================================================================================

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

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


                               Amendment No. 1 to
                                    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.
================================================================================

<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.  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. Meanwhile, the Company
will be working with certain  investigators on NCI-sponsored Phase II studies in
other cancer indications.  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.  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 still 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.

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.


                                        3
<PAGE>


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

                                        5
<PAGE>

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."







                                        6


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

<CAPTION>
-----------------------------------------------------------------------------------------------------------------------
          Program                       Indication(s)                 Status(1)                     Rights
-----------------------------------------------------------------------------------------------------------------------
                                                      Cancer
-----------------------------------------------------------------------------------------------------------------------
<S>                         <C>                                   <C>                   <C>
SU101                       First Relapse malignant glioma        Phase III             SUGEN
PDGF TK Inhibitor            - Monotherapy
                            Newly diagnosed malignant glioma      Phase II              SUGEN
                             - Combination therapy with BCNU
                            Prostate cancer                       Phase I/II pilot      SUGEN
                            -Combination therapy  with            to prepare for
                            mitoxantrone Ovarian, lung            Phase III             SUGEN
                            and anaplastic astrocytoma            Phase II
-----------------------------------------------------------------------------------------------------------------------
SU5416                      Angiogenesis inhibition               Phase I               Taiho
Flk-1/KDR TK Antagonist      -Most solid tumor types                                       Japan
                            Colorectal cancer                     Phase III (summer)    SUGEN
                            Non small cell lung cancer            Phase III                United States and rest of
                            AIDS-related Kaposi's sarcoma         Phase II/III          world
-----------------------------------------------------------------------------------------------------------------------
SU6668                      Angiogenic and cytostatic anti-tumor  Phase I               SUGEN
Broad Spectrum Inhibitor    activity
                            -Most solid  tumors
-----------------------------------------------------------------------------------------------------------------------
Raf Antagonist              Pancreatic, bladder cancers           Lead compounds        ASTA Medica
                                                                                           Europe and South America
                                                                                        SUGEN
                                                                                        United States and rest of
                                                                                        world
-----------------------------------------------------------------------------------------------------------------------
Pan-Her Antagonist          Breast, ovarian, gastric, lung, head  Preclinical           ASTA Medica
                            and neck, prostate cancers                                     Europe and South America
                                                                                        SUGEN
                                                                                           United States and rest of
                                                                                        world
-----------------------------------------------------------------------------------------------------------------------
GRB2 Antagonist             Multiple TK-driven tumors             Lead compounds        SUGEN
-----------------------------------------------------------------------------------------------------------------------
Met TK Antagonist           Stomach, colorectal and lung cancers  Screening             SUGEN
-----------------------------------------------------------------------------------------------------------------------
Five 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>

         "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.  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. Meanwhile, the Company
will be working with certain  investigators on NCI-sponsored Phase II studies in
other cancer indications.  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
         (6) show minimal systemic toxicity.

                                       11
<PAGE>

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 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

                                       12
<PAGE>

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   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

                                       13
<PAGE>

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 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.

                                       14
<PAGE>

         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  collaborations  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.  The Company has recorded the amount received in excess of the
fair market value of the Common Stock issued as revenue in  accordance  with its
policy.  Fair market value of the Common Stock issued  equals the 20 day average
closing  price  as  defined  in the  ASTA  Medica  agreement.  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 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.

                                       15
<PAGE>

Allergan

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

         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 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

                                       16
<PAGE>

unless NYU terminates  the agreement upon  insolvency of the Company or due to a
material breach by the Company. Upon such termination of the agreement, NYU will
continue  to own  the  rights  to the  technology  it has  developed  under  the
agreement.  The Company is  obligated  to pay  royalties  to NYU on sales of any
SUGEN products for which an IND is filed within four years of the end of the NYU
research  period  except  for  certain  in-licensed  products.  As  part of this
arrangement, NYU purchased 200,000 shares of SUGEN Common Stock at the Company's
formation.

Max-Planck Society

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

         Max-Planck-Institut fur Biochemie.  The Company entered into a research
and license  agreement with MPI and Garching which expired in August 1997 but is
expected  to be  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.

Research and Development Activities


         Research   and   development   costs   reimbursed   by  the   Company's
collaborators amounted to $14.9 million, $6.0 million and $13.6 million in 1998,
1997  and  1996,  respectively.  Company-sponsored  research  amounted  to $32.0
million, $28.6 million and $16.2 million for the same periods then ended.


Other Sources of Materials for Screening

         The Company has entered into a number of agreements  designed to obtain
novel  biochemical  and  biological  compounds and extracts for screening in its
proprietary  assay  systems.  These  agreements  cover a broad range of chemical
entities  from  sources  across the  world.  SUGEN  also has an  agreement  with
Panlabs,  Inc. of Bothell,  Washington  for the supply of  microbial  and fungal
extracts and the isolation and  identification  of active  components from these
extracts. The original agreement was entered into in March 1993 and is renewable
for  successive  one year periods.  The  agreement  most recently was amended in
early 1997,  under which  Panlabs  will  supply the Company  with a  significant
number of extracts  from which the Company can select a portion to be designated
as "selected organisms." SUGEN will own all rights to the selected organisms and
the active compounds  produced by them,  including any  derivatives.  Panlabs is
supplying other  companies with similar  extracts under similar  conditions.  In
June  1995,  SUGEN  and  Toyama  Prefectural  University  of Tokyo  initiated  a
collaboration  to  discover  new drugs  for the  treatment  of cancer  and other
diseases by inhibiting TKs and TPs and related molecules. A research team headed
by Professor Toshikazu Oki in the University's  Biotechnology Research Center is
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'

                                       17
<PAGE>

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  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.


                                       18
<PAGE>

         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 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.

                                       19
<PAGE>

         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  effective  or more  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.

                                       20
<PAGE>

         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  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.

                                       21
<PAGE>

         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.

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.

                                       22
<PAGE>


                                  RISK FACTORS

         This  report  contains  forward-looking  statements.  These  statements
relate to  future  events or our  future  clinical  or  product  development  or
financial  performance.   In  some  cases,  you  can  identify   forward-looking
statements  by phrases  such as "may,"  "will,"  "should,"  "expects,"  "plans,"
"anticipates,"  "believes,"  "estimates," "predicts," "potential," or "continue"
or the negative of such terms and other  comparable  phrases.  These  statements
reflect  only our  current  expectations.  Actual  events or results  may differ
materially.  In evaluating these statements,  you should  specifically  consider
various factors, including the risks outlined below. These factors may cause our
actual results to differ materially from any forward-looking  statements. We are
not  undertaking  any  obligation  to  update  any  forward-looking   statements
contained in this report to reflect any future events or developments.

Our  product  candidates  are at an early  stage of  development,  and if we are
unable to successfully develop and commercialize products, we would not generate
revenues.

         To date, none of our product candidates have been  commercialized.  All
of our  product  candidates  are in early  stages of  development,  and our drug
discovery and development  methods are relatively new and untested.  We face the
risks of failure  inherent in  developing  biotechnology  products  based on new
technologies.  To achieve profitable operations on a continuing basis, we, alone
or  with  collaborative  partners,   must  successfully  develop,   manufacture,
introduce  and  market  our  proposed  products.  To  date,  three  of our  drug
candidates  have entered human clinical  testing.  We cannot predict  whether we
will be able to develop any commercial  products.  Products,  if any,  resulting
from our research and  development  programs are not expected to be commercially
available until at least 2001,  even if successfully  developed and proven to be
safe and effective.

If we are unable to raise  additional  funds, we may not be able to continue our
product development efforts, and the future viability of our business will be at
risk.

         Our product development programs are very costly. We expect to continue
to spend substantial  funds for our research,  preclinical and clinical testing,
and operations for the foreseeable future. Our future cash liquidity and capital
requirements will depend on many factors, including:

         o        continued  scientific progress of our research and development
                  programs;

         o        our ability to establish collaborations with partners;

         o        progress of our  preclinical  and  clinical  trials of product
                  candidates;

         o        the time and costs of obtaining regulatory clearances;

         o        the  costs   involved  in   obtaining   and   protecting   our
                  intellectual property rights;

         o        competing technological developments;


                                       23
<PAGE>


         o        changes  in  our  existing   research  and   commercialization
                  collaboration arrangements; and

         o        costs associated with commercialization of our products.

         As of March 31, 1999, we had  approximately  $61.9 million available in
cash and short-term investments,  and we incurred approximately $19.2 million in
development and operating  expenses in the first quarter of fiscal year 1999. We
believe  that  our  existing  capital  resources,  together  with  facility  and
equipment lease lines, the anticipated revenues from current  collaborations and
projected interest income,  will support our current and planned operations into
2000.  However,  we cannot  predict  whether our  assumed  levels of revenue and
expense will prove accurate.

         We may need to raise additional funds if:

         o        our lead product candidates, SU101, SU5416 and SU6668, are not
                  sufficiently safe or effective to be commercialized;

         o        we do not establish future collaborations with partners;

         o        our clinical  trials of SU101,  SU5416 and SU6668 are delayed,
                  are  not   successful  or  are  more  costly  than   currently
                  predicted; or

         o        additional clinical trials are required for product approval.

         We cannot predict whether we will be able to raise  sufficient funds in
the future.  If adequate funds are not  available,  we may be unable to fund our
research and development  efforts,  conduct our clinical trials, or successfully
commercialize and market our product candidates. If we raise additional funds by
issuing equity securities,  our existing stockholders may experience substantial
dilution.  If we raise additional funds through collaborative  arrangements,  we
may be required to give up some  commercialization  rights to our  technologies,
product candidates or products.

We have only a limited operating history,  and we expect to continue to generate
losses.

         We may never achieve a profitable level of operations. To date, we have
engaged  primarily in research and development.  Our development and general and
administrative  expenses have resulted in  substantial  losses.  As of March 31,
1999, we had an accumulated  deficit of approximately  $145.5 million. We expect
our losses to continue at least  through 2001.  We expect  cumulative  losses to
increase  substantially  as our  research  and  development  efforts,  including
preclinical and clinical testing, are expanded. Our ability to become profitable
will depend on our ability to, among other things:

           o      obtain and protect our intellectual property rights;



                                       24
<PAGE>

           o      complete our product development;

           o      obtain product regulatory approvals;

           o      manufacture and market our proposed products; and

           o      achieve market acceptance for our products.


We rely  heavily on  collaborations  for the  discovery,  development,  clinical
testing and  commercialization  of our product  candidates.  Our  dependence  on
collaborators  may delay or impair our ability to generate revenues or adversely
affect our profitability.

         Our  strategy  for  the  discovery,   development,   clinical  testing,
manufacturing and  commercialization  of our proposed products includes entering
into various  collaborations with corporate partners,  licensors,  licensees and
others,  and is dependent upon the subsequent  success of these outside partners
in performing their responsibilities. If our partners are not successful, we may
not be able  to  continue  our  product  development  efforts,  and  the  future
viability of our company will be at risk. Currently, we have collaborations with
the following partners:

           o      Allergan, Inc. and its affiliate Vision Pharmaceuticals, L.P.

           o      ASTA Medica Aktiengesellschaft

           o      Esteve S.A. of Spain

           o      Max-Planck Society

           o      National Cancer Institute

           o      New York University Medical Center

           o      ProChon Biotech Limited

           o      Taiho Pharmaceutical Ltd.

           o      Zeneca Limited

         Our  ability to  develop,  test,  manufacture  and market our  proposed
products  successfully depends  significantly on our partners' performance under
these,  and future,  collaborations.  We cannot control the amount and timing of
resources to be devoted to our collaborations by corporate  partners.  We cannot
be  certain  that our  partners  will  perform  their  obligations  under  these
collaborations  or  that  we will  succeed  in  identifying  lead  compounds  or
developing  commercial products from these or future  collaborations.  We cannot
predict  whether our  partners  or any future  partners  will  pursue  their own
existing or alternative  technologies  in preference to those being developed in
our collaborations.  Generally,  our collaborative  arrangements do not



                                       25
<PAGE>

obligate our partners to devote a specific level of funding to research  related
to our potential  products.  Our  collaborative  partners are free to select the
methods they use in pursuing their research  targets.  We cannot predict whether
our  collaborative  partners  will continue to conduct  research  related to our
potential  products or conduct  research and select research targets in a manner
consistent  with  our  best  interests.  If our  collaborative  partners  do not
continue to conduct  research related to our potential  products,  our business,
financial  condition  and results of operations  could be  materially  adversely
affected.  We also cannot predict whether we will derive any additional  revenue
from such arrangements over and above the contractual payment amounts.

         o        Termination  of  collaborations.  The  termination or material
                  reduction  in the  scope of our  collaborations  could  have a
                  material adverse effect on our business.  Unless extended, our
                  research  collaboration with Allergan expires in October 1999,
                  research funding under our  collaboration  with Zeneca expires
                  in March 2000, and our collaboration  with New York University
                  expires in September 2001. Our  collaboration  with Max-Planck
                  expired in August  1997,  and the  restatement  and renewal of
                  this arrangement is currently under negotiation.  We expect to
                  complete  written  documentation  of  the  renewed,   modified
                  collaboration  that is consistent with the oral  understanding
                  Max-Planck  and  SUGEN  have  been  operating  under  to date.
                  However,  we cannot  predict  whether any of these  agreements
                  will be renewed on favorable  terms, if at all.  Additionally,
                  our   collaborations   may   be   terminated   under   certain
                  circumstances. If any of our partners terminates its agreement
                  or fails to provide  adequate  funding to support our research
                  and  product  development  efforts,  we will  need  to  obtain
                  additional  funding from other sources and will be required to
                  devote   additional   resources  to  the  development  of  our
                  products. We cannot predict whether we would be able to find a
                  suitable  substitute partner in a timely manner, on reasonable
                  terms, or at all. If we fail to find a suitable  partner,  our
                  research,  development or commercialization of certain planned
                  products would be delayed significantly,  which would cause us
                  to incur additional expenditures. In addition,  termination of
                  a  collaboration  may cause us to give up rights to technology
                  or products jointly developed under the collaboration.

         o        Future collaborations.  In addition, we cannot predict whether
                  you that we will be able to negotiate additional collaborative
                  arrangements  on  acceptable  terms,  if at all,  or that such
                  future  collaborations will be successful.  To the extent that
                  we choose not to or are unable to establish such arrangements,
                  it would require  substantially  greater  capital to undertake
                  research,  development and marketing of our proposed  products
                  at our own expense. In addition,  we may encounter significant
                  delays in  introducing  our  proposed  products  into  certain
                  markets or find that the  development,  manufacture or sale of
                  our proposed products in such markets is adversely affected by
                  the absence of such collaborative agreements. Additionally, if
                  we  do  not  establish  such  future  collaborations,  we  may
                  encounter   significant   delays   in  the   development   and
                  commercialization  of our proposed  products which would cause
                  us to incur substantial additional expenditures.

                                       26
<PAGE>

If we are  unable to  protect  our  intellectual  property,  we may be unable to
prevent other companies from using our technology in competitive products. If we
are unable to operate our  business  without  infringing  intellectual  property
rights of others,  we may be prevented from developing and  commercializing  our
product candidates.

         Our technology will be protected from  unauthorized  use by others only
to the extent that it is covered by valid and enforceable patents or effectively
maintained as trade  secrets.  As a result,  our success  depends in part on our
ability to:

         o        obtain patents;

         o        protect trade secrets;

         o        operate  without  infringing  on  the  proprietary  rights  of
                  others; and

         o        prevent others from infringing on our proprietary rights.

         As of June 14,  1999,  we held  exclusive  rights to at least 60 issued
U.S. patents, exclusive rights to at least 10 U.S. patent applications for which
notices  of  allowances  had been  received,  and had  filed  or held  exclusive
licenses to approximately 110 U.S. patent  applications.  We also hold exclusive
rights to many  corresponding  foreign patent  applications.  Patent matters for
biotechnology  companies,  especially  concerning  cell  receptors  and  the DNA
encoding them, involve complex legal and factual questions, so we cannot predict
the  availability and scope of patent  protection.  We cannot be certain that we
will develop  products  that are  patentable or that patents will issue from our
pending  applications.  In addition,  we cannot  predict  whether our patents or
patents that we license from others will be  enforceable  and afford  protection
against  competitors.  Our  patents or patent  applications,  if issued,  may be
challenged,  invalidated or  circumvented.  Our patent rights may not provide us
with proprietary  protection or competitive  advantages against competitors with
similar  technologies.  Others may independently develop technologies similar to
ours or  independently  duplicate our  technologies.  Due to the extensive  time
required  for  development,  testing  and  regulatory  review  of our  potential
products,  our patents may expire or remain in existence for only a short period
following commercialization. This would reduce or eliminate any advantage of the
patents.

         We cannot be  certain  that we were the first to make the  products  or
processes  covered by each of our issued or pending patent  applications or that
we were the first to file patent applications for such products or processes.  A
number of pharmaceutical  companies,  biotechnology companies,  universities and
research  institutions have filed patent applications or received patents in the
field of TKs, TPs and STKs and their related signalling pathways. Our commercial
success will depend, in part, on not infringing our competitors' patents and not
breaching technology licenses we obtain. We have been notified from time to time
of claims that we may be infringing other's  intellectual  property rights. Some
companies  have filed  patent  applications  or been  granted  patents  covering
subject matter  potentially  useful or necessary to us or  conflicting  with our
patents and patent  applications.  Such conflicts could significantly reduce the
scope of our issued or licensed patents. In addition, we may need to license the
right to use  third-party  patents and other  intellectual  property to continue
development  and marketing of our



                                       27
<PAGE>

products.  We may not be able to acquire such  required  licenses on  acceptable
terms,  if at all.  If we do not  obtain  such  licenses,  we may need to design
around  other  parties'  patents  or we may  not be  able to  proceed  with  the
development, manufacture or sale of our products.

         o        SU101.  SU101, a compound generally known as leflunomide,  was
                  discovered  more  than 17 years  ago.  In  December  1997,  we
                  received two U.S.  patents  relating to methods of using SU101
                  for  treating  various  diseases,  including  certain  cancers
                  characterized by inappropriate  PDGF-R activity.  We currently
                  own the exclusive  rights to one of the patents.  We have been
                  assigned  exclusive  world-wide rights to the other patent and
                  the corresponding foreign patent applications from all but one
                  party.  We  cannot  predict  whether   negotiations  with  the
                  remaining  party  to  acquire  the  remaining  rights  will be
                  successful.  In addition,  we have filed  several U.S.  patent
                  applications,  and corresponding  foreign patent applications,
                  covering  different  formulations  of SU101  and  their use to
                  treat various diseases.  Currently,  we have received two U.S.
                  patents  relating  to SU101  formulations.  These two  patents
                  cover  the  SU101   formulation   that  we  believe   will  be
                  commercially marketed. While we plan to commercialize SU101 in
                  certain major markets outside the U.S.  through our affiliates
                  or licensees, we cannot predict whether we will receive patent
                  protection outside the U.S.

                           Hoechst AG holds a number of U.S. and foreign patents
                  and has filed U.S. and foreign  patent  applications  covering
                  different compositions and pharmaceutical uses of leflunomide,
                  including  the use of  leflunomide  for  treating  cancer.  We
                  believe our research and  development and clinical trials with
                  SU101 in the U.S. are protected from claims of infringement of
                  the Hoechst U.S.  patents  because such  activities  are being
                  conducted for the development and submission of information to
                  the FDA for regulatory approval.  However,  similar protection
                  may not be  available  outside  the U.S.  Although  we  cannot
                  predict if SU101 will be approved by the FDA for  marketing in
                  the U.S., we believe that some of Hoechst's  U.S.  patents may
                  have  expired by the time  marketing  of SU101 begins and that
                  Hoechst's  other U.S.  patents will either not be infringed by
                  our  making,  using and  selling  of SU101 in the U.S.  or are
                  subject to claims that they are not valid,  thereby permitting
                  us to  produce  and  market  SU101  without  valid  claims  of
                  infringement  of  the  Hoechst  patents.  However,  we  cannot
                  predict whether a court will agree with our beliefs  regarding
                  invalidity and non-infringement of Hoechst's issued patents or
                  that the term of Hoechst's issued patents will be extended. To
                  date,  Hoechst has not initiated legal proceedings  against us
                  concerning  possible patent  infringement.  However, we cannot
                  predict  whether  Hoechst will assert claims against us in the
                  future.  If a court found us to be  infringing  a valid patent
                  issued to Hoechst covering the use of leflunomide for treating
                  cancer,  we would be required to obtain a license from Hoechst
                  to  manufacture or sell SU101 for treating  cancer.  We cannot
                  predict  whether  we  would be able to  reach  agreement  with
                  Hoechst for a license for SU101 upon  favorable  terms,  if at
                  all.  The  assertion  of  any  infringement  claims,  even  if
                  resolved in our favor,  could result in substantial  costs and
                  expenses to us.

                                       28
<PAGE>

         o        SU5416.  In August 1998, we received a U.S.  patent  covering,
                  among  other  things,  SU5416  and  methods  of using  SU5416.
                  Currently,   we  have  related  foreign  patent   applications
                  pending, including in Japan and the European community. Except
                  in  Japan,  we  hold  exclusive   worldwide  rights  to  these
                  applications.  If foreign patents are not issued,  the failure
                  to  receive  foreign  patent   protection   could   materially
                  adversely affect our business, financial condition and results
                  of operations.

         o        SU6668.  The  compound  SU6668 is  generically  covered  by an
                  issued U.S. patent.  That is, SU6668 is encompassed by some of
                  the  claims  in the  issued  U.S.  patent,  but  SU6668 is not
                  specifically  recited in the claims. In general,  such generic
                  coverage provides adequate patent protection.  However, it may
                  be advantageous  under certain  circumstances to obtain claims
                  that  specifically  recite SU6668.  For example,  a competitor
                  that  challenges  the  validity  of a  patent  may be  able to
                  invalidate a claim that encompasses many different  compounds,
                  but not a claim that  recites one specific  compound.  We have
                  filed a U.S.  utility  application and  corresponding  foreign
                  patent applications  specifically claiming SU6668. We hold the
                  exclusive  worldwide rights to these  applications,  except in
                  Japan.  We cannot  predict  whether  patents  will issue which
                  specifically  recite  SU6668  or that  the  term  of any  U.S.
                  patents will exceed that of the term of the  outstanding  U.S.
                  patent that generically  covers SU6668. The failure to receive
                  U.S. and foreign patent protection could materially  adversely
                  affect  our  business,  financial  condition  and  results  of
                  operations.

         We may face litigation to defend against claims of infringement, assert
claims of  infringement,  enforce  our  patents,  protect  our trade  secrets or
know-how,  or determine  the scope and validity of others'  proprietary  rights.
Patent  litigation is costly and would divert our attention  and  resources.  In
addition, we may be involved in interference  proceedings declared by the United
States  Patent and  Trademark  Office to  determine  the  priority of our patent
applications  compared to the patent  applications of one or more third parties.
Litigation or interference  proceedings  could have a material adverse effect on
our  business,  financial  condition and results of  operations,  including as a
result of any delay in the marketing of our products due to  litigation  related
to our  intellectual  property.  Additionally,  we could be  unsuccessful in our
efforts to enforce our intellectual property rights or obtain patent protection.
We have received  letters from at least two third parties  indicating  that they
believe we may be practicing  their  proprietary  technology.  We do not believe
that we practice any validly claimed subject matter in which these third parties
possess an ownership  interest.  However,  we cannot  predict  whether the third
parties  will agree with our position or that a court will agree with our belief
regarding invalidity and/or non-infringement.  As set forth above, any resulting
litigation could materially  adversely affect our business,  financial condition
and results of operations.


If we are not  able to  demonstrate  the  safety  and  efficacy  of our  product
candidates in our clinical trials or our clinical  trials are delayed,  we would
not be able to market our  products  in the United  States or abroad on a timely
basis, if at all.

                                       29
<PAGE>

         Clinical  development,   including  preclinical  testing,  is  a  long,
expensive and uncertain process. Any of our clinical trials may not be correctly
designed  to result in data  necessary  to prove the safety and  efficacy of our
product  candidates.  It may take us several years to complete our testing,  and
failure can occur at any stage of testing.  We cannot rely on interim results of
trials to  necessarily  predict their final results,  and acceptable  results in
early trials might not be repeated in later trials. A number of companies in the
pharmaceutical and biotechnology  industries have suffered  significant setbacks
in advanced clinical trials, even after promising results in earlier trials. Any
trial may fail to  produce  results  satisfactory  to the FDA.  Preclinical  and
clinical data can be interpreted in different ways, which could delay,  limit or
prevent regulatory approval. Negative or inconclusive results or adverse medical
events  during a trial  could  cause a trial to be  repeated  or a program to be
terminated.

         The rate of completion of our clinical trials is dependent upon,  among
other  factors,  the  rate of  patient  enrollment.  Patient  enrollment  can be
affected  by the size of the  available  patient  population,  the nature of the
trial  protocol,  the  location  of clinical  sites and the patient  eligibility
criteria  for the study.  Delays in patient  enrollment  may result in increased
costs,  delays or  termination of clinical  trials,  which could have a material
adverse effect on our business. In addition,  because we have a limited clinical
staff, we generally rely on third-party  clinical  investigators  to conduct our
clinical trials,  and as a result, we face certain  additional  delaying factors
outside our control. These factors include:

         o        third-party  investigator failure to perform their contractual
                  obligations;

         o        third-party investigator failure to meet regulatory standards;

         o        inadequately  trained or  insufficient  personnel at the study
                  site; and

         o        delays in approvals from a study site's review board.


         We  cannot  predict  whether  we  will be able  to  submit  a new  drug
application  as  scheduled  if clinical  trials are  completed  or when new drug
applications  will be reviewed  and cleared by the FDA, if at all. For our three
cancer drug candidates  currently in clinical trials,  we cannot be certain that
planned trials will begin on time, and we cannot predict whether clinical trials
will be completed on schedule.  We cannot predict whether any trials will result
in marketable products or that any products will be commercially successful even
if approved for  marketing.  Our product  development  costs will increase if we
have  delays in  testing  or  approvals.  If the  delays  are  significant,  our
business,  financial  condition  and results of  operations  will be  materially
adversely affected.

Clinical  testing may uncover  negative side effects for our product  candidates
which may delay or prevent commercialization of such drug products.

         We face  the  risk  that any  drug  candidate  may be toxic or  produce
negative side effects in animals or humans when given in high doses or over long
periods of time.  We cannot  predict  whether  unacceptable  toxicities  or side
effects  will  occur at any time in any  toxicological  study



                                       30
<PAGE>

or human  clinical  trial of our  proposed  products.  If our  products  produce
unacceptable  toxicities or side effects in our clinical testing,  we and/or the
FDA  may  interrupt,  limit,  delay  or  stop  the  development  of our  product
candidates.  Even if a product receives  regulatory  clearance,  it may later be
shown to be unsafe or ineffective,  thus limiting the product's use or requiring
its  removal  from the  market.  We cannot  predict  whether  any of our product
candidates will be safe and effective when administered to patients.


Our products have never been manufactured on a commercial scale, and our lack of
manufacturing expertise may impair our ability to generate revenues.

         We  have no  manufacturing  facilities  and  thus  rely on  third-party
manufacturers to produce our compounds for research and development, preclinical
and clinical  purposes.  If we cannot  contract  for a sufficient  supply of our
compounds on acceptable  terms,  or if our  manufacturers  experience  delays or
difficulties,  our preclinical and clinical testing schedule would be delayed. A
delay in our  testing  schedule  would  result in a delay in the  submission  of
products for  regulatory  approval and the  subsequent  commercial  sale of such
products,  which would  materially  adversely  affect our  business.  Also,  any
manufacturer will have to prove both to us and to the FDA that its manufacturing
process complies with government regulations. Our products under development, as
well as many of their  components,  have never been manufactured on a commercial
scale.  It may be  difficult  or  impossible  to  economically  manufacture  our
products on a commercial  scale. We may need to identify and qualify  additional
manufacturers for commercial production.  We cannot be certain that our existing
manufacturers  or any new  manufacturer  will be able to  provide  the  required
quantities of our compounds on reasonable terms, or at all.

We have no sales and marketing  capability,  and our lack of sales and marketing
personnel and expertise may impair our ability to generate revenues.

         We  currently  have very  limited  sales,  marketing  and  distribution
capability.  We intend to rely on relationships with one or more  pharmaceutical
companies with established  distribution systems and sales forces to market some
of our proposed products.  In addition, we expect to market some of our proposed
products  directly.  Thus,  we must develop a marketing and sales force with the
necessary technical expertise.  If we do not establish sufficient in-house sales
and distribution capabilities or establish successful marketing, co-promotion or
licensing  arrangements with third parties,  we will not be able to successfully
market and commercialize our drug products.

If our  products  are not  accepted  by the  health  care  community,  including
physicians,  patients and health care  payors,  we may not be able to market and
commercialize our products, and our profitability may be adversely affected.

         We believe  that our ability to  commercialize  our product  candidates
effectively will depend on the safety,  efficacy and  cost-effectiveness  of our
products and the  availability  of adequate  insurance  reimbursement  for these
products.  The  treatment of cancer with  cytostatic,  as opposed to  cytotoxic,
therapy is a novel  method of  treating  cancer  that may not be accepted by



                                       31
<PAGE>

the health care community.  If cytostatic  cancer treatments are not accepted by
the health care  community,  our ability to generate  revenues  may be impaired.
Additionally,  even if our approach to the  treatment of cancer with  cytostatic
therapy is proven to be safe and  effective  and is  accepted by the health care
community,  our ability to successfully  commercialize  our products  depends in
part on obtaining  adequate  reimbursement  for product costs from  governmental
authorities  and private  health care  insurers  (including  health  maintenance
organizations).  Government  and  private  third-party  payors are  increasingly
attempting to contain  health care costs by limiting both the extent of coverage
and the  reimbursement  rate for new tests and  treatments.  If  government  and
private  third-party  payors do not  adequately  provide  reimbursement  for our
product  costs,  our products may not be accepted by the health care  community,
and our ability to  generate  revenues  may be  impaired.  Even if our  products
receive the necessary  regulatory and health care reimbursement  approvals,  our
products still may not achieve any significant degree of market acceptance among
physicians,  patients  and health care  payors.  We cannot  predict  whether our
technologies will be accepted rapidly or at all. If our products fail to achieve
market acceptance,  our business,  results of operations and financial condition
would be materially adversely affected.

If we fail to comply with extensive regulations enforced by domestic and foreign
regulatory authorities, the commercialization of our product candidates could be
prevented or delayed.

         Our products under  development  and  anticipated  future  products are
subject to extensive and rigorous  regulation by United States local,  state and
federal  regulatory  authorities and by foreign  regulatory  bodies. The FDA and
other regulatory agencies impose substantial requirements upon the manufacturing
and  marketing of products  such as those being  developed by our company or any
partner. The process of obtaining FDA and other required regulatory approvals is
long,  expensive  and  uncertain,  and delays or failures to receive  regulatory
approvals  may  prevent  us from  commercializing  our  products  and impair our
ability to generate  revenues.  The time  required for  regulatory  approvals is
uncertain and the process  typically  takes a number of years,  depending on the
type, complexity and novelty of the product. We may encounter significant delays
or excessive costs in our efforts to secure necessary approvals or licenses.

         To date, none of our product  candidates have received FDA approval for
commercialization.  The FDA may not approve any of our product  candidates if it
believes that any applicable regulatory criteria are not satisfied.  The FDA may
also require additional  testing for safety and efficacy,  which would delay our
commercialization  of our  product  candidates.  We cannot  predict  whether our
products  will  receive FDA  approval  in a timely  manner,  if at all.  Even if
approvals are obtained,  the  marketing and  manufacturing  of drug products are
subject  to  continuing  FDA  and  other   regulatory   requirements,   such  as
requirements to comply with good manufacturing practices, as defined by the FDA.
The failure to comply with such requirements could result in enforcement action,
which could  adversely  affect us and our business.  Later discovery of problems
with a product,  manufacturer or facility may result in additional  restrictions
on the product or  manufacturer,  including  withdrawal  of the product from the
market.  The government may impose new regulations  which could further delay or
preclude regulatory  approval of our potential  products.  We cannot predict the
impact  of  adverse  governmental  regulation  which  might  arise  from  future
legislative or administrative action.

                                       32
<PAGE>

         We intend to generate  product revenue from sales outside of the United
States.  Distribution  of our  products  outside  the United  States also may be
subject to extensive  government  regulation.  These regulations,  including the
requirements  for  approvals  or  clearance  to market,  the time  required  for
regulatory review and the sanctions imposed for violations,  vary by country. It
is uncertain  whether we will obtain  regulatory  approvals in such countries or
that we will be required to incur  significant costs in obtaining or maintaining
our  foreign  regulatory  approvals.  Failure  to  obtain  necessary  regulatory
approvals  or any other  failure to comply with  regulatory  requirements  could
result in reduced revenue and earnings.

We may not be able to  effectively  compete  against our  current and  potential
competitors.

         We operate in a rapidly  changing field,  and we expect our products to
encounter significant competition. Currently, other products and therapies exist
or are being  developed  that will compete with the products that we are seeking
to develop and market.  We face intense  competition  from large  pharmaceutical
companies,  including  Zeneca,  Novartis  and Bayer.  We also  compete with more
established  biotechnology  companies,  such as Genentech and Immuncy,  and even
smaller companies that form collaborative arrangements with large pharmaceutical
and biotechnology  companies,  such as InCLONE and Entremed. Such competition is
expected to increase.  Our success will depend in part on our ability to respond
quickly to  medical  and  technological  changes  through  the  development  and
introduction of new products. Product development is risky and uncertain, and we
cannot predict whether we will develop our products  successfully.  Competitors'
products or  technologies  may make our  products  obsolete  or  non-competitive
before we are able to generate any significant revenue.  Many of our competitors
or  potential   competitors  have  substantially  greater  financial  and  other
resources than we have. These  competitors,  academic  institutions and research
organizations  all may have greater  experience in  preclinical  testing,  human
clinical trials and other regulatory approval procedures. Our ability to compete
successfully will depend, in part, on our ability to:

         o        attract and retain skilled scientific personnel;

         o        develop safe and efficacious products;

         o        obtain patent or other proprietary protection for our products
                  and technologies;

         o        obtain required regulatory approvals for our products;

         o        maintain access to  sufficiently  broad libraries of compounds
                  for screening potential targets;

         o        be early entrants to the market; and

         o        manufacture,  market and sell our products,  independently  or
                  through collaborations.


                                       33
<PAGE>

We cannot predict  whether our  competitors  will develop more effective or more
affordable  products or achieve product patent protection and  commercialization
earlier than we will.

Failure to attract and retain key employees could adversely  affect our research
and development  efforts,  our ability to conduct clinical trials or our ability
to market and commercialize our product candidates.

         Because  of the  scientific  nature of our  business,  we depend on the
principal members of our management and scientific staff,  including our Science
Advisory Board and Clinical Advisory Board. We do not maintain "key person" life
insurance on any of our officers,  employees or consultants.  Our future success
will  depend  largely  on our  ability  to attract  and  retain  highly  skilled
executive,  scientific and managerial personnel.  Competition for such personnel
is intense.  We cannot  predict  whether we will be successful in attracting and
retaining  such  personnel.  In  July  1998,  we  entered  into  a  compensation
arrangement  with  Stephen  Evans-Freke,  our  Chairman  of the  Board and Chief
Executive Officer, related to Mr. Evans-Freke's commitment to serve as our Chief
Executive  Officer  until at  least  June 30,  1999.  Generally,  we do not have
employment  agreements  with  our  executive  officers  providing  for a term of
service, and we do not have any agreement with Mr. Evans-Freke providing for his
service as Chief Executive  Officer after June 30, 1999. The failure to maintain
our executive,  management and  scientific  staff and to attract  additional key
personnel could materially  adversely affect our business,  financial  condition
and  results of  operations  and may  prevent  us from  achieving  our  business
objectives.  Although we intend to provide incentive compensation to attract and
retain our key personnel, we cannot guarantee these efforts will be successful.

If we are not successful in our attempt to commercialize  our products in Europe
through  European  national  partners,  our ability to generate  revenues may be
impaired and our profitability may be adversely affected.

         Our strategy for the  commercialization  of our product  candidates  in
Europe  includes  entering into agreements with a limited number of distribution
partners  who bring strong local  presence on a  pan-European  scale rather than
with a single  international  pharmaceutical  company. We cannot predict whether
this commercialization strategy will prove to be successful.

         This strategy may require more capital than licensing  European  rights
to  product  candidates.  We cannot  predict  whether  we will be able to obtain
sufficient capital to pursue this strategy.  Our strategy may cause SUGEN Europe
to bear  research and  development  expenses for a longer period of time without
sharing the costs with a corporate partner. Thus, if products are not ultimately
successful,  we may have large research and  development  losses.  We may not be
able  to  establish  arrangements  with  appropriate  partners  in all  relevant
countries on reasonable terms, or at all. Our success will depend  significantly
on our partners' ability and willingness to perform their obligations. We cannot
predict  whether  our  partners  will  perform  their   obligations   under  any
commercialization  arrangements.  Additionally,  contracting with numerous local
partners  instead of one large European partner may be harder to manage and have
higher administrative costs. In addition, our commercialization arrangements may
be effected by the European  Union  requirements  for free trade within  Europe.
Price sensitivities in individual  markets,  including Spain, where SUGEN Europe
recently  entered  into a  distribution



                                       34
<PAGE>

arrangement,  may  impact  the terms of  collaborations  and the  pricing of our
products in individual  markets. As is generally the case for trading within the
European Union, the ability of buyers in countries throughout the European Union
to purchase products in lower price markets may impact SUGEN Europe's ability to
enter into  distribution  arrangements  for additional  European markets and the
terms of these arrangements.

         Our European operations are subject to the additional risks inherent in
international business activities, including:

         o        the general  economic  conditions in the countries in which we
                  and our affiliates operate;

         o        overlapping tax structures;

         o        unexpected changes in regulatory requirements;

         o        compliance with various foreign laws and regulations;

         o        longer accounts receivable payment cycles in some countries;

         o        import and export licensing requirements;

         o        trade restrictions;

         o        exchange controls; and

         o        changes in tariff and freight rates.


The  market  price of our stock may be highly  volatile  which  could  result in
substantial losses for individual stockholders.

         Our common stock currently  trades on the Nasdaq National  Market.  The
market prices for  securities of emerging  biotechnology  companies like us have
been highly volatile.  Announcements may have a significant impact on the market
price of our common stock. Such announcements may include:

         o        biological or medical discoveries;

         o        technological  innovations or new commercial products by us or
                  our competitors;

         o        developments concerning proprietary rights,  including patents
                  and litigation matters;

         o        regulatory  developments in both the United States and foreign
                  countries;


                                       35
<PAGE>

         o        public concern as to the safety of new technologies;

         o        developments  in our  relationships  with  current  or  future
                  collaborative partners;

         o        general market conditions;

         o        comments  made by  analysts,  including  changes in  analysts'
                  estimates of our financial performance; and

         o        quarterly fluctuations in our revenue and financial results.

         The stock market has from time to time  experienced  extreme  price and
volume  fluctuations,  which have  particularly  affected the market  prices for
emerging  biotechnology  companies,  and which have often been  unrelated to the
operating  performance of such companies.  These broad market  fluctuations  may
adversely  affect the market price of our common stock.  For example,  our stock
price has ranged  from $9.75 to $29.50  over the last two  years.  In  addition,
sales of substantial  amounts of our common stock in the public market following
this  offering  could lower the market price of our common  stock.  In the past,
following  periods of  volatility  in the  market  price of a  company's  stock,
securities  class action  litigation has occurred  against the issuing  company.
Such  litigation   could  result  in  substantial   costs  and  a  diversion  of
management's attention and resources, which could have a material adverse effect
on our revenue and earnings.  Any adverse determination in such litigation could
also subject us to significant liabilities.

We may be liable if our products harm people.

         We face potential liability risks inherent in the testing and marketing
of medical  products.  We may be liable if any of our  products  causes  injury,
illness or death. We have obtained limited product  liability  insurance for our
human  clinical  trials.   However,  such  insurance  is  becoming  increasingly
expensive,  and we  cannot  predict  whether  we will be able to  maintain  such
insurance or obtain insurance covering injury,  illness or death from use of our
products that are  commercialized at a reasonable cost, if at all. Any insurance
we obtain may not provide adequate  coverage against  potential  liabilities.  A
liability  claim,  regardless  of merit or eventual  outcome,  could  materially
adversely affect our business, results of operation and financial condition.

Shares eligible for sale in the public market may affect the market price of our
common stock.

         Substantially  all of the shares of our common  stock are  eligible for
sale in the public  market.  The issuance of shares of our common stock upon the
exercise of stock  options and  warrants,  and the future sale of such shares by
current  stockholders,  could  adversely  affect the market  price of our common
stock. In March 1999, we issued:

         o        12% senior convertible notes which are convertible into common
                  stock

                                       36
<PAGE>

         o        warrants to purchase  12% senior  convertible  notes which are
                  convertible into common stock

Conversion  of the 12% senior  convertible  notes,  exercise of any common stock
warrants issued upon redemption of the 12% senior  convertible notes or warrants
to purchase  additional 12% senior  convertible notes and payment of interest on
the 12% senior convertible notes in








 [QUERY!!!! -- ENDS IN THE MIDDLE OF THE SENTENCE??????? COPY MISSING????????]





                                       37
<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.



                                       38
<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.



                                       39
<PAGE>



Item 6.         SELECTED FINANCIAL DATA

<TABLE>

Statement of Operations Data:
(in thousands, except per share data)
<CAPTION>
                                                                                 Year Ended December 31,
                                                                --------------------------------------------------------
                                                                  1998        1997        1996        1995       1994
                                                                --------    --------    --------    --------    --------
<S>              <C>                                            <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>
<TABLE>


Balance Sheet Data:
(in thousands)
<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
<FN>

(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.

</FN>
</TABLE>



                                       40
<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/A.  Except for the
historical information contained herein, the discussion in this Annual Report on
Form 10-K/A 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/A should be read as being  applicable  to all related  forward-looking
statements  wherever  they  appear in this  Annual  Report on Form  10-K/A.  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.


                                       41
<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.  Consistent with the contractual terms of certain of
the Company's  collaborative  agreements,  and the  underlying  substance of the
event,  milestone  payments received in the form of stock purchases at a premium
above its fair market value, is recorded at fair market value and the premium is
recognized  as contract  revenue.  When common  stock is  purchased at a premium
above its fair market value upon the initiation of an agreement,  the premium is
recorded as equity at the amount paid in. 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.  Research  funding  under  certain  of the  Company's
collaborations  are scheduled to expire in accordance  with their original terms
in the fourth  quarter of 1999 and the first  quarter of 2000 which will  reduce
the Company's annual revenues by approximately $5.8 million.


         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.


                                       42
<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. The research
funding  term under the  Allergan  and Zeneca  collaborations  are  scheduled to
expire in October 1999 and March 2000, respectively. If the funding arrangements
are not renewed by these collaborative partners, the Company will scale back its
resources  dedicated to these  programs and  reassign  these  resources to other
research and  development  areas.  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  cancelation.  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,  $2.7  million and $1.2
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 $4.2 million of
fully  depreciated  assets  associated  with the previously  occupied  facility.
Additions for 1997 and 1996



                                       43
<PAGE>



primarily included  expansion costs associated with the former  facilities,  and
purchases of lab equipment,  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  financings  and capital lease  transactions;  however,  there can be no
assurance that additional financing will be available on acceptable terms, or at
all.  If  additional  funds are raised by  issuing  equity  securities,  further
dilution to stockholders may result.  In addition,  in the event that additional
funds are  obtained  through  arrangements  with  collaborative  partners,  such
arrangements  may  require the  Company to  relinquish  rights to certain of its
technologies,  product  candidates or products that the Company would  otherwise
seek to develop or  commercialize  itself.  If adequate funds are not available,
the Company may be required to delay,  reduce the scope of or  eliminate  one or
more of its  research  or  development  programs,  which  could have a material,
adverse effect on the Company.




                                       44
<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 Y2K 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.


         To the extent that our assessment is finalized without  identifying any
material noncompliant  information technology systems operated by us or by third
parties,  the most reasonably likely worst case scenario is a systematic failure
beyond our control, such as prolonged  telecommunications or electrical failure.
Such a failure could prevent us from operating our business. We believe that the
primary business risks in the event of such failure, would include:

         o        Interruption  in  manufacturing  process  (clinical  supplies,
                  validation and registration runs);

         o        Inability to access  clinical data to compile  timely New Drug
                  Applications;

         o        Inability to conduct research and development experiments; and

         o        Claims  of  mismanagement,   misinterpretation  or  breach  of
                  contract.

         Any  of  these  risks  would  have a  material  adverse  effect  on our
business, results of operations and financial condition.




                                       45
<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 a
result,  the  Company  does not expect  any  material  loss with  respect to its
investment portfolio. The Company has no cash flow exposure due to interest rate
changes for its 5% Senior Custom Convertible Notes.

<TABLE>

         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.

<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%


Liabilities

5% Senior custom convertiable notes  $      -    $  5.7           -          -         -        -    $  5.7    $    6.2

Weighted average interest rate                       5%

</TABLE>



                                       46
<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.





                                       32


<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.




                                       47
<PAGE>


<TABLE>

                                     PART IV

<CAPTION>

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

(a)

<S>                                                                                            <C>
     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
</TABLE>

     2.  Financial Statement Schedules

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




                                       48
<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)


                                       49
<PAGE>


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

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

  10.21++      Exclusive License Agreement,  dated January 21, 1994, between the
               Registrant and Washington Research Foundation. (1)

  10.22        Purchase  Agreement  between the Registrant  and Zeneca  Limited,
               dated October 4, 1994. (2)

  10.23++      Amended and Restated  Research and License  Agreement between the
               Registrant and Yissum Research  Development Company of The Hebrew
               University of Jerusalem (labeled "Psoriasis"). (8)

  10.24++      Amended and Restated  Research and License  Agreement between the
               Registrant and Yissum Research  Development Company of The Hebrew
               University of Jerusalem (labeled "Papilloma"). (8)

  10.25++      Amended and Restated  Research and License  Agreement between the
               Registrant and Yissum Research  Development Company of The Hebrew
               University of Jerusalem (labeled "Sepsis/Inflammation"). (8)

  10.26++      Amended and Restated  Research and License  Agreement between the
               Registrant and Yissum Research  Development Company of The Hebrew
               University  of  Jerusalem  (labeled   "Restenosis"). (8)

  10.27        Consulting   Agreement,   dated  August  16,  1991,  between  the
               Registrant and Dr. Joseph Schlessinger. (1)

  10.28        Consulting   Agreement,   dated  August  16,  1991,  between  the
               Registrant and Dr. Axel Ullrich. (1)

  10.29        Seaport Centre  Standard Lease and Addendum I, dated November 12,
               1991,  between the Registrant and Seaport Center Venture Phase I.
               (1)

  10.29(i)     First  Amendment,  dated July 8, 1993, to Seaport Centre Standard
               Lease between the  Registrant and Seaport Center Venture Phase I.
               (1)

  10.29(ii)    Second Amendment,  dated June 2, 1995, to Seaport Centre Standard
               Lease between the  Registrant and Seaport Centre Venture Phase I.
               (3)

  10.29(iii)   Construction Addendum, dated June 2, 1995, to Second Amendment to
               Seaport Centre  Standard Lease between the Registrant and Seaport
               Centre Venture Phase I. (3)

  10.30        Registrant's 1994 Employee Stock Purchase Plan. (1)

 *10.31        Registrant's 1994  Non-Employee  Directors' Stock Option Plan, as
               amended. (11)

  10.32        Form of  Indemnity  Agreement  to be  entered  into  between  the
               Registrant and its officers and directors. (1)

  10.33        Warrant  Agreement to Purchase 7,200 Shares of Series G Preferred
               Stock,  dated May 5, 1994,  between the  Registrant and Financing
               for Science International, Inc. (1)

  10.34++      Research and License Agreement, dated August 1, 1994, between the
               Company and the Hospital for Sick Children. (1)

  10.34(i)     Amendment   to  Research  and  License   Agreement   between  the
               Registrant  and the Hospital for Sick  Children,  dated August 1,
               1995. (4)

  10.35        Research and Technology  Agreement,  dated March 3, 1993, between
               the Registrant and PanLabs, Inc., as amended. (1)

  10.36++      Collaboration  Agreement,   between  the  Registrant  and  Zeneca
               Limited, dated March 22, 1995. (2)

  10.37        Agreement  for the Purchase of Common Stock of the  Registrant by
               Zeneca Limited, dated January 6, 1995. (2)

  10.38        Loan  Agreement and  Promissory  Note between the  Registrant and
               James L. Tyree, dated August 29, 1994. (3)

  10.39        Deferred Compensation  Agreement between the Registrant and James
               L. Tyree, dated August 29, 1994. (3)

  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)




                                       50
<PAGE>



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

  10.42        Form of Nonstatutory Stock Option under the Long-Term  Objectives
               Stock Option Plan for Senior Management. (6)

  10.43        Rights  Agreement,  dated  as  of  August  1,  1995  between  the
               Registrant  and The  First  National  Bank of  Boston,  as Rights
               Agent. (5)

  10.44        Form of  Agreement  for  the  Purchase  of  Common  Stock  of the
               Registrant and list of participants thereto,  dated September 21,
               1995. (4)

  10.45        Lease  Financing  Commitment  Letter,  dated  September  12, 1995
               between the Registrant  and Financing for Science  International,
               Inc. (4)

  10.46++      Collaboration  Agreement,  between the Registrant and ASTA Medica
               Aktiengesellschaft, dated December 5, 1995. (7)

  10.47        Agreement  for the Purchase of Common Stock of the  Registrant by
               ASTA Medica Aktiengesellschaft, dated December 5, 1995. (7)

  10.48++      Termination and Redemption  Agreement  between the Registrant and
               Amgen Inc., dated January 9, 1996. (8)

  10.49++      Warrant  to  purchase  200,000  shares  of  Common  Stock  of the
               Registrant,  dated January 19, 1996,  issued by the Registrant to
               Amgen Inc. (8)

  10.50++      License  Agreement  between the  Registrant  and Zeneca  Limited,
               dated January 19, 1996. (8)

  10.51++      Cooperative  Research  and  Development   Agreement  between  the
               Registrant  and the National  Cancer  Institute,  dated April 12,
               1996. (9)

  10.52++      Termination  notice,  dated May 24, 1996,  between the Registrant
               and Yissum Research  Development Company of The Hebrew University
               of Jerusalem (labeled "Sepsis/Inflammation"). (9)

  10.53++      Termination  notice,  dated May 24, 1996.  between the Registrant
               and Yissum Research  Development Company of The Hebrew University
               of Jerusalem (labeled "Restenosis"). (9)

  10.54++      Research and  Development  Agreement  between the  Registrant and
               Arqule, Inc. (10)

  10.55++      Extension   of  Research  and  License   Agreement   between  the
               Registrant and the Max Planck Institute. (10)

  10.56        Promissory   Note  received  by  the   Registrant   from  Stephen
               Evans-Freke. (10)

  10.57        Agreement  for the purchase of Common Stock of the  Registrant by
               Vision Pharmaceuticals L.P. (10)

  10.58++      Collaboration  Agreement by and between the Registrant and Vision
               Pharmaceuticals L.P. and Allergan, Inc. (10)

  10.59++      Extension of Research Agreement between the Registrant and Yissum
               Development Company of the Hebrew University. (10)

  10.60        James L. Tyree Separation Agreement. (10)

  10.61++      Master  Lease  Agreement,  dated  March  28,  1997,  between  the
               Registrant and Transamerica Business Credit Corporation. (13)

  10.62++      Lease Financing  Commitment Letter, dated March 20, 1997, between
               the Registrant and Transamerica Business Credit Corporation. (13)

  10.63++      Build-To-Suit  Lease Agreement,  dated June 11, 1997, between the
               Registrant and Britannia Pointe Grand Limited Partnership. (14)

  10.64++      Form of Warrant for the Purchase of Common Stock,  dated June 30,
               1997,   issued  in  the  connection  with   Build-To-Suit   Lease
               Agreement,  between the  Registrant  and  Britannia  Pointe Grand
               Limited Partnership. (14)

  10.65++      Second Amended and Restated Research and License Agreement, dated
               June 30, 1997,  between the Registrant  and New York  University.
               (14)

  10.66++      Termination  notice,  dated June 1, 1997,  between the Registrant
               and Yissum Research  Development Company of The Hebrew University
               of Jerusalem. (14)

  10.67++      Form of Note Purchase  Agreement,  dated as of September 8, 1997,
               by and between the  Registrant  and the investors  named therein.
               (16)

  10.68++      Amended and Restated Master Lease  Agreement,  dated November 12,
               1997, and Lease Financing  Commitment  Letter,  dated November 5,
               1997,  between the Registrant and  Transamerica  Business  Credit
               Corporation.




                                       51
<PAGE>


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

 *10.69        Restricted  Stock Bonus  Agreement  between the Registrant and K.
               Peter Hirth, Ph.D., dated September 16, 1997.

  10.70        Common Stock  Purchase  Agreement  dated January 12, 1998 between
               the Registrant and ASTA Medica Aktiengesellschaft. (17)

  10.71++      First  Amendment  to Lease,  dated  March 8,  1998,  between  the
               Registrant and Britannia Pointe Grand Limited Partnership. (17)

  10.72        Common Stock Purchase Agreement, dated June 30, 1998, between the
               Registrant and Oceana Investment Corporation PLC. (18)

  10.73++      Heads of Agreement,  dated June 30, 1998,  between the Registrant
               and ProChon Biotech Limited. (18)

  10.74++      Collaboration  Agreement,   dated  July  28,  1998,  between  the
               Registrant, SUGEN International AG, and Taiho Pharmaceutical Co.,
               Ltd. (19)

 *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.



                                       52
<PAGE>


  (12)         Filed as an exhibit to the Registrant's Registration Statement on
               Form S-8 (No. 333-09321),  dated August 1, 1996, and incorporated
               herein by reference.

  (13)         Incorporated by reference to identically  numbered exhibits filed
               in response to Item 6 "Exhibits" of the  Company's  Form 10-Q for
               the quarter ended March 31, 1997.

  (14)         Incorporated by reference to identically  numbered exhibits filed
               in response to Item 6 "Exhibits" of the  Company's  Form 10-Q for
               the quarter ended June 30, 1997.

  (15)         Filed  as an  exhibit  to  the  Form  8-K  Current  Report  dated
               September 12, 1997, and incorporated herein by reference.

  (16)         Filed as an exhibit to the Registrant's Registration Statement on
               Form S-3,  dated  October 10, 1997,  and  incorporated  herein by
               reference.

  (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 March 31, 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 June 30, 1998.

  (19)         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.


                                       53
<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>

<TABLE>

                                        SUGEN, Inc.

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

<CAPTION>
                                                                 December 31,  December 31,
                                                                    1998          1997
                                                                  ---------    ---------
<S>                                                               <C>          <C>
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
                                                                  =========    =========

<FN>

                                  See accompanying notes.
</FN>
</TABLE>
                                       F-3
<PAGE>
<TABLE>

                                               SUGEN, Inc.

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

<CAPTION>
                                                                      Years Ended December 31,
                                                           --------------------------------------------
                                                                1998           1997           1996
                                                           ------------    ------------    ------------
<S>                                                        <C>             <C>             <C>
Contract revenue (includes amounts from related party      $     14,916    $      6,031    $     13,650
   of $3,204 in 1998, $3,074 in 1997 and $3,055 in 1996)

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
                                                           ============    ============    ============

<FN>

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

                                       F-4


<PAGE>

<TABLE>
                                                            SUGEN, Inc.

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


                                                                                             Common Stock            Additional
                                                                                      -------------------------       Paid-In
                                                                                         Shares        Amount         Capital
                                                                                      -----------    -----------    -----------
<S>                                                                                    <C>           <C>            <C>
Balances at December 31, 1995                                                          10,634,917    $       106    $    81,696
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
Amortization of deferred compensation                                                        --             --             --
                                                                                      -----------    -----------    -----------
Balances at December 31, 1996                                                          12,993,450            130        107,990
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
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                                                        --             --             --
                                                                                      -----------    -----------    -----------
Balances at December 31, 1997                                                          15,307,146            153        141,426
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
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
Amortization of deferred compensation                                                        --             --             --
                                                                                      ===========    ===========    ===========
Balances at December 31, 1998                                                          16,613,567    $       166    $   157,005
                                                                                      ===========    ===========    ===========


                                                                                                                    Accumulated
                                                                                                     Receivable        Other
                                                                                       Deferred         From       Comprehensive
                                                                                     Compensation    Stockholder       Income
                                                                                      -----------    -----------    -----------
<S>                                                                                   <C>            <C>            <C>
Balances at December 31, 1995                                                         $      (397)   $      --      $       120
Net unrealized loss on available-for-sale securities of $152                                 --             --             (152)
Net loss                                                                                     --             --             --

Comprehensive income

Issuance of Common Stock upon exercise of stock options and in
   connection with an employee stock purchase plan, net                                      --             --             --
Issuance of Common Stock for cash and note in connection with
   the exercise of stock options                                                             --             (883)          --
Issuance of Common Stock for cash to Allergan, net of issuance costs of $32                  --             --             --
Issuance of Common Stock for cash in connection with the follow-on
   public offering, net of offering costs of $2,133                                          --             --             --
Issuance of Common Stock upon exercise of warrants, net                                      --             --             --
Repurchase of Common Stock for cash from Amgen Inc.                                          --             --             --
Issuance of warrants for cash to Amgen Inc.                                                  --             --             --
Deferred compensation related to grant of certain stock options                              (538)          --             --
Amortization of deferred compensation                                                         225           --             --
                                                                                      -----------    -----------    -----------
Balances at December 31, 1996                                                                (710)          (883)           (32)
Net unrealized gain on available-for-sale securities of $69                                  --             --               69
Net loss                                                                                     --             --             --

Comprehensive income

Issuance of Common Stock upon exercise of stock options and in
   connection with an employee stock purchase plan, net                                      --             --             --
Deferred compensation related to stock grant to an officer                                   (350)          --             --
Issuance of Common Stock for cash in connection with the follow-on
   public offering, net of offering costs of $2,340                                          --             --             --
Fair value of warrants issued                                                                --             --             --
Amortization of deferred compensation                                                         365           --             --
                                                                                      -----------    -----------    -----------
Balances at December 31, 1997                                                                (695)          (883)            37
Unnrealized gain on available-for-sale securities of $48, net of reclassification
   adjustment for gains included in net income of $32                                        --             --               16
Net loss                                                                                     --             --             --

Comprehensive income

Issuance of Common Stock upon exercise of stock options and in
   connection with an employee stock purchase plan, net                                      --             --             --
Deferred compensation related to stock grant to an officer                                   (271)
Issuance of Common Stock upon exercise of warrants, net                                      --             --             --
Issuance of Common Stock in connection with conversions
   of senior custom convertible notes, net                                                   --             --             --
Issuance of Common Stock for cash to ProChon                                                 --             --             --
Issuance of Common Stock for cash to ASTA Medica Aktiengesellschaft                          --             --             --
Fair value of certain options and warrants granted to external parties                       --             --             --
Deferred compensation related to certain options granted to employees                        (464)          --             --
Amortization of deferred compensation                                                         459           --             --
                                                                                      ===========    ===========    ===========
Balances at December 31, 1998                                                         $      (971)   $      (883)   $        53
                                                                                      ===========    ===========    ===========



                                                                                                        Total
                                                                                      Accumulated    Stockholders'
                                                                                        Deficit        Equity
                                                                                      -----------    -----------
<S>                                                                                   <C>            <C>
Balances at December 31, 1995                                                         $   (38,084)   $    43,441
Net unrealized loss on available-for-sale securities of $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                                                             --                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                                                             (57,965)        48,530
Net unrealized gain on available-for-sale securities of $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                                                             (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
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                                                         $  (130,652)   $    24,718
                                                                                      ===========    ===========

<FN>

                                                      See accompanying notes.
</FN>
</TABLE>
                                                                F-5

<PAGE>
<TABLE>

                                             SUGEN, Inc.

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

<CAPTION>
                                                                    Years Ended December 31,
                                                              --------------------------------------
                                                                1998           1997           1996
                                                              --------       --------       --------
<S>                                                           <C>            <C>            <C>
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
                                                              ========       ========       ========

Supplemental disclosure of noncash investing and
   financing activities:
Issuance of Common Stock upon conversion of Senior Custom
   Convertible Notes, due 2000, net                            $ 10,281       $   --         $   --
                                                               ========       ========       ========
Write-off of fully depreciated assets                          $  4,182       $   --         $   --
                                                               ========       ========       ========
Issuance of warrants for non-cash benefits                     $     69       $  1,903       $   --
                                                               ========       ========       ========
<FN>

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



                                       F-7


<PAGE>

1.       Organization and Significant Accounting Policies (Continued)

         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 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 marketing and  distribution  rights and previous
research and  development  work  performed are  recognized in full upon contract
execution.  Periodic  research funding payments are recognized as revenue as the
work is performed. Milestones are recorded when the specific performance goal is
achieved,  no future  performance  obligations  with  respect  to the  milestone
payment exist and collection of the amounts due is assured.  Consistent with the
contractual terms of certain of the Company's collaborative agreements,  and the
underlying  substance of the event,  milestone  payments received in the form of
stock  purchases at a premium above its fair market  value, are recorded at fair
market  value and the premium is  recognized  as contract  revenue.  When common
stock is purchased at a premium above its fair market value upon the  initiation
of an  agreement,  the  premium is  recorded  as equity at the  amount  paid in.
Further, the collaborative partners purchasing common stock at a premium receive
no rights or privileges other than the customary  registration rights and rights
and privileges of the Company's other common shareholders.

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 and non-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.  Stock options granted to non-employees  are accounted for in accordance
with Statement of Financial  Accounting Standard No. 123,  "Accounting for Stock
Based Compensation."

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.



                                       F-8
<PAGE>


1.       Organization and Significant Accounting Policies (Continued)

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.

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 could  have a
material  impact  on  the  Company's  results  of  operations,   as  significant
mark-to-market  adjustments may result due to fluctuations in interest rates and
the price of the Company's common stock, which historically has been volatile.


2.       Investments
<TABLE>

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

                                       F-9
<PAGE>



2.       Investments (continued)


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.


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
                                            ================   ===============


         Additions  to 1998  property  and  equipment  are net of a $4.2 million
write-off of fully depreciated  assets  associated with the previously  occupied
facilities.


         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 ($9.3 million  inception to date) 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.


                                      F-10

<PAGE>

5.       Research and Development Collaboration Agreements (continued)


         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 of
which the premium  above fair market  value was  recorded as equity.  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.

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 ($4.6 million  inception to date) 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,  of which the premium  above fair market value was recorded as
equity 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.

                                      F-11


<PAGE>


5.       Research and Development Collaboration Agreements (continued)

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,  of which the premium  above fair market value was recorded as
equity.  In January 1998, the first  milestone in connection  with the Company's
collaboration with ASTA Medica was achieved in the Pan-Her cancer program.  ASTA
Medica exercised its option to satisfy its $500,000 milestone obligation through
the  purchase of 18,665  shares of SUGEN  Common  Stock at a price of $26.79 per
share. The Company has recorded the amount received in excess of the fair market
value of the common stock issued as revenue in accordance  with its policy.  The
fair market value of the common stock issued equaled the 20 day average  closing
price as defined in the ASTA Medica agreement.

         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, of which the premium
above fair market value was recorded as equity.  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,  of
which the premium  above fair market value was recorded as equity.  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 a $3.0 million initial research payment,  is receiving research
and  development  funding ($4.0 million from inception to date) 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 that extends until 2015 with renewal options  totaling an aggregate of
ten years and is accounted for as an operating  lease.  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 five year term of the warrants.  In accordance with the
terms of the agreement,  the landlord  agreed to use its reasonable best efforts
to complete the facility according to the building specifications and to provide
for occupancy by the Company by an



                                      F-12
<PAGE>


6.       Leases (continued)


agreed upon date.  In addition to obtaining  financing for its share of the cost
of  building  improvements,  the  Company is  obligated  to make  timely  rental
payments in accordance with the payment schedule. 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.

The  Company  finances  substantially  all  of its  purchases  of  property  and
equipment  through  the use of lease lines of credit.  Generally  on a quarterly
basis,  assets  purchased by the Company are submitted  for financing  under its
capital lease  arrangements.  Cash proceeds are received by the Company when the
documentation  submitted is accepted by the lender and the Company  accounts for
these transactions as capital lease obligations.


         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
                                               ========


         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  1997 Notes were converted into
1,002,349  shares of Common  Stock at the weighted  average  price of $11.96 per
share. In connection with the issuance of the 1997 Notes,  the Company  recorded
total debt issuance  costs of $2.6 million which was included in Other Assets in
the balance sheets. Such amounts are amortized to interest expense over the term
of the 1997  Notes.  Upon  conversion,  a pro rata  portion  of the  unamortized
issuance costs are reclassified to stockholders' equity.


         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.


                                      F-13
<PAGE>


7.       Senior Custom Convertible Notes (continued)


         The fair value of the 1997  Notes for each  period  presented  has been
estimated by management  using a discounted  cash flow  approach  adjusted by an
estimate of the fair value of the related conversion  feature.  Such values were
estimated  to be $6.2  million and $14.9  million at December 31, 1998 and 1997,
respectively.  The fair value estimates included above exclude the fair value of
the detachable common stock warrants originally issued upon issuance of the 1997
Notes.


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 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.

                                      F-14
<PAGE>

9.       Stockholders' Equity (continued)

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 ix 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.

                                      F-15
<PAGE>


10.      Stock Option and Purchase Plans (continued)

         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's  repurchase  rights lapse over the remaining
vesting period of the options.

         The Company recorded deferred  compensation  expense for the difference
between the exercise price and the fair value of the Company's  Common Stock for
options granted to employees 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.

         In 1998,  the  Company  granted  options to purchase  45,000  shares to
non-employees  with an  estimated  fair  value of  approximately  $217,000.  The
options vest over a one year to a four year period and the Company will continue
to record  additional  expense related to these options in future years. For the
year ended  December 31, 1998,  the Company  expensed an aggregate  compensation
amount of  approximately  $225,000  relating to all  non-employee  stock  option
grants.


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,  which lapses
over the remaining  vesting period of the options.  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 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.

                                      F-16
<PAGE>

10.      Stock Option and Purchase Plans (continued)

         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.  The Company's  repurchase  right lapses
over the remaining vesting period of the options.


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-17

<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 per
                                  Options       Shares           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.
<TABLE>

The following table  summarizes  information  concerning  currently  outstanding
options:
<CAPTION>
                                                                                       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
            -----------------  --------------   --------------  -------------  ------------   -------------
<S>         <C>                  <C>                    <C>           <C>          <C>              <C>
            $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
                               ==============                                  ============

</TABLE>

                                      F-18


<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,
representing   the  purchase   price  of  the  common  stock,   is  included  in
stockholders'  equity.  The remaining balance has been recorded as part of loans
receivable from key employees and officers.  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.


                                      F-19
<PAGE>


12.      Income Taxes (continued)

         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                             $   --      $   --
                                                    ========    ========

         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-20


<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 amended report to be
signed on its behalf by the undersigned,  thereunto duly authorized, in the City
of South San Francisco, State of California, on July 29, 1999.


                                      SUGEN, INC.



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






         Pursuant  to the  requirements  of the  Securities  Act of  1934,  this
amended  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      July 29, 1999
------------------------------    Chairman of the Board
(Stephen Evans-Freke)             (Principal Executive Officer)




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




Jeremy L. Curnock Cook*           Director                         July 29, 1999
------------------------------
(Jeremy L. Curnock Cook)



<PAGE>




                                  Director and Secretary           July 29, 1999
------------------------------
(Samuel A. Hamad)



                                  Director                         July 29, 1999
------------------------------
(Gerald Moeller)



Donald E. Nickelson*              Director                         July 29, 1999
------------------------------
 (Donald E. Nickelson)



Richard D. Spizzirri*             Director                         July 29, 1999
------------------------------
(Richard D. Spizzirri)



Axel Ullrich*                     Director                         July 29, 1999
------------------------------
(Axel Ullrich)



* By: /s/ James L. Knighton
     -------------------------
          James L. Knighton
          Attorney-in-Fact