles involve significant additional responsibilities, Chen and the Company
shall negotiate in good faith to determine any additional compensation that
shall be paid to Chen. Except as provided in Section 2(b)(i) hereof, Chen agrees
to devote her full business time, energy and skill to the Company's affairs and
shall at all times act with due regard to the best interests of the Company.

<PAGE>
(b) Outside Commitments. Chen represents and agrees that (i) except for
service on the Baltimore City Judicial Nominating Commission, which involves no
more than an average of six (6) days of work per year, she is not currently
employed by, nor does she sit on the Board of Directors of, any other company or
institution; and (ii) during her employment by the Company, except as provided
in (i) above, she shall not accept employment by or serve as a consultant to,
any company or other institution except with the prior consent of the Chief
Executive Officer or Board of Directors of the Company.

3. Compensation and Other Benefits. For all services to be rendered by Chen and
all covenants undertaken by her pursuant to this Agreement, the Company shall
pay and Chen shall accept the compensation set forth in this Section 3.

(a) Salary. The Company shall pay Chen a salary at the rate of One
Hundred Seventy-Five Thousand Dollars ($175,000) per annum during the term of
her employment hereunder, payable in accordance with the Company's normal
payroll practices for its senior management. The Company may, at any time, in
the discretion of its Board of Directors increase, but not decrease, Chen's base
salary based upon merit as a result of positive reviews of Chen's performance by
the Chief Executive Officer.

(b) Stock Options. The Company shall grant Chen stock options (the
"Options") under the Seragen, Inc. 1992 Long Term Incentive Plan (the "Plan") to
purchase sufficient shares of the Company's common stock, par value $.01 per
share ("Common Stock"), to equal 2.0% of the then outstanding Common Stock,
measured on a Fully Diluted Basis (as the term is defined in Section 5), at the
Fair Market Value (as defined in the Plan) per share of Common Stock on the date
of grant. To the extent permitted by federal income tax law, options issued to
Chen under the Plan shall be "incentive stock options" (as defined in Section
422 of the Internal Revenue Code (the "Code")). The Options shall be evidenced
by a Stock Option Agreement (the "Option Agreement") setting forth the terms and
conditions applicable to the Options.

<PAGE>
(i) Vesting. The Option Agreement shall provide that:

(1) the Options shall vest, i.e., become
exercisable as follows: (A) 1/48 of the Options, multiplied by the number of
calendar months or partial calendar months that have elapsed from November 11,
1996 until the date of grant of the Options, shall vest immediately upon the
grant of Options and (B) 1/48 of the Options shall vest on the first day of each
calendar month thereafter, so that Chen shall be fully (100%) vested on October
1, 2000;

(2) upon the termination by the Company of Chen's
employment without Just Cause or Chen's termination for Good Reason (as the
terms are defined in Section 5), in place of the vesting schedule provided in
Section 3(b)(i)(1) above, the number of Options that shall vest as of the date
of such termination shall be equal to the sum of (A) 25% of the Options and (B)
3.125% of the Options, multiplied by the number of calendar months or partial
calendar months that have elapsed from November 11, 1996 until the date of such
termination; and

(3) upon the a Change in Ownership (as the term is
defined in Section 5), in place of the vesting schedule provided in Section
3(b)(i)(1) above, the Options shall become fully (100%) vested.

(ii) General Provisions.

(1) The Options shall, to the extent vested, be fully
exercisable until the tenth (10th) anniversary of the date of grant, except that
the Options will expire 15 days after a termination of employment with Just
Cause. To the extent that any Options that are "incentive stock options" are not
exercised before the expiration of the exercise periods that apply for purposes
of Section 422 of the Code, such Options will remain outstanding for the
remainder of their term but will thereafter be treated as non-qualified stock
options.

(2) The Options shall be exercisable in accordance with
the terms of the Plan, including the right to pay the option exercise price in
whole or in part by surrendering shares

<PAGE>
of Common Stock or Restricted Stock (as such term is defined in the Plan) held
by Chen for at least six months prior to the exercise date with an aggregate
Fair Market Value equal to the option exercise price or in accordance with a
cashless exercise program established with a securities brokerage firm and
approved by the Company, and shall provide that stock certificates to be issued
upon exercise of vested Options shall be issued outright and free of escrow no
later than three (3) days after the date of exercise.

(3) Stock certificates issued pursuant to the exercise
of an Option shall include only such legends as are required to comply with
federal or state securities law or regulations.

(4) The Options shall include all rights and benefits
under the Plan, including Section 11 (relating to accelerated vesting on a
Change in Control), and the Company shall not terminate any Option issued to
Chen upon a Change in Control (as defined in the Plan) without Chen's written
approval.

(5) In the event that the Company grants options or
other equity interests to management, employees, directors or consultants, or
the Company sells shares of its Common Stock or any equity securities or
securities convertible or exchangeable into any equity securities of the
Company, as part of a plan or series of plans of financing, or the number of
shares of Common Stock outstanding on a Fully Diluted Basis increases as a
result of a change in the conversion ratio of any class of securities
convertible or exchangeable into any equity securities of the Company, the
Company shall grant Chen additional stock options under the Plan covering that
number of shares of Common Stock necessary to cause Chen's proportionate
holdings of the outstanding Common Stock on a Fully Diluted Basis, immediately
after the grant or sale of such options, shares or other equity interests to
equal her proportionate holdings of the outstanding Common Stock, on a Fully
Diluted Basis, immediately prior to the grant or sale of

<PAGE>
such options, shares or other equity interests (the "Dilution Options"), but not
to exceed two percent (2%) of the Common Stock on a Fully Diluted Basis.

Dilution Options will be granted on the last day of the calendar
quarter during which such grant or sale of options, shares or other equity
interests is completed, based on the number of shares of Common Stock
outstanding on a Fully Diluted Basis on the last day of such calendar quarter,
except that, in the case of any target Equity Financing (as the term is defined
in Section 5) from which the Company receives proceeds of at least Ten Million
($10,000,000) Dollars, the Dilution Options will be granted immediately upon the
consummation of such Target Equity Financing. Dilution Options will have an
exercise price equal to the fair market value per share of Common Stock on the
date of grant of such Dilution Options, and will otherwise be subject to the
same terms and conditions, and will vest and remain exercisable on the same
terms, as are set forth in Section 3(b) for all other Options granted to Chen.

Chen's right to receive Dilution Options pursuant to this subsection
3(b)(ii)(5) will terminate after the Company has received cumulative proceeds
(since the date of execution of this Agreement) of at least Twenty Million
($20,000,000) Dollars from one or more Target Equity Financings.

(6) The Company shall, on or before July 1, 1997, at
its own expense register under the Securities Act of 1933 the maximum aggregate
number of shares issuable under the Plan on a Registration Statement on Form S-8
and use its best efforts to maintain the effectiveness of such Registration
Statement for as long as any of the Options or Dilution Options remain
outstanding.

(c) Commuting and Living Expense Reimbursement. The Company shall,
within ten (10) days of receipt of reasonable substantiation, reimburse Chen for
(i) all reasonable costs incurred by her in connection with obtaining lodging
accommodations in the vicinity of the Company's principal office in order to
carry out her duties and responsibilities under this

<PAGE>
Agreement and weekly travel between such location and her family residence
located in Baltimore, Maryland, plus (ii) any federal, state or local income or
payroll taxes incurred by Chen with respect to payments made under this Section
3(c), including this subsection 3(c)(ii), so that Chen shall be made whole on an
after tax basis.

(d) Vacation and Employee Benefits. Chen shall be entitled to paid
vacations in accordance with the policies of the Company from time to time in
effect, subject to a minimum of four (4) weeks per year, and shall be eligible
to participate in any pension, profit sharing or similar plan and any health,
hospitalization, medical, accident, disability, sick leave, supplementary income
benefit, life insurance or other similar benefit plan or program of the Company
now existing or hereafter established and available to the Company's employees
generally or to key employees as a group to the extent her age, health, and
other qualifications make her eligible to participate. Furthermore, Chen shall
be entitled to such additional benefits as may be granted to her from time to
time by the Chief Executive Officer or the Board of Directors of the Company.

(e) Severance. Upon the termination of Chen's employment for any
reason, the Company shall pay Chen for up to four (4) weeks of any unused
accrued vacation time, together with all salary and other benefits accrued
through the date of termination. If either Chen shall voluntarily terminate her
employment for Good Reason (as defined in Section 5) or Chen's employment
hereunder is terminated by the Company without Just Cause (as defined in Section
5), the Company shall provide Chen with the following severance benefits:

(i) upon the date of such termination the Company shall pay Chen,
as termination and severance pay, in a lump sum, an amount equal to twelve (12)
months' salary based on her then salary rate; and

(ii) upon the date of such termination the Company shall pay Chen,
in a lump sum, the amount of any remaining obligations under any lease for local
lodging, up to a maximum of one year; and

<PAGE>
(iii) the Company will continue to provide Chen and her family with
the same group health plan benefits coverage provided to them prior to Chen's
termination for the maximum period set forth in the continuation coverage
requirements under "COBRA", and the Company will provide such coverage without
cost or charge of any nature to Chen or any member of her family, other than any
applicable deductible or co-payment, for such maximum period, but in no event
for a period longer than twelve (12) months following the date of Chen's
termination.

(f) Death or Disability. If Chen's employment is terminated by death
or disability, the Company shall pay to Chen's estate or to Chen, as the case
may be, the balance of her accrued and unpaid salary through the date of such
termination and unreimbursed expenses and her unused accrued vacation time (up
to four (4) weeks). For the purposes of this section, the word "disability"
shall have the same meaning as in the Company's then-applicable long-term
disability policy that would qualify Chen for full benefits under the policy.

(g) Employment. All compensation payable and other benefits provided
under this Section 3 shall be subject to customary withholding for income,
F.I.C.A. and other employment taxes. The value of stock issued pursuant to the
exercise of an Option or Dilution Option shall be measured solely in accordance
with IRS rules and regulations.

(h) Asset Value Realization Bonus. The Company and its shareholders
presently intend to develop the business of the Company over the long term
through the efforts of Chen and the other employees of the Company, which
efforts are intended to result in a substantial increase in the value of the
Common Stock and of the Options granted to Chen under Section 3(b) above. If,
however, a Change in Ownership of the Company (as the term is defined in Section
5) is Effected (as hereinafter defined) during the term of Chen's employment
with the Company or at any time before the first anniversary of Chen's
termination of employment, then the Company shall pay Chen a bonus (the "Asset
Value Realization Bonus") equal to two percent (2%) of the Net

<PAGE>
Proceeds (as hereinafter defined) for any acquisition that is part of the Change
in Ownership, which amount shall be reduced (but not below zero) by the Option
Stock Gain (as hereinafter defined) recognized by Chen as a result of the sale
by her of Common Stock acquired upon the exercise of Options or Dilution Options
granted to her under Section 3(b) above. The Company shall pay the Asset Value
Realization Bonus, or any increase in the Asset Value Realization Bonus, on or
before the closing of any acquisition that is part of a Change in Ownership. If
any part of the Net Proceeds is payable after closing (the "Deferred Payments"),
however, then the Company may defer the payment of the part of the Asset Value
Realization Bonus allocable to the Deferred Payments until receipt of the
Deferred Payments, provided the payor of the Deferred Payments has agreed in
writing to pay directly to Chen the Asset Value Realization Bonus allocable to
the Deferred Payments as and when such Deferred Payments are made to the Company
or its shareholders. "Net Proceeds" shall mean the total cash plus any property
received directly or indirectly by the Company or its shareholders in kind with
respect to all acquisitions constituting the Change in Ownership, reduced by all
investment banking fees, brokerage fees, appraisal fees, and other professional
expenses directly attributable to the acquisitions. A transaction shall be
"Effected" by a certain date if it is consummated by that date or is the subject
matter of an agreement or memorandum of intent executed by that date and
subsequently consummated. "Option Stock Gain" shall mean the difference between
the net proceeds from Chen's sale of Common Stock and the net cost to Chen to
exercise the Options and Dilution Options for such stock on the assumption that
Chen has, in fact, exercised all vested options and sold all Common Stock
received on such exercise as of the date of the Change in Ownership; Chen shall
for this purpose be deemed to have sold all Common Stock that (i) she owns at
the time of the Change of Ownership or could then own if she exercised all
vested options, (ii) she is permitted to sell, and (iii) in the event of a
merger or sale of securities, she has received an offer to purchase, and is
permitted to sell, on the same terms and conditions as those of the transactions

<PAGE>
that constitute the Change in Ownership. Chen's right to receive an Asset Value
Realization Bonus under this Section 3(h) shall terminate (i) upon a
restructuring that eliminates the liquidation preferences of all preferred stock
and other equity securities of the Company senior to the Common Stock (including
the Class A Common Stock expected to be issued in 1997) or (ii) if all shares of
preferred stock and other equity securities senior to the Common Stock
(including the Class A Common Stock expected to be issued in 1997) cease to be
outstanding, as a result of, their conversion into Common Stock or for any other
reason.

4. Termination of Employment.

(a) Termination by Company. The Company may terminate Chen's employment
hereunder at any time without Just Cause, effective upon not less than thirty
(30) days' prior written notice. The Company may terminate Chen's employment
hereunder with Just Cause immediately without notice. If the termination is for
Just Cause, the Company shall provide Chen as soon as practicable with a written
explanation of the facts on which the termination is based. For the purposes of
this Agreement, the Company shall be deemed to have terminated Chen without Just
Cause if (i) Chen shall have notified the Company in writing that she has Good
Reason (as defined in Section 5) to terminate employment with the Company, (ii)
the Company shall not have eliminated such Good Reason within thirty (30) days
of such notice, and (iii) Chen shall have given notice of termination of her
employment more than thirty (30) days after delivery of such notice of Good
Reason and less than sixty (60) days after delivery of such notice of Good
Reason.

(b) Termination by Chen. Chen may terminate her employment hereunder at any
time upon not less than thirty (30) days' prior written notice. Upon Chen's
voluntary termination of employment without Good Reason pursuant to this Section
4(b), Chen shall not be entitled to the severance benefits described in Section
3(e) above.

<PAGE>
(c) Disability. If Chen shall incur a disability, the Company may terminate
Chen's employment upon not less than thirty (30) days' prior written notice.
Upon such termination, Chen shall be entitled to receive from the Company only
those payments set forth in Section 3(f) hereof. For the purposes of this
section, the word "disability" shall have the same meaning as in the Company's
then-applicable long-term disability policy that would qualify Chen for full
benefits under the policy.

5. Definitions.

(a) Just Cause. For the purposes of this Agreement, "Just Cause" shall mean:

(i) the commission by Chen of an act of, or omission of an act that
would constitute, willful and material malfeasance or gross negligence in the
performance of her duties on behalf of the Company;

(ii) the commission by Chen of a willful act of material fraud in the
performance of her duties on behalf of the Company;

(iii) the conviction of Chen for commission of a felony; or

(iv) the breach by Chen of any material term of this Agreement or the
continuing willful failure of Chen to perform her material duties to the Company
(other than any such failure resulting from Chen's incapacity due to physical or
mental illness) after written notice thereof (specifying the particulars thereof
in reasonable detail) and a reasonable opportunity to be heard and cure such
breach or failure are given to Chen by the Chief Executive Officer of the
Company or the Board of Directors of the Company. No notice, however, shall be
due for a breach or failure to perform that cannot be cured or for any act
described in clauses (i), (ii) or (iii) above.

For purposes of this Section 5(a), no act, or failure to act, on Chen's part
shall be considered "willful" unless done, or omitted to be done, by her not in
good faith and without reasonable belief that her action or omission was in the
best interests of the Company.

<PAGE>
(b) Good Reason. For the purposes of this Agreement, "Good Reason" shall
mean:

(i) the Company shall have materially breached its obligations under
this Agreement (including any substantial change in Chen's duties or
responsibilities), and such breach is not cured within twenty (20) days of
Chen's sending a written notice of such breach;

(ii) the Company shall have incurred a Change in Ownership;

(iii) the Company shall have incurred a Change in Control;

(iv) the Company shall be Insolvent;

(v) the Company shall have acted in bad faith to cause Chen to resign
from the Company;

(vi) the Options shall not have been granted within six (6) months of
the date of execution of this Agreement; or

(vii) the Dilution Options shall not have been granted within the time
period set forth in Section 3(b).

Good Reason shall not arise in any situation in which Chen shall have given
written consent to the act or failure to act of the Company.

(i) it commences any case, proceeding or other action (A) under the
Federal Bankruptcy Code seeking to have an order for relief entered with respect
to it, or seeking to adjudicate it a bankrupt or insolvent, or seeking
reorganization, arrangement, adjustment, liquidation, dissolution, composition
or other relief with respect to it or its debts, or (B) seeking appointment of a
receiver, trustee, custodian or other similar official for it or for all or any
substantial part of its property, or the Company shall make a general assignment
for the benefit of its creditors, or

(ii) there shall be commenced against the Company any case, proceeding or
other action of a nature referred to in Section 5(c)(i) above, which case,
proceeding or other action

<PAGE>
results in the entry of an order for relief from which no stay has been granted
within sixty (60) days, or

(iii) for a period in excess of sixty (60) days, the Company shall
generally not, or shall be unable to, pay its debts as they become due or shall
admit in writing its inability to pay its debts.

(d) Change in Ownership. For purposes of this Agreement, a "Change in
Ownership" of the Company shall mean (i) the acquisition by any "person" or
group of "persons" (as defined in Section 13(d)(3) of the Securities Exchange
Act of 1934 ("Exchange Act")), whether by way of merger, sale of assets, stock
purchase, tender offer or otherwise, of (A) all or substantially all of the
equity securities of the Company or (B) all or substantially all of the
operating assets of the Company and its subsidiaries taken as a whole, or (ii)
the sale or out-licensing after the date hereof of the majority (in value) of
the technology assets of the Company and its subsidiaries taken as a whole,
which shall not include the sale of the Company's manufacturing and clinical
operations facilities to Boston University or Boston University's designated
affiliate.

(e) Change in Control. For purposes of this Agreement, a "Change in Control"
of the Company shall have the same meaning as provided in Section 11(b) of the
Plan as in effect on the date hereof.

(f) Fully Diluted Basis. For purposes of this Agreement, "Fully Diluted Basis"
shall mean that all shares of Common Stock issuable upon exercise of options
outstanding under the Plan or any other stock option plan (including the Options
and Dilution Options granted to Chen pursuant to this Agreement) and all shares
of Common Stock issuable on exercise of all other outstanding options, warrants,
conversion rights or other rights issued by the Company to acquire equity
securities shall be deemed to be outstanding.

(g) Target Equity Financing. Target Equity Financing shall mean the sale or
issuance of stock of the Company or of debt securities of the Company with
conversion rights, other than

<PAGE>
(i) stock or debt securities sold or issued to a shareholder and/or affiliated
investment entities who as of the Effective Date collectively own at least 1% of
the Common Stock as measured on a Fully Diluted Basis or (ii) stock issued as a
result of the exercise of options presently outstanding or issued pursuant to
the Plan.

6. Confidentiality.

(a) Chen acknowledges that during the course of her employment with the
Company she will have access to and may obtain, develop or learn of Confidential
Information (as defined below).

(b) Chen agrees that while employed by the Company and thereafter she shall
hold such Confidential Information in strictest confidence and that, except
pursuant to her employment with the Company, she shall not at any time, during
or after the conclusion of her employment with the Company, or in any manner,
either directly or indirectly, use (for her own benefit or otherwise), divulge,
disclose or communicate to any unauthorized person, firm or corporation in any
manner whatsoever any Confidential Information.

(c) Under this Agreement, the term "Confidential Information" shall include
but not be limited to any of the following information relating to the Company
learned by Chen during or as a result of her employment or prior consulting
engagement with the Company:

(i) information relating to the products, product development
activities, research, technical and/or scientific know-how, plans, projects,
processes or manner of operations;

(ii) computer databases, software programs and information relating to
the nature of the hardware or software and how said hardware and software are
used in combination or alone;

(iii) methods of selling, pricing and business operations in general as
well as specific;

<PAGE>
(iv) the identity of customers, market research information and any
other information in any form relating to such customers and their relationships
or dealings with the Company or any subsidiary or affiliate thereof;

(v) any trade secret or confidential information of or concerning any
customers, affiliates or business relations; and

(vi) any other trade secret or information of a confidential or
proprietary nature.

(d) While an employee of the Company, Chen shall use, divulge, disclose or
communicate Confidential Information only in the scope of her employment with
the Company. Chen shall not at any time after the termination of her employment
with the Company, for whatever reason, use, divulge, disclose, or communicate
for any purpose any Confidential Information.

(e) Chen will not make or use any notes or memoranda relating to any
Confidential Information except for the benefit of the Company, and will, at the
Company's request, return each original and every copy of any and all notes,
memoranda, correspondence, diagrams or other records, in written or other form,
that she may at any time have within her possession or control that contain any
Confidential Information.

(f) Notwithstanding the above, this Section 6 shall not apply to any matter
which is now or becomes part of the public domain, other than through Chen's
improper act or omission, was known to Chen prior to the commencement of her
employment or any prior consulting arrangements with the Company or is disclosed
to Chen by a third party which did not obtain the information, directly or
indirectly, under an obligation of confidence to the Company. Further, this
agreement shall not apply to information which Chen is required to disclose by
enforceable legal process.

7. Non-Competition.

Chen acknowledges and recognizes the highly competitive nature of the
business conducted by the Company. Accordingly, Chen agrees that, in
consideration of the premises

<PAGE>
contained herein, she shall not, for her own benefit or for the benefit of any
other person or entity, while employed by the Company and for a one-year period
thereafter:

(a) become an employer, officer, director, owner, employee, partner,
consultant or other participant in any entity, or assist any person, which
competes with or which is about to compete with the Company in the business of
developing, manufacturing, marketing or selling pharmaceutical products based
upon diphtheria fusion toxins or any other technology owned by the Company
before Chen's termination (a "Competitive Business"); or

(b) own any interest in any entity which engages, or is about to engage in a
Competitive Business; provided, however, that Chen shall have the right to
acquire as a passive investor an equity interest of not more than one percent
(1%) of the issued and outstanding shares of any publicly traded corporation's
stock.

8. Company Right to Inventions. Chen shall promptly disclose, grant and assign
to the Company for its sole use and benefit any and all inventions,
improvements, technical information and suggestions relating in any way to
diphtheria fusion toxins or other technology created by the Company, which she
may develop or acquire while employed by the Company (whether or not during
usual working hours), together with all patent applications, letters patent,
copyrights and reissues thereof that may at any time be granted for or upon any
such invention, improvement or technical information. In connection therewith:

(a) Chen shall without charge, but at the expense of the Company, promptly
at all times hereafter execute and deliver such applications, assignments,
descriptions and other instruments as may be reasonably necessary or proper in
the reasonable opinion of the Company to vest title to any such inventions,
improvements, technical information, patent applications, patents, copyrights or
reissues thereof in the Company and to enable it to obtain and maintain the
entire right and title thereto throughout the world; and

<PAGE>
(b) Chen shall render to the Company at its expense (including a reasonable
payment for the time involved in case she is not then in its employ) all such
assistance as it may reasonably require in the prosecution of applications for
said patents, copyrights or reissues thereof, in the prosecution or defense of
interferences which may be declared involving any of said applications, patents
or copyrights and in any litigation in which the Company may be involved
relating to any such patents, inventions, improvements or technical information.

9. Breach. In the event of breach by Chen of any provision of Sections 6, 7 and
8 hereof, the remedy at law will be deemed inadequate, and the Company will be
entitled, in addition to any other remedies available by law, to appropriate
injunctive and other relief. Should any provision hereof be adjudged to any
extent invalid by any competent tribunal, such provision will be deemed modified
to the extent necessary to make it enforceable.

10. Indemnity. To the extent permitted by law, the Company shall indemnify Chen
and hold her harmless for all acts or decisions made by her in good faith while
performing services for the Company or any designee of the Company and shall pay
or reimburse Chen all expenses as and when incurred, including attorneys' fees,
actually and necessarily incurred by Chen in connection with the defense of any
action, suit or proceeding to which Chen may be made a party by reason of her
performing services hereunder and in connection with any related appeal
including the cost of court settlements. The Company shall also use its best
efforts to obtain coverage for her under any insurance policy obtained during
the term of this Agreement covering the other officers and directors of the
Company against lawsuits.

11. Notices. All notices, requests, demands and other communications provided
for by this Agreement shall be in writing and shall be deemed to have been given
when sent by facsimile or when mailed at any general or branch United States
Post Office enclosed in a certified postpaid envelope and addressed to the
address of the respective party stated below or to such changed address as the
party may have fixed by notice:

<PAGE>
To the Company: Seragen, Inc.
97 South Street
Hopkinton, MA 01748
Attention: Chief Executive Officer
Fax No.: (508) 485-9805

To Chen: Ms. Elizabeth Chen
122 West Montgomery Street
Baltimore, Maryland 21230
Fax No.: (410) 385-0961

12. Legal Fees. The Company shall pay Chen's reasonable legal fees
incurred with respect to the preparation of this Agreement and other documents
related to her employment by the Company.

13. Miscellaneous.

(a) Construction. This Agreement shall be construed, interpreted and
governed by the laws of the State of Delaware without regard to the principles
of conflicts of laws.

(b) Binding Agreement; Assignability. This Agreement shall be binding
upon and inure to the benefit of Chen, her legal representatives, heirs and
distributees, and the Company, its successors and assigns; provided, however,
that because this Agreement is a personal service contract, Chen shall not
assign any of her employment duties or obligations hereunder and any purported
assignment shall be null and void ab initio.

(c) Previous Agreements. This Agreement supersedes all other
agreements between the Company and Chen relating to Chen's employment by the
Company.

(d) Entire Agreement. This Agreement constitutes the entire agreement
of the parties with respect to its subject matter, and no waiver, modification
or change of any of its provisions shall be valid unless in writing and signed
by the party against whom such claimed waiver, modification or change is sought
to be enforced.

<PAGE>
(e) Waiver. The waiver of any breach of any duty, term or condition of
this Agreement shall not be deemed to constitute a waiver of any preceding or
succeeding breach of the same or of any other duty, term or condition of this
Agreement.

(f) Headings. The headings of the sections and subsections of this
Agreement are inserted for convenience only and shall not be deemed to
constitute a part hereof or to affect the meaning thereof.

(g) Survival. The provisions of Sections 6, 7, 8 and 10 shall survive
termination of this Agreement.

(h) Representations and Warranties of Chen. Chen represents and
warrants that her performance of all of the terms of this Agreement and as an
employee of the Company does not and will not breach any consulting, employment,
non-compete or other agreement to keep in confidence proprietary information,
knowledge, or data acquired by her in confidence or in trust from a third party
prior to her employment with the Company.

(i) Representations and Warranties of Company.

(i) The Company is a corporation duly organized, validly existing
and in good standing under the laws of the State of Delaware and is duly
qualified to do business in the Commonwealth of Massachusetts and has full power
and authority to operate its businesses as now operated and to perform this
Employment Agreement in accordance with its terms.

(ii) The execution and delivery of this Employment Agreement to
Chen and the carrying out of the provisions hereof have been duly authorized by
the Board of Directors of the Company.

(iii) This Employment Agreement shall be, when duly executed and
delivered, a legal and binding obligation of the Company, enforceable in
accordance with its terms.

(iv) Neither the execution nor delivery of this Employment
Agreement, nor the compliance with its terms, shall constitute a violation or
breach of the Certificate of

<PAGE>
Incorporation, as amended to date, or of the by-laws, as currently in effect, of
the Company or of any agreement between the Company and any other party.

(j) Capitalized Terms. All capitalized terms shall have the meanings
provided in Section 5 unless provided elsewhere.

(k) Arbitration. Except as provided in Paragraph 9 above, any claim or
controversy arising out of or relating to this Agreement or the breach thereof
shall be settled by arbitration in accordance with the laws of the Commonwealth
of Massachusetts. Such arbitration shall be conducted in the City of Boston in
accordance with the rules then-existing of the American Arbitration Association
for commercial disputes. In any such arbitration each party shall have the right
to demand (i) a written statement setting forth, for each cause of action, a
detailed statement of the facts on which it is based and a description of how
the amount demanded was calculated; and (2) to demand inspection and copying of
relevant documents and things in the possession or control of any of the other
parties, prior to the arbitration hearing. The arbitrator shall have authority
to order compliance with, and shall otherwise supervise, such demands for
written statements and/or for pre-hearing inspection and copying. Judgment upon
the award rendered by the arbitrators may be entered in any court having
jurisdiction thereof.

IN WITNESS WHEREOF, the parties have executed this Agreement effective
as of the day and year first above written.

SERAGEN, INC.

By:_________________________

(L.S.)
ELIZABETH CHEN

19
<PAGE>

Exhibit 10.74

March 28, 1997

Seragen, Inc.
97 South Street
Hopkinton, MA 01748

Re: Employment Agreement

Gentlemen:

The undersigned hereby confirms that the term "Change in
Ownership" as defined in the Employment Agreement dated November
6, 1996 between the undersigned and Seragen, Inc. (the "Company")
does not include the sale of the Company's manufacturing and
clinical operations facilities to Boston University or Boston
University's designated affiliate pursuant to the Assets Purchase
Agreement dated as of February 14, 1997 between the Company and
Boston University.

Sincerely yours,

/s/ Reed R. Prior

Reed R. Prior
<PAGE>

Exhibit 10.75

March 28, 1997

Seragen, Inc.
97 South Street
Hopkinton, MA 01748

Re: Employment Agreement

Gentlemen:

Sincerely yours,

/s/ Elizabeth C. Chen

Elizabeth C. Chen
<PAGE>

EXHIBIT 21

List of Subsidiaries

Subsidiary Name Jurisdiction of Incorporation
- --------------- -----------------------------
Seragen Technology, Inc. Delaware

<PAGE>

Exhibit No 23.1

CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS

As independent public accountants, we hereby consent to the incorporation of our
reports, included in this Form 10-K, into the Company's previously filed
Registration Statements Nos. 333-12613, 33-93792, 33-84556, 33-74396,
and 33-59644.

/s/ Arthur Andersen LLP
ARTHUR ANDERSEN LLP

Boston, Massachusetts
March 28, 1997
<PAGE>

Exhibit No 23.2

CONSENT OF INDEPENDENT ACCOUNTANTS

We consent to the incorporation by reference in the registration statements of
Seragen, Inc. on Form S-3 (File No.'s 333-12613, 33-93792 and 33-74396) and on
Form S-8 (File No.'s 33-84556 and 33-59644) of our report, which includes an
explanatory paragraph concerning factors which raise substantial doubt about the
Company's ability to continue as a going concern, dated February 23, 1996, on
our audits of the financial statements of Seragen, Inc. as of December 31, 1995
and for the years ended December 31, 1995 and 1994 which report is included in
the 1996 Annual Report on Form 10-K.

/s/ Coopers & Lybrand L.L.P.
Coopers & Lybrand L.L.P.

Boston, Massachusetts
March 27, 1997
<PAGE>

<S> <C>

<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from financial
statements for the twelve month period ended December 31, 1996 and is qualified in its entirety
by reference to such financial statements.
</LEGEND>

<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-1-1996
<PERIOD-END> DEC-31-1996
<CASH> 2,158,710
<SECURITIES> 0
<RECEIVABLES> 1,319,244
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 3,763,310
<PP&E> 4,604,115
<DEPRECIATION> 0
<TOTAL-ASSETS> 8,444,608
<CURRENT-LIABILITIES> 9,691,212
<BONDS> 0
0
30,915,522
<COMMON> 171,994
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 8,444,608
<SALES> 0
<TOTAL-REVENUES> 10,542,315
<CGS> 0
<TOTAL-COSTS> 26,872,113
<OTHER-EXPENSES> 2,923,864
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 5,453,638
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> (34,981,478)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (34,981,478)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0

</TABLE>