SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                    FORM 10-K

                        For Annual and Transition Reports
                     Pursuant to Sections 13 or 15(d) of the
                       Securities and Exchange Act of 1934


[ 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

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

              For the transition period from            to

                           Commission File No. 0-19731

                          Shaman Pharmaceuticals, Inc.
             (Exact name of registrant as specified in its charter)
              Delaware                                  94-3095806
      (State or other jurisdiction of       (IRS Employer Identification Number)
      incorporation or organization)

   213 East Grand Avenue, South San Francisco, California          94080
      (Address of principal executive offices)                   (ZIP Code)

Registrant's telephone number, including area code:    650-952-7070

SECURITIES REGISTERED PURSUANT TO SECTION 12 (b) OF THE ACT:    NONE

SECURITIES REGISTERED PURSUANT TO SECTION 12 (g) OF THE ACT:

                          COMMON STOCK $.001 PAR VALUE
                                (Title of Class)

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 (Section 229.405 of this chapter) is not contained herein, and
will not be  contained,  to the best of  registrant's  knowledge,  in definitive
proxy or information  statements  incorporated  by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [ ]

The  aggregate  market value of the voting stock held by  non-affiliates  of the
Registrant  based upon the closing sales price of the Common Stock on the Nasdaq
National Market on February 27, 1998 was $86,810,345.*

The number of shares of the Registrant's Common Stock outstanding was 17,856,477
as of February 27, 1998.

                       DOCUMENTS INCORPORATED BY REFERENCE

Portions of Registrant's  Definitive Proxy Statement filed with the Commission 
pursuant to Regulation  14A in  connection  with  the  Company's  1998  Annual  
Meeting  are incorporated herein by reference into Part III of this Report.

---------------
    *Excludes 494,408 shares of the Registrant's  Common Stock held by executive
officers,  directors and affiliated  parties at February 27, 1998.  Exclusion of
such shares should not be construed to indicate  that any such person  possesses
the  power,  direct  or  indirect,  to  direct  or cause  the  direction  of the
management or policies of the Registrant or that such person is controlled by or
under common control with the Registrant.


<PAGE>






                           
                                    PART I
ITEM 1.  BUSINESS

    In addition to historical  information,  this report  contains  predictions,
estimates and other  forward-looking  statements  that involve a number of risks
and  uncertainties  that are  described  more fully in "Item 1 - Risk  Factors."
While this outlook  represents our current  judgment on the future  direction of
the business,  these risks and  uncertainties  are only some of the factors that
may ultimately affect the success of Shaman Pharmaceuticals, Inc. Actual results
may differ materially from any future performance suggested in this report.

The Company

     Shaman  is  a  leader  in  the  identification  and  development  of  novel
pharmaceutical  products  for  the  treatment  of  human  diseases  through  the
isolation and  optimization of active  compounds found in tropical  plants.  The
Company  believes  that by focusing on drugs  extracted  from plants with a long
history of medicinal  use, its drug  discovery  efforts will be quicker and more
likely to lead to safe and effective pharmaceuticals.  Shaman has human clinical
trials underway for its three lead product candidates: Provir, nikkomycin Z, and
SP-134101.  Shaman has completed Phase II trials showing efficacy for Provir for
the treatment of  AIDS-associated  and watery diarrhea.  In the first quarter of
1998,  Provir is scheduled to enter a pivotal  Phase III trial for the treatment
of diarrhea in  patients  with AIDS.  This single  study,  upon  completion,  is
intended  to serve as the basis  for the  submission  of a New Drug  Application
("NDA") with the U.S. Food and Drug Administration ("FDA"). With success, Provir
for diarrhea in patients with AIDS will become the first product  commercialized
by Shaman. Two additional  dose-optimizing  Phase II trials for Provir in watery
diarrhea  commenced  in 1997.  These  trials are intended to be completed in the
first half of 1998 and, if successful, will lead to Phase III trials.

    Nikkomycin Z, an orally-active  product for the treatment of endemic mycoses
and other  systemic  fungal  infections,  completed a Phase I trial in the UK in
1997, and the Company filed an Investigational  New Drug application  ("IND") in
the United States in December 1997. The Company  intends to continue  multi-dose
Phase I testing of this compound.

    Shaman's research and preclinical  development is principally focused on the
identification  and  optimization  of compounds to treat Type II (adult onset or
non-insulin dependent) diabetes, an effort that has led to the identification of
21 chemically distinct,  orally-active compounds which have demonstrated glucose
lowering effects in preclinical animal testing. In October 1997, Shaman filed an
IND for SP-134101,  an oral product for the treatment of Type II diabetes.  This
first product to emerge from the diabetes  discovery  program  entered  clinical
trials in January 1998.  Significant  funding, as well as milestone payments for
this  program,   are  provided  through   collaborations  with  Lipha,  s.a.,  a
wholly-owned subsidiary of Merck KGaA, Darmstadt,  Germany ("Lipha/Merck"),  and
Ono Pharmaceutical Co., Ltd. ("Ono").

Background

    Shaman builds on the knowledge and expertise of ethnobotanist  and physician
teams who work with traditional healers to identify effective treatments for the
therapeutic areas targeted by the Company.  These teams gather  comparative data
on traditional  medicinal uses of plants from  geographically  diverse  tropical
areas and prioritize  plant drug  candidates  based on common use among cultures
and other factors,  including cross-checking  field-derived  information against
the  results of  literature  searches as to  chemical  constituents,  previously
discovered  biological  activity  and  other  reported  medicinal  uses.  Shaman
isolates and identifies the active  compounds from plant extracts by testing for
activity in whole animal models at each step of its  purification  process.  The
Company's  


                                       2
<PAGE>

natural product  chemists use  chromatography,  spectroscopy,  nuclear  magnetic
resonance  ("NMR")  and  other  proven  technologies  to  identify  and  isolate
compounds  and  structures.  Because  these  compounds  reflect  the  previously
untapped plant diversity of the rain forests, they have, to date, also exhibited
significant  diversity of chemical structure.  In addition,  the Company's whole
animal screening  approach provides the opportunity to discover novel methods of
treatment for diseases in which the underlying  mechanism of action of a disease
is complicated and not well understood.

The Shaman Strategy

    Shaman's  strategy is to employ a drug discovery process focused on diseases
     that:

      o     appear to result from  multiple and, in many cases,  unknown  causes
            and  therefore  may not be  amenable  to a  targeted  in vitro  drug
            discovery process;

      o     occur in the rain forests and are readily  recognized and treated by
            traditional  healers (e.g., foot ulcers,  sweet urine, poor eyesight
            and fungal infections are often predictive of Type II diabetes); and

      o     allow the plant extract  treatment to be confirmed in a whole animal
            model and then purified to isolate the active compound.

    Shaman believes this drug discovery process provides it with the opportunity
     to:

      o     identify  novel  methods of  treating  diseases  with  therapeutic
            relevance;

      o     discover  new  chemical  entities or new classes of  compounds  to
            treat disease; and

      o     provide early confirmation of efficacy and safety.

    Shaman intends to commercialize its products through licensing  arrangements
when safety and efficacy have been  demonstrated  in humans.  Shaman  intends to
out-license  broad  applications  of its products  worldwide while retaining the
opportunity  to  directly  access  markets  through  niche  applications  and/or
co-promotion.


                                       3
<PAGE>



Clinical and Research Programs

    Shaman has  established  and is  continuing  to build a portfolio of product
candidates.  The following table describes the major  therapeutic areas in which
the Company is conducting its product development and research:

<TABLE>
<CAPTION>

Product         Indication          Status                    Commercial Rights
-------         ----------          ------                    -----------------
<S>             <C>                 <C>                       <C>    
Provir          AIDS-associated     Entering Phase III        Shaman
                 diarrhea           pivotal study-
                                    Q1, 1998. Completed a
                                    Phase II efficacy
                                    study in Q4, 1997

Provir          Watery diarrhea     Commenced two Phase II    Shaman
                                    dosing trials in Q3 &
                                    Q4, 1997.  Completed
                                    initial Phase II
                                    efficacy studies in
                                    1996 & 1997

Provir          Pediatric           Formulation under         Shaman
                 diarrhea           development 

Nikkomycin Z    Endemic mycoses     Completed Phase I study   Shaman
                                    in Q2, 1997; multi-dose      
                                    Phase I study scheduled 
                                    in 1998

Nikkomycin Z    Azole-resistant     Initiation pending        Shaman
 and Azoles      Candida            pre-clinical development
                                    by Pfizer

SP-134101       Type II Diabetes    Initiated Phase I study   Shaman
                                    in Q1, 1998

Oral            Type II Diabetes    Preclinical               Ono; Lipha/Merck;
 antihyperglycemic                                            and Shaman. Shaman
 compounds                                                    receives royalties
                                                              on sales outside
                                                              the U.S. and 
                                                              profit sharing in 
                                                              the U.S.

</TABLE>

Provir

      The  Shaman-patented  compound SP-303 is the active  ingredient in Provir.
SP-303 is extracted from the latex of the Croton tree, which grows abundantly in
Latin  America.  This latex is used  orally by many native  cultures  throughout
Latin  America  for a  variety  of  medicinal  purposes,  including  respiratory
infections and gastrointestinal  problems. Provir is an oral drug that acts as a
specific  inhibitor  of  fluid  loss  via an  antisecretory  mechanism  to treat
diarrhea.  In  clinical  trials,  the  Company  determined  that  Provir  is not
systemically  absorbed,  which lessens the potential for drug  interactions  and
side effects.

     Provir has demonstrated initial indications of activity for diarrhea in
patients with AIDS.  Based upon  successful  Phase II study results  released in
October  1997 in AIDS  patients  with  diarrhea,  Provir is scheduled to enter a
Phase  III  trial in this  population  during  the  first  quarter  of 1998.  If
successful,  this  single  study will serve as the basis for an NDA  submission
that the Company is currently targeting for 1999.

      Shaman has also completed Phase II trials showing preliminary efficacy for
Provir for the treatment of watery diarrhea.  However,  in October 1997, interim
results from one  outpatient  study in mild  non-specific  diarrhea did not show
significant  efficacy  and the  trial was  discontinued.  To  further  determine
Provir's effect in other more severe diarrheas, two additional dose-optimization
Phase II trials in  moderate-to-severe  traveler's  and  inpatient  acute watery
diarrhea are currently underway.

Diarrhea in Patients with AIDS/HIV

     Diarrhea  in patients  with HIV and AIDS is a  devastating  syndrome  which
afflicts  between  20% and 60% of  patients.  Even given the success of protease
inhibitors and triple anti-HIV regimens in

                                       4
<PAGE>

improving  patient  prognosis,  the  problem  of  diarrhea  continues  and   has
emerged as a major  medical and quality of life  problem as patients  attempt to
live a normal lifestyle.  Unfortunately,  current symptomatic  therapies provide
either poor relief or bring with them the burden of  unacceptable  side effects.
Hence,  this population faces a serious unmet medical need. In the face of these
problems,  patients  with  chronic  diarrhea  have been  forced  to alter  their
lifestyle to accommodate this disruption in the activities of daily life.

    Provir is  currently  being  developed  for the  treatment  of  diarrhea  in
patients with AIDS. A recently  completed (October 1997) Phase II study enrolled
AIDS patients with chronic diarrhea.  Patients were randomized to receive either
SP-303 500 mg or placebo  given every six hours  (q6h) for four days.  Fifty-one
patients (26 received  SP-303,  25 received  placebo) were available to evaluate
drug efficacy.  There were no significant differences between the treatment arms
with respect to any of the baseline  demographic  variables examined.  Of the 51
fully evaluable patients,  48 (94.1%) had no identifiable pathogen isolated from
their screening stool sample (culture and microscopic examination).
    
     Treatment with SP-303 was well  tolerated with no imbalance  between groups
in  the  occurrence  of  adverse  events  or  in  treatment-emergent  laboratory
abnormalities,  and all were considered mild in nature.  At day four, the SP-303
treated group  demonstrated a mean reduction from baseline stool weight of 451.3
grams  per 24 hours as  compared  to 150.7  grams  per 24 hours in the  patients
receiving placebo.  In addition,  abnormal stool frequency decreased from a mean
of 5.2 per 24 hours at baseline to 2.2 per 24 hours in the Provir-treated group,
compared to 3.1 in the placebo group.

    A longitudinal  random regression analysis of the treatment effect over four
days  indicated the patients  treated with SP-303  experienced  a  statistically
significant  reduction in stool weight (p=0.008) and in abnormal stool frequency
(p=0.039)  when compared  with placebo.  The  point-in-time  analysis  comparing
baseline to Day 4 of treatment  yielded  p-values of p=0.14 in mean reduction in
stool weight, and p=0.26 in mean reduction in abnormal stool frequency. The mean
maximal  time  between  abnormal  stools was  greater in the SP-303  group (30.6
hours) as compared with patients who received  placebo (24.6 hours,  p = 0.035).
The results of this study  suggest that SP-303 is  effective  in reducing  stool
weight  and  abnormal  stool  frequency  in  patients  with AIDS and  chronic or
sub-acute diarrhea.

    A Phase III trial  designed  to  confirm  the Phase II results is planned to
begin in the first quarter of 1998. During the Phase III clinical trial,  Provir
will be studied in a larger number of patients for a longer duration of therapy,
including outpatient experience. Agreement has been reached with the U.S. FDA on
the trial design,  including endpoints, for this pivotal Phase III study, which,
if  successful,  may enable the  company to file an NDA for this  indication  in
1999.

      Based on these Phase II results and the Phase III plan, Shaman is actively
pursuing a commercialization  partnership with other AIDS-focused  companies for
this indication.

Watery Diarrhea

      Watery  diarrhea is often caused by infectious  agents such as V. cholerae
and E. coli.  These agents secrete toxins that adhere to the intestinal wall and
cause increased  secretion of chloride ions from intestinal cells,  resulting in
fluid accumulation in the small intestine.  This in turn leads to severe and, in
some cases, life threatening  diarrhea.  According to the 1995 data from the IMS
America, Ltd. ("IMS"), the leading  pharmaceutical  marketing data firm, over 26
million  prescriptions  are  written  annually  for watery  diarrhea.  Moreover,
approximately  67 million  over-the-counter  product  units are sold in the U.S.
alone.

      Current  primary  treatments  for  watery  diarrhea  do  not  address  the
dehydration  or fluid loss caused by the illness.  Watery  diarrhea is typically
treated with one of two treatment regimens:  

                                       5
<PAGE>

antibiotics  or  antimotility   agents.   Antibiotics  kill the bacteria,  while
antimotility  agents reduce diarrhea frequency by inhibiting  peristaltic action
(natural  muscular  contraction of the intestinal  tract).  For mild to moderate
cases of watery  diarrhea,  the use of  antibiotics  is discouraged by the World
Health  Organization  ("WHO")  and the  Centers  for  Disease  Control  ("CDC").
Bacteria  can,  in  many  cases,  build  up  a  resistance  to  antibiotics  and
antibiotics can reduce the body's ability to build natural immunities to disease
and, therefore, increase the likelihood of reinfection.

      While antimotility agents are effective in reducing the severity of watery
diarrhea, they often cause severe constipation.  In addition, because of reduced
motility in the  intestine,  the bacteria are often not eliminated and remain in
the gut. When the treatment is stopped,  the patient often  experiences  rebound
diarrhea. Moreover, these agents are not recommended in children and the elderly
because of the risk of prolonging the illness.

      Preclinical  studies  indicate  that  Provir  treats  watery  diarrhea  by
inhibiting the secretion of chloride ions from  intestinal  cells,  specifically
countering fluid loss, a fundamental  mechanism causing  diarrhea.  Based on its
mechanism  of action and results of initial  clinical  testing,  it appears that
Provir  does not affect the normal  motility  of the  intestine  and the lack of
absorption of Provir in the  intestine  contributes  to its safety,  its reduced
potential for drug interactions, and its specificity of action.

      Shaman has conducted  Phase I clinical  trials for Provir in more than 150
adults, children and infants as young as three months of age, in both single and
multiple doses. These trials  demonstrated that Provir is safe and can be easily
tolerated  in doses up to two  grams  per day for two  days.  The  results  also
indicated no significant adverse side effects of the drug.

      In November 1996, the Company completed a Phase II trial in 75 patients to
determine the efficacy of Provir in the treatment of traveler's and non-specific
diarrhea.  This open-label Phase II study was conducted by Dr. Herbert DuPont, a
world  recognized  expert  in travel  medicine,  of the  University  of Texas at
Houston and Baylor  College of  Medicine.  It  included  American  subjects  who
suffered  from  diarrhea  upon  traveling  to Mexico as well as native  Mexicans
suffering from diarrhea of unknown cause, or non-specific diarrhea.

      In  the  Phase  II  study,  89% of the 75  patients  treated  with  Provir
responded  favorably  (returned  to  normal  bowel  function)  after 48 hours of
treatment,  with over 60% of those  patients  returning  to normal after just 24
hours.  Traveler's  diarrhea  left  untreated  usually lasts five to seven days.
Non-specific  diarrhea  usually  lasts  three to four days.  Of the 71  patients
available  for follow up,  none of the  patients  experienced  worsening  of the
diarrhea  illness  once  resolution  of  the  disease  began.  In  addition,  no
significant  adverse  reactions  were reported.  Of 25 patients with  traveler's
diarrhea receiving one or two grams of Provir per day,  effectiveness  (measured
as a combination of stool frequency,  stool  consistency,  and  gastrointestinal
symptoms)  was  demonstrated  in 72% of  patients  over the course of the study.
Within  this  patient  group,  the mean time to last  unformed  stool,  the most
significant  indicator  of  therapeutic  effect,  was 58% less  than  historical
controls would  indicate.  The patients  experiencing  non-specific  diarrhea of
unknown etiology received either a one or two gram dose per day for two days. In
the group of 15 patients  receiving the one gram dose, all patients responded to
therapy, and 87% returned to normal stool frequency after 24 hours of treatment.
In the group of 35 patients  receiving the two gram dose, 34 patients  responded
to  therapy,  and 80%  returned  to  normal  stool  frequency  after 24 hours of
treatment.  The mean time to last  unformed  stool was reduced by 50% in the one
gram  dose  group and 32  percent  in the two gram dose  group  compared  to the
historical control in a cure study.

     In October 1997, the Company determined from an interim analysis of another
Phase II  outpatient  study of 166  Mexican  nationals  with  mild  non-specific
diarrhea  that  Provir  provided  no  benefit  over  placebo  after  two days of
treatment. In this mild, non-specific diarrhea, it was difficult to show an


                                       6
<PAGE>

added benefit of Provir therapy during the short course of illness.  Based on
these results,  the Company suspended its study of mild,  non-specific  diarrhea
and is now focusing on moderate-to-severe diarrhea.

      In  the  Third  and  Fourth  quarters  of  1997,   Shaman   initiated  two
double-blind, randomized, placebo controlled Phase II studies of Provir designed
to determine  the optimal  effective  dose level of Provir for the  treatment of
moderate-to-severe watery diarrhea. These studies include an outpatient study of
travelers in Mexico and Jamaica, as well as an in-hospital study in Venezuela.

Pediatric Diarrhea

      According to the Journal of Pediatrics,  in the United States alone,  over
30 million  episodes of diarrhea  occur annually in children under five years of
age. In  addition,  there are over one billion  episodes of  pediatric  diarrhea
worldwide  annually and four million deaths  associated with pediatric  diarrhea
per year  among  children  less than five  years  old in  developing  countries.
Current  recommended  therapies for  pediatric  diarrhea are designed to replace
water and electrolytes. Antimotility agents are contraindicated in children less
than two years of age and not  recommended for treatment of diarrhea in children
of any age. In the vast  majority of diarrheal  illnesses in the United  States,
particularly  those in  children,  the use of  antibiotics  is not  recommended.
Shaman is currently engaged in formulation  development of Provir as a potential
treatment  for  pediatric  diarrhea in  preparation  for  initiating  a clinical
development program.

Nikkomycin Z

      Nikkomycin    Z   was    licensed    in   1995   from    Bayer   AG.   See
"Business--Collaborative  Relationships and License Agreements." Nikkomycin Z is
an orally administered product designed for the treatment of endemic mycoses and
other  systemic  fungal  infections.  Nikkomycin Z is novel in its  mechanism of
action against fungal infections.  Preclinical  studies of nikkomycin Z indicate
that it is  fungicidal  and could  prove  superior  to  current  treatments.  By
inhibiting  chitin  synthetase,  which is found in the cell walls of most fungi,
but  not  in  mammalian  cells,  nikkomycin  Z  inhibits  cell  wall  synthesis,
ultimately  causing  fungal  cells to expand  and  burst.  The lack of chitin in
mammalian  cells  should  prevent  similar  damage  to normal  cells in  tissues
affected by these fungal infections.

      Endemic  mycoses  are  systemic  fungal  infections  concentrated  in  the
southwest,  central and northeast regions of the United States.  There are three
basic forms of endemic mycoses:  coccidiomycosis (valley fever),  histoplasmosis
and blastomycosis  ("cocci," "histo" and "blasto").  The infecting organisms are
found in soil.  When the soil is  disturbed  (such as during  crop  planting  or
harvesting),  the fungi become airborne and may be inhaled into the lungs.  Once
infected,  otherwise healthy  individuals will experience mild flu-like symptoms
but may never be diagnosed with the disease. In more severe cases,  however, the
fungus spreads systemically and results in disseminated fungal infections. It is
estimated that approximately  240,000 persons per year in the United States show
clinical  symptoms  of endemic  mycoses.  The Company  believes  that the annual
market for treatment of endemic  mycoses in the United  States is  approximately
$150 million.

      Currently,  two classes of drugs are commonly prescribed of  the treatment
for endemic mycoses:  azoles,  which are fungistatic  (inhibit the growth of the
fungus, but do not kill it) and polyenes  (including  amphotericin B), which are
fungicidal (kill the fungus).  However, often these drugs cannot be tolerated in
high enough doses to kill the fungi.

      Nikkomycin  Z is an orally  active  product for the  treatment  of endemic
mycoses and other systemic fungal infections. A single-dose Phase I trial in the
UK was  completed  in 1997.  Shaman  filed an IND in the  United  States to test
nikkomycin Z in December 1997 and intends to begin multi-dose Phase I testing in
1998.

                                       7
<PAGE>

      Candidiasis  is a fungal  infection  that can result in  serious  systemic
disease.  Approximately  265,000  patients  worldwide  are treated  annually for
systemic  candidiasis.  Nikkomycin  Z has  also  been  shown  to be  capable  of
interacting  in  a  synergistic  fashion  with  a  number  of  known  antifungal
compounds, including fluconazole (Diflucan) and itraconazole (Sporonox), the two
largest selling  antifungals in the world.  Based on this synergistic  activity,
the Company plans to supply nikkomycin Z to Pfizer Corporation for a combination
study that tests  nikkomycin  Z in  combination  with  fluconazole  in  treating
azole-resistant  esophageal  candidiasis.  The estimated  annual total market of
antifungal  agent sales for systemic  fungal  infections is  approximately  $2.0
billion.

Virend

      Shaman recently  suspended a Phase II clinical trial of Virend,  a topical
treatment for herpes, which was being studied in combination with oral acyclovir
in patients with AIDS.  It was  determined  from an interim  analysis that there
were no additional  benefits to the use of Virend over the use of oral acyclovir
alone. Based on these results, the Company has suspended this program.

SP-134101

      SP-134101 is a Shaman-patented,  oral product for the treatment of Type II
diabetes. In October 1997, Shaman filed the IND for SP-134101, the first product
to emerge from the diabetes  discovery  effort. A Phase I trial for the compound
began in January 1998. In preclinical  studies SP-134101 has been shown to lower
blood glucose,  triglycerides,  and blood pressure. SP-134101 appears to work by
increasing glucose uptake in the peripheral tissues and decreasing  triglyceride
output from the liver.

Drug Discovery Research

Diabetes

      Type II diabetes is a chronic disease in which the tissues of the body are
resistant to the actions of insulin (a hormone  produced by the  pancreas),  and
the pancreas  cannot secrete enough  insulin to overcome this  resistance.  When
this  happens,  the  ability of  insulin  to carry out its normal  action on the
liver, muscle and adipose tissues is lost, the result is increased blood glucose
and associated symptoms.  This disease is the result of multiple causes, many of
which  are  undefined  at the  molecular  level.  In the  United  States  alone,
approximately 625,000 new cases of Type II diabetes are diagnosed each year, and
it is estimated  that there will be over 18 million cases by the year 2002 (over
five percent of the population).

      Shaman is  focused on the  development  of oral  antihyperglycemic  (blood
glucose  lowering)  agents for the  treatment of Type II  diabetes.  The program
involves in vivo  screening of plants by oral  administration  in animal models,
followed  by  the   fractionation   of  active   extracts,   the  isolation  and
identification of active compounds, and the capability to profile and prioritize
promising  candidates for clinical  development.  In just over 24 months of this
program,  the Company has identified 21  orally-active  compounds for which,  to
date, 14 original U.S. patent  applications  have been filed (five of which have
been issued) and eleven international patent applications have been filed. These
compounds represent new classes and, potentially,  new methods for treating Type
II diabetes.

      The diabetes  research  and  development  program  serves as the basis for
Shaman's collaboration with Lipha/Merck and Ono. Significant funding, as well as
milestone  payments  for this  program,  result from these  collaborations.  See
"Business--Collaborative Relationships and License Agreements."


                                       8
<PAGE>

      The Company filed an IND for its first diabetes  compound,  SP-134101,  in
1997, and began a Phase I trial for the compound in January 1998.

Collaborative Relationships and License Agreements

      In September  1996,  the Company  entered  into a five-year  collaborative
agreement with Lipha/Merck to develop jointly Shaman's  antihyperglycemic drugs.
In exchange for development and marketing  rights in all countries except Japan,
South Korea and Taiwan  (which are covered  under an earlier  agreement  between
Shaman  and Ono),  Lipha/Merck  will  provide  up to $9.0  million  in  research
payments and up to $10.5 million in equity  investments  priced at a 20% premium
to a multi-day  volume weighted  average price of the Company's  Common Stock at
the time of  purchase.  Of the $4.5 million  received on signing the  agreement,
$1.5  million was an up-front  research  payment and $3.0  million was an equity
investment.  The agreement also provides for additional preclinical and clinical
milestone  payments to the Company in excess of $10.0  million per  compound for
each antihyperglycemic drug developed and commercialized.

      To date,  Shaman has identified 21  proprietary,  orally-active  compounds
which show preclinical activity as treatments for Type II diabetes.  Lipha/Merck
will bear all pre-clinical,  clinical, regulatory and other development expenses
associated  with the compounds  selected  under the agreement.  In addition,  as
products are commercialized,  Shaman will receive royalties on all product sales
outside the United States and up to 50% of the profits (if the Company exercises
its co-promotion rights) or royalties on all product sales in the United States.
Certain of the  milestone  payments  will be  credited  against  future  royalty
payments,  if any, due to the Company from sales of products  developed pursuant
to the agreement.

      In May 1995, the Company entered into a  collaborative  agreement with Ono
providing for,  among other things,  three years of funding for the research and
development of compounds for the treatment of Type II diabetes.  Under the terms
of the agreement,  Shaman will screen 100  diabetes-specific  plants per year in
vivo,  isolate and identify active  compounds,  and participate in any medicinal
chemistry  modification.  In turn,  Ono will provide Shaman with access to Ono's
preclinical and clinical  development  capabilities through proprietary in vitro
assays and medicinal chemistry efforts.  Ono's development and commercialization
rights are for the countries of Japan,  South Korea and Taiwan.  Under the terms
of the  Agreement,  Ono will  provide  $7.0  million in  collaborative  research
funding and will pay preclinical and clinical milestone payments of $4.0 million
per  compound for each  antidiabetic  drug that is  commercialized.  Of the $3.0
million received on signing the agreement, $1.0 million was an up-front research
payment.  Shaman  received an additional  $1.0 million  payment (beyond the $7.0
million  commitment)  in  December  1996 for  enhanced  access  rights  to these
compounds.

      In June 1995, the Company  licensed several patents from Bayer AG relating
to the use of  nikkomycin  Z and the  composition  and  use of  nikkomycin  Z in
combination  with other  antifungal  compounds for the development of antifungal
agents.  Under the terms of the  agreement,  the  Company  has paid  Bayer AG an
initial  milestone  payment and may be required,  upon the occurrence of certain
events,  to make  additional  milestone  payments  and to pay  royalties  on any
commercialized products derived from the agreement.

      In February  1990, the Company  entered into a license  agreement with Dr.
Michael  Tempesta.  There currently  exists a dispute with Dr. Tempesta over the
scope and coverage,  if any, of the license.  The maximum royalty claimed by Dr.
Tempesta is two percent on net sales of a certain  antiviral  agent. In November
1996, a demand for  arbitration was filed by the Company to address a claim made
by Dr.  Tempesta that the royalty will be payable with respect to either or both
of Provir and Virend. See "Legal Proceedings."


                                       9
<PAGE>

      As the Company continues its product development and commercialization, it
intends to enter into additional  corporate alliances which may include licenses
and/or marketing rights to selected products and markets.

Manufacturing

      Shaman intends to conduct both pilot-scale and commercial manufacturing of
its future products either in-house,  with  collaborative  partners,  or through
contract manufacturing facilities.  The Company has created an in-house facility
that  operates  under Good  Manufacturing  Practices  ("GMP") and has  conducted
pilot-scale  manufacturing of SP-303.  The Company has a sufficient  quantity of
raw material for SP-303 and SP-303 manufacturing  capacity to complete currently
planned clinical trials. In addition,  Shaman also expects to establish a second
source  manufacturing  facility to produce clinical and early commercial lots in
1998.

      In January  1996,  the  Company  entered  into an  agreement  with  Abbott
Laboratories ("Abbott") for the production of nikkomycin Z. Abbott has developed
processes and  manufactured  nikkomycin Z in compliance  with GMP guidelines for
the Company's  clinical trial  programs.  SP-134101 is being  manufactured  by a
contract  manufacturer  in  compliance  with GMP  guidelines  for the  Company's
clinical trial programs.

Marketing

      In July  1997,  Shaman  hired a  senior  executive  to  direct  commercial
development, including sales and marketing. The Company's general strategy is to
develop corporate alliances with larger pharmaceutical  companies for certain of
its programs in order to take  advantage of such  companies'  abilities to reach
broad-based markets. Shaman is also evaluating the opportunity to retain certain
marketing  rights to its  products.  At the  present  time,  Shaman has no sales
staff. See  "Business--Collaborative  Relationships and License  Agreements" and
"Risk Factors--Limited Manufacturing and Marketing Experience and Capacity."

Patents and Proprietary Technology

      Proprietary protection for the Company's product candidates, processes and
know-how is important to the Company's business. The Company's policy is to file
patent applications to protect technology,  inventions and improvements that are
considered  commercially  important  to the  development  of its  business.  The
Company also relies upon trade secrets,  know-how and  continuing  technological
innovation to develop and maintain its competitive  position.  The Company plans
to aggressively prosecute and defend its patents and proprietary technology.

      The  Company  has  been  issued  a U.S.  patent  related  to its  specific
proanthocyanidin  polymer  compositions  designated  SP-303;  specifically,  the
patent contains  composition of matter claims related to SP-303 contained in the
Company's Provir product.

      The  Company  has also filed  foreign  applications  corresponding  to its
issued U.S. patents relating to its proanthocyanidin  polymer  composition.  The
Company has been granted  patents in  Australia,  Mexico and New Zealand and has
patent applications pending in Canada,  Europe, Japan, the Republic of Korea and
Singapore.

      The Company has also recently filed a U.S. patent application  directed to
new  formulations  and methods of using its  specific  proanthocyanidin  polymer
composition for treatment of watery diarrhea.  These  formulations are contained
in the Company's Provir product.


                                       10
<PAGE>

      The  Company has five issued U.S.  patents  relating to  compositions  and
methods  for  treating  Type II  diabetes,  as well  as  reducing  hyperglycemia
associated  with other  etiologies.  The Company also has nine  additional  U.S.
patent  applications  still pending which relate to compositions and methods for
treating Type II diabetes,  as well as reducing  hyperglycemia  associated  with
other  etiologies.  The Company has filed  eleven  foreign  applications,  i.e.,
international  applications  under the Patent  Cooperation  Treaty designating a
number of foreign countries, as well as applications in Taiwan, corresponding to
a number of the U.S.  applications  and plans to file  additional  corresponding
foreign applications within the relevant convention periods.

      The  Company  also  has  one  pending  U.S.   patent   application  and  a
corresponding  international patent application  designating a number of foreign
countries   relating  to  methods  for   administering   and  sustained  release
formulations  for  anti-fungal   agents  like  nikkomycin  Z.  The  methods  and
compositions  are  useful  for  treatment  of  fungal  infections,  particularly
candidiasis,  the most  frequently  encountered  life-threatening  mycoses.  The
Company  has  licensed  several  patents  from Bayer AG  relating  to the use of
nikkomycin Z and the  composition  and use of nikkomycin Z in  combination  with
other antifungal compounds for the development of antifungal agents.

      There can be no assurance that the Company's  pending patent  applications
will result in patents  being  issued or that,  if issued,  patents  will afford
protection  against  competitors with similar  technology;  nor can there be any
assurance  that others will not obtain  patents  that the Company  would need to
license or  circumvent.  See "Risk  Factors--Uncertainty  Regarding  Patents and
Proprietary Rights."

Raw Materials Supply

      The Company  imports all of the plant  material  it screens  from  foreign
countries,  particularly  from countries in Latin and South  America,  Southeast
Asia and Africa. Shaman's relationships with botanical organizations in tropical
regions have enabled the Company to set up large-scale  supply  arrangements for
the raw material from which some of its lead products are derived.  For example,
the plant  material  required  for SP-303 is found in at least  seven  Latin and
South American countries and can be harvested in a sustainable manner where work
forces  already  exist.  Presently,  Shaman is harvesting  approximately  12,000
kilograms of the SP-303  source  plant per year from South and Central  America,
pursuant to supply  agreements with corporations  working in those regions.  The
SP-303 source plant occurs naturally in these areas and, after  harvesting,  can
be  regenerated  to  maturity in seven  years.  Shaman is  currently  engaged in
setting  up  market-scale,  long-term  acquisition  of  quantities  of  material
adequate to meet projected commercial demands for the launch and sale of Provir.

      Shaman requires that all large-scale  plant  collections be conducted in a
sustainable  manner,  which could include  replanting in areas of intensive wild
harvesting. In the case of SP-303, the source plant can be sustainably harvested
because  it grows  spontaneously  with  minimal  management.  Shaman  works with
communities  and  cooperatives  in South and Latin America to harvest the SP-303
source plant and other source plants in a regenerable manner.  These communities
and cooperatives,  many of which receive support from national and international
government  agencies,  are  experienced  in the  sustainable  harvest  of  other
tropical forest products,  including  natural rubber,  nuts and fruits.  Company
policy also requires that each source plant  targeted for  large-scale  compound
isolation  must  have  multi-country   sources  of  supply  or  be  economically
synthesizable.  This policy  reduces  the risks  associated  with using  foreign
suppliers, such as political or economic instability.

     Shaman has entered into supply agreements with companies working in Central
and South  America  pursuant to which they will  supply  certain  quantities  of
Shaman's commercial requirements of the raw material used to produce SP-303 from
their countries. These companies work with cooperatives of indigenous peoples to
supply source plants to Shaman, to transfer material information to Shaman
  


                                       11
<PAGE>

relating  to  improvements  in  the  collection   and  harvesting   of  the  raw
material,  and to improve sustainable harvesting techniques in order to create a
model of sustainable  production in tropical  forests.  Although the Company has
developed  multi-country  sources of supply for its key plant  materials and has
entered into long-term  supply  agreements  for the source  material for SP-303,
there can be no  assurance of a continual  source of supply of these  materials.
See "Risk Factors--Dependence on Sources of Supply."

      When  it  is  economically   advantageous  and  technically   feasible  to
synthesize  a  compound  rather  than  extract it from raw plant  material,  the
Company  will  utilize  large-scale  chemical  synthesis  to obtain a sufficient
supply  of such  compound  in  order to  satisfy  its  commercial  requirements.
However,  there can be no  assurance  that the  Company  will be  successful  in
synthesizing any such products.

Competition

      Competition  in the  pharmaceutical  industry is  extremely  intense.  The
principal  factors  upon which such  competition  is based  include  therapeutic
efficacy,  side-effect  profile,  ease of  use,  safety,  physician  acceptance,
patient  compliance,  marketing,  distribution  and price.  Many  treatments for
infectious and metabolic  diseases exist and additional  therapeutics  are under
development,  including other naturally-sourced  pharmaceuticals.  To the extent
these  therapeutics  address  the disease  indications  on which the Company has
focused,  they  may  represent  significant  competition.   Many  pharmaceutical
companies have significantly greater research and development  capabilities,  as
well as substantially greater marketing,  financial and human resources than the
Company.  In addition,  many of these  competitors  have  significantly  greater
experience  than the  Company  in  undertaking  preclinical  testing  and  human
clinical  trials  of  new  pharmaceutical   products  and  obtaining  regulatory
approvals of such products.  These companies may represent significant long-term
competition for the Company.

      There  can be no  assurance  that  developments  by  other  pharmaceutical
companies  will  not  render  Shaman's  products  or  technologies  obsolete  or
noncompetitive, or that the Company will be able to keep pace with technological
developments  of  its  competitors.  Many  of  the  Company's  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  desired
therapeutic effect than products being developed by the Company. These competing
products may be more  effective  and less costly than the products  developed by
Shaman.

Government Regulation

      The  research  and  development,  manufacture  and  marketing  of Shaman's
products are subject to  substantial  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,  research
and development activities and the testing, manufacture,  safety, effectiveness,
labeling,  storage, record keeping,  approval,  advertising and promotion of the
Company's products.

      The  process  required  by the FDA before the  Company's  products  may be
marketed in the United States generally involves the following:  (i) preclinical
laboratory  and animal tests;  (ii)  submission to the FDA of an IND, which must
become effective before human clinical testing may commence;  (iii) adequate and
well-controlled  human  clinical  trials to establish the safety and efficacy of
the proposed drug for its intended  indications;  (iv) the submission to the FDA
of an NDA; (v) satisfactory completion of an FDA inspection of the manufacturing
facilities  at which the  product  is made to assess  compliance  with GMP.  The
testing and approval process  requires  substantial  time,  effort and financial
resources.

                                       12
<PAGE>

      Preclinical tests include laboratory  evaluation of the product as well as
animal studies to assess the potential  safety and efficacy of the product.  The
results of the preclinical tests,  together with  manufacturing  information and
analytical  data, are submitted to the FDA as part of the IND, which must become
effective before human clinical trials may commence.  The IND will automatically
become  effective 30 days after  receipt by the FDA,  unless the FDA before that
time raises concerns or questions about the conduct of the trials as outlined in
the IND. In such cases the IND sponsor and the FDA must resolve any  outstanding
concerns  before  clinical  trials can proceed.  There can be no assurance  that
submission  of an IND will  result in FDA  authorization  to  commence  clinical
trials.

      Clinical trials involve the administration of the investigational products
to healthy volunteers or patients under the supervision of a qualified principal
investigator.  Further,  each clinical study must be reviewed and approved by an
independent  Institutional Review Board ("IRB") at each institution at which the
study will be conducted.  The IRB will  consider,  among other  things,  ethical
factors,  the  safety  of  human  subjects  and the  possible  liability  of the
institution.

Clinical  trials are typically  conducted in three  sequential  phases which may
overlap.  Phase I usually  involves  the initial  introduction  of the drug into
healthy human subjects where the product is tested for safety, dosage tolerance,
absorption, metabolism, distribution and excretion. Phase II involves studies in
a limited  patient  population  to (i) determine the efficacy of the product for
specific  targeted  indications,  (ii) determine dose tolerance and optimal dose
and (iii)  identify  possible  adverse  effects and safety risks.  When Phase II
evaluations  demonstrate  that the product is  effective  and has an  acceptable
safety  profile,  Phase III trials are undertaken to further  evaluate  clinical
efficacy and to further  test for safety in an expanded  patient  population  at
geographically-dispersed  clinical  study  sites.  The  FDA or the  sponsor  may
suspend  clinical  trials at any point in this process for a variety of reasons,
including  either party's belief that clinical  subjects are being exposed to an
unacceptable health risk.

      Occasionally,  the FDA will require Phase IV "Post-Marketing Trials" which
are  conducted  after  FDA  clearance  to gain  additional  experience  from the
treatment  of  patients  in  the  intended  therapeutic  area.  Other  Phase  IV
commitments might be additional toxicology or pharmacology studies.

After  completion of the required  testing,  generally an NDA is submitted.  FDA
approval of the NDA is required before marketing may begin in the United States.
The NDA must include the results of extensive clinical and other testing and the
compilation  of data  relating  to the  product's  chemistry,  pharmacology  and
manufacture,  the cost of all of which is substantial.  The FDA reviews all NDAs
submitted  before  it  accepts  them  for  filing  and  may  request  additional
information rather than accept an NDA for filing. In such an event, the NDA must
be resubmitted with the additional  information and, again, is subject to review
before  filing.  Once the  submission is accepted for filing,  the FDA begins an
in-depth  review of the NDA. Under the Federal Food,  Drug and Cosmetic Act, the
FDA has 180 days in which to review the NDA and  respond to the  applicant.  The
review is often  extended by mutual  agreements of the sponsor and the FDA, or a
major  amendment to the  submission.  The FDA may refer the  application  to the
appropriate advisory committee for review, evaluation and a recommendation as to
whether the application should be approved.

     The FDA is not bound by the  recommendation of an advisory  committee,  but
generally follows the committee's recommendation.  If evaluations of the NDA and
the manufacturing facilities are favorable, the FDA may issue either an approval
letter or an approvable letter, which usually


                                       13
<PAGE>

contains  a  number  of  conditions  that  must  be met in order to secure final
approval  of an NDA.  When and if those  conditions  have  been met to the FDA's
satisfaction,  the FDA will issue an  approval  letter,  authorizing  commercial
marketing of the drug for certain  indications.  If the FDA's  evaluation of the
NDA submission or manufacturing  facilities is not favorable, the FDA may refuse
to approve the NDA or issue a not approvable letter.

      Each drug product  manufacturing  establishment that supplies drugs to the
U.S.  market  must be  registered  with,  and be  approved  by, the FDA prior to
commencing commercial production,  and is subject to biennial inspections by the
FDA for GMP compliance after an NDA has been approved. In addition, drug product
manufacturing  establishments located in California also must be licensed by the
State of California.

      The  Company  will also be subject  to a variety  of  foreign  regulations
governing clinical trials,  registrations and sales of its products.  Whether or
not FDA  approval  has  been  obtained,  approval  of a  product  by  comparable
regulatory  authorities of foreign countries must be obtained prior to marketing
the product in those  countries.  The  approval  process  varies from country to
country and the time  needed to secure  approval  may be longer or shorter  than
that required for FDA approval.

The Healing Forest Conservancy

      In  January  1990,  Shaman  formed  The  Healing  Forest  Conservancy,   a
California not-for-profit public benefit corporation (the "Conservancy"),  which
is dedicated to maintaining global plant  biodiversity.  The Conservancy focuses
on conserving plants that have been used  traditionally for medicinal  purposes.
Shaman has donated 13,333 shares of Common Stock to the Conservancy's  endowment
fund.  The Company  also plans to donate  additional  funds when it has achieved
profits from product sales, if any, to provide benefits to indigenous peoples in
the countries where Shaman's source plants are obtained. The Conservancy is also
soliciting private donations to fund its operations and conservation efforts.

Employees

      As of  February  27,  1998,  the  Company  had  106  employees.  Of  these
employees,  72 are  dedicated to research,  development,  quality  assurance and
quality control, regulatory affairs and preclinical testing.  Thirty-four of the
Company's  full-time  employees  hold a Ph.D.  or M.D. In addition,  the Company
currently fills 15 positions through the use of temporary staff and consultants.

Scientific Strategy Team

      Shaman's Scientific Strategy Team ("SST") consists of an interdisciplinary
group of ethnobotanists,  scientists,  pharmacologists,  physicians, pharmacists
and Company  personnel.  Several members of the SST who are actively  working in
the field have  agreed to  exclusively  advise the  Company in  connection  with
medical and  ethnobotanical  matters and to refrain from  consulting  with other
pharmaceutical  companies on all ethnobotanical  matters.  Some members may have
collaborative   relationships  with  other   pharmaceutical   firms  for  random
collection of plants on a contract basis.

      The principal criteria used in selecting members of the SST are breadth of
the scientific discipline, recognized scientific excellence in their fields, and
ability to contribute to the team evaluation process.  The Company relies on the
SST to identify plant candidates for Shaman's botanical screening process and to
evaluate the information obtained about these candidates,  both in the field and
in literature.  SST members who are not employees of the Company are compensated
with stock options for their 


                                       14
<PAGE>

general contributions  throughout the year, and  are paid  $1,000  per  day  for
participation at the SST meetings,  which  occur approximately  every 12 months.
Shaman  also  pays SST members  for any additional consulting services and field
expeditions conducted on behalf of the Company.

      The SST includes the following members:

      Edward F. Anderson,  Ph.D. is a Senior  Research  Botanist at the Desert
Botanical  Gardens  in  Phoenix,  Arizona.  Formerly,  he was a  Professor  of
Biology  at the  Whitman  College  in Walla  Walla,  Washington.  Dr. Anderson
received a B.A. in Biology from Pomona  College in California  and an M.A. and
a Ph.D. in Botany from Claremont  Graduate School and Rancho Santa Ana Botanic
Garden, respectively.

      Paul S.  Auerbach,  M.D. is Chief  Operating  Officer of  MedAmerica  in
Oakland,  California.  Dr. Auerbach was formerly Chief,  Division of Emergency
Medicine   at  Stanford   University   Hospital   in   Stanford,   California.
Dr. Auerbach  earned an A.B. in Religion  from Duke  University,  an M.D. from
Duke  University  School  of  Medicine,  and was a  Sloan  fellow,  M.S.M.  at
Stanford University Graduate School of Business.

      Michael J.  Balick,  Ph.D.  is  Director  of the  Institute  of Economic
Botany  at  The  New  York  Botanical  Garden.  Dr. Balick  holds  a  B.S.  in
Agriculture  and Plant  Science  from the  University  of Delaware and both an
A.M. and a Ph.D. in Biology from Harvard University.

      Baruch S.  Blumberg,  M.D.,  Ph.D.  is  Associate  Director  of Clinical
Research  at the Fox  Chase  Cancer  Center  in  Philadelphia  and  the  first
American dean of a college at Oxford University.  Dr. Blumberg  became a Nobel
laureate in 1976 for his discovery of the  hepatitis B antigen.  He received a
B.S.  from Union  College in New York,  an M.D. from the College of Physicians
and Surgeons at Columbia  University and a Ph.D. in  Biochemistry  from Oxford
University.

      Anthony  Conte is a retired  pharmacist  and  former  proprietor  of the
Gilliar  Drug   Company, Inc.   Mr. Conte   has  30  years  of  experience  in
commercializing  pharmaceuticals.  He received a B.S.  in  Pharmacy  from Long
Island University,  Brooklyn College of Pharmacy and an M.S. in Pharmaceutical
Chemistry  from  Columbia  University.  Mr. Conte is the father of  Ms. Conte,
President, Chief Executive Officer and a director of Shaman.

      James A. Duke,  Ph.D. is a recently  retired  research  scientist at the
Agricultural  Research Service of the United States Department of Agriculture.
Dr. Duke  earned his A.B.,  B.S. and Ph.D.  in Botany from the  University  of
North Carolina.

      Elaine  Elisabetsky,  Ph.D.  is  a  research  fellow  of  the  Brazilian
Research  Council,  Associate  Professor  at the  Universidade  Federal do Rio
Grande  do  Sul  and  a  board   member  of  the   International   Society  of
Ethnopharmacology.  Dr. Elisabetsky  holds a B.S. in Biomedical  Sciences from
the Escola de Medicina in Sao Paulo,  Brazil, a Ph.D. in Pharmacology from the
Departmento  de  Farmacologia  e  Bioquimica,  Escola  Paulista de Medicina in
Brazil,   and  has  received   post-doctorate   training  in  ethnobotany  and
ethnopharmacology from The New York Botanical Garden.

      Norman R. Farnsworth,  Ph.D. is Research  Professor of Pharmacognosy and
Director  of the  Program for  Collaborative  Research  in the  Pharmaceutical
Sciences  at the  College of  Pharmacy,  University  of  Illinois  at Chicago.
Dr. Farnsworth  received a B.S. and an M.S. in Pharmacy from the Massachusetts
College of  Pharmacy  and a Ph.D.  in  Pharmacognosy  from the  University  of
Pittsburgh.

                                       15
<PAGE>

      Maurice  M.  Iwu,   Ph.D.  is  founder  and  director  of   BioResources
Development   Conservation   Programme  and  Professor  of  Pharmacognosy  and
Medicinal  Chemistry at the  University of Nigeria,  Nsukka.  Dr. Iwu earned a
Ph.D. in Pharmacognosy from the University of Bradford,  England.

      Charles  F.  Limbach,  M.D.  is a  practitioner  of family  medicine  in
Salinas, California.  Dr. Limbach earned a B.A. in Biology from the University
of Michigan and an M.D. from Michigan State University.

      Koji Nakanishi,  Ph.D. is Centennial  Professor of Chemistry at Columbia
University  and  formerly  Director of the Suntory  Institute  for  Bioorganic
Research in Osaka,  Japan.  Dr. Nakanishi  was the recipient of the 1990 Japan
Academy Prize and the Imperial  Prize,  the highest  Japanese  honor a scholar
can  receive.  He  received  a B.S.  and a  Ph.D.  in  Chemistry  from  Nagoya
University in Japan.

      Mark J.  Plotkin,  Ph.D.  is  Executive  Director  of  Ethnobiology  and
Conservation Team and previously  served as Director of Plant  Conservation at
the  World  Wildlife  Fund.  He  also  serves  as  a  Research   Associate  of
Ethnobotanical  Conservation at the Botanical Museum at Harvard University and
Secretary  of the  Ethnobotany  Specialist  Group,  Species  Survival  for the
International  Union for the Conservation of Nature.  Dr. Plotkin  received an
A.B. from Harvard  University  Extension,  an M.F.S. in Wildlife  Ecology from
Yale School of Forestry and Environmental  Studies,  and a Ph.D. in Biological
Conservation from Tufts University.

      Nathaniel Quansah,  Ph.D. is an independent  ethnobotanical  researcher.
Dr. Quansah  obtained a B.S. from the  University  of Cape Coast,  Ghana and a
Ph.D. in Botany from Goldsmith's College, University of London.

      Robert  F.  Raffauf,   Ph.D.  is  Professor   Emeritus  at  Northeastern
University's College of Pharmacy.  He holds a B.S. in  Chemistry/Biology  from
the  College  of the City of New York,  an M.A.  in  Chemistry  from  Columbia
University and a Ph.D. in Organic/Analytical  Chemistry from the University of
Minnesota.

      Richard E. Schultes,  Ph.D. is Professor Emeritus at Harvard University.
Dr. Schultes  has spent 40 years studying the  traditional  uses of the higher
plants  and  fungi of the  Colombian  Amazon.  He has been  the  recipient  of
numerous  awards,  including  the  Gold  Medal  of the  World  Wildlife  Fund.
Dr. Schultes holds an A.B., an A.M. and a Ph.D. from Harvard University.

      Charles G. Smith,  Ph.D.  has been a consultant to start-up  businesses,
major  pharmaceutical  companies and venture  capital  firms since 1986.  Most
recently,  he served as Vice  President of Research and  Development at Revlon
Healthcare  Group.  Dr. Smith  received  a B.S.  in  Chemistry  from  Illinois
Institute of Technology,  an M.S. in Biochemistry from Purdue University,  and
a Ph.D. in Biochemistry from the University of Wisconsin.

      D.  Doel  Soejarto,   Ph.D.  is  Professor  of  Pharmacognosy   for  the
Department of Medicinal  Chemistry and  Pharmacognosy  and for the Program for
Collaborative  Research in the  Pharmaceutical  Sciences at the  University of
Illinois at Chicago.  Dr. Soejarto holds a B.S. in Biology from the College of
Tjiawi,  Java,  an A.M. in Biology/Botany  from Harvard University and a Ph.D.
in Biology from Harvard University.

      Hildebert  K.M.  Wagner,  Ph.D.  is  Professor of  Pharmacognosy  in the
Institut Fur Pharmazeutische  Biologie at the Ludwig Maximilians University in
Munich,  Germany.  Dr. Wagner  also serves as  co-director of the Institute of
Pharmaceutical  Biology at the  University  of Munich.  He earned his Ph.D. in
Pharmacognosy at the University of Munich.

                                       16
<PAGE>

Risk Factors

      This  Form  10-K   contains,   in  addition  to  historical   information,
forward-looking  statements  within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended,  that involve risks and uncertainties.  The Company's actual results
could  differ  materially  from the  results  discussed  in the  forward-looking
statements.  Factors that could cause or contribute to such differences  include
those  discussed in "Risk  Factors,"  "Management's  Discussion  and Analysis of
Financial Condition and Results of Operations," and elsewhere in this Form 10-K.

      Early Stage of Development;  Technological Uncertainty. Shaman has not yet
completed the development of any products.  Many of the Company's  products will
require  significant   additional  clinical  testing  and  investment  prior  to
commercialization.  Products  for  therapeutic  use in human health care must be
evaluated  in extensive  human  clinical  trials to  determine  their safety and
efficacy  as part of a  lengthy  process  to  obtain  government  approval.  The
Company's  Provir,  nikkomycin  Z and  SP-134101  products  are each in clinical
development.  Positive  results for any of these products in a clinical trial do
not necessarily assure that positive results will be obtained in future clinical
trials  or that  government  approval  to  commercialize  the  products  will be
obtained.

      Clinical trials may be terminated at any time for many reasons,  including
toxicity or adverse event  reporting.  There can be no assurance that any of the
Company's  products will be  successfully  developed,  enter into human clinical
trials,  prove to be safe and  efficacious in clinical  trials,  meet applicable
regulatory standards,  obtain required regulatory approvals, be capable of being
produced  in  commercial  quantities  at  reasonable  costs  or be  successfully
marketed or that the Company will not encounter problems in clinical trials that
will cause the Company to delay or suspend product  development.  Failure of any
of the Company's  products to be  commercialized  could have a material  adverse
effect on the Company's business, financial condition and results of operations.

      History  of  Operating  Losses;  Products  Still  in  Development;  Future
Profitability  Uncertain.  Shaman was  incorporated  in 1989 and has experienced
significant operating losses in each of its fiscal years since operations began.
As of December 31, 1997,  the Company's  accumulated  deficit was  approximately
$111.9 million.  The Company has not generated any product  revenues and expects
to incur  substantial  operating  losses  over the next  several  years.  All of
Shaman's  products and compounds are in research and development,  which require
substantial expenditures of funds. In order to generate revenues or profits, the
Company,   alone  or  with  others,  must  successfully  develop,  test,  obtain
regulatory approval for and market its potential  products.  No assurance can be
given  that  Shaman's  product  development  efforts  will be  successful,  that
required  regulatory  approvals  will be  obtained,  or that  the  products,  if
developed and introduced,  will be successfully  marketed or will achieve market
acceptance.

      No Assurance of Successful Product Development. The Company's research and
development  programs  are at various  stages of  development,  ranging from the
research  stage  to  clinical  trials.   Substantial   additional  research  and
development  will be  necessary  in order  for the  Company  to move  additional
product candidates into clinical testing, and there can be no assurance that any
of the Company's  research and  development  efforts on these or other potential
products, including Provir, nikkomycin Z, and SP-134101 will lead to development
of products that are shown to be safe and effective in clinical trials.

      In addition,  there can be no assurance  that any such  products will meet
applicable  regulatory  standards,  be capable of being  produced in  commercial
quantities at acceptable costs, be eligible for third party  reimbursement  from
governmental or private  insurers,  be  successfully  marketed or achieve market
acceptance.  Further,  the Company's  products may prove to have  undesirable or
unintended  side  


                                       17
<PAGE>

effects  that may prevent or limit their  commercial  use. The Company may find,
at any  stage  of  this complex  product development process, that products that
appeared  promising  in preclinical studies  or  Phase I  and Phase II  clinical
trials do  not demonstrate  efficacy in larger-scale,  Phase III clinical trials
and do not receive regulatory approvals.   Accordingly, any product  development
program  undertaken  by the Company may be  curtailed,  redirected, suspended or
eliminated at any time.

      In addition,  there can be no  assurance  that the  Company's  testing and
development schedules will be met. Any failure to meet such schedules could have
a material  adverse effect on the Company's  business,  financial  condition and
results of  operations.  The  Company's  clinical  trials may be delayed by many
factors,  including,  but  not  limited  to:  slower  than  anticipated  patient
enrollment;  difficulty in finding a sufficient  number of patients  fitting the
appropriate  trial  profile;  difficulties  in  the  acquisition  of  sufficient
supplies of clinical trial  materials;  or, failure to show efficacy in clinical
trials or adverse events  occurring  during the clinical  trials.  Completion of
testing,  studies  and trials  may take  several  years,  and the length of time
varies substantially with the type, complexity,  novelty and intended use of the
product. In addition, data obtained from preclinical and clinical activities are
susceptible  to varying  interpretations,  which could  delay,  limit or prevent
regulatory  approval.  Delays or rejections may be  encountered  based upon many
factors,  including  changes in  regulatory  policy during the period of product
development and could have a material adverse effect on the Company's  business,
financial  condition  and  results  of  operations.   See  "Business--Government
Regulation."

      Future Capital Needs;  Uncertainty of Additional Funding. The Company will
require  substantial  additional funds to conduct the development and testing of
its potential  products and to  manufacture  and market any products that may be
developed.  The Company's  future capital  requirements  will depend on numerous
factors,  including the progress of its research and development  programs,  the
progress of  preclinical  and clinical  testing,  the time and costs involved in
obtaining regulatory approvals, the cost of filing,  prosecuting,  defending and
enforcing  patent  claims  and other  intellectual  property  rights,  competing
technological  and  market  developments,  changes  in  the  Company's  existing
collaborative  and  licensing  relationships,  the  ability  of the  Company  to
establish  additional  collaborative   relationships  for  the  manufacture  and
marketing of its  potential  products,  and the purchase of  additional  capital
equipment.  In addition, Note Purchase Agreements entered into by the Company in
connection  with  the  1997  Private  Placement,   provide  that  under  certain
circumstances,  the Company  would be required to redeem all or some  portion of
the $10.4 million principal due thereunder, which redemption could significantly
accelerate the Company's cash expenditures and capital  requirements  beyond the
levels currently anticipated.

      The Company intends to seek  additional  funding through public or private
equity or debt financings, collaborative arrangements or from other sources. The
Company may seek additional  capital at any time that it deems market conditions
to be favorable.  If additional  funds are raised by issuing equity  securities,
significant  dilution to  existing  stockholders  may result.  In the event that
additional funds are obtained through collaborative agreements,  such agreements
may  require the company to  relinquish  rights to certain of its  technologies,
product  candidates,  products or marketing  territories  that the Company would
otherwise  seek to develop or  commercialize  itself.  There can be no assurance
that  additional  financing will be available on acceptable  terms or at all. If
adequate  funds are not available,  the Company may be required to delay,  scale
back  or  eliminate  one or  more  of its  research,  discovery  or  development
programs,  which could have a material adverse effect on the Company's business,
financial condition and results of operations.  See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."

      Uncertainties  Associated with Clinical Trials. Shaman has conducted,  and
plans to continue to conduct, extensive and costly clinical trials to assess the
safety and efficacy of its  potential  products.  The rate of  completion of the
Company's  clinical trials is dependent upon,  among other factors,  the rate of
completion and approval of trial protocols, the availability of funds for trials
and the rate of 


                                       18
<PAGE>

patient enrollment.  Patient enrollment is a function of many factors, including
the nature of the Company's clinical  trial  protocols, existence  of  competing
protocols, size of patient population, proximity of patients to  clinical  sites
and eligibility criteria for the study. Delays in patient enrollment will result
in increased costs and delays, which could have a material adverse effect on the
Company's  ability to complete clinical trials in a timely fashion.

      The Company  cannot assure that patients  enrolled in its clinical  trials
will respond to the Company's product candidates. Setbacks are to be expected in
conducting  human  clinical  trials.   Failure  to  comply  with  the  U.S.  FDA
regulations  applicable  to such  testing  can  result in delay,  suspension  or
cancellation of such testing, and/or refusal by the FDA to accept the results of
such testing. In addition, the FDA or the Company may suspend clinical trials at
any time if either of them concludes that any patients participating in any such
trial are being exposed to unacceptable health risks.  Further,  there can be no
assurance  that human  clinical  testing  will  demonstrate  that any current or
future product candidate is safe or effective or that data derived from any such
study  will  be  suitable  for  submission  to  the  FDA  or  other   regulatory
authorities.  Failure of the Company's  clinical trials to demonstrate safety or
efficacy in humans  could cause the delay,  suspension,  or  termination  of any
product  program  and could  have a  material  adverse  effect on the  Company's
business, financial condition and results of operations.

      Dependence on  Collaborative  Relationships.  The  Company's  research and
development  efforts in its  diabetes  program and, to a lesser  extent,  in its
other programs,  is dependent upon its arrangements with Lipha/Merck and Ono and
the  compliance  of  such  partners  with  the  terms  and  conditions  of  such
collaborative  agreements including,  without limitation,  providing funding for
research and development efforts and the achievement of milestones and assisting
the Company in its research and development efforts.  These partners may develop
products  that may compete with those of the  Company.  The amount and timing of
resources they allocate to these  programs is not within the Company's  control.
There can be no assurance that these partners will perform their  obligations as
expected or that any  significant  revenues will ultimately be derived from such
agreements.  The Company's agreement with Ono may be terminated in the event Ono
determines further  development of compounds is not warranted,  provided certain
other conditions are met.  Termination of either agreement is subject to certain
surviving  obligations.  If one or more such partners elected to terminate their
relationships  with the  Company,  or if the  Company  or its  partners  fail to
achieve  targeted  milestones,  it could have a material  adverse  effect on the
Company's  ability  to fund such  programs,  or to  develop  any  products  on a
collaborative basis with such partners. In addition, the Company may seek future
collaborative agreements in order to commercialize additional product candidates
or that any such agreements  will be successful.  There can be no assurance that
the  Company  will be able to enter  into  such  additional  agreements  and any
failure  could  have a  material  effect on the  Company's  business,  financial
condition, and results of operations. See "Business--Collaborative Relationships
and License Agreements."

      Rapid Technological Change and Substantial Competition. The pharmaceutical
industry is subject to rapid and substantial technological change. Technological
competition from pharmaceutical and biotechnology  companies and universities is
intense.  Many  of  these  entities  have  significantly  greater  research  and
development  capabilities,  as well  as  substantial  marketing,  manufacturing,
financial and managerial resources,  and represent  significant  competition for
the Company.  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  desired
therapeutic  effect than  products  developed  by the Company.  These  competing
products may be more  effective  and less costly than the products  developed by
the Company. In addition, other forms of medical treatment may offer competition
to the Company's  products.  The development of competing compounds could have a
material  adverse  effect on the  Company's  business,  


                                       19
<PAGE>

financial  condition  or  results  of  operations.  See "Business--Competition."

      Government  Regulation;  No Assurance  of  Regulatory  Approvals.  All new
drugs,  including  the  Company's  products  under  development,  are subject to
extensive and rigorous  regulation by the federal  government,  principally  the
FDA, and  comparable  agencies in state and local  jurisdictions  and in foreign
countries.   These  authorities   impose   substantial   requirements  upon  the
preclinical and clinical testing,  manufacturing and marketing of pharmaceutical
products.  The steps required before a drug may be approved for marketing in the
United States  generally  include (i)  preclinical  laboratory and animal tests,
(ii) the  submission  to the FDA of an IND for  human  clinical  testing,  (iii)
adequate and well  controlled  human clinical trials to establish the safety and
efficacy of the drug, (iv) submission to the FDA of an NDA, and (v) satisfactory
completion of an FDA inspection of the  manufacturing  facility or facilities at
which the drug is made to assess compliance with GMP.

      Lengthy and detailed  preclinical  and  clinical  testing,  validation  of
manufacturing and quality control processes, and other costly and time-consuming
procedures are required.  Satisfaction  of these  requirements  typically  takes
several years and the time needed to satisfy them may vary substantially,  based
on the type, complexity and novelty of the pharmaceutical product. The effect of
government  regulation  may be to delay or to  prevent  marketing  of  potential
products for a considerable  period of time and to impose costly procedures upon
the Company's  activities.  There can be no assurance  that the FDA or any other
regulatory agency will grant approval for any products  developed by the Company
on a timely basis,  or at all.  Success in  preclinical  or early stage clinical
trials does not assure success in later stage clinical trials.

      Data obtained from preclinical and clinical  activities are susceptible to
varying interpretations which could delay, limit or prevent regulatory approval.
If  regulatory  approval  of a product  is  granted,  such  approval  may impose
limitations on the indicated uses for which a product may be marketed.  Further,
even if regulatory  approval is obtained,  later discovery of previously unknown
problems  with a product may result in  restrictions  on the product,  including
withdrawal  of the product  from the market.  Any delay or failure in  obtaining
regulatory  approvals  would have a  material  adverse  effect on the  Company's
business, financial condition and results of operation.

      Among the conditions for FDA approval of a  pharmaceutical  product is the
requirement that the  manufacturer's  (either the Company's own or a third-party
manufacturer)  quality control and manufacturing  procedures  conform to current
GMP,  which  must be  followed  at all  times.  The FDA  strictly  enforces  GMP
requirements through periodic unannounced inspections. There can be no assurance
that the FDA will determine that the facilities and manufacturing  procedures of
the Company or any third-party  manufacturer of the Company's  planned  products
will conform to GMP requirements.  Additionally,  the Company or its third-party
manufacturer must pass a pre-approval inspection of its manufacturing facilities
by  the  FDA  before  obtaining  marketing  approval.  Failure  to  comply  with
applicable regulatory  requirements may result in penalties such as restrictions
on a product's marketing or withdrawal of a product from the market.

      The FDA's policies may change and additional government regulations may be
promulgated  which could prevent or delay  regulatory  approval of the Company's
potential products.  Moreover,  increased attention to the containment of health
care costs in the United States could result in new government  regulations that
could have a material adverse effect on the Company's  business.  The Company is
unable to predict the likelihood of adverse  governmental  regulation that might
arise from future  legislative or  administrative  action,  either in the United
States or abroad. See "Business--Government Regulation."

      Dependence on Sources of Supply.  The Company currently imports all of the
plant  materials from which its products are derived from countries in South and
Latin America, Africa and Southeast Asia. 


                                       20
<PAGE>

To  the  extent  that  its  products  cannot  be   economically  synthesized  or
otherwise  produced,  the Company will continue to be dependent upon a supply of
raw plant  material.  The Company does not have formal  agreements in place with
all of its suppliers. In addition, a continued source of plant supply is subject
to the risks inherent in  international  trade.  These risks include  unexpected
changes in  regulatory  requirements,  exchange  rates,  tariffs  and  barriers,
difficulties  in  coordinating  and  managing  foreign   operations,   political
instability and potentially adverse tax consequences. Interruptions in supply or
material increases in the cost of supply could have a material adverse effect on
the  Company's  business,  financial  condition  and results of  operations.  In
addition,  tropical  rain forests,  and certain  irreplaceable  plant  resources
therein, are currently threatened with destruction. In the event portions of the
rain forests are destroyed which contain the source material from which Shaman's
current or future products are derived,  such destruction  could have a material
adverse  effect on the Company's  business,  financial  condition and results of
operations.

      Limited  Manufacturing and Marketing Experience and Capacity.  The Company
currently produces products only in quantities necessary for clinical trials and
does not have the staff or  facilities  necessary  to  manufacture  products  in
commercial  quantities.  As a result,  the  Company  must rely on  collaborative
partners or third-party manufacturing facilities,  which may not be available on
commercially  acceptable  terms adequate for Shaman's  long-term  needs.  If the
Company should  encounter  delays or difficulties in establishing  relationships
with  qualified  manufacturers  to produce,  package and distribute its finished
products,   clinical  trials,   regulatory  filings,   market  introduction  and
subsequent sales of such products could be adversely affected.

      Contract manufacturers must adhere to GMP regulations strictly enforced by
the FDA on an ongoing basis through its facilities inspection program.  Contract
manufacturing  facilities must pass a pre-approval  plant inspection  before the
FDA will approve an NDA. Certain material manufacturing changes that occur after
approval are also subject to FDA review and clearance or approval.  There can be
no assurance that the FDA or other regulatory  agencies will approve the process
or the  facilities by which any of the Company's  products may be  manufactured.
The Company's  dependence on third parties for the  manufacture  of products may
adversely  affect the  Company's  ability to develop and  deliver  products on a
timely and  competitive  basis.  Should the Company be  required to  manufacture
products  itself,  the Company  will be subject to the  regulatory  requirements
described above, to similar risks regarding  delays or difficulties  encountered
in  manufacturing  any such  products  and will require  substantial  additional
capital.  There can be no assurance that the Company will be able to manufacture
any such products successfully or in a cost-effective manner.

      The Company  currently has no sales staff.  To the extent that the Company
does not or is unable to enter into  co-promotion  agreements  or to arrange for
third party distribution of its products,  significant additional resources will
be required to develop a complete  marketing  and sales  force.  There can be no
assurance that the Company will be able to enter into  collaborative  agreements
or successfully establish a marketing and sales force.

      Uncertainty  Regarding  Patents  and  Proprietary  Rights.  The  Company's
success will depend in large part on its ability to obtain and maintain patents,
protect trade secrets and operate without infringing upon the proprietary rights
of others.  Moreover,  competitors may have filed patent applications,  may have
been issued  patents or may obtain  additional  patents and  proprietary  rights
relating to products or processes  competitive with those of the Company.  There
can be no assurance  that the Company's  patent  applications  will be approved,
that  the  Company  will  develop  additional   proprietary  products  that  are
patentable,  that any issued  patents  will  provide the Company  with  adequate
protection for its  inventions or will not be challenged by others,  or that the
patents of others will not impair the  ability of the  Company to  commercialize
its  products.  The  patent  position  of firms in the  pharmaceutical  industry
generally is highly uncertain, involves complex legal and factual questions, and
has  recently  been the subject of much  litigation.  No  consistent  policy has
emerged from 


                                       21
<PAGE>

the U.S. Patent and  Trademark  Office  or the courts  regarding  the breadth of
claims  allowed  or the  degree  of  protection  afforded  under  pharmaceutical
patents.  There can be no assurance that others will not  independently  develop
similar products,  duplicate any of the Company's  products or design around any
patents of the Company.

      A  number  of   pharmaceutical   companies   and   research  and  academic
institutions have developed technologies,  filed patent applications or received
patents on various  technologies that may be related to the Company's  business.
Some of these  technologies,  applications  or  patents  may  conflict  with the
Company's  technologies or patent applications.  The European Patent Office, the
French Patent Office, the German Patent Office and the Australian Patent Office,
have each granted a patent containing broad claims to  proanthocyanidin  polymer
compositions (and methods of use of such compositions), which are similar to the
Company's specific proanthocyanidin polymer composition,  to Leon Cariel and the
Institut des Substances Vegetales. The effective filing date of these patents is
prior to the  effective  filing date of the  Company's  foreign  pending  patent
application  in Europe.  Certain of the  foreign  patents  have been  granted in
jurisdictions  where examination is not rigorous.  The Company has instituted an
Opposition in the European  Patent Office against  granted  European  Patent No.
472531  owned by Leon Cariel and  Institut des  Substances  Vegetales.  Based on
opinions of foreign  counsel,  the Company  believes that the granted claims are
invalid and intends to vigorously prosecute the Opposition.

      There can be no assurance  that the Company will be  successful  in having
the granted  European patent revoked or the claims  sufficiently  narrowed so as
not to potentially cover the Company's  proanthocyanidin polymer composition and
methods of use.  There can be no assurance that Leon Cariel and the Institut des
Substances  Vegetales will not assert claims relating to this patent against the
Company.  There can be no assurance  that the Company  would be able to obtain a
license to this patent at all, or at  reasonable  cost, or be able to develop or
obtain  alternative  technology  to use in  Europe  or  elsewhere.  The  earlier
effective  filing date of this patent could limit the scope of the  patents,  if
any,  that the  Company  may be able to obtain  or  result in the  denial of the
Company's patent applications in Europe or elsewhere.

    In the United States,  the Patent and Trademark Office has rendered judgment
in an  Interference  declared  between the Company's  issued patent covering its
specific  proanthocyanidin  polymer  composition  and  certain  claims  of  U.S.
application  corresponding to the granted European patent of Leon Cariel and the
Institut des Substances  Vegetales by Daniel Jean and Leon Cariel.  Judgment was
awarded to the Company. Since the period for appeal has passed, this judgment is
now final.

    Additionally,  in connection with the Interference  proceeding,  the Company
has had an  opportunity to review the claims and file history of the Daniel Jean
and Leon Cariel  patent  application  which,  under U.S.  patent  law,  are kept
confidential. One broad claim, in particular, of the Daniel Jean and Leon Cariel
patent  application,  which was not involved in the Interference  proceeding and
which  has  been   indicated  to  be  allowable,   covers  a  large  variety  of
proanthocyanidin  polymers.  Based on opinion of counsel,  the Company  believes
that this  broad  claim is  subject  to attack as  invalid in view of prior art.
Based  on  knowledge  of  the  Company's   specific   proanthocyanidin   polymer
composition,  the  Company  believes  that the  manufacture,  use or sale of its
specific  proanthocyanidin polymer composition would not constitute infringement
of this broad claim, once it issues. There can be no assurances,  however,  that
the Company would  prevail  should an action for  infringement  of such claim be
commenced. In addition, if patents that cover the Company's activities have been
or are issued to other  companies,  there can be no  assurance  that the Company
would be able to obtain  licenses to these  patents at a reasonable  cost, or at
all, or be able to develop or obtain alternative technology.

      If the Company does not obtain such licenses, it could encounter delays or
be  precluded  from  introducing  products  to  the  market.  Litigation  may be
necessary to defend against or assert claims of 


                                       22
<PAGE>

infringement,  to enforce  patents  issued to the  Company  or to protect  trade
secrets or know-how owned by the Company.  Additional  interference  proceedings
may be declared or necessary to determine  issues of invention;  such litigation
and/or  interference  proceedings  could  result  in  substantial  cost  to  and
diversion of effort by, and may have a material  adverse effect on, the Company.
In addition, there can be no assurance that these efforts by the Company will be
successful.

      The Company's competitive position is also dependent upon unpatented trade
secrets.  There can be no assurance that others will not  independently  develop
substantially  equivalent  proprietary  information  and techniques or otherwise
gain access to the Company's trade secrets,  that such trade secrets will not be
disclosed or that the Company can  effectively  protect its rights to unpatented
trade  secrets.  To the extent that the Company or its  consultants  or research
collaborators  use  intellectual  property owned by others in their work for the
Company,  disputes  also may arise as to the  rights  in  related  or  resulting
know-how and inventions. See "Business--Patents and Proprietary Rights."

      Patent  applications  in the United  States are  generally  maintained  in
secrecy  until  patents are issued.  Since  publication  of  discoveries  in the
scientific  or patent  literature  tends to lag  behind  actual  discoveries  by
several  months,  Shaman  cannot be  certain  that it was the first to  discover
compositions  covered by its pending  patent  applications  or the first to file
patent  applications  on such  compositions.  There can be no assurance that the
Company's patent  applications  will result in issued patents or that any of its
issued  patents  will  afford   comprehensive   protection   against   potential
infringement.

      The Company is prosecuting  its patent  applications  with the PTO but the
Company  does  not know  whether  any of its  applications  will  result  in the
issuance of any patents or, if any patents are issued, whether any issued patent
will provide  significant  proprietary  protection  or will be  circumvented  or
invalidated.  During the course of patent  prosecution,  patent applications are
evaluated, inter alia, for utility, novelty, non-obviousness and enablement. The
PTO may require that the claims of an  initially  filed  patent  application  be
amended if it is determined that the scope of the claims includes subject matter
that is not useful, novel, non-obvious or enabled.

      Furthermore,  in certain instances, the practice of a patentable invention
may require a license from the holder of dominant patent rights.  In cases where
one  party  believes  that it has a claim to an  invention  covered  by a patent
application  or  patent  of a second  party,  the first  party  may  provoke  an
interference  proceeding in the PTO or such a proceeding  may be declared by the
PTO.  In  general,  in an  interference  proceeding,  the PTO would  review  the
competing  patents and/or patent  applications  to determine the validity of the
competing  claims,   including  but  not  limited  to  determining  priority  of
invention.  Any such determination would be subject to appeal in the appropriate
U.S. federal courts.

      There can be no assurance that additional  patents will be obtained by the
Company or that issued  patents will provide a  substantial  protection or be of
commercial benefit to the Company. The issuance of a patent is not conclusive as
to its validity or  enforceability,  nor does it provide the patent  holder with
freedom to operate  without  infringing  the patent  rights of others.  A patent
could be challenged by litigation  and, if the outcome of such  litigation  were
adverse  to the  patent  holder,  competitors  could be free to use the  subject
matter covered by the patent, or the patent holder may license the technology to
others in settlement of such litigation. The invalidation of patents owned by or
licensed to the Company or  non-approval  of pending patent  applications  could
create increased competition,  with potential adverse effects on the Company and
its  business  prospects.  In  addition,  there  can be no  assurance  that  any
applications  of  the  Company's   technology  will  not  infringe   patents  or
proprietary rights of others or that licenses that might be required as a result
of such infringement for the Company's  processes or products would be available
on commercially reasonable terms, if at all.

    The  Company  cannot  predict  whether  its  or  its   competitors'   patent
applications will result in valid patents being issued. Litigation,  which could
result in substantial cost to the Company,  may also 


                                       23
<PAGE>

be necessary to enforce the Company's  patent and  proprietary  rights and/or to
determine the scope and validity of others'  proprietary rights. The Company may
participate in  interference  proceedings  that may in the future be declared by
the U.S. Patent and Trademark Office,  which could result in substantial cost to
the Company.  There can be no assurance that the outcome of any such  litigation
or interference proceedings will be favorable to the Company or that the Company
will be able to obtain  licenses to  technology  that it may require or that, if
obtainable, such technology can be licensed at a reasonable cost.

     Year 2000 Compliance. The Company is in the process of assessing the impact
of year 2000 on its operations and systems, including those of its suppliers and
collaborators  and  other  third  parties.  Management  is  in  the  process  of
formalizing  its  assessment   procedures  and  developing  a  plan  to  address
identified  issues, if any. To date, the Company has evaluated its financial and
accounting  systems and  concluded  that they are not and will not be materially
affected by the year 2000. The Company does not yet know the extent,  if any, of
the impact of the year 2000 on its other systems and equipment or those of third
parties with which the Company  does  business.  There can be no assurance  that
third  parties,   such  as  suppliers,   clinical  research   organizations  and
collabortive  parties,  are using  systems that are year 2000  compliant or will
address  any year 2000  issues  in a timely  fashion,  or at all.  Any year 2000
compliance problems of either the Company, its suppliers,  its clinical research
organizations,  or its  collaborative  partners  could have a  material  adverse
effect on the Company's business, operating results and financial conditions.

      Uncertainty of Product Pricing,  Reimbursement  and Related  Matters.  The
Company's  business  may be  materially  adversely  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,  the
pricing or  profitability  of health  care  products  is  subject to  government
control.  In the United States,  there have been, and the Company  expects 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 or reforms will be adopted, the announcement
of such  proposals  or  reforms  could  have a  material  adverse  effect on the
Company's ability to raise capital or form  collaborations,  and the adoption of
such proposals or reforms could have a material  adverse effect on the Company's
business, financial condition or results of operations.

      In addition, in both the United States and elsewhere, sales of health care
products are dependent in part on the availability of  reimbursement  from third
party  payers,  such as  government  and private  insurance  plans.  Significant
uncertainty exists as to the reimbursement  status of newly approved health care
products, and third party payers are increasingly challenging the prices charged
for medical  products and services.  If the Company  succeeds in bringing one or
more products to the market,  there can be no assurance that  reimbursement from
third party payers will be available or will be  sufficient to allow the Company
to sell its products on a competitive or profitable basis.

      Possible  Volatility of Stock Price.  From time to time,  the stock market
has experienced  significant price and volume fluctuations that may be unrelated
to the operating performance of particular companies or industries. In addition,
the market price of the Company's  Common  Stock,  like the stock prices of many
publicly traded biotechnology and smaller pharmaceutical companies, has been and
may continue to be highly volatile.  Announcements of technological innovations,
regulatory matters or new commercial products by the Company or its competitors,
developments  or disputes  concerning  patent or proprietary  rights,  publicity
regarding  actual or  potential  medical  results  relating  to  products  under
development by the Company or its competitors,  regulatory  developments in both
the United  States and  foreign  countries,  public  concern as to the safety of
pharmaceutical  products,  and economic and other external  factors,  as well as
period-to-period  fluctuations  in  financial  results,  may have a  significant
impact on the market  price of  Shaman's  Common  Stock.  See "Part  II--Item 5:
Market for Registrant's Common Stock and Related Stockholder Matters."

                                       24
<PAGE>

      Environmental  Regulation. In connection with its research and development
activities and manufacturing of clinical trial materials, the Company is subject
to federal, state and local laws, rules,  regulations and policies governing the
use,  generation,   manufacture,  storage,  air  emission,  effluent  discharge,
handling  and  disposal of certain  materials  and wastes.  Although the Company
believes  that it has complied with these laws and  regulations  in all material
respects  and  has  not  been  required  to  take  any  action  to  correct  any
noncompliance,  there can be no assurance  that the Company will not be required
to incur  significant  costs to comply with  environmental and health and safety
regulations in the future.  The Company's  research and  development  activities
involve  the  controlled  use of  hazardous  materials,  chemicals,  viruses 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 state and federal  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 such liability could exceed the resources of the Company.

      Anti-Takeover  Effect of  Delaware  Law and  Certain  Charter  and  Bylaws
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 Directors has the authority to issue up to 600,000 additional
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.

      Product  Liability  Exposure;  Limited Insurance  Coverage.  The Company's
business exposes it to potential  product  liability risks which are inherent in
the  development,  testing,  manufacture,  marketing and sale of  pharmaceutical
products.  Product liability insurance for the pharmaceutical industry generally
is  expensive.  There can be no assurance  that the  Company's  present  product
liability  insurance  coverage is adequate.  Such existing  coverage will not be
adequate as the Company further  develops its products,  and no assurance can be
given that adequate  insurance  coverage  against all  potential  claims will be
available in sufficient amounts or at a reasonable cost.

      Limitation of Liability and Indemnification.  The Company's Certificate of
Incorporation  limits,  to the maximum  extent  permitted  by Delaware  Law, the
personal  liability  of  directors  for  monetary  damages  for  breach of their
fiduciary  duties as a director.  The Company's  Bylaws provide that the Company
shall  indemnify  its officers and directors and may indemnify its employees and
other  agents to the fullest  extent  permitted  by law. The Company has entered
into  indemnification  agreements  with its  officers and  directors  containing
provisions which are in some respects broader than the specific  indemnification
provisions contained in Delaware Law. The indemnification agreements may require
the Company,  among other  things,  to  indemnify  such  officers and  directors
against certain  liabilities that may arise by reason of their status or service
as directors or officers (other than liabilities arising 


                                       25
<PAGE>

from  willful  misconduct  of a  culpable  nature),  to advance  their  expenses
incurred as a result of any  proceeding  against  them as to which they could be
indemnified,  and to obtain directors' and officers' insurance,  if available on
reasonable terms.

      Section 145 of the Delaware Law provides that a corporation  may indemnify
a director,  officer, employee or agent made or threatened to be made a party to
an action by reason of the fact that he was a  director,  officer,  employee  or
agent of the  corporation  or was  serving  at the  request  of the  corporation
against expenses actually and reasonably incurred in connection with such action
if he acted in good faith and in a manner he reasonably believed to be in or not
opposed to the best  interests  of the  corporation,  and,  with  respect to any
criminal  action or proceeding,  had no reasonable  cause to believe his conduct
was  unlawful.  Delaware  Law  does not  permit a  corporation  to  eliminate  a
director's  duty of care,  and the  provisions of the Company's  Certificate  of
Incorporation have no effect on the availability of equitable remedies,  such as
injunction or rescission, for a director's breach of the duty of care.

      Dependence  on Key  Personnel.  The  Company's  ability  to  maintain  its
competitive position depends in part upon the continued contributions of its key
senior management.  The Company's future performance also depends on its ability
to attract and retain qualified management and scientific personnel. Competition
for such  personnel is intense,  and there can be no assurance  that the Company
will be able to continue to attract, assimilate or retain other highly qualified
technical and management  personnel in the future.  The loss of key personnel or
the failure to recruit additional personnel or to develop needed expertise could
have a material adverse effect on the Company's  business,  financial  condition
and results of operations.

ITEM  2.  PROPERTIES

      Shaman's headquarters are located in South San Francisco,  California. The
Company leases approximately 73,000 square feet for offices, laboratories, pilot
manufacturing and preclinical testing in three adjacent buildings. An additional
building with approximately  43,000 square feet becomes available to the Company
in late 1999.  The lease on these spaces  expires  February  28,  2003,  and the
Company has an option to renew the lease for two additional  five-year  periods.
The South San Francisco  facility  serves as the principal site for  preclinical
research, clinical trial management, process development,  quality assurance and
quality  control,  regulatory and other affairs.  The Company  believes that its
current  facilities  are  suitable  and  adequate  to  meet  its  needs  for the
foreseeable future.  Shaman anticipates it will be able to expand its facilities
to nearby  locations as the need  develops.  There can be no assurance  however,
that such space will be available on favorable terms, if at all.

ITEM  3.  LEGAL PROCEEDINGS

      The Company has initiated  arbitration against Dr. Michael Tempesta with
respect to a February  1990  license  agreement.  See  "Business--Collaborative
Relationships and License Agreements."

     Ms. Jacqueline Cossmon, the Company's former Vice President of investor and
public  relations filed a complaint  against the Company with the Superior Court
of the  State of  California,  County  of San  Mateo on  December  31,  1997 for
wrongful  termination and is seeking  monetary  damages.  The Company denies any
wrongdoing  with respect to Ms.  Cossmon and intends to  vigorously  defend this
action.

      With the  exception  of the  patent  opposition  proceeding  in  Europe,
arbitration  against Dr.  Tempesta and Ms.  Cossmon's  action,  the Company is
not   party   to   any   other   material   legal   proceedings.   See   "Risk
Factors--Uncertainty Regarding Patents and Proprietary Rights."


                                       26
<PAGE>


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

      No matters  were  submitted  to a vote of  securities  holders  during the
fourth quarter of the fiscal year ended December 31, 1997.


                                       27
<PAGE>




                                    PART II

ITEM  5.    MARKET FOR  REGISTRANT'S  COMMON  STOCK AND RELATED  STOCKHOLDER
            MATTERS

      The Company's  common stock trades on the Nasdaq National Market tier of
the Nasdaq  Stock Market under the symbol  SHMN.  The  Company's  Common Stock
began trading on January 26, 1993.

      Set forth below is the range of high and low  closing  sale prices for the
Company's  common stock for each quarter in the two most recent fiscal years, as
regularly quoted in the Nasdaq National Market.
<TABLE>
<CAPTION>

                                       High           Low
<S>                                    <C>            <C>    
                   Q1 FY 96          $ 7.32         $ 5.13
                   Q2 FY 96            9.00           6.13
                   Q3 FY 96            8.63           5.75
                   Q4 FY 96            7.38           5.38

                   Q1 FY 97            6.25           3.88
                   Q2 FY 97            6.19           4.69
                   Q3 FY 97            7.00           5.12
                   Q4 FY 97            7.06           4.25
</TABLE>

    As of February 23, 1998, there were approximately 847 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.


                                       28
<PAGE>




ITEM  6.  SELECTED FINANCIAL DATA  (in thousands, except per share data)
<TABLE>
<CAPTION>

Year Ended December 31,            1997     1996      1995      1994       1993
-----------------------            ----     ----      ----      ----       ----                               
<S>                                <C>      <C>       <C>       <C>        <C>    
Statements of Operations Data:
   Revenue from collaborative
      agreements                 $ 3,500  $ 3,406   $ 2,210   $ 1,360   $ 2,050
   Operating expenses (1):
     Research and development     24,140   19,138    17,635    18,643    13,646
     General and administrative    4,833    3,537     3,705     3,545     2,659
                                 -------  -------   -------   -------   -------
    Total operating expenses      28,973   22,675    21,340    22,188    16,305       
                                 -------  -------   -------   -------   -------

   Loss from operations          (25,473) (19,269)  (19,130)  (20,828)  (14,255)

   Interest income                 1,218    1,082     1,695     2,045     1,543
   Interest expense (cash)        (1,341)    (603)     (569)     (698)     (315)
   Interest expense (non-cash     (3,692)      --        --        --        --
                                  -------  -------   -------   -------  -------
                                                                                                           
Net loss                        $(29,288) $(18,790) $(18,004) $(19,481)$(13,027)
                                ========= ========= ========= ========= ========
                           
                                                                       

Net loss per share (2)           $ (1.72)  $ (1.39)  $ (1.37)  $ (1.50) $ (1.30)
                                  =======   =======   =======   =======  =======
                                                                        
                              
Shares used in calculation
   of net loss per share (2)      17,010    13,496    13,161    12,986   10,036

</TABLE>
  
<TABLE>
<CAPTION>

At December 31,                1997      1996       1995       1994      1993
---------------                ----      ----       ----       ----      ----
<S>                            <C>       <C>        <C>        <C>       <C>   

Balance Sheet Data:
   Cash, cash equivalents,
      and investments       $ 21,421  $ 16,533   $ 26,665   $ 39,843   $ 57,333
   Working capital            14,547     9,641     22,850     33,422     36,711
   Total assets               26,753    22,377     33,810     49,673     67,229
   Long-term obligations,
      excluding current
      installments            13,985     2,569      4,930      3,932      3,261
   Accumulated deficit      (111,910)  (82,622)   (63,832)   (45,828)   (26,348)
   Total stockholders' 
      equity                 $ 5,148  $ 11,977   $ 24,205   $ 41,300   $ 60,436
                                  
</TABLE>

(1)   Certain expenses have been reclassified to conform to 1997 presentation.

(2)   Net loss per  share is based on the  weighted  average  number  of  common
      shares  outstanding  during  the  period  and,  for  periods  prior to the
      Company's  initial  public  offering  in  January  1993,   certain  common
      equivalent shares.  The company has not paid any dividends on its capital
      stock since its inception.


                                       29
<PAGE>



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

Overview

     Shaman  Pharmaceuticals,  Inc.  ("Shaman" or the  "Company")  discovers and
develops  novel  pharmaceutical  products for major human  diseases by isolating
active  compounds  from  tropical  plants.  The Company has three  compounds  in
clinical   development:   Provir,   an  oral   product  for  the   treatment  of
AIDS-associated  and watery  diarrhea;  nikkomycin Z, an oral antifungal for the
treatment of systemic fungal infections;  and SP-134101, an oral product for the
treatment  of Type II  diabetes.  Shaman  maintains  an active  Type II diabetes
research  program  which serves as the basis for its  collaborations  with Lipha
s.a.,   a   wholly-owned   subsidiary   of  Merck   KGaA,   Darmstadt,   Germany
("Lipha/Merck"), and with Ono Pharmaceutical Co., Ltd. ("Ono") of Osaka, Japan.

      The Company began  operations in March 1990. To date,  Shaman has not sold
any  products  and does not  anticipate  receiving  product  revenue in the near
future.   The  Company's   accumulated   deficit  at  December  31,  1997,   was
approximately $ 111.9 million.  Shaman expects to continue to incur  substantial
and increasing  losses over the next several years, due primarily to the expense
of preclinical  studies,  clinical trials and its ongoing research program.  The
Company expects that losses will fluctuate from quarter to quarter and that such
fluctuations could be substantial. Shaman has financed its research, development
and  administrative   activities  through  various  private  and  public  equity
financings,  loans  and  debt  financings,  and  collaborative  agreements  with
pharmaceutical  companies  and,  to  a  lesser  extent,  through  equipment  and
leasehold improvement lease financings.

Results of Operations for the Years Ended December 31, 1997, 1996 and 1995

      The Company recorded collaborative revenues of $3.5 million, $3.4 million,
and $2.2  million for 1997,  1996,  and 1995,  respectively.  Revenues  for 1997
resulted  from the  Company's  on-going  research  funding from Ono and research
funding from Shaman's collaboration with Lipha/Merck. Revenues for 1996 resulted
from the  Company's  on-going  research  funding  from Ono, an  additional  $1.0
million payment from Ono for enhanced rights to Shaman's antidiabetic compounds,
and  research  payments  and  access  fees  from  Shaman's   collaboration  with
Lipha/Merck.  Revenues in 1995 resulted  solely from the Company's  relationship
with Ono,  and  included a  one-time  access  fee  associated  with the May 1995
commencement  of the  collaboration.  The Company  expects  that  revenues  from
collaborative agreements will continue to fluctuate in the future as development
of its various compounds proceeds and new products are partnered for development
and commercialization.

     The Company  incurred  research and development  expenses of $24.1 million,
$19.1 million, and $17.6 million for 1997, 1996, and 1995,  respectively.  These
expenses include salaries for scientific personnel,  clinical development costs,
laboratory  supplies,  patent  protection and  consulting  fees,  travel,  plant
collections, facilities expenses and other expenditures relating to research and
product development. Research and development expenses increased $5.0 million in
1997 compared with 1996,  and increased $1.5 million in 1996 compared with 1995.
The  increase in 1997 was  primarily  attributable  to the  Company's  increased
clinical  development  activities  with respect to Provir,  partially  offset by
reduced  expenses for clinical  development  activities  for  nikkomycin  Z. The
increase  in  1996  was  primarily   attributable  to  the  Company's   clinical
development   activities  for  Provir,  as  well  as  additional   research  and
development activities with respect to nikkomycin Z, partially offset by reduced
expenses  for  clinical   development   activities  for  Virend.   Research  and
development expenses are expected to increase in 1998 as Provir enters Phase III
clinical  development  for  AIDS-associated  diarrhea,  other products  continue
through  development and the Company  actively  maintains its diabetes  research
program.

                                       30
<PAGE>

      General and  administrative  expenses were $4.8 million,  $3.5 million and
$3.7  million for 1997,  1996 and 1995,  respectively.  These  expenses  include
administrative salaries, consulting, legal, travel and other operating expenses.
General and  administrative  expenses increased $1.3 million in 1997 compared to
1996,  and decreased $0.2 million in 1996 compared to 1995. The increase in 1997
was primarily  attributable an increase in compensation  and marketing  research
related to late stage clinical  products,  as well as additional  legal expenses
related  to certain  disputes  related to the  Company's  intellectual  property
rights. The Company's expanded research and clinical  activities in 1998 are not
expected  to  require  commensurate  increases  in  general  and  administrative
support.

      Interest income was $1.2 million,  $1.1 million and $1.7 million for 1997,
1996 and 1995, respectively. Interest income increased $100,000 in 1997 compared
with 1996 and decreased  $600,000 in 1996 compared  with 1995.  Interest  income
fluctuations  have been  consistent  with changes in average cash and investment
balances  with which the Company  substantially  funded its  operations in 1997,
1996 and 1995. The balances of cash, cash equivalents and investments were $21.4
million,  $16.5 million and $26.7  million at December 31, 1997,  1996 and 1995,
respectively.

      Interest  expense was $5.0 million,  $603,000 and $569,000 for 1997,  1996
and 1995,  respectively.  Interest expense  increased in 1997 compared with 1996
principally  due to a $3.7  million  non-cash  interest  charge  related  to the
issuance  of senior  convertible  notes in June  1997,  as well as the  interest
expense  related to the Company's  secured debt financing in May 1997.  Interest
expense  increased  in 1996  compared  with 1995 as the Company  absorbed a full
year's expense on its unsecured  term loan.  The Company's  general policy is to
finance  capital  equipment and tenant  improvements on a long-term  basis,  and
interest  expense  in the  future  will be  dependent  in part on the  Company's
capacity to finance its future equipment needs.

      At  December  31,  1997,  the  Company  had  federal  net  operating  loss
carryforwards of  approximately $ 102 million.  The federal net operating loss
carryforwards  will expire at various  dates  beginning in 2004 through 2012, if
not sooner  utilized.  Utilization  of the net  operating  losses and credits is
subject to a  substantial  annual  limitation  due to the "change in  ownership"
provisions  of the  Internal  Revenue  Code of  1986,  as  amended.  The  annual
limitation  may result in the  expiration  of net  operating  losses and credits
before utilization.

Liquidity and Capital Resources

      As of December  31,  1997,  the  Company's  cash,  cash  equivalents,  and
investments totaled approximately $21.4 million,  compared with $16.5 million at
December 31, 1996. The net increase was primarily attributable to funds received
from the private placement of senior convertible notes in June 1997,  registered
direct public offerings in January 1997 and April 1997, the secured loan entered
into  in May  1997,  and  research  funding  from  Shaman's  collaboration  with
Lipha/Merck and Ono.

     In June  1997,  the  Company  privately  issued  $10.4  million  of  senior
convertible  notes ("The 1997  Private  Placement").  The notes mature in August
2000 and bear interest at a rate of 5.5% per annum. Interest on the notes may be
paid in Common Stock or cash at the Company's option.  Initially, the notes were
convertible  into Common  Stock of the Company at 100% of the low trading  price
during a designated time period prior to conversion provided that the conversion
price will not be less than $5.50 per share.  Starting  in  November  1997,  the
notes are  convertible  into Common Stock of the Company at a 10% discount  from
the low trading price during a designated  time period prior to the  conversion,
with a floor of $5.50  through  March 31,  1998,  pursuant  to a  November  1997
understanding  with the note  holders  to  revise  the  terms  of the  note.  In
connection  with this  understanding,  the  Company  issued to the note  holders
three-year  warrrants to purchase an aggregate of 137,500 shares of common stock
at an  exercise  price of $7.50 per  share.  The  Company  filed a  registration
statement with the SEC for the resale of shares issued upon  conversion of these
notes, which  registration  statement was declared effective on 


                                       31
<PAGE>

August 29, 1997.  Of the notes  issued,  $400,000  were issued to the  placement
agent as part of the  placement  fee.  The Company paid the  placement  agent an
additional  $300,000 in cash.  The placement  fees and other offering costs have
been  capitalized  in other  assets  as  deferred  issuance  costs and are being
amortized  to  interest  expense  over the life of the notes.  The net  proceeds
totaled  approximately  $9.5 million after the placement  agent's fees and other
offering expenses.

    In May 1997, the Company obtained a $5.0 million,  36-month term loan to pay
off pre-existing  debt, finance capital asset acquisitions and finance continued
research and clinical  development of the Company's existing product candidates.
The loan  carries an  interest  rate of 14.58%  and is payable in equal  monthly
installments over the term of the loan. The lender was granted ten-year warrants
to purchase 200,000 shares of the Company's Common Stock at $6.25 per share. The
Company has  attributed a value of $648,000 to these  warrants.  This amount has
been  recorded  as a discount  on the  related  debt and is being  amortized  as
interest expense over the term of the loan.

      In April 1997, the Company sold 1,600,000  shares of Common Stock at $4.97
per  share in a  registered  direct  public  offering,  marketed  solely  by the
Company,  which yielded  gross  proceeds of $7.95  million.  The net proceeds of
approximately  $7.8 million from this  offering  will be used for the  continued
research and clinical development of the Company's existing product candidates.

      In January 1997,  the Company sold  2,000,000  shares of Common Stock in a
registered  direct public  offering for gross proceeds of $9.0 million.  The net
proceeds of  approximately  $8.1 million from this offering will be used for the
continued  research and clinical  development of the Company's  existing product
candidates.

      In September  1996,  the Company  entered  into a five-year  collaborative
agreement with Lipha/Merck to jointly develop Shaman's  antihyperglycemic drugs.
Upon signing the  collaboration,  the Company received an annual research fee of
$1.5  million  which is  amortized  to revenue  over twelve  months,  as work is
performed.  The Company  also  received  approximately  $3.0 million for 388,918
shares of Common Stock priced at $7.71 per share,  representing a 20% premium to
the weighted  average price of the Company's  stock at the time of purchase.  In
exchange for  development  and marketing  rights in all countries  except Japan,
South Korea,  and Taiwan (which are covered under an earlier  agreement  between
Shaman  and Ono),  Lipha/Merck  will  provide  up to $9.0  million  in  research
payments and up to $10.5 million in equity  investments  priced at a 20% premium
to a multi-day  volume weighted  average price of the Company's  common stock at
the time of purchase. The agreement also provides for additional preclinical and
clinical  milestone  payments  to the  Company  in excess of $10.0  million  per
compound  for  each   antihyperglycemic   drug  developed  and   commercialized.
Lipha/Merck  will  bear  all  pre-clinical,   clinical,   regulatory  and  other
development expenses associated with the compounds selected under the agreement.
In addition,  as products are  commercialized,  Shaman will receive royalties on
all product sales outside the United States and up to 50% of the profits (if the
Company exercises its co-promotion  rights) or royalties on all product sales in
the United States.  Certain of the milestone  payments will be credited  against
future  royalty  payments,  if any,  due to the  Company  from sales of products
developed pursuant to the agreement.

      For the year ended December 31, 1997,  Shaman  recognized  $1.5 million in
revenue from the  Lipha/Merck  collaboration.  Shaman also received $1.5 million
for 200,787 shares of Common Stock priced at $7.47 per share, representing a 20%
premium to the  weighted  average  price of the  Company's  stock at the time of
purchase.

      In July 1996,  the Company  closed a private  placement (the "1996 Private
Placement")  pursuant  to  Regulation  S under the  Securities  Act of 1933,  as
amended,  in which it received  gross  proceeds of $3.3  million for the sale of
400,000 shares of Series A Convertible Preferred Stock and for the issuance of a
six-year  warrant to purchase 550,000 shares of the Company's Common Stock at an
exercise  price of  


                                       32
<PAGE>

$10.18 per share.  The Preferred Stock does not carry a dividend  obligation and
will  convert into Common Stock no later than July 23, 1999 at a price per share
between $6.00 and $8.15,  depending on the market value of the Company's  Common
Stock during the period  prior to  conversion.  Holders of preferred  shares are
entitled to a liquidation preference of $8.15 per share. In addition to the sale
of  Preferred  Stock and warrant,  the Company has the right,  from time to time
during the period  beginning  January  1997 and ending July 2000,  to sell up to
1,200,000  additional  shares of Common Stock to the investor at a formula price
of 100% or 101% of a multi-day  average of the  Company's  Common Stock price at
the time of sale.  If the Company  exercises  this right,  the  investor has the
option to increase the shares purchased by up to an aggregate of 527,500 shares.
Pursuant  to the  terms of the  1997  Private  Placement,  the  Company  may not
exercise this right until late February 1998.

     The Company expects to incur  substantial  additional costs relating to the
continued   preclinical  and  clinical  testing  of  its  products,   regulatory
activities and research and development  programs.  The Company anticipates that
its cash,  cash  equivalents  and  investment  balances of  approximately  $21.4
million  at  December  31,  1997,  the   collaborative   revenue   committed  by
Lipha/Merck, Lipha/Merck's commitment to purchase additional equity and Shaman's
additional  rights to sell Common Stock under the 1996 Private Placement will be
adequate to fund operations, including payments due under long-term obligations,
through the end of 1998. Milestone payments which may be received by the Company
from Ono and  Lipha/Merck  would  extend the  Company's  capacity to finance its
operations  beyond  that time.  However,  there can be no  assurance  that these
milestones will be achieved,   or that additional  funding,  if needed,  will be
available on reasonable terms, or at all.

      Long-term  obligations  increased $11.4 million in 1997 compared with 1996
primariy due to the issuance of $10.4 million senior  convertible  notes in June
1997 along with other various financing activities.

     The Company is in the process of  assessing  the impact of year 2000 on its
operations and systems,  including those of its suppliers and  collaborators and
other third parties.  Management is in the process of formalizing its assessment
procedures and developing a plan to address  identified issues, if any. To date,
the Company has evaluated its  financial  and  accounting  systems and concluded
that they are not and will not be  materially  affected  by the year  2000.  The
Company does not yet know the extent,  if any, of the impact of the year 2000 on
its other systems and equipment or those of third parties with which the Company
does business.  There can be no assurance that third parties, such as suppliers,
clinical research organizations and collabortive parties, are using systems that
are year  2000  compliant  or will  address  any year  2000  issues  in a timely
fashion, or at all. Any year 2000 compliance problems of either the Company, its
suppliers,  its clinical research  organizations,  or its collaborative partners
could  have a  material  adverse  effect on the  Company's  business,  operating
results and financial conditions.


Future Outlook

      In addition to historical  information,  this report contains predictions,
estimates and other  forward-looking  statements  that involve a number of risks
and uncertainties. These risks and uncertainties include the fact that Shaman is
still a  relatively  young  company  and has not yet  completed  a full cycle of
development,  regulatory approval and commercialization for any of its products.
The clinical and regulatory  processes through which the Company's products must
proceed  are  complex,  uncertain  and  costly,  and no  assurance  can be given
regarding the timing of clinical or regulatory progress or that the Company will
be  successful  in  commercializing  any  of  its  product   candidates.   These
development processes require substantial amounts of funding, and the Company is
dependent on corporate  partners and the equity markets to finance such efforts.
Where  access to funding  is  difficult,  the  Company's  stockholders  may face
significant  dilution,  and the  ability  of the  Company  to  proceed  with its
programs and plans may be  significantly  and  adversely  affected.  Actions and


                                       33
<PAGE>

advances by competitors may also significantly  affect the Company's  prospects,
as  may  the  existence  of  patents  held  by  such  competitors  or  potential
competitors.  In addition, there can be no assurance that any plants required by
the Company will be  indefinitely  available or that any compounds  derived from
the plant material will result in protected proprietary rights for the Company.


                                       34
<PAGE>




ITEM  8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

               REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS

The Board of Directors and Stockholders
Shaman Pharmaceuticals, Inc.

    We have audited the accompanying  balance sheets of Shaman  Pharmaceuticals,
Inc. as of December 31, 1997 and 1996, and the related statements of operations,
stockholders'  equity,  and cash flows for each of the three years in the period
ended 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 audits.

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

    In our opinion,  the financial  statements referred to above present fairly,
in all material respects, the financial position of Shaman Pharmaceuticals, Inc.
at December 31, 1997 and 1996,  and the results of its  operations  and its cash
flows for each of the three years in the period  ended  December  31,  1997,  in
conformity with generally accepted accounting principles.





Palo Alto, California
January 29, 1998                                            ERNST & YOUNG LLP

 
                                       35
<PAGE>


                               BALANCE SHEETS

<TABLE>
<CAPTION>
                                                          December 31,
                                                 -------------------------------
                                                       1997           1996
                                                   -------------  -------------
<S>                                                <C>            <C>
ASSETS

Current assets:
   Cash and cash equivalents                      $ 11,340,702   $ 16,051,251                                                    
   Short-term investments                           10,079,943        481,677
   Prepaid expenses and other current assets           746,058        938,872   
                                                  -------------  -------------
Total current assets                                22,166,703     17,471,800
                                                  -------------  -------------
Property and equipment:
   Equipment and furniture                           7,370,051      6,683,261
   Leasehold improvements                            7,351,827      7,125,235
                                                  -------------  -------------
                                                    14,721,878     13,808,496
   Less:  accumulated depreciation and             
   amortization                                     10,749,738      9,031,571
                                                  -------------  -------------
                                                     3,972,140      4,776,925
Other assets                                           613,657        128,080
                                                  -------------  -------------
Total assets                                      $ 26,752,500   $ 22,376,805   

LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
   Accounts payable and other accrued expenses    $    925,701    $ 1,445,616   
   Accrued clinical trial costs                      1,689,659      1,233,014  
   Accrued professional fees                           718,625        689,216
   Accrued compensation                                368,272        332,738
   Advances - contract research                      1,133,605      1,883,605
   Current installments of long-term obligations     2,783,976      2,246,795
                                                   -------------  -------------
Total current liabilities                            7,619,838      7,830,984

Long-term obligations, excluding current             
   installments                                      4,017,979      2,568,931
Senior convertible notes                             9,967,044             --

Stockholders' equity:
   Preferred stock, $0.001 par value;
     issuable in series;
     1,000,000 shares authorized; 400,000
     convertible shares
      issued and outstanding at December 31,
     1997 and 1996
     (Liquidation preference at December 31,
     1997 and 1996  - $3,258,800)                          400            400
   Common stock, $0.001 par value; 40,000,000 
     shares authorized;  17,796,045 shares
     and 13,920,684 shares issued and
     outstanding at December 31, 1997 and
     1996, respectively                                 17,796         13,921
   Additional paid-in capital                      117,164,524     94,604,455
   Deferred compensation and other adjustments        (124,910)       (20,250)
   Accumulated deficit                            (111,910,171)   (82,621,636)
                                                  -------------  -------------
Total stockholders' equity                           5,147,639     11,976,890
                                                  -------------  -------------
Total liabilities and stockholders' equity        $ 26,752,500   $ 22,376,805
                                                  =============  =============

</TABLE>
                See accompanying notes to financial statements.


                                       36
<PAGE>




                           STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>


                                            Years Ended December 31,
                                ------------------------------------------------
                                     1997              1996            1995
                               ---------------   ---------------  --------------
<S>                            <C>               <C>              <C>   
Revenue from collaborative
   agreements                    $ 3,500,000       $ 3,406,250     $ 2,210,147
                                                      

Operating expenses:
   Research and development       24,140,246        19,138,190      17,634,898                      
   General and  administrative     4,833,489         3,537,157       3,704,962
                               ---------------   ---------------  --------------
Total operating expenses          28,973,735        22,675,347      21,339,860
                               ---------------   ---------------  --------------

Loss from operations             (25,473,735)      (19,269,097)    (19,129,713)

Interest income                    1,217,884         1,082,618       1,695,192
Interest expense (cash)           (1,340,544)         (603,330)       (568,985)
Interest expense (non-cash)       (3,692,140)               --              --
                               ---------------  ----------------  --------------

Net loss                       $ (29,288,535)    $ (18,789,809)   $ (18,003,506)                                           
                               ===============   ===============  ==============

Net loss per share                  $  (1.72)         $  (1.39)         $ (1.37)
                                                                
                               ===============   ===============  ==============
Shares used in calculation
   of net loss per share          17,010,000        13,496,000       13,161,000
                               ===============   ===============  ==============

</TABLE>


                See accompanying notes to financial statements.



                                       37
<PAGE>





                       STATEMENTS OF STOCKHOLDERS' EQUITY
              For the Years Ended December 31, 1995, 1996 and 1997
<TABLE>
<CAPTION>

                                              Deferred
             Convertible          Addition  Compensation              Total
              Preferred   Common  Paid-In     and     Accumulated  Stockholders'
                Stock     Stock   Capital     Other      Deficit       Equity
                                             Adjustments
--------------------------------------------------------------------------------
<S>              <C>      <C>     <C>          <C>       <C>         <C>

Balance at        
  December 31,        
  1994             --     13,019  88,013,987  (898,737) (45,828,321) 41,299,948

Issuance of
  238,297 shares
  of common
  stock upon
  the exercise
  of stock
  options           --       239     406,176        --           --     406,415
Unrealized
  gain on
  available-for-sale
  securities        --        --          --   351,259           --     351,259
Amortization
  and reversals
  of deferred
  compensation      --        --    (249,237)  400,522           --     151,285
Net loss            --        --          --        --  (18,003,506)(18,003,506)
                ------    ------      ------    ------  ----------- ----------- 
Balance at
  December 31,
  1995              --    13,258  88,170,926  (146,956) (63,831,827) 24,205,401
Issuance of
  273,978 shares
  of common
  stock upon
  the exercise
  of stock
  options            --      274     439,806        --           --     440,080
Issuance of
  400,000 shares
  of series A
  convertible
  preferred
  stock             400       --   3,057,823        --           --   3,058,223
Issuance of
  388,918 shares
  of common
  stock in
  connection
  with Lipha/Merck
  collaboration      --      389   2,971,833        --           --   2,972,222
Unrealized
  loss on
  available-for-sale
  securities         --       --          --   (26,458)          --     (26,458)
Amortization
  and reversals
  of deferred
  compensation       --       --     (35,933)  153,164           --     117,231
Net loss             --       --          --        --  (18,789,809)(18,789,809)
                 ------   ------      ------    ------   ---------- -----------   
Balance at
  December 31, 
  1996              400   13,921  94,604,455   (20,250) (82,621,636) 11,976,890
                =======  =======  ========== ==========  ========== ===========

Issuance of                       
  19,472 shares
  of common
  stock upon        
  the exercise
  of stock
  options            --       19     64,137         --           --      64,156
Issuance of
  2,000,000
  shares of common
  stock in
  connection with
  a registered
  direct
  public offering
  in January 1997,
  net of
  issuance costs
  of $.93 million     --   2,000   8,068,410        --           --   8,070,410
Issuance of
  1,6000,000
  shares of common
  stock in
  connection with
  a registered
  direct public
  offering
  in April 1997,
  net of
  issuance costs
  of $.13 million     --   1,600   7,822,654        --           --   7,824,254
Issuance of
  200,787 shares
  of common
  stock in
  connection
  with Lipha/
  Merck
  collaboration       --     201   1,492,338        --           --   1,492,539
Issuance of
  55,102 shares
  of common
  stock upon
  conversion of
  senior
  convertible
  notes in
  November 1997       --      55     223,108        --           --     223,163
Unrealized
  loss on
  available-for-sale
  securities          --      --         --     (9,720)          --      (9,720)
Deferred
  compensation
  related to
  granting of
  options to
  non-employees,
  net of
  amortization
  and reversals       --      --    240,282    (94,940)          --     145,342
Value ascribed
  to warrants
  issued in
  conjunction
  with secured
  loan                --      --    648,000         --           --     648,000
Value ascribed
  to in-the-money
  conversion
  option of
  senior
  convertible
  notes               --      --   3,692,140        --           --   3,692,140
Value ascribed
  to warrants
  issued in
  conjunction
  with senior
  convertible
  notes               --      --     309,000        --           --     309,000
Net loss              --      --          --        --  (29,288,535)(29,288,535)
                   =====   ======   ========     =====   ==========  ==========
Balance at
  December 31,
  1997              $400 $17,796 $117,164,524 $(124,910)$(111,910,171)$5,147,639
                 ======  =======  ============ ========   ============ =========

</TABLE>

                See accompanying notes to financial statements.


                                       38
<PAGE>




                           STATEMENTS OF CASH FLOWS
               Increase (Decrease) in Cash and Cash Equivalents
<TABLE>
<CAPTION>

                                                 Years ended December 31,
                                    -------------------------------------------
                                         1997           1996           1995
                                     ------------   ------------   ------------
<S>                                  <C>            <C>            <C>   
Operating activities:
  Net loss                        $ (29,288,535)  $ (18,789,809)  $ (18,003,506)                                             
  Adjustments to reconcile net
    loss to net cash used
    in operating activities:
      Depreciation and amortization   2,108,896       2,363,091       2,717,332
      Interest expense on issuance      
        of senior convertible notes   3,692,140              --              --
  Changes in operating assets and
    liabilities:
      Prepaid expenses, current assets      
        and other assets                628,198         (80,148)        531,303
      Accounts payable, accrued
        professional fees,
        accrued compensation,
        accrued clinical
        trial costs and contract      
        research advances              (748,327)      2,021,220         206,079
                                     -----------    -----------     -----------
Net cash used in 
   operating activities             (23,607,628)    (14,485,646)    (14,548,792)
                                    -----------     -----------     ----------- 
Investing activities:
  Purchases of available-for-sale 
     investments                    (14,562,627)    (10,872,811)    (20,007,947)
  Maturities of available-for-sale 
    investments                       4,954,640      26,325,454      33,970,649
  Sales of available-for-sale 
    investments                              --       1,494,000              --
  Capital expenditures                 (913,382)       (864,729)       (411,592)
                                     -----------     -----------     -----------

Net cash provided by (used in) 
  investing activities              (10,521,369)     16,081,914      13,551,110
                                    -----------      ----------      ----------
Financing activities:
  Proceeds from issuance of preferred 
    stock, net                               --       3,058,223              --
  Proceeds from issuance of common 
    stock, net                        17,446,683      3,412,302         406,415
  Proceeds from issuance of long-term 
    obligations                        5,000,000        600,000       1,900,000
  Proceeds from issuance of senior 
    convertible notes, net             9,479,039             --              --
  Principal payments on long-term 
    obligations                       (2,936,297)    (1,825,665)       (875,192)
  Proceeds from asset financing
    arrangements                         429,023             --              --
                                      -----------    -----------     -----------
Net cash provided by financing 
  activities                          29,418,448      5,244,860       1,431,223
                                      ----------      ---------       ---------
Net increase (decrease) in cash and
  cash equivalents                    (4,710,549)     6,841,128         433,541
Cash and cash equivalents at 
  beginning of period                 16,051,251      9,210,123       8,776,582
                                      -----------    -----------     -----------
Cash and cash equivalents at end    $ 11,340,702   $ 16,051,251     $ 9,210,123
  of periiod                         ===========    ===========      ===========


Supplemental information
  Interest paid                        $ 538,891      $ 603,330       $ 634,131
                                     ===========    ===========      ===========

</TABLE>


                See accompanying notes to financial statements.


                                       39
<PAGE>



                         NOTES TO FINANCIAL STATEMENTS

1.  Summary of Significant Accounting Policies

General

     Shaman  Pharmaceuticals,  Inc.  ("Shaman" or the  "Company")  discovers and
develops  novel  pharmaceutical  products for major human  diseases by isolating
active  compounds  from  tropical  plants.  The Company has three  compounds  in
clinical   development:   Provir,   an  oral   product  for  the   treatment  of
AIDS-associated  and watery  diarrhea;  nikkomycin Z, an oral antifungal for the
treatment of systemic fungal infections;  and SP-134101, an oral product for the
treatment  of Type II  diabetes.  Shaman  maintains  an active  Type II diabetes
research  program  which serves as the basis for its  collaborations  with Lipha
s.a.,   a   wholly-owned   subsidiary   of  Merck   KGaA,   Darmstadt,   Germany
("Lipha/Merck"), and with Ono Pharmaceutical Co., Ltd. ("Ono") of Osaka, Japan.

Revenue Recognition

    Revenue recognized under the Company's  collaborative research agreements is
recorded as earned  based upon the  performance  requirements  of the  contract.
Payments received in advance under these agreements are deferred until earned.

Stock-Based Compensation

     In October 1995,  the Financial  Accounting  Standards  Board (FASB) issued
SFAS No. 123, "Accounting for Stock-Based  Compensation," which encourages,  but
does not  require,  companies  to record  compensation  expense for  stock-based
employee compensation plans at fair value. The Company has elected to follow the
disclosure  requirements  of SFAS No. 123 for the year ended  December 31, 1997,
1996 and 1995 and will continue to measure stock-based compensation to employees
in  accordance  with APB  Opinion  No.  25,  "Accounting  for  Stock  Issued  to
Employees." Accordingly,  the disclosure requirements will have no effect on the
Company's financial position or results of operations. Note 7 contains a summary
of the pro forma  effects to reported  net loss and net loss per share for 1997,
1996 and 1995 as if the Company had elected to  recognize  compensation  expense
based on the fair value of options granted as described by SFAS 123.

    The Company  grants stock  options to employees  and  directors  for a fixed
number of shares with an exercise price equal to the fair market value of shares
at the date of grant.  The Company accounts for stock option grants to employees
and directors in accordance with APB Opinion No. 25, Accounting for Stock Issued
to Employees and, accordingly,  recognizes no compensation expense for the stock
option grants to employees and directors.

Per Share Data

    In February 1997, the Financial  Accounting Standards Board issued Statement
No.  128,  Earnings  per Share,  which the Company  adopted in the period  ended
December 31, 1997. Under the new requirements for calculating basic earnings per
share,  the dilutive effect of stock options and other common stock  equivalents
is excluded.  The impact of Statement  128 results in no change to the Company's
net loss per share,  as stock  options and other common stock  equivalents  have
been excluded from the current computation as they are antidilutive.

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

                                       40
<PAGE>

Cash, Cash Equivalents, Investments and Concentration of Credit Risk

    The  Company   considers  all  highly  liquid   investments  with  remaining
maturities  of three months or less at time of purchase to be cash  equivalents.
Investments  with  maturities  of less than one year from the balance sheet date
and with  original  maturities  greater than 90 days are  considered  short-term
investments.  Investments with maturities greater than one year from the balance
sheet date are considered long-term  investments.  Investments consist primarily
of commercial paper,  investments in government securities,  corporate bonds and
asset-backed  securities.  These  investments  typically bear minimal risk. This
diversification of risk is consistent with the Company's policy to maintain high
liquidity and ensure safety of principal.  The Company  maintains its cash, cash
equivalents  and  investments  in accounts with several  United States banks and
brokerage houses.

    Management  determines the appropriate  classification of debt securities at
the time of purchase  and  re-evaluates  such  determination  as of each balance
sheet date.  As of December 31, 1997 and 1996,  the Company has  classified  its
entire investment portfolio as available-for-sale. Available-for-sale securities
are carried at fair value,  with the  unrealized  gains and losses,  net of tax,
included in stockholders'  equity. The amortized cost of debt securities in this
category is adjusted for  amortization of premiums and accretion of discounts to
maturity.  Such amortization is included in interest income.  Realized gains and
losses   and   declines   in  value   judged  to  be   other-than-temporary   on
available-for-sale  securities are included in interest  income or expense.  The
cost of securities sold is based on the specific identification method. Interest
and dividends on securities  classified  as  available-for-sale  are included in
interest income.

Property and Equipment

    Property and  equipment  are stated at cost.  Depreciation  of equipment and
furniture is provided on a straight-line  basis over the estimated  useful lives
of the respective assets,  which range from three to five years.  Equipment held
under  capital  leases is  amortized  using the  straight-line  method  over the
shorter  of the lease term or  estimated  useful  life of the  asset.  Leasehold
improvements  are amortized on a straight-line  basis over the remaining life of
the lease.

Use of Estimates

    The  preparation  of  financial  statements  in  conformity  with  generally
accepted  accounting  principles  requires  management  to  make  estimates  and
assumptions  that affect the amounts  reported in the financial  statements  and
accompanying notes. Actual results could differ from those estimates.

Reclassification

    Certain prior year amounts have been  reclassified to conform to the current
year's presentation.

2.  Collaborative Relationships

     In  September  1996,  the Company  entered  into a five-year  collaborative
agreement with Lipha/Merck to jointly develop Shaman's  antihyperglycemic drugs.
Upon signing the  collaboration,  the Company received an annual research fee of
$1.5  million  which was  amortized  to revenue  over twelve  months as work was
performed. The Company also received approximately $3 million for 388,918 shares
of common  stock  priced at $7.71 per share,  representing  a 20% premium to the
weighted  average  price of the  Company's  stock at the  time of  purchase.  In
exchange for  development  and marketing  rights in all countries  except Japan,
South Korea,  and Taiwan (which are covered under an earlier  agreement  between
Shaman and Ono, Lipha/Merck will provide up to $9.0 million in research 


                                       41
<PAGE>

payments and up to $10.5 million in equity  investments  priced at a 20% premium
to a multi-day  volume weighted  average price of the Company's  common stock at
the time of purchase. The agreement also provides for additional preclinical and
clinical  milestone  payments  to the  Company  in excess of $10.0  million  per
compound  for  each   antihyperglycemic   drug  developed  and   commercialized.
Lipha/Merck  will  bear  all  pre-clinical,   clinical,   regulatory  and  other
development expenses associated with the compounds selected under the agreement.
In addition,  as products are  commercialized,  Shaman will receive royalties on
all product sales outside the United States and up to 50% of the profits (if the
company exercises its co-promotion  rights) or royalties on all product sales in
the United States.  Certain of the milestone  payments will be credited  against
future  royalty  payments,  if any,  due to the  Company  from sales of products
developed pursuant to the agreement.
    
     For the year ended  December  31,  1997,Shaman  recognized  $1.5 million in
revenue from the  Lipha/Merck  collaboration.  Shaman also received $1.5 million
for 200,787 shares of Common Stock priced at $7.47 per share, representing a 20%
premium to the  weighted  average  price of the  Company's  stock at the time of
purchase.  Revenues from Lipha/Merck accounted for 43% and 12% of total revenues
earned in 1997 and 1996, respectively.

    In May 1995,  the Company  entered into a  collaborative  agreement with Ono
providing for,  among other things,  three years of funding for the research and
development  of  compounds  for the  treatment  of Type II  diabetes.  Under the
agreement,  Shaman  will screen 100  diabetes-specific  plants per year in vivo,
isolate  and  identify  active  compounds,  and  participate  in  any  medicinal
chemistry  modification.  In turn,  Ono will provide Shaman with access to Ono's
preclinical and clinical  development  capabilities through proprietary in vitro
assays and medicinal chemistry effort.  Ono's development and  commercialization
rights are for the countries of Japan,  South Korea and Taiwan.  Under the terms
of the agreement,  Ono will provide up to $7.0 million in collaborative research
funding and will pay preclinical and clinical milestone payments of $4.0 million
per  compound for each  antidiabetic  drug that is  commercialized.  Of the $3.0
million  received  on signing  the  agreement,  $1.0  million  was an access and
license fee  recognized as revenue in 1995,  and the remaining  $2.0 million was
the annual  research  and  development  funding  recognized  as revenue over the
subsequent year.  Shaman received an additional $1.0 million payment (beyond the
$7.0 million  commitment)  in December 1996 for enhanced  access rights to these
compounds.  For the year ended December 31, 1997, Shaman recognized $2.0 million
in revenue from the Ono  collaboration.  Revenues from Ono accounted for 57% and
88% of total revenues earned in 1997 and 1996, respectively.

    Costs  associated  with  revenue  from these  collaborations  totaled  $11.4
million  and  $11.6  million  for the year  ended  December  31,  1997 and 1996,
respectively,  and are  included in  research  and  development  expenses in the
accompanying financial statements.

3.  Investment  Securities

    The following is a summary of available-for-sale securities (in thousands):
<TABLE>
<CAPTION>
                                             Gross         Gross      Estimated
                                          Unrealized    Unrealized      Fair
                                Cost         Gains        Losses        Value
                         -------------------------------------------------------
                                           December 31, 1997
                         -------------------------------------------------------
<S>                         <C>           <C>            <C>           <C>    
U.S. Treasury securities and
  government obligations   $   4,625     $      --    $      (10)      $  4,615
U.S. corporate bonds           3,000            --                        3,000
U.S. corporate commercial
  paper and other             10,810            --           (20)        10,790
                         -------------------------------------------------------
         Total             $  18,435     $      --    $      (30)      $ 18,405
                           =========    ==========    ===========     =========
</TABLE>


                                       42
<PAGE>
                                                           
                                                
3. Investment  Securities (cont'd)

Above amounts are included in the balance sheet as follows:
<TABLE>
<CAPTION>

                                            Gross          Gross      Estimated
                                         Unrealized      Unrealized      Fair
                               Cost         Gains         Losses        Value
                      ----------------------------------------------------------
                                         December 31, 1997
                      ----------------------------------------------------------
<S>                        <C>           <C>          <C>              <C>     
Cash and cash equivalents  $   8,345     $      --    $      (20)      $  8,325
Short-term investments        10,090            --           (10)        10,080 
                          ----------    ----------    ----------    -----------                         
  Total                    $  18,435     $      --    $      (30)      $ 18,405
                          ==========    ==========    ===========   ===========




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

U.S. Treasury securities and
  government obligations    $    499     $     --        $   (17)      $    482
U.S. corporate bonds           2,218           --             --          2,218
U.S. corporate commercial
  paper and other             12,830           --             (3)        12,827
                            --------      -------         ------        -------
   Total                    $ 15,547     $     --        $   (20)      $ 15,527
                            ========     ========        ========      ========

Above amounts are included in the balance sheet as follows:

Cash and cash equivalents   $ 15,048     $     --        $    (3)      $ 15,045
Short-term investments           499           --            (17)           482
                            --------     --------        --------      --------
  Total                     $ 15,547     $     --        $   (20)      $ 15,527
                            ========     ========        ========      ========

</TABLE>

    The average remaining maturity of the portfolio was approximately four and a
half months as of December 31, 1997 and 1996, respectively.

    The estimated  fair value amounts have been  determined by the Company using
available market information and appropriate valuation  methodologies.  However,
judgment is required in  interpreting  market data to develop the  estimates  of
fair value.

Fair Value of Long-Term Obligations

    The fair values of the Company's  long-term  obligations are estimated using
discounted  cash  flow  analyses  based  on the  Company's  current  incremental
borrowing rate for similar types of borrowing arrangements. The carrying amounts
and fair values of long-term  obligations consisted of the following at December
31, 1997:

<TABLE>
<CAPTION>
                                        Carrying Value           Fair Value
                                        --------------           ----------
<S>                                       <C>                    <C>       
Leasehold improvements financings         $2,093,435             $2,010,938
Equipment  borrowings                     $  401,555             $  403,194
Secured Loan                              $4,190,105             $4,330,073

</TABLE>

The  carrying  value of the  Company's  term loan  approximates  its fair  value
because the interest rates on the note takedowns are periodically reset.
 


                                       43
<PAGE>


4.  Long-Term Obligations

    Long-term  obligations  consist of secured and unsecured term loans,  senior
convertible  notes,  secured  borrowings used to acquire property and equipment,
capital lease arrangements and a leasehold improvement financing obligation.

    In October 1995,  the Company  closed a $2.5 million  unsecured term loan to
finance  capital asset  acquisitions  and potential  facilities  expansion.  The
Company failed to achieve certain financing and collaborative  objectives by May
15, 1996 which  resulted  in an  acceleration  of  principal.  The  acceleration
provisions  required that principal  amortization be shortened from 30 months to
24 months,  with the first monthly  payment due May 15, 1996. The unsecured term
loan was paid off in May 1997.  Interest  on each  advance  was  charged  at the
London  Interbank  Offered  Rate  ("LIBOR")  plus 1.5% or prime plus  0.5%.  The
interest  rate on the loan  was  approximately  7.14%  at May 1997 and  7.13% at
December 31, 1996.

    In May  1997,  the  Company  obtained  a $5.0  million  term  loan to payoff
pre-existing  debt,  finance capital asset  acquisitions  and finance  continued
research  and  clinical  development.  The loan is payable in  thirty-six  equal
monthly  installments  and the interest  rate is 14.58%.  The lender was granted
warrants to purchase  200,000 shares of the Company's  Common Stock at $6.25 per
share, which are exercisable over a ten year period.

     In June  1997,  the  Company  privately  issued  $10.4  million  of  senior
convertible  notes (The "1997  Private  Placement").  The notes mature in August
2000 and bear interest at a rate of 5.5% per annum. Interest on the notes may be
paid in Common Stock or cash at the Company's option.  Initially,  the notes are
convertible  into Common  Stock of the Company at 100% of the low trading  price
during a designated time period prior to conversion provided that the conversion
price will not be less than $5.50 per share.  Starting  in  November  1997,  the
notes are  convertible  into Common Stock of the Company at a 10% discount  from
the low trading price during a designated  time period prior to the  conversion,
with a floor of $5.50  through  March 31,  1998,  pursuant  to a  November  1997
understanding  with the note  holders  to  revise  the  terms  of the  note.  In
connection  with this  understanding,  the  Company  issued to the note  holders
three-year  warrrants to purchase an aggregate of 137,500 shares of common stock
at an exercise price of $7.50 per share. In November 1997, a principal amount of
$220,666 was converted into 55,102 shares of the Company's Common Stock.

    Of the notes issued,  $400,000 were issued to the placement agent as part of
the placement fee. The Company paid the placement  agent an additional  $300,000
in cash. The placement  fees and other  offering costs have been  capitalized in
other  assets as deferred  issuance  costs and are being  amortized  to interest
expense ove the life of the notes. The net proceeds totaled  approximately  $9.5
million after the placement agent's fees and other offering expenses.

     The SEC has  promulgated  requirements  for  charges  to be  recognized  by
companies  which issue certian  convertible  notes that provide for a guaranteed
discount  feature.  In  connection  with the issuance of the notes,  the Company
recognized a non-cash  charge in the amount of  $3,692,000  in the third quarter
ended September 30, 1997. This amount was calculated as required by the SEC.

     Equipment  borrowings  totaled $401,555 and $1,183,335 at December 31, 1997
and 1996, respectively. The borrowings bear interest at rates ranging from 10.7%
to 12.75% at  December  31,  1997 and 1996,  respectively,  are  secured  by the
equipment acquired, and are payable in monthly installments ranging from $10,000
to $156,000 through December 1998.


                                       44
<PAGE>

    The Company has also acquired  certain  equipment and furniture  pursuant to
capital lease arrangements.  The gross amount of equipment and furniture and the
related  accumulated  amortization  recorded  under capital  leases  included in
property and equipment are as follows:

<TABLE>
<CAPTION>

At December 31,                                1997               1996
                                               ----               ----
<S>                                        <C>                <C>        
  Equipment and furniture                  $ 1,890,164        $ 1,461,141
  Less accumulated amortization             (1,354,475)        (1,194,475)
                                           -----------        -----------                                                           
                                           $   535,689        $   266,666
                                           ===========        ===========
</TABLE>

Amortization   of  assets   acquired  under  capital  leases  is  included  with
depreciation and amortization expense.

      In  connection  with the facility  lease  described in Note 5, the Company
entered  an  agreement  with  the  former  tenant  of the  facility  to  acquire
approximately  $1.5 million of tenant  improvements by making annual payments to
the former tenant, including accrued interest, of $540,000 in 1998 through 2002.

      At December 31, 1997,  future  payments on  long-term  obligations  are as
follows:
<TABLE>
<CAPTION>

              Senior                                      Leasehold
            Convertible   Secured   Equipment   Capital   Improvement    
              Notes        Loan     Borrowings  Leases    Financing      Total
            ----------  ---------  ---------  ---------  -----------  ----------
<C>        <C>          <C>         <C>        <C>        <C>        <C>                                                  
1998       $       --   $1,558,076  $401,555   $128,382   $540,000   $2,628,013                                           
1999               --    1,801,058        --    128,382    540,000    2,469,440
2000       10,179,334      830,971        --    128,382    540,000   11,678,687
2001               --          --         --    128,382    540,000      668,382
2002               --          --         --         --    540,000      540,000
            ----------  ---------  ---------  --------- -----------  ----------
Total 
 minimum
 payments  10,179,334    4,190,105   401,555    513,528  2,700,000   17,984,522
Less amount
 representing
 interest (at          
 rates ranging
 from 10.7% to
 14.6%             --           --        --    (84,506)  (606,565)    (691,071)
           ----------    ---------  ---------  --------- ----------  ----------
           10,179,334    4,190,105   401,555    429,022  2,093,435   17,293,451
Less 
 current            
 installments      --   (1,558,076) (401,555)   (92,507)  (540,000)  (2,592,138)
           ----------    ---------  --------- ---------  ----------  ----------
Long-term
 obligations,
 excluding         
 current           
 install-
 ments    $10,179,334   $2,632,029  $     --   $336,515 $1,553,435  $14,701,313
          ===========  ===========  =========  ======== ===========  ==========
</TABLE>

5.    Commitments  and  Contingencies

      In January  1993,  the  Company  entered a  noncancelable  lease for a new
research and office facility in South San Francisco,  California.  The lease, as
amended in April 1994, provides for future lease payments totaling approximately
$7.7  million  through  2003 and options to renew for a total of ten years.  The
Company is required to pay operating costs, including property taxes, utilities,
insurance and maintenance.

      At December 31, 1997,  the minimum  noncancelable  future rental  payments
under the Company's operating leases are:
<TABLE>
<S>                    <C>          <C>

                       1998         $1,187,000
                       1999          1,292,000
                       2000          1,497,000
                       2001          1,497,000
                       2002          1,497,000
                       Thereafter      762,000

</TABLE>
                                       45
<PAGE>


    Rent expense for each of the three years ended  December 31, 1997,  1996 and
1995 was approximately $1,154,000, $1,348,000, and $1,004,000, respectively.

    The Company is involved in  litigation,  arbitration  and disputes which are
normal to its  business.  Management  believes  losses that might  eventually be
sustained  from such  matters,  if any,  would not be material to future  years'
financial position or results of operations.  Further,  product liability claims
may be asserted in the future  relative to events not known to management at the
present time. The Company has insurance  coverage which  management  believes is
adequate to protect against such product  liability  losses as could  materially
affect the Company's financial position.

6.  Contractual Agreements

    The Company has entered into license,  clinical trial and supply  agreements
with universities,  research organizations and commercial companies.  Certain of
these  agreements  require  payments of  royalties  on future sales of resulting
products and may subject the Company to minimum annual  payments to its contract
partners.  In  addition,  the Company  signed an  agreement  in 1995 which could
result  in  the  payment  of  milestone   installments  if  certain  development
objectives are achieved.  To date, payments under these agreements have not been
significant  and, at December 31, 1997,  related  noncancelable  commitments are
immaterial.

7.  Stockholders' Equity

Preferred Stock

    The Company is  authorized  to issue  1,000,000  shares of  preferred  stock
(400,000  shares of which are issued and  outstanding).  The Company's  Board of
Directors may set the rights and privileges of any preferred stock issued.

    In July 1996, the Company closed a private placement  pursuant to Regulation
S under the  Securities  Act of 1933,  as amended,  in which it  received  gross
proceeds of $3.3 million for 400,000  shares of Series A  convertible  preferred
stock  ("preferred  stock") and a six-year warrant to purchase 550,000 shares of
the  Company's  common  stock at an  exercise  price of $10.184  per share.  The
Preferred  Stock  does not carry a dividend  obligation  and will  convert  into
common stock no later than July 23, 1999 at a price per share  between $6.00 and
$8.147,  depending on the market value of the Company's  common stock during the
period  prior to  conversion.  Holders of  preferred  shares are  entitled  to a
liquidation  preference of $8.147 per share and have voting rights equivalent to
the number of common  shares into which  their  preferred  shares  could then be
converted.  In addition to the sale of Preferred Stock and warrant,  the Company
has the right,  from time to time during the period  beginning  January 1997 and
ending July 2000, to sell up to 1,200,000  additional  shares of common stock to
the  investor at a formula  price of 100% or 101% of a multi-day  average of the
Company's common stock price at the time of sale. If the Company  exercises this
right,  the investor has the option to increase the shares purchased by up to an
aggregate of 527,500 shares.

                                       46
<PAGE>

Common Stock

    In December 1992, the Company  adopted the 1992 Stock Option Plan (the Plan)
as the  successor  plan to the Company's  1990 Stock Option Plan.  The Plan will
terminate  on the earlier of  December  31, 2002 or the date on which all shares
available  for issuance  under the Plan have been issued or  canceled.  The Plan
provides for two separate components: the Discretionary Option Grant Program and
the Automatic Option Grant Program.

    Under the Discretionary Option Grant Program,  options granted may either be
incentive options or non-statutory options.  Incentive options may be granted to
employees at a price not less than the fair market value of the Company's common
stock  on the  grant  date.  Non-statutory  options  may be  granted  at a price
determined by the plan  administrator.  Each option  granted is  exercisable  as
determined by the plan  administrator,  with a term not to exceed ten years. The
Plan also allows for the  granting of options with  repurchase  rights and stock
appreciation rights at the discretion of the plan administrator.

    Under the Automatic  Option Grant  Program,  each  individual  who becomes a
non-employee  board  member  on or  after  the  effective  date  of the  Plan is
automatically  granted a non-statutory stock option to purchase 20,000 shares of
common stock. Further, each non-employee board member who has served as a member
for  at  least  six  months  prior  to  the  annual  stockholders'   meeting  is
automatically  granted an annual non-statutory stock option to purchase not more
than  7,500  nor  less  than  5,000  shares  of  common  stock,  depending  on a
calculation based on the average selling price of the common stock. The exercise
price of each option  granted is the fair value of the common  stock on the date
of grant. These options have a ten-year term and vest over 24 months.

    Both programs  provide for automatic  acceleration of the exercise period in
the event of certain corporate  transactions,  including a merger, asset sale or
change in control of the  Company.  The Plan was amended in 1997 to increase the
shares authorized for issuance by additional 700,000 shares.

    The 1990 Stock  Option  Plan  provided  for the  granting of  incentive  and
non-statutory stock options. Both types of options were immediately  exercisable
and  expire ten years from the date of grant.  Vesting  of  optioned  shares was
determined  by the board of  directors  and  generally  occurred  over a two- to
four-year  period from the date of grant.  At December 31, 1997,  all options to
purchase common stock issued under this plan were vested.

A summary of stock option activity is as follows:

<TABLE>
<CAPTION>
                                         Options Outstanding
                          ---------------------------------------------------
                                                        Weighted     Weighted
                                                         Average      Average
                             Number        Price Per    Exercise    Fair Value   
                           of Shares         Share       Price    at Grant Date
                        -------------     ----------   ----------  -------------
<S>                       <C>             <C>           <C>        <C> 
Balance at December 31,                   
  1995                      1,809,065    $  .06-13.25     $ 4.40            
    Granted at fair value     847,928      5.88- 8.13       6.75        $ 3.85
    Exercised                (273,978)      .06- 7.86       1.61               
    Forfeited                (281,039)      .24-13.25       6.12             
                            ----------     ----------      -----         -----
Balance at December 31,          
  1996                      2,101,976       .06-13.25       5.48          
    Granted at fair value     951,400      4.13- 6.81       5.41        $ 3.46
    Exercised                 (19,472)      .24- 5.88       3.29             
    Forfeited                (242,299)     3.50-13.25       6.40            
                           -----------     ----------      -----         -----
Balance at December 31,
  1997                      2,791,605     $ .06-13.25     $ 5.40       
                          ===========     ===========     ======        ======
                          
</TABLE>
                                                                         
    At December 31, 1997,  1,310,036  shares under options were exercisable at a
weighted  average exercise price of $5.25 per share (968,235 shares at $5.10 per
share at December 31, 1996).


                                       47
<PAGE>

    The  following  table   summarizes   information   regarding  stock  options
outstanding at December 31, 1997:

<TABLE>
<CAPTION>
                          
                              
                              Weighted                     Shares under Options 
                               Average                        Exercisable at 
             Option Shares   Contractual     Weighted         December 31, 1997
  Range of    Outstanding at   Remaining     Average       ---------------------
  Exercise    December 31,       Life        Exercise           Weighted Average
  Prices         1997          (Years)        Price     Number    Exercise Price
  ---------  --------------  -------------  ----------  -------   --------------
<S>  <C>       <C>            <C>            <C>        <C>       <C>

$0.06-$ 3.63     684,820         6.20        $ 2.71     517,558        $ 2.46
 4.13-  5.25     605,394         8.53          5.07     127,627          5.20
 5.38-  6.06     735,288         8.89          5.68     243,280          5.59
 6.38-  7.50     571,028         8.01          6.88     235,492          6.91
 7.86- 13.25     195,075         5.86         10.41     186,079         10.52
------------  -----------       -----        ------    --------       -------   
$0.06-$13.25   2,791,605         7.76        $ 5.39   1,310,036        $ 5.25
============   =========        =====        ======   =========        ======   

</TABLE>

      For certain  options  issued during the years ended  December 31, 1993 and
1994, the Company recorded deferred  compensation for the difference between the
exercise  price and the fair market value of the  Company's  common stock at the
date of grant.  For certain  additional  options  issued  during the years ended
December  31,  1996 and 1997 to  non-employees,  the Company  recorded  deferred
compensation  expense  for the fair  value of the  options at the date of grant.
Deferred  compensation is amortized to expense on a straight-line basis over the
vesting period of the options.

Pro Forma Information

      The Company has elected to follow Accounting  Principles Board Opinion No.
25,   "Accounting  for  Stock  Issued  to  Employees"  ("APB  25")  and  related
interpretations  in  accounting  for its  employee  stock  options  because,  as
discussed below,  the alternative fair value accounting  provided for under FASB
No. 123,  "Accounting  for  Stock-Based  Compensation,"  requires  use of option
valuation  models  that were not  developed  for use in valuing  employee  stock
options.  Under APB 25,  because the exercise  price of the  Company's  employee
stock  options  equals the market price of the  underlying  stock on the date of
grant, no compensation expense is recognized.

      Pro  forma  information  regarding  net loss  and net  loss  per  share is
required by SFAS 123, and has been  determined  as if the Company had  accounted
for its employee stock options granted subsequent to December 31, 1994 under the
fair value method of SFAS 123. The fair value for these options was estimated at
the date of grant using the  Black-Scholes  option pricing model.  The following
are the  weighted-average  assumptions  for  1997,  1996 and 1995  respectively:
risk-free  interest  rates of  6.27%,  5.73%,  and  6.94%;  no  dividends  paid;
volatility factors of the expected market price of the Company's common stock of
 .75 and a  weighted-average  expected life of the options of 5.0, 3.85, and 3.91
years. The effects of applying FAS 123 for recognizing  compensation expense and
providing  pro  forma  disclosures  in  1997  and  1996  are  not  likely  to be
representative of the effects on reported net income in future years.

      The  Black-Scholes  option  valuation  model  was  developed  for  use  in
estimating the fair value of traded  options which have no vesting  restrictions
and are fully  transferable.  In addition,  option  valuation models require the
input of highly  subjective  assumptions  including  the  expected  stock  price
volatility.  Because the Company's  employee stock options have  characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially  


                                       48
<PAGE>

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 the
Company's employee stock options.

      For purposes of pro forma  disclosures,  the  estimated  fair value of the
options is amortized to pro-forma  net loss over the options'  vesting  periods.
The Company's pro forma  information  follows (in thousands  except for net loss
per share information):
<TABLE>
<CAPTION>

                                1997             1996            1995
                                ----             ----            ----
<S>                          <C>             <C>             <C>    
Net loss
    Historical              $ (29,289)       $ (18,790)      $ (18,004)
    Pro forma               $ (31,101)       $ (20,280)      $ (18,731)
Net loss per share
    Historical              $   (1.72)       $   (1.39)      $   (1.37)
    Pro forma               $   (1.83)       $   (1.50)      $   (1.42)

</TABLE>

Reserved Shares

      At December 31,  1997,  4,560,284  shares of common stock were  reserved
for conversion of outstanding  preferred  stock and for issuance upon exercise
of outstanding options, warrants and options available for future grant.

Warrants

     In connection  with  obtaining  long term debt  financing in May 1997,  the
Company agreed to issue warrants to purchase a total of 200,000 shares of common
stock at an exercise  price of $7.50 per share (see Note 4). These warrants were
determined to have a total value of $648,000  based on the Black Scholes  option
pricing model. Such value has been recognized as a reduction to the related debt
and is being amortized to interest expense over the term of such debt.

      In  connection  with  an  amendment  to the  conversion  terms  of  senior
convertible  notes in November 1997,  the Company issued  warrants to purchase a
total of  137,500  shares of common  stock  (see Note 4).  These  warrants  were
determined to have a total value of $309,000  based on the Black Scholes  option
pricing  model.  Such value has been  recognized  as a reduction  to the related
convertible  notes and is being amortized to interest  expense over the extended
conversion term.

      At December  31, 1997,  warrants to purchase a total of 979,205  shares of
common stock were outstanding, with exercise prices ranging from $2.40 to $10.83
per share.  These  warrants,  which expire in 1998 through 2007,  were issued to
creditors in connection with certain lease financing  arrangements and preferred
stock financing arrangements.

8.  Taxes

     As of December  31,  1997,  the Company  had  federal  net  operating  loss
carryforwards of approximately  $102 million.  The net operating loss and credit
carryforwards  will expire at various  dates  beginning in 2004 through 2012, if
not sooner utilized.

     Deferred income taxes reflect the net tax effects of temporary  differences
between the carrying  amounts of assets and liabilities for financial  reporting
and the amounts used for income tax purposes.


                                       49
<PAGE>

Significant  components of  the  Company's  deferred  tax assets and liabilities
for federal and state income taxes as of December 31, 1997, 1996 and 1995 are as
follows:

<TABLE>
<CAPTION>
Deferred tax assets:                       1997          1996           1995
                                        ---------      ---------      --------
<S>                                    <C>            <C>           <C>        
  Net operating loss carryforwards     $35,200,000    $26,600,000   $20,600,000
  Research credits 
     (expiring in 2004 - 2012)           2,800,000      2,300,000     1,900,000
  Capitalized research and 
      development costs                  4,700,000      3,700,000     2,900,000
  Other                                    400,000        400,000       100,000
                                      ------------    -----------   -----------
  Total deferred tax assets             43,100,000     33,000,000    25,500,000
  Valuation allowance for deferred 
      tax assets                       (43,100,000)   (33,000,000)  (25,500,000)
                                      ------------    -----------   -----------
  Net deferred tax asset               $        --    $        --   $        --
                                       ============   ============  ===========
</TABLE>

      The net  valuation  allowance  increased by $6.7  million  during the year
ended December 31, 1995.

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



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

      Not applicable.


                                       50
<PAGE>

                                   PART III

ITEM  10.   DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

Identification of Directors and Executive Officers

      The  information  required by this Item 10  concerning  the  directors and
executive  officers  of the  Company  is  incorporated  by  reference  from  the
information under the captions "Proposal One - Election of Directors Information
With Respect to Nominees" and "Executive  Compensation  and Other  Information -
Directors and Executive Officers" in the Company's Definitive Proxy Statement to
be filed with the Commission  pursuant to Regulation 14A in connection  with the
Company's 1998 Annual Meeting of Stockholders (the "Proxy Statement").

Compliance with Section 16(a) of the Securities Exchange Act of 1934

      The  information  required by this Item 10 as to  compliance  with Section
16(a) of the Securities  Exchange Act of 1934 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 11 is incorporated by reference from
the information under the caption "Executive Compensation and Other Information"
in the Proxy Statement.

ITEM  12.   SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

      The information required by this Item 12 is incorporated by reference from
the information under the caption "Security  Ownership of Management and Certain
Beneficial Owners" in the Proxy Statement.

ITEM  13.   CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

      The information required by this Item 13 is incorporated by reference from
the information under the caption "Executive  Compensation and Other Information
- Certain Relationships and Related Transactions" in the Proxy
Statement.


                                       51
<PAGE>




                                    PART IV

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

(a)   (1)   Financial Statements

            The  following  Financial  Statements  together  with the  Report of
            Independent  Auditors are filed as part of this Form 10-K under Item
            8 above:

            Report of Independent Auditors

            Balance Sheets at December 31, 1997 and 1996

            Statements  of  Operations  for  each  of  the  years  ended
            December 31, 1997, 1996 and 1995

            Statements  of  Stockholders'  Equity  for each of the years
            ended December 31, 1997, 1996 and 1995

            Statements  of  Cash  Flows  for  each  of the  years  ended
            December 31, 1997, 1996 and 1995

            Notes to Financial Statements

(a)   (2)   Financial Statement Schedules

            No financial  statement  schedules are included because they are not
            required or the required  information  is included in the  financial
            statements or notes thereto.

(b)   Reports on Form 8-K

            A current  Report on Form 8-K was filed on  November  19,  1997  
            containing information required by Item 5, Other Events.

(c)   Exhibits

      Exhibit No. Description

      3.1(12)      Restated Certificate of Incorporation,  as filed with the 
                   Delaware Secretary of State on June 3, 1997.
      3.2(9)       Amended and Restated By-Laws, as amended March 29, 1996.
      4.1(9)       Certificate of Designation of Preferences of Series A 
                   Preferred Stock of the Registrant, as filed with the Delaware
                   Secretary of State on July 27, 1996.
      10.1(1)(14)  1990 Stock Option Plan, as amended.
      10.2(1)(14)  401(k) Plan.
      10.3(1)(14)  Form of Stock Purchase Agreement.
      10.4(1)      Form of Confidentiality Agreement-Employees & Consultants.
      10.5(1)      Form of Confidentiality Agreement-Strategic Planning.
      10.6(1)      Form of Indemnification Agreement.
      10.7(1)(14)  Form of Employment Agreement.
      10.8(1)      Form of Agreement with Scientific Strategy Team Members.
      10.9(1)      Form of Proprietary Information and Inventions 
                   Agreement-Employees.


                                       52
<PAGE>

      10.10(1)     Form of Proprietary Information and Inventions
                   Agreement-Consultants.
      10.11(1)     Letter  Agreements dated December 8, 1989, May 30, 1990, June
                   21, 1990,  August 24, 1990 and July 22, 1991,  between Shaman
                   and National Institute of Allergy and Infectious Diseases.
      10.12(1)(13) License Agreement dated February 8, 1990, between Shaman and 
                   Dr. Michael Tempesta.
      10.13(1)(14) Stock Purchase Agreement dated June 15,1990, between Shaman 
                   and Lisa A. Conte.
      10.14(1)     Master  Equipment  Lease  Agreement dated September 28, 1990,
                   between Shaman and MMC/GATX  Partnership  No. I, with related
                   schedules.
      10.15(1)     Series B Preferred Stock Warrants dated September 28,1990 and
                   June 28, 1991, issued to MMC/GATX Partnership No. I.
      10.16(1)(13) License  Agreement dated December 5, 1990, as amended January
                   19,  1992,  between  Shaman  and the  University  of  British
                   Columbia.
      10.17(1)     Master Equipment Lease Agreement dated December 26, 1990, 
                   between Shaman and Lease Management Services, Inc.
      10.18(1)     Master Equipment Lease Agreement dated April 22,1991, between
                   Shaman and Industrial Way I Limited Partnership.
      10.19(1)(13) Contract Services  Agreement dated May 23, 1991,  February 1,
                   1992,  February 4, 1992,  September  23, 1992 and October 30,
                   1992, between Shaman and New Drug Services, Inc.
      10.20(1)(13) License  Agreement dated  September 25, 1991,  between Shaman
                   and Inverni della Beffa SpA.
      10.21(1)(13) Manufacturing Agreement dated September 25, 1991 between 
                   Shaman and Indena SpA.
      10.22(1)(13) Master Clinical Trial Agreement dated  September 30,  1991 
                   between Shaman and International Drug Registration, Inc.
      10.23(1)     Series D Preferred Stock Warrant dated February 3, 1992, 
                   issued to MMC/GATX Partnership No. I.
      10.24(1)(13) Supply Agreement dated June 1, 1992.
      10.25(1)(13) Supply Agreement dated June 1, 1992.
      10.26(2)     Screening Agreement dated August 31, 1992, as amended June 2,
                   1993, between Shaman and Merck Research Laboratories.
      10.27(1)(13) Agreement   dated  October  16,  1992,   between  Shaman  and
                   International Medical Technical Consultants, Inc.
      10.28(5)(13) Research  Agreement  dated October 21, 1992, as amended April
                   27, 1994, between Shaman and Eli Lilly and Company.
      10.29(1)     Registration  Rights  Agreement  dated  October 22, 1992,  as
                   amended December 14, 1992, between Shaman and certain holders
                   of preferred stock of Shaman.
      10.30(1)     Industrial  Lease  Agreement  dated January 1, 1993,  between
                   Shaman and Grand/Roebling Investment Company.
      10.31(1)     Three  Party  Agreement  dated as of January 1, 1993,  by and
                   among Berlex  Laboratories,  Inc., Shaman and  Grand/Roebling
                   Investment
                   Company.
      10.32(2)(13) Letter Agreement dated March 1,  1993,  between  Shaman  and
                   Lederle-Praxis Biologicals, Division of  American   Cynamide
                   Corporation.
      10.33(4)     Contract  Service  Agreements dated May 10,  1993,  between 
                   Shaman and R.C. Benson & Sons, Inc.
      10.34(4)(13) Clinical Trial Agreement dated July 21, 1993,  between Shaman
                   and the University of Rochester.
      10.35(4)(13) Letter  Agreement dated  August 24, 1993,  between Shaman and
                   University of Michigan.
      10.36(4)(13) Laboratory   Services  Agreement  dated  September  1,  1993,
                   between Shaman and Hazelton Washington, Inc.


                                       53
<PAGE>

      10.37(4)     Loan and Security Agreement dated September 27, 1993, between
                   Shaman and Household Commercial of California.
      10.38(4)    Master  Equipment  Lease  Agreement dated September 30, 1993,
                   between Shaman and MMC/GATX  Partnership  No. I, with related
                   schedules.
      10.39(4)     Common Stock  Warrant  dated  September  30, 1993,  issued to
                   MMC/GATX Partnership No. I.
      10.40(4)     Common Stock Warrant  dated October 5, 1993,  issued to Meier
                   Mitchell & Co.
      10.41(6)(13) Joint  Research  and  Product Development  Agreement, dated 
                   May 24, 1995, by and between Ono Pharmaceutical Co., Ltd. and
                   Registrant.
      10.41(a)(10) Amendment Agreement, dated December 4,  1996,  to  the  Joint
                   Research and Product Development Agreement by and between Ono
                   Pharmaceutical Co., Ltd. and Registrant.
      10.42(6)(13) License  Agreement,  dated June 8, 1995, by and between Bayer
                   AG and Registrant.
      10.43(7)(13) Development Agreement, dated January 11, 1996, by and between
                   Abbott Laboratories and Registrant.
      10.44(7)     Loan  Agreement,  dated  October 20, 1995, by and between The
                   Daiwa Bank, Limited and Registrant.
      10.45(7)     Assignment and Assumption, dated February 2, 1996, between 
                   The Daiwa Bank, Limited and The Sumitomo Bank, Limited.
      10.46(8)     Letter dated March 29, 1996 from The Sumitomo  Bank,  Limited
                   to the Registrant  amending the Loan Agreement  dated October
                   20, 1995.
      10.47(9)(13) Subscription Agreement dated July 25, 1996 by and between the
                   Registrant and Fletcher International Limited.
      10.48(10)(13)Joint Research and Product Development and  Commercialization
                   Agreement dated September 23, 1996,  by  and  between  Lipha,
                   Lyonnaise   Industrielle  Pharmaceutique   s.a.  and   the 
                   Registrant.
      10.49(10)(13)Stock Purchase  Agreement dated September 23, 1996, by and 
                   between Lipha, Lyonnaise Industrielle Pharmaceutique s.a. and
                   the Registrant.
      10.50(11)(14)Shaman  Pharmaceuticals,  Inc.  1992  Stock  Option  Plan 
                   (as Amended and Restated on February 14, 1997).
      10.51(3)(14) Form of Notice of Grant with Stock Option Agreement.
      10.52(3)(14  Form of Addendum to Stock  Option   Agreement   (Special  Tax
                   Elections).
      10.53(3)(14) Form of Addendum to Stock Option Agreement   (Limited  Stock
                   Appreciation Rights).
      10.54(11)(14)Form  of  Non-Employee  Director Automatic  Stock  Option 
                   Agreement.
      10.55(12)    Masopracol License Agreement, dated as of March 19,  1997, by
                   and between Access Pharmaceuticals, Inc. and the Registrant.
      10.56(12)(13)Amended and Restated  Masopracol  License  Agreement,  dated 
                   as of April __,  1997, by and between Access Pharmaceuticals,
                   Inc. and the Registrant.
      10.57(12)    Loan and Security Agreement, dated as of May 7, 1997, between
                   MMC/GATX Partnership I and Registrant.
      10.57A(12)   Amendment No. 1 to Loan and  Security Agreement, dated  as of
                   [June 30,] 1997, by and  between  Registrant   and  MMC/GATX
                   Partnership No. I.
      10.58(12)    Secured  Promissory Note, dated May 16, 1997, issued in favor
                   of MMC/GATX Partnership No. I.
      10.59(12)    Warrant,  granted  May 7,  1997, in favor  of  MMC/GATX  
                   Partnership No. I.
      10.60(12)    Amendment  to  Warrants,  dated   May 7,   1997,    MMC/GATX
                   Partnership No. I and Registrant.
      10.61(12)    Engagement  Agreement,  dated  April 7, 1997,  by and between
                   Registrant and Diaz & Altschul Capital, LLC.
      10.62(12)    Amended  Engagement  Agreement,  dated June 30, 1997,  by and
                   between Registrant and Diaz & Altschul Capital, LLC.
      10.63(12)    Form of Note Purchase  Agreement,  dated as of June 30, 1997,
                   by and between 


                                       54
<PAGE>

                   Registrant and certain investors.
      10.64*       Master Lease Agreement, dated September 15,   1997,  between
                   Shaman and Transamerica Business Credit Corporation, with 
                   related schedules.
      23.1*        Consent of Ernst & Young LLP, Independent Auditors.
      24.1*        Power of Attorney (included under the caption "Signatures").
      27*          Financial Data Schedule.



      *     Filed herewith.
      (1)   Incorporated   by  reference  to  exhibits  filed  with  the
            Registrant's  Registration  Statement on Form S-1,  File No.
            33-55892 which was declared effective January 26, 1993.
      (2)   Incorporated  by reference to exhibits  filed with the  Registrant's
            Quarterly Report on Form 10-Q for the quarter ended March 31, 1993.
      (3)   Incorporated  by  reference  to  exhibits  filed on July 23,
            1993 with Registrant's  Registration  Statement on Form S-8,
            File No. 33-66450.
      (4)   Incorporated  by reference to exhibits filed on November 10,
            1993 with Registrant's  Registration  Statement on Form S-1,
            File No. 33-71506.
      (5)   Incorporated  by  reference  to  exhibits  filed  with  Registrant's
            Quarterly Report on Form 10-Q for the quarter ended March 31, 1994.
      (6)   Incorporated  by  reference  to  exhibits  filed  with  Registrant's
            Quarterly  Report on Form 10-Q for the quarter  ended June 30, 1995,
            as amended.
      (7)   Incorporated by reference to exhibits filed with Registrant's Annual
            Report on Form 10-K for the year ended December 31, 1995.
      (8)   Incorporated  by  reference  to  exhibits  filed  with  Registrant's
            Quarterly Report on Form 10-Q for the quarter ended March 31, 1996.
      (9)   Incorporated  by  reference  to  exhibits  filed  with  Registrant's
            Quarterly  Report on Form 10-Q for the quarter  ended June 30, 1996,
            as amended.
      (10)  Incorporated  by  reference  to  exhibits  filed  with  Registrant's
            Quarterly  Report on Form 10-Q for the quarter  ended  September 30,
            1996, as amended.
      (11)  Incorporated  by  reference  to  exhibits  filed on June 30,
            1997 with Registrant's  Registration  Statement on Form S-8,
            File No. 333-30365.
      (12)  Incorporated   by   reference   to   exhibits   filed   with
            Registrant's   Registration  Statement  on  Form  S-3,  File
            No. 333-31843.
      (13)  Confidential  treatment  has been  granted  with  respect to certain
            portions of these agreements.
      (14)  Management contract or compensation plan.


                                       55
<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.

Dated: March 3, 1998


                                             SHAMAN PHARMACEUTICALS, INC.


                                          By: /s/ Lisa A.  Conte
                                              _______________________________   
                                              Lisa A. Conte
                                              President, Chief Executive Officer
                                              and Chief  Financial Officer
                                         

                              POWER OF ATTORNEY

      KNOW ALL MEN BY THESE  PRESENTS,  that each person who  signature  appears
below constitutes and appoints jointly and severally,  Lisa A. Conte and G. Kirk
Raab,  or either  of them as his or her true and  lawful  attorneys-in-fact  and
agents, with full power of substitution and  resubstitution,  for him or her and
in his or her name, place and stead, in any and all capacities,  to sign any and
all  amendments  to this  Report on Form  10-K,  and to file the same,  with all
exhibits  thereto,  and  other  documents  in  connection  therewith,  with  the
Securities and Exchange  Commission,  granting unto said  attorneys-in-fact  and
agents,  and each of them,  full power and  authority to do and perform each and
every act and thing requisite and necessary to be done in connection  therewith,
as fully to all intents and  purposes as he might or could do in person,  hereby
ratifying and confirming all that said  attorneys-in-fact  and agents, or any of
them, or their or his substitute or substitutes,  may lawfully do or cause to be
done by virtue hereof.

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

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

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


/s/Lisa A. Conte           President, Chief Executive Officer,     March 3, 1998
____________________       Chief Financial Officer and Director
Lisa A. Conte              (principal executive and financial officer)


/s/Adrian D. P. Bellamy    Director                                March 3, 1998
________________________
 Adrian D.P. Bellamy


/s/Herbert H. McDade, Jr.  Director                                March 3, 1998
______________________ 
Herbert H. McDade, Jr.


                                       56
<PAGE>


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

 
/s/G. Kirk Raab             Chairman of the Board                  March 3, 1998
______________________
G. Kirk Raab


/s/M. David Titus           Director                               March 3, 1998
_____________________  
M. David Titus


/s/John A.  Young           Director                               March 3, 1998
______________________
John A. Young


                                       57
<PAGE>






                                                                 Exhibit  23.1



              CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS


      We  consent  to the  incorporation  by  reference  in  the  Registration
Statements (Form S-8 No. 33-66450,  33-93938, No. 333-09169 and No. 333-30365)
pertaining  to the 1992 Stock Option Plan of Shaman  Pharmaceuticals,  Inc. of
our report dated January 29, 1998,  with respect to the  financial  statements
of Shaman Pharmaceuticals,  Inc. included in the Annual Report (Form 10-K) for
the year ended December 31, 1997.





Palo Alto, California
March 2, 1998                                                ERNST & YOUNG LLP



                                       58
<PAGE>



                                                                  EXHIBIT 10.64

                   MASTER LEASE AGREEMENT, WITH RELATED SCHEDULES

                                    BETWEEN

                    TRANSAMERICA BUSINESS CREDIT CORPORATION

                                      AND

                             SHAMAN PHARMACEUTICALS


<PAGE>

                             MASTER LEASE AGREEMENT


Lessor:     TRANSAMERICA BUSINESS CREDIT CORPORATION
            Riverway II
            West Office Tower
            West Higgins
            Rosemont, Illinois  60018


Lessee:     SHAMAN PHARMACEUTICALS, INC.
            213 East Grand Avenue
            South San Francisco, California  94080-4812


The lessor  pursuant to this Master Lease  Agreement  ("Agreement")  dated as of
September 15, 1997, is Transamerica Business Credit Corporation ("Lessor").  All
equipment,  together with all present and future additions,  parts, accessories,
attachments,  substitutions,  repairs, improvements, and replacements thereof or
thereto,  which are the  subject of a Lease (as  defined  in the next  sentence)
shall  be  referred  to as  "Equipment."  Simultaneous  with the  execution  and
delivery of this  Agreement,  the parties  are  entering  into one or more Lease
Schedules (each, a "Schedule")  which refer to and incorporate by reference this
Agreement, each of which constitutes a lease (each, a "Lease") for the Equipment
specified therein.  Additional details pertaining to each Lease are specified in
the applicable  Schedule.  Each Schedule that the parties  hereafter  enter into
shall constitute a Lease.  Lessor has no obligation to enter into any additional
leases with, or extend any future financing to, Lessee.


            1.  LEASE.  Subject to and upon all of the terms and  conditions  of
this  Agreement and each  Schedule,  Lessor hereby agrees to lease to Lessee and
Lessee hereby agrees to lease from Lessor the Equipment for the Term (as defined
in  Paragraph  2 below)  thereof.  The timing and  financial  scope of  Lessor's
obligation  to enter  into  Leases  hereunder  are  limited  as set forth in the
Commitment Letter executed by Lessor and Lessee, dated as of August 26, 1997 and
attached hereto as Exhibit A (the "Commitment Letter").

            2. TERM.  Each Lease shall be  effective  and the term of each Lease
("Term")  shall  commence on the  commencement  date specified in the applicable
Schedule and, unless sooner terminated (as hereinafter  provided),  shall expire
at the end of the term  specified  in such  Schedule;  provided,  however,  that
obligations  due to be performed by Lessee during the Term shall  continue until
they have been  performed  in full.  Schedules  will only be executed  after the
delivery of the Equipment to Lessee or upon completion of deliveries of items of
such Equipment with aggregate cost of not less than $50,000.

            3.  RENT.  Lessee  shall  pay as  rent  to  Lessor,  for  use of the
Equipment  during the Term or Renewal Term (as defined in Paragraph  8),  rental
payments equal to the sum of all rental payments including,  without limitation,
security  deposits,  advance rents, and interim rents payable in the amounts and
on the dates specified in the applicable Schedule ("Rent"). If any Rent or other
amount  payable by Lessee is not paid within five days after the day on which it
becomes payable, Lessee will pay on demand, as a late charge, an amount equal to
5% of such  unpaid  Rent or other  amount  but only to the extent  permitted  by
applicable  law. All payments  provided for herein shall be payable to Lessor at
its address specified above, or at any other place designated by Lessor.

            4. LEASE NOT CANCELABLE; LESSEE'S OBLIGATIONS ABSOLUTE. No Lease may
be  canceled  or  terminated  except  as  expressly  provided  herein.  Lessee's
obligation to pay all Rent due or to become due hereunder  shall be absolute and
unconditional  and  shall  not be  subject  to any  delay,  reduction,  set-off,
defense,  counterclaim,  or recoupment for any reason whatsoever,  including any
failure of the  Equipment  or any  representations  by the  manufacturer  or the
vendor thereof. If the Equipment is unsatisfactory for any reason,  Lessee shall
make any claim solely against the  manufacturer or the vendor thereof and shall,
nevertheless, pay Lessor all 



                                       1
<PAGE>
                                       


Rent payable hereunder.

            5.    SELECTION  AND  USE OF  EQUIPMENT.  Lessee  agrees  that  it
shall be responsible for the selection and use of, and results  obtained from,
the Equipment and any other associated equipment or services.

            6. WARRANTIES.  LESSOR MAKES NO REPRESENTATION OR WARRANTY,  EXPRESS
OR IMPLIED,  AS TO ANY MATTER WHATSOEVER,  INCLUDING,  WITHOUT  LIMITATION,  THE
DESIGN  OR  CONDITION  OF THE  EQUIPMENT  OR ITS  MERCHANTABILITY,  SUITABILITY,
QUALITY,  OR FITNESS FOR A PARTICULAR  PURPOSE,  AND HEREBY  DISCLAIMS  ANY SUCH
WARRANTY.  LESSEE  SPECIFICALLY WAIVES ALL RIGHTS TO MAKE A CLAIM AGAINST LESSOR
FOR BREACH OF ANY WARRANTY  WHATSOEVER.  LESSEE LEASES THE EQUIPMENT "AS IS." IN
NO EVENT  SHALL  LESSOR  HAVE ANY  LIABILITY,  NOR SHALL  LESSEE HAVE ANY REMEDY
AGAINST  LESSOR,  FOR ANY  LIABILITY,  CLAIM,  LOSS,  DAMAGE,  OR EXPENSE CAUSED
DIRECTLY OR INDIRECTLY BY THE EQUIPMENT OR ANY  DEFICIENCY OR DEFECT  THEREOF OR
THE OPERATION,  MAINTENANCE,  OR REPAIR THEREOF OR ANY CONSEQUENTIAL  DAMAGES AS
THAT TERM IS USED IN SECTION  2-719(3) OF THE MODEL UNIFORM  COMMERCIAL CODE, AS
AMENDED FROM TIME TO TIME ("UCC"). Lessor grants to Lessee, for the sole purpose
of prosecuting a claim, the benefits of any and all warranties made available by
the manufacturer or the vendor of the Equipment to the extent assignable.

            7.    DELIVERY.  Lessor hereby  appoints  Lessee as Lessor's agent
for the sole and limited  purpose of accepting  delivery of the Equipment from
each vendor  thereof.  Lessee shall pay any and all delivery and  installation
charges.  Lessor  shall not be liable to Lessee  for any delay in, or  failure
of, delivery of the Equipment.

            8. RENEWAL.  So long as no Event of Default or event which, with the
giving of notice,  the passage of time,  or both,  would  constitute an Event of
Default,  shall have  occurred and be  continuing,  or the Lessee shall not have
exercised  its  purchase  option  under  Paragraph  9 hereof,  each  Lease  will
automatically  renew  for a term  specified  in  the  applicable  Schedule  (the
"Renewal Term") on the terms and conditions of this Agreement or as set forth in
such Schedule;  provided,  however,  that Obligations due to be performed by the
Lessee during the Renewal Term shall  continue until they have been performed in
full.

            9. PURCHASE  OPTION.  So long as no Event of Default or event which,
with the giving of notice,  the passage of time,  or both,  would  constitute an
Event of Default,  shall have  occurred  and be  continuing,  Lessee  may,  upon
written  notice to Lessor  received at least one hundred  eighty days before the
expiration of a Term, purchase all, but not less than all, the Equipment covered
by the  applicable  Lease  on the  date  specified  therefor  in the  applicable
Schedule  ("Purchase  Date"). The purchase price for such Equipment shall be its
fair  market  value as set forth in the  applicable  Schedule  determined  on an
"In-place,  In-use" basis, as mutually agreed by Lessor and Lessee,  or, if they
cannot agree, as determined by an independent  appraiser  selected by Lessor and
approved by Lessee, which approval will not be unreasonably delayed or withheld.
Lessee shall pay the cost of any such appraisal.  So long as no Event of Default
or event which,  with the giving of notice,  the passage of time, or both, would
constitute  an Event of Default shall have  occurred and be  continuing,  Lessee
may,  upon written  notice to Lessor  received at least one hundred  eighty days
prior to the  expiration  of the Renewal  Term,  purchase all, but not less than
all, the Equipment  covered by the  applicable  Schedule by the last date of the
Renewal Term (the "Alternative  Purchase Date") at a purchase price equal to its
then fair market value on an "In-place,  In-use" basis.  On the Purchase Date or
the  Alternative  Purchase Date, as the case may be, for any  Equipment,  Lessee
shall pay to Lessor the purchase price,  together with all sales and other taxes
applicable  to the transfer of the  Equipment  and any other amount  payable and
arising  hereunder,  in  immediately  available  funds,  whereupon  Lessor shall
transfer  to  Lessee,  without  recourse  or  warranty  of any kind,  express or
implied,  all of Lessor's right, title, and interest in and to such Equipment on
an "As Is, Where Is" basis.

            10. OWNERSHIP;  INSPECTION;  MARKING;  FINANCING STATEMENTS.  Lessee
shall affix to the Equipment any labels supplied by Lessor indicating  ownership
of such  Equipment.  The  Equipment is and shall be the sole property of Lessor.
Lessee shall have no right, title, or interest therein, except as lessee under a
Lease.  The Equipment is and shall at all times be and remain personal  property
and shall not become a 



                                       2
<PAGE>

fixture.  Lessee  shall obtain and record such  instruments  and take such steps
as may be  necessary to prevent  any person from  acquiring  any rights  in  the
Equipment  by  reason  of the  Equipment  being  claimed  or  deemed  to be real
property.  Upon  request by Lessor,  Lessee  shall  obtain and deliver to Lessor
valid and effective waivers, in recordable form, by the owners,  landlords,  and
mortgagees  of the  real  property  upon  which  the  Equipment  is  located  or
certificates  of Lessee that it is the owner of such real  property or that such
real property is neither leased nor  mortgaged.  Lessee shall make the Equipment
and its  maintenance  records  available for  inspection by Lessor at reasonable
times and upon reasonable notice. Lessee shall execute and deliver to Lessor for
filing any UCC financing  statements or similar  documents Lessor may reasonably
request.

            11. EQUIPMENT USE. Lessee agrees that the Equipment will be operated
by competent,  qualified  personnel in connection with Lessee's business for the
purpose for which the Equipment was designed and in accordance  with  applicable
operating instructions,  laws, and government regulations, and that Lessee shall
use all  reasonable  precautions to prevent loss or damage to the Equipment from
fire and other hazards.  Lessee shall procure and maintain in effect all orders,
licenses,  certificates,  permits,  approvals, and consents required by federal,
state,  or local laws or by any  governmental  body,  agency,  or  authority  in
connection with the delivery, installation, use, and operation of the Equipment.

            12.  MAINTENANCE.  Lessee, at its sole cost and expense,  shall keep
the  Equipment in a suitable  environment  as  specified  by the  manufacturer's
guidelines or the equivalent, shall meet all recertification  requirements,  and
shall  maintain  the  Equipment  in its original  condition  and working  order,
ordinary wear and tear  excepted.  At the reasonable  request of Lessor,  Lessee
shall furnish all proof of maintenance.

            13. ALTERATION; MODIFICATIONS; PARTS. Lessee may alter or modify the
Equipment only with the prior written consent of Lessor. Any alteration shall be
removed  and the  Equipment  restored  to its  normal,  unaltered  condition  at
Lessee's expense (without damaging the Equipment's  originally intended function
or its value) prior to its return to Lessor.  Any part  installed in  connection
with  warranty or  maintenance  service or which cannot be removed in accordance
with the preceding sentence shall be the property of Lessor.

            14.  RETURN OF EQUIPMENT.  Except for Equipment  that has suffered a
Casualty  Loss (as  defined in  Paragraph  15 below) and is not  required  to be
repaired  pursuant  to  Paragraph  15 below or  Equipment  purchased  by  Lessee
pursuant to  Paragraph 9 above,  upon the  expiration  of the Renewal  Term of a
Lease,  or upon demand by Lessor  pursuant to Paragraph  22 below,  Lessee shall
contact Lessor for shipping instructions and, at Lessee's own risk,  immediately
return the Equipment,  freight prepaid,  to a location in the continental United
States specified by Lessor. At the time of such return to Lessor,  the Equipment
shall (i) be in the  operating  order,  repair,  and condition as required by or
specified in the original specifications and warranties of each manufacturer and
vendor thereof,  ordinary wear and tear excepted,  (ii) meet all recertification
requirements, and (iii) be capable of being promptly assembled and operated by a
third party purchaser or third party lessee without further repair, replacement,
alterations, or improvements,  and in accordance and compliance with any and all
statutes, laws, ordinances, rules, and regulations of any governmental authority
or any political  subdivision thereof applicable to the use and operation of the
Equipment.  Except as otherwise  provided under Paragraph 9 hereof, at least one
hundred eighty days before the expiration of the Renewal Term, Lessee shall give
Lessor  notice of its intent to return the  Equipment at the end of such Renewal
Term. During the one hundred eighty-day period prior to the end of a Term or the
Renewal Term, Lessor and its prospective  purchasers or lessees shall have, upon
not less than two  business  days'  prior  notice to Lessee  and  during  normal
business  hours, or at any time and without prior notice upon the occurrence and
continuance of an Event of Default, the right of access to the premises on which
the Equipment is located to inspect the Equipment, and Lessee shall cooperate in
all other respects with Lessor's remarketing of the Equipment. The provisions of
this Paragraph 14 are of the essence of the Lease,  and upon  application to any
court of equity having jurisdiction in the premises, Lessor shall be entitled to
a decree  against  Lessee  requiring  specific  performance  of the covenants of
Lessee set forth in this  Paragraph  14. If Lessee fails to return the Equipment
when  required,  the terms and  conditions  of the Lease  shall  continue  to be
applicable and Lessee shall continue to pay Rent until the Equipment is received
by Lessor.

            15. CASUALTY INSURANCE; LOSS OR DAMAGE. Lessee will maintain, at its
own 


                                       3
<PAGE>

expense,  liability and property damage insurance relating  to  the   Equipment,
insuring  against such risks as are  customarily  insured against on the type of
equipment  leased  hereunder  by  businesses  in which Lessee is engaged in such
amounts,  in such form,  and with  insurers  satisfactory  to Lessor;  provided,
however,  that the amount of insurance  against damage or loss shall not be less
than the  greater  of (a) the  replacement  value of the  Equipment  and (b) the
stipulated  loss value of the  Equipment  specified in the  applicable  Schedule
("Stipulated  Loss  Value").  Each  liability  insurance  policy  shall  provide
coverage (including,  without limitation,  personal injury coverage) of not less
than  $1,000,000  for each  occurrence,  and shall name Lessor as an  additional
insured;  and each  property  damage policy shall name Lessor as sole loss payee
and all policies shall contain a clause  requiring the insurer to give Lessor at
least  thirty  days'  prior  written  notice of any  alteration  in the terms or
cancellation  of the  policy.  Lessee  shall  furnish  to  Lessor a copy of each
insurance policy (with  endorsements)  or other evidence  satisfactory to Lessor
that the required insurance  coverage is in effect;  provided,  however,  Lessor
shall have no duty to ascertain  the  existence  of or to examine the  insurance
policies to advise  Lessee if the  insurance  coverage  does not comply with the
requirements  of this  Paragraph.  If Lessee  fails to insure the  Equipment  as
required,  Lessor  shall have the right but not the  obligation  to obtain  such
insurance,  and the cost of the insurance shall be for the account of Lessee due
as part of the next due Rent.  Lessee  consents  to Lessor's  release,  upon its
failure to obtain  appropriate  insurance  coverage,  of any and all information
necessary to obtain insurance with respect to the Equipment or Lessor's interest
therein.

            Until  the  Equipment  is  returned  to and  received  by  Lessor as
provided in  Paragraph  14 above,  Lessee shall bear the entire risk of theft or
destruction of, or damage to, the Equipment including,  without limitation,  any
condemnation,  seizure,  or requisition of title or use  ("Casualty  Loss").  No
Casualty Loss shall relieve  Lessee from its  obligations  to pay Rent except as
provided  in clause (b) below.  When any  Casualty  Loss  occurs,  Lessee  shall
immediately notify Lessor and, at the option of Lessor, shall promptly (a) place
such  Equipment  in good repair and working  order;  or (b) pay Lessor an amount
equal to the  Stipulated  Loss  Value of such  Equipment  and all other  amounts
(excluding  Rent)  payable by Lessee  hereunder,  together with a late charge on
such amounts at a rate per annum equal to the rate imputed in the Rent  payments
hereunder  (as  reasonably  determined  by Lessor) from the date of the Casualty
Loss  through  the date of  payment  of such  amounts,  whereupon  Lessor  shall
transfer to Lessee,  without recourse or warranty  (express or implied),  all of
Lessor's  interest,  if any, in and to such  Equipment  on an "AS IS,  WHERE IS"
basis. The proceeds of any insurance payable with respect to the Equipment shall
be applied, at the option of Lessor,  either towards (i) repair of the Equipment
or (ii) payment of any of Lessee's obligations hereunder. Lessee hereby appoints
Lessor as Lessee's  attorney-in-fact  to make claim for, receive payment of, and
execute and endorse all  documents,  checks or drafts issued with respect to any
Casualty Loss under any insurance policy relating to the Equipment.

            16. TAXES.  Lessee shall pay when due, and indemnify and hold Lessor
harmless  from,  all sales,  use,  excise,  and other taxes,  charges,  and fees
(including,  without  limitation,  income,  franchise,  business and occupation,
gross receipts, licensing,  registration,  titling, personal property, stamp and
interest equalization taxes, levies,  imposts,  duties, charges, or withholdings
of any nature), and any fines, penalties, or interest thereon, imposed or levied
by any governmental  body,  agency,  or tax authority upon or in connection with
the Equipment, its purchase,  ownership,  delivery, leasing, possession, use, or
relocation  of the Equipment or otherwise in  connection  with the  transactions
contemplated  by each  Lease  or the  Rent  thereunder,  excluding  taxes  on or
measured by the net income of Lessor. Upon request, Lessee will provide proof of
payment.  Unless Lessor elects otherwise,  Lessor will pay all property taxes on
the Equipment  for which Lessee shall  reimburse  Lessor  promptly upon request.
Lessee shall timely  prepare and file all reports and returns which are required
to be made with respect to any  obligation  of Lessee under this  Paragraph  16.
Lessee shall,  to the extent  permitted by law, cause all billings of such fees,
taxes, levies,  imposts,  duties,  withholdings,  and governmental charges to be
made to Lessor in care of Lessee. Upon request,  Lessee will provide Lessor with
copies of all such billings.

            17.  LESSOR'S  PAYMENT.  If Lessee fails to perform its  obligations
under  Paragraph 15 or 16 above,  or  Paragraph 23 below,  Lessor shall have the
right  to  substitute  performance,  in  which  case  Lessee  shall  immediately
reimburse Lessor therefor.

            18. GENERAL INDEMNITY. Each Lease is a net lease. Therefore,  Lessee
shall indemnify Lessor and its successors and assigns  against,  and hold Lessor
and its  successors  and assigns  harmless



                                       4
<PAGE>

from, any and all claims, actions, damages,  obligations,  liabilities,  and all
costs and expenses, including, without limitation, legal fees incurred by Lessor
or its  successors  and  assigns  arising out of each Lease  including,  without
limitation, the purchase, ownership,  delivery, lease, possession,  maintenance,
condition,  use, or return of the  Equipment,  or arising by  operation  of law,
except  that  Lessee  shall  not be liable  for any  claims,  actions,  damages,
obligations, and costs and expenses determined by a non-appealable,  final order
of a court of competent  jurisdiction  to have occurred as a result of the gross
negligence or willful misconduct of Lessor or its successors and assigns. Lessee
agrees that upon written notice by Lessor of the assertion of any claim, action,
damage, obligation,  liability, or lien, Lessee shall assume full responsibility
for the defense  thereof,  provided  that  Lessor's  failure to give such notice
shall not limit or otherwise affect its rights  hereunder.  Any payment pursuant
to this  Paragraph  (except  for any payment of Rent) shall be of such amount as
shall be  necessary  so that,  after  payment of any taxes  required  to be paid
thereon by Lessor,  including  taxes on or measured by the net income of Lessor,
the  balance  will  equal the  amount  due  hereunder.  The  provisions  of this
Paragraph  with  regard to matters  arising  during a Lease  shall  survive  the
expiration or termination of such Lease.

            19.  ASSIGNMENT  BY  LESSEE.  Lessee  shall not,  without  the prior
written consent of Lessor, (a) assign, transfer, pledge, or otherwise dispose of
any Lease or  Equipment,  or any  interest  therein;  (b)  sublease  or lend any
Equipment or permit it to be used by anyone other than Lessee and its employees;
or (c) move any Equipment  from the location  specified for it in the applicable
Schedule,  except that Lessee may move Equipment to another  location within the
United  States  provided  that Lessee has  delivered to Lessor (A) prior written
notice thereof and (B) duly executed  financing  statements and other agreements
and instruments (all in form and substance satisfactory to Lessor) necessary or,
in the opinion of the Lessor,  desirable  to protect  Lessor's  interest in such
Equipment. Notwithstanding anything to the contrary in the immediately preceding
sentence,  Lessee may keep any Equipment consisting of motor vehicles or rolling
stock at any location in the United States.

            20. ASSIGNMENT BY LESSOR.  Lessor may assign its interest or grant a
security  interest in any Lease and the Equipment  individually or together,  in
whole or in part. If Lessee is given written notice of any such  assignment,  it
shall immediately make all payments of Rent and other amounts hereunder directly
to such  assignee.  Each such  assignee  shall  have all of the rights of Lessor
under each Lease  assigned  to it.  Lessee  shall not  assert  against  any such
assignee  any set-off,  defense,  or  counterclaim  that Lessee may have against
Lessor or any other person.

            21. DEFAULT; NO WAIVER. Lessee or any guarantor of any or all of the
obligations  of Lessee  hereunder  (together with Lessee,  the "Lease  Parties")
shall be in default under each Lease upon the occurrence of any of the following
events (each,  an "Event of Default"):  (a) Lessee fails to pay within five days
of when due any amount required to be paid by Lessee under or in connection with
any Lease;  (b) any of the Lease  Parties  fails to perform any other  provision
under  or in  connection  with a  Lease  or  violates  any of the  covenants  or
agreements  of such Lease Party  under or in  connection  with a Lease;  (c) any
representation  made or financial  information  delivered or furnished by any of
the Lease Parties  under or in connection  with a Lease shall prove to have been
inaccurate in any material respect when made; (d) any of the Lease Parties makes
an assignment for the benefit of creditors, whether voluntary or involuntary, or
consents to the  appointment  of a trustee or  receiver,  or if either  shall be
appointed for any of the Lease Parties or for a substantial part of its property
without its consent and, in the case of any such  involuntary  proceeding,  such
proceeding  remains  undismissed or unstayed for  forty-five  days following the
commencement  thereof; (e) any petition or proceeding is filed by or against any
of the Lease Parties under any Federal or State bankruptcy or insolvency code or
similar law and,  in the case of any such  involuntary  petition or  proceeding,
such petition or proceeding remains  undismissed or unstayed for forty-five days
following the filing or commencement  thereof, or any of the Lease Parties takes
any action  authorizing  any such petition or  proceeding;  (f) any of the Lease
Parties  fails to pay  when due any  indebtedness  for  borrowed  money or under
conditional sales or installment sales contracts or similar agreements,  leases,
or  obligations  evidenced  by  bonds,  debentures,   notes,  or  other  similar
agreements  or  instruments  to any creditor  (including  Lessor under any other
agreement)  after  any and all  applicable  cure  periods  therefor  shall  have
elapsed;  (g) any judgment  shall be rendered  against any of the Lease  Parties
which shall remain unpaid or unstayed for a period of sixty days; (h) any of the
Lease Parties shall dissolve,  liquidate, wind up or cease its business, sell or
otherwise  dispose  of all or  substantially  all of its  assets,  or  make  any
material  change in its lines of business;  (i) any of the Lease  Parties  shall
amend or modify its name,  unless  such Lease Party  delivers to Lessor,  thirty
days prior to any such proposed  


                                       5
<PAGE>

amendment or modification,  written notice of such amendment or modification and
within  ten  days  before  such  amendment  or  modification  delivers  executed
financing statements (in form and substance satisfactory to the Lessor); (j) any
of the Lease  Parties shall merge or  consolidate  with any other entity or make
any material  change in its capital  structure,  in each case  without  Lessor's
prior written consent,  which shall not be unreasonably withheld; (k) any of the
Lease  Parties  shall suffer any loss or  suspension  of any  material  license,
permit,  or other  right or asset  necessary  to the  profitable  conduct of its
business,  fail generally to pay its debts as they mature, or call a meeting for
purposes of compromising  its debts;  (l) any of the Lease Parties shall deny or
disaffirm its obligations  hereunder or under any of the documents  delivered in
connection herewith;  or (m) there is a change in more than 35% of the ownership
of any equity  interests of any of the Lease  Parties on the date hereof or more
than 35% of such  interests  become  subject  to any  contractual,  judicial  or
statutory lien, charge, security interest, or encumbrance.

            22.  REMEDIES.  Upon the occurrence and  continuation of an Event of
Default,  Lessor shall have the right, in its sole  discretion,  to exercise any
one or more of the following remedies: (a) terminate each Lease; (b) declare any
and all Rent and other  amounts then due and any and all Rent and other  amounts
to  become  due  under  each  Lease  (collectively,   the  "Lease  Obligations")
immediately  due  and  payable;  (c)  take  possession  of any or all  items  of
Equipment,  wherever  located,  without  demand,  notice,  court order, or other
process of law, and without liability for entry to Lessee's premises, for damage
to Lessee's  property,  or otherwise;  (d) demand that Lessee immediately return
any or all Equipment to Lessor in accordance  with Paragraph 14 above,  and, for
each day that  Lessee  shall  fail to return any item of  Equipment,  Lessor may
demand an amount equal to the Rent payable for such Equipment in accordance with
Paragraph 14 above; (e) lease,  sell, or otherwise dispose of the Equipment in a
commercially  reasonable manner, with or without notice and on public or private
bid; (f) recover the  following  amounts from the Lessee (as damages,  including
reimbursement  of costs and expenses,  liquidated  for all purposes and not as a
penalty):  (i) all costs and expenses of Lessor  reimbursable  to it  hereunder,
including,  without limitation,  expenses of disposition of the Equipment, legal
fees,  and all other  amounts  specified in  Paragraph 23 below;  (ii) an amount
equal to the sum of (A) any accrued and unpaid Rent through the later of (1) the
date of the applicable default, (2) the date that Lessor has obtained possession
of the Equipment,  or (3) such other date as Lessee has made an effective tender
of possession of the Equipment to Lessor (the "Default  Date") and (B) if Lessor
resells or re-lets the Equipment, Rent at the periodic rate provided for in each
Lease for the additional  period that it takes Lessor to resell or re-let all of
the Equipment; (iii) the present value of all future Rent reserved in the Leases
and  contracted to be paid over the unexpired  Term of the Leases  discounted at
five percent compound interest;  (iv) the reversionary value of the Equipment as
of the  expiration  of the  Term of the  applicable  Lease  as set  forth on the
applicable  Schedule;  and (v) any  indebtedness  for Lessee's  indemnity  under
Paragraph  18 above,  plus a late charge at the rate  specified  in  Paragraph 3
above,  less the amount  received by Lessor,  if any, upon sale or re-let of the
Equipment;  and (g)  exercise  any other  right or remedy to recover  damages or
enforce the terms of the Leases. Upon the occurrence and continuance of an Event
of Default or an event  which with the giving of notice or the  passage of time,
or both,  would  result in an Event of  Default,  Lessor  shall  have the right,
whether or not Lessor has made any demand or the obligations of Lessee hereunder
have matured,  to  appropriate  and apply to the payment of the  obligations  of
Lessee hereunder all security  deposits and other deposits  (general or special,
time or  demand,  provisional  or  final)  now or  hereafter  held by and  other
indebtedness or property now or hereafter owing by Lessor to Lessee.  Lessor may
pursue any other rights or remedies  available  at law or in equity,  including,
without limitation,  rights or remedies seeking damages,  specific  performance,
and injunctive  relief.  Any failure of Lessor to require strict  performance by
Lessee,  or any  waiver  by  Lessor  of any  provision  hereunder  or under  any
Schedule,  shall not be  construed as a consent or waiver of any other breach of
the same or of any other  provision.  Any  amendment or waiver of any  provision
hereof or under any Schedule or consent to any  departure by Lessee  herefrom or
therefrom shall be in writing and signed by Lessor.

            No right or remedy is  exclusive  of any  other  provided  herein or
permitted by law or equity. All such rights and remedies shall be cumulative and
may be enforced concurrently or individually from time to time.

            23.  LESSOR'S  EXPENSE.  Lessee shall pay Lessor on demand all costs
and expenses (including legal fees and expenses) incurred in connection with the
preparation,  execution and delivery of this Agreement and any other  agreements
and  transactions  contemplated  hereby,  which expenses shall not exceed $5,000
without the written consent of Lessee,  and all costs and expenses in protecting
and enforcing  Lessor's  rights and  interests in each Lease and the  equipment,
including,  without  limitation,  legal,  collection,  and remarketing  fees 


                                       6
<PAGE>

and expenses incured by Lessor in enforcing the terms, conditiond, or provisions
of each Lease or upon the occurrence and continuation of an Event of Default.

            24.  LESSEE'S  WAIVERS.  To the extent  permitted by applicable law,
Lessee hereby waives any and all rights and remedies  conferred upon a lessee by
Sections 2A-508 through 2A-522 of the UCC. To the extent permitted by applicable
law, Lessee also hereby waives any rights now or hereafter  conferred by statute
or otherwise  which may require  Lessor to sell,  lease,  or  otherwise  use any
Equipment in mitigation  of Lessor's  damages as set forth in Paragraph 22 above
or which may otherwise  limit or modify any of Lessor's rights or remedies under
Paragraph  22. Any  action by Lessee  against  Lessor for any  default by Lessor
under any Lease  shall be  commenced  within  one year  after any such  cause of
action accrues.

            25. NOTICES;  ADMINISTRATION.  Except as otherwise  provided herein,
all  notices,  approvals,  consents,  correspondence,  or  other  communications
required or desired to be given hereunder shall be given in writing and shall be
delivered by overnight courier,  hand delivery, or certified or registered mail,
postage prepaid, if to Lessor, then to Transamerica Technology Finance Division,
76 Batterson Park Road, Farmington, Connecticut 06032, Attention: Assistant Vice
President,  Lease  Administration,  with a copy to Lessor at  Riverway  II, West
Office Tower, 9399 West Higgins Road, Rosemont, Illinois 60018, Attention: Legal
Department,  if to Lessee, then to Shaman Pharmaceuticals,  Inc., 213 East Grand
Avenue,  South San  Francisco,  California  94080-4812  or such other address as
shall be designated by Lessee or Lessor to the other party. All such notices and
correspondence shall be effective when received.

            26.  REPRESENTATIONS.  Lessee represents and warrants to Lessor that
(a) Lessee is duly organized,  validly existing,  and in good standing under the
laws of the  State  of its  incorporation;  (b)  the  execution,  delivery,  and
performance by Lessee of this Agreement are within  Lessee's  powers,  have been
duly authorized by all necessary action,  and do not and will not contravene (i)
Lessee's  organizational  documents  or  (ii)  any  law,  regulation,  rule,  or
contractual  restriction binding on or affecting Lessee; (c) no authorization or
approval or other action by, and no notice to or filing with,  any  governmental
authority or regulatory  body is required for the due execution,  delivery,  and
performance by Lessee of this Agreement;  (d) each Lease  constitutes the legal,
valid,  and  binding   obligations  of  Lessee  enforceable  against  Lessee  in
accordance  with its  terms;  (e) the cost of each  item of  Equipment  does not
exceed the fair and usual  price for such type of  equipment  purchased  in like
quantity and reflects all discounts,  rebates,  and allowances for the Equipment
(including,  without  limitation,  discounts for  advertising,  prompt  payment,
testing,  or other services) given to the Lessee by the manufacturer,  supplier,
or any other  person;  and (f) all  information  supplied by Lessee to Lessor in
connection  herewith  is  correct  and  does not  omit  any  material  statement
necessary to insure that the information supplied is not misleading.

            27. FURTHER  ASSURANCES.  Lessee,  upon the request of Lessor,  will
execute,  acknowledge,  record,  or  file,  as the  case  may be,  such  further
documents and do such further acts as may be reasonably necessary, desirable, or
proper to carry out more  effectively  the  purposes of this  Agreement.  Lessee
hereby  appoints Lessor as its  attorney-in-fact  to execute on behalf of Lessee
and  authorizes  Lessor to file without  Lessee's  signature  any UCC  financing
statements and amendments Lessor deems advisable.

            28.  FINANCIAL  STATEMENTS.  Lessee shall deliver to Lessor:  (a) as
soon as available, but not later than 120 days after the end of each fiscal year
of Lessee and its consolidated  subsidiaries,  the  consolidated  balance sheet,
income  statement,  and  statements  of cash flows and  shareholders  equity for
Lessee and its consolidated  subsidiaries (the "Financial  Statements") for such
year, reported on by independent certified public accountants without an adverse
qualification;  and (b) as soon as  available,  but not later than 60 days after
the end of each of the first three fiscal  quarters in any fiscal year of Lessee
and its  consolidated  subsidiaries,  the Financial  Statements  for such fiscal
quarter, together with a certification duly executed by a responsible officer of
Lessee that such  Financial  Statements  have been prepared in  accordance  with
generally accepted  accounting  principles and are fairly stated in all material
respects  (subject to normal  year-end  audit  adjustments).  Lessee  shall also
deliver to Lessor as soon as  available  copies of all press  releases and other
similar communications issued by Lessee.

            29.  CONSENT  TO  JURISDICTION.  Lessee  irrevocably  submits to the
jurisdiction  of any Illinois state or federal court sitting in Illinois for any
action  or  proceeding  arising  out of or  relating  to this  


                                       7
<PAGE>

Agreement or the transactions contemplated hereby, and Lessee irrevocably agrees
that all  claims in respect of any such  action or  proceeding  may be heard and
determined in such Illinois state or federal court.

            30.   WAIVER OF JURY TRIAL.  LESSEE AND LESSOR  IRREVOCABLY  WAIVE
ALL RIGHT TO TRIAL BY JURY IN ANY ACTION,  PROCEEDING, OR COUNTERCLAIM ARISING
OUT OF OR RELATING TO THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY.

            31.  FINANCE  LEASE.  Lessee and  Lessor  agree that each Lease is a
"Finance Lease" as defined by Section 2A-103(g) of the UCC. Lessee  acknowledges
that Lessee has reviewed and approved each written  Supply  Contract (as defined
by UCC 2A-103(y))  covering Equipment purchased from each "Supplier" (as defined
by UCC 2A-103(x)) thereof.

            32. NO AGENCY.  Lessee  acknowledges  and agrees  that  neither  the
manufacturer or supplier,  nor any salesman,  representative,  or other agent of
the   manufacturer   or   supplier,   is  an  agent  of  Lessor.   No  salesman,
representative,  or agent of the manufacturer or supplier is authorized to waive
or  alter  any  term or  condition  of this  Agreement  or any  Schedule  and no
representation  as to the Equipment or any other matter by the  manufacturer  or
supplier shall in any way affect Lessee's duty to pay Rent and perform its other
obligations as set forth in this Agreement or any Schedule.

            33. SPECIAL TAX INDEMNIFICATION. Lessee acknowledges that Lessor, in
determining the Rent due hereunder, has assumed that certain tax benefits as are
provided to an owner of property  under the Internal  Revenue  Code of 1986,  as
amended (the "Code"),  and under  applicable state tax law,  including,  without
limitation,  depreciation  deductions  under  Section  168(b) of the  Code,  and
deductions  under  Section  163 of the Code in an amount  at least  equal to the
amount of interest  paid or accrued by Lessor with  respect to any  indebtedness
incurred by Lessor in financing its purchase of the Equipment,  are available to
Lessor as a result of the lease of the Equipment.  In the event Lessor is unable
to obtain such tax  benefits  as a result of an act or  omission  of Lessee,  is
required to include in income any amount other than the Rent,  or is required to
recognize  income in respect of the Rent  earlier than  anticipated  pursuant to
this Agreement, Lessee shall pay Lessor additional rent ("Additional Rent") in a
lump sum in an amount needed to provide Lessor with the same after-tax yield and
after-tax  cash flow as would have been  realized  by Lessor had Lessor (i) been
able to obtain such tax  benefits,  (ii) not been required to include any amount
in income other than the Rent,  and (iii) not been required to recognize  income
in respect of the Rent earlier than anticipated pursuant to this Agreement.  The
Additional Rent shall be computed by Lessor,  which computation shall be binding
on Lessee.  The Additional Rent shall be due immediately  upon written notice by
Lessor to Lessee of Lessor's inability to obtain tax benefits,  the inclusion of
any amount in income other than the Rent or the recognition of income in respect
of the Rent earlier than anticipated pursuant to this Agreement.  The provisions
of this Paragraph 33 shall survive the termination of this Agreement.

            34.   GOVERNING  LAW;  SEVERABILITY.  EACH LEASE SHALL BE GOVERNED
BY THE LAWS OF THE STATE OF ILLINOIS  WITHOUT GIVING EFFECT TO THE CONFLICT OF
LAW  PRINCIPLES  THEREOF.  IF ANY  PROVISION  SHALL BE HELD TO BE  INVALID  OR
UNENFORCEABLE,  THE VALIDITY AND  ENFORCEABILITY  OF THE REMAINING  PROVISIONS
SHALL NOT IN ANY WAY BE AFFECTED OR IMPAIRED.

LESSEE ACKNOWLEDGES THAT LESSEE HAS READ THIS AGREEMENT AND THE SCHEDULE HERETO,
UNDERSTANDS THEM, AND AGREES TO BE BOUND BY THEIR TERMS AND CONDITIONS. FURTHER,
LESSEE  AND  LESSOR  AGREE  THAT THIS  AGREEMENT,  THE  SCHEDULES  DELIVERED  IN
CONNECTION  HEREWITH  FROM  TIME TO  TIME,  AND THE  COMMITMENT  LETTER  ARE THE
COMPLETE  AND  EXCLUSIVE   STATEMENT  OF  THE  AGREEMENT  BETWEEN  THE  PARTIES,
SUPERSEDING ALL PROPOSALS OR PRIOR  AGREEMENTS,  ORAL OR WRITTEN,  AND ALL OTHER
COMMUNICATIONS BETWEEN THE PARTIES RELATING TO THE SUBJECT MATTER HEREOF. SHOULD
THERE EXIST ANY  INCONSISTENCY  BETWEEN THE TERMS OF THE  COMMITMENT  LETTER AND
THIS AGREEMENT, THE TERMS OF THIS AGREEMENT SHALL PREVAIL.



                                       8
<PAGE>


            IN WITNESS WHEREOF,  the parties hereto have executed or caused this
Agreement to be duly executed by their duly  authorized  officers as of the date
first written above.



                                    SHAMAN PHARMACEUTICALS, INC.


                                       By: /s/ Lisa A. Conte
                                          _______________________               
                                       Name:  Lisa A. Conte
                                       Title:   President & CEO
                                       Federal Tax ID: 94-3095806

                                    TRANSAMERICA BUSINESS CREDIT CORPORATION



                                       By: /s/ Gary P. Moro
                                          _______________________               
                                       Name: Gary P. Moro
                                       Title:   Vice President




                                       9
<PAGE>



                             SECRETARY'S CERTIFICATE



      I,  _______________,  hereby state that I am the duly  elected  acting and
qualified Secretary of Shaman Pharmaceuticals, Inc., a Delaware corporation (the
"Company"), and that:

      (a) Through a unanimous consent in lieu of a Board of Directors meeting of
the Company,  proposed in accordance  with its bylaws and the laws of said State
on the  ______  day of  _________,  signed  by  quorum  for the  transaction  of
business, the following resolutions were duly and regularly adopted:

            RESOLVED,  that  the  form,  terms  and  provisions  of  all  of the
documents  and  instruments  executed  by the  Company  with  and/or in favor of
Transamerica   Business  Credit   Corporation   (the   "Agreements"),   and  the
transactions  contemplated  thereby  be,  and  the  same  are,  in all  respects
approved, and that the President,  each Vice President and each other officer of
the Company (the "Authorized Persons"), or any of them, be, and they hereby are,
authorized,  empowered,  and directed to execute and deliver the  Agreements and
any and all other agreements,  documents,  instruments and certificates required
or desirable in  connection  therewith,  if  necessary or  advisable,  with such
changes  as they  may  deem in the  best  interest  of the  Company,  and  their
execution  and  delivery  ofthe  Agreements,  and  all  such  other  agreements,
documents,  instruments  and  certificates,  shall be  deemed  to be  conclusive
evidence that the same are in all respects  authorized  and approved;  and be it
further

      RESOLVED,  that the actions of any Authorized  Person  heretofore taken in
furtherance of the Agreements be, and hereby are, approved, adopted and ratified
in all respects.

            (i) The above  resolutions:  (a) are not contrary to the Articles or
Certificate  of  Incorporation  or bylaws of the  Company  and (b) have not been
amended, modified,  rescinded or revoked and are in full force and effect on the
date hereof.

            (iii) The following  persons are duly qualified and acting  officers
of the Company,  duly elected to the offices set forth opposite their respective
names, and the signature appearing opposite the name of each such officer is his
authentic signature:

      Name                    Office                        Signature


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


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

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


      IN WITNESS WHEREOF,  I have executed this Certificate,  this _________ day
of ___________.



                                                      ________________________
                                                            Secretary



<PAGE>


                                    Exhibit A

August 26, 1997



Mr. M. David Titus
Director
Shaman Pharmaceuticals, Inc.
213 East Grand Avenue
South San Francisco, CA 94080-4812

Dear Dave:

Transamerica   Business  Credit   Corporation  -  Technology   Finance  Division
("Lessor") is pleased to offer this commitment (this  "Commitment") to lease the
equipment  described  below to Shaman  Pharmaceuticals,  Inc.  ("Lessee").  This
Commitment  supersedes all prior  correspondence,  proposals,  and oral or other
communications relating to leasing arrangements between Lessor and Lessee.

The outline of this offer is as follows:

Lessee:               Shaman Pharmaceuticals, Inc.

Lessor:               Transamerica Business Credit Corporation - Technology 
                      Finance Division

Equipment:            Laboratory and computer equipment and tenant improvements
                      (all  equipment subject  to  Lessor's  approval  prior  to
                      funding),  including,  without limitation,  all additions,
                      improvements,   replacements,   repairs,    appurtenances,
                      substitutions,  and attachments  thereto  and all proceeds
                      thereof  ("Equipment").  Tenant  improvements  shall   not
                      exceed 20% of  aggregate Equipment Cost.  

Equipment  Costs:     Up to $1,000,000

Equipment Location:   South San Francisco, California

Anticipated Delivery: Through June 30, 1998

Lease Term
Commencement:         Upon delivery of the Equipment or upon each completion of 
                      deliveries of items of  Equipment with  aggregate  cost of
                      not less than $50 000, but no later than June 30, 1998.

Term:                 From each Lease Term Commencement  until  48  months from 
                      the first day of the month next following  or  coincident 
                      with that Lease Term Commencement.

Monthly Rent:         Monthly Rent equal to 2.4937% of  Equipment  Cost will be 
                      payable monthly  in  advance.  The first and last months' 
                      rent will be payable  upon each  Lease Term Commencement.


                                       
<PAGE>

Adjustment to
Rental Payments:      The Lessor reserves  the right to increase the Montly Rent
                      Payments  as of the date of each  Lease  Term Commencement
                      proportionally  to the  change  in the  weekly average of
                      the interest rates of four-year  U.S.  Treasury Securities
                      from  the week  ending  February  14,  1997  to  the  week
                      preceding the  date   of each Lease Term Commencement,  as
                      published  in  the Wall Street Journal.  As of the date of
                      each  Lease  Term  Commencement, the Monthly Rent Payments
                      will  be  fixed for  the  term.   A schedule of the actual
                      Monthly Rent  Payments  will be  provided  by  the  Lessor
                      following each Lease Term Commencement.

Interim Rent:         Interim Rent will accrue from each Lease Term Commencement
                      until the next following first day of a month  (unless the
                      Lease Term  Commencement  is on the first day of a month).
                      Interim Rent will  be calculated at the  daily  equivalent
                      of the currently adjusted Monthly Rent Payment.

Purchase Option:      The Lessee will have the option to  purchase  all (but not
                      less than all) the Equipment at the expiration of the term
                      of the lease for the then current Fair Market Value of the
                      Equipment,  plus applicable sales and other taxes.

                      Fair Market Value will be 10% of Equipment Cost.

Automatic Renewal:    In the event the Lessee does not exercise the Purchase
                      Option  described  above,  the lease will  automatically
                      renew for a term of one year with Monthly Rentals equal to
                      1.00% of Equipment Cost payable monthly in advance. At the
                      expiration of the  renewal  period, the Lessee  will  have
                      the  option  to purchase  all (but not less than all) the 
                      Equipment for $1.00,  plus applicable  sales   and   other
                      taxes.

Net Lease:            The lease will be a net lease under which the Lessee  will
                      be responsible for maintenance, insurance, taxes, and  all
                      other costs and expenses.

Taxes:                Sales or use taxes will be added to the  Equipment Cost or
                      collected on the gross rentals, as appropriate.
                  
Insurance:            Prior  to  any  delivery of  Equipment,  the  Lessee  will
                      furnish confirmation of insurance acceptable to the Lessor
                      covering  the  Equipment,  including  primary,  all  risk,
                      physical damage, property damage  and bodily  injury  with
                      appropriate loss payee endorsement in favor of the Lessor.

Conditions Precedent  1.  No material adverse change in the financial condition,
to Each Lease Term        operation or prospects of the Lessee prior to funding.
Commencement:             The Lessor  reserves  the right to rescind  any unused
                          portion  of its commitment in the event of a  material
                          adverse change in the financial  condition,  operation
                          or prospects of the Lessee.

                      2.  Completion of the documentation and final terms of the
                          proposed financing satisfactory to Lessor and Lessor's
                          counsel.

                      3.  Results of all due diligence, including lien, judgment
                          and tax searches, reference calls (including to Delphi
                          Ventures and Silicon Valley  Bank) and  other  matters
                          Lessor  may  reasonably request shall  be satisfactory
                          to  Lessor  and  Lessor's counsel.


                                       2
<PAGE>

                      4.  Receipt by Lessor of duly executed Lease documentation
                          in form and substance satisfactory to  Lessor  and its
                          counsel.

                      5.  Lessor shall receive  title and a valid and  perfected
                          first  priority lien  and  security  interest  in  all
                          Equipment acquired through the use of this  Commitment
                          and Lessor shall have received satisfactory   evidence
                          that there are no liens on any Equipment   except   aS
                          expressly permitted herein.
                      
Additional Covenants: There will be no actual or  threatened  conflict  with, or
                      violation of, any regulatory  statute,  standard  or  rule
                      relating to  the Lessee, its present or future operations,
                      or the Equipment.
                    
                      Lessee will be required  to  provide  quarterly  financial
                      information.  All information  supplied by the Lessee will
                      be  correct  and will not omit any statement  necessary to
                      make the information  supplied  not be  misleading.  There
                      will  be no material breach  of  the  representations  and
                      warranties of the Lessee in the lease. The representations
                      will  include that the Equipment  Cost of each item of the
                      Equipment  does  not exceed  the fair and usual price  for
                      like quantity  purchased of  such  item  and  reflects all
                      discounts, rebates and allowances for the Equipment  given
                      to Lessee or any  affiliate of Lessee by the manufacturer,
                      supplier  or  anyone else  including,  without limitation,
                      discounts for advertising,  prompt  payment,  testing   or
                      other services.

Fees and Expenses:    The Lessee will be responsible for the Lessor's reasonable
                      expenses in connection with closing the transaction.  Such
                      expenses shall not exceed $5,000 without  the  consent  of
                      the Lessee.
                  
Law:                  This letter  and  the  proposed  Lease  are intended to be
                      governed by and construed in accordance with Illinois  law
                      without regard to its conflict of law provisions.
      
Indemnity:            Lessee agrees to  indemnify  and to hold harmless  Lessor,
                      and its officers, directors  and  employees   against  all
                      claims,   damages, liabilities  and expenses which may  be
                      incurred  by  or  asserted  against  any  such  person  in
                      connection  with  or  arising  out  of this letter and the
                      transactions  contemplated   hereby,  other than   claims,
                      damages,  liability,  and  expense   resulting  from  such
                      person's gross negligence or willful misconduct.

Confidentiality:      This letter  is  delivered to you  with the  understanding
                      that neither  it nor its  substance   shall  be  disclosed
                      publicly or privately   to any  third  person except those
                      who are in a confidential  relationship  to you  (such  as
                      your legal counsel and  accountants), or where the same is
                      required  by law and then only on the basis that it not be
                      further disclosed, which conditions Lessee and its  agents
                      agree to be bound by upon  acceptance of this letter.
                  
                      Without  limiting the generality of the foregoing, none of
                      such persons shall  use  or  refer  to  Lessor  or  to any
                      affiliate  name in  any  disclosures  made  in  connection
                      with  any  of  the  transactions  without  Lessor's  prior
                      written consent.
                  
                      Upon completion of the  initial  takedown  by  Lessor  and
                      Lessee, the Lessee 


                                       3
<PAGE>

                      will  no  longer   be  required  to  obtain Lessor's prior
                      written consent to disclose the transaction  contemplated
                      hereby. In addition, the  Lessee  agrees to provide camera
                      ready artwork of typestyles  and  logos of the Lessee  for
                      use  in  promotional  material  by  the  Lessor.
                                       
Conditions of         This Commitment  Letter is intended to be a summary of the
Acceptance:           most important elements  of the  agreement to enter into a
                      leasing  transaction with  Lessee,  and  it is  subject to
                      all  requirements  and  conditions  contained   in   Lease
                      documentation  proposed  by  Lessor or  its counsel in the
                      course of closing  the Lease  described herein.  Not every
                      provision that imposes duties,  obligations,  burdens,  or
                      limitations on Lessee is contained  herein,  but shall  be
                      contained in  the final Lease  documentation  satisfactory
                      to Lessor and its counsel.

                      EACH OF THE PARTIES HERETO IRREVOCABLY AND UNCONDITIONALLY
                      WAIVES ALL RIGHT TO TRIAL  BY  JURY IN ANY  SUIT,  ACTION,
                      PROCEEDING OR  COUNTERCLAIM  ARISING OUT OF OR RELATED TO 
                      THIS LETTER OR THE TRANSACTION DESCRIBED IN THIS LETTER.



Application Fee:      The $10,000  Application  Fee  previously  paid by Lessee
                      will  be first   applied  to the costs and expenses of the
                      Lessor  in  connection  with  the   transaction,  and  any
                      remainder shall be applied pro-rata  to the second month's
                      rent due under each Lease.
                


Commitment            This Commitment shall expire on September 3, 1997,  unless
Expiration:           prior  thereto either extended in writing by the Lessor or
                      accepted as provided below by  the Lessee.
                 


Should  you have any  questions,  please  call me.  If you wish to  accept  this
Commitment,  please so indicate by signing and returning the enclosed  duplicate
copy of this letter to me by
September 3, 1997.

                                    Yours truly,

                                    TRANSAMERICA BUSINESS CREDIT CORP.
                                    TECHNOLOGY FINANCE DIVISION



                                     By: /s/ Gerald A. Michaud
                                         _____________________________________  
                                            Gerald A. Michaud
                                            Senior Vice President - Marketing

Accepted this 2nd day of September, 1997

Shaman Pharmaceuticals, Inc.


By:  /s/ M. David Titus
     __________________
        M. David Titus
        Director



                                       4
<PAGE>







                       SCHEDULE TO MASTER LEASE AGREEMENT

                          Dated as of ________________

                                Schedule No. ____

Lessor Name & Mailing Address                Lessee Name & Mailing Address
Transamerica Business Credit Corporation     Shaman Pharmaceuticals, Inc.
Riverway II                                  213 East Grand Avenue
West Office Tower                            South San Francisco, California
9399 West Higgins Road                       94080-4812
Rosemont, Illinois  60018

Equipment Location (if different than Lessee's address above):



This Schedule covers the following described equipment ("Equipment"):

            See Exhibit II attached hereto and made a part hereof.

The  Equipment is hereby leased  pursuant to the  provisions of the Master Lease
Agreement  between the  undersigned  Lessee and Lessor dated  September 15, 1997
(the "Master Lease"),  the terms of which are  incorporated  herein by reference
thereto, plus the following additional terms, provisions, and modifications. The
Lessor reserves the right to adjust the monthly  payments in accordance with the
Commitment  Letter dated August 26,  1997,  if the Lessor has not received  this
Schedule  and an  Acceptance  and  Delivery  Certificate  executed by the Lessee
within five business days from the date first set forth above.

1.    Term (Number of Months)                         ____ months

2.    Equipment Cost                                  $____________

3.    Commencement Date                               _____________

4.    Rate Factor                                     2.4937% of Equipment
      Cost

5.    Total Rents                         $___________
      Total sales/use tax                 $___________      $____________

6.    Advance Rents (first and last)      $___________
      Sales/use tax for advance rent      $___________      $____________

7.    Monthly rental payments             $___________
      Monthly sales/use tax               $___________      $____________

      and the second such rental payment
      will be due on                                  _____________
      and subsequent rental payments will
      be due on the same day of each month thereafter

8.    Security Deposit                                N/A

9.    In addition to the monthly rental
      payments provided for herein, Lessee shall
      pay to Lessor, as interim rent, payable on
      the commencement date specified above, an
      amount equal to 1/30th of the monthly rental
      payment (including monthly sales/use tax)
      multiplied by the number of days from and
      including the commencement date through the
      end of the same calendar month.                 $___________




                                       
<PAGE>




Renewal terms:

In the event the Lease does not exercise the Purchase  Option  described  below,
the Lease shall  automatically renew for a term of 12 months with Monthly Rental
equal to 1.0% of the original  Equipment Cost payable in monthly in advance.  At
the  expiration  of the  renewal  period,  the  Lessee  shall have the option to
purchase all (but not less than all) the  Equipment for $1.00,  plus  applicable
and other taxes.

Lessee  hereby  irrevocably  authorizes  Lessor to insert in this  Schedule  the
Commencement Date and the due date of the first rental payment.

Except as expressly provided or modified hereby, all the terms and provisions of
the Master Lease Agreement shall remain in full force and effect.

The Purchase Date shall be ______________.  The Purchase Price shall be the Fair
Market  Value of the  Equipment.  Lessee and Lessor  agree that the Fair  Market
Value  of the  Equipment  on the  Purchase  Date  shall  be  equal to 10% of the
Equipment Cost.

The Stipulated  Loss Value of any items of Equipment shall be an amount equal to
the present  value of all future Rent  discounted at a rate of 5% per annum plus
the Reversionary Value.

The Reversionary Value of any item of Equipment shall be 10% of Equipment Cost.


TRANSAMERICA BUSINESS CREDIT                 SHAMAN PHARMACEUTICALS, INC.
 CORPORATION                                 (Lessee)
(Lessor)

By:__________________________                By:________________________

Title:_______________________                Title:______________________




                                       2
<PAGE>



                                   EXHIBIT II

To:
   ___ Schedule to Master Lease Agreement      ___ Sale and Leaseback Agreement
   ___ UCC                                     ___ Bill Of Sale
   ___ Collateral Access Agreement             ___ Opinion of Counsel
   

                                  Dated ________________

                                         Between

                         TRANSAMERICA BUSINESS CREDIT CORPORATION

Customer Name:    Shaman Pharmaceuticals, Inc.
Equipment Locations:    ______________________
                        ______________________

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QTY    DESCRIPTION  NO.                   VENDOR      DATE        COST
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Transamerica Business Credit              Shaman Pharmaceuticals, Inc.
Corporation

By:___________________                    By:____________________

Title:_________________                   Title:___________________



                                       
<PAGE>






                       ACCEPTANCE AND DELIVERY CERTIFICATE



            Shaman Pharmaceuticals,  Inc., as lessee ("Lessee") under the Master
Lease Agreement  dated as of September 15, 1997 between Lessee and  Transamerica
Business Credit  Corporation,  as Lessor, does hereby acknowledge the acceptance
and delivery of the equipment listed in Lease Schedule No.____,  such acceptance
and delivery having been made on the ____ day of ________________.

                                          SHAMAN PHARMACEUTICALS, INC.


                                             By: ______________________        
                                             Name:
                                             Title:




                                       
<PAGE>



                          SALE AND LEASEBACK AGREEMENT


            THIS SALE AND LEASEBACK AGREEMENT (this "Agreement"),  is made as of
_____________,  among  Shaman  Pharmaceuticals,  Inc.,  a  Delaware  corporation
("Seller"), and Transamerica Business Credit Corporation, a Delaware corporation
("Buyer").

                              W I T N E S S E T H :


            WHEREAS,  Seller is the  owner of the  equipment  more  particularly
described on Exhibit II hereto (the "Equipment");

            WHEREAS, Seller desires to sell to Buyer and Buyer desires to
purchase from Seller the Equipment; and

            WHEREAS, Buyer, as a condition to such purchase,  wishes to lease to
Seller and Seller wishes to lease from Buyer the  Equipment  under the terms and
conditions  of the Master Lease  Agreement  dated as of  September  15, 1997 and
Schedule No. ____ thereto (collectively,  as amended,  supplemented or otherwise
modified from time to time, the "Lease")  between Buyer, as lessor,  and Seller,
as lessee.

            NOW,  THEREFORE,  in  consideration of the premises herein contained
and other good and valuable consideration,  the receipt and sufficiency of which
are hereby acknowledged, the parties hereto hereby agree as follows:

                  1.     Amount and Terms of Purchase.

                  (a) Subject to the terms and conditions of this Agreement, and
in reliance  upon the  representations  and  warranties of the Seller herein set
forth,  the Buyer  agrees  to  purchase  all of the  Seller's  right,  title and
interest  in and to all of the  Equipment  such that the Buyer  will  become the
owner of all such  Equipment  for all  purposes  whatsoever.  The Seller  hereby
agrees that the Buyer is under no obligation to purchase any other equipment now
or in the  future  and shall not assert a claim that the Buyer may have any such
obligation.

                  (b) The  price to be paid by the  Buyer  with  respect  to the
purchase  of the  Equipment  (the  "Purchase  Price")  is  $______________.  The
Purchase Price shall be payable to the Seller on the Lease Commencement Date (as
defined in the Lease).

                  (c) The  Seller  shall  pay any  and all  applicable  federal,
state,  county or local taxes and any and all  present or future  taxes or other
governmental  charges  arising  in  connection  with the  sale of the  Equipment
hereunder, including sales, use or occupation taxes due upon the purchase by the
Buyer.

                  (d) The purchase of the Equipment shall be evidenced by a bill
of sale,  substantially  in the form attached  hereto as Exhibit A (the "Bill of
Sale"), duly executed by the Seller.


                                       
<PAGE>

                  2.     Conditions to Purchase.  The obligation of the Buyer
to purchase the Equipment is subject to the following conditions:

                  (a)      The Buyer shall have received this Agreement, duly
executed by the Seller.

                  (b)      The Buyer shall have received the Bill of Sale,
duly executed by the Seller.

                  (c)      The Buyer shall have received the Lease, duly
executed by the Seller.

                  (d) The Buyer shall have received  resolutions of the Board of
Directors of the Seller  approving and authorizing  the execution,  delivery and
performance by the Seller of this Agreement, the Lease and the notices and other
documents to be delivered by the Seller hereunder and thereunder  (collectively,
the "Sale and Leaseback Documents").

                  (e) The Buyer shall have received the  certificate of title or
similar evidence of ownership with respect to each item of Equipment and Uniform
Commercial  Code  financing  statements  covering  the  Equipment  in  form  and
substance satisfactory to the Buyer, duly executed by the Seller.

                  (f) No material  adverse  change has occurred  with respect to
the business, prospects,  properties, results of operations, assets, liabilities
or condition (financial or otherwise) of the Seller and its affiliates, taken as
a whole, since December 31, 1996.

                  (g) The Buyer shall have  received  all  warranties  and other
documentation  received or executed by Seller in  connection  with the  original
acquisition  of the  Equipment  by the Seller (and by its  execution  hereof the
Seller hereby assigns to the Buyer all such warranties and other Documentation).

                  (h) The  Buyer  shall  have  received  such  other  approvals,
opinions or documents as the Buyer may reasonably request.

                  3.     Representation and Warranties.  To induce the Buyer
to enter into this Agreement, the Seller represents and warrants to the Buyer
that:

                  (a) The Seller is duly  authorized  to  execute,  deliver  and
perform its obligations  under each of the Sale and Leaseback  Documents and all
corporate  action  required  on its part  for the due  execution,  delivery  and
performance of the  transactions  contemplated  herein and therein has been duly
and effectively taken.

                  (b) The execution,  delivery and  performance by the Seller of
each  of  the  Sale  and  Leaseback   Documents  and  the  consummation  of  the
transactions  contemplated  herein 


                                       2
<PAGE>

and  therein  does not and will not  violate  any  provision  of, or result in a
default under, the Seller's Articles or Certificates of Incorporation or By-laws
or any  indenture  or  agreement  to which the Seller is a party or to which its
assets are bound or any order,  permit,  law, statute,  code,  ordinance,  rule,
regulation,  certificate or any other requirement of any governmental  authority
or regulatory body to which the Seller is subject,  or result in the creation or
imposition of any mortgage,  deed of trust, pledge,  security interest,  lien or
encumbrance  of any kind upon or with  respect to the  Equipment or any proceeds
thereof,  other than those in favor of the Buyer as contemplated by the Sale and
Leaseback Documents.

                  (c) No  authorization  or approval or other  action by, and no
notice to or filing  with,  any  governmental  authority or  regulatory  body is
required for the due execution, delivery and performance by the Seller of any of
the Sale and Leaseback Documents to which it is a party.

                  (d) Each Sale and Leaseback  Document to which the Seller is a
party constitutes or will constitute, when delivered hereunder, the legal, valid
and  binding  obligation  of  the  Seller  enforceable  against  the  Seller  in
accordance with its respective terms,  except as such  enforceability may be (i)
limited by the effect of applicable  bankruptcy,  insolvency,  reorganization or
similar laws affecting the  enforcement of creditors'  rights  generally or (ii)
subject to the effect of general  principles  of equity  (regardless  of whether
such enforceability is considered in a proceeding at equity or at law).

                  (e) There  are no  actions,  suits,  or  proceedings  pending,
threatened  against or affecting  the Seller  which seek to enjoin,  prohibit or
restrain the consummation of any of the transactions  contemplated  hereby or by
the other Sale and Leaseback Documents.

                  (f) Each item of  Equipment  is owned by the  Seller  free and
clear of any liens and encumbrances of any kind or description. Upon purchase of
the Equipment hereunder, the Buyer will acquire good and marketable title in and
to the Equipment.

All  representations  and warranties  herein shall survive the execution of this
Agreement and the purchase of the Equipment.

                  4. Indemnities.  The Seller agrees to indemnify,  defend,  and
save  harmless the Buyer and its officers,  directors,  employees,  agents,  and
attorneys,  and each of them (the "Indemnified  Parties"),  from and against all
claims, actions,  suits, and other legal proceedings,  damages, costs, interest,
charges,  counsel  fees and other  expenses  and  penalties  (collectively,  the
"Indemnified Amounts") which any of the Indemnified Parties may sustain or incur
by reason of or arising out of (i) the Seller's ownership of any Equipment prior
to the date on which such  Equipment is sold to the Buyer,  or the Seller's acts
or omissions  prior to such date under,  in connection  with or relating to such
Equipment  or any of the  Sale and  Leaseback  Documents,  (ii)  the  operation,
maintenance or use of such Equipment prior to such date, (iii) the inaccuracy of
any of the Seller's  representations or warranties  contained in any of the Sale
and  Leaseback  


                                       3
<PAGE>

Documents,  (iv) the breach of any of the Seller's covenants contained in any of
the Sale and  Leaseback  Documents,  (v) any loss or damage to any  Equipment in
excess of the deductible which is not paid by insurance or (vi) any sales,  use,
excise  and other  taxes,  charges,  and fees  (including,  without  limitation,
income,  franchise,   business  and  occupation,  gross  receipts,  sales,  use,
licensing,   registration,   titling,  personal  property,  stamp  and  interest
equalization  taxes,  levies,  imposts,  duties,  charges or withholdings of any
nature), and any fines, penalties or interest thereon,  imposed or levied by any
governmental  body,  agency  or tax  authority  upon or in  connection  with the
Equipment, its acquisition,  ownership,  delivery,  leasing,  possession, use or
relocation or otherwise in connection with the transactions contemplated by each
Sale and Leaseback Document.

                  5. Remedies.  Upon the Seller's  violation of or default under
any provision of this Agreement, the Buyer may (subject to the provisions of the
other Sale and  Leaseback  Documents)  proceed to protect and enforce its rights
either by suit in equity or by action at law or both,  whether for the  specific
performance  of any  covenant  or  agreement  contained  herein or in aid of the
exercise  of any power  granted  in any Sale and  Leaseback  Document;  it being
intended that the remedies contained in any Sale and Leaseback Document shall be
cumulative  and shall be in addition to every other remedy given under such Sale
and  Leaseback  Document or now or hereafter  existing at law or in equity or by
statute or otherwise.

                  6. Amendments, etc. No amendment or waiver of any provision of
this Agreement,  nor consent to any departure  therefrom,  shall in any event be
effective  unless the same shall be in writing and signed by the Buyer, and then
such waiver or consent shall be effective only in the specific  instance and for
the specific purpose for which given.

                  7.     Notices, etc.  All notices and other communications
provided for hereunder shall be in writing and sent:

            if to the Seller, at its address at:

                  Shaman Pharmaceuticals, Inc.
                  213 East Grand Avenue
                  South San Francisco, California  94080-4812
                  Attention:  Mr. M . David Titus
                  Telephone No.: (650) 952-7070
                  Telecopy No.:  (650) 873-8367



                                       4
<PAGE>

            if to the Buyer, at its address at:

                  Transamerica Business Credit Corporation
                  Technology Finance Division
                  76 Batterson Park Road
                  Farmington, Connecticut 06032-2571
                      Attention: Assistant Vice President,
                              Lease Administration
                      Telephone No.: (860) 677-6466
                      Telecopy No.: (860) 677-6766

            with a copy to:

                  Transamerica Business Credit Corporation
                  9399 West Higgins Road
                  Rosemont, Illinois  60018
                  Attention:  Legal Department
                  Telephone No.:  (847) 685-1106
                  Telecopy No.:  (847) 685-1143

or to such  other  address  as shall be  designated  by such  party in a written
notice to the other party. All such notices shall be deemed given (i) if sent by
certified or registered mail, three days after being postmarked, (ii) if sent by
overnight delivery service,  when received at the above stated addresses or when
delivery is refused and (iii) if sent by facsimile transmission, when receipt of
such transmission is acknowledged.

                  8. No Waiver; Remedies. No failure on the part of the Buyer to
exercise,  and no delay in exercising,  any right  hereunder  shall operate as a
waiver  thereof,  nor shall any  single or  partial  exercise  of any such right
preclude  any other or further  exercise  thereof or the  exercise  of any other
right.  The remedies  herein  provided are  cumulative  and not exclusive of any
remedies provided by law.

                  9.     Benefit.  Without the prior written consent of the
Buyer, the Seller may not transfer, assign or delegate any of its rights,
duties or obligations hereunder.

                  10.    Binding Effect.  This Agreement shall be binding
upon and inure to the benefit of the Seller and the Buyer and their
respective successors and assigns.

                  11.    GOVERNING LAW.  THIS AGREEMENT SHALL BE GOVERNED BY,
AND SHALL BE CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF ILLINOIS
WITHOUT GIVING EFFECT TO THE CONFLICTS OF LAW PRINCIPLES THEREOF.



                                       5
<PAGE>

                  12.    Execution in Counterparts.  This Agreement may be
executed in any number of counterparts, each of which shall constitute an
original and all of which taken together shall constitute one and the same
agreement.

                  13.    Severability.  If one or more of the provisions
contained in this Agreement shall be invalid, illegal, or unenforceable in
any respect, the validity, legality, and enforceability of the remaining
provisions contained herein, and any other application thereof, shall not in
any way be affected or impaired thereby.

                  14. SUBMISSION TO JURISDICTION.  ALL DISPUTES ARISING UNDER OR
IN CONNECTION WITH THIS AGREEMENT  BETWEEN THE PARTIES HERETO,  WHETHER SOUNDING
IN CONTRACT,  TORT,  EQUITY OR  OTHERWISE,  SHALL BE RESOLVED  ONLY BY STATE AND
FEDERAL COURTS LOCATED IN ILLINOIS,  AND THE COURTS TO WHICH AN APPEAL THEREFROM
MAY BE TAKEN;  PROVIDED,  HOWEVER,  THAT THE BUYER SHALL HAVE THE RIGHT,  TO THE
EXTENT  PERMITTED  BY  APPLICABLE  LAW,  TO  PROCEED  AGAINST  THE SELLER OR ITS
PROPERTY  IN ANY  LOCATION  REASONABLY  SELECTED  BY THE BUYER IN GOOD  FAITH TO
ENABLE THE BUYER TO REALIZE ON SUCH PROPERTY,  OR TO ENFORCE A JUDGMENT OR OTHER
COURT ORDER IN FAVOR OF THE BUYER. EACH PARTY AGREES THAT IT WILL NOT ASSERT ANY
PERMISSIVE  COUNTERCLAIMS,  SETOFFS OR CROSS-CLAIMS IN ANY PROCEEDING BROUGHT BY
THE BUYER;  IT BEING  UNDERSTOOD THAT THIS SENTENCE DOES NOT PRECLUDE THE SELLER
FROM ASSERTING COMPULSORY COUNTERCLAIMS. THE SELLER WAIVES ANY OBJECTION THAT IT
MAY HAVE TO THE  LOCATION  OF THE  COURT IN WHICH  THE  BUYER  HAS  COMMENCED  A
PROCEEDING,  INCLUDING, WITHOUT LIMITATION, ANY OBJECTION TO THE LAYING OF VENUE
OR BASED ON FORUM NON CONVENIENS.

                  15.    JURY TRIAL.  THE PARTIES HERETO EACH HEREBY WAIVE TO
THE FULLEST EXTENT PERMITTED BY LAW ANY RIGHT TO A TRIAL BY JURY IN ANY
ACTION OR PROCEEDING ARISING UNDER OR IN CONNECTION WITH THIS AGREEMENT.



                                       6
<PAGE>




            IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be executed by their respective  officers  hereunto duly  authorized,  as of the
first date written above.


                                    SHAMAN PHARMACEUTICALS, INC.



                                       By:  __________________________
                                       Name:
                                       Title:



                                    TRANSAMERICA BUSINESS CREDIT CORPORATION



                                       By:  __________________________
                                       Name:
                                       Title:






Exhibit II-  Equipment
Exhibit A-   Bill of Sale



                                       7
<PAGE>



                                  BILL OF SALE


            KNOW ALL PERSONS BY THESE PRESENTS Shaman Pharmaceuticals, Inc. (the
"Seller"), for  ___________________________________  Dollars ($____________) and
other  valuable  consideration  to it in hand  paid,  receipt of which is hereby
acknowledged,  does  unconditionally,  absolutely and irrevocably  grant,  sell,
assign,  transfer and convey unto TRANSAMERICA  BUSINESS CREDIT  CORPORATION and
its assignees or  successors  (collectively,  the "Buyer"),  all of the Seller's
right, title and interest in and to the equipment described on Exhibit II hereto
(collectively, the "Equipment").

            TO HAVE AND TO HOLD said Equipment  unto the said Buyer,  to and for
its use forever.

            AND, the Seller  hereby  warrants,  covenants and agrees that it (a)
has good and marketable title to the Equipment,  free and clear of any liens and
other  encumbrances;  and (b) will warrant and defend the sale of the  Equipment
against any and all persons claiming against such title.

            IN WITNESS  WHEREOF the Seller has caused this instrument to be duly
executed and delivered as of this ____ day of ____________.



                                    SHAMAN PHARMACEUTICALS, INC.


                                    By:  ______________________________
                                           Name:
                                           Title:



                                       
<PAGE>



                           COLLATERAL ACCESS AGREEMENT
                    TRANSAMERICA BUSINESS CREDIT CORPORATION
                        9399 West Higgins Road, Suite 600
                            Rosemont, Illinois 60018

                                                    ____________________, 199___


______________________________
______________________________
______________________________

      Re:   Shaman Pharmaceuticals, Inc.

Ladies and Gentlemen:

            We have  been  asked by Shaman  Pharmaceuticals,  Inc.,  a  Delaware
corporation  (the  "Company") to finance  certain  equipment (the  "Equipment"),
which will be located at the address  identified on Schedule A (the "Premises").
The obligations of the Company to us will be secured by, among other things, the
Equipment.  We understand that the Company leases the Premises from you pursuant
to a lease or is the owner of the Premises,  which is subject to a lien in favor
of you pursuant to a mortgage  (such lease or mortgage  being referred to as the
"Agreement").

            In  connection  with  the  extensions  of  credit  to be made to the
Company,  Transamerica  Business Credit  Corporation,  ("Transamerica")  will be
making customary Uniform  Commercial Code filings on behalf of Transamerica with
respect to the  Equipment.  In  addition,  we request  your  acknowledgment  and
cooperation for preserving and enforcing  Transamerica's  security interests. To
expedite the  consummation of the proposed  financing,  we would appreciate your
execution of this letter.

            To induce Transamerica to finance the Equipment,  and for other good
and valuable consideration, you confirm and acknowledge the following matters to
us:

                  1. You will  allow us,  or our  auditors  or other  designees,
reasonable access to the Premises to inspect the Equipment from time to time. In
addition,  upon our request,  you will grant us and our designees  access to the
Premises  for 90 days at  reasonable  times to show the  Equipment  to potential
purchasers and to remove the Equipment from the Premises.

                  2. In the event that the Company  defaults in its  obligations
under the  Agreement or you desire or elect to  terminate  or exercise  remedies
under the Agreement for any reason, including a default by the Company under the
Agreement,  you will notify us in writing of this fact prior to your terminating
or  exercising  remedies  under the  Agreement  and retaking  possession  of the
Premises.  You hereby confirm and acknowledge to us that you do not and will not
have  any  claim to or lien on any of the  Equipment,  assuming  such  Equipment
constitutes trade fixtures or personal property, and not part of the building.

            We would  appreciate  your  confirming  to us your  agreement to the
foregoing  provisions  of this letter by signing and returning to us this letter
at our address shown above.

Very truly yours,

TRANSAMERICA BUSINESS CREDIT CORPORATION

By:  ____________________________________
   Name:
   Title:

ACKNOWLEDGED AND AGREED:


By:______________________________________
   Name:
   Title:


                                       
<PAGE>



                                   SCHEDULE A



Equipment Locations:

213 East Grand Avenue
South San Francisco, California  94080-4812



                                       2
<PAGE>




                             INSURANCE REQUIREMENTS

LIABILITY INSURANCE:

All  liability  policies are to name  customer as the insured,  and meet, at the
minimum the following requirements:

Minimum limits of liability are:

Bodily Injury:          $1,000,000 per occurrence
Property Damage:        $1,000,000 per occurrence

All liability  insurance  policies are to specify  TRANSAMERICA  BUSINESS CREDIT
CORPORATION (TBCC), as Additional Insured,  and must be effective at the time of
shipment of the Equipment from the seller.

PROPERTY INSURANCE:

All property insurance  policies are to name customer as the insured,  and meet,
at the minimum, the following requirements:

a. Broad Form,  Special Form,  All Risk with the dollar amount of the deductible
noted.  Property  insurance  coverage  should  be  in an  amount  equal  to  the
replacement  cost of the Equipment as further  described on the attached Exhibit
II.

b. All property insurance policies are to specify TRANSAMERICA  BUSINESS  CREDIT
   CORPORATION  (TBCC),  as Loss Payee,  and must be  effective  at  the time of
   shipment of the Equipment from the seller.

GENERAL:

1. All insurance policies are to provide that in the event of material change to
the policy (i.e, terms,  conditions,  limits, broker or insurer, or cancellation
of the policy or any part) either by the insured or the insurance  company,  the
insurer will provide 30 days' prior written  notice of such  material  change or
cancellation to TRANSAMERICA BUSINESS CREDIT CORPORATION (TBCC).

2. All insurance policies are to provide that violation of terms, conditions, or
warranties of the policy by the insured or others will not invalidate insofar as
the interest of TRANSAMERICA BUSINESS CREDIT CORPORATION (TBCC), is concerned.

3. In order to eliminate multiple certifications, we encourage blanket liability
and Broad Form,  Special Form and All Risk coverage  warranted to remain in full
force until at least 30 days' prior written notice is provided as aforesaid.



                                       
<PAGE>




                     EXHIBIT A TO UCC-1 FINANCING STATEMENT

COLLATERAL:  All  equipment  and other  personal  property  under  Master  Lease
Agreement dated as of September 15, 1997  (including any and all  modifications,
attachments,  related parts, accessories and additions thereto and substitutions
and replacements  therefor, in whole or in part, and all chattel paper, rentals,
accounts  receivable,  general  intangibles  and other income related thereto or
arising  therefrom  and all  proceeds  thereof  including,  without  limitation,
insurance proceed) now or hereafter leased under such Master Lease Agreement and
Schedules.

The  Secured  Party is a Lessor  and the  Debtor is a Lessee in  respect  to the
leased property, and the lease is not intended as a security agreement to create
a security  interest in Lessor.  This  statement is not to be evidence  that the
lease  is a  security  agreement,  but if it is  determined  to be so for  other
reasons,  this  financing  statement  is filed to perfect  the  Secured  Party's
security interest in the property.


                                       
<PAGE>