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                       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 year ended December 31, 1996.

                                       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)

                                 (415) 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 14, 1997 was $92,674,953.

The number shares of Common Stock  outstanding  at March 14, 1997 was 13,039,822
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 1997 Annual Meeting
are incorporated herein by reference in Part III of this Report.

This  report on Form 10-K,  including  all  exhibits,  contains  ___ pages.  The
exhibit index is located on page 54 of this report.

--------
(1) Excludes 5,067,783 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 14, 1997.

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                                     PART I

Item 1.  BUSINESS

Overview

         SUGEN is a  biopharmaceutical  company  focused  on the  discovery  and
development  of small  molecule  drugs which  target  specific  cellular  signal
transduction pathways. Signal transduction is the process by which a signal from
the  exterior of a cell is  transmitted  to the cell  nucleus,  resulting in the
activation or suppression of specific genes.  Dysfunctional  signal transduction
pathways  have been  implicated  in disease areas such as cancer and diabetes as
well as  dermatology,  ophthalmology  and in  disorders  of the  cardiovascular,
immune and  neurological  systems.  The main focus of SUGEN's  research and drug
development  programs is on specific  signalling  pathways regulated by tyrosine
kinases ("TKs"),  tyrosine  phosphatases  ("TPs") and  serine-threonine  kinases
("STKs").  TKs,  TPs and STKs can take  the form of  cell-surface  receptors  or
intra-cellular signalling molecules. Cell surface receptor TKs, receptor TPs and
receptor STKs are three of the largest  known  families of receptors in the body
and  are  key  regulators  of  critical  cellular  functions  including  growth,
maturation,  migration, metabolism and survival. Aberrant signalling of TKs, TPs
and STKs has been shown to result in a variety of chronic and acute pathological
disorders.    SUGEN's   founding   scientists,   Dr.   Axel   Ullrich   of   the
Max-Planck-Institut  fur Biochemie  ("MPI") and Dr. Joseph  Schlessinger  of New
York  University  Medical  Center  ("NYU"),  are pioneers in the  discovery  and
characterization of TKs, TPs and their signalling pathways.

         SUGEN is pursuing two separate business models for commercialization of
its products and technologies, one for oncology and one for applications outside
of cancer.  In the cancer  field,  SUGEN is  committed  to building a vertically
integrated oncology business in North America, with the objective of bringing to
market a family  of  target-specific  signal  transduction  inhibitors  that are
proprietary  to SUGEN.  In cancer,  the  Company  believes  that it will  become
standard  practice  eventually to classify  tumors by their  molecular  trigger,
thereby  enabling  physicians to prescribe the appropriate  signal  transduction
inhibitor drug as part of a treatment regimen.  SUGEN believes it is a leader in
the research and discovery of novel signal transduction  targets for cancer drug
development.

         In December 1994, the Company filed its first  Investigational New Drug
("IND")  application  with the U.S.  Food and Drug  Administration  ("FDA")  for
SU101,  a  platelet-derived   growth  factor  receptor  ("PDGF  TK")  signalling
antagonist. Imbalances in the PDGF TK signalling pathway have been implicated by
SUGEN and  others in  subsets  of  several  cancers  including  brain,  ovarian,
prostate,  lung and melanoma.  The Company currently is sponsoring several Phase
I/II and Phase II clinical  trials.  As of March 3, 1997 over 100 patients  have
been treated with SU101.

         SUGEN currently is pursuing six additional  proprietary  cancer-related
drug  development  programs.  The most  advanced of these  includes the Flk-1 TK
angiogenesis inhibitor program that addresses patients with solid tumors and may
also have applications as an anti-metastasis  agent. The Company currently plans
to select an IND  candidate or  candidates  in the Flk-1 TK program and to begin
human safety studies  mid-year 1997,  and currently  plans to initiate  efficacy
studies during the fourth  quarter of 1997. The Company is also pursuing  GRB-2,
Raf and orally available PDGF TK inhibitor programs, in which lead compounds are
now undergoing in vivo pharmacology studies.

         SUGEN's cancer drug development  strategy is designed to facilitate the
rapid  progression  from Phase I clinical  studies to FDA  approval  and product
launch,  and thus the  Company is  targeting  fast track entry  indications  for
clinical  development  even where these  constitute a relatively small subset of
the  potentially  addressable  patient  population.  Once  a  product  has  been
introduced to the clinic,  SUGEN expects to work with the oncology  community on
additional  clinical  studies  to  extend  the  labeling  of the  drug to  other
applications.  In order to market its products effectively,  the Company intends
to build a U.S. sales force of approximately 50 representatives who would target
the  major  cancer  treatment  centers.  The  Company  also  expects  to seek to
in-license  and  market  additional  late-stage  cancer  assets  that  serve  to
complement  SUGEN  products,  and  intends  to work  with a partner  to  develop
genomic-based cancer diagnostics.

         SUGEN is committed to pursuing in parallel the clinical  development of
a number of  target-specific  cancer drugs in North America,  concentrating each
clinical  development  program on entry  indications in which patients have very
poor prognoses and no satisfactory alternative therapies. For each of its cancer
development

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programs,  the Company seeks to find partners for European and Asian territories
in order  to share  development  costs.  This  strategy  is  exemplified  by the
collaboration with ASTA Medica  Aktiengesellschaft  ("ASTA Medica") with respect
to the Pan-Her and Raf inhibitor programs, in which ASTA Medica is the Company's
collaboration partner in Europe and South America.

         Separate  from this  strategy,  the Company is funding a portion of its
ongoing cancer research through a collaboration with Zeneca Limited  ("Zeneca"),
a  major  international   pharmaceutical   company.   Zeneca  is  the  Company's
collaboration  partner and worldwide  licensee with respect to five  undisclosed
cancer drug  discovery  and  development  programs,  on which SUGEN will receive
milestone  payments  and  royalties  on  worldwide  sales and will also have the
opportunity  to earn  profit  participation  in the  North  American  market  by
contributing to clinical development costs.

         SUGEN is also  applying its drug  discovery  platform to areas  outside
oncology, including diabetes, dermatology, ophthalmology, neurological disorders
and immunology.  In December 1996, the Company filed an IND application with the
FDA for SU5271,  an  epidermal  growth  factor  receptor  ("EGF TK")  signalling
antagonist.  SU5271 is a synthetic small molecule signal transduction  inhibitor
that blocks keratinocyte  growth.  Hyperproliferating  keratinocytes are a major
constituent of psoriatic lesions which can be blocked by selectively  inhibiting
signalling of the EGF TK.

         In  the  areas   outside   cancer,   SUGEN   intends   to  pursue   the
commercialization  of its technology through joint ventures or collaborations in
which SUGEN contributes validated targets, screening technologies and drug leads
while the partner provides the disease and clinical expertise as well as funding
to bring  potential  products to market.  This  strategy is  exemplified  by the
October  1996  collaboration  agreement  with Vision  Pharmaceuticals  L.P.,  an
affiliate  of Allergan,  Inc. and  Allergan,  Inc.  (collectively,  "Allergan").
Through this collaboration,  Allergan became SUGEN's exclusive corporate partner
in the ophthalmic  neovascularization  field,  with the aim of utilizing SUGEN's
proprietary small molecule signal transduction  inhibition technology to develop
novel therapies for the treatment of such major  ophthalmic  diseases as macular
degeneration and diabetic retinopathy.

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.

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

         TKs, TPs and STKs are classes of signalling  molecules that are central
to the healthy  functioning  of all tissues.  Some well known TKs include  Her2,
PDGF TK, insulin receptor  ("insulin TK"), EGF TK, macrophage colony stimulating
factor  receptor  and  nerve  growth  factor  receptor.  At  present,  there are
approximately  100 known human TKs,  all of which have been cloned over the last
twelve  years.  TPs were not  discovered  until 1988,  and at present  there are
approximately 50 known human TPs.

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<PAGE>

         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  which  phosphorylate
serine and threonine  residues.  These enzymes  control an array of processes in
the cell. Many STKs act downstream in signal transduction  cascades initiated by
TKs, while others integrate signals  originating from other classes of receptors
(e.g., G protein-coupled  receptors).  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.

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,  coupled with
structural  characteristics of these molecules, make them attractive targets for
drug discovery and therapeutic intervention.  The intracellular domains of these
receptors 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.

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, as TPs have been shown to counteract the activity
of TKs, TPs have been implicated as potential tumor suppressor genes.

         In 1986,  Dr.  Ullrich  and Dr.  Dennis  Slamon  of the  University  of
California at Los Angeles Medical Center, a researcher,  clinical oncologist and
member of SUGEN's Science Advisory Board,  established the clinical relevance of
overexpression  of a  receptor  TK  known as 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

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significant  inhibitory effect on tumor growth,  validating Her2 as a target for
cancer therapy in the subset of patients that  overexpress  this TK.  Similarly,
aberrant  PDGF TK  signalling  has been  implicated  in  studies  at  SUGEN  and
elsewhere   in  subsets  of  brain,   ovarian  and  other  solid   tumors,   and
overexpression  of the EGF TK has been  implicated in subsets of breast,  brain,
head and neck, lung and gastric cancers.

         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,  thus reducing the likelihood of a TK inhibitor  affecting  normal
cells and causing  problematic  side  effects.  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.

Angiogenesis

         Studies  conducted by SUGEN in mice have shown that small molecule drug
candidates  targeting the Flk-1 pathway can block the formation of blood vessels
("angiogenesis")  essential to the growth and spread of most solid tumors. Flk-1
TK receptors, present on endothelial cells which make up blood vessel walls, act
as  regulators  of  cell  growth  and  angiogenesis.   Tumors  secrete  vascular
endothelial  growth factor ("VEGF") which binds to Flk-1 TK receptors  resulting
in the sprouting of capillaries from the blood vessel toward the tumor. Blocking
Flk-1 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 labs, small molecule
inhibitors  of  the  Flk-1  receptor  tyrosine  kinase  blocked   VEGF-dependent
angiogenesis, as well as vascular permeability, and human endothelial cells were
prevented  from  undergoing  cell division that is required for the formation of
new blood vessels.  Other studies by the Company  suggest that a tumor's ability
to form  metastases  depends on the  degree of  vascularization  of the  primary
tumor.  A high  degree of  vascularization  generally  correlates  with a poorer
prognosis.  SUGEN has  demonstrated  that by  blocking  Flk-1 TK  activity  in a
metastasis  model it can block the formation of metastases to the liver and also
prolong life in animals.  Flk-1 TK  inhibitors  thus are  potentially  useful to
treat  metastatic  disease  in defined  patient  populations.  Currently,  SUGEN
researchers  are testing in advanced  preclinical  studies a number of potential
drug  candidates  that inhibit the  activity of Flk-1 TK. The Company  currently
plans to initiate  human  safety  studies  mid-year  1997 and to initiate  human
efficacy trials by the fourth quarter of 1997.

         Flk-1  TK may  also be an  effective  therapeutic  for  treating  other
diseases  associated  with  angiogenesis.  These include  psoriasis,  rheumatoid
arthritis and ocular  neovascularization.  Potential ophthalmic applications are
in diabetic retinopathy and macular degeneration.

Diabetes

         SUGEN has  determined  that certain TPs appear to be the body's natural
down regulators of the insulin TK signalling  pathway.  A drug which selectively
blocks these TPs may restore signalling through the insulin TK pathway,  thereby
increasing glucose uptake and metabolism, and may constitute a novel therapeutic
approach  to both Type I and Type II  diabetes.  Such a drug may also  offer the
advantage of being orally available.

Psoriasis

         Hyperproliferation of keratinocytes  contributes to psoriasis, and work
by SUGEN  and its  collaborators  has  demonstrated  that EGF TK  signalling  is
required  for the growth of  keratinocytes.  These  studies  suggest that a drug
which  blocks the EGF TK may be useful in  treating  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.  SUGEN's work in psoriasis is based in
part on research  done by its  collaborators  at Hebrew  University of Jerusalem
("HUJ").

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Neurobiology

         TKs, TPs and their  signalling  pathways are known to play key roles in
the  maintenance  of the  central  and  peripheral  nervous  systems.  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
neurodegenerative diseases.

Immunology

         The role of TKs and STKs in the generation and maintenance of the human
immune system has been well established by a number of research teams around the
world.  Signal  transduction  molecules in the immune system represent potential
drug   discovery   targets   for   identifying   novel   immunosuppressive   and
immuno-stimulative drugs.

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.

         At SUGEN,  the process of drug discovery  includes the following steps,
regardless of disease area: (1) target  identification;  (2) target  validation;
(3)  assay  design  and  screening  of  compounds   for  leads;   and  (4)  lead
optimization,  including  crystallography and medicinal chemistry. The Company's
in-house research teams also work closely with NYU, MPI and  Max-Planck-Institut
fur Physiologische und Klinische Forschung ("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 one 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. 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 numerous 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 68,000 million  instructions  per second (mips)  throughput.
Using sophisticated  pattern recognition  algorithms,  SUGEN is able to mine the
public databases on a daily basis 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 homologs of human genes in non-human  genome  databases that could
provide quick insights into the function of the new human gene.

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         SUGEN has used this  bioinformatics  platform to develop a  proprietary
technology called transcript imaging, for which the Company has filed for patent
protection.  This technology enables SUGEN researchers to take a small sample of
cells or tissue of interest and to obtain  rapidly a systematic  analysis of the
expression  levels in the  sample of every  TK, TP and STK in  SUGEN's  library.
Transcript imaging allows SUGEN to identify quickly the 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 target for drug  development.
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
transcript  imaging also has the  potential  to become an  important  diagnostic
tool,  but SUGEN will seek to pursue this  opportunity  in  partnership  with an
established diagnostics company.

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. SUGEN terms
this process  "target  validation,"  and it 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.

Assay Design/Screening

         From its  inception,  SUGEN  has  committed  significant  resources  to
building a strong assay  development  capability,  and 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,  and 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

                                        7
<PAGE>

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  a  worldwide  collection  network
providing  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  infrastructure.  Work  being  done  in  Dr.
Schlessinger's  lab at NYU will  allow  SUGEN  scientists  to  direct  synthetic
chemistry  efforts in a manner that relies upon information  derived from models
that use SUGEN  compounds in  association  with the catalytic  core of TKs. With
this  information  in hand,  the  Company  believes  that the lead  optimization
process can be pursued in a more rational manner since chemistry efforts will be
better  directed.  In this regard,  SUGEN is  collaborating  with  ArQule,  Inc.
("ArQule")  in certain of its programs,  in order to use ArQule's  combinatorial
chemistry  technology to rapidly  synthesize  large numbers of analog  compounds
around SUGEN's lead compounds, using crystallography information to direct these
efforts.  The  crystallographic  analysis  also provides a rationale to identify
novel  chemical  templates  that would provide a cache of novel  compounds  with
application to the inhibition of TKs and STKs with broad application.

         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  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.

Product Development Programs

         The  breadth of  involvement  of TKs,  TPs,  STKs and their  signalling
pathways  in  biological  functions  makes it  impractical  for the  Company  to
establish  drug discovery  programs in all disease areas in which  opportunities
may  emerge.  SUGEN  currently  is  focusing  on disease  areas  that  represent
significant market  opportunities and where the underlying science is relatively
mature. Therefore,  SUGEN concentrates its drug development resources on cancer,
diabetes and psoriasis, with additional focused efforts on cardiovascular,

                                        8
<PAGE>

immunologic and neurologic  disorders.  The Company  believes that these disease
areas offer opportunities for the development of novel pharmaceuticals that will
represent  major  advances  in  efficacy  and safety  over  currently  available
therapies.
<TABLE>

         The following table outlines SUGEN's research and development programs.
Certain of these  programs  are being  pursued  independently,  while others are
being undertaken with SUGEN's collaborators.
<CAPTION>
--------------------------------------------------------------------------------------------------------------------
               Program                            Indication                   Status (1)              Rights
                                                   Oncology
--------------------------------------------------------------------------------------------------------------------
 SU101
 <S>                                  <C>                                <C>                     <C>
 PDGF TK Antagonist                   Malignant glioma and other         Phase I/II, Phase II    SUGEN
                                      solid tumors
--------------------------------------------------------------------------------------------------------------------
 Flk-1 TK Antagonist                  Angiogenesis inhibition            Preclinical             SUGEN
                                      - Solid tumors
--------------------------------------------------------------------------------------------------------------------
 GRB2 Antagonist                      Multiple TK-driven tumors          Lead compounds          SUGEN
--------------------------------------------------------------------------------------------------------------------
 Pan-Her Antagonist                   Breast, ovarian, gastric, lung     Lead compounds          ASTA Medica
 (formerly Her2 Antagonist)           head and neck, prostate cancers                            Europe  and  South
                                                                                                 America
                                                                                                 SUGEN
                                                                                                 United  States and
                                                                                                 rest of world
--------------------------------------------------------------------------------------------------------------------
 Orally available PDGF TK             Solid tumors                       Lead compounds          SUGEN
 Antagonists
--------------------------------------------------------------------------------------------------------------------
 Raf Antagonist                       Pancreatic, bladder cancers        Lead compounds          ASTA Medica
                                                                                                 Europe  and  South
                                                                                                 America
                                                                                                 SUGEN
                                                                                                 United  States and
                                                                                                 rest of world
--------------------------------------------------------------------------------------------------------------------
 Met TK Antagonist                    Stomach, colorectal and lung       Screening               SUGEN
                                      cancers
--------------------------------------------------------------------------------------------------------------------
 Five undisclosed cancer targets      Certain major cancers              Research and screening  Zeneca
--------------------------------------------------------------------------------------------------------------------

                                                  Other Programs

--------------------------------------------------------------------------------------------------------------------
 SU5271                               Psoriasis                          Phase I                 SUGEN
 EGF TK Antagonist
--------------------------------------------------------------------------------------------------------------------
 Flk-1 TK Antagonist                  Angiogenesis  inhibition in        Lead compounds          Allergan
 (and other targets)                  ophthalmology
                                       - Diabetic Retinopathy
                                       - Macular Degeneration
--------------------------------------------------------------------------------------------------------------------
 PDGF TK Antagonist                   Cardiovascular diseases            Lead compounds          SUGEN
 (and other targets)
--------------------------------------------------------------------------------------------------------------------
 Insulin TP Antagonist                Diabetes                           Lead compounds          SUGEN
                                        Type I/Type II
--------------------------------------------------------------------------------------------------------------------
 Neurology targets                    Neurodegenerative diseases         Research, screening     SUGEN
                                                                         and lead compounds
--------------------------------------------------------------------------------------------------------------------
 Immunology targets                   Immune suppression, asthma         Research and screening  SUGEN
--------------------------------------------------------------------------------------------------------------------
<FN>

-----------

     (1)"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.

         See  "Business  Risks" for a discussion of certain risks related to the
development of potential products.
</FN>
</TABLE>

                                        9

<PAGE>

Cancer

         Many of the cancers that SUGEN's  programs are addressing  have patient
subsets  with  extremely  poor  prognosis  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 trial duration if
the compounds prove to be active.

SU101/PDGF TK Antagonist. SU101 is a small synthetic molecule which inhibits the
PDGF TK 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.
Imbalances in the PDGF TK signalling  pathway have been  implicated by SUGEN and
others in subsets of several cancers including brain,  ovarian,  prostate,  lung
and melanoma.

         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
prognosis.  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 prognosis for these patients, the Company
believes that establishing clinical efficacy may not require large trials if the
compound is active.

   In December  1994, the Company filed its first IND  application  with FDA for
SU101,  a  platelet-derived   growth  factor  receptor  ("PDGF  TK")  signalling
antagonist.  The Company currently is sponsoring several Phase I/II and Phase II
clinical  trials.  As of March 3, 1997 over 100 patients  have been treated with
SU101.

         SUGEN  believes  SU101  may have  applications  in other  cancers  that
involve aberrant PDGF TK signalling.  The PDGF TK also appears to be involved in
both  restenosis  of blood  vessels  after  clearance by  angioplasty,  and more
broadly  in  atherosclerosis.  The  Company is  currently  in  discussions  with
potential  corporate partners regarding  cardiovascular  applications of PDGF TK
antagonists. There can be no assurance that the Company will be able to conclude
a cardiovascular collaboration on acceptable terms or at all.

         The  Company has filed  patent  applications  in the United  States and
abroad claiming the method of treating PDGF TK driven cancers with SU101.  While
the  Company  believes  at this time that it will  receive  method of use patent
protection on SU101,  there can be no assurance that any such patent  protection
will be issued.  In March 1997, the U.S.  patent office issued to SUGEN a patent
on the formulation of SU101.  Patents have been issued in the United States to a
large  pharmaceutical  company  covering the use of leflunomide and structurally
related  compounds for the treatment of cancer.  The Company  presently does not
know if commercialization of SU101 will infringe these patents but believes that
these patents may be subject to claims of invalidity as they relate to SU101.

Flk-1 TK  Antagonist.  Formation  of the  body's  network of blood  vessels,  or
angiogenesis,  occurs throughout early human development. This process generally
stops once a person  reaches  adulthood.  Exceptions  include  wound healing and
during 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  inhibitors  of
angiogenesis for cancer because,  theoretically,  inhibiting  angiogenesis would
starve  tumors with few side effects.  The potential  markets for such a product
include all patients with solid tumors where an angiogenesis  inhibitor could be
an important adjunctive therapy, and in patients with metastatic disease.

         SUGEN and its collaborators  have identified the Flk-1 TK as a receptor
VEGF  and as a  major  regulator  of  angiogenesis.  Experiments  in  mice  have
confirmed that eliminating Flk-1 TK activity effectively disables the ability of
the  majority  of tumors to  stimulate  formation  of blood  vessels  to nourish
themselves,  resulting in inhibition of tumor growth. Most recently, the Company
has identified several small molecule inhibitors of the Flk-1 receptor that meet
its  preclinical  profile for an IND candidate in this program,  and the Company
has proceeded into pharmacology and pharmaceutical development.

         The  Company  has  established  an  exclusive  research  and  licensing
agreement  with  the MPP 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.

                                       10
<PAGE>

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.

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.

         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.

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. Monoclonal antibodies targeting Her2,
including one developed by Dr.  Ullrich,  are currently in human 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 believes it has identified a number of
highly potent and specific small molecule inhibitors of Pan-Her.  The Company is
currently  testing several of these  molecules in animal models.  The Company is
pursuing its Pan-Her Antagonist program in collaboration with ASTA Medica.

Orally  active 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  as a chronic  oral dosage  form.  The Company
currently  has  several  small  molecule  inhibitors  of the PDGF TK  signalling
pathway which in 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 Company has delayed commencement of clinical trials with
respect to SU102,  one of these small  molecule  inhibitors,  while it evaluates
safety,   efficacy  and   pharmacokinetic   parameters  of  certain  alternative
compounds.

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.

         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.  Recent reports have shown that  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

                                       11
<PAGE>

psoriasis,  and work by SUGEN and others has demonstrated that EGF TK signalling
is required for the growth of keratinocytes.  SUGEN's work in psoriasis is based
in part on research done by its collaborators at HUJ.

         SU5271/EGF TK Antagonist.  SUGEN filed an IND  application in late 1996
with FDA for the  clinical  testing  of SU5271 in the  treatment  of  psoriasis.
SU5271 is a synthetic small molecule signal  transduction  inhibitor that blocks
keratinocyte growth. Hyperproliferating keratinocytes are a major constituent of
psoriatic lesions which can be blocked by selectively  inhibiting  signalling of
the EGF  Receptor.  The  Company has  initiated a Phase I study to evaluate  the
safety of the  topical  use of  SU5271  in  psoriatic  patients  at Mount  Sinai
Hospital in New York, New York.

         SU5271,  a potent and highly selective  inhibitor of EGF-R  signalling,
represents the first extension of SUGEN's drug discovery platform into the field
of dermatology.  SUGEN received an exclusive,  worldwide license from Zeneca for
the  dermatologic  uses of SU5271 and has also filed its own method of treatment
and other patent claims with respect to this compound.

Angiogenesis Inhibition in Ophthalmology

         A number of ophthalmological  disorders involve  neovascularization  of
different  regions of the eye.  Since Flk-1 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  TK  inhibitors  might  be
therapeutically  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.  Target validation strategies are now being initiated for Flk-1 TK and
other angiogenesis targets.

Diabetes

         Both Type I and Type II diabetes are  characterized  by  pathologically
high  levels of blood  glucose  due to lack of  efficient  cellular  uptake  and
metabolism  of glucose.  Type I  diabetics  produce low 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 both insulin and 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.

         The Company recently achieved  reproducible proof of principle with its
lead  phosphatase  inhibitor  compounds  in animal  models of Type II  diabetes.
SUGEN's  animal  studies  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.

Neurobiology

         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.  This  program  is  SUGEN's  independent
continuation of the Amgen  collaboration which was terminated in early 1996. See
"Management's  Discussion  and  Analysis of Financial  Condition  and Results of
Operations."

                                       12
<PAGE>

Immunology

         The role of TKs in the generation  and  maintenance of the human immune
system has been  clearly  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 asthma.

Corporate and Clinical Development Collaborations

         The Company's  approach to corporate  partnering is different in cancer
than it is in  other  disease  areas.  Since  the  Company's  goal is to build a
vertically  integrated  cancer  business  in North  America,  it seeks to retain
market rights to its proprietary  cancer programs with respect to the core North
American cancer market  concentrated  in the major cancer  centers,  but to find
European  and  Asian  partners  willing  to  contribute   substantially  to  the
development  effort  in  these  programs  as  part of a  geographical  licensing
arrangement.  The Company's  collaboration  with Zeneca in cancer (see below) is
the  exception in that Zeneca  gained  world-wide  rights to certain early stage
programs in return for significant  funding of SUGEN's cancer research  efforts.
Outside cancer, the Company aims to establish global  collaborations  focused on
specific  disease areas with partners that have strong  preclinical and clinical
development  capabilities  in the  relevant  disease  area,  in  addition to the
ability to fund the programs.

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  will  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  and  October  1996  financings,  purchasing  an
additional 281,875 and 509,000 shares, respectively, of Common Stock in order to
maintain its  ownership  position.  To date,  Zeneca has invested  approximately
$29.5 million in the Company's Common Stock.

         In addition to its equity purchases and annual research funding, Zeneca
paid a $5  million  technology  set-up  fee to SUGEN,  and will  make  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. 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

                                       13
<PAGE>

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 August 1995, the Company entered into a  Collaborative  Research and
Development  Agreement  ("CRADA") with the National Cancer Institute (the "NCI")
under which the NCI may  participate in the clinical  development of SU101,  the
Company's lead anti-cancer  compound. In April 1996, SUGEN entered into a second
CRADA with 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 million  technology
set-up fee and is  providing  additional  consideration  in the form of contract
services for  non-collaboration  work.  Additionally,  ASTA Medica  purchased $9
million of Common Stock at a price of $20.88 per share. In due course, SUGEN may
receive  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  for SUGEN  territories.  SUGEN retains
market  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,  pain, inflammation and disorders of the central
nervous  system/epilepsy.  ASTA Medica employs  approximately  5,900 individuals
worldwide.  The  company  is owned by  Degussa,  a German  manufacturer  of fine
chemicals and precious metals.

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  will also  establish a
comprehensive  effort to identify and validate signal  transduction  targets for
choroidal  and  retinal  neovascularization.  Allergan  will  be  the  exclusive
corporate  partner for SUGEN in ocular diseases of  neovascularization  and will
have  exclusive  rights to all  ophthalmic  uses of  collaboration  products and
collaboration know-how world-wide.  In return,  Allergan paid SUGEN a $2 million
initial fee for past research services and will fund collaboration  research and
drug discovery at SUGEN for at least three years.  Allergan initially  purchased
$4  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

                                       14
<PAGE>

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 Martinsreid,  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  in the  target  identification  and  screening  areas.  Overall,
SUGEN's collaborations encompass over 150 researchers,  the majority of whom are
with MPI, MPP or NYU.

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 all the TK and TP technology being developed 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 and TPs and their
physiological  role, as well as  identifying,  isolating and cloning new TKs and
TPs and the components of the signal transduction  pathways emanating from these
proteins.  The research  program is scheduled to expire in 1997, but is expected
to be extended in modified form for additional  periods of time. 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 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
products using the NYU technology.  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
Max- Planck  Society in Germany.  These  collaborations  include  licenses  from
Garching  Innovation  GmbH  ("Garching"),  the licensing  arm of the  Max-Planck
Society.

Max-Planck-Institut  fur Biochemie ("MPI").  The Company entered into a research
and  license  agreement  with  MPI and  Garching  which  expires  in 1997 but is
expected to be  extended  in  modified  form.  This  agreement  grants  SUGEN an
exclusive  worldwide  license  to  the  commercial  uses  of  all  the TK and TP
technology being developed under the leadership of Dr. Ullrich. The scope of the
research program includes identification, isolation and cloning of novel 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 own the rights to the technology it
has developed  under the agreement.  As with the NYU  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 (MPP). 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 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.

The Hebrew University of Jerusalem

         SUGEN is the  exclusive  licensee of research  being carried out by Dr.
Alexander  Levitzki at the HUJ under an agreement entered into in September 1993
and amended in March 1995 and May 1996. The Company's

                                       15
<PAGE>

license  includes  exclusive  rights  in  certain  fields  to a series of issued
patents  and  patent  applications  and  other  proprietary   know-how  covering
synthetic  small  molecule TK  inhibitors,  including  compounds  and methods of
treatment,  as well as all new  compounds  which result from the ongoing work of
Dr.  Levitzki's team at the HUJ during the research  program.  SUGEN's  research
scientists  work closely with Dr.  Levitzki and the chemists in his  laboratory,
providing  activity  data on  compounds,  which in turn  supports the  iterative
process of lead  optimization.  SUGEN's rights to the licensed products that are
of  continued  interest to the  Company  survive,  subject to certain  diligence
requirements,  upon  expiration  of  the  research  period  or  termination  for
convenience.  SUGEN  retains  rights to all the  licensed  products  should  the
agreement  be  terminated  due  to a  breach  by  or  insolvency  of  HUJ.  Upon
termination of the agreement due to insolvency of the Company or due to a breach
by the Company,  HUJ will own the rights to the technology  developed  under the
agreement  and the Company will be obligated to return all material  relating to
the  technology.  The Company is  obligated to make  milestone  payments and pay
royalties on any sales of licensed products. This research program terminates in
June 1997 and is extendible by the Company for additional periods.

         In  addition,  SUGEN  has also  entered  into  sponsored  research  and
exclusive license  agreements with HUJ providing SUGEN with commercial rights to
compounds  emanating from programs  focused on clinical  development of tyrosine
kinase  inhibitors in therapeutic areas outside SUGEN's main areas of focus. The
aim of these  programs  is to  develop  small  molecules  for the  treatment  of
psoriasis and human papilloma virus infection.  The sponsored  research programs
are currently scheduled to continue through September 1997. The programs require
120 days notice for  cancellation.  The contracts provide for limitations on the
amount payable by SUGEN for sponsored research under all of these programs after
notice of  cancellation.  SUGEN's  rights to the licensed  products  that are of
continued  interest  to  the  Company  survive,  subject  to  certain  diligence
requirements,  upon  expiration  of  the  research  period  or  termination  for
convenience.  SUGEN  retains  rights to all the  licensed  products  should  the
agreement be terminated due to a breach by or insolvency of HUJ.

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  provides  lead  chemical  structures  and new
chemical  structure  scaffolds  to  enable  ArQule to use its  Directed  ArrayTM
combinatorial  synthesis  technologies to build a novel  collection of compounds
with potentially  broad  applications  for the  pharmaceutical  industry.  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  are providing 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.

                                       16
<PAGE>

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 March 3,  1997,  SUGEN  held  exclusive  rights to at least 11
issued  U.S.   patents  and  had  filed  and/or  held   exclusive   licenses  to
approximately 132 United States patent applications,  as well as related foreign
patent  applications.  While  the  Company  believes  at this  time that it will
receive method of use patent protection on SU101, there can be no assurance that
any such  patent  protection  will  issue.  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  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  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.

         SU101, a compound generally known by the name leflunomide,  is a member
of the isoxazole  family of compounds.  Leflunomide  was discovered more than 15
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.  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.  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  United States  patents are either invalid or will not be infringed by
the  manufacture  and sale of SU101.  However,  the  Company  has  learned  that
additional  patents have been issued in the United States to the  pharmaceutical
company covering the use of leflunomide and structurally related

                                       17
<PAGE>

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. The Company presently does not intend to commercialize SU101 outside the
United States. There can be no assurance that SU101 will not infringe the 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 such  claims,  even if resolved  favorably  to the  Company,  could result in
substantial costs to the Company.

         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,  preclinical  and  clinical  testing,
obtaining regulatory approvals and marketing than the Company. Smaller companies
may also prove to be significant competitors, particularly through collaborative
arrangements with large pharmaceutical and established  biotechnology companies.
Many of these  competitors have significant  products that have been approved or
are in  development  and operate  large,  well funded  research and  development
programs.  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.
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  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,   or  achieve   earlier  patent   protection  or  product
commercialization than the Company.

Government Regulation

         The manufacturing and marketing of the Company's potential products and
its  ongoing  research  and  development  activities  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 and clinical testing 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,

                                       18
<PAGE>

complexity  and  novelty  of  the  product  and  requires  the   expenditure  of
substantial resources. Preclinical studies must be conducted in conformance with
the FDA's  good  laboratory  practice  ("GLP")  regulations.  Before  commencing
clinical  investigations  in humans,  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
testing  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  and clinical
activities 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.

         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
and clinical purposes.  The products under development by the Company have never
been  manufactured on a commercial scale and there can be no assurance that such
products can be manufactured  at a cost or in quantities  necessary to make them
commercially  viable.  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
and  clinical  testing  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 Good Manufacturing  Practices  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.

Business Risks

         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 two drug
candidates  (SU101 and SU5271) have entered human clinical  testing.  To achieve
profitable  operations  on a  continuing  basis,  the  Company,  alone  or  with
collaborative partners, must successfully develop,


                                       19
<PAGE>

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.  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.  In addition,  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.  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. 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 manufacturing  uncertainties,  the Company's lack of
sales  and  marketing   capabilities,   competition,   uncertainties   regarding
protection  of  patents  and  proprietary  rights,   government  regulation  and
uncertainties regarding pharmaceutical pricing and reimbursement.

Facilities

         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.
The Company believes that its current facilities plus anticipated  additions are
sufficient to meet its needs for the next few years. The Company plans to expand
its  facilities  to  support  growth in its  operations  and will be  evaluating
alternative space options. There can be no assurances,  however, that such space
will be available on favorable terms, if at all.

Employees

         As of  March  3,  1997 ,  the  Company  had  160  full-time  employees,
including a technical scientific staff of 120. 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,  medicinal  chemistry and
pharmaceutical  development.  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.  The Company  believes
that its current  facilities plus  anticipated  additions are sufficient to meet
its needs for the next few years.  The Company plans to expand its facilities to
support  growth  in its  operations  and will be  evaluating  alternative  space
options. 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 legal proceedings.

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

None.



                                       21
<PAGE>

                                     PART II


Item 5.        MARKET FOR THE 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 since October 1994. These prices do not
include retail markups, markdowns or commissions.


                                                --------------------------------
                                                       High               Low
         -----------------------------------------------------------------------
         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
         -----------------------------------------------------------------------
         1995
         Fourth Quarter                               16.00              9.25
         Third Quarter                                13.88              6.88
         Second Quarter                                8.38              4.63
         First Quarter                                 7.75              4.63
         -----------------------------------------------------------------------
         1994
         Fourth Quarter (from October 4, 1994)    $    8.00         $    4.75
         -----------------------------------------------------------------------

As of March 14,  1997  there  were  approximately  235  holders of record of the
Company's  Common Stock.  On March 14, 1997, the last sale price reported on the
Nasdaq  National  Market  System for the  Company's  Common Stock was $11.63 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,
                                     --------------------------------------------------------------------------
                                         1996             1995            1994           1993          1992
                                     ------------- ----------------- -------------- -------------- ------------

<S>                                  <C>           <C>               <C>            <C>            <C>
Contract revenue (1)                 $     13,650  $         13,843  $       6,270  $       5,470  $     1,080
Costs and expenses:

    Research and development               29,792            23,226         17,079         10,251        4,531
    General and administrative              5,529             5,086          3,106          2,169        1,591
                                     ------------- ----------------- -------------- -------------- ------------
         Total costs and expenses          35,321            28,312         20,185         12,420        6,122
                                     ------------- ----------------- -------------- -------------- ------------
Operating loss                            (21,671)          (14,469)       (13,915)        (6,950)      (5,042)

Other income and expense:

    Interest income                         2,481             1,988            529            339          131
    Interest expense                         (691)             (494)          (278)           (56)         (45)
    Gain on sale of investment
       in Selectide Corporation               -               1,006            -              -              -
                                     ------------- ----------------- -------------- -------------- ------------
         Other income, net                  1,790             2,500            251            283           86
                                     ------------- ----------------- -------------- -------------- ------------
Net loss                             $    (19,881) $        (11,969) $     (13,664) $      (6,667) $    (4,956)
                                     ============= ================= ============== ============== ============

Net loss per share                         ($1.81)           ($1.32)        ($4.15)        ($3.89)      ($3.00)
                                     ============= ================= ============== ============== ============

Shares used in computing net
   loss per share                          10,966             9,085          3,296          1,712        1,649
                                     ============= ================= ============== ============== ============

Pro forma net loss per share (2)                                            ($2.22)        ($1.39)      ($1.37)
                                                                     ============== ============== ============

Shares used in computing pro
    forma net loss per share (2)                                             6,143          4,786        3,618
                                                                     ============== ============== ============

Balance Sheet Data:
(in thousands)
                                                                   December 31,
                                     --------------------------------------------------------------------------
                                         1996            1995             1994           1993           1992
                                     ------------- ----------------- -------------- -------------- ------------

Cash, cash equivalents and
    short-term investments           $     56,334  $         53,253  $      22,414  $      16,984  $    12,315
Total assets                         $     61,936  $         59,243  $      28,455  $      20,812  $    15,306
Capital lease obligations -
    non-current portion              $      2,938  $          3,651  $       2,087  $         441  $       291
Accumulated deficit                  $    (57,997) $        (37,964) $     (26,270) $     (12,451) $    (5,784)
Stockholders' equity                 $     48,530  $         43,441  $      18,319  $      13,230  $    11,127
<FN>

(1) Includes amounts from related party
(2) Pro forma net loss per share  information  gives effect to the conversion of
    all preferred  stock  outstanding  from the date of issuance.  See Note 1 of
    Notes to Financial Statements.
</FN>
</TABLE>

                                       23
<PAGE>


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

         This Annual Report  contains,  in addition to  historical  information,
forward-looking  statements that involve risks and uncertainties.  The Company's
actual  results  could differ  significantly  from the results  discussed in the
forward-looking  statements.  Factors  that could  cause or  contribute  to such
differences include the factors discussed below as well as the factors discussed
in other sections of this Annual Report. The Company undertakes no obligation to
release the results of any revision to these  forward-looking  statements  which
may be made to reflect events or  circumstances  occurring after the date hereof
or to reflect the occurrence of unanticipated events.

Overview

         SUGEN was founded in July 1991 to discover and develop  small  molecule
drugs that target specific cellular signal transduction pathways. These pathways
have been  implicated  in  diseases  such as cancer and  diabetes  as well as in
dermatologic,  immunologic,  cardiovascular  and neurologic  disorders.  Through
December 31, 1996,  substantially  all of the Company's  revenue has been earned
pursuant to  collaborations  with Zeneca,  ASTA Medica,  Allergan and Amgen. The
Company  intends  to pursue its drug  discovery  programs  independently  and in
collaboration with established pharmaceutical companies.

         In  January  1995,  the  Company   established  an  oncology   research
collaboration with Zeneca. The Company received a $5.0 million technology set-up
fee, receives annual research funding and will receive  additional fees upon the
achievement  of specified  milestones.  In addition,  Zeneca  purchased  789,141
shares of Common  Stock at a price of $15.84 per share.  In December  1995,  the
Company  established an oncology  product  development  collaboration  with ASTA
Medica.  The  Company  received a $4.0  million  technology  set-up fee and will
receive additional fees upon the achievement of specified  milestones as well as
additional  consideration in the form of contract services for non-collaboration
work. In addition, ASTA Medica purchased 431,137 shares of Common Stock for $9.0
million,  or $20.88 per share. In January 1996, the Company and Amgen terminated
their  research  collaboration  one year prior to the scheduled  expiration.  In
connection with the termination,  Amgen paid SUGEN $2.5 million, forgave amounts
previously  advanced,  and purchased from SUGEN, for $200,000, a warrant for the
purchase of 200,000  shares of Common Stock with an exercise price of $15.50 per
share.  In addition,  SUGEN  repurchased  235,000 of the 387,878 shares of SUGEN
Common  Stock  held by Amgen at $11.48 per share.  The  termination  arrangement
further  provides that the Company will make royalty and certain other  payments
to Amgen in the event that  designated  potential  products  are  developed  and
marketed.  In October 1996, the Company  established an  ophthalmology  research
collaboration with Allergan. The Company received a $2.0 million initial payment
for past research  services,  receives  annual  research  funding and expects to
receive  additional  fees  upon the  achievement  of  specified  milestones  and
royalties on any product sales. In addition,  Allergan  purchased 191,571 shares
of Common Stock at a price of $20.88 per share.

         In October  and  November  1996,  the  Company  completed  a  follow-on
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.  Zeneca purchased
509,000  shares  and  Allergan   purchased   250,000  shares  of  Common  Stock,
respectively, 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,  1996,  the  Company's
accumulated deficit was $58.0 million.

Results of Operations

         The Company's  revenues for the years ended December 31, 1996, 1995 and
1994 were $13.7 million, $13.8 million and $6.3 million, respectively.  Revenues
for the year ended  December  31, 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.  Through
December 31, 1996, the set-up and wind-down fees from the ASTA

                                       24
<PAGE>

Medica and Amgen  collaborations,  respectively,  had been fully  recognized  as
revenue.  Going forward,  the Company will not recognize any additional  revenue
under the Amgen  collaboration,  and will recognize additional revenue under the
ASTA Medica  collaboration only upon the achievement of specified milestones and
for contract services provided by ASTA Medica for  non-collaboration  work. As a
result,  collaboration revenue will be lower in 1997 than in 1996 in the absence
of additional  collaboration agreements during the year. 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  1995  included  the   recognition   of  a  $5.0  million
non-recurring   technology  set-up  fee  received  upon  the  execution  of  the
collaboration  agreement  with  Zeneca and the partial  recognition  of the $4.0
million  technology  set-up fee  received  in  connection  with the ASTA  Medica
collaboration.  The  increase in revenues  in 1995 over the  preceding  year was
primarily due to revenue from the Zeneca collaboration.

         Research  and  development  expenses  for the years ended  December 31,
1996,  1995 and 1994 were  $29.8  million,  $23.2  million  and  $17.1  million,
respectively.  The increase  during 1996 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 studies of the Company's lead anti-cancer  compound,
SU101,  contributed to higher expenses during 1996. Further,  the advancement of
multiple  programs  through  preclinical   development,   including   activities
associated  with the December 1996 filing of the Company's  Investigational  New
Drug ("IND") with the U.S. Food and Drug Administration ("FDA") for the clinical
testing of SU5271 in the treatment of psoriasis, led to higher expenses in 1996.
The increase during 1995 was also driven by expenses  associated with additional
personnel  dedicated to the  Company's  research and  development  programs.  In
addition,  the  initiation  of Phase I clinical  activities  contributed  to the
growth in 1995 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 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,
1996,  1995  and  1994  were  $5.5  million,  $5.1  million  and  $3.1  million,
respectively.   The   increase  in  1996  was   primarily   due  to   additional
administrative  staffing,  the related  recruiting and  relocation  expenses and
costs  associated with the  resignation of an officer.  The increase in 1995 was
primarily due to increased administrative staffing, additional costs incurred in
connection with corporate development  activities and higher expenses associated
with the  Company's  reporting  requirements  as a result of becoming a publicly
held company.  The Company expects that its general and administrative  expenses
will  continue  to  increase  in order to support  the  Company's  research  and
development efforts.

         Interest  income for the years ended  December 31, 1996,  1995 and 1994
were $2.5 million, $2.0 million and $529,000, respectively. These increases were
due to higher  investment  balances  arising  primarily  from  issuances  of the
Company's capital stock. Interest expense for the years ended December 31, 1996,
1995  and  1994  were  $691,000,  $494,000  and  $278,000,  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.  A $1.0  million gain on the sale of the
Company's  investment  in  Selectide  Corporation  was  included in other income
during the twelve month period 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.

Liquidity and Capital Resources

         The Company had cash, cash  equivalents  and short-term  investments of
approximately  $56.3 million at December 31, 1996  compared  with  approximately
$53.3 million at December 31, 1995. The increase in cash and investments  during
the  year  ended  December  31,  1996 was  primarily  due to the  $27.4  million
generated from issuances of Common Stock,  partially  offset by the net loss for
the  year,  after  adjustments  for non cash  items  and the  repurchase  of the
Company's Common Stock from Amgen as discussed above.

                                       25
<PAGE>

         Through December 31, 1996, 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 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 a capital lease line of $3.5 million
available  through  June  1997  for  the  purchase  of  equipment  and  facility
improvements,  of which  $663,000 was  available at December 31, 1996.  In March
1997,  the  Company  entered  into a lease  financing  Commitment  Letter for an
additional  capital lease line in the amount of $3.5 million for the purchase of
equipment and facilities improvements.

         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  $2.3  million in 1997.  A number of these
agreements expire in late 1997. However,  the Company anticipates renewing these
agreements which may increase future  commitments of the Company.  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 by the Company.

         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 1997. 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, 1996, 1995 and 1994 were $1.7 million,  $2.6 million and $2.4
million,  respectively,  which  included  $1.3  million,  $2.6  million and $2.7
million,  respectively, of equipment and leasehold improvements financed through
the Company's master lease agreements. In general,  additions for 1996, 1995 and
1994  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 1996 and
1995  also  included  a  significant  investment  in state  of the art  computer
hardware  and  software to support the  Company's  genomics  and  bioinformatics
programs.  Under these capital leases and certain operating lease  arrangements,
the Company has lease  commitments  of $8.6 million  through  2001.  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
1997 will be higher  than that of the prior year  primarily  due to  anticipated
facility  improvements  to its laboratory and office space.  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.

         The Company  estimates that its existing  capital  resources,  together
with facility and  equipment  financing,  anticipated  revenues from its current
collaborations and net income from investment activities,  will be sufficient to
fund  its  planned  operations  into  the  second  half  of  1998.  The  Company
anticipates  that the funds from  future  collaborations  will  extend this time
period.  However, there can be no assurance that the Company will enter into any
such collaborations.  In addition, 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 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 two drug
candidates  (SU101 and SU5271) have entered human clinical  testing.  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

                                       26
<PAGE>

they are  developed  successfully  and proven to be safe and  effective.  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.  In addition,  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.  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. 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 manufacturing  uncertainties,  the Company's lack of
sales  and  marketing   capabilities,   competition,   uncertainties   regarding
protection  of  patents  and  proprietary  rights,   government  regulation  and
uncertainties regarding pharmaceutical pricing and reimbursement.


                                       27
<PAGE>

Item 8.           FINANCIAL STATEMENTS AND SUPPLEMENTAL 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 DISCLOSURES

Not applicable.

                                       28
<PAGE>

                                    PART III


Item 10.        DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

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, 1997 in connection with the  solicitation of proxies for the Company's
Annual Meeting of Stockholders to be held May 21, 1997 (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

(a)
<CAPTION>

     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, 1996 and 1995                                         F-3

           Statements of Operations for each of the three years in the period
              ended December 31, 1996                                                           F-4

           Statement of Stockholders' Equity for each of the three years in the
              period ended December 31, 1996                                                    F-5

           Statements of Cash Flows for each of the three years in the period
              ended December 31, 1996                                                           F-6

           Notes to Financial Statements                                                        F-7

     2.  Financial Statement Schedules
</TABLE>

     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>
<TABLE>

     3.  Exhibits
<CAPTION>

Exhibit
Number                                   Exhibit
------                                   -------

<S>               <C>
    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)
   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)


                                       31
<PAGE>

Exhibit
Number                                            Exhibit
------                                            -------

   10.20++        Research and License Agreement, dated October 1, 1993, among the Registrant, Max-Planck-Gesellschaft,
                    Max-Planck-Institut and Garching Innovation GmbH. (1)
   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)

                                       32
<PAGE>

Exhibit
Number                                            Exhibit
------                                            -------

   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)
   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 Institut. (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)
   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.
<FN>
--------------

   *              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.

                                       33
<PAGE>

   (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.
</FN>
</TABLE>


(b)    Reports on Form 8-K

No reports  on Form 8-K were  filed by the  Company  during  the  quarter  ended
December 31, 1996.


                                       34

<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, 1996

                                   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,  1996  and  1995,  and  the  related   statements  of  operations,
stockholders'  equity,  and cash flows for each of the three years in the period
ended December 31, 1996. These financial  statements are the  responsibility  of
the Company's  management.  Our responsibility is to express an opinion on these
financial statements based on our audits.

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

         In our opinion,  the  financial  statements  referred to above  present
fairly,  in all material  respects,  the  financial  position of SUGEN,  Inc. at
December 31, 1996 and 1995, and the results of its operations and its cash flows
for each of the three years in the period ended  December 31, 1996 in conformity
with generally accepted accounting principles.




                                                     ERNST & YOUNG LLP



Palo Alto, California
February 7, 1997


                                       F-2
<PAGE>

                                   SUGEN, Inc.

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


                                                     December 31,   December 31,
                                                         1996           1995
                                                    -------------   ------------
ASSETS
Current assets:
     Cash and cash equivalents                         $  24,852    $   8,226
     Short-term investments                               31,482       45,027
     Accounts receivable                                     264          288
     Prepaid expenses and other current assets               468          746
                                                       ---------    ---------
        Total current assets                              57,066       54,287

Property and equipment, net                                4,095        4,513
Other assets                                                 775          443
                                                       ---------    ---------
                                                       $  61,936    $  59,243
                                                       =========    =========

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
     Accounts payable                                  $     852    $     652
     Accrued liabilities                                   7,406        3,587
     Deferred revenue                                        375        6,558
     Capital lease obligations - current portion           1,835        1,354
                                                       ---------    ---------
        Total current liabilities                         10,468       12,151

Capital lease obligations - non-current portion            2,938        3,651

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:
       12,993,450 and 10,634,917 in 1996 and 1995,
       respectively                                          130          106
     Additional paid-in capital                          107,990       81,696
     Deferred compensation                                  (710)        (397)
     Note receivable from stockholder                       (883)        --
     Accumulated deficit                                 (57,997)     (37,964)
                                                       ---------    ---------

        Total stockholders' equity                        48,530       43,441
                                                       ---------    ---------

                                                       $  61,936    $  59,243
                                                       =========    =========

                             See accompanying notes.

                                       F-3
<PAGE>

                                   SUGEN, Inc.
<TABLE>

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

<CAPTION>
                                                   Years Ended December 31,
                                         --------------------------------------------
                                             1996            1995            1994
                                         ------------    ------------    ------------

<S>                                       <C>             <C>             <C>
Contract revenue (includes amounts from   $     13,650    $     13,843    $      6,270
   related party)

Costs and expenses:
   Research and development                     29,792          23,226          17,079
   General and administrative                    5,529           5,086           3,106
                                          ------------    ------------    ------------
   Total costs and expenses                     35,321          28,312          20,185
                                          ------------    ------------    ------------

Operating loss                                 (21,671)        (14,469)        (13,915)

Other income and expenses:
   Interest income                               2,481           1,988             529
   Interest expense                               (691)           (494)           (278)
   Gain on sale of investment in
     Selectide Corporation                        --             1,006            --
                                          ------------    ------------    ------------
   Other income, net                             1,790           2,500             251
                                          ============    ============    ============
Net loss                                  $    (19,881)   $    (11,969)   $    (13,664)
                                          ============    ============    ============


Net loss per share                        $      (1.81)   $      (1.32)   $      (4.15)
                                          ============    ============    ============

Shares used in computing net loss
  per share                                 10,966,000       9,085,000       3,296,000
                                          ============    ============    ============

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

                                       F-4
<PAGE>
<TABLE>
                                                             Sugen, Inc.

                                                  STATEMENT OF STOCKHOLDERS' EQUITY
                                                       (Dollars in thousands)
<CAPTION>

                                                                Convertible
                                                              Preferred Stock                 Common Stock            Additional
                                                           -------------------------    -------------------------     Paid-In
                                                              Shares      Amount         Shares         Amount         Capital
                                                          ----------    ------------    ---------    ------------    ------------
<S>                                                       <C>           <C>             <C>          <C>             <C>
Balances at December 31, 1993                             14,263,943    $        143    1,462,312    $         15    $     25,888
Issuance of Common Stock upon exercise of stock options         --              --        115,652               1              75
Issuance of Common Stock for cash in connection with
 initial public offering, net of issuance costs of $2,188       --              --      2,780,117              28          18,635
Conversion of Preferred Stock into Common Stock in
 connection with initial public offering
  (net of $1 paid for fractional shares                  (14,263,943)           (143)   3,803,619              38             104
Deferred compensation related to grant of certain options       --              --           --              --               392
Amortization of deferred compensation                           --              --           --              --              --
Change in net unrealized losses on available-for-sale
securities                                                      --              --           --              --              --
Net loss                                                        --              --           --              --              --
                                                          ----------    ------------   ----------    ------------    ------------
Balances at December 31, 1994                                   --              --      8,161,700              82          45,094
Issuance of Common Stock upon exercise of stock options
 and in connection with an employee stock purchase plan         --              --        141,824               1             302
Placement of Common Stock for cash, net of issuance costs
of $450                                                         --              --      1,396,875              14          16,299
Issuance of Common Stock for cash to Zeneca Limited, net of
 issuance costs of $150                                         --              --        789,141               8          12,342
Issuance of Common Stock for cash to ASTA Medica
 Aktiengesellschaft, net of issuance costs of $50               --              --        431,137               4           8,946
Issuance of Common Stock for services                           --              --         15,000            --               139
Repurchase of Common Stock for cash from Selectide
 Corporation                                                    --              --       (300,760)             (3)         (1,426)
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          81,696
Issuance of Common Stock upon exercise of stock options and
in connection with an employee stock purchase plan, net         --              --        194,195               2             717
Issuance of Common Stock for cash and note in connection
 with the exercise of stock options                             --              --        132,333               1             883
Issuance of Common Stock for cash to Allergan, net of
 issuance costs of $32                                          --              --        191,571               2           3,966
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          22,686
Issuance of Common Stock upon exercise of warrants, net                                     5,434            --              --
Repurchase of Common Stock for cash from Amgen, Inc.            --              --       (235,000)             (2)         (2,696)
Issuance of warrants for cash to Amgen Inc.                     --              --           --              --               200
Deferred compensation related to grant of certain
  stock options                                                 --              --           --              --               538
Amortization of deferred compensation                           --              --           --              --              --
Change in net unrealized losses on a variable-for-sale
  securities                                                    --              --           --              --              --
Net loss                                                        --              --           --              --              --
                                                          ----------    ------------   ----------    ------------    ------------
Balances at December 31, 1996                                   --      $       --     12,993,450    $        130    $    107,990
                                                          ==========    ============   ==========    ============    ============
<FN>
                            See accompanying notes.
</FN>
</TABLE>

<TABLE>
                                  Sugen, Inc.

                       STATEMENT OF STOCKHOLDERS' EQUITY
                             (Dollars in thousands)
                                 CONTINUED ....
<CAPTION>

                                                                            Note
                                                                          Receivable                       Total
                                                             Deferred       From          Accumulated  Stockholders'
                                                           Compensation   Stockholder       Deficit        Equity
                                                           ------------   -----------     -----------  -------------
<S>                                                          <C>            <C>          <C>           <C>
Balances at December 31, 1993                                $   (365)      $   --       $  (12,451)   $      13,230
Issuance of Common Stock upon exercise of stock options          --             --              --                76
Issuance of Common Stock for cash in connection with
 initial public offering, net of issuance costs of $2,188        --             --              --            18,663
Conversion of Preferred Stock into Common Stock in
 connection with initial public offering
  (net of $1 paid for fractional shares                          --             --              --                (1)
Deferred compensation related to grant of certain options        (392)          --              --              --
Amortization of deferred compensation                             170           --              --               170
Change in net unrealized losses on available-for-sale
securities                                                       --             --              (155)           (155)
Net loss                                                         --             --           (13,664)        (13,664)
                                                             --------        -----       -----------   -------------
Balances at December 31, 1994                                    (587)          --           (26,270)         18,319
Issuance of Common Stock upon exercise of stock options
 and in connection with an employee stock purchase plan          --             --              --               303
Placement of Common Stock for cash, net of issuance costs
of $450                                                          --             --              --            16,313
Issuance of Common Stock for cash to Zeneca Limited, net of
 issuance costs of $150                                          --             --              --            12,350
Issuance of Common Stock for cash to ASTA Medica
 Aktiengesellschaft, net of issuance costs of $50                --             --              --             8,950
Issuance of Common Stock for services                            --             --              --               139
Repurchase of Common Stock for cash from Selectide
 Corporation                                                     --             --              --            (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                                    (397)          --           (37,964)         43,441
Issuance of Common Stock upon exercise of stock options and
in connection with an employee stock purchase plan, net          --             --              --               719
Issuance of Common Stock for cash and note in connection
 with the exercise of stock options                              --           (883)             --                 1
Issuance of Common Stock for cash to Allergan, net of
 issuance costs of $32                                           --             --              --             3,968
Issuance of Common Stock for cash in connection with the
 follow-on public offering, net of offering costs of $2,13       --             --              --            22,707
Issuance of Common Stock upon exercise of warrants, net          --             --              --              --
Repurchase of Common Stock for cash from Amgen, Inc.             --             --              --            (2,698)
Issuance of warrants for cash to Amgen Inc.                      --             --              --               200
Deferred compensation related to grant of certain
  stock options                                                  (538)          --              --              --
Amortization of deferred compensation                             225           --              --               225
Change in net unrealized losses on a variable-for-sale
  securities                                                     --             --              (152)           (152)
Net loss                                                         --             --           (19,881)        (19,881)
                                                             --------         ----       -----------   -------------
Balances at December 31, 1996                                $   (710)       $(883)      $   (57,997)   $     48,530
                                                             ========        =====       ===========   =============
<FN>
                                                       See accompanying notes.
</FN>
</TABLE>

                                                                 F-5
<PAGE>

                                   SUGEN, Inc.
<TABLE>

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

<CAPTION>
                                                                            Years Ended December 31,
                                                                        --------------------------------
                                                                         1996         1995        1994
                                                                        --------    --------    --------
<S>                                                                     <C>         <C>         <C>
Cash flows from operating activities
Net loss                                                                $(19,881)   $(11,969)   $(13,664)
Adjustments to reconcile net loss to net cash used in
   operating activities:
   Depreciation and amortization                                           2,308       1,629       1,009
   Deferred revenue                                                       (6,183)      1,922        (395)
   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                                                      24          35         (23)
     Prepaid expenses and other current assets                               278        (200)       (431)
     Other assets                                                           (332)        (39)       (204)
     Accounts payable                                                        200        (420)        296
     Accrued liabilities                                                   3,819       1,996         474
                                                                        --------    --------    --------
Net cash used in operating activities                                    (19,767)     (7,913)    (12,938)
                                                                        --------    --------    --------

Cash flows from investing activities
Purchases of short-term investments                                      (27,998)    (57,118)    (11,917)
Maturities of short-term investments                                      36,973      15,308       1,643
Sales of short-term investments                                            4,418       6,873         998
Purchases of property and equipment, net                                  (1,665)     (2,042)     (1,304)
Proceeds from sale of investment in Selectide Corporation                   --         2,923        --
                                                                        --------    --------    --------
Net cash provided by (used in) investing activities                       11,728     (34,056)    (10,580)
                                                                        --------    --------    --------

Cash flows from financing activities
Proceeds from issuance of Common Stock, net                               27,395      37,916      18,738
Repurchase of Common Stock                                                (2,698)     (1,429)       --
Proceeds from issuance of warrant                                            200        --          --
Proceeds from lease financing of property and equipment                    1,247       2,109       1,580
Payments under capital lease obligations                                  (1,479)     (1,000)       (491)
                                                                        --------    --------    --------
Net cash provided by financing activities                                 24,665      37,596      19,827
                                                                        --------    --------    --------

Net increase (decrease) in cash and cash equivalents                      16,626      (4,373)     (3,691)
Cash and cash equivalents at beginning of year                             8,226      12,599      16,290
                                                                        ========    ========    ========
Cash and cash equivalents at end of year                                $ 24,852    $  8,226    $ 12,599
                                                                        ========    ========    ========

Supplemental disclosure of cash flow information
Cash paid during the year for interest                                  $    691    $    494    $    278
                                                                        ========    ========    ========

Supplemental schedule of noncash investing and
   financing activities:
Equipment acquired under capital leases                                 $   --      $  1,059    $  1,090
                                                                        ========    ========    ========
<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 a small molecule drugs which target  specific  cellular  signal  transduction
pathways.  Dysfunctional  signal  transduction  pathways have been implicated in
diseases such as cancer and diabetes,  as well as in dermatologic,  immunologic,
cardiovascular and neurologic 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 for previous  research and development  work performed is recognized in
full upon contract execution.  Periodic research funding payments are recognized
as  income  when  earned.  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.

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.

                                       F-7
<PAGE>

1.   Organization and Significant Accounting Policies (Continued)

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

         Net loss per share is computed  using the  weighted  average  number of
common  shares  outstanding.   Common  equivalent  shares  from  stock  options,
convertible  preferred  stock, and warrants are excluded from the computation as
their effect is antidilutive, except that through June 30, 1994, pursuant to the
Securities and Exchange Commission Staff Accounting Bulletins, common and common
equivalent  shares issued during the 12-month period prior to the initial filing
of the  registration  statement  for  the  initial  public  offering  at  prices
substantially  below  the  public  offering  price  have  been  included  in the
calculation as if they were outstanding (using the treasury stock method and the
public offering price for stock options and warrants and the if-converted method
for convertible preferred stock).

         The  following  pro forma per share data is  provided  to  present  the
calculation  on a  consistent  basis  for all  periods  presented.  It has  been
computed as described above and also gives  retroactive  effect from the date of
issuance to the conversion of convertible  preferred  stock which  automatically
converted  to common  shares upon the closing of the  Company's  initial  public
offering in October 1994.

                                                                   Year Ended
                                                                  December 31,
                                                                 ---------------
                                                                      1994
                                                                 ---------------
         Pro forma net loss per share                             $     (2.22)
                                                                 ===============
         Shares used in computing pro forma net loss per share      6,143,000
                                                                 ===============

2.   Investments
<TABLE>

         The  following  is a summary  of  available-for-sale  securities  as of
December 31 (in thousands):
<CAPTION>
                                                         Available-for-Sale Securities
                            -----------------------------------------------------------------------------------------
                                               1996                                          1995
                            -------------------------------------------   -------------------------------------------
                                            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       $ 13,348         $    (21)     $ 13,327        $ 20,617        $     54      $ 20,671
U.S. corporate notes           16,409               (8)       16,401          19,177              59        19,236
Foreign debt securities         1,726               (1)        1,725           7,073               8         7,081
U.S. corporate
   commercial paper            11,534               (2)       11,532           2,689              (1)        2,688
Repurchase agreements           8,036             --           8,036             850            --             850
Money market funds,
   certificates of deposit
   and other                    5,313             --           5,313           2,727            --           2,727
                             --------         --------      --------        --------        --------      --------
                             $ 56,366         $    (32)     $ 56,334        $ 53,133        $    120      $ 53,253
                             ========         ========      ========        ========        ========      ========

Amounts included in:
   Cash equivalents          $ 24,853         $     (1)     $ 24,852        $  8,227        $     (1)     $  8,226
   Short-term investments      31,513              (31)       31,482          44,906             121        45,027
                             --------         --------      --------        --------        --------      --------
                             $ 56,366         $    (32)     $ 56,334        $ 53,133        $    120      $ 53,253
                             ========         ========      ========        ========        ========      ========
</TABLE>
                                       F-8
<PAGE>

2.   Investments (Continued)

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, 1996 the average portfolio  duration was  approximately  four
months and the  longest  contractual  maturity  did not exceed two years.  Gross
realized gains and losses were immaterial during 1996 and 1995.


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 $1,917,000,  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):

                                                   1996           1995
                                              -------------   -------------

Leasehold improvements                         $   3,168       $   2,731
Office and computer equipment                      2,320           1,675
Laboratory equipment                               2,896           2,313
                                              -------------   -------------
                                                   8,384           6,719
Accumulated depreciation and amortization         (4,289)         (2,206)
                                              -------------   -------------
Net property and equipment                     $   4,095       $   4,513
                                              =============   =============

         Property and equipment  under capital  leases  amounted to $7.5 million
and $6.2  million as of  December  31,  1996 and 1995 with  related  accumulated
amortization of $3.9 million and $1.9 million, respectively.


5.   Accrued Liabilities

The  components of accrued  liabilities  consist of the following at December 31
(in thousands):

                                                     1996            1995
                                                -------------   -------------

Accrued research and development services         $   3,724       $   1,381
Accrued compensation                                    883             657
Accrued professional fees                               524             344
Other                                                 2,275           1,205
                                                -------------   -------------
                                                  $   7,406       $   3,587
                                                =============   =============

                                       F-9
<PAGE>

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 1996 financing (see Note 9), 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.  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. Additionally,
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  October 1996 and September 1995
financings (see Note 9), purchasing an additional  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 $29.5  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.

                                      F-10

<PAGE>

6.   Research and Development Collaboration Agreements (Continued)

         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.

7.   Leases

         In September  1995,  the Company  secured a $3.5 million  capital lease
line to fund facility  improvements and equipment  associated with the Company's
research,  development and administrative  facilities.  As of December 31, 1996,
the Company had approximately $663,000 available under this lease line.

         The Company leases its office and laboratory facilities under operating
leases  through 1998 having  renewal  options  ranging from three to five years.
Rent expense for this and other operating leases amounted to $1.6 million,  $1.4
million and $1.1 million for 1996, 1995 and 1994, respectively.

         Future minimum  payments under capital and operating leases at December
31, 1996 are as follows (in thousands):

                                                        Capital       Operating
                                                        Leases         Leases
                                                       ----------    ----------
         Year ended December 31:
              1997                                      $ 2,414       $ 1,531
              1998                                        1,969         1,198
              1999                                        1,048            21
              2000                                          378            --
                                                       ----------    ----------
              Total minimum lease payments                5,809       $ 2,750
                                                                     ==========
              Amount representing interest               (1,036)
                                                       ----------
              Present value of minimum lease payments     4,773
              Less current portion                       (1,835)
                                                       ----------
              Non-current portion                       $ 2,938
                                                       ==========


8.  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  $2.3 million in 1997. A number of these agreements expire in late
1997,  however,  the Company  anticipates  renewing these  agreements which will
increase the future  commitments of the Company.  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 $3.5  million,  $4.2  million  and $3.7  million  for 1996,  1995 and 1994,
respectively.

                                      F-11
<PAGE>

9.  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, 1996, 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,  when,
as and if declared by the Board of Directors quarterly dividends. As of December
31, 1996, no dividends had been declared and no shares were outstanding.

Common Stock

         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.

         In October and November 1994, the Company  completed its initial public
offering of 2,780,117  shares of Common  Stock.  The net proceeds to the Company
were  approximately  $18.7  million.  Upon  effectiveness  of  the  registration
statement  relating to the  offering,  all of the  Preferred  Stock  outstanding
automatically converted into 3,803,619 shares of Common Stock.

          The total number of shares of Common Stock  outstanding was 12,993,450
as of December 31, 1996, of which 76,874 were subject to repurchase. At December
31, 1996, the Company has reserved 3,021,660 shares of Common Stock for issuance
upon  exercise of warrants  and options and 136,188  common  shares for issuance
under the Employee Stock Purchase Plan.

Warrants

         The following  warrants to purchase  shares of common stock were issued
in connection with various  license and equipment  lease financing  arrangements
(also see Note 6):

                 Warrants Outstanding at December 31, 1996
------------------------------------------------------------------------------
Number of Shares     Price Per       Aggregate Price       Expiration Date
                       Share
-----------------  ---------------   -----------------  ----------------------
     200,000       $     15.50             $3,100,000        January 2003
     133,333             11.25              1,499,996        July 1997
      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


                                      F-12

<PAGE>

9.  Stockholders' Equity (Continued)

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.


10.  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, 1997. As of December 31, 1996, 63,812 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  this  Plan may be either  incentive  stock  options  or
nonstatutory  stock  options.  As of December  31,  1996,  an  aggregate of 2.75
million  shares of Common Stock had been reserved for issuance  under this Plan,
of which 650,000 shares are subject to stockholders' approval.

         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.  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, 1996 options to purchase  681,096  shares of Common
Stock were  exercisable,  of which 109,929 shares would be subject to repurchase
if all were exercised.

         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").


                                      F-13
<PAGE>

10.  Stock Option and Purchase Plans (Continued)

         Options  granted under the Directors'  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
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, 230,000 shares of Common Stock have been
reserved for issuance.  As of December 31, 1996,  options for 128,000 shares had
been  issued and were  outstanding,  of which  122,000  and 61,000  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 will be amortized
over the remaining  vesting period of approximately  five years, or such shorter
period as described below.  The options,  as amended in August 1996, vest over a
period of approximately six years, but may be fully or partially accelerated if,
in  the  opinion  of  the  Board  of  Directors,  certain  specific  performance
objectives are met by December 31, 1997.

         As of December 31, 1996,  options for 180,000 shares were  outstanding,
of which  135,000  shares and  128,250  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 1995 and 1996,  respectively:  risk-free  interest rates of 5.7%
and 5.9%; dividend yields of 0%; volatility factors of the expected market price
of the Company's  Common Stock of .57; and a  weighted-average  expected life of
the option of 3 years.

         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.

                                      F-14
<PAGE>

10.  Stock Option and Purchase Plans (Continued)

         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):

                                                1996          1995
                                            -----------   ------------

           Pro forma net loss               $ (21,813)      $(12,846)
                                            ===========   ============

           Pro forma net loss per share     $   (1.99)      $  (1.41)
                                            ===========   ============

         The weighted average fair value of options granted during 1996 and 1995
was $5.39 and $3.55, respectively. Because FAS 123 is applicable only to options
granted subsequent to December 31, 1994, its pro forma effects will not be 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
                                                                  -----------------------------------
                                                                                          Weighted
                                                 Shares Available                         Average
                                                   For Grant of        Number of         Price per
                                                     Options             Shares            Share
                                                 -----------------   --------------    ---------------
            <S>                                    <C>                 <C>                 <C>
            Balance at December 31, 1993             155,516             515,485            $0.83
            Shares authorized                        500,000
            Options granted                         (413,703)            413,703             5.06
            Options exercised                                           (115,652)            0.66
            Options forfeited                         29,614             (29,614)            1.02
                                                 -----------------   --------------
            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 (a)                     (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
                                                 =================   ==============
<FN>

         Note:
         (a) Of the 652,066 options granted in 1996,  options for 151,847 shares
         are subject to stockholder approval.
</FN>
</TABLE>
                                      F-15
<PAGE>

10.  Stock Option and Purchase Plans (Continued)
<TABLE>

         The  following  table  summarized   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          262,778             6.6           $1.35       201,593           $1.24
             5.00 -   5.75           56,929             8.3            5.38        34,882            5.50
             6.00 -   8.13          626,644             7.3            6.96       444,606            7.14
             9.67 -  11.88          752,192             9.2           11.30       195,481           11.46
            12.00 -  15.00          199,320             9.1           13.49        61,534           13.55
            -----------------  --------------   --------------  -------------  ------------   -------------
            $0.38 - $15.00        1,897,863             8.2           $8.54       938,096           $7.13
            =================  ==============   ==============  =============  ============   =============
</TABLE>

11.  Income Taxes

         As of December 31,  1996,  the Company had federal net  operating  loss
carryforwards  of  approximately  $55 million.  The federal net  operating  loss
carryforwards will expire at various dates beginning on 2006 through 2011.

         Deferred  income  taxes  reflect  the  net  tax  effects  of  temporary
differences between the carrying amounts of assets and liabilities 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 as of December 31 are as follows (in thousands):

                                               1996         1995
                                              --------    --------
Net operating loss carryforwards              $ 19,300    $ 10,300
Research credits (expires 2006-2011)             2,100       1,500
Capitalized R&D                                  1,100         600
Deferred revenue                                   200         800
Other - net                                        800       2,300
                                              --------    --------
Total deferred tax assets                       23,500      15,500
Valuation allowance for deferred tax assets    (23,500)    (15,500)
                                              --------    --------
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
$5.1 million and $5.4 million during 1995 and 1994, respectively.

         Utilization of the net operating losses and credits may be subject to a
substantial  annual  limitation  due to the ownership  change  provisions of the
Internal  Revenue  Code  of  1986.  The  annual  limitation  may  result  in the
expiration of net operating losses and credits before utilization.


12.  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>


12.  Related Party Transactions      (Continued)

         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, 1996,  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  9).  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
$330,000 of loans receivable from certain key employees and officers at December
31, 1996.


                                      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, 1997.

                                         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 Christine E.
Gray-Smith,  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.

         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.


         Signature                    Title                          Date
         ---------                    -----                          ----



/s/ Stephen Evans-Freke        Chief Executive Officer and      March 26, 1997
-----------------------------  Chairman of the Board
(Stephen Evans-Freke)          (Principal Executive Officer)




/s/ Christine Gray-Smith       Vice President, Finance          March 26, 1997
-----------------------------  (Principal Financial and
(Christine Gray-Smith)         Accounting Officer)


<PAGE>


/s/ Axel Ullrich                Director                         March 26, 1997
------------------------------
(Axel Ullrich)



/s/ Richard D. Spizzirri        Director and Secretary           March 26, 1997
------------------------------
(Richard D. Spizzirri)



/s/ Jeremy L. Curnock Cook      Director                         March 26, 1997
------------------------------
(Jeremy L. Curnock Cook)



/s/ Anthony B. Evnin            Director                         March 26, 1997
------------------------------
(Anthony B. Evnin)



/s/ Charles M. Hartman          Director                         March 26, 1997
------------------------------
(Charles M. Hartman)



/s/ Heinrich Kuhn               Director                         March 26, 1997
------------------------------
(Heinrich Kuhn)



/s/ Donald E. Nickelson         Director                         March 26, 1997
------------------------------
(Donald E. Nickelson)



/s/ Bruce R. Ross               Director                         March 26, 1997
------------------------------
(Bruce R. Ross)



/s/ Glenn S. Utt, Jr.           Director                         March 26, 1997
------------------------------
(Glenn S. Utt, Jr.)



/s/ Michael A. Wall             Director                         March 26, 1997
------------------------------
(Michael A. Wall)


<PAGE>

                                   SUGEN, Inc.
<TABLE>

                                  EXHIBIT INDEX
<CAPTION>
                                                                                                  Sequentially
Exhibit                                                                                             Numbered
Number                                            Exhibit                                            Page
------                                            -------                                            ----
<S>               <C>

    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)
   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)

<PAGE>
                                                                                                  Sequentially
Exhibit                                                                                             Numbered
Number                                            Exhibit                                            Page
------                                            -------                                            ----
   10.20++        Research and License Agreement, dated October 1, 1993, among the
                    Registrant,   Max-Planck-Gesellschaft,   Max-Planck-Institut  and  Garching
                    Innovation GmbH. (1)
   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)

<PAGE>

                                                                                                  Sequentially
Exhibit                                                                                             Numbered
Number                                            Exhibit                                            Page
------                                            -------                                            ----
   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)
   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 Institut. (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)
   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.
<FN>
--------------
    *             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.


<PAGE>
                                                                                                  Sequentially
Exhibit                                                                                             Numbered
Number                                            Exhibit                                            Page
------                                            -------                                            ----

   (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.
</FN>
</TABLE>