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, 1997

                                       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 Identification No.)
incorporation or organization)

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, 1998: $66,223,000.

Number of shares of Common Stock, $.01 par value, outstanding as of February 28,
1998: 21,932,287.

                       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  1998 Annual
Meeting of Stockholders scheduled to be held on May 18, 1998.


<PAGE>


Item 1. Business

         This Form 10-K may  contain,  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 any such
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.

Overview


         Matrix   Pharmaceutical,   Inc.   ("Matrix"  or  "the  Company")  is  a
development-stage company that is a leader in the formulation and development of
novel  pharmaceutical  product  candidates  that are  designed  to  improve  the
delivery of cancer drugs to more effectively treat solid tumors. The Company has
applied  its  expertise  in  tumor  biology  and  physiology,  advanced  imaging
techniques,  pharmaceutical chemistry,  polymer chemistry,  analytical chemistry
and biochemistry, and chemical engineering to develop platform technologies with
distinct drug delivery  characteristics and capabilities:  aqueous-based protein
gel  systems  for  water-soluble  chemotherapeutic  agents;  Anhydrous  Delivery
Vehicles   ("ADV")   (predominantly    non-aqueous   semi-solid   systems)   for
chemotherapeutic agents that are poorly water soluble; and methods in an earlier
stage of 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.

         Several  Matrix  products have been  evaluated or are  currently  being
evaluated in human clinical trials. The Company's lead cancer product candidate,
IntraDose(TM) (cisplatin/epinephrine) Injectable Gel, incorporates cisplatin, an
established  chemotherapeutic  agent,  in a proprietary  viscous gel formulation
that  facilitates  the delivery and retention of cisplatin  within solid tumors.
The   Company's   second   oncology   product   under   development,   MPI  5020
Radiopotentiator,  is designed to potentiate,  that is, enhance, the efficacy of
radiation  treatments  when  used  concurrently  with  radiotherapy.   MPI  5020
incorporates  fluorouracil,  another  established  chemotherapeutic  agent, in a
proprietary gel formulation that delivers and retains  fluorouracil within solid
tumors. The Company's core technology for delivery of water-soluble chemotherapy
agents is also used in AccuSite(TM)  (fluorouracil/epinephrine)  Injectable Gel,
which  incorporates  fluorouracil  and has been tested in serious skin  diseases
such  as  condyloma  (genital  warts),  basal  cell  carcinoma,   squamous  cell
carcinoma,  and psoriasis.  IntraDose and AccuSite have demonstrated the ability
to provide  sustained  high drug  concentrations  within  solid  tumors and skin
lesions  and to reduce the  systemic  toxicities  associated  with  conventional
chemotherapy.

Matrix Technology

         Aqueous-based  protein systems.  IntraDose,  MPI 5020, and AccuSite are
based  on  the  Company's  patented  injectable  gel  technology,   in  which  a
chemotherapeutic drug is combined with a protein matrix and, in certain cases, a
vasoconstrictor, to create an injectable gel. This gel enables targeted delivery
of  water-soluble  drugs by direct injection into solid tumors and skin lesions.
The Matrix delivery system localizes the release of drug,  maintaining high drug
concentrations  at the tumor or  lesion  site and  increasing  the  duration  of
exposure of the targeted  tissue to the  therapeutic  agent.  In  IntraDose  and
AccuSite  the  activity of the drug can be further  enhanced by the  addition of
epinephrine,  a  vasoconstrictor  which  reduces  local blood flow and acts as a
"chemical tourniquet" to hold the drug in place.

         The Company  believes that its technology will allow the development of
new products from  established  drugs or agents that may be available from other
companies or  institutions,  thus  reducing the

                                                                               2
<PAGE>


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 is 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.

         Fluorouracil  and cisplatin are widely used as systemic 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.  Abnormal cells are more  susceptible than normal cells to the effects
of  such   drugs.   Unfortunately,   normal   cells   (e.g.,   bone  marrow  and
gastrointestinal  mucosa  cells)  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 a tolerated dose that is 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 its aqueous-based
protein systems technology include:

         o        Sustained high  concentrations  of drug at the target site. By
                  maintaining  high,  local  drug  concentrations  in the target
                  tissue,  the systems  increase the exposure of diseased tissue
                  to the drug.

         o        Lowered systemic toxicity. Because the systems concentrate the
                  drug at the disease site and limit the drug exposure to normal
                  tissues,  overall  systemic  toxicity  is reduced  compared to
                  systemic chemotherapy.

         o        Site specific application. Products are injected directly into
                  the tumor or skin lesion. Any accessible lesion or solid tumor
                  which can be seen,  palpated,  or visualized with  established
                  imaging  techniques  or  accessed  directly  or  by  means  of
                  minimally invasive techniques can potentially be treated.

         o        Applicability to a broad range of therapeutic compounds.  Many
                  conventional  drugs  and  novel   biopharmaceuticals   can  be
                  delivered using the aqueous-based protein systems. 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.

         Anhydrous   Delivery  Vehicles  ("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  ("IV") injection or infusion.
The  solubilizing  agents  employed in several of these drug products to prepare
suitable  IV  solutions  may cause  significant  toxicity.  The  development  of
potential new anti-cancer  agents such as camptothecin  has also been limited by
poor aqueous  solubility.  The Company's  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

                                                                               3

<PAGE>


Company believes that this technology may also lend itself well to water-soluble
drugs that have limited stability when dissolved in aqueous media.

         A number  of  water  insoluble  cytotoxic  drugs,  such as  paclitaxel,
camptothecin,  and  etoposide,  use novel  mechanisms  to disrupt the ability of
cancer cells.  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.

Products in Clinical Development

<TABLE>
         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>
                                                                           Development         Commercial
         Product/Indication                   Delivery Platform             Status(1)            Rights
         ------------------                   -----------------             ---------            ------
<S>                                  <C>                                   <C>                   <C>
IntraDose

Head & Neck Cancer                   Aqueous-based protein system          Phase III             Matrix

Other Solid Tumors                   Aqueous-based protein system          Phase III             Matrix

Liver Cancer - Primary               Aqueous-based protein system          Phase II              Matrix

Liver Cancer - Metastatic            Aqueous-based protein system          Phase II              Matrix
Colorectal Cancer

MPI 5020 Radiopotentiator

Recurrent breast cancer              Aqueous-based protein system          Phase I/II            Matrix
(chest wall metastases)

MPI 5019 - Camptothecin

Topoisomerase Inhibition             Anhydrous Delivery Vehicle            Preclinical           Matrix

MPI 5018 - Paclitaxel

Tubulin Inhibition                   Anhydrous Delivery Vehicle            Preclinical           Matrix

<FN>
(1)      The  Company's  product  candidates  are  generally  developed  in  the
         following   stages:   pre-clinical   studies   (preparing  to  file  an
         Investigational  New Drug ("IND") Application in the United States or a
         Clinical Trial Exemption ("CTX") in foreign countries); clinical trials
         (which  may  include   Phases  I,  II,  III  and  IV  and  variants  or
         combinations  of  the  foregoing);   regulatory  submission  (New  Drug
         Application ("NDA") or Market Authorization  Application ("MAA"));  and
         cleared for marketing. See "-- Government Regulation."
</FN>
</TABLE>
                                                                               4

<PAGE>

IntraDose Injectable Gel

         Matrix is developing  IntraDose  Injectable  Gel for a 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 metastatic  disease at the 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  and
control of other tumor related symptoms become important, as do the potential to
retard disease progression and possibly prolong survival.

         The Company's IntraDose product candidate  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,  computerized  tomography ("CT" scan)
and magnetic  resonance  imaging ("MRI" scan) 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,  the Company  believes that  treatments with IntraDose may be given in
any out-patient setting that is equipped to administer cytotoxic drugs, offering
the potential for cost-effective  treatment without  in-patient  hospitalization
for surgery or prolonged chemotherapy.

Head and Neck Cancer/Other Solid Tumors

         The  Company  is  currently  conducting  placebo-controlled  Phase  III
clinical trials for head and neck cancer as well as pivotal open-label trials in
solid tumors  including  recurrent  chest wall  metastases  (from breast cancer,
ovarian cancer and lung cancer),  esophageal cancer, melanoma, and various other
carcinomas.  These tumors may be either primary,  recurrent, 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 utilize data from its trials
in head and neck  cancer  and other  solid  tumors to  support  approval  of the
broadest possible label for IntraDose in the United States and Western Europe.

         Head and Neck Cancer Market.  The Company estimates that  approximately
41,000 new cases of head and neck  cancer are  diagnosed  annually in the United
States and 73,000 new cases are diagnosed  annually in Western Europe,  based on
data from the American Cancer Society and The International  Agency for Research
on Cancer, a unit of the World Health Organization.  The incidence is highest in
countries  with high rates of  cigarette  smoking and  consumption  of alcoholic
beverages.  Cancers  of the  head  and  neck  are  predominately  squamous  cell
carcinomas.  Of these,  approximately  70% are  diagnosed as later stage disease
which has spread beyond the site of origin, 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 surgical resection difficult or impossible due to proximity to
vital body  structures  and/or  cosmetic  or  functional  considerations,  while
radiotherapy  often damages  surrounding  healthy  tissues.  The use of systemic
chemotherapy  in the management of head and neck cancers has been limited by 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,  radiation, and surgery. The
most important limitation of the available therapies for head and neck cancer is
the high recurrence rate, generally 50% or higher.

                                                                               5

<PAGE>


         A  standard  course of  chemotherapy  for  patients  with head and neck
cancer  often  requires  hospitalization  with  daily  intravenous  infusion  of
chemotherapy.  The  majority of  patients  who  receive  chemotherapy  will also
require ancillary supportive treatments, such as intravenous fluids, 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.


         Other Solid Tumor  Market.  Tumors  that can be accessed  and  injected
directly or by means of an endoscopic  procedure or minimally invasive technique
include  tumors of the  esophagus,  chest wall  metastases  from primary  breast
cancer,  and  malignant  melanomas  of  the  skin.  The  Company  believes  that
approximately  75,000  cases  are  diagnosed  each  year  in the  United  States
(comprised of  approximately  25,000 cases of chest wall metastases from primary
breast cancer,  12,000 cases of esophageal cancer, and 38,000 cases of malignant
melanoma) and that approximately 71,000 cases are diagnosed each year in Western
Europe  (approximately  24,000  in  esophageal  cancer,  26,000  in  chest  wall
metastases from primary breast cancer, and 21,000 in malignant melanoma),  based
on data from the  American  Cancer  Society  and The  International  Agency  for
Research on Cancer. Recurrent solid tumors of these types are being evaluated in
the Company's open-label Phase III trials.  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 and other solid tumors with IntraDose. The
investigators  reported  on 45  patients  with a  total  of 82  treated  tumors.
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, 39% (32
of 82) of all treated tumors  exhibited a complete  response (100%  reduction in
tumor  volume)  and 50% of all  treated  tumors (41 of 82)  exhibited a complete
response or partial  response  (greater than 50% reduction in tumor  volume).  A
response was defined as tumor  reduction of any  duration,  rather than duration
lasting  at least 28 days,  the  standard  clinical  definition  of a  response,
because some patients  received  systemic  chemotherapy for treatment of disease
progression  in distant,  untreated  tumors  shortly  after being  treated  with
IntraDose.  Sixteen of the complete responses (19.5% of treated tumors) could be
followed for at least 28 days and had a lasting complete  response without other
therapy. The median duration of complete response was 125 days.

          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 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
solid  tumors.  The  double-blind,  placebo-controlled  Phase  III head and neck
cancer trials require  approximately 180 evaluable patients,  90 patients in the
United States trial and 90 patients in the European  trial.  The Phase III other
solid  tumor  trials are  open-label  studies  that  require  approximately  130
evaluable patients,  65 in the United States and 65 in Western Europe.  Patients
enrolled  in the Phase III trials must have  advanced  recurrent  or  refractory
disease.  The  study  endpoints  are  objective  tumor  responses  (i.e.,  tumor
shrinkage of at least 50%) and achievement of pre-selected treatment goals, such
as prevention of obstruction of vital structures,  prevention of

                                                                               6

<PAGE>

breakthrough  of the skin, pain control,  wound care,  improvement in ability to
hear,  see, and eat,  and other  palliative  benefits.  Assuming  completion  of
patient enrollment and treatment in, and successful results from, these studies,
the Company  anticipates using the data from these trials to support  regulatory
submissions in the United States and Western Europe.

Liver Cancer

         Two types of tumors  are found in the liver --  primary  hepatocellular
cancer (the most common cancer arising from liver cells) and tumors  originating
in other tissues (most commonly from colorectal  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).  The Company  believes  the  incidence  (number of new cases per year) of
primary liver cancer is approximately  20,000 in the United States and 20,000 in
Western Europe and the incidence of hepatic  metastases from colorectal  cancers
is  approximately  44,000 and 82,000 in the United  States and  Western  Europe,
respectively,  based on data available from the American  Cancer Society and The
International Agency for Research on Cancer.

         When  possible,  surgery is the first line  treatment for both types of
liver tumors.  However,  a majority of patients with liver tumors are inoperable
due to tumor location, tumor 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  are  applicable  to only a  minority  of
patients  and have had  only  limited  beneficial  results.  Due to the  limited
availability and effectiveness of current  therapies,  the Company believes that
fewer than 50% of all patients with liver cancer are treated.

         Matrix  believes  that  IntraDose  may  have  utility  as a first  line
treatment for many patients with  unresectable  liver cancer from 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 cm3 and as large as  3,164  cm3  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 five
percent of the platinum 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  initiated  two  open-label  Phase II trials for
patients  with liver  cancer.  A Phase II trial for patients  with primary liver
cancer is in progress at medical centers in the United States,  Europe, and Hong
Kong. A Phase II trial for patients  with cancers  metastatic  to the liver from
colorectal  cancer is  underway  at medical  centers  in the  United  States and
Europe. These trials are designed to evaluate tumor necrosis, tumor response (as
measured by CT scan), time to tumor progression, pattern of disease progression,
and survival.

                                                                               7
<PAGE>


MPI 5020 Radiopotentiator

         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  local  delivery  of  radiopotentiating  agents  significantly
enhances 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 aqueous protein gel technology. In 1997, the Company initiated a Phase
I/II trial in chest wall  metastatic  disease from  recurrent  breast  cancer at
medical centers in the United States.  This  dose-escalation  and dose-frequency
study is  intended  to  evaluate  the  safety of MPI 5020 when  administered  in
conjunction with 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

         The  Company has focused  preclinical  research  efforts on delivery of
topoisomerase inhibitors and tubulin-binding agents through Matrix's proprietary
ADV technology.  Topoisomerase inhibitors and tubulin-binding agents are classes
of chemical  compounds that have  demonstrated  potent  anti-cancer  activity in
vitro and in vivo but are  poorly  water  soluble.  In order to be  administered
intravenously,  many of these  chemical  compounds  have  been  formulated  with
solubilizing  agents that may cause serious  systemic side effects.  The Company
believes its ADV technology may improve the therapeutic ratio (i.e., to increase
a drug's local  effectiveness  and/or  significantly  reduce  dose-limiting side
effects which result from its systemic administration) of these and other poorly
water soluble anti-cancer agents.

         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 by Matrix's
ADV technology may be more effective and less toxic than systemic administration
of camptothecin or recently marketed camptothecin analogues. In addition, Matrix
is conducting laboratory and preclinical experiments on a group of topoisomerase
inhibitors  known as azatoxins to which Matrix has a  nonexclusive  license from
the National Cancer Institute. Potential indications for systemic administration
of 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.  The Company has
also  designed  several  aqueous  gel   formulations  of  vinblastine,   another
tubulin-binding anticancer drug.

AccuSite Injectable Gel

         Matrix has evaluated  AccuSite in four major skin disease  indications:
condyloma (genital warts) and basal cell cancer, for which Phase III trials have
been completed,  and squamous cell cancer and psoriasis, for which Phase I/II or
Phase II trials have been conducted.  These skin diseases are  characterized  by
superficially  occurring  hyperproliferative  lesions  which  are  sensitive  to
fluorouracil, the active agent in AccuSite.

         The Company has pursued  registration of AccuSite for the genital warts
indication in the United States and in most of Western Europe. AccuSite has been
approved  for  treatment  of  genital  warts  in

                                                                               8

<PAGE>

Denmark, Germany, Ireland,  Luxembourg, the Netherlands,  and the United Kingdom
and  recommended  for  approval in Belgium,  Finland,  and Italy.  A  regulatory
decision is expected in 1998 in France.  However, in September 1997, the Company
indefinitely  suspended,  both  within  the United  States and other  countries,
further  development  and   commercialization   programs  related  to  AccuSite,
including  marketing of AccuSite in the United Kingdom,  where it was introduced
by Matrix in January  1997,  after  receiving  a second  action  letter from the
United States Food and Drug Administration ("FDA") with respect to the Company's
NDA for AccuSite.  The FDA action letter  reiterated  concerns  expressed by the
agency in December 1996 about the safety profile of AccuSite and, in particular,
about the  persistence  in  certain  AccuSite-treated  patients  of a  bump-like
thickening or swelling  (induration) at the site of injection,  which the agency
believes  could  indicate an  inflammatory  process.  The Company  believes  the
clinical data for AccuSite, including supplementary data submitted to the FDA in
March 1997 as an amendment to the NDA  originally  filed in 1995, are supportive
of the safety and  efficacy of the product in this  indication.  The Company has
requested  a  re-review  by the FDA of its NDA and does not  intend  to  conduct
further clinical studies or otherwise invest  substantial  Company  resources in
pursuit of marketing  clearance in the United States.  The Company is evaluating
whether,  in the absence of  commercialization  in the United States,  it may be
cost effective to market AccuSite in Europe through local  partners.  Currently,
AccuSite is licensed in Italy to the Dompe Group of Milan; in Spain and Portugal
to  Laboratorios  Dr.  Esteve of  Barcelona;  and in the United States to Altana
Inc., a pharmaceutical subsidiary of Altana A.G., a German-based  pharmaceutical
and  chemical  company  that is active in the  dermatology  and  women's  health
markets, the principal segments for AccuSite. Marketing of AccuSite in Europe is
dependent upon, in addition to regulatory  approvals,  the availability of local
marketing  partners and, in markets where prices are regulated,  the negotiation
of satisfactory pricing with local governments.

Manufacturing and Supply

         Matrix maintains worldwide manufacturing rights to all of its products.
The Company  has  manufactured  AccuSite  and  IntraDose  at  facilities  it has
operated  in San  Jose  and  Milpitas,  California,  as  well  as at a  contract
manufacturing  facility.  The Company's San Jose facility and Milpitas  facility
were  inspected  by FDA and  British  regulatory  personnel  and  found to be in
compliance  with Current Good  Manufacturing  Practices  ("cGMP") and equivalent
British  standards.  These  facilities  are  scheduled to be closed by the first
quarter  of 1998 as part of a  restructuring  of the  Company's  work  force and
consolidation of  manufacturing  operations in a 67,000 square foot research and
manufacturing facility in San Diego,  California,  which the Company acquired in
1995. Following extensive renovations that were completed in 1997, the San Diego
facility is scheduled to become  operational in 1998 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 Company  intends to use the San Diego
facility  to  meet  its  near-term  clinical  and  long-term   commercial  scale
production  requirements.  This  facility  will require  approval by  regulatory
authorities prior to commercialization of products  manufactured there. In March
1998, the Company entered into a sale and leaseback  agreement for the San Diego
facility. See Item 2, "Properties."

         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 the Company's
initial  product  candidates,  IntraDose,  MPI 5020,  and AccuSite,  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
multiple products receive marketing approvals.

                                                                               9

<PAGE>


         Several of the materials  used in the Company's  products are available
from a limited number of suppliers. These items, including collagen gel and bulk
drug  substance,  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 raw materials and components utilized in its
products.

Sales and Marketing

         The  Company  currently  owns  worldwide  marketing  rights for all its
products under  development,  except for AccuSite in the United  States,  Italy,
Spain, and Portugal.  The Company's  business strategy is to market or co-market
IntraDose and its other oncology product candidates,  if approved, in the United
States and to license its products  outside the United States to  pharmaceutical
partners  who have  substantially  greater  resources  and  experience  in local
markets.  See  "Risk  Factors - Limited  Manufacturing  and Sales and  Marketing
Experience."

Patents and Proprietary Rights

         The Company's policy is to aggressively  seek patent  protection and to
enforce all of its  intellectual  property  rights.  In the United  States,  the
Company  has  five  issued  patents,   one  allowed  patent,  and  five  pending
applications.  In Western Europe, the Company has three issued patents and seven
pending  applications.  The  Company  has one  allowed  patent  and two  pending
applications  in Japan.  Three of the five patents  issued in the United  States
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  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 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.  The allowed
patent  in  the  United   States,   which  expires  in  2015,   covers   certain
dry-containing  collagen  gels,  including  AccuSite  and,  potentially,   other
products developed by the Company.


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  cancers  and  skin  diseases  are  targets  for   therapeutic   product
development at numerous entities, many of which have greater human and financial
resources than the Company. In addition,  conventional drug therapy, surgery and
other more established treatments and modalities will compete with 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

                                                                              10

<PAGE>

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.

         The Company's  competitive  position depends upon, among other factors,
its ability to attract and retain qualified personnel,  obtain patent protection
or otherwise  develop  proprietary  products or processes and secure  sufficient
capital resources to complete product development and regulatory processes.  The
Company expects that competition among products approved for sale will be based,
among other factors,  on product activity,  safety,  reliability,  availability,
price,  patent  position and new usage and  purchasing  patterns  established by
managed care and other group purchasing organizations.

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  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.

         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 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,  is
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 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.

                                                                              11

<PAGE>

         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 must be obtained
from the relevant regulatory authorities.

         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 $20,256,000, $24,320,000, and $27,214,000 in 1995, 1996, and 1997,
respectively.

Employees

         As of December  31,  1997,  the  Company  had a total of 105  full-time
employees,  including  30  in  research  and  development,  31  in  medical  and
regulatory affairs, biostatistics,  and technical services, 21 in manufacturing,
and 23 in other departments. The Company believes that it has been successful in
attracting  skilled and  experienced  personnel;  however,  competition for such
personnel  is intense and there can be no  assurance  that the  Company  will be
successful at attracting and retaining  qualified  personnel in the future. None
of the Company's employees are covered by collective  bargaining  agreements and
management considers relations with its employees to be good.

                                                                              12

<PAGE>


                                  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 product candidate,  including a review of its manufacturing  processes
and  production  facilities,  is required  before such product  candidate 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  foreign  authorities  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,  the Company must  demonstrate  to the
satisfaction  of the FDA  that  the  Company's  product  candidate  is safe  and
effective for its intended uses and is manufactured in conformity with the FDA's
cGMP regulations.  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 some 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  products,  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. During the first quarter
of  1998,  the  Company  closed  its  manufacturing  facilities  in San Jose and
Milpitas,  California and consolidated  manufacturing personnel at the Company's
San Diego production facility.  There can be no assurance that the Company's San
Diego  manufacturing  facility  will be accepted  by the FDA in the future,  and
failure to receive or maintain  such  acceptance  would have a material  adverse
effect on the Company's business.

         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,
changes in applicable law or FDA policy during the period of product development
and FDA  regulatory  review may result in the delay or rejection of an NDA filed
by the Company.  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.

                                                                              13

<PAGE>

         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  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,  the subsequent  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.

         Matrix  filed  an NDA for  AccuSite  Injectable  Gel for  treatment  of
condyloma  (genital  warts) with the FDA in 1995.  The FDA has issued two action
(non-approvable)  letters with respect to the Company's  application.  An action
letter  received in September 1997 reiterated  concerns  expressed by the FDA in
December 1996 about the safety profile of AccuSite and, in particular, about the
persistence in certain  AccuSite-treated  patients of a bump-like  thickening or
swelling (induration) at the site of injection,  which the agency believes could
indicate an  inflammatory  process.  The Company  believes the clinical data for
AccuSite,  including supplementary data submitted to the agency in March 1997 as
an  amendment  to the NDA,  are  supportive  of the safety and  efficacy  of the
product in this indication.  The Company has requested a re-review by the FDA of
its NDA.  However,  the Company  does not intend to invest  substantial  Company
resources in pursuit of marketing clearance of AccuSite in the United States and
believes it is unlikely  that  AccuSite  will be cleared  for  marketing  in the
United  States.  Accordingly,  the Company has  indefinitely  suspended  further
development and commercialization programs related to AccuSite.

         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 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 must be obtained from the relevant regulatory authorities.

         AccuSite has been approved in Denmark,  Germany,  Ireland,  Luxembourg,
The Netherlands, and the United Kingdom and recommended for approval in Belgium,
Finland,  and Italy.  A regulatory  decision is expected in 1998 in France.  The
Company is evaluating whether, in the absence of commercialization in the United
States,  it may be cost  effective to market  AccuSite in Europe  through  local
partners.  Commercialization  of AccuSite in Europe would,  in certain  markets,
also require the  negotiation of  satisfactory  pricing with local  governments.
There  can be no  assurance  that the  Company  will  develop  the  distribution
agreements and regulatory approvals,  including pricing approvals, that would be
necessary to commercialize AccuSite in Europe.

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 clinical 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 or the
Company may modify or 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 provide data suitable for submission to the FDA.

                                                                              14

<PAGE>

         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 in 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.

History of Losses; Future Profitability Uncertain

         Matrix was incorporated in 1985 and has experienced  significant losses
since that date. As of December 31, 1997, the Company's  accumulated deficit was
approximately  $145,620,000.  The Company has not  generated  revenues  from its
products  or product  candidates  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 on successfully developing products,
obtaining  regulatory  approvals for its products,  entering into agreements for
product commercialization outside the United States, and developing an effective
sales and marketing organization in the United States. 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 and development of its product candidates.  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  1999.  See  "Management's  Discussion  and
Analysis of Financial Condition and Results of Operations."

Limited Manufacturing and Sales and Marketing Experience

         The  Company  intends  to  market  and  sell  certain  of  its  product
candidates,  if successfully  developed and approved,  through its own dedicated
sales force in the United States and through pharmaceutical licensees in Europe.
However,  for  AccuSite,  the  Company has  entered  into a sales and  marketing
agreement with Savage Laboratories, the U.S. marketing division of Altana, Inc.,
to sell,  market and  distribute  AccuSite to  dermatology  and  obstetrics  and
gynecology audiences in the United States. The Company has similar agreements in
place for AccuSite with pharmaceutical  companies in Italy, Spain, and Portugal.
The Company has  announced the  withdrawal of AccuSite from the United  Kingdom,
where it has been marketed since January 1997 by a contract sales  organization.
In order to establish a successful direct sales and marketing  capability in any
of its  targeted  markets,  the Company  will need to 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  resources  will be
available to the Company to fund  marketing  and sales  expenses,  many

                                                                              15

<PAGE>

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.

         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 closed
manufacturing facilities in San Jose and Milpitas, California on or before March
31, 1998 and transferred manufacturing personnel to a research and manufacturing
facility  in San  Diego,  California  that  was  acquired  in 1995  to meet  the
Company's  anticipated long-term commercial scale production  requirements.  The
Company  expects that the San Diego facility and contract  manufacturers  should
provide sufficient production capacity to meet clinical requirements.  There can
be no  assurance  that the Company will be able to validate  this  facility in a
timely  manner or that this  facility  will be adequate for  Matrix's  long-term
needs  without  delaying  the  Company's  ability to meet  product  demand or to
manufacture  in a  cost-effective  manner.  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 raw materials and components utilized
in its products. Any interruption of supply could have a material adverse effect
on the Company's ability to manufacture its products,  complete clinical trials,
or 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 U.S.  patent for cisplatin,  a  chemotherapeutic  drug
that is the active compound in IntraDose, if the newly-issued patent were upheld
and if IntraDose  were found to infringe  that  patent,  and if the Company were
unable to obtain a license  under  that  patent.  See  "--Uncertainty  Regarding
Patents and Proprietary Rights."

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 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 that obtain 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

                                                                              16

<PAGE>

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 the prosecution of the Japanese version of the first
patent on the Company's base technology (see  "Business--Patents and Proprietary
Rights"),  the Company became aware of a previously unknown prior art reference.
This was brought to the attention of the U.S. PTO in a reexamination of the U.S.
patent.  Both the Japanese  application has been allowed,  and the United States
patent has reissued with claims slightly modified in light of the prior art. The
Company  believes,  although no assurance can be given, that the modified claims
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 with claims 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,  may have been improperly
awarded and should be found invalid and/or  unenforceable.  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  would be able to obtain a
license to the patent on commercially  reasonable  terms, if at all, in order to
commercialize IntraDose in the United States.


         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.

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 be more  effective  and less costly  than the  products
developed

                                                                              17

<PAGE>


by the Company. In addition,  conventional drug therapy,  surgery and other more
familiar treatments and modalities will compete with 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 receipt 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,  profitability,  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.

         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  payers  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
limit  prices the  Company  can charge for its  products.  The cost  containment
measures that health care payers 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.

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

                                                                              18

<PAGE>


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   chemotherapeutic  agents  employed  by  the  Company  in  its
aqueous-based  protein systems,  ADV, and regional delivery technology 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.

         In addition,  bovine sourced  materials are of some concern  because of
transmission of Bovine Spongiform Encelphalopathy ("BSE"). The Company has taken
all precautions to minimize the risk of  contamination of its collagen with BSE,
including  the  use of  United  States-sourced  cow  hides.  The  Committee  For
Proprietary  Medicinal Products  ("CPMP"),  a steering committee of the European
Medicines Evaluation Agency ("EMEA"),  has classified materials made from bovine
skin products as showing no detectable  infectivity,  indicating minimal risk of
transmission of BSE.

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,
in addition, 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

         Certain  provisions of the Company's  Certificate of Incorporation  and
Bylaws  may have the  effect of making it more  difficult  for a third  party to
acquire,  or discouraging a third party from  attempting to acquire,  control of
the Company.  Such provisions could limit the price that certain investors might
be willing to pay in the future for shares of the Company's  Common  Stock.  The
Company's  Board of

                                                                              19

<PAGE>

Directors has the authority to issue shares of Preferred  Stock and to determine
the price,  rights,  preferences,  privileges and  restrictions  of those shares
without any further vote or action by the stockholders.

         The rights of the  holders of Common  Stock will be subject to, and may
be adversely  affected by, the rights of the holders of any Preferred Stock that
may be issued in the future.  The issuance of Preferred  Stock,  while providing
desirable  flexibility  in  connection  with  possible  acquisitions  and  other
corporate  purposes,  could  have the effect of making it more  difficult  for a
third  party to  acquire  a  majority  of the  outstanding  voting  stock of the
Company.  The Company has no present  plans to issue shares of Preferred  Stock.
Certain provisions of Delaware law applicable to the Company could also delay or
make more  difficult  a merger,  tender  offer or proxy  contest  involving  the
Company,  including  Section 203 of the Delaware General  Corporation Law, which
prohibits a Delaware  corporation from engaging in any business combination with
any interested stockholder for a period of three years unless certain conditions
are met.

Year 2000 Compliance

         The Company is aware of the issues associated with the programming code
in existing computer systems as the millennium (year 2000) approaches. The "year
2000" problem is pervasive  and complex as virtually  every  computer  operation
will be affected in some way by the  rollover of the two digit year value to 00.
The issue is whether  computer  systems will properly  recognize  date sensitive
information  when  the  year  changes  to  2000.  Systems  that do not  properly
recognize such  information  could generate  erroneous data or cause a system to
fail.

         During 1997,  the Company  installed a new  accounting  system that was
confirmed by the vendor to address the year 2000 related  issues.  However,  the
Company  has not  analyzed  the  external  factors,  such as the impact on those
vendors  adversely  affected by the year 2000 issue,  and has not  assessed  the
related  potential  effect on the  Company's  business,  financial  condition or
results of  operations.  There can be no  assurance  that  computer  systems and
applications of other  companies on which the Company's  operations rely will be
converted  in a timely  fashion,  or that such  failure  to  correct  by another
company would not have a material adverse effect on the Company.

                                                                              20

<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>
Michael D. Casey                           52             President, Chief Executive Officer and Director

James R. Glynn                             51             Chief Operating Officer, Chief Financial Officer,
                                                          Assistant Secretary and Director

Richard D. Leavitt, M.D.                   52             Senior Vice President, Medical and Regulatory
                                                          Affairs

Dennis M. Brown, Ph.D.                     48             Vice President, Discovery Research

Richard E. Jones, Ph.D.                    53             Vice President, Research and Development

Andrew G. Korey, Ph.D.                     49             Vice President, Business Development/Scientific
                                                          Licensing

Ronald P. Lucas                            56             Vice President, Operations

Natalie L. McClure, Ph.D.                  45             Vice President, Regulatory Affairs and Quality
                                                          Assurance

Harry D. Pedersen                          42             Vice President, Corporate Development
</TABLE>

         Mr. Casey has been President, Chief Executive Officer and a director of
the Company since  September  1997.  From November 1995 to December 1996, he was
Executive Vice President of Schein Pharmaceutical,  Inc., ("Schein"),  a generic
and  ethical  pharmaceutical  company,  and in  December  1996 he was  appointed
President of the retail and  specialty  products  division of Schein.  From June
1993 to November  1995,  he served as President and Chief  Operating  Officer of
Genetic Therapy,  Inc., a biopharmaceutical  company. Mr. Casey was President of
McNeil  Pharmaceutical,  a unit of Johnson & Johnson, from 1989 to June 1993 and
Vice President, Sales and Marketing for the Ortho Pharmaceutical Corp. ("Ortho")
subsidiary of Johnson & Johnson from 1985 to 1989. Previously,  he held a number
of sales and marketing positions with Ortho.

         Mr. Glynn was named Chief Operating Officer of the Company in September
1997 and has served as Chief  Financial  Officer  since July 1995 and  Assistant
Secretary  and  director of the Company  since June 1997.  Mr.  Glynn  served as
interim  President and Chief  Executive  Officer from June to September 1997. He
joined  the  Company  in July 1995 as Senior  Vice  President,  Chief  Financial
Officer and Secretary. Prior to joining the Company, from 1987 to February 1995,
he served 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.

         Dr.  Leavitt  joined  the  Company  in  November  1996 as  Senior  Vice
President,  Medical and Regulatory Affairs.  From June 1993 to November 1996, he
was Vice President,  Clinical and Regulatory

                                                                              21

<PAGE>

Affairs of Focal  Incorporated,  a biopharmaceutical  company.  Prior to joining
Focal  Incorporated,  from 1991 to June 1993 he  served  as  Director,  Clinical
Research at Genetics Institute.  Prior to joining Genetics Institute,  from 1986
to  1991  he  held  various  management  positions  at  Fujisawa  USA,  Fujisawa
SmithKline  Corporation,  and Centocor  Incorporated.  Prior to joining Centocor
Incorporated, he was an Assistant Professor at the University of Maryland School
of Medicine and Johns Hopkins University School of Medicine.

         Dr. Brown, a founder of the Company, has been Vice President, Discovery
Research since March 1995 and was Vice President of Scientific Affairs from 1985
to March 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 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.

         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,  Business   Development/Scientific
Licensing in March 1998 after serving as Vice President, Medical Information and
Extramural  Scientific  Affairs  from  January  1997 to March 1998.  He held the
position of Vice President,  Clinical  Research and Medical Affairs from January
1996 to January  1997.  From 1990 to January  1996, he held the position of Vice
President,  Medical and Regulatory Affairs. Prior to joining Matrix, in 1989 Dr.
Korey was a consultant with A. Korey & Associates.  He held the position of Vice
President, Medical Affairs at Genelabs, Inc., a biotechnology company, from 1987
to 1989 and Director of Scientific and Medical Affairs at Syntex Pharmaceuticals
Canada from 1981 to 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 1996.
From September 1994 to February 1996, he was the Vice President of Operations at
Telios Pharmaceuticals ("Telios"), a division of Integra LifeSciences.  Prior to
joining  Telios,  he was the Vice  President of Operations  from January 1991 to
September 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.  He also
held a number of  management  and technical  positions at Eli 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. Dr. McClure held the positions of Associate Director of
Regulatory  Affairs from January 1993 to August 1993 and Director of  Regulatory
Affairs  from  August  1993 to March  1996.  Prior to joining  Matrix,  she held
various  positions at Syntex  Corporation  in the Chemical  Process  Development
department and in Regulatory Affairs.

         Mr.  Pedersen was appointed Vice  President,  Corporate  Development in
June 1997. Between December 1995 and May 1997, he was Senior Director, Strategic
Business Development, for Hoechst Marion Roussel. Between June 1992 and December
1995, he was Senior  Director of Business  Development  for Marion  Merrell Dow.
Prior to that, he held a variety of positions with Marion Laboratories including
Manager of European Licensing.

                                                                              22

<PAGE>

Item 2.  Properties

         In December  1995, the Company  purchased a research and  manufacturing
facility  in San  Diego,  California  for $13.1  million.  The  facility,  which
approximates 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 investments,  to which the
Company has committed  capital  expenditures of approximately  $8.9 million,  of
which $6.9  million has been paid through  December 31, 1997.  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 two-year period totals approximately $2.9 million.

         In March 1998, the Company entered into an agreement with a real estate
investment  trust  for the sale and  leaseback  of its San  Diego  manufacturing
facility structured as an $18,600,000 purchase and a $6,000,000 convertible loan
secured by specific manufacturing related building improvements. The lease has a
term of  thirteen  years with the option to renew up to 25 years.  Net cash from
the lease and loan  agreement,  after the payment of the  existing  mortgage and
escrow and other related fees, totals approximately $14,000,000 and will be used
to fund operating expenses and capital purchases.

         During  September  1997,  the Company's  management  suspended  further
development and  commercialization of AccuSite after being notified that the FDA
did not  approve  AccuSite as a treatment  for  genital  warts.  Pursuant to the
restructuring  plan which was  established  in the third  quarter  of 1997,  the
Operations  group  relocated  to  the  San  Diego  facility  from  its  Northern
California  facilities  during  the  fourth  quarter  of 1997.  During the first
quarter  of  1998,  the  Company   terminated   its  lease   obligation  on  the
manufacturing facility in San Jose and negotiated termination agreements for the
manufacturing  and storage  facilities  located in Milpitas,  California.  Costs
associated  with the  termination  of the  leases  and  write-off  of  leasehold
improvements for the leased facilities have been accrued in current  liabilities
on the balance  sheet.  See  "Management  Discussion  and  Analysis--Results  of
Operations."

         In May 1994,  the  Company  entered  into an  18-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.

Item 3. Legal Proceedings

         On December 21, 1994, Collagen Corporation ("Collagen") filed a lawsuit
against  the   Company  in  Santa   Clara   County   Superior   Court   alleging
misappropriation of trade secrets concerning the Company's manufacturing process
for collagen and seeking  unspecified damages and injunctive relief. The Company
denied all allegations of the complaint and subsequently filed a cross-complaint
against  Collagen  and Howard  Palefsky,  Collagen's  former  Chairman and Chief
Executive Officer,  seeking recovery of damages for defamation and violations of
state law unfair competition.

         On May 23,  1997,  the  lawsuit  between  the  parties  was  settled on
mutually agreeable terms and dismissed with prejudice. All claims by and against
all parties have been released. Matrix agreed that for a period of five years it
shall not  manufacture or sell products  directly  competitive  with  Collagen's
current core products.  Collagen has granted Matrix a  non-exclusive  license to
certain Collagen intellectual property for certain non-monetary consideration.

                                                                              23
<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, 1997.

                                     Part II


Item 5. Market for Registrant's Common Equity and Related Stockholder Matters

         The Common Stock of Matrix  Pharmaceutical,  Inc.  trades on the Nasdaq
National  Market tier of the Nasdaq  Stock  Market  under the symbol  MATX.  The
Company's  common stock began trading on January 28, 1992.  The following  table
presents quarterly  information on the high and low sale prices of the Company's
Common Stock for fiscal years 1997 and 1996,  as regularly  quoted on the Nasdaq
National Market.

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

                      1997
                      1st Quarter           $      7.50        $     5.75
                      2nd Quarter                  7.84              5.00
                      3rd Quarter                  7.44              3.94
                      4th Quarter                  5.00              3.00

                      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

         As of February 28, 1998, there were approximately 271 holders of record
of the Company's  Common Stock.  No dividends have been paid on the Common Stock
since the Company's  inception,  and the Company does not anticipate  paying any
dividends in the foreseeable future.

                                                                              24
<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,
------------------------------------------------------------------------------------------------------------------------------------
                                                  1993           1994           1995          1996           1997          1997
------------------------------------------------------------------------------------------------------------------------------------
Consolidated Statement of Operations Data:

<S>                                            <C>            <C>            <C>            <C>            <C>          <C>
Revenues                                       $   2,150      $     100      $    --        $    --        $    --      $   2,250

Costs and expenses
     Research and development                     12,651         17,072         20,256         24,320         27,214      116,569
     General and administrative                    3,289          3,806          8,336         11,428         14,270       47,235
     Special charges                                --             --             --             --            4,518        4,518
------------------------------------------------------------------------------------------------------------------------------------
         Total costs and expenses                 15,940         20,878         28,592         35,748         46,002      168,322
------------------------------------------------------------------------------------------------------------------------------------

Loss from operations                             (13,790)       (20,778)       (28,592)       (35,748)       (46,002)    (166,072)

Interest and other income                          1,941          1,311          2,179          6,534          5,913       21,181
Rental income                                       --             --             --              659          1,467        2,126
Interest expense                                    (100)          (121)          (204)        (1,088)        (1,109)      (2,855)
------------------------------------------------------------------------------------------------------------------------------------

Net loss                                       $ (11,949)     $ (19,588)     $ (26,617)     $ (29,643)     $ (39,731)   $(145,620)
====================================================================================================================================

Basic and diluted net loss per
common share                                   $   (1.18)     $   (1.86)     $   (2.19)     $   (1.48)     $  (1.85)

Weighted average shares used in
computing basic and diluted net
loss per common share                             10,132         10,538         12,173         20,081        21,536

                                                                 December 31,
-------------------------------------------------------------------------------------------------------------------
                                                    1993         1994          1995           1996           1997
-------------------------------------------------------------------------------------------------------------------
Summary of Consolidated Balance Sheet Data:
Cash, cash equivalents
     and investments                           $    35,316    $  35,059      $  77,331     $  114,584     $  80,368
Total assets                                        39,077       37,767         94,419        134,950       110,429
Total long-term liabilities                            870          761         12,307         11,724        22,161
Total stockholders' equity                          35,629       34,168         76,355        115,511        76,653

</TABLE>
                                                                              25

<PAGE>

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

         This Form 10-K may  contain,  in  addition to  historical  information,
forward-looking statements,  including without limitation,  statements regarding
the timing and outcome of  regulatory  reviews  and  clinical  trials.  Any such
forward-looking  statements are based on management's  current  expectations and
are  subject  to a number of risks and  uncertainties  that could  cause  actual
results to differ materially from expected results. For additional  information,
including  risk  factors,   such  as  no  assurance  of  regulatory   approvals;
uncertainties  associated  with  clinical  trials;  history  of  losses;  future
profitability uncertain;  additional financing requirements and uncertain access
to  capital   markets;   limited   sales  and  marketing   experience;   limited
manufacturing  experience;  dependence on sources of supply; rapid technological
change;  substantial competition;  uncertainty regarding patents and proprietary
rights;  uncertainty  of  pharmaceutical  pricing;  and no assurance of adequate
reimbursement,  please see the "Risk Factors" section included in this Form 10-K
as well as other factors discussed below and elsewhere in this report.

         The  following  discussion  should  be read  in  conjunction  with  the
consolidated financial statements and related notes included on pages 35-53.

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 has a history of
 operating losses and expects to incur  substantial  additional  losses over the
 next several years as it continues to develop its current and future  products.
 For the period  from its  inception  to  December  31,  1997,  the  Company has
 incurred a cumulative net loss of $145,620,000.

         Revenues in 1993 and 1994 were  generated  primarily by amounts  earned
 under license agreements. No revenues were recognized in 1995, 1996, or 1997.

 Results of Operations

 Years ended December 31, 1997 and 1996.

         The Company had no revenue for 1997 or 1996.

         Research  and  development  expenses  for  1997  increased  by  12%  to
 $27,214,000  as compared to $24,320,000  for 1996.  This increase was primarily
 due to higher  personnel  costs for the  Company's  clinical  and  research and
 development  programs as well as increases in manufacturing  personnel costs in
 anticipation  of the commercial  introduction of AccuSite in the United States.
 Higher clinical expenses related to IntraDose  Injectable Gel in 1997 over 1996
 were offset by lower clinical trial expenses for AccuSite in 1997.

         General  and  administrative  expenses  for  1997  increased  by 25% to
$14,270,000 as compared to $11,428,000 for 1996. This increase was primarily due
to higher legal expenses  related to the Collagen  litigation  which was settled
during the second  quarter  of 1997,  increases  in  recruiting  and  relocation
expenses, higher personnel costs, and product sales expenses associated with the
commercial launch of AccuSite in the United Kingdom during 1997.

                                                                              26

<PAGE>

         Pre-tax  special  charges of $4,518,000  were recorded during the third
quarter of fiscal  1997 in  connection  with the  decision  to  suspend  further
development and commercialization of AccuSite. Management suspended the AccuSite
program after being  notified that the FDA was not prepared to approve  AccuSite
as a treatment for genital warts.  In September 1997,  restructuring  costs were
accrued to conclude the clinical trials and commercial  programs associated with
AccuSite.  The Company reduced its workforce by approximately  63 employees,  of
which 46 positions related to manufacturing,  resulting in severance expenses of
$1,478,000.  Additional  expenses included the write-off of inventory related to
AccuSite of $1,245,000,  costs totaling $1,194,000 associated with the shut down
of the Company's Northern  California  facilities and write-off of manufacturing
equipment,  the closing of clinical trials with respect to AccuSite of $414,000,
and sales and marketing costs associated with AccuSite of $187,000.  At December
31, 1997, the reserve balance of $2,063,000 was included in current  liabilities
of which accruals for future cash payments was approximately $1,500,000.

         Net interest and other income increased by 3% to $6,271,000 for 1997 as
 compared to $6,105,000  for 1996.  The increase is primarily due to the receipt
 of rental  income  from the  lease in July  1996 of a portion  of the San Diego
 facility  for  fiscal  1997 and the  amortization  of a five  year  non-compete
 agreement. This is partially offset by a decline in interest income as a result
 of lower average cash balances experienced throughout the year.

         As of  December  31,  1997,  the  Company  had  federal  and  state net
 operating loss  carryforwards  of  approximately  $140,600,000 and $13,100,000,
 respectively.  The Company also had federal research and development tax credit
 carryforwards of approximately  $3,200,000.  The federal net operating loss and
 credit  carryforwards  will expire at various dates  beginning in the year 2000
 through 2012, if not utilized.  The state net operating loss carryforwards will
 expire at various dates beginning in 1998 through 2003, if not utilized.

 Years ended December 31, 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. In addition,  1995 general and
 administrative  expenses include the repurchase of marketing rights to AccuSite
 for $2,000,000. This increase was primarily due to higher legal expenses due to
 the Collagen  litigation,  higher-personnel  expenses,  including the hiring of
 additional marketing staff, and AccuSite market prelaunch expenses.

         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.

                                                                              27

<PAGE>

Liquidity and Capital Resources

         At  December  31,  1997,  the  Company had  $80,400,000  in cash,  cash
equivalents and marketable securities,  compared to $114,600,000 at December 31,
1996.  The decrease of  $34,200,000  includes  cash  receipts  from an equipment
financing  agreement of $9,950,000,  interest and rental income of approximately
$7,400,000 and $2,800,000 as part of a non-compete agreement. Cash disbursements
were  used  primarily  to  fund  operating  activities,  inventory  and  capital
purchases.

         In March 1998, the Company entered into an agreement with a real estate
investment  trust  for the sale and  leaseback  of its San  Diego  manufacturing
facility structured as an $18,600,000 purchase and a $6,000,000 convertible loan
secured by specific manufacturing related building improvements. The lease has a
term of  thirteen  years with the option to renew up to 25 years.  Net cash from
the lease and loan  agreement,  after the payment of the  existing  mortgage and
escrow and other related fees, totals approximately $14,000,000 and will be used
to fund operating expenses and capital purchases.

         In October 1997,  the Company  received  $9,950,000,  net of commitment
 fees, as part of a five-year  equipment  financing  agreement maturing in 2002.
 The  agreement is secured by the  equipment  purchased  by the Company  between
 October 21, 1995 and March 31, 1998.

         Special  charges of  approximately  $4,500,000 were recorded during the
third  quarter  of 1997 in  connection  with the  decision  to  suspend  further
development  and  commercialization  of AccuSite.  See "Results of  Operations".
Total cash payments for  restructuring are  approximately  $2,700,000,  of which
$1,500,000  remained  payable at December  31,  1997.  The  remaining  amount is
expected to be paid during the first half of 1998.

         In December  1995, the Company  purchased a research and  manufacturing
facility in San Diego, California for $13,100,000.  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  investments to which
the Company has committed capital expenditures of approximately  $8,900,000,  of
which  $6,900,000 has been paid through December 31, 1997. 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
for the year ended December 31, 1997 was approximately $1,500,000.

         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 $67,400,000 to the Company.

         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 $50,900,000 to the Company.

         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.  As of December 31, 1997, the remaining  balance of this
obligation was $1,500,000.

         On August 29, 1995, the Company raised $16,800,000 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.

                                                                              28

<PAGE>

         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 as well as  additional
 capital  that  may  be  generated   through  equity  and  debt  financings  and
 collaborative agreements.

         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 oncology products, continued research
 and development programs,  the development of manufacturing  capabilities,  and
 general working capital requirements. The Company anticipates that its existing
 and  committed  capital  resources,  including  the  proceeds of its April 1996
 public  offering,  October  1997  equipment  financing,  and  recent  sales and
 leaseback  agreement,  will  enable it to  maintain  its  current  and  planned
 operations at least through 1999.  The Company may require  additional  outside
 financing to complete the process of bringing current  products to market,  and
 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 the 1997 and 1996 fiscal years.

Year 2000 Compliance

         The Company is aware of the issues associated with the programming code
in existing computer systems as the millennium (year 2000) approaches. The "year
2000" problem is pervasive  and complex as virtually  every  computer  operation
will be affected in some way by the  rollover of the two digit year value to 00.
The issue is whether  computer  systems will properly  recognize  date sensitive
information  when  the  year  changes  to  2000.  Systems  that do not  properly
recognize such  information  could generate  erroneous data or cause a system to
fail.

         During 1997,  the Company  installed a new  accounting  system that was
confirmed by the vendor to address the year 2000 related  issues.  However,  the
Company  has not  analyzed  the  external  factors,  such as the impact on those
vendors  adversely  affected by the year 2000 issue,  and has not  assessed  the
related  potential  effect on the  Company's  business,  financial  condition or
results of  operations.  There can be no  assurance  that  computer  systems and
applications of other  companies on which the Company's  operations rely will be
converted  in a timely  fashion,  or that such  failure  to  correct  by another
company would not have a material adverse effect on the Company.

                                                                              29

<PAGE>

<TABLE>
<CAPTION>
Item 7A. Quantitative and Qualitative Disclosures About Market Risk

         Not applicable.

Item 8. Financial Statements and Supplementary Data

                  Index to Consolidated Financial Statements:

<S>               <C>                                                                            <C>
                  Consolidated Balance Sheets--December 31, 1996 and 1997.                       Page 35

                  Consolidated Statements of Operations
                  Years Ended December 31, 1995, 1996 and 1997, and Period from
                  Inception (February 11, 1985) To December 31, 1997.                            Page 36

                  Consolidated Statement of Stockholders' Equity
                  Period from Inception (February 11, 1985) To
                  December 31, 1997.                                                             Pages 37-38

                  Consolidated Statements of Cash Flows
                  Years Ended December 31, 1995, 1996 and 1997, and Period from
                  Inception (February 11, 1985) To December 31, 1997.                            Page 39

                  Notes to Consolidated Financial Statements                                     Pages 40-52

                  Report of Ernst & Young LLP, Independent Auditors                              Page 53

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

         Not applicable.
</TABLE>

                                    Part III

Item 10. Directors and Executive Officers of the Registrant

         The  information  required by this 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 Stockholders to be held on May
18, 1998 (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  21 and 22.  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.

                                                                              30

<PAGE>

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.

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

<TABLE>
<CAPTION>
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.

                  Index to Consolidated Financial Statements:

<S>               <C>                                                                            <C>
                  Consolidated Balance Sheets--December 31, 1996 and 1997.                       Page 35

                  Consolidated Statements of Operations
                  Years Ended December 31, 1995, 1996 and 1997, and Period from
                  Inception (February 11, 1985) To December 31, 1997.                            Page 36

                  Consolidated Statement of Stockholders' Equity
                  Period from Inception (February 11, 1985) To
                  December 31, 1997.                                                             Pages 37-38

                  Consolidated Statements of Cash Flows
                  Years Ended December 31, 1995, 1996 and 1997, and Period from
                  Inception (February 11, 1985) To December 31, 1997.                            Page 39

                  Notes to Consolidated Financial Statements                                     Pages 40-52

                  Report of Ernst & Young LLP, Independent Auditors                              Page 53
</TABLE>

(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, 1997.

                                                                              31
<PAGE>

<TABLE>
(c) Exhibits
<CAPTION>
Number            Exhibit
------            ------------------------------------------------------------------------------------------------------------------
<S>               <C>
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)

3.1b              Restated Certificate of Incorporation filed with the Delaware Secretary of State on August 13, 1992

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)

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

10.14b            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

10.22a            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

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

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

--------
*    Confidential treatment has been granted with respect to certain portions of this agreement.

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.
                                                                                                                                  32
<PAGE>

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)

10.36*            Lease between the Company and Calaveras  Associates II, dated August 4, 1993 (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)

10.38             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 10-Q 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 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)

10.46*            Settlement and License Agreement effective as of May 23, 1997 by and between Collagen Corporation and the Company

10.47*            Distribution Agreement made as of August 4, 1997 by and between the Company and Altana, Inc.

10.48e            1988 Restricted Stock Plan (Amended and Restated through March 19, 1997)

10.49f            Form of Stock Issuance Agreement

10.50g            1991 Directors Stock Option Plan (Amended and Restated through March 19, 1997)

10.51h            Form of Non-Statutory Stock Option Agreement

10.52             Imperial Bank Credit Agreement date October 8, 1997

10.53             Option Acceleration Program dated January 27, 1998

10.54             Termination of Lease Agreement with Becton Dickinson

10.55             Employment Agreement between the Company and Michael D. Casey

23.1              Consent of Ernst & Young LLP, Independent Auditors

27                Financial Data Schedule

<FN>
---------
*    Confidential treatment has been granted with respect to certain portions of this agreement.
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.
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
e    Incorporated by reference to Exhibit 99.1 of Registration Statement on Form S-8 (No. 333-32213).
f    Incorporated by reference to Exhibit 99.6 of Registration Statement on Form S-8 (No. 333-32213).
g    Incorporated by reference to Exhibit 99.7 of Registration Statement on Form S-8 (No. 333-32213).
h    Incorporated by reference to Exhibit 99.8 of Registration Statement on Form S-8 (No. 333-32213).

                                                                              33
</FN>
</TABLE>


<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 27, 1998           By:    /s/ Michael D. Casey
     ----------------------         ----------------------------
                                           Michael D. Casey
                                           President and Chief Executive Officer

                                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.

<TABLE>
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.

<CAPTION>
<S>        <C>                              <C>
Date:      March 27, 1998                   /s/ Michael D. Casey
     ----------------------         --------------------------------
                                            Michael D. Casey
                                            President, Chief Executive Officer and Director (Principal Executive
Officer)

Date:      March 27, 1998                   /s/ J. Stephan Dolezalek
     ----------------------         --------------------------------
                                            J. Stephan Dolezalek
                                            Director

Date:      March 27, 1998                   /s/ James R. Glynn
     ----------------------         --------------------------------
                                            James R. Glynn
                                            Director, Chief Operating Officer, Chief Financial Officer, Assistant
                                            Secretary (Principal Financial and Accounting Officer)

Date:      March 27, 1998                   /s/ Marvin E. Jaffe, M.D.
     ----------------------         --------------------------------
                                            Marvin E. Jaffe, M.D.
                                            Director

Date:      March 27, 1998                   /s/ Bradley G. Lorimier
     ----------------------         --------------------------------
                                            Bradley G. Lorimier
                                            Director

Date:      March 27, 1998                   /s/ Edward E. Luck
     ----------------------         --------------------------------
                                            Edward E. Luck
                                            Chairman of the Board

Date:      March 27, 1998                   /s/ John E. Lyons
     ----------------------         --------------------------------
                                            John E. Lyons
                                            Director

Date:      March 27, 1998                   /s/ Julius L. Pericola
     ----------------------         --------------------------------
                                            Julius L. Pericola
                                            Director
</TABLE>
                                                                              34

<PAGE>

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

                           Consolidated Balance Sheets


<CAPTION>
(In thousands except share and per share amounts)                                               December 31,
------------------------------------------------------------------------------------------------------------------------
                                                                                                1996               1997
------------------------------------------------------------------------------------------------------------------------
Assets

<S>                                                                                  <C>                <C>
Current assets:
       Cash and cash equivalents                                                     $        20,138    $        19,719
       Short-term investments                                                                 38,997             40,666
       Short-term notes from related parties                                                       -                750
       Other current assets                                                                    3,041              1,378
------------------------------------------------------------------------------------------------------------------------
              Total current assets                                                           62,176              62,513

Property and equipment, net                                                                   17,152             26,742
Non-current investments                                                                       55,449             19,983
Long term notes from related parties                                                               -                600
Deposits and other assets, net                                                                   173                591
------------------------------------------------------------------------------------------------------------------------
                                                                                     $       134,950    $       110,429
========================================================================================================================

Liabilities and Stockholders' Equity

Current liabilities:
       Accounts payable                                                              $         2,636    $         2,800
       Accruals for special charges                                                                -              2,063
       Accrued compensation                                                                    1,045                922
       Accrued clinical trial costs                                                            1,239              1,788
       Other accrued liabilities                                                               2,135              1,759
       Current portion of debt and capital lease obligations                                     660              2,283
------------------------------------------------------------------------------------------------------------------------
              Total current liabilities                                                        7,715             11,615
Debt and capital lease obligations, less current portion                                      11,724             20,248
Deferred other income                                                                              -              1,913
------------------------------------------------------------------------------------------------------------------------
              Total long-term liabilities                                                     11,724             22,161

Stockholders' equity
       Common stock,  $0.01 par value per share;  30,000,000 shares  authorized,
          21,257,856  shares issued and outstanding in 1996;  21,908,300  shares
          issued and outstanding in 1997                                                         213                219
       Additional paid-in capital                                                            222,043            224,925
       Notes receivable from shareholders                                                          -             (2,313)
       Deferred compensation                                                                    (780)              (539)
       Unrealized losses on marketable securities                                                (76)               (19)
       Deficit accumulated during the development stage                                     (105,889)          (145,620)
------------------------------------------------------------------------------------------------------------------------
              Total stockholders' equity                                                     115,511             76,653
------------------------------------------------------------------------------------------------------------------------
                                                                                     $       134,950    $       110,429
========================================================================================================================
<FN>
                            (See accompanying notes )
</FN>
</TABLE>
                                                                              35

<PAGE>

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

                      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,
------------------------------------------------------------------------------------------------------------------------------------
                                                                 1995               1996                1997                1997
------------------------------------------------------------------------------------------------------------------------------------

<S>                                                           <C>                 <C>                 <C>                 <C>
Revenues                                                      $    --             $    --             $    --             $   2,250

Costs and expenses
     Research and development                                    20,256              24,320              27,214             116,569
     General and administrative                                   8,336              11,428              14,270              47,235
     Special charges                                               --                  --                 4,518               4,518
------------------------------------------------------------------------------------------------------------------------------------
         Total costs and expenses                                28,592              35,748              46,002             168,322
------------------------------------------------------------------------------------------------------------------------------------

Loss from operations                                            (28,592)            (35,748)            (46,002)           (166,072)

Interest and other income                                         2,179               6,534               5,913              21,181
Rental Income                                                      --                   659               1,467               2,126
Interest expense                                                   (204)             (1,088)             (1,109)             (2,855)
------------------------------------------------------------------------------------------------------------------------------------

Net loss                                                      $ (26,617)          $ (29,643)          $ (39,731)          $(145,620)
====================================================================================================================================

Basic and diluted net loss per
     common share                                             $   (2.19)          $   (1.48)          $   (1.85)
================================================================================================================

Weighted average shares used in
     computing basic and diluted net
     loss per common share                                       12,173              20,081              21,536
================================================================================================================

<FN>
                            (See accompanying notes )
</FN>
</TABLE>
                                                                              36

<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, 1997
                                                           (In thousands)

<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
                                                                                                   Unrealized   Deficit
                                                                                   Notes              Gain    Accumulated
                                                                                  Receiv-           (Losses)   During the   Total
                                                  Convertible          Additional  able   Deferred     on        Develop-    Stock-
                                                  Preferred   Common     Paid-in  Share-  Compen-   Marketable    ment     holders'
                                                    Stock      Stock     Capital  holders  sation   Securities    Stage     Equity
------------------------------------------------------------------------------------------------------------------------------------

<S>                                               <C>        <C>        <C>        <C>    <C>        <C>        <C>        <C>
Issuance of 508,867 shares of common stock        $   --     $      5   $    137   $--    $    (55)  $   --     $   --     $     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         --           36     48,950    --        --         --         --       48,986

Issuance of 5,250,000 shares of convertible
   preferred stock                                      53       --        5,272              --         --         --        5,325

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 stock-
   holders(at $1.75 per share) in May 1990,
   net of offering costs                                45       --        7,880    --        --         --         --        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)                                      (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    --        --         --         --           14

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)      --         --         --

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    --        --         --         --           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    --        --         --         --        2,835

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    --        --         --         --          177

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    --        --         --         --        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    --        --         --         --       11,790

Amortization of deferred compensation                 --         --          (12)   --         718       --         --          706

Unrealized gains (losses) on marketable
   securities                                         --         --         --      --        --         (670)      --         (670)

Net loss                                              --         --         --      --        --         --      (49,629)   (49,629)
------------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1994                          --          108     84,460    --        (101)      (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)       --            1        425    --        --         --         --          426

Issuance of 10,800 shares to employees at
   $14.00 per share                                   --         --          151    --        --         --         --          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    --        --         --         --       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                                     --           41     50,908    --        --         --         --       50,949

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

Amortization of deferred compensation                 --         --         --      --         101       --         --          101

Unrealized gains (losses) on marketable
   securities                                         --         --         --      --        --          358       --          358

Net loss                                              --         --         --      --        --         --      (26,617)   (26,617)
------------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1995                      $   --     $    165  $ 153,262   $--    $   (514)   $  (312) $ (76,246) $  76,355
</TABLE>
                                                                              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, 1997
                                                           (In thousands)
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
                                                                                                   Unrealized   Deficit
                                                                                   Notes              Gain    Accumulated
                                                                                  Receiv-           (Losses)   During the   Total
                                                  Convertible          Additional  able   Deferred     on        Develop-    Stock-
                                                  Preferred   Common     Paid-in  Share-  Compen-   Marketable    ment     holders'
                                                    Stock      Stock     Capital  holders  sation   Securities    Stage     Equity
------------------------------------------------------------------------------------------------------------------------------------

<S>                                               <C>        <C>        <C>        <C>     <C>       <C>        <C>        <C>
Balance at December 31, 1995
                                                  $  --      $   165    $153,262   $--     $  (514)  $   (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)                                        --            3       1,395    --       --         --         --         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                                    --           32      67,336    --       --         --         --        67,368

Conversion of 13,334 shares of convertible
   preferred stock into 1,333,400 shares
   of common stock                                   --           13        (357)   --       --         --         --          (344)

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

Amortization of deferred compensation                --         --         --       --         141      --         --           141

Unrealized gains (losses) on marketable
   securities                                        --         --         --       --       --           236      --           236

Net loss                                             --         --         --       --       --         --       (29,643)   (29,643)
------------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1996                         --        213       222,043    --        (780)       (76)  (105,889)   115,511

Issuance of 208,862 shares of common stock to
   employees and investors for cash under the
   stock option plan (from $0.23 to $.37
    per share)                                       --          2            74    --       --         --          --           76

Issuance of 71,582 shares to employees under
   employee savings and retirement plan
   (from $4.94 to $6.69 per share)                   --         --           427    --       --         --          --          427

Issuance of 370,000 shares to officers and
   employees for promissory notes under
   Shared Investment Program ($6.25 per share)       --          4         2,309 (2,313)     --         --          --         --

Forfeitures of deferred compensation                 --         --          (576)   --        576       --          --         --

Deferred compensation related to grant of
   certain stock options                             --         --           648    --        (648)     --          --         --

Amortization of deferred compensation                --         --         --       --         313      --          --          313

Unrealized gains (losses) on marketable
   securities                                        --         --         --       --       --            57       --           57

Net loss                                             --         --         --       --       --         --       (39,731)   (39,731)
------------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1997                      $  --     $  219      $224,925 $(2,313)  $  (539)  $    (19) $(145,620)  $ 76,653
====================================================================================================================================

<FN>
                                             (See accompanying notes)
</FN>
</TABLE>
                                                                              38

<PAGE>

<TABLE>

                                                     MATRIX PHARMACEUTICAL, INC.
                                                    (a development stage company)

                                                CONSOLIDATED STATEMENTS OF CASH FLOWS
                                          Increase (Decrease) in Cash and Cash Equivalents

<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
                                                                                                                       Period from
                                                                                                                        Inception
                                                                                                                       (February 11,
                                                                                                                         1985) to
                                                                                 For the Years Ended December 31,       December 31,
------------------------------------------------------------------------------------------------------------------------------------
                                                                                1995            1996           1997           1997
------------------------------------------------------------------------------------------------------------------------------------
<S>                                                                          <C>            <C>            <C>            <C>
Cash flows used in operating activities:
     Net loss                                                                $ (26,617)     $ (29,643)     $ (39,731)     $(145,620)
     Adjustments to reconcile net loss to net cash used
     by operating activities:
         Depreciation and amortization                                             946          1,051          1,142          5,609
         Amortization of deferred compensation                                     101            141            313          1,273
         Repurchase of marketing rights                                          2,000           (250)          (250)         1,500
         Other                                                                     154             83             72            500

     Changes in assets and liabilities:
         Other current assets                                                     (425)        (2,089)         1,663         (1,378)
         Deposits and other assets                                                   3             44           (418)          (600)
         Notes receivable from related parties                                    --             --           (1,350)        (1,350)
         Accounts payable                                                          356          1,031            164          2,800
         Accrued compensation                                                      513            201           (123)           922
         Deferred other income                                                    --             --            2,473          2,473
         Restructuring costs                                                      --             --            2,063          2,063
         Accrued clinical trial costs                                            1,476           (575)           549          1,788
         Other accrued liabilities                                                 138          1,471           (936)         1,199
------------------------------------------------------------------------------------------------------------------------------------
         Net cash (used for) operating activities                              (21,355)       (28,535)       (34,369)      (128,821)
Cash flows from investing activities:
     Capital expenditures                                                      (14,904)        (2,326)        (9,857)       (31,654)
     Investment in available-for-sale securities                               (14,796)      (189,548)       (31,100)      (381,983)
     Investment in held-to-maturity securities                                    --             --             --          (23,827)
     Proceeds from sale of available-for-sale securities                         5,480         95,219           --          221,101
     Maturities of investments                                                  12,647         21,734         65,000        123,708
------------------------------------------------------------------------------------------------------------------------------------
         Cash flows provided by (used for) investing activities                (11,573)       (74,921)        24,043        (92,655)
Cash flows from financing activities:
     Payments on debt and capital lease obligations                               (426)          (503)          (546)        (2,672)
     Issuance of convertible promissory note
         payable to stockholders                                                  --             --             --              400
     Net cash proceeds from issuance of:
         Debt and capital lease financing                                       10,408           --            9,950         22,835
         Preferred stock                                                           (46)          --             --           24,679
         Common stock                                                           68,391         68,422            503        195,953
------------------------------------------------------------------------------------------------------------------------------------
         Cash flows provided by financing activities                            78,327         67,919          9,907        241,195
Net increase (decrease) in cash and cash equivalents                            45,399        (35,537)          (419)        19,719
Cash and cash equivalents at the beginning of period                            10,276         55,675         20,138           --
------------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at the end of period                               $  55,675      $  20,138      $  19,719      $  19,719
====================================================================================================================================
Supplemental schedule of noncash investing and
financing activities:
     Notes receivable from shareholders in exchange
          for capital stock                                                  $    --        $    --        $   2,313      $   2,313
     Financing of capital equipment                                               --             --              943            943
     Issuance of stock upon conversion of
         promissory notes payable to stockholders                                 --             --             --              425
====================================================================================================================================
Supplemental disclosure of cash flow information:
         Interest paid                                                       $     204      $   1,088      $   1,229      $   2,975
====================================================================================================================================
<FN>
                            (See accompanying notes)
</FN>
</TABLE>
                                                                              39

<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  development  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 subsequent to 1995, by
long-term debt. The Company  anticipates that its existing and committed capital
resources will enable it to maintain its planned operations through 1999.

Principles of consolidation.  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.  In 1997, the Financial  Accounting  Standards  Board issued
Statement of Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS
128").  SFAS 128 replaced the calculation of primary and fully diluted per share
data with basic and diluted per share data. Unlike primary per share data, basic
per  share  data  excludes  any  dilutive  effects  of  options,   warrants  and
convertible securities. Diluted per share data is very similar to the previously
reported  fully  diluted per share data.  All per share  amounts for all periods
have been presented, and where appropriate,  restated to conform to the SFAS 128
requirements.

         Net loss per common share is computed using the weighted average number
of common shares  outstanding.  Common  equivalent shares from stock options and
warrants are not included in the per share calculations  because their inclusion
would be antidilutive.

Cash and cash equivalents,  short-term investments, and non-current investments.
The Company invests its excess cash in government and corporate debt 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.

                                                                              40

<PAGE>

         The  Company   determines  the  appropriate   classification   of  debt
securities at the time of purchase and reevaluates  such  designation as of each
balance sheet date. 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.  Realized  gains and  losses and
declines in value judged to be other-than-temporary are included in interest and
other  income.   The  cost  of   securities   sold  is  based  on  the  specific
identification method.

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,  existing and new 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.

Long-term  obligations.  The carrying amounts of the loan and installment  notes
(note 6) approximates their fair value.

Stock based compensation.  Statement of Financial  Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" ("SFAS 123"), 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" ("APB 25"), 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 12 to
the  Consolidated  Financial  Statements  contains  a  summary  of the pro forma
effects to reported net loss and per share data for 1995,  1996,  and 1997 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 123.

New Accounting Pronouncements.  In June 1997, the Financial Accounting Standards
Board  issued the  Statement  of  Financial  Accounting  Standard No. 130 ("SFAS
130"), "Reporting  Comprehensive Income," which the Company is required to adopt
for its fiscal year ended December 31, 1998.  This  Statement  requires that all
items  that  are  required  to  be  recognized  under  accounting  standards  as
components of comprehensive  income be reported in a financial statement that is
displayed with the same prominence as other financial statements.  In June 1997,
the  Financial  Accounting  Standards  Board  issued the  Statement of Financial
Accounting  Standard No. 131 ("SFAS  131"),  "Disclosures  about  Segments of an
Enterprise and Related  Information," which the Company is required to adopt for
its fiscal year ended December 31, 1998.  This Statement  establishes  standards
for the way that public business  enterprises report information about operating
segments in annual financial  statements and in interim financial reports issued
to stockholders.  It also establishes  standards for related  disclosures  about
products and services,  geographic  areas, and major  customers.  Both standards
will require additional disclosures,  but will not have a material effect on the
Company's financial position, cash flows or results of operations.

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 these estimates.

                                                                              41
<PAGE>


<TABLE>
2. FINANCIAL INSTRUMENTS

         The following is a summary of available-for-sale securities:

<CAPTION>
(In thousands)                                                   Available-For-Sale Securities
-------------------------------------------------------------------------------------------------------------------
                                                                          Gross            Gross         Estimated
                                                                     Unrealized       Unrealized              Fair
December 31, 1997                                        Cost             Gains           Losses             Value
-------------------------------------------------------------------------------------------------------------------

<S>                                                 <C>                   <C>            <C>             <C>
U.S. government securities                          $  38,490             $  76          $   18          $  38,548
Certificates of deposit                                25,099                 1              17             25,083
Commercial paper                                       13,300               -                 -             13,300
Master notes                                            1,687               -                 -              1,687
Repurchase agreements                                     338               -                 -                338
-------------------------------------------------------------------------------------------------------------------
                                                    $  78,914             $  77          $    35         $  78,956
===================================================================================================================

(In thousands)                                                Available-For-Sale Securities
-------------------------------------------------------------------------------------------------------------------
                                                                          Gross            Gross         Estimated
                                                                     Unrealized       Unrealized              Fair
December 31, 1996                                        Cost             Gains           Losses             Value
-------------------------------------------------------------------------------------------------------------------

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>

         Included  in cash  equivalents  at  December  31,  1997  and  1996  are
$18,307,000 and $18,953,000, respectively, 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.

         No securities were sold during 1997. During the year ended December 31,
1996,  the  Company  sold  available-for-sale  securities  with a fair  value of
$46,000,000.  The gross realized gain on such sales totaled $117,000 in 1996. 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.

                                                                              42

<PAGE>


<TABLE>
The cost and  estimated  fair value of debt  securities at December 31, 1997, 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.


<CAPTION>
(In  thousands)                                                              Available-for-Sale Securities
-------------------------------------------------------------------------------------------------------------------
                                                                                                         Estimated
December 31, 1997                                                                  Cost                 Fair Value
-------------------------------------------------------------------------------------------------------------------

<S>                                                                           <C>                        <C>
Due in one year or less                                                       $  58,914                  $  58,973
Due after one year through five years                                            20,000                     19,983
-------------------------------------------------------------------------------------------------------------------
                                                                              $  78,914                  $  78,956
===================================================================================================================
</TABLE>


3.  REPURCHASE OF MARKETING RIGHTS

         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.  As of December 31, 1997 the obligation has a balance of
$1,500,000  and is included in current and long term  obligations on the balance
sheet.

<TABLE>
4.   INVENTORY

         Inventory,  which is included in other assets in 1996, 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.

         During 1997, the Company recorded additional AccuSite product inventory
of  $1,000,000  increasing  the  balance to  $1,700,000,  of which a reserve was
established  at  $500,000  during  the  second  quarter  of  1997  based  on the
expiration  date of the  shelf  life for the  AccuSite  product.  The  remaining
balance of  $1,200,000  was written off in the third quarter of 1997 as a result
of the suspension of the AccuSite program.

<CAPTION>
(In  thousands)
----------------------------------------------------------------------------------------------------------------

December 31,                                                                       1996                   1997
----------------------------------------------------------------------------------------------------------------

<S>                                                                            <C>                     <C>
Finished goods                                                                 $      -                $      -
Work in process                                                                     440                       -
Raw material                                                                        318                       -
----------------------------------------------------------------------------------------------------------------

Total Inventory                                                                  $  758                $      -
================================================================================================================
</TABLE>
                                                                              43

<PAGE>

<TABLE>

5.  PROPERTY AND EQUIPMENT

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

<CAPTION>
(In thousands)
-----------------------------------------------------------------------------------------------------------------

December 31,                                                           1996                                 1997
-----------------------------------------------------------------------------------------------------------------

<S>                                                            <C>                                <C>
Land                                                           $      4,258                       $        4,258
Building                                                              6,928                               13,872
Laboratory and operating equipment                                    4,234                                7,219
Office and computer equipment                                         2,462                                3,413
Leasehold improvements                                                2,890                                1,790
Manufacturing start-up costs                                            490                                  490
Construction in progress                                                265                                    -
-----------------------------------------------------------------------------------------------------------------
                                                                     21,527                               31,042
Less accumulated depreciation and amortization                       (4,375)                              (4,300)
-----------------------------------------------------------------------------------------------------------------
Net property and equipment                                     $     17,152                       $       26,742
=================================================================================================================
</TABLE>

         In December  1995, the Company  purchased a research and  manufacturing
facility in San Diego,  California for $13,100,000.  The facility includes land,
building and related improvements,  equipment, furniture, and an adjacent parcel
of land. As of December 31, 1997, approximately $8,400,000 has been incurred for
validation and process  installation  investments which are included in building
and laboratory and operating equipment.

         Leasehold   improvement   balances  as  of  December   31,1997  exclude
$1,100,000  of  fully  depreciated   leasehold   improvements  pursuant  to  the
termination of the lease agreement for the Menlo Park facility.

         The Company  refinanced several of its existing operating leases in the
fourth  quarter  1997.  As the new  leases  were  recorded  as  capital  leases,
additional  laboratory and operating equipment and office and computer equipment
of $900,000,  together  with a  corresponding  capital  lease  obligation,  were
recorded as of December 31, 1997.

6.  DEBT AND CAPITAL LEASE OBLIGATIONS

         Asset  purchased  under  debt  (installment  notes)  or  capital  lease
financing  arrangements consist of building and related improvements,  leasehold
improvements,  laboratory,  operating, office and computer equipment with a cost
of  approximately  $15,838,000  and  $16,749,000  at December 31, 1996 and 1997,
respectively.  Accumulated  depreciation  of these assets totaled  approximately
$2,478,000  and  $2,772,000  at December  31, 1996 and 1997,  respectively.  The
weighted  average  interest rate for debt and capital lease  obligations in 1997
was 9.90%.

         In  October  1997,  the  Company  entered  into a five  year  equipment
financing  agreement for  $10,000,000.  The loan bears 9% interest per annum and
matures in 2002.  The agreement is secured by all of the equipment  purchased by
the Company between October 21, 1995 and March 31, 1998.

                                                                              44

<PAGE>

         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.

<TABLE>
         Future principal  payments under  installment  notes and minimum future
payments under capital leases, are as follows at December 31, 1997:

<CAPTION>
(In thousands)
--------------------------------------------------------------------------------------------------------------------
                                                                                 Capital
                                                        Installment               Lease
Years ending December 31,                                  Notes               Obligations                 Total
--------------------------------------------------------------------------------------------------------------------

<S>                                                      <C>                   <C>                      <C>
1998                                                     $      3,476          $       754              $     4,230
1999                                                            3,563                  568                    4,131
2000                                                            3,474                   26                    3,500
2001                                                            2,974                   26                    3,000
2002                                                            6,233                   26                    6,259
Thereafter                                                     12,321                    -                   12,321
--------------------------------------------------------------------------------------------------------------------
                                                               32,041                1,400                   33,441
Less amount representing interest                              10,765                  145                   10,910
--------------------------------------------------------------------------------------------------------------------
Present value of net minimum payments                          21,276                1,255                   22,531
Current portion                                                 1,631                  652                    2,283
--------------------------------------------------------------------------------------------------------------------
Amounts due after one year                               $     19,645          $       603              $    20,248
====================================================================================================================
</TABLE>

7. LEASE COMMITMENTS

         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
leases a  facility  in the  United  Kingdom.  Rent  expense  under  all of these
arrangements  was  approximately  $1,422,000 in 1995,  $1,610,000  in 1996,  and
$1,764,000  in  1997.  Rental  commitments  under  the  building  and  equipment
operating leases are as follows at December 31, 1997:

(In  thousands)
-----------------------------------------------------------------------------
Years ending December 31,                                               Total
-----------------------------------------------------------------------------

1998                                                             $      1,290
1999                                                                      789
2000                                                                      646
2001                                                                      669
2002                                                                      699
Thereafter                                                             10,234
-----------------------------------------------------------------------------
Total minimum lease payments                                     $     14,327
=============================================================================

                                                                              45

<PAGE>

         During  September  1997,  the Company's  management  suspended  further
development and  commercialization of AccuSite after being notified that the FDA
did not  approve  AccuSite as a treatment  for  genital  warts.  Pursuant to the
restructuring  plan which was  established  in the third  quarter  of 1997,  the
Operations  group  relocated  to  the  San  Diego  facility  from  its  Northern
California facilities during the fourth quarter of 1997.

         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.

8. SPECIAL CHARGES

         Pre-tax  special  charges of $4,518,000  were recorded during the third
quarter of fiscal  1997 in  connection  with the  decision  to  suspend  further
development and commercialization of AccuSite. Management suspended the AccuSite
program after being notified that the FDA is not prepared to approve AccuSite as
a treatment  for genital  warts.  In September  1997,  restructuring  costs were
accrued to conclude the clinical trials and commercial  programs associated with
AccuSite.   Pursuant  to  the  plan,  the  Company   reduced  its  workforce  by
approximately 63 employees, of which 46 positions related to manufacturing,  for
a total  severance  package of  $1,478,000.  Additional  expenses  included  the
write-off  of  inventory  related to  AccuSite  of  $1,245,000,  costs  totaling
$1,194,000  associated with the shut down of Northern California  facilities and
write-off  of  manufacturing  equipment,  the  closing of  clinical  trials with
respect to AccuSite of $414,000,  and sales and marketing costs  associated with
AccuSite of  $187,000.  At December  31,  1997,  $2,063,000  remained in current
liabilities  of which  accruals  for  future  cash  payments  was  approximately
$1,500,000.

9. LITIGATION

         On December 21, 1994, Collagen Corporation ("Collagen") filed a lawsuit
against  the   Company  in  Santa   Clara   County   Superior   Court   alleging
misappropriation of trade secrets concerning the Company's manufacturing process
for collagen and seeking  unspecified damages and injunctive relief. The Company
denied all allegations of the complaint and subsequently filed a cross-complaint
against  Collagen  and Howard  Palefsky,  Collagen's  former  Chairman and Chief
Executive Officer,  seeking recovery of damages for defamation and violations of
state law unfair competition.

         On May 23,  1997,  the  lawsuit  between  the  parties  was  settled on
mutually agreeable terms and dismissed with prejudice. All claims by and against
all parties have been released. Matrix agreed that for a period of five years it
shall not  manufacture or sell products  directly  competitive  with  Collagen's
current core products.  Collagen has granted Matrix a  non-exclusive  license to
certain Collagen intellectual property for certain non-monetary consideration.

10. DEFERRED OTHER INCOME

         In June 1997,  the Company  received  $2,800,000 as part of a five year
non-compete  agreement.  This  amount  is  amortized  to other  income  over the
duration of the  agreement.  At December  31,  1997,  the  remaining  balance of
$2,473,000 was included in other accrued  liabilities  and deferred other income
in current liabilities and long-term obligations, respectively.

                                                                              46

<PAGE>

11. STOCKHOLDERS' EQUITY

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 rights 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, 1997, 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,  $16,800,000  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 $50,900,000 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 $67,400,000 to the Company.

Shared Investment  Program.  In March 1997, the Board of Directors  authorized a
special risk sharing  arrangement  designated as the Shared  Investment  Program
("the Program").  Under the Program,  the Company's executive officers and other
key managerial personnel were given the opportunity to purchase shares of Common
Stock in an individually  designated  amount per  participant  determined by the
Committee of the Board of Directors.  A total of 370,000  shares were  purchased
under the Program by nine eligible employees at $6.25 per share, the fair market
value of the Common Stock on June 25, 1997,  for an aggregate  consideration  of
$2,312,500.  The purchase price was paid through the participant's delivery of a
full-recourse  promissory note payable to the Company.  Each note bears interest
at 6.69%  compounded  semi-annually  and has a maximum  term of nine years.  The
notes are  secured by a pledge of the  purchased  shares with the  Company.  The
Company  recorded  notes  receivables  from  participants  in this  program  for
$2,312,500 in the equity section in the Consolidated Balance Sheet.

12. STOCK OPTION PLANS

1991  Directors  Stock Option Plan.  The Board of Directors  adopted a Directors
Stock Option Plan (the "Directors Plan") in 1991. Under the Directors Plan, each
individual who first becomes a non-employee  member of the Board of Directors is
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.  In May 1994,  an
additional  200,000 shares were reserved for issuance  pursuant to the Directors
Plan. In March 1997,  the Board amended the Directors Plan which was approved by
stockholders at the annual stockholders' meeting in June 1997. Under the amended
Directors Plan, an additional 250,000 shares were reserved for issuance pursuant
to the Directors Plan, and allow each outstanding  option held by a board member
on January 1, 1997 and each subsequently granted option to remain outstanding as
to any vested option shares for the full 10-year option term, whether or not the
optionee continues to serve on the board. The maximum number of shares which may
be issued  under the  automatic  option  grant  program  is 592,858  shares.  At
December 31, 1997, the total number of common shares reserved for issuance under
director's  stock  options was 592,858,  of which 243,033  remain

                                                                              47

<PAGE>

available for grant. At December 31, 1997, options to purchase 208,967 shares of
common stock under the Directors 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.  In June 1997,  an additional
2,000,000  shares were  reserved for issuance  pursuant to the Plan. At December
31,  1997,  the total  number of  common  shares  reserved  for  issuance  under
restricted  stock options was 3,911,030 of which 1,443,775  remain available for
grant.

<TABLE>
Activity under the Restricted Stock Plan is as follows:

<CAPTION>
                                                            Purchase                                         Weighted
                                                           rights and                                         average
                                         Shares              options                                         exercise
                                        available          outstanding             Price per share            price**
                                       ------------        ------------        -----------------------       ----------

<S>                                     <C>                  <C>                <C>         <C>               <C>
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

Additional authorization                 2,000,000                  -
Restricted stock awards                   (185,000)                 -
Grants of options and purchase rights   (3,030,584)          3,030,584          $   3.50 -  $    6.69         $   4.37
Exercise of options and purchase
   rights                                        -            (208,862)         $    .23 -  $     .37         $    .36
Forfeitures                              2,411,103          (2,411,103)         $   3.94 -  $   21.00         $   7.36
                                       ------------        ------------        -----------------------       ----------
Balances at December 31, 1997            1,443,775           2,282,255          $    .23 -  $   15.00         $   4.13
                                       ============        ============

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

         At December  31,  1997,  options to purchase  350,279  shares of common
stock were exercisable at a weighted-average  exercise price of $4.67 per share.
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.

                                                                              48
<PAGE>

<TABLE>

         Exercise prices for options  outstanding as of December 31, 1997 ranged
from $0.23 to $15.00 per share. The weighted-average  remaining contractual life
of those options is 9.6 years. Ranges of exercise price for 1997 are as follows:
<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>           <C>
 $    0.23  -   $     0.37          139,434         $    0.35                 4.4          139,434       $     0.35
 $    0.38  -   $     3.94        1,946,361         $    3.94                 9.9           74,224       $     3.94
 $    3.95  -   $    15.00          196,460         $    8.65                10.6          136,621       $     9.47
                               -------------       -----------      --------------    -------------    -------------
                                  2,282,255         $    4.13                 9.6          350,279       $     4.67
                               =============       ===========      ==============    =============    =============
</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 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.

         On October 29, 1997,  the Board of Directors  approved a resolution  to
offer eligible employees,  including  executive officers,  holding stock options
granted under the Plan, the opportunity to exchange their existing stock options
for new options at the then current  fair market  value of $3.94 per share.  The
resolution  maintains  the same  vesting  schedule  for  unvested  shares as was
applicable for the existing stock options,  but increases the service period for
those shares  previously  vested.  Vested existing options exchanged for the new
options will vest 50% after six months and 50% after one year.

         The Company applies APB 25, "Accounting for Stock Issued to Employees."
Pro forma  information  regarding  net loss per share is  required  by SFAS 123,
"Accounting  for  Stock-Based  Compensation,"  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, 1996, and 1997 under SFAS
123 with the following  assumptions:  dividend  yield of zero % for three years,
volatility factors of 0.62 for 1995, 0.66 for 1996, and 0.56 for 1997, risk-free
interest rate of 6.1% for 1995, 6.2% for 1996 and 1997,  assumed forfeiture rate
of 6.4% for 1995 and 1996,  and 10.57%  for 1997,  and an  expected  life of 4.0
years for all three years.

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

                                                                              49
<PAGE>


<TABLE>

         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 loss and  earnings  per share for 1995,  1996,  and 1997  would have been as
follows:
<CAPTION>

-----------------------------------------------------------------------------------------------------------------------
                                                                        For the Years ended December 31,
(In thousands)                                                   1995                1996                  1997
-----------------------------------------------------------------------------------------------------------------------
<S>                                                          <C>                  <C>                      <C>
Net loss - as reported                                       $     (26,617)       $     (29,643)           $  (39,731)

Net loss - pro forma                                         $     (26,761)       $     (30,706)           $  (41,006)

Basic and diluted net loss per share - as reported           $       (2.19)       $       (1.48)           $    (1.85)

Basic and diluted net loss per share - pro forma             $       (2.20)       $       (1.53)           $    (1.90)

</TABLE>


         The weighted average fair value of options granted at fair market value
during  1995,  1996,  and  1997,  is  estimated  at  $6.98,  $5.73,  and  $2.23,
respectively  on the date of grant.  The weighted  average of options granted at
below fair market  value  during 1995,  1996,  and 1997,  is estimated at $7.56,
$7.39, and $2.19, 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 1999.

13. INCOME TAXES

         As of  December  31,  1997,  the  Company  had  federal  and  state net
operating loss  carryforwards  of  approximately  $140,600,000  and  $13,100,000
respectively.  The Company also had federal  research and development tax credit
carryforwards  of approximately  $3,200,000.  The federal net operating loss and
credit  carryforwards  will expire at various  dates  beginning in the year 2000
through 2012, if not utilized. The state of California net operating losses will
expire at various dates beginning in 1998 through 2003, 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.

         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
                                                                              50
<PAGE>

<TABLE>
components  of the  Company's  deferred  tax assets for federal and state income
taxes for the years ended December 31, 1995, 1996, and 1997 are as follows:
<CAPTION>

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

At December 31,                                                       1995                1996                   1997
----------------------------------------------------------------------------------------------------------------------
<S>                                                            <C>                 <C>                   <C>
Deferred tax assets
     Net operating loss carryforwards                          $    25,500         $    35,000           $    48,600
     Research credits                                                2,700               3,500                 4,900
     Capitalized research expenses                                   3,800               5,300                 6,700
     Other                                                             900               1,900                 3,300
----------------------------------------------------------------------------------------------------------------------

     Total deferred tax assets                                 $    32,900         $    45,700           $    63,500
     Valuation allowance for deferred tax assets                   (32,900)            (45,700)              (63,500)
----------------------------------------------------------------------------------------------------------------------
Net deferred tax assets                                        $      --           $      --             $      --
======================================================================================================================
</TABLE>

         The net valuation allowance  increased by $13,000,000,  $12,800,000 and
$17,800,000 in 1995, 1996, and 1997, respectively.

14. RELATED PARTIES

         During the years ended December 31, 1997, 1996, and 1995, legal fees of
approximately $2,816,200, $1,843,100, and $1,494,700, 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, 1997 and 1996,  amounts owed to
Brobeck, Phleger, & Harrison were $111,800 and $387,300, respectively.

         In 1997,  a director of the Company  received  $750,000 in exchange for
promissory  notes secured by a deed of trust. The notes bear an interest rate of
7% per annum and are due in 1998.  During 1997, two officers  received  $100,000
and $500,000,  respectively,  in exchange for  non-interest  bearing  promissory
notes secured by deeds of trust.

         In March 1997, the Board of Directors authorized a special risk sharing
arrangement  designated as the Shared Investment Program ("the Program").  Under
the Program, the Company's executive officers and other key managerial personnel
were given the opportunity to purchase shares of Common Stock in an individually
designated  amount per  participant  determined by the Committee of the Board of
Directors.  A total of 370,000 shares were  purchased  under the Program by nine
eligible employees at $6.25 per share, the fair market value of the Common Stock
on June 25, 1997, for an aggregate consideration of $2,312,500.

15. 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 Board of Directors  approved a matching  contribution under the
Company's 401 (k) plan. Under this program,  retroactive to January 1, 1996, the
Company made 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. At the end of each quarter, the Company issues new shares of its common
stock, using the fair market value, for its matching


                                                                              51

<PAGE>

contribution.  Company matching  contributions were $71,000 and $424,000 in 1996
and 1997, respectively.

16. SUBSEQUENT EVENT (UNAUDITED)

         In March 1998, the Company entered into an agreement with a real estate
investment  trust  for the sale and  leaseback  of its San  Diego  manufacturing
facility structured as an $18,600,000 purchase and a $6,000,000 convertible loan
secured by specific manufacturing related building improvements. The lease has a
term of  thirteen  years with the option to renew up to 25 years.  Net cash from
the lease and loan  agreement,  after the payment of the  existing  mortgage and
escrow and other related fees, totals approximately $14,000,000 and will be used
to fund operating expenses and capital purchases.

                                                                              52


<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, 1996 and
1997,  and the related  consolidated  statements  of  operations,  stockholders'
equity and cash flows for each of the three years in the period  ended  December
31, 1997 and for the period from  inception  (February 11, 1985) to December 31,
1997.  These  financial  statements  are  the  responsibility  of the  Company's
management.  Our  responsibility  is to express  an  opinion on these  financial
statements based on our 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, 1996 and
1997,  and the  results of its  operations  and cash flows for each of the three
years in the period ended  December  31, 1997 and for the period from  inception
(February 11, 1985) to December 31, 1997, in conformity with generally  accepted
accounting principles.


                                                    Ernst & Young LLP


Palo Alto, California
January 23, 1998
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