<PAGE>   1
 
================================================================================
 
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                            ------------------------
 
                                   FORM 10-K
(MARK ONE)
 
[X]   ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
       SECURITIES EXCHANGE ACT OF 1934
 
                  FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
 
                                       OR
 
[  ]   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
       SECURITIES EXCHANGE ACT OF 1934
 
        FOR THE TRANSITION PERIOD FROM ______________ TO ______________
 
                         COMMISSION FILE NUMBER 0-22890
 
                          SANGSTAT MEDICAL CORPORATION
             (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
 
<TABLE>
<S>                                           <C>
                   DELAWARE                                    94-3076-069
           (STATE OF INCORPORATION)                (I.R.S. EMPLOYER IDENTIFICATION NO.)
</TABLE>
 
                                1505 ADAMS DRIVE
                          MENLO PARK, CALIFORNIA 94025
               (ADDRESS OF PRINCIPAL EXECUTIVE OFFICE, ZIP CODE)
 
       Registrant's telephone number, including area code: (415) 328-0300
 
        Securities registered pursuant to Section 12(b) of the Act: None
 
          Securities registered pursuant to Section 12(g) of the Act:
                         Common Stock ($.001 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 a 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. [  ]
 
     The aggregate market value of voting stock held by non-affiliates of the
Registrant, as of March 10, 1997 was approximately $340,153,573 (based on the
closing price for shares of the Registrant's Common Stock as reported by the
Nasdaq National Market System for the last trading day prior to that date).
Shares of Common Stock held by each officer, director, and holder of 5% or more
of the outstanding Common Stock have been excluded in that such persons may be
deemed to be affiliates. This determination of affiliate status is not
necessarily a conclusive determination for other purposes.
 
     On March 10, 1997 approximately 13,139,870 shares of the Registrant's
Common Stock, $.001 par value, were outstanding.
================================================================================
<PAGE>   2
 
                                     PART I
 
ITEM 1.  BUSINESS
 
OVERVIEW
 
     SangStat, The Transplant Company, is a specialty pharmaceutical company
applying a disease management approach to improve the outcome of organ
transplantation. The Company's products and product candidates are designed to
prevent and treat graft rejection and monitor transplant patients throughout
their lifetimes. SangStat's lead drug candidates are THYMOGLOBULIN for the
treatment of acute graft rejection episodes, and CYCLOSPORINE, for chronic daily
immunosuppression to prevent graft rejection. In January 1997, the Company filed
a Product License Application ("PLA") with the FDA for marketing approval of
THYMOGLOBULIN. This application was accepted for review by the FDA in February
1997. In November 1996, the Company filed an Abbreviated Antibiotic Drug
Application ("AADA"), which the FDA accepted for review in January 1997, for
marketing approval of its proprietary CYCLOSPORINE formulation. Cyclosporine,
which to date has only been marketed by Novartis AG ("Novartis"), is the leading
immunosuppressive drug used by transplant patients, with reported worldwide
sales of $1.2 billion in 1995. SangStat is also conducting clinical trials for a
generic AZATHIOPRINE product candidate for use as an adjunct therapy in chronic
immunosuppression. ALLOTRAP 2702, a proprietary HLA peptide designed to promote
graft acceptance, is in Phase II clinical trials in Europe. To further the
Company's goal of providing comprehensive disease management, the Company has
established THE TRANSPLANT PHARMACY, a pilot program designed to provide mail
order distribution of drugs and transplant patient management services.
 
     SangStat's strategy is to provide a comprehensive disease management
approach to the organ transplantation market by developing a family of products
that address the needs of patients at each stage of transplant care from
pre-transplant monitoring to the lifetime post-transplant phase. The Company
plans to capitalize on this broad product pipeline by developing relationships
with key providers and managed care organizations to better integrate the
management of the transplant patients' care and improve outcomes and lower
costs.
 
ORGAN TRANSPLANTATION
 
     Organ transplantation can save or improve the lives of patients with organ
failures for whom there are few alternative treatments. Transplantation involves
surgically replacing the failed organ of a transplant recipient with a viable
organ from a donor. Because the success of a transplant depends on the degree of
compatibility between the organ donor and the recipient, a typical transplant
candidate must wait on a national computerized waiting list until a compatible
organ can be found. Currently, there are approximately 80,000 transplant
candidates registered on waiting lists in approximately 500 transplant centers
throughout North America and Europe. At any given time, approximately 70% of
these patients are waiting for kidney transplants. The other patients are
waiting for liver, heart, heart-lung, bowel or pancreas transplants. Each year
approximately 50,000 new patients receive donated organs. In order to prevent
rejection of implanted organs, recipients must begin a life-long regimen of
immunosuppressive therapy immediately upon receiving a donated organ. There are
more than 200,000 patients in North America and Europe that need daily
immunosuppressive therapy to prevent graft rejection and graft loss.
 
     In addition to being a life-saving and life-enhancing procedure,
transplantation can be cost-effective as well. For example, the cost over a
10-year period of a kidney transplant is generally less than the cost of
dialysis. However, transplantation is still very costly, due in substantial part
to the costs of lifetime immunosuppressive therapy and associated side effects
as well as the costs of treating rejection and infection episodes. Therefore,
products that limit the need for immunosuppression and reduce the frequency and
severity of rejection and infection episodes could significantly improve the
cost-effectiveness of transplantation.
 
                                        1
<PAGE>   3
 
  The Transplant Immune Response
 
     The function of the immune system is to protect the body from damage caused
by invading microorganisms or other foreign matter, including donor organs. This
defensive function is performed by the humoral (B-cell) and cell-mediated
(T-cell) arms of the immune system. When challenged, the humoral and
cell-mediated systems interact and generate a coordinated immune response to
recognize, target and eliminate the pathogen or, in the case of transplantation,
the donor organ, thereby resulting in graft rejection. Specifically, the donor
organ antigens (HLA molecules) are recognized by the immune system of the graft
recipient as being "non-self."
 
     The immune response to a transplant depends on the level of compatibility
between donor and recipient HLA molecules. The HLA system consists of a complex
array of molecules playing a key role in the normal immune response as well as
in graft acceptance or rejection. HLAs were originally discovered by Dr. Jean
Dausset, a scientific advisor to SangStat, and Nobel Prize laureate for this
pioneering discovery.
 
     Molecular differences between an organ donor's and a recipient's HLAs lead
to the recognition of the donor's HLAs as non-self by the recipient's immune
system. Graft rejection results when the recipient's immune system T-cell
progenitors recognize the donor's HLAs as non-self, activate against the graft
and proliferate into numerous cytotoxic T-cells. When these cytotoxic T-cells
invade and attack the graft, rejection and loss of the organ often occur. In
addition to T-cells, anti-HLA antibodies can play an active role in the
anti-graft immune response. The presence of anti-HLA antibodies in the
recipient's blood may indicate a high risk of accelerated rejection. Maximizing
HLA compatibility by selecting, for a given recipient, the donor whose HLAs are
as similar as possible to the recipient's HLAs and not recognized by antibodies
preexisting in the recipient's blood, is key to reducing the risk of rejection.
 
     However, because it is extremely difficult to get a perfect HLA match
except in identical twins, rejection episodes occur frequently. Current
therapies used to reduce the occurrence of rejection episodes involve the
chronic use of immunosuppressants, which impair the entire immune system of the
recipient. Even with the use of immunosuppressants, graft rejection remains
frequent, and their chronic use can lead to serious side effects, including
life-threatening infections, kidney or liver toxicity and cancers.
 
  The Transplant Process
 
     A typical transplant patient progresses through three clinical phases: the
pre-transplant phase; the acute phase (surgery and first year post-transplant);
and the lifetime post-transplant phase.
 
     The Pre-Transplant Phase.  A transplant candidate is registered on a
national computerized waiting list, which ranks candidates according to the
urgency of the need for a transplant and maintains the data necessary to
determine if a compatible organ becomes available. A kidney transplant candidate
usually waits months or even years for a compatible organ and continues to
undergo dialysis several times per week to substitute for the failed kidneys.
Typically, a blood sample is collected as frequently as monthly and evaluated to
estimate the candidate's level of immune sensitization against a panel of HLA
molecules representative of the population of prospective organ donors. This
procedure, called Panel Reactive Antibody (PRA) testing utilizes
microlymphocytotoxicity, a complex and subjective laboratory method developed in
the 1960s. Traditional HLA compatibility testing lacks accuracy and
standardization and therefore often results in poor matching of donors and
recipients.
 
     The Acute Phase (Surgery and First Year Post-Transplant).  Most organs are
retrieved from trauma victims who are declared brain-dead but maintain cardiac
function until their organs are removed. The harvested organs are stored in a
preservation solution to prevent deterioration and then tissue typed to
determine the level of HLA antigens. Each organ is cross matched with
approximately 100 potential recipients on the transplant waiting lists. Once the
best candidate for each organ has been chosen, the
 
                                        2
<PAGE>   4
 
organ is shipped in an organ preservation solution to the recipient's transplant
center. The length of storage time allowed before transplant varies among organ
types and can severely limit the distance an organ can be shipped. The quality
of organ preservation is therefore an important factor contributing to the
viability of the transplant.
 
     Transplant surgery has become a relatively safe and standardized procedure.
After the transplant, the challenge for physicians is to prevent graft rejection
by suppressing the activity of T-cells. Consequently, the success of the
transplant is highly dependent on the immunosuppressive regimen which is
initiated the day of transplantation and continued daily for the rest of the
patient's life. In addition, organ recipients must be regularly monitored to
measure the body's immune response and blood drug levels and to identify acute
rejection episodes.
 
     Despite the use of immunosuppressants, during the first year following
transplantation many transplant patients (estimates range from 15% in certain
populations to more than 60% in others, depending on risk factors and therapy)
undergo one or more graft rejection episodes. During a rejection episode, the
body mounts an immune attack on the graft, resulting in impaired function of the
transplanted organ. Because rejection, infection and drug toxicity produce
similar symptoms, diagnosis of rejection may be difficult until it reaches an
advanced stage and is confirmed by an invasive graft biopsy. The only way to
stop the rejection process is by administering additional immunosuppressive
therapy, such as high doses of steroids, and/or anti-T-cell monoclonal and/or
polyclonal antibodies. In many cases, rejection can be arrested and organ damage
reversed. However, at the end of the first year, about 20% of kidney transplant
patients (and a higher percentage for other organs) have lost their grafts.
Surgery is typically required to remove the rejected kidney and the patient must
return to chronic dialysis and possibly receive a second transplant, which has a
lower probability of success than the first. Failure to reverse rejection of
other organs often results in the death of the patient.
 
     The Lifetime Post-Transplant Phase.  The use of immunosuppressants,
initiated during the acute phase, is continued daily throughout the patient's
lifetime to minimize or prevent the loss of the graft by acute or chronic
rejection. Conventional therapy typically combines several drugs, most commonly
cyclosporine, azathioprine and steroids, or alternative combinations for certain
patients using tacrolimus and/or mycophenolate mofetil. These drugs act
nonspecifically and broadly impair the recipient's immune system in order to
reduce the immune response against the graft. Cyclosporine is the leading
immunosuppressive drug used in the post-transplant phase. In 1995, worldwide
sales of Novartis' cyclosporines, Sandimmune and Neoral, were reported at $1.2
billion. Even with the use of immunosuppressants, patients have an approximate
5% to 20% risk of losing grafts per year during the first three years following
transplantation, and less than 50% of patients have functioning grafts after
approximately ten years.
 
                                        3
<PAGE>   5
 
PRODUCTS, PRODUCT CANDIDATES AND SERVICES
 
     SangStat's portfolio of complementary drugs, monitoring products, product
candidates and services are designed to prevent and treat graft rejection and
monitor patients throughout the patient's lifetime. The following table
summarizes SangStat's products, product candidates and services.
--------------------------------------------------------------------------------
 
<TABLE>
<CAPTION>
                                        POTENTIAL CLINICAL
TRANSPLANT PHASE    PRODUCT/SERVICE            USE                    STATUS(1)
-----------------  -----------------    ------------------    -------------------------
<S>                <C>                  <C>                   <C>
Pre-Transplant     PRA-STAT             Detects anti-HLA      Marketed
Monitoring                              antibodies in
                                        candidates
                   CROSS-STAT           Detects candidate     Marketed
                                        antibodies against
                                        a specific donor
 
Transplant         THYMOGLOBULIN(2)     Treats acute          PLA under review in U.S.;
Acute Care                              kidney rejection      NDS filed in Canada
                                        episodes
                   ALLOTRAP 2702        Promotes graft        Phase II trials (Europe)
                                        acceptance
                   CELSIOR(3)           Preserves organs      Clinical trials
                                        prior to
                                        transplantation
 
Lifetime Post-     CYCLOSPORINE         Chronic               AADA under review in U.S.
Transplant Care                         immunosuppression
                   AZATHIOPRINE         Chronic               Bioequivalence trials
                                        immunosuppression
                   MONITORING           Patient management    Clinical trials
                   PRODUCTS
 
                   THE TRANSPLANT       Mail order and        Piloting at selected
                   PHARMACY             patient management    centers
                                        program
</TABLE>
 
   ------------------------------------
   (1) "Phase I, II or III" indicates that the product candidate is in a
       certain stage of clinical trials. "Bioequivalence Trials" are clinical
       studies in healthy volunteers which assess pharmacokinetic parameters
       of the drug candidate against the reference drug to support an
       application for the approval of a generic drug without the need for
       safety and efficacy trials. "AADA under review" means that an
       Abbreviated Antibiotic Drug Application has been accepted for filing
       by the FDA and is now under review for approval in the U.S. on the
       basis that the product may be bioequivalent to an existing reference
       listed drug and may conform with AADA regulations. "NDS Filed" means
       that a New Drug Submission has been filed with the Health Protection
       Board. "PLA under review" means that a Product License Application for
       approval of a biological product has been accepted for filing by the
       FDA and is now under review for approval in the U.S. "Marketed" means
       that commercial sales of the product have commenced. See "--Government
       Regulation."
 
   (2) THYMOGLOBULIN is licensed exclusively from PMC for the United States
       and Canada and commercialized by PMC in many European countries. See
       "--Strategic Relationships."
 
   (3) CELSIOR was licensed from PMC and the Company has the exclusive rights
       to market the product in the United States and Canada. See
       "--Strategic Relationships."
--------------------------------------------------------------------------------
 
     Since its inception in 1988, SangStat has focused on the development of
products to improve the outcome of organ transplantation. The Company's revenue
is primarily derived from the distribution of the Company's therapeutic
transplantation product candidate, THYMOGLOBULIN in Canada and from sales of its
pre-transplant monitoring products PRA-STAT and CROSS-STAT in the United States,
Canada and Europe. Sales of organ transplantation products comprised 46%, 78%
and 88% of the Company's net product sales in 1994, 1995 and 1996, respectively.
 
                                        4
<PAGE>   6
 
  THYMOGLOBULIN
 
     Thymoglobulin is a pasteurized, rabbit anti-human thymocyte immunoglobulin
(polyclonal antibody preparation) which induces immunosuppression as a result of
T-cell depletion. The Company filed a PLA with the FDA for market approval in
January 1997 which was accepted for review by the FDA in February 1997. SangStat
has an exclusive license from PMC to market THYMOGLOBULIN in the United States
and Canada. Thymoglobulin is commercially available in many European countries
where it is a market leader in its category. Approved for use in 39 countries,
thymoglobulin has been commercialized and used to treat more than 30,000
patients principally in Europe by PMC since 1985.
 
     SangStat completed a pivotal Phase III human clinical trial in the United
States in August 1996. The trial was designed to demonstrate safety and efficacy
equivalent to current anti-T-cell therapy for the treatment of acute kidney
rejection episodes. The trial was a double-blinded, randomized, multi-center
Phase III clinical trial of THYMOGLOBULIN versus ATGAM (marketed by Pharmacia &
Upjohn Inc.) in the treatment of acute rejection episodes following renal
transplantation in adults. The 163 adult patients enrolled in the trial were
kidney transplant recipients with biopsy-proven acute graft rejection. Patients
randomized into the treatment groups were to receive either 1.5 mg/kg per day of
THYMOGLOBULIN or 15 mg/kg per day of ATGAM for 7 to 14 days and were followed
for three months following enrollment. Patients were stratified into groups
according to the degree of rejection severity (steroid resistant mild, moderate
or severe rejection). The severity of rejection was based on the kidney biopsy
using the standardized international Banff criteria. Of the 162 evaluable
patients in the trial, 82 received THYMOGLOBULIN and 80 received ATGAM. The
trial was conducted at 28 leading transplant centers around the United States.
 
     An intent-to-treat analysis of the data (primary endpoint, i.e. the major
variable in the trial) indicated that the observed overall success rate in the
reversal of acute rejection for THYMOGLOBULIN was 87.8% compared to an observed
overall rate of 76.3% for ATGAM. These results, which have not yet been reviewed
by the FDA, were statistically significant and demonstrated that THYMOGLOBULIN
was not just equivalent to ATGAM, but reversed rejection in a higher number of
cases (p = 0.027). However, because the study was designed to show equivalence,
there can be no assurance that the FDA will allow a claim of superiority.
Success, according to the primary endpoint, was the post-therapy return of serum
creatinine level (a measure of kidney function) to, or below, baseline level. A
preliminary intent-to-treat analysis of the secondary endpoints (i.e. secondary
variables in the trial) showed that the two therapies were equivalent for these
secondary endpoints. Secondary endpoints were (i) graft survival at Day 30, (ii)
Day 30 creatinine to baseline creatinine ratio and (iii) histological
improvement between enrollment and post-therapy biopsies. Patients on both
therapies experienced similar side effects and there was no difference in the
safety profile between the two therapies.
 
     SangStat believes that, because of the preclinical and clinical data
available on THYMOGLOBULIN from PMC, only the single completed Phase III trial
will be required in the United States to support FDA approval. However, there
can be no assurance that the results of a single Phase III clinical trial, in
combination with existing European safety and efficacy data, will be sufficient
to support an ELA, PLA, or any future ELA supplements needed for commercial
marketing. The Company filed an ELA and a PLA with the FDA in August 1996 and
January 1997, respectively. Both applications have been accepted for filing and
are now under review by the FDA. The Company intends to file an additional ELA
supplement for a new PMC facility necessary to meet North American market
demand. SangStat has filed an NDS and is generating fluctuating revenues through
the distribution of THYMOGLOBULIN in Canada under the EDR program, which permits
the distribution of certain products before final regulatory approval. In the
United States, SangStat has provided THYMOGLOBULIN for compassionate use for
over 50 patients. Data in support of the PLA submission were derived from
extensive European clinical trials and post-marketing surveys, as well as
experience in Canada under the EDR program. SangStat is developing THYMOSTAT, a
monitoring assay for THYMOGLOBULIN to assist in optimal definition of the
therapeutic regimen (i.e. monitoring blood levels of a product to determine
which blood levels lead to the best results for patients using the product).
 
                                        5
<PAGE>   7
 
  CYCLOSPORINE
 
     In North America and Europe there are more than 200,000 transplant
recipients requiring expensive daily immunosuppressive therapy for the rest of
their lives. The majority of these patients use cyclosporine. The Company
estimates that the current cyclosporine cost per patient is $7,000 to $8,000 per
year. Cyclosporine is a small, cyclic peptide that works by inhibiting T-cell
activation and preventing T-cells from attacking a transplanted organ. The
development of cyclosporine for the prevention of graft rejection was a medical
breakthrough in the early 1980's and resulted in the rapid growth of organ
transplantation. Sandimmune, the original formulation of cyclosporine was
introduced by Novartis, formerly Sandoz, in the United States in 1983. Neoral,
an improved formulation of cyclosporine with increased bioavailability, was
launched first in Europe in 1994 and then in the United States in September
1995. Currently, the majority of all new transplant recipients are started on
Neoral, and, as of the end of 1996, the Company estimates, based on information
released by Novartis, that more than 70% of European and 50% of the United
States transplant recipients have been initiated on, or converted to, Neoral. In
November 1996, SangStat filed an AADA with the FDA, which the FDA accepted for
review in January 1997, for marketing approval of its proprietary formulation of
CYCLOSPORINE. The Company believes its formulation of CYCLOSPORINE is
bioequivalent to Novartis' newest formulation, Neoral. Worldwide sales of
Novartis' cyclosporine in 1995 are reported at $1.2 billion.
 
     Two different formulations of the same drug are considered bioequivalent if
the drug's absorption rate, blood concentration and persistence in the
bloodstream are demonstrated to be equivalent in healthy volunteers in
controlled, crossover trials according to defined regulatory policy. Two key
pharmacokinetic parameters, area under the blood concentration vs. time curve
(AUC) and the maximum drug concentration (Cmax) are measured in human
bioequivalence trials. These parameters are calculated from drug levels measured
in the blood over a defined time period following dosing. AUC to a defined time
point (AUC (0-t)) and AUC to infinity (AUC (0-()) are calculated separately.
Among other factors, if the 90% confidence intervals (for the ratio of the log
transformed parameters of SangStat's CYCLOSPORINE and Neoral) are contained
within the range of 80% to 125%, the formulations are considered bioequivalent
under current FDA policy.
 
     SangStat's pivotal trial was a single-dose, randomized, cross over
bioequivalence trial in 36 healthy human volunteers comparing, under fasting
conditions, SangStat's CYCLOSPORINE with Neoral. Subjects had blood samples
taken at defined time points over a 36-hour period and the cyclosporine blood
levels were analyzed using a standardized, validated cyclosporine assay.
 
     Statistical comparison of the key pharmacokinetic parameters for SangStat's
CYCLOSPORINE and Neoral yielded the following results which the Company believes
demonstrate bioequivalence; however, the FDA has not yet reviewed any of these
data:
 
<TABLE>
<CAPTION>
                  SANGSTAT/NEORAL          90% CONFIDENCE
PARAMETER     LEAST SQUARES MEAN RATIO      INTERVAL(1)       POWER(2)
----------    ------------------------     --------------     --------
<S>           <C>                          <C>                <C>
Cmax                    99.6%                96.9 - 104%        99.99%
AUC(0-t)                99.8%                97.3 - 103%        99.99%
AUC(0-()                99.4%                97.0 - 103%        99.99%
</TABLE>
 
---------------
 
(1) Based on log transformed parameters.
 
(2) Power = Power (%) to detect 20% differences between treatments (a=0.05). For
    the study to be statistically significant, the power should be at least 80%.
 
     SangStat has now completed five human trials with its proprietary
CYCLOSPORINE formulation in a total of 119 healthy volunteers and patients. In
addition to the pivotal trial, a supporting trial in 21 subjects designed to
assess food effect on cyclosporine bioavailability also demonstrated
statistically significant bioequivalence between SangStat's CYCLOSPORINE and
Neoral under fed conditions. The
 
                                        6
<PAGE>   8
 
Company subsequently confirmed bioequivalence in two additional healthy
volunteer trials in 38 subjects (African Americans and females) and its first
patient trial in 24 kidney transplant recipients. In each of the pivotal and
additional trials, the incidence, severity or frequency of side effects was
similar between the two products. The Company continues to expand its global
regulatory clinical trial program with trials ongoing and planned for different
populations of organ transplant recipients, and expects to present the results
of these trials at upcoming transplant and regulatory meetings.
 
     Under current FDA regulations and policy, a generic cyclosporine that is
shown to be bioequivalent to Neoral may be approved without the need to
duplicate safety and efficacy trials. If the FDA approves SangStat's
CYCLOSPORINE based on bioequivalence to Neoral, SangStat intends to market its
formulation as a branded therapeutic substitute for Neoral.
 
     The Company has entered into an agreement for commercial scale production
of CYCLOSPORINE bulk material (i.e. the active ingredient of CYCLOSPORINE) from
an established fermentation manufacturing source. The agreement has an initial
term of ten years following the first regulatory approval of CYCLOSPORINE for
commercial sale in North America and Europe, subject to earlier termination upon
120 days notice in the event of a substantial breach by either party of its
material obligations under the agreement. The Company has also separately
contracted for the manufacture of the finished commercial supply (i.e. product
in completed dosage form) of its CYCLOSPORINE product candidate from an
established third-party source who will prepare bulk CYCLOSPORINE, provided by
the Company, for subsequent commercial sale and distribution worldwide by the
Company. The Company retains the exclusive commercial rights worldwide. There
can be no assurance that the Company's third-party manufacturers will perform
satisfactorily and any such failure may delay clinical trial development or the
submission of product for regulatory approval, impair the Company's ability to
deliver products on a timely basis, or otherwise impair the Company's
competitive position, which would have a material adverse effect on the
Company's business, financial condition, cash flows and results of operations.
See "Risk Factors--Limited Manufacturing Capability."
 
     Commercialization of the Company's CYCLOSPORINE drug candidate may be
several years away and successful development and commercialization is subject
to numerous risks, including failure to obtain regulatory approvals and
potential intellectual property claims of third parties, including those of
Novartis and its manufacturing contractors. In addition, if the Company is
unable to demonstrate to the FDA that its formulation is bioequivalent to
Neoral, a currently approved Novartis formulation, the Company would be required
to undertake additional development work and seek regulatory approval through
the potentially longer NDA process if it wished to continue to pursue this
product candidate.
 
     Cyclosporine is particularly difficult to manufacture since it must be
extracted from whole cells and carefully purified. There can be no assurance
that SangStat's CYCLOSPORINE drug candidate can be manufactured in commercial
quantities at an economical cost. There can be no assurance that SangStat can
manufacture, or have manufactured, formulate or commercialize its CYCLOSPORINE
product without infringing patent or other proprietary rights of Novartis or
other third parties, due in part to the large number and scope of these patents
and the difficulty of solubilizing cyclosporine into a formulated drug product.
Although Novartis' composition of matter patent for cyclosporine expired in
September 1995 in the United States, Novartis' patents relating to formulations
are expected to continue to present significant barriers to entry to potential
competitors.
 
     There can be no assurance that Novartis will not seek to protect its market
share through litigation, or other actions, against SangStat, its affiliates and
partners, or the FDA, or take actions which could adversely affect the
regulatory approval process. To date, no litigation has been commenced by
Novartis nor has Novartis threatened the Company with litigation. In November
1996, however, Novartis filed a citizens' petition with the FDA, seeking to
prohibit the use of Neoral as a reference drug for demonstration of
bioequivalence. Neoral was listed as a reference drug in the FDA's Approved Drug
Products with Therapeutic Equivalence Evaluations. There can be no assurance
that SangStat's formulation will not be found to infringe on Novartis'
proprietary rights. If Novartis brings suit against SangStat in the United
States or elsewhere, SangStat could be greatly delayed in obtaining regulatory
approval of any CYCLOSPORINE product, or in bringing any CYCLOSPORINE product
 
                                        7
<PAGE>   9
 
candidate to market, or could be enjoined from selling the product for a
significant period of time or ultimately be prevented from selling its
CYCLOSPORINE product candidate entirely. Should this happen, the Company does
not believe it would be able to obtain a license from Novartis on acceptable
terms because the Company believes cyclosporine is an important product for
Novartis and that Novartis would not want to diminish its profits from this
product by licensing it on acceptable terms to the Company. Failure to obtain
any such required license could prevent the Company from selling CYCLOSPORINE
entirely, which would have a material adverse effect on the Company's future
results of operations. A number of key employees were previously employed at
Novartis and it is possible a claim could be asserted against SangStat based on
such prior employment. While the Company believes that such a claim would be
without merit in part because such employees have informed the Company that they
did not have any non-competition agreements with Novartis and that they have not
violated any confidentiality agreements with Novartis, such a claim could
nonetheless result in litigation. Any litigation, whether or not resolved in
favor of the Company, is likely to be expensive, lengthy and time consuming and
could have a material adverse effect on the Company's business, financial
condition, cash flows and results of operations. To date no litigation has been
threatened, but there can be no assurance that Novartis will not commence
litigation or otherwise attempt to delay the marketing of CYCLOSPORINE in the
future. See "Risk Factors--Risks Associated with CYCLOSPORINE."
 
  AZATHIOPRINE
 
     Azathioprine is an immunosuppressant that inhibits the development of
T-cells by interfering with the differentiation and proliferation of activated
lymphocytes. It is used as an adjunct for the prevention of rejection in renal
organ transplantation. The patent for azathioprine composition of matter has
expired. Therapy is usually initiated shortly after transplantation and
continued daily for the patient's lifetime. It is used in conjunction with
cyclosporine and steroids in the standard "triple therapy" regimen used by the
majority of U.S. transplant centers. It is currently marketed as Imuran by Glaxo
Wellcome Ltd. and as generic azathioprine by Roxane Laboratories. United States
sales of Imuran and Azathioprine in 1996 were estimated to be $80 million.
 
     SangStat has developed a generic AZATHIOPRINE for use in transplantation as
an adjunct therapy in chronic immunosuppression and is currently conducting
human bioequivalency trials. Pending successful completion of these trials, the
Company intends to seek market approval by filing an Abbreviated New Drug
Application ("ANDA") with the FDA and to market the product as a branded
therapeutic substitute for Imuran.
 
  ALLOTRAP PEPTIDES
 
     ALLOTRAP 2702 is a small peptide derived from the Company's proprietary
sHLA technology that is designed to promote graft acceptance. SangStat believes
that the ALLOTRAP family of peptides may enable the body to accept a graft as
self without otherwise limiting the normal operation of the immune system, thus
possibly reducing the need for chronic immunosuppressive therapy. The Company
believes that if an ALLOTRAP peptide is exposed to the recipient's T-cell
progenitors simultaneously with the donor's HLAs, the T-cell progenitors are
deactivated. As a result, the T-cells are not activated against the donor's HLA
and do not reject the graft.
 
     The results of an initial Phase II study in Europe showed that ALLOTRAP
2702 was safe and well-tolerated in the study. A key finding, with respect to
biological activity, was the statistically significant in vivo inhibition of
cell-mediated cytotoxicity by ALLOTRAP 2702. Such inhibition had previously been
identified as a key endpoint in preclinical studies. The trial was conducted at
the Center of Transplantation at Nantes, the largest kidney/pancreas transplant
center in France, and was a double-blinded, randomized, placebo-controlled
safety and pharmacokinetic study of ALLOTRAP 2702 in 28 renal transplant
recipients. The results showed that there were no adverse effects attributed to
ALLOTRAP 2702 therapy, and no anti-peptide antibodies, which would lower the
peptide's potential immunosuppressive efficacy, could be detected. Furthermore,
renal function, as assessed by serum
 
                                        8
<PAGE>   10
 
creatinine levels at one and three months post-transplant, was similar between
the high dose peptide group and placebo group. In this study, the investigators
also found that ALLOTRAP 2702 resulted in a statistically significant difference
in cell-mediated ("Natural Killer" or "NK" cells) cytotoxicity in the group
receiving ten days' therapy as compared to controls (p = 0.001). This effect on
NK cell activity was previously demonstrated in preclinical studies to be a key
marker of efficacy whereby NK cell inhibition correlated with the prolongation
of graft survival without the need for continuous immunosuppression. These
results indicate that ALLOTRAP 2702 had a biological effect in humans and that
NK cell activity may serve as a surrogate endpoint in future trials. Additional
human studies are ongoing or planned. Additional ALLOTRAP peptides are in
preclinical research.
 
     Although the Company believes it conducted its clinical trials taking into
account both European and U.S. regulatory standards, there can be no assurance
that such data will be accepted by the FDA. The Company expects to conduct
several additional Phase II clinical studies to assess product efficacy and
optimize dosage before potentially conducting large-scale Phase III trials. The
use of ALLOTRAP peptides to promote graft acceptance in humans is novel and
unproven and there can be no assurance that such peptides will prove to be safe
or effective in humans for any clinical indication for any transplant type or at
any dosage.
 
  Pre-transplant HLA Monitoring Products and Product Candidates
 
     SangStat's pre-transplant monitoring products and product candidates are
intended to improve HLA compatibility between organ donors and recipients by
providing accurate, rapid, efficient and standardized testing. Current HLA
testing mainly involves a complex procedure, microlymphocytotoxicity, which is
run in specialized transplant laboratories by highly-trained technicians. These
tests require viable cells and multiple reagents. Results obtained from visual
reading using a microscope are often subjective. This method of HLA testing is
labor intensive and lacks accuracy and standardization, often causing
inconsistent results.
 
     sHLA constitutes a convenient biological material for testing transplant
candidates to guide HLA compatible donor selection. Found in whole blood and
plasma of all individuals, sHLA molecules are similar to cell HLAs: (i) they
have the same basic structure, (ii) they bind to anti-HLA antibodies and (iii)
they are polymorphic. SangStat has observed that sHLA molecules can be
accurately measured using immunoassay technology and substituted for cell HLAs
for detection of anti-HLA antibodies and HLA typing. SangStat's scientists
showed that sHLA molecules circulating in blood could be used for accurate and
rapid HLA typing and detection of anti-HLA antibodies. These assays form the
basis of the technology used to develop PRA-STAT and CROSS-STAT. The Company is
currently manufacturing and selling PRA-STAT and CROSS-STAT through its direct
sales force. These pre-transplant monitoring products and product candidates
together are expected to improve donor/recipient matching and post-transplant
monitoring.
 
     PRA-STAT is designed for Panel Reactive Antibody (PRA) testing to track the
appearance and disappearance of anti-HLA antibodies in transplant candidates,
and to analyze such antibodies. This guides the selection criteria of the
prospective donor for each transplant candidate. PRA testing is often performed
every month on patients waiting for transplants. PRA-STAT was introduced in
March 1994 and is currently being marketed.
 
     CROSS-STAT is designed to assess which candidate reacts the least to the
donor's HLAs, thus determining the best recipient for the available organ (cross
matching). If the candidate had antibodies against the donor's HLAs, the HLA
compatibility would be poor, and the candidate would not receive the transplant.
Crossmatching is the final step in determining the best donor/recipient
compatibility. The Company received FDA clearance for CROSS-STAT in May 1995 and
the product is currently being marketed. The Company believes that such
monitoring products could contribute to better management of transplant patients
and immunosuppressive therapy.
 
     In July 1996, the Company completed an agreement with Baxter Healthcare
Corporation ("Baxter") to reacquire marketing rights to PRA-STAT and CROSS-STAT
pre-transplant monitoring
 
                                        9
<PAGE>   11
 
products. The Company reacquired these products in order to market these
monitoring products directly and to better establish its own product
distribution capabilities. The terms of this reacquisition included the
acceptance of salable inventory returns and the purchase of certain equipment
from Baxter aggregating approximately $355,000, as well as the obligation to pay
Baxter royalties on future sales of the reacquired products.
 
  Organ Preservation Product Candidate
 
     The quality of organ preservation is an important factor contributing to
the viability of the transplant. Most organs are retrieved from trauma victims
who are declared brain-dead but maintain cardiac function until their organs are
removed. The harvested organs are stored in a preservation solution to prevent
deterioration and tissue typed to determine the HLA antigens. Following this,
each donor must be crossmatched with the patients on the transplant waiting
lists, each organ being crossmatched with approximately 100 potential
recipients. Once the best candidate for each organ has been chosen, the organs
are shipped to the recipient's transplant center. The amount of storage time
allowed before transplant varies between organ types and can severely limit the
distance an organ can be shipped. SangStat has acquired from PMC an exclusive
license to commercial rights for CELSIOR in the United States and Canada.
CELSIOR is a formulated solution to store and extend viability of organs between
organ recovery and transplantation. SangStat intends to assess the effect of
CELSIOR on organ viability and speed of post-transplant organ function recovery.
After consultation with the FDA, the Company recently voluntarily withdrew its
510(k) for a two-component CELSIOR product in favor of a one component product.
The Company is now conducting a clinical trial for a redesigned, one-component,
ready-to-use CELSIOR product candidate and intends to submit a new 510(k).
 
  Post-transplant Monitoring Product Candidates
 
     The efficacy and safety of a transplant depends on individual
susceptibility to graft rejection and immunosuppressive therapy. Few tools exist
for post-transplant surveillance to assist physicians in prescribing each
patient's immunosuppressive drug regimen. SangStat is developing several
monitoring products to assist the physician in customizing drug therapy for each
patient, such as THYMOSTAT to monitor patients treated with THYMOGLOBULIN.
 
  THE TRANSPLANT PHARMACY
 
     To further the Company's goal to provide comprehensive disease management,
in September 1996 SangStat established THE TRANSPLANT PHARMACY, a pilot program
designed to provide mail order distribution of drugs and other services for
transplant patients. Its first site of operation opened in September 1996 at the
University of Tennessee Bowld Hospital Organ Transplant Center in Memphis,
Tennessee. The Company has also established a central mail order facility in
Menlo Park, California.
 
     SangStat intends to develop a dedicated sales force to market its
transplant products directly to transplant centers and patients. To further this
goal and to provide comprehensive disease management, SangStat established THE
TRANSPLANT PHARMACY, a pilot program dedicated to providing direct distribution
by mail order of drugs and transplant patient management services in September
1996. This service will promote medication compliance, measure clinical and
economic outcomes, and provide feedback directly to clinicians. Patients
electing to enroll will be able to have all of their medications filled through
the program's central pharmacy. THE TRANSPLANT PHARMACY will also place a key
individual, such as a pharmacist, in each transplant center that joins the
program to interact directly with physicians, nurses and patients. THE
TRANSPLANT PHARMACY program seeks to provide a singular and integrated approach
to the management of transplantation, in which the Company's drugs, monitoring
products, and services can be supplied to meet the needs of individual
transplant centers and their patients.
 
                                       10
<PAGE>   12
 
  Xenotransplantation
 
     SangStat is working on a xenotransplantation technology (XE-9) through its
wholly-owned subsidiary, XenoStat, Inc. ("XenoStat"). Xenotransplantation is the
transplantation of an organ from one species to a different species. If
successful in humans, it could partly overcome the current limited availability
of organs. SangStat does not expect any application of the XenoStat technology
in humans for the next several years, if at all. Such applications will require
extensive clinical trials and regulatory approvals.
 
  XENOJECT Technology
 
     SangStat is developing a new platform technology called XENOJECT. The
Company believes XENOJECT will promote the elimination of undesirable cells by
halting the acceptance process of the immune system. XENOJECT specifically
redirects a graft immune response from its natural target to an undesirable
target by adding incompatible transplantation antigens to the surface of the
undesirable cell. XENOJECT may become an enabling technology which offers major
potential advantages over other specific immunotherapy technologies, such as
therapeutic monoclonal antibodies (murine or humanized) or immunotoxins.
Potential benefits include increased potency, decreased immunogenicity, easier
manufacturing (small molecule) and potential for oral administration. Potential
clinical applications include cancer and infectious disease therapy. Currently,
the Company conducts discovery research in the field of cancer and immune
disorders.
 
STRATEGIC RELATIONSHIPS
 
     The Company evaluates on an ongoing basis potential collaborative
relationships with corporate and other partners where such relationships may
complement and expand SangStat's research, development, sales and marketing
capabilities. There can be no assurance that the Company will be interested in
or able to negotiate any additional collaborative arrangements or that, if
established, such relationships will be successful.
 
  Pasteur Merieux Connaught
 
     In October 1993, SangStat entered into an exclusive licensing agreement
with PMC for the clinical development, marketing and sale of THYMOGLOBULIN and
CELSIOR in the United States and Canada. The agreement provides, among other
things, that (i) SangStat will use commercially reasonable efforts to obtain
regulatory approval through a Phase III clinical trial for THYMOGLOBULIN for
treatment of kidney rejection episodes; (ii) PMC will manufacture and supply
products for clinical and commercial use; and (iii) SangStat will pay a fee upon
achievement of milestones as well as royalties based upon commercial sales.
Although THYMOGLOBULIN has been approved and is sold on a commercial basis in
several European countries, there can be no assurance that regulatory approval
will be obtained in the United States or Canada. The agreement has an initial
term of fifteen years, subject to earlier termination upon 120 days notice of a
substantial breach by either party of its material obligations under the
agreement.
 
  Center of Transplantation of Nantes, France
 
     SangStat's subsidiary, SangStat Atlantique S.A., leases approximately 2,500
square feet of office space within the Center of Transplantation of Nantes,
France (Centre Hospitalier Universitaire de Nantes). The Center of
Transplantation is the largest kidney transplant center in France and has
provided equipment and personnel to perform development work for SangStat in the
area of immunointervention. Work projects are funded by SangStat on a project by
project basis. Although it is not obligated to do so, the Center of
Transplantation has provided limited funding for certain expenses incurred as
part of the clinical development of ALLOTRAP peptides.
 
                                       11
<PAGE>   13
 
  Stanford University
 
     SangStat has a worldwide, exclusive license from Stanford University to
make, sell or otherwise distribute products covered by patents and patent
applications on certain HLA peptides, including the ALLOTRAP peptides. Stanford
University has no obligation to conduct any further research with respect to
such ALLOTRAP peptides. The exclusivity of SangStat's rights under the license
agreement with Stanford University expire after the earlier of October 2007, or
10 years from the date of first commercial sale of any product covered by the
patent application licensed from Stanford University. Additionally, under the
terms of this agreement, SangStat must pay to Stanford University annual license
fees and a royalty on products covered by the license agreement.
 
COMPETITION
 
     The drugs being developed by the Company compete with existing and new
drugs being created by pharmaceutical, biopharmaceutical, biotechnology
companies and universities. Many of these entities have significantly greater
research and development capabilities, as well as substantial marketing,
manufacturing, financial and managerial resources and represent significant
competition for the Company. The principal factors upon which the Company's
products compete are product utility, therapeutic benefits, ease of use,
effectiveness marketing, distribution and price. The Company believes it
competes favorably with respect to all of these factors. With respect to
THYMOGLOBULIN, CYCLOSPORINE and AZATHIOPRINE, the Company will be competing
against large companies that have significantly greater financial resources and
established marketing and distribution channels for equivalent products. The
generic drug industry is characterized by intense price competition and the
Company anticipates that it will face this and other forms of competition. There
can be no assurance that developments by others will not render the Company's
products or technologies obsolete or noncompetitive or that the Company will be
able to keep pace with technological developments. Many of the competitors have
developed or are in the process of developing technologies that are, or in the
future may be, the basis for competitive products. Some of these products may
have an entirely different approach or means of accomplishing the desired
therapeutic effect than products being developed by the Company and may be more
effective and less costly. In addition, many of these competitors have
significantly greater experience than the Company in undertaking preclinical
testing and human clinical trials of pharmaceutical products and obtaining
regulatory approvals of such products. Accordingly, the Company's competitors
may succeed in commercializing products more rapidly than the Company. For
example, the Company believes that the degree of market penetration of its
CYCLOSPORINE drug candidate is dependent in part on whether the Company is the
first company to market a generic formulation of cyclosporine. The Company
believes that other companies are developing cyclosporine formulations that may
be marketed as generic equivalents. Were these competitors to develop their
products more rapidly and complete the regulatory process sooner, it could have
a material adverse effect on the Company's business, financial condition, cash
flows and results of operations.
 
     Treatments for the problems associated with transplantation that the
Company's products seek to address are currently available. For example,
Sandimmune and Neoral, marketed by Novartis, would compete with CYCLOSPORINE,
and Orthoclone OKT3, marketed by Johnson & Johnson and ATGAM, marketed by
Pharmacia & Upjohn Inc., would be competitive with THYMOGLOBULIN. Prograf
marketed by Fujisawa Pharmaceutical Co. Ltd, CellCept, marketed by Roche Ltd.
and Imuran, marketed by Glaxo Wellcome Ltd. would be competitive with
CYCLOSPORINE and AZATHIOPRINE. All of such products are commercially available
for use as immunosuppressive drugs and are widely prescribed. In addition, One
Lambda Inc., Pel Freez, Biotest Diagnostics Corp., and Genetic Therapy, Inc.
market products for pre-transplant HLA monitoring and Abbott Laboratories
markets a cyclosporine level post-transplant monitoring device, all of which are
widely used. Additional therapeutics and monitoring products are available or
are under development by these and other parties including, but not limited to:
Roche (mycophenolate mofetil), Glaxo-Wellcome and Roxane (azathioprine) American
Home Products Corp. (rapamycin), Fujisawa Pharmaceutical Co. Ltd.
 
                                       12
<PAGE>   14
 
(tacrolimus), Bristol Myers Squibb (CTLA4), and DuPont Merck (ViaSpan), and
other companies including, but not limited to Abbott, MedImmune Inc., Novartis,
BioTransplant, Inc., PMC, and Ivax Corp. In addition, THE TRANSPLANT PHARMACY
also competes with other drug distribution companies, such as Chronimed Inc.,
HMI and Stadtlander Drug Company. To the extent these companies' therapeutics,
monitoring products and services address the problems associated with
transplantation on which the Company has focused, they may represent significant
competition.
 
PATENTS AND PROPRIETARY TECHNOLOGY
 
     The Company's policy is to seek patent protection and to enforce its
intellectual property rights. The Company has ten issued patents which cover
several different test formats for sHLA-based and allied assays, including
PRA-STAT and CROSS-STAT. The Company's patents expire on various dates beginning
in the year 2008 and ending in the year 2015. SangStat has patent applications
pending in the United States in the pretransplant and post-transplant
monitoring, CYCLOSPORINE, XENOJECT and xenotransplantation areas. The Company
has also filed patent applications with respect to several product candidates in
many other countries, including Japan, Canada and the countries regulated by the
European Patent Office.
 
     There can be no assurance that SangStat can manufacture, or have
manufactured, formulate or commercialize its CYCLOSPORINE product without
infringing patent or other proprietary rights of Novartis or other third
parties. Although Novartis' composition of matter patent for cyclosporine
expired in September 1995 in the United States, Novartis' patents relating to
cyclosporine are expected to continue to present significant barriers to entry
to potential competitors. There can be no assurance that Novartis or others will
not seek to protect their market share through litigation or otherwise against
SangStat, its affiliates and partners or the FDA, or actions which adversely
affect the regulatory approval process, such as citizens' petitions, or that
SangStat's formulation will not be found to infringe Novartis' or others'
proprietary rights. If Novartis or others bring suit against SangStat, the
Company could be greatly delayed in bringing its CYCLOSPORINE product to market,
enjoined from selling the product for a significant period of time or ultimately
be prevented from selling its CYCLOSPORINE product candidate entirely. See "Risk
Factors--Risks Associated with CYCLOSPORINE."
 
     The Company's family of ALLOTRAP peptides is being developed under an
exclusive, worldwide, license from Stanford University. Although Stanford has
filed patent applications with respect to such technology, no assurance can be
given that the patent application or any of its claims will be allowed, valid,
or enforceable or that the Company's products will not infringe on other
patents.
 
     Patent applications in the United States are maintained in secrecy until
patents issue. Since publication of discoveries in the scientific or patent
literature tends to lag behind actual discoveries by several months, SangStat
cannot be certain that it was the first to discover compositions covered by its
pending patent applications or the first to file patent applications on such
compositions. There can be no assurance that the Company's pending patent
applications will result in issued patents or that any of its issued patents
will afford protection against a competitor.
 
     There can be no assurance that any patent issued to, or licensed by, the
Company will provide protection that has commercial significance. The Company's
patents involve specific claims and thus do not provide broad coverage. There
can be no assurance that the Company's patent applications or any claims of
these patent applications will be allowed, valid or enforceable, that any
patents or any claims of these patents will provide the Company with competitive
advantages for its products or that they will not be successfully challenged or
circumvented by the Company's competitors.
 
     The Company also relies on trade secrets and proprietary know-how which it
seeks to protect, in part, by confidentiality agreements with its employees and
consultants. There can be no assurance that these agreements will not be
breached, that the Company would have adequate remedies for any breach or that
the Company's trade secrets will not otherwise become known or independently
developed by competitors. The Company has registered or applied for registration
of the names of most of its products under development or commercialized for
research and development use.
 
                                       13
<PAGE>   15
 
However, there can be no assurance that any trademark registration will be
granted or not challenged by competitors.
 
MANUFACTURING
 
     The Company lacks facilities to manufacture any of its drug candidates in
accordance with current GMP prescribed by the FDA. The Company generally relies
on third parties to manufacture its compounds for clinical trials, including
THYMOGLOBULIN, CYCLOSPORINE, ALLOTRAP, AZATHIOPRINE and CELSIOR and has
contracted or expects to contract for commercial production of these compounds.
There can be no assurance that it will be able to enter into commercial scale
manufacturing contracts or that any other third-party arrangements can be
established on a timely or commercially reasonable basis, or at all. If such
arrangements are established, the Company will depend on such third parties to
perform their obligations effectively and on a timely basis. There can be no
assurance that such parties will perform and any such failure may delay clinical
development or submission of products for regulatory approval, or otherwise
impair the Company's competitive position which could have a material adverse
effect on the Company's business, financial condition, cash flows and results of
operations. In addition, the manufacturing of drug candidates involves a number
of technical steps and requires meeting stringent quality control specifications
imposed by government regulatory bodies and by the Company itself. Additionally,
such products can only be manufactured in facilities approved by the applicable
regulatory authorities. Because of these and other factors, the Company may not
be able to quickly and efficiently replace its manufacturing capacity in the
event that its manufacturers are unable to manufacture their products at one or
more of their facilities. If these manufacturers were affected for any reason,
the Company's ability to ship its products could be impaired, which could have a
material adverse effect on the Company's business, financial condition, cash
flows and results of operations.
 
     For certain of its potential products, the Company will need to develop
further its production technologies for use on a larger scale in order to
conduct human clinical trials and produce such potential products for commercial
sale at an acceptable cost. The Company intends to rely on its third-party
manufacturers to meet FDA required GMP. However, the Company is ultimately
responsible for any failure of such manufacturers to meet such requirements.
 
     The Company intends to obtain quantities of THYMOGLOBULIN for clinical
trials, distribution for compassionate use and commercial use under an agreement
with PMC. There can be no assurance that PMC or any other manufacturer will meet
FDA standards governing GMP or that any ELAs or ELA supplements required for
manufacturing will be filed, reviewed and approved or that PMC will fulfill its
obligations to SangStat.
 
     The Company has contracted for commercial scale production of cyclosporine
and azathioprine bulk material for its CYCLOSPORINE and AZATHIOPRINE drug
candidates from established third-party manufacturing sources. The Company has
also separately contracted for the manufacture of the finished commercial supply
of its CYCLOSPORINE product candidate from an established third-party source.
There can be no assurance that such third parties will perform satisfactorily
and any such failure may delay clinical trial development or the submission of
the product for regulatory approval, impair the Company's ability to deliver
products on a timely basis, or otherwise impair the Company's competitive
position, which could have a material adverse effect on the Company's business,
financial condition and results of operations. See "Risk Factors--Risks
Associated with CYCLOSPORINE."
 
     The Company is currently purchasing ALLOTRAP peptides for its clinical
trials under a supply agreement with UCB. The Company believes that UCB adheres
to established GMP production methods and complies with the Company's quality
control and quality assurance standards. More than 10 lots of clinical amounts
of ALLOTRAP peptides have been manufactured by UCB to date. The Company expects
to purchase ALLOTRAP peptides from UCB for commercial sale. However, there can
be no assurance that UCB will be able to scale up its manufacturing to support
the commercial sale of ALLOTRAP peptides or that supply of ALLOTRAP peptides to
the Company will be uninterrupted.
 
                                       14
<PAGE>   16
 
The Company does not expect to establish any significant manufacturing capacity
with respect to therapeutic products in the near future.
 
     With respect to its monitoring products including PRA-STAT and CROSS-STAT
the Company currently has in-house manufacturing capabilities and believes it
operates in compliance with GMP. However, there can be no assurance that
SangStat would pass a regulatory inspection from the FDA or other agencies. The
raw materials required for the majority of the Company's products and product
candidates are currently available from several suppliers in quantities
sufficient to conduct the Company's research, development and clinical
development activities. However, there can be no assurance that the raw
materials necessary for the manufacture of the Company's products and product
candidates will be available in sufficient quantities or at a reasonable cost.
Complications or delays in obtaining raw materials or in product manufacturing
could delay the submission of products for regulatory approval, product launch
and the initiation of new development programs, which could materially impair
the Company's business, financial condition, cash flows and results of
operations. See "Risk Factors--Limited Manufacturing Capability."
 
MARKETING
 
     SangStat currently retains all commercial rights to its products and plans
to market directly those products for which it obtains regulatory approval.
However, for certain territories, the Company may also enter into co-promotion
arrangements or other licensing arrangements with pharmaceutical, diagnostic or
biotechnology companies. SangStat intends to expand its direct sales force to
market all of its transplant products, including THYMOGLOBULIN, CYCLOSPORINE,
AZATHIOPRINE, CELSIOR, ALLOTRAP 2702, PRA-STAT, CROSS-STAT and other monitoring
products. Implementation of this strategy will depend on many factors, including
the market potential of any products the Company develops as well as on the
Company's financial resources. The Company sells certain of its monitoring
products for research or investigational use through a small, direct sales
operation. SangStat has also established THE TRANSPLANT PHARMACY, a pilot
program furthering the Company's approach of comprehensive disease management,
which will directly dispense all needed medications by mail to transplant
recipients enrolled in the program. See "Business--THE TRANSPLANT PHARMACY." To
the extent the Company enters into co-promotion or other licensing arrangements,
any revenues received by the Company will be dependent on the efforts of third
parties and there can be no assurance that such efforts will be successful. To
the extent that the Company itself undertakes to market a substantial portion of
its products, or is unable to enter into co-promotion agreements or to arrange
for third party distribution of its products, additional expenditures,
management resources and time will be required to develop a sales force.
 
GOVERNMENT REGULATION
 
     SangStat's research and development activities, preclinical studies and
clinical trials, and ultimately the manufacturing, marketing and labeling of its
products, are subject to extensive regulation by the FDA and other regulatory
authorities in the United States and other countries. The United States Federal
Food, Drug, and Cosmetic Act (the "Act") and the regulations promulgated
thereunder and other federal and state statutes and regulations govern, among
other things, the testing, manufacture, safety, efficacy, labeling, storage,
record keeping, approval, advertising, promotion, import and export of the
Company's products. Preclinical study and clinical trial requirements and the
regulatory approval process typically take years and require the expenditure of
substantial resources. Additional government regulation may be established that
could prevent or delay regulatory approval of the Company's product candidates.
Delays or rejections in obtaining regulatory approvals would adversely affect
the Company's ability to commercialize any product candidates the Company
develops and the Company's ability to receive product revenues or royalties. If
regulatory approval of a product candidate is granted, the approval may include
significant limitations on the indicated uses for which the product may be
marketed.
 
                                       15
<PAGE>   17
 
     The FDA and other regulatory authorities require that the safety and
efficacy of certain of the Company's product candidates be supported through
adequate and well-controlled clinical trials. If the results of pivotal clinical
trials submitted by the Company in applications for approval do not establish
the safety and efficacy of the Company's product candidates to the satisfaction
of the FDA and other regulatory authorities, the Company will not receive the
approvals necessary to market its product candidates, which would have a
material adverse effect on the Company's business, financial condition, cash
flows and results of operations.
 
  FDA Regulation--Approval of Therapeutic Products
 
     The Company's therapeutic products are regulated as drugs and, in the case
of THYMOGLOBULIN, as biological products. The steps ordinarily required before a
drug or biological product may be marketed in the United States include (a)
preclinical and clinical studies, (b) the submission to the FDA of an
Investigational New Drug application ("IND"), which must become effective before
human clinical trials may commence, (c) adequate and well-controlled human
clinical trials to establish the safety and efficacy of the drug, (d) the
submission to the FDA of New Drug Application ("NDA"), or Product License
Application ("PLA") together with an Establishment License Application ("ELA"),
if applicable, and (e) FDA approval of the application, including approval of
all product labeling.
 
     Preclinical tests include laboratory evaluation of product chemistry,
formulation and stability, as well as animal studies to assess the potential
safety and efficacy of each product. Preclinical safety tests must be conducted
by laboratories that comply with FDA regulations regarding Good Laboratory
Practice. The results of the preclinical tests are submitted to the FDA as part
of an IND and are reviewed by the FDA before the commencement of human clinical
trials. Unless the FDA objects to an IND, the IND will become effective 30 days
following its receipt by the FDA. There can be no assurance that submission of
an IND will result in FDA authorization to commence clinical trials or that the
lack of an objection means that the FDA will ultimately approve an application
for marketing approval.
 
     Clinical trials involve the administration of the investigational product
to humans under the supervision of a qualified principal investigator. Clinical
trials must be conducted in accordance with Good Clinical Practices ("GCP")
under protocols submitted to the FDA as part of the IND. Also, each clinical
trial must be approved and conducted under the auspices of an Institutional
Review Board ("IRB") and with patient informed consent. The IRB will consider,
among other things, ethical factors, the safety of human subjects and the
possible liability of the institution conducting the clinical trials.
 
     Clinical trials are typically conducted in three sequential phases, but the
phases may overlap. Phase I clinical trials involve the initial introduction of
the drug into healthy human volunteers. In Phase I clinical trials, the drug is
tested for safety (adverse effects), dosage tolerance, metabolism, distribution,
excretion and pharmacodynamics (clinical Pharmacology). Phase II clinical trials
are conducted in a target patient population to gather evidence about the
pharmacokinetics, safety and biological or clinical efficacy of the drug for
specific indications; to determine dosage tolerance and optimal dosage; and to
identify possible adverse effects and safety risks. When a compound has shown
evidence of efficacy and an acceptable safety profile in Phase II evaluations,
Phase III clinical trials are undertaken to evaluate clinical efficacy and to
test for safety in an expanded patient population. There can be no assurance
that any of the Company's clinical trials will be completed successfully or
within any specified time period. The Company or the FDA may suspend clinical
trials at any time, if either entity concludes that clinical subjects are being
exposed to an unacceptable health risk, or for other reasons.
 
     There can be no assurance that, after the results of the Phase III clinical
trials have been announced, the FDA will not disagree with the design of the
Phase III clinical trial protocols. In addition, the FDA inspects and reviews
clinical trial sites, informed consent forms, data from the clinical trial
sites, including case report forms and record keeping procedures, and the
performance of the protocols by clinical trial personnel to determine compliance
with good clinical practice. The FDA
 
                                       16
<PAGE>   18
 
also examines whether there was bias in the conduct of clinical trials. The
conduct of clinical trials is complex and difficult, especially in Phase III.
There can be no assurance that the design or the performance of the Phase III
clinical trial protocols will be successful.
 
     The results of preclinical studies and clinical trials, if successful, are
submitted in an application to seek the FDA approval to market the drug or
biological product for a specified use. The testing and approval process
requires substantial time and effort, and there can be no assurance that any
approval will be granted for any product or that approval will be granted
according to any schedule. The FDA may refuse to approve an application if it
believes that applicable regulatory criteria are not satisfied. The FDA may also
require additional testing for safety and efficacy of the drug. Moreover, if
regulatory approval of a drug product is granted, the approval will be limited
to specific indications. There can be no assurance that any of the Company's
product candidates will receive regulatory approvals for marketing, or if
approved, that approval will be for the indications requested by the Company.
 
     The FDA has implemented an accelerated review process for drugs that treat
serious or life threatening diseases and conditions. Such approval is subject to
the additional requirement that, following product launch, a Company continue to
study the drug to verify and describe its clinical benefit. Under these FDA
Accelerated Approval Procedures, the FDA may withdraw approval if the Company
fails to show due diligence in conducting post-marketing clinical trials or if
these clinical trials fail to demonstrate clinical benefit to the FDA's
satisfaction. When appropriate, the Company intends to pursue opportunities for
accelerated review of its products. The Company cannot predict the ultimate
opportunities for accelerated review of its products. The Company cannot predict
the ultimate effect of the accelerated review process on the timing or
likelihood of FDA review of any of its product candidates.
 
     For certain drugs that are generic versions of previously approved
products, there is an abbreviated FDA approval process. A sponsor may submit an
Abbreviated Application for: (1) a drug product that is the "same" as the drug
product listed in the approved drug product list published by the FDA (the
"listed drug") with respect to active ingredient(s), route of administration,
dosage form, strength and conditions of use recommended in the labeling; (2) a
drug product that differs with regard to certain changes from a listed drug if
the FDA has approved a petition from a prospective applicant permitting the
submission of an Abbreviated Application for the changed product; and (3) a drug
that is a duplicate of, or meets the monograph for, an approved antibiotic drug.
While the Company believes that CYCLOSPORINE and AZATHIOPRINE will qualify for
this abbreviated format, there can be no assurance that the FDA will not require
additional information or that these products will be approved for marketing.
 
     An Abbreviated Application need not contain the clinical and preclinical
data supporting the safety and effectiveness of the product. The applicant must
instead demonstrate that the product is bioequivalent to the listed drug. FDA
regulations define bioequivalence as the absence of a significant difference in
the rate and the extent to which the active ingredient moiety becomes available
at the site of drug action when administered at the same molar dose under
similar conditions in an appropriately designed study. If the approved generic
drug is both bioequivalent and pharmaceutically equivalent to the listed drug,
the agency may assign a code to the product in an FDA publication that will
represent a determination by the agency that the product is therapeutically
equivalent to the listed drug. This designation will be considered by third
parties in determining whether the generic drug will be utilized as an
alternative to the listed drug. There can be no assurance that the Company will
receive an "AB" rating on CYCLOSPORINE and AZATHIOPRINE, which in certain cases
would require substitution of the Company's CYCLOSPORINE for Neoral and
AZATHIOPRINE for Immuran.
 
  FDA Regulation--Approval of Monitoring Products
 
     The Company's monitoring products are regulated as medical devices by the
FDA and as such require regulatory clearance prior to commercial distribution.
New medical devices are generally
 
                                       17
<PAGE>   19
 
introduced to the market based on a premarket notification or "510(k)"
submission to the FDA in which the sponsor establishes that the proposed device
is "substantially equivalent" to a legally marketed Class I or Class II medical
device or to a Class III medical device for which the FDA has not required
premarket approval. The claim of substantial equivalence will generally have to
be supported by various types of data and materials including, in some
instances, preclinical and/or clinical test results.
 
     Following submission of the 510(k), the sponsor may not place the device
into U.S. commercial distribution until a substantial equivalence order is
issued by the FDA. The order may be sent within 90 days of submission but could
take significantly longer. The order may declare the FDA's determination that
the device is "substantially equivalent" to another legally marketed device and
allow the proposed device to be marketed in the United States. The FDA may,
however, determine that the proposed device is not substantially equivalent, or
may require further information, such as additional test data, before the FDA is
able to make a determination regarding substantial equivalence. Such
determination or request for additional information could delay the Company's
market introduction of its products by several quarters or more and could have a
material adverse effect on the Company's business, financial condition and
results of operations. There is no assurance that a 510(k) marketing clearance
will be granted for these products. Additional regulatory barriers may be
encountered by not meeting performance requirements of American Society of
Histocompatability and Immunogenetics ("ASHI") and the labeling requirements of
Clinical Laboratory Improvements Amendment ("CLIA").
 
     If the sponsor of a 510(k) cannot obtain an FDA order declaring substantial
equivalence, the sponsor will have to submit a premarket approval application
("PMA"). A PMA will generally have to be supported by extensive data, including
preclinical and clinical trial data, to prove the safety and efficacy of the
device. Although, by statute, the FDA has 180 days to review a PMA once it has
been accepted for filing. PMA reviews more often involve a significantly longer
time period, usually 12 to 24 months or longer from the date of filing. There
also can be no assurance that the data collected by the sponsor would support a
PMA marketing approval.
 
     The sponsor may be required to obtain an Investigational Device Exemption
("IDE") before it commences clinical testing to support a 510(k) submission or
PMA. Each clinical trial must be approved and conducted under the auspices of an
IRB and with patient informed consent. The IRB will consider, among other
things, ethical factors, the safety of human subjects, and the possible
liability of the institution conducting the clinical trials. For some products,
the sponsor must also submit the protocol to the FDA. The sponsor of the IDE may
be able to distribute limited amounts of these products for research use only if
certain FDA requirements are met. Some of these requirements may also apply to
distribution for clinical investigational use only. The FDA monitors and
oversees the use and distribution of all "research use only" and
"investigational use only" devices. There can be no assurances that the FDA will
determine that the Company's product candidates are substantially equivalent to
other legally marketed devices. The FDA may require the submission of a PMA,
which would delay the Company's market introduction of its products and could
have a material adverse effect on the Company's business, financial condition
and results of operations. The testing and approval process will require
substantial time and effort, and there can be no assurance that any approval
will be granted for any product or that approval will be granted according to
any schedule. The FDA may refuse to approve a PMA if it believes that applicable
regulatory criteria are not satisfied. The FDA may also require additional
testing for safety and efficacy of the device. Moreover, if the PMA is approved,
the approval will be limited to specific indications or uses. There can be no
assurance that any of the Company's product candidates will receive regulatory
approvals for commercial distribution, or if approved that approval will be for
the indications requested by the Company.
 
     Prior to any approval of the Company's products for marketing, all
manufacturing facilities must pass the FDA preapproval inspections.
 
                                       18
<PAGE>   20
 
  FDA Regulation--Post-Approval Requirements
 
     Even if regulatory approvals for the Company's product candidates are
obtained, the Company, its products and the facilities manufacturing the
Company's products are subject to continual review and periodic inspection. Each
U.S. drug and device manufacturing establishment must be registered with the
FDA. Domestic manufacturing establishments are subject to biennial inspections
by the FDA and must comply with the FDA's GMP regulations. To supply device
products for use in the United States, foreign manufacturing establishments must
comply with the FDA's GMP regulations and are subject to periodic inspection by
the FDA or by regulatory authorities in those countries under reciprocal
agreements with the FDA. In complying with GMP regulations, manufacturers must
expend funds, time and effort in the area of production and quality control to
ensure full technical compliance. The FDA stringently applies regulatory
standards for manufacturing.
 
     Labeling and promotional activities are regulated by the FDA and, in
certain instances, by the Federal Trade Commission. The Company must also report
certain adverse events involving its drugs and devices to the agency under
regulations issued by the FDA. The FDA can impose other post-marketing controls
on the Company and its products, and has expanded authority in this regard for
certain products, such as devices approved under PMAs.
 
     Failure to comply with applicable regulatory requirements, can result in,
among other things, warning letters, fines, injunctions, civil penalties recall
or seizure of products, total or partial suspension of production, refusal of
the government to grant approvals, premarket clearance or pre-market approval,
withdrawal of approvals and criminal prosecution of the Company and employees.
 
  European Regulation
 
     The Company's activities in Europe are regulated by both the law of the
European Union ("EU") and by the national law of the EU Member States. There are
a number of EU Regulations and Directives in force governing the authorization
and the marketing of medicinal products. The purpose of such Regulations and
Directives is to harmonize the legal framework regulating medicinal products in
the EU. In the event of a conflict between EU legislation and national law, EU
legislation takes precedence over national law. Once adopted, Regulations apply
immediately in Member States, Directives must be implemented into national law
by Member States. Failure to implement Directives by national governments either
properly or in a timely fashion still leaves significant areas of regulation to
national law. Efforts to harmonize regulation of medicines within the EU began
in 1965 with the adoption of Directive 65/65 which required Member States to
establish premarket approval requirements and prescribed the criteria for
approval. Since then, the EU has issued a series of measures aimed at making
regulation of medicinal products more uniform.
 
  European Regulation--Approval of Therapeutic Products
 
     In addition to Regulations and Directives, the EU has formulated
non-binding guidelines (the "Guidelines") which set out detailed EU requirements
relating to the quality, safety and efficacy of medicinal products. Such
Guidelines have been formulated by the European Commission in consultation with
the Committee for Proprietary Medicinal Products ("CPMP"). Although these
Guidelines are not legally binding, failure to comply with them makes it less
likely that product research work submitted in support of an application for
marketing authorizations will be acceptable to the competent authorities
throughout the EU. In European countries which are not EU Member States,
national laws apply which are frequently divergent from the EU framework. The
following paragraphs relate only to regulation in EU Member States.
 
     When adequate preclinical data are available, an application normally will
be made either to the relevant national regulatory authority and/or to an ethics
committee for approval to carry out a clinical trial with the unlicensed
medicinal product. While marketing authorizations must be supported by clinical
trials of a type and extent set out in the Directives and Guidelines, the actual
 
                                       19
<PAGE>   21
 
approval process for commencement of clinical trials is not currently harmonized
by EU law and varies from state to state.
 
     Clinical trials are typically conducted in three sequential phases which
may overlap. In Phase I, the product is tested in humans to determine certain
parameters relating to safety, potential adverse effects and/or
pharmacokinetics. Phase II involves studies in a target patient population to
collect additional pharmacokinetic clinical data demonstrating safety and,
subsequently, to determine the preliminary biological or clinical efficacy and
optional dosage of the product. Phase III trials are then undertaken to collect
further data to demonstrate quality, safety and efficacy within an expanded
target patient population. The various European regulatory authorities may
require multiple Phase III trials to support the quality, safety and efficacy of
the product. This process may take three to six or more years to complete.
 
     When appropriate clinical trial data supporting quality, safety and
efficacy are available, an application for a marketing authorization may be
submitted. In 1993, legislation was adopted which established a very new and
amended system for the registration of medicinal products in the EU. The main
purpose of this system is to prevent the existence of essentially separate
national approval systems which have been a major obstacle to harmonization. One
of the most significant features of this new system is the establishment of a
new European Agency for the Evaluation of Medicinal Products ("EMEA"). Under the
new system, marketing authorizations, broadly speaking, may be submitted at
either a centralized, a decentralized or a national level.
 
     The centralized procedure is administered by the EMEA; this procedure is
mandatory for the approval of biotechnology and high technology products and
available at the applicant's option for other products. The centralized
procedure provides for the first time in the EU for the grant of a single
marketing authorization which is valid in all EU Member States.
 
     As of January 1995, a mutual recognition procedure is available at the
request of the applicant for all medicinal products which are not subject to the
centralized procedure under the so-called "decentralized procedure". The
decentralized procedure will be mandatory beginning January 1, 1998. The
decentralized procedure creates a new system for mutual recognition of national
approval decisions, makes changes in existing procedures for national approvals
and establishes procedures for co-ordinated EU action on product suspensions and
withdrawals. Under this procedure, the holder of a national marketing
authorization for which mutual recognition is sought may submit an application
to one or more Member States, certify that the dossier is identical to that on
which the first approval was based or explain any differences and certify that
identical dossiers are being submitted to all Member States from which
recognition is sought. Within 90 days of receiving the application and
assessment report, each Member State must decide whether to recognize the
approval. The procedure encourages Member States to work with applicants and
other regulatory authorities to resolve disputes concerning mutual recognition.
If such disputes cannot be resolved within the 90-day period provided for
review, the application will be subject to a binding arbitration procedure.
 
     The Company will choose the appropriate route of European regulatory filing
to accomplish the most rapid regulatory approvals. However, there can be no
assurance that the chosen regulatory strategy will secure regulatory approvals
or approvals of the Company's chosen products indications.
 
     Under all procedures approval of an application must be refused if, after
review, it appears that the quality, safety or efficacy of a medicinal product
has not been adequately demonstrated by the applicant. In practice, requirements
for specific post-marketing surveillance, or Phase IV studies, are increasingly
imposed as de facto conditions of the grant of a marketing authorization.
 
     In some Member States, before a product is marketed, it is also necessary
to obtain approval for the price to be charged for the product. However, this is
not, the position in the United Kingdom, for example, where the initial price is
set by the Company (subject to the constraints of the Pharmaceutical Price
Regulation System, which controls the profitability of a Company's business with
the National Health Service). The European Commission is presently reviewing
various matters relating to the
 
                                       20
<PAGE>   22
 
pricing of medicinal products within the EU. Currently EU regulation does not
harmonize the pricing measures Member States may enact, but only seeks to
guarantee the transparency of these measures. The Company believes it is
unlikely the EU will regulate in the area of health care financing. The Company
believes that determination of prices and reimbursement of health care products
is therefore likely to remain a prerogative to the Member States for the
foreseeable future. There can be no assurance that Member States will not adopt
new cost containment policies that will limit marketing opportunities in the EU.
 
     The passage of a product through the approval system is likely to take a
considerable period of time. However, it is hoped that the new authorization
system will limit the length of time the review process will take. Generally
under the scheme the review process is intended to take a maximum of 210 days
after the receipt of a valid application.
 
     It should also be noted that each national regulatory authority has the
power to suspend or revoke a marketing authorization any time if it is no longer
satisfied as to the product's safety, quality and efficacy. Increasing
harmonization of decision-making by national authorities through the CPMP and/or
the new European Agency, and the existence of a mechanism by which any EU
distribution could compel a Member State to act in accordance with a CPMP
opinion, should result in more efficiency and importantly, future market
authorization process.
 
     EU law requires that companies manufacturing products must hold a
manufacturer's authorization and must comply with EU requirements as to GMP.
These standards are enforced by inspection. Primary responsibility for ensuring
that manufacturing procedures conform to marketing authorizations and good
manufacturing practice requirements will rest with the authorities in the Member
States where the product is manufactured or first imported into the EU.
 
     A procedure for abridged applications for generic products also exists in
the EU. The general effect of the abridged application procedure is to give
scope for the emergence of generic competition once patent protection has
expired and the original product has been on the market for at least six years
or ten years. Independent of any patent protection, under the abridged
procedure, new products benefit in principle from a basic six-year period of
protection (commencing with the data of first authorization in the EU) from
abridged applications for a marketing authorization. Abridged applications can
be made principally for medicinal products which are essentially similar to
medicinal products which have been authorized for either six or ten years. Under
the abridged application procedure, the applicant is not required to provide the
results of pharmacological and toxicological tests or the results of clinical
trials. For such abridged applications, all data concerning manufacturing,
quality and bioavailability are required. The applicant submitting the abridged
application generally must provide evidence or information that the drug product
subject to this application is essentially similar to that of the listed drug
product: (1) it has the same qualitative and quantitative composition with
respect to the active ingredient; (2) the dosage form; and (3) similarity in
bioavailability between the new drug product and the reference listed drug. This
period of protection is extended to ten years in respect of products derived
from certain biotechnological processes or other high-technology medicinal
products viewed by the competent authorities as representing a significant
innovation. Further, each Member State may have a discretion to extend the basic
six-year period of protection to a ten-year period, to all products marketed in
its territory. Most Member States have exercised such discretion. This
protection does not prevent another Company from making a full application
supported by all necessary pharmacological, toxicological and clinical data
within the period of protection. The application of the rules of marketing
exclusivity to various product situations remains uncertain, and divergent views
are taken by some of the EU regulatory authorities on the availability of the
period of protection where new products are different from existing products
only in terms of, for instance, strength or dosage form.
 
                                       21
<PAGE>   23
 
  European Regulations--Monitoring Products
 
     The Commission of the European Communities proposed a draft of new
directives to govern approvals of in vitro diagnostic medical devices in late
1995, amending the existing Directive. Future approvals of the Company's
monitoring products may therefore be dependent on meeting the conditions of the
proposed Directive. The compliance with this proposed Directive must be in place
no later than April 1, 1998. The Company's monitoring products will likely have
to meet the essential requirements of the Directive. Once deemed acceptable such
monitoring products will have CE markings of conformity.
 
  Environmental Regulation
 
     In connection with its research and development activities and its
manufacturing materials and products, the Company is subject to federal, state
and local laws, rules, regulations and policies governing the use, generation,
manufacture, storage, air emission, effluent discharge, handling and disposal of
certain materials, biological specimens, and wastes. Although the Company
believes that it has complied with these laws, regulations and policies in all
material respects and has not been required to take any action to correct any
noncompliance, there can be no assurance that the Company will not be required
to incur significant costs to comply with environmental and health and safety
regulations in the future. The Company's research and development involves the
controlled use of hazardous materials, including but not limited to certain
hazardous chemicals and infectious biological specimens. Although the Company
believes that its safety procedures for handling and disposing of such materials
comply with the standards prescribed by state and federal regulations, the risk
of accidental contamination or injury from these materials cannot be eliminated.
In the event of such an accident, the Company could be held liable for any
damages that result and any such liability could exceed the resources of the
Company.
 
SCIENTIFIC, MEDICAL, PHARMACY AND REGULATORY ADVISORY BOARDS
 
     The Company's Scientific, Medical, Pharmacy and Regulatory Advisory Boards
consist of individuals with recognized expertise in immunology, transplantation
or regulatory affairs. The Scientific, Medical, Pharmacy and Regulatory Advisory
Boards' members advise the Company about present and long-term scientific
planning, research and development. Members meet individually or as a group with
the management of the Company from time to time. Each member of the Scientific,
Medical, Pharmacy and Regulatory Advisory Boards has entered into a consulting
agreement with the Company.
 
     The following persons are members of one or more of the Company's
Scientific, Medical, Pharmacy and Regulatory Advisory Boards:
 
     RITA ALLOWAY, PHARM.D., is an Associate Professor in the Department of
Clinical Pharmacy at the University of Tennessee, Memphis, Tennessee. Dr.
Alloway is a Board Certified Pharmacotherapy Specialist practicing at the UT
William F. Bowld Hospital. Her current research is focused on individualizing
and optimizing immune suppressive regimes for the transplant recipient. Dr.
Alloway is the Past President of the Mid South College of Clinical Pharmacy.
 
     CAROL CLAYBERGER, PH.D., is an Assistant Professor of Immunology in the
Department of Cardiothoracic Surgery of Stanford University School of Medicine,
Stanford, California. Dr. Clayberger's current research is centered on an
understanding of the effect of synthetic peptides on the immune response and the
development of novel immunomodulatory agents. Dr. Clayberger holds a Ph.D. in
Cell Biology from Yale University.
 
     JEAN DAUSSET, M.D., received a Nobel Prize in Medicine in 1980 for work
that led to the discovery of HLA. In 1984, he founded and is currently serving
as President of the Human Polymorphism Study Center (CEPH) which is currently
engaged in research directed toward mapping the human genome. Professor Dausset
is a member of the French Academy of Sciences, a foreign member of the American
Academy of Arts and Sciences and of the National Academy of Sciences.
 
                                       22
<PAGE>   24
 
     ROY FIRST, M.D., is a Professor of Internal Medicine at the University of
Cincinnati Medical Center, and Director of the Section of Transplantation in the
Division of Nephrology and Hypertension. He is a Past President of the American
Society of Transplant Physicians (ASTP), and is current Chairman of the Ad Hoc
Committee for Organ Donation of the United Network for Organ Sharing (UNOS). Dr.
First obtained his medical degree at the University of Witwatersrand in
Johannesburg, South Africa in 1966.
 
     A. OSAMA GABER, M.D., is Associate Professor, Department of Surgery,
University of Tennessee and President of the Medical Staff at UT William F.
Bowld Hospital. He was President of the Tennessee Transplant Society and is
Co-Chair SEOPF Pancreas Transplant Committee.
 
     F. CARL GRUMET, M.D., is a Professor of Pathology at Stanford University,
Stanford, California. He is the Director of both the Transfusion Service and the
Histocompatibility Laboratory at Stanford University Medical Center, the
Director of the Stanford Specialized Center for Research in Transfusion Medicine
and Associate Medical Director of the Stanford University Medical School Blood
Center.
 
     RONALD D. GUTTMANN, M.D., FRCPC, is Director of the McGill Center for
Clinical Immunobiology and Transplantation, and a Professor of Medicine at the
McGill University Faculty of Medicine, Montreal, Quebec, Canada. Dr. Guttmann
was previously affiliated with the Peter Bent Brigham Hospital and Harvard
Medical School.
 
     ANDREW J. PERLMAN, M.D., PH.D., has been the Vice President of Medical
Research at Tularik, Inc., a private biotechnology company, since January 1993.
From 1987 to 1993, Dr. Perlman served in various positions at Genentech, Inc.,
most recently as Senior Director, Clinical Research. Dr. Perlman has a M.D. and
a Ph.D. in Physiology from New York University.
 
     ROGER RATOUIS, PH.D., is a consultant for regulatory affairs. From 1959 to
1990, Dr. Ratouis was employed by Roussel Uclaf where he held various positions,
first in research, then in pharmaceutical development, before heading the
Regulatory Affairs and Planning Department in the Health Care Division.
 
     JEAN-PAUL SOULILLOU, M.D., is a Professor of Immunology at the University
of Nantes, Nantes, France. He is the Director of the kidney transplant program,
which in 1992 performed the largest number of kidney transplants in France and
is one of the largest programs in Europe. He is the Director of INSERM-U211
research laboratory and the founder and scientific director of Fondation
Transvie, a non-profit research organization for xenotransplantation. Dr.
Soulillou is also on the editorial boards of Transplantation and The New England
Journal of Medicine.
 
EMPLOYEES
 
     As of December 31, 1996, the Company employed 75 people. Of these
employees, 58 were dedicated to research, development, manufacturing, quality
assurance and quality control, regulatory affairs or preclinical testing. In
addition, 13 people comprised the Company's staff for sales of its monitoring
products in the United States, Canada and Europe and sale of THYMOGLOBULIN in
Canada. The Company is the beneficiary of key person life insurance policy
covering Dr. Pouletty in the amount of $1,000,000. None of the Company's current
employees is represented by a labor union or is the subject of a collective
bargaining agreement. The Company believes that it maintains good relations with
its employees.
 
ITEM 2.  PROPERTIES
 
     The Company headquarters are located in Menlo Park, California. Floor space
in California is approximately 19,500 square feet, including offices, laboratory
space, manufacturing space, storage area and specialized areas for pilot
production and preclinical testing. The Menlo Park facility serves as the
principal site for preclinical research, clinical trial management, process
development, monitoring product manufacturing, quality assurance and quality
control, and regulatory affairs. The lease for this
 
                                       23
<PAGE>   25
 
building space expires in 1999 and may be renewed for subsequent years. The
Company believes that this facility is sufficient to meet the Company's
manufacturing needs with respect to its monitoring products for the foreseeable
future.
 
     In addition, the Company leases approximately 1,500 square feet in Menlo
Park for its central mail order pharmacy. This facility's lease contains an
option to lease another 1,500 square feet.
 
     The Company also leases approximately 2,500 square feet from the Center of
Transplantation in Nantes, France, which is the primary site for preclinical
development of therapeutics. This lease expires in December 1998 and the Company
has the option to renew its lease for use of these facilities for additional
five-year periods.
 
     The Company believes that its current facilities are suitable and adequate
to meet its needs for the foreseeable future and anticipates that it will be
able to expand its facilities to nearby locations as the need develops.
 
     The Company leases approximately 2,000 square feet in Missassauga, Ontario,
Canada. The lease for this facility expires in August 1999, and the Company has
the option to renew its lease for subsequent five-year periods. This site is
used as headquarters for marketing and sales activities of SangStat Canada, Ltd.
 
ITEM 3.  LEGAL PROCEEDINGS
 
     None.
 
ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS
 
     None.
 
                                       24
<PAGE>   26
 
                                    PART II
 
ITEM 5.  MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
 
     The Company's Common Stock commenced trading publicly on the Nasdaq
National Market on December 14, 1993 and is traded under the symbol SANG. The
following table sets forth for the periods indicated the high and low daily
closing prices for the Common Stock:
 
<TABLE>
<CAPTION>
                                                                        HIGH         LOW
                                                                       -------     -------
    <S>                                                                <C>         <C>
    FISCAL YEAR ENDED DECEMBER 31, 1995
    First Quarter....................................................  $ 7.125     $ 4.500
    Second Quarter...................................................    6.375       4.375
    Third Quarter....................................................    8.875       5.125
    Fourth Quarter...................................................   10.750       6.875
 
    FISCAL YEAR ENDED DECEMBER 31, 1996
    First Quarter....................................................   19.125      10.250
    Second Quarter...................................................   21.250      15.750
    Third Quarter....................................................   26.750      10.500
    Fourth Quarter...................................................   30.750      20.375
 
    FISCAL YEAR ENDED DECEMBER 31, 1997
    First Quarter (through March 10, 1997)...........................   35.750      25.380
</TABLE>
 
     On March 10, 1997 the closing sale price of the Common Stock as reported on
the Nasdaq National Market was $33.813 per share. As of March 10, 1997 there
were approximately 110 holders of record of the Common Stock.
 
                                DIVIDEND POLICY
 
     The Company has not declared or paid any cash dividends since its
inception. The Company currently intends to retain all earnings, if any, for use
in the expansion of its business and therefore does not anticipate paying any
dividends in the foreseeable future.
 
                                       25
<PAGE>   27
 
ITEM 6.  SELECTED CONSOLIDATED FINANCIAL DATA
 
     The selected consolidated financial data set forth below with respect to
the Company's statements of operations for each of the three years in the period
ended December 31, 1996, and with respect to the balance sheets as of December
31, 1995 and 1996, are derived from the Consolidated Financial Statements of the
Company which are included elsewhere in this Annual Report on Form 10-K. The
statement of operations data for the years ended December 31, 1992 and 1993 and
the balance sheet data as of December 31, 1992, 1993 and 1994, are derived from
audited consolidated financial statements not included herein. The data set
forth below should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the Consolidated
Financial Statements of the Company and the Notes thereto included elsewhere in
this Annual Report on Form 10-K.
 
<TABLE>
<CAPTION>
                                                               YEAR ENDED DECEMBER 31,
                                               --------------------------------------------------------
                                                1992        1993        1994        1995         1996
                                               -------     -------     -------     -------     --------
                                                        (IN THOUSANDS, EXCEPT PER SHARE DATA)
<S>                                            <C>         <C>         <C>         <C>         <C>
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
     Revenues:
          Net product sales..................  $   445     $   518     $   674     $ 2,698     $  2,399
          Collaborative agreement............       --       2,625       3,000       1,125           --
          Government grants..................       90          51          --          --           --
                                               -------     -------     -------     -------      -------
               Total revenues................      535       3,194       3,674       3,823        2,399
                                               -------     -------     -------     -------      -------
     Operating expenses:
          Cost of sales and manufacturing....    1,047         955       1,503       2,753        2,846
          Research and development...........    2,303       3,679       4,845       6,647        8,330
          Selling, general and
            administrative...................    2,116       2,202       3,157       3,773        6,120
                                               -------     -------     -------     -------      -------
               Total operating expenses......    5,466       6,836       9,505      13,173       17,296
                                               -------     -------     -------     -------      -------
     Loss from operations....................   (4,931)     (3,642)     (5,831)     (9,350)     (14,897)
     Other income (expense)--net.............        2         (78)        284         672        2,123
                                               -------     -------     -------     -------      -------
               Net loss......................  $(4,929)    $(3,720)    $(5,547)    $(8,678)    $(12,774)
                                               =======     =======     =======     =======      =======
     Net loss per common share(1)............                          $ (0.79)    $ (0.92)    $  (1.03)
                                                                       =======     =======      =======
     Pro forma net loss per common and
       equivalent share(1)...................  $ (1.00)    $ (0.70)
                                               =======     =======
     Shares used in per share
       computations(1).......................    4,950       5,309       7,049       9,385       12,405
</TABLE>
 
<TABLE>
<CAPTION>
                                                               YEAR ENDED DECEMBER 31,
                                               --------------------------------------------------------
                                                1992        1993        1994        1995         1996
                                               -------     -------     -------     -------     --------
                                                                    (IN THOUSANDS)
<S>                                            <C>         <C>         <C>         <C>         <C>
CONSOLIDATED BALANCE SHEET DATA:
     Cash, cash equivalents and short-term
       investments...........................  $   622     $10,641     $12,378     $ 9,222     $ 41,321
     Working capital.........................      305       9,859      11,367       8,451       40,724
     Total assets............................    1,502      12,499      14,450      11,560       44,750
     Long-term obligations, excluding current
       portion...............................    1,522       1,346       1,153       1,091        1,100
     Foreign subsidiary capital converted to
       capital stock in 1993.................      363          --          --          --           --
     Accumulated deficit.....................  (10,107)    (13,827)    (19,374)    (28,052)     (40,826)
     Total stockholders' equity..............   (1,125)      9,497      11,328       8,281       40,955
</TABLE>
 
------------------------------
(1) For a description of the computation of net loss per common share see Note 1
    of Notes to Consolidated Financial Statements. Pro forma net loss per common
    and equivalent share includes convertible preferred stock as well as common
    shares issued and options and warrants to purchase shares of common or
    preferred stock granted by the Company at less than the initial public
    offering (IPO) price during the twelve months preceding the IPO.
 
                                       26
<PAGE>   28
 
ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
         OF OPERATIONS
 
     The following discussion and analysis should be read in conjunction with
"Selected Consolidated Financial Data" and the Company's Consolidated Financial
Statements and Notes thereto included elsewhere in this ANNUAL REPORT ON FORM
10-K. Except for the historical information contained herein, the discussion in
this ANNUAL REPORT ON FORM 10-K contains certain forward-looking statements that
involve risks and uncertainties, such as statements of the Company's plans,
objectives, expectations and intentions. The cautionary statements made in this
ANNUAL REPORT ON FORM 10-K should be read as being applicable to all related
forward-looking statements wherever they appear in this ANNUAL REPORT ON FORM
10-K. The Company's actual results could differ materially from those discussed
here. Factors that could cause or contribute to such differences include those
discussed in "Risk Factors," as well as those discussed elsewhere herein.
 
OVERVIEW
 
     Since its inception in 1988, SangStat has focused on the development of
products to improve the outcome of organ transplantation. The Company's revenue
is primarily derived from the distribution of the Company's therapeutic
transplantation product candidate, THYMOGLOBULIN in Canada and from sales of its
pre-transplant monitoring products PRA-STAT and CROSS-STAT (the "Monitoring
Products") in the United States, Canada and Europe. Sales of these organ
transplantation products comprised 46%, 78% and 88% of the Company's net product
sales in 1994, 1995 and 1996, respectively.
 
     The Company has also from time to time sold other monitoring products for
laboratory research and investigational use and various devices and services.
These other revenue sources comprised 54%, 22% and 12% of total product revenues
in 1994, 1995 and 1996, respectively. These other revenue sources are not
central to the Company's current or future strategy or operating objectives.
 
     The Company's accumulated deficit from inception through December 31, 1996
was $40,826,000. The Company expects losses to continue for the next several
years due to the expansion of clinical trials, research and development programs
and sales and marketing activities. The Company's operating loss has increased
each year since inception and losses are expected to continue in the future may
as a result of a number of factors including the uncertainty in the timing and
the amount of revenue to be earned upon product sales, expenses required for
product development, clinical trials and marketing operations. In addition, the
Company's business is subject to significant risks, including but not limited
to, the success of its research and development efforts, litigation by third
parties regarding intellectual property, in particular, potential litigation
with Novartis regarding the Company's CYCLOSPORINE product candidate, obtaining
and enforcing patents important to the Company's business, the lengthy and
expensive regulatory approval process, reliance on third parties to manufacture
products or product candidates, competition from other products and
uncertainties associated with health care reform measures. Even if the Company's
products appear promising at various stages of development, they may not reach
the market for a number of reasons. Such reasons include, but are not limited
to, the possibilities that the product candidates will be found to be
ineffective or unsafe to manufacture on a large scale, be uneconomical to
market, be precluded from commercialization by proprietary rights of third
parties or be unacceptable to providers, payors or patients. Additional
expenses, delays and losses of opportunities that may arise out of these and
other risks could have a material adverse impact on the Company's business,
financial condition, cash flows and results of operations.
 
RESULTS OF OPERATIONS
 
     Net loss.  Net loss increased from $5,547,000 in 1994 to $8,678,000 in 1995
and further to $12,774,000 in 1996, primarily reflecting increases in research
and development, including clinical trials and regulatory affairs, and selling,
general and administrative expenses.
 
                                       27
<PAGE>   29
 
     Total revenues. Net product sales increased by $2,024,000 or 300% from
$674,000 in 1994 to $2,698,000 in 1995 and decreased by $299,000 or 11% to
$2,399,000 in 1996. The increase in sales from 1994 to 1995 resulted
substantially from the commencement of distribution of the Company's first
therapeutic product, THYMOGLOBULIN, in Canada in January 1995 under that
country's Emergency Drug Release ("EDR") program, and to a lesser extent,
increased sales of Monitoring Products. The decrease in sales from 1995 to 1996
was substantially due to a 19% decline in revenues for THYMOGLOBULIN due to a
decrease in the number of compassionate use cases which qualified for
THYMOGLOBULIN under Canada's EDR program. The decrease in THYMOGLOBULIN sales
was partially offset by a 25% increase sales of Monitoring Products and the
commencement of THE TRANSPLANT PHARMACY sales.
 
     As expected, no collaborative agreement milestone payments were received
from Baxter in 1996, reflecting completion of the final milestones for PRA-STAT
and CROSS-STAT in 1995. The final payments of $1,125,000 in the first six months
of 1995 represented the completion of $10.0 million received by SangStat for
milestones, license fees and equity in 1993 through 1995 under its collaborative
agreement with Baxter. The Company reacquired commercial rights for Monitoring
Products from Baxter in July 1996, and now directly markets such products
through its own sales and marketing staff in the United States and Europe to
directly market its Monitoring Products.
 
     Cost of sales and manufacturing. Cost of sales and manufacturing expenses
increased by $1,250,000 or 83% from $1,503,000 in 1994 to $2,753,000 in 1995 and
increased further by $93,000 or 3% to $2,846,000 in 1996. The increase from 1994
to 1995 was substantially due to direct costs associated with THYMOGLOBULIN
sales and to a lesser extent from headcount increases associated with expansion
of manufacturing and quality assurance capabilities for Monitoring Products. The
increase from 1995 to 1996 was substantially due to additional costs associated
with the increased sales of Monitoring Products and the commencement of THE
TRANSPLANT PHARMACY sales. This increase was partially offset by a decrease in
sales of THYMOGLOBULIN, resulting in a decrease of $324,000 in direct
THYMOGLOBULIN costs. The Company's Monitoring Products business does not
currently generate a profit because the Company has not achieved a scale of
production that allows it to cover fixed manufacturing costs.
 
     Research and development. Research and development expenses increased by
$1,802,000 or 37% from $4,845,000 in 1994 to $6,647,000 in 1995, and increased
further by $1,683,000 or 25% to $8,330,000 in 1996. The increase from 1994 to
1995 occurred substantially as a result of expanded clinical and regulatory
activities associated with the Company's pharmaceutical product candidates,
including THYMOGLOBULIN, ALLOTRAP 2702, CYCLOSPORINE, AZATHIOPRINE and CELSIOR
and to a lesser extent development of Monitoring Products. The increase from
1995 to 1996 was substantially associated with further expansion of clinical and
regulatory activities associated with the Company's pharmaceutical product
candidates including the filing of an Abbreviated Antibiotic Drug Application
(AADA) for marketing clearance of its proprietary Neoral-bioequivalent
CYCLOSPORINE product candidate with the FDA in November 1996.
 
     Selling, general and administrative. Selling, general and administrative
expenses increased by $616,000 or 20% from $3,157,000 in 1994 to $3,773,000 in
1995, and increased further by $2,347,000 or 62% to $6,120,000 in 1996. Costs,
including personnel additions associated with the support of THYMOGLOBULIN sales
through SangStat Canada, Ltd. represented 92% of the increase from 1994 to 1995.
In connection with the Company's reacquisition of marketing rights to Monitoring
Products from Baxter in July 1996, the Company commenced sales of the Monitoring
Products through its own sales staff in the United States and Europe. As a
result, sales and marketing expenses for Monitoring Products increased
$1,251,000 from 1995 to 1996. Selling, general and administrative expenses
increased by $1,096,000 from 1995 to 1996 as the result of the establishment of
a pilot facility for THE TRANSPLANT PHARMACY, as well as expanded investor
relations and other general and administrative activities.
 
     Other income and expenses. Interest income increased by $384,000 or 90%
from $427,000 in 1994 to $811,000 in 1995 and increased by $1,450,000 or 179% to
$2,261,000 in 1996. These increases are due
 
                                       28
<PAGE>   30
 
primarily to the increase in average cash balances available for investment as a
result of the sale of equity securities during 1995 and 1996. The Company
conducts its European operations through its wholly-owned French subsidiary,
SangStat Atlantique S.A. and its Canadian operations through its wholly-owned
subsidiary SangStat Canada, Ltd. and does not currently engage in any foreign
currency hedging activities. The Company's operations in Europe are primarily
related to research and development, including clinical trial activities, for
its pharmaceutical product candidates. The Company's loss generated from its
European operations have increased $202,000 or 23% from $865,000 in 1994 to
$1,067,000 in 1995 and $246,000 or 23% to $1,313,000 in 1996, primarily due to
expansion of such research and development activities. The Company has not
historically experienced significant gains or losses associated with foreign
currency rate fluctuations and does not believe it has significant exposure to
risks associated therewith. See Notes 1, 7 and 13 of Notes to Consolidated
Financial Statements.
 
LIQUIDITY AND CAPITAL RESOURCES
 
     From inception through December 31, 1996, the Company has financed its
operations substantially from proceeds of approximately $21,236,000 from private
placements, $6,750,000 in licensing fees and milestone payments from Baxter, and
$61,342,000 from public offerings of its Common Stock.
 
     During the years ended December 31, 1994, 1995 and 1996, the Company's net
cash used in operating activities was approximately $5,210,000, $8,591,000 and
$12,526,000, respectively. The increase in net cash used in operating activities
in each year above is substantially due to the increased amount of net loss
incurred in each year. As of December 31, 1996, the Company had cash, cash
equivalents and short-term investments of $41,321,000 and total assets of
$44,750,000.
 
     Net cash provided by financing activities totalled $7,177,000, $5,213,000
and $44,811,000 during the years ended December 31, 1994, 1995 and 1996. Such
amounts were substantially comprised of proceeds received from the sale of
Common Stock during the respective periods of $7,402,000, $5,581,000 and
$45,159,000 offset in part by net repayments of notes payable and capital lease
obligations.
 
     Net cash used in investing activities totalled $2,835,000, $1,873,000 and
$17,048,000 during the years ended December 31, 1994, 1995 and 1996, and
resulted substantially from the Company's net purchases of short-term
investments.
 
     Although the Company has no current contractual obligations relating to
capital expenditures, it anticipates that capital expenditures, primarily for
its United States operations, will aggregate approximately $1 million during
1997.
 
     At December 31, 1996, the Company had Federal, state and foreign net
operating loss ("NOL") carryforwards of approximately $37,200,000, $13,600,000
and $1,000,000, respectively, available to reduce future taxable income. In
addition, the Company had available research and experimentation credit
carryforwards of approximately $734,000 and $393,000 for federal and state tax
purposes. The Company's ability to realize the benefits of the NOL and credit
carryforwards is dependent upon the generation of sufficient taxable income in
the respective taxing jurisdiction prior to their expiration. There can be no
assurance that the Company will be able to generate sufficient taxable income to
avail itself of such benefits.
 
     The Company expects to incur significant costs related to, among other
things, continued clinical and preclinical testing, regulatory approval
activities and research and development programs in the future, and
establishment of larger sales staffs in the United States and Europe. If and
when the Company receives FDA approval of its therapeutic drug candidates, the
Company expects to have additional working capital requirements for expansion of
sales, increased inventory levels and payment of certain license obligations. If
the Company receives FDA approval for THYMOGLOBULIN, it would be obligated to
make a final milestone payment under a related license agreement totalling $1.5
million.
 
                                       29
<PAGE>   31
 
     The Company may need to raise additional funds through additional
financings, including private or public equity offerings and collaborative
research and development arrangements with corporate partners. There can be no
assurance that adequate funds will be raised on favorable terms, if at all, or
that discussions with potential collaborative partners will result in any
agreements. The Company anticipates that its existing capital resources,
including the anticipated net proceeds from the Company's pending public
offering and the interest earned thereon, will be sufficient to fund its
operations for at least the next several years. The Company's future capital
requirements will depend on many factors, including its research and development
programs, the scope and results of clinical trials, the time and costs involved
in obtaining regulatory approvals, the costs involved in obtaining and enforcing
patents or any litigation by third parties regarding intellectual property, the
status of competitive products, the establishment of manufacturing capacity or
third-party manufacturing arrangements, the establishment of sales and marketing
capabilities, the establishment of collaborative relationships with other
parties, and the costs of manufacturing scale-up and working capital
requirements for inventory and financing of accounts receivable. If adequate
funds are not available, the Company may be required to delay, scale back or
eliminate one or more of its development programs or obtain funds through
arrangements with collaborative partners or others that may require the Company
to relinquish rights to certain technologies, product candidates or products
that the Company would not otherwise relinquish.
 
RISK FACTORS
 
     HISTORY OF OPERATING LOSSES; FUTURE PROFITABILITY UNCERTAIN.  SangStat was
incorporated in 1988 and has experienced significant operating losses since that
date. As of December 31, 1996, the Company's accumulated deficit was
$40,826,000. The Company's operating expenses have increased from approximately
$9.5 million to $13.2 million to $17.3 million over the last three fiscal years.
Total revenues increased from approximately $3.7 million to $3.8 million and
then decreased to $2.4 million and net losses from operations increased from
approximately $5.8 million to $9.4 million to $14.9 million over the last three
fiscal years. The Company expects to incur significant operating losses over the
next several years. There can be no assurance that the Company will ever achieve
significant revenues from product sales or profitable operations. To date, the
Company's product revenues have been substantially dependent on sales of certain
organ transplantation products, including a limited number of monitoring
products and sales of THYMOGLOBULIN in Canada under Canada's Emergency Drug
Release (EDR) program.
 
     NO ASSURANCE OF SUCCESSFUL PRODUCT DEVELOPMENT.  To achieve profitable
operations, the Company, alone or with others, must successfully develop, obtain
regulatory approval for, manufacture, introduce and market its potential
products. Much of the development work for SangStat's potential products remains
to be completed. There can be no assurance that the Company's product
development efforts will be successfully completed, that required regulatory
approvals will be obtained, or that any products if developed and introduced
will be successfully marketed. To date, the Company has no drug products
approved for commercial sale in any country.
 
     The Company's product candidates will require extensive development,
testing and investment, as well as regulatory approval prior to
commercialization. Cost overruns due to unanticipated regulatory delays or
demands, unexpected adverse side effects or insufficient therapeutic efficacy
will prevent or substantially slow the development effort and ultimately would
have a material adverse effect on the Company. Furthermore, there can be no
assurance that the Company's research and development efforts will be successful
and that any given product will be approved by appropriate regulatory
authorities or that any product candidate under development will be safe,
effective or capable of being manufactured in commercial quantities at an
economical cost, will not infringe the proprietary rights of others or will
achieve market acceptance.
 
     The Company's first drug candidate, THYMOGLOBULIN, for which the Company
has licensed the rights from PMC in the United States and Canada, has not been
approved for commercial sale in these territories. The Company completed a
single multi-center Phase III clinical trial in the United States in
 
                                       30
<PAGE>   32
 
August 1996 and filed an Establishment License Application ("ELA") with PMC and
PLA with the FDA in August 1996 and January 1997, respectively. The PLA for
THYMOGLOBULIN was accepted for review by the FDA in February 1997. The Company
has also filed an NDS for marketing approval in Canada. However, there can be no
assurance that the results of this Phase III clinical trial, in combination with
existing European safety and efficacy data and manufacturing process data, will
be sufficient to support an ELA, PLA, or any necessary future ELA supplement
needed for commercial marketing. In addition, there can be no assurance that
THYMOGLOBULIN will be demonstrated to have the manufacturing or quality control
specifications and requisite safety and efficacy so that an ELA/PLA or NDS will
be obtained from either the United States or Canada, respectively, or that
THYMOGLOBULIN will be manufactured in sufficient quantities or will become a
viable commercial product.
 
     The Company's other principal pharmaceutical product candidates, including
the Company's formulations of CYCLOSPORINE and AZATHIOPRINE, as well as CELSIOR
and ALLOTRAP 2702, have not been approved for commercial sale in any country.
The Company commenced human bioequivalence trials with respect to AZATHIOPRINE
in October 1996. The Company recently voluntarily withdrew its 510(k) for a
two-component CELSIOR product and is now conducting a clinical trial for a
redesigned one-component, ready-to-use CELSIOR product candidate. The Company
has completed a Phase I clinical trial and an initial Phase II pharmacokinetic
and safety clinical trial for ALLOTRAP 2702, both of which took place in France.
The Company designed both clinical trials to comply with regulatory standards in
France as well as in the United States, so that it may use the data to support
its NDA to the FDA. There can be no assurance that such data will be accepted by
the FDA. The use of ALLOTRAP peptides to promote graft acceptance in humans is
novel and unproven and there can be no assurance that such peptides will prove
to be safe or effective in humans for any clinical indication, including for any
transplant type or at any dosage. The Company has no clinical evidence in humans
that ALLOTRAP peptides will be effective in promoting graft acceptance or safety
in transplant patients and there can be no assurance that ALLOTRAP 2702 or any
other product candidates based on ALLOTRAP peptides will receive marketing
approval or become viable commercial products. Certain of the Company's
monitoring product candidates are in development and have not been approved for
commercial sale. There can be no assurance that these product candidates will be
successfully developed, receive regulatory approval or be marketed on a
profitable basis. See "Business--Products and Product Candidates."
 
     RISKS ASSOCIATED WITH CYCLOSPORINE.  The Company is developing a generic
CYCLOSPORINE for chronic immunosuppression. Commercialization of the Company's
CYCLOSPORINE drug candidate may be several years away and successful development
and commercialization is subject to numerous risks, including failure to obtain
regulatory approvals and potential intellectual property claims of third
parties, including those of Novartis and its manufacturing contractors. In
addition, if the Company is unable to demonstrate to the FDA that its
formulation is bioequivalent to Neoral, a currently approved Novartis
formulation, the Company would be required to undertake additional development
work and seek regulatory approval through the potentially longer NDA process if
it wished to continue to pursue this product candidate. There can be no
assurance that the proposed label, dosage form or manufacturing process of the
Company's CYCLOSPORINE, or the results of the Company's CYCLOSPORINE
bioequivalence study, will be accepted by the FDA. Furthermore, there can be no
assurance that the current FDA policies and regulations pertaining to the
Company's products or product candidates will not change in the future.
 
     There can be no assurance that Novartis will not seek to protect its market
share through litigation, or other actions, against SangStat, its affiliates and
partners, or the FDA, or take actions which could adversely affect the
regulatory approval process. To date, no litigation has been commenced by
Novartis nor has Novartis threatened the Company with litigation. In November
1996, however, Novartis filed a citizens' petition with the FDA, as described
below, seeking to prohibit the use of Neoral as a reference drug for
demonstration of bioequivalence. There also can be no assurance that SangStat's
formulation will not be found to infringe on Novartis' proprietary rights. If
Novartis brings suit against SangStat in the United States or elsewhere,
SangStat could be greatly delayed in obtaining regulatory approval of any
CYCLOSPORINE product, in bringing any CYCLOSPORINE
 
                                       31
<PAGE>   33
 
product candidate to market, or could be enjoined from selling the product for a
significant period of time or ultimately be prevented from selling its
CYCLOSPORINE product candidate entirely. A number of key employees were
previously employed at Novartis and it is possible a claim could be asserted
against SangStat based on such prior employment. While the Company believes that
such a claim would be without merit, in part because such employees have
informed the Company that they did not have any non-competition agreements with
Novartis and that they have not violated any confidentiality agreements with
Novartis, such a claim could nonetheless result in litigation. Any litigation,
whether or not resolved in favor of the Company, is likely to be expensive,
lengthy and time consuming and could have a material adverse effect on the
Company's business, financial condition, cash flows and results of operations.
To date no litigation has been threatened, but there can be no assurance that
Novartis will not commence litigation or otherwise attempt to delay the
marketing of CYCLOSPORINE in the future.
 
     Novartis filed a citizens' petition with the FDA to remove the designation
of its Neoral cyclosporine product as a reference listed drug in the FDA's
Approved Drug Products with Therapeutic Equivalence Evaluations (the "Orange
Book"). A "reference listed drug" is an approved drug against which generic drug
candidates can be measured to determine bioequivalence. The FDA has accepted for
review SangStat's CYCLOSPORINE AADA submitted for approval based on
bioequivalence to Neoral. Neoral was listed as a reference drug in the Orange
Book published in February 1997. However, should the FDA remove Neoral as a
reference listed drug in the Orange Book, SangStat may be required to submit a
full application rather than an AADA for any generic cyclosporine product
submitted for approval based on bioequivalence to Neoral. If the FDA requires
SangStat to file a full application rather than an AADA for CYCLOSPORINE the
time required for agency review of the application could be materially
lengthened and adversely affect the likelihood of agency approval of the
application. Novartis may submit additional citizens' petitions and other
documents and information to the FDA that may raise other issues related to
procedural and substantive requirements for approval of any SangStat
CYCLOSPORINE application. The submission of such petitions, documents, and/or
information could materially lengthen the time required for agency review of the
application and adversely affect the likelihood of agency approval of the
application.
 
     Cyclosporine is particularly difficult to manufacture and there can be no
assurance that SangStat's CYCLOSPORINE drug candidate can be manufactured in
commercial quantities at an economical cost. There can be no assurance that
SangStat can manufacture, or have manufactured, formulate or commercialize its
CYCLOSPORINE product without infringing patent or other proprietary rights of
Novartis or other third parties. Although Novartis' composition of matter patent
for cyclosporine expired in September 1995 in the United States, Novartis'
patents relating to cyclosporine formulations are expected to continue to
present significant barriers to entry to potential competitors.
 
     The Company has contracted for commercial scale production of cyclosporine
bulk material (i.e. the active ingredient of CYCLOSPORINE) for its CYCLOSPORINE
drug candidate from an established third-party manufacturing source. The Company
has also separately contracted for the manufacture of the finished commercial
supply of its CYCLOSPORINE product candidate from an established third-party
source. There can be no assurance that such third parties will perform
satisfactorily and any such failure may delay regulatory approval, product
launch, impair the Company's ability to deliver products on a timely basis, or
otherwise impair the Company's competitive position, which would have a material
adverse effect on the Company's business, financial condition, cash flows and
results of operations.
 
     UNCERTAINTY OF MARKET ACCEPTANCE.  Even if regulatory approvals are
obtained, uncertainty exists as to whether the Company's products will be
accepted by the market. In addition, there can be no assurance that the Company
will receive an "AB" rating (i.e. designation by the FDA that a generic drug is
bioequivalent to an FDA approved reference listed drug, allowing substitution of
one for the other) on CYCLOSPORINE or AZATHIOPRINE which in certain cases would
require substitution of the Company's CYCLOSPORINE for Neoral and AZATHIOPRINE
for Imuran, respectively. In particular, there can be no assurance that the
Company's product candidates would obtain significant
 
                                       32
<PAGE>   34
 
market share. Factors that may affect the willingness of patients, physicians,
pharmacists and third-party payors to convert to SangStat products, if approved,
include price, perception of bioequivalence, perceived clinical benefits and
risks, ease of use, other product features and brand loyalty. In addition, other
factors may limit the market acceptance of products developed by the Company,
including the timing of regulatory approval and market entry relative to
competitive products, the availability of alternative therapies, the price of
the Company's products relative to alternative therapies, the availability of
third-party reimbursement and the extent of marketing efforts by the Company or
third-party distributors or agents retained by the Company. There can be no
assurance that patients, physicians, pharmacists, or third-party payors will
accept the Company's products. In particular, with respect to CYCLOSPORINE,
there can be no assurance that even if product approval is obtained, the Company
will be successful in taking significant market share away from Novartis.
 
     UNCERTAINTY REGARDING PATENTS AND PROPRIETARY RIGHTS.  The Company's
success depends in part on its ability to obtain and enforce patent protection
for its products and to preserve its trade secrets. The Company holds patents
and pending patent applications in the United States and abroad. The Company's
patents involve specific claims and thus do not provide broad coverage. There
can be no assurance that the Company's patent applications or any claims of
these patent applications will be allowed, or found to be valid or enforceable,
that any patents or any claims of these patents will provide the Company with
competitive advantages for its products or that such issued patents and any
patents issued under pending patent applications will not be successfully
challenged or circumvented by the Company's competitors. The Company has not
conducted extensive patent and prior art searches with respect to many of its
product candidates and technologies, and there can be no assurance that
third-party patents or patent applications do not exist or could not be filed in
the United States, Europe or other countries which would have an adverse effect
on the Company's ability to market its products. There can be no assurance that
any claims in the Company's patent applications would be allowed, or found to be
valid or enforceable, or that any of the Company's products would not infringe
on others' patents or proprietary rights in the United States or abroad. The
ALLOTRAP peptide family is being developed under an exclusive, worldwide license
from Stanford University. Although Stanford has filed patent applications with
respect to such technology, there can be no assurance that, other than the
patent application that has issued, any of the claims of such patent
applications will be allowed, or found to be valid or enforceable and as to the
issued patent, that the claims will be found to be valid or enforceable.
 
     Patent applications in the United States are maintained in secrecy until
patents issue. Since publication of discoveries in the scientific or patent
literature tends to lag behind actual discoveries by several months, SangStat
cannot be certain that it was the first to discover compositions covered by its
pending patent applications or the first to file patent applications on such
compositions. There can be no assurance that the Company's pending patent
applications will result in issued patents or that any of its issued patents
will afford protection against a competitor.
 
     There can be no assurance that SangStat can manufacture, or have
manufactured, formulate or commercialize CYCLOSPORINE without infringing
third-party patents. Although Novartis' composition of matter patent for
cyclosporine expired in September 1995 in the United States, Novartis' patents
relating to cyclosporine are expected to continue to present significant
barriers to entry to potential competitors because of the large number and scope
of Novartis' patents, and the difficulty of solubilizing cyclosporine bulk
material into a formulated drug product. There can be no assurance that Novartis
or its contract manufacturers will not seek to protect its market share through
litigation, or otherwise, or that SangStat's CYCLOSPORINE will not be found to
infringe Novartis' or others' proprietary rights. Any litigation, brought by
Novartis or other parties, whether or not resolved in favor of the Company, is
likely to be expensive and time-consuming and could have a material adverse
effect on the Company's business, financial condition, cash flows and results of
operations. No assurance can be given that Novartis will not commence litigation
or otherwise attempt to affect the regulatory approval or marketing of
CYCLOSPORINE in the future. If Novartis or other companies were to successfully
bring legal actions against the Company claiming patent or other intellectual
 
                                       33
<PAGE>   35
 
property right infringements, in addition to any liability for damages, the
Company could be enjoined by a court from selling such products or processes and
might be required to obtain a license to manufacture or sell the affected
product or process. There can be no assurance that the Company would prevail in
any such action or that the Company could obtain any license required under any
such patent on acceptable terms. In particular, in the case of CYCLOSPORINE, the
Company believes that no license would be available on acceptable terms. The
biotechnology and pharmaceutical industries have experienced significant
litigation regarding patent and other intellectual property rights. If the
Company becomes involved in such litigation with respect to CYCLOSPORINE or any
other product, it could consume a substantial portion of the Company's financial
and human resources, regardless of the outcome of such litigation. See
"Business--Patents and Proprietary Technology" and "Risk Factors -- Risks
Associated with CYCLOSPORINE."
 
     The Company also relies on trade secrets and proprietary know-how which it
seeks to protect, in part, by confidentiality agreements with its employees and
consultants. There can be no assurance that these agreements will not be
breached, that the Company would have adequate remedies for any breach or that
the Company's trade secrets will not otherwise become known or independently
developed by competitors. The Company has registered or applied for registration
of the names of most of its products under development or commercialized for
research and development use. However, there can be no assurance that any
trademark registration will be granted or not challenged by competitors. See
"Business--Patents and Proprietary Technology."
 
     SUBSTANTIAL COMPETITION.  The drugs being developed by the Company compete
with existing and new drugs being created by pharmaceutical, biopharmaceutical,
biotechnology and diagnostics companies and universities. Many of these entities
have significantly greater research and development capabilities, as well as
substantial marketing, manufacturing, financial and managerial resources and
represent significant competition for the Company. The principal factors upon
which the Company's products compete are product utility, therapeutic benefits,
ease of use, effectiveness marketing, distribution and price. The Company
believes it competes favorably with respect to all of these factors. With
respect to THYMOGLOBULIN, CYCLOSPORINE and AZATHIOPRINE, the Company will be
competing against large companies that have significantly greater financial
resources and established marketing and distribution channels for competing
products. The drug industry is characterized by intense price competition and
the Company anticipates that it will face this and other forms of competition.
There can be no assurance that developments by others will not render the
Company's products or technologies obsolete or noncompetitive or that the
Company will be able to keep pace with technological developments. Many of the
competitors have developed or are in the process of developing technologies that
are, or in the future may be, the basis for competitive products. Some of these
products may have an entirely different approach or means of accomplishing the
desired therapeutic effect than products being developed by the Company and may
be more effective and less costly. In addition, many of these competitors have
significantly greater experience than the Company in undertaking preclinical
testing and human clinical trials of pharmaceutical products and obtaining
regulatory approvals of such products. Accordingly, the Company's competitors
may succeed in commercializing products more rapidly than the Company. For
example, the Company believes that the degree of market penetration of its
CYCLOSPORINE drug candidate is dependent in part on whether the Company is the
first company to market a bioequivalent formulation of cyclosporine. The Company
believes that other companies may be developing cyclosporine formulations that
may be marketed as generic equivalents. Were these competitors to develop their
products more rapidly and complete the regulatory process sooner, it could have
a material adverse effect on the Company's business, financial condition, cash
flows and results of operations.
 
     Treatments for the problems associated with transplantation that the
Company's products seek to address are currently available. For example,
Sandimmune and Neoral, marketed by Novartis would compete with CYCLOSPORINE.
Additionally, Orthoclone OKT3, marketed by Johnson & Johnson and ATGAM, marketed
by Pharmacia & Upjohn Inc., would be competitive with THYMOGLOBULIN. Prograf,
marketed by Fujisawa Pharmaceutical Co. Ltd., CellCept, marketed by Roche Ltd.
and
 
                                       34
<PAGE>   36
 
Imuran, marketed by Glaxo Wellcome Ltd. would be competitive with CYCLOSPORINE
and AZATHIOPRINE. All of the aforementioned competitive and other drugs are
commercially available for use as immunosuppressive drugs and are widely
prescribed. To the extent these therapeutics, monitoring products or novel
transplant procedures address the problems associated with transplantation on
which the Company has focused, they may represent significant competition. See
"Business--Competition."
 
     LIMITED MANUFACTURING CAPABILITY.  The Company lacks facilities to
manufacture any of its drug candidates in accordance with current good
manufacturing practices prescribed and strictly enforced by the FDA. The Company
generally relies on third parties to manufacture its compounds for clinical
trials, including THYMOGLOBULIN, CYCLOSPORINE, AZATHIOPRINE, CELSIOR and
ALLOTRAP 2702 and has contracted or expects to contract for commercial
production of these compounds. The Company has an agreement with PMC under which
it intends to obtain THYMOGLOBULIN for clinical trials and commercial use. There
can be no assurance that PMC or other manufacturers will meet FDA standards
governing Good Manufacturing Practices ("GMP") or other regulatory guidelines,
that any ELA's required for manufacturing will be filed, reviewed and approved,
or that any third-party manufacturer will pass a preapproval inspection. The
Company is currently purchasing ALLOTRAP 2702 for clinical trials from UCB
bioproducts S.A. ("UCB") located in Belgium, and intends to contract with UCB
for commercial production. The Company is currently purchasing CYCLOSPORINE for
clinical trials from an established fermentation manufacturing source under a
contract which also provides for the production of commercial scale quantities.
The Company has also entered into an agreement with Eli Lilly and Company
("Lilly") under which Lilly has agreed to fill and finish bulk CYCLOSPORINE,
provided by the Company, for subsequent commercial sale and distribution
worldwide by the Company. There can be no assurance that the Company will be
able to enter into secondary bulk material source contracts or successful
secondary commercial scale manufacturing contracts or that any other third-party
arrangements can be established on a timely or commercially reasonable basis, or
at all. The Company will depend on all such third parties to perform their
obligations effectively and on a timely basis. There can be no assurance that
such parties will perform and any failures by third parties may delay clinical
development or submission of products for regulatory approval, or otherwise
impair the Company's competitive position which could have a material adverse
effect on the Company's business, financial condition, cash flows and results of
operations. In addition, the manufacturing of drug candidates involves a number
of technical steps and requires meeting stringent quality control specifications
imposed by government regulatory bodies and by the Company itself. Additionally,
such products can only be manufactured in facilities approved by the applicable
regulatory authorities. Because of these and other factors, the Company may not
be able to replace its manufacturing capacity quickly or efficiently in the
event that its manufacturers are unable to manufacture their products at one or
more of their facilities. For certain of its potential products, the Company
will need to develop its production technologies further for use on a larger
scale in order to conduct human clinical trials and produce such products for
commercial scale at an acceptable cost.
 
     To date, the Company is manufacturing only two monitoring products in
commercial quantities, PRA-STAT and CROSS-STAT, which are being marketed by
SangStat's direct sales force in Europe and North America. To be successful, the
Company's products must be manufactured in commercial quantities in compliance
with regulatory requirements and at acceptable cost. The Company has limited
experience in manufacturing its monitoring products, and there can be no
assurance that the Company will be able to continue production of its existing
products and scale-up production of future monitoring products to commercial
levels. In addition, some materials used in the Company's products may be
available only from sole suppliers. There can be no assurance that interruptions
in supplies will not occur in the future, which could have a material adverse
effect on the Company's ability to manufacture its products or to conduct
clinical trials.
 
     LIMITED MARKETING CAPABILITY.  The Company has a limited marketing and
sales staff. To the extent that the Company itself undertakes to market a
substantial portion of its products, or is unable
 
                                       35
<PAGE>   37
 
to enter into co-promotion agreements or to arrange for third-party distribution
of its products, additional expenditures, management resources and time will be
required to develop a sales force. Currently, the Company intends to develop a
sales force both in North America and Europe to market its products. However,
there can be no assurance that the Company will be able to establish a sales
force or enter into co-promotion or distribution agreements on terms favorable
to the Company or on a timely basis. In addition, if the Company succeeds in
bringing products to market, it will compete with many other companies that
currently have extensive and well-funded marketing and sales operations. There
can be no assurance that the Company's marketing and sales operations would
compete successfully against such other companies. The Company has recently
established THE TRANSPLANT PHARMACY for the direct distribution by mail order of
the Company's products and services, as well as products and services of third
parties. Establishing THE TRANSPLANT PHARMACY as a viable distribution system
entails a number of risks including the Company's ability to enter into
agreements with transplant centers to utilize THE TRANSPLANT PHARMACY's
services, compliance with state regulations regarding pharmacy licensing and
compliance with federal and state laws regulating payments for referrals for
health care services. There can be no assurance that the Company will be
successful in establishing THE TRANSPLANT PHARMACY as a viable distribution
method for the Company's products and services. See "Business--Marketing."
 
     NO ASSURANCE OF FDA, CANADIAN OR EUROPEAN REGULATORY APPROVAL; GOVERNMENT
REGULATION. The Company's research, preclinical development, clinical trials,
manufacturing, marketing and distribution of its products in the United States
and other countries are subject to extensive regulation by numerous governmental
authorities including, but not limited to, the FDA. In order to obtain
regulatory approval of a drug product, the Company must demonstrate to the
satisfaction of the applicable regulatory agency, among other things, that such
product is safe and effective for its intended uses and that the manufacturing
facilities are in compliance with GMP requirements. The Company must also
demonstrate the approvability of a PLA and ELA for its biological products. The
approval of the Company's generic product candidates is dependent on
demonstrating bioequivalence with reference products in addition to assurance of
the compliance with GMP regulations. In order to market its monitoring products,
which are considered to be medical devices, the Company or its licensees will be
required either to receive 510(k) marketing clearance or Premarket Approval
Application ("PMA") approvals from the FDA for such products among other
regulatory requirements. To obtain a 510(k) marketing clearance, the Company
must show that a monitoring product is "substantially equivalent" to a legally
marketed product not requiring FDA approval. In addition, the Company must
demonstrate that it is capable of manufacturing the product to the relevant
standards. To obtain PMA approval, the Company must submit extensive data,
including pre-clinical and clinical trial data to prove the safety and efficacy
of the device. Additionally, the Company is currently distributing several
monitoring products for research or investigational use. Although the Company
believes it is complying with FDA regulations regarding such distribution, there
can be no assurance that the FDA will not determine that the Company is
violating FDA regulations with respect to the distribution of these products.
The process of obtaining FDA and other required regulatory approvals is lengthy
and will require the expenditure of substantial resources, and there can be no
assurance that the Company will be able to obtain the necessary approvals.
Moreover, if and when such approval is obtained, the marketing, distribution and
manufacture of the Company's products would remain subject to extensive
regulatory requirements administered by the FDA and other regulatory bodies.
Failure to comply with applicable regulatory requirements can result in, among
other things, warning letters, fines, injunctions, civil penalties, recall or
seizure of products, total or partial suspension of production, refusal of the
government to grant pre-market clearance or pre-market approval, withdrawal of
approvals and criminal prosecution of the Company and employees. Additionally,
the Company intends to pursue commercialization of its products in European
countries. Both the Company's pre-transplant and post-transplant monitoring
products should be subject to regulation as in vitro medical devices for which
regulations are being presently formulated under harmonized European Directives.
This new Directive is likely to impose additional requirements on the pre-
transplant donor/recipient matching products and the post-transplant monitoring
products. This
 
                                       36
<PAGE>   38
 
legislation may include, among other things, requirements with respect to the
design, safety and performance of the products as well as impose premarket
approval procedures such as product type certification and quality systems
certification of manufacturing. The Company's therapeutic products are subject
to foreign regulatory requirements governing the conduct of clinical trials,
product licensing, pricing and reimbursement, which vary from country to
country. The process of obtaining foreign regulatory approvals can be lengthy
and require the expenditure of substantial resources, and there can be no
assurance that the Company will be able to obtain the necessary approvals or the
approvals for the proposed indications. See "Business--Government Regulation."
 
     DEPENDENCE ON COLLABORATIVE RELATIONSHIPS.  The Company has in the past
relied on collaborative relationships to finance certain of its research and
development programs. The Company may enter into collaborative relationships
with corporate and other partners to develop and commercialize certain of its
potential products. There can be no assurance that the Company will be able to
negotiate acceptable collaborative arrangements in the future, that such
collaborations will be available to the Company on acceptable terms or that any
such relationships, if established, will be scientifically or commercially
successful. See "Business--Strategic Relationships."
 
     DEPENDENCE UPON KEY PERSONNEL.  The Company's ability to develop its
business depends in part upon its attracting and retaining qualified management
and scientific personnel, including consultants and members of its Scientific,
Medical and Regulatory Advisory Board. As the number of qualified personnel is
limited, competition for such personnel is intense. There can be no assurance
that the Company will be able to continue to attract or retain such people. The
loss of key personnel or the failure to recruit additional key personnel could
significantly impede attainment of the Company's objectives and have a material
adverse effect on the Company's financial condition and results of operations.
The Company's planned activities will require the addition of new personnel,
including management, and the development of additional expertise by existing
management personnel, in areas such as research, product development,
preclinical testing, clinical trial management, regulatory affairs, finance,
manufacturing, pharmacy affairs and marketing and sales. The inability to
acquire such services or to develop such expertise could have a material adverse
effect on the Company's business, financial condition and results of operations.
See "Business--Scientific, Medical, Pharmacy and Regulatory Advisory Board" and
"Management."
 
     UNCERTAINTY OF PHARMACEUTICAL PRICING AND REIMBURSEMENT.  SangStat's
ability to commercialize its products may 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
coverage insurers and other organizations. Significant uncertainty exists as to
the pricing, availability of distribution channels and reimbursement status of
newly approved healthcare products and there can be no assurance that adequate
third party coverage will be available for the Company to maintain price levels
sufficient for realization of an appropriate return on its investment in product
development. In certain foreign markets, pricing or profitability of healthcare
products is subject to government control. In the United States, there have
been, and the Company expects that there will continue to be, a number of
federal and state proposals to implement similar government control. In
addition, an increasing emphasis on managed care in the United States has and
will continue to increase the pressure on pharmaceutical pricing. While the
Company cannot predict whether any such legislative or regulatory proposals will
be adopted or the effect such proposals or managed care efforts may have on its
business, the announcement of such proposals or efforts could have a material
adverse effect on the Company's ability to raise capital, and the adoption of
such proposals or efforts could have a material adverse effect on the Company's
business, financial condition and results of operations. Further, to the extent
that such proposals or efforts have a material adverse effect on other
pharmaceutical companies that are prospective corporate partners for the
Company, the Company's ability to establish corporate collaborations may be
adversely affected. In addition, third-party payors are increasingly challenging
the prices charged for medical products and services. If the Company succeeds in
bringing one or more products to the market, there can be no assurance that
these products will be considered cost effective or that reimbursement to the
consumer will be available or
 
                                       37
<PAGE>   39
 
will be sufficient to allow the Company to sell its products on a competitive
basis. See "Business--Products, Product Candidates and Services."
 
     FLUCTUATIONS IN OPERATING RESULTS.  The Company's operating losses have
increased each year since inception and losses are expected to continue in the
future as a result of a number of factors including the uncertainty in the
timing and the amount of revenue earned upon product sales and achievement of
research and development milestones, funding under collaborative research
agreements and expenses required for product development, clinical trials and
marketing operations. The Company's operating results may fluctuate
significantly depending on other factors, including the introduction of new
products by the Company's competition, regulatory actions, market acceptance of
the Company's products, adoption of new technologies, manufacturing
capabilities, legal actions and third-party reimbursement policies.
 
     PRODUCT LIABILITY EXPOSURE; LIMITED INSURANCE COVERAGE.  The Company faces
an inherent business risk of exposure to product liability claims in the event
that the use of products manufactured by the Company results in adverse effects
during research, clinical development or commercial use. While the Company will
attempt to take appropriate precautions, there can be no assurance that it will
avoid significant product liability exposure. The Company's product liability
insurance coverage is currently limited to $3,000,000 which may not be adequate
insurance coverage to cover potential liability exposures. Moreover, there can
be no assurance adequate insurance coverage will be available at acceptable
cost, if at all, or that a product liability claim would not materially
adversely affect the business, financial condition, cash flows and results of
operations of the Company.
 
     HAZARDOUS MATERIALS.  In connection with its research and development
activities and operations, the Company is subject to federal, state and local
laws, rules, regulations and policies governing the use, generation,
manufacture, storage, air emission, effluent discharge, handling and disposal of
certain materials, biological specimens and wastes. There can be no assurance
that the Company will not incur significant costs to comply with environmental
and health and safety regulations. The Company's research and development
involves the controlled use of hazardous materials, including but not limited to
certain hazardous chemicals and infectious biological specimens. Although the
Company believes that its safety procedures for handling and disposing of such
materials comply with the standards prescribed by state and federal regulations,
the risk of accidental contamination or injury from these materials cannot be
eliminated. In the event of such an accident, the Company could be held liable
for any damages that result and any such liability could exceed the resources of
the Company. "See Business--Government Regulation."
 
     VOLATILITY OF STOCK PRICE.  The market prices for securities of
biotechnology companies, including the Company's, have historically been highly
volatile, and the market has from time to time experienced significant price and
volume fluctuations that are unrelated to the operating performance of
particular companies. Factors such as fluctuations in the Company's operating
results, announcements of technological innovations or new therapeutic products
by the Company or its competitors, regulatory developments, disputes or
developments related to patent or other proprietary rights, public concern as to
the safety of products developed by the Company or others and general market
conditions may have a significant effect on the market price of the Common
Stock. See "Price Range of Common Stock."
 
     EFFECT OF CERTAIN PROVISIONS; ANTITAKEOVER EFFECTS OF CERTIFICATE OF
INCORPORATION, BYLAWS, STOCKHOLDER RIGHTS PLAN AND DELAWARE LAW.  Certain
provisions of the Company's Certificate of Incorporation and Bylaws could delay
or make more difficult a merger, tender offer or proxy contest involving the
Company, which could adversely affect the market price of the Company's Common
Stock. The Company's Board of Directors has the authority to issue up to
5,000,000 shares of Preferred Stock and to determine the price, rights
preferences, privileges and restrictions, including voting rights, of those
shares without any further vote or action by the stockholders. The rights of the
holders of Common Stock will be subject to, and may be adversely affected by,
the rights of the holders of any Preferred Stock that may be issued in the
future. The issuance of Preferred Stock could have the effect of making it more
difficult for a third party to acquire a majority of the outstanding voting
stock of the Company. Further, the Company has adopted a
 
                                       38
<PAGE>   40
 
stockholder rights plan. The plan allows for the issuance of a dividend to
stockholders of rights to acquire shares of the Company or, under certain
circumstances, an acquiring corporation, at less than half their fair market
value. The plan could have the effect of delaying, deferring or preventing a
change in control of the Company. In addition, the Company is subject to the
antitakeover provisions of Section 203 of the Delaware General Corporation Law,
which will prohibit the Company from engaging in a "business combination" with
an "interested stockholder" for a period of three years after the date of the
transaction in which the person became an interested stockholder, unless the
business combination is approved in a prescribed manner. The application of
Section 203 also could have the effect of delaying or preventing a change of
control of the Company.
 
ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
 
     Reference is made to item 14(a)(1) of this Annual Report on Form 10-K.
 
ITEM 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
         FINANCIAL DISCLOSURE
 
     Not applicable.
 
                                       39
<PAGE>   41
 
                                    PART III
 
ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
 
     Executive officers, directors and key employees of the Company, and their
ages are as follows:
 
<TABLE>
<CAPTION>
               NAME                  AGE                          POSITION
-----------------------------------  ---     --------------------------------------------------
<S>                                  <C>     <C>
Philippe Pouletty, M.D.............   38     Chief Executive Officer and Chairman
David Winter, M.D..................   61     President, Chief Operating Officer
Timothy J. Schroeder...............   37     Executive Vice President, Clinical Development
Ralph Levy.........................   47     Senior Vice President, Operations, and Secretary
Hana Berger Moran, Ph.D............   50     Senior Vice President, Regulatory Affairs
Roland Buelow, Ph.D................   39     Vice President, Research and Development
Randell J. Correia, Pharm.D........   38     Vice President, The Transplant Pharmacy
Henry N. Edmunds, Ph.D.............   51     Vice President, Chief Financial Officer
Robert Floc'h, Ph.D................   46     Vice President, Pharmaceutical Development and
                                             General Manager, SangStat Atlantique
Gilles des Gachons, M.D............   35     Vice President, SangStat Canada, Ltd.
Maree Wall.........................   32     Vice President, Corporate Communications
Gordon Russell(2)..................   62     Director
Fredric J. Feldman, Ph.D...........   57     Director
Elizabeth Greetham(1)..............   47     Director
Richard D. Murdock.................   49     Director
Andrew J. Perlman, M.D.,              46     Director
  Ph.D.(1).........................
Vincent R. Worms(1)(2).............   42     Director
</TABLE>
 
------------------------------
(1) Member of the Compensation Committee.
 
(2) Member of the Audit Committee.
 
     Philippe Pouletty, M.D., founded SangStat in 1988 and has served as Chief
Executive Officer since then. Dr. Pouletty has also been a Director since 1988,
and has served as Chairman since February 1995. Dr. Pouletty was a founder and,
from 1984 to 1988, a Director of Research at Clonatec, a French diagnostics
company. Dr. Pouletty has a M.D. degree from the University of Paris VI. He
holds a M.S. in immunology and a M.S. in virology from Institut Pasteur. Dr.
Pouletty conducted research as a post-doctoral fellow at Stanford University. He
serves as Vice-President of Fondation Transvie, a non-profit foundation for
xenotransplantation.
 
     David Winter, M.D., joined SangStat in February 1995 as President and Chief
Operating Officer. From October 1992 to February 1995 he was President and Chief
Operating Officer at GenPharm International, Inc. He was formerly Vice
President, Clinical Research & Development, and Vice President, Scientific and
External Affairs for Sandoz Pharmaceuticals Corporation (now Novartis) from 1985
to 1992. Dr. Winter received his M.D. from Washington University of St. Louis.
 
     Timothy J. Schroeder joined SangStat in October 1993 as its Executive Vice
President, Clinical Development. From 1987 to 1993, he was the Director of
Transplant Laboratory Services at the University of Cincinnati Hospital and from
1990 to 1993, he was an Assistant Professor of Pathology and Laboratory Medicine
at the University of Cincinnati. Mr. Schroeder has been a consultant to several
pharmaceutical companies. He is a member of the American Society of Transplant
Physicians, of the Transplantation Society and of the International Liver
Transplant Society. His graduate degree is from the University of Cincinnati
College of Medicine.
 
                                       40
<PAGE>   42
 
     Ralph Levy joined the Company in July 1990 as Vice President of Operations.
In December 1995 Mr. Levy was promoted to Senior Vice President, Operations.
From 1988 to 1989, he was the Director of Operations for Syva Company. From 1987
to 1988, he was the Director of Manufacturing and Materials Management at
Gen-Probe, Inc. Mr. Levy has an B.S. in Chemistry from City College of New York
and a M.S. in Chemistry from Seton Hall University.
 
     Hana Berger Moran, Ph.D., joined SangStat in April 1994 as Vice President,
Regulatory Affairs. In January 1997 she was promoted to Senior Vice President,
Regulatory Affairs. From 1991 to 1994 she was Director of Regulatory Affairs at
Athena Neurosciences, Inc., and from 1990 to 1991 was Associate Director of
Regulatory Affairs at Fujisawa Pharmaceutical Co. Dr. Berger Moran holds an M.S.
degree in chemical engineering in pharmaceutical sciences and technology from
Slovak Institute of Technology and a Ph.D. in organic chemistry of natural
products from Feinberg Graduate School at the Weizmann Institute of Science in
Rehovoth, Israel.
 
     Roland Buelow, Ph.D., joined the Company in February 1993 as Vice
President, Research. From 1989 to January 1993 he was Project Leader at
Immulogic Pharmaceutical Corporation. From 1987 to 1989, Dr. Buelow was Research
Scientist at Stanford University. Dr. Buelow received his Ph.D. from the
Max-Planck Institute for Biology in Tuebingen, Germany.
 
     Randell J. Correia, Pharm.D., joined SangStat in October 1995 as Vice
President of Pharmacy Affairs. From 1988 to 1994 he was the Chief Executive
Officer of California Infusion Services, a subsidiary of California Healthcare
System. In 1995 he served as Program Manager for Stanford Health Systems Home
Pharmacy. Dr. Correia is an Assistant Clinical Professor for the University of
California at San Francisco and the University of the Pacific Schools of
Pharmacy. Dr. Correia has a Doctor of Pharmacy Degree from the University of the
Pacific, Stockton, California.
 
     Henry N. Edmunds, Ph.D., joined SangStat in June 1992 as Vice President,
Chief Financial Officer. From 1984 to 1992, Dr. Edmunds was the Director of
Business Development and Business Manager of Genencor, Inc. Dr. Edmunds has a
Ph.D. in Biochemistry from the University of California at Berkeley and an
M.B.A. from the Stanford Graduate School of Business.
 
     Robert Floc'h, Ph.D., joined SangStat Atlantique in November 1992 as
General Manager and Vice President, Pharmaceutical Development. From 1991 to
1992 he was General Manager of Departmental Laboratories at the Department of
Loire Atlantique. From 1980 to 1991, Dr. Floc'h was with Rhone Poulenc S.A.,
where he held various positions of increasing responsibility most recently as
head of the Department of Chemical and Biopharmaceutical Development of Rhone
Merieux since 1986. Dr. Floc'h is a pharmacist and holds a Ph.D. in Medicinal
Chemistry from the University at Nantes.
 
     Gilles des Gachons, M.D., joined the Company in June 1994 as the General
Manager, SangStat Canada Ltd. In June 1996 he was promoted to Vice President,
SangStat Canada Ltd. From 1992 to 1994, he was Product Director for Ortho
Biotech, Inc., becoming also Clinical Director in 1993. He joined Johnson &
Johnson, International as Product Manager in 1989. Dr. des Gachons earned two
post-graduate degrees in Health Economics, and Medical and Odontological
Evaluation, from the University of Paris, and graduated in the Political Science
Program in Public Administration at the Institut d'Etudes Politiques de Paris.
He has an M.D. from the University of Paris and an M.P.H. from Harvard
University.
 
     Maree Wall joined SangStat in January 1996 as Vice President, Corporate
Communications. From 1986 to 1992 she was a sales representative and Product
Manager at Sandoz Australia Pty. Ltd. (now Novartis). She transferred to Sandoz'
U.S. affiliate in 1992 and was assigned to the Immunology Product Marketing
Group and worked on both Transplantation and Autoimmune Disease indications.
Most recently, she was an Associate Director in the Transplant Business Unit at
Sandoz Pharmaceutical Corporation (now Novartis). Ms. Wall holds a B.S. degree
in Microbiology and Physiology from the University of Western Australia.
 
     Gordon Russell has served as Chairman of the Board from January 1992 until
February 1995, and as a Director of the Company continuously since February
1990. In February 1995, Mr. Russell resigned
 
                                       41
<PAGE>   43
 
from his post as Chairman of the Board. Mr. Russell serves on the Board of
ChemTrak Incorporated and has been a General Partner of Sequoia Capital since
1979. Mr. Russell is Chairman of the Board of Overseers of the Dartmouth Medical
School and the C. Everett Koop Institute at Dartmouth. He also serves as
Chairman of the Board of Trustees of the Palo Alto Medical Foundation. Mr.
Russell has an A.B. in History from Dartmouth College.
 
     Fredric J. Feldman, Ph.D., has been a Director of the Company since March
1992. He is currently CEO and a Director of Biex, Inc., a women's healthcare
company, and a Director of OrthoLogic Corporation and Oncogenetics, Inc. From
1992 to 1995 he was Chairman and CEO of Oncogenetics, Inc. From 1988 to 1992, he
was President and CEO of Microgenics Corporation, a medical diagnostics product
manufacturer. From 1984 to 1988, Dr. Feldman served as the President of
Instrumentation Laboratory, a diagnostic instrument company. Dr. Feldman has a
Ph.D. in Analytical Chemistry from the University of Maryland and a B.S. in
Chemistry from Brooklyn College of City University of New York.
 
     Elizabeth Greetham has been a Director of the Company since September 1996.
She is currently Portfolio Manager of Life Sciences L.P. Funds and handles
analytical responsibilities for all healthcare investments for the
institutional, Mutual and High Individual Net Worth Accounts at Weiss, Peck &
Greer Investments, where she has been employed since 1990. Ms. Greetham also
serves as a Director of various pharmaceutical companies, including Medco
Research, Chemex Pharmaceutical, Progenics Pharmaceutical, Repligen, Guilford
Pharmaceutical and ChiRex. Ms. Greetham has a M.A. in Economics from Edinburgh
University.
 
     Richard D. Murdock has been a Director of the Company since October 1993.
He is also a Director of Matrix Pharmaceutical, a public biotechnology company.
Mr. Murdock has been the CEO and a Director of CellPro, Incorporated, a public
biotechnology company, since June 1992. From August to December 1991, he was
CellPro's Vice President of Marketing and Corporate Development and in December
1991 he was appointed President. From 1989 to 1991, he was European Vice
President of the Fenwal Division of Baxter, which specializes in automated
blood-processing equipment. From 1986 to 1989, he was Vice President of
Marketing for Fenwal Automated Systems Inc. Mr. Murdock received a B.S. in
Zoology from the University of California at Berkeley in 1969.
 
     Andrew J. Perlman, M.D., Ph.D., has been a Director of the Company since
December 1992. Dr. Perlman has been the Vice President of Medical Research at
Tularik, Inc., a private biotechnology company, since January 1993. From 1987 to
1993, Dr. Perlman served in various positions at Genentech, Inc., most recently
as Senior Director, Clinical Research. Dr. Perlman has an M.D. and a Ph.D. in
Physiology from New York University.
 
     Vincent R. Worms has been a Director of the Company since October 1991. Mr.
Worms has been a General Partner of Partech International since 1982. He has an
engineering degree from Ecole Polytechnique in Paris, and an M.S. degree from
the Massachusetts Institute of Technology. Mr. Worms is presently a Director of
Visioneer and Business Objects.
 
     The Company's bylaws authorize the Board of Directors to fix the number of
directors. The number is currently fixed at seven. All Directors hold office
until the next annual meeting of stockholders and until their successors have
been elected and qualified. Officers are appointed to serve at the discretion of
the Board of Directors. There are no family relationships among executive
officers or Directors of the Company.
 
                                       42
<PAGE>   44
 
ITEM 11.  EXECUTIVE COMPENSATION
 
SUMMARY OF CASH AND OTHER COMPENSATION
 
     The following table provides certain summary information concerning the
compensation earned by the Company's Chief Executive Officer and four other most
highly compensated executive officers of the Company serving as such as of the
end of the last fiscal year whose compensation for such year was in excess of
$100,000 for services rendered in all capacities to the Company and its
subsidiaries for the 1996, 1995, and 1994 fiscal years. Such individuals will be
hereafter referred to as the Named Executive Officers. No other executive
officer who would otherwise have been includable in such table on the basis of
salary and bonus earned for the 1996 fiscal year resigned or terminated
employment during that fiscal year.
 
                           SUMMARY COMPENSATION TABLE
 
<TABLE>
<CAPTION>
                                      ANNUAL                           LONG-TERM
                                             COMPENSATION             COMPENSATION
                                                                  --------------------
                                                                         AWARDS
                                 ----------------------------     --------------------
                                          -------------------     NUMBER OF SECURITIES      ALL OTHER
           NAME AND                       SALARY       BONUS           UNDERLYING          COMPENSATION
      PRINCIPAL POSITION         YEAR       ($)         ($)             OPTIONS               ($)(1)
-------------------------------  ----     -------     -------     --------------------     ------------
<S>                              <C>      <C>         <C>         <C>                      <C>
Philippe Pouletty..............  1996     250,000         (3)             35,000              11,470
President and                    1995     200,000      75,000            110,000               9,618
Chief Executive Officer          1994     160,000      64,000                 --              10,342
 
David Winter...................  1996     170,000         (3)                 --              11,244
President and Chief Operating    1995     146,243(2)       --            125,000               7,582
Officer
 
Ralph Levy.....................  1996     142,708         (3)             10,500               8,243
Vice President                   1995     120,479      26,205             15,000               7,447
Operations                       1994     107,854      23,708                 --               8,939
 
Roland Buelow..................  1996     129,167         (3)             10,500               7,766
Vice President,                  1995     120,000      29,625             25,000               6,415
Research                         1994     111,000      23,310                 --               7,826
 
Robert Floc'h..................  1996     117,286         (3)             10,500               9,266
Vice President,                  1995     123,468      23,680             15,000               9,898
Pharmaceutical,                  1994     103,828      19,727                 --               6,113
Development and General
  Manager, SangStat Atlantique
</TABLE>
 
---------------
(1) Represents the health insurance premiums paid on behalf of such individuals.
 
(2) David Winter joined SangStat on February 20, 1995 as President and Chief
    Operating Officer. The stated salary is for the period February 20, 1995
    through December 31, 1995.
 
(3) The bonus amounts for the 1996 fiscal year have not yet been established.
 
                                       43
<PAGE>   45
 
                     OPTION/SAR GRANTS IN LAST FISCAL YEAR
 
     The following table shows, with respect to the Named Executive Officers,
certain information concerning the grant of stock options in 1996. No stock
appreciation rights were granted during 1996.
 
<TABLE>
<CAPTION>
                                  INDIVIDUAL GRANTS                                     POTENTIAL REALIZABLE
-------------------------------------------------------------------------------------     VALUE AT ASSUMED
                                             PERCENT OF                                   ANNUAL RATES OF
                               NUMBER OF    TOTAL OPTIONS                                   STOCK PRICE
                               SECURITIES    GRANTED TO                                   APPRECIATION FOR
                               UNDERLYING   EMPLOYEES IN      EXERCISE                     OPTION TERM(4)
                                OPTIONS        FISCAL          PRICE       EXPIRATION   --------------------
            NAME               GRANTED(1)      YEAR(2)      ($/SHARE)(3)      DATE         5%         10%
-----------------------------  ----------   -------------   ------------   ----------   --------   ---------
<S>                            <C>          <C>             <C>            <C>          <C>        <C>
Philippe Pouletty............     35,000         14.4         $  13.50       7/23/06    $297,153   $ 753,043
David Winter.................         --           --               --            --          --          --
Ralph Levy...................     10,500          4.3         $  13.50       7/23/06      89,146     225,913
Roland Buelow................     10,500          4.3         $  13.50       7/23/06      89,146     225,913
Robert Floc'h................     10,500          4.3         $  13.50       7/23/06      89,146     225,913
</TABLE>
 
---------------
(1) Each option will vest in four successive equal annual installments over the
    optionee's continued service with the Company measured from the date of
    grant. For Dr. Pouletty's 35,000 share grant, Dr. Buelow's 10,500 share
    grant, Dr. Floc'h's 10,500 share grant, and Mr. Levy's 10,500 share grant,
    the date of grant was July 24, 1996.
 
(2) Based on an aggregate of 243,700 options granted to employees in 1996,
    including options granted to the Named Executive Officers.
 
(3) The exercise price may be paid in cash, in shares of the Company's Common
    Stock valued at fair market value on the exercise date, or through a
    cashless exercise procedure involving a same-day sale of the purchased
    shares. The Company may also finance the option exercise by lending the
    optionee sufficient funds to pay the exercise price for the purchased shares
    and the federal and state income or employment tax liability incurred by the
    optionee in connection with such exercise. The optionee may be permitted,
    subject to the approval of the Plan Administrator, to apply a portion of the
    shares purchased under the option (or to deliver existing shares of Common
    Stock) in satisfaction of such tax liability.
 
(4) Potential realizable value is based on the assumption that the price per
    share of Common Stock appreciates at the assumed annual rate of stock
    appreciation for the option term. There is no assurance that the assumed 5%
    and 10% annual rates of appreciation (compounded annually) will actually be
    realized over the term of the option. The assumed 5% and 10% annual rates
    are set forth in accordance with the rules and regulations adopted by the
    Securities and Exchange Commission and do not represent the Company's
    estimate of stock price appreciation.
 
                                       44
<PAGE>   46
 
OPTION EXERCISES AND HOLDINGS
 
     The following table sets forth information concerning option exercises and
option holdings for the fiscal year ended December 31, 1996 with respect to the
Named Executive Officers. Except as set forth below, no options or stock
appreciation rights were exercised by any such officer during such year and no
stock appreciation rights were outstanding on December 31, 1996.
 
              AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
                       AND FISCAL YEAR-END OPTION VALUES
 
<TABLE>
<CAPTION>
                                                                                        VALUE OF UNEXERCISED IN-THE-
                                                             NUMBER OF SECURITIES         MONEY OPTIONS AT FY-END
                                                            UNDERLYING UNEXERCISED       (MARKET PRICE OF SHARES AT
                                       VALUE REALIZED     OPTIONS AT FISCAL YEAR-END        FY-END ($26.50) LESS
                                      (MARKET PRICE AT               (#)                      EXERCISE PRICE)
                    SHARES ACQUIRED    EXERCISE LESS     ----------------------------   ----------------------------
       NAME         ON EXERCISE (#)   EXERCISE PRICE)    EXERCISABLE(1) UNEXERCISABLE   EXERCISABLE    UNEXERCISABLE
------------------- ---------------   ----------------   ------------   -------------   ------------   -------------
<S>                 <C>               <C>                <C>            <C>             <C>            <C>
Philippe
  Pouletty.........      5,600            $122,747          301,160             --       $6,262,644            --
David Winter.......         --                  --          125,000             --        2,609,375            --
Ralph Levy.........        500              13,863           62,620             --        1,414,447            --
Roland Beulow......         --                  --           49,500             --        1,014,225            --
Robert Floc'h......         --                  --           45,500             --          952,400            --
</TABLE>
 
---------------
(1) The options are immediately exercisable but any shares of Common Stock
    acquired upon exercise are subject to repurchase by the Company at the
    original exercise price upon optionee's cessation of service prior to
    vesting of such shares. Of the exercisable options, as of December 31, 1996,
    Dr. Pouletty is vested in 262,100 shares, Mr. Levy is vested in 39,308
    shares, Dr. Floc'h is vested in 21,438 shares, Dr. Buelow is vested in
    16,313 shares and Dr. Winter is vested in 57,292 shares.
 
EMPLOYMENT CONTRACTS, TERMINATION OF EMPLOYMENT ARRANGEMENTS AND CHANGE IN
CONTROL AGREEMENTS
 
     None of the Company's executive officers have employment agreements with
the Company, and their employment with the Company may be terminated at any time
at the discretion of the Board of Directors. However, the Compensation Committee
of the Board of Directors has authority as Plan Administrator of the 1993 Stock
Option Plan to provide for the accelerated vesting of the shares of Common Stock
subject to outstanding options held by the Chief Executive Officer and the
Company's other executive officers, whether granted under that plan or any
predecessor plan, in the event their employment were to be terminated (whether
involuntarily or through a forced resignation) following: (i) an acquisition of
the Company by merger or asset sale, or (ii) a hostile takeover of the Company
effected through a successful tender offer for more than 50% of the Company's
outstanding Common Stock or through a change in the majority of the Board as a
result of one or more contested elections for Board membership.
 
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
 
     The Compensation Committee currently consists of three directors, Elizabeth
Greetham, Andrew Perlman and Vincent Worms.
 
                                       45
<PAGE>   47
 
ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
 
                             PRINCIPAL STOCKHOLDERS
 
     The following table sets forth certain information known to the Company
with respect to the beneficial ownership of the Company's Common Stock as of
December 31, 1996 by (i) all persons who are beneficial owners of five percent
(5%) or more of the Company's Common Stock, (ii) each director, (iii) certain
executive officers and (iv) all directors and executive officers as a group.
 
<TABLE>
<CAPTION>
                                                                             PERCENTAGE OF SHARES
                                                                NUMBER        BENEFICIALLY OWNED
                                                               OF SHARES     ---------------------
                                                               BENEFICIALLY   BEFORE       AFTER
     NAME AND ADDRESS (AS REQUIRED) OF BENEFICIAL OWNER        OWNED (#)     OFFERING     OFFERING
-------------------------------------------------------------  ---------     --------     --------
<S>                                                            <C>           <C>          <C>
Partech International(1).....................................   967,976         7.4%         6.4%
101 California Street
Suite 3150
San Francisco, CA 94111
David Rammler(2).............................................   753,321         5.7%         5.0%
3000 Sand Hill Road
Suite 280, Bldg. 4
Menlo Park, CA 94025
Sequoia Capital(3)...........................................   722,034         5.5%         4.8%
3000 Sand Hill Road
Suite 280, Bldg. 4
Menlo Park, CA 94025
Philippe Pouletty, M.D.(4)...................................   576,153         4.3%         3.7%
SangStat Medical Corporation
1505 Adams Drive
Menlo Park, California 94025
David Winter, M.D.(5)........................................   135,700         1.0%           *
Timothy J. Schroeder(6)......................................    68,700           *            *
Ralph Levy(7)................................................    75,500           *            *
Hana Berger Moran, Ph.D.(8)..................................    53,500           *            *
Roland Buelow, Ph.D.(9)......................................    67,500           *            *
Henry N. Edmunds, Ph.D.(10)..................................    43,500           *            *
Robert Floc'h, Ph.D.(11).....................................    45,500           *            *
Gordon Russell(3)............................................   767,277         5.8%         5.1%
Fredric J. Feldman, Ph.D.(12)................................    36,525           *            *
Elizabeth Greetham(13).......................................   274,000         2.1%         1.8%
Richard D. Murdock(14).......................................    18,600           *            *
Andrew J. Perlman, M.D., Ph.D.(15)...........................    23,400           *            *
Vincent R. Worms(1)..........................................   981,976         7.5%         6.5%
All directors and officers as a group (14 persons)...........  3,080,024       22.3%        20.4%
</TABLE>
 
------------------------------
 
  *  Does not exceed one percent.
 
(#) Beneficial ownership is determined in accordance with the rules of the
    Securities and Exchange Commission (the "Commission") and generally includes
    voting or investment power with respect to securities. Shares of Common
    Stock subject to options which are currently exercisable or convertible or
    which will become exercisable or convertible within sixty (60) days after
    December 31, 1996 are deemed outstanding for computing the beneficial
    ownership of the person holding such option but are not outstanding for
    computing the beneficial ownership of any other person. Except as indicated
    by footnote, and subject to community property laws where
 
                                       46
<PAGE>   48
 
    applicable, the persons named in the table above have sole voting and
    investment power with respect to all shares of Common Stock shown as
    beneficially owned by them.
 
 (1) Includes 102,774 shares held by Parvest Europe Investment II, C.V. Includes
     285,001 shares held by Parvest U.S. Growth Fund Partners, C.V. Includes
     333,646 shares held by Parvest U.S. Partners II, C.V. Includes 246,555
     shares held by entities which are affiliates of Partech International. Mr.
     Worms, a director of the Company, is a general partner of Parvest Europe
     Investment II, C.V., Parvest U.S. Growth Fund Partners, C.V. and Parvest
     U.S. Partners II, C.V. and either a general partner or a director of the
     affiliates referred to in the preceding sentence, and may be deemed to
     share voting and investment power with respect to such shares. The shares
     beneficially owned by Mr. Worms include options to purchase 14,000 shares
     granted in July 1996, subject to stockholder approval.
 
 (2) Includes 8,000 shares Common Stock held by Christine Rammler, Mr. Rammler's
     wife. Includes options to purchase 12,000 shares granted to David Rammler
     under the Option Plan.
 
 (3) Includes 663,434 shares held by Sequoia Capital Growth Fund. Includes
     42,347 shares held by Sequoia Technology Partners III. Includes 323 shares
     held by Sequoia XX. Includes 12,470 shares held by Sequoia XXI. Includes
     2,894 shares held by Sequoia XXII. Includes 566 shares held by Sequoia
     XXIII. Mr. Russell, a director of the Company, is a general partner of
     Sequoia Capital, and may be deemed to share voting and investment power
     with respect to such shares. Mr. Russell disclaims beneficial ownership of
     such shares, except to the extent of his interest in such shares arising
     from his interests in the entities referred to above. The shares
     beneficially owned by Mr. Russell include 45,243 shares owned by Mr.
     Russell and options to purchase 14,000 shares granted in July 1996, subject
     to stockholder approval.
 
 (4) Includes options to purchase 301,160 shares of Common Stock.
 
 (5) Includes options to purchase 125,000 shares granted under the Option Plan.
 
 (6) Includes options to purchase 64,700 shares granted under the Option Plan.
 
 (7) Includes options to purchase 62,120 shares granted under the Option Plan.
 
 (8) Represents options to purchase 53,500 shares granted under the Option Plan.
 
 (9) Includes options to purchase 49,500 shares granted under the Option Plan.
 
(10) Includes options to purchase 19,479 shares granted under the Option Plan.
 
(11) Represents options to purchase 20,000 shares granted under the Company's
     1993 Stock Option Plan (France) and options to purchase 25,500 shares
     granted under the Option Plan.
 
(12) Represents 13,125 shares held by the Feldman family trust, options to
     purchase 14,400 shares granted under the Option Plan, and options to
     purchase 9,000 shares granted in July 1996, subject to stockholder
     approval.
 
(13) Includes 255,000 shares held by Weiss, Peck & Greer Investments. Ms.
     Greetham, a Director of the Company, handles all healthcare investments for
     the institutional, Mutual and High Individual Net Worth Accounts at Weiss,
     Peck & Greer Investments, and may be deemed to have share voting and
     investment power in such shares arising from her interest in the entity
     above. Ms. Greetham disclaims beneficial ownership of such shares, except
     to the extent of her interest in the entity referred to above. The shares
     beneficially owned by Ms. Greetham include options to purchase 19,000
     shares granted in September 1996, subject to stockholder approval.
 
(14) Represents options to purchase 9,600 shares granted under the Option Plan
     and options to purchase 9,000 shares granted in July 1996, subject to
     stockholder approval.
 
(15) Represents options to purchase 14,400 shares granted under the Option Plan
     and options to purchase 9,000 shares granted in July 1996, subject to
     stockholder approval.
 
                                       47
<PAGE>   49
 
ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
 
     No disclosure required.
 
                                       48
<PAGE>   50
 
                                    PART IV
 
ITEM 14.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
 
     (a) The following documents are filed as a part of this Annual Report on
Form 10-K:
 
          1. Financial Statements.
 
<TABLE>
            <S>                                                             <C>
            Independent Auditors' Report..................................   52
            Consolidated Balance Sheets -- December 31, 1995 and 1996.....   53
            Consolidated Statements of Operations for the years ended
              December 31, 1994, 1995 and 1996............................   54
            Consolidated Statements of Stockholders' Equity for the years
              ended December 31, 1994, 1995 and 1996......................   55
            Consolidated Statements of Cash Flows for the years ended
              December 31, 1994, 1995 and 1996............................   56
            Notes to Consolidated Financial Statements for the years ended
              December 31, 1994, 1995 and 1996............................   57
            2. Financial Statement Schedule.
 
            All schedules have been omitted since the required information
            is not present in amounts sufficient to require submission of
            the schedule or because the information required is included
            in the consolidated financial statements or notes thereto.
            3. Exhibits.  Reference is made to Item 14(c) of this Annual
              Report on Form 10-K.
</TABLE>
 
     (b) Reports on Form 8-K.
 
          No reports on Form 8-K were filed during the last quarter of the
     fiscal year covered by this Annual Report on Form 10-K.
 
     (c) Exhibits.
 
<TABLE>
<S>          <C>
 2.1(7)      Agreement and Plan of Merger dated as of July 24, 1995
             between the Registrant and SangStat Medical Corporation,
             a California corporation, as filed with the Delaware
             Secretary of State on August 11, 1995.
 3.1(7)      Amended and Restated Articles of Incorporation of the
             Registrant filed November 29, 1993.
 3.3(7)      Bylaws of Registrant.
 3.4(6)      Certificate of Designation for the Series A Junior
             Participating Preferred Stock, filed with the Delaware
             Secretary of State on August 16, 1995.
 4.5(3)      Specimen Common Stock Certificate of Registrant.
10.1(1)(3)   Collaborative Agreement effective April 19, 1993, as
             amended, between SangStat and Baxter Healthcare
             Corporation.
10.2(1)(3)   License Agreement, dated October 21, 1991, between the
             Registrant and The Board of Trustees of Leland Stanford
             Junior University.
10.3(3)      Contract for the Provisions of Services, dated October
             5, 1993 between the Centre Hospitals or Universitaire de
             Mantas an SangStat Atlantique.
</TABLE>
 
                                       49
<PAGE>   51
 
<TABLE>
<S>          <C>
10.4(1)(3)   License Agreement, dated October 13, 1993, between the
             Registrant and Pasteur Merieux Serums et Vacaine.
10.5(1)(3)   Letter Agreement between SangStat and Ortho Biotech.
10.6(2)(3)   1990 Stock Option Plan, as amended October 1992 and Form
             of Stock Option Agreement.
10.7(2)(3)   1993 Stock Option/Stock Issuance Plan.
10.8(3)      Series B Stock Purchase Agreement, dated September 21,
             1989, between the Registrant and the Investors listed in
             Schedule A thereto.
10.9(3)      Series C Stock and Warrant Purchase Agreement, dated
             January 26, 1990, between the Registrant and the
             Investors listed in Schedule A thereto.
10.10(3)     Series D Stock and Warrant Purchase Agreement, dated
             July 15, 1991, between the Registrant and the Investors
             listed in Schedule A thereto.
10.11(3)     Amendment Agreement to the Series D Stock and Warrant
             Purchase Agreement, dated October 5, 1992, between the
             Registrant and the Investors listed in Schedule A of
             that certain Series D Stock and Warrant Purchase
             Agreement, dated July 15, 1991.
10.12(3)     Note and Warrant Purchase Agreement, dated October 2,
             1992, between the Registrant and the Investors listed in
             the Schedule of Lenders thererto.
10.13(3)     Series E Stock and Warrant Purchase Agreement, dated
             April 15, 1993, between the Registrant and the Investors
             listed in Schedule A thereto.
10.14(2)(3)  Amended and Restated Shareholders Agreement, dated
             January 26, 1990, between the Registrant and Philippe
             Pouletty.
10.15(3)     Equipment Lease Agreement dated October 11, 1990 between
             SangStat and David Sampler.
10.16(3)     Real Property Lease, dated August 20, 1990, between the
             Registrant and Manle Business Park and Patrick
             Associates, Inc.
10.17(3)     Lease Agreement dated September 1, 1993 between SangStat
             Atlantique and Centre Hospitaliar.
10.18(7)     Form of Indemnification Agreement to be entered into
             between the Registrant and each of its officers and
             directors.
10.19(1)(3)  License Agreement, dated November 15, 1993, between the
             Registrant and the Board of Trustees of Leland Stanford
             Junior University
10.20(3)     Letter Agreement between the Registrant and Barter
             Healthcare Corporation dated December 11, 1993.
10.21(1)(5)  License Agreement with Pasteur Marieaux Serums et
             Vaccine.
10.22(2)(5)  Supply Agreement with Pasteur Marieux Serums et Vaccine.
</TABLE>
 
                                       50
<PAGE>   52
 
<TABLE>
<S>          <C>
10.23(4)     Common Stock Purchase Agreement, dated December 21, 1994
             between the Registrant and the investors listed in
             Schedule A thereto.
11.1(8)      Calculation of Net Loss Per Common and Equivalent Share.
21.1(5)      Subsidiaries of Registrant.
23.1         Independent Auditors' Consent.
24.1         Power of Attorney. (Reference is made to page 67)
27.1         Financial Data Schedule
</TABLE>
 
------------------------------
(1) Confidential Treatment has been granted for the deleted portions of this
    document.
 
(2) Management contract or compensatory plan or arrangement.
 
(3) Previously filed as an Exhibit to the Registrant's REGISTRATION STATEMENT on
    Form S-1 (No. 33-70436).
 
(4) Previously filed as an Exhibit to the Registrant's Form 8-K filed January 6,
    1994.
 
(5) Previously filed as an Exhibit to the Registrant's REGISTRATION STATEMENT on
    Form S-1 (No. 33-88432).
 
(6) Previously filed as an Exhibit to Registrant's Form 8-K filed August 14,
    1995.
 
(7) Previously filed as an Exhibit to the Registrant's REGISTRATION STATEMENT on
    Form 8-B filed December 4, 1995.
 
(8) Previously filed as an Exhibit to the Registrant's REGISTRATION STATEMENT on
    Form S-3 (No. 333-20301).
 
                                       51
<PAGE>   53
 
                          INDEPENDENT AUDITORS' REPORT
 
To the Board of Directors and Stockholders
  of SangStat Medical Corporation:
 
We have audited the accompanying consolidated balance sheets of SangStat Medical
Corporation and subsidiaries (the Company) as of December 31, 1995 and 1996, and
the related consolidated statements of operations, stockholders' equity and cash
flows for each of the three years in the period ended December 31, 1996. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our 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, such consolidated financial statements present fairly, in all
material respects, the financial position of SangStat Medical Corporation and
subsidiaries at December 31, 1995 and 1996, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 1996 in conformity with generally accepted accounting principles.
 
DELOITTE & TOUCHE LLP
 
San Jose, California
January 29, 1997
 
                                       52
<PAGE>   54
 
                          SANGSTAT MEDICAL CORPORATION
 
                          CONSOLIDATED BALANCE SHEETS
 
<TABLE>
<CAPTION>
                                                                          DECEMBER 31,
                                                                  -----------------------------
                                                                      1995             1996
                                                                  ------------     ------------
<S>                                                               <C>              <C>
                                            ASSETS
CURRENT ASSETS:
  Cash and cash equivalents.....................................  $  4,609,186     $ 19,818,940
  Short-term investments........................................     4,612,565       21,501,961
  Accounts receivable...........................................       406,153          399,437
  Other receivables.............................................       170,118          483,252
  Inventories...................................................       766,124          802,137
  Prepaid expenses..............................................        73,531          413,181
                                                                  ------------     ------------
          Total current assets..................................    10,637,677       43,418,908
PROPERTY AND EQUIPMENT--Net.....................................       528,962          993,995
OTHER ASSETS....................................................       393,238          337,213
                                                                  ------------     ------------
          TOTAL.................................................  $ 11,559,877     $ 44,750,116
                                                                  ============     ============
                             LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
  Accounts payable..............................................  $  1,041,389     $  1,094,104
  Accrued liabilities...........................................       652,742          875,602
  Capital lease obligations--current portion....................       238,651          262,339
  Notes payable--current portion................................       254,249          462,743
                                                                  ------------     ------------
          Total current liabilities.............................     2,187,031        2,694,788
                                                                  ------------     ------------
CAPITAL LEASE OBLIGATIONS.......................................       286,558          296,715
                                                                  ------------     ------------
NOTES PAYABLE...................................................       804,811          803,631
                                                                  ------------     ------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
  Convertible preferred stock, $.001 par value 5,000,000 shares
     authorized; none outstanding...............................            --               --
  Common stock, $.001 par value, 25,000,000 shares authorized;
     outstanding: 1995, 9,598,083 shares; 1996, 13,129,560
     shares.....................................................    36,275,765       81,657,313
  Accumulated deficit...........................................   (28,051,991)     (40,825,826)
  Accumulated translation adjustment............................        46,811           20,634
  Unrealized gain on investments................................        10,892          102,861
                                                                  ------------     ------------
          Total stockholders' equity............................     8,281,477       40,954,982
                                                                  ------------     ------------
          TOTAL.................................................  $ 11,559,877     $ 44,750,116
                                                                  ============     ============
</TABLE>
 
                See notes to consolidated financial statements.
 
                                       53
<PAGE>   55
 
                          SANGSTAT MEDICAL CORPORATION
 
                     CONSOLIDATED STATEMENTS OF OPERATIONS
 
<TABLE>
<CAPTION>
                                                               YEAR ENDED DECEMBER 31,
                                                     --------------------------------------------
                                                        1994            1995             1996
                                                     -----------     -----------     ------------
<S>                                                  <C>             <C>             <C>
REVENUES:
  Net product sales................................  $   674,253     $ 2,697,759     $  2,398,979
  Revenue from collaborative agreement (Note 6)....    3,000,000       1,125,000               --
                                                     ------------    ------------    -------------
          Total revenues...........................    3,674,253       3,822,759        2,398,979
                                                     ------------    ------------    -------------
 
COSTS AND OPERATING EXPENSES:
  Cost of sales and manufacturing expenses.........    1,503,307       2,753,173        2,845,802
  Research and development.........................    4,845,382       6,647,232        8,330,129
  Selling, general and administrative..............    3,157,015       3,772,289        6,120,489
                                                     ------------    ------------    -------------
          Total operating expenses.................    9,505,704      13,172,694       17,296,420
                                                     ------------    ------------    -------------
     Loss from operations..........................   (5,831,451)     (9,349,935)     (14,897,441)
 
OTHER INCOME (EXPENSE):
  Interest income..................................      427,253         811,056        2,261,450
  Interest expense.................................     (143,222)       (139,118)        (137,844)
                                                     ------------    ------------    -------------
          Other income--net........................      284,031         671,938        2,123,606
                                                     ------------    ------------    -------------
NET LOSS...........................................  $(5,547,420)    $(8,677,997)    $(12,773,835)
                                                     ============    ============    =============
NET LOSS PER COMMON SHARE (Note 1).................  $     (0.79)    $     (0.92)    $      (1.03)
                                                     ============    ============    =============
WEIGHTED AVERAGE COMMON SHARES.....................    7,049,032       9,384,726       12,405,081
                                                     ============    ============    =============
</TABLE>
 
                See notes to consolidated financial statements.
 
                                       54
<PAGE>   56
 
                          SANGSTAT MEDICAL CORPORATION
 
                CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
 
<TABLE>
<CAPTION>
                                             COMMON STOCK                        ACCUMULATED     UNREALIZED
                                       ------------------------   ACCUMULATED    TRANSLATION   GAIN (LOSS) ON
                                         SHARES       AMOUNT        DEFICIT      ADJUSTMENT     INVESTMENTS        TOTAL
                                       ----------   -----------   ------------   -----------   --------------   ------------
<S>                                    <C>          <C>           <C>            <C>           <C>              <C>
BALANCES, January 1, 1994............   6,707,626   $23,293,638   $(13,826,574)   $  30,423       $     --      $  9,497,487
Sale of common stock (net of issuance
  costs of $6,000)...................     244,314     1,576,823                                                    1,576,823
Sale of common stock upon private
  placement offering (net of issuance
  costs of $40,000)..................   1,400,000     5,560,000                                                    5,560,000
Exercise of stock options and
  warrants...........................     116,451       264,694                                                      264,694
Accumulated translation adjustment...                                                28,019                           28,019
Unrealized loss on investments.......                                                              (51,958)          (51,958)
Net loss.............................                               (5,547,420)                                   (5,547,420)
                                       ----------   -----------   ------------     --------       --------      ------------
BALANCES, December 31, 1994..........   8,468,391    30,695,155    (19,373,994)      58,442        (51,958)       11,327,645
Sale of common stock (net of issuance
  costs of $317,818).................   1,000,000     5,182,182                                                    5,182,182
Exercise of stock options and
  warrants...........................     129,692       398,428                                                      398,428
Accumulated translation adjustment...                                               (11,631)                         (11,631)
Unrealized gain on investments.......                                                               62,850            62,850
Net loss.............................                               (8,677,997)                                   (8,677,997)
                                       ----------   -----------   ------------     --------       --------      ------------
BALANCES, December 31, 1995..........   9,598,083    36,275,765    (28,051,991)      46,811         10,892         8,281,477
Sale of common stock (net of issuance
  costs of $408,729).................   3,450,000    45,062,271                                                   45,062,271
Exercise of stock options............      81,117        96,817                                                       96,817
Issuance of stock for services.......         360         8,460                                                        8,460
Stock option compensation expense....                   214,000                                                      214,000
Accumulated translation adjustment...                                               (26,177)                         (26,177)
Unrealized gain on investments.......                                                               91,969            91,969
Net loss.............................                              (12,773,835)                                  (12,773,835)
                                       ----------   -----------   ------------     --------       --------      ------------
BALANCES, December 31, 1996..........  13,129,560   $81,657,313   $(40,825,826)   $  20,634       $102,861      $ 40,954,982
                                       ==========   ===========   ============     ========       ========      ============
</TABLE>
 
                See notes to consolidated financial statements.
 
                                       55
<PAGE>   57
 
                          SANGSTAT MEDICAL CORPORATION
 
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
 
<TABLE>
<CAPTION>
                                                                         YEAR ENDED DECEMBER 31,
                                                              ---------------------------------------------
                                                                 1994             1995             1996
                                                              -----------     ------------     ------------
<S>                                                           <C>             <C>              <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
  Net loss..................................................  $(5,547,420)    $ (8,677,997)    $(12,773,835)
  Adjustments to reconcile net loss to net cash used in
    operating activities:
    Depreciation and amortization...........................      323,171          349,420          421,261
    Stock compensation expense..............................           --               --          222,460
    Changes in assets and liabilities:
      Accounts receivable...................................      (80,124)        (222,518)           5,167
      Other receivables.....................................       24,994          (46,503)        (316,123)
      Inventories...........................................     (298,149)        (157,992)         (37,016)
      Prepaid expenses......................................      276,357          (23,357)        (344,110)
      Accounts payable......................................     (111,325)          77,110           63,502
      Accrued liabilities...................................      202,443          110,547          232,860
                                                              -----------     ------------     ------------
         Net cash used in operating activities..............   (5,210,053)      (8,591,290)     (12,525,834)
                                                              -----------     ------------     ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
  Sale of common stock......................................    7,401,517        5,580,610       45,159,088
  Note payable borrowings...................................           --          252,033          383,000
  Notes payable repayments..................................           --         (333,650)        (446,481)
  Repayment of capital lease obligations....................     (224,475)        (285,627)        (285,018)
                                                              -----------     ------------     ------------
         Net cash provided by financing activities..........    7,177,042        5,213,366       44,810,589
                                                              -----------     ------------     ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
  Purchases of property and equipment.......................     (107,580)         (20,262)        (279,888)
  Maturities of short-term investments......................    2,017,189       20,401,597       16,560,957
  Purchase of short-term investments........................   (4,615,020)     (22,392,910)     (33,362,727)
  Other assets..............................................     (129,230)         138,994           33,444
                                                              -----------     ------------     ------------
         Net cash used in investing activities..............   (2,834,641)      (1,872,581)     (17,048,214)
                                                              -----------     ------------     ------------
EFFECT OF EXCHANGE RATE CHANGES ON CASH.....................       55,093           30,763          (26,787)
                                                              -----------     ------------     ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS........     (812,559)      (5,219,742)      15,209,754
CASH AND CASH EQUIVALENTS, Beginning of year................   10,641,487        9,828,928        4,609,186
                                                              -----------     ------------     ------------
CASH AND CASH EQUIVALENTS, End of year......................  $ 9,828,928     $  4,609,186     $ 19,818,940
                                                              ===========     ============     ============
NONCASH INVESTING AND FINANCING ACTIVITIES:
  Property acquired under capital leases....................  $   196,346     $    273,532     $    318,863
                                                              ===========     ============     ============
  Property acquired under notes payable.....................  $        --     $         --     $    290,050
                                                              ===========     ============     ============
  Unrealized gain (loss) on investments.....................  $   (51,958)    $     62,580     $     91,969
                                                              ===========     ============     ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION--
  Cash paid during the year for interest....................  $    92,757     $    143,950     $    149,295
                                                              ===========     ============     ============
</TABLE>
 
                See notes to consolidated financial statements.
 
                                       56
<PAGE>   58
 
                          SANGSTAT MEDICAL CORPORATION
 
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                  YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
 
1.  ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
 
     ORGANIZATION--SangStat Medical Corporation and subsidiaries (the Company)
is a specialty pharmaceutical company applying a disease management approach to
improve the outcome of organ transplantation. The Company's products and product
candidates are designed to prevent and treat graft rejection and monitor
patients throughout the lifelong transplantation process.
 
     PRINCIPLES OF CONSOLIDATION--The consolidated financial statements include
the accounts of the Company and its wholly-owned subsidiaries. Intercompany
accounts and transactions are eliminated.
 
     REVENUE RECOGNITION--Revenue from product sales is recognized upon
shipment, net of estimated sales allowances. Revenue from collaborative
agreements is recognized in accordance with the contract terms, generally as
milestones are met and no significant obligation for future services exists (see
Note 6).
 
     RESEARCH AND DEVELOPMENT--Research and development costs are expensed as
incurred and include expenses associated with new product research, clinical
trials of existing technologies and regulatory affairs activities associated
with product candidates.
 
     CASH AND CASH EQUIVALENTS--The Company considers all highly liquid debt
instruments purchased with an original maturity date of three months or less to
be cash equivalents.
 
     SHORT-TERM INVESTMENTS--Short-term investments consist primarily of highly
liquid debt instruments purchased with a remaining maturity date of greater than
three months. The Company has classified all of its short-term investments as
"available-for-sale securities." The carrying value of such securities is
adjusted to fair market value, with unrealized gains and losses being recorded
as a separate component of stockholders' equity (see Note 2).
 
     INVENTORIES--Inventories are stated at the lower of cost (first-in,
first-out) or market.
 
     PROPERTY AND EQUIPMENT--Property and equipment are stated at cost.
Depreciation is calculated using the straight-line method over estimated useful
lives of three to five years. Leasehold improvements and assets under capital
leases are amortized over their estimated useful lives or the lease term,
whichever is appropriate.
 
     INCOME TAXES--The Company records income taxes using the asset and
liability approach, whereby deferred tax assets and liabilities, net of
valuation allowances, are recorded for the future tax consequences of temporary
differences between financial statement and tax bases of assets and liabilities
and for the benefit of net operating loss carryforwards.
 
     FOREIGN CURRENCY TRANSLATION--Operations of the Company's foreign
subsidiaries are measured using local currency as the functional currency for
each subsidiary. Assets and liabilities of the foreign subsidiaries are
translated into U.S. dollars at the exchange rates in effect as of the balance
sheet dates, and results of operations for each subsidiary are translated using
average rates in effect for the periods presented. Foreign currency transaction
gains and losses are included in the consolidated statements of operations.
 
     STOCK COMPENSATION--The Company accounts for stock-based awards granted to
employees based on the intrinsic value method in accordance with APB Opinion No.
25, "Accounting for Stock Issued to Employees" (see Note 8).
 
     NET LOSS PER COMMON SHARE--Net loss per common share is based on the
weighted average number of common shares outstanding during the periods. Common
equivalent shares, including stock
 
                                       57
<PAGE>   59
 
                          SANGSTAT MEDICAL CORPORATION
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
                  YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
 
options and warrants, have been excluded in the calculation of common shares
since they are antidilutive.
 
     CERTAIN SIGNIFICANT RISKS AND UNCERTAINTIES--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 of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
 
     The Company sells its products to organizations in the healthcare industry
in the United States, Canada and Europe, and does not require its customers to
provide collateral or other security to support accounts receivable. While the
Company maintains allowances for potential bad debt losses, such losses to date
have not been material.
 
     The Company participates in the very dynamic biotechnology industry. The
Company believes that changes in any of the following areas could have a
negative impact on the Company in terms of its future financial position and
results of operations: ability to obtain additional financing; successful
product development; manufacturing and marketing capabilities; ability to
negotiate acceptable collaborative relationships; obtaining necessary FDA and
foreign regulatory approvals; ability to attract and retain key personnel;
litigation and other claims against the Company, including, but not limited to,
patent claims; increased competition; uncertainty regarding health care
reimbursement and reform; and potential exposure for product liability and
hazardous materials.
 
2.  SHORT-TERM INVESTMENTS
 
     Short-term investments consist of the following:
 
<TABLE>
<CAPTION>
                                                           DECEMBER 31, 1995
                                      -----------------------------------------------------------
                                                      UNREALIZED      UNREALIZED
                                       AMORTIZED        GAIN ON         LOSS ON         MARKET
                                         COST         INVESTMENTS     INVESTMENTS        VALUE
                                      -----------     -----------     -----------     -----------
    <S>                               <C>             <C>             <C>             <C>
    Corporate bonds.................  $ 3,005,790      $   7,115       $ (10,130)     $ 3,002,775
    U.S. Treasury notes.............    1,492,847         13,907              --        1,506,754
    Foreign issues..................      103,036             --              --          103,036
                                      -----------       --------        --------      -----------
              Total.................  $ 4,601,673      $  21,022       $ (10,130)     $ 4,612,565
                                      ===========       ========        ========      ===========
</TABLE>
 
<TABLE>
<CAPTION>
                                                           DECEMBER 31, 1996
                                      -----------------------------------------------------------
                                                      UNREALIZED      UNREALIZED
                                       AMORTIZED        GAIN ON         LOSS ON         MARKET
                                         COST         INVESTMENTS     INVESTMENTS        VALUE
                                      -----------     -----------     -----------     -----------
    <S>                               <C>             <C>             <C>             <C>
    Corporate bonds.................  $21,399,100      $ 106,836       $  (3,975)     $21,501,961
                                      ===========       ========        ========      ===========
</TABLE>
 
     At December 31, 1995 and 1996, all short-term investments had maturities of
less than one year.
 
                                       58
<PAGE>   60
 
                          SANGSTAT MEDICAL CORPORATION
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
                  YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
 
3.  INVENTORIES
 
     Inventories consist of:
 
<TABLE>
<CAPTION>
                                                                         DECEMBER 31,
                                                                     ---------------------
                                                                       1995         1996
                                                                     --------     --------
    <S>                                                              <C>          <C>
    Raw materials..................................................  $432,549     $265,537
    Work in process................................................   213,863      275,503
    Finished goods.................................................   119,712      261,097
                                                                     --------     --------
              Total................................................  $766,124     $802,137
                                                                     ========     ========
</TABLE>
 
4.  PROPERTY AND EQUIPMENT
 
     Property and equipment consist of:
 
<TABLE>
<CAPTION>
                                                                       DECEMBER 31,
                                                                ---------------------------
                                                                   1995            1996
                                                                -----------     -----------
    <S>                                                         <C>             <C>
    Machinery and equipment...................................  $ 1,677,929     $ 2,491,647
    Furniture and fixtures....................................       23,323          50,296
    Leasehold improvements....................................       83,760         122,104
                                                                -----------     -----------
    Total.....................................................    1,785,012       2,664,047
    Accumulated depreciation and amortization.................   (1,256,050)     (1,670,052)
                                                                -----------     -----------
    Property and equipment--net...............................  $   528,962     $   993,995
                                                                ===========     ===========
</TABLE>
 
     Included in machinery and equipment at December 31, 1995 and 1996 are
assets leased under capital leases of $441,837 and $456,083 (net of accumulated
amortization of $460,287 and $496,831), respectively.
 
5.  ACCRUED LIABILITIES
 
     Accrued liabilities consist of:
 
<TABLE>
<CAPTION>
                                                                         DECEMBER 31,
                                                                     ---------------------
                                                                       1995         1996
                                                                     --------     --------
    <S>                                                              <C>          <C>
    Salaries and related benefits..................................  $545,803     $713,447
    Other..........................................................   106,939      162,155
                                                                     --------     --------
              Total................................................  $652,742     $875,602
                                                                     ========     ========
</TABLE>
 
6.  COLLABORATIVE AGREEMENTS
 
     In April 1993, the Company entered into a collaborative licensing,
marketing and development agreement (the Agreement) with Baxter Healthcare
Corporation (Baxter). The Agreement provides to Baxter exclusive marketing
rights to certain products. In addition, the Agreement specifies that the
Company develop certain products pursuant to specifications and milestones as
outlined in the Agreement. In 1994 and 1995, $3,000,000 and $1,125,000,
respectively, was earned as milestones were attained. The final payments of
$1,125,000 in 1995 represented the completion of $10.0 million received by
SangStat for milestones, license fees and equity in 1993 through 1995 under its
collaborative agreement with Baxter. The costs associated with the development
of the products encompassed under the Agreement and achievement of related
milestones were approximately $1,400,000 in both 1994 and
 
                                       59
<PAGE>   61
 
                          SANGSTAT MEDICAL CORPORATION
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
                  YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
 
1995; such costs have been included in research and development expenses in the
Consolidated Statements of Operations. The agreement was amended upon written
consent of the parties such that, effective July 1, 1996, the Company reacquired
exclusive commercial rights for the monitoring products from Baxter. Since that
date, the Company has been marketing these monitoring products through its own
sales staff in the United States and Europe.
 
     In October 1993, the Company entered into an agreement with Pasteur Merieux
Serums et Vaccins (the Merieux Agreement). The Merieux Agreement specifies that
the Company will have exclusive rights to market certain Merieux products in the
United States and Canada upon approval of the FDA or similar agencies. The
Company must use reasonable commercial efforts to obtain FDA approval. The
Merieux Agreement provides for payments by the Company upon completion of
certain milestones totaling $2,000,000 and royalties on sales of products,
subject to minimum amounts. In 1994, $500,000 was expensed under the Merieux
Agreement as the first milestone was attained by Pasteur Merieux Serums et
Vaccins (none in 1995 or 1996).
 
7.  NOTES PAYABLE
 
     Notes payable consist of:
 
<TABLE>
<CAPTION>
                                                                        DECEMBER 31,
                                                                  -------------------------
                                                                     1995           1996
                                                                  ----------     ----------
    <S>                                                           <C>            <C>
    Notes due to former Series E preferred stockholders.........  $  666,804     $  555,485
    Baxter equipment note.......................................          --        260,419
    Research and development loan...............................     295,156        217,291
    Other loans.................................................      97,100        233,179
                                                                  ----------     ----------
    Total.......................................................   1,059,060      1,266,374
    Less current portion........................................    (254,249)      (462,743)
                                                                  ----------     ----------
    Long-term...................................................  $  804,811     $  803,631
                                                                  ==========     ==========
</TABLE>
 
     Upon the Company's initial public offering in 1993, notes payable of
$1,240,897 were issued to Series E preferred stockholders in accordance with
certain antidilution provisions of the Series E preferred stock purchase
agreement. The remaining balance of $555,485 at December 31, 1996 is payable in
eight equal annual installments and bears interest at 6.06%.
 
     The Baxter equipment note bears interest at 8.25% over a seven-year period
in equal quarterly installments beginning in 1996.
 
     The research and development loan provided by the French government is
denominated in French Francs, does not bear interest and is payable (based on
the exchange rate at December 31, 1996) in the amounts of $92,871 and $124,420
in 1997 and 1998, respectively. The other loans consist primarily of a note
payable for insurance and a noninterest bearing loan denominated in French
Francs provided by a French government agency.
 
                                       60
<PAGE>   62
 
                          SANGSTAT MEDICAL CORPORATION
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
                  YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
 
     As of December 31, 1996, future principal payments of notes payable are as
follows:
 
<TABLE>
<CAPTION>
                            YEARS ENDING DECEMBER 31,
    -------------------------------------------------------------------------
    <S>                                                                        <C>
    1997.....................................................................  $  462,743
    1998.....................................................................     247,688
    1999.....................................................................     126,340
    2000.....................................................................     111,948
    2001.....................................................................     113,718
    Thereafter...............................................................     203,937
                                                                               ----------
              Total..........................................................  $1,266,374
                                                                               ==========
</TABLE>
 
8.  STOCKHOLDERS' EQUITY
 
     COMMON STOCK--In December 1994, the Company issued 1,400,000 shares of
common stock in a private placement for aggregate consideration of $5,600,000,
in February 1995 issued 1,000,000 shares of common stock in a public offering
for aggregate consideration of $5,500,000, and in March 1996 issued 3,450,000
shares of common stock in a public offering for aggregate consideration of
$45,471,000.
 
     STOCKHOLDER RIGHTS PLAN--In August 1995, the Company's Board of Directors
approved a plan to protect stockholders' rights in the event of a proposed
takeover of the Company. Under the plan, a preferred share purchase right
(Right) is attached to each share of common stock. The Rights are exercisable
only if a person or group acquires 15% or more of the Company's common stock or
announces a tender offer, the consummation of which would result in ownership by
a person or group of 15% or more of the Company's common stock. Each Right will
entitle stockholders to buy one one-hundredth of a share of a new series of
junior participating preferred stock at an exercise price of $45 upon certain
events. If, after the Rights become exercisable, the Company is acquired in a
merger or other business combination transaction, or sells 50% or more of its
assets or earnings power, each Right will entitle its holder to purchase, at the
Right's then-current price, a number of the acquiring company's common shares
having a market value at the time of twice the Right's exercise price. If a
person or group acquires 15% or more of the Company's outstanding common stock,
each Right will entitle its holder (other than such person or members of such
group) to purchase, at the Right's then-current exercise price, a number of the
Company's common shares (or cash, other securities or property) having a market
value twice the Right's exercise price. At any time within ten days after a
person or group has acquired beneficial ownership of 15% or more of the
Company's common stock, the Rights are redeemable for $.01 per Right at the
option of the Board of Directors. The Rights expire on August 25, 2005, unless
earlier redeemed or exchanged.
 
     COMMON STOCK WARRANTS--In 1991, the Company issued warrants to purchase
259,268 shares of common stock at $4.075 per share. All of these warrants were
exercised from 1993 through 1995.
 
     STOCK OPTION PLAN--Under the Company's stock option plans, incentive or
nonstatutory stock options to purchase up to 1,590,200 shares of common stock
may be granted to employees, directors, and consultants. Incentive stock options
must be granted at not less than fair market value at the date of grant.
Nonstatutory options must be granted at not less than 85% of fair market value
at the date of the grant.
 
                                       61
<PAGE>   63
 
                          SANGSTAT MEDICAL CORPORATION
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
                  YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
 
     A summary of stock option activity is as follows:
 
<TABLE>
<CAPTION>
                                                                                  WEIGHTED
                                                                 NUMBER OF        AVERAGE
                                                                  SHARES       EXERCISE PRICE
                                                                 ---------     --------------
    <S>                                                          <C>           <C>
    Balances, January 1, 1994..................................    575,715         $ 1.18
    Options granted............................................     71,600           7.00
    Options exercised..........................................    (57,190)          0.41
    Options cancelled..........................................    (32,850)          1.33
                                                                 ---------
    Balances, December 31, 1994 (200,700 vested at a weighted
      average price of $0.74)..................................    557,275           2.00
    Options granted (weighted average fair value of $3.28).....    501,080           5.73
    Options exercised..........................................    (37,460)          0.55
    Options cancelled..........................................     (6,682)          0.41
                                                                 ---------
    Balances, December 31, 1995 (255,798 vested at a weighted
      average price of $1.50)..................................  1,014,213           3.85
    Options granted (weighted average fair value of $8.16).....    243,700          15.02
    Options exercised..........................................    (81,117)          1.19
    Options cancelled..........................................     (7,204)          6.47
                                                                 ---------
    Balances, December 31, 1996................................  1,169,592         $ 6.61
                                                                 =========
</TABLE>
 
     Options to purchase common stock generally vest over a period of four
years, are exercisable immediately and expire ten years from the date of grant.
Unvested common shares acquired under the plan are subject to repurchase by the
Company at the original issuance price. At December 31, 1996, 402,036
outstanding shares were subject to such repurchase rights at prices ranging from
$0.41 to $26.38 per share. As of December 31, 1996, options for 48,720 shares,
which were granted outside of the stock option plan, were outstanding and are
included in the above table. As of December 31, 1996, 268,059 shares were
available under the plan for future grant.
 
     During 1996, the Board of Directors, subject to shareholder approval,
approved the 1996 Directors Option Plan and in accordance with the Plan granted
options to purchase a total of 74,000 shares of common stock at $13.50 - $23.50
per share to the outside Directors. Such grants are included in the above table,
however, until shareholder approval has been received, a measurement date for
these grants will not be established. Consequently, the difference between fair
market value and the exercise price is being amortized to expense over the
vesting period of the options.
 
     Additional information regarding options outstanding as of December 31,
1996 is as follows:
 
<TABLE>
<CAPTION>
                         OPTIONS OUTSTANDING AND EXERCISABLE
                    ---------------------------------------------          VESTED OPTIONS
                                  WEIGHTED AVE.                       -------------------------
                                    REMAINING       WEIGHTED AVE.                 WEIGHTED AVE.
   RANGE OF          NUMBER        CONTRACTUAL        EXERCISE        NUMBER        EXERCISE
EXERCISE PRICES     OUTSTANDING     LIFE(YRS)           PRICE         VESTED          PRICE
---------------     ---------     -------------     -------------     -------     -------------
<S>                 <C>           <C>               <C>               <C>         <C>
$ 0.19 - $ 2.50       310,733          6.5             $  1.06        303,548        $  1.03
  2.51 -   5.00       226,580          8.1                4.67        181,376           4.69
  5.10 -   8.25       360,579          8.2                6.29        146,132           6.27
  8.26 -  13.50       236,700          9.5               13.50          5,760          13.50
 13.51 -  26.38        35,000          9.7               24.34              0           0.00
                    ---------          ---              ------        -------         ------
                    1,169,592          8.0             $  6.58        636,816        $  3.39
                    =========          ===              ======        =======         ======
</TABLE>
 
                                       62
<PAGE>   64
 
                          SANGSTAT MEDICAL CORPORATION
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
                  YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
 
     ADDITIONAL STOCK PLAN INFORMATION--Effective for 1996, the Company was
required to adopt the disclosure requirements of Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (SFAS
123). SFAS 123 defines a fair value method of accounting for stock-based
compensation awards to employees. The Company has elected to continue to follow
the provisions of Accounting Principals Board No. 25, "Accounting for Stock
Issued to Employees," and its related interpretations; accordingly, no
compensation expense has been recognized in the financial statements for
employee stock arrangements.
 
     SFAS 123 requires that the fair value of stock-based awards to employees be
calculated through the use of option pricing models, even though such models
were developed to estimate the fair value of freely tradable, fully transferable
options without vesting restrictions, which significantly differ from the
Company's stock option awards. These models also require subjective assumptions,
including future stock price volatility and expected time to exercise, which
greatly affect the calculated values. The Company's calculations were made using
the Black-Scholes option pricing model with the following weighted average
assumptions: expected life, five and a half years; stock volatility, 54% in 1996
and 1995; risk free interest rate, approximately 6% in 1996 and 7% in 1995; and
no dividend payments during the expected term. Forfeitures are recognized as
they occur. If the computed fair values of the 1995 and 1996 awards had been
amortized to expense over the vesting period of the awards, pro forma net loss
would have been approximately $8,903,000 ($0.95 per share) in 1995 and
$13,378,000 ($1.08 per share) in 1996. However, the impact of outstanding
non-vested stock options granted prior to 1995 has been excluded from the pro
forma calculation; accordingly, the 1995 and 1996 pro forma adjustments are not
indicative of future period pro forma adjustments, when the calculation will
apply to all applicable stock options.
 
9.  LEASING ARRANGEMENTS
 
     The Company leases administrative facilities under operating leases and
machinery and equipment under capital leases expiring through 2000.
 
     As of December 31, 1996, future minimum annual payments under capital and
operating leases are as follows:
 
<TABLE>
<CAPTION>
                                                                     CAPITAL      OPERATING
                       YEARS ENDING DECEMBER 31,                      LEASES       LEASES
    ---------------------------------------------------------------  --------     ---------
    <S>                                                              <C>          <C>
    1997...........................................................  $315,293     $ 284,300
    1998...........................................................   189,452       291,711
    1999...........................................................   133,861       163,169
    2000...........................................................     8,363        18,949
                                                                     ---------     --------
    Total minimum lease payments...................................   646,969     $ 758,129
                                                                                   ========
    Less amounts representing interest.............................   (87,915)
                                                                     ---------
    Present value of minimum lease payments........................   559,054
    Less current portion...........................................  (262,339)
                                                                     ---------
    Capital lease obligations......................................  $296,715
                                                                     =========
</TABLE>
 
     Rent expense for the years ended December 31, 1994, 1995 and 1996 was
$225,687, $267,312 and $289,007 respectively.
 
                                       63
<PAGE>   65
 
                          SANGSTAT MEDICAL CORPORATION
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
                  YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
 
10.  INCOME TAXES
 
     Loss before income taxes consists of the following:
 
<TABLE>
<CAPTION>
                                                                 DECEMBER 31,
                                                 --------------------------------------------
                                                    1994            1995             1996
                                                 -----------     -----------     ------------
    <S>                                          <C>             <C>             <C>
    Income (loss) before income taxes:
      Domestic.................................  $(5,475,695)    $(8,856,483)    $(12,634,970)
      Foreign..................................      (71,725)        178,486         (138,865)
                                                 -----------     -----------     ------------
                                                 $(5,547,420)    $(8,677,997)    $(12,773,835)
                                                 ===========     ===========     ============
</TABLE>
 
     No income tax provision (benefit) has been provided due to the Company's
continuing losses.
 
     Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amount of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes, as well as operating loss
and tax credit carryforwards. Significant components of the Company's deferred
income tax assets and liabilities are as follows:
 
<TABLE>
<CAPTION>
                                                                      DECEMBER 31,
                                                              -----------------------------
                                                                  1995             1996
                                                              ------------     ------------
    <S>                                                       <C>              <C>
    Deferred tax assets:
      Net operating losses..................................  $  9,701,724     $ 14,222,632
      General business credits..............................     1,127,395        1,127,395
      Accruals deductible in different periods..............       380,695          743,564
      Depreciation..........................................       115,809          141,335
                                                              ------------     ------------
                                                                11,325,623       16,234,926
    Valuation allowance.....................................   (11,325,623)     (16,234,926)
                                                              ------------     ------------
              Total.........................................  $         --     $         --
                                                              ============     ============
</TABLE>
 
     Based on its history of operating losses, the Company has placed a
valuation allowance of $11,325,623 and $16,234,926 against its otherwise
recognizable net deferred tax assets at December 31, 1995 and 1996,
respectively, due to the uncertainty surrounding the realizability of these
benefits.
 
     At December 31, 1996, the Company had federal, California and foreign net
operating loss carryforwards of approximately $37,200,000, $13,600,000, and
$1,000,000, respectively, available to reduce future taxable income. Such
carryforwards expire beginning in 1997 through 2011.
 
     Utilization of the net operating losses and credits may be subject to an
annual limitation due to ownership change limitations provided by the Internal
Revenue Code of 1986 and similar state provisions. The annual limitation may
result in the expiration of net operating losses and credits before utilization.
 
     Also at December 31, 1996, the Company had research and experimentation
credit carryforwards available of approximately $734,000 and $393,000 for
federal and state tax purposes, respectively. The federal tax credit
carryforwards expire beginning in 2004 and the state tax credit carryforwards
have no expiration date.
 
11.  EMPLOYEE BENEFIT PLAN
 
     In May 1995, the Company established a 401(k) tax-deferred savings plan,
whereby eligible employees may contribute up to 20% of their eligible
compensation (to a maximum of approximately
 
                                       64
<PAGE>   66
 
                          SANGSTAT MEDICAL CORPORATION
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
                  YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
 
$9,500 per year). Company contributions are discretionary and as of December 31,
1996 the Company had not made any contributions.
 
12.  MAJOR CUSTOMERS
 
     Baxter accounted for approximately 90%, 49% and 16% of total revenues in
1994, 1995 and 1996, respectively (see Note 6). Another customer accounted for
approximately 10% of total revenues in 1996.
 
13.  FOREIGN OPERATIONS
 
     The Company is engaged in one business segment: the development and
marketing of products for use in transplantation, including monitoring test
products and therapeutic products. The Company's operations in Europe are
conducted primarily in France and primarily relate to research and development
and clinical trials for therapeutic products.
 
     Summarized data for the Company's domestic and foreign operations are as
follows:
 
<TABLE>
<CAPTION>
                                      UNITED
                                      STATES          EUROPE          CANADA       CONSOLIDATED
                                   ------------     -----------     ----------     ------------
    <S>                            <C>              <C>             <C>            <C>
    Year ended December 31, 1994:
      Sales to unaffiliated        $  3,656,051     $    18,202     $       --     $  3,674,253
         customers...............
                                   ============     ============    ============
      Loss from operations.......  $ (4,920,839)    $  (864,517)    $  (46,095)    $ (5,831,451)
                                   ============     ============    ============
      Total assets...............  $ 13,818,654     $   605,148     $   26,238     $ 14,450,040
                                   ============     ============    ============
    Year ended December 31, 1995:
      Sales to unaffiliated        $  2,356,211     $        --     $1,466,548     $  3,822,759
         customers...............
                                   ============     ============    ============
      Loss from operations.......  $ (8,193,698)    $(1,066,847)    $  (89,390)    $ (9,349,935)
                                   ============     ============    ============
      Total assets...............  $ 10,348,129     $   610,015     $  601,733     $ 11,559,877
                                   ============     ============    ============
    Year ended December 31, 1996:
      Sales to unaffiliated        $    931,706     $   275,154     $1,192,119     $  2,398,979
         customers...............
                                   ============     ============    ============
      Loss from operations.......  $(13,431,697)    $(1,312,577)    $ (153,167)    $(14,897,441)
                                   ============     ============    ============
      Total assets...............  $ 43,005,162     $   953,026     $  791,928     $ 44,750,116
                                   ============     ============    ============
</TABLE>
 
                                       65
<PAGE>   67
 
                                   SIGNATURES
 
     Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, on March 12, 1997.
 
                                          SANGSTAT MEDICAL CORPORATION
 
                                          By:      /s/ PHILIPPE POULETTY
                                            ------------------------------------
                                                     Philippe Pouletty
                                            Chairman and Chief Executive Officer
 
                                       66
<PAGE>   68
 
                               POWER OF ATTORNEY
 
     KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Philippe Pouletty and Henry N. Edmunds,
and each of them, as his true and lawful attorneys-in-fact and agents, with full
power of substitution and resubstitution, for him and in his name, place and
stead, in any and all capacities, to sign any and all amendments to this Report
on Form 10-K, and to file the same, with all exhibits thereto, and other
documents in connection therewith, with the Securities and Exchange Commission,
granting unto said attorneys-in-fact and agents, and each of them, full power
and authority to do and perform each and every act and thing requisite and
necessary to be done in connection therewith, as fully to all intents and
purposes as he might or could do in person, hereby ratifying and confirming all
that said attorneys-in-fact and agents, or any of them, or their or his
substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
 
     Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
 
<TABLE>
<CAPTION>
                 SIGNATURE                                 TITLE                     DATE
-------------------------------------------    -----------------------------    ---------------
 
<C>                                            <S>                              <C>
           /s/ PHILIPPE POULETTY               Chief Executive Officer          March 12, 1997
-------------------------------------------    (Principal Executive
          Philippe Pouletty, M.D.              Officer) and Chairman of the
                                               Board of Directors
           /s/ HENRY N. EDMUNDS                Vice President and Chief         March 12, 1997
-------------------------------------------    Financial Officer (Principal
          Henry N. Edmunds, Ph.D.              Accounting Officer)
 
                                               Director                         March   , 1997
-------------------------------------------
              Gordon Russell
 
          /s/ FREDRIC J. FELDMAN               Director                         March 12, 1997
-------------------------------------------
         Fredric J. Feldman, Ph.D.
 
          /s/ ELIZABETH GREETHAM               Director                         March 12, 1997
-------------------------------------------
            Elizabeth Greetham
 
          /s/ RICHARD D. MURDOCK               Director                         March 12, 1997
-------------------------------------------
            Richard D. Murdock
 
                                               Director                         March   , 1997
-------------------------------------------
        Andrew Perlman, M.D., Ph.D.
 
             /s/ VINCENT WORMS                 Director                         March 12, 1997
-------------------------------------------
               Vincent Worms
</TABLE>
 
                                       67
<PAGE>   69
 
                          SANGSTAT MEDICAL CORPORATION
 
                               INDEX TO EXHIBITS
 
<TABLE>
<CAPTION>
                                                                                      SEQUENTIALLY
                                                                                        NUMBERED
EXHIBIT                                      DESCRIPTION                                  PAGE
--------         -------------------------------------------------------------------  ------------
<C>              <S>                                                                  <C>
   2.1 (7)       Agreement and Plan of Merger dated as of July 24, 1995 between the
                 Registrant and SangStat Medical Corporation, a California
                 corporation, as filed with the Delaware Secretary of State on
                 August 11, 1995.
   3.1 (8)       Amended and Restated Articles of Incorporation of the Registrant
                 filed November 29, 1993.
   3.3 (7)       Bylaws of Registrant.
   3.4 (6)       Certificate of Designation for the Series A Junior Participating
                 Preferred Stock, filed with the Delaware Secretary of State on
                 August 16, 1995.
   4.5 (3)       Specimen Common Stock Certificate of Registrant.
  10.1 (1)(3)    Collaborative Agreement effective April 19, 1993, as amended,
                 between SangStat and Baxter Healthcare Corporation.
  10.2 (1)(3)    License Agreement, dated October 21, 1991, between the Registrant
                 and The Board of Trustees of Leland Stanford Junior University.
  10.3 (3)       Contract for the Provision of Services, dated October 5, 1993
                 between the Centre Hospitalier Universitaire de Nantes and SangStat
                 Atlantique.
  10.4 (1)(3)    License Agreement, dated October 13, 1993, between the Registrant
                 and Pasteur Merieux Serums et Vaccine.
  10.5 (1)(3)    Letter Agreement between SangStat and Ortho Biotech.
  10.6 (2)(3)    1990 Stock Option Plan, as amended October 1992 and form of Stock
                 Option Agreement.
  10.7 (2)(3)    1993 Stock Option/Stock Issuance Plan.
  10.8 (3)       Series B Stock Purchase Agreement, dated September 21, 1989,
                 between the Registrant and the Investors listed in Schedule A
                 thereto.
  10.9 (3)       Series C Stock and Warrant Purchase Agreement, dated January 26,
                 1990, between the Registrant and the Investors listed in Schedule A
                 thereto.
  10.10(3)       Series D Stock and Warrant Purchase Agreement, dated July 15, 1991,
                 between the Registrant and the Investors listed in Schedule A
                 thereto.
  10.11(3)       Amendment Agreement to the Series D Stock and Warrant Purchase
                 Agreement, dated October 5, 1992, between the Registrant and the
                 Investors listed in Schedule A of that certain Series D Stock and
                 Warrant Purchase Agreement, dated July 15, 1991.
  10.12(3)       Note and Warrant Purchase Agreement, dated October 2, 1992, between
                 the Registrant and the Investors listed in the Schedule of Lenders
                 thereto.
  10.13(3)       Series E Stock and Warrant Purchase Agreement, dated April 19,
                 1993, between the Registrant and the Investors listed in Schedule A
                 thereto.
  10.14(2)(3)    Amended and Restated Shareholders Agreement, dated January 26,
                 1990, between the Registrant and Philippe Pouletty.
  10.15(3)       Equipment Lease Agreement dated October 11, 1990 between SangStat
                 and David Rammler.
</TABLE>
 
                                       68
<PAGE>   70
 
<TABLE>
<CAPTION>
                                                                                      SEQUENTIALLY
                                                                                        NUMBERED
EXHIBIT                                      DESCRIPTION                                  PAGE
--------         -------------------------------------------------------------------  ------------
<C>              <S>                                                                  <C>
  10.16(3)       Real Property Lease, dated August 20, 1990, between the Registrant
                 and Menlo Business Park and Patrician Associates, Inc.
  10.17(3)       Lease Agreement dated September 1, 1993 between SangStat Atlantique
                 and Center Hospitalier.
  10.18(7)       Form of Indemnification Agreement to be entered into between the
                 Registrant and each of its officers and directors.
  10.19(1)(3)    License Agreement, dated November 15, 1993, between the Registrant
                 and the Board of Trustees of Leland Stanford Junior University.
  10.20(3)       Letter Agreement between the Registrant and Baxter Healthcare
                 Corporation dated December 11, 1993.
  10.21(1)(5)    License Agreement with Pasteur Marieux Serums et Vaccine.
  10.22(2)(5)    Supply Agreement with Pasteur Marieux Serums et Vaccine.
  10.23(4)       Common Stock Purchase Agreement, dated December 23, 1994, between
                 the Registrant and the Investors listed in Schedule A thereto.
  11.1 (8)       Calculation of Net Loss per Common and Equivalent Share.
  21.1 (5)       Subsidiaries of Registrant.
  23.1           Independent Auditors' Consent.
  24.1           Power of Attorney. (Reference is made to page 67)
  27.1           Financial Data Schedule.
</TABLE>
 
------------------------------
(1) Confidential Treatment has been granted for the deleted portions of this
    document.
 
(2) Management contract or compensatory plan or arrangement.
 
(3) Previously filed as an Exhibit to the Registrant's Registration Statement on
    Form S-1 (No. 33-70436).
 
(4) Previously filed as an Exhibit to the Registrant's Form 8-K filed January 6,
    1994.
 
(5) Previously filed as an Exhibit to the Registrant's Registration Statement on
    Form S-1 (No. 33-88432).
 
(6) Previously filed as an Exhibit to Registrant's Form 8-K filed August 14,
    1995.
 
(7) Previously filed as an Exhibit to the Registrant's Registration Statement on
    Form 8-B filed December 4, 1995.
 
(8) Previously filed as an Exhibit to the Registrant's Registration Statement on
    Form S-3 (No. 333-20301).
 
                                       69