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

                                    FORM 10-K
(Mark one)
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities
    Exchange Act of 1934 for the fiscal year ended December 31, 1998.

                                       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.)

          230 East Grand Avenue, South San Francisco, California 94080
                    (address of principal executive offices)

                                 (650) 553-8300
              (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 15, 1999 was $180,348,242. (1)

The number shares of Common Stock  outstanding  at March 15, 1999 was 16,734,658
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 1999 Annual Meeting
are incorporated herein by reference in Part III of this Report.

----------
(1) Excludes 6,007,944 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 15, 1999.

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<PAGE>
PART I

Item 1.           BUSINESS

         This Annual  Report on Form 10-K  contains  forward-looking  statements
within the meaning of Section 27A of the  Securities Act of 1933 and Section 21E
of the  Securities  Exchange Act of 1934 which are subject to the "safe  harbor"
created by those sections. These forward-looking statements include, but are not
limited to, statements  concerning the Company's plans to: continue  development
of its current  product  candidates;  conduct  clinical  trials with  respect to
SU101,  SU5416,  SU6668 and other  product  candidates;  utilize  the  Company's
capital  resources  and  the  time  periods  related  thereto;  seek  regulatory
approvals;  engage  third-party  manufacturers to supply its clinical trials and
commercial   requirements;   establish  a  marketing,   sales  and  distribution
capability;  and evaluate  additional product candidates for subsequent clinical
and commercial development. These forward-looking statements may be found in the
"Business" and "Management's  Discussion and Analysis of Financial Condition and
Results  of   Operations"   sections  of  this  Annual   Report  on  Form  10-K.
Forward-looking statements not specifically set forth above may also be found in
these and other  sections of the Annual Report on Form 10-K.  Each  statement is
based on the current expectations of the Company and is subject to the risks and
uncertainties inherent in the Company's business. In accordance with the Private
Securities Litigation Reform Act of 1995, the Company reminds investors that all
such  "forward-looking  statements"  are  necessarily  only  estimates of future
results  and  that  the  actual  results  achieved  by the  Company  may  differ
materially from these current expectations due to a number of factors, including
(i) the  Company's  technological  success  in  developing  lead  compounds  and
products;  (ii)  the  availability  and  terms  of  financing  of the  Company's
operations;  (iii) the actions of third  parties,  including  collaborators  and
competitors;  (iv) the demonstration of the safety and efficacy of the Company's
products at each stage of clinical development; (v) the ability to obtain patent
and other  proprietary  rights protection for the Company's  products;  (vi) the
receipt of timely  regulatory  approval  of the  Company's  products;  (vii) the
ability to manufacture product candidates in commercial quantities at reasonable
costs and in a manner acceptable to various regulatory  authorities;  and (viii)
market acceptance of the Company's  products.  Factors creating  uncertainty are
discussed in more detail in  individual  sections of this Annual  Report on Form
10-K.  In  particular,  see the  "Liquidity  and Capital  Resources"  section of
"Management's  Discussion  and  Analysis of Financial  Condition  and Results of
Operations."

Overview

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

         SU101, the Company's most advanced product  candidate,  is an inhibitor
of the  platelet-derived  growth factor receptor ("PDGF TK") signalling pathway.
Imbalances in the PDGF TK signalling pathway have been shown by SUGEN and others
to be implicated in significant  subsets of certain types of cancers,  including
brain,  prostate,  lung and ovarian.  The Company initiated a Phase III clinical
trial in refractory  glioblastoma  (an  aggressive  type of brain cancer) in the
first quarter of 1998 and expects to conduct an interim  analysis by year end. A
Phase II  study of SU101 as  single  agent  therapy  for  refractory  anaplastic
astrocytoma,  another type of malignant  brain tumor, is also being conducted in
parallel with the Phase III trial, and at the same centers. A

                                        2
<PAGE>
Phase II clinical trial of SU101 in combination with BCNU, the chemotherapy drug
that is part of the standard  treatment  regimen in newly diagnosed brain cancer
patients,  was  initiated  in  mid-1997,  and is  expected  to be  completed  by
mid-year.  The Company is also  conducting a pilot study of SU101 in combination
with  mitoxantrone,  in preparation for a pivotal Phase III trial as combination
front-line therapy in hormone-refractory  prostate cancer patients, set to begin
later this year. In addition, the Company has ongoing Phase II trials in ovarian
and non small cell lung cancers,  set for completion in mid 2000. To date,  over
400  patients  have been  treated  with SU101 in 13  Company-sponsored  clinical
trials.

         The Company  initiated Phase I clinical  testing in September 1997 with
its lead  angiogenesis  inhibitor,  SU5416,  a Flk-1/KDR TK inhibitor,  which is
designed to inhibit the growth and spread of cancer by preventing  the formation
of new blood  vessels  (angiogenesis)  required to nourish  the tumor.  To date,
SU5416 has shown an excellent  safety  profile in over 100 patients with a range
of solid tumors, including advanced colorectal, lung and renal cell cancers, and
AIDS-related  Kaposi's  sarcoma;  anecdotal  indications  of activity  have been
observed in a number of patients,  including prolonged periods of stable disease
and some  instances  of  tumor  shrinkage.  After  extensive  consultation  with
numerous oncology opinion leaders, the Company announced plans to accelerate the
development  of SU5416 with the  initiation of Phase III clinical  trials in non
small cell lung and colorectal cancers, and Phase II/III studies in AIDS-related
Kaposi's sarcoma in the U.S. and Europe this year.  Meanwhile,  the Company will
be working with certain investigators on NCI-sponsored Phase II studies in other
cancer indications.  This strategy may expedite the commercialization of SU5416,
which has the potential to become the first specific  angiogenesis  inhibitor to
reach the U.S.  market.  There can be no assurance  that this  commercialization
strategy will result in  accelerated  commercialization  of SU5416 or that other
angiogenesis  inhibitors  will  not  receive  regulatory  approval  prior to any
approval of SU5416.

         SUGEN's  third  novel  anti-cancer  drug  candidate  is  SU6668,  which
combines both  angiogenic  and  cytostatic  anti-tumor  activity by  selectively
blocking multiple targets involved in the growth and spread of tumors, including
the Flk-1/KDR,  PDGF and  fibroblast  growth factor (FGF)  receptors.  SU6668 is
currently in Phase I clinical trials in Europe and in the U.S. using intravenous
and oral  formulations,  respectively.  Both studies are expected to conclude in
the later half of 1999.

         SUGEN  is also  pursuing  additional  cancer-related  drug  development
programs,  including  Pan-Her,  Met-TK,  CDK2,  GRB2, Raf and other  proprietary
programs,  many of which have lead compounds now undergoing in vivo pharmacology
studies.  The  Company  currently  plans to select a lead  compound  for a small
molecule  Pan-Her  inhibitor  this  year,  and  expects  to  identify a clinical
candidate for either the Met-TK or CDK2 program in 1999.  However,  there can be
no assurance  that lead  compounds will emerge in any of these programs in 1999,
or at all.

         SUGEN is also applying its drug discovery and  development  platform to
areas  outside  oncology,   including   ophthalmology,   rheumatoid   arthritis,
cardiovascular disease,  diabetes, and immunology. The Company is awaiting final
results of a Phase I/II clinical trial with SU5271,  an epidermal  growth factor
receptor ("EGF TK")  antagonist,  for the treatment of psoriasis;  however,  the
results  seen  to date  have  not  been  compelling,  and  given  the  Company's
prioritization on its cancer programs, the Company does not currently anticipate
moving forward into Phase II with SU5271.

         SUGEN  employs  a   target-driven   approach  to  drug   discovery  and
development.  The Company  believes that the  receptors and signal  transduction
pathways that play a causative role in disease states are attractive targets for
drug design and development. SUGEN's drug discovery platform consists of:

         (1)      target identification,  using advanced genomics techniques and
                  the Company's proprietary bioinformatics program;
         (2)      target validation in relevant in vivo disease models;
         (3)      whole cell or other assay design and  target-driven  screening
                  of compounds for leads; and
         (4)      lead  optimization  using  crystallography  and  computational
                  chemistry.

                                       3
<PAGE>
The Company believes that its drug discovery and development platform may reduce
the cost, time and risk associated with bringing potential products to market by
rationally  screening  for potent and specific drug leads in the early stages of
discovery  and  optimizing  pharmacologic  features in the later  stages of drug
development, thereby reducing the incidence and severity of side effects.

         SUGEN  is   concurrently   pursuing   two   business   strategies   for
commercialization  of its products and technologies.  In the cancer field, SUGEN
intends to build a vertically  integrated  oncology  business in North  America,
with the  objective  of  bringing to market a family of  target-specific  signal
transduction   inhibitors   proprietary   to  SUGEN.   To  market  its  products
effectively,  the Company  currently intends to build a focused U.S. sales force
to target the major  cancer  treatment  centers and may explore  alliances  with
potential marketing and distribution partners to optimize sales. On the European
front,  SUGEN  recently  established  SUGEN  Europe  AG  ("SUGEN  Europe")  as a
currently wholly owned subsidiary in Schaffhausen,  Switzerland. This new entity
has become the European licensee for SUGEN's cancer pipeline,  with a mission to
build a strong and profitable  cancer business in Europe.  While the Company had
initially  planned  to  license  European  rights  to its  products  to a  fully
integrated  pharmaceutical  company,  SUGEN  has  concluded  that the  available
financial terms of that route would not adequately  reflect the market potential
of its  products in such a  potentially  rapidly  growing  market.  SUGEN Europe
expects to work with four or five  national  distribution  partners  who bring a
strong local presence on a pan-European  scale to maximize product revenue.  The
first of these  distribution  agreements  has been concluded with Esteve S.A. of
Spain,  and active  negotiations  are ongoing with respect to the other European
territories.  The Company also plans to seek  additional  corporate  partners to
fund product  development and to  commercialize  its products in the rest of the
world. In Japan, the Company entered into an agreement with Taiho Pharmaceutical
Ltd. ("Taiho") for the development and commercialization of SUGEN's angiogenesis
inhibitors for the treatment of cancer. Under this agreement,  Taiho contributes
to the  worldwide  development  and clinical  trials costs of SU5416 and SU6668,
pays certain milestones, and receives Japanese commercial rights; SUGEN, through
its  affiliate,  SUGEN  International  AG ("SUGEN  International"),  may provide
finished product to Taiho on prenegotiated  terms.  While the Company  generally
intends  to retain  rights to its cancer  programs  in North  America,  SUGEN is
funding a portion of its ongoing cancer research  through a  collaboration  with
Zeneca Limited  ("Zeneca") for the development of five cancer targets  including
the Aurora2,  an oncogene  overexpressed in more than 50% of primary  colorectal
cancers.  Pursuant to its  agreement  with  Zeneca,  the  Company  will have the
opportunity to obtain profit  participation  rights in the North American market
by contributing to clinical  development  costs as incurred and in addition will
receive  milestone  payments  and  royalties on worldwide  sales.  Finally,  the
Company is collaborating with ASTA Medica  Aktiengesellschaft ("ASTA Medica") of
Germany  with  respect  to its  Pan-Her  and  Raf  programs  currently  in  drug
discovery;  ASTA Medica makes certain payments to SUGEN,  and receives  European
and Latin American commercial rights in cancer.

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

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").

                                        4
<PAGE>
         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 may affect  different
cellular  processes  responsible  for  growth,  differentiation,   migration  or
metabolism.

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

         Kinases and phosphatases  are classes of signalling  molecules that are
central to the healthy functioning of all tissues.  The Company's research focus
in this area has been on TKs,  TPs and  selected  STKs.  At  present,  there are
approximately  100 known human TKs,  including Her2, PDGF TK, and EGF TK, all of
which have been cloned  over the last 14 years.  TPs were not  discovered  until
1988, and at present SUGEN believes there are approximately 95 known human TPs.

         Generally,  when a ligand  binds to receptor  TKs, the  receptors  must
dimerize (join in pairs at the cell surface) to become activated.  This coupling
activates a specific  enzyme  activity  which resides  within the  intracellular
domain of each TK. Upon activation,  the TKs commence  cross-phosphorylation,  a
process  whereby  phosphates  (highly  charged  particles) are added to specific
sites  on each of the  TKs.  These  phosphates  serve  as  attachment  sites  in
downstream signalling  molecules.  Many of these downstream signalling molecules
in turn become  phosphorylated  themselves,  enabling  them to recruit their own
substrates and thus pass on the signal.

         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 from target proteins,  thereby
regulating the activity of the TKs.  Generally,  when a receptor TK is activated
by its ligand, a given biologic response is triggered.  Conversely, when a TP is
activated,  there is usually down  regulation of a given biologic  response.  In
this  manner,  TKs can be  visualized  as the "gas  pedal" and TPs as the "brake
pedal" for numerous  biological  processes.  Many  cellular  responses  are thus
regulated by the balance between specific TKs and TPs.

         The most  abundant  kinases  in the cell are  STKs,  enzymes  which 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,  proliferation  of connective  tissue cells
(fibroblasts),  survival and  differentiation of nerve cells and regeneration of
tissues during wound healing.  While normal cellular function involves a balance
between kinase and phosphatase activity, imbalances between these molecules have
been shown to result in a variety of chronic and acute pathological  conditions,
including cancer and diabetes as well as in dermatologic, ophthalmic, neurologic
and immunologic disorders.

         The  close  association  of TKs,  TPs and STKs with  disease  make them
attractive  targets  for  drug  discovery  and  therapeutic  intervention.   The
intracellular domains where enzymatic activity occurs can be targeted with great
selectivity by drugs that inhibit enzyme activity or that prevent the binding of
downstream signalling molecules to the phosphorylated receptor.  Critical points
further downstream in the signalling

                                       5
<PAGE>
cascade may also be viable targets since selective  intervention at these points
can prevent the message from reaching its final destination in the nucleus.

Product Development Programs

         TKs, TPs, STKs and their signalling  pathways are implicated in a broad
number of diseases. SUGEN focuses its product development efforts on those areas
which  represent  significant  market  opportunities  and for which the  disease
processes and signalling  pathways are well understood.  The Company has several
novel product  candidates in various stages of development  for disease areas in
which there is a critical  need for major  advances in efficacy  and safety over
currently  available  therapies.  These  diseases  include  cancer  as  well  as
diabetes, immunologic, and cardiovascular disorders. See "-Overview."

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

                                        6
<PAGE>
<TABLE>
------------------------------------------------------------------------------------------------------------------
<CAPTION>
        Program                        Indication(s)                  Status(1)                Rights
------------------------------------------------------------------------------------------------------------------
                                                      Cancer
------------------------------------------------------------------------------------------------------------------
<S>                          <C>                                   <C>                <C>
SU101                        First Relapse malignant glioma        Phase III          SUGEN
PDGF TK Inhibitor             - Monotherapy
                             Newly diagnosed malignant glioma      Phase II                
                              - Combination therapy with BCNU
                             Prostate cancer                       Phase I/II pilot        
                             Combination therapy  with             to prepare for
                             mitoxantrone                          Phase III               
                             Ovarian, lung and anaplastic          Phase II
                             astrocytoma
------------------------------------------------------------------------------------------------------------------
SU5416                       Angiogenesis inhibition               Phase I            Taiho
Flk-1/KDR TK Antagonist       - Most solid tumor types                                  Japan
                             Colorectal cancer                     Phase III          SUGEN
                             Non small cell lung cancer            (summer)             United States and rest of
                             AIDS-related Kaposi's sarcoma         Phase III            world
                                                                   Phase II/III
------------------------------------------------------------------------------------------------------------------
SU6668                       Angiogenic and cytostatic anti-tumor  Phase I            SUGEN
Broad Spectrum Inhibitor     activity                                                   United States and rest of
                             - Most solid  tumors                                       World
                                                                                      Taiho, Japan
------------------------------------------------------------------------------------------------------------------
Raf Antagonist               Pancreatic, bladder cancers           Lead compounds     SUGEN
                                                                                        United States and rest of
                                                                                        world
                                                                                       ASTA Medical
                                                                                         Europe and South America
------------------------------------------------------------------------------------------------------------------
Pan-Her Antagonist           Breast, ovarian, gastric, lung, head  Preclinical        SUGEN
                             and neck, prostate cancers                                 United States and rest of
                                                                                          world
                                                                                        ASTA Medical
                                                                                          Europe and South America
------------------------------------------------------------------------------------------------------------------
GRB2 Antagonist              Multiple TK-driven tumors             Lead compounds     SUGEN
------------------------------------------------------------------------------------------------------------------
Met TK Antagonist            Stomach, colorectal and lung cancers  Screening          SUGEN
------------------------------------------------------------------------------------------------------------------
Five cancer targets,         Certain major cancers                 Research and       Zeneca
  including the Aurora2                                            screening
------------------------------------------------------------------------------------------------------------------
Other proprietary programs   Various cancers                       Research and       SUGEN
                                                                   screening
------------------------------------------------------------------------------------------------------------------
                                                  Other Programs
------------------------------------------------------------------------------------------------------------------
Insulin TP Antagonist        Diabetes Type I/Type II               Preclinical        SUGEN
------------------------------------------------------------------------------------------------------------------
Immunology targets           Immune suppression, acute             Research and       SUGEN
                             inflammation                          screening
------------------------------------------------------------------------------------------------------------------
Flk-1/KDR TK Antagonist      Rheumatoid arthritis                  Preclinical        SUGEN
(other targets)
------------------------------------------------------------------------------------------------------------------
Flk-1/KDR TK Antagonist      Angiogenesis inhibition in            Preclinical        Allergan
(other targets)              ophthalmology
                              - Diabetic retinopathy
                              - Macular degeneration
------------------------------------------------------------------------------------------------------------------
Neurology targets            Neurodegenerative diseases            Research and       SUGEN
                                                                   screening
------------------------------------------------------------------------------------------------------------------
PDGF TK Antagonist           Cardiovascular diseases               Lead compounds     SUGEN
(and other targets)
------------------------------------------------------------------------------------------------------------------
</TABLE>

(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.

                                        7
<PAGE>
Cancer

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

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

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

SU101/PDGF TK Antagonist. SU101 is a synthetic small molecule which inhibits the
platelet-derived  growth factor receptor  signalling  pathway.  PDGF is a growth
factor  ligand  that  stimulates  the growth of a variety of cell types  through
binding to the PDGF TK. The PDGF TK was first cloned by a group of collaborators
led by Dr.  Ullrich in 1983. In December  1994,  the Company filed its first IND
with the Food and Drug  Administration  ("FDA") for SU101,  a PDGF TK signalling
antagonist.

         Imbalances in the PDGF TK  signalling  pathway have been shown by SUGEN
and  others to be  implicated  in certain  types of  cancers,  including  brain,
prostate,  lung and ovarian cancers.  The Company initiated a Phase III clinical
trial in refractory  glioblastoma  (an  aggressive  type of brain cancer) in the
first quarter of 1998 and expects to conduct an interim  analysis by year end. A
Phase II  study of SU101 as  single  agent  therapy  for  refractory  anaplastic
astrocytoma,  another type of malignant  brain tumor, is also being conducted in
parallel with the Phase III trial, and at the same centers.  A Phase II clinical
trial of SU101 in combination with BCNU, the  chemotherapy  drug that is part of
the standard  treatment  regimen in newly diagnosed brain cancer  patients,  was
initiated in mid-1997,  and is expected to be completed by mid-year. The Company
is also conducting a pilot study of SU101 in combination with  mitoxantrone,  in
preparation for a pivotal Phase III trial as combination  front-line  therapy in
hormone-refractory  prostate cancer  patients,  set to begin later this year. In
addition, the Company has ongoing Phase II trials in ovarian, and non small cell
lung cancers set for completion in mid 2000.

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

                                        8
<PAGE>
SU5416/Flk-1/KDR  TK  Antagonist.  Formation  of the  body's  network  of  blood
vessels, or angiogenesis,  occurs throughout  childhood.  This process generally
stops once a person reaches adulthood. Exceptions exist during wound healing and
the menstrual  cycle.  Angiogenesis is re-triggered in adults,  however,  during
certain pathological conditions including tumor formation and metastasis, and in
certain  ophthalmic  disorders,   including  diabetic  retinopathy  and  macular
degeneration.  The  pharmaceutical  industry  has  long  sought  small  molecule
inhibitors of angiogenesis with low toxicity  profiles  because,  theoretically,
inhibiting   angiogenesis   may  limit  tumor  growth,   extend  the  period  of
disease-free  remission in patients who respond to front-line therapy and reduce
the potential for metastases.  The potential  markets for such a product include
all patients with solid tumors where angiogenesis  inhibition may play a role as
an important adjunctive therapy, and in patients with metastatic disease.

         SUGEN and its  collaborators  have  identified  the  Flk-1/KDR  TK as a
receptor  for  vascular  endothelial  growth  factor  ("VEGF")  and  as a  major
regulator of angiogenesis.  Blocking Flk-1/KDR TK activity blocks the ability of
most tumors to stimulate  formation of blood vessels and thus deprives the tumor
of necessary nutrients. In preclinical studies conducted by researchers at SUGEN
and  collaborating  laboratories,  small  molecule  inhibitors  of the Flk-1/KDR
blocked   VEGF-dependent   angiogenesis,   as  well  as  vascular  permeability.
Additionally,  human  endothelial  cells were  prevented  from  undergoing  cell
division that is required for the formation of new blood vessels.

         The Company  entered  Phase I clinical  testing in September  1997 with
SU5416, which to date has shown an excellent safety profile in over 100 patients
with a range of solid tumors, including advanced colorectal, lung and renal cell
cancers, and AIDS-related  Kaposi's sarcoma.  After extensive  consultation with
numerous oncology opinion leaders, the Company announced plans to accelerate the
development  of SU5416 with the  initiation of Phase III clinical  trials in non
small cell lung and colorectal cancers, and Phase II/III studies in AIDS-related
Kaposi's sarcoma in the U.S. and Europe this year.  Meanwhile,  the Company will
be working with certain investigators on NCI-sponsored Phase II studies in other
cancer indications.  This strategy may expedite the commercialization of SU5416,
which has the potential to become the first specific  angiogenesis  inhibitor to
reach the U.S.  market.  There can be no assurance  that this  commercialization
strategy will result in  accelerated  commercialization  of SU5416 or that other
angiogenesis  inhibitors  will  not  receive  regulatory  approval  prior to any
approval of SU5416.

         The Company had an exclusive research and licensing  agreement with the
Max-Planck-Institut  fur Physiologische and Klinische Forschung ("MPP") (MPI and
MPP are  collectively  referred to herein as  "Max-Planck  Society" or "MPS") to
support the work of Dr. Werner Risau,  who was a SUGEN consultant and a director
of MPP, and his laboratory.  Dr. Risau was one of the leading researchers in the
field of  angiogenesis.  Dr. Risau died in August  1998,  and the future of this
collaboration has yet to be determined.

SU6668 Broad Spectrum Inhibitor. Through the Company's ongoing research and drug
discovery  efforts  in  angiogenesis,   SUGEN  has  identified  additional  drug
candidates  which have  demonstrated  good potency on Flk-1/KDR,  and additional
targets including FGF-R and PDGF-R which inhibit both the angiogenic process and
tumor growth and  survival.  In this regard,  SUGEN has  identified  SU6668 as a
compound with these features.  SU6668 is currently in Phase I clinical trials in
Europe and in the U.S. using  intravenous and oral  formulations,  respectively.
Both studies are expected to conclude in mid 1999.

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

                                        9
<PAGE>
that the  suppression  of Her2 activity has a significant  inhibitory  effect on
tumor growth,  validating  Her2 as a target for cancer  therapy in the subset of
patients that overexpress this TK.

         Genentech's  Herceptin,  the monoclonal  antibody  targeting  Her2, has
recently  been  approved  for  use in the  treatment  of  certain  Her2-positive
cancers. While the Company believes that this approval may serve to validate the
concept  of  targeting  aberrant  TKs in  cancer,  SUGEN  believes  that a small
molecule  inhibitor of Her2 TK in addition to the closely  related Her1 and Her4
receptors  (thus,  a Pan-Her  inhibitor)  has the potential to be a more broadly
applicable and useful product than the antibody approach. SUGEN has identified a
number of small molecule inhibitors of Pan-Her targets. The Company is currently
testing  several of these  molecules  in animal  models in order to identify the
clinical  candidate in 1999. SUGEN is pursuing its Pan-Her antagonist program in
collaboration with ASTA Medica.

Raf Antagonist.  Raf, an STK, is a downstream  signalling molecule through which
numerous signalling pathways have been found to converge. 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. 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.

         SUGEN has developed  proprietary  Raf-based  assays and has  identified
catalytic  inhibitors  of Raf. The Company  believes that drugs that inhibit Raf
signalling  may  arrest  tumors  driven  by  excessive  Ras  activity  and other
oncogenic  targets.  The Company has been pursuing its Raf antagonist program in
collaboration with ASTA Medica.

Met TK Antagonist. Met TK activity 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 to the bone,  liver,  and lung.  SUGEN has recently
completed target validation studies on Met TK, has established a target-specific
screening  cascade,  and  has  derived  compounds  that  are in  evaluation  for
anti-metastatic behavior in animal models.

CDK2  Antagonist.  Aberrant  regulation of CDK2 protein kinase activity has been
associated with a wide variety of cancers and tumor types.  SUGEN has identified
potent  and  selective  inhibitors  of the  CDK2  STK that  inhibit  cell  cycle
progression and induce apoptosis. Lead finding efforts are under way to evaluate
compounds for oral efficacy using animal models.

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" above). 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 holds issued
patents to claims on the GRB2  target and  compounds  to inhibit  GRB2  mediated
signalling.  In vivo studies indicate  efficacy in tumor growth  inhibition with
identified lead compounds when given by the oral route of administration.

Angiogenesis  Inhibition for Ophthalmic Disorders.  A number of ophthalmological
disorders  involve  neovascularization  of different  regions of the eye.  Since
Flk-1/KDR TK and other tyrosine kinase targets have been shown to play a crucial
role in ocular  neovascularization,  SUGEN and  Allergan  are  collaborating  to
identify,  develop  and  commercialize  novel  angiogenesis  inhibitors  for the
treatment of ophthalmic  diseases.  In 1998,  SUGEN and  Allergan,  using animal
models,  have validated TK targets in order to provide the framework to identify
lead  compounds.  SUGEN and  Allergan  are  currently  in lead  optimization  to
identify clinical-stage compounds.

                                       10
<PAGE>
Diabetes

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

         Dr.  Ullrich was the first to clone the TK  receptor  to which  insulin
binds. In a normal state,  the body secretes  insulin which in turn binds to the
insulin TK. These events activate the insulin TK signalling  pathway,  resulting
in  cellular  uptake of glucose and  glucose  metabolism.  In Type I and Type II
diabetes,  the TK  signalling  mechanism is  impaired.  Certain TPs appear to be
involved  in down  regulating  (dephosphorylating)  the  insulin  TK  signalling
pathway.  Recently,  disruption of a tyrosine  phosphatase  gene has led to mice
exhibiting features of human diabetes. This target validations work supports the
premise long held by SUGEN that a small molecule which specifically inhibits TPs
that regulate insulin TK signalling,  would lead to increased glucose uptake and
metabolism.

         SUGEN is currently  optimizing  lead compounds that inhibit TPs for use
in the treatment of diabetes.

Neurology

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

Immunology

         The role of TKs in the generation  and  maintenance of the human immune
system has been well established by many researchers around the world. SUGEN has
developed a diverse  family of TK assays with  application  to the  discovery of
drugs for immunologic disorders.  For example,  ZAP-70, an intracellular TK, has
been shown to be a primary  regulator of  T-lymphocyte  cell  activation  of the
immune system.  This TK and other TK targets in the immune system represent drug
discovery targets for identifying novel  immunosuppressive and immuno-modulating
drugs.  SUGEN has  identified  potent and selective  chemical  leads for many of
these targets and is progressing a number of these leads into animal studies.

SUGEN's Drug Discovery Technology

         SUGEN's  primary  mission is to discover and develop  drugs that target
specific TKs, TPs, and STKs.  SUGEN's  current drug discovery  effort is focused
primarily  on the  discovery of small  molecule  drugs  derived  from  synthetic
compound libraries.  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 may provide
more flexibility with respect to pharmacologic  parameters,  dose, and delivery,
including by the oral route. SUGEN has been able to identify lead compounds in a
number of its programs that:

         (1) penetrate the cell;
         (2) effect intracellular targets specifically;
         (3) modulate biological function without cytotoxicity;
         (4) show favorable oral bioavailability;
         (5) can be easily manufactured; and

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<PAGE>
         (6) show minimal systemic toxicity.

SUGEN's process of drug discovery includes:

         (1) target identification;
         (2) target  validation in relevant cellular and in vivo disease models;
         (3) drug  screen  assay  design and  screening  of  compounds  for high
             quality chemical leads;
         (4) lead finding crystallography and computational chemistry; and
         (5) lead  optimization  using  medicinal  chemistry  and  pharmacologic
             screens.

Target Identification

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

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

         SUGEN's bioinformatics program starts with a physical repository of the
approximately  550  protein  kinases,  130 protein  phosphatases,  and 800 other
signal  transduction  genes.  These genes are placed onto a signal  transduction
chip, or DNA microarray,  in order to study how their expression is regulated in
normal and diseased  tissue in addition to other genes  discovered  by SUGEN but
not  published to date.  SUGEN also has a proprietary  panel of  oligonucleotide
primers capable of recognizing genes that are minimally related to genes already
in the SUGEN  library.  All of this  information  is  supported  by an  in-house
massively parallel computer processing platform capable of approximately  68,000
million instructions per second (mips) throughput.  Using sophisticated  pattern
recognition  algorithms,  SUGEN is able to  rapidly  mine the  public  databases
looking for new  sequence  material of interest,  for the complete  sequences of
gene fragments  identified  from cells of interest,  for  additional  members of
newly discovered families of signal transduction genes, or for human homologs of
genes from lower organisms where genetic studies provide  information  pertinent
to the function of the new human gene.

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

Target Validation

         A primary  challenge  in SUGEN's  target-driven  drug  discovery  is to
progress as efficiently  as possible from  identifying a potential new target to
verifying  that a drug  which  specifically  acts on that  target  could  have a
significant therapeutic benefit in the treatment of a given disease. Within this
process, "target validation" is a

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<PAGE>
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  built  a  strong  assay  development
capability. The Company regards this capability as an important component of its
proprietary position in the discovery and development of target-specific  signal
transduction  inhibitor  drugs.  Assay quality has proven to be a very important
determinant of whether screens favor the identification of high-quality chemical
leads with the  desired  chemical  features to make drugs.  SUGEN  employs  both
cell-based and biochemical  assays in semi-automated  format to support all drug
discovery programs related to TKs, TPs and STKs and related signalling targets.

Lead Finding

         SUGEN's drug  discovery  process  employs a cascade of tests  including
animal models to ensure that chemicals affect a specific target function that is
consistent with each step of the screening cascade. By employing target-specific
and  proprietary  screening  cascades,  SUGEN has  identified  and  continues to
identify   high-quality   lead   compounds   which  are  active  in  whole  cell
environments,  are potent and specific on intracellular  targets, and which have
shown favorable  features when tested in in vivo disease models where the target
plays a role.  SUGEN  has  obtained  and  generated  various  in-house  chemical
collections  for screening.  In addition,  SUGEN has  implemented  combinational
chemistry to generate  focused  chemical  collections that effect protein kinase
targets.

         SUGEN  has  integrated   crystallographic  analysis  and  computational
chemistry into its drug discovery process.  Work conducted in Dr. Schlessinger's
laboratory at NYU, as well as with other collaborators,  allows SUGEN scientists
to elucidate the mechanism of compound interactions in the catalytic core of TKs
and provides a basis for further directed  synthetic  chemistry  efforts in lead
generation  and  potential  development  of  additional  compounds  against  new
targets.

Lead Optimization/Preclinical Development

         The objective of SUGEN's lead  optimization  program is to optimize the
pharmacologic  properties  of  lead  compounds  by  designing  and  synthesizing
compounds  with the best  chemical  features for systemic  efficacy and delivery
with the fewest side effects.  The lead optimization process uses a wide variety
of in vivo  pharmacologic  endpoints in order to derive  compounds with the best
clinical  utility.  SUGEN's  expertise  derived from its  development of several
clinical-stage  compounds has led to a proprietary  source of information  about
the relationships  between  compounds,  specific targets,  and the pharmacologic
properties  of the  compounds  which  maximizes  the  efficacious  potential  of
compounds in the clinical setting and favors commercial potential.

Corporate and Clinical Development Collaborations

         The Company's  approach to corporate  partnering is different in cancer
than it is in other disease areas. In the cancer field, SUGEN intends to build a
vertically  integrated oncology business in North America, with the objective of
bringing to market a family of target-specific  signal  transduction  inhibitors
proprietary to SUGEN. To market its products effectively,  the Company currently
intends to build a focused U.S. sales force to target the major cancer treatment
centers and may explore  alliances  with  potential  marketing and  distribution
partners to optimize sales. On the European  front,  SUGEN recently  established
SUGEN Europe as a currently

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<PAGE>
wholly owned subsidiary in Schaffhausen, Switzerland. This new entity has become
the European  licensee for SUGEN's  cancer  pipeline,  with a mission to build a
strong and profitable cancer business in Europe. While the Company had initially
planned  to  license  European  rights  to its  products  to a fully  integrated
pharmaceutical  company,  SUGEN has concluded  that the financial  terms of that
route would not adequately  reflect the market potential of its products in such
a potentially rapidly growing market.  SUGEN Europe expects to work with four or
five  national  distribution  partners  who bring a strong  local  presence on a
pan-European scale to maximize product revenue.  The first of these distribution
agreements has been concluded with Esteve S.A. of Spain, and active negotiations
are ongoing with respect to the other European territories. The Company plans to
seek  additional   corporate  partners  to  fund  product   development  and  to
commercialize  its  products  in the rest of the world.  In Japan,  the  Company
entered into an agreement with Taiho for the development  and  commercialization
of SUGEN's  angiogenesis  inhibitors  for the  treatment  of cancer.  Under this
agreement,  Taiho  contributes to the worldwide  development and clinical trials
costs of SU5416 and SU6668,  pays  certain  milestones,  and  receives  Japanese
commercial  rights;  SUGEN,  through its  affiliate,  SUGEN  International,  may
provide  finished  product to Taiho on  prenegotiated  terms.  While the Company
generally  intends to retain  rights to its cancer  programs  in North  America,
SUGEN  is  funding  a  portion  of  its  ongoing  cancer   research   through  a
collaboration with Zeneca for the development of five cancer targets,  including
Aurora2,  an  oncogene  overexpressed  in more  than 50% of  primary  colorectal
cancers.  Pursuant to its  agreement  with  Zeneca,  the  Company  will have the
opportunity to obtain profit  participation  rights in the North American market
by  contributing  to clinical  development  costs as incurred  and will  receive
milestone  payments and royalties on worldwide sales.  Outside of oncology,  the
Company's  strategy is to seek  corporate  collaborations  or joint  ventures to
which SUGEN contributes validated targets, screening technologies and drug leads
while the partner provides the disease-specific  and drug development  expertise
as well as  marketing  experience,  in  addition to  providing  funding to bring
potential products to market. As part of this strategy, the Company entered into
a  collaboration  with  Allergan  for  angiogenesis   inhibition  in  ophthalmic
applications  resulting from the Company's Flk-1/KDR TK antagonist program.  The
Company also has an agreement with ProChon for the  development of drugs for the
treatment of achondroplasia and other growth disorders.

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 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.  The research  term is due to
expire in March 2000 unless renewed by mutual  consent.  SUGEN  performs  target
identification,  target validation,  assay development and screening for initial
leads,   while  Zeneca  scientists   concentrate  on  lead   identification  and
optimization and preclinical and clinical  development  activities.  Zeneca will
market collaboration  products worldwide.  SUGEN has also granted Zeneca a right
of first  negotiation  to  expand  this  collaboration  in  order  to  encompass
additional SUGEN cancer research  projects,  but has  specifically  excluded the
cancer related projects that SUGEN already has in development.

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

         In addition to its equity purchases and annual research funding, Zeneca
paid a $5.0  million  technology  set-up fee to SUGEN,  and will make  milestone
payments (which may be offset against  royalties over time) tied to the progress
of  compounds in the  collaboration,  and  royalties  on worldwide  sales of any
collaboration

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

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

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

National Cancer Institute

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

ASTA Medica Aktiengesellschaft

         In December 1995, SUGEN and ASTA Medica entered into a collaboration to
research,  develop,  manufacture,   market  and  distribute  potential  oncology
products  based  upon  the  Company's  Pan-Her  antagonist  and  Raf  antagonist
programs.  Under the terms of the collaboration,  ASTA Medica will undertake the
medicinal  chemistry  and  pharmaceutical   development  work  on  SUGEN's  drug
candidates,  and will perform preclinical and clinical  development in Europe in
accordance with FDA standards.  ASTA Medica paid SUGEN a $4.0 million technology
set-up fee and is  providing  additional  consideration  in the form of services
provided by ASTA Medica pursuant to the collaboration  but on  non-collaboration
programs.  Additionally, ASTA Medica purchased $9.0 million of Common Stock at a
price of $20.88 per share.  In January  1998,  SUGEN and ASTA Medica  decided to
proceed into clinical development with their Pan-Her cancer program, marking the
first milestone in SUGEN's collaboration with ASTA Medica. ASTA Medica exercised
its option to satisfy  its  $500,000  milestone  obligation  by the  purchase of
18,665 shares of SUGEN Common Stock at a price of approximately $26.79 per share
of which the premium  above fair  market  value was  recorded  as revenue.  ASTA
Medica has subsequently made certain cash payments and has purchased  additional
SUGEN shares in connection with modifications to the collaboration  agreement as
they relate to the Pan-Her program. In due course,  SUGEN may receive additional
milestone  payments in the two programs if they are  successful.  The  agreement
provides for ASTA Medica to receive exclusive  marketing rights to collaboration
products in Greater Europe (including  countries and territories  located in the
former Soviet Union) and South America, subject to

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<PAGE>
an obligation to pay royalties on net sales in such  territories to SUGEN.  ASTA
Medica  also has the right of first offer to  manufacture  product to be sold in
SUGEN  territories.  SUGEN  retains  marketing  rights in the rest of the world,
subject to a royalty payable to ASTA Medica in most circumstances.

         ASTA Medica is an international pharmaceutical company headquartered in
Germany.   The  Company's   research  and  development  is  focused  on  cancer,
respiratory   diseases/allergies   and   disorders   of  the   central   nervous
system/epilepsy. The company is owned by Degussa, a company active in the fields
of chemicals, health and nutrition, as well as banking 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  aims  to  establish  a
comprehensive  effort to identify and validate signal  transduction  targets for
choroidal and retinal  neovascularization.  Allergan is the exclusive  corporate
partner for SUGEN in ocular  diseases of  neovascularization  and has  exclusive
rights  to all  ophthalmic  uses of  collaboration  products  and  collaboration
know-how  worldwide.  In return,  Allergan paid SUGEN a $2.0 million initial fee
for past  research  services  and is  funding  collaboration  research  and drug
discovery at SUGEN for at least three years.  Allergan initially  purchased $4.0
million of Common Stock at $20.88 per share and purchased an additional  250,000
shares of Common  Stock at $12.00 per share in SUGEN's  October  1996  follow-on
offering.   SUGEN  will  also  receive  payments  upon  achievement  of  certain
milestones  and  royalties  with  respect to  worldwide  sales of  collaboration
products.  In  addition,  SUGEN will have the right to  contribute  to  clinical
development  costs on each program,  thereby earning  participation in the North
American  and  European  profits  from  successful  products  coming out of such
programs  over and above  its  royalty  entitlement.  Apart  from  this  option,
Allergan will be responsible for all development expenses.

         In July 1998,  the  Company  received  its first  milestone  payment of
$437,500, net of royalties to third parties, triggered by the identification and
validation of the kinase  receptors  playing the primary role in the  angiogenic
component of these diseases

Taiho Pharmaceutical Ltd.

         In July 1998, the Company  entered into an agreement with Taiho for the
development and commercialization of the Company's  angiogenesis  inhibitors for
the prevention and treatment of cancer. In connection with this agreement, Taiho
will receive marketing rights in Japan,  while the Company will retain marketing
rights for the rest of the  world.  The  Company  received  an initial  research
payment,  is  receiving  research  and  development  funding  and  will  receive
additional payments upon the achievement of certain milestones.  The Company has
retained the rights to  manufacture  and supply  finished  products to Taiho for
sale in Japan on prenegotiated terms.

ProChon Biotech Limited

In June 1998,  the Company  entered into a  collaboration  with ProChon  Biotech
Limited  ("ProChon") to discover and develop small molecule signal  transduction
inhibitors for the treatment of achondroplasia  and other growth  disorders.  In
connection with this collaboration,  the Company received $3.0 million comprised
of a $750,000  initial  research  payment and a $2.25 million stock  purchase of
93,750  shares of SUGEN  Common  Stock at $24.00 per  share.  In  addition,  the
Company  will  receive  payments  upon  achievement  of certain  milestones  and
royalties with respect to worldwide sales of collaboration products.

Research Collaborations

         SUGEN's scientific  founders are Dr. Joseph  Schlessinger,  Chairman of
the  Department of  Pharmacology  at NYU, and Dr. Axel Ullrich,  Director of the
Department of Molecular Biology at MPI in Martinsried,  Germany.  In the fall of
1991, the Company entered into research collaboration agreements with

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<PAGE>
both institutions. More recently the Company has established additional research
collaborations relating to TPs, TKs and STKs identification and screening areas.

New York University Medical Center

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

Max-Planck Society

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

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

         Max-Planck-Institut  fur  Physiologische und Klinische  Forschung.  The
Company  had  an  exclusive   research   and   licensing   agreement   with  the
Max-Planck-Institut  fur Physiologische and Klinische Forschung ("MPP") (MPI and
MPP are  collectively  referred to herein as  "Max-Planck  Society" or "MPS") to
support the work of Dr. Werner Risau,  who was a SUGEN consultant and a director
of MPP, and his laboratory.  Dr. Risau was one of the leading researchers in the
field of  angiogenesis.  Dr. Risau died in August  1998,  and the future of this
collaboration has yet to be determined.

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

                                       17
<PAGE>
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
provided to SUGEN compounds from Toyama's microbial strain libraries for testing
of potential biological activity.  The collaboration ended with the departure of
Professor  Oki in the  fourth  quarter  of 1998.  In July  1996,  SUGEN  and the
Institutes  of Botany  and  Microbiology  of the  Chinese  Academy  of  Sciences
initiated  exclusive   collaborations  to  discover  novel  signal  transduction
inhibitor  candidates  and  pharmacophores.  The  Institute  of  Botany  and the
Institute of  Microbiology  have provided to SUGEN extracts from the Institutes'
plant and microbial  collections  for testing of potential  biological  activity
against  SUGEN's  signal  transduction  targets.  Other SUGEN  compound  sources
include natural product  libraries from around the globe,  including  microbial,
fungal  and plant  extracts,  as well as  additional  sources  of small  organic
compounds.

Patents and Proprietary Technology

         SUGEN'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
January  31,  1999,  SUGEN  held  exclusive  rights to at least 45  issued  U.S.
patents,  had exclusive rights to at least 20 U.S. patent applications for which
notices of  allowance  had been  received  and had filed  and/or held  exclusive
licenses to  approximately  110 United  States patent  applications.  SUGEN also
holds exclusive rights to many foreign patent applications  corresponding to the
United States patents and patent applications.

         There can be no assurance that SUGEN 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  SUGEN's
technology.  There can be no assurance  that  SUGEN's  patent  applications,  if
issued as patents, will not be challenged,  invalidated or circumvented, or that
the rights granted thereunder will provide proprietary protection or competitive
advantages  to SUGEN.  Competitors  have filed  applications,  have been  issued
patents, and may file additional  applications and obtain additional patents and
proprietary  rights relating to products or processes  competitive with those of
SUGEN or which could block  SUGEN's  efforts to obtain  patents or  commercially
develop its technology.

         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, related downstream signaling
molecules, and compounds and other modulators thereof. The commercial success of
SUGEN will depend in part on SUGEN not infringing  patents issued to competitors
and not breaching  the  technology  licenses  upon which any SUGEN  products are
based.  SUGEN in the past has been,  and from time to time in the future may be,
notified of claims that SUGEN may be  infringing  patents or other  intellectual
property rights owned by third parties.  Certain patent  applications or patents
of  SUGEN's   competitors   may  conflict   with  SUGEN'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 SUGEN. Such
conflicts  could result in a significant  reduction in the scope of the coverage
of SUGEN'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, SUGEN 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 SUGEN will be able to obtain any
such license on commercially  favorable  terms, if at all, and if these licenses
are not  obtained,  SUGEN might be prevented  from pursuing the  development  of
certain of its  potential  products.  SUGEN'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  SUGEN.
Litigation,  which  could  result in  substantial  costs to  SUGEN,  may also be
necessary to enforce any patents issued or licensed to SUGEN or to determine the
scope and validity of third-party  proprietary rights. There can be no assurance
that SUGEN's issued or licensed patents would be held

                                       18
<PAGE>
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
SUGEN's  management  resources  during  such  litigation  could  have a material
adverse effect on SUGEN.  An adverse  outcome could subject SUGEN to significant
liabilities to third parties,  require disputed rights to be licensed from third
parties or require SUGEN to cease using such technology, any of which could have
a material  adverse  effect on SUGEN.  If  competitors of SUGEN prepare and file
patent  applications in the United States that claim  technology also claimed by
SUGEN, SUGEN 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 SUGEN,  even if the eventual outcome is favorable
to SUGEN. When patents are granted in certain countries or regions such as Japan
and the European community,  third parties can oppose such issuance.  Should the
relevant patent office  institute a proceeding  termed an opposition,  SUGEN may
decide to defend  its  patent.  There can be no  assurance  that  SUGEN  will be
successful  or that the  patent  office  will not revoke the patent or alter the
scope of protection previously granted.

         SU101, a compound generally known by the name leflunomide,  is a member
of the isoxazole  family of compounds.  Leflunomide  was discovered more than 17
years ago. In December 1997, the Company received two U.S. patents,  Patent Nos.
5,700,823 and 5,700,822, relating to methods of using SU101 for treating various
diseases or disorders  including cancers  characterized by inappropriate  PDGF-R
activity.  SUGEN owns the exclusive rights to U.S. Patent No.  5,700,823.  SUGEN
has been assigned the exclusive  world-wide  rights to U.S. Patent No. 5,700,822
and the  corresponding  foreign  applications  from all but one of the assignees
with whom  negotiations  will be  undertaken.  No assurance can be provided that
such negotiations will be successful,  nor that the failure of such negotiations
will not result in a reduced value of U.S. Patent No.  5,700,822 and any foreign
patents  that  are  obtained.  In  addition,  SUGEN  has  filed  several  patent
applications in the United States directed to formulations  containing SU101 and
the  use of  such  formulations  for  treating  various  diseases  or  disorders
including  cancer.  Corresponding  foreign  patent  applications  have also been
filed.  The Company  has  received  two U.S.  patents  relating to  formulations
comprising  SU101.  Both of these patents cover the formulation  including SU101
which SUGEN  presently  believes will be commercially  marketed.  SUGEN owns the
exclusive  world-wide  rights  to both of these  patents  and the  corresponding
foreign applications.

         SUGEN plans to commercialize SU101 in certain major markets outside the
United  States  either  through  affiliates  or through  licensees.  While SUGEN
believes at this time that it will receive patent protection  outside the United
States relating to the use of SU101 and formulations containing SU101, there can
be no assurance that any such patent protection will be issued.

         Hoechst AG  ("Hoechst")  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,  including the use of leflunomide for treating cancer.  SUGEN
believes its research and  development and its clinical trials with SU101 in the
United States are  protected  from claims of  infringement  of the United States
patents because such  activities are being conducted  solely for uses reasonably
related to  development  and submission of information to the FDA for regulatory
approval.  Similar  protection  may not be available  outside the United States.
Although SUGEN cannot predict  whether or when SU101 will be approved by the FDA
for  marketing  in the United  States,  it believes  that  certain of  Hoechst's
patents in the United States may have expired when marketing does begin and that
the remaining  U.S.  patents are either  subject to claims of invalidity or will
not be infringed by the  manufacture  and sale of SU101 in the United States for
treating cancer characterized by inappropriate PDGF-R activity.  There can be no
assurance that a court will agree with SUGEN's beliefs regarding  invalidity and
non-infringement  of  Hoechst's  issued  patents,  that  the  term of  Hoechst's
existing patents will not be extended,  or that the claims of Hoechst's  pending
patent  applications  will not be  modified  prior to  issuance so as to enhance
their validity or scope. To date,  Hoechst has not commenced  legal  proceedings
against SUGEN concerning possible patent infringement. There can be no assurance
that  Hoechst in the future will not assert  claims  against  SUGEN.  If a court
found  SUGEN to be  infringing  a valid  patent  issued to Hoechst in the United
States  covering  the use of  leflunomide  for treating  cancer,  SUGEN would be
required to obtain a license from Hoechst to manufacture or sell leflunomide for
treating cancer. There can be no assurance that SUGEN could reach agreement with
Hoechst for a license for SU101 upon favorable terms or at all, if required. The
inability  of SUGEN to resolve  this matter on  favorable  terms or at all could
have a material adverse effect on SUGEN. In any

                                       19
<PAGE>
event,  the assertion of any such claims,  even if resolved  favorably to SUGEN,
could result in substantial costs to SUGEN.

         The scope, term and validity of Hoechst's patent protection outside the
United States are different  than the  situation in the United  States.  SUGEN's
ability to manufacture and sell SU101 outside the United States may be adversely
impacted by this patent  protection.  If a court found SUGEN to be  infringing a
valid  patent  issued  to  Hoechst  in a  foreign  country  covering  the use of
leflunomide  for  treating  cancer,  SUGEN would be required to obtain a license
from Hoechst to  manufacture  or sell  leflunomide  for  treating  cancer in the
relevant  country.  There can be no assurance  that SUGEN could reach  agreement
with  Hoechst  for a  license  for  SU101  upon  favorable  terms or at all,  if
required.

         SUGEN is  currently  undertaking  clinical  trials  with  the  compound
referred to as SU5416. In August 1998, SUGEN received U.S. Patent No. 5,792,783,
with product and methods of use claims covering SU5416. Related applications are
pending  abroad,  including  Japan  and  the  European  community.  SUGEN  holds
exclusive worldwide rights to these applications, except in Japan.

         SUGEN is currently  undertaking  studies of the compound referred to as
SU6668. The compound SU6668 is generically covered by U.S. Patent No. 5,792,783.
SUGEN filed a provisional patent  application in the United States  specifically
disclosing  and claiming  SU6668.  It is SUGEN's  intention to file the material
contained in this  application  outside of the United  States within one year of
the  provisional  filing date.  SUGEN holds exclusive  worldwide  rights to this
application,  except in Japan. There can be no assurance that patents will issue
with claims specifically  reciting SU6668.  Should such patents issue, there can
be no assurance  that the term of such  patents will exceed that of U.S.  Patent
No. 5,792,783.

         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 SUGEN  would have  adequate  remedies  for any  breach,  or that
SUGEN's  trade  secrets  will not  otherwise  become  known or be  independently
discovered  by  competitors.  To the  extent  that SUGEN or its  consultants  or
research  collaborators use intellectual  property owned by others in their work
for SUGEN,  disputes  may also  arise as to the  rights in related or  resulting
know-how and inventions.

Competition

         SUGEN is  engaged  in a rapidly  changing  field.  Other  products  and
therapies  that will  compete  directly  with the  products  that the Company is
seeking  to  develop  and  market   currently  exist  or  are  being  developed.
Competition from fully integrated  pharmaceutical companies and more established
biotechnology  companies is intense and is expected to  increase.  Most of these
companies  have  significantly  greater  financial  resources  and  expertise in
research and  development,  manufacturing,  conducting  preclinical  studies and
clinical trials,  obtaining regulatory approvals and marketing than the Company.
Many of these  competitors have significant  products that have been approved or
are in  development  and operate  large,  well-funded  research and  development
programs. For example,  Genentech's Herceptin, the monoclonal antibody targeting
Her2-dependent  breast tumors,  was recently approved for the treatment of Her-2
positive  breast  cancers.  Smaller  companies may also prove to be  significant
competitors,   particularly  through   collaborative   arrangements  with  large
pharmaceutical and established  biotechnology companies.  Academic institutions,
governmental  agencies and other public and private research  organizations also
conduct   research,   seek  patent   protection   and  establish   collaborative
arrangements  for  products  and  clinical  development  and  marketing.   These
companies and institutions  compete with the Company in recruiting and retaining
highly qualified scientific and management personnel. Competition may also arise
from companies pursuing differing technological  approaches to cancers and other
disease indications targeted by the Company's product candidates. In addition to
the above factors,  SUGEN will face  competition  based on product  efficacy and
safety,  the timing and scope of regulatory  approvals,  availability of supply,
marketing  and  sales  capability,  reimbursement  coverage,  price  and  patent
position.  There is no assurance that the Company's competitors will not develop
more

                                       20
<PAGE>
affordable  products,  compete more  effectively  for corporate  partnerships or
achieve earlier patent protection or product commercialization than the Company.

         Other   examples  of   competition   can  be  found  in  the  field  of
angiogenesis,  where several  biotechnology and pharmaceutical  companies are in
the process of developing  angiogenesis  inhibitors  that block the formation of
blood  vessels to tumors  using  direct,  indirect,  and unknown  mechanisms  of
action. The stage of these competitive  programs range from preclinical to Phase
III clinical development.

Government Regulation

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

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

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

         Before  receiving FDA  clearance to market a product,  the Company will
have to  demonstrate  that the  product  is safe and  effective  on the  patient
population  that will be treated.  Data  obtained from  preclinical  studies and
clinical trials are susceptible to varying  interpretations,  which could delay,
limit or prevent regulatory clearances. In addition, delays or rejections may be
encountered   based  upon   additional   government   regulation,   from  future
legislation, administrative action or changes in FDA policy during the period of
product  development,  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

                                       21
<PAGE>
conjunction with others will prove to be safe and efficacious in clinical trials
and will meet all of the applicable  regulatory  requirements  needed to receive
marketing clearance.

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

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

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

Manufacturing

         The  Company  has no  manufacturing  facilities  and  relies  on  other
manufacturers to produce its compounds for research and development, preclinical
studies and clinical trials.  The products under development by the Company have
never been manufactured for commercial  purposes,  and there can be no assurance
that such products can be manufactured  at a cost or in quantities  necessary to
make  them   commercially   viable.   Any  change  in  the  Company's   existing
relationships  with, or  interruption in supply from, its  manufacturers  of the
compounds  used in its  clinical  trials could affect  adversely  the  Company's
ability to  complete  its  ongoing  clinical  trials  and to market its  product
candidates,  if approved.  Any such change or  interruption  may have a material
adverse  effect on the  Company.  In the event of a change in the  supplier of a
compound used in its clinical  trials,  the Company would be required to collect
data from its ongoing  clinical  trials with respect to a compound and file such
data with the FDA to establish comparability between the compound as produced by
different suppliers. There can be no assurance that the Company would be able to
establish such comparability. A failure to establish comparability could lead to
a requirement that the Company conduct additional  clinical trials,  which would
delay the Company's pursuit of regulatory  approval for a product candidate.  If
the Company were unable to contract for a sufficient  supply of its compounds on
acceptable  terms,  or if it  should  encounter  delays or  difficulties  in its
relationships with manufacturers, the Company's preclinical studies and clinical
trial  schedule  would be  delayed,  resulting  in delay  in the  submission  of
products for regulatory approval or the market introduction and subsequent sales
of such  products,  which could have a material  adverse  effect on the Company.
Moreover, contract manufacturers that the Company may use must adhere to current
GMP regulations  enforced by the FDA through its facilities  inspection program.
If  these  facilities  cannot  pass a  pre-approval  plant  inspection,  the FDA
pre-market approval of the products will not be granted.

                                       22
<PAGE>
Employees

         As of December  31,  1998,  the Company  had 239  full-time  employees,
including a technical scientific staff of 147. The Company places an emphasis on
recruiting the highest caliber personnel. The Company has selected and assembled
a group of experienced  scientists and managers with skills in a wide variety of
disciplines,   including   molecular   biology,   chemistry  and  pharmaceutical
development. To date, the Company believes it has been successful in its efforts
to recruit qualified employees, and although we cannot guarantee we can continue
to recruit this level of expertise, we expect to be able to do so in the future.

                                       23
<PAGE>
Item 2.           PROPERTIES

         In the fourth quarter of 1998,  the Company  relocated its research and
headquarters  facilities to a site of approximately  106,000 square feet located
in South San  Francisco,  California.  The  Company  leases  this space under an
operating lease extending until 2015,  having renewal options of ten years.  The
lease of the Company's  previously occupied  facilities of approximately  60,000
square feet located in Redwood City, California, was terminated at approximately
the  same  time  as the  commencement  of the  lease  of the new  facility.  See
"Management's  Discussion  and  Analysis of Financial  Condition  and Results of
Operations."

         The Company believes that its South San Francisco facility, in addition
to its options for  additional  space at the South San Francisco  site,  will be
sufficient  to meet  its  needs  for the next  several  years.  There  can be no
assurances,  however,  that,  additional space, if needed,  will be available on
favorable terms, if at all.


Item 3.           LEGAL PROCEEDINGS

SUGEN is not a party to any material legal proceedings.

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

None.

                                       24
<PAGE>
                                     PART II

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

         Since the  Company's  initial  public  offering of its common  stock in
October 1994,  the Company's  Common Stock has traded on the Nasdaq Stock Market
under the symbol SUGN.  The following  table lists the high and low sales prices
for the  Company's  Common  Stock for each quarter of fiscal year 1998 and 1997.
These prices do not include retail markups, markdowns or commissions.


                                          ---------------------------
                                             High              Low
         ------------------------------------------------------------
         1998
         Fourth Quarter                   $  17.25         $  11.13
         Third Quarter                       18.94             9.75
         Second Quarter                      18.00            12.63
         First Quarter                       15.50            11.63
         ------------------------------------------------------------
         1997
         Fourth Quarter                      21.13            12.63
         Third Quarter                       20.94            11.88
         Second Quarter                      13.25            10.00
         First Quarter                     $ 15.25         $   9.88
         ------------------------------------------------------------

         As of March 15, 1999 there were  approximately 299 holders of record of
the Company's  Common Stock.  On March 15, 1999, the last sale price reported on
the Nasdaq National Market System for the Company's  Common Stock was $16.81 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.

         In December  1998,  the Company  and ASTA Medica  entered  into a first
amendment to the  existing  collaboration  agreement  and issued and sold 13,307
shares of SUGEN Common Stock at $28.18 per share for a total  purchase  price of
$375,000  under an  exemption  from  registration  pursuant  to Section 4 (2) of
Securities Act of 1933.

                                       25
<PAGE>
Item 6.           SELECTED FINANCIAL DATA

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

<TABLE>
<CAPTION>
                                                            Year Ended December 31,
                                           --------------------------------------------------------
                                             1998        1997        1996        1995        1994
                                           --------    --------    --------    --------    --------

<S>                                        <C>         <C>         <C>         <C>         <C>
Contract revenue (1)                       $ 14,916    $  6,031    $ 13,650    $ 13,843    $  6,270
Costs and expenses:
  Research and development                   46,851      34,585      29,792      23,226      17,079
  General and administrative                  9,517       6,227       5,529       5,086       3,106
                                           --------    --------    --------    --------    --------
      Total costs and expenses               56,368      40,812      35,321      28,312      20,185
                                           --------    --------    --------    --------    --------
Operating loss                              (41,452)    (34,781)    (21,671)    (14,469)    (13,915)
Other income and expense:
  Interest income                             3,373       2,786       2,481       1,988         529
  Interest expense                           (1,548)     (1,065)       (691)       (494)       (278)
  Gain on sale of investment
    in Selectide Corporation                     --          --          --       1,006          --
                                           --------    --------    --------    --------    --------
      Other income, net                       1,825       1,721       1,790       2,500         251
                                           --------    --------    --------    --------    --------
Net loss                                   $(39,627)   $(33,060)   $(19,881)   $(11,969)   $(13,664)
                                           ========    ========    ========    ========    ========

Basic and diluted net loss per share (2)   ($  2.49)   ($  2.47)   ($  1.81)   ($  1.32)   ($  4.37)
                                           ========    ========    ========    ========    ========

Shares used in computing basic and
  diluted net loss per share (2)             15,934      13,387      10,966       9,085       3,129
                                           ========    ========    ========    ========    ========

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

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

Balance Sheet Data:
(in thousands)

<TABLE>
<CAPTION>
                                                           December 31,
                                  -------------------------------------------------------------
                                     1998         1997         1996         1995         1994
                                  ---------    ---------    ---------    ---------    ---------
<S>                               <C>          <C>          <C>          <C>          <C>
Cash, cash equivalents and
  short-term investments          $  47,297    $  75,295    $  56,334    $  53,253    $  22,414
Total assets                      $  59,333    $  84,825    $  61,936    $  59,243    $  28,455
Capital lease obligations
  - non-current portion           $   5,724    $   3,152    $   2,938    $   3,651    $   2,087
Senior custom convertible notes   $   5,694    $  17,500    $      --    $      --    $      --
Accumulated deficit               $(130,599)   $ (90,988)   $ (57,997)   $ (37,964)   $ (26,270)
Stockholders' equity              $  24,718    $  49,013    $  48,530    $  43,441    $  18,319
</TABLE>

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

                                       26
<PAGE>
Item 7.           MANAGEMENT'S DISCUSSION AND ANALYSIS
                  OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

         The following  discussion  and analysis  should be read in  conjunction
with "Selected Financial Data" and the Company's Financial  Statements and Notes
thereto  included  elsewhere in this Annual Report on Form 10-K.  Except for the
historical information contained herein, the discussion in this Annual Report on
Form 10-K contains  certain  forward-looking  statements  that involve risks and
uncertainties,   such  as  statements  of  the  Company's   plans,   objectives,
expectations and intentions.  These forward-looking  statements are based on the
current  expectations  of the Company,  and the Company assumes no obligation to
update this information. The cautionary statements made in this Annual Report on
Form 10-K  should be read as being  applicable  to all  related  forward-looking
statements  wherever  they  appear  in this  Annual  Report  on Form  10-K.  The
Company's  actual results could differ  materially  from those  discussed  here.
Factors  that  could  cause or  contribute  to such  differences  include  those
discussed  under  "Liquidity  &  Capital  Resources"  below,  as well  as  those
discussed elsewhere herein.

Overview

         SUGEN was founded in July 1991 to  discover  and develop new classes of
small  molecule  drugs  which  target  specific  cellular  signal   transduction
pathways.  These  signalling  pathways  are involved in a variety of chronic and
acute  pathological  diseases,  including  cancer  and  diabetes  as  well as in
dermatologic,  ophthalmic,  neurologic and immune disorders.  The Company's most
advanced  product  candidate  is SU101,  a PDGF TK  signalling  antagonist.  The
Company initiated a Phase III clinical trial for use of SU101 as a treatment for
refractory  glioblastoma during the first quarter of 1998.  Additionally,  SUGEN
currently has underway  multiple Phase II studies including SU101 in combination
with BCNU in front-line glioma,  mono-therapy in ovarian and non small cell-lung
cancers  and  mono-therapy  and in  combination  with  mitozantrone  in  hormone
refractory  prostate  cancer.  A Phase II study of SU101 as single agent therapy
for refractory anaplastic astrocytoma, another type of malignant brain tumor, is
also being  conducted  in  parallel  with the Phase III  trial,  and at the same
centers.  To date,  approximately  400 patients  have been treated with SU101 in
thirteen  Company-sponsored clinical trials. The Company's second cancer product
candidate, SU5416, is a Flk-1/KDR TK antagonist which inhibits angiogenesis (the
process by which blood vessels are formed). Currently, the Company is conducting
multiple  Phase I clinical  trials for SU5416 in solid  tumors in Europe and the
U.S.  and a Phase  I/II  study of SU5416 in  Kaposi's  sarcoma  in the U.S.  The
Company  announced  plans to  accelerate  the  development  of  SU5416  with the
initiation  of Phase III clinical  trials in non small cell lung and  colorectal
cancers and for Phase II/III studies in Kaposi's sarcoma.  In December 1998, the
Company  filed an  Investigational  New Drug ("IND") with the U.S. Food and Drug
Administration  ("FDA")  for its third  cancer  product,  SU6668,  a novel broad
spectrum inhibitor of angiogenesis and tumor growth, and is currently initiating
Phase I  clinical  trials  in Europe  and the U.S.  using  intravenous  and oral
formulations, respectively. For the year ending December 31, 1998, substantially
all of the Company's revenue apart from interest income has been earned pursuant
to collaborations  with Zeneca Limited  ("Zeneca"),  Taiho  Pharmaceutical  Ltd.
("Taiho"),   Vision  Pharmaceuticals  L.P.,  an  affiliate  of  Allergan,  Inc.,
Allergan,  Inc. (collectively  "Allergan"),  and ASTA Medica  Aktiengesellschaft
("ASTA  Medica").  The  Company  intends  to pursue its  cancer  drug  discovery
programs  independently in North America and its programs in other disease areas
in collaboration with established pharmaceutical companies.

         In June 1998, the Company  established  SUGEN  International AG ("SUGEN
International"),  as a wholly-owned subsidiary. SUGEN Europe AG ("SUGEN Europe")
was  established  in  August  1998,  as  a  wholly-owned   subsidiary  of  SUGEN
International.  Both entities are  incorporated  in the Canton of  Schaffhausen,
Switzerland.  SUGEN  International  and SUGEN Europe will hold certain rights to
the Company's  technology  portfolio outside of North America. The entities were
formed to facilitate  commercialization  of the Company's  products  outside the
United States.

         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  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,  1998,  the  Company's
accumulated deficit was $130.5 million.

                                       27
<PAGE>
Results of Operations

         The Company's revenues for the years ended December 31, 1998, 1997, and
1996 were $14.9 million, $6.0 million, and $13.7 million, respectively. Revenues
for the year ended December 31, 1998 included  contract  revenue from the Taiho,
Zeneca,  Allergan, and ASTA Medica collaborations,  milestone payments under the
ASTA Medica and Allergan  collaborations,  and  recognition of initial  research
payments  received  in  connection  with the Taiho and ProChon  Biotech  Limited
("Prochon")  collaborations.  The  increase  in  revenues  in 1998 over 1997 was
primarily due to revenue earned under the Taiho and ProChon  collaborations,  of
which  approximately  $4.0  million was  non-recurring.  The Company is actively
pursuing  additional  collaborations,  but no  assurance  can be given as to the
ability of the Company to conclude such  collaborations on a timely basis, or at
all.

         Revenues  for  1997  included  contract  revenue  from the  Zeneca  and
Allergan  collaborations,  and contract  services  revenue earned under the ASTA
Medica  collaboration  for  services  provided  by ASTA  Medica  pursuant to the
collaboration but on non-collaboration  programs.  The decrease in 1997 revenues
from 1996 was due to the  recognition  of set-up and wind-down  fees  associated
with the Allergan,  ASTA Medica and Amgen Inc.  collaborations  in 1996. No such
fees were recognized in 1997.

         Research  and  development  expenses  for the years ended  December 31,
1998,  1997 and 1996 were  $46.9  million,  $34.6  million,  and $29.8  million,
respectively.  The increase  during 1998 was  primarily due the  progression  of
clinical activities, including expanded Phase II studies and the initiation of a
Phase III  registrational  study of SU101,  in addition to expanded  Phase I and
Phase I/II  studies of SU5416.  The  advancement  of multiple  programs  through
preclinical development,  including activities associated with the Company's IND
filing of SU6668 combined with higher  personnel  related costs  associated with
the expansion of the Company's research and development programs,  led to higher
expenses in 1998.  The  increase in 1997  expenses  from the  previous  year was
primarily  associated  with  additional  personnel  dedicated  to the  Company's
research and development  programs.  Additional  Phase I and Phase II studies of
SU101 and the initiation of Phase I studies of SU5416,  also  contributed to the
growth in 1997 expenses.  The Company  expects that its research and development
expenses will  continue to grow in future years due to the clinical  advancement
of SU101,  SU5416 and SU6668,  including the related  manufacturing  and process
development  efforts, the hiring of personnel,  additional  preclinical studies,
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,
1998,  1997,  and 1996  were  $9.5  million,  $6.2  million  and  $5.5  million,
respectively. The increase in 1998 was primarily due to higher headcount related
expenses,  costs  associated  with the formation of the Company's  international
subsidiaries,  non-recurring  costs associated with the Company's  relocation to
its  South  San  Francisco  facility  and  additional  expenses  in the areas of
investor relations and business development.  The increase in 1997 was primarily
due to increased  administrative staffing, the related recruiting and relocation
expenses and costs  associated  with  corporate  and business  development.  The
Company  expects that its general and  administrative  expenses will continue to
increase in order to support the Company's  expanding  research and  development
efforts and the anticipated establishment of a sales and marketing force.

         Interest  income for the years ended December 31, 1998,  1997, and 1996
was $3.4 million, $2.8 million, and $2.5 million, respectively.  These increases
were due to higher  investment  balances arising primarily from issuances of the
Company's  capital stock and convertible  debt.  Interest  expense for the years
ended  December 31, 1998,  1997 and 1996 was $1.5  million,  $1.1  million,  and
$691,000,  respectively.  The  increase  in 1998 was  primarily  due to expenses
related to the issuance of senior custom  convertible  notes in September  1997.
The increase in 1997 from 1996 was primarily due to the Company's  continued use
of capital lease  financing for equipment and property  improvements  related to
its previous facilities. The Company expects that interest expense will continue
to increase in future years due to the continued use of capital lease  financing
for equipment and facility  improvements and interest  expenses  associated with
the March 1999 convertible debt financing.

                                       28
<PAGE>
         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 equity securities.

Liquidity and Capital Resources

          At December  31,  1998,  the Company had cash,  cash  equivalents  and
short-term   investments   of   approximately   $47.3   million   compared  with
approximately  $75.3  million at December  31,  1997.  The  decrease in cash and
investments  during  the year  ended  December  31,  1998 was  primarily  due to
operating losses.  Subsequent to year end, the Company completed a $28.0 million
private placement of senior convertible notes as further discussed below.

         Through December 31, 1998, the Company's principal sources of financing
have been its initial and follow-on public offerings of Common Stock, placements
of the Company's Preferred and Common Stock and senior custom convertible notes,
and funds received under the Company's corporate  collaborations.  The Company's
current  principal  sources  of  liquidity  are  its  research  and  development
collaborations  with Taiho,  Zeneca,  Allergan and ASTA Medica,  its cash,  cash
equivalents and short-term investments and capital lease financing.  In February
1999,  the  Company  secured  a $5.0  million  lease  line for the  purchase  of
equipment and tenant improvements.

         In March 1999,  the Company  completed  the private  placement of $28.0
million principal amount of 12% Senior Convertible Notes due 2002 (the "Notes").
The Notes are convertible into SUGEN Common Stock at $20.50 per share.  Interest
on the Notes may be paid in SUGEN Common Stock or cash, at the Company's option.
As part of the Note placement,  purchasers were issued warrants (the "Warrants")
to acquire up to an  additional  $21.0  million  principal  amount of 12% Senior
Convertible  Notes which will mature on the third  anniversary  date of issuance
(the "Warrant  Notes").  The Warrant Notes will have  principally the same terms
and conditions as the original Notes. The Warrants to purchase the Warrant Notes
are exercisable  until March 2001. The Company has the right, at its option,  to
require  the  exercise  of the  Warrants  by the  holders  in the event that the
closing price of the Company's  Common Stock exceeds  certain  levels during the
term of the  Warrants,  subject to certain  limitations.  On or before August 6,
1999, the then  outstanding  balance of the 5% Senior Custom  Convertible  Notes
issued in September 1997 with a floating conversion  mechanism will be converted
into SUGEN  Common  Stock in  accordance  with  their  terms or, at a premium of
approximately  125% to 132% of  their  principal  amount,  exchanged  for (i) an
additional  principal amount of the 12% Senior  Convertible  Notes due 2002 (the
"Exchange  Notes")  and (ii)  Warrants to acquire  Warrant  Notes in a principal
amount equal to 75% of the principal  amount of the Exchange Notes. The Warrants
will be  accounted  for as a  derivative  financial  instrument.  See  "Notes to
Consolidated Financial Statements-Subsequent Events."

         The Company has entered into license and  research  agreements  whereby
the Company funds research projects performed by others or in-licenses compounds
from third  parties.  Some of the  agreements  may  require  the Company to make
milestone and royalty payments.  Under these programs,  commitments for external
research funding are approximately  $1.5 million,  $1.4 million and $1.1 million
in 1999, 2000 and 2001,  respectively.  Most of these commitments are cancelable
within a three-to-six  month period and limit the amounts payable by the Company
for sponsored  research  under the programs  after notice of  cancellation.  The
Company  anticipates  renewing certain contracts that expired in 1997 which will
increase future  commitments  beyond the levels indicated above for 1999 through
2001.

         Increase in net  equipment  and  leasehold  improvements  for the years
ended December 31, 1998, 1997 and 1996 were $3.3 million,  $3.2 million and $1.7
million,  respectively,  which  included  $5.8  million,  $1.4  million and $1.3
million,  respectively, of equipment and leasehold improvements financed through
the Company's master lease agreements.  1998 net capital additions  consisted of
$6.5 million in gross  additions  ($3.4 million of which was associated with the
new build-to-suit facility) partially offset by the write-off of $4.1 million of
fully  depreciated  assets  associated  with the previously  occupied  facility.
Additions for 1997 and 1996 primarily  included  expansion costs associated with
the former facilities, and purchases of lab equipment,

                                       29
<PAGE>
computer  hardware and software.  Under the capital leases and certain operating
lease arrangements,  including the current facility lease agreement, the Company
has lease  commitments of approximately  $26.2 million through 2003. 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
1999 will be lower than that of the prior year as 1998 included costs associated
with the  completion  of the  Company's  new  facility.  However,  the Company's
obligations and related  interest  expense may increase in future periods if the
Company pursues the option of expanding its facility. See "Properties."

         The Company  estimates that its existing capital  resources,  including
the proceeds from the March 1999 placement of the Notes,  together with facility
and equipment financing,  expected revenues from current  collaborations and net
income  from  investment  activities,  will be  sufficient  to fund its  planned
operations  into 2000.  However,  there can be no assurance  that the underlying
assumed levels of revenue and expense will prove accurate.  Whether or not these
assumptions  prove to be accurate,  the Company  will need to raise  substantial
additional  capital to fund its  operations.  The  Company  intends to seek such
additional funding through collaborative arrangements,  public or private equity
or debt  financing  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.

Risk Factors

         The Company is at an early stage of  development  and must be evaluated
in light of the  uncertainties  and  complications  present  in a  biotechnology
company.  The  Company has been in  existence  only since 1991 and to date three
cancer drug candidates (SU101, SU5416, and SU6668) have entered clinical trials.
To achieve  profitable  operations on a continuing basis, the Company,  alone or
with collaborative partners, must successfully develop,  manufacture,  introduce
and market its proposed products. Products, if any, resulting from the Company's
research and development programs are not expected to be commercially  available
for a number of years, even if they are developed  successfully and proven to be
safe and effective.  The Company has experienced  significant  operating  losses
since its inception.  The Company expects to incur significant  operating losses
at least for the next several years and expects cumulative losses to increase as
the  Company's  research and  development  efforts,  including  preclinical  and
clinical testing,  are expanded.  Substantially all of the Company's revenues to
date have been  received  pursuant to the Company's  collaborations.  Should the
Company or its collaborators fail to perform in accordance with the terms of any
of their  agreements,  any consequent loss of revenue under the agreements could
have a material adverse effect on the Company's  results of operations.  Some of
the  Company's  currently  proposed  products  are  subject to  development  and
licensing arrangements with the Company's collaborators.  Therefore, the Company
is dependent on the research and development efforts of these collaborators with
respect to some of its proposed  products  and is entitled  only to a portion of
the revenues,  if any, realized from the commercial sale of any of the potential
products covered by the collaborations in many  jurisdictions.  Before obtaining
regulatory  clearance  for  the  commercial  sale of any of its  products  under
development,  the  Company  must  demonstrate  through  preclinical  studies and
clinical  trials that the potential  product is safe and  efficacious for use in
humans for each target  indication.  The failure to adequately  demonstrate  the
safety and  efficacy  of a product  under  clinical  development  could delay or
prevent regulatory  clearance of the potential product and could have a material
adverse effect on the Company.  The foregoing  risks reflect the Company's early
stage of  development  and the nature of the  Company's  industry and  potential
products.  Also inherent at the Company's  stage of  development  are a range of
additional risks,  including  uncertainties  regarding protection of patents and
proprietary  rights,  government  regulation,   competition,   employee  issues,
manufacturing   uncertainties,   the  Company's  lack  of  sales  and  marketing
capabilities,  uncertainty of market acceptance of the Company's  products,  and
uncertainties regarding pharmaceutical pricing and reimbursement.

                                       30
<PAGE>
Year 2000

         The Year 2000 Issue is the result of information technologies, computer
systems and  scientific  and  manufacturing  equipment  being  written using two
digits  rather  than four  digits to define the  applicable  year.  As a result,
time-sensitive   functions  of  those   software   programs  and  equipment  may
misinterpret  dates after  January 1, 2000,  to refer to the  twentieth  century
rather  than the  twenty-first  century.  This could cause  system or  equipment
shutdowns,  failures or  miscalculations  resulting in  inaccuracies in computer
output or disruptions of operations,  including,  among other things, inaccurate
processing  of  financial  information  and/or  temporary  inability  to process
transactions,  manufacture  products,  or  engage  in  similar  normal  business
activities.

         The Company has a Year 2000 Project ("Y2K Project") in place to address
the  potential  exposures  related to the  impact on its  computer  systems  and
scientific and manufacturing  equipment  containing  computer related components
for the Year 2000 ("Y2K") and beyond.  Approximately  half of the  Company's Y2K
scheduled  work is complete.  The remaining work is scheduled to be completed by
the end of the fourth  quarter of 1999.  The Y2K  Project  phases  include:  (1)
inventorying  and prioritizing  business  critical  systems;  (2) Y2K compliance
analysis; (3) remediation activities including repairing or replacing identified
systems; (4) testing; and (5) developing contingency plans.

         An  inventory  of  business  critical   financial,   informational  and
operational systems, has been completed.  This inventory has been prioritized to
reflect key items of  significance.  Compliance  analysis is  approximately  70%
complete for these systems. Remediation activities vary by department,  however,
on the average,  remediation activities are approximately 50% complete.  Testing
of the Company's information technology infrastructure is 50% complete.  Testing
of business  critical  application  programs will begin in the second quarter of
1999, and is scheduled to be complete by the fourth quarter of 1999. Contingency
planning  will begin in the second  quarter of 1999.  The Company  believes that
with the  completed  modifications,  the Y2K  issue  will  not pose  significant
operational  problems for its key computer  systems and equipment.  However,  if
such  modifications  and  conversions  are not made,  or are not  completed in a
timely  fashion,  the Year  2000  issue  could  have a  material  impact  on the
operations of the Company,  the precise  degree of which cannot be known at this
time.

         In addition to risks associated with the Company's own computer systems
and equipment,  the Company has  relationships  with, and is to varying  degrees
dependent upon, a large number of third parties that provide information,  goods
and services to the Company.  These include financial  institutions,  suppliers,
vendors,  and research and  development  associates.  If significant  numbers of
these third parties  experience  failures in their computer systems or equipment
due to Y2K  noncompliance,  it could  affect  the  Company's  ability to process
transactions,  manufacture  products,  or  engage  in  similar  normal  business
activities.  While some of these risks are  outside the control of the  Company,
the Company has instituted  programs,  including internal records review and use
of external questionnaires, to identify key third parties, assess their level of
Y2K compliance, update contracts and address any noncompliance issues. The total
cost of the Y2K systems  assessments and conversions is funded through operating
cash flows and is not expected to exceed $200,000 of which approximately $20,000
has been spent to date. The actual financial impact could, however,  exceed this
estimate.

                                       31
<PAGE>
Item 7A.          QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

         The Company is exposed to market  risk,  including  changes to interest
rates and  foreign  currency  exchange  rates.  A  discussion  of the  Company's
accounting policies for financial  instruments and further disclosures  relating
to  financial  instruments  is  included  in the  Organization  and  Significant
Accounting Policies in the Notes to Consolidated Financial Statements.

         The Company  monitors  the risks  associated  with  interest  rates and
foreign currency  exchange rate risks and has established  policies and business
practices to protect against these and other  exposures.  The Company places its
investments in instruments that meet high credit quality standards, as specified
in the Company's investment policy guidelines; the policy also limits the amount
of credit exposure to any one issue,  issuer, or type of instrument and does not
permit  derivative  financial  instruments in its investment  portfolio.  As the
result,  the  Company  does not expect  any  material  loss with  respect to its
investment portfolio.

         The following table provides  information about the Company's financial
instruments  that are  sensitive to changes in interest  rates.  For  investment
securities, the table presents principal cash flows and related weighted-average
interest rates by expected maturity dates.

<TABLE>
<CAPTION>
                                                                                                 Fair
                                                                          There-               Value At
(in millions)                      1999       2000   2001   2002   2003   after       Total    12/31/98
                                  ---------------------------------------------------------------------
Assets

<S>                               <C>       <C>         <C>    <C>    <C>    <C>    <C>        <C>
Cash and Cash Equivalents         $ 24.0         -      -      -      -      -      $  24.0    $  23.9
 Weighted average interest rate     5.10%

Short-term investments            $ 15.5    $  7.5      -      -      -      -      $  23.0    $  23.4
 Weighted average interest rate     5.62%     6.17%
</TABLE>

                                       32
<PAGE>
Item 8.           FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

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


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

Not applicable.

                                       33
<PAGE>
                                    PART III

Item 10.          DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

         Bruce R. Ross resigned from the Company's Board of Directors  effective
February 18, 1999 for personal reasons.

         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, 1999 in connection with the  solicitation of proxies for the Company's
Annual Meeting of Stockholders to be held May 19, 1999 (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.

                                       34
<PAGE>
                                     PART IV

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

(a)

     1.   Financial Statements                                              Page

     The  following  financial  statements  of SUGEN,  Inc.  are  included  in a
     separate section of this report:

          Report of Ernst & Young LLP, Independent Auditors                  F-2

          Consolidated  Balance  Sheets at December  31, 1998 and
            1997                                                             F-3

          Consolidated  Statements of Operations  for each of the
            three years in the period ended December 31, 1998                F-4

          Consolidated  Statement of Stockholders' Equity for the
            three years in the period ended December 31, 1998                F-5

          Consolidated  Statements  of Cash  Flows  for the three
            years in the period ended December 31, 1998                      F-6

          Notes to Consolidated Financial Statements                         F-7

     2.   Financial Statement Schedules

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

                                       35
<PAGE>
     3.   Exhibits

Exhibit
Number            Exhibit

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

                                       36
<PAGE>
Exhibit
Number                                            Exhibit


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

                                       37
<PAGE>
Exhibit
Number                                            Exhibit

 10.43       Rights Agreement, dated as of August 1, 1995 between the Registrant
               and The First National Bank of Boston, as Rights Agent. (5)
 10.44       Form  of  Agreement  for  the  Purchase  of  Common  Stock  of  the
               Registrant and list of participants thereto,  dated September 21,
               1995. (4)
 10.45       Lease Financing Commitment Letter, dated September 12, 1995 between
               the Registrant and Financing for Science International, Inc. (4)
 10.46++     Collaboration  Agreement,  between the  Registrant  and ASTA Medica
               Aktiengesellschaft, dated December 5, 1995. (7)
 10.47       Agreement for the  Purchase of Common  Stock of the  Registrant  by
               ASTA Medica Aktiengesellschaft, dated December 5, 1995. (7)
 10.48++     Termination and  Redemption  Agreement  between the  Registrant and
               Amgen Inc., dated January 9, 1996. (8)
 10.49++     Warrant  to  purchase   200,000  shares  of  Common  Stock  of  the
               Registrant,  dated January 19, 1996,  issued by the Registrant to
               Amgen Inc. (8)
 10.50++     License Agreement between the Registrant and Zeneca Limited,  dated
               January 19, 1996. (8)
 10.51++     Cooperative   Research  and  Development   Agreement   between  the
               Registrant  and the National  Cancer  Institute,  dated April 12,
               1996. (9)
 10.52++     Termination notice,  dated May 24, 1996, between the Registrant and
               Yissum Research  Development  Company of The Hebrew University of
               Jerusalem (labeled "Sepsis/Inflammation"). (9)
 10.53++     Termination notice,  dated May 24, 1996. between the Registrant and
               Yissum Research  Development  Company of The Hebrew University of
               Jerusalem (labeled "Restenosis"). (9)
 10.54++     Research and  Development  Agreement  between  the  Registrant  and
               Arqule, Inc. (10)
 10.55++     Extension of Research and License  Agreement between the Registrant
               and the Max Planck Institute. (10)
 10.56       Promissory   Note   received  by  the   Registrant   from   Stephen
               Evans-Freke. (10)
 10.57       Agreement for the  purchase of Common  Stock of the  Registrant  by
               Vision Pharmaceuticals L.P. (10)
 10.58++     Collaboration  Agreement by and between the  Registrant  and Vision
               Pharmaceuticals L.P. and Allergan, Inc. (10)
 10.59++     Extension of Research  Agreement  between the Registrant and Yissum
               Development Company of the Hebrew University. (10)
 10.60       James L. Tyree Separation Agreement. (10)
 10.61++     Master  Lease  Agreement,   dated  March  28,  1997,   between  the
               Registrant and Transamerica Business Credit Corporation. (13)
 10.62++     Lease Financing  Commitment  Letter,  dated March 20, 1997, between
               the Registrant and Transamerica Business Credit Corporation. (13)
 10.63++     Build-To-Suit  Lease  Agreement,  dated June 11, 1997,  between the
               Registrant and Britannia Pointe Grand Limited Partnership. (14)
 10.64++     Form of Warrant for the  Purchase of Common  Stock,  dated June 30,
               1997,   issued  in  the  connection  with   Build-To-Suit   Lease
               Agreement,  between the  Registrant  and  Britannia  Pointe Grand
               Limited Partnership. (14)
 10.65++     Second Amended and Restated Research and License  Agreement,  dated
               June 30, 1997,  between the Registrant  and New York  University.
               (14)
 10.66++     Termination notice,  dated June 1, 1997, between the Registrant and
               Yissum Research  Development  Company of The Hebrew University of
               Jerusalem. (14)
 10.67       Form of Note Purchase Agreement,  dated as of September 8, 1997, by
               and between the Registrant and the investors named therein. (15)
 10.68++     Amended and Restated  Master Lease  Agreement,  dated  November 12,
               1997, and Lease Financing  Commitment  Letter,  dated November 5,
               1997,  between the Registrant and  Transamerica  Business  Credit
               Corporation.
*10.69       Restricted  Stock Bonus  Agreement  between the  Registrant  and K.
               Peter Hirth, Ph D., dated September 16, 1997.

                                       38
<PAGE>
Exhibit
Number                                            Exhibit

 10.70       Common Stock Purchase  Agreement dated January 12, 1998 between the
               Registrant and ASTA Medica Aktiengesellschaft. (16)
 10.71++     First  Amendment  to  Lease,  dated  March  8,  1998,  between  the
               Registrant and Britannia Pointe Grand Limited Partnership. (16)
 10.72       Common Stock Purchase  Agreement,  dated June 30, 1998, between the
               Registrant and Oceana Investment Corporation PLC. (17)
 10.73++     Heads of Agreement, dated June 30, 1998, between the Registrant and
               ProChon Biotech Limited. (17)
 10.74++     Collaboration   Agreement,   dated  July  28,  1998,   between  the
               Registrant, SUGEN International AG, and Taiho Pharmaceutical Co.,
               Ltd. (18)
*10.75       Restricted Stock Bonus  Agreement  between the Registrant and James
               L. Knighton, dated October 29, 1998.
*10.76       Letter  Agreement  between the  Registrant and Stephen Evans Freke,
               dated July 21, 1998.
 10.77+      First  Amendment  to  the  Collaboration  Agreement,   between  the
               Registrant and ASTA Medica Aktiengesellschaft, dated December 31,
               1998.
 10.78       Agreement for the  Purchase of Common  Stock of the  Registrant  by
               ASTA Medica Aktiengesellschaft, dated December 31, 1998.
 23.1        Consent of Ernst & Young LLP, Independent Auditors.
 24.1        Power of Attorney  (incorporated  in the signature page of the Form
             10-K).
 27          Financial Data Schedule.
-------------

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

                                       39
<PAGE>
(15)         Filed as an exhibit to the Form 8-K Current Report dated  September
               12, 1997, and incorporated herein by reference.
(16)         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, 1998.
(17)         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, 1998.
(18)         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, 1998.


b)     Reports on Form 8-K

     No reports on Form 8-K were filed during the year ended December 31, 1998.

                                       40
<PAGE>








                           Annual Report on Form 10-K

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

            Consolidated Financial Statements and Supplementary Data

                                Certain Exhibits

                          Year Ended December 31, 1998

                                   SUGEN, Inc.

                         South San Francisco, California











                                       F-1
<PAGE>
                REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS




The Board of Directors and Stockholders
SUGEN, Inc.

         We have audited the accompanying  consolidated balance sheets of SUGEN,
Inc. as of December 31, 1998 and 1997, and the related  consolidated  statements
of operations,  stockholders' equity, and cash flows for each of the three years
in the period ended  December  31,  1998.  These  financial  statements  are the
responsibility of the Company's management.  Our responsibility is to express an
opinion on these consolidated 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  consolidated  financial  statements are
free of material  misstatement.  An audit includes  examining,  on a test basis,
evidence  supporting the amounts and disclosures in the  consolidated  financial
statements.  An audit also includes assessing the accounting principles used and
significant  estimates  made by  management,  as well as evaluating  the overall
consolidated  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 consolidated financial position of SUGEN,
Inc.  at  December  31,  1998 and  1997,  and the  consolidated  results  of its
operations  and its cash flows for each of the three  years in the period  ended
December 31, 1998 in conformity with generally accepted accounting principles.




                                                             ERNST & YOUNG LLP



Palo Alto, California
February 5, 1999,
except for Note 13 as to which
the date is March 24, 1999.

                                       F-2
<PAGE>
                                   SUGEN, Inc.

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


                                                    December 31,    December 31,
                                                        1998            1997
                                                    ------------    ------------
ASSETS
Current assets:
  Cash and cash equivalents                          $  23,901        $ 23,816
  Short-term investments                                23,396          51,479
  Accounts receivable                                      373             237
  Prepaid expenses and other current assets              1,022             754
                                                     ---------        --------
      Total current assets                              48,692          76,286

Property and equipment, net                              7,863           4,601
Other assets                                             2,778           3,938
                                                     =========        ========
                                                     $  59,333        $ 84,825
                                                     =========        ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
  Accounts payable                                   $   4,883        $  1,991
  Accrued liabilities                                   13,910          10,267
  Deferred revenue                                       1,625             625
  Capital lease obligations - current portion            2,779           2,277
                                                     ---------        --------
      Total current liabilities                         23,197          15,160

Capital lease obligations - non-current portion          5,724           3,152
Senior custom convertible notes                          5,694          17,500
                                                     ---------        --------
  Total long-term liabilities                           11,418          20,652

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:
   16,613,567 and 15,307,146 in 1998 and 1997,
   respectively                                            166             153
  Additional paid-in capital                           157,005         141,426
  Deferred compensation                                   (971)           (695)
  Note receivable from stockholder                        (883)           (883)
  Accumulated other comprehensive income (loss)            (53)            (69)
  Accumulated deficit                                 (130,546)        (90,919)
                                                     ---------        --------
      Total stockholders' equity                        24,718          49,013
                                                     ---------        --------
                                                     $  59,333        $ 84,825
                                                     =========        ========

                             See accompanying notes.
                                       F-3
<PAGE>
                                   SUGEN, Inc.

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


                                               Years Ended December 31,
                                      ------------------------------------------
                                          1998          1997           1996
                                      ------------  ------------    ------------
Contract revenue (includes amounts
 from related party)                  $    14,916    $     6,031    $    13,650

Costs and expenses:
  Research and development                 46,851         34,585         29,792
  General and administrative                9,517          6,227          5,529
                                      -----------    -----------    -----------
  Total costs and expenses                 56,368         40,812         35,321
                                      -----------    -----------    -----------

Operating loss                            (41,452)       (34,781)       (21,671)

Other income and expenses:
  Interest income                           3,373          2,786          2,481
  Interest expense                         (1,548)        (1,065)          (691)
                                      -----------    -----------    -----------
  Other income, net                         1,825          1,721          1,790
                                      ===========    ===========    ===========
Net loss                              $   (39,627)   $   (33,060)   $   (19,881)
                                      ===========    ===========    ===========

Basic and diluted net loss per share  $     (2.49)   $     (2.47)   $     (1.81)
                                      ===========    ===========    ===========
Shares used in computing basic and
 diluted net loss per share            15,934,000     13,387,000     10,966,000
                                      ===========    ===========    ===========

                             See accompanying notes.

                                       F-4
<PAGE>
                                   SUGEN, Inc.

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

<TABLE>
<CAPTION>

                                                     Common Stock          Additional
                                             --------------------------     Paid-In        Deferred
                                                Shares         Amount       Capital      Compensation
                                             -----------    -----------   -----------    ------------
<S>                                           <C>           <C>           <C>            <C>
Balances at December 31, 1995                 10,634,917    $       106   $    81,696    $       (397)
Net unrealized loss on available-for-sale
 securities of $152                                   --             --            --              --
Net loss                                              --             --            --              --

Comprehensive income

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            (538)
Amortization of deferred compensation                 --             --            --             225
                                             -----------    -----------   -----------    ------------
Balances at December 31, 1996                 12,993,450            130       107,990            (710)
Net unrealized gain on available-for-sale
 securities of $69                                    --             --            --              --
Net loss                                              --             --            --              --

Comprehensive income

Issuance of Common Stock upon exercise of
 stock options and in connection with an
 employee stock purchase plan, net               288,696              3         1,543              --
Deferred compensation related to stock
 grant to an officer                              25,000             --           350            (350)
Issuance of Common Stock for cash in
 connection with the follow-on public
 offering, net of offering costs of $2,340     2,000,000             20        29,640              --
Fair value of warrants issued                         --             --         1,903              --
Amortization of deferred compensation                 --             --            --             365
                                             -----------    -----------   -----------    ------------
Balances at December 31, 1997                 15,307,146            153       141,426            (695)
Unnrealized gain on available-for-sale
 securities of $48, net of reclassification
 adjustment for gains included in net
 income of $32                                        --             --            --              --
Net loss                                              --             --            --              --

Comprehensive income

Issuance of Common Stock upon exercise of
 stock options and in connection with an
 employee stock purchase plan, net               156,528              2         1,415              --
Deferred compensation related to stock
 grant to an officer                              20,000             --           271            (271)
Issuance of Common Stock upon exercise of
 warrants, net                                     1,822             --            --              --
Issuance of Common Stock in connection
 with conversions of senior custom
 convertible notes, net                        1,002,349             10        10,271              --
Issuance of Common Stock for cash to ProChon      93,750              1         2,239              --
Issuance of Common Stock for cash to ASTA
 Medica Aktiengesellschaft                        31,972             --           625              --
Fair value of certain options and warrants
 granted to external parties                          --             --           294              --
Deferred compensation related to certain
 options granted to employees                         --             --           464            (464)
Amortization of deferred compensation                 --             --            --             459
                                             -----------    -----------   -----------    ------------
Balances at December 31, 1998                 16,613,567    $       166   $   157,005    $       (971)
                                             ===========    ===========   ===========    ============
</TABLE>


<TABLE>
<CAPTION>
                                                  Note         Accumulated
                                               Receivable         Other                           Total
                                                  From        Comprehensive    Accumulated    Stockholders'
                                               Stockholder        Income         Deficit         Equity
                                               -----------    -------------    -----------    -------------
<S>                                            <C>            <C>              <C>            <C>
Balances at December 31, 1995                  $        --    $         120    $   (38,084)   $      43,441
Net unrealized loss on available-for-sale                                   
 securities of $152                                     --             (152)                           (152)
Net loss                                                --               --        (19,881)         (19,881)
                                                                                              -------------
Comprehensive income                                                                                (20,033)
                                                                                              -------------
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 $2,133              --               --             --           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                                  --               --             --               --
Amortization of deferred compensation                   --               --             --              225
                                               -----------    -------------    -----------    -------------
Balances at December 31, 1996                         (883)             (32)       (57,965)          48,530
Net unrealized gain on available-for-sale
 securities of $69                                      --               69             --               69
Net loss                                                --               --        (33,060)         (33,060)
                                                                                              -------------
Comprehensive income                                                                                (32,991)
                                                                                              -------------
Issuance of Common Stock upon exercise of
 stock options and in connection with an
 employee stock purchase plan, net                      --               --             --            1,546
Deferred compensation related to stock
 grant to an officer                                    --               --             --               --
Issuance of Common Stock for cash in
 connection with the follow-on public
 offering, net of offering costs of $2,340              --               --             --           29,660
Fair value of warrants issued                           --               --             --            1,903
Amortization of deferred compensation                   --               --             --              365
                                               -----------    -------------    -----------    -------------
Balances at December 31, 1997                         (883)              37        (91,025)          49,013
Unnrealized gain on available-for-sale
 securities of $48, net of reclassification
 adjustment for gains included in net
 income of $32                                          --               16             --               16
Net loss                                                --               --        (39,627)         (39,627)
                                                                                              -------------
Comprehensive income                                                                                (39,611)
                                                                                              -------------
Issuance of Common Stock upon exercise of
 stock options and in connection with an
 employee stock purchase plan, net                      --               --             --            1,417
Deferred compensation related to stock
 grant to an officer                                    --
Issuance of Common Stock upon exercise of
 warrants, net                                          --               --             --               --
Issuance of Common Stock in connection
 with conversions of senior custom
 convertible notes, net                                 --               --             --           10,281
Issuance of Common Stock for cash to ProChon            --               --             --            2,240
Issuance of Common Stock for cash to ASTA
 Medica Aktiengesellschaft                              --               --             --              625
Fair value of certain options and warrants
 granted to external parties                            --               --             --              294
Deferred compensation related to certain
 options granted to employees                           --               --             --               --
Amortization of deferred compensation                   --               --             --              459
                                               -----------    -------------    -----------    -------------
Balances at December 31, 1998                  $      (883)   $          53    $  (130,652)   $      24,718
                                               ===========    =============    ===========    =============
</TABLE>
                             See accompanying notes.
                                       F-5
<PAGE>
                                   SUGEN, Inc.

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


                                                     Years Ended December 31,
                                                 ------------------------------
                                                   1998       1997       1996
                                                 --------   --------   --------

Cash flows from operating activities
Net loss                                         $(39,627)  $(33,060)  $(19,881)
Adjustments to reconcile net loss to net cash
  used in operating activities:
  Depreciation and amortization                     3,886      3,146      2,308
  Issuance of options for non-cash benefits           225         --         --
  Changes in operating assets and liabilities:
    Accounts receivable                              (136)        27         24
    Prepaid expenses and other current assets        (268)      (286)       278
    Other assets                                     (582)    (1,370)      (332)
    Accounts payable                                2,892      1,139        200
    Accrued liabilities                             3,721      2,861      3,819
    Deferred revenue                                1,000        250     (6,183)
                                                 --------   --------   --------
Net cash used in operating activities             (28,889)   (27,293)   (19,767)
                                                 --------   --------   --------
Cash flows from investing activities
Purchases of short-term investments               (45,043)   (54,884)   (27,998)
Maturities of short-term investments               48,521     31,515     36,973
Sales of short-term investments                    24,621      3,441      4,418
Purchases of property and equipment, net           (6,481)    (3,177)    (1,665)
                                                 --------   --------   --------
Net cash provided by (used in)
  investing activities                             21,618    (23,105)    11,728
                                                 --------   --------   --------
Cash flows from financing activities
Proceeds from issuance of Common Stock, net         4,282     31,206     27,395
Proceeds from issuance of senior custom
  convertible notes                                    --     17,500         --
Repurchase of Common Stock                             --         --     (2,698)
Proceeds from issuance of warrant                      --         --        200
Proceeds from lease financing of property
  and equipment                                     5,796      2,750      1,247
Payments under capital lease obligations           (2,722)    (2,094)    (1,479)
                                                 --------   --------   --------
Net cash provided by financing activities           7,356     49,362     24,665
                                                 --------   --------   --------
Net increase (decrease) in cash and
  cash equivalents                                     85     (1,036)    16,626
Cash and cash equivalents at beginning of year     23,816     24,852      8,226
                                                 --------   --------   --------
Cash and cash equivalents at end of year         $ 23,901   $ 23,816   $ 24,852
                                                 ========   ========   ========
Supplemental disclosure of cash flow information
Cash paid during the year for interest           $  1,332   $    847   $    691
                                                 ========   ========   ========

                             See accompanying notes.

                                       F-6
<PAGE>
                                   SUGEN, Inc.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


1. Organization and Significant Accounting Policies

Organization

            SUGEN, Inc. (the "Company"),  a Delaware corporation founded in July
1991, is a biopharmaceutical company focused on the discovery and development of
small  molecule  drugs  which  target  specific  cellular  signal   transduction
pathways.  These signalling  pathways are regulated by cell surface receptors or
intracellular   signalling   molecules   known  as   tyrosine   kinases   (TKs),
serine-threonine  kinases  (STKs)  and  tyrosine  phosphatases  (TPs).  Aberrant
signalling of TKs, STKs and TPs has been shown to result in a variety of chronic
and acute  pathological  diseases,  including  cancer  and  diabetes  as well as
dermatologic,  ophthalmic,  neurologic and immune disorders. The Company pursues
its drug  discovery  programs  independently  and in  collaboration  with  other
pharmaceutical companies.

Principles of Consolidation

         The  consolidated  financial  statements  include the Company's  wholly
owned subsidiaries,  SUGEN International AG ("SUGEN  International"),  and SUGEN
Europe  AG  ("SUGEN  Europe").  In June  1998,  the  Company  established  SUGEN
International incorporated in the Canton of Zug, Switzerland,  as a wholly-owned
subsidiary.  SUGEN  Europe was  established  in August 1998,  as a  wholly-owned
subsidiary of SUGEN  International.  SUGEN  International  and SUGEN Europe will
hold  certain  rights to the  Company's  technology  portfolio  outside of North
America.  All  material   intercompany   accounts  and  transactions  have  been
eliminated in consolidation.

Formation Costs

         Formation costs  associated with the  establishment of the subsidiaries
are expensed as incurred. These costs include legal, tax, and accounting fees.

Foreign Currency Translation

         The functional currency of the Company's  wholly-owned  subsidiaries is
the Swiss Franc.  Assets and liabilities of the  subsidiaries  are translated at
the United  States  Dollar  exchange  rate in effect at the balance  sheet date.
Amounts included in the subsidiaries' statements of operations are translated at
the average rate of exchange prevailing during the period. Adjustments resulting
from the  translation of financial  statements  denominated in Swiss Francs,  if
significant,  are  reflected  as a  separate  component  of other  comprehensive
income.

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  included  in
accumulated other  comprehensive  income in stockholders'  equity. The amortized
cost of debt  securities is adjusted for  amortization of premiums and accretion
of discounts to maturity. Such amortization is

                                       F-7
<PAGE>
1. Organization and Significant Accounting Policies (Continued)

included in interest  income.  Realized  gains and losses and  declines in value
judged to be other than  temporary  on  available-for-sale  securities  are also
included  in  interest  income.  The  cost of  securities  sold is  based on the
specific  identification  method.  Interest  and  dividends  on  securities  are
included in interest income.

Revenue Recognition

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

Research and Development Expense

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

Depreciation and Amortization

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

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

            Basic and diluted net loss per share is computed  using the weighted
average  number  of  common  shares  outstanding.   Stock  options,  convertible
preferred  stock, and warrants are excluded from the computation as their effect
is  antidilutive.  If the  Company  had been in a net income  position,  diluted
earnings per share would have been presented  separately and would have included
the effect of  outstanding  stock  options and  warrants,  calculated  using the
treasury stock method.

Comprehensive Income (Loss)

         As of January 1, 1998, the Company  adopted  Statement  130,  Reporting
Comprehensive Income.  Statement 130 establishes new rules for the reporting and
display of  comprehensive  income and its components;  however,  the adoption of
this Statement had no impact on the Company's net loss or shareholders'  equity.
Statement   130   requires   unrealized   gains  or  losses  on  the   Company's
available-for-sale  securities  and foreign  currency  translation  adjustments,
which prior to adoption were reported  separately in shareholders'  equity to be
included in other  comprehensive  income.  Prior year financial  statements have
been reclassified to conform to the requirements of Statement 130.

                                       F-8
<PAGE>
1. Organization and Significant Accounting Policies (Continued)

Recent Accounting Standards

         Effective  January  1998,  the Company  adopted  Statement of Financial
Accounting  Standard No. 131,  "Disclosures  about Segments of an Enterprise and
Related  Information",  ("SFAS 131") which established revised standards for the
reporting of financial and descriptive  information about operating  segments in
financial  statements.  The Company has determined  that it operates in only one
segment.  Accordingly,  the  adoption  of the  Statement  had no  impact  on the
Company's financial statements.

         In June 1998, the Financial Accounting Standards Board issued Statement
of  Financial   Accounting   Standards  No.  133,   "Accounting  for  Derivative
Instruments  and  Hedging  Activities",   ("SFAS  133").  SFAS  133  provides  a
comprehensive  and consistent  standard for the  recognition  and measurement of
derivatives and hedging activities.  The adoption of SFAS 133 is not expected to
have an impact on the Company's results of operations or financial condition.

2. Investments

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

<TABLE>
<CAPTION>
                                                Available-for-Sale Securities
                            -------------------------------------------------------------------
                                          1998                               1997
                            --------------------------------   --------------------------------
                                      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       $ 6,017   $       37   $   6,054   $11,518   $       17   $  11,535
U.S. corporate notes         14,648            9      14,657    36,393           16      36,409
U.S. corporate
  commercial paper           14,273            7      14,280    16,001            2      16,003

Certificates of deposit       4,970           --       4,970     3,999            2       4,001
Money market funds
and other                     7,336           --       7,336     7,347           --       7,347
                            -------   ----------   ---------   -------   ----------   ---------
                            $47,244   $       53   $  47,297   $75,258   $       37   $  75,295
                            =======   ==========   =========   =======   ==========   =========

Amounts included in:
  Cash equivalents          $23,896   $        5   $  23,901   $23,814   $        2   $  23,816
  Short-term investments     23,348           48      23,396    51,444           35      51,479
                            -------   ----------   ---------   -------   ----------   ---------
                            $47,244   $       53   $  47,297   $75,258   $       37   $  75,295
                            =======   ==========   =========   =======   ==========   =========
</TABLE>

            The estimated fair value amounts have been determined by the Company
using available market information and appropriate  valuation  methodologies and
for debt securities,  the fair value  approximates the amortized cost.  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,  1998,  the  average  portfolio  duration  was
approximately six months and the longest contractual maturity did not exceed two
years.  Gross realized gains and losses were immaterial  during 1998,  1997, and
1996.

                                       F-9
<PAGE>
3. Property and Equipment

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

                                                     1998           1997
                                                   --------       --------
Leasehold improvements                             $  3,960       $  4,084
Office and computer equipment                         4,508          3,251
Laboratory equipment                                  5,392          4,226
                                                   --------       --------
                                                     13,860         11,561
Accumulated depreciation and amortization            (5,997)        (6,960)
                                                   --------       --------
Net property and equipment                         $  7,863       $  4,601
                                                   ========       ========

            Property  and  equipment  under  capital  leases  amounted  to $10.4
million  and $8.9  million  as of  December  31,  1998 and  1997,  with  related
accumulated amortization of $4.0 million and $5.1 million, respectively.

4. Accrued Liabilities

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

                                                       1998          1997
                                                     -------       -------
Accrued research and development services            $ 6,859       $ 5,351
Accrued compensation                                   1,937         1,176
Accrued professional fees                              1,118           859
Other                                                  3,996         2,881
                                                     -------       -------
                                                     $13,910       $10,267
                                                     =======       =======

5. Research and Development Collaboration Agreements

Zeneca Limited - Related Party

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

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

            Zeneca participated in the Company's November 1997, October 1996 and
September  1995  financings  (see Note 9),  purchasing  an  additional  456,000,
509,000 and 281,875 shares of the Company's  Common Stock,  respectively.  These
additional   investments   maintained  Zeneca's  ownership  level  in  SUGEN  at
approximately  20% and increased its cumulative equity investment in the Company
to $36.8 million. As of December 31, 1998, Zeneca's ownership level in SUGEN was
approximately  18%.  Zeneca has committed not to increase its holdings above 20%
without the approval of SUGEN's Board of Directors.

                                      F-10
<PAGE>
5. Research and Development Collaboration Agreements (continued)

Allergan, Inc.

            In October 1996, the Company  established a research and development
collaboration with Allergan,  Inc. and Vision Pharmaceuticals L.P., an affiliate
of  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  worldwide.  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 agreement provides the Company to 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.

            In July 1998, the first  milestone in connection  with the Company's
collaboration with Allergan was achieved. In connection with this milestone, the
Company recognized $437,500 in contract revenue, net of royalties.

Amgen, Inc.

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

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

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.  In 1995 ASTA
Medica  purchased  431,137  shares of SUGEN  Common Stock for $9.0  million,  or
$20.88 per share.  In January 1998, the first  milestone in connection  with the
Company's  collaboration  with ASTA Medica was  achieved  in the Pan-Her  cancer
program.  ASTA Medica  exercised  its option to satisfy its  $500,000  milestone
obligation through the purchase of 18,665 shares of

                                      F-11
<PAGE>
5. Research and Development Collaboration Agreements (continued)

SUGEN Common  Stock at a price of $26.79 of which the premium  above fair market
value was recorded as revenue.

            In December  1998,  the Company and ASTA Medica entered into a first
amendment to the existing  collaboration  agreement to extend the period of time
for the screening and  selection of active  compounds  under the Pan-Her and Raf
programs.  The Company will receive $1.5 million in consideration  for extending
the  Pan-Her  project,  $750,000  of which was  received  in 1998;  $375,000  in
contract  revenue for 1998 services and the remaining  $375,000 for the purchase
of 13,307  shares of SUGEN Common  Stock at $28.18 per share.  In the event ASTA
Medica elects to extend the screening period under the Raf program,  the Company
would receive additional consideration.

ProChon Biotech Limited

            In June 1998, the Company entered into a collaboration  with ProChon
Biotech  Limited  ("ProChon")  to discover  and develop  small  molecule  signal
transduction  inhibitors  for the treatment of  achondroplasia  and other growth
disorders.  In connection  with this  collaboration,  the Company  received $3.0
million  comprised of a $750,000  initial  research  payment and a $2.25 million
stock  purchase of 93,750  shares of SUGEN Common Stock at $24.00 per share.  In
addition,  the  Company  will  receive  payments  upon  achievement  of  certain
milestones  and  royalties  with  respect to  worldwide  sales of  collaboration
products.

Taiho Pharmaceutical Ltd.

            In July 1998,  the  Company  entered  into an  agreement  with Taiho
Pharmaceutical Ltd. ("Taiho") for the development and  commercialization  of the
Company's angiogenesis inhibitors for the prevention and treatment of cancer. In
connection with this agreement,  Taiho will receive  marketing  rights in Japan,
while the Company will retain  marketing  rights for the rest of the world.  The
Company  received  an  initial  research  payment,  is  receiving  research  and
development funding and will receive additional payments upon the achievement of
certain  milestones.  The Company has  retained  the rights to  manufacture  and
supply products to Taiho for sale in Japan.

6. Leases

            In June 1997,  the Company  entered  into a  build-to-suit  facility
lease  agreement  which  extends  until 2015 with  renewal  options  totaling an
aggregate of ten years.  In  connection  with this  agreement,  the Company also
issued  warrants to purchase  shares of Common Stock.  The related fair value of
the warrants was recorded as deferred  expenses and is being  amortized over the
term of the  warrants.  In the fourth  quarter  of 1998,  the new  facility  was
completed, coinciding with the expiration of the Company's pre-existing facility
leases.  Rent expense for the office and  laboratory  facility  leases and other
operating  leases  amounted to $2.4  million,  $1.6 million and $1.6 million for
1998, 1997 and 1996, respectively.

            Future  minimum  payments  under  capital  and  operating  leases at
December 31, 1998 are as follows (in thousands):

                                                  Capital      Operating
                                                  Leases        Leases
                                                 --------      ---------
            Year ended December 31:
              1999                               $  3,633      $  3,033
              2000                                  2,890         3,057
              2001                                  2,129         3,780
              2002                                  1,573         3,856
              2003                                    113         3,943
                                                 --------
              Total minimum lease payments         10,338
              Amount representing interest         (1,835)
                                                 --------
              Present value of minimum lease
               payments                             8,503
              Less current portion                 (2,779)
                                                 --------
              Non-current portion                $  5,724
                                                 ========

                                      F-12
<PAGE>
6. Leases (continued)

            Annual   rental   obligations   under   operating   leases   average
approximately $3.5 million from 2004 through the end of the term of the lease.

7. Senior Custom Convertible Notes

            In September  1997, the Company  completed the sale of $17.5 million
principal  amount  of 5% Senior  Custom  Convertible  Notes due 2000 (the  "1997
Notes").  The 1997 Notes were sold at par, mature on September 12, 2000 and bear
interest  at a rate of 5% per annum  (payable  in Common  Stock or cash,  at the
Company's  option).  The 1997 Notes are  convertible  together  with accrued and
unpaid interest and subject to certain limitations,  into shares of Common Stock
at a conversion price equal to the average of the two lowest trade prices of the
Common  Stock  during  the 20 trading  days  immediately  preceding  the date of
conversion  (the  "Conversion  Price").  Since January 19, 1998,  the Conversion
Price may not exceed $14.87, 115% of the average closing bid price of the Common
Stock for the 20 trading days  immediately  preceding  such date.  In connection
with the issuance of the 1997 Notes,  the Company issued warrants to purchase up
to 332,500 shares of Common Stock at an exercise price of $16.74 per share. Cash
and non-cash  issuance costs (including the fair value of the warrants)  totaled
approximately  $2.6  million and are  recorded as  deferred  expenses  which are
amortized to expense  over the term of the 1997 Notes.  No purchaser of the 1997
Notes will be allowed to convert 1997 Notes and/or  warrants  which would result
in such  person  owning  more than 4.9% of the then  outstanding  Common  Stock.
Through  December 31, 1998,  $11.9  million of principal  and accrued and unpaid
interest relating to the Company's  outstanding  senior custom convertible notes
were  converted into  1,002,349  shares of Common Stock at the weighted  average
price of $11.96 per share.

            Upon the  occurrence  of  certain  events,  at the  election  of the
holders of the 1997 Notes,  the Company may be required to redeem in cash all or
a portion of the 1997 Notes at  redemption  prices which are at a premium to the
face value of the 1997 Notes.  If the 1997 Notes are not  converted  into Common
Stock upon  maturity in September  2000,  the 1997 Notes will be  exchanged  for
13.75%  five-year  debentures.  Pursuant  to the  terms  of the 1997  Notes,  in
addition to other  covenants,  the Company has agreed to certain  limitations on
the incurrence of additional indebtedness.

8. Commitments Under Research and Development Programs

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

            Under  these  programs,   commitments   for  research   funding  are
approximately  $1.5 million,  $1.4 million,  and $1.1 million in 1999, 2000, and
2001,  respectively.  The Company  anticipates  renewing certain  contracts that
expired  in  1997  which  will  increase  future  commitments.   Most  of  these
commitments  are  cancelable  within a  three-to-six  month period and limit the
amounts  payable by the Company for sponsored  research under the programs after
notice of cancellation.  Related  research and development  expenses under these
programs were $1.4 million,  $3.1 million,  and $3.5 million for 1998,  1997 and
1996, respectively.

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, 1998, 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

                                      F-13
<PAGE>
9. Stockholders' Equity (continued)

matters  submitted to a vote of the stockholders and shall rank, with respect to
the payment of dividends and the distribution of assets, junior to all series of
any other class of the Company's  Preferred Stock.  Subject to the rights of the
holders of any shares of Preferred Stock with respect to dividends,  the holders
of shares of Junior  Preferred  Stock,  in  preference  to the holders of Common
Stock,  shall be  entitled  to  receive  quarterly  dividends,  when,  as and if
declared by the Board of  Directors.  As of December 31, 1998,  no dividends had
been declared and no shares were outstanding.

Common Stock

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

            The  total  number  of  shares  of  Common  Stock   outstanding  was
16,613,567 as of December 31, 1998, of which 50,875 were subject to  repurchase.
At December 31, 1998, the Company has reserved  5,511,691 shares of Common Stock
for issuance  upon  exercise of warrants and options and  conversion of debt and
38,300 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  the  Senior  Custom  Convertible  Notes,   certain
collaboration  agreements,  and various  license,  facility and equipment  lease
financing arrangements (also see Notes 5, 6 and 7):

                    Warrants Outstanding at December 31, 1998
             ---------------------------------------------------------
             Number of     Price Per    Aggregate
              Shares         Share        Price        Expiration Date
             ---------     ---------   ----------      ---------------
              332,500      $   16.74   $5,566,050      September 2000
              200,000          15.50    3,100,000      January 2003
               70,000          15.44    1,080,800      June 2002
               40,000           3.75      150,000      October 1999
               36,847          10.31      379,985      July 2000
               13,598          12.87      175,006      December 2001
               10,000          16.64      166,400      March 2003
                7,200          11.25       81,000      December 1999

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
                                      F-14
<PAGE>
10. Stock Option and Purchase Plans (continued)

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,  1999.  As of
December 31, 1998, 161,700 shares had been issued under the ESPP.

1992 Stock Option Plan

            The 1992 Stock  Option Plan (the  "Plan")  provides for the grant of
options to purchase  shares of Common Stock to  employees,  including  officers,
directors, and consultants, upon terms determined by the Board of Directors. The
options  granted  under  the Plan  may be  either  incentive  stock  options  or
nonstatutory  stock options.  As of December 31, 1998, an aggregate of 4,250,000
shares of Common Stock had been  reserved for issuance  under the Plan, of which
750,000 shares are subject to stockholders' approval.

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

            As of December 31,  1998,  options to purchase  1,194,477  shares of
Common  Stock  were  exercisable,  of which  73,163  shares  would be subject to
repurchase if all were exercised.

            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 prior to shareholder  approval in the period  between  December
1997 through May 1998. This deferred  compensation  expense aggregated  $464,000
and is being amortized over the related vesting period.

1994 Non-Employee Directors' Stock Option Plan

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

            Options granted under this Plan to Non-Employee Directors upon their
initial  election to the Board will vest and be exercisable in five equal annual
installments  commencing  on the  date  one year  after  the date of the  grant.
Vesting is contingent upon the continuous service of the director.  The director
may elect at any time while a  Non-Employee  Director of the Company to exercise
the option  prior to vesting of the option.  Any  unvested  shares so  purchased
shall be subject to a repurchase  right in favor of the Company.  The Directors'
Plan has been amended to provide for automatic vesting of options granted upon a
change of control, as defined. Options granted annually to existing Non-Employee
Directors  vest in full on the  date ten  days  prior  to the date of the  first
annual  meeting of  stockholders  of the Company  subsequent  to the date of the
grant.  The exercise  price of options  granted under the  Directors'  Plan must
equal or exceed the fair market  value of the Common Stock on the date of grant.
Under this plan, 380,000 shares of Common Stock have been reserved for issuance.
As of December 31, 1998,  options for 186,000 shares were outstanding,  of which
184,000  and  53,000  shares  were  exercisable  and  subject to  repurchase  if
exercised, respectively.

Long-Term Objectives Stock Option Plan for Senior Management

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

                                      F-15
<PAGE>
10. Stock Option and Purchase Plans (continued)

market value on the date of grant for incentive stock options.  Under this plan,
270,000 shares of Common Stock have been authorized for issuance.

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

            As  of  December   31,  1998,   options  for  180,000   shares  were
outstanding,  of which  153,000  shares and 74,250 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 1998, 1997, and 1996, respectively:  risk-free interest rates of
4.8%, 5.9% and 5.9%;  dividend yields of 0%; volatility  factors of the expected
market  price  of the  Company's  Common  Stock  of  .53,  .55  and  .57;  and a
weighted-average expected life of the options of three 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.

            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):

                                           1998          1997          1996
                                        ----------    ----------    ----------
         Pro forma net loss             $  (42,766)   $  (35,604)   $  (21,813)
                                        ==========    ==========    ==========
         Pro forma net loss per share   $    (2.68)   $    (2.66)   $    (1.99)
                                        ==========    ==========    ==========

            The weighted average fair value of options granted during 1998, 1997
and 1996 was $5.64, $5.66 and $5.39, respectively.

                                      F-16
<PAGE>
10. Stock Option and Purchase Plans (continued)

            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:

                                                       Outstanding Stock Options
                                                       -------------------------
                                           Shares                      Weighted
                                          Available                     Average
                                        For Grant of     Number of       Price
                                           Options        Shares       per Share
                                        ------------    ----------     ---------

         Balance at December 31, 1995        456,660     1,786,428        6.49
         Shares authorized                   650,000            --          --
         Options granted                    (652,066)      652,066       12.08
         Options exercised                        --      (305,072)       4.60
         Options forfeited                   235,559      (235,559)       7.85
                                        ------------    ----------
         Balance at December 31, 1996        690,153     1,897,863        8.54
         Shares authorized                   900,000            --          --
         Options granted                    (713,500)      713,500       13.15
         Options exercised                        --      (254,836)       5.13
         Options forfeited                    93,186       (93,186)      11.12
                                        ------------    ----------
         Balance at December 31, 1997        969,839     2,263,341       10.27
         Shares authorized                   750,000            --
         Options granted (a)                (834,656)      834,656       13.61
         Options exercised                        --      (109,285)       7.93
         Options forfeited                    97,689       (97,689)      12.75
                                        ------------    ----------
         Balance at December 31, 1998        982,872     2,891,023       11.24
                                        ============    ==========

       Note:

         (a) Of the 834,656 options granted in 1998, options for 22,128 shares
             are subject to stockholder approval.

The following table  summarizes  information  concerning  currently  outstanding
options:

                                                            Exercisable
                      Outstanding Stock Options            Stock Options
                 -----------------------------------   ---------------------
                               Weighted
                                Average    Weighted                Weighted
   Range of                    Remaining    Average                 Average
   Exercise        Number     Contractual  Exercise      Number    Price Per
    Prices       of Shares        Life       Price     of Shares     Share
--------------   ---------    -----------  ---------   ---------   ---------

$0.38 - $0.38       25,508        3.4      $    0.38      25,508   $   0.38
1.13 - 1.13         75,308        4.6           1.13      75,308       1.13
2.44 - 2.44         44,760        5.2           2.44      41,694       2.44
5.00 - 7.50        300,248        6.0           6.33     284,590       6.32
7.88 - 11.75       821,860        7.2          10.44     625,682      10.28
11.88 - 17.63    1,614,041        9.1          13.41     475,609      13.49
19.00 - 19.00        9,298        8.5          19.00       3,086      19.00
                 ---------                             ---------
$0.38 - $19.00   2,891,023        8.0      $   11.24   1,531,477       9.73
                 =========                             =========

                                      F-17
<PAGE>
11. Related Party Transactions

            In 1995,  the Company  entered into a  collaboration  agreement with
Zeneca (see Note 5). As of December 31, 1998, Zeneca owned  approximately 18% of
the Company's outstanding Common Stock.

            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  stockholders'  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  is  approximately
$446,000 of loans receivable from certain key employees and officers at December
31, 1998.

            In September 1997 and October 1998,  the Company  granted a total of
45,000  shares of Common  Stock,  to  certain  officers  and  recorded  deferred
compensation  expense  in the  combined  amount  of  $621,000,  which  is  being
amortized over the vesting period of the shares.

            Revenues derived under  arrangements  with related parties comprised
approximately  21%,  51%,  and 22% of total  revenues  in 1998,  1997 and  1996,
respectively.

12.      Income Taxes

            The Company's  current loss consists of a loss from U.S. and foreign
operations of $18.6 million and $21.0 million, respectively.

            As of  December  31,  1998,  the  Company  had federal and state net
operating loss  carryforwards of approximately  $104.7 million and $3.8 million,
respectively.   The  Company  also  had  federal  and  California  research  and
development  tax credit  carryforwards  of  approximately  $4.1 million and $3.1
million,  respectively.  The federal net operating loss and credit carryforwards
will expire at various  dates  beginning in the year 2006 through  2018,  if not
utilized.  The State of California  net operating  losses will expire at various
dates beginning in 1999 through 2003, if not utilized.

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

            For Swiss tax  purposes,  the  Company has net  operating  losses of
approximately  $21.0  million  which will expire in 2005.  The Company  does not
expect to derive future tax savings from these losses.

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

                                                         1998        1997
                                                       --------    --------
         Net operating loss carryforwards              $ 35,800    $ 30,400
         Research credits carryforwards                   6,300       3,700
         Capitalized R&D                                  3,100       1,700
         Deferred revenue                                   200         100
         Other - net                                      2,300       1,900
                                                       --------    --------
         Total deferred tax assets                       47,700      37,800
         Valuation allowance for deferred tax assets    (47,700)    (37,800)
                                                       --------    --------
         Net deferred tax assets                       $     --    $     --
                                                       ========    ========

                                      F-18
<PAGE>
12. Income Taxes (continued)

            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
$14.3 million and $8.0 million for the fiscal years ended  December 31, 1997 and
1996, respectively.

            Deferred tax assets as of December  31, 1998  include  approximately
$1.5 million  relating to the exercise of stock options,  which will be credited
to equity when realized.

13. Subsequent Events

            In February 1999, the Company  secured a $5.0 million  capital lease
line to finance the purchase of equipment and tenant improvements.

            In March 1999, the Company  completed the private placement of $28.0
million principal amount of 12% Senior Convertible Notes due 2002 (the "Notes").
The Notes are convertible into SUGEN Common Stock at $20.50 per share.  Interest
on the Notes may be paid in SUGEN Common Stock or cash, at the Company's option.
As part of the Note placement,  purchasers were issued warrants (the "Warrants")
to acquire up to an  additional  $21.0  million  principal  amount of 12% Senior
Convertible  Notes which will mature on the third  anniversary  date of issuance
(the "Warrant  Notes").  The Warrant Notes will have  principally the same terms
and conditions as the original Notes. The Warrants to purchase the Warrant Notes
are exercisable  until March 2001. The Company has the right, at its option,  to
require  the  exercise  of the  Warrants  by the  holders  in the event that the
closing price of the Company's  Common Stock exceeds  certain  levels during the
term of the  Warrants,  subject to certain  limitations.  On or before August 6,
1999, the then outstanding  balance of the 1997 Notes with a floating conversion
mechanism  (See Note 7) will be converted  into SUGEN Common Stock in accordance
with  their  terms  or,  at a  premium  of  approximately  125% to 132% of their
principal  amount,  exchanged for (i) an additional  principal amount of the 12%
Senior  Convertible  Notes due 2002 (the "Exchange  Notes") and (ii) Warrants to
acquire Warrant Notes in a principal amount equal to 75% of the principal amount
of the Exchange Notes.

            The  estimated  fair value of the Warrants will be determined at the
time of  issuance  and  adjusted  to their  fair  value  while  outstanding  and
unexercised.  The non cash fair value of the  Warrants,  together with the costs
and expenses  related to the issuance of the Notes and Warrants will be recorded
as debt  issuance  costs and  amortized  to expense  over the term of the Notes.
Further, if upon exercise of the Warrants the fair value of the Company's Common
Stock is more than $20.50 per share (the conversion price of the Warrant Notes),
the  Company  may record an  additional  non cash  expense  for such  beneficial
conversion  feature (if such benefit exceeds the previously  recorded fair value
of the Warrants).

                                      F-19
<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 South
San Francisco, State of California, on March 29, 1999.

                                        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  James  L.
Knighton,  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 29, 1999
--------------------------     Chairman of the Board
(Stephen Evans-Freke)          (Principal Executive Officer)




/s/ James L. Knighton          Senior Vice President and         March 29, 1999
--------------------------     Chief Financial Officer
(James L. Knighton)            (Principal Financial and
                               Accounting Officer)




/s/ Axel Ullrich               Director                          March 29, 1999
--------------------------
(Axel Ullrich)
<PAGE>


/s/ Richard D. Spizzirri       Director and Secretary            March 29, 1999
--------------------------
(Richard D. Spizzirri)



/s/ Jeremy L. Curnock Cook     Director                          March 29, 1999
--------------------------
(Jeremy L. Curnock Cook)



/s/ Heinrich Kuhn              Director                          March 29, 1999
--------------------------
(Heinrich Kuhn)



/s/ Donald E. Nickelson        Director                          March 29, 1999
--------------------------
(Donald E. Nickelson)