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

                                    FORM 10-K

(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
    OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996

                                       OR

( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
    ACT OF 1934

                         Commission File number: 0-19750
                                                 -------

                           MATRIX PHARMACEUTICAL, INC.
             (Exact name of registrant as specified in its charter)


          Delaware                                               94-2957068
(State or other jurisdiction of                               (I.R.S. Employer
incorporation or organization)                               Identification No.)

 34700 Campus Drive, Fremont California                            94555
(Address of principal executive offices)                         (Zip  Code)

       Registrant's telephone number, including area code: (510) 742-9900

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

                                                           Name of each exchange
Title of each class                                         on which registered
-------------------                                        ---------------------
       None                                                         None

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

                          Common Stock, $.01 Par Value

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the  preceding 12 months (or for such  shorter  period that the  registrant  was
required  to file  such  reports),  and  (2) has  been  subject  to such  filing
requirements for the past 90 days.

                                    Yes X No
                                       ---  ---

Indicate by 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 Form 10-K or any amendment to this Form
10-K.

The  aggregate  market  value  of  voting  stock,   $.01  par  value,   held  by
non-affiliates of the registrant as of February 28, 1997: $125,699,700.

Number of shares of Common Stock and Common Stock  equivalents,  $.01 par value,
outstanding as of February 28, 1997: 21,257,908.

                       DOCUMENTS INCORPORATED BY REFERENCE

Portions of the following  document are  incorporated by reference into Part III
of this Form 10-K Report:  the Proxy Statement for the Registrant's  1997 Annual
Meeting of Stockholders scheduled to be held on June 25, 1997.



                                     Page 1
<PAGE>

Item 1. Business

Overview

         Matrix  is a  leader  in  the  formulation  and  development  of  novel
site-specific  treatments  for cancer and serious skin  diseases.  The Company's
most  advanced  product  candidates,   AccuSite(TM)   (fluorouracil/epinephrine)
Injectable Gel and IntraDose(TM) (cisplatin/epinephrine) Injectable Gel, utilize
established chemotherapeutic agents in a proprietary viscous gel formulation and
are directly injected into skin lesions (AccuSite) and solid tumors (IntraDose).
AccuSite  and  IntraDose  have   demonstrated   the  ability  to  increase  drug
concentrations  within  solid  tumors  and to  reduce  the  systemic  toxicities
associated with conventional chemotherapy.

         To date, the Company has pursued six disease  indications  for AccuSite
and  IntraDose.  The Company has conducted or presently is conducting  Phase III
trials in genital warts,  basal cell cancer,  and head and neck cancer and Phase
II trials in squamous  cell cancer,  psoriasis,  and liver  cancer.  The Company
received a product  license in the United Kingdom in May 1996 to market AccuSite
for the treatment of external  genital  warts and commenced  marketing and sales
activities  in January 1997.  The Company has filed for marketing  clearance for
AccuSite in other European countries and in the United States.

         Matrix has  developed a core  expertise  in a range of  scientific  and
analytical  disciplines  to  improve  the  delivery  of  cancer  drugs  to  more
effectively treat solid tumors. The Company's capabilities include tumor biology
and physiology,  advanced imaging techniques,  pharmaceutical chemistry, polymer
chemistry,  analytical  chemistry/biochemistry  and  chemical  engineering.  The
Company has effectively  leveraged its technical  expertise to develop  platform
technologies  with  distinct  drug delivery  characteristics  and  capabilities:
Therapeutic   Implant   (aqueous  based  protein   systems)  for   water-soluble
chemotherapeutic  agents;  Anhydrous Delivery Vehicles ("ADV") (nonaqueous lipid
emulsion systems) for water-insoluble chemotherapeutic agents; and methods under
development for the regional delivery of  chemotherapeutic  agents.  The Company
believes that its technical  expertise combined with its proprietary  technology
base allows it to design and develop delivery systems tailored to the properties
of  specific  chemotherapeutic  drugs to improve  their  therapeutic  utility in
treating a broad range of cancer indications and tumor types.

Matrix Technology

         Therapeutic Implant. Matrix's AccuSite and IntraDose products are based
on its  patented  Therapeutic  Implant  injectable  gel  technology,  in which a
chemotherapeutic drug is combined with a protein matrix and chemical modifier to
create an injectable gel. This gel enables  targeted  delivery of drug by direct
injection into solid tumors and skin lesions,  placing high local concentrations
of drug  specifically  where needed.  Any accessible lesion or solid tumor which
can be seen,  palpated or visualized  with  established  imaging  techniques can
potentially be treated. The biodegradable protein matrix sustains the local drug
release,  maintaining high drug  concentrations  at the tumor or lesion site and
increasing the duration of exposure of drug to the targeted tissue. The activity
of the drug is further enhanced by the addition of chemical  modifiers,  such as
vasoconstrictors,  which  reduce  local  blood  flow  and  act  as  a  "chemical
tourniquet" to hold the drug in place.

         The Company  believes that its  technology  allows the  utilization  of
established  drugs or agents in  development  that may be  available  from other
companies or  institutions,  thus  reducing the risk,  cost and time involved in
drug  discovery  and  preclinical  development.  Although  the  chosen  drugs or
compounds may or may not be "off-patent,"  when they are  incorporated  into the
Company's  proprietary  drug  delivery  system,  the  resulting  product will be
proprietary to the Company. The Company, therefore, expects to be competitive in
the marketplace and have a proprietary  position in such products for the length
of the patents on its technology and resulting products.

         The Company's  Therapeutic  Implant  products  currently in development
employ fluorouracil or cisplatin,  two of the most widely used  chemotherapeutic
agents to treat solid  tumors.  These  chemotherapeutic  drugs exert a cytotoxic
effect  on  dividing   cells  at  various   stages   during   their  growth  and
multiplication. Cancer and hyperproliferative skin diseases are characterized by
rapid  and  unregulated  cell  division.  The  abnormal  cells  tend  to be more
susceptible than normal cells to the effects of such drugs. Unfortunately, there
are normal cells  (e.g.,  in the bone marrow and

                                     Page 2
<PAGE>

gastrointestinal  mucosa)  that  rapidly  divide and are also  sensitive  to the
cytotoxic  drugs.  This  toxicity to normal  tissue  limits the  maximum  dosing
permitted  with  systemically  administered  chemotherapeutic  drugs  and  often
results in the tolerated dose being  substantially lower than the dose necessary
to kill all diseased tissue.  Suboptimal dosing  contributes to the emergence of
drug resistance among remaining cancer cells, complicating further drug therapy.

         The Company  believes that the principal  advantages of the Therapeutic
Implant technology include:

         o        Sustained high, local drug  concentrations at the target site.
                  By maintaining  high, local drug  concentrations in the target
                  tissue,  the  Therapeutic  Implant  increases  the exposure of
                  diseased  tissue  to the  drug.  The  effect  can  be  further
                  enhanced  by the  addition  of a chemical  modifier  to aid in
                  holding the drug in place.

         o        Lowered  systemic  toxicity.  Because the Therapeutic  Implant
                  concentrates  the drug at the disease site and limits the drug
                  exposure  to normal  tissues,  overall  systemic  toxicity  is
                  sharply reduced compared to systemic chemotherapy.

         o        Site specific application. The Therapeutic Implant is injected
                  directly into the tumor or skin lesion.  Any accessible lesion
                  or  solid  tumor  which  can  be  seen  or   visualized   with
                  established imaging techniques can potentially be treated.

         o        Applicability to a broad range of therapeutic compounds.  Many
                  conventional  drugs  and  novel   biopharmaceuticals   can  be
                  incorporated  into the Therapeutic  Implant  technology.  This
                  allows the Company to utilize new or approved  drugs and other
                  biological   agents   available   from  other   companies   or
                  institutions,  thus reducing the risk,  cost and time involved
                  in drug discovery.

         o        Minimally invasive cost-effective  procedures. The Therapeutic
                  Implant should permit  administration in an outpatient setting
                  in most applications.

         Anhydrous Delivery Vehicle (ADV). Approximately half of the anti-cancer
drugs in use today, including paclitaxel,  etoposide, and teniposide, are poorly
soluble  in  water,  posing  difficulties  for  administration  by  conventional
systemic  routes such as  intravenous  injection or infusion.  The  solubilizing
agents  employed  in several  of these drug  products  to  prepare  suitable  IV
solutions have led to  significant  toxicity.  The  development of potential new
anti-cancer  agents such as  camptothecin  has also been limited by poor aqueous
solubility.  The  Company's  therapeutic  approach to cancer  treatment by local
delivery of chemotherapeutic  agents may obviate many of these difficulties.  In
addition,  the  Company  has  developed  a series  of ADVs  that in  preclinical
experiments  significantly enhance the local efficacy of these drugs compared to
the efficacy  obtained  when these drugs are delivered  systemically  using more
conventional  aqueous delivery  systems.  The Company believes that ADV carriers
may be  applicable  to a  large  variety  of  water-insoluble  drugs,  with  the
potential to  significantly  improve the clinical  utility of these agents.  The
Company  also  believes  that  this  technology  may also  lend  itself  well to
water-soluble drugs that have limited stability when dissolved in aqueous media.

         Water insoluble  cytotoxic  drugs such  paclitaxel,  camptothecin,  and
etoposide   disrupt  the  ability  of  cancer  cells  to  multiply  using  novel
mechanisms.  Paclitaxel  binds tubulin,  the protein critical for cell division.
Camptothecin  interferes with the topoisomerase I enzyme, which is necessary for
DNA transcription and translation.  Preclinical studies conducted by the Company
have demonstrated  substantially  improved  effectiveness in antitumor  activity
with local delivery of camptothecin,  paclitaxel, etoposide, and other cytotoxic
drugs when delivered in various ADV  formulations.  The  therapeutic  utility of
other  chemotherapeutic  drugs, including other tubulin-binding drugs, thymidine
synthetase  inhibitors,   topoisomerase  inhibitors  and  platinum-based  drugs,
potentially also could be enhanced by this delivery technology. A patent for ADV
technology was granted in 1996 in the United  States,  and similar patent claims
have  been  filed in Europe  and  Japan.  The  Company  has also  filed a patent
application in the United States for a related ADV technology.


                                     Page 3
<PAGE>


Products in Clinical Development
<TABLE>

         Matrix is pursuing  several broad programs for the development of novel
treatments for cancer and serious skin diseases.  The following table summarizes
the Company's products in development,  the primary indications for each product
and the current clinical development status. The Company has additional products
in preclinical development and is conducting fundamental research and studies in
several areas.

<CAPTION>
       Product Area/                                                        Development              Commercial
        Indication                      Delivery Platform                    Status(1)                 Rights
       -------------                    -----------------                   -----------              ----------
<S>                                   <C>                              <C>                            <C>
 AccuSite
    Genital Warts                     Therapeutic Implant              Marketed in the United         Matrix (4)
                                                                       Kingdom, MAA filed
                                                                       elsewhere in Europe (2)

                                                                       NDA filed in the U.S. (3)

    Basal Cell Cancer                 Therapeutic Implant              Phase III                      Matrix

    Squamous Cell  Carcinoma          Therapeutic Implant              Phase II                       Matrix

 IntraDose
    Head & Neck Cancer/               Therapeutic Implant              Phase III                      Matrix
    Accessible Solid Tumors

    Liver Cancer                      Therapeutic Implant              Phase I/II                     Matrix

 MPI 5020 Radiopotentiator
    Recurrent breast cancer           Therapeutic Implant              Investigational New Drug       Matrix
    (chest wall metastases)                                            Application (IND) filed

 Preclinical
    Topoisomerase Inhibitors          ADV, Therapeutic Implant         Preclinical                    Matrix

    Tubulin-Binding                   ADV, Therapeutic Implant         Preclinical                    Matrix

<FN>
(1)      The Company's products are generally developed in the following stages:
         pre-clinical  studies  (preparing to file an  Investigational  New Drug
         ("IND")  Application  or  Clinical  Trial  Exemptions   (CTX-foreign)),
         clinical  trials  (which  may  include  Phases  I,  II,  III and IV and
         variants or  combinations  of the foregoing) and regulatory  submission
         (New  Drug  Application  ("NDA")  or Market  Authorization  Application
         ("MAA")). See "-- Government Regulation."

(2)      The Company  filed its  original  MAA in the United  Kingdom  under the
         mutual recognition  process in August 1995, and subsequently filed MAAs
         in Germany,  Sweden and France in  November  1995 and Italy in December
         1995. An application for approval under the mutual recognition  process
         by other members of the European  Union was completed in December 1996.
         The Company  received a product  license from the United Kingdom in May
         1996 and commenced marketing and sales activities in the United Kingdom
         in January 1997.

(3)      The Company  submitted an NDA in the United  States in  September  1995
         that was accepted for filing by the U.S.  Food and Drug  Administration
         ("FDA") in November  1995. In December  1996,  the Company  received an
         action letter from the FDA. See "-- Genital Warts."

(4)      The  Company has  licensed  marketing  rights for  AccuSite in Italy to
         Dompe Farmaceutici. See "-- Sales and Marketing."
</FN>
</TABLE>


                                     Page 4
<PAGE>


AccuSite Injectable Gel

         Matrix has  evaluated  AccuSite in  clinical  trials in four major skin
disease indications: genital warts, basal cell cancer, squamous cell cancer, and
psoriasis.  These skin diseases are  characterized  by  superficially  occurring
hyperproliferative lesions which are sensitive to fluorouracil, the active agent
in AccuSite.

Genital Warts

         AccuSite was introduced in the United Kingdom in January 1997 following
approval  from the United  Kingdom's  Medicines  Control  Agency in May 1996. In
December 1996, the Company  completed  filings under the European Union's mutual
recognition  process  for  marketing  clearance  by other  member  states of the
European  Union.  In addition,  the Company filed MAA  applications  in Germany,
France,  Italy and Sweden in 1995 for direct approval by regulatory  agencies in
those nations.

         In December,  1996,  the Company  announced  that it received an action
letter from the FDA identifying  issues that will need to be resolved before the
Company's NDA for AccuSite  Injectable  Gel can be approved for the treatment of
genital warts. The NDA was accepted for filing by the FDA in November 1995.

         The  FDA  letter  cited  the  information  submitted  by  Matrix  to be
inadequate and said that the AccuSite application was consequently  unapprovable
as submitted. The FDA's response raised issues relating to clinical matters (the
importance of the  persistence of one tissue  condition as it relates to product
equivalence,  length of patient  follow-up,  and a potential risk of inadvertent
administration  that  could  lead to  serious  side  effects  --  though no such
inadvertent administration was observed in clinical studies),  chemistry matters
(e.g.,  expiration  dating and sampling  plans) and  microbiology  issues (e.g.,
filter  and  equipment   sterilization   validations).   The  Company  met  with
representatives of the FDA in February 1997 in order to clarify issues raised in
the FDA letter. Following this meeting, in March 1997 the Company filed with the
FDA an  amendment  to its NDA  containing  additional  clinical  data and  other
information in support of the Company's submission.

         Genital warts are one of the most common sexually transmitted diseases.
They are caused by  infection  by the human  papillomavirus  ("HPV") and have no
known  cure.  The Company  estimates  that there are  approximately  6.7 million
individuals  who have  genital  warts in the  United  States.  Of  these,  it is
estimated that  approximately 2 million patients are actively seeking treatment.
SRI International  estimates that there are approximately 1 million new cases of
genital warts in Western Europe each year.

         Current treatments for genital warts include the application of topical
medications such as podophyllin,  podofilox,  bi-and  tri-chloroacetic acids and
liquid  nitrogen.  Surgery,  electrodesiccation,  interferon  therapy  and laser
ablation are also used. The aim of these  treatments is to destroy and/or remove
the wart tissue. Despite this variety of treatment options, many lesions are not
completely  eradicated,  recurrence  rates are high and many of these treatments
are associated with persistent pain. The Company estimates that greater than 40%
of patients who are treated for genital warts have recurrent lesions. Based upon
interviews with patients and clinicians,  the Company believes that a relatively
low  percentage of afflicted  patients in the United  States and Western  Europe
seek treatment due to the limited effectiveness of currently available therapies
and the time and expense associated with suboptimal results.

         The Company has completed  pivotal  trials of its AccuSite  product for
the treatment of genital warts.  The Company's  Phase III trial consisted of 359
evaluable  patients  who  were   prospectively   divided  into  three  subgroups
determined by the extent of disease area.  The mean duration of disease prior to
treatment  for the  patients  entered  in this  trial  was 24  months,  and most
patients had been previously  treated with other  therapies.  In this trial, the
Company's  AccuSite product  achieved a complete  response rate (defined as 100%
clearing  of the  treated  lesion)  in 77% of  treated  lesions,  and an overall
response  rate  (combined  complete  and  partial  response)  in 89% of  treated
lesions.  Sixty-one  percent of patients  treated with AccuSite  achieved a 100%
clearing of all genital warts compared to 5% of patients receiving placebo.

                                     Page 5
<PAGE>

         The Company  believes  that  patients with total wart areas equal to or
less than 55mm2 are  representative  of average patients  seeking  treatment for
genital  warts.  Such  patients  comprised  52% of the  patients  treated in the
Company's Phase III trial.  In these  patients,  AccuSite had an 88% rate of per
lesion  complete  response and a 93% overall per lesion  response rate (complete
and partial responses). In addition, response duration in this patient sub-group
at the 90 day follow up point  showed that 71% of the  complete  response  group
remained free of  recurrence.  This study  demonstrated  that per lesion and per
patient response rates were  statistically  significant and consistent with data
from the Company's  earlier pivotal study,  providing a basis to seek regulatory
approval for AccuSite for the treatment of genital warts.

Basal Cell Cancer

         Basal  cell  cancer  is the most  common  form of skin  cancer,  and is
typically caused by overexposure to ultraviolet  rays in sunlight.  Unlike other
forms of cancers, basal cell cancers rarely form distant metastases. However, in
advanced cases,  the tumor may invade  underlying  vital  structures,  requiring
surgery  to remove  large  amounts  of facial or other  tissues.  In the  United
States, Western Europe and Australia, over 1.5 million people seek treatment for
basal cell cancer annually.

         Currently  available  treatments  include a number of local  therapies:
conventional  surgical  removal  (the  most  commonly  used  treatment),   Moh's
micrographic  surgery,  curettage,  electrodesiccation,   freezing  with  liquid
nitrogen,  laser  ablation,  radiation,  and topical  medication.  Despite these
treatments,  documented  post-treatment  recurrence  rates range from 2-26%.  In
addition,  surgical  procedures  may  result  in  trauma,  discomfort,  cosmetic
defects, scarring, and depression deformities.

         The  Company has  evaluated  AccuSite  as a  non-surgical,  potentially
non-scarring,   alternative  to  existing  therapies.   The  Company's  goal  in
conducting  clinical trials in this indication has been to demonstrate  efficacy
rates  comparable to or better than those  published for surgical  removal,  but
with the added benefit of improved  cosmetic results without incurring the risks
and trauma  associated with surgery.  Matrix's  regulatory  strategy has been to
conduct  clinical trials that support  approval of basal cell cancer as a second
indication for AccuSite in the United States and Western  Europe,  assuming that
the Company first receives marketing approval for the genital warts indication.

         In  September  1994,  the Company  presented  data from a Phase II dose
optimization and scheduling study in basal cell cancer. The clinical endpoint of
the study was the  presence or absence of cancer  cells in the  treated  area as
determined  by  histological  examination  of excised  tissue three months after
AccuSite  treatment.  In this study,  91% of 116 evaluable  patients  achieved a
complete response (histological  confirmation of no remaining disease).  Results
from this Phase II study  demonstrated a 100% complete response rate in the most
effective  treatment schedule (three treatments per week for a two week period).
In addition,  good to excellent  cosmetic  results were reported by the patients
and  physicians,  with no  clinically  significant  drug-related  systemic  side
effects.

         In April  1995,  the  Company  initiated  a Phase III basal cell cancer
clinical  trial program on three  continents.  The trial  enrolled more than 500
patients with  clinical  sites in certain  European  countries,  Australia,  New
Zealand and the United States,  utilizing the treatment regimen that exhibited a
100% complete response in the Company's Phase II trial.

         In order to satisfy FDA requirements for approval, the Company has also
conducted  two  multicenter  double  blind  studies in patients  with basal cell
cancer to  statistically  confirm the relative  contribution to efficacy made by
each of the three components of the AccuSite formulation.  Similar "contribution
of component" trials have been successfully  completed for genital warts. In May
1996,  the Company  concluded  that an analysis of the  histology  data from the
basal cell  contribution  of  component  studies  showed that these  trials were
insufficient to meet this regulatory requirement.

         Additionally,  in September 1996, an interim  analysis was conducted of
the clinical response rate data from the Phase III basal cell cancer trial. That
analysis indicated that treatment with AccuSite achieved complete response rates
of more than 80% but less than the 90% response rates perceived to be associated
with surgery.  Though the Company  intends to evaluate  one-year  follow-up data
from the Phase III basal cell program when these data become  available in 1997,
at the present
                                     Page 6
<PAGE>

time the Company  believes the available data from these three trials would make
it difficult to  commercialize  AccuSite for the additional  indication of basal
cell cancer in the United States.

Squamous Cell Carcinoma of the Skin

         Squamous cell carcinoma is the second most prevalent skin cancer.  This
type of skin cancer is  characterized  by a more rapid  growth rate and a higher
rate of metastasis than basal cell cancer.  There are approximately  280,000 new
cases of squamous cell carcinoma diagnosed in the United States,  Western Europe
and Australia each year.

         Squamous  cell  carcinoma  is treated in much the same  manner as basal
cell cancer,  with surgical  excision the  predominant  approach.  Curettage and
electrodesiccation  are also  utilized,  but only for very small  squamous  cell
carcinomas.  Due to the aggressive nature of this cancer,  surgical excision can
often be  disfiguring  or  entail  expensive  cosmetic  procedures  to repair or
minimize the scarring that frequently results from treatment.

         The Company  conducted  an  open-label,  multicenter  Phase II clinical
study to evaluate  AccuSite for the treatment of squamous cell  carcinoma of the
skin.  The  clinical  endpoint  of the trial was  histological  confirmation  of
complete tumor  resolution.  Study results  presented in 1996 indicated that 96%
(22 of 23) of evaluable squamous cell lesions completely  resolved following six
weekly  treatments with AccuSite.  Cosmetic  appearance of the treated sites was
typically  judged as "good to excellent"  by both the physician and patient.  No
clinically significant  treatment-related  adverse medical events were reported.
The  Company  expects to publish  this study but not to pursue  registration  of
AccuSite as a treatment for squamous cell carcinoma.

IntraDose Injectable Gel

         Matrix is  developing  IntraDose  Injectable  Gel for a wide variety of
solid tumors.  Ninety percent of cancer patients suffer from solid tumors (i.e.,
carcinomas and sarcomas). Approximately 70% of these patients have local disease
with no evidence of distant  disease  spread at time of diagnosis.  Conventional
therapies  for cancer  include  surgery,  radiation  and systemic  drug therapy.
Despite  continued  advances in these  treatments,  they are limited by negative
side effects, such as loss of normal body functions,  weakness, loss of appetite
and nausea, which are the result of the killing,  altering or removing of normal
cell tissue, Therefore, quality of life factors such as pain management, control
of tumor related  symptoms and the potential to retard disease  progression  and
possibly prolong survival become important.

         The  Company's  IntraDose  product  represents  a new  approach  to the
treatment of solid tumors. IntraDose is designed for direct injection into solid
tumors,  including primary,  metastatic and recurrent tumors. Imaging techniques
such  as  endoscopy,   ultrasound  and  computerized   tomography   ("CT")  have
substantially  increased the number of solid tumors potentially treatable by the
Company's products.  The Company believes IntraDose may be efficacious when used
as a  single  agent  as well  as when  used  in  combination  with  conventional
treatment modalities.  In addition,  Matrix's IntraDose product can generally be
administered in an outpatient setting, offering the potential for cost-effective
treatment without hospitalization for surgery.

Head and Neck Cancer/Other Accessible Solid Tumors

         The Company is currently  conducting Phase III clinical trials for head
and neck cancer as well as accessible  solid tumors  including  recurrent  chest
wall metastases (from breast cancer, ovarian cancer and lung cancer), esophageal
cancer,  melanoma  and various  squamous  cell  carcinomas.  These tumors may be
either primary or metastatic.  The Company  believes that these cancers are well
suited to a direct  injection with the Company's  IntraDose  product as they are
either visible,  palpable or easily  accessible  with an endoscope.  The Company
plans to combine  data from its Phase III trials in this  indication  to support
approval of the broadest  possible  label for IntraDose in the United States and
in Western Europe.


                                     Page 7
<PAGE>


         Head and Neck Cancer Market. There are approximately  115,000 new cases
of head and neck cancer  diagnosed in the United States and Western  Europe each
year.  Cancers of the head and neck are predominately  squamous cell carcinomas.
Of these,  approximately  70% are  diagnosed  as later stage  disease  which has
spread  throughout  the  patient's  body,  and 30% are  diagnosed as early stage
disease that is localized.  Cancers of the head and neck are often  difficult to
treat effectively with conventional surgery and radiotherapy  techniques.  Tumor
location can make resection  difficult or even  impossible,  due to proximity to
vital body  structures  and/or  cosmetic  or  functional  considerations,  while
radiotherapy often damages  surrounding healthy tissues.  Systemic  chemotherapy
has been  ineffective  in the  management  of head and neck  cancers  due to the
difficulty of achieving  adequate and lasting tumor responses  without incurring
unacceptable  side effects.  This has led to a continuing  investigation  of new
chemotherapeutics  and  combinations  of  chemotherapy  and radiation.  The most
important  limitation of the available therapies for head and neck cancer is the
high recurrence rate, generally 50% or higher.

         A  standard  course of  chemotherapy  for  patients  with head and neck
cancer  typically  requires up to five days of  hospitalization  with continuous
intravenous  infusion of  chemotherapy.  The  majority  of patients  who receive
chemotherapy  will  also  require  ancillary  supportive  treatments,   such  as
hydration,  antiemetics  or growth  factor  support  to  control  the toxic side
effects of the chemotherapy.  Clinical results suggest that the use of IntraDose
may not require some or all of these  supportive  treatments.  IntraDose  can be
administered in an outpatient setting in less than one hour.

         Accessible Solid Tumor Market. Accessible solid tumors are diagnosed in
approximately  150,000 new patients annually in the United States and in Western
Europe.  The major types of  accessible  solid  tumors  being  evaluated  in the
Company's  Phase III trials  include  chestwall  metastases  from breast cancer,
esophageal  tumors and melanoma.  Metastatic  tumors found in the chest wall and
other locations are usually treated with systemic chemotherapy and radiotherapy.
However,  this approach  often leads to the  development  of drug  resistance or
cumulative  radiation  toxicity.  Currently there are few treatment  options for
recurrent tumors.

         Clinical  Studies.   In  October  1996,  at  the  American  Academy  of
Otolaryngology-Head  and Neck Surgery meeting,  clinical investigators presented
an update from the Company's completed  open-label Phase I/II clinical trial for
the  treatment  of head and  neck  cancer/other  accessible  solid  tumors  with
IntraDose.  The investigators reported on 45 patients with a total of 82 treated
tumors,  of which 70 were  evaluable.  Forty-one of the 45 patients had received
radiotherapy  or cancer drug  therapy  prior to being  treated  with  IntraDose,
factors which reduce the likelihood of a significant  response to the future use
of chemotherapy.  In this trial, 47% of all evaluable treated tumors exhibited a
complete  response (100% reduction in tumor volume) and 59% of evaluable  tumors
exhibited a complete response or partial response (greater than 50% reduction in
tumor volume).

          IntraDose  achieved  these  response  rates  in  these  patients  with
advanced  disease  without causing a clinically  unacceptable  level of systemic
toxicity. Dose-limiting toxicity was not observed in this trial, and the overall
side  effects were deemed to be moderate in severity  when  compared to standard
chemotherapy regimens. In addition, these patients did not experience any of the
principal side effects  associated with the systemic use of cisplatin  including
nephrotoxicity, neurologic changes and ototoxicity.

         In June 1995, the Company announced  initiation of two Phase III trials
for patients  with head and neck cancer and two trials for  patients  with other
accessible  solid tumors.  The head and neck Phase III trial is a  double-blind,
placebo controlled trial and will enroll approximately 180 patients, 90 patients
in the  United  States  and 90  patients  in  certain  European  countries.  The
accessible  tumor  Phase III  trials  are open label  studies  that will  enroll
approximately 130 patients,  65 patients in the United States and 65 patients in
Western Europe.  Assuming  successful  results from these Phase III trials,  the
Company  anticipates  using the data from  these  trials to  support  regulatory
submissions in the United States and Western Europe.

         The Company believes IntraDose may also become an effective alternative
for patients with unresectable  esophageal  cancer.  The American Cancer Society
estimates that 12,100 new cases of

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esophageal  cancer were diagnosed in the United States in 1995, of which 90% are
expected to be fatal.  Patients  often  suffer  debilitating  symptoms  from the
growth of the tumor,  including  difficulties in swallowing  solid food,  weight
loss,  pain  and  eventually  death.  Currently,  local  palliation  is aimed at
allowing  patients  to swallow and  requires  surgical  intervention,  radiation
therapy, laser therapy or stent placement.  Of the four patients with esophageal
cancer treated in the Company's  Phase I/II  accessible  tumor trial,  dysphagia
(inability  to swallow)  resolved in all patients.  All four  patients  retained
their ability to swallow during the follow-up  period of the study. In addition,
two  patients  had in excess of 50%  reduction  in tumor volume and two patients
showed stable disease.

Liver Cancer

         Two types of tumors  are found in the liver --  primary  hepatocellular
cancer (a cancer  arising  from liver  cells) and  tumors  originating  in other
tissues  that  have  metastasized  to  the  liver.  Primary  liver  cancer  is a
significant  health  problem  in the  parts  of the  world  where  hepatitis  is
prevalent (e.g.,  Japan,  Korea and Southeast Asia),  with more than 100,000 new
cases in 1995. In the United States and Western Europe, there were approximately
40,000 newly  diagnosed  patients  with primary liver cancer in 1996 and 142,000
newly diagnosed patients with hepatic metastases from colorectal cancers.

         When  possible,  surgery is the first line  treatment for both types of
liver tumors. However, fewer than 10% of patients with liver tumors are operable
due to tumor  location,  size and  extent of  disease.  For  unresectable  liver
cancer, treatments have included the use of systemic chemotherapy, radiotherapy,
liver  transplantation,  cryotherapy,  hepatic arterial infusion of chemotherapy
and  chemoembolization,  all of which have had only limited beneficial  results.
Due to the limited effectiveness of current therapies, the Company believes that
fewer than 50% of all patients with liver cancer are treated.

         Matrix  believes that  IntraDose may become a first line  treatment for
many patients with  unresectable  liver tumors for either  primary or metastatic
liver  tumors.  Clinical  investigators  treated  patients  with  both  forms of
unresectable  liver  cancer  in  a  Phase  I/II  clinical  trial  program.   The
investigators treated 28 patients who had 25 tumors evaluable for tumor necrosis
(tumor  destruction,  estimated  by CT  scan).  Ten of the 25  evaluable  tumors
exhibited at least 90% necrosis in response to IntraDose treatment. Liver tumors
as small as 1.6 cm and as large as 3,164 cm were treated.  Patients were treated
in  an  outpatient  setting,  with  the  treatment  assisted  by  either  CT  or
ultrasound.

         Patients  treated in this study  experienced  none of the typical  side
effects   associated  with  intravenous   cisplatin,   such  as  nephrotoxicity,
neurologic  changes or ototoxicity.  In addition,  in a  pharmacokinetics  study
conducted in patients treated at the M.D.  Anderson Cancer Center,  less than 5%
of the drug levels anticipated from a standard intravenous dose of cisplatin was
found in patient  plasma after  treatment  with  IntraDose.  The majority of the
IntraDose  product was confined to the treated  tumor.  The type and severity of
side  effects were similar to those  experienced  by patients  treated for liver
cancer.

         In 1997, the Company plans to initiate two Phase II trials for patients
with liver cancer. A multicenter  Phase II trial for patients with primary liver
cancer  will be  conducted  in the  United  States,  Europe  and  Hong  Kong.  A
multicenter  Phase II trial for patients  with cancers  metastatic  to the liver
from colorectal cancer will be conducted in the United States and Europe.  These
trials are designed to evaluate tumor  necrosis,  tumor response (as measured by
CT), time to tumor progression, pattern of disease progression, and survival.

MPI 5020 Radiopotentiator

         The Company has expanded  efforts in exploring drug product  candidates
for the enhancement of radiation  therapy.  Radiation therapy remains a critical
tool in the  management  of many  types  of  solid  tumors.  However,  radiation
resistance,  hypoxic tumor cells, and normal tissue sensitivity to radiation has
limited  the  benefit of this  therapy.  Using its  platform  technologies,  the
Company  has  demonstrated  in  preclinical  experiments  that  effective  local
delivery  of  radiopotentiating  agents  significantly  improves  the effects of
radiation in solid tumors.  The Company's lead candidate in this area, MPI 5020,
is a  fluorouracil  (5-FU)-based  product  that uses the  Company's  Therapeutic
Implant  technology.  In January 1997 the Company  filed an IND for a

                                     Page 9
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Phase I/II trial in chest wall metastatic  disease from recurrent breast cancer.
This  dose-escalating  study is intended to evaluate the safety of MPI 5020 when
injected  within  one hour prior to  standard  radiotherapy  and to compare  the
effect on tumor  growth  of tumors  treated  with MPI 5020 and  radiotherapy  to
tumors treated with radiotherapy alone.

Preclinical Programs

         In  addition  to  its  clinical  programs,   the  Company  is  pursuing
preclinical  programs  focused  on  the  modification  and  optimization  of the
Company's core drug delivery  technologies for use with specific drugs in target
cancer  indications.  The Company  anticipates that its more  recently-developed
drug  delivery  technologies,  such  as  its  ADV  technology,  may be  used  to
effectively   deliver  a  family  of  both  water-soluble  and   water-insoluble
anticancer  drugs for local  administration.  The  Company  believes  that these
delivery technologies,  combined with the Company's technical expertise, provide
the   opportunity  to  tailor  a  specific  drug  delivery   technology  to  the
requirements of various anticancer  agents,  thereby improving their therapeutic
ratio (i.e.,  increasing  the drug's local  effectiveness  and/or  significantly
reducing   dose-limiting   side  effects   which  result  from  their   systemic
administration).  The Company has recently focused preclinical  research efforts
on topoisomerase  inhibitors and  tubulin-binding  agents.  These two classes of
chemical compounds have demonstrated potent anti-cancer activity in vitro and in
vivo, but many of the compounds comprising these chemical classes have needed to
be formulated with soluble agents that cause serious  dose-limiting side effects
in order to be administered intravenously.

         Topoisomerase  Inhibitors.  Topoisomerase  inhibitors  are agents  that
interfere  with DNA binding  enzymes that are involved in the copying and repair
of a cell's DNA. The Company has  developed a  formulation  of  camptothecin,  a
well-known  topoisomerase  inhibitor,  which uses the Company's ADV  technology.
Preclinical  experiments suggest that camptothecin locally delivered in Matrix's
ADV technology may be more effective and less toxic than systemic administration
of  camptothecin.   In  addition,   in  1996,  Matrix  in-licensed  a  group  of
topoisomerase  inhibitors  known as azatoxins from the National Cancer Institute
that will be the subject of a new research and preclinical  development program.
Potential  indications  for  the  Company's  topoisomerase   inhibitors  include
bladder, colorectal, and prostate cancer.

         Tubulin  binding  agents.  Tubulin  is  a  protein  critical  for  cell
division.  The Company has designed an ADV  formulation of  paclitaxel,  a known
anti-cancer  agent that binds tubulin.  Potential  indications for the Company's
formulation of paclitaxel include breast and ovarian cancer.

Manufacturing and Supply

         Matrix maintains worldwide manufacturing rights to all of its products.
The  Company  is  currently  manufacturing  AccuSite  for  commercial  sales and
IntraDose for its clinical  trials at its  manufacturing  facilities in San Jose
and Milpitas,  California,  as well as at a contract manufacturing facility. The
Company's facilities in San Jose and Milpitas are currently leased by Matrix and
are  utilized  for the aseptic  processing  of  collagen  gel,  sterile  filling
operations  and  non-sterile  processing  of  collagen  gel,  as well as for all
materials receiving activities, labeling, packaging and shipping operations. The
lease on the San Jose facility  extends  through  November 1997, with options to
renew through  November 1999. The Company  currently is negotiating an extension
of the lease on the Milpitas facility, which expires in August 1997.

         The  Company's San Jose and Milpitas  facilities  were the subject of a
Pre-Approval  Inspection  (PAI)  by the  FDA in  1996  in  connection  with  the
Company's New Drug  Application  for AccuSite.  This  inspection  found that the
facilities conform to FDA cGMP (Current Good Manufacturing Practices) standards.
The  facility  was  similarly  inspected  and  accepted  by  British  regulatory
personnel as a condition of AccuSite's approval in the United Kingdom.

         The  Company  anticipates  that its San Jose  and  Milpitas  facilities
should  provide  sufficient  production  capacity  to meet  clinical  and  early
commercial  requirements  of its AccuSite  product and selected  components  for
IntraDose  products  through 1998.  In December  1995,  the Company  purchased a
research  and  manufacturing  facility in San Diego,  California.  The  facility
totals approximately  67,000 square feet and includes  production,  research and
development  and  administrative  operations,  as well as an adjacent  parcel of
land. The Company  intends to use the

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<PAGE>

facility to meet its long-term  commercial scale production  requirements.  This
facility requires validation and process  installation that will require capital
expenditures of  approximately  $10.5 million.  The Company  estimates that this
facility will not be available for production until late 1998.

         The Company's  ability to conduct clinical trials on a timely basis, to
obtain  regulatory  approvals and to  commercialize  its products will depend in
part upon its ability to manufacture  its products,  either  directly or through
third parties,  at a competitive  cost and in accordance with applicable FDA and
other regulatory requirements,  including cGMP regulations.  Because both of the
Company's  initial  product  candidates,  AccuSite  and  IntraDose,  utilize the
Company's  proprietary protein carrier,  the Company uses a common manufacturing
facility for these products. As a result, the Company believes it may be able to
realize product cost economies of scale over the next few years when and if both
products receive marketing approvals.

         Several of the materials  used in the Company's  products are available
from a limited  number of  suppliers.  These items,  including  collagen gel and
drugs, have generally been available to Matrix and others in the  pharmaceutical
industry  on  commercially  reasonable  terms.  If the  Company's  manufacturing
facilities  are not able to produce  sufficient  quantities  of collagen  gel in
accordance  with  applicable  regulations,  the  Company  would  have to  obtain
collagen gel from another source and gain  regulatory  approval for that source.
Matrix has negotiated and intends to continue to negotiate supply agreements, as
appropriate,  for the  components  of raw  materials  utilized in its  products.
Matrix is also in the process of  attempting  to approve  second  sources for as
many as possible of these supplies.

         The Company's process of manufacturing  collagen gel is currently being
challenged  in  litigation  with  Collagen  Corporation.  See "Risk  Factors  --
Litigation."

Sales and Marketing

         The  Company  currently  has  worldwide  marketing  rights  for all its
products,  except for  AccuSite  in Italy.  In the United  States,  the  Company
intends to utilize a direct sales  organization to market AccuSite  primarily to
dermatologists  and urologists and to market  IntraDose to  oncologists,  if and
when regulatory approvals for these products are obtained.  The Company believes
that the  dermatology,  urology,  and oncology  markets in the United States are
highly concentrated and, therefore,  that a direct sales force will enable it to
effectively  penetrate these primary target markets. The Company also intends to
evaluate  potential  product  acquisition  and  in-licensing   opportunities  in
oncology which would leverage its direct sales efforts. In addition, the Company
may pursue  co-marketing or  co-promotional  activities to address other medical
specialties (e.g., Ob/Gyn for AccuSite) beyond its initial target markets.

         In the United  Kingdom,  the Company is  marketing  AccuSite  through a
direct sales organization  supplied on a contract basis. The Company may utilize
this  approach to field its own sales force in the United  States and in certain
other European countries.  In general, for geographic markets outside the United
States the Company intends to establish  relationships  with marketing  partners
for the sale of its products.  As part of this  strategy,  the Company may enter
into marketing and collaborative  arrangements  which include granting marketing
rights with respect to selected products and markets. In March 1997, the Company
announced  the first such  relationship,  a  distribution  agreement  with Dompe
Farmaceutici, a unit of the Dompe Group, for the sale of AccuSite in Italy.

         Since 1995, the Company has employed  experienced  marketing executives
to plan and manage the sales of its  products.  These  personnel  include a Vice
President of Sales and Marketing  who has  extensive  experience in starting and
managing sales and marketing  organizations in the  pharmaceutical  industry;  a
Director of Marketing who has significant  market research,  product  management
and  marketing  communications  experience,  and who has  been  responsible  for
several successful pharmaceutical product introductions; a Senior Sales Director
with  extensive  industry  experience in managing  large sales forces as well as
forming and managing  smaller  start-up  company sales forces;  and a Commercial
Director  for  Europe  who has  experience  with a  multinational,  Europe-based
pharmaceutical  company.  See "Risk  Factors  --  Limited  Sales  and  Marketing
Experience."

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<PAGE>

Patents and Proprietary Rights

         The Company's policy is to aggressively  seek patent  protection and to
enforce all of its intellectual  property  rights.  The Company has five patents
issued in the United States and has six pending applications. In Western Europe,
the Company has three issued patents and four pending applications.  The Company
has three pending  applications in Japan. Three of the five issued United States
patents  relate to the  Company's  base  technologies.  The first of these three
patents  claims  compositions  consisting  of collagen or  fibrinogen as protein
matrices,   cytotoxic  and   antiproliferative   drugs,   and   (optionally)   a
vasoconstrictive  agent. This patent (discussed earlier in this section) expires
in the  United  States  in 2003  and  also  covers  the  method  of use of these
compositions  in  treating  cancerous  or  hyperproliferative  lesions  by local
application.  The second  patent,  which  expires in the United  States in 2007,
includes  pharmaceutical  compositions consisting of a range of cytotoxic agents
(including radionuclides,  etc.) in combination with vasoconstrictive agents and
(optionally)  a  variety  of  other  tissue  modifiers,  formulated  in  aqueous
pharmacologically  acceptable vehicles.  The method of use of these compositions
in treating  cancerous lesions by local  application is also covered.  The third
patent covers certain  formulations of the Company's  Anhydrous Delivery Vehicle
(ADV)  technology  for  delivering   water-insoluble   anti-cancer   drugs,  and
specifically  covers  water-immiscible  fatty  acid  ester  matrices  containing
cytostatic   agents  and  their  use  for  treating  cancer  via   intralesional
administration.

Competition

         The  development of  therapeutic  agents for human disease is intensely
competitive.  Many different approaches are being developed or have already been
adopted for routine use for the management of diseases  targeted by the Company.
Certain  skin  diseases  and cancers are the  targets  for  therapeutic  product
development at numerous entities, many of which have greater human and financial
resources than the Company  dedicated to product  development and human clinical
testing.  In  addition,  conventional  drug  therapy,  surgery  and  other  more
established  treatments and modalities  will offer  competition to the Company's
products.

         The  pharmaceutical  industry  is  subject  to  rapid  and  substantial
technological   change.   Technological   competition  from  pharmaceutical  and
biotechnology   companies,   universities,   governmental  entities  and  others
diversifying  into the field is intense  and is expected  to  increase.  Most of
these entities have significantly greater research and development capabilities,
as well as  substantial  marketing,  financial  and  managerial  resources,  and
represent  significant   competition  for  the  Company.   Acquisitions  of,  or
investments  in,  competing  biotechnology  companies  by  large  pharmaceutical
companies  could  increase  such  competitors'  financial,  marketing  and other
resources. There can be no assurance that developments by others will not render
the Company's products or technologies noncompetitive,  or that the Company will
be able to keep pace with technological developments. Competitors have developed
or are in the process of developing  technologies that are, or in the future may
be,  the basis for  competitive  products.  Some of these  products  may have an
entirely  different  approach or means of accomplishing  the therapeutic  effect
than products being developed by the Company.  These  competing  products may be
more effective and less costly than the products developed by the Company.

Government Regulation

         The Company and its products are subject to comprehensive regulation by
the FDA in the United States and by comparable  authorities in other  countries.
These national agencies and other federal,  state, and local entities  regulate,
among other things, the preclinical and clinical testing, safety, effectiveness,
approval,  manufacture,  labeling,  marketing,  export, storage, record keeping,
advertising, and promotion of the Company's products.

         The process  required by the FDA before the  Company's  products may be
approved for marketing in the United States  generally  involves (i) preclinical
laboratory  and animal tests,  (ii)  submission to the FDA of an IND, which must
become  effective   before  clinical  trials  may  begin,   (iii)  adequate  and
well-controlled  human  clinical  trials to establish the safety and efficacy of
the drug for its intended  indication  (iv) submission to the FDA of an NDA, and
(v) FDA review of the NDA in order to determine, among other things, whether the
drug is safe and effective for its intended uses.  When a product  contains more
than one active drug  component,  as do some of the  Company's

                                    Page 12
<PAGE>

current  product  candidates,  the  FDA  may  request  that  additional  data be
submitted in order to  demonstrate  the  contribution  of each such component to
clinical efficacy.

         Matrix has used three different sources of collagen gel in the products
on which it has conducted clinical trials;  Koken Co. Ltd.  ("Koken"),  Collagen
Corporation  ("Collagen")  and its own  production.  The Company  intends to use
collagen gel of its own  manufacture in products it markets  commercially if FDA
approval is  received.  Accordingly,  the Company  has not  referenced  Collagen
Corporation's  Pre-Market  Approval  files  in its NDA.  See  "Risk  Factors  --
Litigation".

         When there has been a manufacturing  change in a product during product
development,  such as a change in the  supplier of a component or in the process
by  which  the  component  is  manufactured  or  in  the  site  at  which  it is
manufactured,  as is the  case  with  the  collagen  gel  used in the  Company's
AccuSite product,  the FDA may request (and has requested in Matrix's case) that
additional data be submitted to demonstrate  that the  manufacturing  change has
not  affected  the  clinical  performance  of the  product  as shown in  earlier
clinical  trials.  Accordingly,  Matrix has  conducted  a series of  preclinical
studies to show  comparability of products made from Collagen,  Koken and Matrix
collagen gel, a bioequivalency study to show comparability of products made with
Matrix  and  Collagen  collagen  gel  and  Phase  III  clinical  trials  to show
comparability in clinical  performance of a product made with Koken collagen gel
and a product made with  Collagen  collagen  gel.  The Company also  conducted a
Phase III(b) clinical trial to demonstrate the comparable  clinical  performance
of a product  made with  Matrix  collagen  gel to a product  made with  Collagen
collagen gel.

         Clinical  trials are  typically  conducted in three  sequential  phases
which may overlap.  During  Phase I, when the drug is  initially  given to human
subjects,  the  product  is tested for  safety,  dosage  tolerance,  absorption,
metabolism,  distribution, and excretion. Phase II involves studies in a limited
patient population to (i) evaluate preliminarily the efficacy of the product for
specific,  targeted  indications,  (ii) determine  dosage  tolerance and optimal
dosage,  and (iii) identify possible adverse effects and safety risks. Phase III
trials are  undertaken  in order to further  evaluate  clinical  efficacy and to
further test for safety within an expanded patient  population at geographically
dispersed clinical study sites. The FDA may suspend clinical trials at any point
in this process if it concludes  that clinical  subjects are being exposed to an
unacceptable health risk.

         FDA  approval  of the  Company's  products,  including  a review of the
manufacturing  processes and facilities  used to produce such products,  will be
required before such products may be marketed in the United States.  The process
of obtaining approvals from the FDA can be costly,  time consuming,  and subject
to  unanticipated  delays.  Any  failure  to obtain or delay in  obtaining  such
approvals  would  adversely  affect  the  ability  of the  Company to market its
proposed  products.  Moreover,  even if  regulatory  approval is  granted,  such
approval  may include  significant  limitations  on  indicated  uses for which a
product could be marketed. See "-- Genital Warts".

         The processes  required by European  regulatory  authorities before the
Company's products can be marketed in Western Europe are similar to those in the
United States.  First,  appropriate  preclinical  laboratory and animal tests as
well as analytical product quality tests must be done, followed by submission of
a CTX or similar  documentation  before human clinical  trials can be initiated.
Upon completion of adequate and well  controlled  clinical trials in humans that
establish the drug is safe and efficacious,  regulatory  approval of an MAA must
be obtained from the relevant regulatory authorities.

         MAA approvals for European countries may be obtained by three different
routes:  (i)  national  submissions,  in which MAA  approval is sought from each
local  health  authority,  (ii)  the  mutual  recognition  process,  in which an
approval is received  from one member state and then  submitted to the remaining
member states for mutual  recognition  of the  approval,  or (iii) a centralized
licensing  procedure in which the European  Medicines  Evaluation  Agency issues
approval for member states of the European  Union.  The Company chose the mutual
recognition  process  for its first MAA  filing  and the  United  Kingdom as its
reference member state. The Company subsequently filed MAAs in Germany,  France,
Italy and Sweden.  In May 1996, the Company was granted a product license by the
British Medicines Control Agency to market AccuSite for the treatment of genital
warts in the United  Kingdom.  In December  1996,  the Company  filed for mutual
recognition by members of the European Union to which it did not make a national
submission.  As of March

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<PAGE>

1997,  the Company has responded or is in the process of responding to questions
submitted by regulatory  agencies in Germany,  France,  and Sweden in connection
with the Company's MAAs in those countries. As with the United States FDA review
process,  there are numerous risks  associated  with the MAA review.  Additional
data may be requested by the regulatory  agency reviewing the MAA to demonstrate
the contribution of a product component to the clinical safety and efficacy,  or
to  confirm  the  comparable  performance  of  materials  produced  by a changed
manufacturing process or at a changed manufacturing site.

         The  proposed  products  and  technologies  of the  Company may also be
subject  to  certain  other  federal,  state,  and  local  government  laws  and
regulations,  including,  but not limited to,  various  environmental  laws, the
Occupational Safety and Health Act, and state,  local, and foreign  counterparts
to such laws.  Compliance with such laws and  regulations  does not have, nor is
such  compliance  presently  expected to have, a material  adverse effect on the
business of the Company.

Research and Development

         The  Company's   sponsored  research  and  development   expenses  were
approximately $17,072,000, $20,256,000, and $24,320,000 in 1994, 1995, and 1996,
respectively.

Employees

         As of December  31,  1996,  the  Company  had a total of 157  full-time
employees,  including  36  in  research  and  development,  35  in  medical  and
regulatory   affairs,   biostatistics,   and   technical   services  and  54  in
manufacturing.  The Company also has a  wholly-owned  subsidiary  located in the
United Kingdom,  Matrix  Pharmaceutical,  Ltd.,  which is managing the Company's
European  clinical  trials.  The  Company  believes  that  it  has  been  highly
successful in attracting skilled and experienced personnel; however, competition
for such  personnel is intense.  None of the Company's  employees are covered by
collective  bargaining  agreements and management  considers  relations with its
employees to be good.

         This  Form  10-K  contains,  in  addition  to  historical  information,
forward-looking  statements that involve risks and uncertainties.  The Company's
actual  results  could  differ  materially  from the  results  discussed  in the
forward-looking  statements.  Factors  that could  cause or  contribute  to such
differences include those discussed in "Risk Factors" as well as those discussed
elsewhere in this Form 10-K.

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                                  RISK FACTORS

No Assurance of Regulatory Approvals

         The preclinical and clinical testing,  manufacturing,  and marketing of
the  Company's  products  are  subject  to  extensive   regulation  by  numerous
governmental  authorities in the United States and other  countries,  including,
but not  limited  to, the FDA.  Among other  requirements,  FDA  approval of the
Company's  products,  including  a review  of the  manufacturing  processes  and
facilities used to produce such products,  will be required before such products
may be marketed in the United States. Similarly, marketing approval by a foreign
governmental  authority  is  typically  required  before  such  products  may be
marketed in a particular foreign country. Matrix has no products approved by the
FDA and one  product  approved  by a foreign  authority  and does not  expect to
achieve  profitable   operations  unless  other  product  candidates  now  under
development  receive  FDA and foreign  regulatory  approval  and are  thereafter
commercialized successfully.

         In  order to  obtain  FDA  approval  of a  product,  the  Company  must
demonstrate  to the  satisfaction  of the FDA  that  such  product  is safe  and
effective for its intended uses and that the Company is capable of manufacturing
the product with procedures that conform to the FDA's current good manufacturing
practice ("cGMP") regulations,  which must be followed at all times. The Company
has  had  only  limited   experience  in  submitting  and  pursuing   regulatory
applications.  The  process of  obtaining  FDA  approvals  can be  costly,  time
consuming,  and subject to unanticipated  delays. There can be no assurance that
such approvals will be granted to the Company on a timely basis, or at all.

         The process of obtaining FDA regulatory  approval  involves a number of
steps that, taken together,  may involve seven years or more from the initiation
of clinical trials and require the expenditure of substantial  resources.  Among
other  requirements,  this process  requires that the product undergo  extensive
preclinical and clinical testing and that the Company file an NDA requesting FDA
approval.  When a product  contains more than one component that  contributes to
the product's effect, as do all of the Company's current product candidates, the
FDA may request that  additional  data be submitted in order to demonstrate  the
contribution  of each such  component to clinical  efficacy.  In addition,  when
there has been a  manufacturing  change in a product  component  (either  in the
process  by  which  the  component  is  manufactured  or the site at which it is
manufactured) during product  development,  as is the case with the collagen gel
used in the Company's AccuSite product, the FDA may request that additional data
be submitted to demonstrate that the  manufacturing  change has not affected the
clinical performance of the product. In addition,  the manufacturing  facilities
for a product must be inspected  and accepted by the FDA as being in  compliance
with  cGMP  regulations  prior  to  approval  of the  product.  There  can be no
assurance that the Company's  current  manufacturing  facilities in San Jose and
Milpitas will continue to be accepted by the FDA, or that its San Diego facility
will be  accepted  in the  future,  and  failure  to receive  or  maintain  such
acceptance would have a material adverse effect on the Company's business.

         Matrix has used three different sources of collagen gel in the products
on which it has conducted clinical trials:  Koken Co., Ltd. ("Koken"),  Collagen
Corporation  ("Collagen")  and its own  production.  The Company  intends to use
collagen gel of its own  manufacture in products it markets  commercially if FDA
approval is received.  Accordingly,  the Company has not  referenced  Collagen's
Pre-Market Approval files in its NDA. (See "-Litigation" )

         However, as noted above, when there has been a manufacturing  change in
a product, such as a change in the supplier of a component,  the FDA may request
that additional data be submitted to demonstrate that the  manufacturing  change
has not  affected the  clinical  performance  of the product as shown in earlier
clinical  trials.  Accordingly,  Matrix has  conducted  a series of  preclinical
studies to show  comparability of products made from Collagen,  Koken and Matrix
collagen gel, a human  pharmacokinetic  study to show  comparability of products
made with Matrix and Collagen  collagen  gel,  and Phase III clinical  trials to
show comparability in clinical performance of a product made with Koken collagen
gel and a product made with Collagen  collagen gel. The Company also conducted a
Phase III(b) clinical trial to demonstrate the comparable  clinical  performance
of a product  made with  Matrix  collagen  gel to a product  made with  Collagen
collagen  gel.  The Company  believes  that all studies  conducted  to date have
supported the comparable clinical performance of products made with collagen gel
from all three  sources,  but there can be no assurance that the FDA will agree.
In  addition,

                                    Page 15
<PAGE>

there  can be no  assurance  that  the FDA  will not  require  further  clinical
demonstrations  either  of the  comparability  of a  product  made  with  Matrix
collagen gel to product made with Collagen  collagen gel or Koken  collagen gel,
or the safety and  efficacy  of a product  made with  Matrix  collagen  gel.  If
questions arise during the FDA review process about  comparability  or about the
safety and efficacy of a product made with collagen, it could delay the approval
process  or prevent  approval  and will  increase  the costs of  obtaining  such
approval. See "Business -- Government Regulation."

         The Company's analysis of the results of its clinical studies submitted
as part of an NDA is subject to review and  interpretation by the FDA, which may
differ from the Company's analysis. There can be no assurance that the Company's
data or its  interpretation  of data will be accepted  by the FDA. In  addition,
delays or rejections may be encountered  based upon changes in applicable law or
FDA policy during the period of product  development and FDA regulatory  review.
Any failure to obtain,  or delay in  obtaining,  FDA approvals  would  adversely
affect the ability of the  Company to market its  proposed  products.  Moreover,
even  if  FDA  approval  is  granted,  such  approval  may  include  significant
limitations on indicated uses for which a product could be marketed.

         Both  before  and  after   approval  is   obtained,   a  product,   its
manufacturer,  and  the  holder  of the  NDA  for the  product  are  subject  to
comprehensive regulatory oversight. Violations of regulatory requirements at any
stage,  including the preclinical  and clinical  testing  process,  the approval
process  or  thereafter  (including  after  approval),  may  result  in  adverse
consequences,  including  the FDA's delay in  approving  or refusal to approve a
product,  withdrawal  of  an  approved  product  from  the  market,  and/or  the
imposition of criminal penalties against the manufacturer and/or the NDA holder.
In  addition,  later  discovery of  previously  unknown  problems  relating to a
marketed  product may result in restrictions on such product,  manufacturer,  or
the NDA holder,  including  withdrawal of the product from the market. Also, new
government   requirements  may  be  established  that  could  delay  or  prevent
regulatory   approval  of  the  Company's   products  under   development.   See
"--Uncertainty   of   Pharmaceutical   Pricing;   No   Assurance   of   Adequate
Reimbursement." See "Business -- Government Regulation."

         The  Company's  NDA for  AccuSite was accepted for filing by the FDA in
November  1995.  In December  1996,  the Company  announced  that it received an
action  letter  from the FDA  identifying  issues  that will need to be resolved
before the  Company's  NDA for  AccuSite  can be approved  for the  treatment of
genital warts.

         The  FDA  letter  cited  the  information  submitted  by  Matrix  to be
inadequate and said that the AccuSite application is consequently not approvable
as submitted. The FDA's response raised issues relating to clinical matters (the
importance  of the  persistence  of one side  effect as it  relates  to  product
equivalence,  length of patient follow-up,  and a potential risk of serious side
effects -- though no such side  effects  were  observed  in  clinical  studies),
chemistry matters (e.g.,  expiration dating and sampling plans) and microbiology
issues (e.g., filter and equipment sterilization validations). In February 1997,
the Company met with FDA  officials to  understand  better the  clinical  issues
raised in the agency's  December 1996 action letter. In March 1997, Matrix filed
an amendment to its NDA that the Company believes addresses the questions raised
in the action letter and during the subsequent meeting. However, there can be no
assurance that the FDA may not ask for  additional  information on these issues,
or raise new issues,  which could delay or preclude marketing  approval.  If the
Company  fails to  commercialize  its program  for  genital  warts in the United
States, this could have a material adverse impact on the Company.

         The processes  required by European  regulatory  authorities before the
Company's products can be marketed in Western Europe are similar to those in the
United States.  First,  appropriate  preclinical  laboratory and animal tests as
well as analytical product quality tests must be done, followed by submission of
a  clinical  trial  exemption  ("CTX")  or similar  documentation  before  human
clinical   trials  can  be   initiated.   Upon   completion   of  adequate   and
well-controlled  clinical  trials in humans that establish that the drug is safe
and efficacious, regulatory approval of a Market Authorization Application (MAA)
must be obtained from the relevant regulatory authorities.

         The Company filed its MAA for AccuSite in the United  Kingdom in August
1995 and subsequently filed an MAA in Germany,  France, Italy and Sweden. In May
1996,  the Company was notified by the  Medicines  Control  Agency in the United
Kingdom that a product  license has been granted for AccuSite for the  treatment
of genital warts.  In December 1996,  the Company  submitted

                                    Page 16
<PAGE>

an application for mutual  recognition of the United Kingdom approval by members
of the European Union to which it did not make a national  submission.  However,
there can be no assurance of mutual recognition by other participating countries
of the approval  obtained in the United  Kingdom.  As with the United States FDA
review  process,  there  are  numerous  risks  associated  with the MAA  review.
Additional data may be requested by the regulatory  agency  reviewing the MAA to
demonstrate the  contribution of a product  component to the clinical safety and
efficacy of a product,  or to confirm the  comparable  performance  of materials
produced by a changed manufacturing process or at a changed manufacturing site.

Uncertainties Associated with Clinical Trials

         Matrix has conducted  and plans to continue to undertake  extensive and
costly  clinical  testing to assess the safety  and  efficacy  of its  potential
products.  Failure to comply with FDA regulations applicable to such testing can
result in delay, suspension,  or cancellation of such testing, and/or refusal by
the FDA to accept the results of such testing. In addition,  the FDA may suspend
clinical  trials  at any time if it  concludes  that the  subjects  or  patients
participating  in such trials are being  exposed to  unacceptable  health risks.
Further,  there can be no assurance  that human  clinical  testing will show any
current  or  future  product  candidate  to be safe and  effective  or that data
derived therefrom will be suitable for submission to the FDA.

         The Company is currently  conducting  multiple  clinical  trials in the
United States and certain  foreign  countries,  including four ongoing Phase III
trials.  The rate of completion of the  Company's  clinical  trials is dependent
upon, among other factors, the rate of patient enrollment. Patient enrollment is
a function of many factors,  including the size of the patient  population,  the
nature of the  protocol,  the  proximity  of patients to clinical  sites and the
eligibility  criteria  for the study.  The Company has  experienced  slower than
planned accrual of patients with its ongoing Phase III trials. Further delays in
completing  enrollment in these trials or delays in other  clinical  studies may
result in increased costs and delays, which could have a material adverse effect
on the Company.  Generally similar considerations apply to clinical testing that
is  subject  to  regulatory  oversight  by foreign  authorities  and/or  that is
intended to be used in  connection  with  foreign  marketing  applications.  See
"Business -- Government Regulation."

History of Losses; Future Profitability Uncertain

         Matrix was incorporated in 1985 and has experienced  significant losses
since that date. As of December 31, 1996, the Company's  accumulated deficit was
approximately  $105.9 million.  The Company has not generated  revenues from its
products  and  expects  to incur  significant  additional  losses  over the next
several years. The Company's ability to achieve a profitable level of operations
is  dependent  in large  part on  successfully  developing  products,  obtaining
regulatory  approvals  for  its  products,  and  making  the  transition  to  an
organization  producing  commercial  products and entering into  agreements  for
product commercialization.  No assurance can be given that the Company's product
development efforts will be completed,  that required regulatory  approvals will
be obtained,  that any products will be manufactured and marketed  successfully,
or that profitability will be achieved.

Additional Financing Requirements and Uncertain Access to Capital Markets

         The Company has expended and will continue to expend  substantial funds
to complete the research, development and marketing of its products. The Company
may require  additional  funds for these purposes through  additional  equity or
debt  financings,  collaborative  arrangements  with corporate  partners or from
other  sources.  No assurance  can be given that such  additional  funds will be
available on acceptable  terms,  if at all. If adequate  funds are not available
from operations or additional sources of financing, the Company's business could
be materially and adversely  affected.  Based on its current operating plan, the
Company  anticipates  that its existing  capital  resources  will be adequate to
satisfy its  capital  needs  through  1998.  See  "Management's  Discussion  and
Analysis of Financial Condition and Results of Operations."

                                    Page 17
<PAGE>

Limited Sales and Marketing Experience

         The  Company  intends to market and sell  certain of its  products,  if
successfully developed and approved, through a dedicated contract sales force in
the United  States and certain  countries  in Europe,  by  co-promoting  certain
products to selected  physician  specialties,  and through  sales and  marketing
partnership  arrangements in other countries.  The Company currently has limited
marketing and sales staff, and has yet to announce  co-promotion or distribution
arrangements  other  than for  Italy.  The  Company  is  developing  a sales and
marketing plan for AccuSite and its other products in clinical  development.  In
order to market its  products  directly,  the Company must develop a sales force
with  technical  expertise.  There can be no assurance  that the Company will be
able to establish a successful  direct sales  organization  or  co-promotion  or
distribution  arrangements.  In addition,  there can be no assurance  that there
will be sufficient sales of AccuSite or other products to fund related expenses,
many of which must be incurred  before  sales  commence.  Failure to establish a
marketing and sales  capability  in the United States and/or  outside the United
States may have a material adverse effect on the Company.

Limited Manufacturing Experience

         The Company's  ability to conduct clinical trials on a timely basis, to
obtain  regulatory  approvals and to  commercialize  its products will depend in
part upon its ability to manufacture  its products,  either  directly or through
third parties,  at a competitive  cost and in accordance with applicable FDA and
other  regulatory  requirements,  including  cGMP  regulations.  The  Company is
currently  manufacturing  commercial  quantities  of  AccuSite  and  supplies of
IntraDose for its clinical  trials at its  manufacturing  facilities in San Jose
and Milpitas,  California.  The Company  anticipates  that its facilities in San
Jose and Milpitas should provide sufficient production capacity to meet clinical
and  early  commercial   requirements  of  its  AccuSite  product  and  selected
components for IntraDose into 1998. However,  there can be no assurance that the
Company  will  be  able to  produce  adequate  quantities  of its  products  for
commercial  marketing and for its clinical  trials;  or that the Company will be
able to manufacture in a cost-effective  manner;  or that the Company's  current
manufacturing facilities will continue to be accepted by the FDA.

         In December  1995, the Company  purchased a research and  manufacturing
facility in San Diego,  California.  The Company intends to use this facility to
meet its  long-term  commercial  scale  production  requirements.  This facility
requires   validation  and  process   installation  that  will  require  capital
expenditures of  approximately  $10.5 million.  The Company  estimates that this
facility will not be available for production  until late 1998.  There can be no
assurance  that the Company will be able to validate and scale up this  facility
in a timely manner or that this facility will be adequate for Matrix's long-term
needs  without  delay to the Company's  ability to meet product  demand.  Matrix
expects to continue to use selected contract  manufacturers,  in addition to its
own manufacturing capability, for some or all of its product components. Failure
to  establish  additional  manufacturing  capacity on a timely  basis may have a
material adverse effect on the Company.

Dependence on Sources of Supply

         Several of the materials  used in the Company's  products are available
from a limited  number of  suppliers.  These items,  including  collagen gel and
various bulk drug substances used in the Company's products, have generally been
available to Matrix and others in the  pharmaceutical  industry on  commercially
reasonable  terms.  If the Company's  manufacturing  facilities  are not able to
produce  sufficient  quantities  of collagen gel in accordance  with  applicable
regulations,  the Company would have to obtain  collagen gel from another source
and gain regulatory approval for that source. There can be no assurance that the
Company would be able to locate an alternative,  cost-effective source of supply
of collagen  gel.  Matrix has  negotiated  and intends to continue to  negotiate
supply agreements, as appropriate,  for the components of raw materials utilized
in its products.  Matrix is also in the process of attempting to approve  second
sources for as many as possible of these  supplies.  Any  interruption of supply
could have a material adverse effect on the Company's ability to manufacture its
products,   and  thus  the  ability  to  complete  the  clinical  trials  or  to
commercialize  products. In addition, the Company's ability to commercialize its
IntraDose  Injectable  Gel product in the United  States could be limited by the
issuance in 1996 of a new U.S.  patent for cisplatin,  a  chemotherapeutic  drug
that is the active compound in IntraDose,  if the newly-issued  patent is upheld
and if  IntraDose  were found to  infringe  that  patent,  and if the Company is
unable to obtain a license  under  that  patent.

                                    Page 18
<PAGE>

See  "--Uncertainty  Regarding  Patents and  Proprietary  Rights." The Company's
process  for  manufacturing  collagen  gel  is  currently  being  challenged  in
litigation with Collagen. See "--Litigation."

Litigation

         On December 21, 1994,  Collagen filed a lawsuit  against the Company in
Santa Clara County  Superior  Court alleging  misappropriation  of trade secrets
concerning the manufacturing process for collagen,  including breach of contract
and fraud. The Complaint seeks unspecified damages and injunctive relief related
to Matrix's  manufacture of collagen,  its regulatory  filings and its hiring of
current or former  Collagen  employees.  On February 14, 1995, the Company filed
its answer to  Collagen's  complaint,  denying  all claims of  misappropriation,
asserting  several  affirmative  defenses and seeking recovery of its attorneys'
fees.  Matrix  has also  filed a  cross-complaint  against  Collagen  and Howard
Palefsky,  Collagen's  Chairman  and former  Chief  Executive  Officer,  seeking
recovery of damages for defamation,  violations of California  antitrust law and
other causes of action.

         On September 12, 1995, Collagen filed a First Amended Complaint, adding
as  defendants  two  former  Collagen  employees  currently  working  at Matrix,
alleging  that these  employees  used  confidential  documents  and  information
acquired  by  them as  Collagen  employees  for the  benefit  of  Matrix.  These
employees had been accused of wrong-doing in the original  Complaint  along with
other former Collagen employees, but not named as defendants.  The First Amended
Complaint purports to add causes of action for conversion against Matrix and the
two  individual  defendants,  and for breach of contract,  breach of confidence,
breach of  fiduciary  obligation  and breach of the duty of loyalty  against the
former Collagen employees.  Matrix is alleged to have induced such breaches. The
First Amended  Complaint adds to the requested relief of the original  Complaint
for damages and injunctive relief a request for the imposition of a constructive
trust on the alleged fruits of the alleged trade secret misappropriation.

         The lawsuit follows a series of contract  negotiations in 1994 aimed at
developing a long-term supply relationship between Collagen and Matrix. Although
processes to  manufacture  collagen gel have been in the public  domain for many
years,  Collagen is  presently  the only  commercial  source of collagen gel for
human use in the United States.  Before Matrix  developed its own  manufacturing
process,  Matrix products in clinical trials included  collagen gel manufactured
by Koken and Collagen. See "-- No Assurance of Regulatory Approvals."

         Discovery  in the case is ongoing.  The trial is  scheduled to begin on
April 7, 1997.

         The  Company  believes  that  the  manufacturing  process  which it has
developed for collagen gel does not  incorporate  any Collagen trade secrets and
that the  lawsuit  filed by  Collagen  is without  merit.  Although  the Company
intends to defend  against  this suit  vigorously,  no  assurances  can be given
regarding its eventual  outcome.  This litigation does not involve any claims of
patent infringement. A finding of misappropriation of trade secrets could result
in  damages  and/or  a  significant  restriction  on the  Company's  ability  to
manufacture its products. Such a finding would also require the Company to alter
its  manufacturing  process,  or seek an alternate source of collagen gel. There
can be no assurance  that the Company  would be able to alter its  manufacturing
process, if required,  in a timely manner, or at all or that it would be able to
secure an alternative  source of collagen gel on commercially  reasonable terms,
or at all. As a result,  there can be no  assurance  that this  lawsuit will not
delay the Company's  product  approvals or affect its ability to manufacture its
products, each of which would have a material adverse effect on the Company, its
prospects and financial  condition.  Additionally,  the costs of litigating this
matter, regardless of outcome, may exceed $2,000,000 in 1997.

Uncertainty Regarding Patents and Proprietary Rights

         The Company's  success  depends in part on its ability to obtain patent
protection  for its  products  and to  preserve  its trade  secrets  and operate
without infringing on the proprietary rights of third parties.  No assurance can
be given that the Company's pending patent applications will be approved or that
any patents will provide  competitive  advantages for the Company's  products or
will not be  successfully  challenged or circumvented  by its  competitors.  The
Company has not  conducted an  exhaustive  patent search and no assurance can be
given  that  patents  do not  exist or could  not be

                                    Page 19
<PAGE>

filed which would have a material  adverse  effect on the  Company's  ability to
market its products or maintain  its  competitive  position  with respect to its
products.   The  Company's  patents  may  not  prevent  others  from  developing
competitive products using related technology. Other companies obtaining patents
claiming  products or  processes  useful to the  Company may bring  infringement
actions against the Company.  As a result, the Company may be required to obtain
licenses from others to develop,  manufacture or market its products.  There can
be no  assurance  that the Company  will be able to obtain any such  licenses on
commercially  reasonable  terms,  if at all.  The  Company  also relies on trade
secrets  and  proprietary  know-how  which  it  seeks to  protect,  in part,  by
confidentiality  agreements  with  its  employees,  consultants,  suppliers  and
licensees. There can be no assurance that these agreements will not be breached,
that the  Company  would have  adequate  remedies  for any  breach,  or that the
Company's  trade  secrets will not  otherwise  become known or be  independently
developed by competitors.

         No  assurance  can be given that any patent  issued to, or licensed by,
the Company will provide  protection that has commercial  significance.  In this
regard,  the patent  position of  pharmaceutical  compounds and  compositions is
particularly uncertain.  Even issued patents may later be modified or revoked by
the United States Patent and Trademark Office ("PTO") in proceedings  instituted
by Matrix or others.  During an  opposition  proceeding  in Japan,  the  Company
became  aware of a  reference  which may affect  the scope of its United  States
Patent  claims  which cover the collagen  gel matrix  products.  The Company has
brought this  reference to the attention of the PTO for a  determination  of the
extent to which the claims  should be  modified in light of this  reference.  No
assurance can be given concerning the outcome of the determination, although the
Company  believes that  modifications of the claims that may be required because
of the reference will not materially adversely affect the Company's  proprietary
protection  for its  products.  In addition,  no assurance can be given that the
Company's  patents  will afford  protection  against  competitors  with  similar
compounds or technologies,  that others will not obtain patents claiming aspects
similar to those covered by the Company's  patents or applications,  or that the
patents of others will not have an adverse  effect on the ability of the Company
to do business.  Moreover,  the Company believes that obtaining  foreign patents
may be more difficult than obtaining  domestic patents because of differences in
patent laws, and recognizes that its patent  position  therefore may be stronger
in the United  States than  abroad.  In  addition,  the  protection  provided by
foreign  patents,  once they are  obtained,  may be weaker than that provided by
domestic patents.

         In addition,  no assurance can be given that the Company's patents will
afford  protection  against  competitors with similar compounds or technologies,
that others will not obtain patents claiming aspects similar to those covered by
the Company's  patents or  applications,  or that the patents of others will not
have an adverse  effect on the ability of the Company to do  business.  In 1996,
for instance,  a composition  of matter patent for the cytotoxic  drug cisplatin
was granted in the United States to a pharmaceutical company whose use patent on
cisplatin as an  anti-tumor  agent  expired in December  1996.  The Company,  on
advice of patent  counsel,  believes  the new patent for  cisplatin,  the active
agent in the Company's  IntraDose product,  was improperly awarded and should be
invalidated.  However, if the new patent on cisplatin is upheld and if IntraDose
were found to infringe that patent,  there can be no assurance  that the Company
will be able to  obtain a  license  to the  patent  in  order  to  commercialize
IntraDose in the United States.

Rapid Technological Change and Substantial Competition

         The  pharmaceutical  industry  is  subject  to  rapid  and  substantial
technological   change.   Technological   competition   in  the  industry   from
pharmaceutical and biotechnology companies, universities,  governmental entities
and others  diversifying  into the field is intense and is expected to increase.
Most of these  entities  have  significantly  greater  research and  development
capabilities, as well as substantially more marketing,  financial and managerial
resources  than the  Company,  and  represent  significant  competition  for the
Company.  Acquisitions of, or investments in, competing  biotechnology companies
by large  pharmaceutical  companies could increase such competitors'  financial,
marketing and other  resources.  There can be no assurance that  developments by
others will not render the Company's products or technologies  noncompetitive or
that the  Company  will be able to keep  pace with  technological  developments.
Competitors have developed or are in the process of developing technologies that
are, or in the future may be, the basis for competitive products.  Some of these
products  may have an  entirely  different  approach  or means of  accomplishing
similar therapeutic effects than products being developed by the Company.  These
competing  products  may

                                    Page 20
<PAGE>

be more effective and less costly than the products developed by the Company. In
addition,  conventional drug therapy, surgery and other more familiar treatments
and modalities will offer competition to the Company's products.

         Any product which the Company  succeeds in developing  and for which it
gains  regulatory  approval must then compete for market  acceptance  and market
share. Accordingly,  important competitive factors, in addition to completion of
clinical  testing and the gaining of regulatory  approval,  will include product
efficacy,  safety,  timing and scope of regulatory  approvals,  availability  of
supply,  marketing and sales  capability,  reimbursement  coverage,  pricing and
patent protection.

Uncertainty of Pharmaceutical Pricing; No Assurance of Adequate Reimbursement

         The future revenues and  profitability  of and  availability of capital
for  biopharmaceutical  companies may be affected by the  continuing  efforts of
governmental  and third  party  payers to  contain or reduce the costs of health
care through various means.  For example,  in certain foreign markets pricing or
profitability of prescription  pharmaceuticals is subject to government control.
In the United States,  there have been, and the Company  expects that there will
continue to be, a number of federal and state  proposals  to  implement  similar
government   control.   While  the  Company  cannot  predict  whether  any  such
legislative  or  regulatory  proposals  will be  adopted,  the  announcement  or
adoption of such proposals could have a material adverse effect on the Company's
prospects. Additionally, the cost of prescription drugs is receiving substantial
attention  in the United  States  Congress.  Legislation  enacted  in 1990,  and
amended and  strengthened  in 1992,  requires  pharmaceutical  manufacturers  to
rebate to the  government a portion of their  revenues  from drugs  furnished to
Medicaid  patients.  In  1992,   legislation  was  enacted  that  extends  these
requirements to cover outpatient pharmaceuticals,  and also mandates a reduction
in pharmaceutical prices charged to certain federally-funded  facilities as well
as to certain hospitals serving a disproportionate share of low-income patients.
It is likely that Congressional  attention will continue to focus on the cost of
drugs  generally,  and particularly on increases in drug prices in excess of the
rate of inflation, given recent government initiatives pertaining to the overall
reform of the U.S.  health  care  system,  and those  specifically  directed  at
lowering  total costs.  The Company  cannot predict the likelihood of passage of
federal and state  legislation  related to health  care reform or lowering  drug
costs.

         The Company's ability to commercialize  its products  successfully will
depend in part on the extent to which appropriate  reimbursement  levels for the
cost of such  products  and  related  treatment  are  obtained  from  government
authorities,  private health  insurers and other  organizations,  such as health
maintenance   organizations   ("HMOs").   Third-party  payors  are  increasingly
challenging  the prices  charged for medical  products and services.  Also,  the
trend towards managed health care in the United States and the concurrent growth
of organizations  such as HMOs,  which could control or significantly  influence
the  purchase of health  care  services  and  products,  as well as  legislative
proposals to reform health care or reduce government insurance programs, may all
result in lower prices for the Company's products. The cost containment measures
that health  care payors and  providers  are  instituting  and the effect of any
health care reform  could  adversely  affect the  Company's  ability to sell its
products and may have a material adverse effect on the Company.

Dependence Upon Qualified and Key Personnel

         Because  of the  specialized  nature  of the  Company's  business,  the
Company's ability to maintain its competitive position depends on its ability to
attract and retain qualified  management and scientific  personnel.  Competition
for such  personnel is intense.  There can be no assurance that the Company will
be able to continue to attract or retain such persons. The loss of key personnel
or the failure to recruit  additional  personnel  could have a material  adverse
effect on the Company's business.

Product Liability Exposure; Limited Insurance Coverage

         The  Company  faces an  inherent  business  risk of exposure to product
liability  claims in the  event  that the use of  products  during  research  or
commercialization results in adverse effects. While the Company will continue to
attempt to take appropriate precautions,  there can be no assurance that it will
avoid  significant  product  liability  exposure.  The Company maintains product
liability  insurance for clinical  studies.  However,  there can be no assurance
that such  coverage  will be adequate

                                    Page 21
<PAGE>

or that adequate insurance coverage for future clinical or commercial activities
will be available at all, or at  acceptable  cost,  or that a product  liability
claim would not materially  adversely affect the business or financial condition
of the Company.

Hazardous Materials and Product Risks

         The Company's  research and development  involves the controlled use of
hazardous  materials,  such as  cytotoxic  drugs,  other toxic and  carcinogenic
chemicals and various radioactive compounds.  Although the Company believes that
its safety  procedures for handling and disposing of such materials  comply with
the standards  prescribed by federal,  state and local regulations,  the risk of
accidental  contamination  or injury from these  materials  cannot be completely
eliminated.  In the event of such an accident,  the Company could be held liable
for any damages that result,  and any such  liability  could be  extensive.  The
Company is also  subject to  substantial  regulation  relating  to  occupational
health and safety,  environmental  protection,  hazardous substance control, and
waste management and disposal. The failure to comply with such regulations could
subject the Company to, among other things, fines and criminal liability.

         Certain of the  chemotherapeutic  agents employed by the Company in its
Therapeutic  Implant,  ADV and Therapeutic  Adhesive  products are known to have
toxic  side  effects,   particularly   when  used  in  traditional   methods  of
administration.  Each product  incorporating such a chemotherapeutic  agent will
require  separate  FDA  approval  as a new drug under the  procedures  specified
above.  Bovine  collagen is a  significant  component of the  Company's  protein
matrix.  Two rare autoimmune  connective  tissue  conditions,  polymyositis  and
dermatomyositis  ("PM/DM"),  have been alleged to occur with increased frequency
in patients  who have  received  cosmetic  collagen  treatments.  Based upon the
occurrence of these conditions, the FDA requested a major manufacturer of bovine
collagen  products for cosmetic  applications  to investigate the safety of such
uses of its collagen.  In October  1991, an expert panel  convened by the FDA to
examine  this issue found no  statistically  significant  relationships  between
injectable  collagen and the  occurrence of autoimmune  disease,  but noted that
certain  limitations  in the  available  data made it  difficult  to establish a
statistically significant association.

Volatility of Stock Price; No Dividends

         The market prices for securities of biopharmaceutical and biotechnology
companies  (including the Company) have historically  been highly volatile,  and
the  market  has from time to time  experienced  significant  price  and  volume
fluctuations  that are  unrelated to the  operating  performance  of  particular
companies. Future announcements concerning the Company, its competitors or other
biopharmaceutical products,  governmental regulation,  developments in patent or
other  proprietary  rights,  litigation  or public  concern  as to the safety of
products  developed by the Company or others and general  market  conditions may
have a significant  effect on the market price of the Common Stock.  The Company
has not paid any cash  dividends  on its  Common  Stock and does not  anticipate
paying any dividends in the foreseeable future.

Anti-Takeover Provisions

         The ability of the Board of Directors of the Company to issue shares of
Preferred  Stock  without  stockholder  approval and a  stockholder  rights plan
adopted by the Company may, alone or in combination,  have certain anti-takeover
effects.  The Company  also is subject to  provisions  of the  Delaware  General
Corporation Law which may make certain business combinations more difficult.

                                    Page 22
<PAGE>


                                   MANAGEMENT
<TABLE>

Executive Officers of the Company

Certain information about the Company's executive officers is set forth below:
<CAPTION>

Name                                       Age            Position
---------------------                      ---            ----------------------------------------------
<S>                                        <C>            <C>
Craig R. McMullen                          53             President, Chief Executive Officer and Director

James R. Glynn                             50             Senior Vice President, Chief Financial Officer and
                                                          Secretary

Richard D. Leavitt, M.D.                   51             Senior Vice President, Medical and Regulatory
                                                          Affairs

Dennis M. Brown, Ph.D.                     47             Vice President, Discovery Research

Lewis P. Chapman                           46             Vice President, Sales and Marketing

Richard E. Jones, Ph.D.                    52             Vice President, Research and Development

Andrew G. Korey, Ph.D.                     48             Vice President, Medical Information and
                                                          Extramural Scientific Affairs

Ronald P. Lucas                            55             Vice President, Operations

Natalie L. McClure, Ph.D.                  44             Vice President, Regulatory Affairs and Quality
                                                          Assurance
</TABLE>

         Mr.  McMullen  has been  President  and Chief  Executive  Officer and a
director  of the  Company  since  March  1991.  From  November  1990  until  his
appointment as President and CEO, he served as a consultant to the Company. From
October  1989  to  February  1991,  Mr.  McMullen  was  a  consultant  with  CRM
Associates.   Until  October  1989,  he  was  with  Hana   Biologics,   Inc.,  a
biotechnology  company,  which he joined as Executive  Vice  President and Chief
Operating  Officer  in 1984.  He became  President  in 1985 and Chief  Executive
Officer,  and a director of Hana Biologics in 1986. From 1978 to 1984, he held a
number of positions at Baxter Travenol  Laboratories,  Inc. ("Baxter Travenol"),
including  National  Sales  Manager,  Director  of  Marketing  and Sales for the
American  Instrument  Company,  Director of  Marketing  and Sales for the Hyland
Diagnostic  Division and Vice President of Marketing for the Laboratory Products
and  Service  Division.  Prior  to  joining  Baxter  Travenol,  he held  various
management  positions with the Scientific Products Division of American Hospital
Supply Corporation.

         Mr. Glynn was named Senior Vice President,  Chief Financial Officer and
Secretary of the Company in July 1995,  after  spending eight years as Executive
Vice  President,  Chief Financial  Officer and Director of Mycogen  Corporation.
From 1982 to 1987,  Mr.  Glynn was Vice  President,  Finance  and  Treasurer  of
Lubrizol Enterprises,  Inc., a venture development company. He also worked as an
audit manager with Price Waterhouse from 1974 to 1982.

         Dr.  Leavitt was named Senior Vice  President,  Medical and  Regulatory
Affairs in November 1996. From 1993 to 1996, he was Vice President, Clinical and
Regulatory Affairs of Focal  Incorporated.  Prior to joining Focal Incorporated,
from  1991 to  1993  he  served  as  Director,  Clinical  Research  at  Genetics
Institute.  Prior  to  joining  Genetics  Institute,  from  1986 to 1991 he held
various  management  positions  for a division of Fujisawa USA,  Fujisawa  Smith
Kline  Corporation,  and at  Centocor  Incorporated.  Prior to joining  Centocor
Incorporated, he was an Assistant Professor at the University of Maryland School
of Medicine and John Hopkins University School of Medicine.

         Dr. Brown, a founder of the Company, has been Vice President, Discovery
Research  since 1995 and was Vice  President of Scientific  Affairs from 1985 to
1995. He was also a director of Matrix from 1985 to 1991.  From 1985 until 1987,
he was an Assistant  Professor  of  Radiology at the

                                    Page 23
<PAGE>

Joint Center for Radiation Therapy at Harvard Medical School. From 1979 to 1985,
he was a Research Associate,  Department of Radiology at the Stanford University
School of Medicine.

         Mr. Chapman has been Vice  President,  Sales and Marketing since August
1995. From 1989 to 1995, he served as executive  director of marketing at Berlex
Laboratories,  Inc. Mr. Chapman also worked at Genentech,  Inc., where he served
as  product  manager  from  1985 to 1988.  He has also  held  various  marketing
positions at Syntex Laboratories, Inc. and Eli Lilly and Company.

         Dr.  Jones was named Vice  President  of Research  and  Development  in
October 1991. Prior to joining Matrix, he held the position of Vice President of
Pharmaceutical  Development at Pharmetrix Corporation,  a biotechnology company,
from 1989 to 1991.  From 1988 to 1989, he held the position of Vice President of
Development at Liposome Technology, Inc., a biotechnology company, and from 1984
to 1988  he was at  Genentech,  Inc.  as  Director,  Pharmaceutical  Research  &
Development and Acting Director,  Pharmaceutical Manufacturing in 1985 and 1986.
He held various positions at Syntex Research from 1969 to 1984.

         Dr. Korey became Vice  President,  Medical  Information  and Extramural
Scientific  Affairs, in January 1997. From 1990 to 1996, he held the position in
the Company of Vice President,  Clinical and Medical  Affairs.  Prior to joining
Matrix, Dr. Korey was a consultant with A. Korey & Associates from January 1989.
He held the position of Vice  President,  Medical  Affairs at Genelabs,  Inc., a
biotechnology company, from July 1987 to January 1989 and Director of Scientific
and  Medical  Affairs at Syntex  Pharmaceuticals  Canada from 1981 to June 1987.
From 1978 to 1981, he served as Assistant  Director of Clinical Research at G.D.
Searle in Canada.

         Mr. Lucas became Vice  President  of  Operations  at Matrix in March of
1996.  From 1994 to 1996,  he was the Vice  President  of  Operations  at Telios
Pharmaceuticals a division of Integra  LifeSciences.  Prior to Telios he was the
Vice President of Operations from 1991 to 1994 at IVAC Corporation a division of
Eli Lilly and Company.  From 1986 to 1991 he was Director of Project  Management
and Director of  Manufacturing  Operations at Hybritech,  Inc. a division of Eli
Lilly and Company.  He also held a number of management and technical  positions
at Lilly's Corporate Headquarters in Indianapolis.

         Dr. McClure was named Vice President, Regulatory Affairs of the Company
in March 1996.  In  September,  1996,  she also assumed  responsibility  for the
Quality Assurance Group. From 1993 to 1996 Dr. McClure held the positions in the
Company of Associate  Director of Regulatory  Affairs and Director of Regulatory
Affairs.  Prior to Matrix,  she held various positions at Syntex  Corporation in
the Chemical Process Development department and in Regulatory Affairs.

Item 2.  Properties

         In May 1994, the Company entered into an eighteen-year  lease agreement
beginning in January,  1996, for a facility totaling approximately 50,000 square
feet in Fremont,  California.  This facility includes  administrative  space and
research and development space. This lease has an escalation clause in which the
annual rent expense ranges from $420,000 to $1,034,000.

         In December  1995, the Company  purchased a research and  manufacturing
facility in San Diego, California for $13.1 million. The facility,  which totals
approximately 67,000 square feet, includes production, research and development,
and  administrative  operations  as well as an  adjacent  parcel  of land.  This
facility requires validation and process  installation that will require capital
expenditures  of  approximately  $10.5 million The facility will be used to meet
the Company's long-term  commercial-scale  production requirements.  On July 15,
1996,  the Company  entered  into an agreement to lease out a portion of its San
Diego manufacturing facility. The lease has a term of two years ending July 1998
and the rental income during the period totals approximately $2.9 million.

         The Company  currently  leases a manufacturing  facility located in San
Jose,  California,  and  a  manufacturing  and  storage  facility  in  Milpitas,
California.  The San Jose plant, which totals  approximately 11,000 square feet,
is utilized  for the aseptic  processing  of  collagen  and for sterile  filling
operations.  The lease on this plant extends through  November 1997 with options
to renew through  November  1999.  This facility  received a Drug  Manufacturing
License in February 1995

                                    Page 24
<PAGE>

from the State of  California.  This license  allows the Company to  manufacture
products from this location.

         The Milpitas facility,  which totals  approximately 10,000 square feet,
is designed for portions of the  non-sterile  processing  of collagen as well as
for  materials  receiving   activities,   labeling,   packaging,   and  shipping
operations.  The Company is currently  negotiating  an extension of the lease on
this facility which expires in August 1997. The Milpitas facility is licensed by
the State of California  for labeling and packaging  activities and is presently
validated for non-sterile production activities.

Item 3.   Legal Proceedings

         On December 21, 1994,  Collagen filed a lawsuit  against the Company in
Santa Clara County  Superior  Court alleging  misappropriation  of trade secrets
concerning the manufacturing process for collagen,  including breach of contract
and fraud. The Complaint seeks unspecified damages and injunctive relief related
to Matrix's  manufacture of collagen,  its regulatory  filings and its hiring of
current or former  Collagen  employees.  On February 14, 1995, the Company filed
its answer to  Collagen's  complaint,  denying  all claims of  misappropriation,
asserting  several  affirmative  defenses and seeking recovery of its attorneys'
fees.  Matrix  has also  filed a  cross-complaint  against  Collagen  and Howard
Palefsky,  Collagen's  Chairman  and former  Chief  Executive  Officer,  seeking
recovery of damages for defamation,  violations of California  antitrust law and
other causes of action.

         On September 12, 1995, Collagen filed a First Amended Complaint, adding
as  defendants  two  former  Collagen  employees  currently  working  at Matrix,
alleging  that these  employees  used  confidential  documents  and  information
acquired  by  them as  Collagen  employees  for the  benefit  of  Matrix.  These
employees had been accused of wrong-doing in the original  Complaint  along with
other former Collagen employees, but not named as defendants.  The First Amended
Complaint purports to add causes of action for conversion against Matrix and the
two  individual  defendants,  and for breach of contract,  breach of confidence,
breach of  fiduciary  obligation  and breach of the duty of loyalty  against the
former Collagen employees.  Matrix is alleged to have induced such breaches. The
First Amended  Complaint adds to the requested relief of the original  Complaint
for damages and injunctive relief a request for the imposition of a constructive
trust on the alleged fruits of the alleged trade secret misappropriation.

         Discovery  in the case is ongoing.  The trial is  scheduled to begin on
April 7, 1997.

         The lawsuit follows a series of contract  negotiations in 1994 aimed at
developing a long-term supply relationship between Collagen and Matrix. Although
processes to  manufacture  collagen gel have been in the public  domain for many
years,  Collagen is presently the only commercial source for collagen gel in the
United States.  Prior to developing its own manufacturing  process,  Matrix used
collagen  gel from two  additional  sources in its  clinical  trials,  including
collagen  gel  manufactured  by Koken and by Collagen.  See "Risk  Factors -- No
Assurance of Regulatory Approvals."

              The Company believes that the  manufacturing  process which it has
developed for collagen gel does not  incorporate  any Collagen trade secrets and
that the  lawsuit  filed by  Collagen  is without  merit.  Although  the Company
intends to defend  against  this suit  vigorously,  no  assurances  can be given
regarding its eventual  outcome.  This litigation does not involve any claims of
patent infringement. A finding of misappropriation of trade secrets could result
in  damages  and/or  a  significant  restriction  on the  Company's  ability  to
manufacture its products. Such a finding would also require the Company to alter
its  manufacturing  process,  or seek an alternate source of collagen gel. There
can be no assurance  that the Company  would be able to alter its  manufacturing
process, if required,  in a timely manner, or at all or that it would be able to
secure an alternative  source of collagen gel on commercially  reasonable terms,
or at all. As a result,  there can be no  assurance  that this  lawsuit will not
delay the Company's  product  approvals or affect its ability to manufacture its
products, each of which would have a material adverse effect on the Company, its
prospects and financial  condition.  Additionally,  the costs of litigating this
matter,  regardless of outcome, may exceed $2,000,000 in 1997. See "Risk Factors
-- Litigation" and "Risk Factors -- Uncertainty Regarding Patent and Proprietary
Rights."

                                    Page 25
<PAGE>

Item 4.  Submission of Matters to a Vote of Security Holders

         No  matters  were  submitted  to a vote of the  Company's  stockholders
through  solicitation  of proxies or  otherwise  during the last  quarter of the
fiscal year ended December 31, 1996.

                                     Part II


Item 5.  Market for Registrants Common Equity and Related Stockholder Matters

         The common shares of Matrix  Pharmaceutical,  Inc.  trade on the Nasdaq
National  Market tier of the Nasdaq  Stock Market  Association  under the symbol
MATX.  The following  table presents  quarterly  information on the high and low
sale prices of the Company's common stock for fiscal years 1996 and 1995.

             Fiscal Year             High                      Low
             -----------             ----                      ---
                    1996

             1st Quarter           $26.00                   $16.75
             2nd Quarter            28.75                    14.75
             3rd Quarter            20.25                     6.75
             4th Quarter             9.50                     5.38

                    1995

             1st Quarter           $14.50                   $ 9.50
             2nd Quarter            15.38                    12.50
             3rd Quarter            16.00                    11.63
             4th Quarter            19.00                    13.25

                                    Page 26
<PAGE>

<TABLE>

Item 6.       Selected Financial Data

<CAPTION>

(In thousands except per share amounts)
----------------------------------------------------------------------------------------------------------------------------
                                                                                                                Period from
                                                                                                                  Inception
                                                                                                              (February 11,
                                                                                                                   1985) to
                                                         For the Years Ended December 31,                      December 31,
----------------------------------------------------------------------------------------------------------------------------
                                           1992          1993           1994            1995          1996           1996
----------------------------------------------------------------------------------------------------------------------------
<S>                                  <C>          <C>            <C>            <C>             <C>          <C>           
Consolidated Statement of
Operations Data:

Revenues                             $       --   $      2,150   $        100   $          --   $       --   $        2,250

Costs and expenses
    Research and development              5,685         12,651         17,072          20,256       24,320           89,355
    General and administrative            2,289          3,289          3,806           8,336       11,428           32,965
----------------------------------------------------------------------------------------------------------------------------
      Total costs and expenses            7,974         15,940         20,878          28,592       35,748          122,320
----------------------------------------------------------------------------------------------------------------------------

Loss from operations                      7,974         13,790         20,778          28,592       35,748          120,070

Interest and other income                 2,177          1,941          1,311           2,179        7,193           15,927
Interest expense                             48            100            121             204        1,088            1,746
----------------------------------------------------------------------------------------------------------------------------

Net loss                             $   (5,845)  $    (11,949)  $    (19,588)  $     (26,617)  $  (29,643)  $     (105,889)
============================================================================================================================

Net loss per share                   $    (0.60)  $      (1.18)  $      (1.86)  $       (2.19)  $    (1.48)

Weighted  average number of
shares outstanding                        9,719         10,132         10,538          12,173       20,081

</TABLE>

<TABLE>
<CAPTION>
                                                                 December 31,
                                       -----------------------------------------------------------------
                                           1992         1993         1994           1995           1996
                                           ----         ----         ----           ----           ----
<S>                                  <C>          <C>          <C>           <C>            <C>        
Consolidated Balance Sheet Data:
Cash, cash equivalents
      and investments                $   44,241   $   35,316   $   35,059    $    77,331    $   114,584
Total assets                             46,624       39,077       37,767         94,419        134,950
Total long-term debt                        711          870          761         12,307         11,724
Total stockholders' equity               44,551       35,629       34,168         76,355        115,511

</TABLE>


                                    Page 27
<PAGE>


Item 7.  Management's   Discussion  and  Analysis  of   Consolidated   Financial
         Condition and Results of Operations.

         This  Form  10-K  contains,  in  addition  to  historical  information,
forward-looking  statements that involve risks and uncertainties.  The Company's
actual  results  could  differ  materially  from the  results  discussed  in the
forward-looking  statements.  Factors  that could  cause or  contribute  to such
differences  include those discussed below as well as those discussed  elsewhere
in this Form 10-K.

 Overview

         Since  the  Company's  inception  in  1985,  the  primary  focus of its
 operations has been research and  development,  and to date it has not received
 any  revenues  from the  commercial  sale of  products.  The  Company  received
 regulatory  approval  for AccuSite in the United  Kingdom  during 1996 and will
 commence  commercial  sales in 1997.  The  Company  has a history of  operating
 losses and expects to incur substantial additional losses over the next several
 years  as it  continues  to  develop  its  products.  For the  period  from its
 inception to December 31, 1996,  the Company has incurred a cumulative net loss
 of $105,889,000.

         Revenues in 1993 and 1994 were  generated  primarily by amounts  earned
 under license agreements which were discontinued in 1995 and 1996.

         The  following  discussion  should  be read  in  conjunction  with  the
 consolidated financial statements and related notes included elsewhere herein.

 Results of Operations

Years ended  December 31, 1996 and 1995. The Company had no revenue for 1996 and
1995.

         Research  and  development  expenses  for  1996  increased  by  20%  to
 $24,320,000  as compared to $20,256,000  for 1995.  This increase was primarily
 due to  increases in clinical  costs to support the  IntraDose  Injectable  Gel
 cancer  program,  a higher level of production  expenses in preparation for the
 commercial  introduction of AccuSite, and higher occupancy costs. This increase
 was partially  offset by lower expenses on clinical trials for AccuSite as well
 as the transfer of certain production expenses to inventory at year end.

         General  and  administrative  expenses  for  1996  increased  by 37% to
 $11,428,000 as compared to $8,336,000 for 1995. This increase was primarily due
 to  higher   legal   expenses   due  to  the   ongoing   Collagen   litigation,
 higher-personnel expenses,  including the hiring of additional marketing staff,
 and AccuSite market prelaunch  expenses.  This increase was partially offset by
 the  repurchase of marketing  rights to AccuSite for  $2,000,000  in 1995.  The
 legal expenses related to the ongoing  litigation with Collagen,  regardless of
 outcome, may exceed $2,000,000 in 1997.

         Net  interest  and other income for 1996  increased  to  $6,105,000  as
 compared to  $1,975,000  for 1995.  The  increase was  primarily  the result of
 higher average balances in cash, cash  equivalents,  and marketable  securities
 due to a secondary  public  offering  which  contributed  net proceeds of $67.4
 million and rental income received from the lease of a section of the Company's
 San Diego facility.

         As of  December  31,  1996,  the  Company  had  federal  and  state net
 operating loss carryforwards of approximately $101.4 million and $10.6 million,
 respectively.  The Company also had federal research and development tax credit
 carryforwards of approximately $2.3 million. The federal net operating loss and
 credit  carryforwards  will expire at various dates  beginning in the year 2000
 through 2011, if not  utilized.  The state net operating  losses will expire at
 various dates beginning in 1997 through 2000, if not utilized.

 Years ended  December 31, 1995 and 1994. The Company had no revenue for 1995 as
 compared  to  $100,000  for  1994.  Revenue  for 1994 came  from  research  and
 development work performed for a pharmaceutical company.

                                    Page 28
<PAGE>

         Research  and  development  expenses  for  1995  increased  by  19%  to
 $20,256,000  as compared to $17,072,000  for 1994.  This increase was primarily
 due to higher costs  associated  with ongoing and advanced  clinical  trials as
 well as higher employee expenses that supported the submission of the Company's
 first NDA for AccuSite.  This was partially  offset by lower costs for clinical
 materials.

         General  and  administrative  expenses  for 1995  increased  by 119% to
 $8,336,000 as compared to $3,806,000 for 1994.  This increase was primarily due
 to the  repurchase of the U.S. and European  marketing  rights to AccuSite from
 Medeva PLC for $2,000,000,  increased  legal expenses of $1,290,000  related to
 the ongoing litigation and consulting and personnel related expenses.

         Net interest and other income for 1995  increased by 66% to  $1,975,000
 as compared to  $1,190,000  for 1994.  The increase was primarily the result of
 higher average balances in cash, cash equivalents, and marketable securities in
 1995 and higher yields on similar average balances.

 Liquidity and Capital Resources

         At December  31,  1996,  the Company had $114.6  million in cash,  cash
 equivalents and marketable securities compared to $77.3 million at December 31,
 1995.

         The Company has financed its operations and capital asset  acquisitions
 from its inception through the sale of equity securities,  interest income, and
 capital lease and debt financing.  The Company expects to finance its continued
 operating  requirements  principally  with cash on hand, sales from AccuSite as
 well as additional  capital  generated  through equity and debt  financings and
 collaborative agreements.

         In May  1994,  the  Company  signed a lease  agreement  for a  facility
 located  in  Fremont,  California.  The term of the lease is for a period of 18
 years starting January 1996. This facility,  which totals  approximately 50,000
 square feet, includes administrative space, and research and development space.
 This lease has an  escalation  clause in which the annual rent  expense  ranges
 from $420,000 to $1,034,000.

         In August 1994,  the Company issued 13,334 shares of Series A preferred
 stock to a group of private investors and received proceeds of $11,790,000, net
 of offering  costs.  The shares were  converted  into  1,333,400  shares of the
 Company's common stock during the first quarter of 1996.

         On August 29, 1995,  the Company  raised $16.8 million  after  issuance
 costs  in a  private  placement  of the  Company's  common  stock to a group of
 investors.  The  offering  involved  the sale of  1,481,982  new  shares of the
 Company's common stock at a price of $12.00 per share.

         In  September  1995,  the  Company  repurchased  from  Medeva  PLC  all
 marketing  rights related to its AccuSite  product for  $2,000,000,  to be paid
 over a period of five years.

         On October 17, 1995, the Company closed a public  offering  pursuant to
which 4,097,000 new shares of common stock were sold at $13.25 per share,  which
resulted in net proceeds of $50.9 million to the Company.

         In December  1995, the Company  purchased a research and  manufacturing
facility  in San  Diego,  California  for $13.1  million.  The  facility,  which
includes  furniture  and  equipment  and an  adjacent  parcel of land,  is being
financed  with a ten year  installment  loan for  $9,938,000,  amortized  over a
period of 30 years. This facility requires  validation and process  installation
that will require capital  expenditures of approximately  $10.5 million. On July
15,  1996,  the Company  entered into an agreement to lease out a portion of its
San  Diego  manufacturing  facility.  The  lease has a term of two years and the
rental income during this period totals approximately $2.9 million.

         On April 8, 1996,  the  Company  closed a public  offering  pursuant to
 which  3,162,500 new shares of the  Company's  common stock were sold at $22.63
 per share resulting in net proceeds of $67.4 million to the Company.


                                    Page 29
<PAGE>

         In May  1996  the  Company  announced  a delay  in the  development  of
AccuSite  Injectable  Gel for patients  with basal cell cancer.  This delay is a
result of  disappointing  findings in preliminary data analysis of two identical
Phase II  "contribution  of components"  trials.  These studies were designed to
demonstrate  that each major  component of the  AccuSite  gel system  provides a
statistically  significant  contribution to the  performance of the product.  In
September  1996, the Company further updated the status of its basal cell cancer
program.  As a result of  conducting  an interim  analysis of data from  another
Phase III basal cell cancer  study,  the Company has  concluded  that it will be
difficult to  commercialize  this program given the high response rates obtained
by surgical procedures.

         In  December  1996,  the Company  announced  that it received an action
letter from the U.S. Food and Drug Administration  (FDA) identifying issues that
will need to be resolved  before the  Company's New Drug  Application  (NDA) for
AccuSite  Injectable Gel can be approved for the treatment of genital warts.  If
the Company fails to  commercialize  its program for genital warts in the United
States,  this would have a material  adverse  impact on future  revenues  of the
Company.

         The Company's  working capital and capital  requirements will depend on
 numerous  factors,  including  the  progress  of  the  Company's  research  and
 development  programs,  preclinical testing and clinical trial activities,  the
 timing and cost of obtaining regulatory approvals, the levels of resources that
 the  Company  devotes  to  the  development  of  manufacturing   and  marketing
 capabilities, technological advances and the status of competitors.

         The Company expects to incur  substantial  additional costs relating to
 the continued  clinical  development  of its products,  continued  research and
 development   programs,   the   development  of  marketing  and   manufacturing
 capabilities,  the purchase of additional capital equipment and general working
 capital  requirements.  The Company anticipates that its existing and committed
 capital resources  including the proceeds of the April 1996 public offering and
 commercial sales of AccuSite will enable it to maintain its current and planned
 operations  through 1998. The Company may require  additional outside financing
 to complete the process of bringing current  products to market,  and while the
 Company is not aware of any limitations on future sources of capital, there can
 be no assurance that such financing will be available on favorable terms, if at
 all.

         Capital  expenditures  for  environmental   control  efforts  were  not
material during 1996, 1995, and 1994.

                                    Page 30
<PAGE>
<TABLE>

Item 8.   Financial Statements and Supplementary Data


                  <S>                                                                              <C>
                  Index to Consolidated Financial Statements

                  Consolidated Balance Sheets--December 31, 1995 and 1996.                           Page 36

                  Consolidated Statements of Operations
                  Years Ended December 31, 1994, 1995 and 1996, and Period from
                  Inception (February 11, 1985) To December 31, 1996.                                Page 37

                  Consolidated Statement of Stockholders' Equity
                  Period from Inception (February 11, 1985) To
                  December 31, 1996.                                                               Pages 38-39

                  Consolidated Statements of Cash Flows
                  Years Ended December 31, 1994, 1995 and 1996, and Period from
                  Inception (February 11, 1985) To December 31, 1996.                                Page 40

                  Notes to Consolidated Financial Statements                                       Pages 41-49

                  Report of Ernst & Young LLP, Independent Auditors                                  Page 50
</TABLE>


Item 9.  Changes  in  and  Disagreements  With  Accountants  on  Accounting  and
         Financial Disclosure

                  Not applicable.


                                    Part III


Item 10.  Directors and Executive Officers of the Registrant

         The  information  required by the item (with  respect to  Directors) is
 hereby  incorporated  by  reference  from the  information  under  the  caption
 "Election of Directors"  contained in the Company's definitive Proxy Statement,
 to be filed with the Securities and Exchange  Commission no later than 120 days
 from  the  end of the  Company's  last  fiscal  year  in  connection  with  the
 solicitation  of proxies for its Annual Meeting of  Shareholders  to be held on
 June 25, 1997 (the "Proxy  Statement").  The  required  information  concerning
 Executive  Officers of the Company is  contained in Item 1, Part 1 of this Form
 10-K under the caption "Executive  Officers of the Company" on pages 23 and 24.
 The information required by Section 16(a) is incorporated by reference from the
 information under the caption  "Compliance with Section 16(a) of the Securities
 Exchange Act of 1934" in the Proxy Statement.

Item 11.  Executive Compensation

         The information required by this item is incorporated by reference from
the information  under the caption  "Election of Directors,  Summary of Cash and
Certain Other Compensation,  Stock Options, Exercises and Holdings" 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   "Ownership  of  Management  and  Certain
Beneficial Owners" in the Proxy Statement.

                                    Page 31
<PAGE>


Item 13. Certain Relationships and Related Transactions

         The information required by this item is incorporated by reference from
the  information   under  the  caption   "Certain   Relationships   and  Related
Transactions" in the Proxy Statement.


                                    PART IV


Item 14. Financial  Statements,  Financial  Statement  Schedules,  Exhibits  and
         Reports on Form 8-K


(a) 1.   Financial Statements

         The following  financial  statements and supplemental data are filed as
part of this Form 10-K. See Index to  Consolidated  Financial  Statements  under
Item 8.

                  Consolidated Balance Sheets-- December 31, 1995 and 1996.

                  Consolidated Statements of Operations
                  Years Ended December 31, 1994,  1995 and 1996, and Period from
                  Inception (February 11, 1985) To December 31, 1996.

                  Consolidated  Statement of  Stockholders'  Equity  Period from
                  Inception (February 11, 1985) To December 31, 1996.

                  Consolidated Statements of Cash Flows
                  Years Ended December 31, 1994,  1995 and 1996, and Period from
                  Inception (February 11, 1985) To December 31, 1996.

                  Notes to Consolidated Financial Statements

                  Report of Ernst & Young LLP, Independent Auditors

(a) 2.   Financial Statement Schedules

         All  schedules are omitted  because they are not  applicable or are not
required or the information  required to be set forth therein is included in the
consolidated financial statements or notes thereto.

(b)      Reports on Form 8-K

         There were no  Current  Reports  on Form 8-K filed  during the  quarter
ended December 31, 1996.

(c) Exhibits

Number            Exhibit Table
------            -------------

3.1               Certificate of Designation of Preferences of Preferred  Shares
                  of the Company as filed with the  Delaware  Secretary of State
                  on August 25, 1994  (Incorporated  by reference to Exhibit 5.3
                  filed with the Company's Form 8-K as filed with the Securities
                  and Exchange Commission on September 27, 1994)

3.11              Restated  Certificate of Incorporation filed with the Delaware
                  Secretary  of  State  on  August  13,  1992  (Incorporated  by
                  reference  to the  exhibit of the same  number  filed with the
                  Company's  Form 10-K as filed with the Securities and Exchange
                  Commission on March 31, 1993)

3.2               Amended and restated bylaws.

3.3               Certificate of Designation of Preferences of Preferred  Shares
                  of the Company as filed with the  Delaware  Secretary of State
                  on August 25, 1994  (Incorporated  by reference to Exhibit 5.3
                  filed with the Company's Form 8-K as filed with the Securities
                  and Exchange Commission on September 27, 1994)

                                    Page 32
<PAGE>

3.4               Certificate of Designations  of Series B Junior  Participating
                  Preferred  Stock  of  the  Company  filed  with  the  Delaware
                  Secretary of State on May 24, 1995  (Incorporated by reference
                  to Exhibit 3.4 as filed with the  Company's  Form 10-Q for the
                  quarter ended June 30, 1995.)

4.1               Amended and Restated Registration Rights Agreement between the
                  Company and the investors listed therein dated August 26, 1994
                  (Incorporated by reference to Exhibit 5.2 filed with Company's
                  Form 8-K as filed with the Securities and Exchange  Commission
                  on September 27, 1994)

4.2               Rights  Agreement  between the Company and the First  National
                  Bank of Boston dated May 18, 1995  (Incorporated  by reference
                  to Exhibit No. 1 to the  Company's  Registration  Statement on
                  Form 8-A dated May 17, 1995).

10.1a             Series B Preferred  Stock  Purchase  Agreement  dated July 29,
                  1987

10.2a             Series B Preferred  Stock  Purchase  Agreement  dated June 30,
                  1988

10.3a             Series C Preferred Stock Purchase Agreement dated May 24, 1990

10.4a             Amendment Agreement dated May 24, 1990

10.5a             Stock Restriction  Agreement between the Company and Edward E.
                  Luck, dated July 29, 1987

10.6a             Stock Restriction  Agreement between the Company and Dennis M.
                  Brown, Ph.D. dated July 29, 1987

10.7a             Agreement to Issue Warrant dated December 17, 1988

10.8a             Series B Preferred Stock Warrant issued to Western  Technology
                  Investment dated December 30, 1988

10.9a             Series  B  Preferred   Stock  Warrant  issued  to  USX  Credit
                  Corporation dated December 30, 1988

10.10a            Series B Preferred Stock Warrant issued to Highline  Financial
                  Services, Inc. dated December 30, 1988

10.11a            Form of Common Stock Purchase Warrant

10.12a            Voting Agreement dated May 24, 1990, as amended

10.13b            1988 Restricted Stock Plan, as restated

10.14b            Form of Restricted Stock Purchase Agreement

10.15b            Form  of  Stock  Purchase  Agreement  (Repurchase  Right  with
                  Escrow)

10.16b            Form of Stock Option Agreement

10.17b            Form of Stock Pledge Agreement

10.18b            1991 Directors Stock Option Plan

10.19a            Master  Equipment  Lease  Agreement  between  the  Company and
                  Western Technology Investment dated December 17, 1988

10.20a            Lease between the Company,  Menlo  Business Park and Patrician
                  Associates, Inc. dated January 28, 1988

10.21a            First  Amendment to Lease between the Company,  Menlo Business
                  Park and Patrician Associates, Inc. dated March 16, 1989

10.22a            Technology Assignment Agreement between the Company and Edward
                  E. Luck and Dennis M. Brown, Ph.D. dated July 29, 1987

10.23a            Supply  Agreement  between the Company and **** dated December
                  22, 1988 (confidential treatment has been granted with respect
                  to portions of this document)

10.24c            Master Equipment Lease Agreement between the Company and Lease
                  Management Services, Inc. dated July 27, 1990

10.25c            Form of Indemnification Agreement

10.26d            Form of Recapitalization

10.27b            Lease  between the Company and Becton  Dickinson  Corporation,
                  dated November 16, 1992

10.28b            Equipment  Lease  Agreement  between the Company and Household
                  Commercial of California, Inc., dated November 16, 1992

------------------
a    Incorporated  herein by  reference to the exhibits of the same number filed
     with the Company's  Registration  Statement on Form S-1 (File No. 33-44459)
     as filed with the Securities and Exchange Commission on December 19, 1991.

b    Incorporated  herein by  reference to the exhibits of the same number filed
     with the  Company's  Form 10-K as filed with the  Securities  and  Exchange
     Commission on March 31, 1993.

c    Incorporated  herein by  reference  to the exhibit of the same number filed
     with  Amendment No. 1 to the Company's  Registration  Statement on Form S-1
     (File No. 33-44459) as filed with the Securities and Exchange Commission on
     January 23, 1992.

d    Incorporated  herein by  reference  to the exhibit of the same number filed
     with  Amendment No. 2 to the Company's  Registration  Statement on Form S-1
     (File No. 33-44459) as filed with the Securities and Exchange Commission on
     January 27, 1992. 

                                    Page 33
<PAGE>

10.29b            Equipment  Lease  Agreement  between  the  Company and General
                  Electric Capital Corporation, dated December 17, 1992

10.30             Settlement  Agreement and General  Release  dated  February 2,
                  1993.  (Incorporated herein by reference to Exhibit 19.1 filed
                  with the Company's  Form 10-Q as filed with the Securities and
                  Exchange Commission on May 14, 1993)

10.31e            Development  Agreement  by and between the Company and Medeva,
                  PLC  dated  May 18,  1993  (confidential  treatment  has  been
                  requested for certain  portions of this Exhibit  pursuant to a
                  separate  filing made by Medeva,  PLC (File No.  1-10817) with
                  its Annual Report on Form 20-F filed with the  Securities  and
                  Exchange Commission on June 29, 1993, Exhibit No. 2.14)

10.32e            Investment  Agreement  by and  between the Company and Medeva,
                  PLC  dated  May 18,  1993  (confidential  treatment  has  been
                  requested for certain  portions of this Exhibit  pursuant to a
                  separate  filing made by Medeva,  PLC (File No.  1-10817) with
                  its Annual Report on Form 20-F filed with the  Securities  and
                  Exchange Commission on June 29, 1993, Exhibit No. 2.14)

10.34e            Note Secured by Stock Pledge  Agreement dated June 30, 1993 by
                  and between the Company and Andrew G. Korey

10.35e            Stock Pledge  Agreement dated June 30, 1993 by and between the
                  Company and Andrew G. Korey

10.36             Lease between the Company and Calaveras  Associates  II, dated
                  August 4, 1993.  (confidential treatment has been granted with
                  respect to portions of this document,  Incorporated  herein by
                  reference  to the  exhibit of the same  number  filed with the
                  Company's  Form 10-Q as filed with the Securities and Exchange
                  Commission on November 12, 1993)

10.37             Lease between the Company,  Menlo Business Park, and Patrician
                  Associates,  Inc. dated July 27, 1993 (Incorporated  herein by
                  reference  to the  exhibit of the same  number  filed with the
                  Company's  Form 10-K as filed with the Securities and Exchange
                  Commission on March 24, 1994)

10.38             Lease between the Company, John Arrillaga and Richard T. Peery
                  Separate  Property  Trust,  dated  May 9,  1994  (Incorporated
                  herein by  reference  to the exhibit of the same number  filed
                  with the Company's  Form 10Q as filed with the  Securities and
                  Exchange Commission on August 12, 1994)

10.39             Investment  Agreement  by and  between  the  Company  and  the
                  investors  listed therein dated August 26, 1994  (Incorporated
                  herein by  reference  to Exhibit 5.1 filed with the  Company's
                  Form 8-K as filed with the Securities and Exchange  Commission
                  on September 27, 1994)

10.40             Equipment  Lease  Agreement  between the Company and Financing
                  For  Science  International,  Inc.  dated  September  1,  1994
                  (Incorporated  by  reference to the exhibit of the same number
                  filed with the Securities and Exchange  Commission on November
                  2, 1994)

10.41             Form of Stock  purchase  Agreement  by and between the Company
                  and the investors  listed therein dated July 14, 1995 and July
                  21, 1995  (Incorporated by reference to Exhibit No. 4.1 to the
                  registration Statement on Form S-3, Registration No. 33-94854,
                  filed with the Securities and Exchange  Commission on July 21,
                  1995, as amended)

10.42             Termination and Repurchase  Agreement  between the Company and
                  Medeva PLC dated September 18, 1995 (Incorporated by reference
                  to exhibit No. 10.1 to the Company's Registration Statement on
                  Form S-3 (file No.  33-96556) as filed with the Securities and
                  Exchange Commission on September 25, 1995

10.43             Equipment  Lease  Agreement  between  the  Company  and  Lease
                  Management Services,  Inc. dated August 28, 1995 (Incorporated
                  herein  by  reference  to  exhibit  No.  10.3  filed  with the
                  Company's  Form 10-Q as filed with the  Security  and Exchange
                  Commission on November 7, 1995)

10.44             Contract of Purchase  and Sale and Joint  Escrow  Instructions
                  between  the  Company  and  the  Federal   Deposit   Insurance
                  Corporation  dated  November 2, 1995  (Incorporated  herein by
                  reference  to the  exhibit of the same  number  filed with the
                  Company's  Form 10-K as filed with the Securities and Exchange
                  Commission on March 1, 1996)

10.45             Industrial  Multi-Tenant  Lease  agreement dated July 15, 1996
                  between the Company, as landlord and Advanced Tissue Sciences,
                  Inc.,  as  tenant  filed  herewith.  (Incorporated  herein  by
                  reference  to the  exhibit of the same  number  filed with the
                  Company's  Form 10-Q as filed with the Securities and Exchange
                  Commission on August 8, 1996)

23.1              Consent of Ernst & Young LLP, Independent Auditors

27                Financial Data Schedule

------------------
e    Incorporated  herein by  reference  to the exhibit of the same number filed
     with the  Company's  Form 10-Q as filed with the  Securities  and  Exchange
     Commission on August 11, 1993.

                                    Page 34
<PAGE>



                                   SIGNATURES

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

                           MATRIX PHARMACEUTICAL, INC.


Date:    March 19, 1997           By: /s/ Craig R. McMullen
     ----------------------       -----------------------------------
                                      Craig R. McMullen
                                      President, Chief Executive Officer
                                      and Director

                                POWER OF ATTORNEY

         KNOW ALL PERSONS BY THESE PRESENTS:

         That the undersigned  officers and directors of Matrix  Pharmaceutical,
Inc., a Delaware  corporation,  do hereby  constitute and appoint James R. Glynn
the lawful  attorney and agent,  with power and authority to do any and all acts
and things and to execute any and all instruments  which said attorney and agent
determines may be necessary or advisable or required to enable said  corporation
to comply with the Securities Exchange Act of 1934, as amended, and any rules or
regulations  or  requirements  of the  Securities  and  Exchange  Commission  in
connection with this Form 10-K. Without limiting the generality of the foregoing
power and authority,  the powers granted include the power and authority to sign
the names of the undersigned  officers and directors in the capacities indicated
below  to  this  Form  10-K,  to any  and  all  amendments,  and to any  and all
instruments or documents filed as part of or in conjunction  with this Form 10-K
or  amendments  or  supplements  thereof,  and  each of the  undersigned  hereby
ratifies and  confirms all that said  attorney and agent shall do or cause to be
done by  virtue  hereof.  This  Power  of  Attorney  may be  signed  in  several
counterparts.

         IN WITNESS WHEREOF,  each of the undersigned has executed this Power of
Attorney as of the date indicated.

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

Date:      March 19, 1997           /s/ James R. Glynn
     ----------------------         --------------------------
                                    James R. Glynn
                                    Senior Vice President and Chief Financial
                                    Officer and Secretary

Date:      March 19, 1997           /s/ Edward E. Luck
     ----------------------         --------------------------
                                    Edward E. Luck
                                    Chairman of the Board

Date:      March 19, 1997           /s/ John E. Lyons
     ----------------------         --------------------------
                                    John E. Lyons
                                    Director

Date:      March 19, 1997           /s/ Julius L. Pericola
     ----------------------         --------------------------
                                    Julius L. Pericola
                                    Director

Date:      March 19, 1997           /s/ Alan E. Salzman
     ----------------------         --------------------------
                                    Alan E. Salzman
                                    Director

Date:      March 19, 1997           /s/ J. Stephan Dolezalek
     ----------------------         --------------------------
                                    J. Stephan Dolezalek
                                    Director

                                    Page 35
<PAGE>

                                          MATRIX PHARMACEUTICAL, INC.
                                         (a development stage company)
<TABLE>
                                          Consolidated Balance Sheets

<CAPTION>
(In thousands except share and per share amounts)                                         December 31,
--------------------------------------------------------------------------------------------------------------
                                                                                     1995               1996
--------------------------------------------------------------------------------------------------------------
<S>                                                                            <C>              <C>          
Assets

Current assets:
     Cash and cash equivalents                                                 $    55,675      $      20,138
     Short-term investments                                                          9,646             38,997
     Other current assets                                                              952              3,041
--------------------------------------------------------------------------------------------------------------
        Total current assets                                                        66,273             62,176

Property and equipment, net                                                         15,919             17,152
Non-current investments                                                             12,010             55,449
Deposits and other assets, net                                                         217                173
--------------------------------------------------------------------------------------------------------------
                                                                               $    94,419      $     134,950
==============================================================================================================

Liabilities and Stockholders' Equity

Current liabilities:
     Accounts payable                                                          $     1,605      $       2,636
     Accrued compensation                                                              844              1,045
     Accrued clinical trial costs                                                    1,814              1,239
     Other accrued liabilities                                                         664              2,135
     Current portion of debt and capital lease obligations                             830                660
--------------------------------------------------------------------------------------------------------------
        Total current liabilities                                                    5,757              7,715
Debt and capital lease obligations, less current portion                            12,307             11,724
Commitments and contingency
Stockholders' equity
     Preferred stock,  $0.01 par value per share,  1,023,571 shares  authorized;
         14,445  shares  designated as Series A preferred  stock,  13,334 shares
         issued and outstanding in 1995; no
         shares issued or outstanding in 1996                                           --                 --
     Common stock, $0.01 par value per share; 30,000,000 shares
        authorized, 16,492,510 shares issued and outstanding in 1995;
        21,257,856 shares issued and outstanding in 1996                               165                213
     Additional paid-in capital                                                    153,262            222,043
     Deferred compensation                                                            (514)              (780)
     Unrealized losses on marketable securities                                       (312)               (76)
     Deficit accumulated during the development stage                              (76,246)          (105,889)
--------------------------------------------------------------------------------------------------------------
        Total stockholders' equity                                                  76,355            115,511
--------------------------------------------------------------------------------------------------------------
                                                                               $    94,419       $    134,950
==============================================================================================================
<FN>

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

                                                    Page 36
<PAGE>

                                          MATRIX PHARMACEUTICAL, INC.
                                         (a development stage company)
<TABLE>
                                     CONSOLIDATED STATEMENTS OF OPERATIONS

<CAPTION>
(In thousands except per share amounts)
-------------------------------------------------------------------------------------------------------------
                                                                                                Period from
                                                                                                  Inception
                                                                                              (February 11,
                                                                                                   1985) to
                                                    For the Years Ended December 31,           December 31,
--------------------------------------------------------------------------------------------------------------
                                              1994              1995               1996                1996
-------------------------------------------------------------------------------------------------------------
<S>                                   <C>              <C>                <C>                <C>            
Revenues                              $         100    $           --     $           --     $         2,250

Costs and expenses
    Research and development                 17,072            20,256             24,320              89,355
    General and administrative                3,806             8,336             11,428              32,965
-------------------------------------------------------------------------------------------------------------
       Total costs and expenses              20,878            28,592             35,748             122,320
-------------------------------------------------------------------------------------------------------------

Loss from operations                         20,778            28,592             35,748             120,070

Interest and other income                     1,311             2,179              7,193              15,927
Interest expense                                121               204              1,088               1,746
-------------------------------------------------------------------------------------------------------------

Net loss                              $     (19,588)   $      (26,617)    $      (29,643)    $      (105,889)
=============================================================================================================

Net loss per share                    $       (1.86)   $        (2.19)    $        (1.48)
=========================================================================================

Weighted average number of
   shares outstanding                        10,538            12,173             20,081
=========================================================================================
<FN>
                                           (See accompanying notes )
</FN>
</TABLE>

                                                    Page 37
<PAGE>

<TABLE>
                                                     MATRIX PHARMACEUTICAL, INC.
                                                    (a development stage company)
                                              Consolidated Statements of Stockholders'
                                                Equity For the period from inception
                                              (February 11, 1985) to December 31, 1996
<CAPTION>
(In thousands)
------------------------------------------------------------------------------------------------------------------------------------
                                                                                                                                   
                                                                                                                                   
                                                                                                                        Deferred   
                                                                    Convertible                       Additional          Compen-  
                                                                    Preferred         Common           Paid-in           sation &  
                                                                      Stock            Stock           Capital             Other   
------------------------------------------------------------------------------------------------------------------------------------
<S>                                                                <C>               <C>               <C>               <C>        
Issuance of 508,867 shares of common stock                         $      --         $       5         $     137         $     (55) 

Issuance of 3,564,000 shares of common stock at
  $15.00 per share, less offering costs, in an initial
  public offering in January 1992                                         --                36            48,950                --  

Issuance of 5,250,000 shares of convertible preferred stock               53                --             5,272                --  

Recapitalization of the Company (259,524 shares of
  common stock converted to 3,500,000 shares of
  convertible preferred stock)                                            35                (3)              (32)               --  

Issuance of 4,571,429 shares convertible preferred
  stock for cash and conversion of $400,000 notes
  payable to stockholders (at $1.75 per share)
  in May 1990, net of offering costs                                      45                --             7,880                --  

Conversion of 6,343,531 shares of convertible
  preferred stock to common stock at the time of the
  initial public offering (after 1-for-2.1
  reverse  stock split in January 1992)                                 (133)               63                70                --  

Issuance of 54,391 shares of common stock to
  employees and  consultants for cash under stock
  option plan (from $0.23 to $0.37 per share)                             --                 1                13                --  

Cancellation of promissory note in exchange
  for the repurchase of 238,095 shares of common
  stock from an officer in December 1990                                  --                (2)              (53)               55  

Deferred compensation related to grant
  of stock options                                                        --                --               819              (819) 

Amortization of deferred compensation                                     --                --               (12)              520  

Issuance of 59,757 shares of common stock to
  employees, consultants, and investors for cash
  under the stock option plan and for exercise
  of warrants (from $0.23 to $0.37 per share)                             --                --                17                --  

Issuance of 200,000 shares of common stock
  to Medeva PLC in May 1993 at $15.00 per
  share, less offering costs                                              --                 2             2,833                --  

Unrealized gains (losses) on marketable securities                        --                --                --                --  

Net loss                                                                  --                --                --                --  
                                                                      -------------------------------------------------------------
                                                                                                                                    
Balance at December 31, 1993                                              --               102            65,894              (299) 

Issuance of 40,118  shares of common stock to
  employees  and  investors for cash
  under the stock option plan and for exercise
  of warrants (from $0.23 to $9.00 per share)                             --                 1               176                --  

Issuance of 466,667 shares of common stock to
  Medeva PLC in May 1994 at $15.00 per share,
  less offering costs                                                     --                 5             6,600                --  

Issuance of 13,334 shares of convertible
  preferred stock in a private placement in
  August 1994 at $900 per share, less offering costs                      --                --            11,790                --  

Amortization of deferred compensation                                     --                --                --               198  

Unrealized gains (losses) on marketable securities                        --                --                --                --  

Net loss                                                                  --                --                --                --  
                                                                      -------------------------------------------------------------

Balance at December 31, 1994                                              --               108            84,460              (101) 

Issuance of 148,016 shares of common stock to
  employees and investors for cash under the
  stock option plan and for exercise of warrants
  (from $0.23 to $11.38 per share)                                        --                 1               425                --  

Issuance of 10,800 shares to employees at
  $14.00 per share                                                        --                --               151                --  

Issuance of 1,481,982 shares of common stock
  for cash in a private placement in August 1995
  at $12 per share, less offering costs                                   --                15            16,804                --  

Issuance of 4,097,000 shares of common stock
  for cash in a follow-on public offering in
  October 1995 at $13.25 per share, less offering costs                   --                41            50,908                --  

Deferred compensation related to grant of stock options                                                      514              (514) 

Amortization of deferred compensation                                     --                --                --               101  

Unrealized gains (losses) on marketable securities                        --                --                --                --  

Net loss                                                                  --                --                --                --  
                                                                      -------------------------------------------------------------

Balance at December 31, 1995                                       $      --         $     165         $ 153,262         $    (514) 

</TABLE>





<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------------
                                                                     Unrealized        Deficit                       
                                                                        Gain         Accumulated                     
                                                                      (Losses)        During the                     
                                                                         on            Develop-      `     Total     
                                                                     Marketable          ment           Stockholders'
                                                                     Securities          Stage            Equity     
---------------------------------------------------------------------------------------------------------------------

<S>                                                                 <C>               <C>               <C>         
Issuance of 508,867 shares of common stock                          $      --         $      --         $      87   
                                                                                                                    
Issuance of 3,564,000 shares of common stock at                                                                     
  $15.00 per share, less offering costs, in an initial                                                              
  public offering in January 1992                                          --                --            48,986   
                                                                                                                    
Issuance of 5,250,000 shares of convertible preferred stock                --                --             5,325   
                                                                                                                    
Recapitalization of the Company (259,524 shares of                                                                  
  common stock converted to 3,500,000 shares of                                                                     
  convertible preferred stock)                                             --                --                --   
                                                                                                                    
Issuance of 4,571,429 shares convertible preferred                                                                  
  stock for cash and conversion of $400,000 notes                                                                   
  payable to stockholders (at $1.75 per share)                                                                      
  in May 1990, net of offering costs                                       --                --             7,925   
                                                                                                                    
Conversion of 6,343,531 shares of convertible                                                                       
  preferred stock to common stock at the time of the                                                                
  initial public offering (after 1-for-2.1                                                                          
  reverse  stock split in January 1992)                                    --                --                --   
                                                                                                                    
Issuance of 54,391 shares of common stock to                                                                        
  employees and  consultants for cash under stock                                                                   
  option plan (from $0.23 to $0.37 per share)                              --                --                14   
                                                                                                                    
Cancellation of promissory note in exchange                                                                         
  for the repurchase of 238,095 shares of common                                                                    
  stock from an officer in December 1990                                   --                --                --   
                                                                                                                    
Deferred compensation related to grant                                                                              
  of stock options                                                         --                --                --   
                                                                                                                    
Amortization of deferred compensation                                      --                --               508   
                                                                                                                    
Issuance of 59,757 shares of common stock to                                                                        
  employees, consultants, and investors for cash                                                                    
  under the stock option plan and for exercise                                                                      
  of warrants (from $0.23 to $0.37 per share)                              --                --                17   
                                                                                                                    
Issuance of 200,000 shares of common stock                                                                          
  to Medeva PLC in May 1993 at $15.00 per                                                                           
  share, less offering costs                                               --                --             2,835   
                                                                                                                    
Unrealized gains (losses) on marketable securities                        (27)               --               (27)  
                                                                                                                    
Net loss                                                                   --           (30,041)          (30,041)  

                                                                       ------------------------------------------   
Balance at December 31, 1993                                              (27)          (30,041)           35,629   
                                                                                                                    
Issuance of 40,118  shares of common stock to                                                                       
  employees  and  investors for cash                                                                                
  under the stock option plan and for exercise                                                                      
  of warrants (from $0.23 to $9.00 per share)                              --                --               177   
                                                                                                                    
Issuance of 466,667 shares of common stock to                                                                       
  Medeva PLC in May 1994 at $15.00 per share,                                                                       
  less offering costs                                                      --                --             6,605   
                                                                                                                    
Issuance of 13,334 shares of convertible                                                                            
  preferred stock in a private placement in                                                                         
  August 1994 at $900 per share, less offering costs                       --                --            11,790   
                                                                                                                    
Amortization of deferred compensation                                      --                --               198   
                                                                                                                    
Unrealized gains (losses) on marketable securities                       (643)               --              (643)  
                                                                                                                    
Net loss                                                                   --           (19,588)          (19,588)  
                                                                     --------------------------------------------   

Balance at December 31, 1994                                             (670)          (49,629)           34,168   
                                                                                                                    
Issuance of 148,016 shares of common stock to                                                                       
  employees and investors for cash under the                                                                        
  stock option plan and for exercise of warrants                                                                    
  (from $0.23 to $11.38 per share)                                         --                --               426   
                                                                                                                    
Issuance of 10,800 shares to employees at                                                                           
  $14.00 per share                                                         --                --               151   
                                                                                                                    
Issuance of 1,481,982 shares of common stock                                                                        
  for cash in a private placement in August 1995                                                                    
  at $12 per share, less offering costs                                    --                --            16,819   
                                                                                                                    
Issuance of 4,097,000 shares of common stock                                                                        
  for cash in a follow-on public offering in                                                                        
  October 1995 at $13.25 per share, less offering costs                    --                --            50,949   
                                                                                                                    
Deferred compensation related to grant of stock options                                                        --   
                                                                                                                    
Amortization of deferred compensation                                      --                --               101   
                                                                                                                    
Unrealized gains (losses) on marketable securities                        358                --               358   
                                                                                                                    
Net loss                                                                   --           (26,617)          (26,617)  
                                                                    ---------------------------------------------   
Balance at December 31, 1995                                        $    (312)        $ (76,246)        $  76,355   

</TABLE>

                                    Page 38
<PAGE>


<TABLE>
                                                     MATRIX PHARMACEUTICAL, INC.
                                                    (a development stage company)
                                              Consolidated Statements of Stockholders'
                            Equity For the period from inception (February 11, 1985) to December 31, 1996
<CAPTION>
(In thousands)
-----------------------------------------------------------------------------------------------------------------------------
                                                                                                                             
                                                                                                                             
                                                                                                                Deferred     
                                                           Convertible                       Additional          Compen-     
                                                            Preferred         Common           Paid-in           sation &    
                                                              Stock            Stock           Capital             Other     
-----------------------------------------------------------------------------------------------------------------------------
<S>                                                          <C>              <C>              <C>               <C>         
Balance at December 31, 1995                                 $      --        $     165        $ 153,262         $    (514)  

Issuance of 269,446 shares of common stock to
  employees and investors for cash under the
  stock option plan (from $0.23 to $13.50 per share)                --                3            1,395                --   

Issuance of 3,162,500 shares of common stock for cash
  in a follow-on public offering in April 1996 at
  $22.63 per share, less offering costs                             --               32           67,336                --   


Conversion of 13,334 shares of convertible preferred
  stock into 1,333,400 shares of common stock                       --               13             (357)               --   

Deferred compensation related to grant of
  certain stock options                                             --                               407              (407)  

Amortization of deferred compensation                               --               --               --               141   

Unrealized gains (losses) on marketable securities                  --               --               --                --   

Net loss                                                            --               --               --                --   
-----------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1996                                 $      --        $     213        $ 222,043         $    (780)  
=============================================================================================================================
</TABLE>



<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------
                                                                  Unrealized        Deficit                       
                                                                     Gain         Accumulated                     
                                                                   (Losses)        During the                     
                                                                      on            Develop-      `     Total     
                                                                  Marketable          ment           Stockholders'
                                                                  Securities          Stage            Equity     
------------------------------------------------------------------------------------------------------------------
<S>                                                              <C>               <C>               <C>         
Balance at December 31, 1995                                     $    (312)        $ (76,246)        $  76,355   
                                                                                                                 
Issuance of 269,446 shares of common stock to                                                                    
  employees and investors for cash under the                                                                       
  stock option plan (from $0.23 to $13.50 per share)                    --                --             1,398   
                                                                                                                 
Issuance of 3,162,500 shares of common stock for cash                                                            
  in a follow-on public offering in April 1996 at                                                                  
  $22.63 per share, less offering costs                                 --                --            67,368   
                                                                                                                 
                                                                                                                 
Conversion of 13,334 shares of convertible preferred                                                             
  stock into 1,333,400 shares of common stock                           --                --              (344)  
                                                                                                                 
Deferred compensation related to grant of                                                                        
  certain stock options                                                 --                --                --   
                                                                                                                 
Amortization of deferred compensation                                   --                --               141   
                                                                                                                 
Unrealized gains (losses) on marketable securities                     236                --               236   
                                                                                                                 
Net loss                                                                --           (29,643)          (29,643   
-------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1996                                     $     (76)        $(105,889)        $ 115,511   
===================================================================================================================
<FN>
                                                      (See accompanying notes)
</FN>
</TABLE>


                                                               Page 39
<PAGE>


                                        MATRIX PHARMACEUTICAL, INC.
                                       (a development stage company)
<TABLE>
                                   CONSOLIDATED STATEMENTS OF CASH FLOWS
                             Increase (Decrease) in Cash and Cash Equivalents
<CAPTION>
(In thousands)
------------------------------------------------------------------------------------------------------------
                                                                                                Period from
                                                                                                 Inception
                                                                                               (February 11,
                                                                                                  1985) to
                                                          For the years ended December 31,      December 31,
------------------------------------------------------------------------------------------------------------
                                                          1994          1995         1996          1996
------------------------------------------------------------------------------------------------------------
<S>                                                       <C>         <C>          <C>           <C>       
Cash flows from operating activities:
   Net loss                                               $(19,588)   $(26,617)    $ (29,643)    $(105,889)
   Adjustments to reconcile net loss to
   net cash used by operating activities:
     Depreciation and amortization                            831          946         1,051         4,467
     Amortization of deferred compensation                    198          101           141           960
     Repurchase of marketing rights                            --        2,000            --         2,000
     Other                                                    146          154            83           428
   Changes in assets and liabilities:
     Other current assets                                     471         (425)       (2,089)       (3,041)
     Deposits and other assets                                272            3            44          (182)
     Accounts payable                                         320          356         1,031         2,636
     Accrued compensation                                      88          513           201         1,045
     Accrued clinical trial costs                            (387)       1,476          (575)        1,239
     Other accrued liabilities                                198          138         1,471         2,135
------------------------------------------------------------------------------------------------------------
     Net cash (used) by operating activities              (17,451)     (21,355)      (28,285)      (94,202)
Cash flows from investing activities:
   Capital expenditures                                      (524)     (14,904)       (2,326)      (21,797)
   Investment in available-for-sale securities            (36,478)     (14,796)     (189,548)     (350,883)
   Investment in held-to-maturity securities                   --           --            --       (23,827)
   Proceeds of available-for-sale securities               44,770        5,480        95,219       221,101
   Maturities of investments                                  500       12,647        21,734        58,708
------------------------------------------------------------------------------------------------------------
     Cash flows provided (used) by investing                
      activities                                            8,268      (11,573)      (74,921)     (116,698)
Cash flows from financing activities:
   Payments on debt and capital lease obligations            (348)        (426)         (753)       (2,376)
   Issuance of convertible promissory note
     payable to stockholders                                   --           --            --           400
   Net cash proceeds from issuance of:
     Debt and capital lease financing                         280       10,408            --        12,885
     Preferred stock                                       11,790          (46)           --        24,679
     Common stock                                           6,782       68,391        68,422       195,450
------------------------------------------------------------------------------------------------------------
     Cash flows provided by financing activities           18,504       78,327        67,669       231,038
Net increase in cash and cash equivalents                   9,321       45,399       (35,537)       20,138
Cash and cash equivalents at the beginning of period          955       10,276        55,675            --
------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at the end of period           $ 10,276     $ 55,675     $  20,138     $  20,138
============================================================================================================

Supplemental schedule of noncash investing
   and financing activities:
   Issuance of stock upon conversion of
   promissory notes payable to stockholders              $     --     $     --      $     --     $     425 
============================================================================================================

Supplemental disclosure of cash flow information:
   Interest paid                                         $    121     $    204      $  1,088     $   1,746
============================================================================================================
<FN>
                                         (See accompanying notes)
</FN>
</TABLE>

                                    Page 40
<PAGE>



                           MATRIX PHARMACEUTICAL, INC.
                          (a development stage company)


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis  of  presentation   Matrix   Pharmaceutical,   Inc.  (the  "Company")  was
incorporated in California on February 11, 1985 and  reincorporated  in Delaware
in January  1992.  The  Company's  principal  activities  to date have  involved
research and development of drug delivery systems using proprietary  technology,
recruiting  key  personnel,  establishing  a  manufacturing  process and raising
capital to finance its  operations.  The Company is  classified as a development
stage company.

         In the course of its development activities,  the Company has sustained
continuing  operating  losses and expects such losses to continue  over the next
several years. The Company has financed its operations and capital  acquisitions
primarily through stock issuances,  capital leases, and in 1995, long-term debt.
The Company  anticipates  that its  existing  and  committed  capital  resources
including the proceeds of the April 1996 public  offering,  and commercial sales
of AccuSite will enable it to maintain its planned operations through 1998.

Principles of  consolidation  In 1993,  the Company  incorporated a wholly owned
subsidiary, Matrix Pharmaceutical Limited. The consolidated financial statements
include  the  accounts  of the Company  and its wholly  owned  subsidiary  after
elimination of all material intercompany balances and transactions.

Revenue  recognition  The Company has  recognized  revenue  under  collaborative
development  agreements  as  it  is  earned.   Non-refundable  fees  related  to
reimbursement  of past  research and  development  efforts are  recognized  upon
signing of the agreement.

Net loss per share Net loss per share is  computed  using the  weighted  average
number of shares of common stock outstanding during the period.

Cash and cash equivalents,  short-term investments,  and non-current investments
The Company  invests its excess cash in  government  and  corporate  securities.
Highly liquid investments with maturities of three months or less at the date of
acquisition  are considered by the Company to be cash  equivalents.  Investments
with  maturities  beyond three months at the date of acquisition and that mature
within one year from the  balance  sheet date are  considered  to be  short-term
investments.  Investments with maturities  longer than one year from the balance
sheet date are classified as short-term  investments or non-current  investments
based on the Company's intended holding period.

         The Company  maintains its cash,  cash  equivalents  and investments in
several  different  instruments  held  by a bank  and a  brokerage  house.  This
diversification  of risk is  consistent  with the  Company's  policy to maintain
liquidity and ensure the safety of principal.

         The  Company   determines  the  appropriate   classification   of  debt
securities at the time of purchase and reevaluates  such  designation as of each
balance  sheet date.  The  amortized  cost of debt  securities  is adjusted  for
amortization   of  premiums  and  accretion  of  discounts  to  maturity.   Such
amortization is included in interest and other income. Realized gains and losses
and declines in value  judged to be  other-than-temporary  are also  included in
interest and other income.  The cost of securities sold is based on the specific
identification  method. Debt securities are classified as held-to-maturity  when
the  Company  has the  positive  intent and  ability to hold the  securities  to
maturity and are carried at amortized cost.

         Debt securities which are not classified as held-to-maturity  and which
are not held for resale in  anticipation  of  short-term  market  movements  are
classified as available-for-sale.  Available-for-sale  securities are carried at
fair value,  with the  unrealized  gains and losses,  net of tax,  reported in a
separate component of stockholders' equity.

                                    Page 41
<PAGE>

Depreciation  and amortization  The Company  depreciates  property and equipment
using the straight-line method over the assets' estimated useful lives. Building
and  improvements  are  depreciated  over 25 years.  Prior to 1996,  laboratory,
operating,  office and  computer  equipment  were  depreciated  over five years.
Beginning in 1996 laboratory,  operating and office equipment and furniture were
depreciated over 10 years and computer  equipment over five years. The change in
depreciation lives for certain assets did not materially impact the consolidated
financial statements. Leasehold improvements are depreciated over the shorter of
the estimated  useful life or the lease term.  Amortization  of equipment  under
capital leases is included with depreciation expense.

Stock based compensation  Statement of Financial  Accounting  Standards No. 123,
"Accounting for  Stock-Based  Compensation,"  encourages,  but does not require,
companies to record  compensation  costs for stock-based  employee  compensation
plans at fair  value.  The  Company  has  elected to  continue  to  account  for
stock-based   compensation  using  the  intrinsic  value  method  prescribed  in
Accounting  Principles  Board  Opinion No. 25,  "Accounting  for Stock Issued to
Employees," and related  Interpretations.  Accordingly,  compensation  costs for
stock options  granted to employees and directors is measured as the excess,  if
any, of the quoted market price of the Company's  stock at the date of the grant
over the  amount an  employee  must pay to  acquire  the  stock.  Note 10 to the
Consolidated  Financial Statement contains a summary of the pro forma effects to
reported  net income and  earnings per share for 1995 and 1996 as if the Company
had elected to recognize  compensation cost based upon the fair value of options
granted at grant date as prescribed by SFAS No. 123.

Use of estimates The  preparation  of 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.

2.  FINANCIAL INSTRUMENTS

<TABLE>
Investments The following is a summary of available-for-sale securities:

<CAPTION>
(In thousands)                                                Available-For-Sale Securities
-------------------------------------------------------------------------------------------------------------------
                                                                          Gross            Gross    Estimated Fair
                                                                     Unrealized       Unrealized             Value
December 31, 1996                                        Cost             Gains           Losses
-------------------------------------------------------------------------------------------------------------------
<S>                                                 <C>                     <C>           <C>            <C>      
Certificates of deposit                             $  57,982               $20           $    2         $  58,000
U.S. government securities                             36,517                71              142            36,446
Repurchase agreements                                  15,046                --               --            15,046
Master notes                                            3,907                --               --             3,907
-------------------------------------------------------------------------------------------------------------------
                                                     $113,452               $91             $144          $113,399
===================================================================================================================
</TABLE>

<TABLE>
         Included in cash  equivalents  are  $18,953,000  of  available-for-sale
securities.  The Company invests in repurchase  agreement  securities  which are
collateralized by U.S.  government  securities which have a market value of 102%
of the investment.  The securities are marked to market daily to ensure that the
market value of the underlying assets remain sufficient.
<CAPTION>
(In thousands)                                                Available-For-Sale Securities
-------------------------------------------------------------------------------------------------------------------
                                                                          Gross            Gross    Estimated Fair
                                                                     Unrealized       Unrealized             Value
December 31, 1995                                        Cost             Gains           Losses
-------------------------------------------------------------------------------------------------------------------
<S>                                                  <C>                    <C>            <C>            <C>     
U.S. government securities                           $ 43,704               $--            $ 262          $ 43,442
Commercial paper                                       26,000                --               --            26,000
U.S. corporate securities                               2,000                --               10             1,990
Mortgage-backed securities                              1,136                --               27             1,109
State and municipal securities                            855                --               --               855
-------------------------------------------------------------------------------------------------------------------
                                                     $ 73,695               $--            $ 299          $ 73,396
===================================================================================================================
</TABLE>

                                    Page 42
<PAGE>

         Included in cash  equivalents  are  $51,740,000  of  available-for-sale
securities.  During 1995, U.S. government securities with a costs of $5,501,000,
gross  unrealized  losses of $120,000 and an estimated  fair value of $5,381,000
were  transferred  from "held to maturity" to "available  for sale."  Management
determined  that these  securities  would be utilized for the Company's  ongoing
operations.

         During the years ended  December  31, 1996 and 1995,  the Company  sold
available-for-sale  securities  with a fair value of $46 million and $4 million,
respectively. The gross realized gain on such sales totaled $117,000 in 1996 and
$1,000 in 1995.  In addition,  the Company  recorded a realized gain of $146,000
from the  proceeds  of a bond in 1996.  The gross  realized  loss on such  sales
totaled $187,000 in 1996 and $48,000 in 1995.

         The  amortized  cost and  estimated  fair value of debt  securities  at
December 31, 1996, by contractual maturity, are shown below. Expected maturities
will differ from  contractual  maturities  because the issuers of the securities
may have the right to prepay obligations without penalties.

(In  thousands)                             Available-for-Sale Securities
----------------------------------------------------------------------------
                                         Amortized                  Estimated
December 31, 1996                             Cost                 Fair Value
------------------------------------------------------------------------------
Due in one year or less                  $  57,935                  $  57,950
Due after one year through five years       55,517                     55,449
------------------------------------------------------------------------------
                                          $113,452                   $113,399
==============================================================================

Long-term  obligations The carrying  amounts of the loan and  installment  notes
(note  6)  approximates  their  fair  value.  The  fair  values  of the loan and
installment notes are estimated using discounted cash flow analyses based on the
Company's  current  incremental  borrowing  rates for similar types of borrowing
arrangements.

3.  COLLABORATIVE ARRANGEMENT

         In May 1993, the Company  established a strategic  alliance with Medeva
PLC ("Medeva") to co-commercialize  the Company's AccuSite product for selective
dermatological  indications  in the United States and Europe.  Medeva  purchased
200,000  shares in 1993 and 466,667 shares in 1994 of new Matrix common stock at
$15 per share for an aggregate  purchase price of $10 million  (before  offering
costs). Medeva also made an initial payment to the Company in 1993 of $2,000,000
in  non-refundable  development  fees for prior  research and  development  work
performed by the Company. In September 1995, the Company repurchased from Medeva
all marketing rights related to its AccuSite product for $2,000,000,  to be paid
over a period of five  years.  As of  December  31,  1996 the  obligation  has a
balance of  $1,750,000  and is included  with  installment  notes on the balance
sheet.

4.   INVENTORY

Inventory  Inventory,  which is included in other assets, is stated at the lower
of  cost or  market.  Cost is  determined  on an  average  cost  approach  which
approximates the first in first out method.

(In  thousands)
--------------------------------------------------------------------------

December 31,                                 1995                   1996
--------------------------------------------------------------------------
Finished goods                           $     --                $    --
Work in process                                --                    440
Raw material                                   --                    318
--------------------------------------------------------------------------
Total Inventory                          $     --                $   758
==========================================================================


                                    Page 43
<PAGE>


5.  PROPERTY AND EQUIPMENT

Property and equipment is stated at cost and consists of the following:

(In thousands)
--------------------------------------------------------------------------------

December 31,                                           1995              1996
--------------------------------------------------------------------------------
Land                                                $ 4,258          $  4,258
Building                                              6,869             6,928
Laboratory and operating equipment                    2,835             4,234
Office and computer equipment                         2,280             2,462
Leasehold improvements                                2,572             2,890
Manufacturing start-up costs                            490               490
Construction in progress                                 --               265
--------------------------------------------------------------------------------
                                                     19,304            21,527
Less accumulated depreciation and amortization       (3,385)           (4,375)
--------------------------------------------------------------------------------
Net property and equipment                          $15,919          $ 17,152
================================================================================
                                                             

In December, 1995 the Company purchased a research and manufacturing facility in
San Diego,  California for $13.1 million.  The facility includes land,  building
and related improvements, equipment, furniture, and an adjacent parcel of land.

6.  DEBT AND CAPITAL LEASE OBLIGATIONS

         Assets  purchased  under  debt  (installment  notes) or  capital  lease
financing  arrangements  consist  of  building  and  improvements,   laboratory,
leasehold improvements,  operating, office and computer equipment with a cost of
approximately   $15,838,000   at  December   31,  1995  and  1996.   Accumulated
depreciation of these assets totaled approximately  $1,788,000 and $2,478,052 at
December 31, 1995 and 1996, respectively. The weighted average interest rate for
debt and capital lease obligations in 1996 was 10.13%.

         During the fourth  quarter of 1995,  the  Company  entered  into a loan
agreement for $9,938,000 to finance the purchase of a manufacturing and research
facility in San Diego,  California.  The loan bears  interest at 10.0% per annum
and is for a period of ten years,  amortized over 30 years.  The loan is secured
by the property purchased.

         Future principal  payments under  installment  notes and minimum future
payments under capital leases, are as follows at December 31, 1996:

(In thousands)
--------------------------------------------------------------------------------
                                                             Capital
                                         Installment           Lease
Years ending December 31,                      Notes     Obligations       Total
--------------------------------------------------------------------------------
1997                                        $  1,492     $      210     $ 1,702
1998                                           1,545            318       1,863
1999                                           1,543            119       1,662
2000                                           1,543             --       1,543
2001                                           1,043             --       1,043
Thereafter                                    25,031             --      25,031
--------------------------------------------------------------------------------
                                              32,197            647      32,844
Less amount representing interest             20,372             88      20,460
--------------------------------------------------------------------------------
Present value of net minimum payments         11,825            559      12,384
Current portion                                  503            157         660
--------------------------------------------------------------------------------
Amounts due after one year                  $ 11,322     $      402     $11,724
================================================================================

                                    Page 44
<PAGE>

7.  LEASE COMMITMENTS

         In 1996, the Company leased  facilities in Fremont and San Jose as well
as two facilities in Milpitas  located in the State of  California.  The Company
also leased a facility in the United  Kingdom.  In  December  1995,  the Company
terminated its remaining  lease of the Menlo Park  facility.  Rent expense under
all of these  arrangements was approximately  $1,238,000 in 1994,  $1,421,600 in
1995,  and  $1,610,000  in 1996.  Rental  commitments  under  the  building  and
equipment operating leases are as follows at December 31, 1996:

(In  thousands)
--------------------------------------------------------------------------------
Years ending December 31,                                                 Total
--------------------------------------------------------------------------------
1997                                                                  $   1,560
1998                                                                        902
1999                                                                        688
2000                                                                        639
2001                                                                        669
Thereafter                                                               10,933
--------------------------------------------------------------------------------
Total minimum lease payments                                          $  15,391
================================================================================

         The Company entered into an eighteen-year  lease agreement beginning in
January,  1996,  for a facility  totaling  approximately  50,000  square feet in
Fremont,  California.  This facility includes  administrative,  and research and
development  usage. This lease has an escalation clause in which the annual rent
expense ranges from $420,000 to $1,034,000.

         The Company  entered into a lease  agreement for a storage and shipping
facility totaling  approximately 5700 square feet in Milpitas,  California.  The
lease  which  expires on  November,  1999 and has an annual rent  expense  which
ranges from $55,000 to $62,000.

8.  LITIGATION

         On December 21, 1994, Collagen  Corporation filed a lawsuit against the
Company in Santa Clara County Superior Court alleging  misappropriation of trade
secrets concerning the manufacturing  process for collagen,  including breach of
contract and fraud.  The  Complaint  seeks  unspecified  damages and  injunctive
relief related to Matrix's  manufacture of collagen,  its regulatory filings and
its hiring of current or former  Collagen  employees.  On February 14, 1995, the
Company  filed  its  answer  to  Collagen's  complaint,  denying  all  claims of
misappropriation, asserting several affirmative defenses and seeking recovery of
its attorneys' fees.  Matrix has also filed a  cross-complaint  against Collagen
and Howard  Palefsky,  Collagen's  Chairman and former Chief Executive  Officer,
seeking recovery of damages for defamation,  violations of California  antitrust
law and other causes of action.

         On September 12, 1995, Collagen filed a First Amended Complaint, adding
as  defendants  two  former  Collagen  employees  currently  working  at Matrix,
alleging  that these  employees  used  confidential  documents  and  information
acquired  by  them as  Collagen  employees  for the  benefit  of  Matrix.  These
employees had been accused of wrong-doing in the original  Complaint  along with
other former Collagen employees, but not named as defendants.  The First Amended
Complaint purports to add causes of action for conversion against Matrix and the
two  individual  defendants,  and for breach of contract,  breach of confidence,
breach of  fiduciary  obligation  and breach of the duty of loyalty  against the
former Collagen employees.  Matrix is alleged to have induced such breaches. The
First Amended  Complaint adds to the requested relief of the original  Complaint
for damages and injunctive relief a request for the imposition of a constructive
trust on the alleged fruits of the alleged trade secret misappropriation.

         Discovery  in the case is ongoing.  The trial is  scheduled to begin on
April 7, 1997.

         The lawsuit follows a series of contract  negotiations in 1994 aimed at
developing a long-term supply relationship between Collagen and Matrix. Although
processes to  manufacture  collagen gel have been in the public  domain for many
years,  Collagen is presently the only commercial source for collagen gel in the
United States.  Prior to developing its own manufacturing  process,  Matrix used

                                    Page 45
<PAGE>

collagen  gel from two  additional  sources in its  clinical  trials,  including
collagen gel manufactured by Koken and by Collagen.

         The  Company  believes  that  the  manufacturing  process  which it has
developed for collagen gel does not  incorporate  any Collagen trade secrets and
that the  lawsuit  filed by  Collagen  is without  merit.  Although  the Company
intends to defend  against  this suit  vigorously,  no  assurances  can be given
regarding its eventual  outcome.  This litigation does not involve any claims of
patent infringement. A finding of misappropriation of trade secrets could result
in  damages  and/or  a  significant  restriction  on the  Company's  ability  to
manufacture its products. Such a finding would also require the Company to alter
its  manufacturing  process,  or seek an alternate source of collagen gel. There
can be no assurance  that the Company  would be able to alter its  manufacturing
process, if required,  in a timely manner, or at all or that it would be able to
secure an alternative  source of collagen gel on commercially  reasonable terms,
or at all. As a result,  there can be no  assurance  that this  lawsuit will not
delay the Company's  product  approvals or affect its ability to manufacture its
products, each of which would have a material adverse effect on the Company, its
prospects and financial  condition.  Additionally,  the costs of litigating this
matter, regardless of outcome, may exceed $2,000,000 in 1997.

9. STOCKHOLDERS' EQUITY

Preferred  Stock In August 1994,  the Company  issued  13,334 shares of Series A
preferred  stock  to a group of  private  investors  and  received  proceeds  of
$11,790,000,  net of offering  costs.  During the first quarter of 1996,  13,334
outstanding shares of the Company's Series A preferred stock were converted into
1,333,400 shares of the Company's common stock.

Preferred  Share Purchase  Rights Plan On April 17, 1995, the Company's Board of
Directors   adopted  a  Preferred   Share  Purchase   Rights  Plan  under  which
stockholders receive one one-hundredth  Series B junior participating  preferred
share purchase  right for each share of Matrix common stock.  The rights will be
distributed as a non-taxable dividend,  will expire on May 28, 2005, and will be
exercisable  only if a person  or group  acquires  20% or more of the  Company's
common stock or announces a tender offer for 20% or more of the Company's common
stock.  The  Board of  Directors  designated  150,000  shares as Series B junior
participating preferred stock. As of December 31, 1996, no shares were issued or
outstanding.

Common Stock On August 29, 1995,  the Company  raised in a private  placement of
the Company's  common stock,  $16.8 million after issuance costs from a group of
investors.  The  offering  involved  the sale of  1,481,982  new  shares  of the
Company's common stock at a price of $12.00 per share.

         On October 17, 1995, the Company closed a public  offering  pursuant to
which 4,097,000 new shares of the Company's common stock were sold at $13.25 per
share, which resulted in net proceeds of $50.9 million to the Company.

         On April 8, 1996,  the  Company  closed a public  offering  pursuant to
which 3,162,500 new shares of the Company's common stock were sold at $22.63 per
share resulting in net proceeds of $67.4 million to the Company.

10. STOCK OPTIONS PLANS

1991  Directors  Stock  Option Plan The Board of  Directors  adopted a Directors
Stock  Option Plan in 1991.  In May 1994,  the Board  amended the plan which was
approved by stockholders at the annual stockholders' meeting in June 1995. Under
the amended plan, each individual who first becomes a non-employee member of the
Board of  Directors  will be  automatically  granted a  non-statutory  option to
purchase 40,000 shares of common stock which vest over a three-year period. Each
non-employee director (upon re-election to the Board) will automatically receive
an option to purchase  3,000  shares of common  stock which vest over a one-year
period.  The amended plan  includes a provision  for a special  option grant for
Board members to receive a second stock option grant for 40,000 shares of common
stock upon the  termination  of a member's  affiliation  with a venture  capital
firm, investment entity or corporate partner for which the member was affiliated
upon his  appointment to the Board.  Such member will not be eligible to receive
the automatic option grant of 3,000 shares until the first annual  stockholders'
meeting  held more than 6 months  after the date of

                                    Page 46
<PAGE>

the special option grant.  Options have a maximum term of 10 years.  The maximum
number of shares which may be issued under the automatic option grant program is
342,858 shares. At December 31, 1996, the total number of common shares reserved
for issuance under director's stock options was 342,858,  of which 68,366 remain
available for grant. At December 31, 1996, options to purchase 183,966 shares of
common stock under the Director Stock Plan were exercisable.

Restricted  stock plan The Company's  Restricted Stock Plan ("the Plan") permits
the Company to (i) grant  incentive  options at 100 percent of fair value at the
date of grant; (ii) grant  non-qualified  options at 85 percent of fair value or
greater; and (iii) grant purchase rights authorizing the sale of common stock at
85 percent  of fair value  subject to stock  purchase  agreements.  Options  may
become exercisable immediately or in installments over time as specified in each
option agreement.  Shares purchasable under immediately  exercisable options and
under  purchase  rights may be subject to repurchase by the Company in the event
of termination of employment;  the Company's repurchase right shall lapse in one
or more  installments  over the purchaser's  period of service.  The term of the
Plan is ten years.  Options have a maximum term of ten years except that options
granted to ten-percent  stockholders  have a maximum term of five years.  In May
1994,  an additional  450,000  shares of common stock were reserved for issuance
pursuant to the Plan. In May, 1996, an additional 850,000 shares of common stock
were reserved for issuance pursuant to the Plan. At December 31, 1996, the total
number of common shares reserved for issuance under restricted stock options was
2,119,892 of which 248,256 remain available for grant.

<TABLE>
Activity under the Restricted Stock Plan is as follows:
<CAPTION>
                                                             Purchase
                                                               rights                                      Weighted*
                                                                  and                                       average
                                            Shares            options                                      exercise
                                         available        outstanding              Price per share            price
                                       ------------       ------------      ----------------------    --------------
<S>                                       <C>              <C>              <C>          <C>    
Balances at December 31, 1993              202,106          1,012,907        $  0.23  -   $ 10.25
Additional authorization                   450,000                 --
Grants of options and purchase rights     (296,500)           296,500        $ 10.75  -   $ 13.50
Exercise of options and purchase rights         --            (36,375)       $  0.23  -   $  9.00
Forfeitures                                 28,403            (28,403)       $  0.37  -   $ 11.38
                                       ------------       ------------      ----------------------    -------------
Balances at December 31, 1994              384,009          1,244,629        $  0.23  -   $ 13.50

Grants of options and purchase rights     (397,100)           397,100        $ 10.41  -   $ 15.00         $  11.96
Exercise of options and purchase rights         --           (135,158)       $  0.23  -   $ 11.38         $   2.87
Forfeitures                                 39,581            (39,581)       $  5.63  -   $ 14.63         $   9.39
                                       ------------       ------------      ----------------------    -------------
Balances at December 31, 1995               26,490          1,466,990        $  0.23  -   $ 15.00         $   7.18

Additional authorization                   850,000                 --
Grants of options and purchase rights   (1,214,050)         1,214,050        $  6.16  -   $ 26.00         $  10.42
Exercise of options and purchase rights         --           (223,588)       $  0.23  -   $ 13.50         $   4.04
Forfeitures                                585,816           (585,816)       $  5.63  -   $ 26.00         $  14.15
                                       ------------       ------------      ----------------------    -------------
Balances at December 31, 1996              248,256          1,871,636        $  0.23  -   $ 21.00         $   7.47
                                       ============       ============

<FN>
*Weighted Average Price per Share not required for 1994
</FN>
</TABLE>

         At December  31,  1996,  options to purchase  753,186  shares of common
stock were exercisable at a weighted-average  exercise price of $5.05 per share.
At December 31, 1995,  options to purchase  919,665  shares of common stock were
exercisable at a weighted-average exercise price of $4.38 per share.

<TABLE>
         Exercise prices for options  outstanding as of December 31, 1996 ranged
from $0.23 to $21.00 per share. The weighted-average  remaining contractual life
of those options is 8.3 years. Ranges of exercise price for 1996 are as follows:

                                    Page 47
<PAGE>

<CAPTION>
                                                                         Weighted-
                                                                           average
                                                    Weighted-            remaining          Number        Weighted-
                                     Number           average          contractual              of          average
                                 of options          exercise             life (in     exercisable         exercise
      Exercise price range      outstanding             price               years)         options            price
---------------------------    -------------       -----------      ---------------    ------------    -------------
 <S>                              <C>               <C>                       <C>          <C>           <C>       
 $    0.23  -   $     0.37          348,296         $    0.36                 4.0          348,296       $     0.36
 $    5.63  -   $     9.00          997,728         $    7.18                 9.0          206,171       $     6.99
 $   10.25  -   $    21.00          525,612         $   12.74                 8.5          198,719       $    11.25
                               -------------       -----------      --------------    -------------    -------------
                                  1,871,636         $    7.47                 8.3          753,186       $     5.05
                               =============       ===========      ==============    =============    =============
</TABLE>

         On September  26, 1996 the Board of Directors  approved a resolution to
offer eligible employees  (excluding  executive  officers) holding stock options
granted under the Plan, the opportunity to exchange their original stock options
for new  options  granted at the then  current  fair  market  value.  Under this
program,  each  outstanding  option  granted  from  1993 to 1996 with a price in
excess of $7.50 per share can be replaced  with a new option  grant for the same
number  of shares  with an  exercise  price of $7.50  per a share.  As a result,
options on 409,050  shares were canceled and  regranted at $7.50 per share.  The
new options have vesting  periods  ranging from two to four years depending upon
the year the original grant was issued and are exercisable in installments  over
time as specified in each option agreement.

         The  Company  applies  APB No.  25,  "Accounting  for  Stock  Issued to
Employees." Pro forma  information  regarding net income (loss) and earnings per
share is required by SFAS No. 123,  "Accounting for Stock-Based  Compensations,"
and has been  determined  as if the Company had  accounted  for its employee and
director stock options under the fair value method of that Statement. The Black-
Scholes  option  pricing  model is used to  calculate  the  fair  value of these
options  for 1995  and 1996  under  SFAS  123  with the  following  assumptions:
dividend yield of zero % for both years,  volatility factors of .62 for 1995 and
 .66 for  1996,  risk-free  interest  rate of 6.1% for  1995  and 6.2% for  1996,
assumed  forfeiture  rate of 6.4% for both years,  and an  expected  life of 4.0
years for both years.

         Had  compensation  costs for the  Company's  stock  option  plans  been
determined  based upon the fair value at the grant date for awards  under  these
plans  consistent with the methodology  prescribed  under SFAS 123 the Company's
net income  (loss) and  earnings  per share for 1995 and 1996 would have been as
follows:
-----------------------------------------------------------------------------
                                         For the Years ended December 31,
(In thousands)                         1995                          1996
-----------------------------------------------------------------------------
Net loss - as reported               $(26,617)                     $(29,643)

Net loss - pro forma                 $(26,761)                     $(30,706)

Net loss per share - as reported       $(2.19)                       $(1.48)

Net loss per share - pro forma         $(2.20)                       $(1.53)

         The weighted average fair value of options granted at fair market value
during 1995 and 1996 is estimated at $6.98 and $5.73,  respectively  on the date
of grant.  The  weighted  average of options  granted at below fair market value
during 1995 and 1996 is estimated at $7.56 and $7.39,  respectively  on the date
of grant.

         SFAS 123 is  effective  for options  granted by the Company  commencing
January 1, 1995. All options granted before January 1, 1995 have not been valued
and no pro forma compensation  expense has been recognized.  However, any option
granted  before  January 1, 1995 that was  repriced  in 1996 is treated as a new
grant within 1996 and valued accordingly.  In addition,  as compensation expense
is recognized  over the vesting period of the option,  the pro forma effect will
not be fully reflected until approximately 1998.


                                    Page 48
<PAGE>


11. INCOME TAXES

         As of  December  31,  1996,  the  Company  had  federal  and  state net
operating loss  carryforwards  of  approximately  $101,400,000  and  $10,600,000
respectively.  The Company also had federal  research and development tax credit
carryforwards  of approximately  $2,300,000.  The federal net operating loss and
credit  carryforwards  will expire at various  dates  beginning in the year 2000
through 2011, if not utilized. The state of California net operating losses will
expire at various dates beginning in 1997 through 2000, if not utilized.

         Utilization  of the  Company's  net operating  loss  carryforwards  and
credits may be subject to an annual  limitation due to the "change in ownership"
provisions of the Internal  Revenue Code of 1986 and similar  state  provisions.
The Company does not expect the  limitation to impact its ability to utilize all
of its current net operating loss and credit carryforwards.

<TABLE>
         Deferred  income  taxes  reflect  the  net  tax  effects  of  temporary
differences  between the carrying amounts of assets for financial  reporting and
the amount used for income tax purposes. Significant components of the Company's
deferred  tax assets for  federal  and state  income  taxes for the years  ended
December 31, 1994, 1995, and 1996 are as follows:

<CAPTION>
(In  thousands)
=====================================================================================================================

At December 31,                                                       1994                1995                 1996
---------------------------------------------------------------------------------------------------------------------
<S>                                                            <C>                 <C>                      <C>    
Deferred tax assets
     Net operating loss carryforwards                          $    16,500         $    25,500              $35,000
     Research credits                                                1,900               2,700                3,500
     Capitalized research expenses                                   1,200               3,800                5,300
     Other                                                             300                 900                1,900
---------------------------------------------------------------------------------------------------------------------

     Total deferred tax assets                                 $    19,900         $    32,900              $45,700
     Valuation allowance for deferred tax assets                   (19,900)            (32,900)             (45,700)
---------------------------------------------------------------------------------------------------------------------
Net deferred tax assets                                        $        --         $        --              $    --
=====================================================================================================================
</TABLE>

         The net valuation  allowance  increased by $7,500,000,  $13,000,000 and
$12,800,000 in 1994, 1995, and 1996, respectively.

12. RELATED PARTIES

         During the years ended December 31, 1996, 1995, and 1994, legal fees of
approximately $1,843,100,  $1,494,700, and $420,200,  respectively, were paid to
Brobeck,  Phleger  &  Harrison,  a law firm in which a current  director  of the
Company is a senior partner.  As of December 31, 1996 and 1995,  amounts owed to
Brobeck, Phleger, & Harrison were $387,300, and $115,800, respectively.

13. EMPLOYEE SAVINGS AND RETIREMENT PLAN

         The Company  adopted a 401 (k) savings and  retirement  plan in January
1990.  The plan covers all eligible  employees who are 21 years of age or older.
In May 1996, the Company  approved a matching  contribution  under the Company's
401 (k) plan.  Under this program,  retroactive  to January 1, 1996, the Company
makes a matching contribution on behalf of each eligible employee equal to 12.5%
of salary deferral  contribution  for 1996 and 50% beginning on January 1, 1997.
The  Company  contributes  to the plan new  shares of its  common  stock at fair
market  value to satisfy  its  liability  for  matching  contributions.  Company
matching contributions were $71,000 in 1996.

                                    Page 49
<PAGE>



                REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS



The Board of Directors and Stockholders
Matrix Pharmaceutical, Inc.


We  have  audited  the  accompanying   consolidated  balance  sheets  of  Matrix
Pharmaceutical,  Inc. (a development  stage company) as of December 31, 1995 and
1996,  and the related  consolidated  statements  of  operations,  stockholders'
equity and cash flows for each of the three years in the period  ended  December
31, 1996 and for the period from  inception  (February 11, 1985) to December 31,
1996.  These  financial  statements  are  the  responsibility  of the  Company's
management.  Our  responsibility  is to express  an  opinion on these  financial
statements based on our audit.

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

In our opinion,  the financial  statements  referred to above present fairly, in
all  material   respects,   the  consolidated   financial   position  of  Matrix
Pharmaceutical,  Inc. (a  development  stage  company) at December  31, 1995 and
1996,  and the  results of its  operations  and cash flows for each of the three
years in the period ended  December  31, 1996 and for the period from  inception
(February 11, 1985) to December 31, 1996, in conformity with generally  accepted
accounting principles.


                                                               Ernst & Young LLP


Palo Alto, California
January 28, 1997


                                    Page 50