================================================================================
                                  UNITED STATES
                       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, 1997.

                                       OR

     Transition  Report  Pursuant  to  Section  13 or  15(d)  of the  Securities
---  Exchange Act of 1934.

                             Commission File Number:
                                     0-24814

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

                                   SUGEN, Inc.
             (Exact name of registrant as specified in its charter)

          Delaware                                               13-3629196
(State or other jurisdiction of                              (I.R.S. Employer
 incorporation or organization)                              Identification No.)

               351 Galveston Drive, Redwood City, California 94063
                    (address of principal executive offices)

                                 (650) 306-7700
              (Registrant's telephone number, including area code)

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

           Securities registered pursuant to Section 12(g) of the Act:

                           Common Stock $.01 par value
                         Preferred Share Purchase Rights

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

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 filing requirements
for the past 90 days. Yes X   No
                         ---    ---
Indicate by check mark if disclosure of delinquent  filers  pursuant to Item 405
of Regulation  S-K is not contained  herein,  and will not be contained,  to the
best of registrant's  knowledge,  in definitive proxy or information  statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K [X].

The aggregate  market value of the of the Common Stock of the registrant held by
non-affiliates as of March 13, 1998 was $141,903,757. (1)

The number shares of Common Stock  outstanding  at March 13, 1998 was 15,384,879
shares.

                       DOCUMENTS INCORPORATED BY REFERENCE
                        (To The Extent Indicated Herein)

Portions of Registrant's Definitive Proxy Statement which will be filed with the
Commission pursuant to Regulation 14A in connection with the 1998 Annual Meeting
are incorporated herein by reference in Part III of this Report.


---------------------------
(1)  Excludes  5,598,413  shares  of  the  Registrant's  Common  Stock  held  by
executive officers, directors and stockholders whose ownership exceeds 5% of the
Common Stock outstanding at March 13, 1998.
================================================================================

<PAGE>


                                     PART I

Item 1.           BUSINESS

         This Annual  Report on Form 10-K  contains  forward-looking  statements
within the meaning of Section 27A of the  Securities Act of 1933 and Section 21E
of the  Securities  Exchange Act of 1934 which are subject to the "safe  harbor"
created by those sections. These forward-looking statements include, but are not
limited to, statements  concerning the Company's plans to: continue  development
of its current  product  candidates;  conduct  clinical  trials with  respect to
SU101,  SU5416 and other  product  candidates;  utilize  the  Company's  capital
resources  and the time periods  related  thereto;  seek  regulatory  approvals;
engage  third-party  manufacturers  to supply its clinical trials and commercial
requirements;  establish a marketing,  sales and  distribution  capability;  and
evaluate  additional product  candidates for subsequent  clinical and commercial
development. These forward-looking statements may be found in the "Business" and
"Management's  Discussion  and  Analysis of Financial  Condition  and Results of
Operations"  sections  of  this  Annual  Report  on Form  10-K.  Forward-looking
statements not specifically set forth above may also be found in these and other
sections  of the Annual  Report on Form  10-K.  Each  statement  is based on the
current   expectations   of  the  Company  and  is  subject  to  the  risks  and
uncertainties inherent in the Company's business. In accordance with the Private
Securities Litigation Reform Act of 1995, the Company reminds investors that all
such  "forward-looking  statements"  are  necessarily  only  estimates of future
results  and  that  the  actual  results  achieved  by the  Company  may  differ
materially from these current expectations due to a number of factors, including
(i) the  Company's  technological  success  in  developing  lead  compounds  and
products;  (ii)  the  availability  and  terms  of  financing  of the  Company's
operations;  (iii) the actions of third  parties,  including  collaborators  and
competitors;  (iv) the demonstration of the safety and efficacy of the Company's
products at each stage of clinical development; (v) the ability to obtain patent
and other  proprietary  rights protection for the Company's  products;  (vi) the
receipt of timely  regulatory  approval  of the  Company's  products;  (vii) the
ability to manufacture product candidates in commercial quantities at reasonable
costs and in a manner acceptable to various regulatory  authorities;  and (viii)
market acceptance of the Company's  products.  Factors creating  uncertainty are
discussed in more detail in  individual  sections of this Annual  Report on Form
10-K.  In  particular,  see the  "Liquidity  and Capital  Resources"  section of
"Management's  Discussion  and  Analysis of Financial  Condition  and Results of
Operations."

Overview

         SUGEN is a  biopharmaceutical  company  focused  on the  discovery  and
development  of small  molecule  drugs which  target  specific  cellular  signal
transduction  pathways.  These signalling pathways are regulated by cell-surface
receptors  or  intracellular  signalling  molecules  known as  tyrosine  kinases
("TKs"),  tyrosine  phosphatases ("TPs") and serine-threonine  kinases ("STKs"),
three of the largest known  families of receptors in the body and key regulators
of critical  cellular  functions.  Aberrant  signalling of TKs, TPs and STKs has
been shown to result in a variety of chronic  and acute  pathological  diseases,
including cancer and diabetes as well as in dermatologic, ophthalmic, neurologic
and immune  disorders.  The Company  believes that compounds  designed to target
certain  kinases and  phosphatases  and inhibit  enzyme  activity or prevent the
binding of downstream  signalling molecules make attractive  therapeutic product
candidates.   The  Company's   research  and   development   efforts  in  signal
transduction are based upon the pioneering  accomplishments  of SUGEN's founding
scientists,  Dr. Axel Ullrich of  Max-Planck-Institut  fur Biochemie ("MPI") and
Dr. Joseph Schlessinger of New York University Medical Center ("NYU").

         SU101,   the  Company's   most  advanced   product   candidate,   is  a
platelet-derived  growth  factor  receptor  ("PDGF TK")  signalling  antagonist.
Imbalances in the PDGF TK signalling pathway have been shown by SUGEN and others
to be implicated in certain types of cancers.  The Company has completed a Phase
II  clinical  trial for use of SU101 as a  treatment  for  refractory  malignant
glioma and has recently  initiated a Phase III clinical  trial in first  relapse
glioma.  A Phase  II  clinical  trial of SU101 in  combination  with  BCNU,  the
chemotherapy  drug  that is part of the  standard  treatment  regimen  in  newly
diagnosed brain cancer patients,  was initiated in mid-1997, and the Company has
also recently initiated a Phase II clinical trial of SU101 in hormone refractory
prostate cancer. To date, over 158 patients have been treated with SU101 in nine
Company-sponsored  clinical  trials  including  patients  with  brain,  ovarian,
prostate and non-small cell lung cancers.

         The Company is also  conducting  its initial Phase I clinical trial for
its second cancer product  candidate,  SU5416,  a Flk-1/KDR TK antagonist  which
inhibits  angiogenesis (the process by which blood vessels are formed) and plans
to initiate Phase II clinical  trials in 1998. The  pharmaceutical  industry has
long sought tumor-specific inhibitors of angiogenesis with low toxicity profiles
because,  theoretically,  inhibiting angiogenesis may limit tumor growth, extend
the period of  disease-free  remission  in patients  who  respond to  front-line
therapy and reduce the potential for metastases. Potential oncology applications
for angiogenesis  include  treatments for most solid tumor types.  SUGEN is also
pursuing six additional  cancer-related  drug development  programs,  including:
Pan-Her, GRB2, Raf, PDGF TK (orally available), second generation

                                        2

<PAGE>
angiogenesis  inhibitors  and other  proprietary  programs,  many of which  lead
compounds are now undergoing in vivo pharmacology studies. The Company currently
plans to file two Investigational New Drug applications  ("IND") in each of 1998
and 1999,  but there can be no assurance that the Company will file such INDs at
such times or at all.

         SUGEN is also applying its drug discovery and  development  platform to
areas  outside  oncology,  including  dermatology,   ophthalmology,   rheumatoid
arthritis,  cardiovascular  disease,  diabetes,  neurodegenerative  diseases and
immunology.  The Company is conducting a Phase I clinical  trial for SU5271,  an
epidermal  growth factor  receptor ("EGF TK")  antagonist,  for the treatment of
psoriasis.

         SUGEN  employs  a   target-driven   approach  to  drug   discovery  and
development.  The Company  believes that the receptors and molecules that play a
causative  role in disease  states are  attractive  targets  for drug design and
development.   SUGEN's  drug   discovery   platform   consists  of:  (1)  target
identification, using advanced genomics techniques and the Company's proprietary
bioinformatics  program;  (2) target  validation  in  relevant  in vivo  disease
models;  (3) whole cell or other assay  design and  target-driven  screening  of
compounds  for  leads;  and (4)  lead  optimization  using  crystallography  and
computational  chemistry.  The  Company  believes  that its drug  discovery  and
development platform may reduce the cost, time and risk associated with bringing
potential  products to market by  rationally  screening  for potent and specific
drug  leads in the  early  stages  of  discovery  and  optimizing  pharmacologic
features in the later stages of drug development, thereby reducing the incidence
and severity of side effects.

         SUGEN  is   concurrently   pursuing   two   business   strategies   for
commercialization  of its products and technologies.  In the cancer field, SUGEN
intends to build a vertically  integrated  oncology  business in North  America,
with the  objective  of  bringing to market a family of  target-specific  signal
transduction   inhibitors   proprietary   to  SUGEN.   To  market  its  products
effectively, the Company currently intends to build a focused U.S. salesforce to
target the major cancer treatment centers.  The Company plans to seek additional
corporate partners to fund product development and commercialize its products in
Europe and Asia.  This strategy is  exemplified  by the Company's  collaboration
with ASTA Medica  Aktiengesellschaft  ("ASTA Medica") for the Pan-Her antagonist
program and the Raf  antagonist  program for the  treatment of certain  cancers.
ASTA Medica has been granted  marketing  rights to these  programs in Europe and
South  America.  While the  Company  generally  intends to retain  rights to its
cancer  programs  in North  America,  SUGEN is funding a portion of its  ongoing
cancer research through a collaboration  with Zeneca Limited  ("Zeneca") for the
development of five undisclosed  cancer targets.  Pursuant to its agreement with
Zeneca,  the Company will have the  opportunity  to obtain profit  participation
rights in the North  American  market by  contributing  to clinical  development
costs as incurred and will receive milestone payments and royalties on worldwide
sales.

         Outside  of  oncology,  the  Company's  strategy  is to seek  corporate
collaborations or joint ventures to which SUGEN contributes  validated  targets,
screening   technologies   and  drug  leads  while  the  partner   provides  the
disease-specific and drug development expertise as well as marketing experience,
in addition to providing funding to bring potential  products to market. As part
of  this  strategy,  the  Company  entered  into  a  collaboration  with  Vision
Pharmaceuticals,  L.P.,  an affiliate  of Allergan,  Inc.,  and  Allergan,  Inc.
(collectively,   "Allergan")   for   angiogenesis   inhibition   in   ophthalmic
applications.

Overview of Cellular Signal Transduction Pathways

         The last decade of research  has led to an increased  understanding  of
how cells  communicate  with each other to coordinate the growth and maintenance
of the  multitude  of  tissues  within  the human  body.  A key  element of this
communication  network is the  transmission  of a signal from the  exterior of a
cell to its nucleus,  which results in the activation or suppression of specific
genes.  This process is called signal  transduction.  An integral part of signal
transduction is the interaction of ligands,  receptors and intracellular  signal
transduction molecules ("downstream signalling molecules").

         Ligands  are  chemical  messengers,  usually  released  by one  cell to
communicate  with a target cell by binding to specific  receptors  on the target
cell's surface.  A receptor generally takes the form of a protein that straddles
a cell's membrane,  with its "ligand binding domain"  protruding out of the cell
and its "intracellular  domain" anchored inside the cell. When a ligand binds to
its receptor, the newly formed  receptor/ligand  complex triggers the activation
of a cascade  of  downstream  signalling  molecules,  thereby  transmitting  the
message  from the  exterior  of the cell to its  nucleus.  When the  message  is
received in the nucleus,  it dictates the  activation or suppression of specific
genes,  resulting  in the  production  of  proteins  that  carry out a  specific
biological response.  Depending on the specific ligand,  receptor and downstream
signalling  molecules,  the resulting  signalling  cascade  controls diverse and
distinct cellular processes. For example, metabolic changes can be effected by a
ligand such as insulin which, after binding to the insulin receptor, activates a
specific set of  downstream  signalling  molecules  within the cell,  ultimately
leading  to the  regulation  of  glucose  uptake  and  other  insulin-associated
functions.
                                        3
<PAGE>

Tyrosine Kinases,  Tyrosine Phosphatases and Serine-Threonine  Kinases in Signal
Transduction

         Kinases and phosphatases  are classes of signalling  molecules that are
central to the healthy functioning of all tissues.  The Company's research focus
in this area has been on TKs,  TPs and  selected  STKs.  At  present,  there are
approximately  100 known human TKs,  including Her2,  PDGF TK, insulin  receptor
("insulin TK"), EGF TK, macrophage colony  stimulating factor receptor and nerve
growth factor  receptor,  all of which have been cloned over the last  seventeen
years.   TPs  were  not  discovered   until  1988,  and  at  present  there  are
approximately 50 known human TPs.

         Generally,  when a ligand  binds to receptor  TKs, the  receptors  must
dimerize (join in pairs at the cell surface) to become activated.  This coupling
activates a specific  enzyme  activity  which resides  within the  intracellular
domain of each TK. Upon activation,  the TKs commence  cross-phosphorylation,  a
process whereby phosphates (highly charged particles) are enzymatically added to
specific sites on each of the TKs. These phosphates serve as attachment sites at
which specific  downstream  signalling  molecules interact with the TKs. Many of
these downstream signalling molecules in turn become phosphorylated  themselves,
enabling  them to  recruit  their own  substrates  and thus pass on the  signal.
Depending on the specific ligand and receptor,  the resulting signalling cascade
leads to changes in gene  expression  or affects  other  cellular  systems  that
ultimately  determine if the cell is to grow,  mature,  migrate,  metabolize  or
survive.

         Complementing TKs are TPs, which were first  characterized in detail by
Dr. Edmond H. Fisher,  a 1992 Nobel Laureate,  SUGEN  collaborator and member of
SUGEN's Science Advisory Board.  While the TKs phosphorylate  target proteins to
exert their activity, the TPs remove phosphates  ("dephosphorylate") from target
proteins, thereby regulating the activity of the TKs. Generally, when a receptor
TK is  activated  by  its  ligand,  a  given  biologic  response  is  triggered.
Conversely,  when a TP is activated, there is usually down regulation of a given
biologic response.  In this manner, TKs can be visualized as the "gas pedal" and
TPs as the "brake  pedal"  for  numerous  biological  processes.  Many  cellular
responses are thus regulated by the balance between specific TKs and TPs.

         The  most  abundant  kinases  in  the  cell  are  STKs,  enzymes  which
phosphorylate  serine and threonine  residues.  STKs are involved in controlling
the  cell  cycle,  the  response  of  the  cell  to  environmental  stress,  the
development  of  certain  cells  and  tissues,   and  other  processes  such  as
metabolism.  Many STKs,  for example,  Raf  kinases,  act  downstream  in signal
transduction   cascades   initiated  by  TKs,  while  others  integrate  signals
originating  from  other  classes  of  receptors,   such  as  G  protein-coupled
receptors.

Diseases and Disorders Related to TK, TP and STK Signalling Pathways

         TKs,  TPs,  STKs and  their  signalling  pathways  play key  roles in a
variety of normal cellular functions  involving virtually every cell type in the
body.  Examples  include the growth of epithelial cells (skin and lining tissues
of internal organs),  angiogenesis,  hematopoiesis,  proliferation of connective
tissue  cells  (fibroblasts),  survival  and  differentiation  of  nerve  cells,
regeneration  of tissues  during  wound  healing  and  regulation  of the energy
metabolism  of all cells.  While  normal  cellular  function  involves a balance
between kinase and phosphatase activity, imbalances between these molecules have
been shown to result in a variety of chronic and acute pathological  conditions,
including cancer and diabetes as well as in dermatologic, ophthalmic, neurologic
and immunologic disorders.

         The  close  association  of TKs,  TPs and STKs with  disease  make them
attractive  targets  for  drug  discovery  and  therapeutic  intervention.   The
intracellular domains where enzymatic activity occurs can be targeted with great
selectivity by drugs that inhibit enzyme activity or that prevent the binding of
downstream signalling molecules to the phosphorylated receptor.  Critical points
further  downstream in the  signalling  cascade may also be viable targets since
selective intervention at these points can prevent the message from reaching its
final destination in the nucleus.

Product Development Programs

         TKs, TPs, STKs and their biological  signalling pathways are implicated
in a broad number of diseases.  SUGEN focuses its product development efforts on
those areas which represent  significant market  opportunities and for which the
disease processes and signalling  pathways are well understood.  The Company has
several novel product  candidates in various stages of  development  for disease
areas in which  there is a critical  need for major  advances  in  efficacy  and
safety over currently available therapies. These diseases include cancer as well
as diabetes, psoriasis and cardiovascular, immunologic and neurologic disorders.
The  Company  has  completed  a Phase II  clinical  trial  for use of SU101 as a
treatment for refractory malignant glioma and has recently initiated a Phase III
clinical  trial in first relapse  glioma.  A Phase II clinical trial of SU101 in
combination  with  BCNU,  the  chemotherapy  drug  that is part of the  standard
treatment regimen in newly diagnosed brain cancer patients,

                                        4

<PAGE>


was initiated in mid-1997,  and the Company has also recently  initiated a Phase
II clinical trial of SU101 in hormone refractory prostate cancer. The Company is
also conducting its initial Phase I clinical trial for its second cancer product
candidate,  SU5416, a Flk-1/KDR TK antagonist which inhibits  angiogenesis.  The
Company currently plans to initiate a Phase II clinical trial of SU5416 in 1998,
although there can be no assurance as to the timing of the Phase II trial.

                                        5

<PAGE>


<TABLE>
         The following table outlines SUGEN's  development and research programs
which are being pursued either  independently by SUGEN or in collaboration  with
the Company's partners:

<CAPTION>
---------------------------------------------------------------------------------------------------------------
     Program                       Indication(s)                      Status(1)          Rights
---------------------------------------------------------------------------------------------------------------
                                                    Cancer
---------------------------------------------------------------------------------------------------------------
<S>                          <C>                                      <C>                <C>
SU101                        First Relapse malignant glioma           Phase III          SUGEN
PDGF TK Antagonist            - Monotherapy
                             Newly diagnosed malignant glioma         Phase II           SUGEN
                              - Combination therapy
                             Prostate cancer                          Phase II           SUGEN
                             Ovarian and non-small cell lung          Phase II           SUGEN
                             cancers
---------------------------------------------------------------------------------------------------------------
SU5416                       Angiogenesis inhibition                  Phase I            SUGEN
Flk-1/KDR TK Antagonist       -Most solid tumor types
---------------------------------------------------------------------------------------------------------------
Second Generation            Most solid tumor types                   Lead compounds     SUGEN
Angiogenesis Inhibitors
---------------------------------------------------------------------------------------------------------------
Raf Antagonist               Pancreatic, bladder cancers              Lead compounds     ASTA Medica
                                                                                            Europe and South
                                                                                            America
                                                                                         SUGEN
                                                                                            United States and
                                                                                            rest of world
---------------------------------------------------------------------------------------------------------------
Orally available PDGF TK     Malignant glioma, prostate, ovarian      Lead compounds     SUGEN
   Antagonists               and non-small cell lung cancers
---------------------------------------------------------------------------------------------------------------
Pan-Her Antagonist           Breast, ovarian, gastric, lung,          Preclinical        ASTA Medica
   (formerly Her2            head and neck, prostate cancers                                Europe and South
   Antagonist)                                                                              America
                                                                                         SUGEN
                                                                                            United States and
                                                                                            rest of world
---------------------------------------------------------------------------------------------------------------
GRB2 Antagonist              Multiple TK-driven tumors                Lead compounds     SUGEN
---------------------------------------------------------------------------------------------------------------
Met TK Antagonist            Stomach, colorectal and lung cancers     Screening          SUGEN
---------------------------------------------------------------------------------------------------------------
Five undisclosed cancer      Certain major cancers                    Research and       Zeneca
   targets                                                            screening
---------------------------------------------------------------------------------------------------------------
Other proprietary programs   Various cancers                          Research and       SUGEN
                                                                      screening
---------------------------------------------------------------------------------------------------------------
                                                Other Programs
---------------------------------------------------------------------------------------------------------------
SU5271                       Psoriasis                                Phase I            SUGEN
EGF TK Antagonist
---------------------------------------------------------------------------------------------------------------
Insulin TP Antagonist        Diabetes Type I/Type II                  Preclinical        SUGEN
---------------------------------------------------------------------------------------------------------------
Immunology targets           Immune suppression, acute                Research and       SUGEN
                             inflammation                             screening
---------------------------------------------------------------------------------------------------------------
Flk-1/KDR TK Antagonist      Rheumatoid arthritis                     Preclinical        SUGEN
(other targets)
---------------------------------------------------------------------------------------------------------------
Flk-1/KDR TK Antagonist      Angiogenesis inhibition in               Preclinical        Allergan
(other targets)              ophthalmology
                              - Diabetic retinopathy
                              - Macular degeneration
---------------------------------------------------------------------------------------------------------------
Neurology targets            Neurodegenerative diseases               Research and       SUGEN
                                                                      screening
---------------------------------------------------------------------------------------------------------------
PDGF TK Antagonist           Cardiovascular diseases                  Lead compounds     SUGEN
(and other targets)
---------------------------------------------------------------------------------------------------------------
</TABLE>

     "Research"            Cloning and  characterization of novel TKs, TPs, STKs
                           and related downstream  signalling  molecules (Target
                           Identification)  and  validation of the role, if any,
                           of  those   molecules  in  a  given  disease  (Target
                           Validation).

     "Screening"           Screening to identify lead compounds.

     "Lead Compounds"      Evaluating drug leads and/or natural product extracts
                           in  relevant  in  vitro  cellular  models   including
                           genetically engineered cell lines, as well as ex vivo
                           human tissues and in vivo animal models.

     "Preclinical"         Pharmacology  and  toxicology  testing in preclinical
                           models,  drug formulation and manufacturing  scale-up
                           to gather  necessary  data to comply with  applicable
                           regulatory  protocols  prior to  submission of an IND
                           with the FDA.

                                        6

<PAGE>


Cancer

         Research over the past 20 years has  reinforced the view that cancer is
a disease involving damage,  loss or amplification of specific genes.  Moreover,
of the  numerous  oncogenes  identified  to date,  many  appear  to be  abnormal
versions of TK and STK signalling pathway  components,  such as ligands,  TKs or
STKs or  downstream  signalling  molecules.  These  discoveries  have led to the
realization that  dysfunctional  TK or STK signalling  pathways play an integral
role in cancer.  More  recently,  TPs have been  implicated  as potential  tumor
suppressor genes due to their ability to counteract the activity of TKs.

         As a result of the close linkage between TK, TP and STK aberrations and
cancer,  SUGEN believes that certain cancers can be  recategorized  according to
specific  TK,  TP and STK  signalling  pathway  defects  rather  than  merely by
physical location in the body (e.g., breast, lung, brain).  Several observations
support  this  approach.  For  example,  TK  overexpression  is not a  transient
phenomenon.  Cancer cells that exhibit TK overexpression do so continuously.  In
addition,  in many cases a cancer cell exhibits heavy overexpression of only one
TK. For instance,  when cancer cells metastasize from a Her2-dependent tumor and
establish  themselves  at a remote site in the body,  the distal  tumor has also
been observed to  overexpress  Her2.  Furthermore,  SUGEN has shown that certain
tumor cells that  overexpress  a TK are more  sensitive  to TK  inhibitors  than
normal cells. The Company  believes that these  observations are the basis for a
new  approach to cancer  therapy  which might  commence  with a sample of biopsy
material being sent to a pathology lab for gene expression profiling in order to
determine the nature of the cellular  abnormality,  such as  overexpression of a
TK. This diagnosis could then be used to select the appropriate  target-specific
signal transduction inhibitor for treatment.

         Many of the cancers that SUGEN's  programs are addressing  have patient
subsets  with  extremely  poor  prognoses  and  no  alternative   for  effective
treatment.  For  example,  in certain  cancers of the brain,  breast,  ovary and
pancreas,  patient  subsets  can be  defined in  advance  for which the  average
survival time is short.  By focusing on these  patients  initially,  the Company
believes that it may be able to demonstrate  statistically  significant efficacy
with  relatively  small patient  numbers and possibly  shortened  clinical trial
duration  if the  compounds  prove  to be  active.  There  can be no  assurance,
however, that the Company will be able to rely on smaller-scale  clinical trials
to expedite commercialization of its products.

SU101/PDGF TK Antagonist. SU101 is a small synthetic molecule which inhibits the
platelet-derived  growth factor receptor  signalling  pathway.  PDGF is a growth
factor  ligand  that  stimulates  the growth of a variety of cell types  through
binding to the PDGF TK. The PDGF TK was first cloned by a group of collaborators
led by Dr.  Ullrich in 1983. In December  1994,  the Company filed its first IND
with the FDA for  SU101,  a PDGF TK  signalling  antagonist.  To date,  over 158
patients have been treated with SU101 in nine Company-sponsored clinical trials.
The  Company  has  completed  a Phase II  clinical  trial  for use of SU101 as a
treatment for refractory malignant glioma and has recently initiated a Phase III
clinical  trial in first relapse  glioma.  A Phase II clinical trial of SU101 in
combination  with  BCNU,  the  chemotherapy  drug  that is part of the  standard
treatment  regimen in newly  diagnosed brain cancer  patients,  was initiated in
mid-1997,  and the Company has also recently initiated a Phase II clinical trial
of SU101 in hormone  refractory  prostate cancer.  Based on Phase I and II data,
the Company may conduct  additional  Phase II clinical  trials in astrocytoma (a
type of primary brain cancer), ovarian and non-small cell lung cancers.

         To expedite the commercialization of SU101, the Company is focusing its
initial  development  efforts on malignant  glioma,  a highly  aggressive  brain
tumor,  and  selected  other  solid  tumor  patient  populations  with very poor
prognoses.  A subset of each of these  cancers  appears  to be  correlated  with
aberrant PDGF TK signalling.  Malignant  glioma patients and refractory  ovarian
patients have a mean survival time of approximately nine months and less than 12
months,  respectively.  Given the poor prognoses for these patients, the Company
believes that FDA approval could  potentially be obtained based on smaller-scale
clinical   trials  than  are  typically   required  for  approval  of  New  Drug
Applications "NDAs". There can be no assurance,  however,  that the Company will
be  able  to  rely  on   smaller-scale   clinical   trials   to   expedite   the
commercialization of SU101 for these patient  populations.  SUGEN believes SU101
may also have  applications  in other  cancers  that  involve  aberrant  PDGF TK
signalling,  including  prostate,  ovarian and  non-small  cell lung cancers and
currently  plans to proceed  with  multiple  registrational  studies in 1998 and
1999.  However,  no  assurance  can be given as to the ability of the Company to
proceed with such studies on a timely basis, or at all.

         In  December  1997 the Company was awarded two method of use patents in
the United States with respect to treating PDGF TK driven cancers with SU101. In
March 1997, the U.S.  patent office issued to SUGEN a patent on the  formulation
of SU101. The Company presently does not know if commercialization of SU101 will
infringe certain patents issued to a large  pharmaceutical  company but believes
that these  patents  may be subject to claims of  invalidity  as they  relate to
SU101. See "Patents and Proprietary Technology."

                                        7

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SU5416/Flk-1/KDR  TK  Antagonist.  Formation  of the  body's  network  of  blood
vessels, or angiogenesis,  occurs throughout  childhood.  This process generally
stops once a person reaches adulthood. Exceptions exist during wound healing and
the menstrual  cycle.  Angiogenesis is re-triggered in adults,  however,  during
certain pathological conditions including tumor formation and metastasis, and in
certain  ophthalmic  disorders,   including  diabetic  retinopathy  and  macular
degeneration.  The  pharmaceutical  industry  has  long  sought  small  molecule
inhibitors of angiogenesis with low toxicity  profiles  because,  theoretically,
inhibiting   angiogenesis   may  limit  tumor  growth,   extend  the  period  of
disease-free  remission in patients who respond to front-line therapy and reduce
the potential for metastases.  The potential  markets for such a product include
all patients with solid tumors where angiogenesis  inhibition may play a role as
an important adjunctive therapy, and in patients with metastatic disease.

         SUGEN and its  collaborators  have  identified  the  Flk-1/KDR  TK as a
receptor  for  vascular  endothelial  growth  factor  ("VEGF")  and  as a  major
regulator of angiogenesis.  Blocking Flk-1/KDR TK activity blocks the ability of
most tumors to stimulate  formation of blood vessels and thus deprives the tumor
of necessary nutrients. In preclinical studies conducted by researchers at SUGEN
and  collaborating  laboratories,  small  molecule  inhibitors  of the Flk-1/KDR
blocked   VEGF-dependent   angiogenesis,   as  well  as  vascular  permeability.
Additionally,  human  endothelial  cells were  prevented  from  undergoing  cell
division that is required for the formation of new blood vessels.  In June 1997,
the  Company  filed an IND in  cancer  for  SU5416,  a drug  developed  from the
Company's  Flk-1/KDR TK angiogenesis  inhibitor program that addresses  patients
with solid tumors and may also have  application  as an  anti-metastasis  agent.
Phase I  clinical  trials in  patients  with  solid  tumors  were  initiated  in
September 1997 and Phase II clinical trials are currently planned to commence in
1998, pending Phase I results.

         The  Company  has  established  an  exclusive  research  and  licensing
agreement  with  the   Max-Planck-Institut   fur  Physiologische  and  Klinische
Forschung  ("MPP")  (MPI  and  MPP  are  collectively   referred  to  herein  as
"Max-Planck  Society" or "MPS") to support the work of Dr. Werner Risau, a SUGEN
consultant  and a director of MPP, and his  laboratory.  Dr. Risau is one of the
leading  researchers in the field of  angiogenesis.  In  collaboration  with the
laboratories of Dr. Risau and Dr. Ullrich,  SUGEN is conducting  further studies
into the mechanisms of angiogenesis,  including the identification of additional
TK and TP related  signalling  pathways involved in angiogenesis.  See "Research
Collaborations."

Second  Generation  Angiogenesis  Inhibitors.   Through  the  Company's  ongoing
research  and drug  discovery  efforts  in  angiogenesis,  SUGEN has  identified
additional  potential drug candidates  which have  demonstrated  good potency on
Flk-1/KDR,  and additional  targets  including PDGF-R and FGF-R which may play a
role in the angiogenic process and tumor metastasis.  With the possibility of an
increased  spectrum  of  activity  from  this  expanded  target  profile,  SUGEN
currently  plans to advance the most  promising  of these drug  candidates  into
Phase I clinical trials in 1998 and may determine to seek to  commercialize  one
or more angiogenesis  inhibitors based on future clinical results. No assurance,
however, can be given as to the ability of the Company to commence such clinical
trials on a timely basis, or at all.

GRB2 Antagonist. Growth factor receptor binding protein 2 ("GRB2"), a downstream
signalling  adaptor  molecule,  was  originally  cloned  by  Dr.  Schlessinger's
laboratory.  GRB2  has been  shown  to be an  essential  element  in the  signal
transduction  pathway of many TKs,  particularly  as a link between TKs and Ras.
(See "Raf Antagonist" below). SUGEN is investigating the role of GRB2 in linking
TK signalling to Ras activation in certain TK induced  cancers,  with the belief
that  inhibition  of GRB2 might be of  therapeutic  benefit for a broad range of
cancers typified by an activation of the TK-Ras pathway. In April 1997, the U.S.
patent office issued a patent on SUGEN's  proprietary  cancer target GRB2. Other
patent claims with respect to this target have also been filed.

         SUGEN has developed  proprietary assays for  high-throughput  screening
for GRB2 inhibitors and has now identified a novel class of signal  transduction
inhibitors  that act by blocking the function of the GRB2  adaptor  protein.  In
vitro studies  indicate that SUGEN's GRB2  inhibitors act as cytostatic  agents,
causing  cancerous  cells to cease  multiplying or enter  programmed  cell death
(apoptosis).  Preliminary  in vivo  studies  indicate  efficacy in tumor  growth
inhibition with identified lead compounds.

Pan-Her Antagonist (formerly Her2 Antagonist). Her2 is a TK, first cloned by Dr.
Ullrich,  which is  believed  to play an  important  role in certain  aggressive
breast, ovarian,  gastric and lung cancers. Dr. Ullrich and Dr. Dennis Slamon of
the University of California at Los Angeles Medical Center and member of SUGEN's
Science Advisory Board have established the clinical relevance of overexpression
of Her2 in human breast and ovarian cancers. In their study of approximately 200
patients,  it was found that  almost 30% of breast and ovarian  cancer  patients
overexpress  Her2 and that high levels of Her2 in a patient's  tumor  correlated
with reduced  survival  time.  Since that time,  subsets of other types of human
tumors  have been shown to express  high levels of Her2,  including  gastric and
lung cancers.  Animal data from several  laboratories has demonstrated  that the
suppression  of Her2  activity  has a  significant  inhibitory  effect  on tumor
growth, validating Her2 as a target for cancer

                                        8

<PAGE>


therapy in the subset of patients that overexpress this TK.

         Monoclonal  antibodies  targeting Her2,  including one developed by Dr.
Ullrich,  are currently in clinical trials by others for certain cancers.  While
the Company  believes  that these  trials may serve to  validate  the concept of
targeting aberrant TKs in cancer, SUGEN believes that a small molecule inhibitor
of Her2 which also blocks the closely  related Her1 and Her4 receptors  (thus, a
Pan-Her antagonist) has the potential to be a more attractive therapy. SUGEN has
identified a number of  potentially  highly potent and specific  small  molecule
inhibitors  of  Pan-Her.  The  Company  is  currently  testing  several of these
molecules in animal models.  SUGEN is pursuing its Pan-Her antagonist program in
collaboration  with ASTA Medica,  and in January 1998 the two companies  jointly
announced  they  would  be the  advancing  the  Pan-Her  program  into  clinical
development with Phase I clinical trials  currently  scheduled to commence later
this  year.  However,  no  assurance  can be  given  to the  ability  of the two
companies to enter such clinical trials on a timely basis, or at all.

Orally Available PDGF TK Antagonist.  SUGEN is committed to developing an orally
active  small  molecule  inhibitor  of the PDGF TK  signalling  pathway.  From a
commercialization  standpoint, an orally active compound may be complementary to
SU101 in that it may be  developed  for use as a chronic  therapy.  The  Company
currently  has  several  small  molecule  inhibitors  of the PDGF TK  signalling
pathway which in vivo animal studies appear to be orally  available and may have
the  potential  to  treat  numerous  PDGF  TK-driven  proliferative   disorders,
especially  cancers.  The PDGF TK also appears to be involved in both restenosis
of  blood  vessels  after  clearance  by   angioplasty,   and  more  broadly  in
atherosclerosis.

Raf Antagonist.  Raf, an STK, is a downstream  signalling molecule through which
numerous  signalling  pathways  have  been  found to  converge.  Raf is known to
interact  with the  oncogene  Ras, and is required in order for Ras to relay its
signals.  The Ras  oncogene  has long  been  known to play an  integral  role in
certain  cancers,  and may be  involved  in  over  20% of all  tumors  including
approximately 90% of pancreatic tumors. Moreover, Ras has drawn the attention of
the  pharmaceutical  industry for many years because of its frequent  mutational
activation in tumor cells. However,  since its biochemical activity and upstream
activators  were not well  defined,  the  search for Ras  inhibitors  has proved
difficult.  In contrast, the Company believes that Raf is a more suitable target
for therapeutic intervention.

         Dr.  Ulf Rapp,  Director  of  Molecular  Biology at the  University  of
Wurzburg,   Germany,   a  SUGEN  consultant  and  the  discoverer  of  Raf,  has
demonstrated that inhibition of Raf blocks the  tumor-forming  potential of Ras.
SUGEN has  developed  proprietary  Raf-based  assays and is screening  for small
molecule  inhibitors  of Raf. The Company  believes  that drugs that inhibit Raf
signalling  may arrest tumors  driven by excessive Ras activity.  The Company is
pursuing its Raf Antagonist program in collaboration with ASTA Medica.

Met TK Antagonist.  Overexpression  of Met TK may be implicated in a significant
portion of tumors of the lung,  stomach and colon.  Moreover,  Met TK may play a
role in the  metastasis of solid  tumors.  SUGEN has recently  completed  target
validation studies on Met TK and has commenced screening against this target.

Psoriasis

         Psoriasis is a chronic skin  disorder that affects  approximately  four
million people in the United States,  and annual treatment costs in this country
are estimated at over $1.5 billion.  There are few currently available drugs for
this disease that offer satisfactory efficacy and safety.  Hyperproliferation of
keratinocytes  contributes  to  psoriasis,  and research by SUGEN and others has
demonstrated that EGF TK signalling is required for the growth of keratinocytes.
SUGEN's  research in psoriasis  was  conducted in part by Hebrew  University  of
Jerusalem.

SU5271/EGF  TK  Antagonist.  SU5271,  a  selective  inhibitor  of  EGF  receptor
signalling,  represents the first  extension of SUGEN's drug discovery  platform
into the  field of  dermatology.  SUGEN has  received  an  exclusive,  worldwide
license  from  Zeneca  for the  dermatologic  uses of SU5271  and has also filed
patent applications of its own with respect to this compound.

         The Company is currently conducting Phase I clinical trials to evaluate
the safety of the  topical  use of SU5271 in  psoriatic  patients at Mount Sinai
Hospital in New York.  SU5271 is a synthetic small molecule signal  transduction
inhibitor that blocks keratinocyte growth.

Angiogenesis Inhibition in Ophthalmology

         A number of ophthalmological  disorders involve  neovascularization  of
different  regions of the eye.  Since  Flk-1/KDR  TK is known to be important in
other  neovascularization  processes  (such as in  tumors),  it may also  play a
crucial role in ocular  neovascularization.  Thus, Flk-1/KDR TK inhibitors might
be therapeutically

                                        9

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beneficial  for treating  ophthalmic  disorders.  In October  1996,  the Company
signed  a  collaboration  agreement  with  Allergan  to  identify,  develop  and
commercialize  novel  angiogenesis  inhibitors  for the  treatment of ophthalmic
diseases.  Flk-1/KDR  TK and other  angiogenesis  targets  are  currently  under
evaluation.

Diabetes

         Both Type I and Type II diabetes are  characterized  by  pathologically
high levels of blood glucose due to inefficient  cellular  uptake and metabolism
of glucose.  Type I diabetes is characterized by insufficient  levels of insulin
and is  thought to be caused by the  autoimmune  destruction  of the  pancreatic
cells that make insulin.  In contrast,  Type II diabetics often produce elevated
levels  of  insulin,  although  this  insulin  does not seem to have  sufficient
effect.  All Type I and some Type II  diabetics  are treated with  insulin.  The
long-term side effects of diabetes and of insulin therapy can be severe.

         Dr.  Ullrich was the first to clone the TK  receptor  to which  insulin
binds. In a normal state,  the body secretes  insulin which in turn binds to the
insulin TK. These events activate the insulin TK signalling  pathway,  resulting
in  cellular  uptake of glucose and  glucose  metabolism.  In Type I and Type II
diabetes,  the TK  signalling  mechanism is  impaired.  Certain TPs appear to be
involved  in down  regulating  (dephosphorylating)  the  insulin  TK  signalling
pathway.  SUGEN believes that a small molecule which specifically inhibits these
TPs may increase insulin TK signalling,  thereby  increasing  glucose uptake and
metabolism.

         SUGEN's animal studies with its lead  phosphatase  inhibitor  compounds
have  demonstrated  the ability of its  initial  lead  compounds  to lower blood
glucose  levels with efficacy  comparable to currently  available  drugs.  These
compounds  will serve as the starting  point for  medicinal  chemistry  and drug
development  with the aim of producing an optimized drug candidate to go forward
into clinical  development.  Based on the mechanism of action of these compounds
and  their  oral  availability,  the  Company  believes  that  it  now  has  the
opportunity  to  develop  drug  candidates  for the  treatment  of both  Type II
(non-insulin dependent) and Type I (insulin dependent) diabetes.

Neurology

         TKs, TPs and their  signalling  pathways are known to play key roles in
the  maintenance of the central and peripheral  nervous  systems.  Several known
neurotrophic  factors  bind to TKs,  and thereby  regulate  differentiation  and
survival of neurons.  SUGEN has identified novel TKs and TPs whose expression is
restricted to the nervous system and which may serve as therapeutic  targets for
intervention in neurological diseases.  SUGEN has also identified lead compounds
that  act  as  selective  TP  inhibitors  and  are  able  to  stimulate   neuron
differentiation in in vitro models.

Immunology

         The role of TKs in the generation  and  maintenance of the human immune
system has been established by a number of researchers in different laboratories
around the world.  SUGEN has  developed a number of  immunology  related  assays
which it is  screening  against  its  library of  compounds  and  extracts.  For
example,  ZAP-70,  an intracellular TK, appears to be a primary regulator of the
generation  and  function  of the  T-lymphocyte  cell  population  of the immune
system.  This TK and other signal  transduction  molecules in the immune  system
represent    potential   drug   discovery    targets   for   identifying   novel
immunosuppressive and immuno-modulating  drugs. The primary clinical indications
that the Company is focusing on in immunology are immune  suppression  and acute
inflamation.

SUGEN's Drug Discovery Technology

         SUGEN's goal is to discover and develop drugs that target specific TKs,
TPs, STKs or related  downstream  signalling  molecules.  SUGEN's drug discovery
effort is focused  primarily on the  discovery of small  molecule  drugs derived
from synthetic  compound  libraries and collections of natural product extracts,
including  microbes,  fungi and plants. As compared to biologic  pharmaceuticals
such as  proteins,  peptides  and  carbohydrates,  small  molecules  often offer
advantages as potential  drugs.  Small molecules can more easily  penetrate cell
membranes and the blood brain barrier, can often be delivered orally, and can be
less  immunogenic.  These  molecules  also tend to involve  substantially  lower
process   development  and   manufacturing   costs.   Using   inhibition  of  TK
phosphorylation  in a whole cell environment as an initial screening  criterion,
SUGEN has been able to identify lead  compounds in a number of its programs that
penetrate the cell easily, show minimal  cytotoxicity and demonstrate potent and
selective activity on given targets.

         SUGEN's  process  of  drug  discovery  includes  the  following  steps,
regardless of disease area: (1) target  identification,  using advanced genomics
techniques  and the Company's  proprietary  bioinformatics  program;  (2) target
validation  in relevant in vivo  disease  models;  (3) whole cell or other assay
design and target-driven

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<PAGE>


screening   of   compounds   for  leads;   and  (4)  lead   optimization   using
crystallography  and computational  chemistry.  The Company's  in-house research
teams  also work  closely  with NYU,  MPI and MPP in target  identification  and
target  validation.  In this  case,  the  remaining  steps of this  process  are
conducted primarily by SUGEN or by its corporate partners.

Target Identification

         SUGEN's genomics efforts are focused exclusively on certain families of
signal transduction genes, which make up approximately two percent of the entire
human genome.  These families include the TKs, TPs, STKs,  adaptor molecules and
certain other important molecules involved in cellular  signalling.  Within this
specific area of focus, SUGEN identifies and defines the function of novel genes
and their protein  products,  and in turn assesses  their utility as targets for
therapeutic intervention against diseases of interest to the Company.

         SUGEN  believes  that  substantially  the entire  human  genome will be
sequenced  within a few years,  and most of that sequence data will be available
on  public  databases  or  elsewhere.   SUGEN's  target  identification  effort,
therefore,  is focused on  determining  the  function  of novel  genes.  In this
regard,  SUGEN has made a strategic  commitment to its bioinformatics  platform,
representing a bridge between  abundant gene sequence data and  disease-relevant
discoveries.

         SUGEN's bioinformatics program starts with a physical repository of the
approximately  200 known  signal  transduction  genes in addition to other genes
discovered  by SUGEN but not  published  to date.  SUGEN also has a  proprietary
panel of oligonucleotide primers capable of recognizing genes that are minimally
related  to genes  already  in the SUGEN  library.  All of this  information  is
supported by an in-house massively parallel computer processing platform capable
of approximately 68,000 million instructions per second (mips) throughput. Using
sophisticated pattern recognition algorithms,  SUGEN is able to rapidly mine the
public databases looking for new sequence material of interest, for the complete
sequences of gene fragments  identified  from cells of interest,  for additional
members of newly discovered  families of signal transduction genes, or for human
homologs of genes from lower organisms where genetic studies provide information
pertinent to the function of the new human gene.

         SUGEN  has  developed  a  proprietary  DNA  array  based  hybridization
technology called transcript imaging, for which the Company has filed for patent
protection.  This  technology  enables  SUGEN  researchers  to rapidly  obtain a
comprehensive  analysis of the  expression  level for all TKs and TPs in a small
sample of cell or tissue.  SUGEN's  transcript  imaging  allows  the  Company to
identify  signalling  pathways  that play key roles in specific  cell types and,
more  importantly,  to  compare  diseased  cells  to  healthy  cells in order to
determine where aberrant signalling may play a causative role in a disease.  For
example, if a particular signal transduction gene is heavily  overexpressed in a
significant  proportion of samples of a specific tumor type, that gene becomes a
potential  candidate  for target  validation.  If the gene can  subsequently  be
validated as playing a causative  role in these  tumors,  it may be adopted as a
target for drug  discovery.  SUGEN  believes that this  technology  also has the
potential to become an important diagnostic tool, an opportunity which SUGEN may
seek to  pursue  in  partnership  with an  established  diagnostics  company  or
otherwise.

         Using both in-house  bioinformatics and molecular biology capabilities,
SUGEN and its  collaborators  have  discovered  more than 15 TKs, 15 TPs and 135
STKs for which the Company has filed or intends to file patent applications.

Target Validation

         A primary  challenge  in SUGEN's  target-driven  drug  discovery  is to
progress as efficiently  as possible from  identifying a potential new target to
verifying  that a drug  which  specifically  acts on that  target  could  have a
significant therapeutic benefit in the treatment of a given disease. Within this
process,  "target  validation" is a crucial step before committing  resources to
assay development and screening for  target-specific  drug leads. The first step
in  validating  a  novel  target  usually  involves   developing  a  battery  of
proprietary  reagents,  including truncated or point-mutated  genes,  anti-sense
constructs and  antibodies.  In the case of novel  receptors,  where the natural
ligands and signalling  substrates initially may be unknown, the Company employs
a variety of advanced methods for identifying and cloning these molecules. Using
these  reagents,  the Company then  engineers cell lines in which it has clearly
characterized  the expression levels and activity of the target gene. These cell
lines can then be used to establish in vitro and in vivo whether down-regulating
the  target  will block the  disease  cascade.  If so, the target is  considered
validated.

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Assay Design/Screening

         From its  inception,  SUGEN  has  committed  significant  resources  to
building  a strong  assay  development  capability.  The  Company  regards  this
capability  as an  important  component  of  its  proprietary  position  in  the
discovery and  development  of  target-specific  signal  transduction  inhibitor
drugs.  Assay  quality  is the  most  important  determinant  of  any  screening
program's  productivity.  This becomes even more important in target-driven drug
discovery.  SUGEN  primarily  employs  engineered  whole cell assays rather than
biochemical   assays.   A  majority   of  SUGEN's   assays  are   designed   for
high-throughput  robotics screening, and its core assay technologies are broadly
applicable to TKs, TPs and STKs and related signalling molecule targets.

         SUGEN's drug discovery process employs a battery of proprietary  assays
and models  engineered  specifically  to ensure  that the target is present  and
functional  in a  consistent  fashion  at each  step of the  screening  cascade.
SUGEN's assays are designed to answer the following four questions:

Screen 1    Can a  compound  block the  signalling  of the  target in  question,
            within the context of a living cell?

Screen 2    Is the  compound  sufficiently  selective  in  blocking  the desired
            target's  signalling (i.e., can it block the target without blocking
            closely related targets)?

Screen 3    Does the compound  exert the desired  biological  effect on a living
            cell (e.g., block cell growth)?

Screen 4    Does the compound  exert the desired  biological  effect  within the
            context of an in vivo disease model?

          By  employing  this  proprietary  screening  cascade,  SUGEN  hopes to
identify  lead  compounds  which are  active in a whole  cell  environment,  are
sufficiently potent and specific to a given target, and are active in an in vivo
disease model which is driven by the given target.

         Once targets are validated by SUGEN and the assays have been  developed
and  validated,  diverse  libraries of  synthetic  small  molecules  and natural
product extracts are screened in order to identify  potential drug leads.  SUGEN
currently has a number of targets  moving through its screening  assays,  and as
new targets are validated SUGEN  continues to add to its panels of assays.  Each
additional assay enhances the Company's  ability to determine the specificity of
lead  compounds.  Along  with  assay  design and  screening,  SUGEN has  devoted
significant  resources to acquiring libraries of structurally  diverse compounds
from a variety of sources around the world.

         Chemical  Compound  Libraries.  SUGEN  has  entered  into a  number  of
agreements designed to obtain chemical compounds for screening. These agreements
cover a broad range of chemical  entities  from  sources  across the world.  The
Company  currently has over 25,000  chemical  compounds  available  in-house for
screening  and has access to a portion of Zeneca's and ASTA  Medica's  libraries
for collaboration targets.

         Natural  Product  Sources.  SUGEN has gained access to  commercial  and
non-commercial  sources  of natural  products,  including  microbial,  plant and
fungal extracts.  These sources  represent an international  collection  network
that provides substantial diversity of material,  including extracts from Japan,
China,  Europe and North America.  The Company is currently  negotiating to gain
access to additional  sources of extracts from different parts of the world. The
Company  currently has over 16,000 natural product extracts  available  in-house
for screening.

Lead Optimization

         The objective of SUGEN's lead  optimization  program is to increase the
potency, specificity and pharmacologic properties of lead compounds by designing
and synthesizing  analogs. Lead optimization uses an iterative process employing
panels  of  assays  to  test  for TK  activity,  TK  specificity,  and  in  vivo
pharmacologic  endpoints  of lead  molecules in order to derive  compounds  with
clinical  utility.  All  results  are  entered  into a database  that allows for
determination  of  structure  and  activity  relationships  leading to synthetic
chemistry efforts that follow important  parameters for drug  development.  This
growing database represents a proprietary source of information on relationships
between  small  molecules,   their  specific  targets,   and  the  pharmacologic
properties  of the compounds  which the Company  believes  will  accelerate  the
optimization of lead compounds in several SUGEN programs.

         SUGEN has recently added  crystallographic  analysis and  computational
chemistry to its drug discovery  process.  Work conducted in Dr.  Schlessinger's
laboratory at NYU, as well as with other collaborators,  allows SUGEN scientists
to elucidate how the Company's product  candidates bind to the catalytic core of
TKs and provides a basis for further  directed  synthetic  chemistry  efforts in
lead optimization, potential development of

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<PAGE>


second generation  compounds and the development of novel inhibitors against new
targets. In this regard, in a collaboration with ArQule, Inc. ("ArQule"),  SUGEN
used combinatorial chemistry technology closely coordinated with crystallography
data to rapidly synthesize large numbers of analog compounds around SUGEN's lead
compounds. The crystallographic  analysis provides a rationale to identify novel
chemical  templates  that may  provide  a cache of novel  compounds  with  broad
application to the inhibition of TKs and STKs.

         The  Company   believes  that  its  ability  to  improve   potency  and
specificity  in the early  stages of drug  discovery  process and  pharmacologic
features in the later stages of lead  optimization  may reduce the incidence and
severity of side effects and thus may reduce the cost,  time and risk associated
with bringing potential products to market.

Preclinical Development

         Wherever  possible,  SUGEN's in vitro and animal  models  utilize tumor
cell  lines,   reagents  and  techniques  developed  during  target  validation;
therefore,  the  appropriateness  of the model system is already  known prior to
drug testing.  In addition,  many other tools used during target  validation are
used again at this stage of testing. Typically, additional cell lines and animal
models will need to be developed in order to enable the accurate assessment of a
compound's target-specific activity in an in vivo environment.

Corporate and Clinical Development Collaborations

         The Company's  approach to corporate  partnering is different in cancer
than it is in other disease areas. In the cancer field, SUGEN intends to build a
vertically  integrated oncology business in North America, with the objective of
bringing to market a family of target-specific  signal  transduction  inhibitors
proprietary to SUGEN. To market its products effectively,  the Company currently
intends to build a focused U.S. sales force to target the major cancer treatment
centers. The Company plans to seek additional corporate partners to fund product
development and commercialize its products in Europe and Asia. While the Company
generally  intends to retain  rights to its cancer  programs  in North  America,
SUGEN  is  funding  a  portion  of  its  ongoing  cancer   research   through  a
collaboration  with  Zeneca  for  the  development  of five  undisclosed  cancer
targets.  Pursuant to its  agreement  with  Zeneca,  the  Company  will have the
opportunity to obtain profit  participation  rights in the North American market
by  contributing  to clinical  development  costs as incurred  and will  receive
milestone  payments and royalties on worldwide sales.  Outside of oncology,  the
Company's  strategy is to seek  corporate  collaborations  or joint  ventures to
which SUGEN contributes validated targets, screening technologies and drug leads
while the partner provides the disease-specific  and drug development  expertise
as well as  marketing  experience,  in  addition to  providing  funding to bring
potential products to market. As part of this strategy, the Company entered into
a  collaboration  with  Allergan  for  angiogenesis   inhibition  in  ophthalmic
applications resulting from the Company's Flk-1/KDR TK antagonist program.

Zeneca Limited

         In January 1995, the Company established a research  collaboration with
Zeneca.  In this  collaboration,  Zeneca and the Company  seek to  discover  and
develop novel small molecule signal transduction inhibitors that address certain
substantial  oncology markets.  The collaboration covers five undisclosed cancer
programs, but excludes all programs upon which the Company is currently building
its own cancer business. The two companies have agreed upon specific programs to
be included initially in the collaboration,  with Zeneca supporting SUGEN's work
on these  programs  for an initial  term of five years.  SUGEN  performs  target
identification,  target validation,  assay development and screening for initial
leads,   while  Zeneca  scientists   concentrate  on  lead   identification  and
optimization and preclinical and clinical  development  activities.  Zeneca will
market collaboration  products worldwide.  SUGEN has also granted Zeneca a right
of first  negotiation  to  expand  this  collaboration  in  order  to  encompass
additional SUGEN cancer research  projects,  but has  specifically  excluded the
cancer related projects that SUGEN already has in development.

         Under the terms of the agreement,  Zeneca  purchased  789,141 shares of
Common  Stock  at a price  of  $15.84  per  share.  This  $12.5  million  equity
investment, combined with Zeneca's $7.5 million participation in SUGEN's October
1994 initial public  offering,  increased  Zeneca's  ownership in the Company to
approximately  20%. Zeneca has committed not to increase its holdings above this
level without the approval of SUGEN's Board of Directors. Zeneca participated in
the  Company's  September  1995,  October  1996 and  November  1997  financings,
purchasing an additional 281,875, 509,000 and 456,000 shares,  respectively,  of
Common Stock in order to maintain its ownership  position.  To date,  Zeneca has
invested approximately $36.8 million in the Company's Common Stock.

         In addition to its equity purchases and annual research funding, Zeneca
paid a $5.0  million  technology  set-up fee to SUGEN,  and will make  milestone
payments (which may be offset against royalties over time) tied

                                       13

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to the progress of compounds in the  collaboration,  and  royalties on worldwide
sales  of any  collaboration  products.  SUGEN  will  also  have  the  right  to
contribute  to  clinical  development  costs on each  program,  thereby  earning
participation in the North American profits from successful  products coming out
of such programs over and above its royalty entitlement. Apart from this option,
Zeneca  will be  responsible  for all  development  expenses.  If a third  party
acquires  35% or  more  of  SUGEN's  voting  stock,  Zeneca  may  terminate  the
collaboration  agreement but retain exclusive  royalty-bearing license rights to
any collaboration  products for which IND filing preparations are complete and a
separate  license  agreement has been  executed.  There can be no assurance that
this  collaboration will result in any milestones being achieved or any products
being successfully developed.

         The agreement provides for SUGEN to be granted access to Zeneca's large
proprietary  collection  of  characterized  chemical  structures  for  screening
against  SUGEN's  signal  transduction  targets,  both within and  outside  this
collaboration,  subject to certain  restrictions  and a right of first licensing
negotiation  on  Zeneca's  part.  Zeneca has granted to SUGEN the right of first
negotiation  to  license  from  Zeneca  oncology   products  (other  than  those
specifically  excluded under the agreement) which Zeneca decides to license to a
third party.

         In January 1996,  SUGEN licensed a small molecule  inhibitor of the EGF
TK from Zeneca.  The compound,  SU5271, was licensed from Zeneca as an extension
of the original  collaboration  agreement  SUGEN  signed with Zeneca.  Under the
terms of this license agreement, Zeneca granted to SUGEN an exclusive, worldwide
license,  with right to sublicense  the compound,  in exchange for milestone and
royalty payments.  The agreement  provides that SUGEN shall have overall control
and  responsibility  for the  preclinical and clinical  development,  regulatory
strategy, process development and commercialization of SU5271.

National Cancer Institute

         In April 1996, the Company  entered into a  Collaborative  Research and
Development  Agreement  ("CRADA") with the National Cancer Institute (the "NCI")
for the  application of SUGEN's  proprietary  transcript  imaging  technology in
order to identify the differences in expression  patterns of signal transduction
genes that  characterize each of the sixty tumor cell lines which constitute the
NCI's screening panel.  Following this transcript imaging analysis of the panel,
the results will be correlated to the data generated over several decades at the
NCI from the  screening  each year of many  thousands of  compounds  and natural
extracts  against  the panel.  Interesting  lead  compounds  from the NCI's open
repository  collection  will  be  tested  in  SUGEN's   target-specific   signal
transduction  assays,  and lead compounds from SUGEN will also be tested against
the NCI panel.  SUGEN will have the option to license  discoveries  made through
this process for adoption into SUGEN's drug discovery programs.

ASTA Medica Aktiengesellschaft

         In December 1995, SUGEN and ASTA Medica entered into a collaboration to
research,  develop,  manufacture,   market  and  distribute  potential  oncology
products  based  upon  the  Company's  Pan-Her  antagonist  and  Raf  antagonist
programs.  Under the terms of the collaboration,  ASTA Medica will undertake the
medicinal  chemistry  and  pharmaceutical   development  work  on  SUGEN's  drug
candidates,  and will perform preclinical and clinical  development in Europe in
accordance with FDA standards.  ASTA Medica paid SUGEN a $4.0 million technology
set-up fee and is  providing  additional  consideration  in the form of services
provided by ASTA Medica pursuant to the collaboration  but on  non-collaboration
programs.  Additionally, ASTA Medica purchased $9.0 million of Common Stock at a
price of $20.88 per share. In January 1998, SUGEN and ASTA Medica proceeded into
clinical  development  with their  Pan-Her  cancer  program,  marking  the first
milestone in SUGEN's  collaborations with ASTA Medica. ASTA Medica exercised its
option to satisfy its milestone  obligation by the purchase of $500,000 of SUGEN
common stock at a price of  approximately  $26.79 per share of which the premium
above fair  market  value was  recorded as  revenue.  In due  course,  SUGEN may
receive  additional   milestone  payments  in  the  two  programs  if  they  are
successful.  The  agreement  provides  for  ASTA  Medica  to  receive  exclusive
marketing  rights  to  collaboration   products  in  Greater  Europe  (including
countries and territories located in the former Soviet Union) and South America,
subject to an obligation to pay  royalties on net sales in such  territories  to
SUGEN.  ASTA Medica also has the right of first offer to manufacture  product to
be sold in SUGEN territories.  SUGEN retains marketing rights in the rest of the
world, subject to a royalty payable to ASTA Medica in most circumstances.

         ASTA Medica is an international pharmaceutical company headquartered in
Germany.   The  Company's   research  and  development  is  focused  on  cancer,
respiratory   diseases/allergies   and   disorders   of  the   central   nervous
system/epilepsy. The company is owned by Degussa, a German company active in the
fields of  chemicals,  health and  nutrition,  as well as banking  and  precious
metals.

                                       14

<PAGE>


Allergan

         In October 1996,  SUGEN entered into a  collaboration  with Allergan to
identify,  develop  and  commercialize  novel  angiogenesis  inhibitors  for the
treatment  of  ophthalmic  diseases.  The  collaboration  aims  to  establish  a
comprehensive  effort to identify and validate signal  transduction  targets for
choroidal and retinal  neovascularization.  Allergan is the exclusive  corporate
partner for SUGEN in ocular  diseases of  neovascularization  and has  exclusive
rights  to all  ophthalmic  uses of  collaboration  products  and  collaboration
know-how  worldwide.  In return,  Allergan paid SUGEN a $2.0 million initial fee
for past  research  services  and is  funding  collaboration  research  and drug
discovery at SUGEN for at least three years.  Allergan initially  purchased $4.0
million of Common Stock at $20.88 per share and purchased an additional  250,000
shares of Common  Stock at $12.00 per share in SUGEN's  October  1996  follow-on
offering.   SUGEN  will  also  receive  payments  upon  achievement  of  certain
milestones  and  royalties  with  respect to  worldwide  sales of  collaboration
products.  In  addition,  SUGEN will have the right to  contribute  to  clinical
development  costs on each program,  thereby earning  participation in the North
American  and  European  profits  from  successful  products  coming out of such
programs  over and above  its  royalty  entitlement.  Apart  from  this  option,
Allergan will be responsible for all development expenses.

Research Collaborations

         SUGEN's scientific  founders are Dr. Joseph  Schlessinger,  Chairman of
the  Department of  Pharmacology  at NYU, and Dr. Axel Ullrich,  Director of the
Department of Molecular Biology at MPI in Martinsried,  Germany.  In the fall of
1991,  the Company  entered into  research  collaboration  agreements  with both
institutions.  More  recently the Company has  established  additional  research
collaborations relating to TPs, TKs and STKs identification and screening areas.

New York University Medical Center

         In September 1991, SUGEN entered into a research and license  agreement
with NYU granting the Company an exclusive  worldwide  license to the commercial
uses of TK, TP and STK technology being developed at NYU under the leadership of
Dr.  Schlessinger.  The research  program  being  conducted at NYU centers on an
investigation  of the mechanisms  underlying the action of TKs, TPs and STKs and
their physiological role, as well as identifying, isolating and cloning new TKs,
TPs and STKs and the components of the signal  transduction  pathways  emanating
from  these  proteins.  The  research  program is  scheduled  to expire in 2001.
SUGEN's license to technology  developed  before or during the research  program
will survive indefinitely unless NYU terminates the agreement upon insolvency of
the Company or due to a material breach by the Company. Upon such termination of
the  agreement,  NYU will  continue to own the rights to the  technology  it has
developed under the agreement.  The Company is obligated to pay royalties to NYU
on sales of any SUGEN  products  for which an IND is filed  within four years of
the end of the NYU research period except for certain in-licensed  products.  As
part of this arrangement,  NYU purchased 200,000 shares of SUGEN Common Stock at
the Company's formation.

Max-Planck Society

         SUGEN has formed research collaborations with two institutes of the MPS
in Germany.  These collaborations include licenses from Garching Innovation GmbH
("Garching"), the licensing arm of MPS.

         Max-Planck-Institut fur Biochemie.  The Company entered into a research
and license  agreement with MPI and Garching which expired in August 1997 but is
expected to be  extended  in  modified  form.  This  agreement  grants  SUGEN an
exclusive worldwide license to the commercial uses of TK and TP technology being
developed at MPI under the leadership of Dr. Ullrich.  The scope of the research
program includes identification, isolation and cloning of novel receptor TKs and
TPs,   characterization   of  signal   transduction   pathway   components   and
investigation  of the normal  biological role of these proteins as well as their
role in disease.  SUGEN's license to technology  developed  before or during the
research program will survive  indefinitely  unless MPI terminates the agreement
upon insolvency of the Company or due to a material breach by the Company.  Upon
such  termination of the  agreement,  MPI will continue to own the rights to the
technology it has developed under the agreement. The Company is obligated to pay
royalties  on sales  of any  products  using  this  technology.  As part of this
arrangement,  MPS currently owns 200,000 shares of SUGEN Common Stock  purchased
at the Company's formation.

         Max-Planck-Institut  fur  Physiologische  und Klinische  Forschung.  In
October 1993,  SUGEN entered into an agreement  with MPP and Garching to support
the work of Dr. Werner Risau, a leading  researcher in the area of angiogenesis.
This agreement grants SUGEN the exclusive  worldwide right to commercialize  Dr.
Risau's  research on the inhibition of  angiogenesis,  vasculogenesis,  vascular
permeability, chemotaxis and

                                       15

<PAGE>


neurite outgrowth.  This research  collaboration will terminate in October 1999.
SUGEN's license to technology  developed  before or during the research  program
will survive indefinitely unless MPP terminates the agreement upon insolvency of
the Company or due to a material breach by the Company.  Upon termination of the
agreement,  MPP will own the rights to the technology it has developed under the
agreement.  The Company is obligated  to pay  royalties on sales of any products
embodying this technology.

ArQule

         In September 1996,  SUGEN entered into a  collaboration  agreement with
ArQule to develop a  proprietary  collection  of  compounds  designed  to target
binding   sites  common  to  many  signal   transduction   molecules   found  in
cell-signalling  pathways.  SUGEN  provided  lead  chemical  structures  and new
chemical  structure  scaffolds  which enabled  ArQule to use its Directed  Array
combinatorial  synthesis  technologies to build a novel  collection of compounds
with  potentially  broad  applications  for  the  pharmaceutical  industry.  The
research  program expired in September 1997.  SUGEN retains  exclusive rights to
this collection with respect to TK and STK targets,  subject to certain payments
and royalties to ArQule.  ArQule retains  responsibility for commercializing the
collection for targets in other areas,  subject to royalty-sharing  arrangements
with SUGEN.

Other Sources of Materials for Screening

         The Company has entered into a number of agreements  designed to obtain
novel  biochemical  and  biological  compounds and extracts for screening in its
proprietary  assay  systems.  These  agreements  cover a broad range of chemical
entities  from  sources  across the  world.  SUGEN  also has an  agreement  with
Panlabs,  Inc. of Bothell,  Washington  for the supply of  microbial  and fungal
extracts and the isolation and  identification  of active  components from these
extracts. The original agreement was entered into in March 1993 and is renewable
for  successive  one year periods.  The  agreement  most recently was amended in
early 1997,  under which  Panlabs  will  supply the Company  with a  significant
number of extracts  from which the Company can select a portion to be designated
as "selected organisms." SUGEN will own all rights to the selected organisms and
the active compounds  produced by them,  including any  derivatives.  Panlabs is
supplying other  companies with similar  extracts under similar  conditions.  In
June  1995,  SUGEN  and  Toyama  Prefectural  University  of Tokyo  initiated  a
collaboration  to  discover  new drugs  for the  treatment  of cancer  and other
diseases by inhibiting TKs and TPs and related molecules. A research team headed
by Professor Toshikazu Oki in the University's  Biotechnology Research Center is
providing to SUGEN  compounds  from  Toyama's  microbial  strain  libraries  for
testing of potential biological activity. In July 1996, SUGEN and the Institutes
of  Botany  and  Microbiology  of the  Chinese  Academy  of  Sciences  initiated
exclusive   collaborations  to  discover  novel  signal  transduction  inhibitor
candidates  and  pharmacophores.  The  Institute of Botany and the  Institute of
Microbiology  have  provided to SUGEN  extracts from the  Institutes'  plant and
microbial  collections  for testing of  potential  biological  activity  against
SUGEN's  signal  transduction  targets.  Other SUGEN  compound  sources  include
natural product libraries from around the globe, including microbial, fungal and
plant extracts, as well as additional sources of small organic compounds.

Patents and Proprietary Technology

         The  Company's  success  will  depend in part on its  ability to obtain
patents,   maintain  trade  secrets  and  operate  without   infringing  on  the
proprietary rights of others,  both in the United States and in other countries.
Patent matters in biotechnology,  and in particular with respect to receptors as
screening  tools and/or the DNA encoding them, are highly  uncertain and involve
complex  legal and  factual  questions.  Accordingly,  the  availability  of and
breadth of claims allowed in biotechnology and pharmaceutical  patents cannot be
predicted.  As of December 31, 1997,  SUGEN held exclusive rights to at least 16
issued  U.S.  patents,   had  exclusive  rights  to  at  least  15  U.S.  patent
applications  for which  notices of allowance had been  received,  and had filed
and/or  held  exclusive  licenses  to  approximately  120 United  States  patent
applications,  as well as related foreign patent applications. In December 1997,
the Company  received two U.S.  patents  relating to methods of using SU101. The
Company also has received a patent  relating to formulations  comprising  SU101.
There can be no assurance  that the Company  will develop  products or processes
that  are  patentable,   that  patents  will  issue  from  any  of  the  pending
applications, or that claims allowed will be sufficient to protect the Company's
technology.  There can be no assurance  that the Company's  patents,  if issued,
will not be challenged,  invalidated or circumvented, or that the rights granted
thereunder will provide proprietary  protection or competitive advantages to the
Company.  Competitors have been issued patents,  may have filed  applications or
may obtain  additional  patents and  proprietary  rights relating to products or
processes  competitive  with  those of the  Company  or which  could  block  the
Company's efforts to obtain patents.

         A  number  of  pharmaceutical   companies,   biotechnology   companies,
universities  and  research  institutions  have  filed  patent  applications  or
received  patents  in the  field of TKs,  TPs and STKs  and  related  downstream
signalling molecules.  The commercial success of the Company will depend in part
on SUGEN not  infringing  patents  issued to  competitors  and not breaching the
technology licenses upon which any Company

                                       16

<PAGE>


products are based.  The Company in the past has been,  and from time to time in
the future may be, notified of claims that the Company may be infringing patents
or other  intellectual  property  rights owned by third parties.  Certain patent
applications  or patents of the  Company's  competitors  may  conflict  with the
Company's  patents  and  patent  applications,  and  SUGEN is aware  that  other
companies have filed patent  applications  and have been granted  patents in the
United States and other countries  claiming subject matter potentially useful or
necessary to the Company. Such conflicts could result in a significant reduction
in the scope of the coverage of the  Company's  issued or licensed  patents.  In
addition,  if patents are issued to other companies which contain competitive or
conflicting  claims and such claims are ultimately  determined to be valid,  the
Company  may be required  to obtain  licenses to these  patents or to develop or
obtain  alternative  technology.  If any licenses are required,  there can be no
assurance  that  the  Company  will  be able  to  obtain  any  such  license  on
commercially favorable terms, if at all, and if these licenses are not obtained,
the Company might be prevented  from pursuing the  development of certain of its
potential  products.  The Company's  breach of an existing license or failure to
obtain a license to any  technology  that it may  require to  commercialize  its
products may have a material  adverse impact on the Company.  Litigation,  which
could  result in  substantial  costs to the  Company,  may also be  necessary to
enforce any patents  issued or licensed to the Company or to determine the scope
and validity of third-party  proprietary rights.  There can be no assurance that
the  Company's  issued or  licensed  patents  would be held  valid by a court of
competent jurisdiction. Even if the outcome of such litigation is favorable, the
cost of such litigation and the diversion of the Company's  management resources
during such litigation could have a material  adverse effect on the Company.  An
adverse  outcome could subject the Company to  significant  liabilities to third
parties,  require  disputed  rights to be licensed from third parties or require
the Company to cease using such  technology,  any of which could have a material
adverse effect on the Company.  If  competitors of the Company  prepare and file
patent  applications in the United States that claim  technology also claimed by
the Company,  the Company may have to  participate in  interference  proceedings
declared by the Patent and Trademark Office to determine  priority of invention,
which could  result in  substantial  cost to the  Company,  even if the eventual
outcome is  favorable  to the  Company.  Indeed,  the Company  has several  such
interferences pending. When patents issue in certain areas such as Japan and the
European community,  third parties can oppose such issuance. Should the relevant
patent  office  institute a  proceeding  termed an  opposition,  the Company may
decide to defend its patent.  There can be no assurance that the Company will be
successful  or that the  patent  office  will not revoke the patent or alter the
scope of protection previously granted.

         SU101, a compound generally known by the name leflunomide,  is a member
of the isoxazole  family of compounds.  Leflunomide  was discovered more than 17
years ago. A large  pharmaceutical  company  holds a number of United States and
foreign  patents  and has filed  applications  in the  United  States and abroad
covering  compositions  of matter and  pharmaceutical  uses of  leflunomide  and
structurally  related  compounds.  As noted  above,  SUGEN has received two U.S.
patents  containing claims relating to the use of SU101 in treating certain PDGF
TK related cancers and tumors.  While the Company  believes at this time that it
will receive method of use patent protection outside the United States on SU101,
there can be no assurance that any such patent protection will be issued.  SUGEN
believes its research and  development and its clinical trials with SU101 in the
United States are  protected  from claims of  infringement  of the United States
patents because such  activities are being conducted  solely for uses reasonably
related to  development  and submission of information to the FDA for regulatory
approval.  Similar  protection  may not be available  outside the United States.
Although the Company  cannot  predict  whether or when SU101 will be approved by
the FDA for  marketing  in the United  States,  it believes  that certain of the
pharmaceutical  company's  patents in the United  States may have  expired  when
marketing does begin and that the remaining  U.S.  patents are either invalid or
will not be infringed by the manufacture and sale of SU101 in the United States.
However,  the Company has learned  that  additional  patents  have issued in the
United States to the pharmaceutical  company covering the use of leflunomide and
structurally  related compounds for the treatment of named cancers.  The Company
presently  does  not know if  commercialization  of SU101  will  infringe  these
additional  patents but believes that the  additional  patents may be subject to
claims of invalidity  as they relate to SU101.  If the  additional  patents were
determined  to be valid with  respect to SU101,  the  Company may be required to
obtain a license from the  pharmaceutical  company in order to  manufacture  and
sell SU101 in the United  States.  There can be no assurance that SU101 will not
infringe  the  recently  issued  patents,  that the  term of the  pharmaceutical
company's  other existing  patents will not be extended,  that the claims of the
pharmaceutical  company's pending patent applications will not be modified prior
to issuance so as to enhance their validity or scope, or that a court will agree
with the Company's  beliefs  regarding  invalidity and  non-infringement  of the
patents.  To date,  the  pharmaceutical  company has not threatened or commenced
legal proceedings against the Company concerning  possible patent  infringement.
There can be no assurance that the pharmaceutical company in the future will not
assert claims  against SUGEN or that the Company could reach  agreement with the
pharmaceutical  company for a license for SU101 upon favorable  terms or at all,
if  required.  The  inability of the Company to resolve this matter on favorable
terms or at all could  have a material  adverse  effect on the  Company.  In any
event,  the  assertion  of any such  claims,  even if resolved  favorably to the
Company, could result in substantial costs to the Company.

                                       17

<PAGE>


         The Company plans to  commercialize  SU101 in the major markets outside
the  United  States  either  through  affiliates  or  through   licensees,   and
anticipates  receiving  similar  patent  protection  in Europe  and Japan to its
Unites  States  position.  The scope,  term and  validity of the  pharmaceutical
company's  patent  protection  outside the United  States is different  than the
situation in the United States,  and the Company's  ability to  manufacture  and
sell SU101  outside the United  States may be adversely  impacted by this patent
protection.

         SUGEN also relies on trade  secrets to protect  technology,  especially
where patent  protection is not believed to be appropriate or obtainable.  SUGEN
attempts  to  protect  its  proprietary  technology  and  processes  in  part by
confidentiality   agreements   with  its  employees,   consultants  and  certain
contractors.  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 be independently
discovered by competitors.  To the extent that the Company or its consultants or
research  collaborators use intellectual  property owned by others in their work
for the  Company,  disputes  may  also  arise as to the  rights  in  related  or
resulting know-how and inventions.

Competition

         SUGEN is  engaged  in a rapidly  changing  field.  Other  products  and
therapies  that will  compete  directly  with the  products  that the Company is
seeking  to  develop  and  market   currently  exist  or  are  being  developed.
Competition from fully integrated  pharmaceutical companies and more established
biotechnology  companies is intense and is expected to  increase.  Most of these
companies  have  significantly  greater  financial  resources  and  expertise in
research and  development,  manufacturing,  conducting  preclinical  studies and
clinical trials,  obtaining regulatory approvals and marketing than the Company.
Many of these  competitors have significant  products that have been approved or
are in  development  and operate  large,  well-funded  research and  development
programs.  For example,  monoclonal  antibodies  targeting  Her2,  including one
developed by Dr. Ullrich, are currently in clinical trials by others for certain
cancers.  Smaller  companies  may  also  prove  to be  significant  competitors,
particularly  through  collaborative  arrangements with large pharmaceutical and
established   biotechnology  companies.   Academic  institutions,   governmental
agencies  and other  public and  private  research  organizations  also  conduct
research,  seek patent protection and establish  collaborative  arrangements for
products  and  clinical   development   and  marketing.   These   companies  and
institutions  compete  with the  Company  in  recruiting  and  retaining  highly
qualified scientific and management  personnel.  Competition may also arise from
companies  pursuing  differing  technological  approaches  to cancers  and other
disease indications targeted by the Company's product candidates. In addition to
the above factors,  SUGEN will face  competition  based on product  efficacy and
safety,  the timing and scope of regulatory  approvals,  availability of supply,
marketing  and  sales  capability,  reimbursement  coverage,  price  and  patent
position.  There is intense  competition  for access to and use of  libraries of
compounds  to use for  screening  and any  inability  of the Company to maintain
access to  sufficiently  broad  libraries of compounds for  screening  potential
targets  would  have a  material  adverse  effect  on the  Company.  There is no
assurance that the Company's competitors will not develop more effective or more
affordable  products,  compete more  effectively  for corporate  partnerships or
achieve earlier patent protection or product commercialization than the Company.

Government Regulation

         The  Company's  ongoing  research and  development  activities  and the
manufacturing and marketing of the Company's  potential  products are subject to
extensive regulation by numerous  governmental  authorities in the United States
and other  countries.  Failure to comply with applicable FDA or other applicable
regulatory  requirements  may result in criminal  prosecution,  civil penalties,
recall or seizure of products,  total or partial  suspension  of  production  or
injunction,  as well as other  regulatory  action  against  the  Company  or its
potential products.

         Prior to  marketing  in the United  States,  any drug  developed by the
Company must undergo  rigorous  preclinical  studies and clinical  trials and an
extensive  regulatory clearance process implemented by the FDA under the federal
Food, Drug and Cosmetic Act. Satisfaction of such regulatory requirements, which
includes  satisfying  the FDA  that the  product  is both  safe  and  effective,
typically  takes several years or more depending  upon the type,  complexity and
novelty of the product and requires the  expenditure of  substantial  resources.
The Company is focusing its initial development efforts related to SU101 for the
treatment of malignant glioma and selected other solid tumor patient populations
with very poor  prognosis.  Given the poor  prognoses  for these  patients,  the
Company  believes  that FDA  approval  could  potentially  be obtained  based on
smaller-scale  clinical trials than are typically required for approval of NDAs.
There can be no  assurance,  however,  that the Company  will be able to rely on
smaller-scale  clinical  trials to expedite the  commercialization  of SU101 for
these patient populations.

                                       18

<PAGE>


         Preclinical studies must be conducted in conformance with the FDA's GLP
regulations.  Before commencing  clinical trials, the Company must submit to and
receive  approval  from  the  FDA of an  IND.  There  can be no  assurance  that
submission  of an IND would  result in FDA  authorization  to commence  clinical
trials.  Clinical trials must meet requirements for  institutional  review board
oversight,  informed  consent and good  clinical  practice  requirements  and is
subject  to  continuing  FDA  oversight.  The  Company  does not have  extensive
experience in conducting and managing the clinical  testing  necessary to obtain
regulatory approval. Clinical trials may require large numbers of test subjects.
Furthermore,  the Company or the FDA may suspend  clinical trials at any time if
they believe that the subjects participating in such trials are being exposed to
unacceptable  health  risks or if the FDA finds  deficiencies  in the IND or the
conduct of the trials.

         Before  receiving FDA  clearance to market a product,  the Company will
have to  demonstrate  that the  product  is safe and  effective  on the  patient
population  that will be treated.  Data  obtained from  preclinical  studies and
clinical  trials are susceptible to varying  interpretations  which could delay,
limit or prevent regulatory clearances. In addition, delays or rejections may be
encountered based upon additional  government regulation from future legislation
or  administrative  action or changes in FDA policy during the period of product
development,  clinical trials and FDA regulatory review. Similar delays also may
be encountered in foreign  countries.  There can be no assurance that even after
such  time  and  expenditures  regulatory  clearance  will be  obtained  for any
products  developed  by the  Company.  If  regulatory  clearance of a product is
granted,  such  clearance will be limited to those disease states and conditions
for which the  product is useful,  as  demonstrated  through  clinical  studies.
Marketing  or  promoting  a drug for an  unapproved  indication  is  prohibited.
Furthermore,   clearance  may  entail  ongoing  requirements  for  postmarketing
studies.  Even if such regulatory clearance is obtained, a marketed product, its
manufacturer  and its  manufacturing  facilities are subject to continual review
and periodic  inspections by the FDA.  Discovery of previously  unknown problems
with a product,  manufacturer  or facility  may result in  restrictions  on such
product or  manufacturer,  including  costly  recalls or even  withdrawal of the
product from the market.  There can be no assurance that any compound  developed
by the  Company  alone or in  conjunction  with others will prove to be safe and
efficacious in clinical  trials and will meet all of the  applicable  regulatory
requirements needed to receive marketing clearance.

         Manufacturers  of drugs and biologics  also are required to comply with
the  applicable  FDA good  manufacturing  practice  ("GMP")  regulations,  which
include  requirements  relating to quality control and quality assurance as well
as the  corresponding  maintenance of records and  documentation.  Manufacturing
facilities  are  subject  to  inspection  by  the  FDA,  including   unannounced
inspection,  and  must  be  licensed  before  they  can be  used  in  commercial
manufacturing  of the  Company's  products.  There can be no assurance  that the
Company  or its  suppliers  will be able  to  comply  with  the  applicable  GMP
regulations  and other FDA  regulatory  requirements.  Such failure could have a
material adverse effect on the Company.

         The   Company   may  elect  to  seek   approval   of  SU101  under  the
Clinton-Kessler  Cancer  Initiative.  Significant  uncertainty  exists as to the
extent to which such initiative will result in accelerated  review and approval.
Further, the FDA has not made available comprehensive guidelines with respect to
this initiative,  retains considerable  discretion to determine  eligibility for
accelerated  review  and  approval  and is not  bound  by  discussions  that  an
applicant  may have had with FDA staff.  Accordingly,  the FDA could employ such
discretion to deny eligibility of SU101 as a candidate for accelerated review or
to require  additional  clinical trials or other  information  before  approving
SU101.  A  determination  that SU101 is not eligible for  accelerated  review or
delays and additional expenses associated with generating a response to any such
request  for  additional  trials  could  have a material  adverse  effect on the
Company.

         Outside the United States, the Company's ability to market a product is
contingent  upon  receiving  a  marketing  authorization  from  the  appropriate
regulatory  authorities.  The  requirements  governing  the  conduct of clinical
trials,  marketing  authorization,  pricing and  reimbursement  vary widely from
country to country. At present, foreign marketing authorizations are applied for
at a national  level,  although  within the European  Community  ("EC")  certain
registration  procedures are available to companies  wishing to market a product
in more than one EC member state. If the regulatory  authority is satisfied that
adequate  evidence  of  safety,  quality  and  efficacy  has been  presented,  a
marketing  authorization  will be  granted.  This  foreign  regulatory  approval
process includes all of the risks associated with FDA clearance set forth above.

Manufacturing

         The  Company  has no  manufacturing  facilities  and  relies  on  other
manufacturers to produce its compounds for research and development, preclinical
studies and clinical trials.  The products under development by the Company have
never been manufactured for large-scale  clinical trials or commercial purposes,
and there can be no assurance that such products can be  manufactured  at a cost
or in  quantities  necessary  for  large-scale  clinical  trials or to make them
commercially viable. Any change in the Company's existing relationships with, or
interruption in supply from, its manufacturers of the compounds used in its

                                       19

<PAGE>


clinical  trials could affect  adversely the  Company's  ability to complete its
ongoing clinical trials and to market its product candidates,  if approved.  Any
such change or interruption  may have a material  adverse effect on the Company.
In the event of a change in the  supplier  of a  compound  used in its  clinical
trials,  the Company would be required to collect data from its ongoing clinical
trials with  respect to a compound  and file such data with the FDA to establish
clinical  comparability between the compound as produced by different suppliers.
There can be no  assurance  that the  Company  would be able to  establish  such
clinical comparability. A failure to establish clinical comparability could lead
to a requirement that the Company enlarge the size of an ongoing clinical trial,
which  would  delay  the  completion  of  such  trial,  increase  its  cost  and
potentially  delay the Company's  pursuit of  regulatory  approval for a product
candidate. If the Company were unable to contract for a sufficient supply of its
compounds on acceptable  terms, or if it should encounter delays or difficulties
in its relationships with manufacturers,  the Company's  preclinical studies and
clinical trial  schedule would be delayed,  resulting in delay in the submission
of products for regulatory  approval or the market  introduction  and subsequent
sales of such  products,  which  could  have a  material  adverse  effect on the
Company.  Moreover,  contract manufacturers that the Company may use must adhere
to current GMP regulations enforced by the FDA through its facilities inspection
program.  If these facilities cannot pass a pre-approval  plant inspection,  the
FDA pre-market approval of the products will not be granted.

Employees

         As of December  31,  1997,  the Company  had 189  full-time  employees,
including a technical scientific staff of 138. The Company places an emphasis on
obtaining the highest  available  quality of staff. The Company has selected and
assembled a group of  experienced  scientists and managers with skills in a wide
variety   of   disciplines,   including   molecular   biology,   chemistry   and
pharmaceutical development. To date, the Company believes it has been successful
in its efforts to recruit qualified employees, but there is no assurance that it
will continue to be as successful in the future. None of the Company's employees
are covered by collective  bargaining  arrangements,  and  management  considers
relations with its employees to be good.

                                       20

<PAGE>


Item 2.         PROPERTIES

         SUGEN currently leases  approximately  60,000 square feet of laboratory
and office  space in Redwood  City,  California.  The Company  leases this space
under  operating   leases  which  last  through   November  and  December  1998.
Approximately  48,000 square feet of the laboratory  and office space  currently
under lease have three- and five-year renewal options at the end of the leases.

         In June 1997, the Company entered into a  build-to-suit  facility lease
agreement  with  respect  to a  new  research  and  headquarters  facilities  of
approximately 106,000 square feet on a site in South San Francisco,  California.
Construction  of the new facility is targeted for  completion  during the fourth
quarter of 1998,  which  coincides with the expiration of the Company's  current
facility  leases.  See  "Management's   Discussion  and  Analysis  of  Financial
Condition   and  Results  of   Operations."   The  Company   believes  that  the
build-to-suit  facility,  in addition to its options for additional space at the
South San  Francisco  site,  will be  sufficient  to meet its needs for the next
several  years.  There can be no  assurances,  however,  that such space will be
available on favorable terms, if at all.


Item 3.         LEGAL PROCEEDINGS

SUGEN is not a party to any material legal proceedings.


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

None.

                                       21

<PAGE>


                                     PART II


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

         Since the  Company's  initial  public  offering of its common  stock in
October 1994,  the Company's  Common Stock has traded on the Nasdaq Stock Market
under the symbol SUGN.  The following  table lists the high and low sales prices
for the  Company's  Common  Stock for each quarter of fiscal year 1997 and 1996.
These prices do not include retail markups, markdowns or commissions.

                                     -----------------------------------
                                               High               Low
------------------------------------------------------------------------
1997
Fourth Quarter                           $     21.13         $     12.63
Third Quarter                                  20.94               11.88
Second Quarter                                 13.25               10.00
First Quarter                                  15.25                9.88
------------------------------------------------------------------------
1996
Fourth Quarter                                 14.50               11.25
Third Quarter                                  12.75                9.38
Second Quarter                                 15.25               11.25
First Quarter                            $     15.88         $     11.75
------------------------------------------------------------------------


         As of March 13, 1998 there were  approximately 229 holders of record of
the Company's  Common Stock.  On March 13, 1998, the last sale price reported on
the Nasdaq National Market System for the Company's  Common Stock was $14.50 per
share.

         The Company has not paid any dividends since its inception and does not
intend to pay any dividends on its Common Stock in the foreseeable future.

                                       22

<PAGE>


Item 6.          SELECTED FINANCIAL DATA

<TABLE>
Statement of Operations Data:
(in thousands, except per share data)

<CAPTION>
                                                                                  Year Ended December 31,
                                                           ------------------------------------------------------------------------
                                                             1997            1996            1995           1994             1993
                                                           --------        --------        --------        --------        --------
<S>                                                        <C>             <C>             <C>             <C>             <C>
Contract revenue (1)                                       $  6,031        $ 13,650        $ 13,843        $  6,270        $  5,470
Costs and expenses:
        Research and development                             34,585          29,792          23,226          17,079          10,251
        General and administrative                            6,227           5,529           5,086           3,106           2,169
                                                           --------        --------        --------        --------        --------
             Total costs and expenses                        40,812          35,321          28,312          20,185          12,420
                                                           --------        --------        --------        --------        --------
Operating loss                                              (34,781)        (21,671)        (14,469)        (13,915)         (6,950)
Other income and expense:
        Interest income                                       2,786           2,481           1,988             529             339
        Interest expense                                     (1,065)           (691)           (494)           (278)            (56)
        Gain on sale of investment
           in Selectide Corporation                            --              --             1,006            --              --
                                                           --------        --------        --------        --------        --------
             Other income, net                                1,721           1,790           2,500             251             283
                                                           --------        --------        --------        --------        --------
Net loss                                                   $(33,060)       $(19,881)       $(11,969)       $(13,664)       $ (6,667)
                                                           ========        ========        ========        ========        ========

Basic and diluted net loss per share (2)                   $  (2.47)       $  (1.81)       $  (1.32)       $  (4.37)       $  (4.84)
                                                           ========        ========        ========        ========        ========

Shares used in computing basic and diluted
        net loss per share (2)                               13,387          10,966           9,085           3,129           1,378
                                                           ========        ========        ========        ========        ========

Pro forma net loss per share (3)                                                                           $  (2.27)       $  (1.49)
                                                                                                           ========        ========

Shares used in computing pro forma net loss per share (3)                                                     6,013           4,485
                                                                                                           ========        ========
</TABLE>


<TABLE>
Balance Sheet Data:
(in thousands)
<CAPTION>
                                                                                           December 31,
                                                               --------------------------------------------------------------------
                                                                 1997           1996           1995           1994           1993
                                                               --------       --------       --------       --------       --------
<S>                                                            <C>            <C>            <C>            <C>            <C>
Cash, cash equivalents and
        short-term investments                                 $ 75,295       $ 56,334       $ 53,253       $ 22,414       $ 16,984
Total assets                                                   $ 84,825       $ 61,936       $ 59,243       $ 28,455       $ 20,812
Senior custom convertible notes                                $ 17,500       $   --         $   --         $   --         $   --
Capital lease obligations - non-current portion                $  3,152       $  2,938       $  3,651       $  2,087       $    441
Accumulated deficit                                            $(90,988)      $(57,997)      $(37,964)      $(26,270)      $(12,451)
Stockholders' equity                                           $ 49,013       $ 48,530       $ 43,441       $ 18,319       $ 13,230

<FN>
(1)  Includes amounts from related party.
(2)  Basic and diluted loss per share for 1994 and 1993 have been  retroactively
     restated to apply the  requirements  of Staff  Accounting  Bulletin  No. 98
     ("SAB  98"),  issued by the SEC in  February  1998.  Under SAB 98,  certain
     shares of common  stock and  options and  warrants  to  purchase  shares of
     common  stock at prices  substantially  below the per share price of shares
     sold in the Company's  initial public offering  previously  included in the
     computation of shares outstanding  pursuant to Staff Accounting  Bulletin's
     Nos. 55, 64 and 83 are now excluded from the computation.
(3)  Pro forma net loss per share  information gives effect to the conversion of
     all preferred stock outstanding from the date of issuance.
</FN>
</TABLE>

                                       23

<PAGE>


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 Financial Data" and the Company's 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.  These forward-looking  statements are based on the
current  expectations  of the Company,  and the Company assumes no obligation to
update this information. 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 under "Liquidity & Capital Resources" below as well as those discussed
elsewhere herein.

Overview

         SUGEN was founded in July 1991 to  discover  and develop new classes of
small  molecule  drugs  which  target  specific  cellular  signal   transduction
pathways.  These  signalling  pathways  are involved in a variety of chronic and
acute  pathological  diseases,  including  cancer  and  diabetes  as  well as in
dermatologic,  ophthalmic,  neurologic and immune disorders.  The Company's most
advanced  product  candidate  is SU101,  a PDGF TK  signalling  antagonist.  The
Company has completed the data analysis on a Phase II clinical  trial for use of
SU101 as a treatment for refractory  malignant  glioma and initiated a Phase III
clinical  trial  during the first  quarter of 1998. A Phase II study of SU101 in
combination  with  BCNU,  the  chemotherapy  drug  that is part of the  standard
treatment  regimen in newly diagnosed brain cancer patients and a Phase II study
in hormone  refractory  prostate cancer was initiated  during the second half of
1997.  To date,  approximately  158  patients,  including  patients  with brain,
ovarian,  prostate and non-small cell lung cancers, have been treated with SU101
in nine  Company-sponsored  clinical trials.  The Company is also conducting its
initial Phase I clinical trial for its second cancer product candidate,  SU5416,
a Flk-1/KDR TK  antagonist  which  inhibits  angiogenesis  (the process by which
blood  vessels are  formed).  In addition,  the Company is  conducting a Phase I
clinical trial for SU5271,  an EGF  antagonist,  for the treatment of psoriasis.
Through December 31, 1997,  substantially  all of the Company's revenue has been
earned pursuant to collaborations  with Zeneca Limited  ("Zeneca"),  ASTA Medica
Aktiengesellschaft ("ASTA Medica"), Vision Pharmaceuticals L.P., an affiliate of
Allergan,  Inc., and Allergan,  Inc.  (collectively  "Allergan")  and Amgen Inc.
("Amgen").   The  Company   intends  to  pursue  its  drug  discovery   programs
independently and in collaboration with established pharmaceutical companies.

         In September 1997, the Company  completed a private  placement of $17.5
million principal amount of 5% Senior Custom Convertible Notes due 2000. The net
proceeds to the Company were approximately $16.3 million.

         In  November  1997,  the  Company  completed  a  follow-on  offering of
2,000,000  shares  of  Common  Stock at a price of  $16.00  per  share.  The net
proceeds to the Company  were  approximately  $29.7  million.  Zeneca  purchased
456,000 shares of Common Stock in the offering.

         The  Company has not been  profitable  since  inception  and expects to
incur  substantial  losses  for the  foreseeable  future,  primarily  due to the
expansion of  preclinical  and clinical  development  activities  as more of its
proprietary  cancer-related  programs  progress toward and into the clinic.  The
Company expects that losses will fluctuate from quarter to quarter and that such
fluctuations  may  be  substantial.  As of  December  31,  1997,  the  Company's
accumulated deficit was $91.0 million.

Results of Operations

         The Company's revenues for the years ended December 31, 1997, 1996, and
1995 were $6.0 million, $13.7 million, and $13.8 million, respectively. Revenues
for the year ended December 31, 1997 included contract

                                       24

<PAGE>

revenue  from the  Allergan  and Zeneca  collaborations  and contract & services
revenue earned under the ASTA Medica collaboration for services provided by ASTA
Medica pursuant to the collaboration but on non-collaboration programs. In 1998,
the Company expects to fully utilize the remaining available credit for contract
services  provided by ASTA Medica and  thereafter  will only  recognize  revenue
under  the  ASTA  Medica   collaboration   upon  the  achievement  of  specified
milestones. The Company is actively pursuing additional  collaborations,  but no
assurance  can be  given  as to  the  ability  of  the  Company  to  enter  such
collaborations on a timely basis, or at all.

         Revenues for 1996  included an up-front  fee and contract  revenue from
the Allergan collaboration,  contract revenue from the Zeneca collaboration, the
recognition of the balance of the $4.0 million technology set-up fee received in
connection with the ASTA Medica collaboration and the $4.3 million wind-down fee
associated  with the Amgen  termination.  The Company  recognizes  revenues from
set-up and wind-down  fees as the related  activities  are  performed,  which is
generally over a twelve-month period or less. The decrease in 1997 revenues from
1996 was due to the  recognition of set-up and wind-down fees from the Allergan,
ASTA Medica and Amgen  collaborations  in 1996. No such fees were  recognized in
1997.

         Research  and  development  expenses  for the years ended  December 31,
1997,  1996 and 1995 were  $34.6  million,  $29.8  million  and  $23.2  million,
respectively.  The increase  during 1997 was primarily  due to higher  personnel
related  costs  associated  with the  expansion  of the  Company's  research and
development  programs.  In addition,  the  progression  of clinical  activities,
including  expanded  Phase  I  and  Phase  II  studies  of  the  Company's  lead
anti-cancer  compound,  SU101,  initiation  of Phase I studies of the  Company's
psoriasis  program,  SU5271,  and Phase I studies of the Company's second cancer
product candidate,  SU5416, contributed to higher expenses during 1997. Further,
the advancement of multiple programs through preclinical development,  including
activities  associated with the Company's June 1997 filing of an Investigational
New Drug  ("IND")  with the U.S.  Food and Drug  Administration  ("FDA") for the
clinical testing of SU5416,  led to higher expenses in 1997. The increase during
1996 was driven by expenses  associated with additional  personnel  dedicated to
the Company's research and development programs. In addition, the progression of
clinical activities, including expanded Phase I studies of SU101, contributed to
the  growth  in 1996  expenses.  The  Company  expects  that  its  research  and
development  expenses will continue to grow in future years due to the hiring of
personnel,  additional  preclinical studies, the progression of SU101 and SU5416
clinical  trials,  the  initiation  of new clinical  trials on  additional  drug
candidates and pursuant to requirements  under the Company's  anticipated future
collaborations.

         General and  administrative  expenses for the years ended  December 31,
1997,  1996 and  1995  were  $6.2  million,  $5.5  million,  and  $5.1  million,
respectively. The increase in 1997 was primarily due to higher headcount related
costs as well as  additional  expenses  in the areas of investor  relations  and
business  development.  The  increase  in 1996 was  primarily  due to  increased
administrative  staffing,  the related  recruiting and  relocation  expenses and
costs  associated with the  resignation of an officer.  The Company expects that
its general and  administrative  expenses  will continue to increase in order to
support the Company's expanding research and development efforts.

         Interest  income for the years ended December 31, 1997,  1996, and 1995
was $2.8 million, $2.5 million, and $2.0 million, respectively.  These increases
were due to higher  investment  balances arising primarily from issuances of the
Company's  capital stock and convertible  debt.  Interest  expense for the years
ended December 31, 1997, 1996 and 1995 was $1.1 million, $691,000, and $494,000,
respectively.  These increases were primarily due to the Company's continued use
of capital lease  financing for equipment and property  improvements  related to
the expansion of its facilities.  The Company expects that interest expense will
continue to increase in future years due to the  continued  use of capital lease
financing for equipment and facility  improvements and the added expense related
to the issuance of senior custom  convertible notes in September 1997,  provided
the debt is not  converted.  A $1.0  million  gain on the sale of the  Company's
investment  in  Selectide  was  included in other  income  during the year ended
December 31, 1995.

         The  Tax  Reform  Act  of  1986  contains  provisions  that  limit  the
utilization of net operating loss and tax credit carryforwards if there has been
a "change in  ownership"  as described  in Section 382 of the  Internal  Revenue
Code.  Such a change in ownership  may have arisen as a result of the  Company's
initial public offering or subsequent sales of securities.

                                       25

<PAGE>


Liquidity and Capital Resources

         At  December  31,  1997,  the Company had cash,  cash  equivalents  and
short-term   investments   of   approximately   $75.3   million   compared  with
approximately  $56.3  million at December  31,  1996.  The  increase in cash and
investments  during the year ended  December 31, 1997 was  primarily  due to the
$31.2 million in net proceeds  from the issuance of Common Stock,  $16.3 million
in net  proceeds  received in  connection  with the  issuance  of senior  custom
convertible  notes in September 1997,  partially  offset by the net loss for the
year.

         Through December 31, 1997, the Company's principal sources of financing
have been its initial and follow-on public offerings of Common Stock, placements
of the Company's Preferred and Common Stock and senior custom convertible notes,
and funds received under the Company's corporate  collaborations.  The Company's
current  principal  sources  of  liquidity  are  its  research  and  development
collaborations with ASTA Medica, Zeneca and Allergan, its cash, cash equivalents
and short-term investments and capital lease financing. The Company has combined
capital lease lines of $6.4 million  available for the purchase of equipment and
facility   improvements  at  December  31,  1997,  including  the  $5.0  million
additional lease line secured in November 1997.

         The Company has entered into license and  research  agreements  whereby
the Company funds research projects performed by others or in-licenses compounds
from third  parties.  Some of the  agreements  may  require  the Company to make
milestone and royalty payments.  Under these programs,  commitments for external
research funding are approximately $1.7 million,  $1.6 million, $1.4 million and
$1.1  million  in  1998,  1999,  2000  and  2001,  respectively.  Most of  these
commitments  are  cancelable  within a  three-to-six  month period and limit the
amounts  payable by the Company for sponsored  research under the programs after
notice of cancellation.  The Company anticipates renewing certain contracts that
expired  in 1997  which  will  increase  future  commitments  beyond  the levels
indicated above for 1998 through 2001.

         From time to time,  the  Company  evaluates  potential  investments  in
complementary  businesses,  products or technologies.  Currently, the Company is
considering modest investments in such complementary businesses during 1998. The
Company  has no other  present  undertakings,  commitments  or  agreements  with
respect to investments in other businesses.

         Net  additions of equipment and  leasehold  improvements  for the years
ended December 31, 1997, 1996, and 1995 were $3.2 million, $1.7 million and $2.6
million,  respectively,  which  included  $1.4  million,  $1.3  million and $2.6
million,  respectively, of equipment and leasehold improvements financed through
the Company's master lease agreements. In general,  additions for 1997, 1996 and
1995  included  facility  expansion  costs,  the  continued  enhancement  of the
Company's  laboratory  capabilities  and the costs associated with the Company's
ongoing effort to maintain an up-to-date  technology base. Additions in 1997 and
1996  also  included  the  purchase  of a mass  spectrometer  and a  significant
investment in computer  hardware and software to support the Company's  genomics
and  bioinformatics  programs,  respectively.  Under  these  capital  leases and
certain  operating  lease   arrangements,   including  the  build-to-suit  lease
agreement,  the Company has lease commitments of $20.0 million through 2002. The
Company intends to fund future capital  expenditures  principally  through lease
financing or other debt  arrangements,  although  there can be no assurance that
such financing will be available. The Company expects that its capital additions
for 1998 will be higher than that of the prior year primarily due to anticipated
facility  improvements  in  connection  with the  build-to-suit  facility  lease
agreement which was entered into in June 1997.  Construction of the new facility
is targeted for completion  during the fourth quarter of 1998,  which  coincides
with the  expiration  of the Company's  current  facility  leases.  Although the
Company has not expended  significant  amounts to date,  the Company  expects to
invest in facility  improvements  and incur move related costs during 1998 as it
approaches building completion.  Accordingly,  it is expected that the Company's
capital  lease  obligations  and  related  interest  expense,  as  well  as  its
depreciation expense, will increase in future periods. See "Properties."

         The Company estimates that its existing capital resources together with
facility and equipment financing,  expected revenues from current collaborations
and net income from investment activities, will be

                                       26

<PAGE>


sufficient to fund its planned  operations into 2000.  However,  there can be no
assurance that the  underlying  assumed levels of revenue and expense will prove
accurate.  Whether or not these  assumptions  prove to be accurate,  the Company
will need to raise substantial  additional  capital to fund its operations.  The
Company   intends  to  seek  such  additional   funding  through   collaborative
arrangements,  public or private  equity or debt  financings  and capital  lease
transactions;  however, there can be no assurance that additional financing will
be available on acceptable  terms, or at all. If additional  funds are raised by
issuing equity  securities,  further  dilution to  stockholders  may result.  In
addition,  in the event that additional funds are obtained through  arrangements
with  collaborative  partners,  such  arrangements  may  require  the Company to
relinquish rights to certain of its technologies, product candidates or products
that the Company would  otherwise seek to develop or  commercialize  itself.  If
adequate funds are not available,  the Company may be required to delay,  reduce
the scope of or eliminate one or more of its research or  development  programs,
which could have a material adverse effect on the Company.

         The Year 2000 Issue is the result of computer  programs  being  written
using two digits  rather than four  digits to define the  applicable  year.  The
Company has reviewed its existing software programs for year 2000 compliance and
believes  that  all  of  its  internal  application  systems  are  currently  in
compliance.  The Company plans to initiate formal communications with all of its
significant suppliers to determine the extent to which the Company is vulnerable
to those third  parties'  failure to remediate  their own Year 2000 Issues.  The
project  is  estimated  to be  completed  early  1999,  which  is  prior  to any
anticipated  impact on its operations.  The Company does not expect the costs of
year  2000  compliance  to have a  material  impact on the  Company's  financial
results.  However,  there can be no assurance that all third parties,  including
clinical  trial  sites,  with whom the  Company  works  will  achieve  year 2000
compliance on a timely basis for systems related to their  interactions with the
Company,  or that failure to achieve year 2000  compliance by such entities will
not have a material adverse effect on the Company.

         The Company is at an early stage of  development  and must be evaluated
in light of the  uncertainties  and  complications  present  in a  biotechnology
company.  The  Company has been in  existence  only since 1991 and to date three
drug candidates  (SU101,  SU5271 and SU5416) have entered  clinical  trials.  To
achieve profitable operations on a continuing basis, the Company,  alone or with
collaborative  partners, must successfully develop,  manufacture,  introduce and
market its proposed  products.  Products,  if any,  resulting from the Company's
research and development programs are not expected to be commercially  available
for a number of years, even if they are developed  successfully and proven to be
safe and effective.  The Company has experienced  significant  operating  losses
since its inception.  The Company expects to incur significant  operating losses
at least for the next several years and expects cumulative losses to increase as
the  Company's  research and  development  efforts,  including  preclinical  and
clinical testing,  are expanded.  Substantially all of the Company's revenues to
date have been  received  pursuant to the Company's  collaborations.  Should the
Company or its collaborators fail to perform in accordance with the terms of any
of their  agreements,  any consequent loss of revenue under the agreements could
have a material adverse effect on the Company's  results of operations.  Many of
the  Company's  currently  proposed  products  are  subject to  development  and
licensing arrangements with the Company's collaborators.  Therefore, the Company
is dependent on the research and development efforts of these collaborators with
respect to some of its proposed  products  and is entitled  only to a portion of
the revenues,  if any, realized from the commercial sale of any of the potential
products covered by the collaborations in many  jurisdictions.  Before obtaining
regulatory  clearance  for  the  commercial  sale of any of its  products  under
development,  the  Company  must  demonstrate  through  preclinical  studies and
clinical  trials that the potential  product is safe and  efficacious for use in
humans for each target  indication.  The failure to adequately  demonstrate  the
safety and  efficacy  of a product  under  clinical  development  could delay or
prevent regulatory  clearance of the potential product and could have a material
adverse effect on the Company.  The foregoing  risks reflect the Company's early
stage of  development  and the nature of the  Company's  industry and  potential
products.  Also inherent at the Company's  stage of  development  are a range of
additional risks,  including  uncertainties  regarding protection of patents and
proprietary  rights,  government  regulation,   competition,   employee  issues,
manufacturing   uncertainties,   the  Company's  lack  of  sales  and  marketing
capabilities,  uncertainty of market acceptance of the Company's  products,  and
uncertainties regarding pharmaceutical pricing and reimbursement.

                                       27

<PAGE>


Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The  response  to this Item is  submitted  in a separate  section of this report
beginning on page F-1.


Item 9.  CHANGES  IN  AND  DISAGREEMENTS  WITH  ACCOUNTANTS  ON  ACCOUNTING  AND
         FINANCIAL DISCLOSURE

Not applicable.

                                       28

<PAGE>


                                    PART III


Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

         Glenn S.  Utt,  Jr.  resigned  from the  Company's  Board of  Directors
effective  January 5, 1998 for personal  reasons.  The Company is retaining  Mr.
Utt's services as a consultant to the Chairman at least until December 31, 1998.

         The information required by this item is incorporated by reference from
the  information  under the captions  "ELECTION OF DIRECTORS"  and  "MANAGEMENT"
contained in the Company's  definitive proxy statement to be filed no later than
April 30, 1998 in connection with the  solicitation of proxies for the Company's
Annual Meeting of Stockholders to be held May 20, 1998 (the "Proxy Statement").

Item 11. EXECUTIVE COMPENSATION

         The information required by this item is incorporated by reference from
the  information  under  the  caption  "EXECUTIVE  COMPENSATION"  of  the  Proxy
Statement.

Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

         The information required by this item is incorporated by reference from
the  information  under the caption  "SECURITY  OWNERSHIP OF CERTAIN  BENEFICIAL
OWNERS AND MANAGEMENT" in the Proxy Statement.

Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

         The information required by this item is incorporated by reference from
the information under the caption "CERTAIN TRANSACTIONS" in the Proxy Statement.

                                       29

<PAGE>


                                     PART IV


<TABLE>
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

<CAPTION>
(a)

     1.  Financial Statements                                                                  Page
                                                                                               ----
<S>                                                                                             <C>
     The  following  financial  statements  of SUGEN,  Inc.  are  included  in a
separate section of this report:

         Balance Sheets at December 31, 1997 and 1996                                           F-3

         Statements of Operations for each of the three years in the period
           ended December 31, 1997                                                              F-4

         Statement of Stockholders' Equity for each of the three years in the
           period ended December 31, 1997                                                       F-5

         Statements of Cash Flows for the three years in the period
           ended December 31, 1997                                                              F-6

         Notes to Financial Statements                                                          F-7
</TABLE>

     2.  Financial Statement Schedules

     All schedules have been omitted as they are not required,  not  applicable,
     or the required  information  is included in the  financial  statements  or
     notes thereto.

                                       30

<PAGE>


     3.  Exhibits

  Exhibit
   Number         Exhibit
   ------         -------
    3.1           Restated  Certificate  of  Incorporation,  filed  February 23,
                  1995. (2)
    3(ii).2       Bylaws of the Registrant. (1)
    3.3           Certificate of  Designation  of Series A Junior  Participating
                  Preferred Stock of the Registrant. (5)
    4.1           Reference is made to Exhibits 3.1 through 3(ii).2.
    4.2           Specimen Stock Certificate. (1)
    4.3           Form of 5% Senior Custom Convertible Note due 2000. (15)
    4.4           Form of Common Stock Purchase Warrant. (15)
   10.1           Form of Investor  Rights  Agreement,  dated December 23, 1992,
                  among the Registrant and certain investors. (1)
   10.2           Registrant's  1992 Amended and Restated Stock Option Plan (the
                  "Option Plan"), as amended. (11)
   10.3           Form of Incentive Stock Option under the Option Plan. (1)
   10.4           Form of Nonstatutory Stock Option under the Option Plan. (1)
   10.5           Warrant to Purchase 2,666 Shares of Series A Preferred  Stock,
                  dated  December 7, 1991,  granted by the  Registrant  to Sanwa
                  Business Credit Corp. (1)
   10.6           Warrant to Purchase 2,666 Shares of Series A Preferred  Stock,
                  dated  December 7, 1991,  granted by the Registrant to Silicon
                  Valley Bancshares. (1)
   10.7           Warrant to Purchase 5,333 Shares of Series A Preferred  Stock,
                  dated  December 7, 1991,  granted by the Registrant to Western
                  Technology Investment. (1)
   10.8           Warrant to Purchase 133,333 Shares of Common Stock, dated July
                  13, 1992, granted by the Registrant to Genentech, Inc. (1)
   10.9           Warrant  Agreement  to  Purchase  40,000  Shares  of  Series D
                  Preferred   Stock,   dated  October  30,  1992,   between  the
                  Registrant and Comdisco, Inc. (1)
   10.10          Warrant  Agreement to Purchase Shares of Series G(F) Preferred
                  Stock,  dated  July  23,  1993,  between  the  Registrant  and
                  Comdisco, Inc. (1)
   10.11          Warrant  Agreement to Purchase Shares of Series G(F) Preferred
                  Stock,  dated  July  23,  1993,  between  the  Registrant  and
                  Comdisco, Inc. (1)
   10.12          Stock Swap Agreement, dated July 27, 1992, as amended, between
                  the Registrant and Selectide Corporation. (1)
   10.13++        Amended and  Restated  Research and License  Agreement,  dated
                  August      16,      1991,      among     the      Registrant,
                  Max-Planck-Gesellschaft,   Max-Planck-Institut   and  Garching
                  Innovation GmbH; and Extension, dated March 31, 1993. (1)
   10.14++        Amended and  Restated  Research and License  Agreement,  dated
                  September  1,  1991,  between  the  Registrant  and  New  York
                  University. (1)
   10.15++        Services and Supply Agreement,  dated January 1, 1992, between
                  the Registrant and BioSignal, Ltd. (1)
   10.15(i)       Exhibit A to Services and Supply  Agreement,  dated January 1,
                  1992, between the Registrant and BioSignal, Ltd. (1)
   10.16++        Collaboration and License Agreement,  dated November 17, 1992,
                  between the Registrant and Selectide Corporation. (1)
   10.17++        Collaboration Agreement,  dated December 18, 1992, between the
                  Registrant and Amgen, Inc. (1)
   10.17(i)++     Amendment  Number One to Collaboration  Agreement  between the
                  Registrant and Amgen, Inc., dated June 15, 1995. (3)
   10.18          Letter of Intent,  dated May 27, 1993,  among the  Registrant,
                  the  State  Science &  Technology  Commission  of the  Peoples
                  Republic of China,  and  International  Technology  Investment
                  Managers (Asia), Inc. (1)
   10.19++        Amended and Restated Research and License  Agreement,  between
                  the Registrant and Yissum Research  Development Company of The
                  Hebrew University of Jerusalem, dated March 27, 1995. (2)
   10.20++        Research and License  Agreement,  dated October 1, 1993, among
                  the Registrant,  Max-Planck-Institut  and Garching  Innovation
                  GmbH. (1).

                                       31

<PAGE>


  Exhibit
   Number         Exhibit
   ------         -------
   10.21++        Exclusive License  Agreement,  dated January 21, 1994, between
                  the Registrant and Washington Research Foundation. (1)
   10.22          Purchase  Agreement between the Registrant and Zeneca Limited,
                  dated October 4, 1994. (2)
   10.23++        Amended and Restated  Research and License  Agreement  between
                  the Registrant and Yissum Research  Development Company of The
                  Hebrew University of Jerusalem (labeled "Psoriasis"). (8)
   10.24++        Amended and Restated  Research and License  Agreement  between
                  the Registrant and Yissum Research  Development Company of The
                  Hebrew University of Jerusalem (labeled "Papilloma"). (8)
   10.25++        Amended and Restated  Research and License  Agreement  between
                  the Registrant and Yissum Research  Development Company of The
                  Hebrew       University       of      Jerusalem       (labeled
                  "Sepsis/Inflammation"). (8)
   10.26++        Amended and Restated  Research and License  Agreement  between
                  the Registrant and Yissum Research  Development Company of The
                  Hebrew University of Jerusalem (labeled "Restenosis"). (8)
   10.27          Consulting  Agreement,  dated  August 16,  1991,  between  the
                  Registrant and Dr. Joseph Schlessinger. (1)
   10.28          Consulting  Agreement,  dated  August 16,  1991,  between  the
                  Registrant and Dr. Axel Ullrich. (1)
   10.29          Seaport  Centre  Standard Lease and Addendum I, dated November
                  12, 1991,  between the  Registrant  and Seaport Center Venture
                  Phase I. (1)
   10.29(i)       First  Amendment,  dated  July  8,  1993,  to  Seaport  Centre
                  Standard  Lease  between the  Registrant  and  Seaport  Center
                  Venture Phase I. (1)
   10.29(ii)      Second  Amendment,  dated  June 2,  1995,  to  Seaport  Centre
                  Standard  Lease  between the  Registrant  and  Seaport  Centre
                  Venture Phase I. (3)
   10.29(iii)     Construction Addendum, dated June 2, 1995, to Second Amendment
                  to Seaport  Centre  Standard  Lease between the Registrant and
                  Seaport Centre Venture Phase I. (3)
   10.30          Registrant's 1994 Employee Stock Purchase Plan. (1)
   *10.31         Registrant's 1994  Non-Employee  Directors' Stock Option Plan,
                  as amended. (11)
   10.32          Form of  Indemnity  Agreement  to be entered  into between the
                  Registrant and its officers and directors. (1)
   10.33          Warrant  Agreement  to  Purchase  7,200  Shares  of  Series  G
                  Preferred Stock, dated May 5, 1994, between the Registrant and
                  Financing for Science International, Inc. (1)
   10.34++        Research and License Agreement,  dated August 1, 1994, between
                  the Company and the Hospital for Sick Children. (1)
   10.34(i)       Amendment  to  Research  and  License  Agreement  between  the
                  Registrant and the Hospital for Sick Children, dated August 1,
                  1995. (4)
   10.35          Research  and  Technology  Agreement,  dated  March  3,  1993,
                  between the Registrant and PanLabs, Inc., as amended. (1)
   10.36++        Collaboration  Agreement,  between the  Registrant  and Zeneca
                  Limited, dated March 22, 1995. (2)
   10.37          Agreement  for the Purchase of Common Stock of the  Registrant
                  by Zeneca Limited, dated January 6, 1995. (2)
   10.38          Loan Agreement and Promissory  Note between the Registrant and
                  James L. Tyree, dated August 29, 1994. (3)
   10.39          Deferred  Compensation  Agreement  between the  Registrant and
                  James L. Tyree, dated August 29, 1994. (3)
   10.40++        Cooperative  Research and  Development  Agreement  between the
                  Registrant and the National Cancer Institute, dated August 14,
                  1995. (4)
   *10.41         Registrant's  1995 Long-Term  Objectives Stock Option Plan for
                  Senior Management, as amended. (12)
   10.42          Form  of   Nonstatutory   Stock  Option  under  the  Long-Term
                  Objectives Stock Option Plan for Senior Management. (6)

                                       32

<PAGE>


  Exhibit
   Number         Exhibit
   ------         -------
   10.43          Rights  Agreement,  dated as of  August 1,  1995  between  the
                  Registrant  and The First  National Bank of Boston,  as Rights
                  Agent. (5)
   10.44          Form of  Agreement  for the  Purchase  of Common  Stock of the
                  Registrant and list of participants  thereto,  dated September
                  21, 1995. (4)
   10.45          Lease Financing  Commitment  Letter,  dated September 12, 1995
                  between   the    Registrant    and   Financing   for   Science
                  International, Inc. (4)
   10.46++        Collaboration  Agreement,  between  the  Registrant  and  ASTA
                  Medica Aktiengesellschaft, dated December 5, 1995. (7)
   10.47          Agreement  for the Purchase of Common Stock of the  Registrant
                  by ASTA Medica Aktiengesellschaft, dated December 5, 1995. (7)
   10.48++        Termination  and Redemption  Agreement  between the Registrant
                  and Amgen Inc., dated January 9, 1996. (8)
   10.49++        Warrant  to  purchase  200,000  shares of Common  Stock of the
                  Registrant,  dated January 19, 1996,  issued by the Registrant
                  to Amgen Inc. (8)
   10.50++        License  Agreement  between the Registrant and Zeneca Limited,
                  dated January 19, 1996. (8)
   10.51++        Cooperative  Research and  Development  Agreement  between the
                  Registrant and the National Cancer Institute,  dated April 12,
                  1996. (9)
   10.52++        Termination notice, dated May 24, 1996, between the Registrant
                  and  Yissum  Research   Development   Company  of  The  Hebrew
                  University of Jerusalem (labeled "Sepsis/Inflammation"). (9)
   10.53++        Termination notice, dated May 24, 1996. between the Registrant
                  and  Yissum  Research   Development   Company  of  The  Hebrew
                  University of Jerusalem (labeled "Restenosis"). (9)
   10.54++        Research and Development  Agreement between the Registrant and
                  Arqule, Inc. (10)
   10.55++        Extension  of  Research  and  License  Agreement  between  the
                  Registrant and the Max Planck Institute. (10)
   10.56          Promissory  Note  received  by  the  Registrant  from  Stephen
                  Evans-Freke. (10)
   10.57          Agreement  for the purchase of Common Stock of the  Registrant
                  by Vision Pharmaceuticals L.P. (10)
   10.58++        Collaboration  Agreement  by and  between the  Registrant  and
                  Vision Pharmaceuticals L.P. and Allergan, Inc. (10)
   10.59++        Extension of Research  Agreement  between the  Registrant  and
                  Yissum Development Company of the Hebrew University. (10)
   10.60          James L. Tyree Separation Agreement. (10)
   10.61++        Master  Lease  Agreement,  dated March 28,  1997,  between the
                  Registrant and Transamerica Business Credit Corporation. (13)
   10.62++        Lease  Financing  Commitment  Letter,  dated  March 20,  1997,
                  between  the  Registrant  and  Transamerica   Business  Credit
                  Corporation. (13)
   10.63++        Build-To-Suit  Lease Agreement,  dated June 11, 1997,  between
                  the Registrant and Britannia Pointe Grand Limited Partnership.
                  (14)
   10.64++        Form of Warrant for the Purchase of Common  Stock,  dated June
                  30, 1997,  issued in the connection with  Build-To-Suit  Lease
                  Agreement,  between the Registrant and Britannia  Pointe Grand
                  Limited Partnership. (14)
   10.65++        Second  Amended and Restated  Research and License  Agreement,
                  dated  June 30,  1997,  between  the  Registrant  and New York
                  University. (14)
   10.66++        Termination notice, dated June 1, 1997, between the Registrant
                  and  Yissum  Research   Development   Company  of  The  Hebrew
                  University of Jerusalem. (14)
   10.67++        Form of Note  Purchase  Agreement,  dated as of  September  8,
                  1997, by and between the  Registrant  and the investors  named
                  therein. (16)
   10.68+         Amended and Restated  Master Lease  Agreement,  dated November
                  12,  1997,  and  Lease  Financing   Commitment  Letter,  dated
                  November 5, 1997,  between  the  Registrant  and  Transamerica
                  Business Credit Corporation.
   *10.69         Restricted Stock Bonus Agreement between the Registrant and K.
                  Peter Hirth, Ph D., dated September 16, 1997.

                                       33

<PAGE>


  Exhibit
   Number         Exhibit
   ------         -------
   23.1           Consent of Ernst & Young LLP, Independent Auditors.
   24.1           Power of Attorney  (incorporated  in the signature page of the
                  Form 10-K).
   27             Financial Data Schedule.

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

   *              Compensatory Plan.
   +              Confidential  Treatment  has been  requested  with  respect to
                  portions of this Exhibit.
   ++             Confidential   treatment  has  previously   been  granted  for
                  portions of this Exhibit.
   (1)            Incorporated  by reference to  identically  numbered  exhibits
                  filed  in  response  to Item 16  "Exhibits"  of the  Company's
                  Registration  Statement  on Form S-1, as amended  (File Number
                  33-77074), which became effective October 4, 1994.
   (2)            Incorporated  by reference to  identically  numbered  exhibits
                  filed  in  response  to Item 14  "Exhibits"  of the  Company's
                  Annual  Report on Form 10-K for the year  ended  December  31,
                  1994.
   (3)            Incorporated  by reference to  identically  numbered  exhibits
                  filed in response to Item 6 "Exhibits" of the  Company's  Form
                  10-Q for the quarter ended June 30, 1995.
   (4)            Incorporated  by reference to  identically  numbered  exhibits
                  filed in response to Item 6 "Exhibits" of the  Company's  Form
                  10-Q for the quarter ended September 30, 1995.
   (5)            Filed as an exhibit to the Form 8-K Current  Report dated July
                  26, 1995 and incorporated herein by reference.
   (6)            Filed as an exhibit to the Registrant's Registration Statement
                  on Form  S-8 (No.  33-99152),  dated  November  9,  1995,  and
                  incorporated herein by reference.
   (7)            Incorporated  by reference to  identically  numbered  exhibits
                  filed  in  response  to Item 14  "Exhibits"  of the  Company's
                  Annual  Report on Form  10-K as  amended,  for the year  ended
                  December 31, 1995.
   (8)            Incorporated  by reference to  identically  numbered  exhibits
                  filed in response to Item 6 "Exhibits" of the  Company's  Form
                  10-Q for the quarter ended March 31, 1996.
   (9)            Incorporated  by reference to  identically  numbered  exhibits
                  filed in response to Item 6 "Exhibits" of the  Company's  Form
                  10-Q for the quarter ended June 30, 1996.
   (10)           Incorporated  by reference to  identically  numbered  exhibits
                  filed in response to Item 6 "Exhibits" of the  Company's  Form
                  10-Q for the quarter ended September 30, 1996.
   (11)           Filed as an exhibit to the Registrant's Registration Statement
                  on Form  S-8  (No.  333-09323),  dated  August  1,  1996,  and
                  incorporated herein by reference.
   (12)           Filed as an exhibit to the Registrant's Registration Statement
                  on Form  S-8  (No.  333-09321),  dated  August  1,  1996,  and
                  incorporated herein by reference.
   (13)           Incorporated  by reference to  identically  numbered  exhibits
                  filed in response to Item 6 "Exhibits" of the  Company's  Form
                  10-Q for the quarter ended March 31, 1997.
   (14)           Incorporated  by reference to  identically  numbered  exhibits
                  filed in response to Item 6 "Exhibits" of the  Company's  Form
                  10-Q for the quarter ended June 30, 1997.
   (15)           Filed  as an  exhibit  to the Form 8-K  Current  Report  dated
                  September 12, 1997, and incorporated herein by reference.
   (16)           Filed as an exhibit to the Registrant's Registration Statement
                  on Form S-3, dated October 10, 1997, and  incorporated  herein
                  by reference.

                                       34

<PAGE>


Item 14.  EXHIBITS,  FINANCIAL  STATEMENT  SCHEDULES  AND  REPORTS  ON FORM  8-K
         (continued)


(b)    Reports on Form 8-K

         SUGEN,  Inc. filed a Current Report on Form 8-K dated October 27, 1997,
in connection with the proposed follow-on public offering of Common Stock by the
Company.

         Additionally,  the  Company  filed a  Current  Report on Form 8-K dated
November 19, 1997, in connection  with the follow-on  public  offering of Common
Stock by the Company.

                                       35

<PAGE>







                           Annual Report on Form 10-K

                   ITEM 8, ITEM 14(a)(1) and (2), (c) and (d)

                   Financial Statements and Supplementary Data

                                Certain Exhibits

                          Year Ended December 31, 1997

                                   SUGEN, Inc.

                            Redwood City, California








                                       F-1

<PAGE>


                REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS




The Board of Directors and Stockholders
SUGEN, Inc.

         We have audited the  accompanying  balance sheets of SUGEN,  Inc. as of
December  31,  1997  and  1996,  and  the  related   statements  of  operations,
stockholders'  equity,  and cash flows for each of the three years in the period
ended December 31, 1997. These financial  statements are the  responsibility  of
the Company's  management.  Our responsibility is to express an opinion on these
financial statements based on our audits.

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

         In our opinion,  the  financial  statements  referred to above  present
fairly,  in all material  respects,  the  financial  position of SUGEN,  Inc. at
December 31, 1997 and 1996, and the results of its operations and its cash flows
for each of the three years in the period ended  December 31, 1997 in conformity
with generally accepted accounting principles.


                                                          ERNST & YOUNG LLP


Palo Alto, California
February 5, 1998

                                       F-2

<PAGE>


<TABLE>
                                                            SUGEN, Inc.

                                                           BALANCE SHEETS
                                         (In thousands, except share and per share amounts)

<CAPTION>
                                                                                                   December 31,         December 31,
                                                                                                       1997                 1996
                                                                                                     ---------            ---------
<S>                                                                                                  <C>                  <C>
ASSETS
Current assets:
        Cash and cash equivalents                                                                    $  23,816            $  24,852
        Short-term investments                                                                          51,479               31,482
        Accounts receivable                                                                                237                  264
        Prepaid expenses and other current assets                                                          754                  468
                                                                                                     ---------            ---------
                Total current assets                                                                    76,286               57,066

Property and equipment, net                                                                              4,601                4,095
Other assets                                                                                             3,938                  775
                                                                                                     ---------            ---------
                                                                                                     $  84,825            $  61,936
                                                                                                     =========            =========

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
        Accounts payable                                                                             $   1,991            $     852
        Accrued liabilities                                                                             10,267                7,406
        Deferred revenue                                                                                   625                  375
        Capital lease obligations - current portion                                                      2,277                1,835
                                                                                                     ---------            ---------

                Total current liabilities                                                               15,160               10,468

Capital lease obligations - non-current portion                                                          3,152                2,938
Senior custom convertible notes                                                                         17,500                 --
                                                                                                     ---------            ---------
                Total long-term liabilities                                                             20,652                2,938

Commitments

Stockholders' equity:
        Preferred stock, $.01 par value; 20,000,000 shares
          authorized, issuable in series; 300,000 shares designated
          as Series A Junior Participating Preferred Stock; none
          issued and outstanding                                                                          --                   --
        Common stock, $.01 par value; 30,000,000 shares
          authorized; shares issued and outstanding:
          15,307,146 and 12,993,450 in 1997 and 1996, respectively                                         153                  130
        Additional paid-in capital                                                                     141,426              107,990
        Deferred compensation                                                                             (695)                (710)
        Note receivable from stockholder                                                                  (883)                (883)
        Accumulated deficit                                                                            (90,988)             (57,997)
                                                                                                     ---------            ---------
                Total stockholders' equity                                                              49,013               48,530
                                                                                                     ---------            ---------
                                                                                                     $  84,825            $  61,936
                                                                                                     =========            =========


<FN>
                                                      See accompanying notes.
</FN>
</TABLE>

                                                                 F-3

<PAGE>


<TABLE>
                                                            SUGEN, Inc.

                                                      STATEMENTS OF OPERATIONS
                                         (In thousands, except share and per share amounts)


<CAPTION>

                                                                                              Years Ended December 31,
                                                                               ----------------------------------------------------
                                                                                   1997                1996                1995
                                                                               ------------        ------------        ------------
<S>                                                                            <C>                 <C>                 <C>
Contract revenue (includes amounts from related party)                         $      6,031        $     13,650        $     13,843

Costs and expenses:
        Research and development                                                     34,585              29,792              23,226
        General and administrative                                                    6,227               5,529               5,086
                                                                               ------------        ------------        ------------
        Total costs and expenses                                                     40,812              35,321              28,312
                                                                               ------------        ------------        ------------

Operating loss                                                                      (34,781)            (21,671)            (14,469)

Other income and expenses:
        Interest income                                                               2,786               2,481               1,988
        Interest expense                                                             (1,065)               (691)               (494)
        Gain on sale of investment in Selectide Corporation                            --                  --                 1,006
                                                                               ------------        ------------        ------------
        Other income, net                                                             1,721               1,790               2,500
                                                                               ------------        ------------        ------------
Net loss                                                                       $    (33,060)       $    (19,881)       $    (11,969)
                                                                               ============        ============        ============


Basic and diluted net loss per share                                           $      (2.47)       $      (1.81)       $      (1.32)
                                                                               ============        ============        ============

Shares used in computing basic and diluted net loss per share                    13,387,000          10,966,000           9,085,000
                                                                               ============        ============        ============


<FN>
                                                      See accompanying notes.
</FN>
</TABLE>

                                                                 F-4

<PAGE>


<TABLE>
                                                            SUGEN, Inc.

                                                 STATEMENT OF STOCKHOLDERS' EQUITY
                                                (In thousands, except share amounts)

<CAPTION>
                                                                                      Convertible
                                                                                    Preferred Stock              Common Stock
                                                                                    ----------------      --------------------------
                                                                                    Shares    Amount      Shares              Amount
                                                                                    ------    ------      ------              ------
<S>                                                                                  <C>      <C>        <C>            <C>
Balances at December 31, 1994                                                        --       $--        8,161,700      $        82
Issuance of Common Stock upon exercise of stock options and in
        connection with an employee stock purchase plan                              --        --          141,824                1
Placement of Common Stock for cash, net of issuance costs of $450                    --        --        1,396,875               14
Issuance of Common Stock for cash to Zeneca Limited, net of
        issuance costs of $150                                                       --        --          789,141                8
Issuance of Common Stock for cash to ASTA Medica
        Aktiengesellschaft, net of issuance costs of $50                             --        --          431,137                4
Issuance of Common Stock for services                                                --        --           15,000             --
Repurchase of Common Stock for cash from Selectide Corporation                       --        --         (300,760)              (3)
Amortization of deferred compensation                                                --        --             --               --
Change in net unrealized losses on available-for-sale securities                     --        --             --               --
Net loss                                                                             --        --             --               --
                                                                              -----------     ----     -----------      -----------
Balances at December 31, 1995                                                        --        --       10,634,917              106
Issuance of Common Stock upon exercise of stock options and in
        connection with an employee stock purchase plan, net                         --        --          194,195                2
Issuance of Common Stock for cash and note in connection with
        the exercise of stock options                                                --        --          132,333                1
Issuance of Common Stock for cash to Allergan, net of issuance
        costs of $32                                                                 --        --          191,571                2
Issuance of Common Stock for cash in connection with the follow-on
        public offering, net of offering costs of $2,133                             --        --        2,070,000               21
Issuance of Common Stock upon exercise of warrants, net                                                      5,434             --
Repurchase of Common Stock for cash from Amgen Inc.                                  --        --         (235,000)              (2)
Issuance of warrants for cash to Amgen Inc.                                          --        --             --               --
Deferred compensation related to grant of certain stock options                      --        --             --               --
Amortization of deferred compensation                                                --        --             --               --
Change in net unrealized losses on available-for-sale securities                     --        --             --               --
Net loss                                                                             --        --             --               --
                                                                              -----------     ----     -----------      -----------
Balances at December 31, 1996                                                        --        --       12,993,450              130
Issuance of Common Stock upon exercise of stock options and in
        connection with an employee stock purchase plan, net                         --        --          288,696                3
Deferred compensation related to stock grant to an officer                                                  25,000             --
Issuance of Common Stock for cash in connection with the follow-on
        public offering, net of offering costs of $2,340                             --        --        2,000,000               20
Fair value of warrants issued                                                        --        --             --               --
Amortization of deferred compensation                                                --        --             --               --
Change in net unrealized gains on available-for-sale securities                      --        --             --               --
Net loss                                                                             --        --             --               --
                                                                              -----------     ----     -----------      -----------
Balances at December 31, 1997                                                        --       $--       15,307,146      $       153
                                                                              ===========     ====     ===========      ===========



                                                                                                  Note
                                                                      Additional               Receivable                   Total
                                                                       Paid-In     Deferred       From     Accumulated Stockholders'
                                                                       Capital   Compensation  Stockholder    Deficit       Equity
                                                                       -------   ------------  -----------    -------       ------
Balances at December 31, 1994                                         $  45,094    $    (587)   $    --      $ (26,270)   $  18,319
Issuance of Common Stock upon exercise of stock options and in
        connection with an employee stock purchase plan                     302         --           --           --            303
Placement of Common Stock for cash, net of issuance costs of $450        16,299         --           --           --         16,313
Issuance of Common Stock for cash to Zeneca Limited, net of
        issuance costs of $150                                           12,342         --           --           --         12,350
Issuance of Common Stock for cash to ASTA Medica
        Aktiengesellschaft, net of issuance costs of $50                  8,946         --           --           --          8,950
Issuance of Common Stock for services                                       139         --           --           --            139
Repurchase of Common Stock for cash from Selectide Corporation           (1,426)        --           --           --         (1,429)
Amortization of deferred compensation                                      --            190         --           --            190
Change in net unrealized losses on available-for-sale securities           --           --           --            275          275
Net loss                                                                   --           --           --        (11,969)     (11,969)
                                                                      ---------    ---------    ---------    ---------    ---------
Balances at December 31, 1995                                            81,696         (397)        --        (37,964)      43,441
Issuance of Common Stock upon exercise of stock options and in
        connection with an employee stock purchase plan, net                717         --           --           --            719
Issuance of Common Stock for cash and note in connection with
        the exercise of stock options                                       883         --           (883)        --              1
Issuance of Common Stock for cash to Allergan, net of issuance
        costs of $32                                                      3,966         --           --           --          3,968
Issuance of Common Stock for cash in connection with the follow-on
        public offering, net of offering costs of $2,133                 22,686         --           --           --         22,707
Issuance of Common Stock upon exercise of warrants, net                    --           --           --
Repurchase of Common Stock for cash from Amgen Inc.                      (2,696)        --           --           --         (2,698)
Issuance of warrants for cash to Amgen Inc.                                 200         --           --           --            200
Deferred compensation related to grant of certain stock options             538         (538)        --           --           --
Amortization of deferred compensation                                      --            225         --           --            225
Change in net unrealized losses on available-for-sale securities           --           --           --           (152)        (152)
Net loss                                                                   --           --           --        (19,881)     (19,881)
                                                                      ---------    ---------    ---------    ---------    ---------
Balances at December 31, 1996                                           107,990         (710)        (883)     (57,997)      48,530
Issuance of Common Stock upon exercise of stock options and in
        connection with an employee stock purchase plan, net              1,543         --           --           --          1,546
Deferred compensation related to stock grant to an officer                  350         (350)        --
Issuance of Common Stock for cash in connection with the follow-on
        public offering, net of offering costs of $2,340                 29,640         --           --           --         29,660
Fair value of warrants issued                                             1,903         --           --           --          1,903
Amortization of deferred compensation                                      --            365         --           --            365
Change in net unrealized gains on available-for-sale securities            --           --           --             69           69
Net loss                                                                   --           --           --        (33,060)     (33,060)
                                                                      ---------    ---------    ---------    ---------    ---------
Balances at December 31, 1997                                         $ 141,426    $    (695)   $    (883)   $ (90,988)   $  49,013
                                                                      =========    =========    =========    =========    =========


<FN>
                                                      See accompanying notes.
</FN>
</TABLE>

                                                                 F-5


<PAGE>


<TABLE>
                                                            SUGEN, Inc.

                                                      STATEMENTS OF CASH FLOWS
                                          Increase (decrease) in cash and cash equivalents
                                                           (In thousands)

<S>                                                                                                                 <C>
                                                                                               Years Ended December 31,
                                                                                       --------------------------------------------
                                                                                         1997              1996               1995
                                                                                       --------          --------          --------
<S>                                                                                    <C>               <C>               <C>
Cash flows from operating activities
Net loss                                                                               $(33,060)         $(19,881)         $(11,969)
Adjustments to reconcile net loss to net cash used in
        operating activities:
        Depreciation and amortization                                                     3,146             2,308             1,629
        Deferred revenue                                                                    250            (6,183)            1,922
        Issuance of Common Stock for services                                              --                --                 139
        Gain on sale of investment in Selectide Corporation                                --                --              (1,006)
        Changes in operating assets and liabilities:
          Accounts receivable                                                                27                24                35
          Prepaid expenses and other current assets                                        (286)              278              (200)
          Other assets                                                                   (1,370)             (332)              (39)
          Accounts payable                                                                1,139               200              (420)
          Accrued liabilities                                                             2,861             3,819             1,996
                                                                                       --------          --------          --------
Net cash used in operating activities                                                   (27,293)          (19,767)           (7,913)
                                                                                       --------          --------          --------

Cash flows from investing activities
Purchases of short-term investments                                                     (54,884)          (27,998)          (57,118)
Maturities of short-term investments                                                     31,515            36,973            15,308
Sales of short-term investments                                                           3,441             4,418             6,873
Purchases of property and equipment, net                                                 (3,177)           (1,665)           (2,042)
Proceeds from sale of investment in Selectide Corporation                                  --                --               2,923
                                                                                       --------          --------          --------
Net cash provided by (used in) investing activities                                     (23,105)           11,728           (34,056)
                                                                                       --------          --------          --------

Cash flows from financing activities
Proceeds from issuance of Common Stock, net                                              31,206            27,395            37,916
Proceeds from issuance of senior custom convertible notes                                17,500              --                --
Repurchase of Common Stock                                                                 --              (2,698)           (1,429)
Proceeds from issuance of warrant                                                          --                 200              --
Proceeds from lease financing of property and equipment                                   2,750             1,247             2,109
Payments under capital lease obligations                                                 (2,094)           (1,479)           (1,000)
                                                                                       --------          --------          --------
Net cash provided by financing activities                                                49,362            24,665            37,596
                                                                                       --------          --------          --------

Net increase (decrease) in cash and cash equivalents                                     (1,036)           16,626            (4,373)
Cash and cash equivalents at beginning of year                                           24,852             8,226            12,599
                                                                                       --------          --------          --------
Cash and cash equivalents at end of year                                               $ 23,816          $ 24,852          $  8,226
                                                                                       ========          ========          ========

Supplemental disclosure of cash flow information
Cash paid during the year for interest                                                 $    847          $    691          $    494
                                                                                       ========          ========          ========

Supplemental schedule of noncash investing and
        financing activities:
Equipment acquired under capital leases                                                $   --            $   --            $  1,059
                                                                                       ========          ========          ========


<FN>
                                                       See accompanying notes
</FN>
</TABLE>

                                                                 F-6

<PAGE>


                                   SUGEN, Inc.

                          NOTES TO FINANCIAL STATEMENTS


1.   Organization and Significant Accounting Policies

Organization

         SUGEN,  Inc. (the "Company"),  a Delaware  corporation  founded in July
1991, is a  biopharmaceutical  company focusing on the discovery and development
of small  molecule  drugs which target  specific  cellular  signal  transduction
pathways.  Dysfunctional signal transduction  pathways have been shown to result
in a variety of chronic and acute  pathological  diseases,  including cancer and
diabetes as well dermatologic,  ophthalmic, neurologic and immune disorders. The
Company pursues its drug discovery  programs  independently and in collaboration
with other pharmaceutical companies.

Use of Estimates

         The  preparation  of  the  financial   statements  in  conformity  with
generally accepted  accounting  principles requires management to make estimates
and assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.

Cash, Cash Equivalents and Short-Term Investments

         The Company  considers  all highly liquid  investments  with a maturity
from date of purchase of three months or less to be cash equivalents.  All other
liquid investments are classified as short-term investments.  The Company limits
its  concentration  of risk by diversifying  its investments  among a variety of
industries and issuers.

         All  debt  securities  are  designated  as  available-for-sale  and are
carried  at fair  value,  with the  unrealized  gains  and  losses  reported  in
stockholders'  equity.  The  amortized  cost of debt  securities is adjusted for
amortization   of  premiums  and  accretion  of  discounts  to  maturity.   Such
amortization  is  included  in interest  income.  Realized  gains and losses and
declines  in  value  judged  to be  other-than-temporary  on  available-for-sale
securities are also included in interest income.  The cost of securities sold is
based  on  the  specific   identification  method.  Interest  and  dividends  on
securities are included in interest income.

Revenue Recognition

         Revenue  from  collaborative  agreements  is  recorded  when  earned as
defined  under the terms of the  agreements.  Non-refundable  fees received upon
contract signing or terminations are recorded as deferred revenue and recognized
as income when the related start-up or wind-down activities are performed, which
is generally  over a twelve month period or less.  Non-refundable  up-front fees
received as consideration  for previous  research and development work performed
are  recognized in full upon contract  execution.  Milestones  are recorded when
earned.  In  instances  where  milestone  payments are received in the form of a
stock purchase at a premium above fair market value,  equity is recorded at fair
market value and the premium  recognized as revenue.  Periodic  research funding
payments  are  recognized  as  income  when  earned.  Substantially  all  of the
Company's revenue is derived from its collaborations.

Research and Development Expense

         Research and development  expense consists of independent  research and
development costs, the costs associated with work performed under collaborations
and the Company's  sponsored funding of research  projects  performed by others.
Research and  development  costs include  direct and  research-related  overhead
expenses and are expensed as incurred.

Depreciation and Amortization

           Property and equipment are stated at cost and  depreciated  using the
straight-line  method over the estimated  useful lives of the assets,  which are
generally  three to five years.  Leasehold  improvements  are amortized over the
shorter of their estimated  useful lives or the term of the lease.  Amortization
of assets held under capital lease is included in depreciation expense.

                                       F-7

<PAGE>


Stock Based Compensation

         The Company generally grants stock options for a fixed number of shares
to employees with an exercise price equal to the fair value of the shares at the
date of grant.  The Company  accounts for stock option grants in accordance with
APB Opinion No. 25, Accounting for Stock Issued to Employees,  and, accordingly,
employs the intrinsic-value method to value stock option grants.

Net Loss Per Share

         In February  1997,  the  Financial  Accounting  Standards  Board issued
Statement of Financial  Accounting  Standards No. 128, Earnings Per Share ("SFAS
128").  SFAS 128 replaced the calculation of primary and fully diluted  earnings
per share with basic and diluted earnings per share. Unlike primary earnings per
share,  basic  earnings  per share  excludes  any  dilutive  effects of options,
warrants and convertible securities.  The adoption by the Company of SFAS 128 on
December  31,  1997 had no  impact  on the net loss per  share  for the  periods
reported.  Per share  amounts for all periods have been  presented in accordance
with SFAS 128 requirements.

            Net loss per share is computed using the weighted  average number of
common shares  outstanding.  Stock options,  convertible  preferred  stock,  and
warrants are excluded from the computation as their effect is antidilutive.

         If the Company had been in a net income position,  diluted earnings per
share would have been presented separately and would have included the effect of
outstanding  stock options and  warrants,  calculated  using the treasury  stock
method.

2.   Investments

<TABLE>
         The  following  is a summary  of  available-for-sale  securities  as of
December 31 (in thousands):

<CAPTION>
                                                                          Available-for-Sale Securities
                                               -------------------------------------------------------------------------------------
                                                               1997                                         1996
                                               --------------------------------------       ----------------------------------------

                                              Unrealized      Estimated                   Unrealized       Estimated
                                                Gains/          Fair                         Gains/          Fair
                                                 Cost         (Losses)        Value           Cost          (Losses)         Value
                                               --------       --------       --------       --------        --------        --------
<S>                                            <C>            <C>            <C>            <C>             <C>             <C>
U.S. Treasury securities
   and obligations of U.S.
   Government agencies                         $ 11,518       $     17       $ 11,535       $ 13,348        $    (21)       $ 13,327
U.S. corporate notes                             36,393             16         36,409         19,422              (8)         19,414
U.S. corporate
   commercial paper                              16,001              2         16,003          9,506              (2)          9,504
Certificates of deposit                           3,999              2          4,001           --              --              --
Repurchase agreements                               900           --              900          8,036            --             8,036
Market rate auction
preferred funds and other                         6,447           --            6,447          6,054              (1)          6,053
                                               --------       --------       --------       --------        --------        --------
                                               $ 75,258       $     37       $ 75,295       $ 56,366        $    (32)       $ 56,334
                                               ========       ========       ========       ========        ========        ========

Amounts included in:
   Cash equivalents                            $ 23,814       $      2       $ 23,816       $ 24,853        $     (1)       $ 24,852
   Short-term investments                        51,444             35         51,479         31,513             (31)         31,482
                                               --------       --------       --------       --------        --------        --------
                                               $ 75,258       $     37       $ 75,295       $ 56,366        $    (32)       $ 56,334
                                               ========       ========       ========       ========        ========        ========
</TABLE>


The  estimated  fair value  amounts have been  determined  by the Company  using
available market information and appropriate valuation  methodologies.  However,
the estimates presented herein are not necessarily indicative of the amounts the
Company could realize in a current market exchange.

As of December 31, 1997, the average portfolio  duration was approximately  five
months and the  longest  contractual  maturity  did not exceed two years.  Gross
realized gains and losses were immaterial during 1997 and 1996.

                                       F-8

<PAGE>


3.  Investment in Selectide Corporation

         In 1992, the Company signed a three-year  collaborative  agreement with
Selectide Corporation ("Selectide"), a privately-held corporation. In connection
with this  agreement,  the  Company  issued  300,760  shares of stock for junior
preferred shares of Selectide valued at $1.9 million,  which shares  represented
approximately 5% of the voting shares of Selectide as of December 31, 1994.

         In January 1995, the Company received  approximately  $2.9 million from
the sale of its 5% ownership in Selectide to Marion Merrell Dow, Inc., resulting
in a gain of approximately $1.0 million. The Company simultaneously  repurchased
the  300,760  shares  of SUGEN  Common  Stock  formerly  held by  Selectide  for
approximately $1.43 million, or $4.75 per share. The net proceeds to the Company
from these transactions was approximately $1.5 million.


4.   Property and Equipment

Property and equipment consists of the following at December 31 (in thousands):

                                                          1997           1996
                                                        --------       --------
Leasehold improvements                                  $  4,084       $  3,168
Office and computer equipment                              3,251          2,320
Laboratory equipment                                       4,226          2,896
                                                        --------       --------
                                                          11,561          8,384
Accumulated depreciation and amortization                 (6,960)        (4,289)
                                                        --------       --------
Net property and equipment                              $  4,601       $  4,095
                                                        ========       ========

         Property and equipment  under capital  leases  amounted to $8.9 million
and $7.5  million as of December  31, 1997 and 1996,  with  related  accumulated
amortization of $5.1 million and $3.9 million, respectively.


5.   Accrued Liabilities

The components of accrued  liabilities  consist of the following at December (in
thousands):

                                                            1997           1996
                                                           -------       -------
Accrued research and development services                  $ 5,351       $ 3,724
Accrued compensation                                         1,176           883
Accrued professional fees                                      859           524
Other                                                        2,881         2,275
                                                           -------       -------
                                                           $10,267       $ 7,406
                                                           =======       =======

6.   Research and Development Collaboration Agreements

Allergan, Inc.

         In October 1996,  the Company  established  a research and  development
collaboration with Vision Pharmaceuticals L.P., an affiliate of Allergan,  Inc.,
and  Allergan,  Inc.  (collectively,   "Allergan"),  to  identify,  develop  and
commercialize  novel  angiogenesis  inhibitors  for the  treatment of ophthalmic
diseases.  The  collaboration  will also  establish  a  comprehensive  effort to
identify and validate  signal  transduction  targets for  choroidal  and retinal
neovascularization.  Allergan will have exclusive  rights to all ophthalmic uses
of  collaboration  products  and  know-how  world-wide.  In return,  the Company
received a $2.0 million initial payment for past research services, is receiving
annual  research  funding  and  expects  to  receive  additional  fees  upon the
achievement  of specified  milestones  and  royalties on any product  sales.  In
addition,  the Company will have the right to contribute to clinical development
costs on each program,  thereby earning  participation in the North American and
European  profits from successful  products coming out of such programs over and
above its royalty  entitlement.  Allergan also purchased 191,571 shares of SUGEN
Common Stock at a price of $20.88 per share and  participated  in the  Company's
October

                                       F-9

<PAGE>


1996 financing (see Note 10),  purchasing an additional 250,000 shares of Common
Stock,  thereby  increasing  its cumulative  equity  investment in SUGEN to $7.0
million.

ASTA Medica Aktiengesellschaft

            In December  1995,  the  Company  established  an  oncology  product
development collaboration with ASTA Medica Aktiengesellschaft ("ASTA Medica") to
develop,  manufacture and bring to market SUGEN's  oncology  products based upon
the cell  signal  transduction  targets  known as Pan-Her  and Raf.  The Company
received  a  $4.0  million  technology  set-up  fee,  is  receiving   additional
consideration in the form of contract  services for  non-collaboration  work and
will receive certain milestone  payments tied to the success of the programs and
royalty  payments on sales in certain  territories.  In January 1998,  the first
milestone in connection  with the Company's  collaboration  with ASTA Medica was
achieved in the Pan-Her  cancer  program.  ASTA Medica  exercised  its option to
satisfy its $500,000 milestone  obligation through the purchase of 18,665 shares
of SUGEN  Common  Stock at a price of  $26.79 of which the  premium  above  fair
market value was recorded as revenue.  The agreement provides for ASTA Medica to
receive exclusive  marketing rights to collaboration  products in Greater Europe
(including the former Soviet Union) and South  America,  subject to royalties to
SUGEN.  The Company  retains market rights in the rest of the world,  subject to
royalties  payable to ASTA Medica in most  circumstances.  In addition,  in 1995
ASTA Medica purchased 431,137 shares of SUGEN Common Stock for $9.0 million,  or
$20.88 per share.

Zeneca Limited - Related Party

         In January 1995, the Company  established a  collaboration  with Zeneca
Limited ("Zeneca") to pursue the research,  development and commercialization of
novel  anti-cancer  drugs targeting  cell-surface  receptors and  intra-cellular
signal  transduction  pathways.  In connection with this agreement,  the Company
received an initial $5.0 million technology set-up fee, is receiving  additional
cash payments for annual  research  funding and will receive  certain  milestone
payments (which may be offset against  royalties over time) tied to the progress
of  compounds in the  collaboration  and  royalties  on  worldwide  sales of any
collaboration  products.  The Company will also have the right to  contribute to
clinical development costs on each program, thereby earning participation in the
North American profits from successful products coming out of such programs over
and above its royalty entitlement.

         As a part of the  collaboration  agreement,  Zeneca  purchased  789,141
shares of the  Company's  Common Stock for $12.5  million,  or $15.84 per share.
This $12.5  million  equity  investment,  combined  with  Zeneca's  $7.5 million
participation  in  SUGEN's  October  1994  initial  public  offering,  increased
Zeneca's  equity  investment  in SUGEN to $20.0  million  and  brought  Zeneca's
ownership in the Company to approximately 20%.

         Zeneca  participated in the Company's  November 1997,  October 1996 and
September  1995  financings  (see Note 10),  purchasing an  additional  456,000,
509,000 and 281,875 shares of the Company's  Common Stock,  respectively.  These
additional   investments   maintained  Zeneca's  ownership  level  in  SUGEN  at
approximately  20% and increased its cumulative equity investment in the Company
to $36.8  million.  Zeneca has committed not to increase its holdings above this
level without the approval of SUGEN's Board of Directors.

Amgen, Inc.

         In December  1992, the Company  established a research and  development
collaboration with Amgen Inc. ("Amgen") to discover and develop  therapeutic and
diagnostic  products in neurobiology and a subset of  hematopoiesis.  As part of
this collaboration, Amgen made a $4.0 million equity investment, which converted
into 387,878  shares of the Company's  Common Stock at the time of the Company's
initial public offering.  For the three year period ended December 31, 1995, the
Company received approximately $18.1 million of research funding from Amgen.

         In January 1996, the Company and Amgen reached an agreement to conclude
their research  collaboration  one year earlier than  originally  planned due to
their changed research priorities.  Under the terms of this wind-down agreement,
Amgen made a final cash  payment to the  Company of $2.5  million (of which $1.1
million was  advanced in December  1995) and forgave  certain  advance  payments
already  made to the  Company  for future  research  work which was  recorded as
wind-down revenue in 1996. Amgen also granted back to SUGEN exclusive  worldwide
rights to 22 propriety signal  transduction  targets discovered in the course of
the  collaboration,  subject to royalty  payments  back to Amgen with respect to
potential  future  product  sales.  In addition,  in January  1996,  the Company
redeemed  235,000 shares of its Common Stock from Amgen at a price of $11.48 per
share,  thereby  reducing Amgen's current holdings of the Company's Common Stock
to  152,878  shares.  Amgen  also  purchased  in  January  1996 for  $200,000  a
seven-year  warrant to purchase  200,000  shares of Common  Stock at an exercise
price of $15.50 per share.

                                      F-10

<PAGE>


7.   Leases

         In March 1997 and November  1997,  the Company  secured  capital  lease
lines for equipment and tenant  improvements  for $3.5 million and $5.0 million,
respectively.  At December  31, 1997,  the Company had a total of  approximately
$6.4 million available under these lease lines.

         The Company leases its current office and laboratory  facilities  under
operating  leases through 1998. Rent expense for the current facility leases and
other operating  leases amounted to $1.6 million,  $1.6 million and $1.4 million
for 1997, 1996 and 1995, respectively.  In June 1997, the Company entered into a
build-to-suit  facility  lease  agreement  which extends until 2015 with renewal
options of ten years. In connection with this agreement, the Company also issued
warrants  to purchase  shares of Common  Stock.  The  related  fair value of the
warrants was recorded as deferred  expenses and will be amortized  over the term
of the warrants.  Minimum rental amounts  stipulated in the lease are subject to
adjustment based upon the final square footage of the building and total cost at
completion.  Construction of the new facility is targeted for completion  during
the fourth quarter of 1998, which coincides with the expiration of the Company's
current facility leases.

         Future minimum  payments under capital and operating leases at December
31, 1997 are as follows (in thousands):

                                                     Capital        Operating
                                                     Leases           Leases
                                                    --------         --------
      Year ended December 31:
         1998                                       $  2,857         $  1,992
         1999                                          1,936            2,388
         2000                                          1,164            2,647
         2001                                            436            3,231
         2002                                             62            3,304
                                                    --------
         Total minimum lease payments                  6,482

         Amount representing interest                 (1,053)
                                                    --------
         Present value of minimum lease payments       5,429
         Less current portion                         (2,277)
                                                    --------
         Non-current portion                        $  3,152
                                                    ========


8.    Senior Custom Convertible Notes

          In September  1997,  the Company  completed  the sale of $17.5 million
principal amount of 5% Senior Custom  Convertible  Notes due 2000 (the "Notes").
The Notes were sold at par,  mature on September 12, 2000 and bear interest at a
rate of 5% per annum (payable in Common Stock or cash, at the Company's option).
The Notes are convertible  together with accrued and unpaid interest and subject
to certain limitations,  into shares of Common Stock at a conversion price equal
to the average of the two lowest  trade prices of the Common Stock during the 20
trading days  immediately  preceding  the date of  conversion  (the  "Conversion
Price").  Since January 19, 1998,  the  Conversion  Price may not exceed $14.87,
115% of the  average  closing  bid price of the Common  Stock for the 20 trading
days  immediately  preceding  such date. In connection  with the issuance of the
Notes,  the Company  issued  warrants to purchase up to 332,500 shares of Common
Stock at an exercise price of $16.74 per share. Cash and non-cash issuance costs
(including the fair value of the warrants)  totaled  approximately  $2.6 million
and are recorded as deferred  expenses  which are  amortized to expense over the
term of the Notes.  No purchaser  of the Notes will be allowed to convert  Notes
and/or  warrants  which would result in such person owning more than 4.9% of the
then outstanding Common Stock.

         Upon the occurrence of certain  events,  at the election of the holders
of the Notes,  the Company may be required to redeem in cash all or a portion of
the Notes at  redemption  prices which are at a premium to the face value of the
Notes.  If the Notes are not  converted  into  Common  Stock  upon  maturity  in
September  2000,  the Notes will be exchanged for 13.75%  five-year  debentures.
Pursuant to the terms of the Notes, in addition to other covenants,  the Company
has agreed to certain limitations on the incurrence of additional indebtedness.

                                      F-11

<PAGE>


9.  Commitments Under Research and Development Programs

         The  Company  enters  from  time  to time  into  license  and  research
agreements  whereby the Company funds research  projects  performed by others or
in-licenses compounds from third parties. Some of the agreements may require the
Company to make milestone and royalty payments.

         Under   these   programs,   commitments   for   research   funding  are
approximately $1.7 million, $1.6 million, $1.4 million and $1.1 million in 1998,
1999, 2000, and 2001,  respectively.  The Company  anticipates  renewing certain
contracts that expired in 1997 which will increase future  commitments.  Most of
these  commitments are cancelable  within a three-to-six  month period and limit
the amounts  payable by the Company for  sponsored  research  under the programs
after notice of cancellation.  Related  research and development  expenses under
these programs were $3.1 million,  $3.5 million and $4.2 million for 1997,  1996
and 1995, respectively.

10.  Stockholders' Equity

Preferred Share Purchase Rights Plan

         In July  1995,  the  Board of  Directors  approved  a  Preferred  Share
Purchase  Rights  Plan  ("Rights  Plan").  The  Rights  Plan  provides  for  the
distribution of a preferred stock purchase right as a dividend for each share of
the Company's Common Stock.  This right entitles  stockholders to purchase stock
in the Company or in an acquirer  of the  Company at a  discounted  price in the
event of certain hostile  efforts to acquire control of the Company.  The rights
may only be  exercised,  if at all,  until the earlier of July 31, 2000,  or the
occurrence of certain  events,  and may be redeemed by the Company.  At December
31, 1997, the rights were not exercisable.

         In connection  with the Rights Plan,  300,000  shares of the authorized
Preferred Stock were designated as Series A Junior Participating Preferred Stock
("Junior  Preferred  Stock"),  of which one share is equivalent to 100 shares of
Common  Stock.  Each share of Junior  Preferred  Stock shall  entitle the holder
thereof to 100 votes on all matters  submitted to a vote of the stockholders and
shall rank,  with respect to the payment of dividends  and the  distribution  of
assets,  junior  to all  series of any other  class of the  Company's  Preferred
Stock.  Subject to the rights of the  holders of any shares of  Preferred  Stock
with respect to dividends,  the holders of shares of Junior  Preferred Stock, in
preference  to the  holders  of  Common  Stock,  shall be  entitled  to  receive
quarterly dividends,  when, as and if declared by the Board of Directors.  As of
December  31,  1997,   no  dividends  had  been  declared  and  no  shares  were
outstanding.

Common Stock

         In November 1997, the Company  completed a follow-on public offering of
2,000,000  shares  of  Common  Stock at a price of  $16.00  per  share.  The net
proceeds to the Company were approximately $29.7 million.

            In October and  November  1996,  the  Company  completed a follow-on
public  offering of  2,070,000  shares of Common  Stock at a price of $12.00 per
share. The net proceeds to the Company were approximately $22.7 million.

            In September  1995, the Company sold 1,396,875  shares of its Common
Stock at a price of $12.00 per share, resulting in net proceeds of approximately
$16.3 million.

          The total number of shares of Common Stock  outstanding was 15,307,146
as of December 31, 1997, of which 63,125 were subject to repurchase. At December
31, 1997, the Company has reserved 5,865,991 shares of Common Stock for issuance
upon  exercise of warrants and options and  conversion of debt and 85,543 common
shares for issuance under the Employee Stock Purchase Plan.

                                      F-12

<PAGE>


Warrants

         The following  warrants to purchase  shares of common stock were issued
in connection  with the Senior  Custom  Convertible  Notes and various  license,
facility and equipment lease financing arrangements (also see Notes 6, 7 and 8):

                          Warrants Outstanding at December 31, 1997
          ----------------------------------------------------------------------
                               Price Per
         Number of Shares        Share        Aggregate Price    Expiration Date
         ----------------      ---------      ---------------    ---------------
              332,500       $     16.74             $5,566,050   September 2000
              200,000             15.50              3,100,000   January 2003
               70,000             15.44              1,080,800   June 2002
               40,000              3.75                150,000   December 1999
               36,847             10.31                379,985   July 2000
               13,598             12.87                175,006   December 2001
                7,200             11.25                 81,000   December 1999
                2,666              4.69                 12,497   December 2001


Note Receivable from Stockholder

         In August 1996, an officer of the Company exercised options to purchase
132,333  shares of common stock at prices ranging from $6.00 to $7.50 per share.
As consideration for the purchase, the officer issued a full recourse Promissory
Note (the "Note") to the Company. The Note bears interest of 6.84% per annum and
is due and payable on August 29, 2001.  However, in the event that the officer's
continuous  status as an employee,  director or  consultant  with the Company is
terminated  for any reason  prior to the  payment in full of the Note,  the Note
shall be  accelerated  and all remaining  unpaid  principal  and interest  shall
become due and payable on the 90th day following such termination.  In addition,
the officer has pledged the shares purchased with this Note as collateral.


11.  Stock Option and Purchase Plans

Employee Stock Purchase Plan

         In April 1994,  the Company  adopted an Employee  Stock  Purchase  Plan
("ESPP")  under which 200,000 shares of Common Stock were reserved for issuance.
All  employees  of the Company,  except  those having a 5% or greater  ownership
stake in the Company,  are eligible to  participate in the ESPP provided that on
the first day of an offering  period they have been  employed by the Company for
at least 30 days and are  customarily  employed by the  Company at least  twenty
hours per week and at least  five  months  per  calendar  year.  Offerings  will
generally  be for six  months,  with the  purchase  price per share equal to the
lower of 85% of the  market  value on the date  granted  (the  beginning  of the
offering  period) or on the date  purchased.  The next  offering  period ends on
March 31, 1998.  As of December 31, 1997,  114,457  shares had been issued under
the ESPP.

1992 Stock Option Plan

         The 1992  Stock  Option  Plan (the  "Plan")  provides  for the grant of
options to purchase  shares of Common Stock to  employees,  including  officers,
directors, and consultants, upon terms determined by the Board of Directors. The
options  granted  under  the Plan  may be  either  incentive  stock  options  or
nonstatutory  stock options.  As of December 31, 1997, an aggregate of 3,500,000
shares of Common Stock had been  reserved for issuance  under the Plan, of which
750,000 shares are subject to stockholders' approval.

         Options  granted under the Plan expire no later than ten years from the
date of grant.  The option price shall be at least 100% of the fair market value
on the date of grant for incentive stock options.  Nonstatutory  options, may be
granted as low as 85% of the fair market value on the date of grant. The options
generally become exercisable over a period of four years from the date of grant.
Options  may be  granted  with  different  vesting  terms  from  time to time as
approved  by the Board of  Directors.  The Plan has been  amended to provide for
automatic vesting of options granted upon a change of control, as defined.

         As of December 31, 1997,  options to purchase  851,649 shares of Common
Stock were  exercisable,  of which 117,813 shares would be subject to repurchase
if all were exercised.

                                      F-13

<PAGE>


         Through December 31, 1994, the Company recorded  deferred  compensation
expense for the difference  between the exercise price and the deemed fair value
for financial statement  presentation purposes of the Company's Common Stock for
certain  options granted in 1994 and 1993.  This deferred  compensation  expense
aggregated $757,000 and is being amortized over the related vesting period.

1994 Non-Employee Directors' Stock Option Plan

         In April 1994,  the Board of Directors  approved the 1994  Non-Employee
Directors'  Stock  Option  Plan  (the  "Directors'  Plan")  to  provide  for the
automatic grant of options to purchase shares of Common Stock to each person who
is elected as a director of the Company and who is not otherwise employed by the
Company (a "Non-Employee Director").

         Options  granted under this Plan to  Non-Employee  Directors upon their
initial  election to the Board will vest and be exercisable in five equal annual
installments  commencing  on the  date  one year  after  the date of the  grant.
Vesting is contingent upon the continuous service of the director.  The director
may elect at any time while a  Non-Employee  Director of the Company to exercise
the option  prior to vesting of the option.  Any  unvested  shares so  purchased
shall be subject to a repurchase  right in favor of the Company.  The Directors'
Plan has been amended to provide for automatic vesting of options granted upon a
change of control, as defined. Options granted annually to existing Non-Employee
Directors  vest in full on the  date ten  days  prior  to the date of the  first
annual  meeting of  stockholders  of the Company  subsequent  to the date of the
grant.  The exercise  price of options  granted under the  Directors'  Plan must
equal or exceed the fair market  value of the Common Stock on the date of grant.
Under this plan, 380,000 shares of Common Stock have been reserved for issuance,
of which 150,000 shares are subject to  stockholders'  approval.  As of December
31, 1997,  options for 161,000  shares were  outstanding,  of which  157,000 and
53,000  shares  were   exercisable  and  subject  to  repurchase  if  exercised,
respectively.

Long-Term Objectives Stock Option Plan for Senior Management

         In July 1995, the Board of Directors  adopted the Long-Term  Objectives
Stock Option Plan for Senior  Management (the "Long-Term  Plan").  The Long-Term
Plan  provides  for the grant of options to purchase  shares of Common  Stock to
certain  senior  employee  officers,  upon  terms  determined  by the  Board  of
Directors.  The options  granted under this Plan may be either  incentive  stock
options or nonstatutory stock options. Options granted under this Plan expire no
later than ten years from the date of grant.  The option price shall be at least
100% of the fair market value on the date of grant for incentive  stock options.
Under  this  plan,  270,000  shares of Common  Stock  have been  authorized  for
issuance.

         In August 1996, the Company  amended the terms of the then  outstanding
options on 180,000 shares of Common Stock to modify the vesting provisions.  The
amendment resulted in $538,000 of deferred compensation which is being amortized
over the remaining vesting period of approximately  five years. The options,  as
amended in August 1996, vest over a period of approximately six years.

         As of December 31, 1997,  options for 180,000 shares were  outstanding,
of which  144,000  shares and  101,250  shares were  exercisable  and subject to
repurchase if exercised, respectively.

Accounting for Stock Based Compensation

         The Company has elected to follow  Accounting  Principles Board Opinion
No. 25,  "Accounting  for Stock  Issued to  Employees"  ("APB  25") and  related
Interpretations  in  accounting  for its  employee  stock  options  because,  as
discussed below,  the alternative fair value accounting  provided for under FASB
Statement  No. 123,  "Accounting  for  Stock-Based  Compensation"  ("FAS  123"),
requires the use of option  valuation  models that were not developed for use in
valuing  employee  stock  options.  Under APB 25, when the exercise price of the
Company's  employee  stock  options  generally  equals the  market  price of the
underlying  stock on the date of grant,  generally  no  compensation  expense is
recognized.

         Pro forma  information  regarding  net income and earnings per share is
required by FAS 123,  which also requires that the  information be determined as
if the Company has accounted for its employee stock options  granted  subsequent
to December  31, 1994 under the fair value  method of that  Statement.  The fair
value  of  these   options  was  estimated  at  the  date  of  grant  using  the
Black-Scholes   option   pricing  model  with  the  following   weighted-average
assumptions for 1997, 1996 and 1995,  respectively:  risk-free interest rates of
5.9%, 5.9% and 5.7%;  dividend yields of 0%; volatility  factors of the expected
market  price  of the  Company's  Common  Stock  of  .55,  .57  and  .57;  and a
weighted-average expected life of the options of 3 years.

                                      F-14

<PAGE>


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

         For purposes of pro forma disclosures,  the estimated fair value of the
options is amortized to expense over the options' vesting period.  The Company's
pro forma  information  follows (in  thousands,  except for  earnings  per share
information):

                                         1997           1996            1995
                                       ---------      ---------      ----------
Pro forma net loss                     $ (35,604)     $ (21,813)     $  (12,846)
                                       =========      =========      ==========
Pro forma net loss per share           $   (2.66)     $   (1.99)     $    (1.41)
                                       =========      =========      ==========


         The weighted  average fair value of options  granted during 1997,  1996
and 1995 was $5.66, $5.39 and $3.55, respectively. As FAS 123 is applicable only
to options  granted  subsequent to December 31, 1994,  its pro forma effects are
not fully reflected until 1997.

<TABLE>
         A summary of the Company's  stock option  activity  under the Company's
option plans which  include the 1992 Stock Option  Plan,  the 1994  Non-Employee
Directors'  Plan and the  Long-Term  Objectives  Stock  Option  Plan for  Senior
Management is as follows:

<CAPTION>
                                                           Outstanding Stock Options
                                                           --------------------------
                                      Shares Available                   Weighted
                                        For Grant of      Number of       Average
                                          Options          Shares     Price per Share
                                          -------          ------     ---------------
<S>                                    <C>              <C>              <C>
    Balance at December 31, 1994          271,427          783,922        3.08
    Shares authorized                   1,300,000            --           --
    Options granted                    (1,131,137)       1,131,137        8.31
    Options exercised                       -             (112,261)       1.22
    Options forfeited                      16,370          (16,370)       5.11
                                          -------        ---------
    Balance at December 31, 1995          456,660        1,786,428        6.49
    Shares authorized                     650,000
    Options granted                      (652,066)         652,066       12.08
    Options exercised                       -             (305,072)       4.60
    Options forfeited                     235,559         (235,559)       7.85
                                          -------        ---------
    Balance at December 31, 1996          690,153        1,897,863        8.54
    Shares authorized                     900,000            --           --
    Options granted (a)                  (713,500)         713,500       13.15
    Options exercised                       -             (254,836)       5.13
    Options forfeited                      93,186          (93,186)      11.12
                                          -------        ---------
    Balance at December 31, 1997          969,839        2,263,341       10.27
                                          =======        =========
</TABLE>


         Note:
         (a)  Of the 713,500 options granted in 1997,  options for 77,161 shares
              are subject to stockholder approval.

                                      F-15

<PAGE>


<TABLE>
The following table  summarizes  information  concerning  currently  outstanding
options:

<CAPTION>
                                                                                       Exercisable
                                         Outstanding Stock Options                    Stock Options
                               ----------------------------------------------  ----------------------------
                                                  Weighted
                                                   Average        Weighted                     Weighted
                                                  Remaining        Average                      Average
            Range of               Number        Contractual      Exercise       Number        Price Per
            Exercise Prices       of Shares          Life           Price       of Shares        Share
            -----------------  --------------   --------------  -------------  ------------   -------------
<S>                                 <C>                 <C>           <C>         <C>               <C>
            $0.38 - $2.44           163,493             5.6           $1.39       154,558           $1.34
             5.00 -  5.75            48,862             7.1            5.40        38,096            5.45
             6.00 -  8.13           498,821             7.2            7.12       419,662            7.21
             9.67 - 11.88           718,905             8.5           11.24       340,220           11.38
            12.00 - 14.88           819,878             9.5           13.27       199,843           13.21
            15.00 - 19.00            13,382             9.7           18.58           270           15.00
                               --------------                                  ------------
            $0.38 - $19.00        2,263,341             8.3          $10.27     1,152,649           $8.64
                               ==============                                  ============
</TABLE>


12.  Income Taxes

         As of  December  31,  1997,  the  Company  had  federal  and  state net
operating loss  carryforwards of  approximately  $88.3 million and $7.1 million,
respectively.   The  Company  also  had  federal  and  California  research  and
development  tax credit  carryforwards  of  approximately  $2.4 million and $1.7
million,  respectively.  The federal net operating loss and credit carryforwards
will expire at various  dates  beginning in the year 2006 through  2012,  if not
utilized.  The State of California  net operating  losses will expire at various
dates beginning in 1998 through 2002, if not utilized.

         Utilization  of the  Company's  net operating  loss  carryforwards  and
credits may be subject to an annual  limitation due to the "change in ownership"
provisions of the Internal  Revenue Code of 1986 and similar  state  provisions.
The annual  limiation may result in the  expiration of net operating  losses and
credits before utilization.

         Deferred income taxes reflect the net effects of temporary  differences
between the carrying amounts of assets for financial  reporting purposes and the
amount used for income tax  purposes.  Significant  components  of the Company's
deferred  tax assets for  federal  and state  income  taxes are as follows as of
December 31 (in thousands):

                                                           1997          1996
                                                         --------      --------
Net operating loss carryforwards                         $ 30,400      $ 19,300
Research credits carryforwards                              3,700         2,100
Capitalized R&D                                             1,700         1,100
Deferred revenue                                              100           200
Other - net                                                 1,900           800
                                                         --------      --------
Total deferred tax assets                                  37,800        23,500
Valuation allowance for deferred tax assets               (37,800)      (23,500)
                                                         --------      --------
Net deferred tax assets                                  $      0      $      0
                                                         ========      ========


         Due to the  Company's  history of losses,  the deferred tax assets have
been fully offset by a valuation allowance. The valuation allowance increased by
$8.0 million and $5.1  million for the fiscal years ended  December 31, 1996 and
1995, respectively.

         Deferred  tax assets as of  December  31,  1997  include  approximately
$900,000  relating to the exercise of stock  options,  which will be credited to
equity when realized.

13.  Related Party Transactions

         In  1992,  the  Company  entered  into a  collaboration  and  licensing
agreement  with  Selectide.  The  Chairman of the Board of  Directors  and Chief
Executive Officer of the Company was also the chairman of the Board of Directors
of Selectide (see Note 3).

                                      F-16

<PAGE>


         In 1996,  the  Company  made a  $100,000  investment  in a China  joint
venture.  The Chairman of the Board of Directors and Chief Executive  Officer of
the Company is also the Chairman and a director of the China joint venture.

         In 1995, the Company entered into a collaboration agreement with Zeneca
(see Note 6). As of December 31, 1997,  Zeneca  owned  approximately  20% of the
Company's outstanding Common Stock.

         In January  1996,  the Company  entered into a license  agreement  with
Zeneca for the  dermatological use of a synthetic small molecule  inhibitor.  In
connection  with the  Company's  filing of an  Investigational  New Drug ("IND")
application  with  the Food and Drug  Administration  ("FDA")  for the  clinical
testing of this compound, SU5271, the Company paid Zeneca $200,000.

         In  connection  with the  resignation  of an officer in June 1996,  the
Company  recorded  approximately  $500,000 in connection with the forgiveness of
loans and salary continuation.

         In August  1996,  an officer  and  director  of the  Company  exercised
options  to  purchase   132,333  shares  of  Common  Stock  (See  Note  10).  As
consideration  for the purchase of these shares and related tax  liability  upon
the exercise of the options,  the officer issued a full recourse promissory note
in the amount of $1.1 million to the Company, of which approximately $883,000 is
included in  stockholder's  equity.  In addition,  the Company  provided secured
loans to certain key  employees  and officers to assist in the down payments for
the purchase of their personal  residences,  all of which are  forgivable  after
specified  years of  employment.  Included  in Other  Assets  are  approximately
$271,000 of loans receivable from certain key employees and officers at December
31, 1997.  Further,  in September  1997,  the Company  granted  25,000 shares of
Common  Stock  to  an  officer  subject  to  forfeiture  and  recorded  deferred
compensation  expense in the amount of $350,000,  which is being  amortized over
the vesting period of the shares.

                                      F-17

<PAGE>


                                   SIGNATURES

         Pursuant to the  requirements  of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of Redwood
City, State of California, on March 26, 1998.


                                                SUGEN, INC.


                                                By:  /s/ Stephen Evans-Freke
                                                     ---------------------------
                                                     Stephen Evans-Freke
                                                     Chief Executive Officer and
                                                     Chairman of the Board



                                POWER OF ATTORNEY

         KNOW ALL PERSONS BY THESE  PRESENTS,  that each person whose  signature
appears below constitutes and appoints Stephen  Evans-Freke and Susan M. Kanaya,
and each of them, 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,
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 his substitutes or substitute,  may lawfully do
or cause to be done by virtue hereof.

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

<CAPTION>
       Signature                                  Title                                    Date
       ---------                                  -----                                    ----
<S>                                    <C>                                              <C>
/s/ Stephen Evans-Freke                Chief Executive Officer and                      March 26, 1998
--------------------------------       Chairman of the Board
(Stephen Evans-Freke)                  (Principal Executive and Financial
                                       Officer)



/s/ Susan M. Kanaya                    Treasurer                                        March 26, 1998
--------------------------------       (Principal Accounting Officer)
(Susan M. Kanaya)


<PAGE>


/s/ Axel Ullrich                       Director                                         March  26, 1998
--------------------------------
(Axel Ullrich)



/s/ Richard D. Spizzirri               Director and Secretary                           March 26, 1998
--------------------------------
(Richard D. Spizzirri)



/s/ Jeremy L. Curnock Cook             Director                                         March 26, 1998
--------------------------------
(Jeremy L. Curnock Cook)



/s/ Charles M. Hartman                 Director                                         March 26, 1998
--------------------------------
(Charles M. Hartman)



/s/ Heinrich Kuhn                      Director                                         March 26, 1998
--------------------------------
(Heinrich Kuhn)



/s/ Donald E. Nickelson                Director                                         March 26, 1998
--------------------------------
(Donald E. Nickelson)



/s/ Bruce R. Ross                      Director                                         March 26, 1998
--------------------------------
(Bruce R. Ross)



/s/ Michael A. Wall                    Director                                         March 26, 1998
--------------------------------
(Michael A. Wall)
</TABLE>