SERAGEN INC, 10-K, 1998-03-31

SERAGEN INC
10-K, 1998-03-31
BIOLOGICAL PRODUCTS, (NO DIAGNOSTIC SUBSTANCES)

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

Form 10-K

Annual Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
for the fiscal year ended December 31, 1997

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 OTC Bulletin Board, of voting stock held by non-affiliates at
March 30, 1998: $7,065,042 (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 30, 1998 was 27,271,414 shares.

<PAGE>
<PAGE>
PART I

ITEM 1. BUSINESS

General

Seragen, Inc. ("Seragen" or the "Company") 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.

In December 1997, the Company submitted a Biologics License Application
("BLA") to the U.S. Food and Drug Administration ("FDA") requesting clearance
to market its lead molecule, DAB389IL-2, for the treatment of patients with
advanced cutaneous T-cell lymphoma ("CTCL") who have received previous
treatment with other agents. In February 1998, the FDA notified the Company
that the BLA had been accepted for filing and designated for "priority"
review. In the case of applications for drugs intended to treat certain life-
threatening illnesses, the FDA may choose to accelerate the review process.
In this case, the priority review designation indicates that the FDA may
review the application in as little as six months. The Company expects the
BLA to be scheduled for discussion at the June 1998 meeting of the Oncologic
Drugs Advisory Committee ("ODAC"), a panel of advisors to the FDA. The
Company also expects FDA inspection of the manufacturing facilities used by
Seragen in connection with the DAB389IL-2 BLA in the second quarter of 1998.

Seragen is also conducting clinical trials of the same molecule for the
treatment of moderate-to-severe psoriasis. A Phase II trial for this
application has been completed, and a follow-up Phase I/II dose-escalation
trial is under way. The molecule has also been evaluated in clinical trials
for other lymphomas and leukemias, HIV infection, and rheumatoid arthritis.

A second molecule developed from the same technology, DAB389EGF, is in a
Phase I/II clinical trial for solid tumors in patients whose tumors exhibit
the EGF receptor. DAB389EGF is also the subject of an agreement with United
States Surgical Corporation ("USSC") for collaborative development for
restenosis following angioplasty.

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.
1
<PAGE>
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, as amended in April 1997,
Lilly has exclusive worldwide rights to develop and promote DAB389IL-2 for the
treatment of cancer, as well as to serve as the Company's sole distributor for
intravenous and intramuscular formulations of DAB389IL-2 for cancer
indications, except in certain Asian countries. Lilly also has the right to
serve as the Company's sole distributor for intravenous and intramuscular
formulations of DAB389IL-2 for non-cancer indications except in certain Asian
countries and member countries of the European Union. All pre-clinical and
clinical programs other than those covered by the Lilly alliance have thus far
been funded by the Company independently.

Even if the BLA is approved by the FDA, a number of considerations affect
the Company's business prospects. These include: the currently-projected
sales levels for DAB389IL-2 in CTCL; the prices that the Company will receive
for the product from Lilly, its marketing partner for cancer; the royalties
the Company must pay to other parties for its technology licenses; the
Company's obligation to repay a $5 million advance against future sales; and
the Company's costs for having the product manufactured. Given these
considerations, the Company does not expect revenues from DAB389IL-2 to cover
its operating costs for the foreseeable future.

The Company has been looking for a partner to develop DAB389IL-2 for
psoriasis. However, the Company's prospects for such arrangements appear to
be limited. The Company's management has found that clinical issues
associated with the side effect profile and with intravenous administration of
the product, along with the fact that the same compound has already been
partnered for cancer indications, make it difficult to attract a partner to
develop DAB389IL-2 for non-cancer indications. Management of the Company
accordingly believes that it will continue to be difficult for Seragen to
establish advantageous partnerships to fund further trials of DAB389IL-2 for
psoriasis or for other autoimmune diseases. Although the Company continues to
pursue such arrangements, its efforts to date have been unsuccessful.

As of February 14, 1997, the Company entered into an agreement to sell
its manufacturing and clinical operations facilities to Boston University
("Boston University" or "B.U.") for $5 million. The agreement was approved
and ratified by the Company's stockholders on December 16, 1997, and the
transaction was completed on December 31, 1997. Prior to closing, B.U. paid
the Company $4.5 million as a deposit and assumed responsibility for the
facility's operations, including responsibility for operating costs. At the
closing, B.U. paid the remaining $500,000 of the purchase price, and a
majority of the Company's employees involved in manufacturing and clinical
operations became employees of the contract service organization created by
Boston University under the name Marathon Biopharmaceuticals, LLC ("Marathon")
for purposes of purchasing the Seragen assets.

As of February 14, 1997, the Company also 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 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 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. Seragen and B.U. are
currently negotiating a reduction in the fees payable in 1997 and for 1998
based on the actual services rendered in 1997 and those anticipated for 1998.
See "Business Outlook -- Dependence on Marathon for Services." The service
agreement has reduced substantially the Company's operating costs in research
and development, as the Company is contracting solely for the services that
the Company requires for clinical and manufacturing purposes.
2
<PAGE>

The Company was organized as a Massachusetts corporation in 1979 as 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 are located at 97 South Street,
Hopkinton, Massachusetts 01748, and its telephone number is (508) 435-2331.

Product Development Update

The Company's fusion protein technology has led to the discovery of a
number of molecules, two of which have been subjects of clinical trials for
the treatment of cancers and/or autoimmune diseases. The Company has filed a
BLA with the FDA requesting clearance to market its lead molecule, DAB389IL-2,
for the treatment of patients with advanced CTCL who have received previous
treatment with other agents. In February 1998, the Company was notified that
the FDA had designated the application for "priority" review, which means that
the FDA may review the application in as little as six months. The Company
expects the application to be scheduled for discussion at the June 1998
meeting of the ODAC, a panel of advisors to the FDA. DAB389IL-2 is also being
investigated in two continuing Phase III clinical trials. One is
investigating the molecule's usefulness in patients with CTCL who have been
less extensively pre-treated; the other is evaluating the benefit of
administration to patients who have relapsed after previous benefit from the
agent, or who had progressive disease after placebo treatment in the
associated trial. DAB389IL-2 is also the subject of a Phase I/II clinical
trial for moderate-to-severe psoriasis. A second molecule developed from the
same technology, DAB389EGF, is in a Phase I/II clinical trial for solid tumors
in patients whose tumors exhibit the EGF receptor. DAB389EGF is also the
subject of an agreement with USSC for collaborative development for restenosis
following angioplasty.

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 cannot 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
meaningful 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.
3
<PAGE>

Cutaneous T-Cell Lymphoma (CTCL)

CTCL is an infrequent, low-grade, non-Hodgkin's lymphoma, composed of
malignant T-lymphocytes, and typically manifesting 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 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 (including 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, length of survival does not appear to be influenced by
aggressive combination therapy. No therapy has been specifically approved by
the FDA to treat CTCL. There is a critical medical need, therefore, for
additional therapies to manage this malignancy.

CTCL Clinical Trial Status

Seragen has been investigating the safety and effectiveness 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
were selected for treatment who 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 eight years in one patient who had a complete
response and is 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 had not been 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 had received extensive previous therapy and needed 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 have been 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.
4
<PAGE>

Enrollment in the first study was completed in July 1996, and
approximately 60% of the number of patients sought have been enrolled in the
second study. Forty-one patients have enrolled in the third study.

In December 1997, the Company submitted a BLA requesting clearance to
market DAB389IL-2 for the treatment of patients with advanced CTCL who have
received previous treatment with other agents. The BLA is based on data from
the first Phase III study together with data from the earlier Phase I/II
clinical trials in CTCL. In February 1998, when the FDA notified the Company
that the application had been accepted for filing, the FDA designated the
application for "priority" review, which means that the FDA may review the
application in as little as six months. The Company expects the application
to be scheduled for discussion at the June 1998 meeting of the ODAC, a panel
of advisors to the FDA. Seragen also expects FDA inspection of the
manufacturing facilities used by the Company in connection with DAB389IL-2 in
the second quarter of 1998.

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 seven-year marketing exclusivity for qualified products.

Investigational results of the first Phase III study, on which the BLA is
partially based, led to the characterization of DAB389IL-2 as potentially
having clinically significant anti-tumor effects, even in patients with
advanced CTCL who have received multiple prior therapies. Seventy-one
patients with CTCL who had failed an average of five prior therapies are
included in the analysis. Seragen's preliminary analysis indicates that,
overall, 30% of the patients treated with DAB389IL-2 demonstrated a protocol-
defined response of 50% or greater reduction in tumor burden lasting at least
six weeks--a response consistent with results of the earlier Phase I/II study.
Preliminary statistical analysis of the trial results indicate that the true
response rate, based on a 95% confidence interval, lies between 18 and 41%.
Approximately ten percent of all patients showed complete remission of all
evidence of tumor for at least six weeks. Further analysis indicated that
symptoms improved in all patients classified as responders and in 80% of
patients who did not qualify as responders. Statistically significant
differences were noted in four measures of quality of life for responders
compared to non-responders.

Analysis also revealed that multiple adverse events occurred in both
(high-dose and low-dose) treatment groups. Clinical syndromes included
hypersensitivity/infusion-related effects, constitutional (flu-like) symptoms,
and the development of a vascular leak disorder. Acute treatment effects
responded to slowing the rate of drug infusion and administration of anti-
histamines. Rashes were also reported.

Thirty-seven percent of the patients withdrew from the trial because of
adverse events. Some of the adverse events that led to discontinuation of
therapy included infectious complications, cardiovascular changes (unstable
angina, arrhythmia) and neurological changes (confusion, amnesia).
Investigators pointed out that, in general, the study enrolled older patients
who had advanced-stage disease and who had received multiple prior therapies.
They also noted that patients with CTCL are particularly susceptible to
infections because of the compromised condition of their skin.

Other Potential Cancer Applications

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. The incidence of T-cell
and B-cell leukemias and lymphomas in the United States in 1995 is set out in
Table 1.

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
5
<PAGE>
Based on research data and screening studies conducted by Seragen, the
Company estimates that approximately 50% of new patients with leukemias and
lymphomas set forth in Table 1 will have IL-2 receptors on the surface of
their malignant cells. This population of patients represents a potential
market for the use of DAB389IL-2 in treating cancer. The Company believes,
however, that there are products being developed by other companies that
present substantial competition in this market.

Autoimmune Diseases

To defend the body against foreign agents, the human immune system
employs specialized cells, including T-cells, which recognize disease-causing
viruses, bacteria, and parasites as foreign. T-cells, an important component
of the immune system, control the network of immune responses by regulating
the activity of other cells in the immune system and by killing foreign cells.
The same immune response that protects the body from foreign agents can also
cause disease when it inappropriately attacks the body's own cells and
proteins. In autoimmune diseases, the immune network mistakenly identifies
"self" as "foreign" and, among other actions, produces T-cells that attack
normal body cells. Such prevalent diseases as rheumatoid arthritis,
psoriasis, multiple sclerosis and alopecia areata are autoimmune diseases. The
prevalence of autoimmune diseases in the United States is set forth in 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. On the basis of limited psoriasis trials conducted to date, 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. The Company believes that DAB389IL-2, because of its side effect
profile, may have applications primarily in the treatment of moderate-to-
severe cases of autoimmune diseases.
6
<PAGE>

Psoriasis

DAB389IL-2 Opportunity in Psoriasis

Seragen believes that the opportunity for a biological agent such as
DAB389IL-2 in the psoriasis market lies in the moderate-to-severely affected
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. The market for a product such as DAB389IL-2 would probably be
limited to administration by clinics and major hospitals.

Limitations of Psoriasis Market for DAB389IL-2

The Company has been conducting a clinical trial program to evaluate the
safety and effectiveness of DAB389IL-2 in moderate-to-severe psoriasis since
1993. 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. In the two
completed studies, dosing schedules investigated showed a statistically
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 second study of DAB389IL-2 in psoriasis 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 of
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.

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 with multiple other
therapies. Tolerability issues suggest that three doses per week for four
weeks, especially at the higher doses tested, may be too frequent. Other
observations indicate that clinical improvement after a single five-day
treatment per month 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 effectiveness of administration of the lower dose
range of DAB389IL-2 on a bi-weekly schedule. This Phase I/II dose-escalation
study is ongoing.

However, even if DAB389IL-2 is found to be effective in this patient
population, the Company does not yet know if the side effect profile, which
may be acceptable in cancer, will be considered tolerable by a majority of
psoriasis patients and their physicians. Furthermore, DAB389IL-2 has at this
point only been administered via intravenous infusion, both to cancer and to
psoriasis patients. Close supervision is required for such administration.
These factors could seriously limit DAB389IL-2 application in psoriasis.
Despite these limitations, if DAB389IL-2 is shown to be safe and effective in
further clinical testing and if it can compete with other products in
development, it might be possible to advance the product for these patients'
special needs.

The Company has been looking for a partner to develop DAB389IL-2 for
psoriasis. However, the Company's prospects for such arrangements appear to
be limited. The Company's management has found that clinical issues
associated with the side effect profile and with intravenous administration of
the product, along with the fact that the same molecule has already been
partnered for cancer indications, make it difficult to attract a partner to
develop DAB389IL-2 for non-cancer indications. Management of the Company
accordingly believes that it will continue to be difficult for Seragen to
establish advantageous partnerships to fund further trials of DAB389IL-2 for
psoriasis or for other autoimmune diseases. Although the Company continues to
pursue such arrangements, its efforts to date have been unsuccessful.

7
<PAGE>

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 Company believes that the RA population may represent a potential market
for DAB389IL-2, although the Company is not currently pursuing clinical
development of this application for DAB389IL-2.

Seragen has conducted three early clinical trials of DAB389IL-2 in
patients with rheumatoid arthritis. One trial is ongoing in a small number of
RA patients who have benefited from treatment with DAB389IL-2 in previous
trials. The Company currently lacks the financial resources to pursue this
application for DAB389IL-2 at this time.

HIV Infection/AIDS

A preliminary safety study of DAB389IL-2 has been conducted in patients
infected with human immunodeficiency virus (HIV). Twenty four patients were
enrolled in a double-blind, randomized, dose-ranging study, and DAB389IL-2 was
found to be safe at the very low doses tested. There can be no assurance that
DAB389IL-2 or any of the Company's other potential products will have an
application in the treatment of HIV. The Company currently lacks the
financial resources to pursue this application for DAB389IL-2 at this time.

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 autoimmune
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 the treatment of MS or AA. The Company currently lacks
the financial resources to pursue this application for DAB389IL-2 at this
time.

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 currently available therapies. Pre-clinical tests
involving animal models have indicated that DAB389EGF administration results
in cell death and tumor regression of EGF-receptor expressing malignancies.

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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 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 in the episodic schedule. Three
additional patients, one with head and neck cancer in the episodic dosing
schedule and two with prostate cancer, were judged in the consecutive dosing
schedule to have stable disease for the six-month study period.

A limited Phase I/II dose escalation study, initially focused on non-
small cell lung cancer and then expanded to include other EGF-R expressing
tumors, is currently in progress.

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.

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, HIV infection and solid tumor cancers. 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 gave 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 had 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 retained
exclusive rights to promote IL-2 fusion protein and future fusion proteins for
dermatologic applications outside of oncology, subject to Lilly's retention of
distribution rights for all formulations of IL-2 Fusion Protein. The Company
also retained responsibility 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 also agreed 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. In addition, Lilly is required to
reimburse 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 $3,337,000, $3,979,000 and $4,281,000 of
contract revenue for such reimbursed development costs during the years ended
December 31, 1995, 1996 and 1997, respectively.

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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 that
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 $2.5 million in any twelve-month period and $5.0 million in the
aggregate. 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 as Lilly acknowledges it will not purchase any bulk
material.

On April 7, 1997, the Company entered into an amendment to its Sales and
Distribution Agreement and Development Agreement with Lilly. Pursuant to the
amendment, Lilly relinquished, subject to certain limitations, all development
and promotion rights to IL-2 Fusion Protein non-cancer indications, as well as
rights to the Company's other molecules. Lilly did, however, retain rights to
distribute all intravenous and intramuscular formulations of IL-2 Fusion
Protein, for both cancer and non-cancer indications, except, in the case of
cancer indications, in certain Asian countries and, in the case of non-cancer
indications, certain Asian countries and member countries of the European
Union. Pursuant to the amendment, Lilly agreed to pay to Ajinomoto Co., Inc.
("Ajinomoto") on behalf of the Company $4.3 million. Lilly paid $2.15
million of this amount to Ajinomoto for a license granted by Ajinomoto
directly to Lilly; and Lilly has agreed to pay, subject to certain conditions,
up to $2.15 million of the Company's $2.25 obligation to Ajinomoto under the
Company's restructured agreement with Ajinomoto. See "Patents, Licenses and
Proprietary Rights". Pursuant to the amendment, Lilly was permitted to credit
$1.5 million of the amount paid by Lilly to Ajinomoto on behalf of the Company
against the $1.5 million milestone payment due under the Sales and
Distribution Agreement between the Company and Lilly on the submission by the
Company of a BLA for CTCL to the FDA. Lilly is not obligated to make any
further payments in respect of the Company's obligations to Ajinomoto if Lilly
terminates the Sales and Distribution Agreement between it and the Company as
a result of a failure by the Company to meet specified clinical, regulatory
and financial milestones and other requirements. Such milestones have not
been met by the Company and, as a result, Lilly has the right at any time to
terminate its arrangements with the Company with 30 days' notice. The Company
has received no indication from Lilly that Lilly intends to exercise that
right. If Lilly were to terminate its agreements with the Company, the
Company would be obligated to pay the $2.15 million payment to Ajinomoto that
Lilly has agreed to make on the Company's behalf, and Lilly's obligations
under the agreements to provide financial support to the Company's clinical
trial efforts would cease.

In consideration for the April 17, 1997 amendment, the Company issued to
Lilly in a private placement 1.0 million shares of its common stock.

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
manufacturing facilities previously owned by it and now owned and operated by
Marathon. Manufacturing facilities utilized for the Company's products are
operated in accordance with current Good Manufacturing Practices ("cGMP").

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The Company entered into an agreement to sell its manufacturing facility
to B.U. in February 1997 and completed the sale on December 31, 1997, pursuant
to an asset purchase agreement See "Business -- General". Simultaneously,
the Company entered into a service agreement with B.U. under which B.U. will
provide certain services related to product research, development,
manufacturing, clinical trials, quality control and quality assurance required
by Seragen to continue clinical trials and to produce commercial quantities of
DAB389IL-2 for sale. Such services will be performed to specifications
outlined in the service contract. In order for this manufacturing facility to
produce material that can be marketed, it must be inspected and licensed by
the FDA. The Company regularly contracts with a variety of firms for certain
quality control testing and fill-finish services, some of which services are
essential to the Company. As of January 1996, Lilly is the Company's
fill/finish contractor. Generally, these agreements may be terminated at any
time by any of the parties thereto.

Competition

The therapeutic products which the Company is developing will compete
with existing therapies for market share. In addition, a number of companies,
including biotechnology companies and pharmaceutical companies, acting
independently or in collaboration, are pursuing the development of novel
pharmaceuticals which target the same diseases the Company is targeting with
its products. 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
that may be competitive with the targeted therapeutic products being developed
by the Company.

The Company's fusion proteins are designed to target cells bearing
receptors that are 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.

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. 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 Company's competitive position also depends upon its ability to
attract and retain qualified personnel, to obtain patent protection or
otherwise develop proprietary products or processes and to 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, the field in which the
Company's technology lies, 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.

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Patents, Licenses and Proprietary Rights

In November 1983 and as amended in August 1997, the Company entered into
an agreement with Harvard University in Cambridge, Massachusetts, whereby the
Company was granted a worldwide license under United States Patent 4,675,382
and all foreign patents and patent applications corresponding to United States
Patent 4,675,382 (the "Murphy Patents"). The Harvard license provides the
Company with the exclusive right to manufacture, have manufactured, sell or
have sold, products made in accordance with the Murphy Patents for human and
veterinary therapeutic and diagnostic uses for the life of the patents. Under
certain circumstances, the license may become non-exclusive. Under the
license, the Company has agreed to pay Harvard University an annual license
fee until a product is marketed, and thereafter, a royalty on net sales,
including a minimum royalty amount if certain sales levels are not met. The
Murphy Patents relate to fusion proteins expressed as the product of a fused
gene wherein the protein is a toxin whose naturally occurring receptor 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 technology represents an
improvement in the technology disclosed in the Murphy patents. Applications
are pending in the United States and many foreign countries. Three U.S.
patents have issued, and at least one additional U.S. patent is expected to
issue, directed to these improvements. 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 70 patents issued worldwide, which
cover certain aspects of its technology and 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.

In August 1987, B.U. acquired Nycomed's majority interest and technology
rights in the Company. 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, but 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 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, that they 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.

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

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

In December 1994, the Company entered into a license agreement with
Ajinomoto 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 was required to
make a payment of $4.3 million by March 31, 1997, and to pay royalties ranging
from 2% to 4% on sales of licensed product by the Company or its sublicensees.
Seragen was required to pay minimum royalties of $100,000 in 1997, $200,000 in
1998 and $300,000 each year thereafter. Seragen did not make any of the
required payments.

On June 1, 1997, the Company restructured its License Agreement with
Ajinomoto. The restructured Ajinomoto Agreement provides that the license
granted by Ajinomoto to the Company will be non-exclusive. Under the terms of
the restructured agreement, the future license fees payable by the Company to
Ajinomoto were reduced to the following amounts: a $2.25 million fee payable
in the amount of $800,000 by June 30, 1998, or approval by the FDA of a BLA
filed by the Company for the licensed product, whichever comes first, in the
amount of $800,000 by June 30, 1999, and in the amount of $650,000 by March
31, 2000; and a reduced royalty of 1% on end-user net sales of the licensed
product by the Company or its sublicenses. Accordingly, in the year ended
December 31, 1997, the Company reduced its obligation to Ajinomoto from $4.3
million to $2.25 million and recorded extraordinary income of $2,050,000 for
the reduction of this liability. The Company amended its agreements with
Lilly whereby Lilly will pay certain license fees to Ajinomoto on behalf of
the Company. See "Business - Strategic Alliance with Eli Lilly and Company".

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 existing 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 (the "Class A Shares") 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.

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STI has no operations, and its sole asset is the Patents. Its authorized
capital stock consists of 214,200 Class A Shares and 23,800 Class B Shares,
all of which, as described in the paragraph above, are issued and outstanding.
Each Class A Share and Class B Share 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 the 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.

The Company did not pay the cash dividends due in respect of the Series B
Shares during the period December 31, 1996 through December 31, 1997, and
does not anticipate making any dividend payments on the Series B Shares in
1998. Correspondingly, STI has not paid the dividends due January 1, 1997
through January 1, 1998, on the Class B Shares and it is not anticipated that
STI will make any dividend payments advisors on the Class B Shares during
1998.

Due to STI's failure to pay dividends 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.

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From April 1, 1984, through December 31, 1996, the Company maintained a
research agreement with Boston Medical Center, 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 as amended in October
1997, the Company has been granted an exclusive license to five existing U.S.
patents and patent applications and to their foreign counterparts.

The Company maintained a research agreement with Beth Israel Hospital in
Boston, Massachusetts (the"BIH Research Agreement"), which began August 1984
and continued until December 31, 1995, related to the control of T-cell
mediated response by targeted agents under the direction of Dr. Terry B.
Strom. Under the BIH Research Agreement, the Company was granted an option to
obtain an exclusive license to any patent application filed on any invention
conceived or reduced to practice during the course of the research. Several
patent applications have been filed pursuant to the BIH Research Agreement.
Two of these describe methods of treating immunological diseases and
transplant rejection and have been issued as U.S. Patents 5,011,684 and
5,336,489. Both of these patents 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. A third patent,
which issued as U.S. 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 to obtain an exclusive license of this
patent.

Including the arrangements described above, the Company has incurred
consulting fees to a stockholder and directors of approximately $155,000,
$169,000 and $50,000 in 1995, 1996 and 1997, respectively. The Company has
also incurred expenses relating to research grants to, and clinical trials
performed at, Boston Medical Center and Beth Israel Hospital of approximately
$335,000 and $175,000 in 1995 and 1996, respectively, with no grants in 1997.

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.

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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. See
"Business -- Strategic Alliance with Eli Lilly and Company". 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
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 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, multi-center, 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 Phase I 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 BLA 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 submitted to the FDA in the form of a BLA. The Company's
application may be subject to the payment of a drug use fee at the time of
submission unless waived by the FDA. Commercial manufacturing and marketing
of biologic products may occur only after approval of a BLA. In responding to
a BLA, the FDA may grant marketing approval, request additional information,
or deny the application if it determines that the application does not satisfy
its regulatory approval criteria. There can be no assurance that approvals
will be granted on a timely basis, if at all, or if granted will cover all the
clinical indications for which the Company is seeking approval. In addition,
approvals may contain significant limitations in the form of warnings,
precautions or contraindications with respect to conditions of clinical use.

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

Orphan Drug Designation

The Orphan Drug Act 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.

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Accelerated Drug Approval

Under current regulations, 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.

In December 1997, the Company submitted a BLA to the FDA requesting
clearance to market its lead molecule, DAB389IL-2, for the treatment of
patients with advanced CTCL who have received previous treatment with other
agents. In February 1998, the FDA notified the Company that the BLA had been
accepted for filing and designated for "priority" review. The priority review
designation indicates that the FDA may review the application in as little as
six months. The Company expects the BLA to be scheduled for discussion at the
June 1998 meeting of the ODAC, a panel of advisors to the FDA. The Company
also expects FDA inspection of the manufacturing facilities used by Seragen
for the product in connection with DAB389IL-2 in the second quarter of 1998.

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 establish a unified approach to the regulation of recombinant DNA
activities.

Foreign Regulations

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

Other Regulations

The Company's activities are also 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, 1995, 1996 and
1997, the Company spent approximately $14.1 million, $14.0 million and $10.6
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.

17
<PAGE>
Employees

As of December 31, 1997, the Company had a total of 13 employees, each of
whom has entered into a confidentiality agreement with the Company. Five of
them held Ph.D. degrees. None of the Company's employees is covered by a
collective bargaining agreement.

In connection with the sale of the Company's manufacturing and clinical
operations to B.U. on December 31, 1997, approximately 90 of the Company's
employees formerly involved in the Company's manufacturing and clinical
operations became employees of Marathon.

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, (v) the methods by which the
Company may develop its products, (vi) the effect of the Company's patent and
other intellectual property rights, (vii) the anticipated results of the
Company's clinical trials and other tests, (viii) the likelihood and timing of
approval of the Company's BLA submitted to the FDA in December 1997, (ix) the
Company's arrangements with Lilly and developments with respect thereto, and
(x) the Company's agreement with Marathon for the provision of certain
services and developments with respect thereto. 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 obligations to its preferred
shareholders, (iv) the Company's ability to satisfy its obligations under the
Seragen Biopharmaceuticals, Ltd. ("SBL") Shareholders' Agreement, and (v) the
Company's ability to raise additional funds through an equity offering,
through collaborative or other arrangements with others and (vi) to complete a
sale or merger of the Company. 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 its products, other that DAB389IL-2 in CTCL, 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.

18
<PAGE>
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 the 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, 1997, had an accumulated deficit of approximately $206
million. The Company expects to incur significant additional operating losses
for the foreseeable future and expects cumulative losses to increase. 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 research
and the 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 trials under the terms of its agreements
with the Company. However, Lilly has the right based on certain specified
clinical, regulatory and financial milestones having not been met to terminate
the Company's agreements with 30 days' notice. If Lilly were to terminate its
agreements with the Company, the Company would be obligated to pay the $2.15
million payment to Ajinomoto that Lilly has agreed to make on the Company's
behalf, and Lilly's obligations under the agreements to provide financial
support to the Company's clinical trial efforts would cease. The Company may
need additional funding in order to continue the trials 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.

The Company's ability to finance its operations beyond June 1998 is
dependent upon its ability to raise additional capital 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, then 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.

19
<PAGE>

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 its competitors with respect to manufacturing and
marketing capabilities, areas in which it has limited or no experience.

Dependence on Marathon for Services. The Company has no independent
manufacturing and clinical operations and will depend upon Marathon's ability
to provide certain services relating to product research, development,
manufacturing, clinical trials, quality control, and quality assurance. The
Marathon employees providing such services are comprised primarily of former
employees of Seragen. Marathon'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 with the Company if its annual
losses exceed $9 million and the Company fails to reimburse B.U. for any
losses in excess of such amount. As of March 31, 1998, the Company has not
paid any portion of these fees, and B.U. has not taken any action to compel
payment. As a result, the Company currently is indebted to B.U. in this
respect in the amount of $5.8 million as of February 28, 1998. In the event
that B.U. were to demand payment of fees payable by the Company under the
service agreement, there can be no assurance that the Company would have
sufficient funds available to make payment. In such event, B.U. could suspend
or terminate the provision of services to the Company under the service
agreement. In the event that B.U. were to suspend or terminate the provision
of service to the Company under the service agreement, 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 sold to
Marathon.

The Company currently is negotiating a reduction in fees payable to
Marathon due to certain reductions in the services performed in 1997 and to be
performed in 1998. There can be no assurance that the Company will be
successful in its renegotiation efforts or that a renegotiated price would be
as favorable as that the Company could obtain from other sources.

Dependence on Collaborative Partners. If Lilly exercises its right to
terminate its alliance with the Company, including its funding of the CTCL
clinical trials, the Company may be required to seek other collaborative
arrangements. See "Business -- Strategic Alliance with Eli Lilly and
Company". There can be no assurance that the Company will be able to
negotiate any other collaborative arrangements on acceptable terms, or that
any such collaborative arrangements will be successful.

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

20
<PAGE>

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 the Company with 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 B.U. and Nycomed certain royalties on the
sales by the Company of certain products. In addition, B.U. 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. See "Business -- Patents, Licenses and Proprietary Rights" and
"Certain Relationships And Related Transactions."

The Company's Patents are the subject of a collateral assignment made by
STI in favor of the Series B shareholders. See "Business -- Patents, Licenses
and Proprietary Rights." 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. There is no assurance that
the Company would be able to make payments due under the Irrevocable License
Agreement in the event the Series B shareholders exercise their right to
require the delivery of the collateral assignment of the Patents.

The Company may need to obtain licenses of 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. Neither the Company nor its manufacturing service provider,
Marathon, has ever engaged in large-scale manufacturing.

21
<PAGE>

The Company regularly contracts with a variety of firms in addition to
Marathon 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 and, 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 subleases approximately 7,000 square feet of office space in
two buildings in Hopkinton, Massachusetts from Marathon. The subleases on
each of the buildings expire in January 1999 and the Company can exercise, at
its option, two one-year extensions on each sublease. The Company believes
that these facilities are adequate for its operations as currently
contemplated.

ITEM 3. LEGAL PROCEEDINGS

The Company is a defendant in an action brought in Massachusetts Superior
Court by Jelric Realty Trust, the owner of premises that the Company leased
and occupied until mid-December, 1997. The plaintiff has alleged that the
Company breached its lease agreements by failing to vacate in a timely manner,
failing to return the premises to original condition, and failing to pay rent
for the last few months of the lease and seeks damages in the amount of
$218,724. The plaintiff has sought and obtained an attachment on funds which
the Company had on deposit at State Street Bank and Trust Company in the
amount of $25,000. The Company has answered the complaint by denying
liability. Discovery in this action has just begun. Because of the early
stage of the proceedings, management is unable to express an opinion as to the
likely outcome of this matter.

22
<PAGE>

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

The Annual Meeting of Shareholders of the Company was held on December
16, 1997. The following matters were voted upon:

(1) Six persons were elected to serve as Directors of the Company to hold
office until the next annual meeting of shareholders and until their
successors are chosen and qualified. The following is a table setting
forth the number of votes cast for and withheld for each nominee for
Director:

Name Vote For Vote Withheld

Reed R. Prior 19,423,202 727,348
Gerald S.J. Cassidy 19,452,145 698,405
Kenneth G. Condon 19,455,758 694,792
Norman A. Jacobs 19,462,245 688,305
Jean C. Nichols 19,468,253 682,297
John R. Silber 19,444,660 705,890

(2) The shareholders approved the sale of the Company's Operating Division
to B.U. and related contract service arrangement between the Company
and B.U. This proposal was approved with 15,241,198 votes for the
proposal, 443,621 votes against the proposal, 77,030 abstentions and
4,388,701 broker non-votes. The sale of the Operating Division and the
related contract service arrangement were also ratified by those
shareholders of the Company excluding B.U., Leon Hirsch and Turi Josefsen
and their affiliates. Of those shares, there were 7,218,871 votes for
the proposal, 443,621 votes against the proposal, 77,030 abstentions and
4,388,701 broker non-votes.

(3) The shareholders approved an amendment of the Company's 1992 Long Term
Incentive Plan to increase the number of shares available under the plan
from 2,300,000 to 16,000,000. This proposal was approved with 13,600,798
votes for the proposal, 2,050,954 votes against the proposal, 110,097
abstentions and 4,388,701 broker non-votes.

(4) The shareholders ratified the selection of Arthur Andersen LLP as the
Company's independent auditors for the fiscal year ending December 31,
1997. This proposal was approved with 19,851,204 votes for the proposal,
176,399 votes against the proposal, 82,947 abstentions and 40,000 broker
non-votes.

23
<PAGE>

<PAGE>
PART II

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

The Company's Common Stock is quoted on the OTC Bulletin Board under the
symbol SRGN. Until September 9, 1997, the Common Stock was quoted on the
Nasdaq National Market. The following table sets forth for the periods
indicated high and low reported sale prices for the Company's Common Stock as
reported on the applicable market.

1996
First Quarter........................ 5 5/8 2 7/8
Second Quarter....................... 5 3/4 3 3/4
Third Quarter........................ 4 1/2 2 5/8
Fourth Quarter....................... 3 1/8 2 9/32
1997
First Quarter........................ 1 5/8 15/16
Second Quarter....................... 2 1/8 15/16
Third Quarter........................ 1 1/16 1/2
Fourth Quarter....................... 11/16 15/64

</TABLE>
The last reported sale price of the Common Stock as reported on the OTC
Bulletin Board on March 30, 1998 was $0.46. OTC Bulletin Board quotations
reflect inter-dealer prices, without retail mark-up, mark-down or commission,
and may not necessarily represent actual transactions. As of March 31, 1998,
there were 680 holders of record of the Company's Common Stock.

The Company has never paid cash dividends on its Common Stock. The
Company is required to pay cash dividends on its Series B Shares, although
these dividends currently are in arrears. The Company is required to pay
Common Stock dividends on its Series D Shares.

As of September 9, 1997, the Company's Common Stock was delisted from
trading on the Nasdaq National Market due to failure of the Company to comply
with Nasdaq's minimum net tangible assets requirement. The delisting of the
Common Stock from the Nasdaq National Market could have a material adverse
effect on the Company's efforts to raise additional equity capital. In
addition, as a result of the delisting of the Common Stock from the Nasdaq
National Market, the investors in SBL, which is a company 49% owned by the
Company, may claim that they are entitled to require the Company to purchase
their shares in SBL for cash. See Note G of "Notes to Financial Statements".
The Company believes that it has meritorious defenses to assert against this
potential claim. There is no assurance that the Company will have sufficient
cash to purchase the investors' shares in SBL for cash. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."

24
<PAGE>

ITEM 6. SELECTED FINANCIAL DATA

The following table presents selected financial data for, and as of the
end of, each of the years in the five-year period ended December 31, 1997
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, 1997 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.
<PAGE>
25
<PAGE>
<TABLE>
<CAPTION>

FOR THE YEARS ENDED DECEMBER 31,
-------------------------------------------------------------------------------------
1993 1994 1995 1996 1997
------------ ----------- ------------ ------------ -------------
(As Restated)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Contract revenue and
license fees ........................... $ 138,226 $ 588,350 $ 3,337,388 $ 5,542,315 $ 4,713,686

Operating Expenses:
Cost of contract revenue
and license fees .................... - 588,350 3,337,388 4,504,243 4,281,174
Research and development .............. 13,718,973 15,240,195 14,086,632 13,959,405 10,601,362
General and administrative ............ 4,357,563 4,903,963 4,904,226 5,148,465 5,738,703
Licensed technology for research
and development ..................... - 2,824,217
------------ ------------ ----------- ----------- -------------
Total operating expenses ............ 18,076,536 23,556,725 22,328,246 23,612,113 20,621,239
------------ ------------ ----------- ----------- ------------
Loss from operations .................. (17,938,310) (22,968,375) (18,990,858) (18,069,798) (15,907,553)

Loss incurred in connection with
Canadian affiliate .................. - - (390,136) (2,923,864) -
Interest income ....................... 611,784 438,338 92,924 120,740 127,322
Interest expense ...................... (53,505) (113,756) (1,813,128) (5,453,638) (172,366)
------------- ----------- ------------ ----------- ------------
Net loss before extraordinary income.... (17,380,031) (22,643,793) (21,101,198) (26,326,560) (15,952,597)
============ ============ ============ ============ ============
Extraordinary income.................... - - - - 2,050,000
------------ ------------ ------------ ------------ ------------
Net loss............................... (17,380,031) (22,643,793) (21,101,198) (26,326,560) (13,902,597)
============ ============ ============ ============ ============
Preferred stock dividends ............. - - - 10,394,918 3,487,587
============ ============ ============ ============ ============

Net loss applicable to common
stockholders ........................ $(17,380,031) $(22,643,793) $(21,101,198) $(36,721,478) $(17,390,184)
============ ============= ============= ============ ============
Net loss per common share ............. $ (1.26) $ (1.45) $ (1.29) $ (2.20) $ (.88)
============ ============= ============= ============ ============
Weighted average common shares
used in computing net loss
per share ........................... 13,775,341 15,631,333 16,355,587 16,724,493 19,826,864
=========== =========== =========== =========== ===========

</TABLE>
<TABLE>
<CAPTION>

26
<PAGE>

DECEMBER 31,
--------------------------------------------------------------------------------------
1993 1994 1995 1996 1997
------------ ----------- ------------ ------------ -------------
(As Restated)
BALANCE SHEET DATA:

<S> <C> <C> <C> <C> <C>
Cash and cash equivalents ............... $ 10,104,179 $ 5,536,782 $ 435,460 $ 1,548,392 $ 5,328,535
Marketable securities ................... - 2,034,948 - - -
Working capital (deficit) ............... 8,612,996 3,859,854 (1,298,886) (5,927,902) (3,125,559)
Total assets ............................ 18,099,705 17,039,292 16,299,508 10,504,608 8,811,565
Short-term debt ......................... 170,572 197,453 248,494 5,402,268 800,000
Long-term debt .......................... 483,364 3,038,778 15,977,899 - 1,450,000
Deferred revenue ........................ - 5,000,000 5,000,000 5,000,000 10,000,000
Canadian affiliate put option
liability ............................. - - 2,076,000 2,400,000 2,400,000
Total liabilities ....................... 2,893,194 13,255,070 26,741,003 17,091,212 23,703,412
Accumulated deficit ..................... (108,528,342) (131,172,135) (152,273,333) (188,994,811) (206,384,995)
Total stockholders's equity (deficit) . 15,206,511 3,784,222 (10,441,495) (6,586,604) (14,891,847)

</TABLE>
<PAGE>
27
<PAGE>

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

Overview

The Company is engaged in the discovery, research and development of
pharmaceutical products for human therapeutic applications. Since 1985, the
Company has focused substantially all of its efforts and resources on research
and development of its fusion protein technology. The Company's fusion
proteins were developed using proprietary technology and have potential
applications in a wide range of human diseases. To date, the Company has not
generated any revenues from the sale of fusion protein products, and the
Company does not expect to receive any such revenues in 1998. 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. After receiving
shareholder approval and ratification, the Company completed the sale of the
Operating Division on December 31, 1997. B.U. assumed responsibility for the
facility's operation including responsibility for operating costs as of
February 14, 1997. 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.)

28
<PAGE>
Results of Operations

1997 to 1996

The Company incurred a net loss of $17.4 million for the year ended
December 31, 1997 compared to $36.7 million for the year ended December 31,
1996. The decrease in net loss of $19.3 million during 1997 was primarily due
to (i) a decrease of $6.9 million in preferred stock dividends and accretion
(ii) a reduction in operating expenses of $3.0 million, (iii) a reduction in
the loss incurred in connection with the Company's Canadian affiliate of $2.9
million, (iv) a decrease of $5.3 million in interest expense, and (v) an
extraordinary gain of $2.1 million reflecting the forgiveness of indebtedness
of the Ajinomoto license agreement. These decreases in expenses were
partially offset by a reduction in revenue of $0.8 million.

The Company's revenues for the year ended December 31, 1997 were $4.7
million as compared to $5.5 million for the year ended December 31, 1996.
Contract revenue from Lilly increased in the year ended December 31, 1997 as
compared to 1996 by $0.3 million, associated with the Phase III clinical trial
for IL-2 Fusion Protein for cancer therapy, other contract revenue increased
by $0.4 million, however this gain was more than offset by a decrease in
revenue from license fees of $1.5 million as a result of a one-time fee
relating to the exercise by a third party of a an option to license certain
patents in the field of transplantation in 1996.

Total operating expenses decreased by $3.0 million to $20.6 million in
1997 from $23.6 million in 1996. Expenses associated with the cost of
contract revenue and license fees decreased by $0.2 million to $4.3 million in
1997 from $4.5 million in 1996. Although the cost of contract revenue from
Lilly increased by $0.3 million, this was more than offset by the one-time
expense of a sublicense fee relating to the exercise by a third party of an
option to license certain patents in the field of transplantation that
occurred in the year ended December 31, 1996. Research and development
expenses decreased by $3.4 million to $10.6 million for the year ended
December 31, 1997 as compared to $14.0 million for the year ended December 31,
1996. This decrease was primarily the result of a reduction in workforce and
related expenses.

General and administrative expenses increased by $0.6 million to $5.7
million for the year ended December 31, 1997 as compared to $5.1 million for
the year ended December 31, 1996 due to the increase in legal expenses
associated with the Company's proxy filing and patent counsel, a fairness
opinion for USSC, the value of warrants issued to USSC, and fees and expenses
of certain consultants.

Losses incurred in connection with the Company's Canadian affiliate
decreased by $2.9 million to $0 in 1997. This decrease reflects the Company's
decision in 1997 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, 1997 as compared to the year ended
December 31, 1996.

Interest expense decreased $5.3 million in 1997 to $0.2 million from $5.5
million in 1996 primarily due to the elimination of the lines of credit in
exchange for Series B Preferred Stock which occurred in July 1996.

The Company recorded $3.5 million in preferred stock dividends in 1997
related to the Series A, B and C Preferred Stock. In 1996 the Company
recorded $10.4 million in preferred stock dividends which 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.

29
<PAGE>

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
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.

30
<PAGE>

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.

Restatement of December 31, 1996 Financial Statements

<TABLE>
For the Year Ended
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 December 31, 1997, the Company had approximately $5.3 million in
cash and cash equivalents, which was comprised of (i) $5.0 million from USSC
pursuant to the USSC License Agreement, (ii) the remainder of the deposit to
date of $4.5 million made by B.U. with respect to the operating facility in
connection with the sale of the Company's manufacturing and clinical
operations to B.U., and (iii) payments received from B.U. in connection with
its assumption of liabilities for the operating division under the Service
Agreement during the period from February 14, 1997, through December 31, 1997,
the date on which the sale of the operating facility to B.U. was consummated.

The Company expects to incur substantial additional research and
development expenses as it continues development of its fusion proteins and
pursues regulatory approval for DAB389IL-2 through its pending BLA. 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
progress in 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.

31
<PAGE>

On April 7, 1997, the Company entered into the Amendment to its Sales and
Distribution Agreement and Development Agreement with Lilly pursuant to which
Lilly had originally obtained the development and marketing rights to the
Company's lead molecule, IL-2 Fusion Protein, for all cancer and certain non-
cancer indications. Under the terms of the Amendment, subject to certain
limitations, Lilly relinquished certain other development and marketing rights
to IL-2 Fusion Protein for non-cancer indications, as well as rights to other
molecules. In addition, Lilly agreed to pay to Ajinomoto on behalf of the
Company $4.3 million: Lilly paid $2.15 million to Ajinomoto for a license
granted by Ajinomoto directly to Lilly; and Lilly has agreed to pay, subject
to certain conditions, up to $2.15 million of the Company's $2.25 million
obligation to Ajinomoto under the Company's restructured agreement with
Ajinomoto. Pursuant to the Amendment, Lilly has credited $1.5 million of the
amount paid by Lilly to Ajinomoto on behalf of the Company against the $1.5
million milestone payment that was due from Lilly to the Company under the
Sales and Distribution Agreement between the Company and Lilly upon the
submission in December 1997 of a BLA for CTCL to the FDA.

Lilly is not obligated to make any further payments in respect of the
Company's obligations to Ajinomoto if Lilly terminates the Sales and
Distribution Agreement and Development Agreement between it and the Company as
a result of a failure by the Company to meet specified clinical, regulatory
and financial milestones and other requirements. The Company has not met the
milestones and as a result, Lilly has the right, with 30 days' notice, to
terminate its agreements with the Company. The Company has received no
indication from Lilly that Lilly intends to exercise that right. If Lilly
were to terminate its agreements with the Company, the Company would be
obligated to pay the $2.15 million payment to Ajinomoto that Lilly has agreed
to make on the Company's behalf, and Lilly's obligations under the agreements
to provide financial support to the Company's clinical trial efforts would
cease.

In exchange for the amendments to the agreement, the Company issued to
Lilly in a private placement 1.0 million shares of its common stock, which
were valued at $800,000 and recorded as research and development expense.

On June 1, 1997, the Company restructured its License Agreement with
Ajinomoto pursuant to which Ajinomoto had granted the Company worldwide rights
to certain IL-2 gene patents owned by the Japanese Foundation for Cancer
Research and Ajinomoto for potential use in the development of the Company's
lead product, IL-2 Fusion Protein. Prior to the restructuring, the Company
was obligated to pay Ajinomoto license fees and royalties as follows: $4.3
million payable upon the occurrence of certain specified events, but no later
than March 31, 1997 (extended by agreement of Ajinomoto to May 31, 1997); and
royalties ranging from 2% to 4% on sales of the licensed product by the
Company or its sublicensees, but with minimum royalties of $100,000 for the
third year of the agreement, $200,000 for the fourth year of the agreement,
and $300,000 for the fifth and following years of the agreement. In addition,
prior to the restructuring, the rights granted by Ajinomoto to the Company
pursuant to the License Agreement were exclusive.

32
<PAGE>
Under the terms of the restructuring, the future license fees and
royalties payable by the Company to Ajinomoto were reduced to the following
amounts: a $2.25 million fee payable in the amount of $800,000 by June 30,
1998, or approval by the FDA of a BLA filed by the Company for the licensed
product, whichever comes first, in the amount of $800,000 by June 30, 1999,
and in the amount of $650,000 by March 31, 2000; and a reduced royalty of 1%
on end user net sales of the licensed product by the Company or its
sublicenses. The Company amended its agreements with Lilly whereby Lilly will
pay license fees to Ajinomoto on behalf of the Company, subject to certain
limitations. The restructuring provides that the license granted by Ajinomoto
to the Company will be non-exclusive. Accordingly, in 1997, the Company
reduced its obligation to Ajinomoto from $4.3 million to $2.25 million and
recorded extraordinary income of $2,050,000 for the reduction of this
liability.

In 1997, the Company sold its Operating Division to B.U. The Company
began assembling the components of the Company's operating division, which
includes substantially all of the Company's personnel and tangible assets and
related contract rights other than (i) certain management personnel, and (ii)
assets utilized by retained management personnel in the performance of their
duties (collectively, the "Operating Division"), over five years ago. The
Company developed the Operating Division in a manner that provided excess
capacity in order to meet anticipated commercial demand for the Company's
products. Historically, the Operating Division has never operated at full
capacity because the Company has not yet begun manufacturing product for
commercial purposes and due to the limited financial resources that the
Company has available to develop other products. The Company, however,
maintained a relatively high level of staffing in order to comply with
regulatory requirements. The Company maintained the Operating Division,
despite its high costs, because of the delays and disruptions in the Company's
product development and clinical trial efforts that the board of directors and
management believed would have resulted had the Company discontinued the
operations of the Operating Division and sought to obtain the services
provided by the Operating Division from third parties. In late 1996, the
Company determined that it did not have adequate financial resources to
maintain the Operating Division in accordance with its initial plans or to
develop additional products utilizing the Operating Division. 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 the Operating Division to B.U. or a designated affiliate for
$5.0 million. The net book value of the assets to be sold to B.U. was
approximately $4.5 million as of February 14, 1997. The Company closed this
transaction on December 31, 1997. The net book value of the assets sold to
B.U. was approximately $3.9 million as of December 31, 1997. At the closing,
B.U. paid the remaining $500,000 of the purchase price, and a majority of the
Company's employees involved in its manufacturing and clinical operations
became employees of the contract service organization created by B.U. under
the name Marathon for purposes of purchasing the Seragen assets. Upon the
closing of this transaction, the Company accounted for the gain on the sale of
the Operating Division and the excess of the reimbursed operating costs over
the amount due to B.U., pursuant to the Service Agreement for the period from
February 14, 1997 until the closing of the transaction, as a contribution of
capital.

33
<PAGE>
Simultaneously with the execution of the Asset Purchase Agreement, the
Company entered into the 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. The Service Agreement expires in January 1999 and is subject to
certain early termination provisions, including the option of B.U. to
terminate the agreement if losses during a contract year exceed $9.0 million
and, after notice, the Company does not reimburse B.U. for the losses in
excess of $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. 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 Operating Division. 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. Seragen and
B.U. are currently negotiating a reduction in the fees payable in 1997 and for
1998 based on the actual services rendered in 1997 and those anticipated for
1998. See "Business Outlook -- Dependence on Marathon for Services". As of
March 31, 1998, the Company has not paid any portion of these fees, and B.U.
has not taken any action to compel payment. As a result, the Company
currently is indebted to B.U. in this respect in the amount of $5.8 million as
of February 28, 1998.

As a result of the Service Agreement, the Company's research and
development operating costs in the year ended December 31, 1997 were reduced
substantially, even after taking into consideration the accrued amount owed to
B.U. under the Service Agreement. The Service Agreement is expected to
continue to result in reduced 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.

On July 31, 1997, the Company entered into the USSC License Agreement
with USSC, granting USSC an option on worldwide rights to the EGF Fusion
Protein for restenosis in cardiovascular applications. Leon C. Hirsch, who
beneficially owns more than 5% of the Company's Common Stock, is the Chairman
of USSC and beneficially owns 7.8% of the common stock of USSC. Turi
Josefsen, who beneficially owns more than 5% of the Company's Common Stock, is
a director of USSC and beneficially owns 1.8% of the common stock of USSC.
John R. Silber, a director of the Company, is a director of USSC and
beneficially owns .02% of the common stock of USSC. Pursuant to the USSC
License Agreement, USSC made an initial payment to the Company of $5.0 million
on July 31, 1997. Under the USSC License Agreement, USSC is entitled to
acquire an exclusive license to the EGF Fusion Protein technology, at any time
during a 15-month evaluation period, upon the payment to the Company of an
additional $5.0 million. In addition, the Company issued to USSC a warrant
for the purchase of 500,000 shares of the Company's Common Stock at a purchase
price of $.5625 per share, the closing sale price for shares of the Company's
Common Stock on the date prior to the date the warrant was issued. The
Company charged $175,000 for such warrant to general and administrative
expense. USSC has agreed to fund trials associated with the development of
EGF Fusion Protein for restenosis. If USSC's option to obtain an exclusive
license of the EGF Fusion Protein technology is exercised, milestone payments
will be payable by USSC to the Company up to a maximum amount of $22.5
million. In addition, USSC will be obligated to pay the Company royalties on
commercial sales of the licensed product. In the event USSC chooses not to
exercise the option, the USSC License Agreement will terminate, and, in
exchange, USSC will receive $5.0 million worth of the Company's Common Stock
valued at the average of the closing prices of the Company's Common Stock (i)
for the ten trading days preceding the date of the USSC License Agreement or
(ii) for the ten trading days preceding the date on which USSC chooses not to
exercise the option, whichever is lower. The Company will record the $5.0
million initial payment from USSC as a liability. In the event that USSC
exercises its option to license the EGF Fusion Protein, the $5.0 million will
be recorded as revenue at that time. In the event that USSC chooses not to
exercise the option, the $5.0 million will be recorded as stockholders'
equity.

34
<PAGE>

On August 6, 1997, the Company and Harvard College amended their license
agreement dated November 29, 1983. Pursuant to the amended license agreement,
the royalties payable by the Company on net sales of product covered by such
license agreement were reduced from 5% to 2%. Further, the royalties payable
to Harvard from sub-licenses were reduced from 50% to 10%.

On October 1, 1997, the Company and the Boston Medical Center (formerly
University Hospital) amended their license and royalty agreement dated
November 18, 1991. Pursuant to the amended license and royalty agreement, the
royalties payable by the Company on net sales of product covered by such
license agreement following the expiration of the Harvard license, above, were
reduced from 1.5% to 1.0%. Further, the royalties payable to Boston Medical
Center from sub-licenses were reduced from 15% to 2% provided that such
products require other patents or licenses in addition to the license from
Boston Medical Center.

On May 29, 1996, the Company issued 4,000 shares of Series A Preferred
stock ("Series A Shares"), to investors outside the United States in reliance
on Regulation S of the Securities Act, for gross proceeds of $4 million
(approximately $3.8 million net of offering fees). Each Series A Share was
convertible into shares of the Company's Common Stock at a 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, subject to a
contractually-imposed maximum of 3,321,563 shares of Common Stock. Any share
the investor was unable to convert due to the conversion cap could be
exchanged for $1,150 per share in cash. On November 11, 1997, the holder of
the Series A Shares and the Company agreed to eliminate the conversion
limitation and the ability to exchange such shares for cash when subject to
such limitation. The holders of the Series A Shares also were entitled to
receive cumulative dividends from May 29, 1996, at an 8% annual rate upon
conversion, payable in shares of Common Stock. Any Series A Shares remaining
outstanding on November 29, 1997, were to be automatically converted into
shares of Common Stock.

On November 26, 1997, the Company issued 923 shares of Series D Preferred
stock ("Series D Shares") in exchange for all remaining outstanding shares of
its Series A Shares. The Series D Shares feature terms identical to the
Series A Shares, except that (1) the Series D Shares do not convert
automatically into Common Stock until November 29, 1998, and (2) the Series D
Shares are redeemable for cash. At December 31, 1997, 908 shares of Series D
Shares were outstanding, representing a liquidation value of $1,023,321.

The Company has not paid the cash dividends due December 31, 1996, March
31, 1997, June 30, 1997, September 30, 1997, and December 31, 1997, on shares
of its Series B Preferred stock ("Series B Shares"), nor has the Company made
the royalty payments due to its subsidiary, Seragen Technology, Inc. ("STI"),
on January 1, 1997, April 1, 1997, July 1, 1997, October 1, 1997, and January
1, 1998. Correspondingly, STI has not paid the dividends due January 1, 1997,
April 1, 1997, July 1, 1997, October 1, 1997, and January 1, 1998 on shares of
its Class B common stock ("Class B Shares"). The Company does not expect STI
to make any dividend payments advisors due on the Class B Shares in 1998. The
holders of the Class B Shares have the right under an escrow agreement to seek
delivery to them of a collateral assignment of the Company's patents.

35
<PAGE>

Dividends payable of approximately $2.9 million with respect of the
Series B Shares were outstanding at December 31, 1997, and are included in
accrued expenses. See Note E to the Company's financial statements.

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 B.U. under Regulation D of the Securities Act of 1933. The
Series C Shares were convertible at the option of the holder into shares of
Seragen Common Stock. See Note J to the Company's financial statements.

Effective March 30, 1998, 1,060 Series C Shares automatically converted,
in accordance with the terms of the Series C preferred stock, into 3,360,625
shares of the Company's common stock and 3,940 Series C Shares were, as
required by the terms of the Series C preferred stock, purchased by the
Company for an aggregate purchase price of $4,530,461. Following these
transactions, no Series C Shares remained outstanding. The purchase price for
the Series C Shares purchased by the Company has not yet been paid by the
Company, nor has B.U., the holder of the Series C Shares, demanded payment of
the said purchase price. As a result, the Company currently is indebted to
B.U. for this amount.

The Company's Common Stock was delisted from trading on the Nasdaq
National Market on September 9, 1997, due to failure to comply with Nasdaq's
minimum net tangible assets requirement. The delisting of the Common Stock
from the Nasdaq National Market could have a material adverse effect on the
Company's efforts to raise additional equity capital. In addition, as a
result of the delisting of the Common Stock from the Nasdaq National Market,
the investors in Seragen Biopharmaceuticals Ltd. ("SBL"), a company 49% owned
by the Company, may claim that they are entitled to require the Company to
purchase their shares in SBL for cash. The Company believes that it has
meritorious defenses to assert against this potential claim. There is no
assurance that the Company will have sufficient cash to purchase the
investors' shares in SBL for cash. The Company intends to re-apply for
listing on the Nasdaq National Market or the Nasdaq Small-Cap Market as soon
as possible after the Company is able to satisfy applicable listing
requirements. There is no assurance that the Company will be able to satisfy
these requirements.

The Company anticipates that existing cash and cash equivalents,
reimbursement of clinical costs for the development of IL-2 Fusion Protein for
cancer therapy from Lilly, the deferral of payments of amounts currently owed
under the service agreement with Marathon and the $5.0 million received from
USSC for a license option will be sufficient to fund the Company's working
capital requirements through approximately June 1998. The Report of
Independent Accountants on the Company's Financial Statements for the fiscal
year ended December 31, 1997 includes an explanatory paragraph concerning
uncertainties surrounding the Company's ability to continue as a going
concern. This uncertainty may adversely affect the Company's ability to raise
additional capital. See Note A in "Notes to the Financial Statements." The
Company's ability to finance its operations is dependent upon its ability to
raise additional capital.

The Company continues to seek additional funds through collaborative or
other arrangements with corporate partners and others. The Company entered
into one such arrangement in 1997 with USSC, as described above, with respect
to its EGF Fusion Protein. However, the Company's prospects for such
arrangements with respect to IL-2 Fusion Protein appear to be limited. The
Company's management has found that clinical issues associated with the side-
effect profile of the product and with its intravenous administration, along
with the fact that the same molecule has already been partnered for cancer
indications, make it difficult to attract a partner to develop the product for
non-cancer indications. Management of the Company accordingly believes that
it will continue to be difficult for the Company to establish, on advantageous
terms, additional collaborative partnerships for further trials of IL-2 Fusion
Protein.

36
<PAGE>

The Company has also explored possible opportunities for equity and debt
offerings. On the basis of discussions with its financial advisors and with
multiple prospective investors, Company management has concluded that it is
unlikely that the Company will be able to obtain such financing on terms that
Company management believes would be attractive to the Company's existing
shareholders.

If the Company does not consummate a financing or other transaction, then
the Company's current cash position may not be sufficient to meet its
financial obligations or to fund operations at the current level beyond June
1998. If adequate additional funds are not available, the Company may be
required to delay, scale back or eliminate some or all of its clinical trials,
manufacturing or development activities or certain other aspects of its
business and may be required to cease operations.

In January 1998, the Company subleased approximately 7,000 square feet of
office space in two buildings in Hopkinton, Massachusetts from Marathon. The
subleases on each of the buildings expires in January 1999 and the Company can
exercise, at its option, two one-year extensions on each sublease.

Safe Harbor Information

Some of the statements contained in this document are forward-looking,
including statements relating directly or by implication to the Company's
products, operations, strategic partnerships, and ability to fund its
operations. These statements are based on current expectations and involve a
number of uncertainties and risks, including (but not limited to) the
Company's ability to proceed with successful development, testing, and
licensing of its products, to modify certain existing arrangements, to enter
into additional strategic partnerships and other collaborative arrangements,
to raise additional capital on satisfactory terms, or to complete a merger or
sale of the Company. For further information, refer to the "Business Outlook"
section. Actual results may differ materially from expectations.

37
<PAGE>

<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Page
Index to Financial Statements and Schedule

Reports of Independent Accountants. . . . . . . . . . . . . . . . . . . . 34

Financial Statements:

Balance Sheets as of December 31, 1996 and 1997 (As Restated). . . . 36

Statements of Operations for the years ended December 31, 1995,
1996 and 1997 (As Restated). . . . . . . . . . . . . . . . . . . . 37

Statements of Stockholders' Equity (Deficit) for the years
ended December 31, 1995, 1996 and 1997 (As Restated) . . . . . . . 38

Statements of Cash Flows for the years ended December 31,
1995, 1996 and 1997 (As Restated) . . . . . . . . . .. . . . . . . 39

Notes to Financial Statements. . . . . . . . . . . . . . . . . . . . 40

38
<PAGE>
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS

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

We have audited the accompanying balance sheets of Seragen, Inc. (a
Delaware Corporation) as of December 31, 1996 and 1997, and the related
statements of operations, stockholders' deficit and cash flows for the years
then ended. 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, 1996 and 1997, and the results of its operations and its cash
flows for the years then ended in conformity with generally accepted
accounting principles.

The accompanying financial statements have been prepared assuming that
the Company will continue as a going concern. As described in Note A, the
Company has experienced significant operating losses since inception, has a
significant stockholders' deficit and has a working capital deficit as of
December 31, 1997. 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
February 5, 1998
(except for the matter discussed in Note J as to which the date is March 30,
1998)
<PAGE>
39
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS

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

We have audited the balance sheet of Seragen, Inc. as of December 31,
1995 and the related statement of operations, stockholders' equity (deficit)
and cash flows for the year then ended. 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, 1995 and the results of its operations and its cash flows for
the year then ended 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

40
<PAGE>
<PAGE>
<TABLE>
BALANCE SHEETS
<CAPTION>

DECEMBER 31,

ASSETS 1996 1997
------------- --------------
(As Restated)
<S> <C> <C>
Current assets:
Cash and cash equivalents........................................................ $ 1,548,392 $ 5,328,535
Restricted cash.................................................................. 610,310 175,000
Contract receivable.............................................................. 485,261 208,190

Unbilled contract receivable..................................................... 833,983 944,063
Prepaid expenses and other current assets........................................ 285,356 72,065
-------- ---------

Total current assets................................................ 3,763,310 6,727,853

Property and equipment, net........................................................ 4,604,115 15,064
Deferred commission................................................................ 2,060,000 2,060,000
Other assets........................................................................ 77,183 8,648
--------- ---------

Total assets........................................................ $ 10,504,608 $ 8,811,565
============ =============
LIABILITIES AND STOCKHOLDERS' (DEFICIT)
Current liabilities:
Accounts payable................................................................. 1,111,477 447,008
Related party payable............................................................ - 3,422,833
Current maturities of long-term debt............................................. 37,418 -
Dividend payable - Series B preferred stock....................................... 583,295 2,943,136
Accrued expenses.................................................................. 2,594,172 2,240,435
Preferred stock redemption liability.............................................. 1,236,753 -
Short-term obligation, less unamortized discount.................................. 4,128,097 800,000
------------- -------------
Total current liabilities........................................... 9,691,212 9,853,412

Non-current liabilities:
Deferred revenue................................................................. 5,000,000 10,000,000
Long-term obligation............................................................. - 1,450,000
Canadian affiliate put option liability........................................... 2,400,000 2,400,000
---------- -----------

Total non-current liabilities....................................... 7,400,000 13,850,000
----------- -----------

Commitments and contingencies
Stockholders' (deficit);
Preferred stock, $.01 par value; 5,000,000 shares authorized
Convertible preferred stock, Series A, $.01 par value; issued and
outstanding 3,105 shares at December 31, 1996, $2,015,522
liquidation preference....................................................... 2,015,522
Convertible preferred stock, Series B, $.01 par value; issued and
outstanding 23,800 shares at December 31, 1996, $23,800,000
liquidation preference....................................................... 23,800,000 23,800,000
Convertible preferred stock, Series C, $.01 par value; issued and
outstanding 5,000 shares at December 31, 1996, $5,100,000
liquidation preference....................................................... 5,100,000 5,500,000
Convertible preferred stock, Series D, $.01 par value; issued and
outstanding 0 and 908 shares at December 31, 1996 and 1997
$0 and $1,023,231 liquidation preference, respectively...................... - 1,023,231
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................................................... 171,994 214,448
Additional paid in capital..................................................... 151,323,022 160,957,800
Accumulated deficit............................................................ (188,994,811) (206,384,995)
------------- -------------
(8,599,795) (14,889,516)

Less-treasury stock (14,632 and 777 shares at cost at December 31,
1995 and 1996, respectively)................................................. (2,331) (2,331)
------------- -------------
Total stockholders'(deficit)........................................ (8,602,126) (14,891,847)
------------- -------------
Total liabilities and stockholders'(deficit)........................ $ 10,504,608 $ 8,811,565
============= ==============
41
PAGE>
</TABLE>
<TABLE>
SERAGEN, INC.
STATEMENTS OF OPERATIONS

FOR THE YEARS ENDED
DECEMBER 31,

1995 1996 1997
----------- ------------ ------------

(As Restated)
<CAPTION>
<S> <C> <C> <C>
Revenue:
Contract revenue and license fees ....... $ 3,337,388 $ 5,542,315 $ 4,713,686
Operating expenses:
Cost of contract revenue and license fees 3,337,388 4,504,243 4,281,174
Research and development ................ 14,086,632 13,959,405 10,601,362
General and administrative .............. 4,904,226 5,148,465 5,738,703

------------ ------------ ------------
22,328,246 23,612,113 20,621,239
------------ ------------ ------------
Loss from operations ................. (18,990,858) (18,069,798) (15,907,553)

Loss incurred in connection with Canadian
affiliate ............................... 390,136 2,923,864
Interest Income ........................... 92,924 120,740 127,322
Interest expense .......................... 1,813,128 5,453,638 172,366
------------ ------------ ------------

Net loss before extraordinary income. (21,101,198) (26,326,560) (15,952,597)
============ ============ ============
Extraordinary income.......................
- - 2,050,000
------------- ------------ -----------
Net loss............................. (21,101,198) (26,326,560) (13,902,597)
------------- ------------ ------------
Preferred stock dividends and accretion ... - (10,394,918) (3,487,587)
============ ============ ============
Net loss applicable
stockholders ............................ $(21,101,198) ($36,721,478) ($17,390,184)
============ ============ ============

Loss Per Common Share:
Basic Diluted (1.29) (2.20) (0.88)
============ ============ ============
Weighted average common shares Outstanding:
Basic 16,355,587 16,724,493 19,826,864
============ ============ ============
</TABLE>

41
PAGE
<PAGE>

<TABLE>

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

For the Years Ended December 31, 1995, 1996 and 1997

<CAPTION>
Series A Series B Series C Series D Additional
Convertible Convertible Convertible Convertible Common Paid-In
Preferred Preferred Preferred Preferred Stock Capital
Stock Stock Stock Stock
------------ ----------- ------------ ----------- ---------- -------------
(As Restated)
<S> <C> <C> <C> <C> <C> <C>
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 ................. - - - - - -
Sales 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
Exercise of stock options .................. - - - - 1 74
Stock issuance in connection with Lilly
Amendment................................... - - - - 10,000 790,000
Preferred stock redemption liability ....... 1,236,753 - - - - -
Dividends................................... 727,746 - 400,000 - - -
Preferred stock conversion ................. (2,956,790) - - - 32,453 2,924,337
Conversion of Preferred Series A to
Preferred Series D.......................... (1,023,231) - - 1,023,231 - -
Gain from the sale of assets and operating
division to Boston University............... - - - - - 5,675,313
Compensation to expense associated
with options issued to non-employees........ - - - - - 245,054
Net loss ................................... - - - - - -
----------- ----------- ----------- ----------- --------- ------------
Balance, December 31, 1997 ................. $ $23,800,000 $ 5,500,000 1,023,231 $ 214,448 $160,957,800
=========== =========== =========== =========== ========= ============

42
<PAGE>

Accumulated Treasury Stockholder's
Deficit Stock Equity (Deficit)
(As restated) (As restated)
------------- ------- ---------------

<S> <C> <C> <C>
Balance, December 31, 1994 ................. $(131,172,135) $ (74,098) 3,784,222
Exercise of stock options................... - - 84,788
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.............. - - 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, 1994 ................. (152,273,333) (92,954) (10,441,495)
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) - (1,666,590)
Preferred stock conversion.................. - - -
Purchase of treasury stock ................. - (107,750) (107,750)
Sales 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)

43
<PAGE>
Exercise of stock options .................. - - 75
Stock issuance in connection with Lilly
Amendment................................... - - 800,000
Preferred stock redemption liability........ - - 1,236,753
Dividends .................................. (3,487,587) - (2,359,841)
Preferred stock conversion ................. - - -
Conversion of Preferred Series A to
Preferred Series D.......................... - - -
Gain from sale of assets and operating
division to Boston University............... - - 5,675,313
Compensation expense associated with
options issued to non-employees............. - - 245,054
Net loss ................................... (13,902,597) - (13,902,597)
-------------- ---------- ------------
Balance, December 31, 1997 ................. $(206,384,995) $ (2,331) $ (14,891,847)
============== ========== ============

</TABLE>

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

44
PAGE
<PAGE>
<TABLE>

SERAGEN, INC.
STATEMENTS OF CASH FLOWS

<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,

1995 1996 1997
(As restated)
------------ ------------ ------------

Cash flows from operating activities:
Net loss ................................................... $(21,101,198) $(26,326,560) $(13,902,597)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization ............................ 969,104 945,225 953,832
Loss incurred in connection with Canadian affiliate ...... 390,136 2,923,864 -
Loss on disposal of property and equipment ............... 2,240 71,811 4,593
Extraordinary income...................................... - - (2,050,000)
Compensation associated with stock issuance and warrants.. - 20,502 245,054
Amortization of discount on long-term debt ............... 687,614 687,615 171,903
Amortization of prepaid interest ......................... 636,319 3,528,677 -
Amortization of debt issuance costs ...................... 79,719 442,117 -
Non-cash charge for issuance of common shares to Lilly.... - - 800,000

Changes in operating assets and liabilities:
Contract receivable ...................................... (439,484) 200,794 277,071
Unbilled contract receivable ............................. (154,368) (337,836) (110,080)
Prepaid expenses and other current assets ................ 192,955 49,882 213,291
Accounts payable ......................................... 94,701 386,151 (664,469)
Related party payable..................................... - - 3,422,833
Deferred commission ...................................... - - -
Accrued commission payable ............................... (300,000) (300,000) -
Accrued expenses ......................................... 385,070 180,888 (353,737)
Deferred revenue ......................................... - - 5,000,000
------------ ------------ ------------
Net cash used in operating activities ...................... (18,557,192) (17,526,870) (5,992,306)
------------ ------------ ------------

Cash flows from investing activities:
Proceeds from sales of marketable securities ............. 2,034,948 - -
Purchases of property and equipment ...................... (351,840) (423,015) (280,045)
Cash received for net book value of assets purchased by
Boston University......................................... - - 3,910,671
Decrease in other assets ................................. 2,970 5,353 68,535
(Increase) decrease restricted cash account .............. (47,445) (175,000) 435,318
------------ ------------ ------------
Net cash (used in) provided by investing activities ........ 1,638,633 (592,662) 4,134,479
------------ ------------ ------------

Cash flows from financing activities:
Proceeds from preferred stock issuances .................. - 9,000,000 -
New proceeds from common stock issuances ................. 238,424 210,682 75
Purchases of treasury stock .............................. (201,939) (107,750) -
Proceeds from issuance of long-term debt ................. 12,500,000 11,300,000 -
Repayments of long-term debt ............................. (197,452) (248,493) (37,418)
Debt and preferred stock issuance costs .................. (521,796) (338,680) -
Dividends paid ........................................... - (583,295) -
------------- ----------- -----------
Cash gain from sale of assets and operating division to
Boston University......................................... - - 5,675,313
------------ ------------ ------------
Net cash provided by financing activities .................. 11,817,237 19,232,464 5,637,970
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents ....... (5,101,322) 1,112,932 3,780,143
Cash and cash equivalents, beginning of period ............. 5,536,782 435,460 1,548,392
------------ ------------ ------------
Cash and cash equivalents, end of period ................... $ 435,460 $ 1,548,392 $ 5,328,535
============ ============ ============
Supplemental disclosures of cash flows information:
Cash paid for interest ................................... $ 489,195 $ 761,981 $ 463
============ ============ ============

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 $ 2,956,790
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 $ 1,127,745
Conversion of Series A Preferred Stock to Series D
Preferred Stock........................................... $ - $ - $ 1,023,231
Removal of conversion cap liability....................... $ - $ - $ 1,236,753
Accrued but unpaid Series B dividend...................... $ - $ 583,295 $ 2,359,841

45
<PAGE>
</TABLE>

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") which was subsequently
amended in April 1997 (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, the Company entered into an agreement to sell its operating
division to B.U. for $5 million (see Note B) and the Company simultaneously
entered into a service agreement under which B.U. will perform research and
development activities on behalf of the Company. After receiving shareholder
approval and ratification, the Company closed the sale of the operating
division on December 31, 1997. Approximately 90 of the Company's employees
were transferred to B.U. upon closing. In July 1997, the Company obtained $5
million through an option agreement with United States Surgical Corporation
("USSC").

The Company has incurred losses of approximately $206 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, 1997, 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, strategic
partnerships and the sale of the Company; however, no assurance can be given
that any such arrangements 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 March 1997, the Company restated its September 30, 1996 financial
statements to reflect the Series A, B and C Preferred Stock at their
liquidation value. Such restatement resulted in an increase in net loss
attributable to common stockholders of $9.6 million for the three and nine
month periods ended September 30, 1996, which includes an $8.6 million
dividend representing the value ascribed to the warrants issued in connection
with the Series B Preferred Stock. 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)

47
<PAGE>

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 B.U. or a designated affiliate for $5.0
million. After receiving shareholder approval and ratification, the Company
closed the sale of its operating division on December 31, 1997. B.U. assumed
responsibility for the facility's operations, including responsibility for
operating costs, as of February 14, 1997.

Simultaneously with the execution of the Asset Purchase Agreement, the
Company entered into a service agreement (the "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. The Service Agreement expires in January
1999, and is subject to certain early termination provisions, 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 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 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. Seragen and B.U. are currently
negotiating a reduction in the fees payable in 1997 and for 1998 based on the
actual service rendered in 1997 and those anticipated for 1998. The Service
Agreement has reduced substantially the Company's operating costs in research
and development, as the Company is contracting solely for the services that
the Company requires for clinical and manufacturing purposes.

The Company recorded a gain of $1,089,328 on the sale of the operating
facility and $4,585,987 for the excess of the reimbursed operating costs over
the amount due to B.U. pursuant to the Service Agreement for the period from
February 14, 1997, until the closing of the transaction on December 31, 1997
as a contribution of capital.

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, 1996 and 1997 consist of money market funds.

Restricted Cash

The Company maintains a restricted cash balance of $175,000 at December
31, 1997, which is available under a letter of credit required by an officer
of the Company with whom the Company entered into an employment agreement.
The restricted cash balance at December 31, 1996 included $435,318 available
under a letter of credit requested by a lessor with whom the Company had a
sale/leaseback arrangement which expired in 1997.

48
<PAGE>

Concentration of Credit Risk

The Company invests its excess cash in deposits with federally insured
banks and money market funds. At December 31, 1996 and 1997, all investments
were in funds which have an average maturity of less than one year. Financial
instruments that subject the Company to credit risk consists primarily of
billed and unbilled contract receivables. As of December 31, 1995, 1996, and
1997 one customer accounted for 100% of billed and unbilled contract
receivables. Revenue from significant customers, which accounted for greater
than 10% of total revenue are as follows:

Year ended December 31,
1995 1996 1997
Customer A 100% 72% 91%
Customer B - 27% -

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 1996 1997
----------- ----------- -----------
<S> <C> <C> <C>
Laboratory equipment ....................... 3 - 7 Years $3,302,145 $ 2,757
Production equipment ....................... 3 - 7 Years 378,474 -
Furniture and fixtures ..................... 3 - 8 Years 627,989 124,153
Leasehold improvements ..................... Life of Lease 9,683,789 -
----------- -----------
13,992,397 126,910

Less accumulated depreciation and
amortization................................ (9,388,282) (111,846)
------------ -----------
$ 4,604,115 $ 15,064
============ ===========
</TABLE>

In connection with the sale of the Company's operating division, substantially
all of the Company's property and equipment was sold to B.U. and realized a
gain of $1,089,328 which was recorded as a component of additional paid in
capital. (See Note B)

Net Loss Per Common Share

In March 1997, The Financial Accounting Standards Board (FASB) issued
SFAS No. 128, Earnings per Share, which established new standards for
calculating and presenting earning per share. Basic loss per common share was
computed by dividing net loss applicable to common shareholder by the weighted
average number of common shares outstanding during the year. Diluted net loss
per share presented for the years ended December 31, 1995, 1996, and 1997 does
not include potential common stock (preferred stock, options and warrants,
see Notes E, J and K) as their effects would be antidilutive. This accounting
change had no effect on the Company's historical loss per common share.

49
<PAGE>

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.

Recent Accounting Pronouncements

In June 1997, the FASB issued SFAS No. 130 Reporting Comprehensive Income
and SFAS No.131, Disclosures About Segments of an Enterprise and Related
Information. Both SFAS No. 130 and SFAS No. 131 are effective for fiscal years
beginning after December 15, 1997. The Company believes that the adoption of
these new accounting standards will not have a material impact on the
Company's financial statements.

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 and Company

On August 3, 1994, the Company and Lilly signed an agreement to form a
global strategic alliance that gave 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 had 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 retained exclusive rights to promote IL-2 Fusion Protein and future
fusion proteins for dermatologic applications outside of oncology and was to
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 also agreed to pay the Company an additional $3 million based
on meeting certain regulatory milestones in the development of IL-2 Fusion
Protein for cutaneous T-cell lymphoma ("CTCL"). In addition, Lilly reimburses
the Company for costs incurred in the clinical development of IL-2 Fusion
Protein for CTCL, including costs for Phase III clinical trials. The Company
recorded approximately $3,337,000, $3,979,000, and $4,281,000 of contract
revenue for such reimbursed development costs during the years ended December
31, 1995, 1996 and 1997, 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.

50
<PAGE>
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 restated its original accounting
treatment. (See Note O). The Company previously recognized the $5.0 million
non-refundable payment as revenue, 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.

Lilly is not obligated to make any further payments in respect of the
Company's obligations to Ajinomoto if Lilly terminates the Sales and
Distribution Agreement between it and the Company as a result of a failure by
the Company to meet specified clinical, regulatory and financial milestones
and other requirements. Such milestones have not been met by the Company and,
as a result, Lilly has the right at any time to terminate its arrangements
with the Company with 30 days' notice. The Company has received no indication
from Lilly that Lilly intends to exercise that right. If Lilly were to
terminate its agreements with the Company, the Company would be obligated to
pay the $2.15 million payment to Ajinomoto that Lilly has agreed to make on
the Company's behalf, and Lilly's obligations under the agreements to provide
financial support to the Company's clinical trial efforts would cease.

In exchange for the amended Sales and Distribution Agreement, the Company
issued to Lilly in a private placement 1.0 million shares of its Common Stock.
The shares of common stock issued to Lilly are valued at the closing price of
the Company's Common Stock as reported on Nasdaq on the date of issuance of
the shares to Lilly, less a discount of 20% to reflect a discount from the
Nasdaq closing price because the shares are not registered under the
Securities Act of 1933. In the quarter ended June 30, 1997, the Company
valued the 1.0 million shares of common stock issued to Lilly at $800,000
based on the April 7, 1997 Nasdaq closing price of $1.00, less 20%, and has
recorded it as research and development expense.

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

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

51
<PAGE>

The Company has not paid the cash dividends due December 31, 1996, March
31, 1997, June 30, 1997, September 30, 1997, and December 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, July 1, 1997, October 1, 1997, and January
1, 1998. Correspondingly, STI has not paid the dividends due January 1, 1997,
and April 1, 1997, July 1, 1997, October 1, 1997, and January 1, 1998, on the
Class B Shares. The Company does not expect STI to make the dividend payments
due on the Class B Shares on April 1, 1998.

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 these
warrants on the date of issuance to be $1.45 per warrant or a total of
$8,617,951. 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 receive additional warrants for certain dilutive events,
subject to various provisions as defined. The investors had received warrants
to purchase an additional 2,217,196 and 8,781,813 shares of Common Stock in
1996 and 1997, respectively 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 a
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
Shares, 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. The Company recorded dividends of $1,166,590 and $2,359,841
in the years ended December 31, 1996 and 1997, respectively.

52
<PAGE>

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. In connection with the issuance of the Series B Shares
the Company formed Seragen Technology, Inc. ("STI"). The Company transferred
all of its existing 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.

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 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 dividends equal to any royalty payable to STI
under the Irrevocable License Agreement.
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.

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.

53
<PAGE>

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 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 became 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 the
purchase of the investors' SBL shares in cash or Company common stock, but the
investors 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. As a result
of the delisting of Seragen Common Stock from the Nasdaq National Market, the
investors in SBL may claim that they are entitled to require the Company to
purchase their SBL shares for cash. See "Management's Discussion and
Analysis." The Company received 49% of SBL's Class A and Class B shares in
exchange for issuing 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).

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. The put option obligation liability represents the estimated put
option liability less the net assets of the Canadian affiliate available to
satisfy such liability if the put option were exercised.

Summarized unaudited financial information for Seragen
Biopharmaceuticals Ltd. for 1997 in U.S. dollars is as follows:
<TABLE>
<CAPTION>

BALANCE SHEET DATA AS OF STATEMENT OF OPERATIONS DATA
------------------------ ----------------------------
DECEMBER 31, 1997 FOR THE YEAR ENDED DECEMBER 31,1997
----------------- ------------------------------------
(Unaudited) (Unaudited)

<S> <C> <C> <C>
Current assets $8,928,799 Investment income $306,517
Noncurrent assets - Operating expenses 283,572
Current liabilities 77,616 Net loss 22,945
Stockholders' Equity 8,851,183
</TABLE>

H. INCOME TAXES:

As of December 31, 1997, the Company had net operating loss carry
forwards for federal income tax purposes of approximately $189 million
expiring at various dates from 1998 through 2013 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 $6
million. The tax credits expire at various dates from 1998 through 2013. 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.

54
<PAGE>

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>
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 4,440,000 - -
2003 - 2013 176,509,000 5,157,000 -
------------ ---------- -------
$189,448,000 $5,650,000 $41,000
------------ ---------- -------
</TABLE>

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

December 31,
----------------------------
1996 1997
---------- ----------
<CAPTION>
<S> <C> <C>
Net Operating loss carryforwards $ 69,694,000 $ 70,291,000
Research and development credits 4,912,000 5,650,000
Investment tax credits 45,000 41,000
Temporary differences 1,727,000 2,980,000
------------ ------------
76,378,000 78,962,000
Valuation allowance (76,378,000) (78,962,000)
------------ ------------
$ - $ -
============ ============
55
<PAGE>
</TABLE>

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

I. 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 was paid in full as of December 31, 1997.

License Fees

In December 1994, the Company entered into a license agreement with
Ajinomoto which provides the Company with exclusive worldwide rights under
Ajinomoto's IL-2 gene patents for the Company's fusion proteins. On June 1,
1997, the Company restructured its license agreement with Ajinomoto (see Note
E). Prior to the restructuring, the Company was obligated to pay Ajinomoto a
license fee of $4.3 million payable upon the occurrence of certain specified
events, but no later than March 31, 1997 (extended by agreement of Ajinomoto
to May 31, 1997), and royalties ranging from 2% to 4% on sales of the licensed
product by the Company or its sublicensees, but with minimum royalties of
$100,000 for the third year of the agreement, $200,000 for the fourth year of
the agreement, and $300,000 for the fifth and following years of the
agreement. In addition, prior to the restructuring, the rights granted by
Ajinomoto to the Company pursuant to the License Agreement were exclusive.
Under the terms of the restructuring, the future license fees payable by the
Company to Ajinomoto were reduced to the following amounts: a $2.25 million
fee payable in the amount of $800,000 by June 30, 1998, or approval by the FDA
of a BLA filed by the Company for the licensed product, whichever comes first,
in the amount of $800,000 by June 30, 1999, and in the amount of $650,000 by
March 31, 2000; and a reduced royalty of 1% on end-user net sales of the
licensed product by the Company or its sublicensee.

The Company amended its agreements with Lilly whereby Lilly will pay
certain license fees to Ajinomoto on behalf of the Company, subject to certain
limitations (see Note D). Lilly assumed $2.15 million of the obligation at
December 31, 1997. The restructuring provides that the license granted by
Ajinomoto to the Company will be non-exclusive. Accordingly, in the quarter
ended June 30, 1997, the Company reduced its obligation to Ajinomoto from $4.3
million to $2.25 million and recorded extraordinary income of $2.05 million
for the forgiveness of indebtedness.

License and Option Agreement with United States Surgical Corporation

On July 31, 1997, the Company entered into an evaluation license and
option agreement (the "USSC License Agreement") with USSC granting USSC an
option on worldwide rights to the Company's DAB389EGF molecule (the "EGF
Fusion Protein") for restenosis in cardiovascular applications. Leon C.
Hirsch is the Chairman of USSC and beneficially owns 7.8% of the common stock
of USSC. Turi Josefsen is a director of USSC and beneficially owns 1.8% of
the common stock of USSC. John R. Silber is a director of USSC and
beneficially owns .02% of the common stock of USSC. Pursuant to the USSC
License Agreement, USSC made an initial payment to the Company of $5.0 million
on July 31, 1997. Under the USSC License Agreement, USSC is entitled to
acquire an exclusive license to the EGF Fusion Protein technology, at any time
during a 15-month evaluation period, upon the payment to the Company of an
additional $5.0 million. In addition, the Company issued to USSC a warrant
for the purchase of 500,000 shares of the Company's Common Stock at a purchase
price of $0.5625 per share, the closing sale price for shares of the Company's
Common Stock on the date prior to the date the warrant was issued. The
Company charged $175,000 for such warrant to general and administrative
expense in the year ended December 31, 1997. USSC has agreed to fund trials
associated with the development of EGF Fusion Protein for restenosis. If
USSC's option to obtain any exclusive license of the EGF Fusion Protein
technology is exercised, milestone payments will be payable by USSC to the
Company up to a maximum amount of $22.5 million. In addition, USSC will be
obligated to pay the Company royalties on commercial sales of the licensed
product. In the event USSC chooses not to exercise the option, the USSC
License Agreement will terminate, and, in exchange, USSC will receive $5.0
million worth of the Company's Common Stock valued at the average of the
closing prices of the Company's Common Stock (i) for the ten trading days
preceding the date of the USSC License Agreement or (ii) for the ten trading
days preceding the date on which USSC chooses not to exercise the option,
whichever is lower. The Company has recorded the $5.0 million initial payment
from USSC as deferred revenue, a liability. In the event that USSC exercises
its option to license the EGF Fusion Protein, the $5.0 million will be
recorded as revenue at that time. In the event that USSC chooses not to
exercise the option, the $5.0 million will be recorded as stockholders'
equity.

56
<PAGE>

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.

COMMON STOCK

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 April 1997, the Company issued 1,000,000 shares of Common Stock to
Lilly in a private placement (see Note D).

SERIES A SHARES

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 Stock ("Series A Shares") to investors
outside the United States pursuant to Regulation S under the Securities Act of
1993. The Series A Shares were 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. The
Series A Shares were subject to a contractual cap on conversion that limited
the total number of shares of Common Stock into which the Series A Shares may
have been converted to a maximum of 3,321,563 shares. The Company and the
holder of the Series A Shares eliminated this cap by agreement dated November
11, 1997. Terms of the Series A Shares also provided for 8% cumulative
dividends payable in shares of Seragen Common Stock at the time of each
conversion. The holders of the Series A Shares were 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 had 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. Such
amount was required to 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 was made to any holders of any shares of
the Common Stock or any other class or series of the Company's capital stock
which was junior to the Series A Shares. From May 29, 1996 through November
25, 1997, 3,077 Series A Shares were converted into 3,746,469 shares of Common
Stock at conversion prices ranging from $0.372 to $2.774 per share of which
895 and 2,182 were converted in 1996 and 1997, respectively. By their terms,
the remaining Series A Shares outstanding plus accrued dividends on November
29, 1997 were to be automatically converted into shares of Seragen Common
Stock. However, on November 6, 1997, all outstanding Series A Shares plus
accrued dividends were exchanged for shares of Series D Preferred stock and
the conversion cap liability was reclassified as preferred stock. (See below).

The Series A Shares were reflected at $2,015,522 at December 31,1996,
representing their liquidation value inclusive of 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 were required to be redeemed due to the conversion
cap limitation as of December 31, 1996. The Company recorded common stock
dividends of $171,688, and $727,746 in the years ended December 31, 1996 and
1997.

SERIES B SHARES

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

57
<PAGE>

SERIES C SHARES

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 B.U. under Regulation D of the
Securities Act of 1933. The Series C Shares were 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, up to a maximum of
3,360,625 shares of Seragen Common Stock. Any shares the investor was unable
to convert due to this limitation could be exchanged for $1,150 per share in
cash. Terms of the Series C Shares also provided for 8% cumulative dividends
payable in shares of Seragen Common Stock at the time of each conversion.
Each Series C Share had a liquidation preference equal to $1,000 plus an
amount equal to any accrued and unpaid dividends from the date of issuance of
the Series C Shares in the event of a voluntary or involuntary liquidation,
dissolution or winding up of the Company. Series C Shares which remained
outstanding on March 30, 1998 were to be automatically converted into shares
of the Company's Common Stock. The Company's Series C Shares were reflected
at $5,100,00 and $5,500,000 at December 31, 1996, and 1997. The Company
recorded common stock dividends of $100,000 and $400,000 in the years ended
December 31, 1996 and 1997, respectively.

SERIES D SHARES

On November 26, 1997, the Company issued 923 shares of its Series D
Preferred Stock (the "Series D Shares") in exchange for all the outstanding
Series A Shares. The Series D Shares are convertible at the option of the
holders 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. Terms of the Series D
Shares also provide for 8% cumulative dividends, from May 29, 1996, payable in
shares of Seragen Common Stock at the time of each conversion. The holders of
the Series D 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. The Series D Shares are redeemable for $1,150 cash per share at the
option of the Company. Each Series D 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 the original issuance of the Series A Shares
(subsequently converted into a Series D Share). Such amount must be paid on
each Series D 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 D Shares.
At December 31, 1997, 908 shares of Series D Shares were outstanding. The
Series D Shares were reflected at $1,023,231 at December 31, 1997,
representing their liquidation value which includes $115,231 of accrued
dividends payable from the original issuance date of the Series A Shares
through December 31, 1997.

58
<PAGE>

K. STOCK OPTIONS AND WARRANTS:

Employee Stock Option Plans

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

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

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. In
December 1997, shareholders approved an amendment to the Company's 1992 Plan
increasing the number of shares available under the plan from 2,300,000 to
16,000,000. 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. There are no shares available for future grant at
December 31, 1997.

A summary of the status of the Company's stock options as of December 31,
1995, 1996 and 1997 and changes during the year ended on those dates is
presented below:

<TABLE>
<CAPTION>
1995 1996 1997
------------------ ----------------- -----------------
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.... 1,954,330 $ 9.12 1,773,440 $8.36 6,803,029 $2.60
Granted........................... 283,264 5.57 5,728,592 1.37 12,856,546 0.54
Exercised......................... (117,014) .98 (111,825) 0.72 (100) 0.75
Canceled.......................... (347,140) 12.46 (587,178) 9.79 (1,038,014) 8.93
--------- --------- ------------
Outstanding at end of year.......... 1,773,440 8.36 6,803.029 2.60 18,621,461 0.82
========= ========= ==========
Options exercisable at year-end..... 1,072,887 1,283,802 5,732,465
========= ========= ==========
</TABLE>
59
<PAGE>

In connection with the sale of the operating division to B.U., the
Company transferred approximately 90 employees to B.U. Options that had been
granted to these transferred employees were automatically converted to non-
qualified stock options. Vesting is contingent upon continued employment with
B.U. and will continue vesting according to their original vesting schedules.
The Company will record a compensation charge of $1,197,827 over the remaining
vesting periods.

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, 1995, 1996 and 1997 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, 1996 and 1997 are as follows:

<TABLE>

The assumptions used and the weighted average information for the years
ended December 31, 1996 and 1997 are as follows:

<CAPTION>
DECEMBER 31, 1996 DECEMBER
31, 1997
----------------- -----------
- -------
<S> <C> <C>
Risk-free interest rates............... 5.52% - 6.73% 5.77% -6.89%
Expected dividend yield................ - -

60
<PAGE>
Expected lives......................... 7.5 years 7.5 years

Expected volatility.................... 96% 107%
Weighted-average grant-date fair
value options granted during
the period........................... $1.17 $0.48

Weighted-average exercise price........ $2.60 $0.82

Weighted-average remaining contractual
life of options outstanding........... 9.25 years 9.04 years

Weighted-average exercise price of
1,283,802 and 5,732,465 options
exercisable at December 31, 1996
and 1997, respectively............... $7.37 $0.94

<CAPTION>
The effect of applying SFAS No. 123 would be as follows:

DECEMBER 31, 1996 DECEMBER 31, 1997
----------------- -----------------
<S> <C> <C>
Pro forma net loss applicable to common stockholders..... $(37,672,478) $(21,280,184)

Pro forma net loss per common share...................... $ (2.25) $ (1.07)

</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.

61
<PAGE>
The total fair value of the options granted and stock issued under the
employee stock purchase plan during 1995, 1996 and 1997 was computed as
approximately $1,285,000, $6,795,000 and $6,076,000, respectively. Of these
amounts, approximately $210,000, $951,000 and $3,890,000 would be charged to
operations for the years ended December 31, 1995, 1996 and 1997, respectively.

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.

Employee Stock Purchase Plan

The Company's Employee Stock Purchase Plan (the "Purchase Plan") allowed
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 had been employed for at least three
months by the Company were eligible to participate in this plan. Shares were
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 was 85% of the fair market value of the stock at
certain predetermined dates, as defined. The Company issued 29,864, and
42,855 shares under the Purchase Plan in the years ended December 31, 1995 and
1996, respectively. In February 1997, the Board of Directors voted to
terminate the Purchase Plan.

Warrants

As of December 31, 1997, the following warrants were outstanding:
<TABLE>
<CAPTION>

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 16,949,009 4.00 Jul. 1, 2006
U.S. Surgical Corporation 500,000 0.56 Aug. 1, 2002
----------
21,037,214

</TABLE>

L. COMMITMENTS

Royalty Arrangements

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

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 1995, 1996 and 1997.

62
<PAGE>

M. RELATED PARTIES

Consulting Contracts

The Company incurred consulting fees to stockholders and directors of
approximately $155,000, $169,000 and $50,000 for the years ended December 31,
1995, 1996 and 1997, respectively. The Company also incurred expenses
relating to research grants to, and clinical trials performed at, B.U. of
approximately $185,000 and $175,000 for the years ended December 31, 1995 and
1996, respectively. There were no expenses incurred related to these research
grants in 1997. The Company also recorded $63,000 of grant revenue on an NIH
grant relating to a subcontract from B.U. in 1996. The full amount was paid
as of December 31, 1996.

The Company incurred consulting fees to other option holders of
approximately $18,000 and $12,000 for the years ended December 31, 1995 and
1996, respectively. There were no consulting fees to other option holders
incurred in 1997. The Company also incurred expenses relating to research
grants to the institution employing one of the option holders of approximately
$150,000 for the year ended December 31, 1995.

N. ACCRUED EXPENSES:

Accrued expenses consists of the following:

<TABLE>
<CAPTION>
DECEMBER 31,

----------------------------
1996 1997
---------- ----------

<S> <C> <C>
Clinical and research .................. $1,158,421 $1,048,940
Professional service fees .............. 219,062 382,800
Payroll, vacation and benefits ......... 632,778 323,840
Other expenses ......................... 583,911 484,855
---------- ----------
$2,594,172 $2,240,435
========== ==========
</TABLE>

O. RESTATEMENT OF DECEMBER 31, 1996 FINANCIAL STATEMENTS

<TABLE> For the Year Ended
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 report for
the fiscal year 1995 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
fiscal year, 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.

63
PAGE
<PAGE>
PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The following identifies the Company's current directors and the
Company's executive officers. All ages indicated are as of March 30, 1998.

Name Age Positions with the Company
Reed R. Prior . . . . . 46 Chairman of the Board of Directors,
Chief Executive Officer, Treasurer
and Director
Gerald S.J. Cassidy . . 57 Director
Elizabeth Chen . . . . 34 Vice President of Business
Development
Kenneth G. Condon . . . 50 Director
Norman A. Jacobs . . . 60 Director
Jean C. Nichols, Ph.D. 46 President, Chief Technology Officer
and Director
John R. Silber, Ph.D. 71 Director

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's career included several positions as CEO of various biomedical
companies in early development stages or in turnaround situations. From 1995
to 1996 he served as President and Chief Executive Officer of ActiMed
Laboratories, a privately-held medical diagnostics company. From 1992 to
1995, he was President and Chief Executive Officer of Receptor Laboratories,
Inc., a start-up biopharmaceutical firm which was sold to Cytel Corporation in
July 1995. From 1990 to 1991, Mr. Prior served as President and Chief
Executive Officer of Genex Corporation, which merged with Enzon, Inc. in
October 1991. From 1986 to 1990, Mr. Prior was President and Chief Executive
Officer of i-Stat Corporation (NASDAQ: STAT), a medical diagnostics company.
Mr. Prior earned a B.S. in biophysics from Michigan State University, and
received an M.B.A. from Harvard Business School.

64
<PAGE>

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,
Chairman and CEO of the Cassidy Companies, Inc., an independent Washington,
D.C. based network of public affairs communications companies consisting of
Cassidy & Associates, Inc. (a government relations firm), Powell Tate, Inc. (a
public relations and financial communications firm), Boland & Madigan, Inc. (a
commerce-oriented government relations firm), Frederick Schneiders Research
Inc. (a public opinion research firm) and Bork & Associates, Inc. (a
litigation support services firm). Prior to the establishment of Cassidy &
Associates in 1975, 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 Reform Commission, and 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, government and politics at numerous
governmental, university, industry and trade association conferences. He is a
member of the Board of Trustees of Villanova University; the Board of
Overseers for the School of Nutrition at Tufts University; the Board of
Trustees of Fontbonne College; and a member of the Board of Trustees of the
Washington Theological Union. He served on the Board of Trustees of Tougaloo
College from 1987 to 1997; the Board of Directors of the Children's Inn at the
National Institute of Health (NIH) from 1987 to 1998; and was a member of the
Steering Committee of The Capital Campaign for Villanova University 1993 to
1997. Mr. Cassidy is a graduate of Villanova University (B.S. 1963) and the
Cornell University Law School (J.D. 1967). 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. In January 1998, Ms. Chen was formally
appointed to the additional position of President and Chief Executive Officer
of Marathon Biopharmaceuticals LLC, the contract service organization formed
from Seragen's former operating division. 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 to 1996, Ms. Chen was
an independent consultant to a number of venture capital funds and a variety
of start-up biotech companies. From 1985 to 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 University and an M.B.A. from The Wharton
School of the University of Pennsylvania.

Kenneth G. Condon, C.P.A., C.F.P. -- Mr. Condon has served as a member of
the Board of Directors of the Company since January 1992. He 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 the former Chairman of the Board and Director of
Bayfunds, Inc. and also served as President and as a Director of the Financial
Executive Institute of Massachusetts. He is currently a member of the
BankBoston Advisory Board and is a member of the Board of Trustees of Newbury
College. He is also a Director of Insmed Pharmaceuticals, Inc. and is a
Director and member of the Executive Committee of the Boston Municipal
Research Bureau. Mr. Condon is a Certified Public Accountant and a Certified
Financial Planner and holds a B.S. in Economics and Mathematics from Tufts
University and an M.B.A. in Finance from The Wharton School of the University
of Pennsylvania.

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 Vice President,
Business Development, Worldwide Injection Systems of Becton Dickinson and
Company since February 1998. From September 1990 to January 1998, Mr. Jacobs
was President of Becton Dickinson Transdermal Systems, a unit of Becton
Dickinson and Company. 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 the Massachusetts Institute of Technology.,
and a B.E. in Chemical Engineering from Yale University.

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 and was elected Secretary in March 1998. 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.

65
<PAGE>

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, Vice President of the United States Strategic
Institute in Washington, D.C., a director of U.S. Surgical Corporation, a
director of Americans for Medical Progress, and a director of Mutual of
America Institutional Funds, Inc.

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 beneficially own
more than 10% of the Company's Common Stock to file with the SEC initial
reports of beneficial ownership and reports of changes in beneficial ownership
of Common Stock and other equity securities of the Company. Officers,
directors and greater than 10% beneficial owners are required by SEC
regulation to furnish the Company with copies of all Section 16(a) forms that
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, 1997, 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 the fiscal years
ended December 31, 1997, 1996, and 1995, 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") for services rendered to the Company in all capacities.

<TABLE>

SUMMARY COMPENSATION TABLE
<CAPTION>

ANNUAL COMPENSATION(1)
----------------------
LONG-TERM
COMPENSATION
OTHER SECURITIES
NAME AND ANNUAL UNDERLYING
PRINCIPAL POSITION YEAR SALARY($) BONUS($) COMPENSATION OPTIONS #
- ------------------ ---- --------- -------- ------------ ---------

<S> <C> <C> <C> <C> <C>
Reed R. Prior 1996 $350,000 - $104,808(2) 7,110,461
Chairman, Chief Executive 1996 55,417(3) $100,000(4) 17,845(5) 4,885,747
Officer and Treasurer

Jean C. Nichols, Ph.D. 1997 225,000 - 42,656(6) 2,116,525
President And Chief 1996 195,542(7) - - 692,752(8)
Technology Officer 1995 190,000 - - 18,000(9)

Elizabeth C. Chen 1997 168,438(10) - 46,265(11) 2,894,174
Vice President for Business
Development

</TABLE>
66
<PAGE>

(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) Amount includes payment of a housing allowance, including an income tax
allowance covering the tax due on reimbursement of such expenses, of
$74,432, relocation cost of $3,397 and accrued vacation payment of
$26,979.

(3) 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.

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

(5) Amount includes payment of a housing allowance, including an income tax
allowance covering the tax due on reimbursement of such expenses, of
$17,845.

(6) Amount includes payment of accrued vacation of $42,656.

(7) 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.

(8) 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.

(9) Represents options which were canceled as of December 18, 1996, and
reissued at a lower price, such options are included in fiscal year
1996.

(10) In fiscal year 1997, Ms. Chen was paid $168,438 base salary for her
partial year of service to the Company. Her annual base salary was
$175,000.

(11) Amount includes payment of a housing allowance, including an income tax
allowance covering the tax due on reimbursement of such expenses, of
$46,265.

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, as well
as the percentage that the grant represents of total options granted to
employees during the fiscal year. In addition, in accordance with rules of
the SEC, the table discloses hypothetical gains that would be realized by the
holders of the options if the options were exercised on the expiration dates.
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.

67
<PAGE>

<TABLE>

OPTION GRANTS IN LAST FISCAL YEAR

INDIVIDUAL GRANTS
--------------------------
NUMBER NUMBER
NUMBER OF OF TOTAL
SECURITIES OPTIONS
UNDERLYING GRANTED TO EXERCISE
OPTIONS EMPLOYEES IN PRICE EXPIRATION
NAME GRANTED(#)(1) FISCAL YEAR ($/SH) DATE 5%($) 10%($)
- ----- ------------ ----------- ------ ---- ----- ------

<S> <C> <C> <C> <C> <C> <C>
Reed R. Prior 898,828 7.0% $1.31 12/18/06 $545,634 1,371,819
473,828 3.7% $1.00 12/18/06 278,431 695,063
2,105,981 16.4% $0.63 12/18/06 747,356 1,852,071
3,631,824 28.2% $0.28 12/18/06 517,913 1,372,786

Jean C. Nichols, Ph.D. 124,894 1.0% $1.31 12/18/06 75,817 190,617
135,293 1.0% $1.00 12/18/06 79,501 198,463
681,336 5.3% $0.63 12/18/06 241,788 599,190
1,175,002 9.1% $0.28 12/18/06 180,501 444,137

Elizabeth C. Chen 1,544,102 12.0% $0.72 07/29/07 698,205 1,769,388
495,525 3.9% $0.63 07/29/07 190,540 480,480
854,547 6.6% $0.28 07/29/07 142,485 356,723
</TABLE>

(1) All options were granted under the Company's Incentive Plan and have an
exercise price equal to the fair market value of the Company's Common
Stock on the date of grant. See "Employment and Consulting Agreements;
Change in Control Arrangements." All options vest either monthly or
quarterly over a three to five year period. Under the terms of the
Incentive Plan, upon a change in control or a potential change in control
(each as defined in the Incentive Plan), all options will be fully vested
and, unless otherwise determined by the committee administering the plan,
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. Under the Incentive Plan,
optionees may settle any tax withholding obligations with the Company's
Common Stock. The committee that administers the Incentive Plan has
authority: to substitute new options for previously granted options
(including previously granted options having higher exercise prices); to
accelerate the vesting of options upon termination of the optionee's
employment 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).

Currently, the Company has 16 million shares of Common Stock available
for issuance under the Incentive Plan. As of December 31, 1997, the Company
had granted, net of cancellations, options to purchase 18,621,461 shares of
Common Stock. As a result, options to purchase 2,621,461 shares of Common
Stock have been granted subject to shareholder approval of a further amendment
to the Incentive Plan to increase the number of shares available for issuance
under the plan.

68
<PAGE>
Fiscal Year-End Option Values

No stock options were exercised by any of the Named Executive Officers in
fiscal year 1997. The following table sets forth the number of shares covered
by both exercisable and unexercisable stock options held by each of the Named
Executive Officers as of December 31, 1997, and the value of "in-the-money"
options, which represent the positive spread, if any, between the exercise
price of a stock option and the year-end price of Common Stock.

<TABLE>
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 3,498,852 8,497,356 - -

Jean C. Nichols, Ph.D. 1,141,981 1,708,117 - -

Elizabeth C. Chen 844,118 2,050,056 - -

</TABLE>

(1) Based on the last reported sale price of the Common Stock as of December
31, 1997 of $0.28.

Director Compensation

Employment and Consulting Agreements; Change in Control Arrangements

Employment Agreement with Reed R. Prior. On November 6, 1996, the
Company entered into an employment agreement with Reed R. Prior pursuant to
which Mr. Prior is serving as Chief Executive Officer and Treasurer of the
Company. Mr. Prior's initial annual base salary is $350,000. Mr. Prior was
reimbursed for his moving expenses in relocating to an apartment in the Boston
area. 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. The Company will
reimburse Mr. Prior for any additional taxes that he incurs as a result of the
Company's reimbursement 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, which number of shares was equal to 8.5% of the Company's Common Stock
outstanding on the grant date on a fully diluted basis, at an exercise price
of $1.31 per share, to vest in 48 monthly increments during the term of the
employment agreement. The Company has the obligation to register all of the
shares underlying options for resale.

The agreement also provides for anti-dilution protections which, among
other things, require the Company to issue additional options to Mr. Prior as
necessary to cause the number of shares underlying his stock options 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 a cumulative total of $20,000,000 in equity or convertible
securities to non-affiliated persons. Pursuant to these anti-dilution
provisions, on March 31, 1997, June 30, 1997, September 30, 1997, and December
31, 1997, the Company granted to Mr. Prior options to purchase 898,828,
473,828, 2,105,981 and 3,631,824 shares of Common Stock, respectively. The
exercise price per share for such options was $1.31, $1.00, $0.63 and $0.28,
respectively. The Company may issue additional options to Mr. Prior on March
31, 1998, as a result of the conversion of Series C Shares and Series D Shares
into Common Stock and any other issuances of Common Stock occurring before
March 31, 1998. The number of options to be granted is not determinable at
this time, although the number of options granted may be significant.

69
<PAGE>
Under the agreement, 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: (i) 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 (ii) 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). The Company's sale of its operating facility to B.U.
did not constitute a "change in ownership" for purposes of Mr. Prior's
agreement.

The agreement with Mr. Prior continues until terminated by either party
on written notice of not less than 30 days. The 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, Mr. Prior will also be entitled to 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 default is 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" as defined in Mr. Prior's employment agreement; or (v) a "change in
control" as defined under the Incentive Plan. 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 Company's
severance obligations. The agreement also includes non-competition,
confidentiality and indemnification provisions.

Mr. Prior also is party to the Shareholders Agreement. See "Executive
Compensation -- Compensation Committee Interlocks and Insider Participation."

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. The agreement was amended in certain
respects and restated as of September 22, 1997. 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.

70
<PAGE>

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, which number of shares was equal to 1.275% of the Company's Common
Stock outstanding on the grant date less 54,000 shares covered by options
previously granted to Dr. Nichols, at an exercise price of $1.31 per share, to
vest in 36 monthly increments during the term of the agreement, and canceled
options for 164,409 shares of Common Stock. The Company has the obligation to
register all of the shares underlying options for resale. On September 30,
1997, the Company issued additional options to Dr. Nichols sufficient to bring
her total options to a number giving her the right to purchase Common Stock
equal to 2.75% of the Company's Common Stock, on a fully diluted basis.

The agreement as amended provides for anti-dilution protections which,
among other things, require the Company to issue additional options as
necessary to cause the number of shares underlying her stock options to equal
but not exceed 2.75% of the Company's outstanding Common Stock on a fully
diluted basis. These anti-dilution provisions will be applicable until the
Company sells a cumulative total of $20,000,000 in equity or convertible
securities to non-affiliated persons. Pursuant to these anti-dilution
provisions and the amendment of Dr. Nichols' employment agreement increasing
her option percentage from 1.275% to 2.75%, on March 31, 1997, June 30, 1997,
September 30, 1997, and December 31, 1997, the Company granted to Dr. Nichols
options to purchase 124,894, 135,293, 681,347 and 1,175,002 shares of Common
Stock, respectively. The exercise price per share for such options was $1.31,
$1.00, $0.63 and $0.28, respectively. The Company may issue additional
options to Dr. Nichols on March 31, 1998, as a result of conversion of Series
C Shares and Series D Shares into Common Stock and any other issuances of
Common Stock occurring before March 31, 1998. The number of options to be
granted is not determinable at this time, although the number of options
granted may be significant.

Under the agreement, Dr. Nichols 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: (i) 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 (ii) the sale or out-licensing of the majority (in value) of the
Company's technology assets. In the event of a "change in ownership,"
Dr. Nichols is entitled to receive an "Asset Value Realization Bonus" equal to
2.75% of the net proceeds from the change in ownership transaction. The
amount that the Company must pay Dr. Nichols will be reduced by the amount of
gain recognized by Dr. Nichols as a result of her sale of Common Stock of the
Company acquired as a result of exercise of options (or deemed sales in
certain circumstances when she is able to, but does not, sell). In the event
of a change in ownership after which the purchaser makes Dr. Nichols a bona
fide employment offer, Dr. Nichols' Asset Value Realization Bonus will be
payable to her as follows: 25% on the closing of the change in ownership, 25%
two months after closing, 25% four months after closing, and 25% six months
after closing, the obligation of the Company to make each such payment in
respect of the Asset Value Realization Bonus being subject to Dr. Nichols'
continued employment with the purchaser at the time the payment falls due. If
the purchaser terminates Dr. Nichols' employment without "just cause" or if
Dr. Nichols terminates her employment with the purchaser for "good reason" (as
defined below, except that a change in ownership or a change in control will
not constitute good reason for this purpose and the termination of
Dr. Nichols' employment by agreement, death, or disability will constitute
good reason for this purpose), Dr. Nichols will be entitled to receive the
entire amount of her Asset Value Realization Bonus as a lump sum payment. The
Company's sale of its operating facility to B.U. did not constitute a "change
in ownership" for purposes of Dr. Nichols' agreement.

71
<PAGE>

The Company's agreement with Dr. Nichols continues until terminated by
either party on written notice of not less than 30 days. The agreement may be
terminated by the Company with or without just cause. In the event the
Company terminates Dr. Nichols' employment other than for just cause, or in
the event that Dr. Nichols terminates her employment for good reason, the
Company is required to pay Dr. Nichols 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 Dr. Nichols
with accelerated vesting of her 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 default is not cured following written notice (all as defined in the
agreement). "Good reason," as defined in the agreement, includes: (i) the
failure of Dr. Nichols to continue as a member of the Board of Directors,
unless Dr. Nichols resigns from that position; (ii) an act of bad faith by the
Company resulting in Dr. Nichols' resignation from the Company; (iii) breach
by the Company of a material term under the employment agreement; (iv) a
"change in ownership" as defined in Dr. Nichols' employment agreement; or (v)
a "change in control" as defined under the Incentive Plan. 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.

Employment Agreement with Elizabeth C. Chen. On January 15, 1997, the
Company entered into an employment agreement with Elizabeth C. Chen, pursuant
to which Ms. Chen was appointed as Vice President of Business Development of
the Company. Ms. Chen's annual base salary is $175,000. In addition, the
Company reimburses Ms. Chen for all reasonable costs incurred by her in
obtaining accommodations in the Boston area and for weekly commuting between
the Company's offices and her permanent residence. The Company will reimburse
Ms. Chen for any additional taxes that she incurs as a result of the Company's
reimbursement of living or commuting expenses. Ms. Chen 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 Ms. Chen's employment agreement, in July 1997, the Company
issued to Ms. Chen an option to purchase 1,544,102 shares of Common Stock,
which number of shares was equal to 2.0% of the Company's Common Stock
outstanding on the grant date, at an exercise price of $0.72 per share, to
vest in 48 monthly increments during the term of the agreement. The Company
has the obligation to register all of the shares underlying options for
resale.

The agreement also provides for anti-dilution protections which, among
other things, require the Company to issue additional options as necessary to
cause the number of shares underlying her stock options to equal, but not
exceed, 2.0% of the Company's outstanding Common Stock on a fully diluted
basis. These anti-dilution provisions will be applicable until the Company
sells a cumulative total of $20,000,000 in equity or convertible securities to
non-affiliated persons. Pursuant to these anti-dilution provisions, on
September 30, 1997, and December 31, 1997, the Company granted to Ms. Chen
options to purchase 495,525 and 854,547 shares of Common Stock, respectively.
The exercise price per share for such options was $0.63 and $0.28,
respectively. The Company may issue additional options to Ms. Chen on March
31, 1998, as a result of conversion of Series C Shares and Series D Shares
into Common Stock and any other issuances of Common Stock occurring before
March 31, 1998. The number of options to be granted is not determinable at
this time, although the number of options granted may be significant.

Under the agreement, Ms. Chen 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: (i) 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 (ii) the sale or out-licensing of the majority (in value) of the
Company's technology assets. In the event of a "change in ownership,"
Ms. Chen is entitled to receive an "Asset Value Realization Bonus" equal to
2.0% of the net proceeds from the change in ownership transaction. The amount
that the Company must pay Ms. Chen will be reduced by the amount of gain
recognized by Ms. Chen as a result of her sale of Common Stock of the Company
acquired as a result of exercise of options (or deemed sales in certain
circumstances when she is able to, but does not, sell). The Company's sale of
its operating facility to B.U. did not constitute a "change in ownership" for
purposes of Ms. Chen's agreement.

72
<PAGE>

The Company's agreement with Ms. Chen continues until terminated by
either party on written notice of not less than 30 days. The agreement may be
terminated by the Company with or without just cause. In the event the
Company terminates Ms. Chen's employment other than for just cause, or in the
event that Ms. Chen terminates her employment for good reason, the Company is
required to pay Ms. Chen as severance a lump sum payment equal to one year's
salary based on the annual rate in effect on the date of termination and any
remaining obligations for accommodations in the Boston area. Upon such
termination, the Company will also provide Ms. Chen with accelerated vesting
of her stock options. The Company also will continue to provide Ms. Chen and
her family with the same group health plan benefits coverage provided to them
prior to her termination for the maximum period set forth in the continuation
coverage requirements under COBRA, up to a maximum of 12 months following
termination.

"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 default is not cured following written notice
(all as defined in the agreement). "Good reason," as defined in the
agreement, includes: (i) an act of bad faith by the Company resulting in
Ms. Chen's resignation from the Company; (ii) breach by the Company of a
material term under the employment agreement; (iii) a "change in ownership" as
defined in Ms. Chen's employment agreement; (iv) a "change in control" as
defined under the Incentive Plan; (v) insolvency of the Company; or (vi) the
Company's failure to grant Ms. Chen options within the time periods specified
in the employment agreement. The agreement also includes non-competition,
confidentiality and indemnification provisions.

Chen Consulting Arrangement with Marathon

The Company currently provides Elizabeth Chen's services to Marathon as
the president and chief executive officer of Marathon. During the term of
this consulting arrangement, Ms. Chen will devote 75% of her professional time
to managing Marathon and 25% of her professional time to the Company.
Marathon will reimburse the Company for an allocable portion of Ms. Chen's
salary and other cash compensation.

Option Plans. Under the Company's Incentive Plan, upon a change in
control or a potential change in control, the vesting of options granted to
the Named Executive Officers under the Incentive 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. Specifically, in the event of (i) a Change in Control, or (ii) a
Potential Change in Control but only if and to the extent determined by the
Board of Directors or the Compensation Committee: (a) all stock appreciation
rights ("SARs") outstanding for at least six months and all Stock Options will
become fully exercisable and vested; (b) all limitations applicable to any
award of Restricted Stock, Deferred Stock, or an Other Stock-Based Award will
lapse and the shares to which the award relates will be deemed fully vested;
and (c) unless the Compensation Committee determines otherwise prior to a
Change in Control, the value of all vested awards under the Incentive Plan
will be cashed out on the basis of the Change in Control Price, which
generally is defined as the highest price per share of Common Stock paid in
any transaction during the 60-day period preceding the Change in Control.

A "Change in Control" generally is deemed to occur if: (i) any person or
group (other than B.U.) acquires, directly or indirectly, beneficial ownership
of 20% or more of the combined voting power of the Company's then-outstanding
securities; (ii) within any 24-month period there is a change in a majority of
the Company's Directors that is not approved by the incumbent Directors; or
(iii) a transaction occurs requiring shareholder approval for the acquisition
of the Company by another entity through asset purchase, merger, or otherwise.

A "Potential Change in Control" generally is deemed to occur if: (i)
shareholders approve an agreement by the Company, the consummation of which
would result in a Change in Control; or (ii) any person or group (other than
B.U.) acquires, directly or indirectly, beneficial ownership of 5% or more of
the combined voting power of the Company's then-outstanding securities and the
Board of Directors adopts a resolution declaring that a Potential Change in
Control has occurred.

73
<PAGE>

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. The Company has a consulting agreement with
Dr. John R. Murphy, a former Director of the Company. Pursuant to this
agreement, Dr. Murphy was paid a consulting fee of $50,000 during the fiscal
year ended 1997 to provide consulting services on biotechnology matters. The
Company has extended this agreement to December 31, 1998 at a rate of $50,000
per year. The Company may elect to impose a two year non-competition 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.

Compensation Committee Interlocks and Insider Participation

The members of the Compensation Committee during fiscal year 1997 were
Messrs. Cassidy and Jacobs.

In June 1995, the Company finalized three separate lines of credit, which
were guaranteed by three different parties, for a total of $23.8 million in
guaranteed bank financing for the Company. The Company 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 were immediately exercisable and
expire in 2005. B.U., the Company's majority shareholder, 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. Gerald S.J. Cassidy, a member of
the Company's Board of Directors, provided 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 "Common Stock Ownership of Certain Beneficial Owners and
Management").

In July 1996, the Company restructured its arrangement with the
guarantors of the Company's $23.8 million loan financing to release the
Company from its obligations to the bank lenders. Under the restructured
arrangement, the guarantors assumed the Company's obligations to the banks,
and in consideration the Company issued Series B Preferred stock ("Series B
Shares") and warrants to the guarantors. The Company issued an aggregate of
23,800 Series B Shares. Each Series B Share is convertible at any time at the
investor's option into a number of shares of Common Stock determined by
dividing $1,000 by the average of the closing sale prices of the Common Stock
as reported on Nasdaq 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% from 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
Series B Share is entitled to a vote equivalent to 250 shares of Common Stock.
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 Series B Share
is $1,000 plus an amount equal to any accrued and unpaid dividends from the
date of issuance of the Series B Shares. The recipients of the Series B
Shares also were issued warrants to purchase a total of 5,950,000 shares of
Common Stock (warrants for the purchase of 250,000 shares of Common Stock for
every $1,000,000 of Series B Shares 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 holder of Series B Shares is
entitled to receive additional warrants pursuant to certain anti-dilution
provisions. Each such additional warrant will have an exercise price of $4.00
per share, will be exercisable commencing on January 1, 1997, and will expire
on July 1, 2006. See "Common Stock Ownership of Certain Beneficial Owners and
Management".

74
<PAGE>

In connection with the issuance of the Series B Shares, the Company
formed Seragen Technology, Inc. ("STI"). The Company transferred all of its
existing 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.

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.

The Company has not paid the cash dividends due December 31, 1996,
March 31, 1997, June 30, 1997, September 30, 1997, and December 31, 1997, on
the Series B Shares, nor has the Company made the royalty payments due to STI
on January 1, 1997, April 1, 1997, July 1, 1997, October 1, 1997, and January
1, 1998. Correspondingly, STI has not paid the dividends due January 1, 1997,
April 1, 1997, July 1, 1997, October 1, 1997, and January 1, 1998 on the Class
B Shares. The Company does not expect STI to make any dividend payments
advisors due on the Class B Shares in 1998.

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. The holders of the Series B Shares have
not yet delivered a notice of default to the escrow agent, although they
currently have the right to do so.

75
<PAGE>

On November 6, 1996, the Company entered into a shareholders agreement
(the "Shareholders Agreement") with B.U., Leon C. Hirsch, Turi Josefsen,
Gerald S.J. Cassidy and Loretta P. Cassidy (collectively, the "Shareholders")
and Reed R. Prior with respect to the election of directors and other matters.
Pursuant to this agreement, the Shareholders have agreed to vote their
respective shares to: (i) maintain the number of persons comprising the Board
of Directors at nine (the Shareholders and Mr. Prior have waived this
requirement until such time as it is possible to attract additional candidates
with sufficient experience and stature in the pharmaceutical industry to make
their election desirable); (ii) not to elect more than two persons designated
by or affiliated with B.U. to the Board of Directors; (iii) to elect Mr. Prior
as a Director; and (iv) to elect three outside directors with experience in
the pharmaceutical industry reasonably acceptable to Mr. Prior. On October
28, 1997, the Shareholders and Mr. Prior agreed to waive the Shareholders
Agreement's requirement of election of three outside directors until such time
as it is possible to attract sufficiently qualified candidates. In addition,
the Shareholders Agreement grants Mr. Prior rights of co-sale in the event
B.U. chooses to sell over 50% of its stock in the Company to a third party.
B.U. 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.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

COMMON STOCK OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following table sets forth certain information regarding the
beneficial ownership of the Company's Common Stock as of March 30, 1998 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.

76
<PAGE>

<TABLE>

SHARE OWNERSHIP
<CAPTION>

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

<S> <C> <C>
Boston University 48,714,723(3)(4) 75.7%
881 Commonwealth Avenue
Boston, MA 02215

Leon C. Hirsch 21,972,880(3)(5) 44.6%
150 Glover Avenue
Norwalk, CT 06856

Turi Josefsen 9,416,948(3)(6) 25.7%
150 Glover Avenue
Norwalk, CT 06856

Gerald S.J. Cassidy 6,308,154(3)(7) 18.8%
700 13th Street, N.W., Suite 400
Washington, DC 20005

Elizabeth Chen 1,145,589(8) 4.0%

Kenneth G. Condon, C.P.A. 5,200(5)(9) *

Norman A. Jacobs 19,000(10) *

Jean C. Nichols, Ph.D. 1,533,696(11) 5.3%
c/o Seragen
97 South Street
Hopkinton, MA 01748

Reed R. Prior 4,748,444(12) 14.8%
c/o Seragen
97 South Street
Hopkinton, MA 01748

John R. Silber, Ph.D. 178,500(13) *

All Officers and Directors as a Group 14,117,633 34.3%

</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) A person or group is deemed to have "beneficial ownership" of any shares
as of March 30, 1998, that such person or persons comprising the group
has the right to acquire within 60 days after such date. Any securities
not outstanding which are subject to options, warrants, rights or
conversion privileges of which a person or group has ownership are
deemed to be outstanding only for the purpose of computing the
percentage of outstanding securities of the class owned by such person
or group; but are not deemed to be outstanding for the purpose of
computing the percentage of the class owned by any other person.

(2) Percentage ownership is based on 27,271,414 shares of Common Stock
outstanding as of March 30, 1998.

(3) Consists of 51,739,130 shares of Common Stock issuable upon conversion
of 23,800 Series B Shares and assumes that Series B Shares are
convertible at a conversion price of $0.44, the conversion price in
effect on March 30, 1998, based on the average of the closing sale
prices of the Common Stock for the ten consecutive trading days
preceding that date.

(4) 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
the 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. The officers of Boston University are
duly authorized by the actions of the Trustees of Boston University. Dr.
Bagalay and Mr. Condon (general partners of the Boston University Nominee
Partnership) and Dr. Silber (a Trustee of Boston University) disclaim
beneficial ownership of these shares. The ownership of the partnership
consists of 15,000 shares issuable upon exercise of stock options, a
warrant to purchase 1,376,666 shares exercisable at $4.75 per share, a
warrant to purchase 10,011.181 shares exercisable at $4.00 per share and
25,652,174 shares of Common Stock issuable upon conversion of 11,800
Series B Shares. Pursuant to the anti-dilution provisions of certain of
its warrants, Boston University may be entitled to receive additional
warrants in the event that USSC declines to exercise its option under the
USSC License Agreement to acquire the EGF Fusion Protein technology and
thereby becomes entitled to receive shares of Common Stock. See "Certain
Transactions." Due to the fact that the price at which shares of Common
Stock would be issuable to USSC under the USSC License Agreement cannot
be determined until USSC declines to exercise its option under the USSC
License Agreement to acquire the EGF Fusion Protein technology, the
Company is unable at this time to determine the number of additional
warrants that would be issuable to Boston University in the event that
USSC were to decline to exercise its option under the USSC License
Agreement to acquire the EGF Fusion Protein technology. Boston
University has entered into the Shareholders Agreement with respect to
the election of directors and other matters. See "Certain Transactions."

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(5) Consists of a warrant to purchase 816,666 shares exercisable at $4.75 per
share, a warrant to purchase 5,938,823 shares exercisable at $4.00 per
share, and 7,000 Series B Shares convertible into 15.217,391 shares of
Common Stock. Does not include 2,545,209 shares issuable upon exercise
of warrants and does not include 6,521,739 shares of Common Stock
issuable upon conversion of 3,000 Series B Shares held by Turi Josefsen,
Mr. Hirsch's wife, as to which Mr. Hirsch disclaims beneficial ownership.
Pursuant to the anti-dilution provisions of certain of its warrants, Mr.
Hirsch may be entitled to receive additional warrants in the event that
USSC declines to exercise its option under the USSC License Agreement to
acquire the EGF Fusion Protein technology and thereby becomes entitled to
receive shares of Common Stock. See "Certain Transactions." Due to the
fact that the price at which shares of Common Stock would be issuable to
USSC under the USSC License Agreement cannot be determined until USSC
declines to exercise its option under the USSC License Agreement to
acquire the EGF Fusion Protein technology, the Company is unable at this
time to determine the number of additional warrants that would be
issuable to Mr. Hirsch in the event that USSC were to decline to exercise
its option under the USSC License Agreement to acquire the EGF Fusion
Protein technology. Mr. Hirsch has entered into the Shareholders
Agreement with respect to the election of directors and other matters.
See "Certain Transactions."

(6) Consists of a warrant to purchase 350,000 shares exercisable at $4.75 per
share, a warrant to purchase 2,545,209 shares exercisable at $4.00 per
share, and 3,000 Series B Shares convertible into 6,521,739 shares of
Common Stock. Does not include 5,938,823 shares issuable upon exercise
of warrants and does not include 15,217,391 shares of Common Stock
issuable upon conversion of 7,000 Series B Shares held by Leon C. Hirsch,
Ms. Josefsen's husband, as to which Ms. Josefsen disclaims beneficial
ownership. Pursuant to the anti-dilution provisions of certain of its
warrants, Ms. Josefsen may be entitled to receive additional warrants in
the event that USSC declines to exercise its option under the USSC
License Agreement to acquire the EGF Fusion Protein technology and
thereby becomes entitled to receive shares of Common Stock. See "Certain
Transactions." Due to the fact that the price at which shares of Common
Stock would be issuable to USSC under the USSC License Agreement cannot
be determined until USSC declines to exercise its option under the USSC
License Agreement to acquire the EGF Fusion Protein technology, the
Company is unable at this time to determine the number of additional
warrants that would be issuable to Ms. Josefsen in the event that USSC
were to decline to exercise its option under the USSC License Agreement
to acquire the EGF Fusion Protein technology. Ms. Josefsen has entered
into the Shareholders Agreement with respect to the election of directors
and other matters. See "Certain Transactions."

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(7) Includes 9,000 shares issuable upon exercise of options held by Mr.
Cassidy, a warrant to purchase 233,332 shares exercisable at $4.75 per
share, a warrant to purchase 1,696,827 shares exercisable at $4.00 per
share, and 4,347,826 shares of Common Stock issuable upon conversion of
2,000 Series B Shares. Mr. Cassidy's Series B Shares and warrants are
owned jointly with his wife, Loretta P. Cassidy. Pursuant to the anti-
dilution provisions of certain of its warrants, Mr. Cassidy may be
entitled to receive additional warrants in the event that USSC declines
to exercise its option under the USSC License Agreement to acquire the
EGF Fusion Protein technology and thereby becomes entitled to receive
shares of Common Stock. See "Certain Transactions." Due to the fact
that the price at which shares of Common Stock would be issuable to USSC
under the USSC License Agreement cannot be determined until USSC declines
to exercise its option under the USSC License Agreement to acquire the
EGF Fusion Protein technology, the Company is unable at this time to
determine the number of additional warrants that would be issuable to Mr.
Cassidy in the event that USSC were to decline to exercise its option
under the USSC License Agreement to acquire the EGF Fusion Protein
technology. Mr. and Mrs. Cassidy have entered into the Shareholders
Agreement with respect to the election of directors and other matters.
See "Certain Transactions."

(8) Includes 1,145,589 shares issuable upon exercise of options held by Ms.
Chen that are exercisable within 60 days. Pursuant to the anti-dilution
provisions of her options, Ms. Chen may be entitled to receive additional
options in the event that USSC declines to exercise its option under the
USSC License Agreement to acquire the EGF Fusion Protein technology and
thereby becomes entitled to receive shares of Common Stock. See "Certain
Transactions." Due to the fact that the price at which shares of Common
Stock would be issuable to USSC under the USSC License Agreement cannot
be determined until USSC declines to exercise its option under the USSC
License Agreement to acquire the EGF Fusion Protein technology, the
Company is unable at this time to determine the number of additional
options that would be issuable to Ms. Chen in the event that USSC were to
decline to exercise its option under the USSC License Agreement to
acquire the EGF Fusion Protein technology.

(9) Consists of 4,000 shares issuable upon exercise of options held by Mr.
Condon.

(10) Consists of 19,000 shares issuable upon exercise of options held by Mr.
Jacobs.

(11) Includes 1,525,190 shares issuable upon exercise of options held by Dr.
Nichols that are exercisable within 60 days. Pursuant to the anti-
dilution provisions of her options, Dr. Nichols may be entitled to
receive additional options in the event that USSC declines to exercise
its option under the USSC License Agreement to acquire the EGF Fusion
Protein technology and thereby becomes entitled to receive shares of
Common Stock. See "Certain Transactions." Due to the fact that the
price at which shares of Common Stock would be issuable to USSC under the
USSC License Agreement cannot be determined until USSC declines to
exercise its option under the USSC License Agreement to acquire the EGF
Fusion Protein technology, the Company is unable at this time to
determine the number of additional options that would be issuable to Dr.
Nichols in the event that USSC were to decline to exercise its option
under the USSC License Agreement to acquire the EGF Fusion Protein
technology.

(12) Consists of 4,748,444 shares issuable upon exercise of options held by
Mr. Prior that are exercisable within 60 days. Pursuant to the anti-
dilution provisions of his options, Mr. Prior may be entitled to receive
additional options in the event that USSC declines to exercise its option
under the USSC License Agreement to acquire the EGF Fusion Protein
technology and thereby becomes entitled to receive shares of Common
Stock. See "Certain Transactions." Due to the fact that the price at
which shares of Common Stock would be issuable to USSC under the USSC
License Agreement cannot be determined until USSC declines to exercise
its option under the USSC License Agreement to acquire the EGF Fusion
Protein technology, the Company is unable at this time to determine the
number of additional options that would be issuable to Mr. Prior in the
event that USSC were to decline to exercise its option under the USSC
License Agreement to acquire the EGF Fusion Protein technology. Mr.
Prior has entered into the Shareholders Agreement with respect to the
election of directors and other matters. See "Certain Transactions."

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(13) 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, B.U., Nycomed (formerly Nyegaard & Co. AS) and the
Company entered into a purchase and sale agreement pursuant to which B.U.,
which then owned approximately 6% of the Company's outstanding Common Stock,
acquired from Nycomed 1,691,761 shares of the Company's Common Stock, which
represented all of Nycomed's ownership interest in the Company and
approximately 71% of the then outstanding Common Stock of the Company. As part
of this transaction, B.U. 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 products (the "Products") derived from or
including the Technology (the "Technology and Marketing Rights"). In exchange
for the acquisition of these assets, B.U. 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 B.U. entered into a Noncompetition and Confidentiality
Agreement under which 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 B.U., Nycomed also transferred to
B.U. a debt owed to Nycomed by the Company in the principal amount of
$1,050,000. In 1988, B.U. 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 B.U.'s acquisition of the majority interest in the
Company in 1987, B.U. 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"). B.U. pledged
certain collateral to the Bank to secure the Guaranty. In 1992, the Company
repaid the line of credit, resulting in a termination of the Guaranty. In
return for providing the Guaranty, the Company issued to B.U. a warrant (the
"Bank Warrant") that was exercisable 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 B.U. acquired
the Technology from Nycomed, B.U. transferred to the Company the Technology
and Marketing Rights obtained from Nycomed in exchange for a continuing
royalty on sales of the Products until the expiration of all patents.
Thereafter, the Company agreed to pay B.U. 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 B.U. with a security interest in
the Technology and Marketing Rights to secure the Company's compliance with
the terms of the agreement and also provides that upon a default by the
Company in the terms of the Technology Agreement, the agreement will terminate
and the Technology and Marketing Rights will revert to B.U. The Technology
Agreement provides for default in the event that (i) the Company defaults in
the performance of any material term of that agreement, (ii) the Company
defaults in the performance of a related financing agreement (which since has
been terminated) or in any indebtedness guaranteed by B.U. (none of which
currently exists), (iii) the Company ceases to continue as a going concern, or
(iv) the Company is placed under receivership.

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As of March 30, 1998, B.U. beneficially owned 11,659,702 shares (or
approximately 42.8%) of the Company's outstanding Common Stock. In addition,
B.U. beneficially owns a stock option to purchase 15,000 shares, a warrant to
purchase 1,376,666 shares, a warrant to purchase 10,011,181 shares subject to
anti-dilution provisions (as defined) and shares issuable on conversion of
11,800 Series B Shares. As of March 30, 1998, if all outstanding securities
were converted to Common Stock, B.U. would own 48,714,723 shares of Common
Stock.

Dr. John R. Murphy, a former director of the Company, has a consulting
agreement with the Company pursuant to which he received consulting fees of
$50,000 in the fiscal year ended 1997. The Company has extended this
agreement through December 31, 1998, at a rate of $50,000 per year.

In June 1995, the Company finalized three separate lines of credit for a
total of $23.8 million in guaranteed bank financing for the Company. The
lines of credit were guaranteed in various amounts by B.U., Leon C. Hirsch,
Turi Josefsen, and Gerald S.J. Cassidy, in exchange for which the Company
provided warrants to the guarantors. For a description of this transaction,
see "Executive Compensation -- Compensation Committee Interlocks and Insider
Participation."

In July 1996, the Company restructured its arrangement with the
guarantors of the Company's $23.8 million loan financing to release the
Company of its liability to the bank lenders. Under the restructured
arrangement, the guarantors assumed the Company's obligations to the banks,
and in consideration the Company issued Series B Shares and warrants to the
guarantors. For a description of this transaction, see "Executive
Compensation -- Compensation Committee Interlocks and Insider Participation."

In September 1996, the Company raised $5 million through the sale of
5,000 Series C Shares in a private placement with B.U. The Series C Shares
were convertible at the option of the holder into shares of the Company's
Common Stock at a 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, up to a maximum of 3,360,625 shares of Common Stock. Any
shares the investor was unable to convert due to this limitation could be
exchanged for $1,150 per share in cash. Terms of the Series C Shares also
provided for 8% cumulative dividends payable in shares of Common Stock at the
time of each conversion. Each Series C Share had 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. The holders of the Series C shares
were not entitled to vote, separately as a series or otherwise, on any matter
submitted to a vote of the Company's shareholders.

Effective March 30, 1998, 1,060 Series C Shares automatically converted,
in accordance with the terms of the Series C preferred stock, into 3,360,625
shares of the Company's common stock and 3,940 Series C Shares were, as
required by the terms of the Series C preferred stock, purchased by the
Company for an aggregate purchase price of $4,530,461. Following these
transactions, no Series C Shares remained outstanding. The purchase price for
the Series C Shares purchased by the Company has not yet been paid by the
Company, nor has B.U., the holder of the Series C Shares, demanded payment of
the purchase price. As a result, the Company currently is indebted to B.U.
for this amount.

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On November 6, 1996, the Company entered into the Shareholders Agreement
with the Shareholders and Reed R. Prior. For a description of the
Shareholders Agreement, see "Executive Compensation -- Compensation Committee
Interlocks and Insider Participation."

As of February 14, 1997, the Company entered into an agreement to sell
its operating division, which includes substantially all of the Company's
assets and personnel other than (i) its patents (which have been previously
pledged to secure certain dividend obligations; see "Executive Compensation --
Compensation Committee Interlocks and Insider Participation") and other
intellectual property, (ii) certain management personnel, and (iii) assets
utilized by the retained management personnel in the performance of their
duties (collectively, the "Operating Division"), to B.U. or a designated
affiliate for $5 million. The agreement was approved and ratified by the
Company's stockholders on December 16, 1997, and the transaction was completed
on December 31, 1997. Prior to closing, B.U. paid the Company $4.5 million as
a deposit and assumed responsibility for the facility's operations, including
responsibility for operating costs. At the closing, B.U. paid the remaining
$500,000 of the purchase price, and the Company transferred to B.U. all assets
and personnel associated with the Operating Division. The Company assigned to
Marathon or B.U. the leases for the Company's premises (all of which were
leased by the Company), subject to an obligation on the part of Marathon to
sublet a portion of the premises back to the Company for use by the Company as
its offices. In addition, The Company assigned to B.U. the leases for
Operating Division equipment and other property that the Company leases. The
Company also assigned its rights under certain of its contracts relating to
the Operating Division (e.g., clinical trial contracts) to B.U. Finally,
effective on the closing of the sale of the Operating Division, the Company's
employees associated with the Operating Division (approximately 90) were
offered employment by Marathon.

As of February 14, 1997, the Company also 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 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 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. Seragen and Marathon are
currently negotiating a reduction in the fees payable in 1997 and for 1998
based on the actual service rendered in 1997 and those anticipated for 1998.
The Company has not paid the service fees, and Marathon has not demanded
payment. As a result, the Company currently is indebted to Marathon in the
amount of $5.8 million as of February 28, 1998. The service agreement has
reduced substantially the Company's operating costs in research and
development, as the Company is contracting solely for the services that the
Company requires for clinical and manufacturing purposes.

On July 31, 1997, the Company entered into the USSC License Agreement
with USSC granting USSC an option on worldwide rights to the Company's EGF
Fusion Protein for restenosis in cardiovascular applications. Leon C. Hirsch,
who beneficially owns more than 5% of the Company's Common Stock, is the
Chairman of USSC and beneficially owns 7.8% of the common stock of USSC. Turi
Josefsen, who beneficially owns more than 5% of the Company's Common Stock, is
a director of USSC and beneficially owns 1.8% of the common stock of USSC.
John R. Silber, a director of the Company, is a director of USSC and
beneficially owns .02% of the common stock of USSC. Pursuant to the USSC
License Agreement, USSC made an initial payment to the Company of $5.0 million
on July 31, 1997. Under the USSC License Agreement, USSC is entitled to
acquire an exclusive license to the EGF Fusion Protein technology, at any time
during a 15-month evaluation period, upon the payment to the Company of an
additional $5.0 million. In addition, the Company issued to USSC a warrant
for the purchase of 500,000 shares of the Company's Common Stock at a purchase
price of $.5625 per share, the closing sale price for shares of the Company's
Common Stock on the date prior to the date the warrant was issued. The
Company will value this warrant and record it as a charge to general and
administrative expense in the quarter ending September 30, 1997. USSC has
agreed to fund trials associated with the development of EGF Fusion Protein
for restenosis. If USSC's option to obtain any exclusive license of the EGF
Fusion Protein technology is exercised, milestone payments will be payable by
USSC to the Company up to a maximum amount of $22.5 million. In addition,
USSC will be obligated to pay the Company royalties on commercial sales of the
licensed product. In the event USSC chooses not to exercise the option, the
USSC License Agreement will terminate, and, in exchange, USSC will receive
$5.0 million worth of the Company's Common Stock valued at the average of the
closing prices of the Company's Common Stock (i) for the ten trading days
preceding the date of the USSC License Agreement or (ii) for the ten trading
days preceding the date on which USSC chooses not to exercise the option,
whichever is lower. The Company will record the $5.0 million initial payment
from USSC as a liability. In the event that USSC exercises its option to
license the EGF Fusion Protein, the $5.0 million will be recorded as revenue
at that time. In the event that USSC chooses not to exercise the option, the
$5.0 million will be recorded as stockholders' equity.

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In February 1998, the Company entered into a license agreement with
DiagnoCure Inc. ("DiagnoCure") of Quebec, Canada pursuant to which the Company
licensed certain of its technology for use in connection with nanoerythrosomes
as bioactive agent carriers for cancer treatment, immunotherapy, gene therapy,
and gene diagnostic applications. The license agreement provides for
specified royalties to be paid to the Company by DiagnoCure on sales of
products containing the licensed Company technology and on fees and other
payments received by DiagnoCure pursuant to any sublicense or similar
transaction involving the licensed Company technology. In connection with the
license agreement, DiagnoCure agreed to undertake certain research and
development activities with John R. Murphy, Ph.D., a former director of the
Company, at B.U. Medical Center/University Hospital.

<PAGE>
PART IV

ITEM 14. EXHIBITS AND REPORTS ON FORM 8-K [has not been updated]

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

Reports of Independent Accountants . . . . . . . ??
Balance Sheets as of December 31, 1996 and 1997 . . ??
Statements of Operations for the years ended
December 31, 1995, 1996 and 1997 . . . . . . . . . ??
Statements of Stockholders' Equity (Deficit) for the
years ended December 31, 1995, 1996 and 1997 . . . ??
Statements of Cash Flows for the years ended
December 31, 1995, 1996 and 1997 . . . . . . . . . ??
Notes to Financial Statement . . . . . . . . . . . ??

2. Schedules - None

3. Exhibits

The exhibits listed in the accompanying Exhibit Index on
Pages ??-?? Hereof are filed or incorporated by reference
as part of this Annual Report on Form 10-K.

4. Executive Compensation Plans and Arrangements

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

(b) Reports on Form 8-K

None

83
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<PAGE>
EXHIBIT INDEX

Exhibit
Number Notes Description Page

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

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

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

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

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

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

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

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

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

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

(4.8) (16) Certificate of Designation of Series C Preferred
Stock of the Registrant, dated September 27, 1996
(4.9) Certificate of Designation of Series D Preferred
Stock of the Registrant, dated November 26, 1997
(filed herewith)
(9.1) (1) Voting Trust Agreement, dated May 28, 1985, among
Stein H. Annexstad and certain stockholders of the
Registrant

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

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

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

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

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

(10.5)*** (1) 1981 Stock Option Plan, as amended and restated
October 19, 1988 (previously filed as Exhibit 10.7
thereto)
(10.6)*** (1) 1992 Long Term Incentive Plan (previously filed as
Exhibit 10.8 thereto)

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

86
<PAGE>
(10.22)* (2) License and Royalty Agreement dated November 18,
1992, between the Registrant and University Hospital
(previously filed as Exhibit 10.37 thereto)

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

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

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

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

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

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

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

87
<PAGE>

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

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

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

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

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

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

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

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

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

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

88
<PAGE>

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

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

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

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

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

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

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

(10.47) (13) Shareholders' Agreement, dated November 22, 1995,
by and between the Registrant and Seragen
Biopharmaceuticals, LTD (previously filed as
Exhibit 10.53 thereto)

(10.48)* (13) Technology Rights and Marketing Agreement dated
November 21, 1995, by and between the Registrant
and Seragen Biopharmaceuticals, LTD (previously
filed as Exhibit 10.54 thereto)

(10.49) (13) Warrant Indenture Agreement, dated November 21,
1995, by and between the Registrant and Seragen
Biopharmaceuticals, LTD (previously filed as
Exhibit 10.55 thereto)

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

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

(10.52) (14) Form of Warrant due July 1, 2006 by and between the
Registrant, Seragen Technology, Inc. and the persons
listed on Schedule 1 thereto (previously filed as
Exhibit 10.58 thereto)

89
<PAGE>

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

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

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

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

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

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

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

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

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

(10.62)*** (16) Amendment to Employment Agreement, dated December 18,
1996, by and between the Registrant and Mr. Reed R.
Prior (previously filed as Exhibit 10.66 thereto)

(10.63)*** (16) Amendment to Employment Agreement, dated December 18,
1996, by and between the Registrant and Dr. Jean C.
Nichols (previously filed as Exhibit 10.67 thereto)

(10.64)*** (16) Waiver to Employment Agreement, dated January 6,
1997, by and between the Registrant and Mr. Reed R.
Prior (previously filed as Exhibit 10.68 thereto)

(10.65)*** (16) Waiver to Employment Agreement, dated January 6,
1997, by and between the Registrant and Dr. Jean C.
Nichols (previously filed as Exhibit 10.69 thereto)

(10.66)*** (16) Waiver No.2 to Employment Agreement, dated January
31, 1997, by and between the Registrant and Mr. Reed
R. Prior (previously filed as Exhibit 10.70 thereto)

(10.67)*** (16) Waiver No.2 to Employment Agreement, dated January
31, 1997, by and between the Registrant and Dr. Jean
C. Nichols (previously filed as Exhibit 10.71 thereto)

90
<PAGE>

(10.68)*** (16) Amendment to 1992 Long Term Incentive Plan, dated
December 18, 1996 (previously filed as Exhibit
10.72 thereto)

(10.69)*** (16) Employment Agreement, dated as of January 15, 1997,
by and between the Registrant and Ms. Elizabeth C.
Chen (previously filed as Exhibit 10.73 thereto)

(10.70)*** (16) Waiver to Employment Agreement, dated 3/28/97, by
and between the Registrant and Mr. Reed R. Prior
(previously filed as Exhibit 10.74 thereto)

(10.71)*** (16) Waiver to Employment Agreement, dated 3/28/97, by
and between the Registrant and Ms. Elizabeth C. Chen
(previously filed as Exhibit 10.75 thereto)

(10.72) (17)* Service Agreement, dated as of February 14, 1997,
between the Registrant and Trustees of Boston
University (previously filed as Exhibit 10.68)

(10.73) (19) Second Amendment to Sublease dated February 21,
1997, by and between the Registrant and SierraCom
(previously filed as Exhibit 10.79 thereto)

(10.74) (20) Stock Purchase Agreement, dated April 7, 1997, by
and between the Registrant and Eli Lilly and Company
(previously filed as Exhibit 99.3 thereto)

(10.75) (21) License Agreement, dated December 13, 1994, by and
between the Registrant and Ajinomoto Co., Inc.
(previously filed as Exhibit 99.2 thereto)

(10.76) (21) Amendment to License Agreement, dated June 1, 1997,
by and between the Registrant and Ajinomoto Co., Inc.
(previously filed as Exhibit 99.3 thereto)

(10.77) (21) Amendment to Sales and Distribution Agreement and
Development Agreement, dated April 7, 1997, by and
between the Registrant and Eli Lilly and Company
(previously filed as Exhibit 99.4 thereto)

(10.78) (22) Amendment No. 4 to the Consulting Agreement executed
May 28, 1997, by and between the Registrant and John
R. Murphy, Ph.D. (previously filed as Exhibit 10.80)

(10.79) (22) Second Amendment to Employment Agreement, dated April
30, 1997, by and between the Registrant and Mr. Reed
R. Prior (previously filed as Exhibit 10.81)

(10.80) (22) Second Amendment to Employment Agreement, dated May
30, 1997, by and between the Registrant and Jean C.
Nichols, Ph.D. (previously filed as Exhibit 10.82)

(10.81) (22) Amendment No. 1 to Asset Purchase Agreement dated May
16, 1997, by and between the Registrant and Boston
University (previously filed as Exhibit 10.83)

(10.82) (23) Evaluation License and Option Agreement, dated as
of July 31, 1997, by and between the Registrant and
U.S. Surgical Corporation (previously filed as
Exhibit 99.2 thereto)

(10.83) (23) Stock Purchase Warrant Agreement, dated July 31,
1997, by and between the Registrant and U.S.
Surgical Corporation (previously filed as Exhibit
99.3 thereto)

91
<PAGE>

(10.84) (24) Amendment No. 2 to Asset Purchase Agreement between
the Registrant and Trustees of Boston University,
dated August 25, 1997 (previously filed as Exhibit
10.87 thereto)

(10.85) (24) Amendment No. 3 to Asset Purchase Agreement between
the Registrant and Trustees of Boston University,
dated October 21, 1997 (previously filed as Exhibit
10.88 thereto)

(10.86) (24) Amendment to the License Agreement between the
Registrant and Harvard College dated August 6, 1997
(previously filed as Exhibit 10.89 thereto)

(10.87) (24) Amendment to the License and Royalty Agreement
between the Registrant and Boston Medical Center,
dated November 18, 1997 (previously filed as Exhibit
10.90 thereto)

(10.88) (24) Forbearance Agreement between the Registrant and Leon
C. Hirsch, Turi Josefsen, Gerald S. J. Cassidy,
Loretta P. Cassidy and the Trustees of Boston
University dated September 1997 (previously filed as
Exhibit 10.91 thereto)

(10.89) (24) 1992 Long Term Incentive Plan, as amended through
December 16, 1997 (previously filed as Exhibit 10.92
thereto)

(10.90) (24) Amended and Restated Employment Agreement between
the Registrant and Jean Nichols dated September 22,
1997 (previously filed as Exhibit 10.93 thereto)

(10.91) (24) Offshore Securities Agreement between the Registrant
and P.R.I.F., dated November 26, 1997 (previously
filed as Exhibit 10.94 thereto)

(10.92) (24) Stockholders Waiver Agreement dated October 28, 1997
(previously filed as Exhibit 10.95 thereto)

(10.93) (24) Amendment to Employment Agreement between the
registrant and Elizabeth Chen dated September 3,
1997 (previously filed as Exhibit 10.96 thereto)

(10.94) (24) Amendment No. 1 to Employment Agreement between the
Registrant and Elizabeth Chen dated September 30,
1997 (previously filed as Exhibit 10.97 thereto)

(10.95) (24) Amendment No. 3 to Employment Agreement between the
Registrant and Reed R. Prior dated September 30, 1997
(previously filed as Exhibit 10.98 thereto)

(10.96) Assignment of Sublease and Agreement for premises at
97 South Street, Hopkinton, Massachusetts dated
December 31, 1997 between the Registrant, 520
Commonwealth Real Estate Corporation and Harold
Nahigian (filed herewith)

(10.97) Assignment of Sublease and Agreement for premises
at 99 South Street, Hopkinton, Massachusetts dated
December 31, 1997 between the Registrant, Marathon
and SierraCom, a division of Sierra Networks, Inc.
(filed herewith)

92
<PAGE>

(10.98) Consulting Agreement, dated as of January 1, 1998,
by and between the Registrant and Dr. John R. Murphy
(filed herewith)

(10.99) Sublease Agreement for premises at 97 South Street,
Hopkinton, Massachusetts, dated January 1, 1998,
between the Registrant and 520 Commonwealth Real
Estate Corporation (filed herewith)

(10.100) Second Sublease Agreement for premises at 99 South
Street, Hopkinton, Massachusetts, dated January 1,
1998, between the Registrant, Marathon and SierraCom,
a division of Sierra Networks, Inc. (filed herewith)

(10.101)*** Waiver No. 5 to Employment Agreement, dated February
5, 1998, by and between the Registrant and Mr. Reed
R. Prior (filed herewith)

(10.102)*** Waiver No. 3 to Employment Agreement, dated February
17, 1998, by and between the Registrant and Ms.
Elizabeth Chen (filed herewith)

(10.103)*** Waiver to Employment Agreement, dated February
23, 1998, by and between the Registrant and Ms. Jean
C. Nichols (filed herewith)

(10.104) Stockholders Waiver Agreement dated November 6, 1997
(filed herewith)

(16.1) (18) Letter regarding change in certifying accountant

(21) List of Subsidiaries (filed herewith)

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

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

(27) Financial Data Schedule

NOTES:

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

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

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

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

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

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

93
<PAGE>

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

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

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

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

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

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

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

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

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

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

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

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

(16) All exhibits descriptions followed by (16) were previously filed as
Exhibits to, and incorporated by reference from, the Registrant's Form
10-K, for the nine months ending December 31, 1996.

(17) All exhibit descriptions followed by (17) were previously filed as
Exhibits to, and incorporated by reference from, the Registrant's Form
8-K for February 18, 1997 event.

(18) All exhibit descriptions followed by (18) were previously filed as
Exhibits to, and incorporated by reference from, the Registrant's Form
8-K for March 12, 1997 event.

(19) All exhibits descriptions followed by (19) were previously filed as
Exhibits to, and incorporated by reference from, the Registrant's Form
10-Q, for the three months ending March 31, 1997.

94
<PAGE>

(20) All exhibit descriptions followed by (20) were previously filed as
Exhibits to, and incorporated by reference from, the Registrant's Form
8-K for April 7, 1997 event.

(21) All exhibit descriptions followed by (21) were previously filed as
Exhibits to, and incorporated by reference from, the Registrant's Form
8-K for June 10, 1997 event.

(22) All exhibits descriptions followed by (22) were previously filed as
Exhibits to, and incorporated by reference from, the Registrant's Form
10-Q, for the six months ending June 30, 1997.

(23) All exhibit descriptions followed by (23) were previously filed as
Exhibits to, and incorporated by reference from, the Registrant's Form
8-K for July 31, 1997 event.

(24) All exhibits descriptions followed by (24) were previously filed as
Exhibits to, and incorporated by reference from, the Registrant's Form
10-Q, for the nine months ending September 30, 1997.

95
<PAGE>

<PAGE>
SIGNATURES

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

Seragen, Inc.

By: /s/ Reed R. Prior Dated: March 31, 1998
------------------------------
Reed R. Prior
Chairman of the Board
and Chief Executive Officer

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

Signatures Title Date

/s/ Reed R. Prior Chairman of the Board, March 31, 1998
------------------------------- Chief Executive Officer
Reed R. Prior and Director
(Principal Executive
Officer)

/s/ Jean C. Nichols, Ph.D. President, Chief Technology March 31, 1998
------------------------------- Officer and Director
Jean C. Nichols, Ph.D. (Principal Financial and
Accounting Officer)

/s/ Gerald S. J. Cassidy Director March 31, 1998
-------------------------------
Gerald S.J. Cassidy

/s/ Kenneth G. Condon Director March 31, 1998
-------------------------------
Kenneth G. Condon

/s/ Norman A. Jacobs Director March 31, 1998
-------------------------------
Norman A. Jacobs

/s/ John R. Silber, Ph.D. Director March 31, 1998
-------------------------------
John R. Silber, Ph.D.

96
<PAGE>

CERTIFICATE OF DESIGNATION, NUMBER,
POWERS, PREFERENCES AND RELATIVE, PARTICIPATING, OPTIONAL,
AND OTHER SPECIAL RIGHTS AND THE QUALIFICATIONS,
LIMITATIONS, RESTRICTIONS, AND OTHER DISTINGUISHING
CHARACTERISTICS OF SERIES D PREFERRED STOCK
OF
SERAGEN, INC.

Seragen, Inc., a corporation organized and existing under the laws of
the State of Delaware (the "Corporation"), hereby certifies that:

1. Incorporation. The Corporation is validly existing and
incorporated under the laws of the State of Delaware.

2. Authorized Preferred Stock. The Corporation's Restated
Certificate of Incorporation, as amended, authorizes the issuance of
5,000,000 shares of Preferred Stock, par value $.01 per share, and
expressly vests in the Board of Directors the authority provided therein to
issue any or all of such shares in one or more series, and by resolution or
resolutions the designation, number, full or limited voting powers,
preferences and relative, participating, optional and other special rights,
and the qualifications, limitations, restrictions, and other distinguishing
characteristics of each series to be issued. The rights of the holders of
the Series D Preferred Stock shall rank pari passu with the rights of the
holders of all other series of Preferred Stock, now existing or hereafter
issued by the Corporation, with respect to all preferences upon
liquidation.

3. Designation of the Series. The Board of Directors of the
Corporation, pursuant to authority expressly vested in it as aforesaid, has
adopted the following, creating a Series D issue of Preferred Stock:

There shall be a series of convertible redeemable Preferred Stock
designated as "Series D Preferred Stock." Each share of such series shall
be referred to herein as a "Series D Share." The par value per share is
$.01. The authorized number of Series D Shares is 979. The Series D
Shares shall be equal in rank to all other series of Preferred Stock,
whether now existing or hereafter issued by the Corporation.

A. Voting Rights. Except as otherwise required by law, the holders
of the Series D Shares shall not be entitled to vote, whether separately as
a series or otherwise, on any matter submitted to a vote of the
shareholders of the Corporation. Notwithstanding the foregoing, without
the prior written consent of the holders of the Series D Shares:
1
<PAGE>
(i) the Corporation shall not amend, alter, or repeal (whether
by amendment, merger, or otherwise) any of the provisions related to the
Series D Shares of its certificate of incorporation or any resolutions of
its board of directors or other instrument establishing and designating the
Series D Shares so as to effect any materially adverse change in the
rights, privileges, powers, or preferences of the holders of Series D
Shares; and (ii) the Corporation shall not create or designate any
additional preferred stock senior in right as to dividends, voting rights,
redemptions or liquidation to the Series D Shares.

B. Dividends. The holders of the Series D Shares shall be entitled
to receive a cumulative dividend at the rate of 8 percent per annum,
calculated on a per share value of $1,000, on the basis of the number of
days elapsed assuming a 365-day year, payable in Common Stock at the time
of each conversion, but in no event later than November 29, 1998 (the
"Automatic Conversion Date") at which time the Series D Shares shall be
automatically converted into Common Stock. Such dividends shall be
calculated from May 29, 1996, and shall be payable on each Conversion Date
(as such term is defined in Section 3.C(iii) below) (the "Dividend Payment
Date"), in preference to dividends on any Common Stock or stock of any class
ranking, as to dividend rights, junior to the Series D Shares. Dividends
shall be fully cumulative and shall accrue (whether or not declared and
whether or not there shall be funds legally available for the payment of
dividends), without interest, and shall be payable on the Dividend Payment
Date.

C. Conversion Rights.

(i) Conversion. Each holder of Series D Shares shall have the
right, at such holder's option, without the payment of any additional
consideration by the holder thereof, to convert all or any of such Series D
Shares into the number of shares of Common Stock for which such Series D
Shares are then convertible pursuant to Section 3.C(ii) below (after giving
effect to any adjustments provided for under Section 3.C(iv) hereof).

(ii) Conversion Price. Upon conversion of the Series D Shares
pursuant to Section 3.B or 3.C(i) hereof, each Series D Share shall be
converted into the number of shares of Common Stock equal to $1,000 plus
the amount of accrued dividends payable on the Conversion Date, divided by
the lesser of (a) the product of seventy-three percent (73%) multiplied by
the average of the closing bid prices of the Common Stock as reported by
the Nasdaq Stock Market or, if the Common Stock is not then listed on the
Nasdaq Stock Market, by the OTC Bulletin Board or any similar
inter-dealer quotation medium on which the Common Stock may be quoted for
the five trading days immediately preceding the conversion date, or (b) the
closing bid price for the Common Stock as reported by the Nasdaq Stock
Market for May 28, 1996.
2
<PAGE>
(iii) Mechanics of Conversion. The holder of any Series D
Shares is entitled, at its option, to convert any or all of its Series D
Shares into Common Stock of the Corporation at the conversion price set
forth in Section 3.C(ii). Such conversion shall be effectuated by
surrendering to the Corporation, or its attorney, the original Series D
Shares to be converted together with a written notice stating that the
holder elects to convert all or a portion of the Series D Shares and
stating the name or names (with address) in which the certificate or
certificates for the shares of Common Stock are to be issued and a
representation letter signed by the holder in a form to be agreed upon by
the holder and the Corporation at the time the Series D Shares are issued.
No fractional shares or scrip representing fractions of shares will be
issued on conversion, but the number of shares of Common Stock issuable
shall be rounded down or up, as the case may be, to the nearest whole
number of shares. The date on which notice of conversion is effective
(the "Conversion Date") shall be deemed to be the earlier of the
Automatic Conversion Date and the date on which the holder has delivered to
the Corporation the original Series D Shares, a facsimile or original of
the signed notice to convert, and a facsimile or original of the signed
representation letter. Within two (2) business days after receipt of the
documentation referred to above, the Corporation shall deliver a
certificate, without stop transfer instructions, for the number of shares
of Common Stock issuable upon conversion. The Corporation shall be
responsible for taking all necessary actions and shall bear all costs to
issue the Common Stock as provided herein, including the delivery of an
opinion letter to the transfer agent, if so required. The person in whose
name the certificate of Common Stock is to be registered shall be treated
as a shareholder of record on and after the Conversion Date. No payment or
adjustment shall be made for accrued and unpaid interest until the
Conversion Date. Upon surrender of any Series D Shares that are to be
converted in part, the Corporation shall issue to the holder, if so
requested, new Series D Shares equal to the number of unconverted Series D
Shares.

(iv) Certain Adjustments. In the event of any change in one or
more classes of capital stock of the Corporation by reason of any stock
dividend, stock split-up, recapitalization, reclassification, or
combination, subdivision or exchange of shares or the like, or in the event
of the merger or consolidation of the Corporation or the sale or transfer
by the Corporation of all or substantially all of its assets, then all
liquidation preference, conversion and other rights and privileges
appurtenant to the Series D Shares shall be promptly and appropriately
adjusted by the Board of Directors of the Corporation so as to fully
protect and preserve the same (such preservation and protection to be to
the same extent and effect as if the subject event had not occurred, or the
applicable right or privilege had been exercised immediately prior to the
occurrence of the subject event, or otherwise as the case may be), it being
the intention that, following any such adjustment, the holders of the
Series D Shares shall be in the same relative position with respect to
their rights and privileges as they possessed immediately prior to the
event that precipitated the adjustment.
3
<PAGE>
(v) Costs. The Corporation shall pay all documentary, stamp,
transfer or other transactional taxes attributable to the issuance or
delivery of shares of Common Stock upon conversion of any Series D Shares;
provided that the Corporation shall not be required to pay any taxes which
may be payable in respect of any transfer involved in the issuance or
delivery of any certificate of such shares in a name other than that of the
holder of the Series D Shares in respect of which such shares are being
issued.

(vi) Reservation of Shares. The Corporation shall reserve, free
from preemptive rights, out of its authorized but unissued shares of Common
Stock solely for the purpose of effecting the conversion of the Series D
Shares, sufficient shares of Common Stock to provide for conversion of all
outstanding Series D Shares.

D. Redemption at Option of the Corporation. The Corporation shall
have the right to redeem Series D Shares pursuant to the following
provisions:

(i) The Corporation shall have the right, at its sole option and
election, to redeem Series D Shares, in whole or in part, at any time and
from time to time at a redemption price of $1,150.00 per share.

(ii) If less than all of the Series D Shares at the time
outstanding are to be redeemed, the Series D Shares so to be redeemed shall
be selected by lot, pro rata or in such other manner as the Board of
Directors may determine to be fair and proper.

(iii) Notice of any redemption of the Series D Shares shall be
given, by telephone line facsimile transmission to such number as shall be
provided to the Corporation for such purpose by each holder of Series D
Shares, not later than ten days prior to the date fixed for redemption to
each holder of Series D Shares to be redeemed. In order to facilitate the
redemption of the Series D Shares, the Board of Directors may fix a record
date for the determination of holders of Series D Shares to be redeemed, or
may cause the transfer books of the Corporation to be closed for the
transfer of Series D Shares, not more than sixty (60) days prior to the
date fixed for such redemption.
4
<PAGE>
(iv) On the redemption date specified in the notice given
pursuant to Section 3.D (iii), the Corporation shall, and at any time after
such notice shall have been given and before such redemption date the
Corporation may, unless otherwise agreed by the Corporation and the holders
of Series D Shares called for redemption, deposit for the pro rata benefit
of the holders of the Series D Shares so called for redemption the funds
necessary for such redemption with a bank or trust company in Boston,
Massachusetts. Any monies so deposited by the Corporation and unclaimed at
the end of five years from the date designated for such redemption shall
revert to the general funds of the Corporation. After such reversion, any
such bank or trust company shall, upon demand, pay over to the Corporation
such unclaimed amounts and thereupon such bank or trust company shall be
relieved of all responsibility in respect thereof to such holder and such
holder shall look only to the Corporation for the payment of the redemption
price. In the event that monies are deposited pursuant to this Section
3.D.(iv) in respect of Series D Shares that are converted in accordance
with the provisions of Section 3.C., such monies shall, upon such
conversion, revert to the general funds of the Corporation and, upon
demand, such bank or trust company shall pay over to the Corporation such
monies and shall thereupon be relieved of all responsibility to the holders
of such shares in respect thereof. Any interest accrued on funds so
deposited pursuant to this Section 3.D.(iv) shall be paid from time to time
to the Corporation for its own account.

(v) Upon either the deposit of funds pursuant to Section
3.D.(iv) in respect of Series D Shares called for redemption or the payment
in respect of Series D Shares called for redemption in accordance with the
provisions of this Section 3.D. to the holders of Series D Shares called
for redemption pursuant to an agreement between the Corporation and such
holders, notwithstanding that any certificates for such shares shall not
have been surrendered for cancellation, (A) the shares represented thereby
shall no longer be deemed outstanding, (B) the rights to receive dividends
thereon shall cease to accrue from and after the date of redemption
designated in the notice of redemption, and (C) all rights of the holders
of the Series D Shares called for redemption shall cease, excepting only
the right to receive the redemption price therefor and the right to convert
such shares into shares of Common Stock as provided in Section 3.C. until
the close of business on the third business day preceding the redemption
date.

E. Liquidation.

(i) Series D Preference. Upon any liquidation, dissolution or
winding up of the Corporation, whether voluntary or involuntary, the
holders of Series D Shares shall be entitled, before any distribution or
payment is made upon any shares of Common Stock or any Preferred Stock
junior in rank to the Series D Shares, to be paid an amount per share equal
to the liquidation value described in this Section 3.E(i) (the "Liquidation
Value"). The per share Liquidation Value of the Series D Shares on any
date is equal to the sum of the following:

(A) $1,000, plus
5
<PAGE>
(B) an amount equal to any accrued and unpaid dividends
from May 29, 1996.

Neither the consolidation nor merger of the Corporation with or into any
other corporation or other entities, nor the sale, transfer or lease of all
or substantially all of the assets of the Corporation shall itself be
deemed to be a liquidation, dissolution or winding-up of the Corporation
within the meaning of this Section 3.E. Notice of liquidation,
dissolution, or winding-up of the Corporation shall be mailed, by
first-class mail, postage prepaid, not less than 20 days prior to the date
on which such liquidation, dissolution, or winding-up is expected to take
place or become effective, to the holders of record of the Series D Shares
at their respective addresses as the same appear on the books of the
Corporation or are supplied by them in writing to the Corporation for the
purpose of such notice, but no defect in such notice or in mailing thereof
shall affect the validity of the liquidation, dissolution or winding-up.

(ii) General.

(A) All of the preferential amounts to be paid to the
holders of the Series D Shares pursuant to Section 3.E(i) shall be paid or
set apart for payment before the payment or setting apart for payment of
any amount for, or the distribution of any assets of the Corporation to,
the holders of the Common Stock or any preferred stock junior in rank to
the Series D Shares in connection with such liquidation, dissolution or
winding-up.

(B) After setting apart or paying in full the preferential
amounts aforesaid to the holders of record of the issued and outstanding
Series D Shares as set forth in Section 3.E(i), the holders of record of
Common Stock and any preferred stock junior in rank to the Series D Shares
shall be entitled to participate in any distribution of any remaining
assets of the Corporation, and the holders of record of the Series D Shares
shall not be entitled to participate in such distribution.

F. Reacquired Shares. Any shares of Series D Shares redeemed,
purchased, converted, or otherwise acquired by the Corporation in any
manner whatsoever shall not be reissued as part of such series and shall be
retired promptly after the acquisition thereof. All such shares upon their
retirement and the filing of any certificate required in connection
therewith pursuant to the Delaware General Corporation Law shall become
authorized but unissued shares of Preferred Stock.

G. Copies of Agreements, Instruments, and Documents. Copies of
any of the agreements, instruments or other documents referred to in this
certificate of designation shall be furnished to any stockholder upon
written request to the Corporation at its principal place of business.
6
<PAGE>

4. The statements contained in the foregoing, creating and
designating the said Series D issue of Preferred Stock and fixing the
number, powers, preferences and relative, optional, participating, and
other special rights and the qualifications, limitations, restrictions, and
other distinguishing characteristics thereof shall, upon the effective date
of said series, be deemed to be included in and be a part of the Restated
Certificate of Incorporation, as amended, of the Corporation pursuant to
the provisions of Sections 104 and 151 of the General Corporation Law of
the State of Delaware.

IN WITNESS WHEREOF, this Certificate of Designation has been
executed on behalf of the Corporation by its Chairman, Chief Executive
Officer and Treasurer and attested by its President and Chief Technology
Officer this 26th day of November, 1997, and they do hereby affirm, under
penalty of perjury, that the foregoing Certificate of Designation is the
act and deed of the Corporation and that the facts stated therein are true
and accurate.

SERAGEN, INC.

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

Attest:

By:/s/ Jean C. Nichols
Jean C. Nichols, Ph.D.
President and Chief Technology
Officer

7
<PAGE>

ASSIGNMENT OF LEASE
AND AGREEMENT

THIS ASSIGNMENT OF LEASE AND AGREEMENT (the "Agreement") is made this
31st day of December 1997 by and among SERAGEN, INC., a Delaware corporation
having a principal place of business at 97 South Street, Hopkinton,
Massachusetts 01748 (the "Assignor"), 520 COMMONWEALTH REAL ESTATE
CORPORATION, a Massachusetts corporation having a principal place of business
at 881 Commonwealth Avenue, Boston, Massachusetts 02215 (the "Assignee"), and
HAROLD NAHIGIAN, an individual having a principal place of business at 246
East Main Street, P.O. Box 701, Marlboro, Massachusetts 01752 (the
"Landlord").

RECITALS:

A. Landlord and Assignor are the landlord and tenant, respectively,
pursuant to that certain Lease dated September 24, 1992 (the
"Lease") with respect to premises located at 97 South Street,
Hopkinton, Massachusetts, as more fully described in the Lease and
in Exhibit A attached thereto. A copy of the Lease is attached
hereto as Schedule A.

B. Assignor and Assignee desire that Assignor assign its entire right
and interests as tenant under the lease to assignee,

NOW, THEREFORE, in consideration of the foregoing, and for other good
and valuable consideration, the receipt and sufficiency of which is hereby
acknowledged by the parties hereto, the parties hereto hereby agree as
follows,

1. Assignment of Lease. Effective at 12:01 A.M. on January 1, 1998
(the "Effective Date"), Assignor does hereby assign, transfer and set over
unto Assignee all of it's right, title and interest as tenant under the Lease.

2. Assumption by Assignee. Assignee hereby accepts such assignment and
agrees with Assignor and Landlord that, as of the Effective Date, Assignee
shall assume all of the obligations and observe all of the covenants on
Assignor's part to be performed or observed under the Lease, as fully and
effectually as if the Assignee were the named tenant under the Lease.

3. Consent of Landlord: Termination of Assignor's Liability. Landlord
hereby consents to the foregoing assignment, and hereby agrees that, as of the
Effective Date, Assignor shall be relieved of all liability as tenant under
the Lease, including, without limitation, the obligation to pay rent and the
performance of the covenants and agreements on tenant's part to be performed
thereunder.

4. Sublet of Space to Assignor. Landlord hereby consents to the
subletting of a portion of the Leased Premises (as that term is defined in the
Lease) by Assignee to Assignor for uses consistent with the uses permitted by
the Lease.

5. Miscellaneous. This Agreement is executed in the Commonwealth of
Massachusetts and shall be governed by and construed in accordance with the
laws of the Commonwealth of Massachusetts. This Agreement shall be binding
upon and inure to the benefit of the parties hereto and their respective
successors and assigns. This Agreement contains the entire agreement among
the parties with respect to the subject matter hereof, and shall supersede any
and all prior agreements, written or oral, with respect to the subject matter
hereof. This Agreement may only be amended by written instrument executed by
the parties hereto.
1
<PAGE>
6. Counterparts. This Agreement may be executed in one or more
counterparts, and by different parties hereto on separate counterparts, each
of which shall be deemed an original, but all of which together shall
constitute one and the same instrument.

IN WITNESS WHEREOF, the parties have hereunto executed this Agreement as
an instrument under seal, all as of the day and year first above written.

SERAGEN, INC.

By: /s/ Reed R. Prior
Name: Reed R. Prior
Title: Chairman and Chief Executive Officer

520 COMMONWEALTH REAL ESTATE
CORPORATION

By:/s/ Kenneth G. Condon
Kenneth G. Condon, President

LANDLORD:

By:/s/ Harold Nahigian
Harold Nahigian
2
<PAGE>

ASSIGNMENT OF SUBLEASE
AND AGREEMENT

THIS ASSIGNMENT OF SUBLEASE AND AGREEMENT (the "Agreement") is made this
31st day of December, 1997 by and among SERAGEN, INC., a Delaware corporation
having a principal place of business at 97 South Street, Hopkinton,
Massachusetts 01748 (the "Assignor"), MARATHON BIOPHARMACEUTICALS, L.L.C.,
a Massachusetts limited liability company having a principal place of business
at 97 South Street, Hopkinton, Massachusetts 01748 (the "Assignee"), and
SIERRACOM, a division of Sierra Network, Inc., a Delaware Corporation, having
a principal place of business at 99 South Street, Hopkinton, Massachusetts
01748 (the "Sublandlord").

RECITALS:

A. Sublandlord and Assignor are the sublandlord and subtenant,
respectively, pursuant to that certain Sublease dated October
1995, as amended (the "Sublease") with respect to premises located
at 99 South Street, Hopkinton, Massachusetts, as more fully
described in the Sublease. A copy of the Sublease is attached
hereto as Schedule A.

B. Assignor and Assignee desire that Assignor assign its entire right
and interest as subtenant under the Sublease to Assignee.

C. Sublandlord agrees to consent to such assignment.

1. Assignment of Sublease. Effective at 12:01 A.M. on January 1, 1998
(the "Effective Date"), Assignor does hereby assign, transfer and set over
unto Assignee all of its right, title and interest as subtenant under the
Sublease.

2. Assumption of Assignee. Assignee hereby accepts such assignment and
agrees with Assignor and Sublandlord that, as of the Effective Date, Assignee
shall assume all of the obligations and observe all of the covenants on
Assignor's part to be performed or observed under the Sublease, as fully and
effectually as if the Assignee were the named subtenant under the Sublease.

3. Consent of Sublandlord. Sublandlord hereby consents to the
foregoing assignment.

4. Termination of Assignor's Liability. Sublandlord hereby agrees
that, as of the Effective Date, Assignor shall be relieved of all liability as
subtenant under the Sublease, including without limitation, the obligation to
pay rent and the performance of the covenants and agreements on subtenant's
part to be performed thereunder, notwithstanding the provisions of Section
23.2 of the Sublease.
1
<PAGE>
5. Miscellaneous. This Agreement is executed in the Commonwealth of
Massachusetts and shall be governed by and construed in accordance with the
laws of the Commonwealth of Massachusetts. This Agreement shall be binding
upon and inure to the benefit of the parties hereto and their respective
successors and assigns. This Agreement may be signed in counterparts, all of
which shall constitute but one and the same instrument. This Agreement
contains the entire agreement among the parties with respect to the subject
matter hereof, and shall supersede any and all prior agreements, written or
oral, with respect to the subject matter hereof. This Agreement may only be
amended by written instrument executed by the parties hereto.

IN WITNESS WHEREOF, the parties have hereunto executed this Agreement as
an instrument under seal, all as of the day and year first above written.

SERAGEN, INC.

By:/s/ Reed R. Prior
Name: Reed R. Prior
Title: Chairman and Chief Executive Officer

MARATHON BIOPHARMACEUTICALS, L.L.C.

By:/s/ Kenneth G. Condon
Kenneth G. Condon, President

SIERRACOM

By:/s/ Peter Sullivan
Name: Peter Sullivan
Title: Vice President

2
<PAGE>

AMENDMENT NO. 5
CONSULTING AGREEMENT

This Amendment, effective as of January 1, 1998, is made by and
between Seragen, Inc., a Delaware corporation having an address at
97 South Street, Hopkinton, Massachusetts ("Seragen") and John R.
Murphy, Ph.D., having an address at 130 Appleton Street, #1E,
Boston, Massachusetts 02116 (the "Consultant").

WHEREAS, the parties entered into a Consulting Agreement effective
January 1, 1992, which was amended effective October 1, 1994,
October 1, 1995, January 1, 1996, and January 1, 1997
(collectively, the "Agreement"); and

WHEREAS the parties now wish to extend the term of the Agreement;

NOW, THEREFORE, Seragen and the Consultant agree to amend the
Agreement as follows:

1. The Agreement shall continue until December 31, 1998.

2. This Amendment shall be made a part of the Agreement and
attached to the agreement. Except as provided in this Amendment,
all other terms and conditions of the Agreement shall remain in
force.

IN WITNESS WHEREOF, the parties have cause this Amendment to
be executed as of the date first written above.

ACCEPTED AND AGREED:

SERAGEN, INC. JOHN R. MURPHY, PH.D.

/s/Reed R. Prior /s/John R. Murphy, Ph.D.
-------------------- -------------------------
Reed R. Prior
Chairman and Chief Executive Officer

<PAGE>

SUBLEASE

THIS SUBLEASE is made effective as of January 1, 1998 by and between
520 COMMONWEALTH REAL ESTATE CORPORATION, a Massachusetts corporation
("Sublandlord") and SERAGEN, INC., a Delaware corporation ("Subtenant").

RECITALS:

WHEREAS, by Lease dated September 24, 1992 (the "Lease") by and between
Harold Nahigian, as Landlord ("Landlord"), and Subtenant, as Tenant, Subtenant
leased the entire building located at 97 South Street, Hopkinton,
Massachusetts, containing approximately 64,287 square feet of space (the
"Premises"); and

WHEREAS, Subtenant has assigned all of its right, title and interest as
Tenant under the Lease to Sublandlord, all pursuant to an Assignment of Lease
and Agreement dated as of December 31, 1997, by and among Subtenant,
Sublandlord and Landlord; and

WHEREAS, Subtenant and Sublandlord each desire that a certain portion of
the Premises be sublet to Subtenant, which portion contains approximately (I)
3,253 square feet of space ("Sublet Premises") and (ii) 1,052 square feet of
shared common area ("Common Area"), as more fully described in Exhibit A
attached hereto and incorporated by reference herein and all upon the terms
and conditions contained herein;

NOW THEREFORE, in consideration of the foregoing, and for other good and
valuable consideration, the receipt and sufficiency of which is hereby
acknowledged by the parties hereto, the parties hereto hereby agree as
follows:

1. Sublet Premises. Sublandlord does hereby sublease to Subtenant the
Sublet Premises for the term and upon the conditions hereinafter
provided.

2. Proportionate Share. The parties agree that Subtenant's "Proportionate
Share" of the Premises is 5.88%.

3. Term. This Sublease shall commence on January 1, 1998 and shall continue
until January 31, 1999. Subtenant shall have two successive options to
extend the term of this Sublease each for a period of one year for the
Rent specified in Sections 4 and 5 of this Sublease (i.e., if, and only
if, Subtenant exercises the option to extend the term of this Sublease
for an additional year, it will have an option at the end of such year to
extend the term for a second year). If Subtenant desires to extend this
Sublease, it shall provide written notice to Sublandlord not less than
ninety (90) prior to the termination of this Sublease or the first
extension thereof.
1
<PAGE>
4. Rent. Subtenant shall pay to Sublandlord, monthly in advance on the
first day of each month, Sublandlord's Base Rent for the Sublet Premises
pursuant to the Lease, and 50% of Sublandlord's Base Rent for the Common
Area pursuant to the Lease.

5. Additional Rent. Subtenant shall pay to Sublandlord its Proportionate
Share of any Additional Rent payable by Sublandlord pursuant to Article
IV of the Lease and Section 6.6 of the Lease. Sublandlord shall notify
Subtenant of any such Additional Rent payable by Sublandlord under
Article IV of the Lease.

6. Assignment and Sub-subletting. Subtenant shall have no right to assign
its interest under this Sublease or to further sublet all or any portion
of the Sublet Premises, without first obtaining the written consent of
Sublandlord, which consent may be withheld in Sublandlord's sole and
absolute discretion.

7. Incorporation of Lease. Except as set forth in this Sublease, this
Sublease shall otherwise be on the same terms and conditions as the
Lease, which is hereby incorporated by reference herein; provided,
however, that (i) each reference in the Lease to the "Lessor" shall be
deemed to be a reference to Sublandlord hereunder, each reference in the
lease to "Lessee" shall be deemed to be a reference to Subtenant
hereunder, and each reference in the Lease to the "Demised Premises"
shall be deemed to be a reference to the Sublet Premises hereunder;
(ii) in any instance or case where the consent of Landlord under the
Lease is required for the exercise or enjoyment of Tenant's rights under
the Lease, such consent shall be deemed for purposes of this Sublease to
be required by both Sublandlord under this Sublease and Landlord under
the Lease, and the giving of such consent by Sublandlord under this
Sublease shall be subject in all respects to the further consent of
Landlord under the Lease; and (iii) the provisions of Articles XXXI
and XXXIII of the Lease shall not be incorporated into this Sublease.

8. Entire Agreement. This Sublease represents the entire agreement between
the parties hereto with respect to the subject matter hereof, and
supersedes any and all prior agreements or drafts, written or oral, with
respect to the subject matter hereof.

9. Notices. Any notice given by either party hereunder shall be in writing
and shall be deemed given if delivered by hand, posted by certified mail,
return receipt requested, or delivered by a nationally recognized
overnight courier, addressed as follows:

If to Sublandlord: Boston University
881 Commonwealth Avenue
Boston, Massachusetts 02215
Attention: Treasurer

If to Subtenant: Seragen, Inc.
97 South Street
Hopkinton, Massachusetts 01748
Attention: President

11. Governing Law. This Sublease shall be governed by and constructed in
accordance with the laws of the Commonwealth of Massachusetts.

IN WITNESS WHEREOF, the parties hereto have hereunto caused this Sublease
to be executed as an instrument under seal by their duly authorized officers,
all as of the day and year first above written.

SUBLANDLORD:

520 COMMONWEALTH REAL ESTATE
CORPORATION

By: /s/ Kenneth G. Condon
----------------------------
Kenneth G. Condon, President

SUBTENANT:

SERAGEN, INC.

By: /s/ Reed R. Prior
--------------------------------
Reed R. Prior, Chairman and CEO

2
<PAGE>

SECOND SUBLEASE

THIS SECOND SUBLEASE is made effective as of January 1, 1998, by and
between MARATHON BIOPHARMACEUTICALS, LLC a Massachusetts limited liability
company ("Second Sublandlord"), and SERAGEN, INC., a Delaware corporation
("Second Subtenant").

RECITALS:

WHEREAS, by sublease dated October 12, 1995, and amendments dated
June 25, 1996, and February 21, 1997 (the "First Sublease"), by and between
SierraCom, a division of Sierra Networks, Inc. ("First Sublandlord") and
Second Subtenant, Second Subtenant subleased certain premises of a building
located at 99 South Street, Hopkinton, Massachusetts, containing
approximately 7,202 square feet of space (the "Premises");

WHEREAS, Second Subtenant has assigned all of its right, title and
interest as subtenant under the First Sublease to Second Sublandlord, all
pursuant to an Assignment of Lease and Agreement dated as of December 31,
1997, by and among Second Subtenant, Second Sublandlord, and First
Sublandlord; and

WHEREAS, Second Subtenant and Second Sublandlord each desires that
a certain portion of the Premises be sublet to Second Subtenant, which
portion contains approximately (I) 590 square feet of space ("the Sublet
Premises") and (ii) 2,478 square feet of shared common area ("Common
Area"), as more fully described in Exhibit A attached hereto and
incorporated by reference herein and all upon the terms and conditions
contained herein;

NOW THEREFORE, in consideration of the foregoing, and for other
good and valuable consideration, the receipt and sufficiency of which is
hereby acknowledged by the parties hereto, the parties hereto hereby agree
as follows:

1. Sublet Premises. Second Sublandlord does hereby sublease to Second
Subtenant the Sublet Premises for the term and upon the conditions
hereinafter provided.

2. Proportionate Share. The parties agree that the Second Subtenant's
"Proportionate Share" of the Premises is 25.4%.

3. Term. This Second Sublease shall commence on January 1, 1998 and
shall continue until January 31, 1999. Second Subtenant shall have
two successive options to extend the term of this Second Sublease
each for a period of one year for the Rent specified in Sections 4
and 5 of this Second Sublease (i.e., if, and only if, Second
Subtenant exercises the option to extend the term of this Second
Sublease for an additional year, it will have an option at
the end of such year to extend the term for a second year). If
Second Subtenant desires to extend this Second Sublease, it shall
provide written notice to Second Sublandlord not less than ninety
(90) prior to the termination of this Second Sublease or the first
extension thereof.
1
<PAGE>
4. Rent. Second Subtenant shall pay to Second Sublandlord, monthly in
advance on the first day of each month, Second Subtenant's Base Rent
for the Sublet Premises pursuant to the First Sublease, and 50% of
Second Sublandlord's Base Rent for the Common Area pursuant to the
First Sublease.

5. Additional Rent. Second Subtenant shall pay to Second Sublandlord its
Proportionate Share of any Additional Rent payable by Second
Sublandlord pursuant to Article IV of the Lease and Section 6.4 of the
First Sublease. Second Sublandlord shall notify Second Subtenant of
any such Additional Rent payable by Second Sublandlord under Article
IV of the Lease.

6. Assignment and Sub-subletting. Second Subtenant shall have no right to
assign its interest under this Second Sublease or to further sublet all
or any portion of the Sublet Premises, without first obtaining the
written consent of Second Sublandlord, which consent may be withheld in
Second Sublandlord's sole and absolute discretion.

7. Incorporation of Lease. Except as set forth in this Second Sublease,
this Second Sublease shall otherwise be on the same terms and
conditions as the First Sublease, which is hereby incorporated by
reference herein; provided, however, that (i) each reference in the
First Sublease to the "Sublessor" shall be deemed to be a reference to
Second Sublandlord hereunder, each reference in the First Sublease to
"Sublessee" shall be deemed to be a reference to Second Subtenant
hereunder, and each reference in the First Sublease to the "Demised
Premises," the "Subleased Premises," or the "Premises" shall be deemed
to be a reference to the Sublet Premises hereunder; (ii) in any
instance or case where the consent of First Sublandlord under the First
Sublease is required for the exercise or enjoyment of Subtenant's
rights under the First Sublease, such consent shall be deemed for
purposes of this Second Sublease to be required by both Second
Sublandlord under this Second Sublease and Sublandlord under the First
Sublease, and the giving of such consent by Second Sublandlord under
this Second Sublease shall be subject in all respects to the further
consent of Sublandlord under the First Sublease; and (iii) the
provisions of Article XXXII of the First Sublease shall not be
incorporated into this Second Sublease.

8. Consent of First Sublandlord. This Second Sublease is conditional on
the parties obtaining the prior written consent of First Sublandlord
and, if First Sublandlord deems it necessary, First Sublandlord's
mortgagee(s) of record. The parties covenant and agree that they will
seek such consent and cooperate with each other and with First
Sublandlord for the purpose of obtaining such consent(s). Second
Sublandlord shall provide Second Subtenant with copies of such
consent(s) upon receipt thereof. If such consents are not received by
April 17, 1998, then at the option of the Second Subtenant,
exercisable by written notice to Second Sublandlord, this Second
Sublease shall be deemed null and void and of no force and effect.

9. Entire Agreement. This Sublease represents the entire agreement
between the parties hereto with respect to the subject matter hereof,
and supersedes any and all prior agreements or drafts, written or
oral, with respect to the subject matter hereof.

10. Notices. Any notice given by either party hereunder shall be in
writing and shall be deemed given if delivered by hand, posted by
certified mail, return receipt requested, or delivered by a
nationally recognized overnight courier, addressed as follows:

If to Second Sublandlord: Marathon Biopharmaceuticals, LLC
97 South Street
Hopkinton, Massachusetts 01748
Attention: President

With a copy to: Boston University
881 Commonwealth Ave
Boston, MA 02215
Attention: Treasurer

If to Second Subtenant: Seragen, Inc.
97 South Street
Hopkinton, Massachusetts 01748
Attention: President

11. Governing Law. This Second Sublease shall be governed by and
constructed in accordance with the laws of the Commonwealth of
Massachusetts.

IN WITNESS WHEREOF, the parties hereto have hereunto caused this
Second Sublease to be executed as an instrument under seal by their duly
authorized officers, all as of the day and year first above written.

SECOND SUBLANDLORD:

MARATHON BIOPHARMACEUTICALS, LLC

By: /s/ Kenneth G. Condon
--------------------------
Kenneth G. Condon, Manager

SECOND SUBTENANT:

SERAGEN, INC.

By: /s/ Reed R. Prior
-------------------------------
Reed R. Prior, Chairman and CEO

FIRST SUBLANDLORD:

SIERRACOM

By: /s/ Peter Sullivan
-----------------------
Name: Peter Sullivan
Title: Vice President

2
<PAGE>

WAIVER NO. 5

Reference is made to the Employment Agreement dated as
of November 6, 1996 between Seragen, Inc. (the "Company") and the undersigned,
as amended (collectively the "Agreement"). Pursuant to the Agreement and
subsequent waivers, the Company agreed to file on or before December 31, 1997,
a registration statement on Form S-8 (the "Registration Statement")
registering under the Securities Act of 1993 all shares issued or to be issued
pursuant to the exercise of the stock options granted to Mr. Prior pursuant to
the Agreement.

The undersigned waives the Company's obligation under
the Agreement to file the Registration Statement by the December 31, 1997
deadline, and agrees that the Company will have met its obligations under the
Agreement to file the Registration Statement if the Registration Statement is
filed on or before July 1, 1998.

Except as expressly waived in this Waiver No. 5, all
other obligations of the Company contained in the Agreement shall remain in
full force and in effect.

EXECUTED as of the 5th day of February, 1998.

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

<PAGE>

WAIVER NO. 3

Reference is made to the Employment Agreement dated as
of January 15, 1997 between Seragen, Inc. (the "Company") and the undersigned,
as amended (collectively the "Agreement"). Pursuant to the Agreement and
subsequent waivers, the Company agreed to file on or before December 31, 1997,
a registration statement on Form S-8 (the "Registration Statement")
registering under the Securities Act of 1993 all shares issued or to be issued
pursuant to the exercise of the stock options granted to Ms. Chen pursuant to
the Agreement.

Except as expressly waived in this Waiver No. 3, all
other obligations of the Company contained in the Agreement shall remain in
full force and in effect.

EXECUTED as of the 17th day of February, 1998.

/s/ Elizabeth Chen
---------------------
Elizabeth Chen

<PAGE>

WAIVER

Reference is made to the Amended and Restated Employment
Agreement dated as of September 22, 1997 between Seragen, Inc. (the "Company")
and the undersigned (the "Agreement"). Pursuant to the Agreement, the Company
agreed to file on or before December 31, 1997, a registration statement on
Form S-8 (the "Registration Statement") registering under the Securities Act
of 1993 all shares issued or to be issued pursuant to the exercise of the
stock options granted to Dr. Nichols pursuant to the Agreement.

The undersigned waives with the Company's obligation
under the Agreement to file the Registration Statement by the December 31,
1997 deadline, and agrees that the Company will have met its obligations under
the Agreement to file the Registration Statement if the Registration Statement
is filed on or before July 1, 1998.

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

EXECUTED as of the 23rd day of February, 1998.

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

<PAGE>

WAIVER AGREEMENT

This Waiver Agreement is made as of October 28, 1997, by and between
Boston University, Leon C. Hirsch, Turi Josefsen, Gerald S.J. Cassidy and
Loretta P. Cassidy (individually, a "Stockholder" and collectively, the
"Stockholders"), Reed R. Prior ("Prior"), and Seragen, Inc. (the "Company").

WHEREAS, the Stockholders, Prior and the Company are the parties to
a certain Stockholders Agreement, dated as of November 6, 1996 (the
"Stockholders Agreement");

WHEREAS, Section 2.1 of the Stockholders Agreement requires the
Stockholders to take or cause to be taken such actions as may be required from
time to time to establish and maintain the number of directors comprising the
whole board of directors of the Company at nine;

WHEREAS, the parties acknowledge that, given the current financial
and business problems faced by the Company, it is difficult to attract the
caliber of directors contemplated by the parties at the time they entered into
the Stockholders Agreement;

WHEREAS, the parties believe that until it is possible to attract
appropriate additional candidates to serve as directors of the Company, it is
in the best interests of the parties and the Company that the size of the
board of directors be set at six directors;

NOW THEREFORE, in consideration of the foregoing premises and other
good and valuable consideration, the receipt and sufficiency of which are
hereby acknowledged, the parties hereto, intending to be legally bound, hereby
agree as follows:

Until such time as it is possible to attract as additional
candidates to serve as directors of the Company persons who have sufficient
experience and stature in the pharmaceutical industry to make their election
to the board of directors of the Company desirable, the number of directors
that comprise the whole board of the Company may be set at six. At such time
as, in the reasonable judgment of Prior after consultation with the other
members of the Company's board of directors, additional appropriate candidates
for the Company's board of directors can be identified, the size of the board
of directors of the Company shall be increased, up to a maximum of nine, as
necessary to permit or facilitate such candidates' election.

The provisions of Section 2.1 of the Stockholders Agreement are
hereby amended and waived to the extent necessary to give effect to the
provisions of the preceding paragraph.

IN WITNESS WHEREOF, the parties hereto have executed this Waiver
Agreement to be effective as of the day first set forth above.

BOSTON UNIVERSITY

By: /s/ Kenneth G. Condon
--------------------------
Kenneth G. Condon
Vice President for
Financial Affairs

/s/ Leon C. Hirsch
--------------------------
Leon C. Hirsch

/s/ Turi Josefsen
--------------------------
Turi Josefsen

/s/ Gerald S.J. Cassidy
--------------------------
Gerald S.J. Cassidy

/s/ Loretta P. Cassidy
--------------------------
Loretta P. Cassidy

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

SERAGEN, INC.

By: /s/ Jean C. Nichols, Ph.D.
--------------------------
Jean C. Nichols, Ph.D.
President and Chief
Technology Office

EXHIBIT 21

List of Subsidiaries

Subsidiary Name Jurisdiction of Incorporation
- - --------------- -----------------------------
Seragen Technology, Inc. Delaware

106
<PAGE>

Exhibit No 23.1

CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS

As independent public accountants, we hereby consent to the incorporation of
our reports, included in this Form 10-K, into the Company's previously filed
Registration Statements Nos. 333-12613, 33-93792, 33-84556, 33-74396,
and 33-59644.

/s/ Arthur Andersen LLP
ARTHUR ANDERSEN LLP

Boston, Massachusetts
March 30, 1998

107
<PAGE>

Exhibit No 23.2

CONSENT OF INDEPENDENT ACCOUNTANTS

We consent to the incorporation by reference in the registration statements of
Seragen, Inc. on Form S-3 (File No.'s 333-12613, 33-93792 and 33-74396) and on
Form S-8 (File No.'s 33-84556 and 33-59644) of our report, which includes an
explanatory paragraph concerning factors which raise substantial doubt about
the Company's ability to continue as a going concern, dated February 23, 1996,
on our audits of the financial statements of Seragen, Inc. as of December 31,
1995 which report is included in the 1997 Annual Report on Form 10-K.

/s/ Coopers & Lybrand L.L.P.
Coopers & Lybrand L.L.P.

Boston, Massachusetts
March 30, 1998

108
<PAGE>

<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from financial
statements for the twelve month period ended December 31, 1997 and is
qualified in its entirety by reference to such financial statements.
</LEGEND>

<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-1-1997
<PERIOD-END> DEC-31-1997
<CASH> 5,503,535
<SECURITIES> 0
<RECEIVABLES> 1,152,253
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 6,727,853
<PP&E> 15,064
<DEPRECIATION> 0
<TOTAL-ASSETS> 8,811,565
<CURRENT-LIABILITIES> 9,853,412
<BONDS> 0
0
30,323,231
<COMMON> 214,448
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 8,811,565
<SALES> 0
<TOTAL-REVENUES> 4,713,686
<CGS> 0
<TOTAL-COSTS> 20,621,239
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 172,366
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> (17,390,184)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (17,390,184)
<EPS-PRIMARY> (.88)
<EPS-DILUTED> 0

</TABLE>