10-K405

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                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                    FORM 10-K
(Mark one)

 [ X ]     Annual report pursuant to Section 13 or 15(d) of the Securities
 ----      Exchange Act of 1934 for the fiscal year ended December 31, 1997 or


 [   ]     Transition report pursuant to Section 13 or 15(d) of the Securities
 ----      Exchange Act of 1934 (for the transition period
           from __________ to ___________)

                         COMMISSION FILE NUMBER: 0-19454

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

                 CALIFORNIA                                 77-0183594
       (State or other jurisdiction of                    (I.R.S. Employer
       incorporation or organization)                   Identification Number)

301 PENOBSCOT DRIVE, REDWOOD CITY, CALIFORNIA                   94063
(Address of principal executive offices)                      (Zip Code)

           Registrant's telephone number, including area code: (650) 361-8901

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

                                      None.

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

                           COMMON STOCK, NO 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 is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]

The aggregate market value of the voting stock held by non-affiliates of the
Registrant, based upon the closing sale price of the Common Stock on March 20,
1998 as reported on the NASDAQ National Market System, was approximately
$10,600,815. Shares of Common Stock held by each officer and director and by
each person who owns 5% or more of the outstanding Common Stock have been
excluded in that such persons may be deemed to be affiliates. This determination
of affiliate status is not necessarily a conclusive determination for other
purposes.

As of March 20, 1998, Registrant had outstanding 18,851,000 shares of Common
Stock.


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                       DOCUMENTS INCORPORATED BY REFERENCE

           The information called for by Part III of this Form 10-K is
incorporated by reference to the definitive proxy statement for the annual
meeting of shareholders of the Company which will be filed no later than 120
days after December 31, 1997.












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                                TABLE OF CONTENTS

                                                                                                              
PART I
           Item 1.        Business................................................................................       4
           Item 2.        Properties..............................................................................      15
           Item 3.        Legal Proceedings.......................................................................      15
           Item 4.        Submission of Matters to a Vote of Security Holders.....................................      16

PART II
           Item 5.        Market for Registrant's Common Equity and Related Shareholder Matters...................      18
           Item 6.        Selected Financial Data.................................................................      19
           Item 7.        Management's Discussion and Analysis of Financial Condition and Results of Operations...      20
           Item 7A.       Quantitative and Qualitative Disclosures about Market Risk .............................      29
           Item 8.        Financial Statements and Supplementary Data.............................................      29
           Item 9.        Changes in and Disagreements with Accountants on Accounting and Financial Disclosure....      41

PART III
           Item 10.       Directors and Executive Officers of the Registrant......................................      41
           Item 11.       Executive Compensation..................................................................      41
           Item 12.       Security Ownership of Certain Beneficial Owners and Management..........................      41
           Item 13.       Certain Relationships and Related Transactions..........................................      41

PART IV
           Item 14.       Exhibit 5, Financial Statement Schedules and Reports on Form 8-K........................      41

SIGNATURES........................................................................................................      45







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                                     PART I


ITEM 1.    BUSINESS


           THIS ITEM CONTAINS CERTAIN FORWARD-LOOKING STATEMENTS WITHIN THE
MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933 AND SECTION 21E OF THE
SECURITIES EXCHANGE ACT OF 1934. THE COMPANY'S ACTUAL RESULTS COULD DIFFER
MATERIALLY FROM THE RESULTS ANTICIPATED IN THE FORWARD-LOOKING STATEMENTS
CONTAINED HEREIN AND IDENTIFIED WITH AN ASTERISK ("*") AND ARE BASED UPON
CURRENT EXPECTATIONS. AS A RESULT OF CERTAIN FACTORS SET FORTH IN "MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS", UNDER
"RISK FACTORS THAT MAY AFFECT FUTURE OPERATING PERFORMANCE" AND ELSEWHERE IN
THIS REPORT.


GENERAL

           Anergen, Inc. (the "Company" or "Anergen") is focused on the
treatment of autoimmune diseases through the discovery and development of
proprietary therapeutics that selectively interrupt the disease process.
Anergen's current research and development efforts are focused on two distinct
core technologies, AnergiX(TM) and AnervaX(TM), that the Company believes may be
used to treat a broad range of autoimmune diseases without generally suppressing
the immune system. The Company is currently conducting a Phase I clinical trial
of the Company's AnergiX compound for the treatment of multiple sclerosis
("MS"), has filed an IND for the AnergiX compound for the treatment of RA and
has completed a Phase IIa clinical trial of its AnervaX compound for the
treatment of rheumatoid arthritis ("RA"). In June 1996, the Company entered into
a collaborative agreement with N. V. Organon ("Organon") to develop an AnergiX
treatment for RA.

           The Company was founded in 1988 to discover and develop
biopharmaceutical compounds for the treatment of autoimmune diseases. To achieve
profitable operations, the Company, alone or with others, must successfully
develop, obtain regulatory approval for, manufacture and market products. The
Company does not have any products available for sale nor does it expect to have
any products commercially available for at least several years, if at all. The
Company's potential products are at the early stages of research and
development, with only limited human testing of certain of the Company's
products undertaken to date. The products currently under development by the
Company will require significant research, laboratory testing and clinical
trials and investment of capital prior to their commercialization. There can be
no assurance that any potential products will be successfully developed, prove
to be safe and efficacious in clinical trials, meet applicable regulatory
standards, be capable of being produced in commercial quantities at acceptable
costs or be successfully marketed.

           In the body's immune system, T cells normally regulate the
identification and destruction of foreign substances and malignant cells.
Autoimmune diseases are caused by abnormal destruction of healthy body tissues
by disease-specific T cells. Anergen's results to date suggest that treatments
based on its core technologies may interrupt the chain of events fundamental to
the onset and continuation of certain autoimmune diseases. The Company's AnergiX
technology is designed to selectively destroy or inactivate (anergize) the T
cells implicated in the disease process. The Company's second core technology,
AnervaX, stimulates the immune system to produce antibodies that may interfere
with the presentation of self-antigens to destructive T cells. The Company
believes that, because its potential therapeutics target only disease-specific T
cells, the normal function of the immune system should remain unaffected. In
contrast, currently available therapies for autoimmune diseases treat only the
symptoms of the disease or broadly suppress the immune system, which can
compromise the ability of the immune system to protect against foreign
substances.

           Anergen initiated a Phase I clinical trial of its AnergiX compounds
for the treatment of MS in September 1996 and the trial is ongoing. The AnergiX
compound is designed to inactivate (anergize) or create cell death in the
specific T cells of the immune system responsible for disease progression
without affecting other T cells involved in the immune defense.

           In April 1996, the Company initiated a multicenter, double-blind,
placebo-controlled Phase IIa clinical trial of its AnervaX compound for the
treatment of RA. This trial completed in December 31, 1997. The Phase IIa
results for AnervaX suggested that the pharmaceutical was safe, well tolerated
and provided persistent clinical benefit for symptoms of advanced rheumatoid
arthritis in a substantial portion of patients in the study.

           The Company entered into a collaborative agreement with Novo Nordisk
in August 1993 under which Novo Nordisk, in exchange for certain marketing
rights, would support research and development of the Company's MS, Myasthenia
Gravis ("MG") and Insulin Dependent Diabetes Mellitus ("IDDM") programs, make
milestone payments, and pay





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royalties on product sales, if any. The Company has the right to co-promote any
resultant products for MS and MG in North America. The Company was to receive
royalties on any products in these three disease areas which are not
co-promoted. In addition, at the time of the agreement, Novo Nordisk made an $8
million equity investment in the Company for 1,219,745 shares of the Company's
Common Stock. In March 1996, the development program with Novo Nordisk was
extended through August 1998. The Company recorded $2.6 million in contract
revenues related to this agreement in 1997 as compared to $3.1 million and $3.0
million in 1996 and 1995, respectively. On February 9, 1998, the Company
announced that it had agreed with Novo Nordisk to terminate the collaboration,
ending August, 1998. Novo Nordisk will reimburse the Company for the cost of
completing the Phase I clinical trial in multiple sclerosis. All rights to all
programs return to the company. In February, 1998, Novo Nordisk paid the Company
$1 million, the estimated cost to complete the trial.

           In June 1996, the Company entered into a collaborative agreement with
Organon under which Organon, in exchange for certain marketing rights, will
support research and development of an AnergiX compound to treat RA that
incorporates a proprietary peptide discovered by Organon. Under the arrangement,
the Company received a one-time license fee of $2 million in September 1996, and
Organon will support research and development, make milestone payments and pay
royalties on sales, if any. The Company recorded $3.1 million in research
support related to this agreement in 1997 and $412,000 in 1996. The license fee,
research and development support, and milestone payments that the Company may
receive under this agreement are estimated to exceed $15 million.*

AUTOIMMUNE DISEASES

           Background. Normally, the immune system recognizes and distinguishes
between invading foreign substances or "antigens" and the body's own tissue. The
body is able to react continually to a wide variety of antigens, to remember a
foreign substance to which it has been exposed previously, and to rid itself of
a foreign substance. The ability of the immune system to distinguish between its
own tissue (self) and foreign substances is essential for its normal function.

           The recognition and memory processes of the immune system are
controlled by the activity of several types of cells. One of the more important,
the "T cell," plays a critical role in recognizing antigens, initiating an
immune response and regulating the resulting cascade of immunological events.
Another type of cell, the "B cell," secretes antibodies that are involved in the
recognition and neutralization of antigens. These processes require the
involvement of proteins called human leukocyte antigen ("HLA") molecules which
are found on the surface of certain cells in the body. The HLA molecules are
encoded by gene complexes called a major histocompatibility complexes ("MHC").
The terms HLA and MHC are sometimes used interchangeably.

           When a foreign substance enters the body, antigen presenting cells,
which act as scavenger cells, encounter and engulf the foreign substance. These
scavenger cells internally break down the antigen into smaller components called
"peptides". The antigen presenting cell then transports each individual peptide,
called an "epitope," bound to the HLA molecule as a complex, to its outer cell
membrane where it is presented to various T cells. Once a responsive T cell is
stimulated, it initiates an immune response that eliminates the foreign
substance from the body. T cells recognize HLA-epitope complexes through
receptors on their surfaces, with each type of T cell recognizing only one out
of millions of possible HLA-epitope complexes. There are several classes of HLA
molecules, with HLA Class II ("HLA II") molecules involved in the presentation
of self-antigens.

           While the immune system is normally extremely efficient in seeking
and destroying foreign substances, in some cases, for reasons that are not yet
understood, the immune system is triggered to begin destroying the body's own
healthy tissue, resulting in autoimmune diseases such as RA, MS, IDDM and MG. In
these diseases, "self" tissue is presented to T cells which respond by
initiating an immune response that destroys healthy tissue. For example, T cells
are involved in the destruction of nerve structures in MS, joint tissue in RA,
and insulin-producing (beta) cells in IDDM.

           Existing Therapeutic Approaches. Traditional therapies for autoimmune
diseases include steroids and other immunosuppressive drugs that generally treat
the symptoms rather than the cause of the disease and are unable to prevent the
activation of T cells that initiate the destructive immune response. Current
treatments are typically administered based on disease severity. For mild forms
of these diseases, drugs that ameliorate the symptoms may be given. These drugs
do not prevent the progression of tissue destruction and are relatively
ineffective in treating more severe symptoms. In advanced disease stages, more
powerful immunosuppressive drugs are used to suppress the body's entire immune
system. This has some therapeutic effect, but also limits the body's ability to
respond to invading foreign substances, which substantially increases the risk
of contracting other illnesses. In addition, such drugs generally have numerous
other unwanted and often severe side effects.







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ANERGEN TECHNOLOGY

           The Company's technology programs focus on the discovery and
development of proprietary therapeutics that destroy or inactivate T cells
involved in the disease process or selectively interrupt antigen presentation to
the T cells without affecting the protective functions of the immune system.
Anergen believes that its approaches for preventing or arresting autoimmune
diseases may result in therapies that are more specific and have fewer side
effects than currently available treatments.* The two core technologies, AnergiX
and AnervaX, under development by the Company are summarized below.

           AnergiX Technology. The Company's AnergiX technology is currently
being used to develop products for MS, RA, IDDM and MG. An AnergiX compound
consists of an epitope of the self-antigen that would normally be associated
with triggering an autoimmune response in a particular disease, combined with a
soluble HLA II molecule. The AnergiX compound thus has two of the three primary
elements associated with the autoimmune response, but lacks the third element,
the antigen presenting cell. It is believed that the activation of T cells
requires not only the initial signal provided by binding to the T cell receptor
of the HLA-epitope complex which is on the surface of antigen presenting cells,
but also a "second signal" provided by the antigen presenting cell itself.
Anergen believes that the binding of its AnergiX compound to the receptor site
of the destructive T cell, in the absence of the antigen presenting cell and its
"second signal" inactivates that T cell. This inactivated or nonresponsive state
is referred to as a state of "anergy". The Company believes that by inducing
anergy, the autoimmune response can be interrupted. In addition, the Company has
shown that in the presence of AnergiX, a significant percentage of T cells may
undergo apoptosis, or programmed cell death, which will also serve to interrupt
the autoimmune process.

           The Company believes, based on its research to date, that the state
of anergy created by the introduction of the Company's AnergiX may last for
periods of up to several months.* The results of the Company's research
demonstrated that a state of anergy may even be induced in T cells that have
already been activated, indicating that such T cells could be inactivated even
after the destructive chain reaction has begun. Because the Company believes
that its AnergiX compounds will bind only to T cells specific to a disease,
other T cells are not expected to be affected, and the rest of the immune system
should remain responsive to foreign substances.*

           AnervaX Technology. The Company's AnervaX technology is currently
being developed to treat RA and Type I Diabetes. AnervaX is a synthetic peptide
vaccine consisting of a small portion of the HLA II molecule. AnervaX is
designed to elicit an immune response that interferes with the presentation of
self-antigens to T cells. This immune response is intended to stimulate the
production of a patient's own antibodies to a subset of the HLA molecules on the
patient's antigen presenting cells. The Company believes that because AnervaX
targets only the subset of HLA molecules that appear to be involved in the
particular autoimmune disease, this approach potentially will allow for the
prevention or treatment of autoimmune disease without generally suppressing the
patient's overall immune system.*







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PRODUCTS UNDER DEVELOPMENT

           The following table sets forth the current status of Anergen's
product development programs.




                                                                      PATIENT POPULATION       CORPORATE        DEVELOPMENT
      DISEASE TARGET                                 TECHNOLOGY         U.S./WORLDWIDE         ALLIANCES (1)    STATUS (2)
      --------------                                 ----------         --------------         -------------    ----------
                                                                                                    
      Multiple Sclerosis...........................    AnergiX          350,000/600,000                          Phase I

      Rheumatoid Arthritis.........................    AnervaX        2,500,000/7,000,000           -            Phase IIa
                                                       AnergiX        2,500,000/7,000,000        Organon         Preclinical
                                                                                                                 
      Insulin-Dependent Diabetes Mellitus..........    AnergiX        1,000,000/3,000,000                        Preclinical
      Myasthenia Gravis............................    AnergiX           25,000/50,000                           Preclinical
                                                                                                                 
      Inflammatory Bowel Disease...................    AnergiX        2,000,000/5,000,000            -           Research


      (1)  See "Business - Collaborative Arrangements" for a discussion of the
           relative rights of the Company and its collaborative partners.

      (2)  Research: Initiation of research studies. 
           Preclinical: Identification of a specific molecule for potential 
           human testing. 
           Phase I: Initial phase of human clinical testing to determine safety
           and measure certain biological parameters.
           Phase IIa: Multicenter, double-blind, placebo-controlled clinical
           trial for safety, immunogenicity, dosage determination and initial
           efficacy in a limited patient population.

           Multiple Sclerosis. Multiple sclerosis is a progressive inflammatory
disease of the central nervous system that predominantly affects young adults
and causes increasing neurologic damage and disability throughout life. Symptoms
range from painful facial muscle spasms, vertigo and vomiting to a myriad of
motor and sensory problems. In the United States, the average longevity of
patients after diagnosis with MS is over thirty years. The care of MS patients
requires long-term medical, neurologic and psychological treatment and support.
Current therapies, which have limited impact on the disease state and primarily
effect symptoms include two beta interferon drugs. Based on published data and
other sources, the Company believes that there are approximately 600,000 cases
of MS worldwide. The Company does not know what side effects, if any, may result
from treatment using the Company's AnergiX approach. Such side effects, if any,
will be identified during human clinical trials. If the Company is successful in
obtaining approval to market any of its treatments, it will have to compete for
market share against other therapies which may exist at that time.

           The Company and Novo Nordisk have developed a potential AnergiX
therapeutic for MS which is a compound of an HLA molecule combined with a
peptide derived from myelin basic protein, the self-antigen believed to be
involved in MS. The Company initiated Phase I clinical testing of its AnergiX
for MS in 1996. The Company's preclinical tests demonstrated that the use of an
AnergiX compound prevented or reduced paralysis caused by the T cell-initiated
destructive autoimmune response in an animal model of MS. Additionally, in vitro
testing of AnergiX on human cells demonstrated inactivation of T cells
associated with MS. This study also indicated that patients' T cells respond to
the same antigen over time and that potentially effective doses appear to be
low. The collaboration with Novo Nordisk terminated effective February 9, 1998
with all rights returning to the Company.

           Rheumatoid Arthritis. Rheumatoid arthritis is a systemic inflammatory
disease that causes joint pain, swelling and, eventually, deformities. In some
cases, people afflicted with RA experience severe musculoskeletal disability.
Over time, progression of the disease involves degradation and destruction of
the surrounding cartilage and bone. Current treatment of RA involves the use of
a variety of drugs in successive stages: first, with drugs having analgesic
actions such as aspirin and other non-steroidal and anti-inflammatory drugs;
second, with agents such as gold and penicillamine that reduce the symptoms of
RA; and third, with drugs which attempt to contain the disease, including
immunosuppressive drugs such as corticosteroids and methotrexate. Each of these
three approaches has side effects of varying intensity and risks that increase
as one moves to the more aggressive therapies. Based on published data and other
sources, the Company believes that there are approximately 7,000,000 cases of RA
worldwide.

           The Company completed Phase I clinical testing of its AnervaX peptide
vaccine to treat RA in October 1995 and initiated Phase IIa clinical testing in
April 1996. The Phase IIa study completed in December 31, 1997. Preclinical
testing demonstrated that Anergen's AnervaX approach may prevent the onset of
disease and reduce the severity of active disease in certain animal models of
autoimmune disease (experimental allergic encephalomyelitis and non-obese
diabetic ("NOD") mice).* In vitro testing indicates that animals treated with
the AnervaX peptide vaccine generate antibodies against HLA II






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molecules. The Company believes that such antibodies bind to HLA II molecules
and that this binding may interfere with the interaction between HLA and T cells
that is involved in the progression of autoimmune disease.* The results of the
Phase I study suggest that the vaccine is well tolerated and capable of inducing
an antibody response.* The results of the Phase IIa study continued to suggest
that AnervaX is safe, well tolerated, and can provide a persistent clinical
benefit for symptoms of advanced Rheumatoid Arthritis in a substantial portion
of patients in the study.*

           In addition, the Company is developing an AnergiX compound to treat
RA in conjunction with Organon under an agreement entered into in June 1996. The
compound to be developed uses Anergen's proprietary AnergiX technology and
incorporates a proprietary peptide discovered by Organon. Under the agreement,
Organon, in exchange for certain marketing rights, will support research and
development, including the full cost of all clinical testing, pay a one-time
license fee, make milestone payments and pay royalties on product sales, if any.
The Company filed an IND for AnergiX for the treatment of RA in March, 1998.

           Insulin-Dependent Diabetes Mellitus. IDDM, or Type I diabetes, is
caused by an autoimmune attack resulting in destruction of the insulin-producing
(beta) cells in the pancreas. Insulin regulates the cellular uptake and
metabolism of glucose, and its deficiency leads to hyperglycemia, diabetic
acidosis, and diabetic coma. Long-term complications include vision loss, renal
failure and peripheral neuropathy. Currently, individuals with IDDM are given
insulin to supplement their ability to produce sufficient amounts of the
hormone. IDDM usually appears in individuals before the age of 20 and affects
about 0.5% of the caucasian population worldwide. Based on published data and
other sources, the Company believes that there are approximately 3,000,000 cases
of IDDM worldwide.

           The Company has performed preclinical studies using an AnergiX
compound composed of an MHC molecule coupled with a synthetic glutamic acid
decarboxylase ("GAD") peptide in NOD mice, an animal model of IDDM. The GAD
peptide is suspected to be the self-antigen which leads to the autoimmune attack
in diabetes. The Company tested this compound by treating NOD mice in a dosing
regimen designed to inactivate or anergize disease-causing T cells, thereby
preventing diabetes. Results of the study showed that treatment with the AnergiX
complex reduced the rate of destruction of insulin-producing (beta) cells in a
dose dependent manner, while treatment with the GAD peptide alone accelerated
the disease.

           DiavaX. The Company has performed preclinical studies using an
extension of the AnervaX technology, called DiavaX. The compound includes a
portion of the MHC molecule found in a majority of diabetes patients. The
preclinical studies have shown that DiavaX has had success in delaying and
suppressing the onset of Type I diabetes in established animal models (NOD
mice).

           Myasthenia Gravis. MG is a neuromuscular disorder that is
characterized by muscle weakness and, in severe cases, may lead to death.
Current methods of treatment of MG utilize drugs that only ameliorate the
symptoms and generally are not effective in most cases of moderate or
progressive MG. The more powerful of these drugs have significant unwanted side
effects. Based on published data and other sources, the Company believes that
there are approximately 50,000 cases of MG worldwide.

           The Company has established an in vivo experimental model of
autoimmune myasthenia gravis in rats, which is considered pathologically and
clinically comparable to human MG. Initial results indicate that the Company's
AnergiX for MG significantly reduces clinical symptoms of this disease in rats.
Additionally, the Company tested its therapeutic approach for MG on human cells.
Through this study, the Company has identified what it believes to be an
appropriate antigenic peptide involved in MG. Using an AnergiX compound, the
Company has demonstrated in vitro inactivation of T cells associated with MG and
that therapeutically effective doses appear to be low.

ADDITIONAL APPLICATIONS FOR ANERGEN TECHNOLOGIES

           The Company believes that its core technologies could be applied to a
number of the other autoimmune diseases.* The creation of an effective AnergiX
product designed to inactivate the T cells associated with a specific autoimmune
disease requires correct combination of a proper epitope specific for the target
autoimmune disease with a proper HLA molecule associated with that disease.
Recent advances in the understanding of events that trigger autoimmune diseases
have accelerated the search for the epitopes associated with particular
diseases. Anergen intends to license technology developed by others and to
collaborate in the research and development of epitopes that, when combined with
the Company's HLA molecules in a proprietary soluble form, would result in
AnergiX compounds for the treatment of other autoimmune diseases.* The Company
has a research collaboration with a physician at the University of Medicine and
Dentistry of New Jersey to identify the epitope associated with Inflammatory
Bowel Disease.






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           In order to develop additional AnervaX peptide vaccine products, the
Company must first identify the particular HLA sub-type involved with initiation
and continuation of the particular autoimmune disease. The Company must then
identify that portion of the HLA molecule sub-type that triggers an immune
response. It is this response that interferes with the presentation of the self
antigen to disease-related T cells. Based upon recent advances in the
understanding of the genetic clustering of HLA sub-types and their involvement
in other autoimmune diseases, the Company believes additional product candidates
may be developed utilizing its AnervaX core technology.*

           While development and commercialization of the Company's approach to
altering autoimmune disease states remains Anergen's focus, the Company is also
monitoring other opportunities that may arise out of its technology and
expertise, including the development of diagnostics for autoimmune and related
diseases and the possibility of adapting its T cell-specific drug delivery
approach to delivering compounds that would kill particular T cells, a method
that may prove useful in severe cases where an autoimmune disease has
substantially progressed.* The Company expects to pursue funding from
collaborative partners prior to extensive research in any of these areas.

COLLABORATIVE ARRANGEMENTS

           Novo Nordisk A/S. In August 1993, the Company entered into a
collaborative agreement with Novo Nordisk with an initial three-year development
term and Novo Nordisk made an equity investment in the Company. Under the
collaborative agreement, Novo Nordisk was to make milestone payments and support
research and development of the Company's MS, MG and IDDM programs in exchange
for exclusive worldwide rights to products developed under the collaboration,
including rights to commercialize these products, subject to the payment of
royalties to the Company. The Company retained rights of co-promotion in North
America for therapeutics in MS and MG. In the event the Company engages in
co-promotion of its MS and MG products in North America, Novo Nordisk agreed to
modify the royalty payments made to the Company to compensate for the level of
its marketing and sales efforts in amounts to be negotiated. In March 1996, the
Company and Novo Nordisk extended the term of the development program by an
additional two-year period through August 1998. On February 9, 1998 the Company
announced that it and Novo Nordisk had agreed to terminate the agreement between
the two parties. All rights will return to the Company and it will not have any
future obligation to Novo Nordisk. Novo Nordisk will reimburse the Company for
the cost of the ongoing Phase I clinical trial in Multiple Sclerosis. In
February 1998, Novo Nordisk paid the Company $1 million, the estimated costs to
complete the Phase I study. Under the original agreement, the research and
development support and milestone payments which may be received by the Company
under this agreement are estimated to total $25 million, including an $8 million
equity investment made in the Company in August of 1993 for 1,219,745 shares of
the Company's Common Stock. The Company recorded $2.6 million in contract
revenues related to this agreement in 1997 compared to $3.1 million and $3.0
million in 1996 and 1995, respectively.

           N.V. Organon. In June 1996, the Company entered into a collaborative
agreement with Organon under which Organon paid a license fee of $2 million,
will make milestone payments, and support research and development of an AnergiX
compound intended for the treatment of RA in exchange for certain marketing
rights, including certain rights to the commercialization of these products,
subject to the payment of royalties to the Company. The compound to be developed
uses Anergen's proprietary technology and incorporates a proprietary peptide
discovered by Organon coupled with an HLA molecule. This arrangement has no
effect on the Company's ownership of its AnervaX therapeutic intended to treat
RA. The Company's development program under the Organon agreement has an initial
three-year term. Under the agreement, Anergen granted to Organon exclusive
worldwide rights to any products developed under the collaborative agreement,
including rights to commercialize the products. While the agreement initially
grants Organon rights to any AnergiX compounds within the field of RA, after an
initial Phase I study, Anergen has the right, at its sole discretion, to convert
Organon's rights to a non-exclusive basis, in which case milestone payments and
royalty rates would be modified.

           The agreement with respect to marketing rights continues in full
force for as long as Organon is engaged in marketing such products. Organon may
terminate the development program after thirty months by giving the Company six
months prior written notice. The Company has retained certain limited rights of
co-promotion in North America for therapeutics developed under the arrangement.
In the event the Company engages in co-promotion of products in North America,
Organon has agreed to modify the royalty payments made to the Company to
compensate for the level of its marketing and sales efforts in amounts to be
negotiated. The development program is subject to ongoing review by a research
committee which includes equal representation of both partners. The development
expenses incurred by the Company and reimbursable by Organon are expected to be
significant and increase.

           The Company recorded $3.1 million in contract revenues related to
1997, compared to $412,000 in 1996.





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           Other Arrangements. The Company has several collaborations with
academic and clinical researchers to perform certain research, development and
clinical trial activities. To the extent that the Company is unable to maintain
or establish such collaborative arrangements, the Company's research,
development and clinical activities and business would be adversely affected.

           The Company's strategy for the development, clinical trials,
manufacturing and commercialization of its products includes maintaining
existing and establishing additional collaborations with corporate partners,
licensors, licensees and others. There can be no assurance that the Company will
be able to maintain existing collaborative arrangements in total or for each
disease area or establish new collaborative arrangements in the future. To the
extent that the Company is unable to maintain or establish such collaborative
arrangements, the Company's research and development efforts and business would
be adversely affected. In addition, the Company's collaborative partners may
develop, either alone or with others, products that compete with the development
and marketing of the Company's products. The development of such competing
products may result in the withdrawal of support with respect to all or a
portion of the Company's technology which would have a material adverse effect
on the Company's business, financial condition and results of operations. See
"Risk Factors That May Affect Future Operating Performance - Dependence on
Collaborative Partners."

MANUFACTURING

           Manufacture of the Company's AnergiX compounds requires the
production of two basic parts: the disease specific epitope and the HLA
molecule. The Company then combines these two component parts and puts them in a
soluble form suitable for a therapeutic product. The Company is currently
synthesizing several different epitopes related to MS, RA, IDDM and MG for use
in its research and development operations. To date, the Company has contracted
with an outside manufacturer to produce the selected MS specific peptide under
GMP guidelines. In the future the Company may consider scaling up its synthesis
operations in order to produce these epitopes internally.

           Production of HLA molecules can be accomplished in one of two ways:
HLA molecules can be extracted from cells cloned from commercially available
cell lines or HLA molecules can be produced using recombinant DNA technology.
During 1993, the Company began producing HLA molecules in its pilot clinical
manufacturing facility. The initial production utilizes a mammalian cell culture
system to grow cells from a human cell line from which HLA molecules are
extracted. In 1995, the Company was inspected and granted a site license to
manufacture products for human use by the California Food and Drug
Administration. The Company, is currently in the process of evaluating
production of HLA molecules using recombinant DNA technology. The Company
believes that either production methodology will provide sufficient quantities
of HLA for the Company's anticipated clinical trials.

           The Company has contracted with an outside manufacturer to fill,
finish and package its final compounds. The Company's strategy is to maintain
control over its AnergiX manufacturing technology which will facilitate seeking
of patent protection and enable timely supply of products for clinical trials.
Whether the Company will choose to develop a full-scale manufacturing facility,
rely on its corporate partner, or rely on outside contract manufacturing will be
determined in the future after consideration of the Company's financial and
scientific resources and the potential advantages and disadvantages of these
alternatives. See "Risk Factors that May Affect Future Operating Performance"
and "Need to Develop Manufacturing Capabilities."

           Manufacture of the Company's AnervaX compounds is performed by an
outside contract manufacturer and the resultant product is filled and finished
by a second subcontractor. There can be no assurance that the Company will be
able to find qualified outside parties to be able to perform these functions on
a timely basis or at a quality and price level that is acceptable to the Company
in the future.

MARKETING AND SALES

           The Company currently has no sales, marketing or distribution
capability. The Company has entered a collaborative relationship with Organon
for the commercialization of its AnergiX products for RA. For other potential
products, the Company intends to rely on relationships with one or more
pharmaceutical companies with established distribution systems and direct sales
forces to market its products. In the event that the Company is unable to reach
agreement with one or more pharmaceutical companies to market its products, it
may be required to market its products directly and to develop a marketing and
sales force with technical expertise and with supporting distribution
capability. There can be no assurance that the Company will be able to establish
in-house sales and distribution capabilities or relationships with third
parties, or that it will be successful in gaining market acceptance for its
products. To the extent the Company enters into co-promotion or other licensing
arrangements, any revenues received by the Company will also depend upon the
efforts of third parties, and






                                       10
   11

there can be no assurance that such efforts will be successful. See "Risk
Factors that May Affect Future Operating Performance - Dependence on
Collaborative Partners" and "- Lack of Marketing Experience; Dependence on Third
Parties."

PATENTS AND PROPRIETARY RIGHTS

           The Company is pursuing patent protection for its proprietary
technologies. In July 1992, the Company was issued a U.S. patent that covers
pharmaceutical compositions comprising MHC-peptide complexes. Four subsequent
U.S. patents have provided additional protection for these complexes, methods of
making them, and their use to induce anergy in T cells. The last patent in this
series was issued in November 1995 and all five U.S. patents in such series
expire in 2009. The Company has also been issued one other U.S. patent based
upon other aspects of its research, expiring in 2011. In June 1996, the Company
received a grant for a European patent directed to the MHC-peptide complexes,
expiring in 2008. A related patent has also been issued in Korea, expiring in
2008. In addition, Anergen has filed other patent applications in Canada, the
EPO and Japan. Pending patent applications in the U.S. and Japan include those
covering different aspects of the Company's AnergiX and AnervaX technologies.

           The Company has also entered into a number of collaborative research
arrangements with consultants at academic institutions. These agreements
generally provide for exchanges of information and for nondisclosure of
technical information by both parties, but the Company's current agreements do
not obligate the Company to release any of its technology for use by any other
entities nor commit the Company to pay royalties on any discovery made in
connection with such research agreements. The Company has a "technology license
agreement" with a collaborator related to its AnervaX technology which provides
for payment of royalties if resultant products are commercialized. In the
future, the Company may enter into agreements which provide for royalties in
exchange for technology rights.

           The Company's success will depend in part on its ability to maintain
patent protection for its therapeutic approach and for any developed products,
to preserve its trade secrets and to operate without infringing the proprietary
rights of third parties. Although the Company has obtained and applied for
patents covering certain aspects of its technology, no assurances can be given
that additional patents will be issued or, if issued, that the scope of any
patent protection will be significant, or that the patents will be held valid if
subsequently challenged. Moreover, the Company cannot ascertain with certainty
that no patent conflict will exist with other products or processes which could
compete with the Company's approaches. See "Risk Factors that May Affect Future
Operating Performance - Uncertainty Relating to Patents and Proprietary Rights."

           The terms Anergen, AnergiX, MS/AnergiX, MG/AnergiX, IDDM/AnergiX,
RA/AnergiX and AnervaX are trademarks of the Company. The Company's registration
of the trademarks Anergen, AnergiX, and AnervaX are currently pending, and the
Company intends to register the remaining trademarks.

COMPETITION

           The biotechnology and pharmaceutical industries are characterized by
rapidly evolving technology and intense competition. The Company's competitors
include major pharmaceutical, chemical and specialized biotechnology companies,
most of which have financial, technical, research and development,
manufacturing, clinical and marketing resources significantly greater than those
of the Company. The Company believes that these other entities recognize the
need for effective therapies for the autoimmune diseases targeted by the Company
and are highly motivated to develop such therapies. In addition, many
specialized biotechnology companies have formed collaborations with large,
established companies to support research, development and commercialization of
products that may be competitive with those of the Company. Academic
institutions, governmental agencies and other public and private research
organizations are also conducting research activities and seeking patent
protection and may commercialize products on their own or through joint
ventures. The Company is aware of certain products in development by competitors
that are intended to be used for the prevention or treatment of certain diseases
the Company has targeted for product development. The existence of these
products, or other products of which the Company is not aware, or products or
treatments that may be developed in the future which may be more effective, may
adversely affect the commercialization or marketability of products which may be
developed by the Company or potentially render the Company's technology obsolete
or non-competitive.

           The Company's competitive position will depend on its ability to
attract and retain qualified scientific and other personnel, develop effective
proprietary products, implement production and marketing plans, obtain patent
protection and secure adequate capital resources. In addition, the first
pharmaceutical product to reach the market in a therapeutic or preventive area
is often at a significant competitive advantage relative to later entrants to
the market. The Company expects its products, if approved for sale, to compete
primarily on the basis of product efficacy, safety, patent position,
reliability, price and patient convenience.





                                       11
   12

           There are numerous pharmaceutical and biotechnology companies
developing therapies against autoimmune diseases. Many pharmaceutical companies
are working on products to treat MS. Current therapies, which have limited
impact on the disease state and primarily affect symptoms, include two beta
interferon drugs. Other potential therapeutics which target the underlying
disease state include oral tolerance therapy and peptide-based therapies. In RA,
there are also many approaches under development which target the underlying
disease state including oral tolerance, peptide-based therapies, peptide
vaccines to the T cell receptors, humanized antibodies and antagonist of tumor
necrosis factor (TNF). In IDDM, one experimental approach is based on
non-specific inhibition of T cells using cyclosporin, a general
immunosuppressant. In patients who already have IDDM, transplantation of
pancreas or insulin-producing (beta) cells is also being explored. Autoimmune
diseases are a major target for many companies developing therapeutics, and it
is unclear which approaches will work most effectively.

           The Company believes that the ability of its AnergiX to inactivate
only the specific T cells related to a particular autoimmune disease may
provide, if the Company's products are successfully developed, an important
competitive advantage over companies using approaches which have broader
suppressive effects on the human immune system. Anergen also believes that its
ability to inactivate these specific T cells without the use of toxins, if
successfully demonstrated, would be advantageous. The Company also believes that
its AnervaX approach, if successfully developed, may offer a competitive
advantage if it is found to interrupt disease progression without severely
suppressing the immune system. See "Risk Factors That May Affect Future
Operating Performance - Competition and Technological Change."

GOVERNMENT REGULATION

           The Company's research and development activities are subject to
regulation by numerous governmental authorities in the United States and other
countries. Further, the future production and marketing of any products
developed by the Company would also be regulated. In the United States,
vaccines, drugs and biologics are subject to rigorous review by the Food and
Drug Administration ("FDA"). The Federal Food, Drug, and Cosmetic Act, the
Public Health Service Act and other federal statutes and regulations govern or
influence the testing, manufacture, safety, labeling, storage, record keeping,
approval, advertising and promotion of such products. Noncompliance with
applicable requirements can result in fines, recall or seizure of products,
clinical study holds, total or partial suspension of production, refusal of the
government to approve New Drug Applications ("NDA"), Product License
Applications ("PLA"), Establishment License Applications ("ELA") or allow the
Company to enter into supply contracts and criminal prosecution. The FDA also
has the authority to revoke PLAs and ELAs previously granted.

           In order to obtain FDA approval of a new biological product, the
Company must submit proof of safety, purity, potency and efficacy. In most cases
such proof entails extensive pre-clinical, clinical and laboratory tests. The
testing, preparation of necessary applications and processing of those
applications by the FDA is expensive and time consuming, can vary based on the
type of product, and may take several years to complete. There is no assurance
that the FDA will act favorably or quickly in making such reviews, and
significant difficulties or costs may be encountered by the Company in its
efforts to obtain FDA approvals that could delay or preclude the Company from
marketing any products it may develop or furnish an advantage to competitors.
The FDA may also require post-marketing testing and surveillance to monitor the
effects of approved products or place conditions on any approvals that could
restrict the commercial applications of such products. Product approvals may be
withdrawn if compliance with regulatory standards is not maintained or if
problems occur following initial marketing. In addition, delays imposed by the
governmental approval process may materially reduce the period during which the
Company may have the exclusive right to exploit patented products or
technologies.

           The FDA approval process for a new biological drug involves
completion of pre-clinical studies which include laboratory tests and animal
studies to assess safety and effectiveness of the drug. Among other things, the
results of these studies as well as how the product will be manufactured are
submitted to the FDA as part of an IND. Unless the FDA objects human clinical
trials may then be conducted 30 days following the receipt of the IND by the
FDA. There can be no assurance that submission of an IND will result in FDA
authorization to commence clinical trials. The results of the clinical trials
are submitted to the FDA as part of a PLA. In addition to obtaining FDA approval
for each AnergiX indication, an ELA must be filed and the FDA must approve the
manufacturing facilities for the product. Product sales may commence if the PLA
and ELA are approved. Regulatory requirements for obtaining such FDA approvals
are rigorous and there can be no assurance that such approvals will be obtained
on a timely basis or at all.

           Human clinical trials are typically conducted in three sequential
phases, but the phases may overlap. Phase I trials consist of testing the
product in a small number of patients primarily for safety at one or more dosage
levels. In Phase II, in addition to safety, the efficacy of the product is
evaluated in a patient population slightly larger than Phase I trials, and
appropriate dosage is established. Phase III trials typically involve additional
testing for safety and clinical efficacy in an






                                       12
   13

expanded patient population at geographically dispersed test sites, and with
dosage that will be submitted for approval. A clinical plan, or "protocol",
accompanied by the approval of the institutional review board at the institution
participating in the trials, and patient informed consent form must be submitted
to the FDA prior to commencement of each clinical trial. The FDA may order the
temporary or permanent discontinuation of a clinical trial at any time if it
believes patient safety is at risk. The Company's regulatory strategy is to seek
input from the FDA at all stages of clinical testing and manufacturing process
development.

           The results of the pre-clinical and clinical studies on biological
drugs such as the Company's AnergiX are submitted to the FDA in the form of a
PLA and ELA for approval to commence commercial sales. After completion of the
FDA's review of the PLA submission, the submission may be sent to an FDA
selected scientific advisory panel composed of physicians and scientists with
expertise in the particular field. The FDA scientific advisory panel issues a
recommendation to the FDA that includes conditions for approval of the PLA.
Although the recommendation is not binding, the agency generally follows an
advisory panel's advice. Toward the end of the PLA review process, the FDA will
conduct an inspection of the manufacturer's facilities to ensure they are in
compliance with the applicable GMP requirements. If the FDA evaluation of both
the ELA application and manufacturing facilities contained in the PLA
application are favorable, the FDA will issue an approval letter, which usually
contains a number of conditions which must be met in order to secure final
approval. In responding to the PLA, the FDA may grant marketing approval,
require additional testing or information, or deny the application. Governmental
approval of products developed by the Company may entail limitations on the
indicated uses for which such products may be marketed. Continued compliance
with all FDA requirements and the conditions in an approved application,
including product specification, manufacturing process, labeling and promotional
material and record keeping and reporting requirements, is necessary for all
products. Failure to comply, or the occurrence of unanticipated adverse effects
during commercial marketing, could lead to the need for product recall or other
FDA-initiated action, which could delay further marketing until the products are
brought into compliance.

           Under the Orphan Drug Act, the FDA may designate a drug as an orphan
drug. An orphan drug is a drug intended to treat a "rare disease or condition,"
which is a disease or condition that affects populations of fewer than 200,000
individuals in the United States or, if victims of a disease number more than
200,000, the sponsor establishes that it does not realistically anticipate that
its product sales will be sufficient to recover its costs. If a product is
designated as an orphan drug, then the sponsor is entitled to receive certain
incentives to undertake the development and marketing of the product, including
limited tax credits and high priority FDA review of an NDA. In addition, the
sponsor that obtains the first marketing approval for a designated orphan drug
for a given rare disease is eligible to receive marketing exclusivity for a
period of seven years. There may be multiple designations of an orphan drug;
however, only the sponsor of the first approved NDA for a given drug for its use
in treating a given rare disease may receive marketing exclusivity. The Company
may apply for orphan drug designation for some of its products and indications
in development. There is no assurance that the FDA would grant orphan drug
designation or marketing exclusivity for any such indications or products.

           The Company is also subject to regulation by the Occupational Safety
and Health Administration ("OSHA") and the Environmental Protection Agency
("EPA") and to regulation under the Toxic Substances Control Act, the Resource
Conservation and Recovery Act and other regulatory statutes, and may in the
future be subject to other federal, state or local regulations. Although the
Company believes that its safety procedures for handling and disposing of
hazardous materials comply with the standards prescribed by current laws and
regulations, the risk of accidental contamination or injury from these materials
cannot be completely eliminated. In the event of such an accident, the Company
could be held liable for any damages that result and any such liability could
exceed the resources of the Company. In addition, regulations may be promulgated
governing biotechnology that may affect the Company's research and development
programs. The Company is unable to predict whether any agency will adopt any
regulation which would have a material adverse effect on the Company's
operations. See "Risk Factors That May Affect Future Operating Performance -
Government Regulation; No Assurance of Obtaining Product Approvals."

           Sales of pharmaceutical products outside the United States are
subject to foreign regulatory requirements that vary widely from country to
country. The time required to obtain approvals required by foreign countries may
be longer or shorter than that required for FDA approval, and requirements for
licensing may differ from FDA requirements.

           Satisfaction of these FDA requirements, or similar requirements by
foreign regulatory agencies, typically takes several years and the time needed
to satisfy them may vary substantially, based upon 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 being 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.






                                       13
   14

Data obtained from preclinical or 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. Delay in obtaining or failure to
obtain regulatory approvals would have a material adverse effect on the
Company's business financial condition or results of operations.

PHARMACEUTICAL PRICING AND REIMBURSEMENT

           Political, economic and regulatory influences are subjecting the
health care industry in the United States to fundamental change. Initiatives to
reduce the federal deficit and to reform health care delivery are increasing
these cost containment efforts. The Company anticipates that Congress, state
legislatures and the private sector will continue to review and assess
alternative benefits, controls on health care spending through limitations on
the growth of private health insurance premiums and Medicare and Medicaid
spending, the creation of large insurance purchasing groups, price controls on
pharmaceuticals and other fundamental changes to the health care delivery
system. Any such proposed or actual changes could cause any potential partners
of the Company to limit or eliminate spending on collaborative development
projects. Legislative debate is expected to continue in the future, market
forces are expected to demand reduced costs and Anergen cannot predict what
impact the adoption of any federal or state health care reform measures or
future private sector reforms may have on its business.

           In both domestic and foreign markets, sales of the Company's proposed
products will depend in part upon the availability of reimbursement from
third-party payors, such as government health administration authorities,
private health insurers and other organizations. In addition, third-party payers
are increasingly challenging the price and cost effectiveness of medical
products and services. Significant uncertainty exists as to the reimbursement
status of newly approved health care products. There can be no assurance that
the Company's potential products or products discovered in collaboration with
the Company will be considered cost-effective or that adequate third-party
reimbursement will be available to enable Anergen to maintain price levels
sufficient to realize an appropriate return on its investment in product
research, discovery and development. Legislation and regulations affecting the
pricing of pharmaceuticals may change before the Company's proposed products are
approved for marketing. Adoption of such legislation could further limit
reimbursement for medical products. If adequate coverage and reimbursement
levels are not provided by the government and third-party payors for the
Company's products, the market acceptance of these products would be adversely
affected, which would have a material adverse effect on the Company's business,
financial condition and results of operations. See "Risk Factors That May Affect
Future Operating Performance - Uncertainty Related to Pharmaceutical Pricing and
Reimbursement."

PRODUCT LIABILITY INSURANCE

           The testing, marketing and sale of human health care products entail
an inherent risk of exposure to product liability claims in the event that the
use of the Company's technology or prospective products is alleged to have
resulted in adverse effects. While the Company has taken, and will continue to
take, what it believes are appropriate precautions to minimize exposure to
product liability, there can be no assurance that it will avoid significant
liability. The Company possesses limited general liability and product liability
insurance related to its clinical trials of AnervaX for RA and AnergiX for MS,
and certain other types of insurance customarily obtained by business
organizations. There can be no assurance that the existing insurance coverage is
adequate or that it will avoid liability. The Company intends to seek insurance
against product liability risks associated with the testing, manufacturing or
marketing of its products. However, there can be no assurance that it will be
able to obtain such insurance in the future, or that if obtained, such insurance
will be sufficient in amount. Consequently, a product liability claim or other
claims with respect to uninsured liabilities or in excess of insured liabilities
could have a material adverse effect on the business, financial condition or
results of operations of the Company.

EMPLOYEES

           As of December 31, 1997, the Company had 72 full-time employees, of
whom thirteen hold doctoral degrees. Of the 72 full-time employees, 54 are
engaged in, or directly support, the Company's research and development
activities. In February, 1998 the Company restructured operations, eliminating
15 full time positions. The Company considers relations with its employees to be
good. None of the Company's employees is covered by a collective bargaining
agreement. See "Risk Factors That May Affect Future Operating Performance
Dependence on and Need for Additional Key Personnel; Reliance on Academic
Collaborators."





                                       14
   15

SCIENTIFIC ADVISORY BOARD

           Anergen benefits from the advice and assistance of its Scientific
Advisory Board, most of whom are involved in ongoing discussions with the
Company's researchers and all of whom are involved in full-time teaching and
research at academic institutions. The names of the members of the scientific
advisory board and some background information about them are set forth below.

           Mark Davis, Ph.D., Professor, Department of Microbiology and
Immunology, Stanford University School of Medicine. Dr. Davis has been involved
in research on the structure and function of the T cell receptor. His group
isolated and characterized a T cell receptor gene and succeeded in expressing
both T cell antigen receptor and HLA II molecules in a soluble form to
facilitate analysis of their properties.

           Patricia Jones, Ph.D., Professor, Department of Biological Sciences,
Stanford University. Dr. Jones has been involved in research on the biochemistry
and molecular biology of HLA II molecules.

           Harden McConnell, Ph.D., Robert Eckels Swain Professor in the
Department of Chemistry, Stanford University. Dr. McConnell has been involved in
research on the properties, structure and functioning of cell membrane
components including HLA II proteins. He is also a director of the Company.

           Subramaniam Sriram, M.D., Professor of Neurology, Vanderbilt
University Medical Center. Dr. Sriram's research efforts are directed towards
elucidating immunological mechanisms of autoimmune diseases of the central
nervous system. He has been involved in advancing the concept that HLA II
molecules and helper T cells are necessary parts of the pathology of autoimmune
diseases.

           The Company believes it has a good working relationship with its
Scientific Advisory Board. Communication with many members of the Scientific
Advisory Board takes place on a regular basis and in some cases at least weekly.
In accordance with consulting agreements the Company has with these advisors,
information conveyed to the Company as part of the consulting activity is the
property of the Company. Should scientific discoveries be made by a member of
the Scientific Advisory Board in conjunction with other research at another
institution rather than while acting as a consultant to the Company, that
discovery would generally be owned by the researcher or that institution. If
such a discovery were deemed to be helpful in the Company's own research, the
Company would have to enter into a license agreement in order to utilize the
discovery. The Company relies on its scientific advisors to assist the Company
in formulating its research and development strategy. Retaining and attracting
qualified advisors will be critical to the Company's success. Each of the
Scientific Advisory Board members is paid $12,000 annually for his or her
services.

ITEM 2.    PROPERTIES

           Anergen's laboratory and administrative facilities occupy
approximately 27,000 square feet of space in Redwood City, California. The
majority of these facilities are subject to a lease which expires on January 31,
1999, with a two-year renewal option. The Company believes that this space is
adequate for its immediate needs, and that it will be able to obtain additional
space as necessary.

ITEM 3.    LEGAL PROCEEDINGS

           The Company is not a party to any legal proceedings.




                                       15
   16


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

           There were no matters submitted to a vote of the shareholders of the
Company during the fourth quarter of the fiscal year covered by this report.


EXECUTIVE OFFICERS OF THE REGISTRANT

           The executive officers of the Company, who serve at the discretion of
the Board of Directors, are as follows:



NAME                               AGE         POSITION WITH THE COMPANY                       OFFICER SINCE
- ----                               ---         -------------------------                       -------------
                                                                                          
Barry M. Sherman, M.D.              56         President, Chief Executive Officer,                 1996
                                                    Secretary and Director

David V. Smith                      38         Vice President, Finance and                         1997
                                                    Chief Financial Officer

Maureen C. Howard, Ph.D.            45         Vice President, Research                            1997


Gilbert R. Mintz, Ph.D.             46         Vice President, Marketing and                       1997
                                                    Business Development

Carol A. Nacy, Ph.D.                50         Chief Scientific Officer                            1997


Michael G. Shulman, M.D.            58         Vice President, Clinical Development                1997


Jeffrey L. Winkelhake, Ph.D.        53         Vice President, Pharmaceutical Development          1993


           Barry M. Sherman, M.D., joined the Company as President and Chief
Executive Officer and as a director in May 1996. Dr. Sherman previously served
as Senior Vice President and Chief Medical Officer at Genentech, Inc.
("Genentech"), a biotechnology company. Dr. Sherman joined Genentech in 1985,
and while there served as a member of the Operations Committee and was
responsible for the company's overall clinical development activities. Since
1986, Dr. Sherman has also been a Clinical Professor of Internal Medicine at
Stanford University. From 1971 to 1985, Dr. Sherman was a professor of Internal
Medicine, Director of the Clinical Research Center and Associate Chairman of the
Department of Internal Medicine at the University of Iowa College of Medicine.
Dr. Sherman received his M.D. in 1966 from the University of Michigan. Dr.
Sherman is also a member of the Board of Directors of Celtrix Pharmaceuticals
and Chrysalis International.

           David V. Smith joined the Company in June, 1997 as Vice President,
Finance and Chief Financial Officer. Prior to joining the Company, Mr. Smith
spent nine years at Genentech, Inc. in the United States and Europe, most
recently as Director of Accounting. Prior to that, Mr. Smith held various
planning and accounting positions with International Business Machines and
Syntex Corporation.

           Maureen C. Howard, Ph.D., joined the Company as Vice President,
Research in September, 1997. Prior to joining the Company, Dr. Howard was the
Director of Immunology at DNAX Research Institute of Molecular and Cellular
Biology. Prior to that, Dr. Howard was a Fulbright and Fogarty Fellow in the
laboratory of Immunology at the National Institute of Health.

           Gilbert R. Mintz, Ph.D., joined the Company as Vice President,
Marketing and Business Development in March 1997. Prior to joining the Company,
Dr. Mintz was with Cygnus, Inc. where he was Director, Marketing and Business
Development responsible for international licensing activities. Dr. Mintz also
held the position of Director of Licensing and Business Development with
Houghten Pharmaceuticals prior to joining Cygnus.





                                       16
   17

           Carol A. Nacy, Ph.D., joined the Company in April 1997 as Chief
Scientific Officer. Prior to joining the Company, she was Executive Vice
President at Entremed, Inc. Prior to that she was Director of Infectious
Diseases at Walter Reed Army Institute of Research.

           Michael G. Shulman, M.D., joined the Company in January 1997 as Vice
President, Clinical Development. Prior to joining the Company, Dr. Shulman
served as a Medical Director and consultant to SangStat Medical Corporation.
From February 1994 he served as Associate Medical Director at Syntex Development
Research, a pharmaceutical company. Prior to that, Dr. Shulman served for over
two years as Associate Director of Immunohematology and Cardiovascular for
Sandoz Pharmaceuticals Corporation.

           Jeffrey Winkelhake, Ph.D., joined the Company in April 1993 as Vice
President, Pharmaceutical Development. Prior to joining the Company, Dr.
Winkelhake served for three years as Director of Program Management at Cytel
Corporation, a biotechnology company. Prior to that, he served for over six
years as Director of Pharmacology at Cetus Corporation, also a biotechnology
company. Dr. Winkelhake received his Ph.D. in Immunochemistry/Pharmacology from
the University of Illinois in 1974.



           There are no family relationships among the executive officers of
Anergen, Inc.






                                       17
   18

                                     PART II

ITEM 5.    MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER
           MATTERS

           The Company's Common Stock is traded on the Nasdaq National Market
under the symbol "ANRG". The following table sets forth, for the periods
indicated, the low and high closing sale prices for the Company's Common Stock
as reported on the Nasdaq National Market:



                  1996                                                 Low           High
                  ----                                                 ---           ----
                                                                                
                  First Quarter.................................    $ 3.56         $ 4.38
                  Second Quarter................................      3.25           6.00
                  Third Quarter.................................      3.06           5.25
                  Fourth Quarter................................      2.81           4.13

                  1997
                  First Quarter.................................    $ 3.12         $ 4.62
                  Second Quarter................................      2.12           3.75
                  Third Quarter.................................      2.18           3.31
                  Fourth Quarter................................      1.68           4.31


           As of March 20, 1998, 18,851,000 shares of the Company's Common
Stock were issued and outstanding and held of record by approximately 319
shareholders and were beneficially owned by over 4700 shareholders.

           The market price of the Company's Common Stock, similar to the
securities of other biotechnology companies, has been and is likely to continue
to be highly volatile. Announcements regarding the results of regulatory
approval filings, clinical trials or other testing, technological innovations or
new commercial products by the Company or its competitors, patents and
intellectual property rights by the Company or its competitors, developments as
to current or future collaborations by the Company or its competitors,
government regulations, the status of health care initiatives, fluctuations in
operating results, changes in recommendations by financial analysts, and general
market conditions for biotechnology stocks could have a significant impact on
the future price of the Common Stock. Trading volume of the Common Stock has
been relatively limited and sales of substantial amounts of Common Stock could
have an adverse effect on the price of the Common Stock.

           No dividends have been declared or paid on the Common Stock. The
Company currently intends to retain all future earnings, if any, for use in its
business and does not anticipate paying any cash dividends in the foreseeable
future.






                                       18
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ITEM 6.    SELECTED FINANCIAL DATA




                                                                           Years Ended December 31,
                                                     --------------------------------------------------------------------
STATEMENTS OF OPERATIONS DATA                          1997           1996           1995           1994            1993
                                                     --------       --------       --------       --------       --------
                                                              (in thousands, except for per share amounts)
Revenues:
                                                                                                       
Contract revenues, primarily from related party      $  5,763       $  3,519       $  3,001       $  2,325       $    339
License fee ...................................          --            2,000           --             --             --

Interest income ...............................           565            653            533            207            312
                                                     --------       --------       --------       --------       --------
                                                        6,328          6,172          3,534          2,532            651
Expenses:
Research and development ......................        11,559          9,278          8,322          7,423          5,553
General and administrative ....................         2,997          2,521          1,976          1,831          1,716
Interest expense ..............................           202            170            322            238            226
                                                     --------       --------       --------       --------       --------
                                                       14,758         11,969         10,620          9,492          7,495
                                                     --------       --------       --------       --------       --------
Net loss ......................................      $ (8,430)      $ (5,797)      $ (7,086)      $ (6,960)      $ (6,844)
                                                     ========       ========       ========       ========       ========
Basic and diluted net loss per share (*) ......      $   (.45)      $  (0.35)      $  (0.55)      $  (0.97)      $  (1.12)
Shares used in calculating basic and diluted
                                                     ========       ========       ========       ========       ========
per share data ................................        18,815         16,482         12,859          7,202          6,118
                                                     ========       ========       ========       ========       ========






                                                                  December 31,
                                           -----------------------------------------------------------
                                             1997         1996         1995         1994         1993
                                           -------      -------      -------      -------      -------
                                                           (in thousands)
                                                                                    
BALANCE SHEET DATA
Cash, cash equivalents and short-term
     investments ....................      $ 8,403      $16,400      $11,492      $ 3,756      $ 9,585
Total assets ........................       10,554       18,423       14,455        6,797       11,763

Long-term portion of capital lease
     obligations and debt ...........          870          366          818          990          956
Shareholders' equity ................        7,787       16,003       11,714        3,870        9,251





(*) Amounts have been calculated and, where necessary, restated in accordance
with Statement of Financial Accounting Standard No. 128, "Earnings Per Share".






                                       19
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ITEM 7.    MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
           RESULTS OF OPERATIONS

           MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS CONTAINS CERTAIN FORWARD-LOOKING STATEMENTS WITHIN THE
MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933 AND SECTION 21E OF THE
SECURITIES EXCHANGE ACT OF 1934. THE COMPANY'S ACTUAL RESULTS COULD DIFFER
MATERIALLY FROM THE RESULTS ANTICIPATED IN THESE FORWARD-LOOKING STATEMENTS AS A
RESULT OF CERTAIN FACTORS SET FORTH HEREUNDER, AND IN "RISK FACTORS THAT MAY
AFFECT FUTURE OPERATING PERFORMANCE."

LIQUIDITY AND CAPITAL RESOURCES

           To date, the Company has financed its operations primarily through
private placements of its equity securities with venture capitalists (which
raised an aggregate of approximately $7.6 million in net proceeds), through an
initial public offering of its Common Stock in October of 1991 (which raised
approximately $14.2 million in net proceeds), through the sale of its Common
Stock to its corporate partner, Novo Nordisk A/S in August of 1993 (which raised
approximately $8 million in net proceeds), through the sale of its Common Stock
and Warrants to purchase its Common Stock through a private placement in June of
1994 (which raised $1.5 million in proceeds), and in April of 1995 through the
issuance of 7,317,073 shares of the Company's Common Stock to two new investors
in exchange for approximately $14.7 million in net proceeds. In August 1996 the
Company issued 3,500,000 shares of the Company's Common Stock in a follow-on
public offering in exchange for approximately $9.4 million in net proceeds, and
in September 1996 the Company issued an additional 168,000 shares of Common
Stock in connection with the exercise of the underwriters' overallottment option
for approximately $500,000 in net proceeds. At December 31, 1997, the Company's
cash, cash equivalents and short-term investments were approximately $8.4
million and the Company had shareholders' equity of approximately $7.8 million.
As of December 31, 1997 the Company had net borrowings of $181,000 under two
loan agreements with Silicon Valley Bank of California. On December 27, 1996 the
Company amended a loan agreement with Silicon Valley Bank to provide an
additional $1,500,000 in financing available through December 31, 1997. As of
December 31, 1997 the Company had borrowed $1,305,000 under the amended
agreement. Lease lines and loans have been and will continue to be used by the
Company to the extent that their terms are commercially attractive; however,
there can be no assurance that additional borrowing facilities will be
available. At December 31, 1997 the Company had no material commitments for
capital expenditures.

           The Company anticipates that its current cash, cash equivalents,
short-term investments and expected revenues under its collaborative agreements
will be sufficient to fund its operations through 1998.* Thereafter, the Company
will require substantial additional funds to continue its operations. The
Company anticipates that its current resources will be primarily used to fund
clinical testing of AnervaX(TM) for Rheumatoid Arthritis ("RA"), AnergiX(TM) for
Multiple Sclerosis ("MS"), AnergiX for the treatment of RA, and continued
research and development of DiavaX for Type 1 Diabetes, Chemokine Receptors in
MS and Diabetes, as well as development of key mechanism studies. The balance of
such resources will be used to fund continued limited research on other
autoimmune diseases and general and administrative activities, including those
associated with seeking collaborative arrangements to enable the Company to
increase its research and development activities in other autoimmune diseases.
These foregoing forward-looking statements regarding the Company's requirements
involve risks and uncertainties that could cause actual results to differ
materially. In particular, the Company's capital requirements will vary
depending upon numerous factors many of which are outside the Company's control.
These factors include the progress of the Company's research and development
programs, manufacturing activities, the progress of the Company's clinical
programs, the results of laboratory testing, the time and cost required to seek
regulatory approvals to commence clinical trials for the Company's initial
products, the need to obtain licenses to other proprietary rights, any required
adjustments to the Company's operating plan to respond to competitive pressures
or technological advances, developments with respect to the Company's existing
or future collaborative arrangements, and the availability of various methods of
financing. The Company expects to seek to raise additional capital in 1998
through equity or debt financing, research and development collaborations with
other pharmaceutical companies or through other sources.* Any additional equity
financing may be dilutive to shareholders, and debt financing, if available, may
involve restrictions on stock dividends and other restrictions on the Company.
Adequate funds for the Company's operations, whether from equity or debt,
collaborative or other arrangements with corporate partners or from other
sources, may not be available when needed or on terms attractive to the Company.
Insufficient funds may require the Company to delay, scale back or eliminate
some or all of its research and product development programs or to license third
parties to commercialize products or technologies that the Company would
otherwise seek to develop itself. The Company's liquidity will be reduced as
amounts are expended for continuing research and development.







                                       20
   21


RESULTS OF OPERATIONS

           The Company's net losses decreased from $7.1 million in 1995, to $5.8
million in 1996 and grew to $8.4 million in 1997. The Company expects to incur
substantial and increasing operating losses for at least the next several years.
The Company's total expenses increased from $10.6 million in 1995 and $12.0
million in 1996 and to $14.7 million in 1997. In 1997, increased expenses were
offset by contract revenues totaling approximately $5.8 million.

           The Company began earning contract revenues in 1993 under its
collaborative agreement with Novo Nordisk A/S. Contract revenues from Novo
Nordisk A/S represent reimbursement of certain research and development costs
and totaled $2.6 million in 1997 compared with $3.1 million for fiscal 1996 and
$3.0 million in 1995. In February 1998, the Company and Novo Nordisk announced
that their collaboration would be terminated, with all rights under the
collaborative agreement returning to the Company. Novo Nordisk has agreed to
reimburse the Company for the cost of the on-going MS Phase I clinical trial
which is expected to be completed during 1998.*

           The Company began earning contract revenues in September 1996 under
its collaborative agreement with N.V. Organon. Contract revenues represent
reimbursement of certain research and development costs and totaled $3.1 million
in 1997 compared with $412,000 in 1996. In September 1996, the Company received
a license fee of approximately $2.0 million related to this agreement.

           Research and development expenses increased from $8.3 million in 1995
to $9.3 million in 1996 and $11.6 million in 1997. The 12% increase from 1995 to
1996 was primarily due to clinical trial costs for the completion of Phase I and
initiation of Phase IIa trials for the Company's AnervaX product, costs
associated with the preparation for and initiation of a Phase I trial for its
AnergiX product for MS and initial activities related to the Company's research
project involving its AnergiX product for RA. The 25% increase from 1996 to 1997
was primarily due to the ongoing Phase I trial for its AnergiX product in MS,
completion of the Phase IIa trial of its AnervaX product in RA, and its research
project in AnergiX for RA. The Company expects research and development spending
to continue to increase during the next several years.

           General and administrative expenses were approximately $2.0 million,
$2.5 million and $3.0 million in 1995, 1996 and 1997, respectively. The Company
expects general and administrative expenses to increase over the next several
years to support its expanded research and development efforts and to pursue
strategic relationships and continued funding for the Company's operations.

           The Company's interest income increased to $653,000 in 1996 from
$533,000 in 1995 due to an increase in cash, cash equivalents and short-term
investment balances resulting from proceeds received from the follow-on
financing completed in August 1996, a license fee received in September 1996,
and earlier payments of corporate partner contract revenues. The Company's
interest income decreased to $565,000 in 1997 from $653,000 in 1996 due to
utilization of cash, cash equivalents and short-term investment balances to fund
continuing operations. Interest expense decreased to $170,000 in 1996 from 1995
due to decreasing debt balances in 1996. Interest expense increased to $202,000
in 1997 due to increasing debt balances in 1997.

           At December 31, 1997, the Company had federal and state net operating
loss carryforwards of approximately $46.8 million and $9.5 million,
respectively, which expire at various dates from 1998 through 2012, if not
utilized. The Company's stock offering in April 1995 resulted in a change in
ownership and it is expected that the entire net operating loss and credit
carryforwards as of April 1995 may be subject to an annual limitation based on
the Company's pre-change value. The annual limitation will result in the
expiration of the net operating losses and credits before utilization. See Note
8 of the December 31, 1997 Financial Statements for a discussion of these
limitations.

* This statement is a forward-looking statement reflecting current expectations.
There can be no assurance that the Company's actual future performance will meet
the current expectations. Investors are strongly encouraged to review the
section entitled "Risk Factors that May Affect Future Operating Performance."

IMPACT OF YEAR 2000

           The Company is in the process of performing its assessment of the
impact of year 2000 on its operations. Management is in the process of
formalizing its assessment procedures and developing a plan to address
identified issues. The Company has evaluated its financial and accounting
systems and concluded that they are not materially affected by the year 2000. It
is unknown the extent, if any, of the impact of the year 2000 on other systems
and equipment. There can be no assurance that all third parties will address the
year 2000 issue in a timely fashion if at all. Any year 2000 compliance






                                       21
   22

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.

RISK FACTORS THAT MAY AFFECT FUTURE OPERATING PERFORMANCE

EARLY STAGE OF PRODUCT DEVELOPMENT; LACK OF COMMERCIAL PRODUCTS; NO ASSURANCE OF
SUCCESSFUL PRODUCT DEVELOPMENT

           The Company was founded in 1988 to discover and develop
biopharmaceutical compounds for the treatment of autoimmune diseases. To achieve
profitable operations, the Company, alone or with others, must successfully
develop, obtain regulatory approval for, manufacture and market products. The
Company does not have any products available for sale nor does it expect to have
any products commercially available for at least several years, if at all. The
Company's potential products are at the early stages of research and
development, with only limited human testing of certain of the Company's
products undertaken to date. The products currently under development by the
Company will require significant additional research, laboratory testing and
clinical trials and investment of capital prior to their commercialization.
There can be no assurance that any potential products will be successfully
developed, prove to be safe and efficacious in clinical trials, meet applicable
regulatory standards, be capable of being produced in commercial quantities at
acceptable costs or be successfully marketed. See "Business -- Products Under
Development."

LIMITED OPERATING HISTORY; HISTORY OF LOSSES

           The Company has experienced significant net losses every year since
its inception in 1988. Net losses for the fiscal years ended December 31, 1996
and 1997 were approximately $5.8 million and $8.4 million, respectively, and the
Company had an accumulated deficit of approximately $50.5 million as of December
31, 1997. The Company expects to incur substantial operating losses for at least
the next several years. The amount of net losses and the time required by the
Company to reach profitability are highly uncertain. There can be no assurance
that the Company will ever be able to generate product revenue or achieve
profitability on a substantial basis or at all. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."

FUTURE REQUIREMENT FOR SIGNIFICANT ADDITIONAL CAPITAL

           The Company anticipates that its current cash, cash equivalents,
short-term investments and expected revenues under its collaborative agreements
will be sufficient to fund its operations through 1998.* Thereafter, the Company
will require substantial additional funds to continue its operations. The
Company anticipates that its current resources will be primarily used to fund
clinical testing of AnervaX for RA, AnergiX for MS, and AnergiX for RA and
continued research and development and preparation for clinical testing of other
technologies in other autoimmune diseases.* The balance of such resources will
be used to fund continued limited research on other autoimmune diseases and
general and administrative activities, including those associated with seeking
collaborative arrangements to enable the Company to increase its research and
development activities in other autoimmune diseases.* The Company's working
capital requirements over the next two years may vary depending upon numerous
factors, including the progress of the Company's research and development
programs, manufacturing activities, the progress of the Company's clinical
programs, the results of laboratory testing, the time and cost required to seek
regulatory approvals to commence clinical trials for the Company's initial
products, the need to obtain licenses to other proprietary rights, any required
adjustments to the Company's operating plan to respond to competitive pressures
or technological advances, developments with respect to existing or future
collaborative arrangements and the availability of various methods of financing.
The Company expects to seek to raise additional capital through equity or debt
financing, research and development collaborations with corporate partners or
through other sources. Any additional equity financing may be dilutive to
shareholders, and debt financing, if available, may involve restrictions on cash
dividends and other restrictions on the Company. Adequate funds for the
Company's operations, whether from equity or debt financings, collaborative or
other arrangements with corporate partners or from other sources, may not be
available when needed or on terms attractive to the Company. Insufficient funds
may require the Company to delay, scale back or eliminate some or all of its
research and product development programs or to license third parties to
commercialize products or technologies that the Company would otherwise seek to
develop itself. The Company's liquidity will be reduced as amounts are expended
for continuing research and development. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources."






                                       22
   23

UNCERTAINTIES RELATED TO PRECLINICAL AND CLINICAL TRIALS

           Before obtaining regulatory approvals for the commercial sale of any
of its products under development, the Company must demonstrate through
preclinical studies and clinical trials that the product is safe and efficacious
for use in each target indication. The results from preclinical studies and
early clinical trials may not be predictive of results that will be obtained in
large-scale testing, and there can be no assurance that the Company's clinical
trials will demonstrate the safety and efficacy of any products or will result
in any marketable products. A number of companies in the biotechnology industry
have suffered significant setbacks in advanced clinical trials, even after
promising results in earlier trials. The failure to adequately demonstrate the
safety and efficacy of a therapeutic product under development could delay or
prevent regulatory approval of the product and could have a material adverse
effect on the Company.

           The rate of completion of the Company's clinical trials is dependent
upon, among other factors, the FDA's willingness to allow Anergen to proceed;
the results of Anergen's continued research and development, including test
results and success in producing the epitopes and HLA molecules for each AnergiX
compound; the number of skilled scientists, clinicians, and consultants the
Company is able to employ in its efforts and the general interest in the medical
community in a therapeutic using the Company's approach for treatment of the
diseases targeted by the Company. Currently, the Company does not anticipate
establishing its own clinical trials facility. The rate of completion of
clinical trials is also dependent on patient enrollment, which is a function of
many factors, including the size of the patient population, the proximity of
patients to clinical sites and the existence of competitive trials. If the
Company is unable to successfully complete its clinical trials, its business,
financial condition and results of operations could be materially and adversely
affected. See "Business -- Government Regulation."

UNCERTAINTY OF MARKET ACCEPTANCE

           Even if the requisite regulatory approvals are obtained for the
Company's potential products or for products developed in collaboration with the
Company, uncertainty exists as to whether such products will be accepted by the
market. A number of factors also may limit the market acceptance of a product
which may be developed by, or discovered through collaboration with, the
Company, including the rate of adoption by health care practitioners, the
indications for which the product is approved, the rate of the product's
acceptance by the target population, the timing of market entry relative to
competitive products, the availability of alternative therapies, the price of
the Company's product relative to alternative therapies, the availability of
third-party reimbursement and the extent of marketing efforts by the Company and
third-party distributors or agents retained by the Company. Side effects or
unfavorable publicity concerning a Company product or any similar product could
have an adverse effect on the Company's ability to obtain physician, patient or
third-party payor acceptance and on efforts to sell that product. There can be
no assurance of the Company's ability, or the length of time required, to
achieve commercialization of the Company's products or that physicians, patients
or third party payors will accept any of the Company's products as readily as
alternative therapies, or at all. See "Business -- Products Under Development"
and " -- Pharmaceutical Pricing and Reimbursement."

GOVERNMENT REGULATION; NO ASSURANCE OF OBTAINING PRODUCT APPROVALS

           The Company's research and development activities are subject to
regulation by numerous governmental authorities in the United States and other
countries. Further, the future production and marketing of any products
developed by the Company would also be regulated, particularly as to safety and
efficacy. In the United States, vaccines, drugs and biologics are subject to
rigorous FDA review. The Federal Food, Drug, and Cosmetic Act, the Public Health
Service Act and other federal statutes and regulations govern or influence the
testing, manufacture, safety, labeling, storage, record keeping, approval,
advertising and promotion of such products. Noncompliance with applicable
requirements can result in fines, recall or seizure of products, clinical study
holds, total or partial suspension of production, refusal of the government to
approve NDAs, PLAs, ELAs or allow the Company to enter into supply contracts and
criminal prosecution. The FDA also has the authority to revoke PLAs and ELAs
previously granted.

           In order to obtain FDA approval of a new biological product, the
Company must submit proof of safety, purity, potency and efficacy. In most cases
such proof entails extensive pre-clinical, laboratory, and clinical tests. The
testing, preparation of necessary marketing applications and processing of those
applications by the FDA is expensive and time consuming, can vary based on the
type of product, and may take several years to complete. There is no assurance
that the FDA will act favorably or quickly in making such reviews, and
significant difficulties or costs may be encountered by the Company in its
efforts to obtain FDA approvals that could delay or preclude the Company from
marketing any products it may develop or furnish an advantage to competitors.
The FDA may also require post-marketing testing and surveillance to monitor the
effects of approved products or place conditions on any approvals that could
restrict the commercial applications






                                       23
   24

of such products. Product approvals may be withdrawn if compliance with
regulatory standards is not maintained or if problems occur following initial
marketing. In addition, delays imposed by the governmental approval process may
materially reduce the period during which the Company may have the exclusive
right to exploit patented products or technologies.

           The FDA approval process for a new biological drug involves
completion of pre-clinical studies which include laboratory tests and animal
studies to assess safety and effectiveness of the drug. Among other things, the
results of these studies as well as how the product will be manufactured, are
submitted to the FDA in an IND and, unless the FDA objects, the IND becomes
effective 30 days following receipt by the FDA. FDA cleared human clinical
trials may then be conducted. The results of the clinical trials are submitted
to the FDA as part of a PLA. In addition to obtaining FDA approval for each
AnergiX indication, an ELA must be filed and the FDA must approve the
manufacturing facilities for the product. Product sales may commence only if the
PLA and ELA are approved. Regulatory requirements for obtaining such FDA
approvals are rigorous and there can be no assurance that such approvals will be
obtained on a timely basis or at all.

           Sales of pharmaceutical products outside the United States are
subject to foreign regulatory requirements that vary widely from country to
country. The time required to obtain approvals required by foreign countries may
be longer or shorter than that required for FDA approval, and requirements for
licensing may differ from FDA requirements.

           If approval is obtained, the Company will be subject to continuing
FDA obligations. When manufacturing biologics, the Company will be required to
adhere to regulations setting forth current Good Manufacturing Practices
("GMP"), which require that the Company manufacture its products and maintain
its records in a prescribed manner with respect to manufacturing, testing and
quality control activities. Further, the Company must pass a preapproval
inspection of its manufacturing facilities by the FDA before obtaining approval.

           Satisfaction of these FDA requirements, or similar requirements by
foreign regulatory agencies, typically takes several years and the time needed
to satisfy them may vary substantially, based upon 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 or indications being 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. Delay in obtaining or failure to obtain regulatory approvals would
have a material adverse effect on the Company's business, financial condition
and results of operations. See "Business - Government Regulation."

DEPENDENCE UPON COLLABORATIVE PARTNERS

           The Company's strategy for the development, clinical trials,
manufacturing and commercialization of its products includes maintaining and
entering into various collaborations with corporate partners, licensors,
licensees and others. To date, the Company has entered into collaborative
arrangements with Novo Nordisk with respect to the Company's AnergiX compounds
for the treatment of MS, MG and IDDM, and with Organon with respect to an
AnergiX compound for the treatment of RA. In February, the Company announced
that it and Novo Nordisk had agreed to terminate the collaboration in AnergiX
for MS, MG and IDDM effective February 9, 1998. There can be no assurance that
the interests and motivations of the Company's collaborators are, or will
remain, aligned with those of the Company or that such collaborators will
successfully perform their development, regulatory compliance, manufacturing or
marketing functions or that such collaborations in whole or in part will
continue. There can also be no assurance that the Company will be able to
negotiate additional collaborative arrangements in the future on acceptable
terms, if at all, or that any such collaborative arrangements will be
successful. To the extent that the Company is not able to maintain or establish
such arrangements, the Company would be required to undertake such activities at
its own expense, which would significantly increase the Company's capital
requirements and limit the programs the Company is able to pursue. In addition,
the Company may encounter significant delays in introducing its products into
certain markets or find that the development, manufacture or sale of its
products in such markets is adversely affected by the absence of such
collaborative agreements.

           The Company cannot control the amount and timing of resources which
its collaborative partners devote to the Company's program or potential
products, which can vary because of factors unrelated to the potential product.
Collaborator participation will depend not only on the achievement of research
objectives by the Company and its collaborators, which






                                       24
   25

cannot be assured, but also on each collaborator's own financial, competitive,
marketing and strategic considerations, which are outside the Company's control.
Such strategic considerations may include the relative advantages of alternative
products being marketed or developed by others, including relevant patent and
proprietary positions. The Company's collaborative partners may develop, either
alone or with others, products that compete with the development and marketing
of the Company's products. Competing products, either developed by the
collaborative partners or to which the collaborative partners have rights, may
result in their withdrawal of support with respect to all or a portion of the
Company's technology, which would have a material adverse effect on the
Company's business, financial condition and results of operations. If Organon or
any future collaborative partner breaches or terminates their agreements with
the Company or otherwise fails to conduct their collaborative activities in a
timely manner, the preclinical or clinical development or commercialization of
product candidates or research programs will be delayed, and the Company will be
required to devote additional resources to product development and
commercialization or terminate certain development programs. There also can be
no assurance that disputes will not arise in the future with respect to the
ownership of rights to any technology developed with third parties. These and
other possible disagreements between collaborators and the Company could lead to
delays in the collaborative research, development and commercialization of
certain product candidates or could require or result in litigation or
arbitration, which would be time consuming and expensive, and would 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 -- Liquidity and Capital Resources" and
"Business -- Collaborative Arrangements" and " -- Manufacturing."

UNCERTAINTY RELATING TO PATENTS AND PROPRIETARY RIGHTS

           The Company's success will depend in significant part on its ability
to maintain patent protection for its therapeutic approach and for any developed
products, to preserve its trade secrets and to operate without infringing the
proprietary rights of third parties. Although the Company has obtained patents
covering certain aspects of its technology, no assurance can be given that
additional patents will be issued or, if issued, that the scope of any patent
protection will be significant, or that the patents will be held valid if
subsequently challenged. Moreover, the Company cannot ascertain with certainty
that no patent conflict will exist with other products or processes which could
compete with the Company's approaches.

           Because of the length of time and expense associated with bringing
new products through development and to the marketplace, and the length of time
required for the governmental approval process, the pharmaceutical industry has
traditionally placed considerable importance on obtaining and maintaining patent
and trade secret protection for significant new technologies, products and
processes. The Company and other biotechnology and pharmaceutical firms have
applied, and are applying, for patents for their products and certain aspects of
their technologies. The enforceability of patents issued to biotechnology and
pharmaceutical firms is highly uncertain. Federal court decisions indicating
legal considerations surrounding the validity of patents in the field are in
transition, and there can be no assurance that the historical legal standards
surrounding questions of validity will continue to be applied or that current
defenses as to issued patents in the field will offer protection in the future.
In addition, there can be no assurance as to the degree and range of protection
any patents will afford, whether patents will issue or the extent to which the
Company will be successful in not infringing patents granted to others.

           While the Company pursues patent protection for products and
processes where appropriate, it also relies on trade secrets, know-how and
continuing technological advancement to develop and maintain its competitive
position. The Company's policy is to have each employee enter into an agreement
that contains provisions prohibiting the disclosure of confidential information
to anyone outside the Company. Research and development contracts and
relationships between the Company and its scientific consultants provide access
to aspects of the Company's know-how that is protected generally under
confidentiality agreements with the parties involved. There can be no assurance,
however, that these confidentiality agreements will be honored or that the
Company can effectively protect its rights to its unpatented trade secrets.
Moreover, 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.

           The Company may be required to obtain licenses to patents or other
proprietary rights from third parties. There can be no assurance that any
licenses required under any patents or proprietary rights will be made available
on terms acceptable to the Company, if at all. If the Company does not obtain
required licenses, it could encounter delays in product development while it
attempts to redesign products or methods or it could find that the development,
manufacture or sale of products requiring such licenses could be foreclosed.

           The Company is aware of a European patent and corresponding U.S. and
Australian patents which contain claims that relate to certain of the Company's
proposed products and their uses. In accordance with European Patent Office
("EPO") procedures, third parties can oppose an EPO patent grant by presenting
information which they believe justifies narrowing or






                                       25
   26

revoking the grant of the patent. The Company is opposing the aforementioned
grant in the EPO. There can, however, be no assurance that the granted EPO
claims will be revoked or significantly narrowed in scope as a result of the
opposition proceeding. If valid claims in these patents are found to be
infringed by the Company's products, the Company's ability to make, use, offer
to sell, or sell, such products could be materially and adversely affected.

           In addition, the Company could incur substantial costs in defending
any patent litigation brought against it or in asserting the Company's patent
rights, including those licensed to the Company by others, in a suit against
another party. The United States Patent and Trademark Office (the "USPTO") could
institute interference proceedings in connection with one or more of the
Company's patents or patent applications which proceedings could result in an
adverse decision as to priority of an invention. The USPTO also could institute
reexamination proceedings in connection with one or more of the Company's
patents or patent applications, which could result in an adverse decision as to
the patents' validity or scope. See "Business -- Patents and Proprietary
Rights."

NEED TO DEVELOP MANUFACTURING CAPABILITIES

           The Company has no volume manufacturing capacity or experience in
volume manufacturing of pharmaceutical or other biological products.
Establishing its own volume manufacturing capabilities would require significant
scale-up expenses and additions to facilities and personnel. In addition, the
Company must successfully develop the process required for volume manufacturing.
The pharmaceutical products under development by the Company have never been
manufactured on a commercial scale and there can be no assurance that such
products can be manufactured at a cost or in quantities to make them
commercially viable. The Company will be required to establish arrangements with
contract manufacturers to supply a portion of its compounds for subsequent
clinical trials as well as the manufacture, packaging, labeling and distribution
of finished products. If the Company is unable to contract for sufficient supply
of a portion of its compounds on acceptable terms, and it is unable to develop
the capability to produce the epitopes internally, the Company's human clinical
testing schedule would be delayed, resulting in the delay of submission of
products for regulatory approval and initiation of new development programs,
which would have a material adverse effect on the Company. If the Company should
encounter delays or difficulties in establishing relationships with
manufacturers to produce, package and distribute its finished products, market
introduction and subsequent sales of such products would be adversely affected.
Moreover, contract manufacturers that the Company may use must adhere to current
GMP regulations enforced by the FDA through its facilities inspection program.
If these facilities cannot pass a pre-approval plant inspection, the FDA
pre-market approval of the products will be adversely affected.

LACK OF MARKETING EXPERIENCE; DEPENDENCE ON THIRD PARTIES

           The Company currently has no sales, marketing or distribution
capability. The Company intends to rely on relationships with one or more
pharmaceutical companies with established distribution systems and direct sales
forces to market its products. In the event that the Company is unable to reach
agreement with one or more pharmaceutical companies to market its products, it
may be required to market its products directly and to develop a marketing and
sales force with technical expertise and supporting distribution capability.
There can be no assurance that the Company will be able to establish in-house
sales and distribution capabilities or relationships with third parties, or that
it will be successful in gaining market acceptance for its products. To the
extent that the Company decides to utilize existing or future co-promotion or
other licensing arrangements, the Company must develop its own sales, marketing
or distribution capability, and there can be no assurance that such efforts will
be successful. See "Business -- Collaborative Arrangements" and " -- Marketing
and Sales."

COMPETITION AND TECHNOLOGICAL CHANGE

           The biotechnology and pharmaceutical industries are characterized by
rapidly evolving technology and intense competition. The Company's competitors
include major pharmaceutical, chemical and specialized biotechnology companies,
most of which have financial, technical, research and development,
manufacturing, clinical and marketing resources significantly greater than those
of the Company. The Company believes that these other entities recognize the
need for effective therapies for the autoimmune diseases targeted by the Company
and are highly motivated to develop such therapies. In addition, many
specialized biotechnology companies have formed collaborations with large,
established companies to support research, development and commercialization of
products that may be competitive with those of the Company. Academic
institutions, governmental agencies and other public and private research
organizations are also conducting research activities and seeking patent
protection and may commercialize products on their own or through joint
ventures. The Company is aware of certain products in development by competitors
that are intended to be used for the prevention or treatment of certain diseases
the Company has targeted for product development.





                                       26
   27

           The existence of these products, or other products or treatments of
which the Company is not aware, or products or treatments that may be developed
in the future which may be more effective, may adversely affect the
commercialization or marketability of products which may be developed by the
Company or potentially render the Company's technology obsolete or
non-competitive.

           The Company's competitive position will depend on its ability to
attract and retain qualified scientific and other personnel, develop effective
proprietary products, implement production and marketing plans, obtain patent
protection and secure adequate capital resources. In addition, the first
pharmaceutical product to reach the market in a therapeutic or preventive area
is often at a significant competitive advantage relative to later entrants to
the market. The Company expects its products, if approved for sale, to compete
primarily on the basis of product efficacy, safety, patent position,
reliability, price and patient convenience. See "Business Competition."


UNCERTAINTY RELATED TO PHARMACEUTICAL PRICING AND REIMBURSEMENT

           Political, economic and regulatory influences are subjecting the
health care industry in the United States to fundamental change. Initiatives to
reduce the federal deficit and to reform health care delivery are increasing
these cost containment efforts. The Company anticipates that Congress, state
legislatures and the private sector will continue to review and assess
alternative benefits, controls on health care spending through limitations on
the growth of private health insurance premiums and Medicare and Medicaid
spending, the creation of large insurance purchasing groups, price controls on
pharmaceuticals and other fundamental changes to the health care delivery
system. Any such proposed or actual changes could cause existing and potential
partners of the Company to limit or eliminate spending on collaborative
development projects. Legislative debate is expected to continue in the future,
market forces are expected to demand reduced costs and Anergen cannot predict
what impact the adoption of any federal or state health care reform measures or
future private sector reforms may have on its business.

           In both domestic and foreign markets, sales of the Company's proposed
products will depend in part upon the availability of reimbursement from
third-party payors, such as government health administration authorities,
private health insurers and other organizations. In addition, other third-party
payors are increasingly challenging the price and cost effectiveness of medical
products and services. Significant uncertainty exists as to the reimbursement
status of newly approved health care products. There can be no assurance that
the Company's potential products or products discovered in collaboration with
the Company will be considered cost-effective or that adequate third-party
reimbursement will be available to enable Anergen to maintain price levels
sufficient to realize an appropriate return on its significant investment in
product research and development. Legislation and regulations affecting the
pricing of pharmaceuticals may change before the Company's proposed products are
approved for marketing. Adoption of such legislation could further limit
reimbursement for medical products. If adequate coverage and reimbursement
levels are not provided by the government and third-party payors for the
Company's products, the market acceptance of these products would be adversely
affected, which would have a material adverse effect on the Company's business,
financial condition and results of operations. See "Business -- Pharmaceutical
Pricing and Reimbursement."

DEPENDENCE ON AND NEED FOR ADDITIONAL KEY PERSONNEL; RELIANCE ON ACADEMIC
COLLABORATORS

           The success of the Company and of its business strategy is dependent
in large part on the ability of the Company to attract and retain key management
and operating personnel. Such persons are in high demand and are often subject
to competing offers. The Company will need to develop expertise and add skilled
employees or retain consultants in such areas as research and development,
clinical testing, government approvals, marketing and manufacturing in the
future. There can be no assurance that the Company will be able to attract and
retain the qualified personnel or develop the expertise needed for its business.
The loss of the services of one or more of the Company's officers or other
members of the research or management group or the inability to hire additional
personnel and develop expertise as needed would have a material adverse effect
on the Company. The Company announced on February 9, 1998, that it will reduce
its workforce by approximately 15 persons.

           A significant portion of the Company's research and development and
clinical trials is conducted under sponsored research programs with several
universities. The Company depends on the availability of the principal
investigator for each such program, and the Company cannot assure that these
individuals or their research staffs will be available to conduct research and
development or clinical trials. The Company's academic collaborators are not
employees of the Company. As a result, the Company has limited control over
their activities and can expect that only limited amounts of their time will be
dedicated to Company activities. In addition, the Company's academic
collaborators are employed by major institutions which have collaborative
relationships with other parties, some of which may be competitors of the
Company. Accordingly,





                                       27
   28

there can be no assurance that research and development, preclinical and
clinical testing performed by these collaborators will be completed in a timely
manner, if at all, and any inability to do so could have a material adverse
effect on the Company.

POTENTIAL PRODUCT LIABILITY

           The testing, marketing and sale of human health care products entail
an inherent risk of exposure to product liability claims in the event that the
use of the Company's technology or prospective products is alleged to have
resulted in adverse effects. While the Company has taken, and will continue to
take, what it believes are appropriate precautions to minimize exposure to
product liability, there can be no assurance that it will avoid significant
liability. The Company possesses limited general liability and product liability
insurance related to its clinical trials of AnervaX for RA and AnergiX for MS
intends to seek such insurance related to its clinical trials of AnergiX for RA
and certain other types of insurance customarily obtained by business
organizations. There can be no assurance that the existing insurance coverage is
adequate or that it will avoid liability. The Company intends to seek insurance
against product liability risks associated with the testing, manufacturing or
marketing of its products. However, there can be no assurance that it will be
able to obtain such insurance in the future, or that if obtained, such insurance
will be sufficient in amount. Consequently, a product liability claim or other
claims with respect to uninsured liabilities or in excess of insured liabilities
could have a material adverse effect on the business or financial condition of
the Company.

HAZARDOUS MATERIALS; ENVIRONMENTAL MATTERS

           The Company is subject to regulation by the Occupational Safety and
Health Administration ("OSHA") and the Environmental Protection Agency ("EPA")
and to regulation under the Toxic Substances Control Act, the Resource
Conservation and Recovery Act and other regulatory statutes, and may in the
future be subject to other federal, state or local regulations. Although the
Company believes that it has complied with these laws, regulations and policies
in all material respects and has not been required to take any significant
action to correct any material 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 involves the controlled use of hazardous materials,
including but not limited to certain hazardous chemicals and radioactive
materials. 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 eliminated. In the event of such an accident, the
Company could be held liable for any damages that result and any such liability
could exceed the resources of the Company. In addition, regulations may be
promulgated governing biotechnology that may affect the Company's research and
development programs. The Company is unable to predict whether any agency will
adopt any regulation which would have a material adverse effect on the Company's
business, financial condition and results of operations.

VOLATILITY OF STOCK PRICE

           The market price of the Company's Common Stock, similar to the
securities of other biotechnology companies, has been and is likely to continue
to be highly volatile. Announcements regarding the results of regulatory
approval filings, clinical trials or other testing, technological innovations or
new commercial products by the Company or its competitors, patents and
intellectual property rights by the Company or its competitors, developments as
to current or future collaborations by the Company or its competitors,
government regulations, the status of health care reform initiatives,
fluctuations in operating results, changes in recommendations by financial
analysts, and general market conditions for biotechnology stocks could have a
significant impact on the future price of the Common Stock. Trading volume of
the Company's Common Stock has been relatively limited and sales of substantial
amounts of Common Stock could have an adverse effect on the price of the Common
Stock.

CONTROL BY EXISTING STOCKHOLDERS

           The Company's officers, directors and principal shareholders, namely
Warburg, Pincus Ventures, L.P. ("Warburg"), International Biotechnology Trust
PLC ("IBT"), and Novo Nordisk, collectively beneficially own approximately 48%
of the Company's outstanding Common Stock. Under a March 1995 common stock
purchase agreement with Warburg and IBT ("Warburg/IBT Purchase Agreement"), the
Company is currently obligated to include in the slate of nominees recommended
by the Company's Board of Directors and management, at each election of
directors, two candidates selected by Warburg, one candidate selected by IBT and
one candidate mutually agreed to by IBT and Warburg. Additionally, while not
obligated to do so, since 1993, the Company has included a representative of
Novo Nordisk in its slate of nominees for the Board of Directors. The ownership
of the Company's Common Stock, and the ability to designate candidates for the
Company's recommended slate of nominees for the Board of Directors, of Warburg,
IBT and Novo Nordisk will enable such shareholders





                                       28
   29

to have significant influence over major corporate transactions as well as the
election of directors of the Company and control over board decisions and could
have the effect of delaying, deterring or preventing a change in control of the
Company.

ANTI-TAKEOVER PROVISIONS; POSSIBLE ISSUANCE OF PREFERRED STOCK OR ACCELERATION
OF OPTION VESTING

           The Board of Directors has authority, without further action by
shareholders, to issue up to 10,000,000 shares of Preferred Stock with rights,
preferences and privileges designated by the Board of Directors. This Preferred
Stock could be issued quickly with terms calculated to delay or prevent a change
in control of the Company or to make removal of management more difficult. In
certain circumstances, such issuance could have the effect of decreasing the
market price of the Common Stock or of delaying, deterring or preventing a
change in control of the Company. The Company has no present plan to issue any
shares of Preferred Stock. Further, pursuant to the Company's option plans, in
the event of certain mergers of the Company with other entities, transfers of
voting control of the Company's capital stock or sale of all or substantially
all of the Company's assets, the Company's Board of Directors has the right
under certain circumstances to cause all outstanding options to become fully
vested prior to the event causing such acceleration and all unexercised options
will terminate upon completion of such event. See "Management -- Employment
Agreements and Change of Control Arrangements."

ITEM 7A.   QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

           Not applicable

ITEM 8.    FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA



                          INDEX TO FINANCIAL STATEMENTS




Item                                                                                                            Page
                                                                                                             
Report of Ernst & Young LLP, Independent Auditors                                                                29

Balance Sheets at December 31, 1997 and December 31, 1996                                                        31

Statements of Operations for each of the three years in the period ended December
      31, 1997                                                                                                   32

Statement of Shareholders' Equity for each of the three years in the period ended
      December 31, 1997                                                                                          33

Statements of Cash Flows for each of the three years in the period ended December
      31, 1997                                                                                                   34

Notes to Financial Statements                                                                                   35-41







                                       29


   30
                REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS


The Board of Directors and Shareholders
Anergen, Inc.

           We have audited the accompanying balance sheets of Anergen, Inc. as
of December 31, 1997 and 1996, and the related statements of operations,
shareholders' 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 Anergen, 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.



                                                 ERNST & YOUNG LLP



Palo Alto, California
February 6, 1998



                                       30
   31

                                  ANERGEN, INC.
                                 BALANCE SHEETS
                       (IN THOUSANDS EXCEPT SHARE AMOUNTS)





                                     ASSETS
                                                                                              DECEMBER 31,
                                                                                        -----------------------
                                                                                          1997           1996
                                                                                        --------       --------
Current assets:
                                                                                                      
      Cash and cash equivalents ..................................................      $  1,412       $  3,963
      Short-term investments .....................................................         6,991         12,437
      Contract receivables-related party 334 .....................................           320
      Prepaid expenses ...........................................................            78            208
                                                                                        --------       --------
                     Total current assets ........................................         8,815         16,928
Property and equipment, net ......................................................         1,703          1,459
Other assets .....................................................................            36             36
                                                                                        --------       --------

                                                                                        $ 10,554       $ 18,423
                                                                                        ========       ========
                          LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
      Accounts payable and accrued liabilities (see Note 7) ......................      $  1,281       $  1,326
      Current portion of capital lease obligations and debt ......................           616            728
                                                                                        --------       --------
                     Total current liabilities ...................................         1,897          2,054
Long-term portion of capital lease obligations and debt ..........................           870            366
Commitments
Shareholders' equity:
      Preferred stock, no par value; 10,000,000 shares authorized; none issued and
             outstanding .........................................................          --             --
      Common stock, no par value; 40,000,000 shares authorized;  18,846,264 and
             18,780,697 shares  issued and outstanding in  1997 and 1996,
             respectively ........................................................        57,670         57,484
      Additional paid-in-capital
               ...................................................................           659            659
      Unrealized gain (loss) on investments ......................................            (6)           (34)
      Accumulated deficit ........................................................        50,536)       (42,106)
                                                                                        --------       --------
                     Total shareholders' equity ..................................         7,787         16,003
                                                                                        --------       --------
                                                                                        $ 10,554       $ 18,423
                                                                                        ========       ========




                             See accompanying notes.



                                       31
   32

                                  ANERGEN, INC.
                            STATEMENTS OF OPERATIONS
                     (IN THOUSANDS EXCEPT PER SHARE AMOUNTS)




                                                                              YEAR ENDED
                                                                              DECEMBER 31,
                                                                   1997           1996           1995
                                                                 --------       --------       --------
                                                                                           
Revenues:
      Contract revenues, primarily from a related party ...      $  5,763       $  3,519       $  3,001
      Licensefee ..........................................          --            2,000           --
      Interest income .....................................           565            653            533
                                                                 --------       --------       --------
                                                                    6,328          6,172          3,534
                                                                 --------       --------       --------

Expenses:
      Research and development ............................        11,559          9,278          8,322
      General and administrative ..........................         2,997          2,521          1,976
      Interest expense ....................................           202            170            322
                                                                 --------       --------       --------
                                                                   14,758         11,969         10,620
                                                                 --------       --------       --------
Net loss ..................................................      $ (8,430)      $ (5,797)      $ (7,086)
                                                                 ========       ========       ========
Basic and diluted net loss per share ......................      $  (0.45)      $  (0.35)      $  (0.55)
                                                                 ========       ========       ========
Shares used in calculating basic and diluted per share data        18,815         16,482         12,859
                                                                 ========       ========       ========






                             See accompanying notes.








                                       32
   33

                                  ANERGEN, INC.
                        STATEMENT OF SHAREHOLDERS' EQUITY
                       (IN THOUSANDS EXCEPT SHARE AMOUNTS)




                                                                   Additional            Unrealized                 Total
                                              Preferred  Common    paid - in  Deferred  gain(loss) on Accumulated shareholders'
                                                 stock   stock      capital compensation investments   deficit     equity
                                                 -------------------------------------------------------------------------

                                                                                                  
Balance, December 31, 1994                        $--   $ 32,572   $    648   $    (36)   $    (91)   $(29,223)   $  3,870
Issuance of 7,317,073 shares of common stock in
      follow-on offering, net                      --     14,651       --         --          --          --        14,651
Issuance of common stock to employees under
      option and purchase plans                    --        136       --         --          --          --           136
Amortization of deferred compensation related
      to a grant of options                        --       --         --           36        --          --            36
Unrealized gain on investments
      available-for-sale                           --       --         --         --           107        --           107
Net loss                                           --       --         --         --          --        (7,086)     (7,086)
                                                 -------------------------------------------------------------------------
Balance, December 31, 1995                         --     47,359        648       --            16     (36,309)     11,714
Issuance of 3,668,000 shares of common stock in
      follow-on offering, net                      --      9,880       --         --          --          --         9,880
Issuance of common stock to employees under
      option and purchase plans                    --        245       --         --          --          --           245
Deferred compensation related to a grant of
      options                                      --       --           11       --          --          --            11
Unrealized loss on investments
      available-for-sale                           --       --         --         --           (50)       --           (50)
Net loss                                           --       --         --         --          --        (5,797)     (5,797)
                                                 -------------------------------------------------------------------------
Balance,  December 31, 1996                        --     57,484        659       --           (34)    (42,106)     16,003
Issuance of common stock to employees under
      option and purchase plans                    --        186       --         --          --          --           186
Unrealized gain on investments
      available-for-sale                           --       --         --         --            28        --            28
Net loss                                           --       --         --         --          --        (8,430)     (8,430)
                                                 -------------------------------------------------------------------------
Balance, December 31, 1997                        $--   $ 57,670   $    659        $--    $     (6)   $(50,536)   $  7,787
                                                 =========================================================================




                             See accompanying notes.




                                       33

   34

                                  ANERGEN, INC.
                            STATEMENTS OF CASH FLOWS
                                 (IN THOUSANDS)




                                                                                     YEARS ENDED
                                                                                     DECEMBER 31,
                                                                         ----------------------------------
                                                                           1997         1996         1995
                                                                         --------     --------     --------
                                                                                                
Cash used in operating activities:
      Net loss                                                           $ (8,430)    $ (5,797)    $ (7,086)
      Adjustments to reconcile net loss to net cash used in operating
        activities:
        Depreciation and amortization                                         874        1,096        1,031
        Deferred compensation                                                               11           36
      Changes in operating assets and liabilities:
        Contract receivables-related party                                    (14)         495         (223)
        Prepaid expenses                                                      130         (106)          76
        Other assets                                                         --            (16)
        Accounts payable and accrued liabilities                              (45)         286           63
                                                                         --------     --------     --------
           Net cash used in operating activities                           (7,485)      (4,015)      (6,119)
Cash provided by (used in) investing activities:
      Purchase of investments available-for-sale                          (27,979)     (21,783)     (30,172)
      Sales and maturities of investments available-for-sale               33,453       20,320       21,763
      Purchase of equipment                                                (1,118)        (545)        (790)
                                                                         --------     --------     --------
           Net cash provided by (used in) investing activities              4,356       (2,008)      (9,199)
Cash provided by financing activities:
      Repayments of capital lease obligations and debt                       (817)        (883)      (1,038)
      Proceeds from facility and equipment debt financing                   1,209          276          789
      Issuance of common stock, net                                           186       10,125       14,787
                                                                         --------     --------     --------
           Net cash provided by financing activities                          578        9,518       14,538
                                                                         --------     --------     --------
Net increase (decrease) in cash and cash equivalents                       (2,551)       3,495         (780)
Cash and cash equivalents at beginning of period                            3,963          468        1,248
                                                                         --------     --------     --------
Cash and cash equivalents at end of period                                  1,412        3,963          468
Short-term investments at end of period                                     6,991       12,437       11,024
                                                                         --------     --------     --------
Cash, cash equivalents and short-term investments
      at end of period                                                   $  8,403     $ 16,400     $ 11,492
                                                                         ========     ========     ========




                             See accompanying notes.







                                       34
   35

                                  ANERGEN, INC.
                         NOTES TO FINANCIAL STATEMENTS

1.         SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Nature of business

           Anergen, Inc. (the "Company") was incorporated on April 26, 1988 for
the purpose of developing therapies using biopharmaceutical compounds for the
treatment of autoimmune diseases. The Company devotes its efforts to research
and development on its own behalf and also on behalf of its corporate partners.

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.

Cash and cash equivalents

           Cash and cash equivalents are carried at cost which approximates fair
value (based on quoted market prices) and include primarily interest bearing
demand deposits and U.S. Government notes with original maturities of three
months or less upon purchase.

Securities available-for-sale

           The Company accounts for its short-term investments in accordance
with Statement of Financial Accounting Standards No. 115, "Accounting for
Certain Investments in Debt and Equity Securities"("Statement 115"). Under
Statement 115 management determines the appropriate classification of debt
securities at the time of purchase and reevaluates such designation as of each
balance sheet date. Debt securities are classified as held-to-maturity when the
Company has the positive intent and ability to hold the securities to maturity.
Marketable securities and debt securities not classified as held-to-maturity are
classified as available-for-sale. To date, all marketable securities have been
classified as available-for-sale. Available-for-sale securities are carried at
fair value, with unrealized gains and losses reported in a separate component of
shareholders' 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. 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 is stated at cost, less accumulated
depreciation and amortization. Depreciation of property and equipment is
provided over the estimated useful lives (3 to 4 years) of the respective assets
using the straight-line method. Leasehold improvements are amortized over the
shorter of the life of the lease or their estimated useful lives using the
straight-line method.

Contract and license fee revenues

           Contract and license fee revenues consist of revenues from the
Company's corporate partners, Novo Nordisk A/S and N.V. Organon. Contract
revenues derived from the corporate partner agreements are recorded as earned
based on the level of research effort performed by the Company. License fees
that are non-refundable and not tied to future performance are recorded when
received. The Company is also entitled to receive from its partners (i)
development milestone payments upon the occurrence of certain events and (ii)
royalties on product sales, if any.

Research and development

           Research and development costs are expensed as incurred and include
personnel costs, materials consumed in research and development activities,
depreciation on equipment used and the cost of facilities used for research and
development as well as outside services.




                                       35
   36

                                  ANERGEN, INC.
                          NOTES TO FINANCIAL STATEMENTS


Accounting and disclosure of stock-based compensation

           The Company has elected to follow Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees" ("APB 25") and related
Interpretations in accounting for its stock options because the alternative fair
market value accounting provided for under FASB Statement No. 123, "Accounting
for Stock-Based Compensation" ("Statement 123"), requires the 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.

Income Taxes

           The Company accounts for income taxes using the liability method as
prescribed by Financial Accounting Standards Board Statement No. 109,
"Accounting for Income Taxes." Research and Experimentation tax credits will be
accounted for under the "flow through" method when utilized.

Net loss per share

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

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.

2.         COLLABORATIONS

Collaboration with N.V. Organon

           In June 1996, the Company entered into a development and license
agreement ("Organon Agreement") with N.V. Organon for the purpose of developing
and commercializing a product for the treatment of rheumatoid arthritis ("RA")
using the Company's AnergiX technology combined with a peptide discovered by
Organon. Under the Organon Agreement, the Company is entitled to receive (i) a
license fee, (ii) research and development cost reimbursement, (iii) development
milestone payments and (iv) royalties on product sales, if any. The Company has
granted to N.V. Organon exclusive worldwide rights to products developed under
the Organon Agreement, including rights to commercialize these products although
the Company retains certain co-promotion rights in North America. The Company
received and recorded a $2 million license fee in September 1996 and recorded
contract revenues of $3,132,000 and $412,000 for the years ended December 31,
1997 and 1996, respectively under this agreement.

Collaboration with Novo Nordisk A/S - related party

           In August 1993, the Company entered into a development and license
agreement ("Novo Nordisk Agreement") with Novo Nordisk A/S for the purpose of
developing and commercializing the Company's AnergiX(TM) products for multiple
sclerosis ("MS"), myasthenia gravis ("MG"), and insulin-dependent diabetes
mellitus ("IDDM"). Under the Novo Nordisk Agreement, the Company is entitled to
receive (i) research and development cost reimbursement, (ii) development
milestone payments and (iii) royalties on product sales, if any. For the years
ended December 31, 1997, 1996 and 1995, the Company recorded contract revenues
of $2,631,000, $3,107,000 and $3,001,000 respectively, under this agreement. The
Company has granted to Novo Nordisk A/S exclusive worldwide rights to products
developed under the Novo Nordisk Agreement, including rights to commercialize
these products. In April 1996, the Novo Nordisk Agreement was expanded to
include increased milestones was extended through August of 1998. In August of
1993, Novo Nordisk A/S purchased 1,219,745 shares of common stock for $8
million, and an officer of Novo Nordisk A/S became a member of the Company's
Board of Directors. In February 1998, the Company and Novo Nordisk agreed to
terminate the agreement between the two parties effective February 9, 1998. All
rights will return to the Company and it will not have any future obligation to
Novo Nordisk. Novo Nordisk will reimburse the Company for the cost of the
ongoing Phase I clinical trial in Multiple Sclerosis.




                                       36
   37

                                  ANERGEN, INC.
                          NOTES TO FINANCIAL STATEMENTS

3.         PROPERTY AND EQUIPMENT

Property and equipment consists of the following at December 31, 1997 and 1996
(in thousands):




                                                              1997        1996
                                                            -------     -------
                                                                      
Research and office leasehold improvements                  $ 1,513     $ 1,028
Research and office equipment                                 3,741       3,202
Pilot manufacturing facility leasehold improvements             600         600
Pilot manufacturing facility equipment                        1,237       1,143
                                                            -------     -------
                                                              7,091       5,973

Less accumulated depreciation and amortization               (5,388)     (4,514)
                                                            -------     -------
                                                            $ 1,703     $ 1,459
                                                            =======     =======



4.         INVESTMENTS

As of December 31, 1997, the Company's investments available-for-sale were
recorded at a fair market value of $6,991,000, consisting of US Corporate
Securities, Mutual Funds and US Government obligations. As of December 31, 1997,
the estimated fair market value of US Corporate Securities, Mutual Funds and US
Government obligations was $2,466,000, 853,000 and 3,672,000, respectively. As
of December 31, 1996, the estimated fair market value of US Corporate Securities
and US Government obligations was $6,127,000 and $6,310,000, respectively. Gross
unrealized gains and losses as of December 31, 1997 and 1996 were immaterial.

The net adjustment to unrealized holding gains (losses) on available-for-sale
securities included as a separate component of shareholders' equity was $28,000,
($50,000) and $107,000 in 1997, 1996 and 1995, respectively. Realized gains and
losses for the years ended December 31, 1997, 1996 and 1995 were immaterial.

The amortized cost and estimated fair value of debt securities at December 31,
1997 and 1996, by contractual maturity, are shown below (in thousands). Expected
maturities will differ from contractual maturities because the issuers of the
securities may have the right to prepay obligations without prepayment
penalties.



                                                                         Estimate
                                                                          Fair
                                                           Cost           Value
                                                          ----------------------
                                                                       
DECEMBER 31, 1997
AVAILABLE-FOR-SALE
Due in one year or less                                   $ 6,997        $ 6,991
Due after one year through three years                       --             --
Due after three years                                        --             --
                                                          ----------------------
                                                          $ 6,997        $ 6,991
                                                          ======================
DECEMBER 31, 1996
AVAILABLE-FOR-SALE
Due in one year or less                                   $11,971        $11,936
Due after one year through three years                        500            501
Due after three years                                        --             --
                                                          ----------------------
                                                          $12,471        $12,437
                                                          ======================









                                       37
   38

5.         LEASE AND DEBT OBLIGATIONS

           The Company leases its facilities under noncancelable operating
leases. Facilities rent expense for 1997, 1996, and 1995, was $508,000,
$589,000, and $551,000, respectively.

           On April 18, 1994 the Company entered into a loan agreement with
Silicon Valley Bank of California ("SVB") which provided $1,200,000 in financing
available through December 31, 1994. As of December 31, 1994 $957,000 had been
drawn down upon under this agreement, all of which is secured by equipment
purchased by the Company. At December 31, 1997, the Company had no net
borrowings under the loan.

           On June 23, 1995 the Company entered into a second loan agreement
with SVB which provided $800,000 in financing available through December 31,
1995, all of which is secured by equipment purchased by the Company. At December
31, 1997, the Company had net borrowings of $181,000 under the original loan
agreement.

           On December 27, 1996 the Company entered into an amendment to the
above agreement with SVB to provide $1,500,000 in additional financing available
through December 31, 1997. As of December 31, 1997 the Company had borrowed
$1,305,000 of the additional funding available under this agreement, all of
which is secured by equipment purchased by the Company. The fair value of the
debt obligation approximates its carrying value at December 31, 1997.

           Future minimum payments, by year and in the aggregate, under the debt
and noncancelable operating leases consisted of the following at December 31,
1997 (in thousands):




                                                                        Operating
                                                             Debt         leases
                                                            ------        ------
                                                                       
1998                                                        $  616        $  530
1999                                                           435            41
2000                                                           435          --
                                                            ------        ------
Total minimum debt and lease payments                        1,486        $  571
Less current portion of debt obligations                       616
                                                            ------
Long-term debt obligations                                  $  870
                                                            ======


6.         SHAREHOLDERS' EQUITY

Change of Control Arrangements

           In the event of a change of control of the Company, the Board of
Directors has authority to issue shares of Preferred Stock with rights,
preferences and privileges designated by the Board of Directors. Further,
pursuant to the Company's option plans, under change of control of the Company,
the Board of Directors has the right, under certain circumstances, to cause all
outstanding options to become fully vested.

1988 Stock Option Plan, 1995 Director Option Plan and 1996 Stock Option Plan

           The Company has granted certain officers, employees and consultants
options to purchase shares of the Company's common stock at prices ranging from
$.16 to $11.00 per share under its 1988 Stock Option Plan, 1995 Director Option
Plan and 1996 Stock Option Plan ("option plans"). The Company has reserved
3,000,000 shares of common stock for issuance under the option plans, of which
972,000 are available for grant at December 31, 1997. These options vest over
periods of up to four years and, once vested, can be exercised at any time for a
period of 9 or 10 years from the date of grant.

           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 stock options because, as discussed below,
the alternative fair market value accounting provided for under FASB Statement
No. 123, "Accounting for Stock-Based Compensation" ("Statement 123"), requires
the use of option valuation models that were not developed for use in valuing




                                       38
   39

                                  ANERGEN, INC.
                          NOTES TO FINANCIAL STATEMENTS

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.

           The Company's option plans have authorized the grant of options to
Company personnel, consultants and directors for up to 3,000,000 shares of the
Company's common stock. Options granted have 9 or 10 year terms and vest and
typically become fully exercisable at the end of 4 years of continued
employment.

           Pro forma information regarding net loss and loss per share is
required by Statement 123, and has been determined as if the Company had
accounted for its employee stock options and its employee stock purchase plan
subsequent to December 31, 1994 under the fair value method of that Statement.
The fair value for these options was estimated at the date of grant using a
Black-Scholes option pricing model with the following weighted average
assumptions for 1995, 1996 and 1997, respectively; risk-free interest rates of
6.72%, 6.83% and 6.41%; no dividend yields; volatility factor of the expected
market price of the Company's common stock of .73 for 1995 and 1996, and 1.05
for 1997; and a weighted-average expected life of the options of 6.87 years for
1995 and 1996, and 5.25 years for 1997.

           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 affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.

           For purposes of pro forma disclosures, the estimated fair value of
the options and Employee Stock Purchase Plan (ESPP) are amortized to expense
over the options' vesting period. The Company's pro forma information follows
(in thousands except for loss per share information):



                                        1997             1996            1995
                                      ---------       ---------       --------- 
                                                                    
Pro forma net loss                    $  (9,843)      $  (6,659)      $  (7,302)
Pro forma loss per share              $   (0.52)      $   (0.40)      $   (0.57)



Because Statement 123 is applicable only to options granted subsequent to
December 31, 1994, its pro forma effect will not be fully reflected until 1998.

           A summary of the Company's stock option activity, and related
information for the years ended December 31 follows:




                                                1997                         1996                          1995
                                                ----                         ----                          ----
                                        Options      Weighted-Average  Options   Weighted-Average   Options      Weighted-Average
                                         (000)        Exercise Price   (000)      Exercise Price     (000)       Exercise Price
                                         -----        --------------   -----      --------------     -----       --------------
                                                                                                       
Outstanding-beginning of year            1,327          $   4.69         879          $   4.94         805          $   4.83
Granted                                    787          $   3.02         535          $   3.72         283          $   2.98
Exercised                                   (4)         $   3.07         (76)         $   0.97        (168)         $   0.24
Forfeited                                 (428)         $   5.16         (11)         $   3.86         (41)         $   7.61
                                        ------                        ------                        ------     
Outstanding-end of year                  1,682          $   3.79       1,327          $   4.69         879          $   4.94

Exercisable at end of year                 823          $   4.54         609          $   5.92         430          $   5.72

Weighted-average fair value of
options granted during the year          $2.01                        $ 2.74                         $2.19


           Exercise prices for options outstanding as of December 31, 1997
ranged from $2.00 to $11.00. The weighted-average remaining contractual life of
those options is 6.13 years.


                                       39

   40

                                  ANERGEN, INC.
                          NOTES TO FINANCIAL STATEMENTS

Employee Stock Purchase Plan

           The Company has an Employee Stock Purchase Plan under which a total
of 250,000 shares of common stock have been reserved and made available for
purchase by eligible employees.

           Eligible employees may have up to 10% of their wages withheld for
purchases of common stock of the Company. On September 30 and March 31 of each
year, the funds then in each employee's account are applied to the purchase of
shares of common stock at 85% of the fair market value at such date or at six
month retroactive intervals up to 24 months, whichever is less. As of December
31, 1997, 209,359 shares had been purchased with such funds.

           Under Statement 123, the fair value for these purchase options was
estimated at the date of grant using a Black-Scholes option pricing model with
the following weighted average assumptions for 1995, 1996 and 1997,
respectively; risk-free interest rates of 5.96% and 5.52% and 5.86%; no dividend
yields; volatility factor of the expected market price of the Company's common
stock of .73 for 1995 and 1996 and 1.05 for 1997; and a weighted-average
expected life of the options of 1.25 for 1995 and 1996 and .5 years for 1997.
The weighted average fair value of those purchase rights granted in 1995, 1996
and 1997 was $0.93, $1.22 and $1.41 respectively.

Warrants

           In 1997 warrants to purchase 50,000 shares of the Company's common
stock at an exercise price of $3.25 per share were issued under a collaboration
agreement and expire on December 31, 2001. No value was assigned to these
warrants due to immateriality; these warrants remain unexercised as of December
31, 1997.


7.         ACCOUNTS PAYABLE AND ACCRUED LIABILITIES

           Accounts payable and accrued liabilities include the following (in
thousands):




                                                                   1997           1996
                                                                  ------         ------
                                                                           
Accounts payable                                                  $  597         $  231
Accrued collaborative expenses                                       237            569
Accrued vacation pay                                                 186            114
Accrued professional fees                                            221            189
Other                                                                 40            223
                                                                  ------         ------
           Total accounts payable and accrued liabilities         $1,281         $1,326
                                                                  ======         ======








                                       40
   41

                                  ANERGEN, INC.
                          NOTES TO FINANCIAL STATEMENTS



8.         INCOME TAXES

           At December 31, 1997, the Company had federal and state net operating
loss carryforwards of approximately $46.8 million and $9.5 million,
respectively. Additionally, the Company has research and development tax credit
carryforwards for federal tax purposes of approximately $2.0 million. The net
operating loss and credit carryforwards will expire at various dates beginning
1998 through 2012, if not utilized.

           The Company's stock offering in April 1995 resulted in a change in
ownership and it is expected that the entire net operating loss and credit carry
forwards as of April 1995 may be subject to an annual limitation based on the
Company's pre-change value. The annual limitation will result in the expiration
of the net operating losses and credits before utilization.

           Net operating losses incurred subsequent to April 1995 may be subject
to annual limitation such that the net operating losses may expire before
utilization.

           Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. Significant
components of the Company's deferred tax liabilities and assets as of December
31, 1997 and 1996 are as follows:



                                                                             December 31,
                                                                ----------------------------------
                                                                    1997                   1996
                                                                ------------          ------------
                                                                                         
            Deferred income tax assets:
               Net operating loss carryforwards                 $ 16,500,000          $ 13,900,000
               Research credits                                    2,900,000             2,000,000
               Capitalized research and development                1,000,000                  --
               Other deferred tax assets                             300,000               700,000
                                                                ----------------------------------
            Net deferred tax assets                             $ 20,700,000            16,600,000
            Valuation allowance for deferred tax assets          (20,700,000)          (16,600,000)
                                                                ----------------------------------
            Total deferred tax assets
                                                                $         --          $         --
                                                                ==================================


           The net valuation allowance increased by $2,200,000 during the year
ended December 31, 1996 ($3,200,000 in 1995).






                                       41
   42

ITEM 9.    CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
           FINANCIAL DISCLOSURE
  
     Not applicable


                                    PART III


           Certain information required by Part III is omitted from this Report
because the registrant will file a definitive proxy statement pursuant to
Regulation 14A (the "Proxy Statement") not later than 120 days after the end of
the fiscal year covered by this Report, and certain information included therein
is incorporated herein by reference.

ITEM 10.   DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

           The information concerning the Company's directors required by this
Item is incorporated by reference to the Company's Proxy Statement.

ITEM 11.   EXECUTIVE COMPENSATION

           The information required by this Item is incorporated by reference to
the Company's Proxy Statement.

ITEM 12.   SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

           The information required by this Item is incorporated by reference to
the Company's Proxy Statement.

ITEM 13.   CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

           The information required by this Item is incorporated by reference to
the Company's Proxy Statement.

                                    PART IV

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

(a)   Financial Statements and Schedules.  The Financial Statements are set
      forth under Item 8 of this Report on Form 10-K  are included.

      1.   Financial Statements.

           The following financial statements of Anergen, Inc. are filed as a
           part of this report:



                                                                                                        Page:
                                                                                                      
           Report of Ernst & Young LLP, Independent Auditors                                             29
           Balance sheets at December 31, 1997 and 1996                                                  31
           Statements of Operations for each of three years in the period ended
                     December 31, 1997                                                                   32
           Statement of Shareholders' Equity for each of three years in the period ended
                     December 31, 1997                                                                   33
           Statements of Cash Flows for each of three years ended December 31, 1997                      34
           Notes to Financial Statements                                                               35-41


           Financial schedules have been omitted because they are not applicable
           or are not required or the information required to be set forth
           therein is included in the Financial Statements or Notes thereto.

(b)   Reports on Form    not applicable.




                                       42
   43


(c)   Exhibits.




  Exhibit         Description
  -------         -----------
                                                              
  3.1(1)          Restated and Amended Articles of Incorporation.
  3.2(1)          Bylaws, as amended.
  4.1(1)          Form of Common Stock Certificate.
  10.1(1)         Form of Indemnification Agreement for directors and officers.
  10.2(1)         1988 Stock Option Plan (as amended) and form of agreements thereunder.
  10.3(1)         1991 Employee Stock Purchase Plan, as amended.
  10.4(2)         1992 Consultant Stock Plan
  10.5(13)        1996 Stock Plan and form of agreement.
  10.6A(1)        Sublease dated December 15, 1989 between the Registrant and Invitron Corporation, with amendment dated February
                  28,1990.
  10.6B(1)        Landlord's Consent to Sublease dated March 2, 1990 among the Registrant, Invitron Corporation and Seaport Centre
                  Venture Phase II.
  10.6C(1)        Ten-Year Industrial Net Lease Agreement dated June 5, 1987 between Invitron Corporation and Seaport Centre
                  Venture Phase II, with amendments dated November 9, 1987; October 31, 1988; August 1989; and February 28,1990.
  10.6D(7)        Amendments to Seaport Center Standard Lease between the Registrant and Metropolitan Life Insurance Company dated
                  January 10, 1995; and March 24, 1995.
  10.6E(10)       Industrial Lease Agreement dated March 15, 1993 between the Registrant and East Bayshore Investment Group, with
                  amendments dated March 31, 1993; and June 17, 1994.
  10.7(1)         Master Lease Agreement dated July 8, 1988 between the Registrant and Comdisco, Inc. with Equipment Schedule No.
                  VL-1 dated July 8, 1988 and Equipment Schedule No. VL-2 dated April 4, 1990.
  10.8A(3)        Loan and Security agreement dated December 29, 1992 between the Registrant and MMC/GATX Partnership No. I.
  10.8B(3)        Secured Promissory Note dated December 29, 1992 issued by the Registrant to MMC/GATX Partnership No. I.
  10.8C(3)        Warrant dated December 29,1992 issued by the Registrant to MMC/GATX Partnership No. I.
  10.8D(4)        Amendment to the Loan and Security agreement dated December 30, 1993 between the Registrant and MMC/GATX
                  Partnership No. I.
  10.8E(4)        Warrant dated December 30, 1993 issued by the Registrant to MMC/GATX Partnership No. I.
  10.9A(5)        Development and License agreement dated August 17, 1993 between the Registrant and Novo Nordisk A/S.
  10.9B(5)        Common Stock Purchase Agreement dated August 17, 1993 between the Registrant and Novo Nordisk A/S.
  10.9C(11)       Amendment No. 1 dated March 26, 1996 to the Development and License Agreement between the Registrant and Novo
                  Nordisk A/S.
  10.9D(11)       Addendum dated March 26, 1996 to the Development and License Agreement between the Registrant and Novo Nordisk
                  A/S.
  10.10A(6)       Loan and Security agreement dated April 18, 1994 between the Registrant and Silicon Valley Bank.
  10.10B(9)       Loan and Security agreement dated June 23, 1995 between the Registrant and Silicon Valley Bank.
  10.10C(10)      Loan Modification Agreement dated August 31, 1994 between the Registrant and Silicon Valley Bank.
  10.10D          Amendment to the Loan and Security agreement June 23, 1995 between the Registrant and Silicon Valley Bank.
  10.11A(6)       Securities Purchase Agreement dated May 11, 1994 between the Registrant and certain Purchasers.
  10.11B(8)       Warrant dated June 30, 1994 issued to Ortelius Trading L.P.
  10.11B-1(9)     Letter related to Warrant issued to Ortelius Trading L.P.
  10.11B-2(14)    Letter related to Warrant issued to Ortelius Trading L.P.
  10.11C(8)       Warrant dated June 30, 1994 issued to GDK, Inc.
  10.11C-1(9)     Letter related to Warrant issued to GDK, Inc.
  10.11C-2        Letter related to Warrant issued to GDK, Inc.
  10.11D(8)       Amendment to Securities Purchase Agreement dated June 30, 1994 between the Registrant and certain purchasers.




                                       43
   44

               
  10.11E(7)       Amendment to Securities Purchase Agreement dated February 15, 1995 between the Registrant and certain
                  purchasers.
  10.12A(7)       Common Stock Purchase Agreement dated March 10, 1995 between the Registrant and Warburg, Pincus Ventures, L.P.
                  and International Biotechnology Trust PLC.
  10.12B(7)       Amendment to Common Stock Purchase Agreement dated March 15, 1995.
  10.13(10)       1995 Director Option Plan.
  10.14(10)       Transition Agreement and Mutual Release between the Company and John W. Fara, Ph.D.
  10.15(12)       Product Development and License Agreement dated June 28, 1996 between the Registrant and N. V. Organon.
  10.16(12)       Employment Agreement of Barry M. Sherman, M.D.
  10.17           Transition Agreement and Mutual Release of John Varian
  23.1            Consent of Ernst & Young LLP, Independent Auditors
  27.1            Financial Data Schedule




     (1)  Incorporated by reference to the exhibit filed with Registrant's
          Registration Statement on Form S-1 (No. 33-42107), as amended.

     (2)  Incorporated by reference to exhibit filed with the Company's Form S-8
          (No. 33-52186).

     (3)  Incorporated by reference to the exhibit filed with the Company's
          Annual Report on Form 10K for the year ended December 31, 1992.

     (4)  Incorporated by reference to the exhibit filed with the Company's
          Quarterly Report on Form 10Q for the quarter ended September 30, 1993.

     (5)  Incorporated by reference to the exhibit filed with the Company's
          Annual Report on Form 10K for the year ended December 31, 1993.

     (6)  Incorporated by reference to the exhibit filed with the Company's
          Quarterly Report on Form 10Q for the quarter ended March 31, 1994.

     (7)  Incorporated by reference to the exhibit filed with the Company's
          Annual Report on Form 10K for the year ended December 31, 1994.

     (8)  Incorporated by reference to the exhibit filed with Registrant's
          Registration Statement on Form S-1 (No. 33-84310), as amended.

     (9)  Incorporated by reference to the exhibit filed with the Company's
          Quarterly Report on Form 10Q for the quarter ended June 30, 1995.

     (10) Incorporated by reference to the exhibit filed with the Company's
          Annual Report on Form 10K for the year ended December 31, 1995.

     (11) Incorporated by reference to the exhibit filed with the Company's
          amendment to its Annual Report on Form 10-K/A for the year ended
          December 31, 1995.

     (12) Incorporated by reference to the exhibit filed with Rcompany's
          Registration Statement on Form S-1 (No. 33-42107), as amended.

     (13) Incorporated by reference to the exhibit filed with the Company's
          Quarterly Report on Form 10Q for the quarter ended September 30, 1996.

     (14) Incorporated by reference to the exhibit filed with the Company's
          Annual Report on Form 10-K for the year ended December 31, 1996.

     +    Confidential treatment granted for portions of this exhibit.






                                       44
   45

                                   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.


                                       ANERGEN, INC.


                                       By:  /s/ BARRY M. SHERMAN
                                            ----------------------------------
                                            Barry M. Sherman, M.D.
                                            President, Chief Executive Officer
                                            and Director
Dated:  March 27, 1998



                                POWER OF ATTORNEY

KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Barry M. Sherman, M.D., and David V. Smith, and
each of them, his attorneys-in-fact, and agents, each with the power of
substitution, for him and in his name, place and stead, in any and all
capacities, to sign any and all amendments to this Report on Form 10-K, and all
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 and about the premises, as fully to all intents and
purposes as he might or could do in person, hereby ratifying and conforming all
that said attorneys-in-fact and agents of any of them, or his or their
substitute or substitutes, may lawfully do or cause to be done by virtue hereof.

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) BARRY M. SHERMAN, M.D.
- ------------------------------------       President, Chief Executive Officer and              March 27, 1998
Barry M. Sherman, M.D.                     Director (Principal Executive Officer)

                                           

(S) DAVID V. SMITH                         VP, Finance & Chief Financial Officer               March 27, 1998
- ------------------------------------       (Principal Financial and Accounting Officer)
David V. Smith                                      
                  

(S) BRUCE L.A. CARTER, PH.D.
- ------------------------------------      
Bruce L. A. Carter, Ph.D.                  Director                                             March 27, 1998

(S) NICHOLAS J. LOWCOCK
- ------------------------------------      
Nicholas J. Lowcock                        Director                                             March 27, 1998


(S) HARDEN M. MCCONNELL, PH.D.
- ------------------------------------      
Harden M. McConnell, Ph.D.                 Director                                             March 27, 1998

(S) HARRY H. PENNER JR.
- ------------------------------------      
Harry H. Penner Jr.                        Director                                             March 27, 1998

(S) JAMES E. THOMAS
- ------------------------------------      
James E. Thomas                            Director                                             March 27, 1998

(S) NICOLE VITULLO
- ------------------------------------      
Nicole Vitullo                             Director                                             March 27, 1998






                                       45



   46


                                 EXHIBIT INDEX



  Exhibit         Description
  -------         -----------
                                                              
  3.1(1)          Restated and Amended Articles of Incorporation.
  3.2(1)          Bylaws, as amended.
  4.1(1)          Form of Common Stock Certificate.
  10.1(1)         Form of Indemnification Agreement for directors and officers.
  10.2(1)         1988 Stock Option Plan (as amended) and form of agreements thereunder.
  10.3(1)         1991 Employee Stock Purchase Plan, as amended.
  10.4(2)         1992 Consultant Stock Plan
  10.5(13)        1996 Stock Plan and form of agreement.
  10.6A(1)        Sublease dated December 15, 1989 between the Registrant and Invitron Corporation, with amendment dated February
                  28,1990.
  10.6B(1)        Landlord's Consent to Sublease dated March 2, 1990 among the Registrant, Invitron Corporation and Seaport Centre
                  Venture Phase II.
  10.6C(1)        Ten-Year Industrial Net Lease Agreement dated June 5, 1987 between Invitron Corporation and Seaport Centre
                  Venture Phase II, with amendments dated November 9, 1987; October 31, 1988; August 1989; and February 28,1990.
  10.6D(7)        Amendments to Seaport Center Standard Lease between the Registrant and Metropolitan Life Insurance Company dated
                  January 10, 1995; and March 24, 1995.
  10.6E(10)       Industrial Lease Agreement dated March 15, 1993 between the Registrant and East Bayshore Investment Group, with
                  amendments dated March 31, 1993; and June 17, 1994.
  10.7(1)         Master Lease Agreement dated July 8, 1988 between the Registrant and Comdisco, Inc. with Equipment Schedule No.
                  VL-1 dated July 8, 1988 and Equipment Schedule No. VL-2 dated April 4, 1990.
  10.8A(3)        Loan and Security agreement dated December 29, 1992 between the Registrant and MMC/GATX Partnership No. I.
  10.8B(3)        Secured Promissory Note dated December 29, 1992 issued by the Registrant to MMC/GATX Partnership No. I.
  10.8C(3)        Warrant dated December 29,1992 issued by the Registrant to MMC/GATX Partnership No. I.
  10.8D(4)        Amendment to the Loan and Security agreement dated December 30, 1993 between the Registrant and MMC/GATX
                  Partnership No. I.
  10.8E(4)        Warrant dated December 30, 1993 issued by the Registrant to MMC/GATX Partnership No. I.
  10.9A(5)        Development and License agreement dated August 17, 1993 between the Registrant and Novo Nordisk A/S.
  10.9B(5)        Common Stock Purchase Agreement dated August 17, 1993 between the Registrant and Novo Nordisk A/S.
  10.9C(11)       Amendment No. 1 dated March 26, 1996 to the Development and License Agreement between the Registrant and Novo
                  Nordisk A/S.
  10.9D(11)       Addendum dated March 26, 1996 to the Development and License Agreement between the Registrant and Novo Nordisk
                  A/S.
  10.10A(6)       Loan and Security agreement dated April 18, 1994 between the Registrant and Silicon Valley Bank.
  10.10B(9)       Loan and Security agreement dated June 23, 1995 between the Registrant and Silicon Valley Bank.
  10.10C(10)      Loan Modification Agreement dated August 31, 1994 between the Registrant and Silicon Valley Bank.
  10.10D          Amendment to the Loan and Security agreement June 23, 1995 between the Registrant and Silicon Valley Bank.
  10.11A(6)       Securities Purchase Agreement dated May 11, 1994 between the Registrant and certain Purchasers.
  10.11B(8)       Warrant dated June 30, 1994 issued to Ortelius Trading L.P.
  10.11B-1(9)     Letter related to Warrant issued to Ortelius Trading L.P.
  10.11B-2(14)    Letter related to Warrant issued to Ortelius Trading L.P.
  10.11C(8)       Warrant dated June 30, 1994 issued to GDK, Inc.
  10.11C-1(9)     Letter related to Warrant issued to GDK, Inc.
  10.11C-2        Letter related to Warrant issued to GDK, Inc.
  10.11D(8)       Amendment to Securities Purchase Agreement dated June 30, 1994 between the Registrant and certain purchasers.



   47

               
  10.11E(7)       Amendment to Securities Purchase Agreement dated February 15, 1995 between the Registrant and certain
                  purchasers.
  10.12A(7)       Common Stock Purchase Agreement dated March 10, 1995 between the Registrant and Warburg, Pincus Ventures, L.P.
                  and International Biotechnology Trust PLC.
  10.12B(7)       Amendment to Common Stock Purchase Agreement dated March 15, 1995.
  10.13(10)       1995 Director Option Plan.
  10.14(10)       Transition Agreement and Mutual Release between the Company and John W. Fara, Ph.D.
  10.15(12)       Product Development and License Agreement dated June 28, 1996 between the Registrant and N. V. Organon.
  10.16(12)       Employment Agreement of Barry M. Sherman, M.D.
  10.17           Transition Agreement and Mutual Release of John Varian
  23.1            Consent of Ernst & Young LLP, Independent Auditors
  27.1            Financial Data Schedule




     (1)  Incorporated by reference to the exhibit filed with Registrant's
          Registration Statement on Form S-1 (No. 33-42107), as amended.

     (2)  Incorporated by reference to exhibit filed with the Company's Form S-8
          (No. 33-52186).

     (3)  Incorporated by reference to the exhibit filed with the Company's
          Annual Report on Form 10K for the year ended December 31, 1992.

     (4)  Incorporated by reference to the exhibit filed with the Company's
          Quarterly Report on Form 10Q for the quarter ended September 30, 1993.

     (5)  Incorporated by reference to the exhibit filed with the Company's
          Annual Report on Form 10K for the year ended December 31, 1993.

     (6)  Incorporated by reference to the exhibit filed with the Company's
          Quarterly Report on Form 10Q for the quarter ended March 31, 1994.

     (7)  Incorporated by reference to the exhibit filed with the Company's
          Annual Report on Form 10K for the year ended December 31, 1994.

     (8)  Incorporated by reference to the exhibit filed with Registrant's
          Registration Statement on Form S-1 (No. 33-84310), as amended.

     (9)  Incorporated by reference to the exhibit filed with the Company's
          Quarterly Report on Form 10Q for the quarter ended June 30, 1995.

     (10) Incorporated by reference to the exhibit filed with the Company's
          Annual Report on Form 10K for the year ended December 31, 1995.

     (11) Incorporated by reference to the exhibit filed with the Company's
          amendment to its Annual Report on Form 10-K/A for the year ended
          December 31, 1995.

     (12) Incorporated by reference to the exhibit filed with Rcompany's
          Registration Statement on Form S-1 (No. 33-42107), as amended.

     (13) Incorporated by reference to the exhibit filed with the Company's
          Quarterly Report on Form 10Q for the quarter ended September 30, 1996.

     (14) Incorporated by reference to the exhibit filed with the Company's
          Annual Report on Form 10-K for the year ended December 31, 1996.

     +    Confidential treatment granted for portions of this exhibit.

EX-10.17

   1
                                                                Exhibit 10.17

                     TRANSITION AGREEMENT AND MUTUAL RELEASE


        This Transition Agreement and Mutual Release ("Agreement") is made by
and between Anergen, Inc. (the "Company"), and John W. Varian ("Executive").

        WHEREAS, Executive was employed by the Company.

        WHEREAS, the Company and Executive have mutually agreed to terminate the
employment relationship with the Company as of April 30, 1997 (the "Effective
Date") and to release each other from any claims arising from or related to the
employment relationship.

        NOW, THEREFORE, in consideration of the mutual promises made herein, the
Company and Executive (collectively referred to as the "Parties") hereby agree
as follows:

        1. Resignation. Executive shall resign from his position as Vice
President, Finance and Chief Financial Officer of the Company effective as of
the Effective Date.

        2. Consideration.

               (a) Salary. The Company will pay Executive on the Effective Date
all salary earned through the Effective Date less applicable withholding. In
addition, the Company agrees to pay to Executive on the Effective Date in lieu
of any other compensation payable a lump sum of One Hundred Thirteen Thousand
Two Hundred Fifty Dollars ($113,250) (less applicable withholding). The
Executive will not participate in any bonus plan or any other executive
compensation program other than as provided in this Section.

               (b) Benefits. Executive's COBRA benefit period shall begin on May
1, 1997. Through October 31, 1997, the Company shall pay the cost of Executive's
COBRA coverage. Notwithstanding the foregoing, in the event comparable benefits
(including pregnancy and child birth coverage) are provided by other employment
during the foregoing period, Executive shall immediately notify the Company, and
the Company will no longer be obligated to pay the cost of Executive's COBRA
coverage beginning on the first day of the month next following the
notification. The Company shall pay the annual premium for the term insurance on
Executive's life, which will become due on approximately September 30, 1997.

               (c) Stock Options. The Company shall amend all of Executive's
Incentive Stock Option Agreements effective as of the date hereof to (i)
accelerate and immediately vest Executive with all options to acquire shares of
the Company's Common Stock which were unvested as of such date, and (ii) extend
the period of exercisability of all options to acquire shares of the Company's
Common Stock to two (2) years from the Effective Date. Executive acknowledges
that such amendment to his Incentive Stock Option Agreements will convert all
such options from Incentive 

   2

Stock Options as defined under Section 422 of the Internal Revenue Code into
Nonstatutory Stock Options. No stock options will be granted to Executive for
fiscal year 1996 or 1997 performance. The exercise of the options herein will
continue to be subject to all of the provisions of the Incentive Stock Option
Agreement.

               (d) Conferences. The Company shall pay the registration fees for
Executive's attendance at the ABFO Conference to be held in San Diego,
California, June 3-6, 1997. The Company shall reimburse Executive for all
reasonable expenses incurred by him in attending the ABFO Conference such as
airfare, hotel and meals. All such expense reimbursement requests must be
submitted in standard expense report format and are subject to standard review
for reasonableness.

                      The  Company  confirms  that it has paid the  registration
fees and airfare for Executive's attendance at the BIO conference to be held in
Houston, Texas, June 8-13, 1997. All other expenses incurred by Executive in
attending the BIO conference shall be his responsibility, subject to payment by
the Company pursuant to Paragraph 13 below.

               (e) Vacation Pay; Expense Reimbursement. Within three (3)
business days following the Effective Date, the Company shall pay to Executive
all accrued but unused vacation time and all reasonable and appropriate expense
reimbursement requests which have been submitted in standard expense report
format.

        3. Confidential Information. Executive shall continue to maintain the
confidentiality of all confidential and proprietary information of the Company
and shall continue to comply with the terms and conditions of the
Confidentiality Agreement between Executive and the Company. Executive shall
return all the Company property and confidential and proprietary information in
his possession to the Company on the date of this Agreement.

        4. Release of Claims. Executive agrees that the foregoing consideration
represents settlement in full of all outstanding obligations owed to Executive
by the Company. Executive and the Company, on behalf of themselves, and their
respective heirs, family members, executors, officers, directors, employees,
investors, shareholders, administrators, affiliates, divisions, subsidiaries,
predecessor and successor corporations, and assigns, hereby fully and forever
release each other and their respective heirs, family members, executors,
officers, directors, employees, investors, shareholders, administrators,
affiliates, divisions, subsidiaries, predecessor and successor corporations, and
assigns to the extent permitted by law and the articles of incorporation or
bylaws of the Company, from, and agree not to sue concerning, any claim, duty,
obligation or cause of action relating to any matters of any kind, whether
presently known or unknown, suspected or unsuspected, that any of them may
possess arising from any omissions, acts or facts that have occurred up until
and including the Effective Date including, without limitation,

                                      -2-
   3

               (a) any and all claims relating to or arising from Executive's
employment relationship with the Company and the termination of that
relationship;

               (b) any and claims relating to, or arising from, Executive's
right to purchase, or actual purchase of shares of stock of the Company,
including, without limitation, any claims for fraud, misrepresentation, breach
of fiduciary duty, breach of duty under applicable state corporate law, and
securities fraud under any state or federal law;

               (c) any and all claims for wrongful discharge of employment;
termination in violation of public policy; discrimination; breach of contract,
both express and implied; breach of a covenant of good faith and fair dealing,
both express and implied; promissory estoppel; negligent or intentional
infliction of emotional distress; negligent or intentional misrepresentation;
negligent or intentional interference with contract or prospective economic
advantage; unfair business practices; defamation; libel; slander; negligence;
personal injury; assault; battery; invasion of privacy; false imprisonment; and
conversion;

               (d) any and all claims for violation of any federal, state or
municipal statute, including, but not limited to, Title VII of the Civil Rights
Act of 1964, the Civil Rights Act of 1991, the Age Discrimination in Employment
Act of 1967, the Americans with Disabilities Act of 1990, the Fair Labor
Standards Act, the Employee Retirement Income Security Act of 1974, The Worker
Adjustment and Retraining Notification Act, Older Workers Benefit Protection
Act; the California Fair Employment and Housing Act, and Labor Code section 201,
et seq. and section 970, et seq.;

               (e) any and all claims for violation of the federal, or any
state, constitution;

               (f) any and all claims arising out of any other laws and
regulations relating to employment or employment discrimination; and

               (g) any and all claims for attorneys' fees and costs.

The Company and Executive agree that the release set forth in this section shall
be and remain in effect in all respects as a complete general release as to the
matters released. This release does not extend to any obligations incurred under
this Agreement or any of Executive's Stock Option Agreements.

        5. Civil Code Section 1542. The Parties represent that they are not
aware of any claim by either of them other than the claims that are released by
this Agreement. Executive and the Company acknowledge that they have been
advised by legal counsel and are familiar with the provisions of California
Civil Code Section 1542, which provides as follows:

               A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR
               DOES NOT KNOW OR SUSPECT TO 

                                      -3-

   4

               EXIST IN HIS FAVOR AT THE TIME OF EXECUTING THE RELEASE, WHICH IF
               KNOWN BY HIM MUST HAVE MATERIALLY AFFECTED HIS SETTLEMENT WITH
               THE DEBTOR.

        Executive and the Company, being aware of said code section, agree to
expressly waive any rights they may have thereunder, as well as under any other
statute or common law principles of similar effect.

        6. No Pending or Future Lawsuits. Executive represents that he has no
lawsuits, claims, or actions pending in his name, or on behalf of any other
person or entity, against the Company or any other person or entity referred to
herein. Executive also represents that he does not intend to bring any claims on
his own behalf or on behalf of any other person or entity against the Company or
any other person or entity referred to herein.

        7. Application for Employment. Executive understands and agrees that, as
a condition of this Agreement, he shall not be entitled to any employment with
the Company, its subsidiaries, or any successor, and he hereby waives any right,
or alleged right, of employment or re-employment with the Company. Executive
further agrees that he will not apply for employment with the Company, its
subsidiaries or related companies, or any successor.

        8. Confidentiality. The Parties represent and warrant that they have not
disclosed to anyone other than their attorneys, tax advisors or Executive's
spouse the proposed monetary consideration involved in the negotiations that led
to this Agreement or the terms of this Agreement, and except that they may
provide testimony or documents pursuant to a valid subpoena as provided for
below, the parties agree that they will keep the existence of this Agreement and
the terms and amounts contained in this Agreement completely confidential and
will not hereafter disclose any information contained in this Agreement to
anyone, other than to their attorneys, Executive's spouse or tax advisors, and,
as for the Company, those who have a reasonable business-related need to know
such information, and in each instance only if each said person to whom
disclosure is made first agrees to maintain full confidentiality in accordance
with the terms of this Agreement. Notwithstanding the foregoing, the Parties may
make disclosure as may be required by Rules and Regulations of the Securities
and Exchange Commission or other governmental agency.

        9. No Cooperation. Executive agrees he will not act in any manner that
might materially damage the business of the Company. Executive agrees that he
will not counsel, cooperate with or assist any attorneys or their clients in the
presentation or prosecution of any disputes, differences, grievances, claims,
charges, or complaints by any third party against the Company and/or any
officer, director, employee, agent representative, shareholder or attorney of
the Company, unless under a subpoena or other court order to do so. If served
with any subpoena requiring the giving of testimony or documents related to the
matters covered by this Agreement, a party hereto or his or its attorney will
give written notice of same to the other party within five (5) working days of
receipt of such subpoena, providing that such notice shall in no event be
received less than seventy-two (72) hours before the obligation to testify or
produce documents matures, unless the subpoena does not afford such time, in
which case notice shall be given immediately. Notwithstanding the foregoing,
Executive shall not be precluded from accepting employment with a company which
may compete 

                                      -4-


   5

fairly and non-tortiously with the Company, nor shall it preclude Executive from
performing the normal duties which may be required by such employment.

        10. Non-Disparagement. Each Party agrees to refrain from any
disparagement, criticism, defamation, libel or slander of the other, or tortious
interference with the contracts and relationships of the other. All inquiries by
potential future employers of Executive will be directed to the Company's Human
Resources Consultant. The Company's Human Resources Consultant shall stress the
positive aspects of Executive's employment with the Company, and shall not
disparage, criticize. defame, liable or slander Executive.

        11. Tax Consequences. The Company makes no representations or warranties
with respect to the tax consequences of the payment of any sums to Executive
under the terms of this Agreement. Executive agrees and understands that he is
responsible for payment, if any, of local, state and/or federal taxes on the
sums paid hereunder by the Company and any penalties or assessments thereon.
Executive further agrees to indemnify and hold the Company harmless from any
claims, demands, deficiencies, penalties, assessments, executions, judgments, or
recoveries by any government agency against the Company for any amounts claimed
due on account of Executive's failure to pay federal or state taxes or damages
sustained by the Company by reason of any such claims, including reasonable
attorneys' fees.

        12. No Admission of Liability. The Parties understand and acknowledge
that this Agreement constitutes a compromise and settlement of disputed claims.
No action taken by the parties hereto, or either of them, either previously or
in connection with this Agreement shall be deemed or construed to be (a) an
admission of the truth or falsity of any claims heretofore made or (b) an
acknowledgment or admission by either party of any fault or liability whatsoever
to the other party or to any third party.

        13. Costs. Except as set forth in this Paragraph 13, the Parties shall
each bear their own costs, expert fees, attorneys' fees and other fees incurred
in connection with this Agreement. Executive shall submit to the Company
invoices for (i) the expenses incurred in attending the BIO conference in
Houston, Texas (in addition to the registration fees and airfare already paid by
the Company), (ii) costs in maintaining a home office, and (iii) attorney's fees
and costs incurred in negotiating this Agreement. The Company shall pay all such
submitted invoices direct to the respective vendors up to an aggregate of
$3,500.

        14. Arbitration. The Parties agree that any and all disputes arising out
of the terms of this Agreement, their interpretation, and any of the matters
herein released, shall be subject to binding arbitration in San Mateo County
before the American Arbitration Association under its California Employment
Dispute Resolution Rules, or by a judge to be mutually agreed upon. The Parties
agree that the prevailing party in any arbitration shall be entitled to
injunctive relief in any court of competent jurisdiction to enforce the
arbitration award. The Parties agree that the prevailing party in any
arbitration shall be awarded its reasonable attorney's fees and costs. Any
litigation brought in 

                                      -5-

   6

connection with this Agreement shall be filed and maintained in the California
Superior Court for the County of San Mateo.

        15. Authority. The Company represents and warrants that the undersigned
has the authority to act on behalf of the Company and to bind the Company and
all who may claim through it to the terms and conditions of this Agreement.
Executive represents and warrants that he has the capacity to act on his own
behalf and on behalf of all who might claim through him to bind them to the
terms and conditions of this Agreement. Each Party warrants and represents that
there are no liens or claims of lien or assignments in law or equity or
otherwise of or against any of the claims or causes of action released herein.

        16. No Representations. Each party represents that it has had the
opportunity to consult with an attorney, and has carefully read and understands
the scope and effect of the provisions of this Agreement. Neither party has
relied upon any representations or statements made by the other party hereto
which are not specifically set forth in this Agreement. The titles contained in
this Agreement are for the convenience of the parties, are not part of this
Agreement and shall not be used in interpreting its terms.

        17. Severability. In the event that any provision hereof becomes or is
declared by a court of competent jurisdiction to be illegal, unenforceable or
void, it shall be adjusted, if possible, in order to achieve the intent of the
parties to this Agreement to the extent possible; and this Agreement shall
continue in full force and effect with such adjusted provision, or if necessary,
without said provision.

        18. Entire Agreement. This Agreement represents the entire agreement and
understanding between the Company and Executive concerning Executive's
separation from the Company, and supersedes and replaces any and all prior
agreements and understandings concerning Executive's relationship with the
Company, the termination thereof, and his compensation by the Company.

        19. No Oral Modification. This Agreement may only be amended in writing
signed by Executive and the President of the Company.

        20. Governing Law. This Agreement shall be governed by the laws of the
State of California, without regard to conflict of laws principles.

        21. Counterparts. This Agreement may be executed in counterparts, and
each counterpart shall have the same force and effect as an original and shall
constitute an effective, binding agreement on the part of each of the
undersigned.

        22. Voluntary Execution of Agreement. This Agreement is executed
voluntarily and without any duress or undue influence on the part or behalf of
the parties hereto, with the full intent of releasing all claims. The Parties
acknowledge that:


                                      -6-

   7

               (a)    They have read this Agreement;

               (b) They have been represented in the preparation, negotiation,
and execution of this Agreement by legal counsel of their own choice or that
they have voluntarily declined to seek such counsel;

               (c) They understand the terms and consequences of this Agreement
and of the releases it contains; and

               (d) They are fully aware of the legal and binding effect of this
Agreement.


ACCEPTED AND AGREED TO:


Dated: April __, 1997                 By
                                         ---------------------------------------
                                          Barry M. Sherman, M.D.
                                          President and Chief Executive Officer



                                                   EXECUTIVE



Dated: April 14, 1997                     --------------------------------------
                                                    John W. Varian

EX-23.1

   1
                                                                    EXHIBIT 23.1

               CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS

        We consent to the incorporation by reference in the Registration
Statement (Form S-8 No. 33-44941) pertaining to the 1991 Employee Stock Purchase
Plan and the 1988 Stock Option Plan, the Registration Statement (Form S-8 No.
33-52186) pertaining to the 1992 Consultant Stock Option Plan, the Registration
Statement (Form S-8 No. 33-70586) pertaining to the 1988 Stock Option Plan of
Anergen, Inc., the Registration Statement (Form S-8 No. 33-95660) pertaining to
the 1995 Directors Option Plan, and the Registration Statement (Form S-8 No.
333-33771) pertaining to the 1996 Stock Plan and the 1991 Employee Stock
Purchase Plan of our report dated February 6, 1998, with respect to the
financial statements of Anergen, Inc. included in the Annual Report (Form 10-K)
for the year ended December 31, 1997.


                                        /s/ ERNST & YOUNG LLP
                                        ---------------------
                                            ERNST & YOUNG LLP

Palo Alto, California
March 26, 1998
  

EX-27.1

 

<ARTICLE> 5
<MULTIPLIER> 1,000
       
                             
<PERIOD-TYPE>                   YEAR
<FISCAL-YEAR-END>                          DEC-31-1997
<PERIOD-START>                             JAN-01-1997
<PERIOD-END>                               DEC-31-1997
<CASH>                                           1,412
<SECURITIES>                                     6,991
<RECEIVABLES>                                      334
<ALLOWANCES>                                         0
<INVENTORY>                                          0
<CURRENT-ASSETS>                                 8,815
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<DEPRECIATION>                                 (5,388)
<TOTAL-ASSETS>                                  10,554
<CURRENT-LIABILITIES>                            1,897
<BONDS>                                            870
<PREFERRED-MANDATORY>                                0
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<COMMON>                                        57,670
<OTHER-SE>                                    (49,883)
<TOTAL-LIABILITY-AND-EQUITY>                    10,554
<SALES>                                              0
<TOTAL-REVENUES>                                 6,328
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<OTHER-EXPENSES>                                14,556
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<INTEREST-EXPENSE>                                 202
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