SERAGEN INC, 10-K/A, 1997-10-31

SERAGEN INC
10-K/A, 1997-10-31
BIOLOGICAL PRODUCTS, (NO DIAGNOSTIC SUBSTANCES)

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

Form 10-K/A#1

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.

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 Biologics 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

<PAGE> 2
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 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 manufacturing 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.

<PAGE> 3
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.

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.)

<PAGE> 4
Table 1

ESTIMATED NEW BLOOD AND LYMPH CANCER CASES, U.S. 1995

<TABLE>
<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.

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.

<PAGE> 5

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 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

<PAGE> 6
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 excessive proliferation of the outer layer of the skin, the

<PAGE> 7
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

<PAGE> 8
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.

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 under way. 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 dosing 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

<PAGE> 9
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.

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
DAB389IL-2 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.

<PAGE> 10

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 DAB389IL-2 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 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.

<PAGE> 11
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.

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

<PAGE> 12
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.

Epidermal Growth Factor ("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 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.

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.

<PAGE> 13
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

<PAGE> 14
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 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 will recognize the $5.0 million
non-refundable payment and amortize the related deferred commission upon the
sale of bulk product to Lilly or at such time that Lilly acknowledges it will
not purchase any bulk material. The Company previously recognized the $5.0
million non-refundable payment and expensed $2.06 million of deferred
commission in the quarter ended June 30, 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,

<PAGE> 15
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.

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

<PAGE>
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 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.

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

<PAGE> 16
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 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 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, which it has not
made. See "Management's Discussion and Analysis of Financial Condition And
Results of Operations"). 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.

STI has no operations, and its sole asset is the Patents. Its authorized
capital Stock consists of 214,200 shares of Class A Common Stock and 23,800
shares of Class B Common Stock, all of which, as described in the paragraph
above, is issued and outstanding. Each share of STI Class A Common Stock and
STI Class B Common Stock is entitled to one vote on all matters submitted to a
vote of STI shareholders, voting together as a single class.

Simultaneously with the contribution of the Patents to STI, the Company
entered into a license agreement with STI pursuant to which STI granted to the
Company an irrevocable worldwide exclusive license with respect to the Patents
(the "Irrevocable License Argeement"). Under the terms of the Irrevocable
License Agreement, the Company is obligated to pay quarterly royalties to STI
in an amount equal to the amount of any dividend that the holders of the
Series B Shares 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 shares of STI Class B Common Stock, in turn, are
entitled to receive cumulative divends equal to any royalty payable to STI
under the Irrevocable License Agreement.

<PAGE> 17
fails for 60 days, after the receipt of notice from the holders of the Class B
Shares, to pay the dividends due. Likewise, the holders of Class B Shares
have executed a reassignment of the Patents to STI, which also is being held
by the escrow agent. The escrow agent is obligated to deliver the
reassignment of the Patents to STI upon the redemption by STI of all of the
Class B Shares. The Class B Shares are required to be redeemed upon the
redemption or conversion of Series B Shares in a number equal to the
number of Series B Shares redeemed or converted. The collateral assignment of
the Patents secures only STI's dividend payment obligations on the Class B
Shares and does not secure any other amounts (e.g., the liquidation preference
of the Series B Shares). The collateral assignment of the Patents has no
effect until the escrow agent is instructed to deliver it to the holders of
the Class B Shares.

The Company has not paid the cash dividends due Defcember 31, 1996 and
March 31, 1997, on the Series B Shares, nor has the Company made the royalty
payments due to STI on January 1, 1997, and April 1, 1997. Correspondingly,
STI has not paid the dividends due January 1, 1997, and April 1, 1997, on the
Class B Shares.

Delivery of notice by the agent for the holders of the Class B Shares to
the escrow agent in accordance with the collateral assignment of the Patents
is the only condition to delivery of the collateral assignment of the Patents
to the holders of the Class B Shares. If the holders of the Class B Shares
were to deliver this notice to the escrow agent, they would thereafter have
the right to foreclose on the Patents, subject to the Company's rights under
the Irrevocable License Agreement. To the Company's knowledge, the holders of
the Class B Shares have not delivered this notice to the escrow agent.

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

<PAGE> 18
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.

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 the
IL-2 Fusion Protein 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

<PAGE> 19
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 Biologics 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
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

<PAGE> 20
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.

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.

<PAGE> 21
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., 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

<PAGE> 22
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 $189
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 negotiate other collaborative arrangements on acceptable terms.
There can be no assurance that the Company's alliance with Lilly will
continue.

<PAGE> 23
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

<PAGE> 24
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 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.
<PAGE> 25
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 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.

PART II

<PAGE> 26
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.

ITEM 6. SELECTED FINANCIAL DATA (As restated)

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
(See Note O to Notes to Financial Statements for restatement discussion).
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.

FOR THE YEARS ENDED DECEMBER 31,
-------------------------------------------------------------------------------------

1992 1993 1994 1995 1996
------------ ------------ ------------ ------------ ------------
(As Restated)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Contract revenue and
license fees ........................... $ 12,500 $ 138,226 $ 588,350 $ 3,337,388 $ 5,542,315

Operating Expenses:
Cost of contract revenue
and license fees .................... - - 588,350 3,337,388 4,504,243
Research and development .............. 15,319,750 13,718,973 15,240,195 14,086,632 13,959,405
General and administrative ............ 5,096,643 4,357,563 4,903,963 4,904,226 5,148,465
Licensed technology for research
and development ..................... - - 2,824,217 - -
------------ ------------ ------------ ------------ ------------
Total operating expenses ............ 20,416,393 18,076,536 23,556,725 22,328,246 23,612,113
------------ ------------ ------------ ------------ ------------
Loss from operations .................. (20,403,893) (17,938,310) (22,968,375) (18,990,858) (18,069,798)

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) (26,326,560)
============ ============ ============ ============ ============
Preferred stock dividends ............. - - - - 10,394,918
============ ============ ============ ============ ============

Net loss applicable to common
stockholders ........................ $(21,347,962) $(17,380,031) $(22,643,793) $(21,101,198) $(36,721,478)
============ ============ ============ ============ ============
Net loss per common share ............. $ (2.13) $ (1.26) $ (1.45) $ (1.29) $ (2.20)
============ ============ ============ ============ ============
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

(As Restated)
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 10,504,608
Short-term debt ......................... - 170,572 197,453 248,494 5,402,268
Long-term debt .......................... - 483,364 3,038,778 15,977,899 ---
Deferred revenue ........................ - - 5,000,000 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 17,091,212
Accumulated deficit ..................... (91,148,311) (108,528,342) (131,172,135) (152,273,333) (188,994,811)
Total stockholders's equity (deficit) . 15,718,459 15,206,511 3,784,222 (10,441,495) (6,586,604)

</TABLE>

<PAGE>
<PAGE> 28

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.

Restatement of December 31, 1996 Financial Statements

In September of 1997, the Company restated its 1996 financial statements to
reflect a change in the accounting treatment for the Company's amended Sales
and Distribution Agreement with Lilly on May 28, 1996. The restatement
consists of (1)recording the $5.0 million payment by Lilly in 1994 as an
advance against future purchases of bulk product by Lilly (the Company had
previously recorded such amount as revenue in the quarter ended June 30,
1996), (2)capitalizing as a deferred expense $2,060,000 of commissions paid by
the Company in connection with the $5.0 million payment from Lilly in 1994,
and (3) reversing a $1.2 million expense accrual associated with providing the
bulk material to Lilly (previously recorded by the Company in the fourth
quarter of 1996). (See Notes D and O in Notes to the Financial Statements.)

Results of Operations

1996 to 1995

The Company incurred a net loss of $36.7 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

<PAGE> 29
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.

The Company's revenues for the year ended December 31, 1996 were $5.5
million as compared to $3.3 million for the year ended December 31, 1995. This
increase of $2.2 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 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 $1.3 million to $23.6 million in
1996 from $22.3 million in 1995. Expenses associated with the cost of
contract revenue and license fees increased by $1.2 million to $4.5 million in
1996 compared to $3.3 million in 1995. This increase reflects 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
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 were
substantially unchanged for the year ended December 31, 1996 as compared to
the year ended December 31, 1995.

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

<PAGE> 30
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.

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.

<PAGE> 31
Restatement of December 31, 1996 Financial Statements

In September of 1997, the Company restated its 1996 financial statements
to reflect a change in the accounting treatment for the Company's amended
Sales and Distribution Agreement with Lilly on May 28, 1996. The restatement
consists of (1) recording the $5.0 million payment by Lilly in 1994 as an
advance against future purchases of bulk product by Lilly (the Company had
previously recorded such amount as revenue in the quarter ended June 30,
1996), (2) capitalizing as a deferred expense $2,060,000 of commissions paid by
the Company in connection with the $5.0 million payment from Lilly in 1994,
and (3) reversing a $1.2 million expense accrual associated with providing the
bulk material to Lilly (previously recorded by the Company in the fourth
quarter of 1996). (See Notes D and O in Notes to the Financial Statements.)
The following table presents the net loss, the net loss applicable to common
stockholders, and the net loss per share as originally reported, and as
restated.

<TABLE>
For the YearEnded
December 31,1996

__________________

As reported As restated
<CAPTION>
<S> <C> <C>
Net loss $(24,586,560) $(26,326,560)

Net loss applicable to
common stockholders (34,981,478) (36,721,478)

Net loss per share $(2.09) $(2.20)

</TABLE>

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.

The Company began assembling the components of its operating division (the
"Operating Division") over five years ago. The Company developed the
Operating Division with excess capacity in order to meet anticipated
commercial demand for the Company's products. In addition, the Company
maintained a relatively high level of staffing in the Operating Division in
order to comply with regulatory requirements. Historically, the Company has
not utilized its Operating Division to full capacity principally because the
Company has not yet begun manufacturing product for commercial purposes and

<PAGE> 32
due to the limited financial resources that the Company has available to
develop other products. The Company maintained the Operating Division,
despite its high costs, because of the delays and disruptions in its clinical
trial efforts that would have resulted from discontinuing the Operating
Division and obtaining the services from third parties. The Company did not
provide services to third parties using the services of the Operating Division
due to regulatory guidelines that prevented it from doing so. In recent
years, the FDA has relaxed these guidelines. However, the Company chose not
to contract out excess capacity because this would not have led to a
substantial and rapid reduction in expenditures and because of the potential
resulting distraction to key management.

As of February 14, 1997, the Company entered into the Asset Purchase
Agreement to sell its manufacturing and clinical operations facilities to
Boston University or a designated affiliate for $5.0 million. The closing of
the transaction is subject to, among other things, approval by the Company's
stockholders. Boston University has paid the Company $4.5 million as a
deposit and, from the time of execution of the agreement, has assumed
responsibility for the facility's operations, including responsibility for
operating costs. These assets represent substantially all of the
Company's property and equipment and consist primarily of leasehold
improvements to the Company's manufacturing facility, laboratory facilities
and laboratory equipment.

Simultaneously with the execution of the Asset Purchase Agreement, the
Company entered into the Service Agreement with Boston University providing
for the purchase by the Company of certain services related to product
research, development, manufacturing, clinical trials, quality control, and
quality assurance. The Service Agreement expires in January 1999 and is
subject to certain early termination provisions, including the option of
Boston University to terminate the agreement if losses during a contract year
exceed $9.0 million and the Company does not reimburse Boston University for
the losses in excess of $9.0 million. The Service Agreement 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 manufacturing and
clinical operations facilities. The Company has agreed to pay Boston
University fees of approximately $5.5 million and $6.6 million in years 1 and
2 of the Service Agreement, respectively. The fees can be increased or
decreased by agreement of the parties, 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 the
Company will be contracting solely for the services that the Company requires
for clinical and manufacturing purposes. The Company will give effect to this
transaction in its financial statements after closing.

At the closing, most of the Company's employees involved in the
manufacturing and clinical operations will become employees of Boston
University. Both the purchase price and the operating costs deposits are
subject to refund to Boston University in the event that conditions for
closing are not met. Upon the closing of this transaction, the Company will
account for the gain and the sale of the operating facility and the excess of
the reimbursed operating costs over the amount due to Boston University,
pursuant to the Service Agreement dated as of February 14, 1997 for the
period from February 14, 1997, until the closing of the transaction, as a
contribution of capital.

The Company expects that the transactions with Boston University
discussed above will effectively out-source the Company's research and
development activities, and reduce the Company's cash needs, both for capital

<PAGE> 33
expenditures and operating expenses. The Company is subject to certain
additional risks and expenditures, including termination of its contract
service agreement if the Company does not reimburse Boston University for the
losses in excess of $9.0 million in a contract year, provided that, after
notice, the Company does not pay Boston University the difference between its
actual losses for that year and $9.0 million. If the Company is unable to or
chooses not to make the additional payments, it will be forced to change to a
new service provider. This could adversely affect the Company's research and
development efforts.

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
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 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 Co., 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.

<PAGE> 34
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 Series B Shares. Each Series B Share is convertible at any time at the
holder's option into shares of Seragen common stock.

In connection with the issuance of 23,800 Series B Shares the Company
formed STI. The Company transferred the Patents to STI in exchange for
214,200 shares of STI's Class A Common Stock and 23,800 shares of STI's Class
B Common Stock (the"Class B Shares"). Each share of STI Class A Common Stock
is owned by the Company. The Company has transferred the Class B Shares to
the holders of the Series B Shares.

STI has no operations, and its sole asset is the Patents. Its authorized
capital Stock consists of 214,200 shares of Class A Common Stock and 23,800
shares of Class B Common Stock, all of which as described in the paragraph
above, is issued and outstanding. Each share of STI Class A Common Stock and
STI Class B Common Stock is entitled to one vote on all matters submitted to a
vote of STI shareholders, voting together as a single class.

Simultaneously with the contribution of the Patents to STI, the Company
entered into the Irrevocable License Agreement. Under the terms of the
Irrevocable License Agreement, the Company is obligated to pay quarterly
royalties to STI in an amount equal to the amount of any dividend that the
holders of the Series B Shares 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 shares of STI Class B Common
Stock, in turn, are entitled to receive cumulative divends equal to any
royalty payable to STI under the Irrevocable License Agreement.

<PAGE> 35
by the escrow agent. The escrow agent is obligated to deliver the
reassignment of the Patents to STI upon the redemption by STI of all of the
Class B Shares. The Class B Shares are required to be redeemed upon the
redemption or conversion of Series B Shares in a number equal to the
number of Series B Shares redeemed or converted. The collateral assignment of
the Patents secures only STI's dividend payment obligations on the Class B
Shares and does not secure any other amounts (e.g., the liquidation preference
of the Series B Shares). The collateral assignment of the Patents has no
effect until the escrow agent is instructed to deliver it to the holders of
the Class B Shares.

The Company has not paid the cash dividends due December 31, 1996 and
March 31, 1997, on the Series B Shares, nor has the Company made the royalty
payments due to STI on January 1, 1997, and April 1, 1997. Correspondingly,
STI has not paid the dividends due January 1, 1997, and April 1, 1997, on the
Class B Shares.

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 did not make 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

<PAGE> 36
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 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.
<PAGE>
<PAGE> 37

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Page
Index to Financial Statements and Schedule

Reports of Independent Accountants. . . . . . . . . . . . . . . . . . . . 41

Financial Statements:

Balance Sheets as of December 31, 1995 and 1996 (As Restated). . . . 43

Statements of Operations for the years ended December 31, 1994,
1995 and 1996 (As Restated). . . . . . . . . . . . . . . . . . . . 44

Statements of Stockholders' Equity (Deficit) for the years
ended December 31, 1994, 1995 and 1996 (As Restated) . . . . . . . 45

Statements of Cash Flows for the years ended December 31,
1994, 1995 and 1996 (As Restated) . . . . . . . . . .. . . . . . . 47

Notes to Financial Statements. . . . . . . . . . . . . . . . . . . . 48

Exhibits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 82

<PAGE>
<PAGE> 38

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 December 31, 1996 financial statements have been restated, (See Note
O).

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
October 22, 1997
<PAGE> 39

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

<PAGE>
<PAGE> 40
SERAGEN, INC.

<TABLE>
BALANCE SHEETS
<CAPTION>

DECEMBER 31,

ASSETS 1995 1996
------------- --------------
(As Restated)
<S> <C> <C>
Current assets:
Cash and cashequivalents......................................................... $ 435,460 $ 1,548,392
Restrictedcash................................................................... 435,318 610,318
Contractreceivable............................................................... 686,055 485,261
Unbilled contractreceivable...................................................... 496,147 833,983
Prepaid expenses and other currentassets......................................... 335,238 285,356
-------- ---------

Total currentassets................................................. 2,388,218 3,763,310

Property and equipment,net......................................................... 5,198,136 4,604,115
Investment inaffiliate............................................................. 2,599,864 --
Deferredcommission................................................................. 2,060,000 2,060,000
Prepaidinterest.................................................................... 3,528,677 --
Other assets........................................................................ 524,613 77,183
--------- ---------

Totalassets......................................................... $ 16,299,508 $ 10,504,608
============= =============
LIABILITIES AND STOCKHOLDERS' (DEFICIT)
Current liabilities:
Accountspayable.................................................................. 725,326 1,111,477
Current maturities of long-termdebt.............................................. 248,494 37,418
Accrued commission payable........................................................ 300,000 --
Accrued expenses.................................................................. 2,413,284 3,177,467
Preferred stock redemptionliability............................................... -- 1,236,753
Short-term obligation, less unamortized discount.................................. -- 4,128,097
------------- -------------
Total currentliabilities............................................ 3,687,104 9,691,212

Non-current liabilities:
Long-term debt, less currentmaturities........................................... 12,537,417 --
Deferredrevenue.................................................................. 5,000,000 5,000,000
Long-term obligation, less unamortizeddiscount................................... 3,440,482 --
Canadian affiliate put option liability........................................... 2,076,000 2,400,000
---------- ---------

Total non-currentliabilities........................................ 23,053,899 7,400,000

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

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
liquidationpreference........................................................ -- 2,015,522
Convertible preferred stock, Series B, $.01 par value; issued and
outstanding 23,800 shares at December 31, 1996, $23,800,000
liquidationpreference........................................................ -- 23,800,000
Convertible preferred stock, Series C, $.01 par value; issued and
outstanding 5,000 shares at December 31, 1996, $5,100,000
liquidationpreference........................................................ -- 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 incapital...................................................... 141,759,580 151,323,022
Accumulateddeficit............................................................. (152,273,333) (188,994,811)
------------- -------------
(10,348,541) (6,584,273)

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) (6,586,604)
------------- -------------
Total liabilities and stockholders'(deficit)........................ $ 16,299,508 $ 10,504,608
============= ==============
<PAGE> 41
</TABLE>

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

<TABLE>
SERAGEN, INC.
STATEMENTS OF OPERATIONS

FOR THE YEARS ENDED
DECEMBER 31,

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

(As Restated)
<CAPTION>
<S> <C> <C> <C>
Revenue:
Contract revenue and license fees ....... $ 588,350 $ 3,337,388 $ 5,542,315
Operating expenses:
Cost of contract revenue and license fees 588,350 3,337,388 4,504,243
Researcg and development ................ 15,240,195 14,086,632 13,959,405
General and administrative .............. 4,903,963 4,904,226 5,148,465
Licensed technology for research and
development .......................... 2,824,217 - -
------------ ------------ ------------
23,556,725 22,328,246 23,612,113
------------ ------------ ------------
Loss from operations ................. (22,968,375) (18,990,858) (18,069,798)

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) (26,326,560)
============ ============ ============
Preferred stock dividends and accretion ... - - (10,394,918)
============ ============ ============
Net loss applicable to common
stockholders ............................ $(22,643,793) ($21,101,198) ($36,721,478)
============ ============ ============

Net loss per common share ................. $ (1.45) ($ 1.29) ($ 2.20)
============ ============ ============
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.

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 PreferredStock Preferred Stock Common Stock Paid-In Capital
--------------- --------------- --------------- ------------ ---------------
(As Restated)
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1993 ................. - - - $142,698 $123,599,530
Private placement of units net of
offering costs, exercise of stock
options .................................. - - - 11,442 6,631,269
Shares issued under corporate partner
agreement, net of costs .................. - - - 7,871 4,657,857
Purchase of treasury stock ................. - - -
Sales of treasury stock .................... - - - 130 (20,342)
Net loss ................................... - - - - -
----------- ----------- ---------- -------- ------------
Balance, December 31, 1994 ................. - - - 162,141 134,868,314
Exercise of stock options .................. - - - 572 84,216
Warrants issued in connection with
lines of credit .......................... - - - - 4,164,996
Warrants issued in connection with
investment in affiliate .................. - - - - 914,000
Shares issued for commission related
to corporate partner agreement - - - 2,200 1,757,800
Purchase of treasury stock ................. - - - - -
Sales of treasury stock .................... - - - 299 (29,746)
Net loss ................................... - - - - -
----------- ----------- ---------- -------- ------------
Balance, December 31, 1995 ................. - - - 165,212 141,759,580
Exercise of stock options .................. - - - 1,068 79,144
Stock issuance ............................. - - - 50 20,452
Issuance of preferred stock ................ $ 4,000,000 $23,800,000 $5,000,000 - -
Warrants issued in connection with
Series B preferred stock ................. - - - - 8,618,000
Preferred stock redemption liability ....... (1,236,753) - - - -
Dividends .................................. 171,688 - 100,000 - -
Preferred stock conversion ................. (919,413) - - 5,664 913,749
Purchase of treasury stock ................. - - - - -
Sale of treasury stock ..................... - - - - (67,903)
Net loss ................................... - - - - -
----------- ----------- ---------- -------- ------------
Balance, December 31, 1996 ................. $ 2,015,522 $23,800,000 $5,100,000 $171,994 $151,323,022
=========== =========== ========== ======== ============

Accumulated Treasury Stockholder's
Deficits Stock Equity (Deficit)
-------- ----- ---------------

<S> <C> <C> <C>
Balance, December 31, 1993 ................. $(108,528,342) $ (7,375) $ 15,206,511
Private placement of units net of
offering costs, exercise of stock
options .................................. - - 6,642,711
Shares issued under corporate partner
agreement, net of costs .................. - - 4,665,728
Purchase of treasury stock ................. - (150,500) (150,500)
Sales of treasury stock .................... - 83,777 63,565
Net loss ................................... (22,643,793) - (22,643,793)
-------------- ---------

Balance, December 31, 1994 ................. (131,172,135) (74,098) 3,784,222
Exercise of stock options .................. - - 84,788
Warrants issued in connection with
loss of credit .......................... - - 4,164,996
Warrants issued in connection with
investment in affiliate .................. - - 914,000
Shares issued for commission related
to corporate partner agreement ........... - - 1,760,000
Purchase of treasury stock ................. - (201,939) (201,939)
Sales of treasury stock .................... - 183,083 153,636
Net loss ................................... (21,101,198) - (21,101,198)
-------------- --------- ------------
Balance, December 31, 1995 ................. (152,273,333) (92,954) (10,441,495)

<PAGE> 43
Exercise of stock options .................. - - 80,212
Stock issuance ............................. - - 20,502
Issuance of preferred stock ................ (338,640) - 32,461,360
Warrants issued in connection with
Series B preferred stock ................. (8,618,000) - -
Preferred stock redemption liability ....... - - (1,236,753)
Dividends .................................. (1,438,278) - (1,166,590)
Preferred stock conversion ................. - - -
Purchase of treasury stock ................. - (107,750) (107,750)
Sale of treasury stock ..................... - 198,373 130,470
Net loss ................................... (26,326,560) - (26,326,560)
-------------- --------- ------------
Balance, December 31, 1996 ................. $(188,994,811) $ (2,331) $ (6,586,604)
============== ========= ============

</TABLE>

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

SERAGEN, INC.
STATEMENTS OF CASH FLOWS

<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,

1994 1995 1996
------------ ------------ ------------
(As Restated)
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss ................................................... $(22,643,793) $(21,101,198) $(26,326,560)
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 2,923,864
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) -
Accrued commission payable ............................... 2,360,000 (300,000) (300,000)
Accrued expenses ......................................... 392,821 385,070 180,888
Deferred revenue ......................................... 5,000,000 -
------------ ------------ ------------
Net cash used in operating activities ...................... (13,462,574) (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

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

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 Board of
Directors has determined to seek ratification of this sale by disinterested
shareholders.

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.

In September 1997, the Company restated its December 31, 1996 financial
statements to reflect a change in the accounting treatment for the Company's
Amended Sales and Distribution Agreement with Lilly on May 28, 1996. Such
restatement resulted in an increase in the net loss applicable to common
stockholders of $1,740,000 for the year ended December 31, 1996.(See Note O)

B. Sale of Manufacturing and Clinical Operations to Boston University

On February 14, 1997, the Company entered into an asset purchase
agreement (the "Asset Purchase Agreement") to sell its manufacturing and
clinical operations facilities to Boston University or a designated affiliate
for $5.0 million. The closing of the transaction is subject to, among other

<PAGE> 46
things, approval by the Company's stockholders. Boston University has paid
the Company $4.5 million as a deposit and, from the time of execution of the
agreement, has assumed responsibility for the facility's operations, including
responsibility for operating costs.

Simultaneously with the execution of the Asset Purchase Agreement, the
Company entered into a service agreement ("the Service Agreement") with Boston
University providing for the purchase by the Company of certain services
related to product research, development, manufacturing, clinical trials,
quality control, and quality assurance. The Service Agreement expires in
January 1999, and is subject to certain early termination provisions,
including the option of Boston University to terminate the agreement if losses
during a contract year exceed $9.0 million and the Company does not reimburse
Boston University for the losses in excess of $9.0 million. The Service
Agreement 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 manufacturing and clinical operations facilities. The Company has agreed
to pay Boston University fees of approximately $5.5 million and $6.6 million
in years 1 and 2 of the Service Agreement, respectively. The fees can be
increased or decreased by agreement of the parties, but may not be reduced to
less than $4.3 million per contract year. The Service Agreement is expected
to reduce substantially the Company's operating costs in research and
development, as the Company will be contracting solely for the services that
the Company requires for clinical and manufacturing purposes. The Company
will give effect to this transaction in its financial statements after
closing.

At the closing, most of the Company's employees involved in the
manufacturing and clinical operations will become employees of Boston
University. Both the purchase price and operating cost deposits are subject
to refund to Boston University in the event that conditions for closing are
not met. Upon the closing of this transaction, the Company will account for
the gain and the sale of the operating facility and the excess of the
reimbursed operating costs over the amount due to Boston University, pursuant
to the Service Agreement dated as of February 14, 1997 for the period from
February 14, 1997, until the closing of the transaction, as a contribution of
capital. 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

<PAGE> 47
fees can be mutually increased or decreased, but may not be reduced to less
than $4.3 million per contract year.

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., in a transaction subject to shareholder approval. The Board of
Directors has determined also to seek ratification of the sale by

<PAGE> 48
disinterested shareholders. see Note B.

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

<PAGE> 49
based on the meeting of certain regulatory milestones in the development of
IL-2 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 to
be recognized upon the recognition of product revenue from Lilly. 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 will recognize the $5.0 million
non-refundable payment and amortize the related deferred commission upon the
sale of bulk product to Lilly or at such time Lilly acknowledges it will not
purchase any bulk material. The Company previously recognized the $5.0
million non-refundable payment and expensed $2.06 million of deferred
commission in the quarter ended June 30, 1996 and expensed $1.2 million
associated with providing the bulk product to Lilly in the quarter ended
December 31, 1996. (See Note O)

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

<PAGE> 50
$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.

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.

<PAGE> 51
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:

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. Each unit 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. The put option obligation liability less
the net assets of the Canadian affliate available to satisfy such liability if
the put option were exercised.

<PAGE> 52

<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.

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:

December 31,
----------------------------
1995 1996
---------- ----------
<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)
------------ ------------
$ - $ -
============ ============

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 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

<PAGE> 54
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 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

<PAGE> 55
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 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

<PAGE> 56
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.

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 DECEMBER31, 1996
----------------- -----------------
<S> <C> <C>
Risk-free interest rates............... 6.01% - 7.47% 5.52% -6.73%
Expected dividend yield................ - -

<PAGE> 57
Expected lives......................... 7.5 years 7.5years
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 9.25years

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.

<PAGE> 58

Warrants
<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>

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 ................................................ 5,891,000

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 various royalty arrangements with third parties which
expire beginning in 1998 and ending in 2014. The Company's obligated to pay
royalties ranging from .5% to 5% of net sales. To date, the Company has
recognized no royalties under these arrangements.

<PAGE> 59
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 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 consist 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. Restatement of December 31, 1996 Financial Statements

<PAGE> 60
1996), (2) capitalizing as a deferred expense $2,060,000 of commissions paid
by the Company in connection with the $5.0 million payment from Lilly in 1994,
and (3) reversing $1.2 million expense accrual associated with providing the
bulk material to Lilly (previously recorded by the Company in the fourth
quarter of 1996). (See Notes D and O). The following table presents the net
loss, the net loss applicable to common stockholders, and the net loss per
share as originally reported, and as restated.
<TABLE>
For the YearEnded
December 31,1996
------------------

As reported As restated
----------- -----------
<CAPTION>
<S> <C> <C>
Net loss $(24,586,560) $(26,326,560)

Net loss applicable to
common stockholders (34,981,478) (36,721,478)

Net loss per share $(2.09) $(2.20)

</TABLE>

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.

<PAGE>
<PAGE> 61
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 ................ 46 Chairman of the Board of
Directors,
Chief Executive Officer and
Director

John E. Bagalay............... 63 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

John R. Murphy, Ph.D.......... 55 Director

Jean C. Nichols, Ph.D. ........ 46 President, Chief Technology
Officer
and Director

John R. Silber, Ph.D. ......... 70 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,

<PAGE> 62
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 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 and
Chairman, since 1975, 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.

<PAGE> 63
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.

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%

<PAGE> 64
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.

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
Vice Chairman, Chief Executive 1995 300,000 - 42,248(9) 40,000
Officer and President 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.(16) 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(17) 1996 138,125(18) - 21,372(19) 10,348
Vice President for Finance, 1995 145,000 - - 12,000
Chief Financial Officer 1994 130,000 26,000(11) - 15,000

</TABLE>
<PAGE> 65

(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.

(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.

<PAGE> 66
(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.

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.

<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".

(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>

<PAGE> 67

(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.
<PAGE>
<PAGE> 67

TEN-YEAR OPTION REPRICINGS

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

NUMBER OF MARKET PRICE EXERCISE
SECURITIES OF STOCK AT PRICE AT TIME LENGTH OF
ORIGINAL
UNDERLYING TIME OF OFREPRICING 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

<PAGE> 68
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 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

<PAGE> 69
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
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 to 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

<PAGE> 70
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.

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

<PAGE> 71

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").

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").

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 connection with the issuance of 23,800 shares of Series B preferred
stock (the "Series B Shares"), the Company formed Seragen Technology, Inc.
("STI"). The Company transferred all of its exsisting and future United
States patents and patent applications (the"Patents") to STI in exchange for
214,200 shares of STI's Class A Common Stock and 23,800 shares of STI's Class
B Common Stock (the"Class B Shares"). Each share of STI Class A Common Stock
is owned by the Company. The Company has transferred the Class B Shares to
the holders of the Series B Shares.
<PAGE> 72
STI has no operations, and its sole asset is the Patents. Its authorized
capital Stock consists of 214,200 shares of Class A Common Stock and 23,800
shares of Class B Common Stock, all of which as described in the paragraph
above, is issued and outstanding. Each share of STI Class A Common Stock and
STI Class B Common Stock is entitled to one vote on all matters submitted to a
vote of STI shareholders, voting together as a single class.

STI has executed a collateral assignment of the Patents in favor of the
holders of the Class B Shares, which is being held by an escrow agent. The
escrow agent is required to deliver collateral assignment to the holders of
the Class B Shares if dividends on the Class B Shares are in arrears and STI
fails for 60 days, after the receipt of notice from the holders of the Class B
Shares, to pay the dividends due. Likewise, the holders of Class B Shares
have executed a reassignment of the Patents to STI, which also is being held
by the escrow agent. The escrow agent is obligated to deliver the
reassignment of the Patents to STI upon the redemption by STI of all of the
Class B Shares. The Class B Shares are required to be redeemed
upon the redemption or conversion of Series B Shares in a number equal to the
number of Series B Shares redeemed or converted. The collateral assignment of
the Patents secures only STI's dividend payment obligations on the Class B
Shares and does not secure any other amounts (e.g., the liquidation preference
of the Series B Shares). The collateral assignment of the Patents has no
effect until the escrow agent is instructed to deliver it to the holders of
the Class B Shares.

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

<PAGE> 73
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. Condon, 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) *

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.

<PAGE> 74
(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 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.
<PAGE> 75

(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.

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

<PAGE> 76
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 automatically be transferred back to Boston University. A default
under the Technology Agreement shall occur if, among other things, the Company
breaches its 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

<PAGE> 77
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").

<PAGE> 78

shares of STI's Class A Common Stock and 23,800 shares of STI's Class B Common
Stock (the"Class B Shares"). Each share of STI Class A Common Stock is owned
by the Company. The Company has transferred the Class B Shares to the holders
of the Series B Shares. STI has no operations, and its sole asset is the
Patents. Its authorized capital Stock consists of 214,200 shares of Class A
Common Stock and 23,800 shares of Class B Common Stock, all of which as
described in the paragraph above, is issued and outstanding. Each share of
STI Class A Common Stock and STI Class B Common Stock is entitled to one vote
on all matters submitted to a vote of STI shareholders, voting together as a
single class.

STI has executed a collateral assignment of the Patents in favor of the
holders of the Class B Shares, which is being held by an escrow agent. The
escrow agent is required to deliver collateral assignment to the holders of
the Class B Shares if dividends on the Class B Shares are in arrears and STI
fails for 60 days, after the receipt of notice from the holders of the Class B
Shares, to pay the dividends due. Likewise, the holders of Class B Shares
have executed a reassignment of the Patents to STI, which also is being held
by the escrow agent. The escrow agent is obligated to deliver the
reassignment of the Patents to STI upon the redemption by STI of all of the
Class B Shares. The Class B Shares are required to be redeemed upon the
redemption or conversion of Series B Shares in a number equal to the
number of Series B Shares redeemed or converted. The collateral assignment of
the Patents secures only STI's dividend payment obligations on the Class B
Shares and does not secure any other amounts (e.g., the liquidation preference
of the Series B Shares). The collateral assignment of the Patents has no
effect until the escrow agent is instructed to deliver it to the holders of
the Class B Shares.

<PAGE> 79
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 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.

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.

<PAGE> 80
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.

<PAGE> 81

EXHIBIT INDEX

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

(27) Restated Financial Data Schedule 84

<PAGE> 82

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: October 31, 1997
------------------------------
Reed R. Prior
Chairman of the Board
And Chief Executive Officer

<PAGE> 83

<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>

<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS

<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<EXCHANGE-RATE> 1
<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> 10,504,608
<CURRENT-LIABILITIES> 9,691,212
<BONDS> 0
0
30,915,522
<COMMON> 171,994
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 10,504,608
<SALES> 0
<TOTAL-REVENUES> 5,542,315
<CGS> 0
<TOTAL-COSTS> 23,612,113
<OTHER-EXPENSES> 2,923,864
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 5,453,638
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> (36,721,478)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (36,721,478)
<EPS-PRIMARY> (2.20)
<EPS-DILUTED> 0

</TABLE>